Ocwen Financial Corporation
OCWEN FINANCIAL CORP (Form: 10-Q, Received: 10/29/2015 06:12:29)



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 September 30, 2015
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 its charter)
Florida
 
65-0039856
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1661 Worthington Road, Suite 100
West Palm Beach, Florida
 
33409
(Address of principal executive office)
 
(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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large Accelerated filer
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 outstanding as of October 26, 2015 : 125,390,482 shares







OCWEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
PAGE
PART I  - FINANCIAL INFORMATION
 
 
Unaudited Consolidated Financial Statements
 
 
 
 
 
 
Consolidated Balance Sheets at September 30, 2015 and December 31, 2014
 
 
 
 
 
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2015 and 2014
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
 
 
 
 
 
 
Notes to Unaudited Consolidated Financial Statements
 
 
 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Controls and Procedures
 
 
 
 
PART II  - OTHER INFORMATION
 
 
Legal Proceedings
 
 
 
 
 
Risk Factors
 
 
 
 
 
Exhibits
 
 
 
 


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 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,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those suggested by such statements. Our business has been undergoing substantial change, which has magnified such uncertainties. Readers should bear these factors in mind when considering such statements and should not place undue reliance on such statements. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 and the following:
adverse effects on our business as a result of regulatory settlements;
reactions to the announcement of such settlements by key counterparties;
increased regulatory scrutiny and media attention, due to rumors or otherwise;
uncertainty related to claims, litigation and investigations brought by government agencies and private parties regarding our servicing, foreclosure, modification and other practices;
any adverse developments in existing legal proceedings or the initiation of new legal proceedings;
our ability to effectively manage our regulatory and contractual compliance obligations;
the adequacy of our financial resources, including our sources of liquidity and ability to sell, fund and recover advances, repay borrowings and comply with our debt agreements;
our servicer and credit ratings as well as other actions from various rating agencies, including the impact of recent or future downgrades of our servicer and credit ratings;
volatility in our stock price;
the characteristics of our servicing portfolio, including prepayment speeds along with delinquency and advance rates;
our ability to contain and reduce our operating costs, including our ability to successfully execute on our cost improvement initiative;
our ability to successfully modify delinquent loans, manage foreclosures and sell foreclosed properties;
uncertainty related to legislation, regulations, regulatory agency actions, regulatory examinations, government programs and policies, industry initiatives and evolving best servicing practices;
our dependence on New Residential Investment Corp. (NRZ) for a substantial portion of our advance funding for non-Agency mortgage servicing rights;
uncertainties related to our long-term relationship with NRZ;
the loss of the services of our senior managers;
uncertainty related to general economic and market conditions, delinquency rates, home prices and disposition timelines on foreclosed properties;
uncertainty related to the actions of loan owners and guarantors, including mortgage-backed securities investors, trustees and government sponsored entities (GSEs), regarding loan put-backs, penalties and legal actions;
our ability to comply with our servicing agreements, including our ability to comply with our seller/servicer agreements with GSEs and maintain our status as an approved seller/servicer;
uncertainty related to the GSEs substantially curtailing or ceasing to purchase our conforming loan originations or the Federal Housing Authority of the Department of Housing and Urban Development or Department of Veterans Affairs ceasing to provide insurance;
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;
our reserves, valuations, provisions and anticipated realization on assets;
our ability to execute on our strategy to reduce the size of our Agency portfolio;
uncertainty related to the ability of third-party obligors and financing sources to fund servicing advances on a timely basis on loans serviced by us;
our ability to effectively manage our exposure to interest rate changes and foreign exchange fluctuations;
uncertainty related to our ability to adapt and grow our business;
our ability to integrate the systems, procedures and personnel of acquired assets and businesses;
our ability to maintain our technology systems and our ability to adapt such systems for future operating environments;

2



uncertainty related to our tax positions;
our ability to recognize the benefits of our deferred tax assets;
uncertainty related to the ability of our technology vendors to adequately maintain and support our systems, including our servicing systems, loan originations and financial reporting systems;
failure of our internal security measures or breach of our privacy protections; and
uncertainty related to the political or economic stability of foreign countries in which we have operations.
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, 2014 , our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. Forward-looking statements speak only as of the date they were made and except for our ongoing obligations under the U.S. federal securities laws, we disclaim any obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise.



3

PART I – FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)



 
September 30, 2015
 
December 31, 2014
Assets
 

 
 

Cash
$
458,674

 
$
129,473

Mortgage servicing rights ($787,344 and $93,901 carried at fair value)
1,153,295

 
1,913,992

Advances
517,378

 
893,914

Match funded advances
1,955,618

 
2,409,442

Loans held for sale ($235,909 and $401,120 carried at fair value)
526,972

 
488,612

Loans held for investment - reverse mortgages, at fair value
2,319,515

 
1,550,141

Receivables, net
361,572

 
270,596

Deferred tax assets, net
63,866

 
76,987

Premises and equipment, net
44,885

 
43,310

Other assets ($18,551 and $7,335 carried at fair value)
609,279

 
490,811

Total assets
$
8,011,054

 
$
8,267,278

 
 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

Match funded liabilities
$
1,589,846

 
$
2,090,247

Financing liabilities ($2,789,663 and $2,058,693 carried at fair value)
2,953,518

 
2,258,641

Other secured borrowings
1,001,070

 
1,733,691

Senior unsecured notes
350,000

 
350,000

Other liabilities
1,036,165

 
793,534

Total liabilities
6,930,599

 
7,226,113

 
 
 
 
Commitments and Contingencies (Notes 19 and 20)


 


 
 
 
 
