Ocwen Financial Corporation
OCWEN FINANCIAL CORP (Form: 10-K, Received: 03/08/2010 06:08:22)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 


 

 

(Mark one)

x

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

 

For the fiscal year ended December 31, 2009

OR

 

o

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

 

For the transition period from: _____________________to _____________________

 

 

Commission File No. 1-13219

 

OCWEN FINANCIAL CORPORATION

(Exact name of Registrant as specified in our charter)


 

 

Florida
65-0039856

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1661 Worthington Road, Suite 100

 

West Palm Beach, Florida

33409

(Address of principal executive office)

(Zip Code)

 

 

(561) 682-8000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 par value

New York Stock Exchange (NYSE)

(Title of each class)

(Name of each exchange on which registered)

 

 

Securities registered pursuant to Section 12 (g) of the Act: Not applicable.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to post such files).

Yes o No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

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 Act) Yes o No x Aggregate market value of the common stock of the registrant held by nonaffiliates as of June 30, 2009: $560,543,297

 

Number of shares of common stock outstanding as of February 26, 2010: 99,958,162 shares

 

DOCUMENTS INCORPORATED BY REFERENCE: Portions of our definitive Proxy Statement with respect to our Annual Meeting of Shareholders to be held on May 6, 2010, are incorporated by reference into Part III, Items 10 - 12 and 14.



OCWEN FINANCIAL CORPORATION
2009 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

 

 

 

 





 

 

 

 

 

 

 

PAGE

 

 

 

 

PART I

 

 

Item 1.

Business

 

3

Item 1A.

Risk Factors

 

11

Item 1B.

Unresolved Staff Comments

 

18

Item 2.

Properties

 

19

Item 3.

Legal Proceedings

 

19

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

20

 

 

 

 

PART II

 

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

20

 

 

 

 

Item 6.

Selected Financial Data

 

23

 

 

 

 

Item 7.

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

 

26

 

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

 

48

 

 

 

 

Item 8.

Financial Statements and Supplementary Data

 

51

 

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

51

 

 

 

 

Item 9A.

Controls and Procedures

 

51

 

 

 

 

Item 9B.

Other Information

 

52

 

 

 

 

PART III

 

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

52

 

 

 

 

Item 11.

Executive Compensation

 

52

 

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

52

 

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

52

 

 

 

 

Item 14.

Principal Accounting Fees and Services

 

53

 

 

 

 

PART IV

 

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

 

53

 

 

 

 

Signatures

 

 

55

1


FORWARD-LOOKING STATEMENTS

          This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, included in this report, including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.

          These statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts” or “continue” or the negative of such terms or other comparable terminology. These forward-looking statements are subject to inherent risks and uncertainties in predicting future results and conditions that could cause the actual results to differ materially from those projected in these forward-looking statements. Some, but not all, of the risks and uncertainties include those referred to in the section entitled “Risk Factors” and 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 asset management vehicles;

 

 

 

 

assumptions about our ability to grow our business;

 

 

 

 

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

 

 

 

 

our ability to reduce our cost structure;

 

 

 

 

our analysis in support of the decision to spin off Altisource 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” above 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 market conditions and government programs;

 

 

 

 

governmental regulations and policies; and

 

 

 

 

uncertainty related to dispute resolution and litigation.

          Further information on the risks specific to our business is detailed within this report and our other reports and filings with the Securities and Exchange Commission (SEC), including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Forward-looking statements speak only as of the date they were made and should not be relied upon. Ocwen Financial Corporation undertakes no obligation to update or revise forward-looking statements.

2


P ART I

 

 

I TEM 1.

BUSINESS (Dollars in thousands, unless otherwise indicated)

GENERAL

          Ocwen Financial Corporation, through its subsidiaries, is a leading provider of residential and commercial mortgage loan servicing, special servicing and asset management services. When we use the terms “Ocwen,” “OCN,” “we,” “us” and “our,” we refer to Ocwen Financial Corporation and its consolidated subsidiaries. Ocwen is headquartered in West Palm Beach, Florida with offices in California, the District of Columbia, Florida and Georgia and global operations in India and Uruguay. OCN is a Florida corporation organized in February 1988. Ocwen Loan Servicing, LLC (OLS), a wholly owned subsidiary of Ocwen, is a licensed mortgage servicer in all 50 states, the District of Columbia and two U.S. territories.

          On August 10, 2009, we completed the distribution of our Ocwen Solutions (OS) line of business, except for BMS Holdings, Inc. (BMS Holdings) and Global Servicing Solutions, LLC (GSS), via the spin-off of a separate publicly traded company, Altisource Portfolio Solutions S.A. (Altisource). Altisource common stock is listed on the NASDAQ market under the ticker symbol “ASPS.” We distributed all of the shares of Altisource common stock to OCN’s shareholders of record as of August 4, 2009 (the Separation).

          On December 3, 2009, we finalized and consummated the transaction to dispose of our investment in Bankhaus Oswald Kruber GmbH & Co. KG (BOK), our wholly owned German banking subsidiary acquired in 2004. We report the operating results of BOK as discontinued operations in our consolidated financial statements.

          Separation of Ocwen Solutions. We completed the Separation on August 10, 2009.

          On November 12, 2008, our Board of Directors authorized management to pursue the Separation, through a tax-free spin-off into a newly formed publicly-traded company, of all of our business operations previously included within the OS line of business except for BMS Holdings and GSS.

          We made our decision based upon a strategic analysis that concluded that the Separation would:

 

 

 

 

l

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

 

 

 

 

l

Better position OS to pursue business opportunities with other servicers;

 

 

 

 

l

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

 

 

 

 

l

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

 

 

 

 

l

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 August 10, 2009, the shares of Altisource were distributed to the Ocwen shareholders and Convertible Notes holders of record as of August 4, 2009, in the form of a pro rata stock distribution. OCN shareholders received a tax-free pro rata distribution of one share of Altisource common stock for every three shares of OCN common stock held and received cash in lieu of fractional shares. Each convertible noteholder participated in the distribution of Altisource shares, without converting the notes, by applying the distribution ratio to the conversion ratio of the convertible notes. Accordingly, upon the separation of Altisource and Ocwen, there was no adjustment to the conversion ratio of the Convertible Notes.

          Because of the Separation and related transactions, Ocwen incurred income taxes to the extent that the fair market value of Altisource assets exceeded Ocwen’s tax basis in such assets in accordance with Section 367 of the Internal Revenue Code. Ocwen recognized $52,047 of income tax expense, of which $25,649 is current expense and $26,398 is deferred expense.

          Altisource’s largest customer will initially be Ocwen, and Altisource entered into long-term services contracts with Ocwen for terms of up to eight years. There are other arrangements between Altisource and Ocwen that will continue following the Separation 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 both provide and receive certain corporate services at prevailing market rates.

          Although Altisource is a separate company from Ocwen as a result of the Separation, Altisource and Ocwen have the same Chairman of the Board, William C. Erbey. Mr. Erbey is also the current Chief Executive Officer of Ocwen. As a result, he has obligations to Ocwen as well as to Altisource. Mr. Erbey currently owns approximately 18% of the common stock of Ocwen and approximately 26% of the common stock of Altisource.

3


CORPORATE STRATEGY AND OUTLOOK

O v erview

          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.

          Our competitive strengths are:

 

 

 

 

Lowest Cost Provider . We believe OLS has the lowest operating cost in the sub-prime mortgage servicing industry. Based on average industry cost information provided by a third party valuation consultant, OLS’ net cost to service a non-performing loan was 60% lower than the average net cost for the subprime industry as of November 30, 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. 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. Similarly, in the most recent study of its kind, a 2008 Credit Suisse study measuring the percentage of greater than 90 days delinquent loans that made at least two payments in a three-month period showed that Ocwen significantly outperformed its competitors. According to the Credit Suisse study, Ocwen achieved at least two payments in a three-month period on almost 50% of greater than 90 days delinquent loans versus the nearest competitor’s just over 30%. We believe these studies, together with our selection by Freddie Mac as a special servicer, 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 that, in turn, reduces our interest expense.

 

 

 

 

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

 

 

 

 

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

          We plan to leverage our competitive strengths to help us achieve our long-term goals for sustainable growth in revenue, after-tax return on equity and earnings per share. We intend to realize these goals by extending our lead as the lowest cost provider, raising the already high quality of servicing that we deliver and developing a predictable and on-going flow of fee income for our servicing business.

Strategic Priorities

          During 2009, we focused on three key initiatives to reinforce our competitive strengths: liquidity and balance sheet strength; revenue opportunities; and quality and cost structure leadership. Our success in these three initiatives led to our strategic priorities for 2010 and beyond:

 

 

 

 

1.

Establish predictable and sustainable revenue growth in our servicing operations

 

2.

Improve process efficiencies to continuously reduce costs

 

3.

Improve quality

 

4.

Reduce asset intensity

These priorities support our long-term goals for return on equity and earnings per share growth.

          As for sustainable revenue growth, we have a three-pronged approach:

 

 

 

 

1.

Acquisition of Existing Servicing Platforms. We are evaluating four servicing acquisitions, two of which, totaling $35 billion in unpaid principal balance (UPB), are nearing final decisions.

4



 

 

 

 

2.

Special Servicing Opportunities. We continue to pursue opportunities with government-sponsored entities to grow our special servicing portfolio. In February 2009, we were selected as a special servicer of non-performing loans for Freddie Mac under a high-risk-loan pilot program. On August 10, 2009, we entered into an Interim Servicing Master Agreement under which we provide mortgage loan servicing with respect to approximately 24,000 non-performing single family mortgage loans backed by Freddie Mac with an aggregate UPB of approximately $4.4 billion. We added approximately 5,400 additional loans with an aggregate UPB of approximately $1.6 billion through December 31, 2009. Through February 2010, we added approximately 5,700 additional loans with an aggregate UPB of approximately $1.1 billion. As with subservicing, special servicing requires limited capital, reducing asset intensity and increasing return on equity.

 

 

 

 

3.

Flow Servicing. Our goal is to develop flow FHA servicing. The economics of FHA servicing closely match our existing business model than does Fannie or Freddie performing servicing which is very dependent upon a low cost of capital. FHA servicing requires intensive servicing and trades for a lower multiple of servicing fees.

          The latter three 2010 priorities:

 

 

 

 

l

improve process efficiencies to reduce costs;

 

 

 

 

l

improve quality; and

 

 

 

 

l

reduce asset intensity;

are interrelated, reflecting our belief that continual process improvement leads to higher quality and lower cost, both operational and financial.

          Our primary lever to accomplish these priorities continues to be to resolve more loans faster. We will focus our resources on first call resolution and self-serve applications. Customers are far happier when their issues are resolved in a single interaction. Furthermore, a growing portion of our customers would prefer to self-serve, particularly if they can choose the timing, and it results in a satisfactory outcome. By resolving more loans faster, we improve quality as perceived by our customers, reduce the level of advances (i.e., reduce asset intensity) and reduce costs.

OPERATING SEGMENTS

          Our current and former business segments, aligned within the 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.

          With the exception of our interests in BMS Holdings and GSS, we distributed the assets, liabilities and operations of the Ocwen Solutions (OS) line of business. Prior to August 10, 2009, OS included our former unsecured collections business, our former residential fee-based loan processing businesses, our former technology platforms, our equity investment in BMS Holdings and the results of our international commercial loan servicing business conducted through GSS.

5


          Segment Results and Assets as of and for the years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

   

Segment

 

$

 

%

 

$

 

%

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

   

External Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing

 

$

271,561

 

 

71.3

%

$

339,278

 

 

69.0

%

$

342,889

 

 

71.3

%

Loans and Residuals

 

 

 

 

 

 

 

 

 

 

353

 

 

0.1

 

Asset Management Vehicles

 

 

1,381

 

 

0.4

 

 

2,751

 

 

0.6

 

 

1,444

 

 

0.3

 

Mortgage Services

 

 

54,052

 

 

14.2

 

 

58,706

 

 

11.9

 

 

73,657

 

 

15.3

 

Financial Services

 

 

40,293

 

 

10.6

 

 

73,835

 

 

15.0

 

 

41,292

 

 

8.6

 

Technology Products

 

 

12,375

 

 

3.2

 

 

17,402

 

 

3.5

 

 

19,864

 

 

4.1

 

Corporate Items and Other

 

 

1,066

 

 

0.3

 

 

156

 

 

 

 

1,162

 

 

0.3

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

Consolidated

 

$

380,728

 

 

100.0

%

$

492,128

 

 

100.0

%

$

480,661

 

 

100.0

%

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations before Income Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing

 

$

87,681

 

 

94.0

%

$

100,770

 

 

325.2

%

$

65,349

 

 

119.8

%

Loans and Residuals

 

 

(9,121

)

 

(9.8

)

 

(14,682

)

 

(47.4

)

 

(8,650

)

 

(15.9

)

Asset Management Vehicles

 

 

(5,317

)

 

(5.7

)

 

(9,813

)

 

(31.7

)

 

(159

)

 

(0.3

)

Mortgage Services

 

 

17,815

 

 

19.1

 

 

13,262

 

 

42.8

 

 

14,002

 

 

25.7

 

Financial Services

 

 

(5,969

)

 

(6.4

)

 

(7,875

)

 

(25.4

)

 

(7,087

)

 

(13.0

)

Technology Products

 

 

9,590

 

 

10.3

 

 

3,580

 

 

11.6

 

 

8,968

 

 

16.4

 

Corporate Items and Other

 

 

(1,418

)

 

(1.5

)

 

(54,260

)

 

(175.1

)

 

(17,869

)

 

(32.7

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

Consolidated

 

$

93,261

 

 

100.0

%

$

30,982

 

 

100.0

%

$

54,554

 

 

100.0

%

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing

 

$

1,191,212

 

 

67.3

%

$

1,416,615

 

 

63.3

%

$

1,710,947

 

 

71.5

%

Loans and Residuals

 

 

48,690

 

 

2.8

 

 

67,317

 

 

3.0

 

 

102,398

 

 

4.3

 

Asset Management Vehicles

 

 

15,271

 

 

0.9

 

 

26,755

 

 

1.2

 

 

74,242

 

 

3.1

 

Mortgage Services

 

 

 

 

 

 

3,558

 

 

0.2

 

 

24,149

 

 

1.0

 

Financial Services

 

 

 

 

 

 

58,707

 

 

2.6

 

 

67,149

 

 

2.8

 

Technology Products

 

 

 

 

 

 

8,906

 

 

0.4

 

 

17,885

 

 

0.8

 

Corporate Items and Other

 

 

514,177

 

 

29.0

 

 

664,962

 

 

29.7

 

 

404,122

 

 

16.9

 

Corporate Eliminations

 

 

 

 

 

 

(9,720

)

 

(0.4

)

 

(8,968

)

 

(0.4

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

Consolidated

 

$

1,769,350

 

 

100.0

%

$

2,237,100

 

 

100.0

%

$

2,391,924

 

 

100.0

%

 

 

   

 

   

 

   

 

   

 

   

 

   

 

          See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segments” and Note 29 to the Consolidated Financial Statements for additional financial information regarding each of our segments.

Servicing

          We earn fees for providing services to owners of mortgage loans and foreclosed real estate. In most cases, we provide these services either because we purchased the mortgage servicing right (MSR) from the owner of the mortgage or because we entered into a subservicing or special servicing agreement with the entity that owns the MSR.

          We are one of the largest servicers of subprime residential mortgage loans. As of December 31, 2009, we serviced 351,595 loans and real estate properties with an aggregate UPB of $49,980,077 under 547 servicing agreements for over 33 clients. These clients include firms such as Deutsche Bank, Credit Suisse and Goldman Sachs. The mortgaged properties securing the loans that we service are geographically dispersed throughout all 50 states, the District of Columbia and two U.S. territories. The five largest concentrations of properties are located in California, Florida, New York, Texas and Illinois which, taken together, comprise 40% of the loans serviced at December 31, 2009. California has the largest concentration with 38,008 loans or 11% of the total.

          Subprime mortgage loan servicing involves special loss mitigation challenges not usually present in prime loan servicing. Over a period of years, we have developed proprietary best practices for reducing loan losses, and we continue to refine and enhance these practices to meet the challenges posed by the current market. Our proactive measures help borrowers who become delinquent begin paying again on their loans and avoid foreclosure. In the current environment, loan modifications often provide a better outcome for loan investors than foreclosures or forbearance plans. We pride ourselves on keeping more borrowers in their homes than other servicers and avoiding foreclosure. This is a “win-win” situation for both the investors and the borrowers that we serve.

6


          Our largest source of revenue is servicing fees. Most purchased MSRs entitle us generally to earn an annual fee of up to 50 basis points of average UPB of the loans serviced. Under subservicing arrangements, where we do not pay for the MSR, we generally earn an annual fee of between 5 and 45 basis points of the average UPB. As a result, our revenue is a function of UPB and the number of delinquent loans that resolve either through borrower payments, modifications (HAMP and non-HAMP) or through a sale of the underlying mortgaged property following foreclosure (Real Estate Owned or REO).

          These fees are supplemented by ancillary income, including late fees from borrowers who are delinquent in remitting their monthly mortgage payments, Speedpay ® fees from borrowers who pay by telephone or through the Internet and interest earned on loan payments that we have collected but have not yet remitted to the owner of the mortgage (float earnings).

          Loan Resolution (Modification and REO Sales). The importance of loan resolution is heightened by our revenue recognition policies. We do not recognize delinquent servicing fees or late fees until cash is collected. The following loan modification scenarios describe the timing of our revenue recognition. The following amounts, which are not presented in thousands, are illustrative and can fluctuate:

 

 

 

 

1.

When a loan becomes current via our non-HAMP modification process, we earn $500 of deferred servicing fees and $500 of late fees.

 

2.

When a loan becomes current via our HAMP modification process we earn $500 on deferred servicing fees, forfeit $500 of late fees and accrue $1,000 in HAMP success fees, or $1,500 if the loan was in imminent risk of default. However, if the loan is in imminent risk of default there will be no deferred servicing fees.

          Loan modification activities are a pipeline leading to modification of the loan or to foreclosure and sale of the resulting REO. The following process describes our modification pipeline:

 

 

 

 

1.

First, the loan and borrower are evaluated for HAMP eligibility. If HAMP criteria are met, HAMP documentation and trial offer phases proceed. The three most common reasons for failure to qualify for HAMP are inability to meet the debt to income (DTI) ratio, inadequate documentation or inadequate or inconsistent income.

 

2.

If the criteria to qualify for HAMP are not met, the loan and borrower are evaluated utilizing non-HAMP criteria that are more flexible and focus on the borrower’s ability to pay and on maximizing net present value for investors. If the criteria are met, non-HAMP documentation and trial offer phases proceed.

 

3.

If the loan and borrower qualify for neither a HAMP nor a non-HAMP modification, liquidation proceeds via either a short sale or foreclosure and REO sale.

          The majority of loans that we modify are delinquent although we do modify some performing loans proactively under the American Securitization Forum guidelines. The most common term modified is the interest rate. Some modifications also involve the forgiveness or rescheduling of delinquent principal and interest. To select the best resolution option for a delinquent loan, we perform a structured analysis of all options using information provided by the borrower as well as external data. We use recent broker price opinions to value the property. We then determine the option with the highest net present value for the loan investor.

