Ocwen Financial Corporation
OCWEN FINANCIAL CORP (Form: 10-Q, Received: 07/28/2016 06:09:57)




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 June 30, 2016
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 July 25, 2016 : 123,986,954 shares







OCWEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
PAGE
PART I  - FINANCIAL INFORMATION
 
 
Unaudited Consolidated Financial Statements
 
 
 
 
 
 
Consolidated Balance Sheets at June 30, 2016 and December 31, 2015
 
 
 
 
 
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
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. 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. 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. 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, 2015 and the following:
adverse effects on our business as a result of regulatory investigations or settlements;
reactions to the announcement of such investigations or settlements by key counterparties;
increased regulatory scrutiny and media attention;
uncertainty related to claims, litigation and investigations brought by government agencies and private parties regarding our servicing, foreclosure, modification, origination and other practices, including uncertainty related to past, present or future investigations and settlements with state regulators, the Consumer Financial Protection Bureau (CFPB), State Attorneys General, the Securities and Exchange Commission (SEC), Department of Justice or the Department of Housing and Urban Development (HUD) and actions brought under the False Claims Act by private parties on behalf of the United States of America regarding incentive and other payments made by governmental entities;
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, including the financial and other covenants contained in them;
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, the Government National Mortgage Association (Ginnie Mae), 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 with respect to the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP), which have been significant drivers of our servicing and origination revenue and which are scheduled to expire on December 31, 2016, unless extended;

2



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;
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;
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;
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, including our new business initiatives;
our ability to maintain our technology systems and our ability to adapt such systems for future operating environments;
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 SEC including our Annual Report on Form 10-K for the year ended December 31, 2015 and our Quarterly and Current Reports on Form 10-Q and Form 8-K, respectively, since such date. Forward-looking statements speak only as of the date they were made and 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)



 
June 30, 2016
 
December 31, 2015
Assets
 

 
 

Cash
$
218,915

 
$
257,272

Mortgage servicing rights ($700,668 and $761,190 carried at fair value)
1,047,142

 
1,138,569

Advances, net
329,228

 
444,298

Match funded advances
1,614,447

 
1,706,768

Loans held for sale ($339,687 and $309,054 carried at fair value)
401,790

 
414,046

Loans held for investment - Reverse mortgages, at fair value
3,057,564

 
2,488,253

Receivables, net
307,372

 
286,981

Premises and equipment, net
63,057

 
57,626

Other assets ($23,839 and $14,352 carried at fair value)
448,737

 
586,495

Total assets
$
7,488,252

 
$
7,380,308

 
 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

Match funded liabilities
$
1,431,381

 
$
1,584,049

Financing liabilities ($3,431,054 and $2,933,066 carried at fair value)
3,568,017

 
3,089,255

Other secured borrowings, net
737,512

 
762,411

Senior unsecured notes, net
346,179

 
345,511

Other liabilities
752,011

 
744,444

Total liabilities
6,835,100

 
6,525,670

 
 
 
 
Commitments and Contingencies (Notes 18 and 19)


 


 
 
 
 
Equity
 

 
 

Ocwen Financial Corporation (Ocwen) stockholders’ equity
 
 
 
Common stock, $.01 par value; 200,000,000 shares authorized; 123,986,954 and 124,774,516 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
1,240

 
1,248

Additional paid-in capital
524,053

 
526,148

Retained earnings
127,220

 
325,929

Accumulated other comprehensive loss, net of income taxes
(1,589
)
 
(1,763
)
Total Ocwen stockholders’ equity
650,924

 
851,562

Non-controlling interest in subsidiaries
2,228

 
3,076

Total equity
653,152

 
854,638

Total liabilities and equity
$
7,488,252

 
$
7,380,308



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 June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue
 
 
 
 
 
 
 
Servicing and subservicing fees
$
307,262

 
$
396,983

 
$
604,758

 
$
843,524

Gain on loans held for sale, net
27,857

 
45,132

 
43,429

 
89,636

Other revenues
37,935

 
21,136

 
55,624

 
40,535

Total revenue
373,054

 
463,251

 
703,811

 
973,695

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 

 
 

Compensation and benefits
98,422

 
105,843

 
194,671

 
210,987

Amortization of mortgage servicing rights
8,347

 
31,586

 
21,153

 
70,080

Servicing and origination
89,987

 
52,558

 
185,679

 
154,360

Technology and communications
32,709

 
41,260

 
59,578

 
80,611

Professional services
121,399

 
72,369

 
192,306

 
129,300

Occupancy and equipment
20,708

 
28,773

 
45,453

 
54,487

Other
13,446

 
19,863

 
14,835

 
30,785

Total expenses
385,018

 
352,252

 
713,675

 
730,610

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest income
5,140

 
5,038

 
9,330

 
10,613

Interest expense
(91,033
)
 
(124,897
)
 
(197,122
)
 
(244,293
)
Gain on sale of mortgage servicing rights, net
853

 
30,306

 
2,028

 
56,712

Other, net
606

 
(8,946
)
 
(2,895
)
 
