Ocwen Financial (OCN) - 2019 Q1 - Quarterly Report

FORWARD-LOOKING STATEMENTS This report contains forward-looking statements whose actual results may differ materially due to various business risks and uncertainties - This report contains forward-looking statements regarding financial position, business strategy, and future operations, which are inherently uncertain due to substantial business changes[6][7] - Actual results may differ materially from forward-looking statements due to various risks, including regulatory investigations, litigation, compliance obligations, financial resource adequacy, MSR investment ability, and integration challenges from the PHH acquisition[7][8][10] PART I - FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's analysis of financial condition and operations Item 1. Unaudited Consolidated Financial Statements This section presents the company's unaudited consolidated financial statements for the three months ended March 31, 2019 Consolidated Balance Sheets The balance sheet shows a slight increase in total assets and liabilities, with a decrease in stockholders' equity | Metric | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Total Assets | 9,537,210 | 9,394,216 | | Total Liabilities | 9,025,616 | 8,839,511 | | Total Stockholders' Equity | 511,594 | 554,705 | | Cash | 263,188 | 329,132 | | Mortgage servicing rights, at fair value | 1,400,191 | 1,457,149 | | Loans held for investment, at fair value | 5,753,154 | 5,498,719 | | HMBS-related borrowings, at fair value | 5,614,688 | 5,380,448 | Consolidated Statements of Operations The company reported a net loss in Q1 2019, driven by a significant increase in MSR valuation adjustments | Metric | Three Months Ended March 31, 2019 ($ thousands) | Three Months Ended March 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Total Revenue | 303,888 | 260,257 | | MSR valuation adjustments, net | 108,998 | 17,129 | | Total Expenses | 280,105 | 206,501 | | Interest expense | (70,445) | (50,810) | | Net income (loss) attributable to Ocwen stockholders | (44,494) | 2,548 | | Basic Income (loss) per share | (0.33) | 0.02 | | Diluted Income (loss) per share | (0.33) | 0.02 | - MSR valuation adjustments, net, increased by 536% year-over-year, significantly impacting profitability[14] Consolidated Statements of Comprehensive Income (Loss) The company reported a comprehensive loss attributable to stockholders, reversing the comprehensive income from the prior year | Metric | Three Months Ended March 31, 2019 ($ thousands) | Three Months Ended March 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Net income (loss) | (44,494) | 2,617 | | Comprehensive income (loss) attributable to Ocwen stockholders | (44,117) | 2,589 | Consolidated Statements of Changes in Equity Stockholders' equity decreased during the quarter, primarily driven by the net loss reported for the period | Metric | December 31, 2018 ($ thousands) | March 31, 2019 ($ thousands) | | :--- | :--- | :--- | | Total stockholders' equity | 554,705 | 511,594 | | Net loss | (44,494) | - | | Equity-based compensation and other | 990 | - | | Other comprehensive income, net of income taxes | 377 | - | - Total stockholders' equity decreased by $43,111 thousand from December 31, 2018, to March 31, 2019, primarily due to the net loss[18] Consolidated Statements of Cash Flows Cash flows from financing activities shifted from a source of cash to a use of cash year-over-year | Metric | Three Months Ended March 31, 2019 ($ thousands) | Three Months Ended March 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | 100,664 | 99,411 | | Net cash used in investing activities | (151,343) | (135,911) | | Net cash (used in) provided by financing activities | (19,764) | 56,367 | | Net increase (decrease) in cash and restricted cash | (70,443) | 19,867 | | Cash and restricted cash at end of period | 326,567 | 322,427 | - Cash flows from financing activities shifted from providing $56,367 thousand in Q1 2018 to using $19,764 thousand in Q1 2019[21] Notes to Unaudited Consolidated Financial Statements These notes provide detailed explanations of accounting policies and specific financial statement line items Note 1 – Organization, Business Environment and Basis of Presentation This note outlines Ocwen's core business, key strategic initiatives post-PHH acquisition, and the impact of new accounting standards - Ocwen's primary business involves originating and servicing loans, including subservicing for New Residential Investment Corp (NRZ) and primary/master servicing for Fannie Mae, Freddie Mac, and Ginnie Mae[24][26] - The company has approximately 7,000 employees, with a significant portion (4,000 in India, 500 in the Philippines) providing internal support services, mainly for loan servicing[28] - Five key initiatives to drive stronger financial performance include: 1) successful integration of PHH and transition to Black Knight MSP servicing system, 2) re-engineering cost structure, 3) replenishing servicing portfolio, 4) managing the balance sheet, and 5) fulfilling regulatory commitments[31][32][33][36][37][38] - The adoption of new leasing guidance (ASU 2016-02) on January 1, 2019, resulted in the recognition of $66,231 thousand in gross Right-of-Use (ROU) assets and $66,247 thousand in lease liabilities[46][47][49] Note 2 – Business Acquisition This note details the acquisition of PHH Corporation, which resulted in a bargain purchase gain and the acquisition of significant tax attributes - Ocwen completed the acquisition of PHH Corporation on October 4, 2018, accounting for it under the acquisition method[53][54] Purchase Price Allocation (October 4, 2018) | Metric | Revised ($ thousands) | | :--- | :--- | | Total identifiable net assets | 422,147 | | Total consideration paid to seller | (358,396) | | Bargain purchase gain | 63,751 | - Acquired tax attributes, including $30.2 million in U.S. federal NOLs, $50.3 million in state NOLs, and $9.2 million in state tax credits, were fully offset by a valuation allowance[57] Pro Forma Results (Three Months Ended March 31, 2018, as if PHH Acquired Jan 1, 2017) | Metric | Amount ($ thousands) | | :--- | :--- | | Revenues | 344,522 | | Net loss from continuing operations | (11,201) | Note 3 – Cost Re-engineering Plan Ocwen initiated a cost re-engineering plan targeting total costs of $65,000 thousand to simplify operations and improve financial performance - Ocwen initiated a cost re-engineering plan in February 2019 to drive stronger financial performance and simplify operations, focusing on organizational redesign, human capital planning, and facilities rationalization[62] Cost Re-engineering Plan Summary (Three Months Ended March 31, 2019) | Cost Category | Incurred ($ thousands) | Remaining Estimate ($ thousands) | Total Plan Costs ($ thousands) | | :--- | :--- | :--- | :--- | | Employee related | 19,163 | 20,837 | 40,000 | | Facility-related | — | 7,000 | 7,000 | | Other | 2,973 | 15,027 | 18,000 | | Total | 22,136 | 42,864 | 65,000 | - The ending balance of the liability for re-engineering plan costs was $17,789 thousand at March 31, 2019[64] Note 4 – Securitizations and Variable Interest Entities This note details Ocwen's involvement in securitizations and Variable Interest Entities (VIEs), including accounting treatments and consolidation policies - Ocwen securitizes, sells, and services forward and reverse residential mortgage loans, and transfers financial assets in asset-backed financing arrangements[65] - Transfers of forward loans are accounted for as sales, with retained Mortgage Servicing Rights (MSRs)[69][70] - Transfers of Home Equity Conversion Mortgages (HECMs) are accounted for as financings, with HECM loans classified as 'Loans held for investment, at fair value'[74] - Ocwen consolidates SPEs for match funded advances and certain mortgage-backed securitization trusts where it is the primary beneficiary, measuring financial assets and liabilities using the more observable fair value[76][80][81] Note 5 – Fair Value This note details Ocwen's fair value measurements, methodologies, and key assumptions for various financial and nonfinancial assets - Fair value is estimated using a hierarchy (Level 1, 2, 3) that prioritizes observable inputs[83][86] - Loans held for investment (reverse mortgages) are measured at fair value based on expected future cash flows, with key assumptions