          The number of completed modifications correlates with the number of trial offers made to borrowers in the prior quarter. Active trial modifications represent an inventory of potential completed modifications in the following quarter. The 6,937 active trial modifications in the third quarter of 2009 contributed approximately half of the completed modifications in the fourth quarter of 2009 with the remainder coming from non-HAMP modifications initiated and completed in the fourth quarter.

          Advance Obligation. As a servicer or subservicer, we have a variety of contractual obligations including the obligation to service the mortgages according to certain standards and to advance funds to securitization trusts in the event that borrowers are delinquent on their monthly mortgage payments. When a borrower becomes delinquent, we “advance” cash to the REMIC Trustees on the scheduled remittance date thus creating a receivable due us from the REMIC Trust. We advance principal and interest (P&I Advances), taxes and insurance (T&I Advances) and legal fees, maintenance and preservation costs on properties that have already been foreclosed (Corporate Advances). If we determine that our P&I Advances cannot be recovered from the projected proceeds, we generally have the right to cease making P&I advances, declare advances in excess of net proceeds to be non-recoverable and, in most cases, immediately recover any excess advances from the general collections accounts of the respective REMIC Trustee. With T&I Advances and Corporate Advances, we continue to advance if net proceeds exceed projected future advances without regard to advances already made. Most of our advances have the highest standing and are “top of the waterfall” so that 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. The costs incurred in meeting these obligations include, but are not limited to, the interest expense incurred to finance the servicing advances.

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          Significant Variables. The key variables that significantly affect operating results in the Servicing segment are aggregate UPB, delinquencies and prepayment speed.

          Aggregate Unpaid Principal Balance (UPB) . Aggregate UPB is a key revenue driver. As noted earlier, servicing fees are a percentage of UPB, and growth in the portfolio means growth in servicing fees. Additionally, a larger servicing portfolio generates increased ancillary fees and leads to larger custodial balances generating greater float income. A larger servicing portfolio also increases expenses although, generally, less rapidly than the growth in UPB. To the extent that we grow UPB through the purchase of MSRs, our amortization of MSRs will generally increase with our servicing revenues. We will also incur additional interest expense to finance servicing advances, and our compensating interest expense will generally increase as the size of our portfolio increases.

          Delinquencies . Delinquencies also have a significant impact on our results of operations. Non-performing loans are more expensive to service than performing loans because our cost of servicing is higher and, although collectability is generally not a concern, advances to our investors increase which results in higher financing costs. Performing loans include those loans that are current or have been delinquent for less than 90 days in accordance with their original terms and those loans for which borrowers are making scheduled payments under loan modifications, forbearance plans or bankruptcy plans. We consider all other loans to be non-performing.

          When borrowers are delinquent, the amount of funds that we are required to advance to the investors on behalf of the borrowers increases. While the collectibility of advances generally is not an issue, we do incur significant costs to finance those advances. We utilize both securitization, (i.e., match funded liabilities) and revolving credit facilities to finance our advances. As a result, increased delinquencies result in increased interest expense.

          In addition, the cost of servicing non-performing loans is higher than the cost of servicing performing loans primarily because the loss mitigation techniques that we employ to keep borrowers in their homes are more costly than the techniques used in handling a performing loan. When loans are performing, we have limited interaction with the borrowers, and relatively low-cost customer service personnel conduct most of those interactions. Once a loan becomes delinquent, however, we must employ our loss mitigation capabilities to work with the borrower to return the loan to performing status. These procedures involve increased contact with the borrower and the development of forbearance plans or loan modifications by highly skilled consultants who command higher compensation. This increase in operating expenses should be somewhat offset by increased late fees for loans that become delinquent but do not enter the foreclosure process.

          Prepayment Speed . The rate at which the UPB for a pool or pools of loans declines has a significant impact on our business. Items reducing UPB include normal principal and interest payments, refinancing, voluntary property sales and involuntary property sales such as foreclosures. Prepayment speed impacts future servicing fees, amortization of servicing rights, float income, interest expense on advances and compensating interest expense. When prepayment speeds increase, our servicing fees decrease faster, which results in a shorter amortization period and higher amortization expense, since servicing rights are amortized in proportion to total expected income over the life of a portfolio. The converse is true when prepayment speeds decrease.

          Prepayment speeds affect our float balances and float income as decreased prepayment speeds lead to lower float balances and lower float income due to lower invested balances. Lower prepayments have been associated with higher delinquency rates, higher advances balances and interest expense, but lower compensating interest expense. Compensating interest expense represents the difference between the full month of interest that we are required to remit to the REMIC Trustee in the month that a loan pays off and the amount of interest that we actually collect from the borrower for that month, and is included in “Servicing and origination expenses” in our consolidated statements of operations.

          Third-Party Servicer Ratings. The U.S. Department of Housing and Urban Development, Freddie Mac and Fannie Mae have approved OLS as a loan servicer. Standard & Poor’s Rating Services (Standard & Poor’s) has rated OLS “Strong” as a Residential Subprime Servicer and Residential Special Servicer. “Strong” represents Standard & Poor’s highest ratings category. Moody’s Investors Services, Inc. (Moody’s) has rated OLS “SQ2–” as a Residential Subprime Servicer and “SQ2” as a Residential Special Servicer. “SQ2” represents Moody’s second highest rating category. Fitch Ratings (Fitch) has rated OLS “RPS2” for Residential Subprime Servicing and “RSS2” for Residential Special Servicing. These represent Fitch’s second highest categories.

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Loans and Residuals

          Our Loans and Residuals segment consists of two components:

          Trading and investing activities . During 2007, we de-emphasized our whole loan purchase and securitization activities. Long-term, the key driver of our results is the performance of our assets. The default risk associated with our loans held for resale and with the loans underlying our mortgage backed securities and the success of our loan modification initiatives are particularly important to asset performance.

          Subprime originations . In January 2007, we decided to close our subprime loan origination operation and no longer originate loans. Our loan origination operation included the results of Funding America, LLC (Funding America) which we began to include in our consolidated financial statements as of December 31, 2005. Our decision to discontinue the subprime loan origination component included closing Funding America.

Asset Management Vehicles

          In 2007, we began developing asset management vehicles that benefit from our servicing and loss mitigation capabilities. These entities provide us with a source of servicing. By involving third parties in the funding of these entities, we are able to realize a greater benefit from our capabilities than would be possible if we were to engage in these ventures using only our own financial resources.

          Ocwen Structured Investments, LLC (OSI). To date we have invested $37,500 in OSI. Our commitment to invest up to an additional $37,500 in OSI expired on September 18, 2008. OSI began operations during the second quarter of 2007. Our ownership interest in OSI is 25%. OSI invests primarily in MSRs and the related lower tranches and residuals of residential mortgage-backed securities, the credit risk of which is partially mitigated by credit default swaps. Under agreements that we entered into with OSI, we are responsible for providing various management services and for subservicing the portfolio of loans underlying its MSRs. During 2009, we received distributions from OSI totaling $4,875 that represent return of capital.

          Ocwen Nonperforming Loans, LLC (ONL). Our investments in ONL and its related entities represent approximately a 25% equity interest. To date we have invested a combined $37,623 in ONL and its related entities and have committed to invest up to an additional $33,840. This commitment expires on September 13, 2010. These entities invest in non-performing residential loans purchased at a discount and in foreclosed real estate. Under agreements that we have entered into with ONL and affiliates, we provide various management services and act as the servicer of the loans and foreclosed real estate. During 2009, we received distributions from ONL and related entities totaling $1,783 that represent return of capital.

Mortgage Services, Financial Services and Technology Products

          Substantially all of the Mortgage Services, Financial Services and Technology Products operations were separated as of August 10, 2009 as part of the Separation of the Ocwen Solutions line of business, except for GSS and BMS which remain at Ocwen. As a separate, publicly traded company, Altisource Portfolio Solutions S.A. will file a Form 10-K with the SEC.

Corporate Items and Other

          In Corporate Items and Other, we report business activities that are individually insignificant, items of revenue and expense not directly related to a business unit, interest income on short-term investments of cash and the related costs of financing these investments and certain other corporate expenses. Our corporate debt is also included in Corporate Items and Other. Insignificant business activities include our affordable housing investment activities, among others. We report the results of operations of BOK in the consolidated financial statements as discontinued operations.

SOURCES OF FUNDS

          We meet our current need for funds through financings, such as match funded liabilities, lines of credit and other secured borrowings, through funds generated by operations, such as servicing fees (including float earnings and ancillary fees), through collections of advances that were not financed and through payments received on loans held for resale and trading securities. Our primary uses of funds are the funding of servicing advances, the payment of interest and operating expenses and the repayments of borrowings. We closely monitor our liquidity position and ongoing funding requirements, and we invest available funds in short-term investment grade securities.

          Our ability to sustain and grow our Servicing business depends in part on our ability to maintain and expand sources of financing to fund servicing advances and to purchase new servicing rights. We finance most of our advances using variable and fixed rate match funded securitization facilities. From time to time, we also finance other assets with debt, as we believe to be appropriate.

9


          Delinquency rates determine the amount of funds that we, as servicer, must advance to meet contractual requirements. Meeting the need to advance these funds requires readily available unused borrowing capacity. However, as noted earlier, we are generally obligated to advance funds only to the extent that we believe that the advances are recoverable. The risk of loss on advances is low because advances generally have priority over the securities that the securitization trust has issued.

          See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for additional financial information regarding our sources of funds.

COMPETITION

          A discussion of competition as it relates to our primary businesses appears in Item 1A, “Risk Factors.”

SUBSIDIARIES

          A list of our significant subsidiaries is set forth in Exhibit 21.0.

EMPLOYEES

          As of December 31, 2009, we had 1,894 employees, of which 328 were resident in our U.S. facilities, 1,469 were resident in our India operations centers and 97 were based in other countries. We have developed our India operations centers over the past eight years.

          In the U.S., our principal location as of December 31, 2009 included our headquarters in West Palm Beach, Florida, which had 241 employees. We had 87 employees at various other locations in the U.S.

          Of our employees in India as of December 31, 2009, 778 were in the city of Bangalore and 691 were in the city of Mumbai. Our India workforce is deployed as follows:

 

 

 

 

86% are in Servicing,

 

12% are in support functions, including Human Resources, Corporate Services, Accounting, Legal and Risk Management and

 

2% are in other business segments.

REGULATION

          Our business is subject to extensive regulation by federal, state and local governmental authorities including the Federal Trade Commission, the SEC and the state agencies that license our servicing and collection entities. We also must comply with a number of federal, state and local consumer protection laws including, among others, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Fair Credit Reporting Act and the Homeowners Protection Act. These statutes apply to debt collection, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and they mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes and regulations are enacted, promulgated or amended.

          We are also subject to licensing and regulation as a mortgage service provider and/or debt collector in a number of states. We are subject to audits and examinations conducted by the states. From time to time, we receive requests from state and other agencies for records, documents and information regarding our policies, procedures and practices regarding our loan servicing and debt collection business activities. We incur significant ongoing costs to comply with governmental regulations.

          Effective June 30, 2005, we voluntarily terminated our status as a federal savings bank, a process we refer to as “debanking.” Prior to returning our original thrift charter to the Office of Thrift Supervision (OTS), we operated as a federal savings bank, and OCN was a registered savings and loan holding company. Our primary regulatory authority was the OTS.

          Following debanking, we continued the Bank’s non-depository businesses, including its residential mortgage servicing business, under OLS, a licensed mortgage servicer in all 50 states, the District of Columbia and two U.S. territories. We entered into various agreements to obtain the approval of our regulator, the OTS, for our debanking plan. We directly or indirectly received assignment of all of the assets, liabilities and business remaining after the consummation of the debanking transactions (the Assignment). We entered into an agreement (the Guaranty) in favor of the OTS and any holders of claims with respect to the liabilities we assumed in connection with the Assignment. The Guaranty contains affirmative covenants relating to the maintenance of a $5,000 cash collateral account, reporting requirements, transactions with affiliates, preservation of the existence of our subsidiaries and maintenance of not less than $35,000 of unencumbered assets.

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          The Guaranty also contains negative covenants that restrict our ability to (i) incur indebtedness if certain financial ratios are not achieved or if we fail to maintain a specified minimum net worth, (ii) enter into merger transactions or a sale of substantially all of our assets, (iii) sell, lease, transfer or otherwise dispose of our assets, or (iv) pay dividends or acquire our capital stock. We agreed not to declare or pay any dividends on or acquire any of our capital stock or other ownership interests or make any distributions or return of capital to our stockholders, partners or members, except for (i) such dividends or distributions that are payable only in OCN’s common stock or (ii) such declarations, dividends, acquisitions, distributions or returns of capital in cash or other property if we maintain a minimum net worth of $333,000 and rating of B2 from Moody’s and B- from S&P on our unsecured, non credit-enhanced debt and any such capital distributions do not exceed our consolidated net income for the year plus our retained earnings for the two preceding years.

          The Guaranty will remain in effect until the later of (a) the sixth anniversary of the date on which our federal bank charter was cancelled or (b) the date on which we have paid in full (i) any obligations that arise out of certain assumed liabilities with respect to which a claim has been asserted on or prior to the sixth anniversary of the date on which our federal bank charter was cancelled and (ii) all other amounts payable by us under the Guaranty.

          While we do not expect that compliance with the Guaranty will have a material adverse impact on our financial condition, results of operations or cash flows, if an event of default were to occur, we would be obligated to increase the cash collateral amount. Furthermore, the OTS and other beneficiaries of the Guaranty are entitled to initiate enforcement proceedings against us, which, in the case of the OTS, could result in monetary civil penalties.

          There are a number of foreign regulations that are applicable to our operations in India including acts that govern licensing, employment, safety, taxes, insurance and the basic law which governs the creation, continuation and the winding up of companies as well as the relationships between the shareholders, the company, the public and the government. The Central Act is applicable to all of India while various state acts may be applicable to certain locations in India. Non-compliance with the laws and regulations of India could result in fines, penalties or sanctions to our operations. In addition, non-compliance could lead to loss of reputation and other penalties and prosecution.

AVAILABLE INFORMATION

          Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available free of charge through our website (http://www.ocwen.com) as soon as such material is electronically filed with or furnished to the SEC. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, including OCN, that file electronically with the SEC. The address of that site is www.sec.gov. We have also posted on our website, and have available in print upon request, the charters for our Audit Committee, Compensation Committee and Governance Committee, our Governance Guidelines and our Code of Ethics and Code of Ethics for Senior Financial Officers. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to or waiver of the Code of Ethics for Senior Financial Officers, as well as any amendment to the Code of Ethics or waiver thereto applicable to any executive officer or director. The information provided on our website is not part of this report and is therefore not incorporated herein by reference.

 

 

I TEM 1A.

RISK FACTORS (Dollars in thousands, except share data or unless otherwise indicated)

          An investment in our common stock involves significant risks that are inherent to our business. We describe below the principal risks and uncertainties that management believes affect or could affect us. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. You should carefully read and consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report before you decide to invest in our common stock. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose all or part of your investment.

Risks Related to the Company

Continued economic slowdown and/or continued deterioration of the housing market could increase delinquencies, defaults, foreclosures and advances. An increase in delinquencies, defaults and foreclosure rates could increase both operating expenses and interest expense on advances and could cause a reduction in income from, and the value of, our servicing portfolio as well as loans and subordinate and residual securities.

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          During any period in which the borrower is not making payments, we are required under most of our servicing agreements to advance our own funds to meet contractual principal and interest remittance requirements for investors, pay property taxes and insurance premiums and process foreclosures. We also advance funds to maintain, repair and market real estate properties on behalf of investors. Most of our advances have the highest standing and are “top of the waterfall” so that 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.

 

 

 

 

Revenue. An increase in delinquencies may delay the timing of revenue recognition because we recognize servicing fees as earned which is generally upon collection. An increase in delinquencies also leads to lower float balances and float earnings.

 

Expenses. An increase in advances outstanding relative to the change in the size of the servicing portfolio can result in substantial strain on our financial resources. This occurs because excess growth of advances increases financing costs with no offsetting increase in revenue, thus reducing profitability. If we are unable to fund additional advances, we could breach the requirements of our servicing contracts. Such developments could result in our losing our servicing rights, which would have a substantial negative impact on our financial condition and results of operations and could trigger cross-defaults under our various credit agreements.

 

Valuation of MSRs. Apart from the risk of losing our servicing rights, defaults are involuntary prepayments resulting in a reduction in UPB. This may result in higher amortization and an impairment in the value of our MSRs such that revenue may decline and interest expense may increase.

We may be unable to obtain sufficient capital to meet the financing requirements of our business. Our financing strategy includes the use of significant leverage. Accordingly, our ability to finance our operations and repay maturing obligations rests in large part on our ability to borrow money. Our ability to borrow money is affected by a variety of factors including:

 

 

 

 

limitations imposed on us by existing lending and similar agreements that contain restrictive covenants that may limit our ability to raise additional debt;

 

the recent decline in liquidity in the credit markets due in part to the recent turmoil in the subprime mortgage market;

 

the strength of the lenders from whom we borrow; and

 

limitations on borrowing on advance facilities which is limited by the amount of eligible collateral pledged and may be less than the borrowing capacity of the facility.

          An event of default, a negative ratings action by a rating agency, the perception of financial weakness, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and make it difficult for us to renew existing credit facilities and obtain new lines of credit. We are currently exploring other methods of raising capital including bank financing, conduit financing or equity or debt offerings. We cannot predict whether any additional financing will be available at all or on acceptable terms.

          Our advance facilities are revolving facilities, and in a typical monthly cycle, we repay up to one-third of the borrowings under these facilities from collections. During the remittance cycle, which starts in the middle of each month, we depend on our lenders to provide the cash necessary to make remittances to the Servicing investors where such new advances represent eligible collateral under our advance facilities. If one or more of these lenders were to fail, we may not have sufficient funds to meet our obligations.

A significant increase in prepayment speeds or delinquencies could adversely affect our financial results. Prepayment speed is a significant driver of our business. Prepayment speed is the measurement of how quickly borrowers pay down the UPB of their loans. Prepayment speeds have a significant impact on our revenues, our expenses and on the valuation of our MSRs as follows:

 

 

 

 

Revenue . If prepayment speeds increase, our servicing fees will decline more rapidly because of the greater than expected decrease in the UPB on which those fees are based. The reduction in servicing fees would be somewhat offset by increased float earnings because the faster repayment of loans will result in higher balances in the custodial accounts that generate the float earnings. Conversely, decreases in prepayment speeds drive increased servicing fees and lead to lower float balances and float earnings. An increase in delinquencies may delay the timing of revenue recognition because we recognize servicing fees as earned which is generally upon collection. An increase in delinquencies also leads to lower float balances and float earnings and more borrowing and interest expense.

12



 

 

 

 

Expenses . Amortization of MSRs is our largest operating expense. Since we amortize servicing rights in proportion to total expected income over the life of a portfolio, an increase in prepayment speeds will lead to increased amortization expense as we revise downward our estimate of total expected income. Faster prepayment speeds would also result in higher compensating interest expense. Compensating interest expense represents the difference, in the month in which a loan is repaid, between the full month of interest that we are required to remit to the trust and the amount of interest that we actually collect from the borrower. Decreases in prepayment speeds lead to decreased amortization expense as the period over which we amortize MSRs is extended. Slower prepayment speeds also lead to lower compensating interest expense.

 

 

 

 

Valuation of MSRs . We base the price we pay for MSRs and the rate of amortization of those rights on, among other things, our projection of the cash flows from the related pool of mortgage loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speeds were significantly greater than expected, the carrying value of our MSRs could exceed their estimated fair value. When the carrying value of MSRs exceeds their fair value, we are required to record an impairment charge which has a negative impact on our financial results.