(10,788
)
Total other expense, net
(84,434
)
 
(98,499
)
 
(188,659
)
 
(187,756
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
(96,398
)
 
12,500

 
(198,523
)
 
55,329

Income tax expense (benefit)
(9,180
)
 
2,594

 
(104
)
 
11,034

Net income (loss)
(87,218
)
 
9,906

 
(198,419
)
 
44,295

Net income attributable to non-controlling interests
(160
)
 
(168
)
 
(290
)
 
(202
)
Net income (loss) attributable to Ocwen stockholders
$
(87,378
)
 
$
9,738

 
$
(198,709
)
 
$
44,093

 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Ocwen stockholders
 
 
 
 
 
 
 
Basic
$
(0.71
)
 
$
0.08

 
$
(1.60
)
 
$
0.35

Diluted
$
(0.71
)
 
$
0.08

 
$
(1.60
)
 
$
0.35

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
123,893,752

 
125,311,133

 
123,993,545

 
125,291,788

Diluted
123,893,752

 
127,152,479

 
123,993,545

 
127,076,178


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 June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
(87,218
)
 
$
9,906

 
$
(198,419
)
 
$
44,295

 
 
 
 
 
 
 
 
Other comprehensive income, net of income taxes:
 

 
 

 
 
 
 

Reclassification adjustment for losses on cash flow hedges included in net income (1)(2)
70

 
5,615

 
175

 
6,033

Other
(1
)
 

 
(1
)
 

Total other comprehensive income, net of income taxes
69

 
5,615

 
174

 
6,033

 
 
 
 
 
 
 
 
Comprehensive income (loss)
(87,149
)
 
15,521

 
(198,245
)
 
50,328

Comprehensive income attributable to non-controlling interests
(160
)
 
(168
)
 
(290
)
 
(202
)
Comprehensive income (loss) attributable to Ocwen stockholders
$
(87,309
)
 
$
15,353

 
$
(198,535
)
 
$
50,126

(1)
These losses are reclassified to Other, net in the Unaudited Consolidated Statements of Operations.
(2)
Net of tax expense of $0.3 million and $0.4 million for the three and six months ended June 30, 2015 , respectively.


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 SIX MONTHS ENDED JUNE 30, 2016 AND 2015
(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, 2015
124,774,516

 
$
1,248

 
$
526,148

 
$
325,929

 
$
(1,763
)
 
$
3,076

 
$
854,638

Net income (loss)

 

 

 
(198,709
)
 

 
290

 
(198,419
)
Repurchase of common stock
(991,985
)
 
(10
)
 
(5,880
)
 

 

 

 
(5,890
)
Exercise of common stock options
69,805

 
1

 
441

 

 

 

 
442

Equity-based compensation and other
134,618

 
1

 
3,344

 

 

 

 
3,345

Capital distribution to non-controlling interest

 

 

 

 

 
(1,138
)
 
(1,138
)
Other comprehensive income, net of income taxes

 

 

 

 
174

 

 
174

Balance at June 30, 2016
123,986,954

 
$
1,240

 
$
524,053

 
$
127,220

 
$
(1,589
)
 
$
2,228

 
$
653,152

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
125,215,615

 
$
1,252

 
$
515,194

 
$
530,361

 
$
(8,413
)
 
$
2,771

 
$
1,041,165

Net income

 

 

 
44,093

 

 
202

 
44,295

Cumulative effect of fair value election - Mortgage servicing rights, net of income taxes

 

 

 
42,846

 

 

 
42,846

Exercise of common stock options
85,173

 
1

 
508

 

 

 

 
509

Equity-based compensation and other
79,330

 
1

 
10,195

 
(14
)
 

 

 
10,182

Other comprehensive income, net of income taxes

 

 

 

 
6,033

 

 
6,033

Balance at June 30, 2015
125,380,118

 
$
1,254

 
$
525,897

 
$
617,286

 
$
(2,380
)
 
$
2,973

 
$
1,145,030




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 Six Months Ended June 30,
 
2016
 
2015
 
 
 
 

Cash flows from operating activities
 

 
 

Net income (loss)
$
(198,419
)
 
$
44,295

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

 
 

Amortization of mortgage servicing rights
21,153

 
70,080

Loss on valuation of mortgage servicing rights, at fair value
59,104

 
48,480

Impairment of mortgage servicing rights
39,030

 
1,608

Gain on sale of mortgage servicing rights
(2,028
)
 
(56,712
)
Realized and unrealized losses on derivative financial instruments
2,080

 
7,268

Provision for bad debts
32,785

 
24,686

Depreciation
11,850

 
8,420

Amortization of debt issuance costs
6,498

 
7,311

Gain on sale of fixed assets

 
(1,095
)
Increase in deferred tax assets

 
(18,909
)
Equity-based compensation expense
3,079

 
3,581

Gain on loans held for sale, net
(43,429
)
 
(89,636
)
Origination and purchase of loans held for sale
(2,883,124
)
 
(2,314,488
)
Proceeds from sale and collections of loans held for sale
2,789,433

 
2,517,096

Changes in assets and liabilities:
 

