Document




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2020
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 Par Value
OCN
New York Stock Exchange (NYSE)
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 every Interactive Data File required to be submitted 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 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
 
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 May 3, 2020: 129,683,377 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 statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.
Forward-looking statements may be identified by a reference to a future period or by the use of forward-looking terminology. Forward-looking statements are typically identified by words such as “expect”, “believe”, “foresee”, “anticipate”, “intend”, “estimate”, “goal”, “strategy”, “plan” “target” and “project” or conditional verbs such as “will”, “may”, “should”, “could” or “would” or the negative of these terms, although not all forward-looking statements contain these words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Our business has been undergoing substantial change and as a result of the global Coronavirus Disease 2019 (COVID-19) pandemic we are in the midst of a period of significant capital markets volatility and rapidly evolving mortgage lending and servicing ecosystem 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 or referenced under Item 1A, Risk Factors and the following:
uncertainty relating to the impacts of the COVID-19 pandemic, including with respect to the response of the U.S. government, state governments, Fannie Mae, Freddie Mac, Ginnie Mae and regulators;
the potential for ongoing COVID-19 related disruption in the financial markets and in commercial activity generally, increased unemployment, and other financial difficulties facing our borrowers;
the proportion of borrowers who enter into forbearance plans, the financial ability of borrowers to resume repayment and their timing for doing so;
impacts on our operations resulting from employee illness, social distancing measures and our shift to greater utilization of remote work arrangements;
the adequacy of our financial resources, including our sources of liquidity and ability to sell, fund and recover servicing advances, forward and reverse whole loans, and HECM and forward loan buyouts and put backs, as well as repay, renew and extend borrowings, borrow additional amounts as and when required, meet our MSR or other asset investment objectives and comply with our debt agreements, including the financial and other covenants contained in them;
increased servicing costs based on rising borrower delinquency levels or other factors;
reduced collection of servicing fees and ancillary income and delayed collection of servicing revenue a result of forbearance plans and moratoria on evictions and foreclosure proceedings;
the size and timing of a potential reverse split of our common stock, and the impact of such a split on our stock price, market capitalization, and the trading market for our common stock;
our ability to regain compliance with the continued listing standards of the New York Stock Exchange;
uncertainty related to our ability to execute on our cost re-engineering initiatives and take the other actions we believe are necessary for us to improve our financial performance;
uncertainty related to our ability to acquire mortgage servicing rights (MSRs) or other assets or businesses at adequate risk-adjusted returns, including our ability to allocate adequate capital for such investments, negotiate and execute purchase documentation and satisfy closing conditions so as to consummate such acquisitions;
uncertainty related to our ability to grow our lending business and increase our lending volumes in a competitive market and uncertain interest rate environment;
uncertainty related to our long-term relationship and remaining agreements with New Residential Investment Corp. (NRZ), our largest servicing client;
our ability to execute an orderly and timely transfer of responsibilities in connection with the termination by NRZ of our legacy PHH Mortgage Corporation (PMC) subservicing agreement;
the reactions of regulators, lenders and other contractual counterparties, rating agencies, stockholders and other stakeholders to the announcement of the termination of the PMC subservicing agreement;
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 regarding incentive and other payments made by governmental entities;

2



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, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Government National Mortgage Association (Ginnie Mae);
our ability to comply with the terms of our settlements with regulatory agencies and the costs of doing so;
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;
our ability to interpret correctly and comply with liquidity, net worth and other financial and other requirements of regulators, Fannie Mae, Freddie Mac and Ginnie Mae, as well as those set forth in our debt and other agreements;
our ability to comply with our servicing agreements, including our ability to comply with our agreements with, and the requirements of, Fannie Mae, Freddie Mac and Ginnie Mae and maintain our seller/servicer and other statuses with 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;
failure of our information technology or other security systems or breach of our privacy protections, including any failure to protect customers’ data;
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 identify and address any issues arising in connection with the transfer of loans to the Black Knight Financial Services, Inc. (Black Knight) LoanSphere MSP® servicing system (Black Knight MSP) without incurring significant cost or disruption to our operations;
the loss of the services of our senior managers and key employees;
uncertainty related to the actions of loan owners and guarantors, including mortgage-backed securities investors, Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs), Government National Mortgage Association (Ginnie Mae) and trustees regarding loan put-backs, penalties and legal actions;
uncertainty related to the GSEs substantially curtailing or ceasing to purchase our conforming loan originations or the Federal Housing Administration (FHA) of the HUD or Department of Veterans Affairs (VA) ceasing to provide insurance;
uncertainty related to our ability to continue to collect certain expedited payment or convenience fees and potential liability for charging such fees;
uncertainty related to our reserves, valuations, provisions and anticipated realization of 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;
the characteristics of our servicing portfolio, including prepayment speeds along with delinquency and advance rates;
our ability to successfully modify delinquent loans, manage foreclosures and sell foreclosed properties;
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 ability to adequately manage and maintain real estate owned (REO) properties and vacant properties collateralizing loans that we service;
uncertainty related to legislation, regulations, regulatory agency actions, regulatory examinations, government programs and policies, industry initiatives and evolving best servicing practices;
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;
our ability to effectively transform our operations in response to changing business needs, including our ability to do so without unanticipated adverse tax consequences;
uncertainty related to the political or economic stability of the United States and of the foreign countries in which we have operations; and
our ability to maintain positive relationships with our large shareholders and obtain their support for management proposals requiring shareholder approval.
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, 2019 and our Quarterly Reports on Form 10-Q and Current Reports on 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 because 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)

 
March 31, 2020
 
December 31, 2019
Assets
 

 
 

Cash and cash equivalents
$
263,555

 
$
428,339

Restricted cash (amounts related to variable interest entities (VIEs) of $13,881 and $20,434)
53,177

 
64,001

Mortgage servicing rights (MSRs), at fair value
1,050,228

 
1,486,395

Advances, net (amounts related to VIEs of $751,020 and $801,990)
1,024,807

 
1,056,523

Loans held for sale ($203,592 and $208,752 carried at fair value)
246,015

 
275,269

Loans held for investment, at fair value (amounts related to VIEs of $22,561 and $23,342)
6,591,382

 
6,292,938

Receivables, net
235,305

 
201,220

Premises and equipment, net
37,430

 
38,274

Other assets ($17,711 and $8,524 carried at fair value) (amounts related to VIEs of $2,290 and $4,078)
484,125

 
563,240

Total assets
$
9,986,024

 
$
10,406,199


 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

Home Equity Conversion Mortgage-Backed Securities (HMBS) related borrowings, at fair value
$
6,323,091

 
$
6,063,435

Advance match funded liabilities (related to VIEs)
625,951

 
679,109

Other financing liabilities, at fair value (amounts related to VIEs of $21,365 and $22,002)
623,049

 
972,595

Other secured borrowings, net (amounts related to VIEs $200,006 and $240,893)
797,615

 
1,025,791

Senior notes, net
311,290

 
311,085

Other liabilities ($2,589 and $100 carried at fair value) (amounts related to VIEs of $88 and $144)
875,171

 
942,173

Total liabilities
9,556,167

 
9,994,188


 
 
 
Commitments and Contingencies (Notes 20 and 21)


 



 
 
 
Stockholders’ Equity
 

 
 

Common stock, $.01 par value; 200,000,000 shares authorized; 129,582,259 and 134,862,232 shares issued and outstanding at March 31, 2020 and December 31, 2019 respectively
1,296

 
1,349

Additional paid-in capital
553,066

 
556,798

Accumulated deficit
(116,993
)
 
(138,542
)
Accumulated other comprehensive loss, net of income taxes
(7,512
)
 
(7,594
)
Total stockholders’ equity
429,857

 
412,011

Total liabilities and stockholders’ equity
$
9,986,024

 
$
10,406,199



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 March 31,
 
2020
 
2019
Revenue
 
 
 
Servicing and subservicing fees
$
211,483

 
$
256,616

Reverse mortgage revenue, net
22,797

 
32,123

Gain on loans held for sale, net
13,331

 
8,982

Other revenue, net
6,231

 
6,167

Total revenue
253,842

 
303,888


 
 