Equity
 

 
 

Ocwen Financial Corporation (Ocwen) stockholders’ equity
 
 
 
Common stock, $.01 par value; 200,000,000 shares authorized; 125,390,482 and 125,215,615 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively
1,254

 
1,252

Additional paid-in capital
527,622

 
515,194

Retained earnings
550,373

 
530,361

Accumulated other comprehensive loss, net of income taxes
(1,886
)
 
(8,413
)
Total Ocwen stockholders’ equity
1,077,363

 
1,038,394

Non-controlling interest in subsidiaries
3,092

 
2,771

Total equity
1,080,455

 
1,041,165

Total liabilities and equity
$
8,011,054

 
$
8,267,278



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

4


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
 
 
 
 
 
 
 
Servicing and subservicing fees
$
360,017

 
$
465,964

 
$
1,203,541

 
$
1,448,096

Gain on loans held for sale, net
27,298

 
27,218

 
116,934

 
110,041

Other revenues
17,631

 
20,516

 
58,166

 
59,896

Total revenue
404,946

 
513,698

 
1,378,641

 
1,618,033

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 

 
 

Compensation and benefits
102,612

 
99,879

 
313,599

 
316,118

Amortization of mortgage servicing rights
18,108

 
60,783

 
88,188

 
186,075

Servicing and origination
101,545

 
49,739

 
255,905

 
129,473

Technology and communications
37,182

 
44,261

 
117,793

 
121,234

Professional services
62,428

 
160,704

 
191,728

 
212,745

Occupancy and equipment
31,043

 
24,697

 
85,530

 
82,504

Other
34,808

 
14,976

 
65,593

 
101,547

Total expenses
387,726

 
455,039

 
1,118,336

 
1,149,696

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest income
5,693

 
6,593

 
16,306

 
17,472

Interest expense
(118,313
)
 
(133,049
)
 
(362,606
)
 
(409,129
)
Gain on sale of mortgage servicing rights
41,246

 

 
97,958

 

Gain on extinguishment of debt

 

 

 
2,609

Other, net
(1,764
)
 
(4,469
)
 
(12,552
)
 
(2,675
)
Total other expense, net
(73,138
)
 
(130,925
)
 
(260,894
)
 
(391,723
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
(55,918
)
 
(72,266
)
 
(589
)
 
76,614

Income tax expense
10,832

 
2,992

 
21,866

 
24,374

Net income (loss)
(66,750
)
 
(75,258
)
 
(22,455
)
 
52,240

Net income attributable to non-controlling interests
(119
)
 
(123
)
 
(321
)
 
(165
)
Net income (loss) attributable to Ocwen stockholders
(66,869
)
 
(75,381
)
 
(22,776
)
 
52,075

Preferred stock dividends

 

 

 
(1,163
)
Deemed dividends related to beneficial conversion feature of preferred stock

 
(808
)
 

 
(1,639
)
Net income (loss) attributable to Ocwen common stockholders
$
(66,869
)
 
$
(76,189
)
 
$
(22,776
)
 
$
49,273

 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Ocwen common stockholders
 
 
 
 
 
 
 
Basic
$
(0.53
)
 
$
(0.58
)
 
$
(0.18
)
 
$
0.37

Diluted
$
(0.53
)
 
$
(0.58
)
 
$
(0.18
)
 
$
0.36

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
125,383,639

 
130,551,197

 
125,322,742

 
133,318,381

Diluted
125,383,639

 
130,551,197

 
125,322,742

 
136,881,326


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

5


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

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(66,750
)
 
$
(75,258
)
 
$
(22,455
)
 
$
52,240

 
 
 
 
 
 
 
 
Other comprehensive income, net of income taxes:
 

 
 

 
 
 
 

Reclassification adjustment for losses on cash flow hedges included in net income (1)
494

 
384

 
6,527

 
1,362

Other

 
2

 

 
5

Total other comprehensive income, net of income taxes
494

 
386

 
6,527

 
1,367

 
 
 
 
 
 
 
 
Comprehensive income (loss)
(66,256
)
 
(74,872
)
 
(15,928
)
 
53,607

Comprehensive income attributable to non-controlling interests
(119
)
 
(123
)
 
(321
)
 
(165
)
Comprehensive income (loss) attributable to Ocwen stockholders
$
(66,375
)
 
$
(74,995
)
 
$
(16,249
)
 
$
53,442

(1)
Net of tax expense of $0.4 million and $0.2 million for the nine months ended September 30, 2015 and 2014 , respectively. These losses are reclassified to Other, net in the Unaudited Consolidated Statements of Operations.



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

6



OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(Dollars in thousands)
 
Ocwen Stockholders
 
 
 
 
 
Common Stock
 
Additional Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income (Loss), Net of Taxes
 
Non-controlling Interest in Subsidiaries
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2014
125,215,615

 
$
1,252

 
$
515,194

 
$
530,361

 
$
(8,413
)
 
$
2,771

 
$
1,041,165

Net income (loss)

 

 

 
(22,776
)
 

 
321

 
(22,455
)
Cumulative effect of fair value election - Mortgage servicing rights, net of income taxes

 

 

 
42,788

 

 

 
42,788

Exercise of common stock options
85,173

 
1

 
508

 

 

 

 
509

Equity-based compensation and other
89,694

 
1

 
11,920

 

 

 

 
11,921

Other comprehensive income, net of income taxes

 

 

 

 
6,527

 

 
6,527

Balance at September 30, 2015
125,390,482

 
$
1,254

 
$
527,622

 
$
550,373

 
$
(1,886
)
 