 
 

Decrease in advances and match funded advances
215,525

 
383,028

Decrease (increase) in receivables and other assets, net
75,208

 
(29,957
)
Increase (decrease) in other liabilities
40,951

 
(84,690
)
Other, net
2,469

 
14,599

Net cash provided by operating activities
172,165

 
534,965

 
 
 
 
Cash flows from investing activities
 

 
 

Origination of loans held for investment – reverse mortgages
(675,665
)
 
(530,402
)
Principal payments received on loans held for investment - reverse mortgages
238,838

 
63,942

Purchase of mortgage servicing rights, net
(12,432
)
 
(6,252
)
Proceeds from sale of mortgage servicing rights
15,122

 
388,938

Proceeds from sale of advances and match funded advances
66,651

 
128,821

Additions to premises and equipment
(17,312
)
 
(8,038
)
Proceeds from sale of premises and equipment

 
4,758

Other
8,179

 
2,158

Net cash provided by (used in) investing activities
(376,619
)
 
43,925

 
 
 
 
Cash flows from financing activities
 

 
 

Repayment of match funded liabilities
(152,668
)
 
(349,125
)
Proceeds from other secured borrowings
4,173,609

 
3,895,539

Repayments of other secured borrowings
(4,368,903
)
 
(4,455,813
)
Payment of debt issuance costs
(2,242
)
 
(18,610
)
Proceeds from sale of loans accounted for as a financing
522,981

 
532,856

Repurchase of common stock
(5,890
)
 

Proceeds from exercise of common stock options
406

 
413

Other
(1,196
)
 
6,457

Net cash provided by (used in) financing activities
166,097

 
(388,283
)
 
 
 
 
Net increase (decrease) in cash
(38,357
)
 
190,607

Cash at beginning of year
257,272

 
129,473

Cash at end of period
$
218,915

 
$
320,080

 
 
 
 
 



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
JUNE 30, 2016
(Dollars in thousands, except per share data and unless otherwise indicated)
 
Note 1 – Organization, Business Environment 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, originates and services loans. We are headquartered in West Palm Beach, Florida with offices located throughout the United States (U.S.) and in the United States Virgin Islands (USVI) and 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 (OFSPL), 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 primarily 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.
Business, Liquidity, Financing Activities and Management’s Plans
We are facing certain challenges and uncertainties that could have significant adverse effects on our business, liquidity and financing activities.
We have faced, and expect to continue to face, increased regulatory and public scrutiny as well as stricter and more comprehensive regulation of our business. We have entered into a number of regulatory settlements, which subject us to ongoing monitoring or reporting and which have significantly impacted our ability to grow our servicing portfolio. See Note 17 – Regulatory Requirements and Note 19 – Contingencies for further information regarding regulatory requirements, regulatory settlements and regulatory-related contingencies.
To the extent that an examination, monitorship, audit or other regulatory engagement results in an alleged failure by us to comply with applicable law, regulation or licensing requirement, or if allegations are made that we have failed to comply with the commitments we have made in connection with our regulatory settlements, or if other regulatory actions are taken in the future against us of a similar or different nature, this could lead to (i) loss of our licenses and approvals to engage in our servicing and lending businesses, (ii) governmental investigations and enforcement actions, (iii) administrative fines and penalties and litigation, (iv) civil and criminal liability, including class action lawsuits, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) inability to raise capital and (vii) inability to execute on our business strategy. Any of these occurrences could increase our operating expenses and reduce our revenues, hamper our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition and results of operations.
Given the intense regulatory scrutiny and the subsequent investments Ocwen has made in its risk and compliance infrastructure, we believe the underlying economics of our Servicing business have likely been changed for the foreseeable future. We believe it is unlikely Ocwen will achieve meaningful profitability in its Servicing business in the near term unless there is a significant, structural change in the business model. While we believe such structural change is probably unlikely in the current regulatory environment, we are nonetheless intensely focused on improving our operations to enhance borrower experiences and improve efficiencies, both of which we believe will drive stronger financial performance through lower overall costs.