 
MSR valuation adjustments, net
(174,120
)
 
(108,998
)
 
 
 
 
Operating expenses
 
 
 
Compensation and benefits
60,728

 
94,696

Servicing and origination
20,256

 
28,698

Professional services
25,637

 
3,441

Technology and communications
15,193

 
24,435

Occupancy and equipment
11,969

 
16,589

Other expenses
3,431

 
3,248

Total operating expenses
137,214

 
171,107


 
 
 
Other income (expense)
 
 
 
Interest income
5,395

 
4,558

Interest expense
(29,982
)
 
(26,489
)
Pledged MSR liability expense
(6,594
)
 
(43,956
)
Other, net
1,328

 
1,020

Total other expense, net
(29,853
)
 
(64,867
)

 
 
 
Loss before income taxes
(87,345
)
 
(41,084
)
Income tax (benefit) expense
(61,856
)
 
3,410

Net loss
$
(25,489
)
 
$
(44,494
)

 
 
 
Loss per share attributable to Ocwen stockholders
 
 
 
Basic and Diluted
$
(0.19
)
 
$
(0.33
)

 
 
 
Weighted average common shares outstanding
 
 
 
Basic and Diluted
134,858,837

 
133,918,986


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

5


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

 
For the Three Months Ended March 31,
 
2020
 
2019
Net loss
$
(25,489
)
 
$
(44,494
)
 
 
 
 
Other comprehensive income, net of income taxes:
 

 
 

Reclassification adjustment for losses on cash flow hedges included in net income
36

 
34

Change in unfunded pension plan obligation liability
46

 
337

Other

 
6

Comprehensive loss
$
(25,407
)
 
$
(44,117
)




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 THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Dollars in thousands)

 
Common Stock
 
Additional Paid-in
Capital
 
(Accumulated Deficit) Retained Earnings
 
Accumulated Other Comprehensive Loss, Net of Income Taxes
 
Total
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2019
134,862,232

 
$
1,349

 
$
556,798

 
$
(138,542
)
 
$
(7,594
)
 
$
412,011

Net loss

 

 

 
(25,489
)
 

 
(25,489
)
Cumulative effect of adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13

 

 

 
47,038

 

 
47,038

Repurchase of common stock
(5,662,257
)
 
(57
)
 
(4,548
)
 

 

 
(4,605
)
Equity-based compensation and other
382,284

 
4

 
816

 

 

 
820

Other comprehensive income, net of income taxes

 

 

 

 
82

 
82

Balance at March 31, 2020
129,582,259

 
$
1,296

 
$
553,066

 
$
(116,993
)
 
$
(7,512
)
 
$
429,857

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
133,912,425

 
$
1,339

 
$
554,056

 
$
3,567

 
$
(4,257
)
 
$
554,705

Net loss

 

 

 
(44,494
)
 

 
(44,494
)
Cumulative effect of adoption of FASB ASU No. 2016-02

 

 

 
16

 

 
16

Equity-based compensation and other
33,630

 

 
990

 

 

 
990

Other comprehensive income, net of income taxes

 

 

 

 
377

 
377

Balance at March 31, 2019
133,946,055

 
$
1,339

 
$
555,046

 
$
(40,911
)
 
$
(3,880
)
 
$
511,594




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 Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities
 

 
 

Net loss
$
(25,489
)
 
$
(44,494
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

MSR valuation adjustments, net
174,120

 
108,998

Gain on sale of MSRs, net
(286
)
 
(369
)
Provision for bad debts
4,879

 
9,170

Depreciation
3,997

 
8,551

Amortization of debt issuance costs
1,733

 
700

Equity-based compensation expense
746

 
857

Gain on valuation of financing liability
(30,697
)
 
(26,237
)
Net gain on valuation of mortgage loans held for investment and HMBS-related borrowings
(17,910
)
 
(23,487
)
Gain on loans held for sale, net
(13,331
)
 
(11,112
)
Origination and purchase of loans held for sale
(831,474
)
 
(304,182
)
Proceeds from sale and collections of loans held for sale
843,178

 
305,322

Changes in assets and liabilities:
 

 
 

Decrease in advances, net
29,428

 
91,114

Decrease in receivables and other assets, net
13,642

 
23,627

Increase (decrease) in other liabilities
18,033

 
(36,755
)
Other, net
408

 
(1,039
)
Net cash provided by operating activities
170,977

 
100,664


 
 
 
Cash flows from investing activities
 

 
 

Origination of loans held for investment
(294,932
)
 
(209,264
)
Principal payments received on loans held for investment
175,095

 
104,630

Purchase of MSRs
(29,828
)
 
(48,641
)
Proceeds from sale of MSRs

 
868

Proceeds from sale of advances
105

 
1,070

Additions to premises and equipment
(1,072
)
 
(531
)
Proceeds from sale of real estate
2,814

 
1,682

Other, net
491

 
(1,157
)
Net cash used in investing activities
(147,327
)
 
(151,343
)

 
 
 
Cash flows from financing activities
 

 
 

Repayment of advance match funded liabilities, net
(53,158
)
 
(128,900
)
Proceeds from mortgage loan warehouse facilities and other secured borrowings
1,330,667

 
616,891

Repayment of mortgage loan warehouse facilities and other secured borrowings
(1,478,616
)
 
(727,711
)
Proceeds from issuance of additional senior secured term loan (SSTL)

 
119,100

Repayment of SSTL borrowings
(126,066
)
 
(6,358
)
Payment of debt issuance costs related to SSTL
(7,267
)
 
(1,284
)
Proceeds from sale of MSRs accounted for as a financing

 
577

Proceeds from sale of Home Equity Conversion Mortgages (HECM, or reverse mortgages) accounted for as a financing (HMBS-related borrowings)
312,249

 
210,563

Repayment of HMBS-related borrowings
(172,429
)
 
(102,389
)
Repurchase of common stock
(4,605
)
 

Other, net
(33
)
 
(253
)
Net cash used in financing activities
(199,258
)
 
(19,764
)

 
 
 
Net decrease in cash, cash equivalents and restricted cash
(175,608
)
 
(70,443
)
Cash, cash equivalents and restricted cash at beginning of year
492,340

 
397,010

Cash, cash equivalents and restricted cash at end of period
$
316,732

 
$
326,567

 
 
 
 
Supplemental non-cash investing and financing activities:
 

 
 

 
 
 
 
Derecognition of MSRs and financing liabilities:
 
 
 
MSRs
$
(263,344
)
 
$

Financing liability - MSRs pledged (Rights to MSRs)
(263,344
)
 

Recognition of future draw commitments for HECM loans at fair value upon adoption of FASB ASU No. 2016-13
$
47,038

 

Recognition of gross right-of-use asset and lease liability:
 
 
 
Right-of-use asset
2,695

 
66,231

Lease liability
2,695

 
66,247

Transfers of loans held for sale to real estate owned (REO)
768

 
1,791

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited consolidated balance sheets that sums to the total of the same such amounts reported in the unaudited consolidated statements of cash flows:
 
March 31, 2020
 
March 31, 2019
Cash and cash equivalents
$
263,555

 
$
263,188

Restricted cash and equivalents:
 
 
 
Debt service accounts
15,868

 
22,087

Other restricted cash
37,309

 
41,292

Total cash, cash equivalents and restricted cash reported in the statements of cash flows
$
316,732