We may be unable to maintain the size of our servicing portfolio. With strong competition in our primary business segment, special servicing contracts and purchases of servicing portfolios may not be sufficient to maintain scale in the servicing business given the continued absence of new securitizations. The lack of subprime originations in 2008 and 2009 has had and may continue to have an adverse impact on our ability to maintain or expand our servicing portfolio. The market for new special servicing contracts, at present, remains relatively small. The strategy of purchasing servicing portfolios requires willing sellers and sufficient advance financing. As a result, we can provide no assurance that we will be able to acquire the servicing required to implement our strategy.

          If we are unable to acquire substantial new servicing or subservicing business, our revenues may continue to decline as a result of the net runoff of the portfolio. As a result, we may be unable to sustain growth or even to maintain our current level of business. In determining the purchase price for servicing rights, management makes assumptions regarding the following:

 

 

 

 

 

 

 

the rates of prepayment and repayment within the underlying pools of mortgage loans;

 


our cost to service the loans;
ancillary fee income; and

 

projected rates of delinquencies and defaults;

 

amount of future servicing advances.

 

future interest rates;

 

 

 

          If these assumptions are inaccurate or the bases for the assumptions change, the price we pay to acquire servicing rights may prove to be too high. This could result in lower than expected profitability or a loss. To the degree that we purchase servicing rights in the future, our success is highly dependent upon accurate pricing of servicing rights.

We are subject to investment risks. We have, in some cases, retained subordinate and residual interests in connection with the securitization of our loans and have acquired other residual interests directly. In addition, we have invested in certain asset management vehicles that invest principally in the same classes of assets. The performance of these types of securities has, at times, been negatively impacted by higher than expected prepayment speeds and credit losses experienced on the mortgage loans collateralizing the securities. We remain subject to the risk of loss on our remaining securities primarily to the extent that actual credit losses exceed expected credit losses in the future.

          We also have invested in loans that we hold for resale. We believe that we have established adequate valuation allowances for declines in fair values below the cost of these loans in accordance with GAAP. However, future increases to these valuation allowances may be necessary due to changes in economic conditions and the performance of these loans prior to their sale or securitization. Increases in our valuation allowance for declines in fair value below cost could adversely affect our results of operations.

We use estimates in determining the fair value of certain assets, such as MSRs, auction rate securities and residual securities. If our estimates prove to be incorrect, we may be required to write down the value of these assets which could adversely affect our earnings. We use internal financial models that use, wherever possible, market participant data to value our MSRs, auction rate securities and residual securities. These models are complex and use asset-specific collateral data and market inputs for interest and discount rates and liquidity dates. For residual securities, these valuation models consider the complex cash flow structure which may differ on each securitization.

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          Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. If prepayment speeds increase, more than estimated, loan loss levels are higher than anticipated or financial market illiquidity continues beyond our estimate, we may be required to write down the value of certain assets, which could adversely affect our earnings.

A downgrade in our servicer ratings could have an adverse effect on our business, financial condition or results of operations. Standard & Poor’s, Moody’s and Fitch rate us as a mortgage servicer. Our current favorable servicer ratings from these entities are important to the conduct of our loan servicing business. We can provide no assurance that these ratings would not be downgraded in the future. Any such downgrade could have an adverse effect on our business, financing activities, financial condition or results of operations.

Governmental and legal proceedings and related costs could adversely affect our financial results. An adverse judgment in various lawsuits, including purported class action lawsuits, could affect our financial condition and results of operations. We and certain of our affiliates have been named as defendants in a number of purported class action lawsuits challenging our residential loan servicing practices. At least one of our competitors has paid significant sums to settle lawsuits brought against it that raised claims similar to those raised in the lawsuits brought against us and our affiliates. Although we believe that we have meritorious legal and factual defenses to the lawsuits, we can provide no assurance that we will ultimately prevail. Litigation and other proceedings may require that we pay settlement costs, damages, penalties or other charges which could adversely affect our financial results. For more information about our legal proceedings, see “Legal Proceedings.”

          The OTS and other beneficiaries of the Guaranty could initiate enforcement proceedings against us which, in the case of the OTS, could result in civil money penalties. Accordingly, there can be no assurance that any such events, were they to occur, would not have a material adverse effect on our financial condition, results of operations or cash flows.

The expanding body of federal, state and local regulation and/or the licensing of loan servicing, collections or other aspects of our business may increase the cost of compliance and the risks of noncompliance. As noted in “Regulation,” our business is subject to extensive regulation by federal, state and local governmental authorities and is subject to various laws and judicial and administrative decisions imposing requirements and restrictions on a substantial portion of our operations. The volume of new or modified laws and regulations has increased in recent years and, in addition, some individual municipalities have begun to enact laws that restrict loan servicing activities including delaying or preventing foreclosures or forcing the modification of certain mortgages. If our regulators impose new or more restrictive requirements, we may incur additional significant costs to comply with such requirements which could further adversely affect our results of operations or financial condition. In addition, our failure to comply with these laws and regulations could possibly lead to civil and criminal liability; loss of licensure; damage to our reputation in the industry; fines and penalties and litigation, including class action lawsuits; or administrative enforcement actions. Any of these outcomes could harm our results of operations or financial condition.

Future legislative changes and other actions and changes may adversely affect future incremental revenues. Under government programs such as the Home Affordable Modification Program (HAMP), a participating servicer may be entitled to receive financial incentives in connection with any modification plans it enters into with eligible borrowers and subsequent “pay for success” fees to the extent that a borrower remains current in any agreed upon loan modification. Changes in current legislative actions regarding such loan modification and refinance programs, future U.S. federal, state and/or local legislative or regulatory actions that result in the modification of outstanding mortgage loans, and changes in the requirements necessary to qualify for refinancing mortgage loans may impact the future extent to which we participate in and receive financial benefits from such programs and may have a material effect on our business. Additionally, the U.S. Congress and/or various states and local legislators may enact additional legislation or regulatory action designed to address the current economic crisis or for other purposes that could have an effect on the execution of our business strategies. To the extent we participate in the HAMP, there is no guarantee as to the continued expectation of future incremental revenues.

          The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the S.A.F.E. Act) requires the individual licensing and registration of those engaged in the business of a loan originator. The S.A.F.E. Act is designed to improve the accountability on the part of loan originators, combat fraud and enhance consumer protections by encouraging states to establish a national licensing system and minimum qualification requirements for applicants. The Department of Housing and Urban Development (HUD) is the federal agency charged with establishing and enforcing a licensing and registration system for states that fail to establish one that meets the minimum requirements of the S.A.F.E. Act. In a proposed rule published by HUD on December 15, 2009, HUD has proposed extending the licensing requirements for loan originators to servicing personnel that are performing modifications. The servicing industry has responded to this proposed rule by requesting HUD reconsider its position as the licensing costs and impact to the modification process will increase the cost of servicing. With comments due on the proposed rule on March 5, 2010, it is not known at this time whether HUD will change its position.

14


Our earnings may be inconsistent . Our past financial performance should not be considered a reliable indicator of future performance, and historical trends may not be reliable indicators of anticipated financial performance or trends in future periods.

          The consistency of our operating results may be significantly affected by inter-period variations in our current operations including the amount of servicing rights acquired and the changes in realizable value of those assets due to, among other factors, increases or decreases in prepayment speeds.

          Certain non-recurring gains and losses that have significantly affected our operating results may result in substantial inter-period variations in financial performance.

Our hedging strategies may not be successful in mitigating our risks associated with interest rate risk. At present, we have entered into two interest rate caps to fix our exposure to variable interest rates under two of our match funded securitizations. If we are successful in acquiring additional servicing or sub-servicing rights, there is no assurance that we will be able to obtain the fixed rate financing that would be necessary to protect us from rising interest rates. Therefore, we may consider utilizing various derivative financial instruments. Nevertheless, no hedging strategy can completely protect us. The derivative financial instruments that we select may not have the effect of reducing our interest rate risks. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could actually increase our risks and losses. In addition, hedging strategies involve transaction and other costs. We cannot be assured that our hedging strategies and the derivatives that we use will adequately offset the risks of interest rate volatility or that our hedging transactions will not result in or magnify losses.

We have significant operations in India that could be adversely affected by changes in the political or economic stability of India or by government policies in India or the U.S. Nearly 1,500 of our employees are located in India. A significant change in India’s economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally and our business in particular. The political or regulatory climate in the U.S. or elsewhere also could change so that it would not be lawful or practical for us to use international operations centers. For example, changes in privacy regulations could require us to curtail our use of lower-cost operations in India to service our businesses. If we were to cease our operations in India and transfer these operations to another geographic area, we could incur increased overhead costs that could materially and adversely affect our results of operations.

          We may need to increase the levels of our employee compensation more rapidly than in the past to retain talent. Unless we are able to continue to enhance the efficiency and productivity of our employees, wage increases in the long term may reduce our profitability.

Technology failures could damage our business operations and increase our costs. The financial services industry as a whole is characterized by rapidly changing technologies, and system disruptions and failures may interrupt or delay our ability to provide services to our customers. The secure transmission of confidential information over the Internet is essential to our maintaining consumer confidence in certain of our services. Security breaches, acts of vandalism and developments in computer capabilities could result in a compromise or breach of the technology that we use to protect our customers’ personal information and transaction data. Consumers generally are concerned with security breaches and privacy on the Internet, and Congress or individual states could enact new laws regulating the electronic commerce market that could adversely affect us.

The loss of the services of our senior managers could have an adverse effect on us. The experience of our senior managers is a valuable asset to us. Our chairman and chief executive officer, William C. Erbey, has been with us since our founding in 1987, and our president, Ronald M. Faris, joined us in 1991. Other senior managers have been with us for 10 years or more. We do not have employment agreements with, or maintain key man life insurance relating to, Mr. Erbey, Mr. Faris or any of our other executive officers. The loss of the services of our senior managers could have an adverse effect on us.

Our directors and executive officers collectively own a large percentage of our common shares and could influence or control matters requiring shareholder approval. Our directors and executive officers and their affiliates collectively own or control approximately 24% of our outstanding common shares. This includes approximately 18% owned or controlled by our chairman and chief executive officer, William C. Erbey, and approximately 6% owned or controlled by our director and former chairman, Barry N. Wish. As a result, these shareholders could influence or control virtually all matters requiring shareholder approval, including the amendment of our articles of incorporation, the approval of mergers or similar transactions and the election of all directors.

15


We are exposed to market risk, including, among other things, liquidity risk, prepayment risk and foreign currency exchange risk. We are exposed to liquidity risk primarily because of the high variable daily cash requirements to support our servicing business including the requirement to make advances pursuant to servicing contracts and the process of remitting borrower payments to the custodial accounts. In general, we finance our operations through operating cash flows and various other sources of funding including match funded agreements, secured lines of credit and repurchase agreements. We believe that we have adequate financing for the next twelve months. On April 30, 2009, we were successful in negotiating an extension of the term note secured by our auction rate securities to June 30, 2010. However, because of the failed auctions, the market for auction rate securities is not currently liquid. In the event we need to liquidate our investment, we may not be able to do so without a loss of capital.

          We are exposed to interest rate risk to the degree that our interest-bearing liabilities mature or reprice at different speeds, or different bases, that our interest earning assets or when financed assets are not interest-bearing. Our servicing business is characterized by non-interest earning assets financed by interest bearing liabilities. Among the more significant non-interest earning assets are servicing advances and MSRs. At December 31, 2009, we had total advances and match funded advances of $968,529. We are also exposed to interest rate risk because a portion of our outstanding debt is variable rate. Rising interest rates may increase our interest expense. Nevertheless, earnings on float balances (assets) partially offset this variability. We have also entered into interest rate caps to hedge our exposure to rising interest rates.

          We are exposed to foreign currency exchange rate risk in connection with our investment in non-U.S. dollar functional currency operations to the extent that our foreign exchange positions remain unhedged. Our operations in Canada, Uruguay and India expose us to foreign currency exchange rate risk, but we consider this risk to be insignificant.

           The tax liability to Ocwen as a result of the Separation could be substantial. In the pre-spin-off restructuring, any assets that were transferred to Altisource or non-U.S. subsidiaries were taxable pursuant to Section 367(a) of the Code, or other applicable provisions of the Internal Revenue Code (the “Code”) and Treasury regulations. Taxable gains not recognized in the restructuring were generally recognized pursuant to the Separation itself under Section 367(b). The taxable gain recognized by Ocwen attributable to the transfer of assets to Altisource equaled the excess of the fair market value of each asset transferred over Ocwen’s basis in such asset. Ocwen’s basis in some assets transferred to Altisource may have been low or zero which could result in a substantial tax liability to Ocwen. In addition, the amount of taxable gain was based on a determination of the fair market value of Ocwen’s transferred assets. The determination of fair market values of non-publicly traded assets is subjective and could be subject to closing date adjustments or future challenge by the Internal Revenue Service (the “IRS”) which could result in an increased U.S. federal income tax liability to Ocwen.

Risks Relating to Ownership of Our Common Shares

Our common share price may experience substantial volatility which may affect your ability to sell our common shares at an advantageous price. The market price of our common shares has been and may continue to be volatile. For example, the closing market price of our common shares on the New York Stock Exchange has fluctuated during the twelve months ended December 31, 2009 between $8.37 per share and $14.30 per share and may continue to fluctuate. Therefore, the volatility may affect your ability to sell our common shares at an advantageous price. Market price fluctuations in our common shares may be due to acquisitions, dispositions, the Separation or other material public announcements along with a variety of additional factors including, without limitation, those set forth under “Risk Factors” and “Forward-Looking Statements.” In addition, the stock markets in general, including the New York Stock Exchange, recently have experienced extreme price and trading fluctuations. These fluctuations have resulted in volatility in the market prices of securities that often has been unrelated or disproportionate to changes in operating performance. These broad market fluctuations may adversely affect the market prices of our common shares.

There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. We are not restricted from issuing additional shares of our common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock.

          We also have currently outstanding, as of December 31, 2009 $56,435 aggregate principal amount of 3.25% contingent convertible senior unsecured notes due 2024. We may issue additional shares of common stock in satisfaction of our make-whole obligations relating to our 3.25% contingent convertible senior unsecured notes due 2024. The issuance of additional shares of our common stock upon conversion of the 3.25% contingent convertible senior unsecured notes due 2024 or other issuances of our common stock or convertible or other equity linked securities, including options, and warrants, or otherwise, will dilute the ownership interest of our common stockholders.

16


          Sales of a substantial number of shares of our common stock or other equity-related securities in the public market could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock.

          There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. We are not restricted from issuing additional shares of our common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock.

Because of certain provisions of our organizational documents, takeovers may be more difficult possibly preventing you from obtaining an optimal share price. Our amended and restated articles of incorporation provide that the total number of shares of all classes of capital stock that we have authority to issue is 220 million, of which 200 million are common shares and 20 million are preferred shares. Our Board of Directors has the authority, without a vote of the shareholders, to establish the preferences and rights of any preferred or other class or series of shares to be issued and to issue such shares. The issuance of preferred shares could delay or prevent a change in control. Since our Board of Directors has the power to establish the preferences and rights of the preferred shares without a shareholder vote, our Board of Directors may give the holders of preferred shares preferences, powers and rights, including voting rights, senior to the rights of holders of our common shares.

Risks Relating to the Separation of Altisource

We could have conflicts with Altisource, and our Chief Executive Officer and Chairman of the Board, and other officers and directors, could have conflicts of interest due to their relationships with Ocwen and Altisource which may be resolved in a manner adverse to us. Conflicts may arise between Ocwen and Altisource as a result of our ongoing agreements and the nature of our respective businesses. Among other things, we became a party to a variety of agreements with Altisource in connection with the Separation, and we may enter into further agreements with Altisource after the Separation. Certain of our executive officers and directors may be subject to conflicts of interest with respect to such agreements and other matters due to their relationships with Altisource.

          William C. Erbey, Ocwen’s Chief Executive Officer and Chairman of the Board, became Altisource’s non-executive Chairman of the Board as a result of the Separation. As a result, he has obligations to us as well as to Altisource and may potentially have conflicts of interest with respect to matters potentially or actually involving or affecting Ocwen and Altisource.

          Mr. Erbey owns substantial amounts of Altisource common stock and stock options because of his relationships with Altisource. This ownership could create or appear to create potential conflicts of interest when our Chairman of the Board is faced with decisions that involve Ocwen, Altisource or any of their respective subsidiaries.

          Matters that could give rise to conflicts between Ocwen and Altisource include, among other things:

 

 

 

 

our ongoing and future relationships with Altisource, including related party agreements and other arrangements with respect to the administration of tax matters, employee benefits, indemnification and other matters;

 

the quality and pricing of services that Altisource has agreed to provide to us or that we have agreed to provide to Altisource and

 

any competitive actions by Altisource.

          We will also seek to manage these potential conflicts through dispute resolution and other provisions of our agreements with Altisource and through oversight by independent members of our Board of Directors. There can be no assurance that such measures will be effective, that we will be able to resolve all conflicts with Altisource or that the resolution of any such conflicts will be no less favorable to us than if we were dealing with a third party.

17


           New prospective tax regulations, if held applicable to the Separation, could materially increase tax costs to Ocwen. On June 10, 2009, the IRS issued new regulations under Section 7874 of the Code. The IRS further indicated that it intends to issue additional regulations with respect to transactions where a U.S. corporation contributes assets, including subsidiary equity interests, to a foreign corporation and distributes the shares of such corporation, as in the Separation and the related transactions. Our understanding of the IRS’s plans regarding these forthcoming regulations is that they would apply to the Separation only if the value of assets held by Ocwen’s corporate or partnership subsidiary entities (either currently, or those that were distributed from such entities as part of the plan encompassing the Separation) exceeded, in the aggregate, 60% of the value of Altisource when contributed to Altisource. It is not certain, however, what these regulations will provide for once adopted. Prior to completing the Separation, Ocwen’s board of directors required Ocwen and Altisource to receive a valuation from an independent valuation firm that enabled the Company to determine whether the value of these assets was less than 60% of the value of Altisource. Because we believe the value of these assets does not exceed the 60% threshold, as we confirmed by information we derived from the independent valuation, we do not believe that Section 7874 of the Code applies to the Separation. The independent valuation is not binding on the IRS. If the IRS were to successfully challenge this valuation, and find that the value of these assets exceeded 60% of the value of Altisource, then Ocwen would not be permitted to offset gain recognized on the transfer of these assets to Altisource with net operating losses, tax credits or other tax attributes. This could materially increase the tax cost to Ocwen of the Separation.

          We may not realize all of the anticipated benefits of potential future acquisitions. Our ability to realize the anticipated benefits of potential future acquisitions of assets and/or companies will depend, in part, on our ability to scale-up to appropriately service any such assets and/or integrate the businesses of such acquired companies with our business. The process of acquiring assets and/or companies may disrupt our business, and may not result in the full benefits expected. The risks associated with acquisitions include, among others:

 

 

 

 

 

 

coordinating market functions;

 

 

unanticipated issues in integrating information, communications and other systems;

 

 

unanticipated incompatibility of purchasing, logistics, marketing and administration methods;

 

 

retaining key employees; and

 

 

the diversion of management’s attention from ongoing business concerns.