9



We are also investing in our forward and reverse lending businesses and will continue to evaluate new adjacent market opportunities that are consistent with our strategic goals, such as providing secured floor plan lending to used car dealerships through our Automotive Capital Services (ACS) venture and providing financing to investors to purchase single family homes and apartments for lease through our Liberty Rental Finance venture. Our new ventures involve risks and uncertainties, including potential difficulties integrating new lines of business into our current infrastructure, the inability to achieve the expected financial results in a reasonable time frame, implementing and maintaining consistent standards, controls, policies and information systems, and diversion of management’s attention from other business matters. Further, our strategic initiatives could be impacted by factors beyond our control, such as general economic conditions and increased competition. The diversion of management’s attention and any delays or difficulties encountered in implementing our new strategic initiatives could negatively impact our business and results of operations. Further, the economic benefits that we anticipate from these strategic initiatives may not develop. There can be no assurance that we will be successful in returning to profitability. Our success will depend on market conditions and other factors outside of our control as well as successful operational execution. If we continue to experience losses, our share price, business, reputation, financial condition and results of operations could be materially and adversely affected.
New Residential Investment Corp. (NRZ) is an important business partner to which we have sold rights to receive servicing fees, excluding ancillary income (other than net income on custodial and escrow accounts), with respect to certain non-Agency mortgage servicing rights (MSRs), which we refer to as Rights to MSRs. As of June 30, 2016 , these Rights to MSRs relate to approximately $128.1 billion in unpaid principal balance (UPB) of our non-Agency MSRs. A level of future uncertainty exists regarding our relationship with NRZ, including with respect to the impact of our Standard & Poor’s Ratings Services (S&P) servicer rating under our agreements with NRZ beginning April 7, 2017. Under the Master Servicing Rights Purchase Agreement and Sale Supplements with NRZ, if a termination event related to our servicer rating exists with respect to any servicing agreement, NRZ will have the right to direct the transfer of servicing with respect to any affected servicing agreement to a licensed replacement servicer that obtains all required third-party consents. As of June 30, 2016, a termination event exists because our servicer rating from S&P is below Average. If our servicer rating from S&P is not upgraded to Average or better prior to April 7, 2017, NRZ will have the right to direct the transfer of any affected servicing agreements to a successor licensed servicer that obtains all required third-party consents. Following any such transfer, we would no longer be entitled to receive future servicing fee revenue with respect to any transferred servicing agreement. See Note 4 — Sales of Advances and MSRs for further information regarding our relationship with NRZ.
If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations and other legal remedies. Our lenders can waive their contractual rights in the event of a default. Effective March 24, 2016 we entered into an amendment to our Senior Secured Term Loan (SSTL), which, among other things, removed in their entirety (including the consolidated total debt to consolidated tangible net worth ratio) or amended for the remaining term of the SSTL certain financial covenants. This amendment also required a prepayment of $6.3 million on May 31, 2016, with additional prepayments of the same amount due on July 29, 2016 and September 30, 2016. As a result of this amendment, we project we will maintain compliance with our financial covenants during 2016. In order to avoid an event of default arising from a covenant breach, we could repay or refinance debt, among other actions. See Note 11 – Borrowings for further information regarding our debt agreements.
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 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 six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2016 . 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, 2015 .
Reclassifications
As a result of our retrospective adoption on January 1, 2016 of FASB Accounting Standards Update (ASU) 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs , and ASU 2015-15, 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 , unamortized debt issuance costs that are not related to revolving line-of-credit arrangements have been reclassified from other assets to other secured

10



borrowings and senior unsecured notes on the consolidated balance sheets, resulting in a reduction to Ocwen’s assets and liabilities of $20.3 million and $24.5 million at June 30, 2016 and December 31, 2015, respectively.
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.
Recently Issued Accounting Standards
Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15)
In August 2014, the FASB issued ASU 2014-15 to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.
In connection with preparing financial statements for each reporting period, an organization’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued, when applicable), based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or are available to be issued, when applicable).
ASU 2014-15 will be effective for the annual period ending on December 31, 2016 and for interim periods beginning in 2017. While the adoption of this standard may result in additional disclosures, it will not have a material impact on our consolidated financial condition or results of operations.
Leases (ASU 2016-02)
In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key qualitative and quantitative information about leasing arrangements. A lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months, regardless of whether the lease is classified as a finance or operating lease. Additional disclosures will help investors and financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for us on January 1, 2019, with early application permitted. We are currently evaluating the effect of adopting this standard.
Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (ASU 2016-05)
In March 2016, the FASB issued ASU 2016-05 to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under FASB Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging , does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 will be effective for us on January 1, 2017, with early adoption permitted, including adoption in an interim period. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.
Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments (ASU 2016-06)
In March 2016, the FASB issued ASU 2016-06 to clarify that in assessing whether embedded contingent put or call options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, an entity is required to apply only the four-step decision sequence in FASB ASC 815-15-25-42 (as amended by this ASU). An entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to interest rates or credit risk. ASU 2016-06 will be effective for us on January 1, 2017, with early adoption permitted, including adoption in an interim period. We are currently evaluating the effect of adopting this standard.

