Ocwen Financial Corporation
OCWEN FINANCIAL CORP (Form: 10-Q, Received: 08/03/2017 16:23:18)




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, 2017
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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large Accelerated filer
o
 
 
Accelerated filer
x
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
Smaller reporting company
o
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 28, 2017 : 130,859,058 shares







OCWEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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 forward-looking 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 this Quarterly Report on Form 10-Q and in Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2016 and the following:
uncertainty related to claims, litigation, cease and desist orders 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, litigation, cease and desist orders and settlements with state regulators, the Consumer Financial Protection Bureau (CFPB), State Attorneys General, the Securities and Exchange Commission (SEC), the 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;
adverse effects on our business as a result of regulatory investigations, litigation, cease and desist orders or settlements;
reactions to the announcement of such investigations, litigation, cease and desist orders or settlements by key counterparties, including lenders;
increased regulatory scrutiny and media attention;
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 prior 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;
our ability to timely transfer mortgage servicing rights under our July 2017 agreements with NRZ and our ability to maintain our long-term relationship with NRZ under these new arrangements;
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 agreements with GSEs and Ginnie Mae and maintain our seller/servicer and other statuses with them;
uncertainty related to the GSEs substantially curtailing or ceasing to purchase our conforming loan originations or the Federal Housing Administration of the Department of Housing and Urban Development or Department of Veterans Affairs ceasing to provide insurance;

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 realize anticipated future gains from future draws on existing loans in our reverse mortgage portfolio;
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 meet capital requirements established by regulators or counterparties;
our ability to protect and maintain our technology systems and our ability to adapt such systems for future operating environments;
failure of our internal information technology and other 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 Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2016 and our Quarterly and Current Reports on Form 10-Q and Form 8-K 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, 2017
 
December 31, 2016
Assets
 

 
 

Cash
$
251,472

 
$
256,549

Mortgage servicing rights ($625,650 and $679,256 carried at fair value)
975,185

 
1,042,978

Advances, net
219,214

 
257,882

Match funded assets (related to variable interest entities (VIEs))
1,292,908

 
1,451,964

Loans held for sale ($239,490 and $284,632 carried at fair value)
260,959

 
314,006

Loans held for investment, at fair value
4,223,776

 
3,565,716

Receivables, net
252,797

 
265,720

Premises and equipment, net
56,409

 
62,744

Other assets ($18,037 and $20,007 carried at fair value) ($26,570 and $43,331 related to VIEs)
399,672

 
438,104

Total assets
$
7,932,392

 
$
7,655,663


 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

HMBS-related borrowings, at fair value
$
4,061,626

 
$
3,433,781

Other financing liabilities ($441,007 and $477,707 carried at fair value)
533,806

 
579,031

Match funded liabilities (related to VIEs)
1,108,377

 
1,280,997

Other secured borrowings, net
643,860

 
678,543

Senior notes, net
347,063

 
346,789

Other liabilities ($11 and $1,550 carried at fair value)
657,413

 
681,239

Total liabilities
7,352,145

 
7,000,380


 
 
 
Commitments and Contingencies (Notes 18 and 19)


 



 
 
 
Equity
 

 
 

Ocwen Financial Corporation (Ocwen) stockholders’ equity
 
 
 
Common stock, $.01 par value; 200,000,000 shares authorized; 124,778,548 and 123,988,160 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
1,248

 
1,240

Additional paid-in capital
529,188

 
527,001

Retained earnings
48,652

 
126,167

Accumulated other comprehensive loss, net of income taxes
(1,338
)
 
(1,450
)
Total Ocwen stockholders’ equity
577,750

 
652,958

Non-controlling interest in subsidiaries
2,497

 
2,325

Total equity
580,247

 
655,283

Total liabilities and equity
$
7,932,392

 
$
7,655,663



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,
 
2017
 
2016
 
2017
 
2016
Revenue
 
 
 
 
 
 
 
Servicing and subservicing fees
$
255,801

 
$
307,262

 
$
528,303

 
$
604,758

Gain on loans held for sale, net
28,255

 
27,857

 
51,199

 
43,429

Other
27,244

 
37,935

 
53,662

 
55,624

Total revenue
311,300

 
373,054

 
633,164

 
703,811


 
 
 
 