          There is no assurance that we will realize the full benefits anticipated for any future acquisitions, or that we will be able to consummate any future acquisitions. In order to finance potential future acquisitions, we may, among other alternatives, issue additional shares of our common stock or convertible or other equity linked securities, including options, and warrants, or otherwise, which will dilute the ownership interest of our common stockholders.

 

 

I TEM 1B.

UNRESOLVED STAFF COMMENTS

          None.

18



 

 

I TEM 2.

PROPERTIES

          The following table sets forth information relating to our primary facilities at December 31, 2009:

 

 

 

 

 

 

Location

 

Owned/Leased

 

Square Footage

 

 

 

 

 

 

 

Executive office and headquarters:

 

 

 

 

 

West Palm Beach, Florida

 

Leased

 

41,860

 

Document storage and imaging facility:

 

 

 

 

 

Riviera Beach, Florida

 

Leased

 

30,000

 

 

 

 

 

 

 

Business operations and technology support offices:

 

 

 

 

 

Bangalore, India

 

Leased

 

56,530

 

Mumbai, India

 

Leased

 

23,140

 

Montevideo, Uruguay

 

Leased

 

16,668

 

          In addition to the facilities listed above, we also lease small offices in Atlanta, Georgia and Washington, D.C. We no longer occupy our former mortgage fulfillment center located in Lisle, Illinois and have sublet the space to a third party for the remaining term of the lease.

 

 

I TEM 3.

LEGAL PROCEEDINGS (Dollars in thousands)

          A description of material pending or recently settled legal proceedings to which OCN or its subsidiaries are a party follows:

          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 trial court struck the amended complaint in its entirety on the grounds of vagueness. Plaintiffs filed a third amended complaint on April 20, 2009. Ocwen has moved to dismiss the third amended complaint. The motion is fully briefed and pending decision by the trial court. 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 by the trial court 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 set a date of September 13, 2010 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.

19


          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 filed an answer denying all charges and a counterclaim for breach of contract, fraud, negligent misrepresentation and indemnification in connection with the MSR purchase transaction. Fact discovery is complete and both Ocwen and the Trustee have filed motions for partial summary judgment. We believe that the Trustee’s allegations against OLS are without merit and intend to continue to vigorously defend against this matter.

          OCN commenced separate arbitrations before the Financial Industry Regulatory Authority against certain 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. In October 2009 and subsequently in early 2010, we settled these arbitration proceedings for cash proceeds.

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

 

 

I TEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          There were no matters submitted to a vote of stockholders during the quarter ended December 31, 2009.

P ART II

 

 

I TEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of the Company’s Common Stock

          The common stock of Ocwen Financial Corporation is traded under the symbol “OCN” on the New York Stock Exchange (NYSE). The following table sets forth the high and low closing sales prices for our common stock:

 

 

 

 

 

 

 

 

 

 

 

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

 

First quarter

 

$

12.02

 

 

$

8.37

 

 

Second quarter

 

 

13.30

 

 

 

10.80

 

 

Third quarter

 

 

14.30

 

 

 

9.02

 

 

Fourth quarter

 

 

11.95

 

 

 

9.05

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

First quarter

 

$

6.53

 

 

$

3.98

 

 

Second quarter

 

 

7.04

 

 

 

3.69

 

 

Third quarter

 

 

8.05

 

 

 

4.52

 

 

Fourth quarter

 

 

9.18

 

 

 

5.49

 

 

          The closing sales price of our common stock on February 26, 2010, was $10.81.

          We do not currently pay cash dividends on our common stock and have no current plans to do so in the future. The timing and amount of future dividends, if any, will be determined by our Board of Directors and will depend, among other factors, upon our earnings, financial condition, cash requirements, the capital requirements of subsidiaries and investment opportunities at the time any such payment is considered. In addition, the Guaranty agreement with the OTS and the indentures and covenants relating to certain of our borrowings contain limitations on our payment of dividends. See Note 31 to the Consolidated Financial Statements for additional information regarding limitations on the payment of dividends on our common stock.

20


          The following graph compares the cumulative total return on the common stock of Ocwen Financial Corporation, exclusive of the significant value distributed to Ocwen investors in the form of Altisource common equity, since December 31, 2004, with the cumulative total return on the stocks included in Standard & Poor’s 500 Market Index and Standard & Poor’s Diversified Financials Market Index.

(LINE GRAPH)

Purchases of Equity Securities by the Issuer and Affiliates

          We did not purchase any shares of our own common stock during the fourth quarter of 2009.

          Our ability to repurchase shares of our common stock is restricted under the terms of the Guaranty that we entered into with the OTS in connection with debanking. See Notes 21 and 31 to the Consolidated Financial Statements for additional information regarding common stock repurchases in prior periods and limitations on the repurchase of our common stock, respectively.

Number of Holders of Common Stock

          At February 26, 2010, 99,958,162 shares of our common stock were outstanding and held by approximately 132 holders of record. Such number of stockholders does not reflect the number of individuals or institutional investors holding our stock in nominee name through banks, brokerage firms and others.

21


Securities authorized for issuance under equity compensation plans

          The information required by this item with respect to securities authorized for issuance under equity compensation plans is incorporated by reference from the section entitled “Security Ownership Of Certain Beneficial Owners And Related Shareholder Matters—Equity Compensation Plan Information” in our definitive Proxy Statement with respect to our Annual Meeting of Shareholders to be held on May 6, 2010 and as filed with the SEC on or about March 30, 2010 (the 2010 Proxy Statement).

22



 

 

I TEM 6.

SELECTED FINANCIAL DATA (Dollars in thousands, except share data)

          The following tables present selected consolidated financial information of Ocwen and its subsidiaries at the dates and for the years indicated. Our historical balance sheet and operations data at and for the five years ended December 31, 2009 have been derived from our audited financial statements. As a result of the Separation, we eliminated the assets and liabilities of Altisource from our consolidated balance sheet effective at the close of business on August 9, 2009. Beginning August 10, 2009, the operating results of Altisource are no longer included in our operating results. We do not report the historical operating results of Altisource as a discontinued operation because of the significance of the continuing involvement between Altisource and Ocwen under long-term services agreements. Accordingly, for periods prior to August 10, 2009, the historical operating results of Altisource are included in continuing operations. We have reclassified certain amounts included in the prior years to conform to the 2009 presentation.

          The selected consolidated financial information should be read in conjunction with the information we have provided in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected balance sheet data

 

 

 

 

 

 

 

Adjusted (1)

 

Adjusted (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

90,919

 

$

201,025

 

$

114,243

 

$

236,581

 

$

269,611

 

Investment grade auction rate securities

 

 

247,464

 

 

239,301

 

 

 

 

 

 

 

Other investment grade securities

 

 

 

 

 

 

34,876

 

 

74,986

 

 

1,685

 

Subordinate and residual securities

 

 

3,692

 

 

4,369

 

 

7,362

 

 

65,242

 

 

30,277

 

Investment in certificates of deposit

 

 

 

 

 

 

 

 

72,733

 

 

 

Loans held for resale, at lower of cost or fair value (2)

 

 

33,197

 

 

49,918

 

 

75,240

 

 

99,064

 

 

624,671

 

Advances

 

 

145,914

 

 

102,085

 

 

292,887

 

 

324,137

 

 

219,716

 

Match funded advances

 

 

822,615

 

 

1,100,555

 

 

1,126,097

 

 

572,708

 

 

377,105

 

Mortgage servicing rights

 

 

117,802

 

 

139,500

 

 

197,295

 

 

183,743

 

 

148,663

 

Deferred tax assets, net (3)

 

 

132,683

 

 

175,145

 

 

175,669

 

 

172,202

 

 

14,818

 

Intangibles, including goodwill (4)

 

 

 

 

46,227

 

 

58,301

 

 

7,053

 

 

7,053

 

Investment in unconsolidated entities (5)

 

 

15,008

 

 

25,663

 

 

76,465

 

 

46,151

 

 

79

 

Other

 

 

160,056

 

 

153,312

 

 

233,489

 

 

150,794

 

 

154,439

 

 

 

   

 

   

 

   

 

   

 

   

 

Total assets

 

$

1,769,350

 

$

2,237,100

 

$

2,391,924

 

$

2,005,394

 

$

1,848,117

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Match funded liabilities

 

$

465,691

 

$

961,939

 

$

1,001,403

 

$

510,236

 

$

339,292

 

Debt securities, lines of credit and other secured borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

7,979

 

 

182,860

 

 

339,976

 

 

310,149

 

 

611,787

 

Long-term (1)

 

 

143,395

 

 

67,377

 

 

143,111

 

 

153,462

 

 

153,385

 

Investment line

 

 

156,968

 

 

200,719

 

 

 

 

 

 

 

Servicer liabilities

 

 

38,672

 

 

135,751

 

 

204,484

 

 

383,549

 

 

298,892

 

Other

 

 

90,782

 

 

78,813

 

 

110,429

 

 

81,340

 

 

85,952

 

 

 

   

 

   

 

   

 

   

 

   

 

Total liabilities

 

 

903,487

 

 

1,627,459

 

 

1,799,403

 

 

1,438,736

 

 

1,489,308

 

 

 

   

 

   

 

   

 

   

 

   

 

Ocwen Financial Corporation stockholders’ equity (1)

 

 

865,611

 

 

609,235

 

 

590,542

 

 

564,868

 

 

356,956

 

Non-controlling interest in subsidiaries (6)

 

 

252

 

 

406

 

 

1,979

 

 

1,790

 

 

1,853

 

 

 

   

 

   

 

   

 

   

 

   

 

Total equity

 

 

865,863

 

 

609,641

 

 

592,521

 

 

566,658

 

 

358,809

 

 

 

   

 

   

 

   

 

   

 

   

 

Total liabilities and equity

 

$

1,769,350

 

$

2,237,100

 

$

2,391,924

 

$

2,005,394

 

$

1,848,117

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans and real estate
serviced for others

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Count

 

 

351,595

 

 

322,515

 

 

435,616

 

 

473,665

 

 

368,802

 

Amount

 

$

49,980,077

 

$

40,171,532

 

$

53,545,985

 

$

52,834,028

 

$

42,779,048

 

23



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31,

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected operations data

 

 

 

 

 

 

 

 

 

Adjusted (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing and subservicing fees

 

$

264,467

 

$

368,026

 

$

379,277

 

$

340,584

 

$

293,382

 

Other

 

 

116,261

 

 

124,102

 

 

101,384

 

 

90,746

 

 

81,703

 

 

 

   

 

   

 

   

 

   

 

   

 

Total revenue

 

 

380,728

 

 

492,128

 

 

480,661

 

 

431,330

 

 

375,085

 

Operating expenses

 

 

235,654

 

 

323,355

 

 

351,866

 

 

339,655

 

 

345,271

 

 

 

   

 

   

 

   

 

   

 

   

 

Income from operations

 

 

145,074

 

 

168,773

 

 

128,795

 

 

91,675

 

 

29,814

 

 

 

   

 

   

 

   

 

   

 

   

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

8,786

 

 

14,696

 

 

29,651

 

 

47,609

 

 

24,551

 

Interest expense (1)

 

 

(62,954

)

 

(86,574

)

 

(76,586

)

 

(56,979

)

 

(42,464

)

Other (1)

 

 

2,355

 

 

(65,913

)

 

(27,306

)

 

(3,717

)

 

408

 

 

 

   

 

   

 

   

 

   

 

   

 

Other expense, net

 

 

(51,813

)

 

(137,791

)

 

(74,241

)

 

(13,087

)

 

(17,505

)

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

 

93,261

 

 

30,982

 

 

54,554

 

 

78,588

 

 

12,309

 

Income tax expense (benefit) (3)

 

 

96,110

 

 

12,006

 

 

15,186

 

 

(127,720

)

 

3,373

 

 

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations

 

 

(2,849

)

 

18,976

 

 

39,368

 

 

206,308

 

 

8,936

 

Income (loss) from discontinued operations, net of taxes (7)

 

 

3,121

 

 

(5,767

)

 

(3,172

)

 

(2,094

)

 

(1,801

)

 

 

   

 

   

 

   

 

   

 

   

 

Net income

 

 

272

 

 

13,209

 

 

36,196

 

 

204,214

 

 

7,135

 

Net loss (income) attributable to non-controlling interest in subsidiaries (6)

 

 

25

 

 

41

 

 

(92

)

 

(69

)

 

(905

)

 

 

   

 

   

 

   

 

   

 

   

 

Net income attributable to OCN

 

$

297

 

$

13,250

 

$

36,104

 

$

204,145

 

$

6,230

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.04

)

$

0.30

 

$

0.63

 

$

3.28

 

$

0.13

 

Income (loss) from discontinued operations (7)

 

 

0.04

 

 

(0.09

)

 

(0.05

)

 

(0.03

)

 

(0.03

)

 

 

   

 

   

 

   

 

   

 

   

 

Net income

 

$

 

$

0.21

 

$

0.58

 

$

3.25

 

$

0.10

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.04

)

$

0.30

 

$

0.62

 

$

2.95

 

$

0.13

 

Income (loss) from discontinued operations (7)

 

 

0.04

 

 

(0.09

)

 

(0.05

)

 

(0.03

)

 

(0.03

)

 

 

   

 

   

 

   

 

   

 

   

 

Net income

 

$

 

$

0.21

 

$

0.57

 

$

2.92

 

$

0.10

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

78,252,000

 

 

62,670,957

 

 

62,712,076

 

 

62,871,613

 

 

62,912,768

 

Diluted (8)

 

 

78,252,000

 

 

62,935,314

 

 

63,496,339

 

 

71,864,311

 

 

63,885,439

 


 

 

(1)

On January 1, 2009, we adopted new accounting guidance that changed the manner in which we recognize interest expense over the life of convertible notes. We were required to apply the new guidance retrospectively for all periods presented. Specific line items impacted by these changes are indicated above.

(2)

During 2005 and 2006, we acquired loans held for resale through whole loan purchases and subprime loan origination activities. We funded these acquisitions with repurchase agreements and other short-term credit facilities. The majority of these loans were disposed of during 2006 through securitization transactions and whole loan sales, and the related debt was repaid. In 2007, we decided to discontinue our subprime loan origination activities.

(3)

In 2009, as a consequence of the Separation and related transactions, Ocwen incurred income taxes to the extent that the fair market value of Altisource assets exceeded Ocwen’s tax basis in such assets in accordance with Section 367 of the Internal Revenue Code. Ocwen recognized $52,047 of income tax expense in 2009, of which $25,649 is current expense and $26,398 is deferred expense. The income tax benefit for 2006 reflects the reversal of $155,377 of valuation allowances on our deferred tax assets in order to increase the net deferred tax asset to the amount that is more likely than not to be realized in future periods.

24



 

 

(4)

The operations of NCI are included in our consolidated financial statements effective June 6, 2007, the date of acquisition, to the date of the Separation. Total goodwill and intangibles were $44,609 and $53,260 at December 31, 2008 and 2007, respectively. NCI revenues and operating expenses for 2008 were $71,331 and $76,470, respectively. For the 2007 period, NCI revenues and operating expenses were $38,157 and $40,578, respectively.

(5)

We account for our investments in unconsolidated entities using the equity method. In 2006, we acquired an equity interest in BMS Holdings. During 2008, our 45% equity interest in the losses of BMS Holdings reduced our investment to zero. Because we are not required to advance funds to BMS Holdings to finance operations and we are not a guarantor of any obligations of BMS Holdings, we suspended the recognition of losses from our investment in BMS Holdings. We will not resume recording income or losses until our share of BMS Holdings’ earnings exceeds our share of their losses that we did not recognize during the period when we suspended recording losses. In 2007, we acquired 25% equity interests in OSI and in ONL and affiliates.

(6)

On January 1, 2009, we began to apply the provisions of the codification of SFAS 160 in ASC 810, Consolidations . This accounting codification established new accounting and reporting standards for non-controlling interest, resulting in a change in presentation, but no earnings impact.

(7)

In the fourth quarter of 2009, we completed the sale of our investment in BOK. We have reported the results of operations of BOK in the consolidated financial statements as discontinued operations.

(8)

The assumed conversion of the 3.25% Convertible Notes has been reflected in the calculation of weighted average common shares outstanding in computing diluted earnings per share for 2006. Conversion of the Convertible Notes to common stock was not assumed for 2009, 2008, 2007 and 2005 because the effect was antidilutive. Interest expense on the Convertible Notes, net of income tax, has been added to net income for purposes of computing diluted earnings per share for 2006.

25



 

 

I TEM 7.

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

INTRODUCTION

          Unless specifically stated otherwise, all references to December 2009, December 2008 and December 2007 refer to our fiscal periods ended, or the dates, as the context requires, December 31, 2009, December 31, 2008 and December 31, 2007, respectively. As described below in greater detail under “Recent Accounting Pronouncements—ASC 470, Debt,” we were required to retroactively apply a change to the accounting for convertible debt instruments. This change resulted in adjustments to amounts reported for periods ended before or on dates prior to January 1, 2009.

          The following discussion of our results of operations, consolidated financial condition and capital resources and liquidity should be read in conjunction with our Consolidated Financial Statements and the related notes, all included elsewhere in this annual report on Form 10-K.

OVERVIEW

Impact of the Separation of Altisource on 2009 Comparisons

          On August 10, 2009, we completed the Separation of Altisource by distributing all of the shares of Altisource common stock to Ocwen shareholders and convertible noteholders of record as of August 4, 2009, in the form of a pro rata stock distribution. Altisource consists of the operations of our former Ocwen Solutions line of business and related assets comprising the Mortgage Services, Financial Services and Technology Products segments except for BMS Holdings and GSS.

          As a consequence of the Separation and related transactions, Ocwen incurred income taxes to the extent that the fair market value of Altisource assets exceeded Ocwen’s tax basis in such assets in accordance with Section 367 of the Internal Revenue Code. Ocwen recognized $52,047 of income tax expense, of which $25,649 is current expense and $26,398 is deferred expense.

          We eliminated the assets and liabilities of Altisource from our consolidated balance sheet effective at the close of business on August 9, 2009. The following table summarizes the assets and liabilities transferred to Altisource in the Separation:

 

 

 

 

 

Assets:

 

 

 

 

Cash

 

$

20,028

 

Receivables

 

 

13,888

 

Goodwill and intangibles, net

 

 

43,767

 

Premises and equipment, net

 

 

8,615

 

Other assets

 

 

2,180

 

 

 

   

 

 

 

 

88,478

 

 

 

   

 

Liabilities

 

 

 

 

Deferred tax liability, net

 

 

1,336

 

Accrued expenses and other liabilities

 

 

14,996

 

 

 

   

 

 

 

 

16,332

 

 

 

   

 

 

 

 

 

 

Reduction in Additional paid-in capital

 

$

72,146

 

 

 

   

 

          Beginning August 10, 2009, the operating results of Altisource are no longer included in our operating results. We do not report the historical operating results of Altisource as a discontinued operation because of the significance of the continuing involvement between Altisource and OCN under the long-term services agreements. The Separation contributed significantly to the declines in revenues, operating expenses, income from operations and income from continuing operations.

          In comparisons to our results of operations in 2009 and the summary of changes in our financial condition as of December 31, 2009, compared to 2008, we focus our discussion below on additional factors, other than the Separation, that affected our results of operations and/or change in financial condition.