11



Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (ASU 2016-07)
In March 2016, the FASB issued ASU 2016-07 to simplify the transition to the equity method of accounting as part of its simplification initiative to reduce cost and complexity in accounting standards while maintaining or improving the usefulness of the information provided to the users of financial statements. This standard requires that an equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment qualifies for equity method accounting, rather than adjusting the investment retroactively. This standard also requires that an entity that has an available-for-sale equity security that qualifies for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment qualifies for use of the equity method. ASU 2016-07 will be effective for us on January 1, 2017, with early application permitted. We are currently evaluating the effect of adopting this standard.
Revenue from Contracts with Customers: Principal versus Agent Considerations (ASU 2016-08)
In March 2016, the FASB issued ASU 2016-08 to clarify the implementation guidance included in FASB ASC Topic 606, Revenue from Contracts with Customers , related to principal versus agent considerations and add illustrative examples to assist in the application of the guidance. When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is that of a principal -- providing the specified good or service itself, or that of an agent -- arranging for that good or service to be provided by the other party. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. ASU 2016-08 will be effective for us on January 1, 2018, with early application permitted. We are currently evaluating the effect of adopting this standard.
Compensation - Stock Compensation: Improvements to Employee Shared-Based Payment Accounting (ASU 2016-09)
In March 2016, the FASB issued ASU 2016-09 to improve the accounting for employee share-based payments. This standard simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, as part of FASB’s simplification initiative to reduce cost and complexity in accounting standards while maintaining or improving the usefulness of the information provided to the users of financial statements. ASU 2016-09 will be effective for us on January 1, 2017, with early adoption permitted. We are currently evaluating the effect of adopting this standard.
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients (ASU 2016-12)
In May 2016, the FASB issued ASU 2016-12 to amend guidance in FASB ASC Topic 606, Revenue from Contracts with Customers , related to collectability, noncash consideration, presentation of sales tax, completed contracts and transition. The amendments are intended to address implementation issues that were raised by stakeholders and to provide additional practical expedients. These amendments are intended to reduce the risk of diversity in practice and the cost and complexity of applying certain aspects of the revenue standard. ASU 2016-12 will be effective for us on January 1, 2018, with early application permitted. We are currently evaluating the effect of adopting this standard.
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13)
In June 2016, the FASB issued ASU 2016-13 to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This standard aligns the accounting with the economics of lending by requiring banks and other lending institutions to immediately record the full amount of credit losses that are expected in their loan portfolios, providing investors with better information about those losses on a more timely basis. The new guidance requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This standard requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. Additionally, the new guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for us on January 1, 2020, with early application permitted. 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.

12



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.
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 periods ended June 30 :
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
Proceeds received from securitizations
$
1,357,206

 
$
1,415,952

 
$
2,366,470

 
$
2,486,724

Servicing fees collected
3,549

 
8,229

 
6,673

 
19,093

Purchases of previously transferred assets, net of claims reimbursed
(766
)
 
396

 
(779
)
 
896

 
$
1,359,989

 
$
1,424,577

 
$
2,372,364

 
$
2,506,713

In connection with these transfers, we retained MSRs of $9.5 million and $16.7 million during the three and six months ended June 30, 2016 , respectively, and $9.8 million and $18.3 million during the three and six months ended June 30, 2015 , respectively.
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:
 
June 30, 2016
 
December 31, 2015
Carrying value of assets:
 
 
 
Mortgage servicing rights, at amortized cost
$
72,548

 
$
54,729

Mortgage servicing rights, at fair value
163

 
236

Advances and match funded advances
29,877

 
26,968

UPB of loans transferred
9,220,490

 
7,471,025

Maximum exposure to loss
$
9,323,078

 
$
7,552,958

At June 30, 2016 and December 31, 2015 , 7.3% and 8.2% , respectively, of the transferred residential loans that we service were 60 days or more past due.
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 (HECM, 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

13



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 HECM loans do not qualify for sale accounting, and therefore, we account for these transfers as financings. Under this accounting treatment, the HECM loans 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 with respect to standard representations and warranties and our contractual obligation to service the HECM loans and the HMBS.
We measure the HECM loans and HMBS-related borrowings at fair value on a recurring basis. The changes in fair value of the HECM loans and HMBS-related borrowings are included in Other revenues in our Unaudited Consolidated Statements of Operations. Included in net fair value gains on the HECM loans and related HMBS borrowings are the interest income that we expect to be collected on the HECM loans and the interest expense that we expect to be paid on the HMBS-related borrowings.
At June 30, 2016 , HMBS-related borrowings of $2.9 billion were outstanding. The amount of HECM loans pledged as collateral to the pools was $3.0 billion at June 30, 2016 . At June 30, 2016 , Loans held for investment - Reverse mortgages, at fair value of $3.1 billion included $86.2 million of originated loans which had not yet been pledged as collateral.
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 have recourse only to the assets of the SPE for satisfaction of the debt. 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.
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:
 
 
 
June 30, 2016
 
December 31, 2015
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial assets:
 
 
 

 
 

 
 

 
 

Loans held for sale:
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value (a)
2
 
$
339,687

 
$
339,687

 
$
309,054

 
$
309,054

Loans held for sale, at lower of cost or fair value (b)
3
 
62,103

 
62,103

 
104,992

 
104,992


14



 
 
 
June 30, 2016
 
December 31, 2015
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Total Loans held for sale
 
 
$
401,790

 
$
401,790

 
$
414,046

 
$
414,046

Loans held for investment - Reverse mortgages, at fair value (a)
3
 
$
3,057,564

 
$
3,057,564

 
$
2,488,253

 
$
2,488,253

Advances and match funded advances (c)
3
 
1,943,675

 
1,943,675

 
2,151,066

 
2,151,066

Receivables, net (c)
3
 
307,372

 
307,372

 
286,981

 
286,981

Mortgage-backed securities, at fair value (a)
3
 
9,063

 
9,063

 
7,985

 
7,985

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

 
 