 
 
 
Expenses
 
 
 
 
 

 
 

Compensation and benefits
90,411

 
98,422

 
182,212

 
194,671

Servicing and origination
64,516

 
89,987

 
132,423

 
185,679

Professional services
65,405

 
121,399

 
107,234

 
192,306

Technology and communications
24,254

 
32,709

 
51,601

 
59,578

Occupancy and equipment
16,480

 
20,708

 
34,229

 
45,453

Amortization of mortgage servicing rights
12,697

 
8,347

 
25,412

 
21,153

Other
6,717

 
13,446

 
23,752

 
14,835

Total expenses
280,480

 
385,018

 
556,863

 
713,675


 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest income
4,239

 
5,140

 
8,002

 
9,330

Interest expense
(81,128
)
 
(91,033
)
 
(165,190
)
 
(197,122
)
Gain on sale of mortgage servicing rights, net
1,033

 
853

 
1,320

 
2,028

Other, net
3,428

 
606

 
7,461

 
(2,895
)
Total other expense, net
(72,428
)
 
(84,434
)
 
(148,407
)
 
(188,659
)

 
 
 
 
 
 
 
Loss before income taxes
(41,608
)
 
(96,398
)
 
(72,106
)
 
(198,523
)
Income tax expense (benefit)
2,828

 
(9,180
)
 
4,953

 
(104
)
Net loss
(44,436
)
 
(87,218
)
 
(77,059
)
 
(198,419
)
Net income attributable to non-controlling interests
(71
)
 
(160
)
 
(172
)
 
(290
)
Net loss attributable to Ocwen stockholders
$
(44,507
)
 
$
(87,378
)
 
$
(77,231
)
 
$
(198,709
)

 
 
 
 
 
 
 
Loss per share attributable to Ocwen stockholders
 
 
 
 
 
 
 
Basic
$
(0.36
)
 
$
(0.71
)
 
$
(0.62
)
 
$
(1.60
)
Diluted
$
(0.36
)
 
$
(0.71
)
 
$
(0.62
)
 
$
(1.60
)

 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
124,582,280

 
123,893,752

 
124,300,171

 
123,993,545

Diluted
124,582,280

 
123,893,752

 
124,300,171

 
123,993,545


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 (LOSS)
(Dollars in thousands)

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(44,436
)
 
$
(87,218
)
 
$
(77,059
)
 
$
(198,419
)
 
 
 
 
 
 
 
 
Other comprehensive income, net of income taxes:
 

 
 

 
 
 
 

Reclassification adjustment for losses on cash flow hedges included in net income (1)
45

 
70

 
112

 
175

Other

 
(1
)
 

 
(1
)
Total other comprehensive income, net of income taxes
45

 
69

 
112

 
174

 
 
 
 
 
 
 
 
Comprehensive loss
(44,391
)
 
(87,149
)
 
(76,947
)
 
(198,245
)
Comprehensive income attributable to non-controlling interests
(71
)
 
(160
)
 
(172
)
 
(290
)
Comprehensive loss attributable to Ocwen stockholders
$
(44,462
)
 
$
(87,309
)
 
$
(77,119
)
 
$
(198,535
)
(1)
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 SIX MONTHS ENDED JUNE 30, 2017 AND 2016
(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, 2016
123,988,160

 
$
1,240

 
$
527,001

 
$
126,167

 
$
(1,450
)
 
$
2,325

 
$
655,283

Net income (loss)

 

 

 
(77,231
)
 

 
172

 
(77,059
)
Cumulative effect of adoption of FASB Accounting Standards Update No. 2016-09

 

 
284

 
(284
)
 

 

 

Equity-based compensation and other
790,388

 
8

 
1,903

 

 

 

 
1,911

Other comprehensive income, net of income taxes

 

 

 

 
112

 

 
112

Balance at June 30, 2017
124,778,548

 
$
1,248

 
$
529,188

 
$
48,652

 
$
(1,338
)
 
$
2,497

 
$
580,247

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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




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,
 
2017
 
2016
Cash flows from operating activities
 

 
 

Net loss
$
(77,059
)
 
$
(198,419
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Amortization of mortgage servicing rights
25,412