Operations Summary

          As discussed above the percent change in our consolidated operating results from 2008 to 2009 were significantly impacted by the Separation of Altisource from Ocwen on August 10, 2009. In addition to the $52,047 income tax expense related to the Separation, Ocwen ceased, beginning on August 10, 2009, to record operating results from Mortgage Services, Financial Services and Technology Products segments except for BMS Holdings and GSS. The 2008 to 2009 comparative discussion below focuses primarily on changes other than those related to the Separation.

26


          The following table summarizes our consolidated operating results for the years indicated. We have provided a more complete discussion of operating results by line of business in the Segments section.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the years ended December 31,

 

% Change

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

2009 to
2008

 

2008 to
2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

380,728

 

$

492,128

 

$

480,661

 

(23

)%

 

2

%

 

Operating expenses

 

 

235,654

 

 

323,355

 

 

351,866

 

(27

)

 

(8

)

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

Income from operations

 

 

145,074

 

 

168,773

 

 

128,795

 

(14

)

 

31

 

 

Other expense, net

 

 

(51,813

)

 

(137,791

)

 

(74,241

)

(62

)

 

86

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

Income from continuing operations before taxes

 

 

93,261

 

 

30,982

 

 

54,554

 

201

 

 

(43

)

 

Income tax expense

 

 

96,110

 

 

12,006

 

 

15,186

 

701

 

 

(21

)

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

(2,849

)

 

18,976

 

 

39,368

 

(115

)

 

(52

)

 

Income (loss) from discontinued operations, net of taxes

 

 

3,121

 

 

(5,767

)

 

(3,172

)

(154

)

 

82

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

Net income

 

 

272

 

 

13,209

 

 

36,196

 

(98

)

 

(64

)

 

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

 

 

25

 

 

41

 

 

(92

)

(39

)

 

(145

)

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

Net income attributable to Ocwen

 

$

297

 

$

13,250

 

$

36,104

 

(98

)

 

(63

)

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment income (loss) from continuing operations before taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing

 

$

87,681

 

$

100,770

 

$

65,349

 

(13

)%

 

54

%

 

Loans and Residuals

 

 

(9,121

)

 

(14,682

)

 

(8,650

)

(38

)

 

70

 

 

Asset Management Vehicles

 

 

(5,317

)

 

(9,813

)

 

(159

)

(46

)

 

6,072

 

 

Mortgage Services

 

 

17,815

 

 

13,262

 

 

14,002

 

34

 

 

(5

)

 

Financial Services

 

 

(5,969

)

 

(7,875

)

 

(7,087

)

(24

)

 

11

 

 

Technology Products

 

 

9,590

 

 

3,580

 

 

8,968

 

168

 

 

(60

)

 

Corporate items and other

 

 

(1,418

)

 

(54,260

)

 

(17,869

)

(97

)

 

204

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

$

93,261

 

$

30,982

 

$

54,554

 

201

 

 

(43

)

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

           2009 versus 2008. Our servicing revenues declined from 2008 due to a lower annual average UPB and fewer total completed loan modifications due in large part to the delays associated with the implementation of the HAMP. Operating expenses in 2009 benefited from lower amortization expense on a smaller mortgage servicing rights portfolio, reduced staffing levels and fewer loan payoffs. Income from operations declined by $23,699, or 14% in 2009 as compared to 2008.

          Other expense, net declined dramatically due to gains on auction rate securities in 2009 compared to losses in 2008, representing a $41,476 improvement, and a reduction in interest expense as advances and advance financing balances declined, despite higher average spreads and facility fees in 2009 compared to 2008. Income from continuing operations before taxes climbed to $93,261 in 2009 from $30,982 in 2008.

          As subservicing and special servicing arrangements represent a larger portion of our portfolio, we expect revenues to decline. However, we anticipate such declines to be more than offset by lower amortization and interest expense.

          We incurred a significant one-time tax expense associated with the Separation and increased our liability for selected tax items by $8,489, representing the full amount of recognized deferred tax assets arising from deductibility of losses in a finance vehicle. These two items contributed to a higher effective tax rate in 2009, the deferred portion of which was non-cash. As a result, income from continuing operations declined $21,825 or 115% in 2009 as compared to 2008. Discontinued operations for 2009 includes a pre-tax gain of $4,034 realized on the sale of BOK.

          Primarily due to the tax impact of the Separation and the increase in our liability for selected tax items, net income declined 98% from 2008 to 2009.

27


           2008 versus 2007. Servicing revenues declined slightly from 2007 to 2008 due to declines in float earnings and servicing fees, offset by increases in late charges. Float earnings declined because of lower interest rates and lower average float balances which declined because of higher delinquencies and a smaller servicing portfolio. Late charges, which are not recognized as revenue until collected, increased to normal levels as delinquency rates stabilized. Operating expenses declined primarily due to significantly lower amortization expense on a smaller mortgage servicing right portfolio and fewer loan payoffs. Income from operations increased 31% in 2008 as compared to 2007.

          The drastic increase in other expense, net of $63,550 from 2007 to 2008 was principally caused by unrealized fair value losses, higher financing costs and lower interest income. Income from continuing operations declined 43% or $23,572 from 2007 to 2008.

          Discontinued operations experienced increased losses from 2007 to 2008 of $2,595, further contributing to an overall 63% drop in net income from 2007 to 2008.

Change in Financial Condition Summary

          The overall decline in our assets of 21% was principally due to the following:

 

 

 

 

l

We implemented a strategy in the third quarter to reduce interest expense by using our cash reserves and proceeds from our equity offering to reduce advance finance borrowings.

 

l

Total advances declined by $234,111 primarily because of a decline in UPB serviced combined with relatively stable loan delinquency rates and lower average advances per loan. This decline is the net result of a $277,940 decline in match funded advances and a $43,829 increase in advances as a result of moving collateral from match funded advance facilities to a non-match funded facility.

 

l

Amortization expense exceeded the fair value of acquisitions, causing a reduction in MSRs.

 

l

Foreclosures, charge-offs, payoffs and declines in estimated values reduced loans held for resale.

 

l

We realized tax benefits in connection with the sale of MSRs and the Separation and applied tax benefits to offset our taxable earnings, all of which led to a decline in our net deferred tax assets.

 

l

We distributed assets of $88,478 as part of the Separation of Altisource.

 

 

 

 

Liabilities declined 44% primarily as a result of the following items:

 

 

 

 

l

Match funded liabilities declined $496,248 reflecting both the decline in advances and our decision to use excess cash to reduce borrowings and interest expense.

 

l

We repaid $43,751 on the investment line term note.

 

l

Servicer liabilities declined by $97,079 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.

 

l

Debt securities declined by $37,803 as a result of repurchases. During 2009, we repurchased $25,910 par value of our 3.25% Convertible Notes and $14,250 par value of our 10.875% Capital Trust Securities, both at a discount to par value in the open market.

 

l

We distributed liabilities of $16,332 as part of the Separation of Altisource.

          We increased our total equity by raising $60,165 net proceeds in a private placement in April and $274,964 net proceeds in a public equity offering in August. In connection with the April private placement, we repurchased $11,000 worth of common stock.

Liquidity Summary

          We define liquidity as unencumbered cash balances plus unused, collateralized advance financing capacity. Following our successful capital raise in August 2009, we implemented a strategy to deploy excess cash balances to reduce outstanding debt levels and interest expense. At December 31, 2009, our cash position was $90,919 compared to $201,025 one year ago. Since we used available cash to fund advance balances, our available credit on collateralized but unused advance financing capacity was $201,200 at December 31, 2009 compared to zero a year ago. Our liquidity as of December 31, as measured by cash and available credit, increased by $91,094, or 45%, from 2008 to 2009.

          Excluding the investment line, which is used to finance the auction rate securities, our borrowings have decreased by $595,111 since December 31, 2008. The decline in borrowings of the Servicing segment reflects a decline in advances and the $97,987 repayment of our MSR facility, including a final payment of $41,994 on August 21, 2009. The decline in borrowings of the Loans and Residuals segment represents the early redemption of the $18,154 note on which the loans had been pledged as collateral, including a final payment of $11,315 on September 23, 2009. Corporate Items and Other borrowings declined as a result of the repayments on the investment line of $43,751 and the repurchase of debt securities with a face value of $40,160.

28


          The fair value of auction rate securities was $247,464 (representing securities with $263,925 total principal) as of December 31, 2009. The remaining balance on the investment line was $156,968. We are successfully executing on our liquidation strategy. In January and March 2010, we settled two of our litigation actions related to auction rate securities resulting in the sale of $103,625 par value for $92,775 cash proceeds. On February 5, 2010, we sold $33,350 par value of securities. Also in February, we exercised a liquidity option related to $88,150 par value of auction rate securities, resulting in a secured borrowing of $74,928. We used the majority of these proceeds to repay the investment line in full on February 17, 2010.

          At December 31, 2009, excluding the investment line, $894,309 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 additional qualifying collateral to our facilities.

CRITICAL ACCOUNTING POLICIES

          Our ability to measure and report our operating results and financial position is heavily influenced by the need to estimate the impact or outcome of risks in the marketplace or other future events. Our critical accounting policies are those that relate to the estimation and measurement of these risks. Because they inherently involve significant judgments and uncertainties, an understanding of these policies is fundamental to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. The following is a summary of our more subjective and complex accounting policies as they relate to our overall business strategy.

Valuation and Amortization of Residential Mortgage Servicing Rights

          Our most significant business is our Servicing business. MSRs are an intangible asset representing the right to service a portfolio of mortgage loans. We generally obtain MSRs by purchasing them from the owners of the mortgage loans. As of December 31, 2009, we held residential MSRs with a carrying value of $117,802 and an estimated fair value of $127,268.

          We account for our residential servicing assets using the amortization method. All newly acquired MSRs are initially measured at fair value. We amortize the balance of servicing assets or liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or liabilities for impairment or increased obligation based on fair value at each reporting date. We determine estimated net servicing income using the estimated future balance of the underlying mortgage loan portfolio, which, absent new purchases, declines over time from prepayments and scheduled loan amortization. We adjust amortization prospectively in response to changes in estimated projections of future cash flows.

          We group the loans that we service into 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:

 

 

 

 

 

 

l

Subprime

l

Re-performing

 

l

ALT A

l

Special servicing

 

l

High-loan-to-value

l

Other

          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 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.

          The most significant assumptions used in our internal valuation are the speed at which mortgages prepay and become delinquent, both of which we derive from our historical experience and available market data. Other assumptions used in our internal valuation are:

 

 

 

 

 

 

l

Cost of servicing

l

Interest rate used for computing float earnings

 

l

Discount rate

l

Interest rate used for computing the cost of Servicing advances

 

l

Compensating interest expense

 

 

29


          At December 31, 2009, we had MSRs relating to the Subprime, ALT A and High-loan-to-value strata. The following table provides the range of prepayment speed and delinquency assumptions (expressed as a percentage) by strata projected over the five-year period beginning December 31, 2009:

 

 

 

 

 

 

 

 

Prepayment Speed

 

Delinquency

 

 

 

 

 

 

 

Subprime

 

15% – 20%

 

17% – 24%

 

ALT A

 

19% – 24%

 

23% – 26%

 

High-loan-to-value

 

42% – 43%

 

12% – 13%

 

Additional assumptions we use to estimate the fair value of MSRs by strata as of December 31, 2009 include the cost of financing advances (1-month LIBOR plus 4%), float earnings (1-month LIBOR), a 20% discount rate and the cost of servicing (representing industry averages, which vary by strata and ranged from $110 per year for a performing ALT A loan to $900 per year for a loan in foreclosure).

          We perform an impairment analysis of our MSRs by strata based on the difference between the carrying amount and estimated fair value. To the extent the estimated fair value is less than the carrying amount for any strata we recognize an impairment valuation allowance.

          Changes in these assumptions are generally expected to affect our results of operations as summarized below:

 

 

 

 

l

Increases in prepayment speeds generally reduce the value of our MSRs as the underlying loans prepay faster which causes accelerated MSR amortization, higher compensating interest payments and lower overall servicing fees, partially offset by a lower overall cost of servicing, increased float earnings on higher float balances and lower interest expense on decreased servicing advance balances.

 

 

 

 

l

Increases in delinquencies generally reduce the value of our MSRs as the cost of servicing increases during the delinquency period, and the amount of servicing advances and related interest expense also increase.

 

 

 

 

l

Increases in the discount rate reduce the value of our MSRs due to the lower overall net present value of the net cash flows.

 

 

 

 

l

Increases in interest rate assumptions for the cost of servicing advances will increase interest expense although this effect is partially offset because rate increases will also increase the amount of float earnings we recognize.

Fair Value of Trading Securities

          We recognize trading securities at fair value. We report changes in fair value as a gain or loss in our Consolidated Statement of Operations.

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

          The discounted cash flow analysis included the following range of assumptions at December 31, 2009:

 

 

 

 

 

l

Expected term

24 months

 

l

Illiquidity premium

1.14%

 

l

Discount rate

1.32% – 4.05%

          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.

          As of December 31, 2009, auction rate securities had a fair value of $247,464 net of unrealized losses of $16,274. Subsequently, in January, February and March of 2010, we liquidated $136,975 par value of securities for $122,640 cash. We recognized no gain or loss on these three transfers. Furthermore, we sold $88,150 par value of securities with the option to repurchase the same securities at the same sales price until October 2012, resulting in a secured borrowing of $74,928. We used the majority of these proceeds to pay down the investment line subsequent to December 31, 2009.

30


          Subordinates and Residuals. Our subordinate and residual securities are not actively traded, and, therefore, we estimate the fair value of these securities based on the present value of expected future cash flows from the underlying mortgage pools. We use our best estimate of the key assumptions we believe are used by market participants. We calibrate our internally developed discounted cash flow models for trading activity when appropriate to do so in light of market liquidity levels. Key inputs include expected prepayment rates, delinquency and cumulative loss curves and discount rates commensurate with the risks. Where possible, we use observable inputs in the valuation of our securities. However, the subordinate and residual securities in which we invest typically trade infrequently and therefore have few or no observable inputs and little price transparency. Additionally, during periods of market dislocation the observability of inputs is further reduced.

          Discount rates for the subordinate and residual securities range from 21% to 22% and are determined based upon an assessment of prevailing market conditions and prices for similar assets. We project the delinquency, loss and prepayment assumptions based on a comparison to actual historical performance curves adjusted for prevailing market conditions. Peak delinquency assumptions range from 20% to 30%, and loss assumptions on current balances range from 20% to 29%. Average prepayment assumptions range from 5% to 6%.

          Residual and subordinate securities had a fair value of $3,692 at December 31, 2009, net of unrealized losses of $31,561.

Loans Held for Resale

          Loans held for resale are reported at the lower of cost or fair value. We account for the excess of cost over fair value as a valuation allowance with changes in the valuation allowance included in gain (loss) on loans held for resale, net, in the period in which the change occurs. All loans held for resale were measured at fair value because the cost of $49,160 exceeded the estimated fair value of $33,197 at December 31, 2009.

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

Deferred Tax Assets

          The use of estimates and the application of judgment are involved in the determination of our overall tax provision and the evaluation of the realizability of our gross deferred tax assets. As of December 31, 2009, we had gross deferred tax assets of $132,758 and gross deferred tax liabilities of $75 resulting in a net deferred tax asset of $132,683. We increased our liability for selected tax items by $8,489, representing the full amount of recognized deferred tax assets arising from deductibility of losses in a finance vehicle. We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. Among the factors considered in this evaluation are estimates of future taxable income, future reversals of temporary differences, tax character (ordinary versus capital) and the impact of tax planning strategies that may be implemented, if warranted. We assess the amount of the valuation allowance each quarter.

Litigation

          We monitor our litigation matters, including advice from external legal counsel, and regularly perform assessments of these matters for potential loss accrual and disclosure. We establish reserves for settlements, judgments on appeal and filed and/or threatened claims for which we believe it is probable that a loss has been or will be incurred and the amount can be reasonably estimated.

SEGMENT RESULTS AND FINANCIAL CONDITION

          For each of our business segments, the following section provides a discussion of the changes in financial condition during the year ended December 31, 2009 and a discussion of pre-tax results of operations for the three annual periods ended December 31, 2009, 2008 and 2007. Due to the Separation, as of August 10, 2009, neither the assets and liabilities, nor the subsequent operations of the Mortgage Services, Financial Services and Technology Products segments, except for BMS and GSS, are included in our results. These partial year results of Ocwen Solutions may not be indicative of results for the full year. As a separate, publicly-traded company, Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) will file a Form 10-K with the Securities and Exchange Commission.

31


          The following table presents the selected results of operations for each of our business segments for the years ended December 31, 2009, 2008 and 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 year ended December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

272,725

 

$

 

$

1,851

 

$

54,052

 

$

40,293

 

$

28,331

 

$

1,066

 

$

(17,590

)

$

380,728

 

Operating expenses

 

 

129,252

 

 

2,831

 

 

3,108

 

 

37,040

 

 

45,002

 

 

18,638

 

 

16,308

 

 

(16,525

)

 

235,654

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

143,473

 

 

(2,831

)

 

(1,257

)

 

17,012

 

 

(4,709

)

 

9,693

 

 

(15,242

)

 

(1,065

)

 

145,074

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

266

 

 

7,183

 

 

 

 

2

 

 

 

 

 

 

1,335

 

 

 

 

8,786

 

Interest expense

 

 

(59,458

)

 

(1,447

)

 

 

 

(28

)

 

(1,285

)

 

(289

)

 

(447

)

 

 

 

(62,954

)

Other

 

 

3,400

 

 

(12,026

)

 

(4,060

)

 

829

 

 

25

 

 

186

 

 

12,936

 

 

1,065

 

 

2,355

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

(55,792

)

 

(6,290

)

 

(4,060

)

 

803

 

 

(1,260

)

 

(103

)

 

13,824

 

 

1,065

 

 

(51,813

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations before income taxes

 

$

87,681

 

$

(9,121

)

$

(5,317

)

$

17,815

 

$

(5,969

)

$

9,590

 

$

(1,418

)

$

 

$

93,261

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

340,725

 

$

 

$

3,664

 

$

58,733

 

$

73,835

 

$

45,283

 

$

156

 

$

(30,268

)

$

492,128

 

Operating expenses

 

 

164,292

 

 

3,025

 

 

4,113

 

 

46,299

 

 

79,757

 

 

35,895

 

 

18,743

 

 

(28,769

)

 

323,355

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

176,433

 

 

(3,025

)

 

(449

)

 

12,434

 

 

(5,922

)

 

9,388

 

 

(18,587

)

 

(1,499

)

 

168,773

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,004

 

 

11,361

 

 

 

 

147

 

 

16

 

 

 

 

2,168

 

 

 

 

14,696

 

Interest expense

 

 

(75,835

)

 

(3,177

)

 

 

 

(200

)

 

(1,977

)

 

(573

)

 

(4,812

)

 

 

 

(86,574

)

Other

 

 

(832

)

 

(19,841

)

 

(9,364

)

 

881

 

 

8

 

 

(5,235

)

 

(33,029

)

 

1,499

 

 

(65,913

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

(75,663

)

 

(11,657

)

 

(9,364

)

 

828

 

 

(1,953

)

 

(5,808

)

 

(35,673

)

 

1,499

 

 

(137,791

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations before income taxes

 

$

100,770

 

$

(14,682

)

$

(9,813

)

$

13,262

 

$

(7,875

)

$

3,580

 

$

(54,260

)

$

 

$

30,982

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

343,648

 

$

352

 

$

1,444

 

$

73,852

 

$

41,292

 

$

36,235

 

$

1,162

 

$

(17,324

)

$

480,661

 