Match funded liabilities (c)
3
 
$
1,431,381

 
$
1,432,592

 
$
1,584,049

 
$
1,581,786

Financing liabilities:
 
 
 
 
 
 
 
 
 
HMBS-related borrowings, at fair value (a)
3
 
$
2,935,928

 
$
2,935,928

 
$
2,391,362

 
$
2,391,362

Financing liability - MSRs pledged (a)
3
 
495,126

 
495,126

 
541,704

 
541,704

Other (c)
3
 
136,963

 
104,925

 
156,189

 
131,940

Total Financing liabilities
 
 
$
3,568,017

 
$
3,535,979

 
$
3,089,255

 
$
3,065,006

Other secured borrowings:
 
 
 
 
 
 
 
 
 
Senior secured term loan (c)(d)
2
 
$
351,703

 
$
367,719

 
$
377,091

 
$
397,956

Other (c)
3
 
385,809

 
385,809

 
385,320

 
385,320

Total Other secured borrowings
 
 
$
737,512

 
$
753,528

 
$
762,411

 
$
783,276

 
 
 
 
 
 
 
 
 
 
Senior unsecured notes (c)(d)
2
 
$
346,179

 
$
238,000

 
$
345,511

 
$
318,063

 
 
 
 
 
 
 
 
 
 
Derivative financial instruments assets (liabilities) (a):
 
 
 

 
 

 
 

 
 

Interest rate lock commitments
2
 
$
14,576

 
$
14,576

 
$
6,080

 
$
6,080

Forward mortgage-backed securities trades
1
 
(7,365
)
 
(7,365
)
 
295

 
295

Interest rate caps
3
 
200

 
200

 
2,042

 
2,042

 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights:
 
 
 
 
 
 
 
 
 
Mortgage servicing rights, at fair value (a)
3
 
$
700,668

 
$
700,668

 
$
761,190

 
$
761,190

Mortgage servicing rights, at amortized cost (c)(e)
3
 
346,474

 
367,951

 
377,379

 
461,555

Total Mortgage servicing rights
 
 
$
1,047,142

 
$
1,068,619

 
$
1,138,569

 
$
1,222,745

(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 carrying values are net of unamortized debt issuance costs and discount. See Note 11 – Borrowings for additional information .
(e)
The net carrying value at June 30, 2016 and December 31, 2015 is net of the valuation allowance on the impaired government-insured stratum of our amortization method MSRs, which is measured at fair value on a non-recurring basis. Before applying the valuation allowance of $56.4 million , the carrying value of this stratum at June 30, 2016 was $154.2 million . At December 31, 2015 , the carrying value of this stratum was $146.5 million before applying the valuation allowance of $17.3 million .

15



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:
 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-Backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Three months ended June 30, 2016
Beginning balance
$
2,771,242

 
$
(2,648,100
)
 
$
8,386

 
$
(523,503
)
 
$
570

 
$
732,174

 
$
340,769

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 
144

 

 
144

Issuances
371,607

 
(289,807
)
 

 

 

 
(1,694
)
 
80,106

Sales

 

 

 

 

 
(1
)
 
(1
)
Settlements
(151,600
)
 
59,223

 

 
28,377

 

 

 
(64,000
)
 
220,007

 
(230,584
)
 

 
28,377

 
144

 
(1,695
)
 
16,249

Total realized and unrealized gains and (losses):
 
 
 
 
 
 
 
 
 

 
 

 
 

Included in earnings
66,315

 
(57,244
)
 
677

 

 
(514
)
 
(29,811
)
 
(20,577
)
Included in Other comprehensive income

 

 

 

 

 

 

 
66,315

 
(57,244
)
 
677

 

 
(514
)
 
(29,811
)
 
(20,577
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending balance
$
3,057,564

 
$
(2,935,928
)
 
$
9,063

 
$
(495,126
)
 
$
200

 
$
700,668

 
$
336,441

 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-Backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Three months ended June 30, 2015
Beginning balance
$
1,808,141

 
$
(1,702,397
)
 
$
7,701

 
$
(594,495
)
 
$
203

 
$
897,797

 
$
416,950

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 
116

 

 
116

Issuances
295,131

 
(294,241
)
 

 

 

 
30

 
920

Sales

 

 

 

 


 
(68,072
)
 
(68,072
)
Settlements
(37,690
)
 
37,812

 

 
13,276

 

 

 
13,398

 
257,441

 
(256,429
)
 

 
13,276

 
116

 
(68,042
)
 
(53,638
)
Total realized and unrealized gains and (losses):


 


 
 
 
 
 
 

 
 

 
 

Included in earnings
31,610

 
(29,172
)
 
456

 

 
(164
)
 
(15,305
)
 
(12,575
)
Included in Other comprehensive income

 

 

 

 

 

 

 
31,610

 
(29,172
)
 
456

 

 
(164
)
 
(15,305
)
 
(12,575
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending balance
$
2,097,192

 
$
(1,987,998
)
 
$
8,157

 
$
(581,219
)
 
$
155

 
$
814,450

 
$
350,737


16



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Six months ended June 30, 2016
Beginning balance
$
2,488,253

