Ocwen Financial Corporation
OCWEN FINANCIAL CORP (Form: 10-Q, Received: 05/05/2011 17:25:23)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended March 31, 2011
   
or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from: _____________________to _____________________
 
Commission File Number: 1-13219
 
Ocwen Financial Corporation
(Exact name of registrant as specified in its charter)

Florida
 
65-0039856
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)

2002 Summit Boulevard, 6 th Floor, Atlanta, Georgia 30319
(Address of principal executive offices) (Zip Code)
 
(561) 682-8000
(Registrant’s telephone number, including area code)

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

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

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

Number of shares of Common Stock, $0.01 par value, outstanding as of April 29, 2011: 100,937,283 shares.

 
 

 

OCWEN FINANCIAL CORPORATION
 
FORM 10-Q

INDEX

 
   
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1

 
 
FORWARD-LOOKING STATEMENTS

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

These forward-looking statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “intend,” “consider,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Such statements are not guarantees of future performance as they are subject to certain assumptions, inherent risks and uncertainties in predicting future results. Important factors that could cause actual results to differ materially include, but are not limited to, the following:

 
·
our sources of liquidity, our ability to fund and recover advances, repayment of borrowings, compliance with debt covenants and the adequacy of financial resources;
     
 
·
servicing portfolio characteristics, including prepayment speeds, float balances, delinquency and advances rates;
     
 
·
our ability to grow or otherwise adapt our business, including the availability of new servicing opportunities and joint ventures;
     
 
·
our ability to reduce our cost structure;
     
 
·
our ability to successfully modify delinquent loans, manage foreclosures and sell foreclosed properties;
     
 
·
our reserves, valuations, provisions and anticipated realization on assets;
     
 
·
our ability to effectively manage our exposure to interest rate changes and foreign exchange fluctuations;
     
 
·
our credit and servicer ratings and other actions from various rating agencies;
     
 
·
uncertainty related to general economic and market conditions, delinquency rates, home prices and real-estate owned disposition timelines;
     
 
·
uncertainty related to the actions of loan owners, including mortgage-backed securities investors, regarding loan putbacks or legal actions;
     
 
·
uncertainty related to the processes for judicial and non-judicial foreclosure proceedings, including potential additional costs or delays or moratoria in the future or claims pertaining to past practices;
     
 
·
uncertainty related to litigation or dispute resolution and inquiries from government agencies into past servicing and foreclosure practices; and
     
 
·
uncertainty related to legislation, regulations, regulatory agency actions, government programs and policies, industry initiatives and evolving best servicing practices.

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 Annual Report on Form 10-K for the year ended December 31, 2010 and our 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

 

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

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
 
   
March 31,
2011
   
December 31,
2010
 
Assets
           
Cash
  $ 129,087     $ 127,796  
Restricted cash – for securitization investors
    1,005       727  
Loans held for resale, at lower of cost or fair value
    25,153       25,803  
Advances
    174,842       184,833  
Match funded advances
    1,639,811       1,924,052  
Loans, net – restricted for securitization investors
    65,112       67,340  
Mortgage servicing rights
    184,571       193,985  
Receivables, net
    50,279       69,518  
Deferred tax assets, net
    137,551       138,716  
Goodwill
    12,810       12,810  
Premises and equipment, net
    5,110       5,475  
Investments in unconsolidated entities
    11,588       12,072  
Other assets
    128,868       158,282  
Total assets
  $ 2,565,787     $ 2,921,409  
                 
Liabilities and Equity
               
Liabilities
               
Match funded liabilities
  $ 1,289,129     $ 1,482,529  
Secured borrowings – owed to securitization investors
    60,841       62,705  
Lines of credit and other secured borrowings
    77,710       246,073  
Servicer liabilities
    2,067       2,492  
Debt securities
    82,554       82,554  
Other liabilities
    123,019       140,239  
Total liabilities
    1,635,320       2,016,592  
                 
Commitments and Contingencies (Note 20)
               
                 
Equity
               
Ocwen Financial Corporation stockholders’ equity
               
Common stock, $.01 par value; 200,000,000 shares authorized; 100,937,283 and 100,726,947 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively
    1,009       1,007  
Additional paid-in capital
    468,963       467,500  
Retained earnings
    467,530       445,456  
Accumulated other comprehensive loss, net of income taxes
    (7,281 )     (9,392 )
Total Ocwen Financial Corporation stockholders’ equity
    930,221       904,571  
Non-controlling interest in subsidiaries
    246       246  
Total equity
    930,467       904,817  
Total liabilities and equity
  $ 2,565,787     $ 2,921,409  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
 
For the three months ended March 31,
 
2011
   
2010
 
Revenue
           
Servicing and subservicing fees
  $ 102,505     $ 66,480  
Process management fees
    7,796       7,906  
Other revenues
    705       1,200  
Total revenue
    111,006       75,586  
                 
Operating expenses
               
Compensation and benefits
    14,787       12,777  
Amortization of mortgage servicing rights
    8,923       6,375  
Servicing and origination
    1,922       591  
Technology and communications
    6,872       5,664  
Professional services
    2,384       3,255  
Occupancy and equipment
    4,130       4,446  
Other operating expenses
    2,181       2,069  
Total operating expenses
    41,199       35,177  
                 
Income from operations
    69,807       40,409  
                 
Other income (expense)
               
Interest income
    2,169       3,645  
Interest expense
    (37,543 )     (12,471 )
Gain on trading securities
          765  
Loss on loans held for resale, net
    (904 )     (1,038 )
Equity in earnings of unconsolidated entities
    130       735  
Other, net
    830       (600 )
Other expense, net
    (35,318 )     (8,964 )
                 
Income before income taxes
    34,489       31,445  
Income tax expense
    12,425       10,574  
Net income
    22,064       20,871  
Net loss (income) attributable to non-controlling interest in subsidiaries
    10       (11 )
Net income attributable to Ocwen Financial Corporation
  $ 22,074     $ 20,860  
                 
Earnings per share attributable to Ocwen Financial Corporation
               
Basic
  $ 0.22     $ 0.21  
Diluted
  $ 0.21     $ 0.20  
                 
Weighted average common shares outstanding
               
Basic
    100,762,446       99,975,881  
Diluted
    107,777,775       107,324,415  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
 