Operating expenses

 

 

219,322

 

 

4,191

 

 

829

 

 

59,603

 

 

47,110

 

 

33,714

 

 

5,775

 

 

(18,678

)

 

351,866

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

124,326

 

 

(3,839

)

 

615

 

 

14,249

 

 

(5,818

)

 

2,521

 

 

(4,613

)

 

1,354

 

 

128,795

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,146

 

 

20,485

 

 

 

 

110

 

 

6

 

 

 

 

7,904

 

 

 

 

29,651

 

Interest expense

 

 

(57,978

)

 

(7,499

)

 

 

 

(504

)

 

(1,305

)

 

(537

)

 

(8,763

)

 

 

 

(76,586

)

Other

 

 

(2,145

)

 

(17,797

)

 

(774

)

 

147

 

 

30

 

 

6,984

 

 

(12,397

)

 

(1,354

)

 

(27,306

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

(58,977

)

 

(4,811

)

 

(774

)

 

(247

)

 

(1,269

)

 

6,447

 

 

(13,256

)

 

(1,354

)

 

(74,241

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations before income taxes

 

$

65,349

 

$

(8,650

)

$

(159

)

$

14,002

 

$

(7,087

)

$

8,968

 

$

(17,869

)

$

 

$

54,554

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

32


Servicing

          The following table presents selected results of operations of our Servicing segment for the years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

   

Revenue

 

 

 

 

 

 

 

 

 

 

Servicing and subservicing fees

 

$

233,759

 

$

304,572

 

$

333,128

 

Process management fees

 

 

38,965

 

 

36,153

 

 

10,509

 

Other

 

 

1

 

 

 

 

11

 

 

 

   

 

   

 

   

 

Total revenue

 

 

272,725

 

 

340,725

 

 

343,648

 

 

 

   

 

   

 

   

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

32,256

 

 

40,539

 

 

37,202

 

Amortization of servicing rights

 

 

32,228

 

 

52,187

 

 

99,118

 

Servicing and origination

 

 

8,071

 

 

16,893

 

 

29,934

 

Technology and communications

 

 

14,215

 

 

12,516

 

 

8,403

 

Professional services

 

 

8,095

 

 

10,577

 

 

9,724

 

Occupancy and equipment

 

 

10,848

 

 

11,307

 

 

13,225

 

Other operating expenses

 

 

23,539

 

 

20, 273

 

 

21,716

 

 

 

   

 

   

 

   

 

Total operating expenses

 

 

129,252

 

 

164,292

 

 

219,322

 

 

 

   

 

   

 

   

 

Income from operations

 

 

143,473

 

 

176,433

 

 

124,326

 

 

 

   

 

   

 

   

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

266

 

 

1,004

 

 

1,146

 

Interest expense

 

 

(59,458

)

 

(75,835

)

 

(57,978

)

Other, net

 

 

3,400

 

 

(832

)

 

(2,145

)

 

 

   

 

   

 

   

 

Total other expense, net

 

 

(55,792

)

 

(75,663

)

 

(58,977

)

 

 

   

 

   

 

   

 

Income from continuing operations before income taxes

 

$

87,681

 

$

100,770

 

$

65,349

 

 

 

   

 

   

 

   

 

33


          The following table provides selected operating statistics at or for the years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change from

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

2008 to 2009

 

2007 to 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Assets Serviced

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing loans (1)

 

$

35,090,126

 

$

30,416,049

 

$

42,389,849

 

15

%

 

(28

)%

 

Non-performing loans

 

 

11,638,689

 

 

6,937,002

 

 

7,433,386

 

68

 

 

(7

)

 

Non-performing real estate (2)

 

 

3,251,262

 

 

2,818,481

 

 

3,722,750

 

15

 

 

(24

)

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

Total residential assets serviced (3)

 

$

49,980,077

 

$

40,171,532

 

$

53,545,985

 

24

 

 

(25

)

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

Average residential assets serviced

 

$

41,093,085

 

$

46,193,422

 

$

55,067,769

 

(11

)

 

(16

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepayment speed (average CPR)

 

 

19.0

%

 

25.0

%

 

23.0

%

(24

)

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of total UPB:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing portfolio

 

 

54.8

%

 

74.3

%

 

71.0

%

(26

)%

 

5

%

 

Subservicing portfolio

 

 

45.2

 

 

25.7

 

 

29.0

 

76

 

 

(11

)

 

Non-performing residential assets serviced, excluding Freddie Mac and VA

 

 

25.6

%

 

24.3

%

 

19.6

%

5

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing loans (1)

 

 

272,656

 

 

261,387

 

 

356,937

 

4

%

 

(27

)%

 

Non-performing loans

 

 

62,717

 

 

47,611

 

 

54,330

 

32

 

 

(12

)

 

Non-performing real estate (2)

 

 

16,222

 

 

13,517

 

 

24,349

 

20

 

 

(44

)

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

Total number of residential assets serviced (3)

 

 

351,595

 

 

322,515

 

 

435,616

 

9

 

 

(26

)

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of residential assets serviced

 

 

305,871

 

 

373,416

 

 

465,029

 

(18

)

 

(20

)

 

Percent of total number:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing portfolio

 

 

55.4

%

 

67.0

%

 

66.1

%

(17

)%

 

1

%

 

Subservicing portfolio

 

 

44.6

 

 

33.0

 

 

33.9

 

35

 

 

(3

)

 

Non-performing residential assets serviced, excluding Freddie Mac and VA

 

 

18.8

%

 

19.0

%

 

16.4

%

(1

)

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Servicing and Subservicing Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average custodial account balances

 

$

378,100

 

$

416,200

 

$

677,200

 

(9

)%

 

(39

)%

 

Float earnings (4)

 

 

4,802

 

 

11,005

 

 

29,299

 

(56

)

 

(62

)

 

Yield

 

 

1.27

%

 

2.64

%

 

4.33

%

(52

)

 

(39

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average balance of advances and match funded advances

 

$

1,042,044

 

$

1,251,388

 

$

861,402

 

(17

)%

 

45

%

 

Average borrowings

 

 

728,217

 

 

1,119,569

 

 

719,668

 

(35

)

 

56

 

 

Interest expense on borrowings

 

 

51,247

 

 

67,516

 

 

52,555

 

(24

)

 

28

 

 

Facility costs included in interest expense

 

 

25,530

 

 

12,586

 

 

6,538

 

103

 

 

93

 

 

Effective average interest rate

 

 

7.04

%

 

6.03

%

 

7.30

%

17

 

 

(17

)

 

Average 1-month LIBOR

 

 

0.33

%

 

2.67

%

 

5.25

%

(88

)

 

(49

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Employment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

India and other

 

 

1,134

 

 

1,135

 

 

1,114

 

%

 

2

%

 

United States

 

 

287

 

 

442

 

 

422

 

(35

)

 

5

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

Total

 

 

1,421

 

 

1,577

 

 

1,536

 

(10

)

 

3

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collections on loans serviced for others

 

$

6,593,399

 

$

10,683,541

 

$

16,223,124

 

(38

)%

 

(34

)%

 


 

 

(1)

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

(2)

Includes $798,148 of foreclosed properties serviced for the VA at December 31, 2007.

(3)

At December 31, 2009, we serviced 243,593 subprime loans with a UPB of $35,682,666. This compares to 227,929 subprime loans with a UPB of $32,776,696 at December 31, 2008 and 292,148 subprime loans with a UPB of $41,947,660 at December 31, 2007.

34



 

 

(4)

A component of Servicing and subservicing fees. Includes $4,745 in 2009, $10,696 in 2008 and $12,998 in 2007 of interest income from auction rate securities.

          The following table provides information regarding the changes in our portfolio of residential assets serviced:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of UPB

 

Count

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing portfolio at beginning of year

 

$

40,171,532

 

$

53,545,985

 

$

52,834,028

 

 

322,515

 

 

435,616

 

 

473,665

 

Additions

 

 

18,821,679

 

 

1,597,351

 

 

21,074,550

 

 

101,622

 

 

9,769

 

 

129,709

 

Runoff

 

 

(9,013,134

)

 

(14,971,804

)

 

(20,362,593

)

 

(72,542

)

 

(122,870

)

 

(167,758

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

Servicing portfolio at end of year

 

$

49,980,077

 

$

40,171,532

 

$

53,545,985

 

 

351,595

 

 

322,515

 

 

435,616

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

          2009 versus 2008. Servicing and subservicing fees declined due to the 11% decline in the average UPB of residential assets serviced and lower modifications in 2009 due to the implementation of HAMP. Compliance with HAMP borrower documentation requirements caused loan modifications that would ordinarily have been completed in 2009 to be delayed. Lower average custodial account balances, due to lower UPB and reduced loan payoff collections, and lower interest rates also contributed to the overall decline in total revenues.

          As subservicing and special servicing arrangements represent a larger portion of our portfolio, we expect revenues to decline. However, we anticipate such declines to be more than offset by lower amortization and interest expense.

          We estimate that during 2009 the balance of uncollected and unrecognized servicing fees related to delinquent borrower payments increased by $5,511 to $55,612 as of December 31, 2009.

          Operating expenses benefited from lower MSR amortization expense, reduced staffing levels and lower servicing and origination expense. Amortization expense declined in 2009 as the projected average prepayment speed (CPR) fell and we shifted our portfolio composition to more subservicing arrangements, leading to a 22% lower average MSR balance in 2009, as compared to 2008. Our efforts to reduce staffing levels resulted in a 20% decline in compensation and benefits expense as we reduced our average US headcount and maintained our India staffing level. Approximately two-thirds of the decline in average U.S. employment was due to our decision in July 2008 not to renew our contract with the VA. Servicing and origination expense declined as a result of a decline in voluntary loan payoffs.

          The delinquency rate remained relatively stable in 2009. Total advances have continued to decline in 2009; however, the effects of implementing HAMP slowed the rate of decline. Lower UPB and increased sales of foreclosed real estate also contributed to the decline in advances. We expect delinquency rates to remain flat or decline somewhat in 2010, which will lead to further reductions in advances as our seasoned portfolio matures.

          Prepayment speed was lower in 2009 primarily due to a decline in loan payoffs partly offset by an increase in real estate sales. Real estate sales and other involuntary liquidations accounted for approximately 82% of prepayments during 2009 as compared to approximately 80% for 2008.

          We completed 51,485 modifications in 2009 as compared to 60,839 in 2008. In 2009, 11% of completed modifications were HAMP and the remaining 89% non-HAMP. The split between HAMP and non-HAMP modifications is to be expected since the earliest period in which completed HAMP modifications could occur was the third quarter.

          We completed 15,677 modifications in the fourth quarter of 2009, of which 4,296 were HAMP and 11,381 were non-HAMP. The number of completed modifications in the fourth quarter of 2009 was 124% higher than the 7,000 modifications completed in the third quarter of 2009. Completed modifications were lower in the second and third quarters of 2009 than in prior quarters because of the challenges imposed by the need to collect the requisite documentation from borrowers and make the changes in our work streams necessitated by the HAMP program. HAMP modification offers were extended to 17,630 borrowers in 2009.

          Interest expense in 2009 was lower than in 2008 principally because of the decline in match funded advances coupled with our strategy of reducing advance financing through the use of cash reserves and the proceeds of our equity offering. At December 31, 2009, 57% of match funded advances were funded through borrowings as compared to 87% at December 31, 2008. Although the majority of our credit facilities bear interest at rates that are adjusted regularly based on 1-Month LIBOR, our average effective interest rate for 2009 did not decline in proportion to the decline in LIBOR. This is principally the result of the higher spreads over LIBOR charged on the new match funded facilities that we added in 2009 and 2008 and higher facility fees charged by the lenders on the new facilities and on the renewal of existing facilities regardless of the amount of borrowing.

35


          The following table shows selected assets and liabilities of our Servicing segment as of December 31:

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

   

 

     

Advances (1)

 

$

141,429

 

$

97,098

 

Match funded advances

 

 

822,615

 

 

1,100,555

 

Mortgage servicing rights (Residential)

 

 

117,802

 

 

139,500

 

Receivables (1)

 

 

43,079

 

 

7,936

 

Debt service accounts

 

 

50,221

 

 

58,468

 

Other

 

 

16,066

 

 

13,058

 

 

 

   

 

   

 

Total assets

 

$

1,191,212

 

$

1,416,615

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Match funded liabilities

 

$

465,691

 

$

961,939

 

Lines of credit and other secured borrowings

 

 

55,810

 

 

97,987

 

Servicer liabilities (2)

 

 

38,570

 

 

135,649

 

Other

 

 

39,999

 

 

23,138

 

 

 

   

 

   

 

Total liabilities

 

$

600,070

 

$

1,218,713

 

 

 

   

 

   

 


 

 

(1)

Includes $37,226 due in connection with a loan subservicing agreement for reimbursable advances, the majority of which we have collected subsequent to December 31, 2009.

(2)

Represents amounts collected, primarily from residential borrowers whose loans we service, which we will deposit in custodial accounts, pay directly to an investment trust or refund to borrowers. The primary factor in the decline from 2008 is low collection volume resulting from slower voluntary prepayments and a smaller servicing portfolio.

          2008 versus 2007. Servicing was our most profitable segment in 2008, despite absorbing the negative impact, first, of higher delinquencies, as compared to 2007, and lower float balances and, second, of increased interest expense that resulted from our need to finance higher servicing advance balances.

          Servicing and subservicing fees declined due to the 16% decline in the average UPB of residential assets serviced and lower float earnings attributable to lower average custodial account balances and lower interest rates. The decline in the average custodial account balance is the result of the decline in the average UPB of residential assets serviced and lower collections related to loan payoffs. However, process management fees, revenues associated with foreclosed residential and real estate marketing activities, increased in 2008 reflecting more effective marketing and pricing related to foreclosed residential real estate. This increase was partially offset by declines in both the number of properties sold and the average price. Total revenues also benefited from the increase in late charges for 2008, due to higher delinquencies and higher collections of previously assessed late charges.

          We estimate that during 2008 the balance of uncollected and unrecognized servicing fees related to delinquent borrower payments increased by $551 to $50,101 as of December 31, 2008.

          Operating expenses benefited from lower MSR amortization expense and lower servicing and origination expense, partially offset by increased technology and communication expenses. Amortization expense declined in 2008 due to a decrease in projected average prepayment speed, leading to a 19% lower average MSR balance in 2008, as compared to 2007. Slower projected mortgage prepayment speeds and higher projected delinquencies have reduced the rate of amortization as we expect to earn the servicing income over a longer period of time. Servicing and origination expense declined as a result of a decline in voluntary loan payoffs, system automation and process improvements. The increase in technology and communication expense in 2008 is due to higher technology support charges from the former Technology Products segment, now part of Altisource. The higher charges principally reflect the implementation of a market-based rate card in the second quarter of 2008 that replaced the cost-based method used in all prior periods. Due to lower operating expenses , income from operations improved by $52,107, or 42% in 2008 as compared to 2007.

          Delinquencies were relatively stable and advances declined during 2008. This is due to both a decline in the UPB of residential assets serviced and to our success in stabilizing the delinquency rate of these loans. Management initiatives designed to maximize the return to the loan investors resulted in increased loan modifications and faster sales of foreclosed real estate and were the primary factor in stabilizing delinquencies.

          Prepayment speed increased in 2008 due to a larger number of real estate sales. Such involuntary liquidations accounted for approximately 80% of prepayments during 2008 as compared to approximately 20% for 2007.

36


          Interest expense increased in 2008 principally because of increased financing costs associated with the growth in residential servicing advances. In 2008, we also experienced an increase in facility fees and in interest rates spreads charged by the lenders. Although the majority of our credit facilities bear interest at rates that are adjusted regularly based on 1-Month LIBOR, our average effective interest rate for 2008 did not decline in proportion to the decline in LIBOR. This is principally the result of the higher spreads over LIBOR charged on the new match funded facilities that we added in 2008 and higher facility fees charged by the lenders on the new facilities and on the renewal of existing facilities.

Loans and Residuals

          The following table presents selected results of operations of our Loans and Residuals segment for the years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

   

Revenue

 

$

 

$

 

$

352

 

Operating expenses

 

 

2,831

 

 

3,025

 

 

4,191

 

 

 

   

 

   

 

   

 

Loss from operations

 

 

(2,831

)

 

(3,025

)

 

(3,839

)

 

 

   

 

   

 

   

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

7,183

 

 

11,361

 

 

20,485

 

Interest expense

 

 

(1,447

)

 

(3,177

)

 

(7,499

)

Loss on trading securities

 

 

(569

)

 

(2,837

)

 

(3,379

)

Loss on loans held for resale, net

 

 

(11,132

)

 

(17,096

)

 

(16,671

)

Other, net

 

 

(325

)

 

92

 

 

2,253

 

 

 

   

 

   

 

   

 

Other expense, net

 

 

(6,290

)

 

(11,657

)

 

(4,811

)

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes

 

$

(9,121

)

$

(14,682

)

$

(8,650

)

 

 

   

 

   

 

   

 

          2009 versus 2008. Interest expense declined in 2009, compared to 2008, due to a lower average loan principal balance, the repayment of debt and lower interest rates. We repaid the remaining outstanding notes on September 2009. Interest income declined due to a lower average loan principal balance, increase in the percentage of nonperforming loans (increased defaults and unrecoverable losses on the underlying mortgage loans) and lower interest rates.

          Losses on trading securities reflect the change in fair value on mortgage-backed securities. Losses on loans held for resale includes the adjustment necessary to present loans and real estate on our balance sheet at the estimated fair value, loan payoffs, foreclosures and charge-offs.

          The UPB of nonperforming loans as a percentage of total UPB was 56% at December 31, 2009 compared to 48% at December 31, 2008. There were no loan sales during 2009.

          The weighted average remaining life of the subordinated and residual securities was 1.28 years at December 31, 2009.

          The following table shows selected assets and liabilities of our Loans and Residuals segment as of December 31:

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

   

Subordinate and residual trading securities

 

$

3,634

 

$

4,204

 

Loans held for resale (1)

 

 

33,197

 

 

49,918

 

Advances on loans held for resale

 

 

4,321

 

 

4,867

 

Real estate (2)

 

 

5,030

 

 

4,682

 

Other

 

 

2,508

 

 

3,646

 

 

 

   

 

   

 

Total assets

 

$

48,690

 

$

67,317

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Lines of credit and other secured borrowings

 

$

 

$

17,760

 

Other

 

 

1,164

 

 

1,409

 

 

 

   

 

   

 

Total liabilities

 

$

1,164

 

$

19,169

 

 

 

   

 

   

 


 

 

(1)

Loans held for resale at December 31, 2009 and 2008 include non-performing loans with a carrying value of $14,382 and $19,193, respectively.

 

 

(2)

Comprised of foreclosed properties that are reported net of fair value allowances of $4,810 and $4,748 at December 31, 2009 and 2008, respectively. During 2009, transfers from loans held for resale more than offset sales of real estate.

          2008 versus 2007. Interest expense declined in 2008, compared to 2007, primarily due to a 68% reduction in the average outstanding balances financing subordinate and residual trading securities and lower interest rates. Interest income declined due to a lower average balance of loans and securities and lower interest rates.

37


          Losses on trading securities reflect the change in fair value on mortgage-backed securities. Losses on loans held for resale includes the adjustment necessary to present loans and real estate on our balance sheet at the estimated fair value, loan payoffs, foreclosures and charge-offs.