$
3,092

 
$
1,080,455

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
135,176,271

 
$
1,352

 
$
818,427

 
$
1,002,963

 
$
(10,151
)
 
$

 
$
1,812,591

Net income

 

 

 
52,075

 

 
165

 
52,240

Preferred stock dividends ($18.75 per share)

 

 

 
(1,163
)
 

 

 
(1,163
)
Deemed dividend related to beneficial conversion feature of preferred stock

 

 

 
(1,639
)
 

 

 
(1,639
)
Conversion of preferred stock
1,950,296

 
20

 
61,980

 

 

 

 
62,000

Repurchase of common stock
(9,920,649
)
 
(99
)
 
(325,510
)
 

 

 

 
(325,609
)
Exercise of common stock options
244,000

 
2

 
1,036

 

 

 

 
1,038

Equity-based compensation and other
17,887

 

 
11,092

 

 

 

 
11,092

Non-controlling interest in connection with acquisition of controlling interest in Ocwen Structured Investments, LLC

 

 

 

 

 
2,526

 
2,526

Other comprehensive income, net of income taxes

 

 

 

 
1,367

 

 
1,367

Balance at September 30, 2014
127,467,805

 
$
1,275

 
$
567,025

 
$
1,052,236

 
$
(8,784
)
 
$
2,691

 
$
1,614,443




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

7


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

 
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
 
 
 
 

Cash flows from operating activities
 
 

 
 

Net income (loss)
 
$
(22,455
)
 
$
52,240

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

 
 

Amortization of mortgage servicing rights
 
88,188

 
186,075

Loss on valuation of mortgage servicing rights, at fair value
 
73,257

 
13,147

Impairment of mortgage servicing rights
 
25,052

 

Gain on sale of mortgage servicing rights
 
(97,958
)
 

Realized and unrealized losses on derivative financial instruments
 
8,529

 
1,955

Provision for bad debts
 
25,272

 
49,583

Depreciation
 
13,467

 
16,601

Amortization of debt issuance costs
 
10,385

 
3,754

Gain on extinguishment of debt
 

 
(2,609
)
(Gain) loss on sale of fixed assets
 
(1,095
)
 
2,093

Decrease in deferred tax assets, net
 
5,700

 
35,884

Equity-based compensation expense
 
5,130

 
9,372

Gain on loans held for sale, net
 
(116,934
)
 
(110,041
)
Origination and purchase of loans held for sale
 
(3,713,311
)
 
(6,007,152
)
Proceeds from sale and collections of loans held for sale
 
3,935,420

 
6,013,059

Changes in assets and liabilities:
 
 

 
 

Decrease in advances and match funded advances
 
491,654

 
236,688

Increase in receivables and other assets, net
 
(1,899
)
 
(11,806
)
Increase in other liabilities
 
30,726

 
46,243

Other, net
 
14,866

 
23,929

Net cash provided by operating activities
 
773,994

 
559,015

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Origination of loans held for investment – reverse mortgages
 
(781,002
)
 
(565,670
)
Principal payments received on loans held for investment - reverse mortgages
 
105,520

 
56,193

Purchase of mortgage servicing rights, net
 
(10,055
)
 
(19,395
)
Proceeds from sale of mortgage servicing rights
 
598,059

 
287

Acquisition of advances in connection with the purchase of mortgage servicing rights
 

 
(84,373
)
Acquisition of advances in connection with the purchase of loans
 

 
(60,482
)
Proceeds from sale of advances and match funded advances
 
285,938

 

Additions to premises and equipment
 
(18,335
)
 
(7,716
)
Proceeds from sale of premises and equipment
 
4,758

 
22

Cash paid to acquire ResCap Servicing Operations (a component of Residential Capital, LLC)
 

 
(54,220
)
Net cash paid to acquire controlling interest in Ocwen Structured Investments, LLC
 

 
(7,834
)
Distributions of capital from unconsolidated entities
 

 
6,572

Other
 
4,082

 
4,248

Net provided by (used in) investing activities
 
188,965

 
(732,368
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Repayment of match funded liabilities
 
(500,401
)
 
(329,175
)
Proceeds from other secured borrowings
 
5,647,016

 
4,352,495

Repayments of other secured borrowings
 
(6,572,601
)
 
(4,532,029
)
Proceeds from issuance of senior unsecured notes
 

 
350,000

Payment of debt issuance costs
 
(18,610
)
 
(6,835
)
Proceeds from sale of mortgage servicing rights accounted for as a financing
 

 
123,551

Proceeds from sale of loans accounted for as a financing
 
803,924

 
572,031

Proceeds from sale of advances accounted for as a financing
 

 
88,095

Repurchase of common stock
 

 
(325,609
)
Payment of preferred stock dividends
 

 
(1,163
)
Proceeds from exercise of common stock options
 
413

 
1,176

Other
 
6,501

 
1,467

Net cash (used in) provided by financing activities
 
(633,758
)
 
294,004

 
 
 
 
 
Net increase in cash
 
329,201

 
120,651

Cash at beginning of year
 
129,473

 
178,512

Cash at end of period
 
$
458,674

 
$
299,163

 
 
 
 
 
Supplemental non-cash investing and financing activities
 
 

 
 

Transfer of loans held for sale to loans held for investment
 
$

 
$
110,874

 



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

8



OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
(Dollars in thousands, except per share data and unless otherwise indicated)
 