 
$
(2,391,362
)
 
$
7,985

 
$
(541,704
)
 
$
2,042

 
$
761,190

 
$
326,404

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 
144

 

 
144

Issuances
675,665

 
(522,981
)
 

 

 

 
(1,275
)
 
151,409

Sales

 

 

 

 

 
(143
)
 
(143
)
Settlements (1)
(238,838
)
 
98,876

 

 
46,578

 
(81
)
 

 
(93,465
)
 
436,827

 
(424,105
)
 

 
46,578

 
63

 
(1,418
)
 
57,945

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

 
 

 
 

Included in earnings
132,484

 
(120,461
)
 
1,078

 

 
(1,905
)
 
(59,104
)
 
(47,908
)
Included in Other comprehensive income (loss)

 

 

 

 

 

 

 
132,484

 
(120,461
)
 
1,078

 

 
(1,905
)
 
(59,104
)
 
(47,908
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending Balance
$
3,057,564

 
$
(2,935,928
)
 
$
9,063

 
$
(495,126
)
 
$
200

 
$
700,668

 
$
336,441

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Six months ended June 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

 

 

 

 
116

 

 
116

Issuances
530,402

 
(532,856
)
 

 

 

 
(1,139
)
 
(3,593
)
Transfer from MSRs, at amortized cost

 

 

 

 

 
839,157

 
839,157

Sales

 

 

 

 

 
(68,989
)
 
(68,989
)
Settlements (1)
(63,923
)
 
63,797

 

 
33,222

 

 

 
33,096

 
466,479

 
(469,059
)
 

 
33,222

 
116

 
769,029

 
799,787

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

 
 

 
 

Included in earnings
80,572

 
(74,687
)
 
822

 

 
(528
)
 
(48,480
)
 
(42,301
)
Included in Other comprehensive income (loss)

 

 

 

 

 

 

 
80,572

 
(74,687
)
 
822

 

 
(528
)
 
(48,480
)
 
(42,301
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending balance
$
2,097,192

 
$
(1,987,998
)
 
$
8,157

 
$
(581,219
)
 
$
155

 
$
814,450

 
$
350,737

(1)
In the event of a transfer to another party of servicing related to Rights to MSRs, we are required to reimburse NRZ at predetermined contractual rates for the loss of servicing revenues. Settlements for Financing liability - MSRs pledged for the six months ended June 30, 2015 includes $2.2 million of such reimbursements. There have been no such payments in 2016 .

17



(2)
Total losses attributable to derivative financial instruments still held at June 30, 2016 and June 30, 2015 were $1.9 million and $0.5 million for the six months ended June 30, 2016 and 2015 , respectively. Total losses attributable to MSRs still held at June 30, 2016 and June 30, 2015 were $58.5 million and $40.9 million for the six months ended June 30, 2016 and 2015 , respectively.
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 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 June 30, 2016 valuation include:
Life in years ranging from 5.82 to 9.25 (weighted average of 6.48 );
Conditional repayment rate ranging from 4.94% to 53.75% (weighted average of 19.74% ); and
Discount rate of 2.49% .
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 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

18



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 independent 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 June 30, 2016 valuation include:
Weighted average prepayment speed
13.17
%
Weighted average delinquency rate
11.57
%
Advance financing cost
5-year swap

Interest rate for computing float earnings
5-year swap

Weighted average discount rate
9.06
%
Weighted average cost to service (in dollars)
$
107

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 the 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 June 30, 2016 valuation include:
 