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
 
For the three months ended March 31,
 
2011
   
2010
 
             
Net income
  $ 22,064     $ 20,871  
                 
Other comprehensive income (loss), net of income taxes:
               
                 
Unrealized foreign currency translation income (loss ) arising during the period (1)
    20       (70 )
                 
Change in deferred loss on cash flow hedges arising during the period (2)
    1,945        
Reclassification adjustment for losses on cash flow hedges included in net income (3)
    155        
Net change in deferred loss on cash flow hedges
    2,100        
                 
Other (4)
    1        
                 
Total other comprehensive income (loss), net of income taxes
    2,121       (70 )
                 
Comprehensive income
    24,185       20,801  
                 
Comprehensive loss attributable to non-controlling interests
          8  
                 
Comprehensive income attributable to Ocwen Financial Corporation
  $ 24,185     $ 20,809  

(1)
Net of income tax (expense) benefit of $(13) and $30 for the three months ended March 31, 2011 and 2010, respectively.
   
(2)
Net of income tax expense of $1,073 for the three months ended March 31, 2011.
   
(3)
Net of income tax expense of $88 for the three months ended March 31, 2011.
   
(4)
Net of income tax expense of $1 for the three months ended March 31, 2011.
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5

 
 
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Dollars in thousands)
 
   
OCN Shareholders
             
   
 
Common Stock
   
Additional
Paid-in
   
 
 
Retained
   
Accumulated
Other
Comprehensive
Loss,
   
Non-controlling Interest in
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Net of Taxes
   
Subsidiaries
   
Total
 
                                           
Balance at December 31, 2010
    100,726,947     $ 1,007     $ 467,500     $ 445,456     $ (9,392 )   $ 246     $ 904,817  
Net income (loss)
                      22,074             (10 )     22,064  
Exercise of common stock options
    210,336       2       577                         579  
Equity-based compensation
                886                         886  
Other comprehensive income, net of income taxes
                            2,111       10       2,121  
Balance at March 31, 2011
    100,937,283     $ 1,009     $ 468,963     $ 467,530     $ (7,281 )   $ 246     $ 930,467  

   
OCN Shareholders
             
   
 
Common Stock
   
Additional
Paid-in
   
 
 
Retained
   
Accumulated
Other
Comprehensive
Loss,
   
Non-controlling Interest in
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Net of Taxes
   
Subsidiaries
   
Total
 
                                           
Balance at December 31, 2009
    99,956,833     $ 1,000     $ 459,542     $ 405,198     $ (129 )   $ 252     $ 865,863  
Adoption of ASC 810 (FASB Statement No. 167), net of tax
                      2,274                   2,274  
Net income
                      20,860             11       20,871  
Exercise of common stock options
    207,775       2       959                         961  
Equity-based compensation
                948                         948  
Other comprehensive loss, net of income taxes
                            (51 )     (19 )     (70 )
Balance at March 31, 2010
    100,164,608     $ 1,002     $ 461,449     $ 428,332     $ (180 )   $ 244     $ 890,847  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
6

 

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 
For the three months ended March 31,
 
2011
   
2010
 
Cash flows from operating activities
           
Net income
  $ 22,064     $ 20,871  
Adjustments to reconcile net income to net cash provided by operating activities
               
Amortization of mortgage servicing rights
    8,923       6,375  
Amortization of debt discount
    6,046       1,146  
Amortization of debt issuance costs – senior secured term loan
    7,771        
Depreciation
    750       397  
Reversal of valuation allowance on mortgage servicing assets
    (214 )     (723 )
Gain on trading securities
          (765 )
Loss on loans held for resale, net
    904       1,038  
Equity in earnings of unconsolidated entities
    (130 )     (735 )
Gain on extinguishment of debt
    (1,246 )     (146 )
(Increase) decrease in deferred tax assets, net
    (10 )     19,102  
Net cash provided by trading activities
          123,193  
Net cash provided by loans held for resale activities
    233       454  
Changes in assets and liabilities:
               
Decrease in advances and match funded advances
    294,180       71,643  
Decrease in receivables and other assets, net
    38,393       13,033  
Decrease in servicer liabilities
    (425 )     (17,421 )
Decrease in other liabilities
    (11,549 )     (14,826 )
Other, net
    2,363       3,359  
Net cash provided by operating activities
    368,053       225,995  
                 
Cash flows from investing activities
               
Distributions of capital from unconsolidated entities
    1,458       1,201  
Investment in unconsolidated entity – Correspondent One S.A.
    (1,025 )      
Additions to premises and equipment
    (385 )     (1,600 )
Proceeds from sales of real estate
    230       822  
(Increase) decrease in restricted cash – for securitization investors
    (278 )     377  
Principal payments received on loans – restricted for securitization investors
    1,501       1,324  
Net cash provided by investing activities
    1,501       2,124  
                 
Cash flows from financing activities
               
(Repayment of) proceeds from match funded liabilities
    (193,400 )     90,794  
Repayment of secured borrowings – owed to securitization investors
    (1,864 )     (3,055 )
Proceeds from lines of credit and other secured borrowings
          74,953  
Repayment of lines of credit and other secured borrowings
    (173,163 )     (13,400 )
Repayment of investment line
          (156,968 )
Repurchase of debt securities
          (11,589 )
Exercise of common stock options
    836       871  
Other
    (672 )     (631 )
Net cash used by financing activities
    (368,263 )     (19,025 )
                 
Net increase in cash
    1,291       209,094  
Cash at beginning of period
    127,796       90,919  
Cash at end of period
  $ 129,087     $ 300,013  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
7

 
 
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Dollars in thousands, except share data)

NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

At March 31, 2011, Ocwen owned all of the outstanding stock of its primary subsidiaries: OLS, Ocwen Financial Solutions, Private Limited (OFSPL) and Investors Mortgage Insurance Holding Company. OCN also holds a 25% interest in Ocwen Structured Investments, LLC (OSI) and an approximate 25% interest in Ocwen Nonperforming Loans, LLC (ONL) and Ocwen REO, LLC (OREO). In March 2011, Ocwen and Altisource Portfolio Solutions S.A. (Altisource) each acquired a 50% equity interest in a newly formed entity, Correspondent One S.A. (Correspondent One).