 
$
326,567



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
MARCH 31, 2020
(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 non-bank mortgage servicer and originator providing solutions through its primary operating subsidiaries, PHH Mortgage Corporation (PMC) and Liberty Home Equity Solutions, Inc. (Liberty). We are headquartered in West Palm Beach, Florida with offices in the United States (U.S.) and the United States Virgin Islands (USVI) and operations in India and the Philippines. Ocwen is a Florida corporation organized in February 1988.
Ocwen directly or indirectly owns all of the outstanding common stock of its operating subsidiaries, including PMC since its acquisition on October 4, 2018, Liberty, Ocwen Financial Solutions Private Limited (OFSPL) and Ocwen USVI Services, LLC (OVIS). On March 13, 2020, as part of Ocwen's legal entity restructuring, Liberty and PMC entered into an amended asset purchase agreement pursuant to which Liberty transferred substantially all of its assets, liabilities, contracts and employees to PMC effective March 15, 2020. We continue to originate and service reverse mortgage loans under the brand name Liberty Reverse Mortgage.
We perform servicing activities related to our own MSR portfolio (primary) and on behalf of other servicers (subservicing), the largest being New Residential Investment Corp. (NRZ), and investors (primary and master servicing), 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 (PLS, or non-Agency). As a subservicer or primary servicer, we may be required to make advances for certain property tax and insurance premium payments, default and property maintenance payments and principal and interest payments on behalf of delinquent borrowers to mortgage loan investors before recovering them from borrowers. Most, but not all, of our subservicing agreements provide for us to be reimbursed for any such advances by the owner of the servicing rights. Advances made by us as primary servicer are generally recovered from the borrower or the mortgage loan investor. 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, 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 mortgages, generally servicing retained. The GSEs or Ginnie Mae guarantee these mortgage securitizations. We originate HECM loans, or reverse mortgages, that are mostly insured by the FHA and are an approved issuer of HMBS that are guaranteed by Ginnie Mae. In addition to our originated MSRs, we acquire MSRs through multiple channels, including flow purchase agreements, the GSE Cash Window program and bulk MSR purchases.
We had a total of approximately 5,400 employees at March 31, 2020 of which approximately 3,400 were located in India and approximately 500 were based in the Philippines. Our operations in India and the Philippines primarily provide internal support services, principally to our loan servicing business and our corporate functions. Of our foreign-based employees, nearly 80% were engaged in supporting our loan servicing operations as of March 31, 2020.
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, and these challenges and uncertainties have been amplified by the emergence of the Coronavirus Disease 2019 (COVID-19) pandemic. Losses have significantly eroded stockholders’ equity and weakened our financial condition. Our near-term priority is to return to sustainable profitability in the shortest timeframe possible within an appropriate risk and compliance environment. If we execute on our key business initiatives, we believe we will drive stronger financial performance. The ability of management to appropriately address these challenges and uncertainties in a timely manner is critical to our ability to operate our business successfully.
First, we must expand our lending business and acquisitions of MSRs that are prudent and well-executed with appropriate financial return targets to replenish and grow our servicing portfolio, and within the constraints of our liquidity. Our efforts to grow and diversify our sources of servicing volumes also mitigate our client concentration risk. We have exposure to client concentration and retention risk as a result of our relationship with NRZ, which accounted for 55% of the UPB in our servicing

9



portfolio as of March 31, 2020. Currently, subject to proper notice (generally 180 days’ notice), the payment of termination and loan deboarding fees and certain other provisions, NRZ has rights to terminate these agreements for convenience. Because of the large percentage of our servicing business that is represented by agreements with NRZ, if NRZ exercised all or a significant portion of these termination rights, we might need to right-size or restructure certain aspects of our servicing business as well as the related corporate support functions. On February 20, 2020, we received a notice of termination from NRZ with respect to the subservicing agreement between NRZ and PMC, which accounted for 19% of our servicing portfolio UPB at March 31, 2020.
Second, we must re-engineer our cost structure to go beyond eliminating redundant costs through the integration process and establish continuous cost improvement as a core strength. Our continuous cost improvement efforts are focused on leveraging our single servicing platform and technology, optimizing strategic sourcing and off-shore utilization, lean process design, automation and other technology-enabled productivity enhancements. Our initiatives are targeted at delivering superior accuracy, cost, speed and customer satisfaction. We believe these steps are necessary to simplify our operations and drive stronger financial performance.
Third, we must manage our balance sheet to ensure adequate liquidity, finance our ongoing business needs and provide a solid platform for executing on our other key business initiatives. Regarding the current maturities of our borrowings, as of March 31, 2020 we had approximately $789.0 million of debt outstanding under facilities coming due in the next 12 months. Portions of our match funded advance 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 have assessed the potential impact of the COVID-19 pandemic on our financial projections and projected liquidity. We have an agreement in place to upsize and extend through June 2021 our OMART and OFAF advance financing facilities. The OMART VFN capacity will increase from $200.0 million to $500.0 million to accommodate forecasted advancing requirements and the amortization of $185.0 million in term notes in August 2020. The OFAF facility will increase to a total capacity of $70.0 million. In addition, we have executed an agreement to extend our MSR repurchase agreement and warehouse facilities with Barclays. We expect to renew, replace or extend our 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. If a lender were to allege an event of default and we are unable to avoid, remedy or secure a waiver of such alleged default, we could be subject to adverse actions by our lenders that could have a material adverse impact on us. In addition, PMC 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, the Department of Housing and Urban Development (HUD), FHA, VA and Ginnie Mae. To the extent these requirements are not met or waived, the applicable agency may, at its option, utilize a variety of remedies including requirements to provide certain information or take actions at the direction of the applicable agency, 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. See Note 11 – Borrowings, Note 19 – Regulatory Requirements and Note 21 – Contingencies for further information.
Finally, we must fulfill our regulatory commitments and resolve our remaining legal and regulatory matters on satisfactory terms. See Note 19 – Regulatory Requirements and Note 21 – Contingencies for further information.
In March 2020, the World Health Organization (WHO) categorized COVID-19 as a pandemic and the COVID-19 outbreak was declared a national emergency in the U.S. The COVID-19 pandemic is adversely affecting economic conditions, including an increase in unemployment, and is creating significant uncertainty about the duration and magnitude of the downturn in the economy. We expect delinquencies and forbearance loans to rise in the near term. Delinquent loans and forbearance loans reduce our servicing fee revenue and are more costly to service. In addition, as servicer, we are required to advance unpaid principal and interest to investors for delinquent and forbearance loans and to make certain advances for unpaid taxes and insurance and other costs to the extent that we determine that such amounts are recoverable. An increase in loans in forbearance or an increase in delinquencies would increase our servicing advances and may increase the related interest expense. Such an increase could also adversely affect our liquidity and our ability to fund servicing advances or finance our business. We are currently negotiating extensions and increases to advance facility commitments with our lenders. There is no assurance that our lenders will agree to extend, renew or increase our financing facilities. We have experienced in the first quarter of 2020, and may continue to experience losses in the valuation of our MSRs, loans or other instruments. Further, our operations may be

10



impacted by reduced employee availability due to illness, voluntary or government mandated social distancing and travel restrictions, as well as our shift to greater utilization of remote work arrangements. These factors may also reduce the capacity of vendors, government agencies, and other third parties on whom we are dependent to conduct our operations. We cannot estimate the duration or the impact of the outbreak on our company due to the recent and rapid developments and varied regulatory and agency responses at this time. Accordingly, the business disruption triggered by COVID-19 could materially and adversely affect our business, financial condition, liquidity or results of operations.
Our ability to execute on our key business initiatives is not certain and is dependent on the successful execution of several complex actions, including our ability to grow our origination business and acquire MSRs with appropriate financial return targets, our ability to acquire, maintain and grow profitable client relationships, our ability to maintain relationships with the GSEs, Ginnie Mae, FHFA, lenders and regulators, our ability to implement further organizational redesign and cost reduction, as well as the absence of significant unforeseen costs, including regulatory or legal costs, that could negatively impact our return to sustainable profitability, and our ability to extend, renew or replace our debt agreements in the ordinary course of business. Our ability to execute on our key initiatives has been hindered by the recent COVID-19 environment and the impact on our organization depends on the duration of the lockdown and the magnitude of the economic downturn. There can be no assurances that the desired strategic and financial benefits of these actions will be realized.
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 months ended March 31, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2020. 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, 2019.
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, income taxes, the provision for losses that may arise from litigation proceedings, 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.
We considered the impact of COVID-19 on the assumptions and estimates used in the unaudited consolidated financial statements for the three months ended March 31, 2020, as described in the relevant notes.
Reclassifications
Certain amounts in the unaudited consolidated balance sheet at December 31, 2019 and the unaudited consolidated statement of operations and consolidated statement of cash flows for the three months ended March 31, 2019 have been reclassified to conform to the current period presentation. The reclassifications had no impact on total assets or total liabilities in our unaudited consolidated balance sheets, no impact on net income (loss) or total revenue in our unaudited consolidated statements of operations and no impact on operating, investing and financing cash flows in our unaudited consolidated statements of cash flows.