Note 1 – Description of Business and Basis of Presentation
Organization
Ocwen Financial Corporation (NYSE: OCN) (Ocwen, we, us and our) is a financial services holding company which, through its subsidiaries, is engaged in the servicing and origination of mortgage loans. Effective October 1, 2015, Ocwen designated its office in West Palm Beach, Florida as corporate headquarters. Previously our office in Atlanta, Georgia was designated as headquarters. We have offices located throughout the United States (U.S.) and in the United States Virgin Islands (USVI) with support operations in India and the Philippines. Ocwen is a Florida corporation organized in February 1988.
Ocwen owns all of the common stock of its primary operating subsidiary, Ocwen Mortgage Servicing, Inc. (OMS), and directly or indirectly owns all of the outstanding stock of its other primary operating subsidiaries: Ocwen Loan Servicing, LLC (OLS), Ocwen Financial Solutions Private Limited, Homeward Residential, Inc. (Homeward), and Liberty Home Equity Solutions, Inc. (Liberty).
We perform primary and master servicer activities on behalf of investors and other servicers, including the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs), the Government National Mortgage Association (Ginnie Mae) and private-label securitizations (non-Agency). As primary servicer, we may be required to make certain payments of property taxes and insurance premiums, default and property maintenance payments, as well as advances of principal and interest payments before collecting them from borrowers. As master servicer, we collect mortgage payments from primary servicers and distribute the funds to investors in the mortgage-backed securities. To the extent the primary servicer does not advance the scheduled principal and interest, as master servicer we are responsible for advancing the shortfall subject to certain limitations.
We originate, purchase, sell and securitize conventional (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government insured (Federal Housing Authority (FHA) or Department of Veterans Affairs (VA)) forward and reverse mortgages. The GSEs or Ginnie Mae guarantee these mortgage securitizations.
Note 1A — Business Environment
Our business has been facing certain challenges and uncertainties, including with respect to the potential impact on us of any regulatory actions against us, downgrades in our third-party servicer ratings or any failure to maintain sufficient liquidity or comply with the covenants in our debt agreements.
We believe that we have made significant progress over the course of 2015 addressing the challenges and uncertainties that our business has been facing. We have largely completed executing on our strategic plan to sell a significant portion of our Agency MSRs, completing sales of approximately $89 billion unpaid principal balance (UPB) of Agency MSRs from which we expect to receive proceeds of approximately $642 million , subject in each case to necessary approvals and the satisfaction of closing conditions. The majority of proceeds received to date have been used to make $561.6 million of prepayments under our Senior Secured Term Loan (SSTL), which has significantly reduced our leverage.
During 2015, we have successfully renewed, refinanced, replaced or extended all of our servicing advance facilities and mortgage loan warehouse facilities prior to their scheduled maturity dates to the extent we have deemed necessary to maintain adequate liquidity. On September 18, 2015, we refinanced an existing $1.8 billion servicing advance facility. The amortization date was extended to September 2016 and the maximum borrowing capacity was reduced to $1.7 billion .
On October 16, 2015, we entered into an amendment to the SSTL facility agreement. Effective as of October 20, 2015, the amendment, among other things (1) removed, until the quarter ending June 30, 2017, the interest coverage and corporate leverage ratio financial covenants; (2) expanded our ability to exclude certain assets from the collateral securing the SSTL to the extent necessary to meet regulatory minimum net worth requirements; (3) increased our ability to make certain permitted investments; and (4) established a requirement that we use 100.0% of the net cash proceeds from future asset sales permitted under the general asset sale basket to prepay the SSTL.
Note 1B - Basis of Presentation
The accompanying unaudited 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

9



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 consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations and other data for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2015 . The unaudited 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, 2014 .
Reclassifications
Within the Other income (expense) section of the Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2014 , we reclassified Interest income from Other, net to a separate line item to conform to the current year presentation.
Certain insignificant amounts in the Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 have been reclassified to conform to the current year presentation. These reclassifications had no impact on our consolidated cash flows from operating, investing or financing activities.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the related disclosures in the accompanying notes. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, the provision for potential losses that may arise from litigation proceedings, and representation and warranty and other indemnification obligations. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.
Income Taxes
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 270, Interim Financial Reporting, and ASC 740-270, Income Taxes — Interim Reporting, at the end of each interim period, we are required to determine the best estimate of our annual effective tax rate and then apply that rate to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) in providing for income taxes on an interim period. However, in certain circumstances where we are unable to make a reliable estimate of the annual effective tax rate, ASC 740-270 allows the actual effective tax rate for the interim period to be used in the interim period. For the three months ended September 30, 2015, we calculated an estimate of our annual effective rate for the year and applied that rate to our pre-tax “ordinary” income or loss for the nine months ended September 30, 2015.
Recently Issued Accounting Standards
Business Combinations: Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (ASU 2015-08)
In May 2015, the FASB issued Accounting Standards Update (ASU) 2015-08, which removes references to the SEC’s Staff Accounting Bulletin (SAB) Topic 5.J on pushdown accounting from ASC 805-50, thereby conforming the FASB’s guidance on pushdown accounting with the SEC’s guidance on this topic. The SEC’s issuance of SAB No. 115 had superseded the guidance in SAB Topic 5.J in connection with the FASB’s November 2014 release of ASU 2014-17. ASU 2015-08 became effective for us upon issuance.
Our adoption of ASU 2015-08 on May 11, 2015 did not have a material impact on our consolidated financial condition or results of operations.
Revenue from Contracts with Customers: Deferral of the Effective Date (ASU 2015-14)
In August 2015, the FASB issued Accounting Standards Update (ASU) 2015-14, which defers the effective date of ASU 2014-09, “Revenue from Contracts with Customers”, by one year. In May 2014, the FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard.
As a result of the issuance of ASU 2015-14, ASU 2014-09 will now be effective for us on January 1, 2018, with early application permitted as of the annual reporting period beginning on January 1, 2017, including interim reporting periods within that reporting period. We are currently evaluating the effect of adopting this standard.