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in conformity with the instructions of the Securities and Exchange Commission (SEC) to Form 10-Q and SEC Regulation S-X, Article 10, Rule 10-01 for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. In our opinion, the accompanying unaudited financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The results of operations and other data for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for any other interim period or for the entire year ending December 31, 2011. The unaudited interim consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.

The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Material estimates that are particularly significant relate to our fair value measurements, the provision for potential estimates that may arise from litigation proceedings, the amortization of mortgage servicing rights (MSRs) and the valuation of goodwill and deferred tax assets.
 
Principles of Consolidation

Our financial statements include the accounts of Ocwen and its majority-owned subsidiaries. We apply the equity method of accounting to investments when the entity is not a variable interest entity (VIE), and we are able to exercise significant influence, but not control, over the policies and procedures of the entity but own 50% or less of the voting securities. We account for our investments in OSI, ONL, OREO and Correspondent One using the equity method. We have eliminated intercompany accounts and transactions in consolidation.

Variable Interest Entities

We evaluate each special purpose entity (SPE) for classification as a VIE. When an SPE meets the definition of a VIE and we determine that Ocwen is the primary beneficiary, we include the SPE in our consolidated financial statements.

We have determined that the SPEs created in connection with the match funded financing facilities discussed below are VIEs of which we are the primary beneficiary. We have also determined that we are the primary beneficiary for certain residential mortgage loan securitization trusts. The accounts of these SPEs are included in our consolidated financial statements.

Securitizations or Asset Backed Financing Arrangements

Ocwen or its subsidiaries have been a transferor in connection with a number of securitizations or asset-backed financing arrangements. We have continuing involvement with the financial assets of eight of the securitizations and four of the asset-backed financing arrangements. We also hold residual interests in and are the servicer for three securitizations where we were not a transferor.
 
 
8

 

We have aggregated these securitizations and asset-backed financing arrangements into two groups: (1) securitizations of residential mortgage loans and (2) financings of advances on loans serviced for others.

Securitizations of Residential Mortgage Loans. In prior years, we securitized residential mortgage loans using certain trusts. These transactions were accounted for as sales even though we continued to be involved with the trusts, typically by acting as the servicer or sub-servicer for the loans held by the trust and by retaining a beneficial ownership interest in the trust. The beneficial interests we held consisted of both subordinate and residual securities that were either retained at the time of the securitization or subsequently acquired.

For four of these trusts, we have determined that our involvement represents a variable interest and that we are the primary beneficiary. We have included these four trusts in our consolidated financial statements. Our involvement with each of the remaining trusts does not represent a variable interest, and therefore, we exclude them from our consolidated financial statements.

We have determined that Ocwen is the primary beneficiary of the four consolidated securitization trusts because:

 
1.
as the servicer we have the right to direct the activities that most significantly impact the economic performance of the trusts through our ability to manage the delinquent assets of the trusts, and
     
 
2.
as holder of all or a portion of the residual tranches of the securities issued by the trust, we have the obligation to absorb losses of the trusts, to the extent of the value of our investment, and the right to receive benefits from the trust, both of which could potentially be significant to the trusts.

For the three months ended March 31, 2011 and 2010, the four consolidated trusts generated income (loss) from continuing operations of $(219) and $343, respectively. See Note 6 and Note 11 for additional information regarding Loans – restricted for securitization investors and Secured borrowings – owed to securitization investors.

The following table presents a summary of the involvement of Ocwen with unconsolidated securitization trusts and summary financial information for the trusts where we are the transferor and hold beneficial interests. Although we are the servicer for these trusts, the residual interests that we hold in these entities have no value and no potential return of significant cash flows. As a result, we are not exposed to loss from these holdings. Further, since our valuation of the residual interest is based on anticipated cash flows, we are unlikely to receive any future benefits from our residual interests in these trusts.
 
For the three months ended March 31,
 
2011
   
2010
 
Total servicing and subservicing fee revenues
  $ 843     $ 951  
                 
   
As of
 
   
March 31,
2011
   
December 31,
2010
 
                 
Total servicing advances
  $ 14,996     $ 16,886  
Total mortgage servicing rights at amortized cost
    1,289       1,330  
 
With regard to both the consolidated and the unconsolidated securitization trusts, we have no obligation to provide financial support to the trusts and have provided no such support. The creditors of the trusts can look only to the assets of the trusts themselves for satisfaction of the debt and have no recourse against the assets of Ocwen. Similarly, the general creditors of Ocwen have no claim on the assets of the trusts. Our exposure to loss as a result of our continuing involvement is limited to the carrying values of our investments in the residual and subordinate securities of the trusts, our mortgage servicing rights that are related to the trusts and our advances to the trusts. We consider the probability of loss arising from our advances to be remote because of their position ahead of most of the other liabilities of the trusts. At March 31, 2011 and December 31, 2010, our investment in the securities of the trusts was $2,660 and $2,691, respectively, all of which is eliminated in consolidation. See Note 4, Note 5 and Note 7 for additional information regarding Advances, Match funded advances and Mortgage servicing rights.

Financings of Advances on Loans Serviced for Others. Match funded advances on loans serviced for others result from our transfers of residential loan servicing advances to SPEs in exchange for cash. These SPEs issue debt supported by collections on the transferred advances. We made these transfers under the terms of five advance facility agreements, one of which we terminated in December 2010. These transfers do not qualify for sales accounting because we retain control over the transferred assets. As a result, we account for these transfers as financings and classify the transferred advances on our Consolidated Balance Sheet as Match funded advances and the related liabilities as Match funded liabilities. Collections on the advances pledged to the SPEs are used to repay principal and interest and to pay the expenses of the entity. Holders of the debt issued by these entities can look only to the assets of the entities themselves for satisfaction of the debt and have no recourse against OCN. However, OLS has guaranteed the payment of the obligations under the securitization documents of one of the entities, Ocwen Servicer Advance Funding (Wachovia), LLC (OSAFW). The maximum amount payable under the guarantee is limited to 10% of the notes outstanding at the end of the facility’s revolving period on June 30, 2011. As of March 31, 2011, OSAFW had $234,327 of notes outstanding.
 