11



We now present Reverse mortgage revenue, net as a separate revenue line item on the face of the unaudited consolidated statements of operations to provide a further breakdown of Other revenue, net and provide greater transparency on the performance associated with our portfolio of HECM loans, net of the HMBS-related borrowings that are both measured at fair value, as follows:
Reclassification within the Statement of Operations - Three Months Ended March 31, 2019
 
 
Revenue
 
 
From
Gain on loans held for sale, net
$
8,613

 
From
Other revenue, net
24,263

 
From
Servicing and subservicing fees
(753
)
 
To
Reverse mortgage revenue, net (New line item)
32,123

 
Total revenue

In addition to the above reclassifications, we have made the following presentation changes:
In the unaudited consolidated statements of operations, we now separately present MSR valuation adjustments, net from Total expenses, renamed “Operating expenses”. The purpose of this reclassification is to separately present fair value changes from operating expenses and provide additional insights on the nature of our performance.
Within Other income (expense), net on the unaudited consolidated statements of operations, we now present the expense related to the pledged MSR liability recorded at fair value separately from Interest expense. The purpose of this reclassification is to improve transparency between the interest expense associated with interest-bearing liabilities recorded on an accrual basis and expenses that are attributable to the pledged MSR liability recorded at fair value. The pledged MSR liability is the obligation to deliver to NRZ all contractual cash flows associated with the underlying MSR that did not meet the requirements for sale accounting treatment. The Pledged MSR liability expense reflects net servicing fee remittance and fair value changes.
Within the Total assets section of our consolidated balance sheet at December 31, 2019, we reclassified Match funded advances to Advances to present all servicing-related advances as a single line item.
Within the Cash flows from operating activities section, we reclassified Amortization of debt issuance costs of $0.7 million from Other, net to a new separate line item.
Within the Cash flows from investing activities section, we reclassified Proceeds from sale of real estate of $1.7 million from Other, net to a new separate line.
Recently Adopted Accounting Standards
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13 and ASU 2019-04)
This ASU requires the measurement and recording of expected lifetime credit losses on loans and other financial instruments measured at amortized cost and replaces the existing incurred loss model for credit losses. The new guidance requires an organization to measure all current expected credit losses (CECL) for financial assets held and certain off-balance sheet credit exposures at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This standard requires enhanced disclosures related to the 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.
We adopted this standard on January 1, 2020 by applying the guidance at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings. We used the modified retrospective method for all financial assets in scope of the standard. Our statements of operations for reporting periods beginning after January 1, 2020 are presented under the new guidance, while prior period amounts continue to be reported in accordance with previously applicable GAAP. As permitted by this standard, we made an irrevocable fair value election for certain financial instruments within the scope of the standard. We elected the fair value option for future draw commitments for HECM loans purchased or originated before January 1, 2019. For the HECM loan future draw commitments, we recorded a $47.0 million cumulative-effect transition gain adjustment (before income taxes) to retained earnings as of January 1, 2020 to recognize the fair value as of that date. We did not record any significant net tax effect related to this adjustment as the increase in the deferred tax liability was offset by a corresponding decrease to the valuation allowance. The transition adjustment related to financial instruments for which we are not electing the fair value option did not result in any significant adjustment to the opening balance of retained earnings. Our measurement of lifetime expected credit losses is based on relevant qualitative and quantitative information about past events, including historical loss experience, current conditions, and reasonable and supportable forecasts that affect collectability.

12



Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
This ASU modifies the disclosure requirements for fair value measurements in FASB ASC Topic 820, Fair Value Measurement. The main provisions in this ASU include removal of the following disclosure requirements: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels and 3) the valuation processes for Level 3 fair value measurements. This standard adds disclosure requirements to report the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and for certain unobservable inputs an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
Our adoption of this standard on January 1, 2020 did not have a material impact on our unaudited consolidated financial statements.
Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15)
This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments in this ASU require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments in this ASU require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of operations as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element.
Upon adoption of this standard on January 1, 2020, we elected to apply the amendments in this ASU prospectively to all implementation costs incurred subsequent to that date. Our adoption of this standard did not have a material impact on our unaudited consolidated financial statements.
Accounting Standards Issued but Not Yet Adopted
Income Taxes: Simplifying the Accounting for Income Taxes (ASU 2019-12)
On December 18, 2019, the FASB issued this ASU to ASC Topic 740, Income Taxes, as part as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Amendments include the removal of certain exceptions to the general principles of ASC 740 in such areas as intraperiod tax allocation, year to date losses in interim periods and deferred tax liabilities related to outside basis differences. Amendments also include simplification in other areas such as interim recognition of enactment of tax laws or rate changes and accounting for a franchise tax (or similar tax) that is partially based on income.
This standard will be effective for us on January 1, 2021. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. If an entity chooses to early adopt, it must adopt all changes as a result of the ASU. We are currently evaluating the effect of this standard.
Note 2 - Cost Re-Engineering Plan
In February 2019, we announced our intention to execute cost re-engineering opportunities in order to drive stronger financial performance and, in the longer term, simplify our operations. Our cost re-engineering plan extended beyond eliminating redundant costs through the integration process and addressed organizational, process and control redesign and automation, human capital planning, off-shore utilization, strategic sourcing and facilities rationalization. Costs for this plan included severance, retention and other incentive awards, facilities-related costs and other costs to execute the reorganization. While we continue to pursue additional cost re-engineering initiatives, this $65.0 million cost re-engineering plan announced in February 2019 was completed by December 31, 2019. Our remaining liability at March 31, 2020 is $5.9 million and is included in Other accrued expenses, a component of Other liabilities.

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The following table provides a summary of plan costs incurred during the three months ended March 31, 2019:
 
Employee-related
 
Other
 
Total
Total costs incurred
$
19,163

 
$
2,973

 
$
22,136

The above expenses were all incurred within the Corporate Items and Other segment. Employee-related costs are reported in Compensation and benefits expense in the unaudited consolidated statements of operations. Other costs are primarily reported in Professional services expense and Other expenses.
Note 3 – 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 using special purpose entities (SPEs) or VIEs into three groups: (1) securitizations of residential mortgage loans, (2) financings of advances and (3) MSR financings. Financing transactions that do not use SPEs or VIEs are disclosed in Note 11 – Borrowings.
We have determined that the SPEs created in connection with our match funded advance financing facilities are VIEs for which we are the primary beneficiary.
From time to time, we may acquire beneficial interests issued in connection with mortgage-backed securitizations where we may also be the master and/or primary servicer. These beneficial interests consist of subordinate and residual interests acquired from third-parties in market transactions. We consolidate the VIE when we conclude we are the primary beneficiary.
Securitizations of Residential Mortgage Loans
Transfers of Forward Loans
We sell or securitize forward loans that we originate or purchase from third parties, generally in the form of mortgage-backed securities guaranteed by the GSEs or Ginnie Mae. Securitization typically occurs within 30 days of loan closing or purchase. 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.
The following table presents a summary of cash flows received from and paid to securitization trusts related to transfers of loans accounted for as sales that were outstanding:
 
Three Months Ended March 31,
2020
 
2019
Proceeds received from securitizations
$
820,001

 
$
242,960

Servicing fees collected (1)
12,252

 
15,918

Purchases of previously transferred assets, net of claims reimbursed
(2,607
)
 
(904
)
 
$
829,646

 
$
257,974

(1)
We 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.
In connection with these transfers, we retained MSRs of $6.6 million and $0.8 million during the three months ended March 31, 2020 and 2019, respectively. We securitize forward and reverse residential mortgage loans involving the GSEs and loans insured by the FHA or VA through Ginnie Mae.
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.