 
21,153

Loss on valuation of mortgage servicing rights, at fair value
51,959

 
59,104

Impairment of mortgage servicing rights
4,650

 
39,030

Gain on sale of mortgage servicing rights, net
(1,320
)
 
(2,028
)
Realized and unrealized (gains) losses on derivative financial instruments
(31
)
 
2,080

Provision for bad debts
31,918

 
32,785

Depreciation
13,439

 
11,850

Amortization of debt issuance costs
1,334

 
6,498

Equity-based compensation expense
3,263

 
3,079

Net gain on valuation of mortgage loans held for investment and HMBS-related borrowings
(11,381
)
 
(14,451
)
Gain on loans held for sale, net
(29,512
)
 
(35,794
)
Origination and purchase of loans held for sale
(2,243,475
)
 
(2,883,124
)
Proceeds from sale and collections of loans held for sale
2,217,259

 
2,789,433

Changes in assets and liabilities:
 

 
 

Decrease in advances and match funded assets
226,742

 
215,525

Decrease in receivables and other assets, net
87,548

 
75,208

(Decrease) increase in other liabilities
(28,053
)
 
40,955

Other, net
8,043

 
9,285

Net cash provided by operating activities
280,736

 
172,169


 
 
 
Cash flows from investing activities
 

 
 

Origination of loans held for investment
(698,473
)
 
(675,665
)
Principal payments received on loans held for investment
192,569

 
238,838

Purchase of mortgage servicing rights
(1,657
)
 
(12,432
)
Proceeds from sale of mortgage servicing rights
1,464

 
15,122

Proceeds from sale of advances
3,719

 
66,651

Issuance of automotive dealer financing notes
(85,076
)
 

Collections of automotive dealer financing notes
76,264

 

Additions to premises and equipment
(7,243
)
 
(17,312
)
Other
2,277

 
8,179

Net cash used in investing activities
(516,156
)
 
(376,619
)

 
 
 
Cash flows from financing activities
 

 
 

Repayment of match funded liabilities, net
(172,620
)
 
(152,668
)
Proceeds from mortgage loan warehouse facilities and other secured borrowings
4,216,466

 
4,173,609

Repayments of mortgage loan warehouse facilities and other secured borrowings
(4,475,642
)
 
(4,368,903
)
Payment of debt issuance costs
(841
)
 
(2,242
)
Proceeds from sale of reverse mortgages (HECM loans) accounted for as a financing (HMBS-related borrowings)
664,453

 
522,981

Repurchase of common stock

 
(5,890
)
Other
(1,473
)
 
(794
)
Net cash provided by financing activities
230,343

 
166,093


 
 
 
Net decrease in cash
(5,077
)
 
(38,357
)
Cash at beginning of year
256,549

 
257,272

Cash at end of period
$
251,472

 
$
218,915

 
 
 
 
 

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, 2017
(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 with operations located 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 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 Administration (FHA) or Department of Veterans Affairs (VA)) forward and reverse mortgages. The GSEs or Ginnie Mae guarantee these mortgage securitizations.
We had a total of approximately 8,900 employees at June 30, 2017 of which approximately 5,700 were located in India and approximately 800 were based in the Philippines. Our operations in India and the Philippines provide internal support services, principally to our loan servicing business as well as to our corporate functions. Of our foreign-based employees, nearly 80% were engaged in supporting our loan servicing operations as of June 30, 2017 .
Business Environment
We are facing certain challenges and uncertainties that could have significant adverse effects on our business, financial condition, liquidity and results of operations. The ability of management to appropriately address these challenges and uncertainties in a timely manner is critical to our ability to successfully operate our business.
We have incurred a net loss for the six months ended June 30, 2017 , which follows losses in each of the last three fiscal years. While these losses have eroded stockholders’ equity and weakened our financial condition, it is important to note that we generated positive operating cash flow in each of these periods. We expect our cash position to strengthen in fiscal 2017 as a result of proceeds we expect to receive in connection with our recent agreements with New Residential Investment Corp. (NRZ), which are discussed in additional detail in Note 4 — Sales of Advances and MSRs . In order to drive stronger financial performance, we are focused on reducing expenses by improving our operating effectiveness relative to the size of our business, improving our lending business and returning to more normalized relationships with our regulators.
Our business continues to be impacted by regulatory actions, regulatory settlements and the current regulatory environment. We have faced, and expect to continue to face, heightened regulatory and public scrutiny as well as stricter and more comprehensive regulation of our business. Since April 20, 2017, the CFPB, two state attorneys general and thirty state mortgage and banking regulatory agencies have taken regulatory action against us alleging various deficiencies in our compliance with laws, regulations and licensing requirements. The consequences of these regulatory actions have included one rating agency downgrading our long-term corporate debt, several rating agencies putting our servicer ratings on watch and Ginnie Mae sending us a notice of violation that includes a forbearance on exercising rights until October 26, 2017. Our business, operating results and financial condition have been significantly impacted in recent periods by legal and other fees and settlement payments related to litigation and regulatory matters, including the costs of third-party monitoring firms under our regulatory settlements. Should the number or scope of regulatory actions against us increase or expand or should reasonable resolutions not be reached, our business, reputation, financial condition, liquidity and results of operations could be adversely