 
9

 

The following table summarizes the assets and liabilities of the SPEs formed in connection with our match funded advance facilities, at the dates indicated:
 
   
March 31,
2011
   
December 31,
2010
 
Match funded advances
  $ 1,639,811     $ 1,924,052  
Other assets
    85,765       103,448  
Total assets
  $ 1,725,576     $ 2,027,500  
                 
Match funded liabilities
  $ 1,289,129     $ 1,482,529  
Due to affiliates (1)
    236,512       262,900  
Other liabilities
    2,441       2,890  
Total liabilities
  $ 1,528,082     $ 1,748,319  

(1)
Amounts are payable to Ocwen and its consolidated affiliates and eliminated in consolidation.

Reclassification

Within the operating activities section of the Consolidated Statement of Cash Flows for 2010, we reclassified the $1,146 adjustment for amortization of the discount on the fee reimbursement advance borrowing from the Decrease in other liabilities line item to Amortization of debt discount, to conform to the 2011 presentation. Also within the operating activities section, we reclassified the $146 gain on extinguishment of debt from Other, net to the new line item, Gain on extinguishment of debt, to conform to the 2011 presentation.

NOTE 2
RECENT ACCOUNTING PRONOUNCEMENTS

ASU No. 2010-06 (ASC 820, Fair Value Measurements and Disclosures): Improving Disclosures about Fair Value Measurements . ASU 2010-06 revised two disclosure requirements concerning fair value measurements and clarified two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and the reasons for such transfers. It also requires the presentation of purchases, sales, issuances and settlements within Level 3 on a gross rather than net basis. The amendments also clarified that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. These new disclosure requirements became effective for our financial statements for the period ended June 30, 2010, except for the requirement concerning gross presentation of Level 3 activity, which became effective for the period ended March 31, 2011. See Note 3 for our fair value disclosures related to financial instruments.

ASU No. 2010-20 (ASC 310, Receivables) : Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses . This standard outlines specific disclosures required for the allowance for credit losses and all financing receivables. A financing receivable is defined as a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the entity’s statement of financial position and includes instruments such as certain trade receivables, notes receivable and lease receivables as well as mortgage loans, auto loans, credit card loans and other consumer or commercial lending agreements.

The standard requires disclosure of disaggregated information for both the finance receivables and the related allowance for credit losses and introduces two defined terms that govern the level of disaggregation. These terms include “portfolio segment” and “class” of financing receivable. A portfolio segment is the level at which an entity determines its allowance for credit losses, such as by type of receivable, industry or risk. A class of financing receivable is defined as a group of finance receivables determined based on their initial measurement attribute, risk characteristics and an entity’s method for monitoring and assessing credit risk. The disclosure requirements specifically do not apply to trade receivables with contractual maturities of one year or less that arose from the sale of goods or services, except for credit card receivables. The disclosure requirements do not apply to mortgage banking activities, including the long-term servicing of loans. In addition, certain disclosures are not required for receivables measured at the lower of cost or market.
 
 
10

 

The new guidance requires an entity to provide the extensive disclosures or information for the reporting periods presented both for information as of the end of a reporting period and for activity that occurred during the period.

Disclosures of information as of the end of a reporting period became effective for our financial statements for the year ended December 31, 2010. The disclosures about activity that occurred during a reporting period, such as the allowance rollforward and modification disclosures became effective for our financial statements for the interim period beginning January 1, 2011. Our adoption of this standard did not have a material effect on our financial position or results of operations.

See Note 8 for our disclosures related to receivables.

ASU 2010-28 (ASC 350, Intangibles – Goodwill and Other): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts . The amendments in this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. For those reporting units, Step 2 of the goodwill impairment test is required if it is more likely than not that a goodwill impairment exists. This update became effective for our financial statements for the interim period beginning January 1, 2011. Our adoption of this standard did not have a material effect on our financial position or results of operations. Our recognized goodwill relates to our September 1, 2010 acquisition (the “HomEq Acquisition”) of the U.S. non-prime mortgage servicing business of Barclays Bank PLC and is included in the Servicing segment, which does not have a negative or zero carrying value.

NOTE 3
FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and the estimated fair values of our financial instruments are as follows at the dates indicated:
 
   
March 31, 2011
   
December 31, 2010
 
   
Carrying
Value
   
Fair
Value
   
Carrying
Value
   
Fair
Value
 
Financial assets:
                       
Loans held for resale
  $ 25,153     $ 25,153     $ 25,803     $ 25,803  
Loans, net – restricted for securitization investors
    65,112       62,728       67,340       64,795  
Advances
    1,814,653       1,814,653       2,108,885       2,108,885  
Receivables, net
    50,279       50,279       69,518       69,518  
Financial liabilities:
                               
Match funded liabilities
  $ 1,289,129     $ 1,292,417     $ 1,482,529     $ 1,486,476  
Lines of credit and other secured borrowings
    77,710       68,312       246,073       252,722  
Secured borrowings – owed to securitization investors
    60,841       60,069       62,705       62,105  
Servicer liabilities
    2,067       2,067       2,492       2,492  
Debt securities
    82,554       80,245       82,554       75,325  
Derivative financial instruments, net
  $ (12,397 )   $ (12,397 )   $ (15,351 )   $ (15,351 )
 
Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.

The three broad categories are:

 
Level 1:
Quoted prices in active markets for identical assets or liabilities.
     
 
Level 2:
Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
     
 
Level 3:
Unobservable inputs for the asset or liability.

 
11

 
 
Where available, we utilize quoted market prices or observable inputs rather than unobservable inputs to determine fair value. We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following table presents assets and liabilities measured at fair value categorized by input level within the fair value hierarchy:
 
   
Carrying
value
   
Level 1
   
Level 2
   
Level 3
 
At March 31, 2011:
                       
Measured at fair value on a recurring basis:
                       
Derivative financial instruments, net (1)
  $ (12,397 )           $ (12,397 )
Measured at fair value on a non-recurring basis:
                           
Loans held for resale (2)
    25,153               25,153  
Mortgage servicing rights (3)
    342               342  
                             
At December 31, 2010:
                           
Measured at fair value on a recurring basis:
                           
Derivative financial instruments, net (1)
  $ (15,351 )           $ (15,351 )
Measured at fair value on a non-recurring basis:
                           
Loans held for resale (2)
    25,803               25,803  
Mortgage servicing rights (3)
    334               334  

(1)
The derivative financial instruments are not exchange-traded and therefore quoted market prices or other observable inputs are not available. Fair value is based on estimates provided by third-party pricing sources. See Note 14 for additional information on our derivative financial instruments.
   