14



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 an estimate of our maximum exposure to loss including the UPB of the transferred loans:
 
March 31, 2020
 
December 31, 2019
Carrying value of assets
 
 
 
MSRs, at fair value
$
83,582

 
$
109,581

Advances
127,114

 
141,829

UPB of loans transferred
15,831,062

 
14,490,984

Maximum exposure to loss
$
16,041,758

 
$
14,742,394

At March 31, 2020 and December 31, 2019, 7.2% and 7.7%, respectively, of the transferred residential loans that we service were 60 days or more past due.
Transfers of Reverse Mortgages
We pool HECM 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, at fair value, on our unaudited consolidated balance sheets. 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. The changes in fair value of the HECM loans and HMBS-related borrowings are included in Reverse mortgage revenue, net in our unaudited consolidated statements of operations.
Financings of Advances
Match funded advances, i.e., advances that are pledged as collateral to our advance facilities, 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 SPEs. These SPEs issue debt supported by collections on the transferred advances, and we refer to this debt as Advance match funded liabilities.
We make transfers to these SPEs in accordance with the terms of our advance financing facility agreements. Debt service accounts require us to remit collections on pledged advances to the trustee within two days of receipt. Collected funds that are not applied to reduce the related Advance match funded debt until the payment dates specified in the indenture are classified as debt service accounts within Restricted cash in our unaudited consolidated balance sheets. The balances also include amounts that have been set aside from the proceeds of our match funded advance facilities to provide for possible shortfalls in the funds available to pay certain expenses and interest, as well as amounts set aside as required by our warehouse facilities as security for our obligations under the related agreements. The funds are held in interest earning accounts and those amounts related to match funded advance facilities are held in the name of the SPE created in connection with the facility.
We classify the transferred advances on our unaudited consolidated balance sheets as a component of Advances, net and the related liabilities as Advance 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 Advances, Restricted cash (Debt service accounts), Advance match funded liabilities and amounts due to affiliates. Amounts due to affiliates are eliminated in consolidation in our unaudited consolidated balance sheets.
MSR Financings
On July 1, 2019, we entered into a $300.0 million financing facility with a third-party secured by certain Fannie Mae and Freddie Mac MSRs (Agency MSRs). Two trusts were established in connection with this facility. On July 1, 2019 we entered into an MSR Excess Spread Participation Agreement under which we created a 100% participation interest in the portfolio excess servicing fees, pursuant to which the holder of the participation interest is entitled to receive certain funds collected on the related portfolio of mortgage loans (other than ancillary income and advance reimbursement amounts) with respect to such Portfolio Excess Servicing Fees. This participation interest has been contributed to the trusts.
In connection with this facility, we entered into repurchase agreements with a third-party pursuant to which we sold trust certificates of the trusts representing certain indirect economic interests in the Agency MSRs and agreed to repurchase such certificates at a future date at the repurchase price set forth in the repurchase agreements. Our obligations under the facility are

15



secured by a lien on the related Agency MSRs. In addition, Ocwen guarantees the obligations under the facility. This facility will terminate in June 2020 unless the parties mutually agree to renew or extend.
We determined that the trusts are VIEs for which we are the primary beneficiary. Therefore, we have included the trusts in our consolidated financial statements effective July 1, 2019. We have the power to direct the activities of the VIEs that most significantly impact the VIE’s economic performance given that we are the servicer of the Agency MSRs that result in cash flows to the trusts. In addition, we have designed the trusts at inception to facilitate the third-party funding facility under which we have the obligation to absorb the losses of the VIEs that could be potentially significant to the VIEs.
The table below presents the carrying value and classification of the assets and liabilities of the Agency MSR financing facility:
 
March 31, 2020
 
December 31, 2019
MSRs pledged (MSRs, at fair value)
$
173,313

 
$
245,533

Unamortized debt issuance costs (Other assets)
473

 
946

Debt service account (Restricted cash)
102

 
100

Outstanding borrowings (Other secured borrowings, net)
114,290

 
147,706

On November 26, 2019, we issued $100.0 million Ocwen Excess Spread-Collateralized Notes, Series 2019-PLS1 Class A (PLS Notes) secured by certain of PMC’s private label MSRs (PLS MSRs). PMC PLS ESR Issuer LLC (PLS Issuer) was established in this connection as a wholly owned subsidiary of PMC. PMC entered into an MSR Excess Spread Participation Agreement with PLS Issuer. PMC created a participation interest in the excess servicing fees, related float and REO fees pursuant to which the holder of the participation interest will be entitled to receive such Excess Servicing Fees, related float and REO fees. PMC holds the MSRs and services the loans which create the related excess cash flows pledged under the MSR Excess Spread Participation Agreement. PLS Issuer’s obligations under the facility are secured by a lien on the related PLS MSRs. PMC sold a participation certificate representing certain economic interests in the PLS MSRs and in order to secure its obligations under the participation certificate, it granted a security interest to PLS Issuer in the PLS MSRs. The PLS Issuer assigned the security interest in the PLS MSRs to the collateral agent for the noteholders. Ocwen guarantees the obligations of PLS Issuer under the facility.
We determined that PLS Issuer is a VIE for which we are the primary beneficiary. Therefore, we have included PLS Issuer in our consolidated financial statements effective November 26, 2019. We have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance given that we are the servicer of the MSRs that result in cash flows to PLS Issuer. In addition, PMC has designed PLS Issuer at inception to facilitate the funding for general corporate purposes. Separately, in return for the participation interests, PMC received the proceeds from issuance of the PLS Notes. PMC is the sole member of PLS Issuer, thus PMC has the obligation to absorb the losses of the VIE that could be potentially significant to the VIE.
The table below presents the carrying value and classification of the assets and liabilities of the PLS Notes facility:
 
March 31, 2020
 
December 31, 2019
MSRs pledged (MSRs, at fair value)
$
141,610

 
$
146,215

Debt service account (Restricted cash)
2,941

 
3,002

Outstanding borrowings (Other secured borrowings, net)
86,911

 
94,395

Unamortized debt issuance costs (Other secured borrowings, net)
(1,196
)
 
(1,207
)
Mortgage-Backed Securitizations
The table below presents the carrying value and classification of the assets and liabilities of two consolidated mortgage-backed securitization trusts included in our unaudited consolidated balance sheets as a result of residual securities we acquired which were issued by the trusts.
 
March 31, 2020
 
December 31, 2019
Loans held for investment, at fair value - Restricted for securitization investors
$
22,561

 
$
23,342

Financing liability - Owed to securitization investors, at fair value
21,365

 
22,002


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We have concluded we are the primary beneficiary of certain residential mortgage-backed securitizations as a result of beneficial interests consisting of residual securities, which expose us to the expected losses and residual returns of the trust, and our role as master servicer, where we have the ability to direct the activities that most significantly impact the performance of the trust.
Upon consolidation of the securitization trusts, we elected to apply the measurement alternative to ASC Topic 820, Fair Value Measurement for collateralized financing entities. The measurement alternative requires a reporting entity to use the more observable of the fair value of the financial assets or the financial liabilities to measure both the financial assets and the financial liabilities of the entity. We determined that the fair value of the loans held by the trusts is more observable than the fair value of the debt certificates issued by the trusts. Through the application of the measurement alternative, the fair value of the financial liabilities of the trusts are measured as the difference between the fair value of the financial assets and the fair value of our investment in the residual securities of the trusts.
Holders of the debt issued by the two securitization trust entities have recourse only to the assets of the SPE for satisfaction of the debt and have no recourse against the assets of Ocwen. Similarly, the general creditors of Ocwen have no claim on the assets of the trusts. Our exposure to loss as a result of our continuing involvement is limited to the carrying values of our investments in the residual securities of the trusts, our MSRs and related advances. 
Note 4 – 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 measured, at fair value are as follows:
 
 
 
March 31, 2020
 
December 31, 2019
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial assets
 
 
 

 
 

 
 

 
 

Loans held for sale
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value (a) (f)
3, 2
 