10



Interest -- Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements -- Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (ASU 2015-15)
In August 2015, the FASB issued Accounting Standards Update (ASU) 2015-15, which clarifies ASU 2015-03, “Interest -- Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs”, by providing guidance regarding the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance on this matter, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on that line-of-credit arrangement.
The issuance of ASU 2015-15 does not change the effective date of ASU 2015-03. ASU 2015-03 will be effective for us on January 1, 2016, with early adoption permitted for financial statements that have not been previously issued. We are currently evaluating the effect of adopting this standard.
Note 2 – Securitizations and Variable Interest Entities
We securitize, sell and service forward and reverse residential mortgage loans and regularly transfer financial assets in connection with asset-backed financing arrangements. 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.
We have determined that the special purpose entities (SPEs) created in connection with our match funded advance financing facilities are variable interest entities (VIEs) for which we are the primary beneficiary.
Securitizations of Residential Mortgage Loans
Currently, we securitize forward and reverse residential mortgage loans involving the GSEs and Ginnie Mae and loans insured by the FHA or VA. We retain the right to service these loans and receive servicing fees based upon the securitized loan balances and certain ancillary fees, all of which are reported in Servicing and subservicing fees in the Unaudited Consolidated Statements of Operations.
Transfers of Forward Loans
We sell or securitize forward loans that we originate or that we purchase from third parties, generally in the form of mortgage-backed securities guaranteed by the GSEs or Ginnie Mae. Securitization usually occurs within 30 days of loan closing or purchase. We retain the servicing rights associated with the transferred loans and receive a servicing fee for services provided. We act only as a fiduciary and do not have a variable interest in the securitization trusts. As a result, we account for these transactions as sales upon transfer.
We report the gain or loss on the transfer of the loans held for sale in Gain on loans held for sale, net in the Unaudited Consolidated Statements of Operations along with the changes in fair value of the loans and the gain or loss on any related derivatives. We include all changes in loans held for sale and related derivative balances in operating activities in the Unaudited Consolidated Statements of Cash Flows.
The following table presents a summary of cash flows received from and paid to securitization trusts related to transfers accounted for as sales that were outstanding during the three and nine months ended September 30 :
 
Three Months
 
Nine Months
 
2015
 
2014
 
2015
 
2014
Proceeds received from securitizations
$
1,478,142

 
$
1,369,468

 
$
3,964,866

 
$
4,346,991

Servicing fees collected
5,973

 
10,840

 
25,066

 
25,174

Purchases of previously transferred assets, net of claims reimbursed
1,512

 
2,237

 
2,408

 
2,237

 
$
1,485,627

 
$
1,382,545

 
$
3,992,340

 
$
4,374,402

In connection with these transfers, we retained MSRs of $9.5 million and $27.8 million during the three and nine months ended September 30, 2015 , respectively, and $10.7 million and $32.1 million during the three and nine months ended September 30, 2014 , respectively. We initially record the MSRs at fair value and subsequently account for them at amortized cost.

11



Certain obligations arise from the agreements associated with our transfers of loans. Under these agreements, we may be obligated to repurchase the loans, or otherwise indemnify or reimburse the investor or insurer for losses incurred due to material breach of contractual representations and warranties.
The following table presents the carrying amounts of our assets that relate to our continuing involvement with forward loans that we have transferred with servicing rights retained as well as our maximum exposure to loss including the UPB of the transferred loans at the dates indicated:
 
September 30, 2015
 
December 31, 2014
Carrying value of assets:
 
 
 
Mortgage servicing rights, at amortized cost
$
45,064

 
$
82,542

Mortgage servicing rights, at fair value
226

 
2,840

Advances and match funded advances
21,686

 
1,236

UPB of loans transferred (1)
6,811,864

 
9,353,187

Maximum exposure to loss
$
6,878,840

 
$
9,439,805

(1)
The UPB of the loans transferred is the maximum exposure to loss under our standard representations and warranties obligations.
At September 30, 2015 and December 31, 2014 , 8.1% and 5.1% , respectively, of the transferred residential loans that we service were 60 days or more past due. During the three and nine months ended September 30, 2015 , there were no charge-offs, net of recoveries, associated with these transferred loans.
Transfers of Reverse Mortgages
We are an approved issuer of Ginnie Mae Home Equity Conversion Mortgage-Backed Securities (HMBS) that are guaranteed by Ginnie Mae. We originate Home Equity Conversion Mortgages (HECMs, or reverse mortgages) that are insured by the FHA. We then pool the loans into HMBS that we sell into the secondary market with servicing rights retained. We have determined that loan transfers in the HMBS program do not meet the definition of a participating interest because of the servicing requirements in the product that require the issuer/servicer to absorb some level of interest rate risk, cash flow timing risk and incidental credit risk. As a result, the transfers of the HECMs do not qualify for sale accounting, and therefore, we account for these transfers as financings. Under this accounting treatment, the HECMs are classified as Loans held for investment - reverse mortgages, at fair value, on our Unaudited Consolidated Balance Sheets. We record the proceeds from the transfer of assets as secured borrowings (HMBS-related borrowings) in Financing liabilities and recognize no gain or loss on the transfer. Holders of participating interests in the HMBS have no recourse against the assets of Ocwen, except for standard representations and warranties and our contractual obligation to service the HECMs and the HMBS.
We have elected to measure the HECMs and HMBS-related borrowings at fair value. The changes in fair value of the HECMs and HMBS-related borrowings are included in Other revenues in our Unaudited Consolidated Statements of Operations. Included in net fair value gains on the HECMs and related HMBS borrowings are the interest income that we expect to be collected on the HECMs and the interest expense that we expect to be paid on the HMBS-related borrowings. We report originations and collections of HECMs in investing activities in the Unaudited Consolidated Statements of Cash Flows. We report net fair value gains on HECMs and the related HMBS borrowings as an adjustment to the net cash provided by or used in operating activities in the Unaudited Consolidated Statements of Cash Flows. Proceeds from securitizations of HECMs and payments on HMBS-related borrowings are included in financing activities in the Unaudited Consolidated Statements of Cash Flows.
At September 30, 2015 and December 31, 2014 , we had HMBS-related borrowings of $2.2 billion and $1.4 billion and HECMs pledged as collateral to the pools of $2.3 billion and $1.6 billion , respectively.
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. We consolidate these SPEs because we have determined that Ocwen is the primary beneficiary of the SPE. These SPEs issue debt supported by collections on the transferred advances, and we refer to this debt as Match funded liabilities.
We make the transfers to these SPEs under the terms of our advance financing facility agreements. We classify the transferred advances on our Unaudited Consolidated Balance Sheets as Match funded advances and the related liabilities as Match funded liabilities. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the SPE. Holders of the debt issued by these entities can look only to the assets of the SPE for satisfaction of the