(2)
Loans held for resale are reported at the lower of cost or fair value. The fair value of loans for which we do not have a firm commitment to sell is based upon a discounted cash flow analysis with 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. All loans held for resale were measured at fair value because the cost exceeded the estimated fair value. At March 31, 2011 and December 31, 2010, the carrying value of loans held for resale is net of a valuation allowance of $14,528 and $14,611, respectively. Current market illiquidity has reduced the availability of observable pricing data. Consequently, we classify loans within Level 3 of the fair value hierarchy.
   
(3)
Balances represent the carrying value of the impaired stratum of MSRs, net of a valuation allowance of $2,650 and $2,864 at March 31, 2011 and December 31, 2010, respectively. The estimated fair value exceeded amortized cost for all other strata. See Note 7 for additional information on MSRs, including significant assumptions used in their valuation.
 
 
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The following tables present a reconciliation of the changes in fair value of our Level 3 assets that we measure at fair value on a recurring basis:
 
Three months ended March 31, 2011:
 
Derivative Financial Instruments
 
       
Beginning balance
  $ (15,351 )
         
Purchases, issuances, sales and settlements:
       
Purchases
     
Issuances
     
Sales
     
Settlements
    46  
      46  
         
Total realized and unrealized gains and (losses) (1):
       
Included in Other, net
    (353 )
Included in Other comprehensive income
    3,261  
      2,908  
         
Transfers in and / or out of Level 3
     
Ending balance
  $ (12,397 )

         
Trading Securities
       
Three months ended March 31, 2010:
 
Derivative
Financial
Instruments
   
Auction Rate
Securities
   
Subordinates
and Residuals
   
Total
 
                         
Beginning balance
  $ (45 )   $ 247,464     $ 59     $ 247,478  
                                 
Purchases, issuances, sales and settlements:
                               
Purchases
                       
Issuances
                       
Sales
          (29,848 )           (29,848 )
Settlements
          (93,345 )           (93,345 )
            (123,193 )           (123,193 )
                                 
Total realized and unrealized gains and (losses) (1):
                               
Included in Gain on trading securities
          765             765  
Included in Other, net
    (435 )                 (435 )
      (435 )     765             330  
                                 
Transfers in and / or out of Level 3
                       
Ending balance
  $ (480 )   $ 125,036     $ 59     $ 124,615  

(1)
Total net gains on trading securities for the first three months of 2010 include unrealized gains of $1,022 on auction rate securities held at March 31, 2010. The total net losses attributable to derivative financial instruments for three months ended March 31, 2011 and March 31, 2010 were comprised exclusively of losses on derivatives held at March 31, 2011 and March 31, 2010.
 
 
13

 
 
NOTE 4
ADVANCES

Advances, representing payments made on behalf of borrowers or on foreclosed properties, consisted of the following at the dates indicated:
 
   
March 31,
2011
   
December 31,
2010
 
Servicing:
           
Principal and interest
  $ 77,889     $ 82,060  
Taxes and insurance
    55,089       49,785  
Foreclosure and bankruptcy costs
    23,000       27,163  
Other
    14,746       21,701  
      170,724       180,709  
Corporate Items and Other
    4,118       4,124  
    $ 174,842     $ 184,833  

Servicing advances of $66,606 and $75,489 were pledged as collateral under the term reimbursement advance borrowing as of March 31, 2011 and December 31, 2010, respectively.

NOTE 5
MATCH FUNDED ADVANCES

Match funded advances on residential loans we service for others, as more fully described in Note 1—Principles of Consolidation-Financings of Advances on Loans Serviced for Others, are comprised of the following at the dates indicated:
 
   
March 31,
 2011
   
December 31,
2010
 
Principal and interest
  $ 736,178     $ 947,990  
Taxes and insurance
    623,553       684,928  
Foreclosure and bankruptcy costs
    128,721       140,181  
Real estate servicing costs
    118,148       116,064  
Other
    33,211       34,889  
    $ 1,639,811     $ 1,924,052  
 
NOTE 6
LOANS – RESTRICTED FOR SECURITIZATION INVESTORS
 
Loans – restricted for securitization investors are held by four securitization trusts that we include in our consolidated financial statements, as more fully described in Note 1—Securitizations of Residential Mortgage Loans. Loans – restricted for securitization investors consisted of the following at:
 
   
March 31,
 2011
   
December 31,
2010
 
Single family residential loans (1)
  $ 67,649     $ 69,718  
Allowance for loans losses
    (2,537 )     (2,378 )
    $ 65,112     $ 67,340  

(1)
Includes nonperforming loans of $13,773 and $12,933 at March 31, 2011 and December 31, 2010, respectively.

At March 31, 2011, the trusts held 1,550 loans that are secured by first or second liens on one- to four-family residential properties. These loans have a weighted average coupon rate of 9.35% and a weighted average remaining life of 134 months.
 
 
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NOTE 7
MORTGAGE SERVICING RIGHTS

Servicing Assets. The following table summarizes the activity in the carrying value of residential servicing assets for the three months ended March 31, 2011:
 
Balance at December 31, 2010
  $ 193,985  
Purchases
     
Servicing transfers and adjustments
    (4 )
Decrease in impairment valuation allowance
    214  
Amortization (1)
    (9,624 )
Balance at March 31, 2011
  $ 184,571  

(1)
During the first three months of 2011 and 2010, amortization of servicing liabilities exceeded the amount of charges we recognized to increase servicing liability obligations by $701 and $400, respectively. Amortization of mortgage servicing rights of $8,923 and $6,375 for these periods is reported net of these amounts in our Consolidated Statement of Operations.

The following table presents the composition of our servicing and subservicing portfolios by type of property serviced as measured by UPB. The servicing portfolio represents purchased mortgage servicing rights while subservicing generally represents all other mortgage servicing rights.
 
   
Residential
   
Commercial
   
Total
 
UPB of Assets Serviced:
               
March 31, 2011:
                 
Servicing
  $ 48,874,298     $     $ 48,874,298  
Subservicing (1)
    21,668,663       388,514       22,057,177  
    $ 70,542,961     $ 388,514     $ 70,931,475  
December 31, 2010:
                       
Servicing
  $ 51,252,380     $     $ 51,252,380  
Subservicing (1)
    22,634,011       434,305       23,068,316  
    $ 73,886,391     $ 434,305     $ 74,320,696  

(1)
Residential subservicing includes non-performing loans serviced for Freddie Mac.