$
203,592

 
$
203,592

 
$
208,752

 
$
208,752

Loans held for sale, at lower of cost or fair value (b)
3
 
42,423

 
42,423

 
66,517

 
66,517

Total Loans held for sale
 
 
$
246,015

 
$
246,015

 
$
275,269

 
$
275,269

 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
 
 
 
 
 
 
 
 
Loans held for investment - Reverse mortgages (a)
3
 
$
6,568,821

 
$
6,568,821

 
$
6,269,596

 
$
6,269,596

Loans held for investment - Restricted for securitization investors (a)
3
 
22,561

 
22,561

 
23,342

 
23,342

Total loans held for investment
 
 
$
6,591,382

 
$
6,591,382

 
$
6,292,938

 
$
6,292,938

 
 
 
 
 
 
 
 
 
 

17



 
 
 
March 31, 2020
 
December 31, 2019
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Advances, net (c)
3
 
$
1,024,807

 
$
1,024,807

 
$
1,056,523

 
$
1,056,523

Receivables, net (c)
3
 
235,305

 
235,305

 
201,220

 
201,220

Mortgage-backed securities (a)
3
 
1,670

 
1,670

 
2,075

 
2,075

Corporate bonds (a)
2
 
211

 
211

 
441

 
441

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

 
 

Advance match funded liabilities (c)
3
 
$
625,951

 
$
631,247

 
$
679,109

 
$
679,507

Financing liabilities:
 
 
 
 
 
 
 
 
 
HMBS-related borrowings (a)
3
 
$
6,323,091

 
$
6,323,091

 
$
6,063,435

 
$
6,063,435

Financing liability - MSRs pledged (Rights to MSRs) (a) (e)
3
 
601,684

 
601,684

 
950,593

 
950,593

Financing liability - Owed to securitization investors (a)
3
 
21,365

 
21,365

 
22,002

 
22,002

Total Financing liabilities
 
 
$
6,946,140

 
$
6,946,140

 
$
7,036,030

 
$
7,036,030

Other secured borrowings:
 
 
 
 
 
 
 
 
 
Senior secured term loan (c) (d)
2
 
$
191,810

 
$
177,546

 
$
322,758

 
$
324,643

Other (c)
3
 
605,805

 
580,569

 
703,033

 
686,146

Total Other secured borrowings
 
 
$
797,615

 
$
758,115

 
$
1,025,791

 
$
1,010,789

 
 
 
 
 
 
 
 
 
 
Senior notes:
 
 
 
 
 
 
 
 
 
Senior unsecured notes (c) (d)
2
 
$
21,125

 
$
14,902

 
$
21,046

 
$
13,821

Senior secured notes (c) (d)
2
 
290,165

 
238,379

 
290,039

 
256,201

Total Senior notes
 
 
$
311,290

 
$
253,281

 
$
311,085

 
$
270,022

 
 
 
 
 
 
 
 
 
 
Derivative financial instrument assets (liabilities)
 
 
 

 
 

 
 

 
 

Interest rate lock commitments (a) (f)
3, 2
 
$
10,478

 
$
10,478

 
$
4,878

 
$
4,878

Forward trades - Loans held for sale (a)
1
 
(235
)
 
(235
)
 
(92
)
 
(92
)
TBA / Forward mortgage-backed securities (MBS) trades and futures - MSR hedging (a)
1
 
2,999

 
2,999

 
1,121

 
1,121

 
 
 
 
 
 
 
 
 
 
MSRs (a) (e)
3
 
$
1,050,228

 
$
1,050,228

 
$
1,486,395

 
$
1,486,395

(a)
Measured at fair value on a recurring basis.
(b)
Measured at fair value on a non-recurring basis.
(c)
Disclosed, but not measured, at fair value. 
(d)
The carrying values are net of unamortized debt issuance costs and discount. See Note 11 – Borrowings for additional information.
(e)
A rollforward of the beginning and ending balances of MSRs and Financing liability - MSRs pledged that we measure at fair value on a recurring basis is provided in Note 7 – Mortgage Servicing and Note 8 — Rights to MSRs, respectively.
(f)
Level 3 at March 31, 2020 and Level 2 at December 31, 2019.



18



The following tables present a rollforward of the beginning and ending balances 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
 
Loans Held for Inv. - Restricted for Securitiza-
tion Investors
 
Financing Liability - Owed to Securit -
ization Investors
 
Loans Held for Sale - Fair Value
 
Mortgage-Backed Securities
 
IRLCs
Three months ended March 31, 2020
Beginning balance
$
6,269,596

 
$
(6,063,434
)
 
$
23,342

 
$
(22,002
)
 
$

 
$
2,075

 
$

Cumulative effect of fair value election
47,038

 

 

 

 

 

 
 
Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 
 
 
 
 

Purchases

 

 

 

 

 

 

Issuances
294,932

 
(312,249
)
 

 

 

 

 

Sales

 

 

 

 

 

 

Settlements
(175,095
)
 
172,429

 
(781
)
 
637

 

 

 

Transfers (to) from:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value
(578
)
 

 

 

 

 

 

Other assets
(265
)
 

 

 

 

 

 

Receivables, net
(129
)
 

 

 

 

 

 

 
165,903

 
(139,820
)
 
(781
)
 
637

 

 

 

Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
133,322

 
(119,837
)
 

 

 

 
(405
)
 

Calls and other

 

 

 

 

 

 

 
133,322

 
(119,837
)
 

 

 

 
(405
)
 

Transfers in and / or out of Level 3

 

 

 

 
25,582

 

 
10,478

Ending balance
$
6,568,821

 
$
(6,323,091
)
 
$
22,561

 
$
(21,365
)
 
$
25,582

 
$
1,670

 
$
10,478


19



 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Loans Held for Inv. - Restricted for Securitiza-
tion Investors
 
Financing Liability - Owed to Securit -
ization Investors
 
Mortgage-Backed Securities
 
Derivatives - Interest Rate Caps
Three months ended March 31, 2019
Beginning balance
$
5,472,199

 
$
(5,380,448
)
 
$
26,520

 
$
(24,815
)
 
$
1,502

 
$
678

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 
 
 
Purchases

 

 

 

 

 

Issuances
209,264

 
(210,563
)
 

 

 

 

Sales

 

 

 

 

 

Settlements
(104,630
)
 
102,389

 
(283
)
 
253

 

 

Transfers (to) from:
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value
(396
)
 

 

 

 

 

Other assets
(119
)
 

 

 

 

 

Receivables, net
(68
)
 

 

 

 

 

 
104,051

 
(108,174
)
 
(283
)
 
253

 

 

Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
Included in earnings:
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
150,667

 
(126,066
)
 

 

 
284

 
(402
)
Calls and other

 

 

 

 

 

 
150,667

 
(126,066
)
 

 

 
284

 
(402
)
Transfers in and / or out of Level 3

 

 

 

 

 

Ending balance
$
5,726,917

 
$
(5,614,688
)
 
$
26,237

 
$
(24,562
)
 
$
1,786

 
$
276

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
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 generally 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 purchase certain loans from Ginnie Mae guaranteed securitizations in connection with loan modifications, strategic early buyouts (EBO) and loan resolution activity as part of our contractual obligations as the servicer of the loans. On January 1, 2020, we elected to classify any repurchased loans after January 1, 2020 as loans held for sale at fair value. Modified and EBO loans purchased before January 1, 2020 are classified as loans held for sale at the lower of cost or fair value. We expect to redeliver (sell) the loans into new Ginnie Mae guaranteed securitizations (in the case of modified loans) or sell the loans to a private investor (in the case of EBO loans). The fair value of these loans was estimated using published forward Ginnie Mae prices or existing sale contracts at December 31, 2019. At March 31, 2020, as a result of the volatility of capital markets due to the COVID-19 pandemic, loans with a fair value of $25.6 million required the use of significant unobservable inputs, including the assumptions of the embedded MSR, margin and yield, and was classified as Level 3.