including a weighted average life of 6.0 years, a conditional repayment rate of 14.4%, and a discount rate of 3.1% as of March 31, 2019[96][97] - Mortgage Servicing Rights (MSRs) are classified as Level 3 and valued using third-party valuation experts, with key assumptions including prepayment speeds (Agency 9.8%, Non-Agency 15.4%), delinquency rates (Agency 6.5%, Non-Agency 27.2%), and discount rates (Agency 9.0%, Non-Agency 12.7%) as of March 31, 2019[100][101][102][104] MSR Sensitivity Analysis (March 31, 2019) | Adverse change in fair value | 10% ($ thousands) | 20% ($ thousands) | | :--- | :--- | :--- | | Weighted average prepayment speeds | (127,188) | (245,678) | | Weighted average discount rate | (39,816) | (77,754) | - HMBS-related borrowings are measured at fair value (Level 3) by discounting projected recovery of principal, interest, and advances, using similar assumptions to reverse mortgages[110][111] Note 6 – Loans Held for Sale This note provides a breakdown of loans held for sale, showing a decline in net gain on sales year-over-year Loans Held for Sale Balances | Category | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Loans Held for Sale - Fair Value | 153,140 | 176,525 | | Loans Held for Sale - Lower of Cost or Fair Value | 69,547 | 66,097 | | Total Loans Held for Sale | 222,687 | 242,622 | Gain on Loans Held for Sale, Net (Three Months Ended March 31) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Gain on sales of loans, net | 20,423 | 20,053 | | Change in fair value of IRLCs | (341) | 1,377 | | Change in fair value of loans held for sale | (142) | (3,924) | | Gain (loss) on economic hedge instruments | (2,270) | 2,398 | | Total Gain on Loans Held for Sale, Net | 17,595 | 19,800 | - The net gain on loans held for sale decreased by 11% year-over-year, primarily due to a $4,485 thousand decline in fair value gains related to transfers of reverse mortgage loans[125] Note 7 – Advances This note details the composition and activity of servicing advances, which decreased during the quarter primarily due to net collections Advances, Net (Balances) | Category | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Principal and interest | 47,039 | 43,671 | | Taxes and insurance | 141,466 | 160,373 | | Foreclosures, bankruptcy and other | 59,990 | 68,597 | | Total Advances | 248,495 | 272,641 | | Allowance for losses | (23,135) | (23,259) | | Advances, net | 225,360 | 249,382 | - Net collections of advances, charge-offs, and other activities resulted in a $23,439 thousand decrease in advances during Q1 2019[126] Note 8 – Match Funded Advances This note provides details on match funded advances, which decreased during the quarter driven by net collections Match Funded Advances (Balances) | Category | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Principal and interest | 374,820 | 412,897 | | Taxes and insurance | 345,589 | 374,853 | | Foreclosures, bankruptcy, real estate and other | 148,311 | 149,544 | | Total Match funded advances | 868,720 | 937,294 | - Net new advances (collections) for match funded assets resulted in a decrease of $68,574 thousand during Q1 2019[127] Note 9 – Mortgage Servicing This note details the MSR portfolio, which is accounted for at fair value, and provides data on servicing portfolio UPB and servicer ratings - Effective January 1, 2018, Ocwen elected fair value accounting for its entire MSR portfolio[128][131] Mortgage Servicing Rights – Fair Value Measurement Method (Balances) | Metric | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Beginning balance | 1,457,149 | 671,962 (for 2018) | | Purchases of MSRs | 54,410 | — | | Changes in fair value | (108,998) | (17,129) (for 2018) | | Ending balance | 1,400,191 | 1,457,149 | Portfolio of Assets Serviced (UPB) | Category | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | March 31, 2018 ($ thousands) | | :--- | :--- | :--- | :--- | | Servicing | 75,288,090 | 72,378,693 | 73,264,640 | | Subservicing | 49,805,407 | 53,104,560 | 1,792,880 | | NRZ | 125,987,243 | 130,517,237 | 98,331,356 | | Total | 251,080,740 | 256,000,490 | 173,388,876 | - During Q1 2019, Ocwen acquired MSRs on portfolios totaling $4.9 billion UPB and sold