12



debt, and the debt is not recourse to Ocwen. The assets and liabilities of the advance financing SPEs are comprised solely of Match funded advances, Debt service accounts, Match funded liabilities and amounts due to affiliates. Amounts due to affiliates are eliminated in consolidation in our Unaudited Consolidated Balance Sheets.
Note 3 – Fair Value
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 that 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.
Level 1:
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2:
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3:
Unobservable inputs for the asset or liability.
We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement.

13



The carrying amounts and the estimated fair values of our financial instruments and certain of our nonfinancial assets measured at fair value on a recurring or non-recurring basis or disclosed, but not carried, at fair value are as follows at the dates indicated:
 
 
 
September 30, 2015
 
December 31, 2014
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial assets:
 
 
 

 
 

 
 

 
 

Loans held for sale:
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value (a)
2
 
$
235,909

 
$
235,909

 
$
401,120

 
$
401,120

Loans held for sale, at lower of cost or fair value (b)
3
 
291,063

 
291,063

 
87,492

 
87,492

Total Loans held for sale
 
 
$
526,972

 
$
526,972

 
$
488,612

 
$
488,612

Loans held for investment - Reverse mortgages, at fair value (a)
3
 
$
2,319,515

 
$
2,319,515

 
$
1,550,141

 
$
1,550,141

Advances and match funded advances (c)
3
 
2,472,996

 
2,472,996

 
3,303,356

 
3,303,356

Receivables, net (c)
3
 
361,572

 
361,572

 
270,596

 
270,596

Mortgage-backed securities, at fair value (a)
3
 
8,541

 
8,541

 
7,335

 
7,335

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

 
 

Match funded liabilities (c)
3
 
$
1,589,846

 
$
1,589,901

 
$
2,090,247

 
$
2,090,247

Financing liabilities:
 
 
 
 
 
 
 
 
 
HMBS-related borrowings, at fair value (a)
3
 
$
2,229,604

 
$
2,229,604

 
$
1,444,252

 
$
1,444,252

Financing liability - MSRs pledged (a)
3
 
560,059

 
560,059

 
614,441

 
614,441

Other (c)
3
 
163,855

 
144,725

 
199,948

 
189,648

Total Financing liabilities
 
 
$
2,953,518

 
$
2,934,388

 
$
2,258,641

 
$
2,248,341

Other secured borrowings:
 
 
 
 
 
 
 
 
 
Senior secured term loan (c)
2
 
$
702,918

 
$
702,397

 
$
1,273,219

 
$
1,198,227

Other (c)
3
 
298,152

 
298,152

 
460,472

 
460,472

Total Other secured borrowings
 
 
$
1,001,070

 
$
1,000,549

 
$
1,733,691

 
$
1,658,699

 
 
 
 
 
 
 
 
 
 
Senior unsecured notes (c)
2
 
$
350,000

 
$
321,563

 
$
350,000

 
$
321,563

 
 
 
 
 
 
 
 
 
 
Derivative financial instruments assets (liabilities) (a):
 
 
 

 
 

 
 

 
 

Interest Rate Lock Commitments (IRLCs)
2
 
$
10,010

 
$
10,010

 
$
6,065

 
$
6,065

Forward MBS trades
1
 
(3,438
)
 
(3,438
)
 
(2,854
)
 
(2,854
)
Interest rate caps
3
 
1,501

 
1,501

 
567

 
567

 
 
 
 
 
 
 
 
 
 
MSRs:
 
 
 
 
 
 
 
 
 
MSRs, at fair value (a)
3
 
$
787,344

 
$
787,344

 
$
93,901

 
$
93,901

MSRs, at amortized cost (c) (d)
3
 
365,951

 
404,533

 
1,820,091

 
2,237,703

Total MSRs
 
 
$
1,153,295

 
$
1,191,877

 
$
1,913,992

 
$
2,331,604

(a)
Measured at fair value on a recurring basis.
(b)
Measured at fair value on a non-recurring basis.
(c)
Disclosed, but not carried, at fair value. 
(d)
The balance at September 30, 2015 includes our impaired government-insured stratum of amortization method MSRs, which is measured at fair value on a non-recurring basis. The carrying value of this stratum at September 30, 2015 was $144.2 million , net of a valuation allowance of $25.1 million .