9



affected. See Note 8 – Mortgage Servicing , Note 11 – Borrowings , Note 17 – Regulatory Requirements and Note 19 – Contingencies for further information. 
With regard to the current maturities of our borrowings, as of June 30, 2017 , we have approximately $928.7 million of debt outstanding under facilities coming due in the next 12 months, including scheduled payments under our Senior Secured Term Loan (SSTL), certain notes under our servicing advance match funded facilities and our mortgage loan warehouse facilities. Portions of our match funded facilities and all of our mortgage loan warehouse facilities have 364-day terms consistent with market practice. We have historically renewed these facilities on or before their expiration in the ordinary course of financing our business. We expect to renew, replace or extend all such borrowings to the extent necessary to finance our business on or prior to their respective maturities consistent with our historical experience.
Our debt agreements contain various qualitative and quantitative events of default provisions that include, among other things, noncompliance with covenants, breach of representations, or the occurrence of a material adverse change. Provisions of this type are commonly found in debt agreements such as ours. Certain of these provisions are open to subjective interpretation and, if our interpretation were contested by a lender, a court may ultimately be required to determine compliance or lack thereof. If a lender were to allege an event of default, whether as a result of recent events or otherwise, and we are unable to avoid, remedy or secure a waiver, we could be subject to adverse action by our lenders, including acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations and other legal remedies, any of which could have a material adverse impact on us. In addition, OLS, Homeward and Liberty are parties to seller/servicer agreements and/or subject to guidelines and regulations (collectively, seller/servicer obligations) with one or more of the GSEs, HUD, FHA, VA and Ginnie Mae. These seller/servicer obligations include financial requirements, including capital requirements related to tangible net worth, as defined by the applicable agency, as well as extensive requirements regarding servicing, selling and other matters. To the extent that these requirements are not met or waived, the applicable agency may, at its option, utilize a variety of remedies including requirements to deposit funds as security for our obligations, sanctions, suspension or even termination of approved seller/servicer status, which would prohibit future originations or securitizations of forward or reverse mortgage loans or servicing for the applicable agency. Any of these actions could have a material adverse impact on us. To date, none of these counterparties has communicated any material sanction, suspension or prohibition in connection with our seller/servicer obligations. See Note 11 – Borrowings and Note 17 – Regulatory Requirements for additional information.
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, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2017 . The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2016 .
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, the amortization of mortgage servicing rights, income taxes, the provision for potential losses that may arise from litigation proceedings, representation and warranty and other indemnification obligations, and our going concern evaluation. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.
Reclassifications
As a result of our adoption on January 1, 2017 of FASB Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation: Improvements to Accounting for Employee Share-Based Payments , excess tax benefits have been classified along with other income tax cash flows as an operating activity in our unaudited consolidated statements of cash flows, rather than being separated from other income tax cash flows and classified as a financing activity. Additionally, cash paid by Ocwen when directly withholding shares for tax-withholding purposes has been classified as a financing activity in our unaudited consolidated statements of cash flows, rather than being classified as an operating activity.