MSRs on portfolios totaling $99.4 million UPB[133] - Servicer ratings outlook for OLS and PHH are stable from S&P and Fitch, but Moody's servicer ratings for OLS are on Review for Downgrade[137][320] Servicing Revenue (Three Months Ended March 31) | Category | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Loan servicing and subservicing fees | 214,483 | 186,926 | | Late charges | 15,439 | 14,589 | | Custodial accounts (float earnings) | 11,934 | 7,263 | | Total Servicing Revenue | 255,863 | 222,138 | Note 10 — Rights to MSRs This note explains that agreements with NRZ, Ocwen's largest client, are accounted for as secured financings - NRZ is Ocwen's largest servicing client, accounting for 50% of the UPB of residential assets serviced and 73% of loan servicing and subservicing fee revenue as of March 31, 2019[142] - Agreements with NRZ for MSRs or Rights to MSRs are accounted for as secured financings, with the MSRs and related financing liability recognized on the balance sheet[141] NRZ Agreements - Balance Sheet Impact (March 31, 2019 vs. December 31, 2018) | Metric | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | MSRs, at fair value | 831,284 | 894,002 | | Financing liability - MSRs pledged, at fair value | 951,216 | 1,032,856 | NRZ Agreements - Statements of Operations Impact (Three Months Ended March 31) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Servicing fees collected on behalf of NRZ | 155,847 | 127,017 | | Less: Subservicing fee retained by Ocwen | 37,407 | 34,217 | | Net servicing fees remitted to NRZ | 118,440 | 92,800 | | Interest expense | 43,956 | 23,050 | - As of March 31, 2019, $25.9 billion in UPB of MSRs for which legal title has not transferred to NRZ remain subject to the New RMSR Agreements[153] Note 11 – Receivables This note details the composition of receivables, with government-insured loan claims being the largest component Receivables, Net (Balances) | Category | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Government-insured loan claims, net | 99,918 | 105,258 | | Due from NRZ (Sales/transfers of MSRs) | 23,430 | 23,757 | | Due from NRZ (Advance funding, subservicing fees) | 9,238 | 30,845 | | Income taxes receivable | 39,382 | 45,987 | | Other receivables | 40,401 | 17,672 | | Allowance for losses | (52,402) | (53,579) | | Receivables, net | 197,043 | 198,262 | Allowance for Losses - Government-Insured Loan Claims (Three Months Ended March 31) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Beginning balance | 52,497 | 53,340 | | Provision | 7,247 | 10,376 | | Charge-offs and other, net | (8,464) | (6,123) | | Ending balance | 51,280 | 57,593 | Note 12 – Other Assets This note lists other assets, highlighting a significant increase in the contingent loan repurchase asset Other Assets (Balances) | Category | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Contingent loan repurchase asset | 399,202 | 302,581 | | Prepaid expenses | 25,668 | 27,647 | | Prepaid representation, warranty and indemnification claims - Agency MSR sale | 15,193 | 15,173 | | Real estate | 7,256 | 7,368 | | Deferred tax asset, net | 5,858 | 5,289 | | Derivatives, at fair value | 4,341 | 4,552 | | Mortgage backed securities, at fair value | 1,786 | 1,502 | | Total Other Assets | 474,172 | 379,567 | Note 13 – Borrowings This note provides a detailed breakdown of Ocwen's borrowings, credit ratings, and debt covenants Match Funded Liabilities (Balances) | Borrowing Type | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Advance Receivables Backed Notes - Series 2015-VF5 | 114,206 | 216,559 | | Advance Receivables Backed Notes - Series 2016-T2 | 235,000 | 235,000 | | Advance Receivables Backed Notes, Series 2018-T1 | 150,000 | 150,000 | | Advance Receivables Backed Notes, Series 2018-T2 | 150,000 | 150,000 | | Ocwen Freddie Advance Funding (OFAF) | 178 | 26,725 | | Total Servicing Advance Financing Facilities | 649,384 | 778,284 | Financing Liabilities (Balances) | Borrowing Type | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | HMBS-Related Borrowings, at fair value | 5,614,688 | 5,380,448 | | MSRs pledged, at fair value | 951,216 | 1,032,856 | | Secured Notes, Ocwen Asset Servicing Income