14



The following tables present a reconciliation of the changes in fair value of Level 3 assets and liabilities that we measure at fair value on a recurring basis for the three and nine months ended September 30, 2015 and 2014 .
 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-Backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Three months ended September 30, 2015
Beginning balance
$
2,097,192

 
$
(1,987,998
)
 
$
8,157

 
$
(581,219
)
 
$
155

 
$
814,450

 
$
350,737

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 
2,084

 

 
2,084

Issuances
250,600

 
(271,068
)
 

 

 

 

 
(20,468
)
Sales

 

 

 

 

 
(2,329
)
 
(2,329
)
Settlements
(41,582
)
 
43,725

 

 
21,160

 

 

 
23,303

 
209,018

 
(227,343
)
 

 
21,160

 
2,084

 
(2,329
)
 
2,590

Total realized and unrealized gains and (losses):
 
 
 
 
 
 
 
 
 

 
 

 
 

Included in earnings
13,305

 
(14,263
)
 
384

 

 
(738
)
 
(24,777
)
 
(26,089
)
Included in Other comprehensive income

 

 

 

 

 

 

 
13,305

 
(14,263
)
 
384

 

 
(738
)
 
(24,777
)
 
(26,089
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending balance
$
2,319,515

 
$
(2,229,604
)
 
$
8,541

 
$
(560,059
)
 
$
1,501

 
$
787,344

 
$
327,238

 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-Backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Three months ended September 30, 2014
Beginning balance
$
1,107,626

 
$
(1,033,712
)
 
$
7,502

 
$
(629,579
)
 
$
97

 
$
104,220

 
$
(443,846
)
Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 

 

 

Issuances
208,566

 
(190,452
)
 

 

 

 

 
18,114

Sales

 

 

 

 


 

 

Settlements
(27,592
)
 
12,690

 

 
10,724

 

 
(934
)
 
(5,112
)
 
180,974

 
(177,762
)
 

 
10,724

 

 
(934
)
 
13,002

Total realized and unrealized gains and (losses):


 


 
 
 
 
 
 

 
 

 
 

Included in earnings
26,724

 
(24,620
)
 
(124
)
 

 
(6
)
 
(1,338
)
 
636

Included in Other comprehensive income

 

 

 

 

 

 

 
26,724

 
(24,620
)
 
(124
)
 

 
(6
)
 
(1,338
)
 
636

Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending balance
$
1,315,324

 
$
(1,236,094
)
 
$
7,378

 
$
(618,855
)
 
$
91

 
$
101,948

 
$
(430,208
)

15



 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Nine months ended September 30, 2015
Beginning balance
$
1,550,141

 
$
(1,444,252
)
 
$
7,335

 
$
(614,441
)
 
$
567

 
$
93,901

 
$
(406,749
)
Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 
2,201

 

 
2,201

Issuances
781,002

 
(803,924
)
 

 

 

 
(1,139
)
 
(24,061
)
Transfer from MSRs carried at amortized cost

 

 

 

 

 
839,157

 
839,157

Sales

 

 

 

 

 
(71,318
)
 
(71,318
)
Settlements (1)
(105,505
)
 
107,522

 

 
54,382

 
346

 

 
56,745

 
675,497

 
(696,402
)
 

 
54,382

 
2,547

 
766,700

 
802,724

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

 
 

 
 

Included in earnings
93,877

 
(88,950
)
 
1,206

 

 
(1,613
)
 
(73,257
)
 
(68,737
)
Included in Other comprehensive income (loss)

 

 

 

 

 

 

 
93,877

 
(88,950
)
 
1,206

 

 
(1,613
)
 
(73,257
)
 
(68,737
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending Balance
$
2,319,515

 
$
(2,229,604
)
 
$
8,541

 
$
(560,059
)
 
$
1,501

 
$
787,344

 
$
327,238

 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Nine months ended September 30, 2014
Beginning balance
$
618,018

 
$
(615,576
)
 
$

 
$
(633,804
)
 
$
442

 
$
116,029

 
$
(514,891
)
Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 
7,677

 

 
23

 

 
7,700

Issuances
565,670

 
(572,031
)
 

 

 

 

 
(6,361
)
Transfer from loans held for sale, at fair value
110,874

 

 

 

 

 

 
110,874

Sales

 

 

 

 

 

 

Settlements
(56,193
)
 
25,725

 

 
14,949

 

 
(934
)
 
(16,453
)
 
620,351

 
(546,306
)
 
7,677

 
14,949

 
23

 
(934
)
 
95,760

Total realized and unrealized gains and (losses):
 
 
 
 
 
 
 
 
 

 
 

 
 

Included in earnings
76,955

 
(74,212
)
 
(299
)
 

 
(374
)
 
(13,147
)
 
(11,077
)
Included in Other comprehensive income (loss)

 

 

 

 

 

 

 
76,955

 
(74,212
)
 
(299
)
 

 
(374
)
 
(13,147
)
 
(11,077
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending balance
$
1,315,324

 
$
(1,236,094
)
 
$
7,378

 
$
(618,855
)
 
$
91

 
$
101,948

 
$
(430,208
)
(1)
In the event of a transfer to another party of servicing related to Rights to MSRs, we are required to reimburse New Residential Investment Corp. (NRZ) at predetermined contractual rates for the loss of servicing revenues. Settlements