          The UPB of nonperforming loans as a percentage of total UPB was 48% at December 31, 2008 compared to 50% at December 31, 2007. There were no loan sales during 2008.

          The weighted average remaining life of the subordinated and residual securities was 1.62 years at December 31, 2008.

Asset Management Vehicles

          The following table presents selected results of operations of our Asset Management Vehicles segment for the years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Revenue (1)

 

$

1,851

 

$

3,664

 

$

1,444

 

Operating expenses

 

 

3,108

 

 

4,113

 

 

829

 

 

 

   

 

   

 

   

 

Income (loss) from operations

 

 

(1,257

)

 

(449

)

 

615

 

 

 

   

 

   

 

   

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

OSI

 

 

(2,650

)

 

(5,643

)

 

1,095

 

ONL and affiliates

 

 

(1,410

)

 

(3,525

)

 

(1,920

)

 

 

   

 

   

 

   

 

Equity in losses of unconsolidated entities

 

 

(4,060

)

 

(9,168

)

 

(825

)

Other, net

 

 

 

 

(196

)

 

51

 

 

 

   

 

   

 

   

 

Other expense, net

 

 

(4,060

)

 

(9,364

)

 

(774

)

 

 

   

 

   

 

   

 

Loss from continuing operations before income taxes

 

$

(5,317

)

$

(9,813

)

$

(159

)

 

 

   

 

   

 

   

 


 

 

(1)

Management fees earned from OSI and ONL and affiliates.

          2009 versus 2008. Management fee revenue continues to decline as the equity of the assets managed continues to decline. Lower equity losses in 2009 were primarily attributable to declines in the losses incurred by OSI and by ONL and affiliates. Losses incurred by these entities in 2009 and 2008 largely resulted from charges to reduce loans, real estate and residual securities to their fair values.

          The following table shows selected assets and liabilities of our Asset Management Vehicles segment as of December 31:

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Receivables

 

$

334

 

$

1,171

 

 

 

   

 

   

 

OSI (1)

 

 

7,885

 

 

15,410

 

ONL and affiliates (2)

 

 

7,044

 

 

10,174

 

 

 

   

 

   

 

Investments in unconsolidated entities

 

 

14,929

 

 

25,584

 

 

 

   

 

   

 

Other

 

 

8

 

 

 

 

 

   

 

   

 

Total assets

 

$

15,271

 

$

26,755

 

 

 

   

 

   

 


 

 

(1)

We received distributions totaling $4,875 during 2009. We did not make any investments in OSI during 2009 because our commitment to invest additional capital has expired.

(2)

During 2009, we received distributions totaling $1,783 and invested an additional $62 in ONL and its affiliates. At December 31, 2009, we had committed to invest up to an additional $33,840 in ONL and affiliated entities. The commitment expires in September 2010.

          2008 versus 2007. We began investing in these entities in the second and third quarters of 2007. Equity losses in 2008 were primarily attributable to losses incurred by OSI and by ONL and affiliates due to charges to reduce loans, real estate and residual securities to their fair values.

Mortgage Services, Financial Services and Technology Products

          Mortgage Services, Financial Services and Technology Products were separated as of August 10, 2009 as part of the Separation of the Ocwen Solutions line of business, except for GSS and BMS Holdings which remain at Ocwen. The partial year results of Ocwen Solutions may not be indicative of results for the full year. As a separate, publicly-traded company, Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) will file a Form 10-K with the Securities and Exchange Commission.

38


Corporate Items and Other

          The following table presents selected results of operations of Corporate Items and Other for the years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,066

 

$

156

 

$

1,162

 

Operating expenses

 

 

16,308

 

 

18,743

 

 

5,775

 

 

 

   

 

   

 

   

 

Loss from operations

 

 

(15,242

)

 

(18,587

)

 

(4,613

)

 

 

   

 

   

 

   

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,335

 

 

2,168

 

 

7,904

 

Interest expense

 

 

(447

)

 

(4,812

)

 

(8,763

)

Gain (loss) on trading securities

 

 

11,756

 

 

(32,643

)

 

(3,284

)

Gain (loss) on debt redemption

 

 

1,415

 

 

(86

)

 

(3

)

Other, net

 

 

(235

)

 

(300

)

 

(9,110

)

 

 

   

 

   

 

   

 

Other income (expense), net

 

 

13,824

 

 

(35,673

)

 

(13,256

)

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes

 

$

(1,418

)

$

(54,260

)

$

(17,869

)

 

 

   

 

   

 

   

 

          2009 versus 2008 . Operating expenses declined primarily due to reduced professional service fees. In 2008, we incurred $11,396 of expenses related to strategic initiatives, including $9,532 in connection with the “going private” transaction which the parties mutually terminated in March 2008. In 2009, our legal fees and settlements increased by $4,577, and we recorded $3,477 of expenses related to the Separation.

          We repurchased debt securities, thereby reducing interest expense and recognizing a gain on redemption. The unrealized gains on trading securities in 2009 were principally based on improvements in the underlying collateral markets and liquidity solution discussions for auction rate securities. In contrast, the unrealized losses on trading securities in 2008 primarily reflected worsening collateral markets and the failure of the auction rate securities markets.

          The following table shows selected assets and liabilities of Corporate Items and Other as of December 31:

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Cash

 

$

90,778

 

$

197,874

 

Trading securities, at fair value

 

 

 

 

 

 

 

Auction rate (1)

 

 

247,464

 

 

239,301

 

Subordinates and residuals

 

 

58

 

 

165

 

Receivables, net (2)

 

 

4,811

 

 

24,104

 

Income taxes receivable

 

 

17,865

 

 

5,386

 

Deferred tax assets, net

 

 

132,683

 

 

175,145

 

Premises and equipment, net

 

 

3,214

 

 

3,415

 

Other

 

 

17,304

 

 

19,572

 

 

 

   

 

   

 

Total assets

 

$

514,177

 

$

664,962

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Investment line (1)

 

$

156,968

 

$

200,719

 

Debt securities (3)

 

 

95,564

 

 

133,367

 

Other liabilities

 

 

49,721

 

 

51,005

 

 

 

   

 

   

 

Total liabilities

 

$

302,253

 

$

385,091

 

 

 

   

 

   

 


 

 

(1)

In January, February and March of 2010, we liquidated $136,975 par value of securities for $122,640 cash. We recognized no gain or loss on these three transfers. Furthermore, we sold $88,150 par value of securities with the option to repurchase the same securities at the same sales price until October 2012. We used the majority of these proceeds to pay down the investment line subsequent to December 31, 2009.

(2)

The balance at December 31, 2008 included $8,286 of mortgage loans originated by BOK, net of allowances of $1,392.

(3)

February 2009, we repurchased $25,910 par value of our 3.25% Convertible Notes at a discount to par in the open market which generated a gain of $534, net of the write-off of unamortized issuance costs. In November 2009, we repurchased $14,250 par value of our 10.875% Capital Trust Securities at a discount to par in the open market resulting in a gain of $882, net of the write-off of unamortized issuance costs.

          2008 versus 2007. Operating expenses increased primarily due to higher professional service fees. In 2008, we incurred $11,396 of expenses related to strategic initiatives including $9,532 in connection with the “going private” transaction which the parties mutually terminated in March 2008.

39


          The decline in interest income is principally due to a decline in the average balance of our investment in short-term investment grade securities including CMOs and commercial paper. Similarly, the decline in interest expense is due to repurchases of our debt securities during 2008.

          The unrealized losses on auction rate securities in 2008 were principally determined based on extremely constrained collateral and credit markets and the failure of the auction markets supporting these securities.

          In August 2007, we redeemed our investment in certificates of deposit prior to their maturity in order to meet an unanticipated liquidity need. The cash received from the issuer upon redemption was less than the adjusted cost basis of the certificates of deposit resulting in a loss of $8,673.

EQUITY

          Total equity increased due to the net proceeds of $274,964 from the public offering of 32,200,000 shares of common stock in August 2009 and proceeds of $60,165 from the private placement of 5,471,500 shares of common stock in April 2009. The exercise of stock options and the compensation related to employee share-based awards along with net income of $272 also contributed to the increase in equity in 2009. Offsetting these increases were the distribution of $72,146 of net assets in connection with the Separation and the repurchase of 1,000,000 shares of common stock for $11,000.

          Non-controlling interests of $252 and $406 at December 31, 2009 and December 31, 2008, respectively, primarily represented the 30% investment in GSS held by ML IBK Positions, Inc. With our adoption on January 1, 2009 of the new accounting guidance related to non-controlling interests, we reclassified non-controlling interest from a separate classification in our consolidated balance sheets to classification as a component of equity.

INCOME TAX EXPENSE (BENEFIT)

          Income tax expense was $96,110, $12,006 and $15,186 for 2009, 2008 and 2007, respectively. In the third quarter of 2009, we incurred income tax expense of $52,047 in connection with the Separation of which $26,398 was deferred tax expense. Income tax expense for prior periods reflects the impact of the change in accounting for the Convertible Notes due to the adoption of FSP APB 14-1 (Codified within FASB Accounting Standards Codification (ASC) 470), “Debt.” See Note 1 to the financial statements for additional details relating to the impact of the adoption of this new accounting pronouncement.

          Our effective tax rate for 2009, excluding the Separation, was 48.42% as compared to 38.71% and 28.45% for 2008 and 2007, respectively. Excluding the effect of increasing our liability for selected tax items in 2009, the increase in valuation allowances in 2008 and the reversal of valuation allowances in 2007, our effective tax rate was 36.42%, 34.25% and 39.38% for 2009, 2008 and 2007, respectively. For the years 2007 through 2009, we paid cash taxes at rates less than our effective tax rate due to the utilization of tax benefits including low income housing tax credits. Our Federal US cash tax rate for 2009, 2008 and 2007 approximates 20.00%. When combined with U.S state and international cash taxes, the rates are 24.80%, 29.29% and 26.68%, respectively. At December 31, 2009, we no longer have any low income housing tax credits available to reduce future taxable income. Income tax expense on income before income taxes differs from amounts that would be computed by applying the Federal corporate income tax rate of 35% primarily because of the effect of foreign taxes, foreign income with an indefinite deferral from U.S. taxation, losses from consolidated VIEs, state taxes, low-income housing tax credits, changes in the valuation allowance and changes in the liability for selected tax items. See Note 26 to our Consolidated Financial Statements for a reconciliation of taxes at the statutory rate to actual income tax expense.

          Our effective tax rate for 2009 includes a non-cash benefit of approximately 1.17% associated with the recognition of certain foreign deferred tax assets, offset by 12.00% resulting from a non-cash increase in our liability for selected tax items related to recognized deferred tax assets arising from deductibility of losses in a finance vehicle.

          Our effective tax rate for 2008 includes a benefit of approximately 1.56% associated with the recognition of certain foreign deferred tax assets. The effective tax rate for 2008 would have been 32.85% but was increased by approximately 4.50% due to the recognition of a valuation allowance on certain NCI related state net operating losses and 1.40% due to recognition of additional tax expense associated with the expiration of certain vested stock options.

          Our effective tax rate for 2007 includes a benefit of approximately 3.32% associated with the recognition of certain foreign deferred tax assets and 5.23% associated with certain provision-to-return reconciling items recognized in the fourth quarter. These reconciling items are a result of certain estimates we used in our 2006 year-end tax provision for which we obtained additional information as part of the tax return preparation process.

40


LIQUIDITY AND CAPITAL RESOURCES

          We define liquidity as unencumbered cash balances plus unused, collateralized advance financing capacity. Our liquidity as of December 31, as measured by cash and available credit, increased by $91,094, or 45%, from 2008 to 2009. At December 31, 2009, our cash position was $90,919 compared to $201,025 one year ago. Our available credit on collateralized but unused advance financing capacity was $201,200 at December 31, 2009 compared to zero a year ago. We used available cash to fund advance balances, as part of our debt and interest expense reduction strategy (more fully described below). We also distributed $20,028 of cash in connection with the Separation and made income tax payments of $52,910.

         Investment policy and funding strategy. Our primary sources of funds for near-term liquidity are:

 

 

 

 

 

 

 

 

l

Match funded liabilities

l

Payments received on loans held for resale

 

 

l

Lines of credit and other secured borrowings

l

Payments received on trading securities

 

 

l

Servicing fees, including float earnings

l

Debt securities

In addition to these near-term sources, additional long-term sources of liquidity include debt securities and equity capital.

          Our primary uses of funds are the funding of servicing advances, the payment of interest and operating expenses, the purchase of servicing rights and the repayment of borrowings. We closely monitor our liquidity position and ongoing funding requirements.

          Our investment policies emphasize principal preservation by limiting investments to include:

 

 

 

 

l

Securities issued by the U.S. government, a U.S. agency or a U.S. government-sponsored enterprise

 

l

Money market mutual funds

 

l

Money market demand deposits

          Currently, we are primarily invested in money market demand deposits. Furthermore, our investment policies are intended to minimize credit and counterparty risk by establishing risk limits based on each counterparty’s equity size and long-term credit ratings. We regularly monitor and project cash flow timing in connection with our efforts to optimize the risk-adjusted yield of our portfolio of investments.

          During the global financial crises of 2007 and 2008, we made preservation of capital and expansion of advance financing capacity our top priorities in order to ensure we could meet our liquidity and operating needs.

          In August 2009, we implemented a strategy to deploy excess cash balances to reduce outstanding debt levels and interest expense. We also began to execute on a strategy to increase the duration of our advance financing. As part of this strategy, we issued multi-year fixed rate notes under the Term Asset Loan Facility (TALF) program administered by the Federal Reserve Bank of New York and created a new advance facility structure which allows for multiple notes with staggering maturity dates to reduce roll-over risk.

          Outlook. In 2010, we expect to reduce up-front facility fees and execute at tighter spreads over LIBOR and commercial paper rates. While we expect to benefit from the fixed interest rates on our $210,000 December 2009 and $200,000 February 2010 TALF notes, these rates are currently higher than LIBOR and commercial paper as of December 31, 2009.

          We also expect to benefit from the increase in the duration of our funding sources. Our recent TALF issuances of $210,000 in December 2009 and $200,000 in February 2010 increased the maturity for 42% of our advance financing needs at fixed interest rates.

          Following the repayment of the investment line in full in February 2010 and the transfers of auction rate securities for cash proceeds, we continue our efforts to release cash by liquidating the remaining auction rate securities with a fair value of $38,083 and par value of $38,800. We expect to complete this in 2010.

          Debt financing summary. During 2009, we reduced our outstanding liabilities by:

 

 

 

 

l

Repurchasing Convertible Notes with a face value of $25,910;

 

l

Repurchasing Capital Trust Securities with a face value of $14,250;

 

l

Repaying our $97,987 MSR financing facility;

 

l

Repaying $43,751 on our auction rate securities investment line; and

 

l

Repaying our Class A-1 notes, representing financing of our loans held for resale.

41


          Despite a credit environment that remains challenged, during 2009 we:

 

 

 

 

l

Renewed a $200,000 advance note;

 

l

Obtained $67,000 in new term advance financing;

 

l

Renewed our investment line in support of the auction rate securities through June 30, 2010;

 

l

Increased the maximum borrowing capacity of a $300,000 advance financing facility to $500,000;

 

l

Issued a new variable funding note with a maximum borrowing capacity of $300,000; and

 

l

Issued $210,000 of advance receivable backed notes under the TALF program.

          As a result of our ability to renew and increase advance facility notes before they entered their amortization period and to issue the TALF notes, maximum borrowing capacity for match funded advances increased by $145,000 from $1,215,000 at December 31, 2008 to $1,360,000 at December 31, 2009. When coupled with a reduction in advances and match funded advances of $234,111, we increased our unused advance borrowing capacity from $257,893 at December 31, 2008 to $894,309 at December 31, 2009. Our prospects for advance financing have improved due to the inclusion of servicer advances in TALF which was announced by the Federal Reserve Bank of New York in on March 19, 2009. TALF allows lenders to invest a relatively small amount of equity while borrowing the remainder from the Federal Reserve Bank at a modest spread over LIBOR, with a note term of up to three years for servicer advances. On December 10, 2009, we issued $210,000 of TALF notes to replace the $165,000 term advance note that we repaid on August 11, 2009. The TALF note enters its amortization period in July 2012.

          The amortization date is the date on which the revolving period ends under each advance facility note and repayment of the outstanding balance must begin if the note is not renewed or extended. The maturity date is the date on which all outstanding balances must be repaid. In all but one advance facility, there is a single note outstanding. For each of these facilities, after the amortization date, all collections that represent the repayment of advances pledged to the facility must be applied to reduce the balance of the note outstanding, and any new advances are ineligible to be financed. In order for us to maintain liquidity and the ability to finance new advances, we repay borrowings under facilities that have entered their amortization period and pledge them to another facility. Our new advance facility structure, which has four notes outstanding as of February 2010, permits collateral to be apportioned between notes when one or more notes are in amortization. This feature permits us to continue to finance new advances provided there is sufficient capacity on other revolving notes in the structure that are not in amortization.

42


          In the table below, we provide the amortization dates and maturity dates for notes under each of our credit facilities as of December 31, 2009, excluding the investment line.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity

 

Amortization
Date

 

Maximum
Borrowing
Capacity (1)

 

Unused
Borrowing
Capacity

 

Balance
Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Match funded liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advance Receivable Backed Note Series 2009-3 (2)

 

 

Jul. 2023

 

 

Jul. 2012

 

$

210,000

 

$

 

$

210,000

 

Variable Funding Note Series 2009-1 (2)

 

 

Dec. 2020

 

 

Feb. 2010

 

 

300,000

 

 

300,000

 

 

 

Variable Funding Note

 

 

Dec. 2013

 

 

Dec. 2010

 

 

250,000

 

 

91,588

 

 

158,412

 

Advance Receivable Backed Notes (3)

 

 

Jan. 2019

 

 

Feb 2010

 

 

100,000

 

 

72,579

 

 

27,421

 

Advance Receivable Backed Notes

 

 

May 2011

 

 

May 2010

 

 

500,000

 

 

430,142

 

 

69,858

 

 

 

   

 

   

 

   

 

   

 

   

 

Total match funded liabilities

 

 

 

 

 

 

 

 

1,360,000

 

 

894,309

 

 

465,691

 

Fee reimbursement advance (4)

 

 

Mar. 2014

 

 

Mar 2010

 

 

60,000

 

 

 

 

60,000

 

Term note

 

 

Mar. 2014

 

 

Mar. 2014

 

 

7,000

 

 

 

 

7,000

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

1,427,000

 

 

894,309

 

 

532,691

 

 

 

   

 

   

 

   

 

   

 

   

 

Corporate Items and Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible notes (5)

 

 

Aug. 2024

 

 

N/A

 

 

 

 

 

 

56,435

 

Capital trust securities

 

 

Aug. 2027

 

 

N/A

 

 

 

 

 

 

39,129

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95,564

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

Discount (4)

 

 

 

 

 

 

 

 

 

 

 

 

(11,190

)

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

$

1,427,000

 

$

894,309

 

$

617,065

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 


 

 

(1)

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. With respect to our match funded facilities, all eligible advances had been pledged to a facility at December 31, 2009. However, we had $201,200 of unused borrowing capacity readily available to us on December 31, 2009 because we had pledged collateral to, but fully drawn on, our facilities.