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. Residential assets serviced consist principally of mortgage loans, primarily subprime, but also include foreclosed real estate. Commercial assets serviced consist of foreclosed real estate. Assets serviced for others are not included on our Consolidated Balance Sheet.

Custodial accounts, which hold funds representing collections of principal and interest we receive from borrowers, are escrowed with an unaffiliated bank and excluded from our Consolidated Balance Sheet. Custodial accounts amounted to approximately $342,100 and $320,300 at March 31, 2011 and December 31, 2010, respectively.

Valuation Allowance for Impairment. During 2008, we established a valuation allowance for impairment of $3,624 on the high-loan-to-value stratum of our mortgage servicing rights as the estimated fair value was less than the carrying value. Changes in the valuation allowance for impairment are reflected in Servicing and origination expenses in our Consolidated Statement of Operations. Net of the current valuation allowance of $2,650, the carrying value of this stratum was $342 at March 31, 2011. For all other strata, the fair value was above the carrying value at March 31, 2011.

The estimated fair value of residential MSRs at March 31, 2011 and December 31, 2010 was $230,994 and $237,407, respectively. The more significant assumptions used in the March 31, 2011 valuation include prepayment speeds ranging from 13% to 28% (depending on loan type) and 90+ non-performing delinquency rates ranging from 15% to 27% (depending on loan type). Other assumptions include an interest rate of 1-month LIBOR plus 4% for computing the cost of financing advances, an interest rate of 1-month LIBOR for computing float earnings and a discount rate of 20%.

Servicing Liabilities. We recognize a servicing liability for those agreements that are not expected to compensate us adequately for performing the servicing. Servicing liabilities were $2,714 and $3,415 at March 31, 2011 and December 31, 2010, respectively, and are included in Other liabilities.
 
 
15

 

NOTE 8
RECEIVABLES

Receivables consisted of the following at the dates indicated:
 
   
Receivables
   
Allowance for Credit Losses
   
Net
 
March 31, 2011
                 
Servicing (1)
  $ 46,984     $ (242 )   $ 46,742  
Affordable housing (2)
    6,893       (5,877 )     1,016  
Due from Altisource (3)
    996             996  
Other
    2,812       (1,287 )     1,525  
    $ 57,685     $ (7,406 )   $ 50,279  
                         
December 31, 2010
                       
Servicing (1)
  $ 59,436     $ (262 )   $ 59,174  
Income taxes receivable
    3,620             3,620  
Affordable housing (2)
    6,882       (5,866 )     1,016  
Due from Altisource (3)
    2,445             2,445  
Other
    4,586       (1,323 )     3,263  
    $ 76,969     $ (7,451 )   $ 69,518  

(1)
The balances at March 31, 2011 and December 31, 2010 arise from our Servicing business and primarily include reimbursable expenditures due from investors and amounts to be recovered from the custodial accounts of the trustees.
   
(2)
The balances at March 31, 2011 and December 31, 2010 primarily represent annual payments to be received through June 2014 for proceeds from sales of investments in affordable housing properties. None of these receivables are delinquent.
   
(3)
See Note 19 for additional information regarding our relationship with Altisource.

Receivable balances are evaluated individually. The change in the allowance for credit losses for the three months ended March 31, 2011 and the balance of the related receivables at those dates were as follows:
 
   
Affordable Housing
   
Other
   
Total
 
                   
Beginning allowance for credit losses balance
  $ 5,866     $ 1,323     $ 7,189  
Charge offs
                 
Recoveries
          (36 )     (36 )
Provision
    11             11  
Ending allowance for credit losses balance
  $ 5,877     $ 1,287     $ 7,164  
                         
Ending receivables balance
  $ 6,893     $ 2,812     $ 9,705  
 
NOTE 9
OTHER ASSETS

Other assets consisted of the following at the dates indicated:
 
   
March 31,
2011
   
December 31,
2010
 
Debt service accounts (1)
  $ 69,566     $ 86,234  
Interest earning collateral deposits (2)
    23,510       25,738  
Prepaid lender fees and debt issuance costs, net (3)
    14,806       22,467  
Term note (4)
    5,600       5,600  
Real estate, net
    4,153       4,682  
Other
    11,233       13,561  
    $ 128,868     $ 158,282  

(1)
Under our four advance funding facilities, we are contractually required to remit collections on pledged advances to the trustee within two days of receipt. The collected funds are not applied to reduce the related match funded debt until the payment dates specified in the indenture. The balance also includes amounts that have been set aside from the proceeds of our four match funded advance facilities to provide for possible shortfalls in the funds available to pay certain expenses and interest. These funds are held in interest earning accounts.
 
 
16

 
 
(2)
Includes $14,908 and $18,684 of cash collateral held by the counterparties to certain of our interest rate swap agreements as at March 31, 2011 and December 31, 2010, respectively.
   
(3)
Costs at March 31, 2011 and December 31, 2010 relate to match funded liabilities and other secured borrowings of the Servicing segment, including the $350,000 senior secured term loan facility. We amortize these costs to the earlier of the scheduled amortization date, contractual maturity date or prepayment date of the debt.
   
(4)
In March 2009, we issued a $7,000 note receivable, maturing on April 1, 2014, in connection with advances funded by the Ocwen Servicer Advance Funding, LLC (OSAF) term note pledged as collateral, as described in Note 12. We receive 1-Month LIBOR plus 300 basis points (bps) under the terms of this note receivable. Under the terms of the note, repayments of $1,400 per year are required beginning April 1, 2010. We are obligated to pay 1-Month LIBOR plus 350 bps under the terms of a five-year note payable to the same counterparty. We do not have a contractual right to offset these payments. This note is performing in accordance with its terms and we have not recognized an allowance for credit allowances at March 31, 2011 or December 31, 2010.