16



for Financing liability - MSRs pledged for the nine months ended September 30, 2015 includes $2.2 million of such reimbursements.
(2)
Total losses attributable to derivative financial instruments still held at September 30, 2015 were $1.3 million for the nine months ended September 30, 2015 .
The methodologies that we use and key assumptions that we make to estimate the fair value of financial instruments and other assets and liabilities measured at fair value on a recurring or non-recurring basis and those disclosed, but not carried, at fair value are described below.
Loans Held for Sale
We originate and purchase residential mortgage loans that we intend to sell to the GSEs. We also own residential mortgage loans that are not eligible to be sold to the GSEs due to delinquency or other factors. Residential forward and reverse mortgage loans that we intend to sell to the GSEs are carried at fair value as a result of a fair value election. Such loans are subject to changes in fair value due to fluctuations in interest rates from the closing date through the date of the sale of the loan into the secondary market. These loans are classified within Level 2 of the valuation hierarchy because the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. We have the ability to access this market, and it is the market into which conventional and government-insured mortgage loans are typically sold.
We repurchase certain loans from Ginnie Mae guaranteed securitizations in connection with loan modifications and loan resolution activity as part of our contractual obligations as the servicer of the loans. These loans are classified as loans held for sale at the lower of cost or fair value, in the case of modified loans, as we expect to redeliver (sell) the loans to new Ginnie Mae guaranteed securitizations. The fair value of these loans is estimated using published forward Ginnie Mae prices. Loans repurchased in connection with loan resolution activities are modified or otherwise remediated through loss mitigation activities or are reclassified to receivables. Because these loans are insured or guaranteed by the FHA or VA, the fair value of these loans represents the net recovery value taking into consideration the insured or guaranteed claim.
For all other loans held for sale, which we report at the lower of cost or fair value, market illiquidity has reduced the availability of observable pricing data. When we enter into an agreement to sell a loan or pool of loans to an investor at a set price, we value the loan or loans at the commitment price. We base the fair value of uncommitted loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows.
Loans Held for Investment – Reverse Mortgages
We have elected to measure these loans at fair value. For transferred reverse mortgage loans that do not qualify as sales for accounting purposes, we base the fair value on the expected future cash flows discounted over the expected life of the loans at a rate commensurate with the risk of the estimated cash flows. Significant assumptions include expected prepayment and delinquency rates and cumulative loss curves. The discount rate assumption for these assets is primarily based on an assessment of current market yields on newly originated reverse mortgage loans, expected duration of the asset and current market interest rates.
The more significant assumptions used in the September 30, 2015 valuation include:
Life in years ranging from 6.33 to 10.22 (weighted average of 6.70 );
Conditional repayment rate ranging from 4.85% to 53.75% (weighted average of 19.39% ); and
Discount rate of 2.95% .
Significant increases or decreases in any of these assumptions in isolation could result in a significantly lower or higher fair value, respectively. The effects of changes in the assumptions used to value the loans held for investment are largely offset by the effects of changes in the assumptions used to value the HMBS-Related Borrowings that are associated with these loans.
Mortgage Servicing Rights
The significant components of the estimated future cash inflows for MSRs include servicing fees, late fees, float earnings and other ancillary fees. Significant cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments.
Third-party valuation experts generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, including risk premiums and liquidity adjustments. The models and related assumptions used by the valuation experts are owned and managed by them and, in many cases, the significant inputs used in the valuation techniques are not reasonably available to us. However, we have an internal understanding of the processes and assumptions used to develop the prices based on our ongoing due diligence, which includes

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regular discussions with the valuation experts. We believe that the procedures executed by the valuation experts, supported by our internal verification and analytical procedures, provide reasonable assurance that the prices used in our Unaudited Consolidated Financial Statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
We evaluate the reasonableness of our third party experts’ assumptions using historical experience adjusted for prevailing market conditions. Assumptions used in the valuation of MSRs include:
Mortgage prepayment speeds
Interest rate used for computing the cost of financing servicing advances
Cost of servicing
Interest rate used for computing float earnings
Discount rate
Compensating interest expense
Delinquency rates
Collection rate of other ancillary fees
Amortized Cost MSRs
We estimate the fair value of MSRs carried at amortized cost using a process that involves either actual sale prices obtained or the use of third-party valuation experts, supported by commercially available discounted cash flow models and analysis of current market data. To provide greater price transparency to investors, we disclose actual Ocwen sale prices for orderly transactions where available in lieu of third-party valuations.
The more significant assumptions used in the September 30, 2015 valuation include:
Weighted average prepayment speed
 
12.67
%
Weighted average delinquency rate
 
14.39
%
Advance financing cost
 
5-year swap

Interest rate for computing float earnings
 
5-year swap

Weighted average discount rate
 
9.30
%
Weighted average cost to service (in dollars)
 
$
98

We perform an impairment analysis based on the difference between the carrying amount and fair value after grouping the underlying loans into the applicable strata. Our strata are defined as conventional and government-insured.
Fair Value MSRs
MSRs carried at fair value are classified within Level 3 of the valuation hierarchy. The fair value is equal to the mid-point of the range of prices provided by third-party valuation experts, without adjustment, except in the event we have a potential or completed Ocwen sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is carried at the estimated sale price. Fair value reflects actual Ocwen sale prices for orderly transactions where available in lieu of independent third-party valuations. Our valuation process includes discussions of bid pricing with the third-party valuation experts and presumably are contemplated along with other market-based transactions in their model validation.
A change in the valuation inputs utilized by the valuation experts might result in a significantly higher or lower fair value measurement. Changes in market interest rates tend to impact the fair value for Agency MSRs via prepayment speeds by altering the borrower refinance incentive, and for Non-Agency MSRs via a market rate indexed cost of advance funding. Other key assumptions used in the valuation of these MSRs include delinquency rates and discount rates.
The primary assumptions used in the September 30, 2015 valuation include:
 
 
Agency
 
Non Agency
Weighted average prepayment speed