Agency
 
Non Agency
Weighted average prepayment speed
17.89
%
 
16.93
%
Weighted average delinquency rate
0.51
%
 
27.94
%
Advance financing cost
5-year swap

 
1ML plus 3.5%

Interest rate for computing float earnings
5-year swap

 
1ML

Weighted average discount rate
9.00
%
 
14.98
%
Weighted average cost to service (in dollars)
$
77

 
$
287


19



Advances
We value advances at their net realizable value, which generally approximates fair value, because advances have no stated maturity, are generally realized within a relatively short period of time and do not bear interest.
Receivables
The carrying value of receivables generally approximates fair value because of the relatively short period of time between their origination and realization.
Mortgage-Backed Securities (MBS)
Our subordinate and residual securities are not actively traded, and therefore, we estimate the fair value of these securities based on the present value of expected future cash flows from the underlying mortgage pools. We use our best estimate of the key assumptions we believe are used by market participants. We calibrate our internally developed discounted cash flow models for trading activity when appropriate to do so in light of market liquidity levels. Key inputs include expected prepayment rates, delinquency and cumulative loss curves and discount rates commensurate with the risks. Where possible, we use observable inputs in the valuation of our securities. However, the subordinate and residual securities in which we have invested trade infrequently and therefore have few or no observable inputs and little price transparency. Additionally, during periods of market dislocation, the observability of inputs is further reduced. Changes in the fair value of our investment in subordinate and residual securities are recognized in Other, net in the Unaudited Consolidated Statements of Operations.
Discount rates for the subordinate and residual securities are determined based upon an assessment of prevailing market conditions and prices for similar assets. We project the delinquency, loss and prepayment assumptions based on a comparison to actual historical performance curves adjusted for prevailing market conditions.
Match Funded Liabilities
For match funded liabilities that bear interest at a rate that is adjusted regularly based on a market index, the carrying value approximates fair value. For match funded liabilities that bear interest at a fixed rate, we determine fair value by discounting the future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. We estimate principal repayments of match funded liabilities during the amortization period based on our historical advance collection rates and taking into consideration any plans to refinance the notes.
Financing Liabilities
HMBS-Related Borrowings
We have elected to measure these borrowings at fair value. We recognize the proceeds from the transfer of reverse mortgages as a secured borrowing that we account for at fair value. These borrowings are not actively traded, and therefore, quoted market prices are not available. We determine fair value by discounting the future principal and interest repayments over the estimated life of the borrowing at a market rate commensurate with the risk of the estimated cash flows. Significant assumptions include prepayments, discount rate and borrower mortality rates for reverse mortgages. The discount rate assumption for these liabilities is based on an assessment of current market yields for newly issued HMBS, expected duration and current market interest rates.
The more significant assumptions used in the June 30, 2016 valuation include:
Life in years ranging from 4.71 to 9.25 (weighted average of 5.36 );
Conditional repayment rate ranging from 4.94% to 53.75% (weighted average of 19.74% ); and
Discount rate of 1.89% .
Significant increases or decreases in any of these assumptions in isolation would result in a significantly higher or lower fair value.
MSRs Pledged
We periodically sell Rights to MSRs and the related servicing advances. Because we have retained legal title to the MSRs, the sales of Rights to MSRs are accounted for as financings. We initially establish the value of the Financing Liability - MSRs Pledged based on the price at which the Rights to MSRs are sold. Thereafter, the carrying value of the Financing Liability - MSRs pledged is adjusted to fair value at each reporting date. We determine fair value by applying the price of the underlying MSRs to the remaining principal balance related to the underlying MSRs. Since we have elected fair value for our portfolio of non-Agency MSRs, future fair value changes in the Financing Liability - MSRs Pledged will be largely offset by changes in the fair value of the related MSRs.

20



The more significant assumptions used in determination of the price of the underlying MSRs at June 30, 2016 include:
Weighted average prepayment speed
17.45
%
Weighted average delinquency rate
29.73
%
Advance financing cost
1ML plus 3.5%

Interest rate for computing float earnings
1ML

Weighted average discount rate
15.04
%
Weighted average cost to service (in dollars)
$
321

Significant increases or decreases in these assumptions in isolation would result in a significantly higher or lower fair value.
Secured Notes
We issued Ocwen Asset Servicing Income Series (OASIS), Series 2014-1 Notes secured by Ocwen-owned MSRs relating to Freddie Mac mortgages. We accounted for this transaction as a financing. We determine the fair value based on bid prices provided by third parties involved in the issuance and placement of the notes.
Other Secured Borrowings
The carrying value of secured borrowings that bear interest at a rate that is adjusted regularly based on a market index approximates fair value. For other secured borrowings that bear interest at a fixed rate, we determine fair value by discounting the future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. For the SSTL, we based the fair value on quoted prices in a market with limited trading activity.
Senior Unsecured Notes
We base the fair value on quoted prices in a market with limited trading activity.
Derivative Financial Instruments
Interest rate lock commitments (IRLCs) represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage applicant (locked pipeline), whereby the interest rate is set prior to funding. IRLCs are classified within Level 2 of the valuation hierarchy as the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. Fair value amounts of IRLCs are adjusted for expected “fallout” (locked pipeline loans not expected to close) using models that consider cumulative historical fallout rates and other factors.
We enter into forward MBS trades to provide an economic hedge against changes in the fair value of residential forward and reverse mortgage loans held for sale that we carry at fair value. Forward MBS trades are primarily used to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Forward contracts are actively traded in the market and we obtain unadjusted market quotes for these derivatives, thus they are classified within Level 1 of the valuation hierarchy.
In addition, we may use interest rate caps to minimize future interest rate exposure on variable rate debt issued on servicing advance financing facilities from increases in one-month LIBOR interest rates. The fair value for interest rate caps is based on counterparty market prices and adjusted for counterparty credit risk.
Note 4 — Sales of Advances and MSRs
In order to efficiently finance our assets, streamline our operations and generate liquidity, we sell MSRs, Rights to MSRs and servicing advances to market participants. We may retain the right to subservice loans when we sell MSRs. In connection with sales of Rights to MSRs, we retain legal ownership of the MSRs and continue to service the related mortgage loans until such time as all necessary consents to a transfer of the MSRs are received.

21



The following table provides a summary of the MSRs and advances sold during the six months ended June 30 :
 
2016
 
2015
 
MSRs
 
Advances and Match Funded Advances
 
MSRs
 
Advances and Match Funded Advances
Sales price of assets sold and adjustments:
 
 
 
 
 
 
 
Accounted for as a sale (1)
$
(229
)
 
$
24,053