20



Loans repurchased in connection with loan resolution activities are classified as 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.
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, unless facts and circumstances exist that could impact deal economics, at which point we use judgment to determine appropriate adjustments to recorded fair value, if any. We determine the fair value of loans for which we have no agreement to sell on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows.
Loans Held for Investment
Loans Held for Investment - Reverse Mortgages
We measure these loans at fair value based 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, including all future draw commitments for HECM loans. On January 1, 2019, we made an irrevocable fair value election on all future draw commitments for HECM loans that were purchased or originated on or after January 1, 2019. In connection with our adoption of ASU 2016-13 on January 1, 2020, we made an irrevocable fair value election on all future draw commitments for HECM loans that were purchased or originated before January 1, 2019. Significant assumptions include expected future draws and 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.
Significant valuation assumptions
March 31,
2020
 
December 31,
2019
Life in years
 
 
 
Range
1.2 to 8.4

 
2.4 to 7.8

Weighted average
6.5

 
6.0

Conditional repayment rate
 
 
 
Range
8.0% to 24.3%

 
7.8% to 28.3%

Weighted average
13.2
%
 
14.6
%
Discount rate
2.0
%
 
2.8
%
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, excluding future draw commitments, are largely offset by the effects of changes in the assumptions used to value the HMBS-related borrowings that are associated with these loans.
Loans Held for Investment – Restricted for securitization investors
We have elected to measure loans held by consolidated mortgage-backed securitization trusts at fair value. The loans are secured by first liens on single family residential properties. Fair value is based on proprietary cash flow modeling processes from a third-party broker/dealer and a third-party valuation expert. Significant assumptions used in the valuation include projected monthly payments, projected prepayments and defaults, property liquidation values and discount rates.
MSRs
We determine the fair value of MSRs primarily using discounted cash flow methodologies. 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.
We engage third-party valuation experts who 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 and prepayment 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, incorporating available industry survey results and client feedback, and including risk premiums and liquidity adjustments. While the models and related assumptions used by the valuation experts are proprietary to them, we understand the methodologies 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 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.

21



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
Curtailment on advances
 
 
MSRs are carried at fair value and classified within Level 3 of the valuation hierarchy. The fair value is determined using 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 sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is recorded 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 are contemplated along with other market-based transactions in their model validation.
A change in the valuation inputs or assumptions might result in a significantly higher or lower fair value measurement. Changes in market interest rates predominantly impact the fair value for Agency MSRs via prepayment speeds by altering the borrower refinance incentive and the non-Agency MSRs due to the impact on advance costs. Other key assumptions used in the valuation of these MSRs include delinquency rates and discount rates.
Significant valuation assumptions
March 31, 2020
 
December 31, 2019
Agency
 
Non-Agency
 
Agency
 
Non-Agency
Weighted average prepayment speed
17.5
%
 
12.2
%
 
11.7
%
 
12.2
%
Weighted average delinquency rate
4.8
%
 
25.7
%
 
3.2
%
 
27.3
%
Advance financing cost
5-year swap

 
5-yr swap plus 2.00%

 
5-year swap

 
5-yr swap plus 2.00%

Interest rate for computing float earnings
5-year swap

 
5-yr swap minus 0.50%

 
5-year swap

 
5-yr swap minus 0.50%

Weighted average discount rate
9.4
%
 
11.3
%
 
9.3
%
 
11.3
%
Weighted average cost to service (in dollars)
$
93

 
$
278

 
$
85

 
$
277

As a result of the market volatility and uncertainties due to the COVID-19 outbreak, management exercised significant judgment in determining and updating the key assumptions that market participants would use when pricing the MSR based on the known or knowable information as of March 31, 2020.
Because the mortgages underlying these MSRs permit the borrowers to prepay the loans, the value of the MSRs generally tends to diminish in periods of declining interest rates, an improving housing market or expanded product availability (as prepayments increase) and increase in periods of rising interest rates, a deteriorating housing market or reduced product availability (as prepayments decrease). The following table summarizes the estimated change in the value of the MSRs as of March 31, 2020 given hypothetical shifts in lifetime prepayments and yield assumptions:
Adverse change in fair value
10%
 
20%
Weighted average prepayment speeds
$
(52,979
)
 
$
(100,320
)
Weighted average discount rate
(14,339
)
 
(27,843
)
The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at March 31, 2020 are increased prepayment speeds and an increase in the yield assumption.
Advances
We value advances at their net realizable value, which generally approximates fair value. Servicing advances have no stated maturity and do not bear interest. Principal and interest advances are generally realized within a relatively short period of time. The timing of recovery of taxes, insurance and other corporate advances depends on the underlying loan attributes, performance, and in many cases, foreclosure or liquidation timeline. The fair value adjustment to servicing advances associated with the estimated time to recover such advances is separately measured and reported as a component of the fair value of the

22



associated MSR, consistent with actual market transactions. Refer to MSRs above for a description of the valuation methodology and assumptions related to the cost of financing servicing advances and discount rate, among other factors.
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 using a process based upon the use of an independent third-party valuation expert. Where possible, we consider observable trading activity in the valuation of our securities. 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. We classify subordinate and residual securities as trading securities and account for them at fair value on a recurring basis. 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.
Advance Match Funded Liabilities
For advance 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 advance 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 assume the notes are refinanced at the end of their revolving periods, consistent with how we manage our advance facilities.
Financing Liabilities
HMBS-Related Borrowings
We have elected to measure these borrowings at fair value. These borrowings are not actively traded, and therefore, quoted market prices are not available. We determine fair value by discounting the projected recovery of principal, interest and advances 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. 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.
Significant valuation assumptions
March 31,
2020
 
December 31,
2019
Life in years
 
 
 
Range
1.2 to 8.4

 
2.4 to 7.8

Weighted average
6.5

 
6

Conditional repayment rate
 
 
 
Range
8.0% to 24.3%

 
7.8% to 28.3%

Weighted average
13.2
%
 
14.6
%
Discount rate
1.8
%
 
2.7
%
Significant increases or decreases in any of these assumptions in isolation would have resulted in a significantly higher or lower fair value.
MSRs Pledged (Rights to MSRs)
We have elected to measure and record these borrowings at fair value. We recognize the proceeds received in connection with Rights to MSRs transactions as a secured borrowing that we account for at fair value. We determine the fair value of the pledged MSR liability following a similar approach as for the associated pledged MSRs. Fair value for the portion of the borrowing attributable to the MSRs underlying the Rights to MSRs is determined using the mid-point of the range of prices provided by third-party valuation experts. Fair value for the portion of the borrowing attributable to any lump sum payments received in connection with the transfer of MSRs underlying such Rights to MSRs to the extent such transfer is accounted for as a financing is determined by discounting the relevant future cash flows that were altered through such transfer using assumptions consistent with the mid-point of the range of prices provided by third-party valuation experts for the related MSR.

23



Significant valuation assumptions
March 31,
2020
 
December 31,
2019
Weighted average prepayment speed
12.3
%
 
11.9
%
Weighted average delinquency rate
27.7
%
 
20.3
%
Advance financing cost
5-year swap plus 0% to 2.00%

 
5-year swap plus 0% to 2.00%

Interest rate for computing float earnings
5-year swap minus 0% to 0.50%

 
5-year swap minus 0% to 0.50%

Weighted average discount rate
11.4
%
 
10.7
%
Weighted average cost to service (in dollars)
$
292

 
$
223

Significant increases or decreases in these assumptions in isolation would have resulted in a significantly higher or lower fair value.
Financing Liability – Owed to Securitization Investors
Consists of securitization debt certificates due to third parties that represent beneficial ownership interests in mortgage-backed securitization trusts that we include in our consolidated financial statements. We determine fair value using the measurement alternative to ASC Topic 820, Fair Value Measurement as disclosed in Note 3 – Securitizations and Variable Interest Entities. In accordance with the measurement alternative, the fair value of the consolidated securitization debt certificates is measured as the fair value of the loans held by the trust less the fair value of the beneficial interests held by us in the form of residual securities.
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 base the fair value on valuation data obtained from a pricing service.
Secured Notes
In 2014, we issued Ocwen Asset Servicing Income Series (OASIS), Series 2014-1 Notes secured by Ocwen-owned MSRs relating to Freddie Mac mortgages. In 2019, we issued Ocwen Excess Spread-Collateralized Notes, Series 2019-PLS1 notes secured by certain of PMC’s private label MSRs. We determine the fair value of these notes based on bid prices provided by third parties involved in the issuance and placement of the notes.
Senior Notes
We base the fair value on quoted prices in a market with limited trading activity, or on valuation data obtained from a pricing service in the absence of trading data.
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. As of December 31, 2019, IRLCs were classified within Level 2 of the valuation hierarchy as the primary component of the price was 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. As of March 31, 2020, IRLCs were transferred to Level 3 assets as historical fallout rates required significant unobservable adjustments to account for the COVID-19 uncertainties.
We entered 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 until August 2019 and, beginning in September 2019, to hedge of our net MSR portfolio. TBAs and interest rate swap futures 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 or three-month Eurodollar rate (1ML or 3ML, respectively) interest rates. The fair value for interest rate caps is based on counterparty market prices and adjusted for counterparty credit risk.