10



Certain amounts in the unaudited consolidated statement of cash flows for the six months ended June 30, 2016 have been reclassified to conform to the current year presentation as follows:
Within the operating activities section, we reclassified Net gain on valuation of mortgage loans held for investment and HMBS-related borrowings from Other to a new separate line item. In addition, we reclassified amounts related to reverse mortgages from Gain on loans held for sale, net to Other.
Within the financing activities section, we reclassified Proceeds from exercise of stock options to Other.
These reclassifications had no impact on our consolidated cash flows from operating, investing or financing activities.
Certain amounts in the unaudited consolidated balance sheet at December 31, 2016 have been reclassified to conform to the current year presentation as follows:
Within the total assets section, we reclassified Deferred tax assets, net to Other assets.
Within the total liabilities section, we reclassified HMBS-related borrowings from Financing liabilities to a new separate line item.
Recently Adopted Accounting Standard
Compensation - Stock Compensation: Improvements to Employee Shared-Based Payment Accounting (ASU 2016-09)
In addition to the reclassification matters discussed above, ASU 2016-09 requires excess tax benefits associated with employee share-based payments to be recognized through the income statement, regardless of whether the benefit reduces income taxes payable in the current period. Prior to our adoption of this standard, excess tax benefits were recognized in additional paid-in capital and were not recognized until the deduction reduced income taxes payable. Additionally, concurrent with our adoption of ASU 2016-09, we made an accounting policy election to account for forfeitures when they occur, rather than estimating the number of awards that are expected to vest, as we had done prior to our adoption of this standard. Amendments requiring recognition of excess tax benefits in the income statement were adopted prospectively. Amendments related to the timing of when excess tax benefits are recognized and forfeitures were adopted using a modified retrospective transition method by means of cumulative-effect adjustments to equity as of January 1, 2017.
For the timing of the recognition of excess tax benefits, the cumulative-effect adjustment was to recognize an increase in retained earnings of $5.0 million and a deferred tax asset for the same amount. However, because we have determined that our US and USVI deferred tax assets are not considered to be more likely than not realizable, we established an offsetting full valuation allowance on the deferred tax asset through a reduction in retained earnings.
For the change in accounting for forfeitures, we recognized a cumulative-effect adjustment through a reduction of $0.3 million in retained earnings and an increase in additional paid-in capital for the same amount. We also recognized the tax effect of this adjustment through an increase in retained earnings of $0.1 million and a deferred tax asset for the same amount. However, we also fully reserved the resulting deferred tax asset as an offsetting reduction in retained earnings.
Recently Issued Accounting Standards
Business Combinations: Clarifying the Definition of a Business (ASU 2017-01)
In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This standard will be effective for us on January 1, 2018. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.
Receivables: Nonrefundable Fees and Other Costs (ASU 2017-08)
In March 2017, the FASB issued ASU 2017-08 to amend the amortization period for certain purchased callable debt securities held at a premium. This standard shortens the amortization period for the premium to the earliest call date, rather than generally amortizing the premium as an adjustment of yield over the contractual life of the instrument, as required by current GAAP. This standard will be effective for us on January 1, 2019. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.
Compensation: Stock Compensation (ASU 2017-09)
In May 2017, the FASB issued ASU 2017-09 to provide clarity and reduce both diversity in practice as well as cost and complexity when applying the modification accounting guidance in FASB ASC Topic 718, Compensation -- Stock Compensation , to a change to the terms or conditions of a share-based payment award. This standard will be effective for us on January 1, 2018. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.

11



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 three groups: (1) securitizations of residential mortgage loans, (2) financings of advances on loans serviced for others and (3) financings of automotive dealer financing notes.
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
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. We also sell newly originated forward and reverse residential mortgage loans to unaffiliated third parties with servicing rights released.
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. To the extent we retain the servicing rights associated with the transferred loans, we 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:
Periods ended June 30,
Three Months
 
Six Months
2017
 
2016
 
2017
 
2016
Proceeds received from securitizations
$
1,022,152

 
$
1,357,206

 
$
2,024,149

 
$
2,366,470

Servicing fees collected
9,843

 
3,549

 
19,950

 
6,673

Purchases of previously transferred assets, net of claims reimbursed
(1,737
)
 
(766
)
 
(2,724
)
 
(779
)
 
$
1,030,258

 
$
1,359,989

 
$
2,041,375

 
$
2,372,364

In connection with these transfers, we retained MSRs of $6.9 million and $15.0 million , and $9.5 million and $16.7 million , during the three and six months ended June 30, 2017 and 2016 , 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, 2017
 