NOTE 10
MATCH FUNDED LIABILITIES

Match funded liabilities, as more fully described in Note 1—Principles of Consolidation – Match Funded Advances on Loans Serviced for Others, are comprised of the following at:
 
                 
Unused
   
Balance Outstanding
 
            Amortization     Borrowing      
March 31,
      December  
Borrowing Type
 
Interest Rate
 
Maturity (1)
  Date (1)     Capacity (2)      
2011
     
 31, 2010
 
Advance Receivable Backed Note Series 2009-3 (3)
  4.14%  
Jul. 2023
 
Jul. 2012
  $     $ 210,000     $ 210,000  
Variable Funding Note Series 2009-2 (4)
 
1-Month LIBOR + 350 bps
 
Nov. 2023
 
Nov. 2012
    88,000              
Variable Funding Note Series 2009-1 (5)
 
Commercial paper rate + 200 bps
 
Feb. 2022
 
Feb. 2012
    249,456       50,544       1,095  
Advance Receivable Backed Note Series 2010-1 (3)(6)
  3.59%  
Sep. 2023
 
Feb. 2011
          160,000       200,000  
Class A-1 Term Note
 
Commercial paper rate + 350 bps
 
Aug. 2043
 
Aug. 2013
          555,919       721,000  
Class A-2 Variable Funding Note
 
Commercial paper rate + 350 bps
 
Aug. 2043
 
Aug. 2013
    200,000              
Class B Term Note
 
Commercial paper rate + 525 bps
 
Aug. 2043
 
Aug. 2013
          25,872       33,500  
Class C Term Note
 
Commercial paper rate + 625 bps
 
Aug. 2043
 
Aug. 2013
          24,617       31,900  
Class D Term Note
 
1-Month LIBOR + 750 bps
 
Aug. 2043
 
Aug. 2013
          18,991       24,600  
Advance Receivable Backed Notes (7)
 
1-Month LIBOR + 400 bps
 
Mar. 2020
 
May 2011
    91,141       8,859       10,315  
Advance Receivable Backed Notes (7)(8)
 
1-Month LIBOR + 200 bps
 
May 2012
 
May 2011
    265,673       234,327       250,119  
                $ 894,270     $ 1,289,129     $ 1,482,529  

(1)
The amortization date of our facilities 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 two advance facilities, 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.
 
 
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(2)
Our unused borrowing capacity is available to us provided that we have additional eligible collateral to pledge. Collateral may only be pledged to one facility.
   
(3)
These notes were issued under the Term Asset-Backed Securities Loan Facility (TALF) program administered by the Federal Reserve Bank of New York.
   
(4)
Under the terms of the note purchase agreement, the maximum funding obligation will increase from $88,000 to $100,000 in November 2011.
   
(5)
The interest rate for this note is determined using a commercial paper rate that reflects the borrowing costs of the lender plus a margin of 200 bps. In February 2011, the amortization date was extended to February 2012.
   
(6)
This note entered into its amortization period in February 2011. The 2010-1 Indenture Supplement provides for scheduled amortization of $40,000 per quarter through January 2012.
   
(7)
In May 2011, the amortization date was extended to June 30, 2011.
   
(8)
Under the terms of the facility, we pay interest on drawn balances at 1-Month LIBOR plus 200 bps. In addition, we pay, in twelve monthly installments, a facility fee of 1.30% of the maximum borrowing capacity of $500,000.

NOTE 11
SECURED BORROWINGS – OWED TO SECURITIZATION INVESTORS

Secured borrowings – owed to securitization investors of $60,841 and $62,705 at March 31, 2011 and December 31, 2010, respectively, consist of certificates that represent beneficial ownership interests in four securitization trusts that we include in our consolidated financial statements, as more fully described in Note 1—Securitizations of Residential Mortgage Loans. The holders of these certificates have no recourse against the assets of Ocwen.

The trusts consist principally of mortgage loans that are secured by first and second liens on one- to four-family residential properties. Except for the residuals, the certificates generally pay interest based on 1-Month LIBOR plus a margin of from 8 to 250 basis points. Interest rates on the certificates are generally capped at the weighted average of the net mortgage rates of the mortgage loans in the respective loan pools.
 
 
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NOTE 12
LINES OF CREDIT AND OTHER SECURED BORROWINGS

Secured lines of credit from various unaffiliated financial institutions are as follows:
 
                    Unused    
Balance Outstanding
 
                    Borrowing     March 31,     December  
Borrowings
 
Collateral
 
Interest Rate
   
Maturity
   
Capacity
   
2011
   
31, 2010
 
                                   
Servicing :
                                 
Senior secured term loan (1)
     
1-Month LIBOR + 700 bps with a LIBOR floor of 2% (1)
   
June 2015
    $     $ 26,250     $ 197,500  
Fee reimburse­ment advance
 
Term note (2)
 
Zero coupon
   
March 2014
            46,754       48,000  
Term note (3)
 
Advances
 
1-Month LIBOR + 350 basis points
   
March 2014
            4,200       5,600  
                            77,204       251,100  
Corporate Items and Other
                                   
Securities sold under an agreement to repurchase (4)
 
Ocwen Real Estate Asset Liquidating Trust 2007-1 Notes
  (4)     (4)             7,261       7,774  
                                84,465       258,874  
Discount (1) (2)
            (6,755 )     (12,801 )
                        $     $ 77,710     $ 246,073  

(1)
On July 29, 2010, we entered into a senior secured term loan facility agreement and borrowed $350,000. The loan was issued with an original issue discount of $7,000 that we are amortizing over the expected life of the loans. The unamortized balance of the discount at March 31, 2011 is $545. Borrowings bear interest, at the election of Ocwen, at a rate per annum equal to either (a) the greatest of (i) the prime rate of Barclays Bank PLC in effect on such day, (ii) the federal funds effective rate in effect on such day plus 0.50% and (iii) the one-month Eurodollar rate (1-Month LIBOR), in each case plus the applicable margin of 6.00% and a floor of 3.00% or (b) 1-Month LIBOR, plus the applicable margin of 7.00% with a 1-Month LIBOR floor of 2.00%. We are required to repay the principal amount in consecutive quarterly installments of $8,750 commencing September 30, 2010, with the balance becoming due on July 29, 2015. Payments in excess of the mandatory quarterly installments also serve to reduce borrowing capacity under this facility, so that capacity always equals the amount outstanding. We have pledged otherwise unencumbered cash, MSRs, advances, receivables, premises and equipment and other assets, excluding interest earning collateral and debt service accounts, as collateral for this loan.
   