(2)

On December 10, 2009, we issued $210,000 of notes under the TALF program. These notes carry a 4.14% fixed rate of interest and enter their amortization period in July 2012. In addition, we issued two variable funding notes. One note with a maximum borrowing capacity of $300,000 enters its amortization period in February 2010. The second note has a maximum borrowing capacity of $100,000; however, the purchaser had no obligation to fund any borrowing under the note until January 2010, at which time the maximum funding obligation was $28,000. The maximum funding obligation under this note increases to $88,000 in November 2010 and to $100,000 in November 2011.

(3)

Effective December 31, 2009, we reduced the maximum borrowing capacity from $200,000 to $100,000. We extended this note through March 19, 2010.

(4)

The fee reimbursement advance is payable annually in five installments of $12,000. The advance does not carry a stated rate of interest. However, we are compensating the lender for the advance of funds by forgoing payment 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.

(5)

On January 29, 2010, we repurchased $12,930 face amount of our Capital Trust Securities for a gain of $717.

          Our ability to finance servicing advances continues to be a significant factor that affects our liquidity. Three of our match funded advance facilities that are rated are subject to increases in the financing discount if deemed necessary by the rating agency in order to maintain the minimum rating required for the facility. While several rating agencies have adjusted their methodology for rating servicer advances and advance rates for newly issued notes are somewhat lower than in the past, we do not expect future advance rate changes to have a material effect on our liquidity. Our ability to continue to pledge collateral under each advance facility depends on the performance of the collateral. Currently, the majority of our collateral qualifies for financing under the advance facility to which it is pledged.

43


          Some of our existing debt covenants limit our ability to incur additional debt in relation to our equity, require that we do not exceed maximum levels of delinquent loans and require that we maintain minimum levels of liquid assets and earnings. Failure to comply with these covenants could result in restrictions on new borrowings or the early termination of our borrowing facilities. We are currently in compliance with these covenants and do not expect them to restrict our activities.

          Equity financing summary. In a private placement transaction that closed on April 3, 2009, we sold 5,471,500 shares of common stock at a price of $11.00 per share for $60,165 in proceeds. On the same date, we also purchased 1,000,000 shares of common stock from our Chairman of the Board at a price of $11.00 per share. These transactions generated net cash of $49,165.

          On August 18, 2009, we completed the public offering of 32,200,000 shares of common stock which includes 4,200,000 shares of common stock purchased by the underwriters pursuant to the full exercise of the over-allotment option granted under the underwriting agreement. We received net proceeds of $274,964 from the offering after deducting underwriting discounts and other offering costs

          Auction rate securities . In early 2008, we suffered a significant adverse liquidity event when the auction markets failed for our $300,000 investment in AAA-rated securities backed by securitized Federal Family Education Loan Program student loans. We financed this investment in auction rate securities through the investment line. With the failure of the auction markets for these securities, we were unable to sell our investment because the market mechanism no longer functioned.

          At December 31, 2009, the fair value of this investment was $247,464 (representing $263,925 par value securities), and the remaining balance on the investment line was $156,968. We are successfully executing on our liquidation strategy.

 

 

 

 

l

On January 16, 2010 and March 4, 2010, we settled two of our litigation actions related to auction rate securities resulting in the sale of a combined $103,625 par value for $92,775 cash proceeds. Proceeds from one settlement were used to pay down the investment line.

 

l

On February 5, 2010, we sold $33,350 par value of securities for cash proceeds of $29,865. These proceeds were used to pay down the investment line.

 

l

On February 12, 2010, we sold $88,150 par value of auction rate securities with the option to repurchase the same securities at the same sales price until October 2012, resulting in a secured borrowing of $74,928. Under this option, we sold the securities at the strike price, but we retain the ability to benefit from future increases in the value of the securities above the strike price over the term of the option. We used these proceeds to repay the investment line.

          On February 17, 2010, we repaid, in full, the investment line.

          Cash flows for the year ended December 31, 2009. Our operating activities generated $206,646 of cash primarily due to lower investment in trading activities, declining delinquencies and lower collections. Trading activities provided $3,700 of cash from redemptions of auction rate securities at par.

          Our investing activities used $3,161 cash primarily due to purchases of MSRs, offset by lower distributions received from asset management vehicles and reduced proceeds from sales of real estate.

          Our financing activities used $313,591 cash as we made net repayments of $585,037 on match funded liabilities, other secured borrowings and the investment line, repurchased debt securities for $37,289 and distributed $20,028 of cash in connection with the Separation, offset in part by $324,129 of net proceeds from the issuance and repurchase of common stock.

          Cash flows for the year ended December 31, 2008. Our operating activities provided $123,091 reflecting increased investment in trading activities, declining delinquencies and lower collections. Trading activities used $236,710 net cash reflecting our investment in auction rate securities, offset in part by the sale or maturity of CMOs and other short-term investment grade securities.

          Our investing activities provided $40,440 net cash due to distributions received from asset management vehicles, purchases of MSRs and proceeds from sales of real estate and commercial MSRs.

          Our financing activities used $76,749 cash as we made $262,960 of net repayments of borrowings under our match funded advance facilities and lines of credit, offset by $200,719 of net borrowing under the investment line to fund our investment in auction rate securities.

44


           Cash flows for the year ended December 31, 2007. Our operating activities used $512,044 of cash primarily due to rising delinquencies and lower collections, which used $523,602 of net funding requirements for advances and match funded advances and $179,065 due to the change in servicer liabilities, offset in part by proceeds from our sale of the UK residuals and the maturity of commercial paper investments.

          Our investing activities used $122,957 net cash due to purchases of MSRs of $113,502, investments in asset management entities totaling $73,513 and net cash paid to acquire NCI of $48,918, partially offset by $66,260 of cash received from our early redemption of certificates of deposit and the return of $45,894 of our investment in BMS Holdings.

          Our financing activities provided $512,663 of cash primarily due to net proceeds from match funded liabilities and lines of credit of our Servicing business totaling $529,292 that were principally related to increased borrowings on servicing advances.

CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS

Contractual Obligations

          The following table sets forth certain information regarding amounts we owe to others under contractual obligations as of December 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than
One Year

 

After One
Year
Through
Three
Years

 

After Three
Years
Through
Five Years

 

After Five
Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

3.25% Convertible Notes (1)

 

$

 

$

 

$

56,435

 

$

 

$

56,435

 

10.875% Capital Trust Securities (2)

 

 

 

 

 

 

 

 

39,129

 

 

39,129

 

Investment line (3)

 

 

156,968

 

 

 

 

 

 

 

 

156,968

 

Lines of credit and other secured borrowings

 

 

12,000

 

 

24,000

 

 

31,000

 

 

 

 

67,000

 

Contractual interest payments (4)

 

 

6,978

 

 

13,050

 

 

12,867

 

 

55,319

 

 

88,214

 

Operating leases

 

 

2,559

 

 

3,525

 

 

964

 

 

2,109

 

 

9,157

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

$

178,505

 

$

40,575

 

$

101,266

 

$

96,557

 

$

416,903

 

 

 

   

 

   

 

   

 

   

 

   

 


 

 

(1)

The Convertible Notes will mature on August 1, 2024. However, 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. Holders may also require that we repurchase all or a portion of their notes for cash on August 1, 2014 and August 1, 2019. Also, upon the occurrence of a “fundamental change,” Holders may redeem the notes at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any. A fundamental change is a change of control or a termination of trading in our common stock.

(2)

On January 29, 2010, we repurchased and retired Capital Trust Securities in the face amount of $12,930.

(3)

The investment line will mature on June 30, 2010. Interest on the term note is 0.35% on that portion of the outstanding balance that does not exceed the available balances on deposit with the lender. For any portion of the outstanding balance of the term note that is in excess of the demand deposits, the interest rate is 1-month LIBOR plus 35 basis points. The 0.35% rate may be adjusted upward by the lender to a maximum of 3.35% if the lender determines that the 0.35% rate does not fairly reflect the cost to the lender of providing the funds. Future interest may vary depending on demand deposit levels, changes in LIBOR and sales or redemptions of auction rate securities.

(4)

Represents estimated future interest payments on borrowings, including capital leases, based on applicable interest rates as of December 31, 2009.

45


          We exclude match funded liabilities from the contractual obligation table above because it represents non-recourse debt that has been collateralized by match funded advances which are not available to satisfy general claims against Ocwen. Except for a guarantee by OLS of payment by one of the SPEs, holders of the notes issued by the SPEs have no recourse against any assets other than the match funded advances that serve as collateral for the securitized debt. OLS’ liability under the guaranty is limited to 10% of the notes outstanding at the end of the revolving period of the related match funded financing facility. At December 31, 2009, the debt outstanding under that facility was $69,858. Actual interest on match funded liabilities was $47,561 in 2009. Future interest may vary depending on utilization and changes in LIBOR and spreads.

Off-Balance Sheet Arrangements

          In the normal course of business, we engage in transactions with a variety of financial institutions and other companies that are not reflected on our balance sheet. In addition, through our investment in subordinate and residual securities, we provide credit support to the senior classes of securities. We are subject to potential financial loss if the counterparties to our off-balance sheet transactions are unable to complete an agreed upon transaction. We seek to limit counterparty risk through financial analysis, dollar limits and other monitoring procedures. We have also entered into non-cancelable operating leases and have committed to invest up to an additional $33,840 in ONL and related entities.

           Derivatives . We record all derivative transactions at fair value on our consolidated balance sheets. We use these derivatives primarily to manage our interest rate risk. The notional amounts of our derivative contracts do not reflect our exposure to credit loss. See Note 22 to our Consolidated Financial Statements for additional information regarding derivatives.

           Involvement with SPEs . We use SPEs for a variety of purposes but principally in the financing of our servicing advances and in the securitization of mortgage loans.

          Our securitizations of mortgage loans were structured as sales. The SPEs to which we have transferred the mortgage loans are qualifying special purpose entities (QSPEs) and therefore have not been subject to consolidation through 2009. We have retained both subordinated and residual interests in these QSPEs. Where we are the servicer of the securitized loans, we generally have the right to repurchase the mortgage loans from the QSPE when the costs exceed the benefits of servicing the remaining loans. See Note 1 to our Consolidated Financial Statements for information regarding accounting changes that eliminated the QSPE concept effective January 1, 2010.

          We generally use match funded securitization facilities to finance our servicing advances. The SPEs to which the advances are transferred in the securitization transaction are included in our consolidated financial statements either because the transfer did not qualify for sales accounting treatment or because the SPE is not a QSPE, and we have the majority equity interest in the SPE, or we are the primary beneficiary where the SPE is also a VIE. The holders of the debt of these SPEs can look only to the assets of the SPEs for satisfaction of the debt and have no recourse against OCN. However, OLS has guaranteed the payment of the obligations of the issuer under a match funded facility that closed 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.

           VIEs . In addition to certain of our financing SPEs, we have invested in several other VIEs primarily in connection with purchases of whole loans. If we determine that we are the primary beneficiary of a VIE, we report the VIE in our consolidated financial statements.

RECENT ACCOUNTING DEVELOPMENTS

Recent Accounting Pronouncements

          Listed below are recent accounting pronouncements which did or are expected to have a significant impact upon adoption. For additional information regarding these and other recent accounting pronouncements, see Note 1 to our Consolidated Financial Statements.

           ASC 860, Transfers and Servicing. This statement clarifies that the objective of the standard is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. That determination must consider the transferor’s continuing involvements in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. This statement modifies the financial-components approach currently used and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset.

46


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

          We are currently evaluating the impact of this standard upon adoption effective January 1, 2010.

           ASC 810, Consolidation. This standard requires 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. We adopted this standard effective January 1, 2010. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics:

 

 

 

 

(a)

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

 

 

 

 

(b)

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

          In addition to reintroducing the concept of control into the determination of the primary beneficiary of a VIE, this statement makes numerous other amendments to the current standards to primarily reflect the elimination of the concept of a QSPE under ASC 860 (above). This statement also amends the current standards to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a VIE. The additional disclosures required by this statement are included in Note 1—Principles of Consolidation.

          This standard became effective as of January 1, 2010.

          As disclosed in Note 1—Securitizations of Residential Mortgage Loans, we currently exclude certain loan securitization trusts from our consolidated financial statements because each is a QSPE. Effective January 1, 2010, we are required to reevaluate these QSPEs as well as all other potentially significant interests in other unconsolidated entities, such as our asset management vehicles and the securitization trusts underlying our servicing portfolio, to determine if we should include them in our consolidated financial statements. We are currently evaluating the potential impact of this new standard, in connection with the new guidance issued under ASC 860 (above).

          ASC 470, Debt. The FASB issued FSP No. APB 14-1 (Codified within ASC 470) providing guidance on convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). Under this guidance, issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Upon adoption of this standard on January 1, 2009, we recognized a discount to reduce the carrying value of the 3.25% Convertible Notes and an offsetting increase to stockholders’ equity. The cumulative effect of adoption resulted in: (1) a reduction of retained earnings of $12,678 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 $19,567. 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 years ended December 31, 2008 and 2007 have been adjusted to include amortization of debt discount of $3,886 and $4,069, respectively, and a reduction in the amortization of debt issue costs of $136 and $153, respectively. The gain previously recognized on the redemption of debt securities during 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.

47



 

 

I TEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in thousands)

          Market risk includes liquidity risk, interest rate risk and foreign currency exchange rate risk. Market risk also reflects the risk of declines in the valuation of financial instruments and the collateral underlying loans. Our Investment Committee reviews significant transactions that may impact market risk and is authorized to utilize a wide variety of techniques and strategies to manage market risk including, in particular, interest rate and foreign currency exchange rate risk.

Liquidity Risk

          We are exposed to liquidity risk primarily because of the cash requirements to support the Servicing business including the requirement to make advances pursuant to servicing contracts and the process of remitting borrower payments to the custodial accounts. In general, we finance our operations through operating cash flows and various other sources of funding including match funded agreements and secured lines of credit. On April 30, 2009, we were successful in negotiating a one-year extension of the investment line to June 30, 2010. However, because of the failed auctions, the market for auction rate securities is currently not liquid. In the event we need to liquidate our investment, we may not be able to do so without a loss of principal.

Interest Rate Risk

          We are exposed to interest rate risk to the degree that our interest-bearing liabilities mature or reprice at different speeds, or different bases, than our interest-earning assets or when we use debt to finance assets that are non-interest earning. Our Servicing business is characterized by non-interest earning assets financed by interest-bearing liabilities. Among the more significant non-interest earning assets are servicing advances and MSRs. At December 31, 2009, we had total advances and match funded advances of $968,529. We are indirectly exposed to interest risk by our funding of advances because approximately 55% of our total advances and match funded advances are funded through borrowings, most of which are variable rate debt. Earnings on float balances (assets) partially offset this risk.

          Following our successful equity capital raise in August 2009, we implemented a strategy to deploy excess cash balances to reduce outstanding debt levels and interest expense. We significantly reduced our ratio of interest-rate sensitive assets to interest rate sensitive liabilities from 2008 to 2009. This reduction helps to reduce our exposure to interest rate volatility. In 2010, we expect to reduce up-front facility fees and execute at tighter spreads over LIBOR and commercial paper rates. We also expect to benefit from the increase in the duration of our funding sources. Our recent Term Asset Loan Facility (TALF) issuances of $210,000 in December 2009 and $200,000 in February 2010 increased the maturity for 42% of our advance financing needs at fixed interest rates.

48


          The tables below present the notional amounts of our financial instruments that are sensitive to changes in interest rates categorized by expected maturity and the related fair value of these instruments at December 31, 2009 and 2008. We use certain assumptions to estimate the expected maturity and fair value of these instruments. We base expected maturities upon contractual maturity and projected repayments and prepayments of principal based on our historical experience. The actual maturities of these instruments could vary substantially if future prepayments differ from our historical experience. Average interest rates are based on the contractual terms of the instrument and, in the case of variable rate instruments, reflect estimates of applicable forward rates as of December 31, 2009. The average presented is the weighted average.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected Maturity Date at December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

2011

 

2012

 

2013

 

2014

 

There-
after

 

Total
Balance

 

Fair
Value (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate-Sensitive Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning cash

 

$

50,373

 

$

 

$

 

$

 

$

 

$

 

$

50,373

 

$

50,373

 

Average interest rate

 

 

0.50

%

 

 

 

 

 

 

 

 

 

 

 

0.50

%

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

 

122,877

 

 

124,587

 

 

 

 

 

 

 

 

 

 

247,464

 

 

247,464

 

Average interest rate

 

 

1.01

%

 

1.59

%

 

 

 

 

 

 

 

 

 

1.29

%

 

 

 

Subordinates and residuals

 

 

593

 

 

421

 

 

189

 

 

312

 

 

496

 

 

1,681

 

 

3,692

 

 

3,692

 

Average interest rate

 

 

19.65

%

 

19.68

%

 

19.51

%

 

18.79

%

 

18.78

%

 

18.73

%

 

19.04

%

 

 

 

Loans held for resale (2)

 

 

12,271

 

 

12,024

 

 

3,631

 

 

1,698

 

 

1,049

 

 

2,524

 

 

33,197

 

 

33,197

 

Average interest rate

 

 

9.74

%

 

9.45

%

 

8.76

%

 

8.69

%

 

8.63

%

 

8.63

%

 

9.35

%

 

 

 

Interest–earning collateral and debt service deposits

 

 

53,892

 

 

5,000

 

 

 

 

 

 

 

 

 

 

58,892

 

 

58,892

 

Average interest rate

 

 

0.44

%

 

0.10

%

 

 

 

 

 

 

 

 

 

0.41

%

 

 

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Total rate-sensitive assets

 

$

240,006

 

$

142,032

 

$

3,820

 

$

2,010

 

$

1,545

 

$

4,205

 

$

393,618

 

$

393,618

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Rate-Sensitive Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Match funded liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

 

$

 

$

150,000

 

$

60,000

 

$

 

$

 

$

210,000

 

$

208,025

 

Average interest rate

 

 

 

 

 

 

4.14

%

 

4.14

%

 

 

 

 

 

4.14

%

 

 

 

Variable interest rate

 

 

255,691

 

 

 

 

 

 

 

 

 

 

 

 

255,691

 

 

255,691

 

Average interest rate

 

 

2.12

%

 

 

 

 

 

 

 

 

 

 

 

2.12

%

 

 

 

Lines of credit and other secured borrowings

 

 

7,979

 

 

8,785

 

 

9,672

 

 

10,649

 

 

18,725

 

 

 

 

55,810

 

 

56,220

 

Average interest rate

 

 

10.10

%

 

10.10

%

 

10.10

%

 

10.10

%

 

7.72

%

 

 

 

9.30

%

 

 

 

Investment Line

 

 

156,968

 

 

 

 

 

 

 

 

 

 

 

 

156,968

 

 

156,968

 

Average interest rate

 

 

0.35

%

 

 

 

 

 

 

 

 

 

 

 

0.35

%

 

 

 

Debt securities (4)

 

 

 

 

 

 

 

 

 

 

56,435

 

 

39,129

 

 

95,564

 

 

84,551

 

Average interest rate

 

 

 

 

 

 

 

 

 

 

3.25

%

 

10.88

%

 

6.37

%

 

 

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Total rate-sensitive liabilities

 

$

420,638

 

$

8,785

 

$

159,672

 

$

70,649

 

$

75,160

 

$

39,129

 

$

774,033

 

$

761,455

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Rate-Sensitive Derivative Financial Instruments:

 

Interest rate caps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding notional

 

$

99,996

 

$

91,665

 

$

83,328

 

$

83,344

 

$

 

$

 

$

358,333

 

$

781