December 31, 2016
Carrying value of assets:
 
 
 
Mortgage servicing rights, at amortized cost
$
101,854

 
$
94,492

Mortgage servicing rights, at fair value
227

 
233

Advances and match funded advances
52,021

 
37,336

UPB of loans transferred
11,588,074

 
10,485,697

Maximum exposure to loss
$
11,742,176

 
$
10,617,758


12



At June 30, 2017 and December 31, 2016 , 6.8% and 7.6% , 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 pool the loans into HMBS that we sell into the secondary market with servicing rights retained or we sell the loans to third parties with servicing rights released. 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 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. We report originations and collections of HECM loans in investing activities in the unaudited consolidated statements of cash flows. We report net fair value gains on HECM loans 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 HECM loans and payments on HMBS-related borrowings are included in financing activities in the unaudited consolidated statements of cash flows.
At June 30, 2017 and December 31, 2016 , HMBS-related borrowings of $4.1 billion and $3.4 billion were outstanding. Loans held for investment, at fair value were $4.2 billion and $3.6 billion at June 30, 2017 and December 31, 2016 , respectively. At June 30, 2017 and December 31, 2016 , Loans held for investment included $99.1 million and $81.3 million , respectively, of originated loans which had not yet been pledged as collateral. See Note 3 – Fair Value and Note 11 – Borrowings for additional information on HMBS-related borrowings and Loans held for investment - Reverse mortgages.
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 a component of Match funded assets 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.
Financings of Automotive Dealer Financing Notes
Match funded automotive dealer financing notes result from our transfers of short-term, inventory-secured loans to car dealers to an SPE in exchange for cash. We consolidate this SPE because we have determined that Ocwen is the primary beneficiary of the SPE. The SPE issues debt supported by collections on the transferred loans.
We make the transfers to the SPE under the terms of our automotive capital asset receivables financing facility agreements. We classify the transferred loans on our unaudited consolidated balance sheets as a component of Match funded assets and the related liabilities as Match funded liabilities. The SPE uses collections of the pledged loans to repay principal and interest and to pay the expenses of the SPE. Holders of the debt issued by the SPE have recourse only to the assets of the SPE for satisfaction of the debt. The assets and liabilities of the automotive capital asset receivables financing SPE are comprised solely of Match funded automotive dealer financing notes, 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.

13



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, 2017
 
December 31, 2016
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial assets:
 
 
 

 
 

 
 

 
 

Loans held for sale:
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value (a)
2
 
$
239,490

 
$
239,490

 
$
284,632

 
$
284,632

Loans held for sale, at lower of cost or fair value (b)
3
 
21,469

 
21,469

 
29,374

 
29,374

Total Loans held for sale
 
 
$
260,959

 
$
260,959

 
$
314,006

 
$
314,006

 
 
 
 
 
 
 
 
 
 
Loans held for investment (a)
3
 
$
4,223,776

 
$
4,223,776

 
$
3,565,716

 
$
3,565,716

Advances (including match funded) (c)
3
 
1,478,255

 
1,478,255

 
1,709,846

 
1,709,846

Automotive dealer financing notes (including match funded) (c)
3
 
33,867

 
33,527

 
33,224

 
33,147

Receivables, net (c)
3
 
252,797

 
252,797

 
265,720

 
265,720

Mortgage-backed securities, at fair value (a)
3
 
8,986

 
8,986

 
8,342

 
8,342

U.S. Treasury notes (a)
1
 
2,076

 
2,076

 
2,078

 
2,078

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

 
 

Match funded liabilities (c)
3
 
$
1,108,377

 
$
1,103,202

 
$
1,280,997

 
$
1,275,059

Financing liabilities:
 
 
 
 
 
 
 
 
 
HMBS-related borrowings, at fair value (a)
3
 
$
4,061,626

 
$
4,061,626

 
$
3,433,781

 
$
3,433,781

Financing liability - MSRs pledged, at fair value (a)
3
 
441,007

 
441,007

 
477,707

 
477,707

Other (c)
3
 
92,799

 
73,154

 
101,324

 
81,805

Total Financing liabilities
 
 
$
4,595,432

 
$
4,575,787

 
$
4,012,812

 
$
3,993,293

Other secured borrowings:
 