(2)
We have pledged our interest in a $60,000 term note issued by OSAF on March 31, 2009 as collateral for this advance. In turn, we have pledged advances on loans serviced for others as collateral for the OSAF note, similar to match funded advances and liabilities. The fee reimbursement advance is payable annually no later than April 30 in five installments of $12,000. However, under the service agreement that governs this advance, a portion of the annual installment is forgiven if the net written premium by the lender for insurance on serviced loans and real estate exceeds $100,000 during the contract year that ends each March 31. Based on the net written premium for the contract year ended March 31, 2011, the lender forgave $1,246 of the outstanding debt balance. We recognized this gain on the extinguishment of debt in Other income (expense), net. We repaid the remainder of the annual $12,000 installment in April 2011. The advance does not carry a stated rate of interest. However, we are compensating the lender for the advance of funds by forgoing the receipt of fees due from the lender over the five-year term of the advance. Accordingly, we recorded the advance as a zero-coupon bond issued at an initial implied discount of $14,627. We used an implicit market rate of 10.1% to compute the discount that we are amortizing to interest expense over the five-year term of the advance. The unamortized balance of the discount at March 31, 2011 is $6,210.
   
(3)
This note that was issued by OSAF is secured by advances on loans serviced for others, similar to match funded advances and liabilities. The lender has pledged its interest in this note to us as collateral against the $5,600 term note receivable from the lender that we hold. See Note 9 additional information.
 
 
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(4)
In August 2010, we obtained financing under a repurchase agreement for the Class A-2 and A-3 notes issued by Ocwen Real Estate Asset Liquidating Trust 2007-1 with a face value of $33,605. This agreement has no stated credit limit and lending is determined for each transaction based on the acceptability of the securities presented as collateral. Borrowings mature and are renewed monthly. The borrowings secured by the Class A-2 notes bear interest at 1-Month LIBOR + 200 basis points and borrowings secured by the Class A-3 notes bear interest at 1-Month LIBOR + 300 basis points.

NOTE 13
OTHER LIABILITIES

Other liabilities were comprised of the following at the dates indicated:
 
   
March 31,
2011
   
December 31,
2010
 
Accrued expenses (1)(2)
  $ 51,065     $ 55,816  
Checks held for escheat
    18,091       18,087  
Derivatives, at fair value
    12,497       15,670  
Deferred income
    9,622       10,394  
Accrued interest payable
    3,559       4,830  
Liability for selected tax items
    2,913       2,913  
Payable to Altisource (3)
    2,899       3,877  
Income taxes payable
    2,793        
Servicing liabilities
    2,714       3,415  
Other (4)
    16,866       25,237  
    $ 123,019     $ 140,239  
 
(1)
The balances at March 31, 2011 and December 31, 2010 include $22,690 and $24,366, respectively, of litigation reserves established primarily in connection with the settlement of one legal proceeding and a judgment in another case. See Note 20 for additional information regarding these cases.
   
(2)
During 2010, in connection with the HomEq Acquisition, we accrued facility closure costs of $7,794 for the termination of the HomEq office leases effective in 2013 and $32,954 for employee termination benefits. The balances at March 31, 2011 and December 31, 2010 include $7,158 and $7,794, respectively, of lease termination accruals and $232 and $1,332, respectively, of employee termination benefit accruals. The change in the accrual balances is due to payments made, net of $8 of amortization of the discount recorded at the time that the lease termination accrual was established.
   
(3)
See Note 19 for additional information regarding our relationship with Altisource.
   
(4)
The balances at March 31, 2011 and December 31, 2010 include $7,645 and $14,943, respectively, due to investors in connection with loans we service under subservicing agreements.

NOTE 14
DERIVATIVE FINANCIAL INSTRUMENTS

Because our current derivative agreements are not exchange-traded, we are exposed to credit loss in the event of nonperformance by the counterparty to the agreements. We control this risk through credit monitoring procedures including financial analysis, dollar limits and other monitoring procedures. The notional amount of our contracts does not represent our exposure to credit loss.
 
Foreign Currency Exchange Rate Risk Management

In 2010, we entered into foreign exchange forward contracts to hedge against the effect of changes in the value of the India Rupee (INR) on amounts payable to our India subsidiary, OFSPL. We did not designate these contracts as hedges. We did not renew or replace these contracts upon their expiration in April 2011.

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

Interest Rate Management
 
We include certain securitization trusts in our consolidated financial statements as more fully described in Note 1—Securitizations of Residential Mortgage Loans. As a result, we report the fair value of an interest rate swap that is held by one of the securitization trusts. Under the terms of the swap, the trust pays a fixed rate of 4.935% and receives a variable rate equal to 1-Month LIBOR. The notional amount and fair value of the swap was $8,700 and $(227), respectively, at March 31, 2011. This swap was not designated as a hedge.
 
 
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In April 2010, we entered into a $250,000 interest rate swap to hedge against the effects of a change in 1-Month LIBOR on borrowing under a $500,000 advance funding facility that carries a variable interest rate. The balance outstanding under this facility at March 31, 2011 was $234,327. Under the terms of the swap, we pay a fixed rate of 2.059% and receive a variable rate equal to 1-Month LIBOR. Settlements under the terms of this swap commenced in August 2010. The notional amount and fair value of the swap was $250,000 and $(6,309), respectively, at March 31, 2011. Projected net settlements for the next twelve months total approximately $3,977 of payments to the counterparty. We designated this swap as a cash flow hedge.

In June 2010, we entered into two interest rate swaps with notional amounts totaling $637,200 to hedge against the effects of changes in the lender’s commercial paper rate and 1-Month LIBOR on borrowings under a second variable-rate advance funding facility. The balance outstanding under this facility at March 31, 2011 was $625,399. Under the terms of the two swaps, we pay fixed rates of 1.575% and 1.5275%, respectively, and receive a variable rate equal to 1-Month LIBOR. Settlements under the terms of these swaps commenced in September 2010. The notional amount and fair value of the swap was $547,327 and $(5,961), respectively, at March 31, 2011. Projected net settlements for the next twelve months total approximately $5,382 of payments to the counterparty. We designated these swaps as cash flow hedges.

The following table summarizes the use of derivatives during the three months ended March 31, 2011:
 
   
Foreign Exchange Forwards
   
Interest Rate Swaps
 
             
Notional balance at December 31, 2010
  $ 6,400     $ 846,888  
Additions