24



Note 5 – Loans Held for Sale
Loans Held for Sale - Fair Value
Three Months Ended March 31,
2020
 
2019
Beginning balance
$
208,752

 
$
176,525

Originations and purchases (2)
831,474

 
219,867

Proceeds from sales
(805,202
)
 
(235,895
)
Principal collections
(6,833
)
 
(5,516
)
Transfers from (to):
 
 
 
Loans held for investment, at fair value
578

 
396

Receivables, net
(31,302
)
 
(581
)
REO (Other assets)
(768
)
 
(696
)
Gain on sale of loans
6,418

 
8,191

Decrease in fair value of loans
(1,642
)
 
(228
)
Other
2,117

 
(8,923
)
Ending balance (1) (2) (3)
$
203,592

 
$
153,140

(1)
At March 31, 2020 and 2019, the balances include $(9.4) million and $(7.8) million, respectively, of fair value adjustments.
(2)
We elected the fair value option for all newly repurchased loans after December 31, 2019, consistent with our fair value election of originated loans.
(3)
At March 31, 2020 and 2019, the balances include $25.6 million and nil, respectively, of loans that we repurchased from Ginnie Mae guaranteed securitizations pursuant to Ginnie Mae servicing guidelines. We may repurchase loans that have been modified, to facilitate loss reduction strategies, or as otherwise obligated as a Ginnie Mae servicer. Repurchased loans may be modified or otherwise remediated through loss mitigation activities, may be sold to a third party, or are reclassified to Receivables.
Loans Held for Sale - Lower of Cost or Fair Value
Three Months Ended March 31,
2020
 
2019
Beginning balance
$
66,517

 
$
66,097

Purchases (1)

 
84,315

Proceeds from sales
(30,492
)
 
(62,135
)
Principal collections
(651
)
 
(1,776
)
Transfers from (to):
 
 
 
Receivables, net
266

 
(27,411
)
REO (Other assets)

 
(1,095
)
Gain on sale of loans
1,842

 
551

Decrease in valuation allowance
(138
)
 
706

Other
5,079

 
10,295

Ending balance (1)
$
42,423

 
$
69,547

(1)
At March 31, 2020 and 2019, the balances include $29.3 million and $42.7 million, respectively, of loans that we repurchased from Ginnie Mae guaranteed securitizations pursuant to Ginnie Mae servicing guidelines. Loans repurchased after December 31, 2019 are classified as Loans Held for Sale - Fair Value since we elected the fair value option, consistent with our fair value election for originated or purchased loans.
Valuation Allowance - Loans Held for Sale at Lower of Cost or Fair Value
Three Months Ended March 31,
2020
 
2019
Beginning balance
$
6,643

 
$
11,569

Provision
570

 
642

Transfer from Liability for indemnification obligations (Other liabilities)
25

 
67

Sales of loans
(457
)
 
(1,415
)
Ending balance
$
6,781

 
$
10,863


25




Gain on Loans Held for Sale, Net
Three Months Ended March 31,
2020
 
2019
Gain on sales of loans, net
 
 
 
MSRs retained on transfers of forward mortgage loans
$
6,561

 
$
828

Gain on sale of repurchased Ginnie Mae loans
1,842

 
538

Gain on sale of forward mortgage loans
6,418

 
10,444

 
14,821

 
11,810

Change in fair value of IRLCs
5,714

 
(341
)
Change in fair value of loans held for sale
159

 
(142
)
Loss on economic hedge instruments
(7,192
)
 
(2,270
)
Other
(171
)
 
(75
)
 
$
13,331

 
$
8,982

Note 6 – Advances
 
March 31, 2020
 
December 31, 2019
Principal and interest
$
426,308

 
$
414,846

Taxes and insurance
383,829

 
422,383

Foreclosures, bankruptcy, REO and other
222,043

 
229,219

 
1,032,180

 
1,066,448

Allowance for losses
(7,373
)
 
(9,925
)
Advances, net
$
1,024,807

 
$
1,056,523

The following table summarizes the activity in net advances:
 
Three Months Ended March 31,
 
2020
 
2019
Beginning balance
$
1,056,523

 
$
1,186,676

New advances
243,545

 
105,995

Sales of advances
(228
)
 
(707
)
Collections of advances and other
(277,585
)
 
(198,008
)
Net decrease in allowance for losses (1)
2,552

 
124

Ending balance
$
1,024,807

 
$
1,094,080

(1)
As disclosed in Note 1, there was no significant adjustment as of January 1, 2020 as a result of the adoption of ASU 2016-13. Servicing advances are generally expected to be fully reimbursed under the terms of the servicing agreements. The estimate for the allowance for losses is based on relevant qualitative and quantitative information about past events, including historical collection and loss experience, current conditions, and reasonable and supportable forecasts that affect collectability. The allowance for losses includes an estimate for claimable (with investors) but nonrecoverable expenses, for example due to servicer error, such as lack of reasonable documentation as to the type and amount of advances.
Allowance for Losses
Three Months Ended March 31,
 
2020
 
2019
Beginning balance
$
9,925

 
$
23,259

Provision (reversal)
(761
)
 
1,762

Net charge-offs and other
(1,791
)
 
(1,886
)
Ending balance (1)
$
7,373

 
$
23,135


26



(1)
$18.0 million allowance related to sold advances was reclassified in the third quarter of 2019 and presented as Other liabilities (Liability for indemnification obligations).
Note 7 – Mortgage Servicing

During each period, we remeasure our MSR at fair value, which contemplates the receipt or nonreceipt of the servicing income for that period. The servicing income, including expectations of future servicing cash flows, are inputs for the measurement of the MSR fair value. The net result on the statement of operations is that we record the contractual cash received in each period as revenue within Servicing and subservicing fees, offset by the remeasurement of the MSR fair value within MSR valuation adjustments, net.
MSRs – Fair Value Measurement Method
Three Months Ended March 31,
2020
 
2019
 
Agency
 
Non-Agency
 
Total
 
Agency
 
Non-Agency
 
Total
Beginning balance
$
714,006

 
$
772,389

 
$
1,486,395

 
$
865,587

 
$
591,562

 
$
1,457,149

Sales and other transfers

 
(56
)
 
(56
)
 
(435
)
 
(132
)
 
(567
)
Additions:
 
 
 
 
 
 
 
 
 
 
 
Recognized on the sale of residential mortgage loans
5,930

 

 
5,930

 
1,407

 

 
1,407

Purchase of MSRs
31,490

 

 
31,490

 
54,513

 

 
54,513

Servicing transfers and adjustments (1)
(263,630
)
 
(893
)
 
(264,523
)
 

 
(3,313
)
 
(3,313
)
Changes in fair value (2):
 
 
 
 
 
 
 
 
 
 
 
Changes in valuation inputs or other assumptions
(166,532
)
 
10,392

 
(156,140
)
 
(64,117
)
 
(156
)
 
(64,273
)
Realization of expected future cash flows and other changes
(27,037
)
 
(25,831
)
 
(52,868
)
 
(31,263
)
 
(13,462
)
 
(44,725
)
Ending balance
$
294,227

 
$