 
 
 
 
 
 
 
 
Senior secured term loan (c) (d)
2
 
$
316,739

 
$
326,625

 
$
323,514

 
$
327,674

Other (c)
3
 
327,121

 
327,121

 
355,029

 
355,029

Total Other secured borrowings
 
 
$
643,860

 
$
653,746

 
$
678,543

 
$
682,703

 
 
 
 
 
 
 
 
 
 

14



 
 
 
June 30, 2017
 
December 31, 2016
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Senior notes:
 
 
 
 
 
 
 
 
 
Senior unsecured notes (c) (d)
2
 
$
3,100

 
$
2,948

 
$
3,094

 
$
3,048

Senior secured notes (c) (d)
2
 
343,963

 
332,136

 
$
343,695

 
352,255

Total Senior notes
 
 
$
347,063

 
$
335,084

 
$
346,789

 
$
355,303

 
 
 
 
 
 
 
 
 
 
Derivative financial instruments assets (liabilities), at fair value (a):
 
 
 

 
 

 
 

 
 

Interest rate lock commitments
2
 
$
5,352

 
$
5,352

 
$
6,507

 
$
6,507

Forward mortgage-backed securities
1
 
1,752

 
1,752

 
(614
)
 
(614
)
Interest rate caps
3
 
1,937

 
1,937

 
1,836

 
1,836

 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights:
 
 
 
 
 
 
 
 
 
Mortgage servicing rights, at fair value (a)
3
 
$
625,650

 
$
625,650

 
$
679,256

 
$
679,256

Mortgage servicing rights, at amortized cost (c) (e)
3
 
349,535

 
440,311

 
363,722

 
467,911

Total Mortgage servicing rights
 
 
$
975,185

 
$
1,065,961

 
$
1,042,978

 
$
1,147,167

(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)
Balances include the impaired government-insured stratum of amortization method MSRs, which is measured at fair value on a non-recurring basis and reported net of the valuation allowance. Before applying the valuation allowance of $32.8 million , the carrying value of the impaired stratum at June 30, 2017 was $168.3 million . At December 31, 2016 , the carrying value of this stratum was $172.9 million before applying the valuation allowance of $28.2 million .
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, 2017
Beginning balance
$
3,916,387

 
$
(3,739,265
)
 
$
8,658

 
$
(459,187
)
 
$
2,262

 
$
651,987

 
$
380,842

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 

 

 

Issuances
351,392

 
(357,704
)
 

 

 

 
(711
)
 
(7,023
)
Sales

 

 

 

 

 
(2
)
 
(2
)
Transfers to Real estate (Other assets)
(1,423
)
 

 

 

 

 

 
(1,423
)
Settlements (1)
(112,279
)
 
101,132

 

 
16,194

 
(42
)
 

 
5,005

 
237,690

 
(256,572
)
 

 
16,194

 
(42
)
 
(713
)
 
(3,443
)
Total realized and unrealized gains and (losses) (2):
 
 
 
 
 
 
 
 
 

 
 

 
 

Included in earnings
69,699

 
(65,789
)
 
328

 
1,986

 
(283
)
 
(25,624
)
 
(19,683
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending balance
$
4,223,776

 
$
(4,061,626
)
 
$
8,986

 
$
(441,007
)
 
$
1,937

 
$
625,650

 
$
357,716


15



 
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 (1)
(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
)
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, 2017
Beginning balance
$
3,565,716

 
$
(3,433,781
)
 
$
8,342

 
$
(477,707
)
 
$
1,836

 
$
679,256

 
$
343,662

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 

 

 

Issuances
698,473

 
(664,453
)
 

 

 

 
(1,417
)
 
32,603

Sales

 

 

 

 

 
(230
)
 
(230
)
Transfers to Real estate (Other assets)
(1,423
)
 

 

 

 

 

 
(1,423
)
Settlements
(192,569
)
 
176,231

 

 
33,193

 
(42
)
 

 
16,813

 
504,481

 
(488,222
)
 

 
33,193

 
(42
)
 
(1,647
)
 
47,763

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

 
 

 
 

Included in earnings
153,579

 
(139,623
)
 
644

 
3,507

 
143

 
(51,959
)
 
(33,709
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending Balance
$
4,223,776

 
$
(4,061,626
)
 
$
8,986

 
$
(441,007
)
 
$
1,937

 
$
625,650

 
$
357,716


16



 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-backed Securities
 
Financing Liability - MSRs Pledged (1)
 
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
(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
)
 
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

(1)
Settlements for Loans held for investment - reverse mortgages consist chiefly of principal payments received, but also may include non-cash settlements of loans.
(2)
Total gains (losses) attributable to derivative financial instruments still held at June 30, 2017 and June 30, 2016 were $0.2 million and $(2.0) million for the six months ended June 30, 2017 and 2016 , respectively. Total losses attributable to MSRs still held at June 30, 2017 and June 30, 2016 were $51.5 million and $58.5 million for the six months ended June 30, 2017 and 2016 , 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. 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 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
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

17



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 included in the valuations consisted of the following at the dates indicated:
 
June 30,
2017
 
December 31, 2016
Life in years
 
 
 
Range
5.4 to 8.2

 
5.5 to 8.7

Weighted average
5.9

 
6.1

Conditional repayment rate
 
 
 
Range
5.3% to 53.8%

 
5.2% to 53.8%

Weighted average
21.3
%
 
20.9
%
Discount rate
3.2
%
 
3.3
%
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 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
Delinquency rates
Cost of servicing
Interest rate used for computing float earnings
Discount rate
Compensating interest expense
Interest rate used for computing the cost of financing servicing advances
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.

18



The more significant assumptions used in the valuations consisted of the following at the dates indicated:
 
June 30, 2017
 
December 31, 2016
Weighted average prepayment speed
9.0
%
 
8.9
%
Weighted average delinquency rate
10.5
%
 
11.1
%
Advance financing cost
5-year swap

 
5-year swap

Interest rate for computing float earnings
5-year swap

 
5-year swap

Weighted average discount rate
9.1
%
 
8.9
%
Weighted average cost to service (in dollars)
$
107

 
$
108

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 disclosed 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 valuations consisted of the following at the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
Agency
 
Non Agency
 
Agency
 
Non Agency
Weighted average prepayment speed
8.5
%
 
16.4
%
 
8.4
%
 
16.5
%
Weighted average delinquency rate
0.7
%
 
29.2
%
 
1.0
%
 
29.3
%
Advance financing cost
5-year swap

 
1-Month LIBOR (1ML) plus 3.5%

 
5-year swap

 
1-Month LIBOR (1ML) plus 3.5%

Interest rate for computing float earnings
5-year swap

 
1ML

 
5-year swap

 
1ML

Weighted average discount rate
9.0
%
 
12.8
%
 
9.0
%
 
14.9
%
Weighted average cost to service (in dollars)
$
63

 
$
313

 
$
64

 
$
307

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.

19



Automotive Dealer Financing Notes
We estimate the fair value of our automotive dealer financing notes using unobservable inputs within an internally developed cash flow model. Key inputs included projected repayments, interest and fee receipts, deferrals, delinquencies, recoveries and charge-offs of the notes within the portfolio. The projected cash flows are then discounted at a rate commensurate with the risk of the estimated cash flows to derive the fair value of the portfolio. The more significant assumptions used in the valuation consisted of the following at the dates indicated:
 
June 30, 2017
 
December 31, 2016
Weighted average life in months
2.7

 
2.7

Average note rate
8.3
%
 
8.3
%
Discount rate
10.0
%
 
10.0
%
Loan loss rate
21.9
%
 
11.3
%
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.
U.S. Treasury Notes
We base the fair value of U.S. Treasury notes on quoted prices in active markets to which we have access.
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 advance 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.

20



The more significant assumptions used in the valuations consisted of the following at the dates indicated:
 
June 30,
2017
 
December 31, 2016
Life in years
 
 
 
Range
4.4 to 8.2

 
4.5 to 8.7

Weighted average
5.0

 
5.1

Conditional repayment rate
 
 
 
Range
5.3% to 53.8%

 
5.2% to 53.8%

Weighted average
21.3
%
 
20.9
%
Discount rate
2.6
%
 
2.7
%
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 the right to receive servicing fees, excluding ancillary income (other than net income on custodial and escrow accounts), relating to certain of our MSRs (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