Series, Series 2014-1 | 63,835 | 65,523 | | Financing liability - Owed to securitization investors, at fair value | 24,562 | 24,815 | | Advances pledged | 4,085 | 4,419 | | Total Financing Liabilities | 6,658,386 | 6,508,061 | - On March 18, 2019, the Senior Secured Term Loan (SSTL) was increased by $120,000 thousand, raising its total borrowing capacity to $455,000 thousand[175] Senior Notes (Balances) | Borrowing Type | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Senior unsecured notes (PHH) | 119,064 | 119,064 | | Senior secured notes | 330,878 | 330,878 | | Unamortized debt issuance costs | (1,959) | (2,075) | | Fair value adjustments | 160 | 860 | | Total Senior Notes, net | 448,143 | 448,727 | - Credit ratings at March 31, 2019: S&P long-term corporate rating 'B-', Moody's long-term corporate rating 'Caa1' (stable outlook)[181][389] - Ocwen is subject to various qualitative and quantitative debt covenants, including maintaining a minimum consolidated tangible net worth of $275,000 thousand[182][183] Collateral for Secured Borrowings (March 31, 2019) | Asset Category | Collateral for Secured Borrowings ($ thousands) | | :--- | :--- | | Mortgage servicing rights | 913,465 | | Match funded advances | 868,720 | | Loans held for investment | 5,671,800 | | Total Assets held as collateral | 7,548,864 | Note 14 – Other Liabilities This note details the composition of other liabilities, showing a significant increase in the contingent loan repurchase liability Other Liabilities (Balances) | Category | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Contingent loan repurchase liability | 399,202 | 302,581 | | Other accrued expenses | 81,393 | 99,739 | | Lease liability | 60,057 | — | | Due to NRZ - Advance collections and servicing fees | 55,907 | 53,001 | | Accrued legal fees and settlements | 52,916 | 62,763 | | Liability for indemnification obligations | 48,668 | 51,574 | | Servicing-related obligations | 39,041 | 41,922 | | Total Other Liabilities | 832,721 | 703,636 | - Accrued legal fees and settlements decreased by $9,847 thousand in Q1 2019, primarily due to payments of $9,407 thousand and a net accrual reversal of $631 thousand[190] Note 15 – Derivative Financial Instruments and Hedging Activities This note describes Ocwen's use of derivatives to manage interest rate risk, none of which were designated as hedges for accounting purposes - None of Ocwen's derivatives were designated as a hedge for accounting purposes at March 31, 2019[193] Derivative Financial Instruments (March 31, 2019) | Derivative Type | Notional Balance ($ thousands) | Fair Value ($ thousands) | | :--- | :--- | :--- | | Interest rate lock commitments (IRLCs) | 117,770 | 3,982 | | Forward MBS Trades | 105,500 | (4,126) | | Interest Rate Caps | 193,750 | 276 | - Ocwen is exposed to unhedged foreign currency exchange rate risk from its operations in India and the Philippines[195] Note 16 – Interest Expense This note provides a breakdown of interest expense, which increased significantly year-over-year due to higher expense on NRZ financing liabilities Interest Expense (Three Months Ended March 31) | Category | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Financing liabilities (NRZ) | 43,956 | 23,050 | | Other financing liabilities | 1,069 | 1,194 | | Senior notes | 8,512 | 7,452 | | Other secured borrowings | 7,878 | 8,188 | | Match funded liabilities | 7,652 | 9,549 | | Other | 1,378 | 1,377 | | Total Interest Expense | 70,445 | 50,810 | - Interest expense on NRZ financing liabilities increased by 91% year-over-year, contributing significantly to the overall rise in interest expense[201] Note 17 – Basic and Diluted Earnings (Loss) per Share This note reports a basic and diluted loss per share of $(0.33) for Q1 2019, a significant decline from the prior-year period Basic and Diluted Earnings (Loss) per Share (Three Months Ended March 31) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net income (loss) attributable to Ocwen stockholders ($ thousands) | (44,494) | 2,548 | | Weighted average shares of common stock (Basic) | 133,918,986 | 133,121,465 | | Basic income (loss) per share | (0.33) | 0.02 | | Diluted income (loss) per share | (0.33) | 0.02 | - The effect of all stock options and common stock awards was excluded from the computation of diluted loss per share for Q1 2019 due to their anti-dilutive effect[202] Note 18 – Business Segment Reporting This note provides a breakdown of financial results for Ocwen's Servicing, Lending, and Corporate Items and Other segments - Ocwen operates through two reportable business segments: Servicing and Lending, plus a Corporate Items and Other segment[205][206][207] Segment Income (Loss) Before Income Taxes (Three Months Ended March 31, 2019) | Segment | Income (loss) before income taxes ($ thousands) | | :--- | :--- | | Servicing | (57,503) | | Lending | 19,860 | | Corporate Items and Other | (3,441) | | Consolidated | (41,084) | Total Assets by Segment (March 31, 2019) | Segment | Total Assets ($ thousands) | | :--- | :--- | | Servicing | 3,221,779 | | Lending | 5,848,830 | | Corporate Items and Other | 466,601 | | Consolidated | 9,537,210 | Note 19 – Regulatory Requirements This note details the extensive regulatory environment governing Ocwen's business and the significant risks associated with non-compliance - Ocwen's business is subject to extensive regulation by federal, state, and local authorities, including the CFPB, HUD, SEC, GSEs, and Ginnie Mae[213][215] - Failure to comply with regulations can lead to administrative fines, penalties, license loss, investigations, civil/criminal liability, reputational damage, and inability to fund operations[216] - NY DFS restrictions include prohibiting boarding new loans onto the REALServicing system, requiring transfer of all New York loans off REALServicing by April 30, 2020, and limiting MSR portfolio growth for New York loans to 2% per year[224] - The CA DBO requires confirmation of $198,000 thousand in debt forgiveness for California borrowers by June 30, 2019, which Ocwen believes it has fulfilled[226] - The most restrictive net worth requirement for Ocwen Loan Servicing, LLC (OLS) was $169,000 thousand at March 31, 2019[222] Note 20 — Commitments This note outlines Ocwen's various commitments, including unfunded lending commitments, HMBS issuer obligations, and long-term service contracts - Unfunded lending commitments for floating-rate reverse mortgage loans totaled $1.5 billion in additional borrower capacity at March 31, 2019[228] - Ocwen has HMBS issuer obligations, including the requirement to purchase loans out of Ginnie Mae securitization pools (MCA repurchases) once the outstanding principal balance reaches 98% of the maximum claim amount[229] HMBS Repurchases Activity (Three Months Ended March 31, 2019) | Category | Number | Amount ($ thousands) | | :--- | :--- | :--- | | Beginning balance | 262 | 16,880 | | Additions | 50 | 6,311 | | Recoveries, net | (6) | (2,325) | | Changes in value | — | (513) | | Ending balance | 306 | 20,353 | - Ocwen's business relies on long-term agreements with Altisource for various business process outsourcing and technology services, with agreements expiring August 31, 2025[232][233] Note 21 – Contingencies This note details Ocwen's various litigation and regulatory contingencies, including ongoing actions from the CFPB and state attorneys general - Ocwen is a defendant in numerous legal proceedings, including class actions alleging violations of federal and state laws governing mortgage servicing and lending activities (e.g, FDCPA, TCPA)[238][239] - The accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was $52,916 thousand at March 31, 2019[241] - Ongoing regulatory actions include a CFPB lawsuit alleging violations related to servicing data, foreclosure practices, and servicer errors, and lawsuits from the Florida Attorney General and Office of Financial Regulation with similar claims[254][261] - Ocwen has exposure to loan put-back and indemnification obligations from lending, sales, and securitization activities, requiring indemnification or repurchase of loans under certain circumstances[268][270] Representation and Warranty Obligations Activity (Three Months Ended March 31) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Beginning balance | 49,267 | 19,229 | | Provision for (reversal of) obligations | (2,155) | 57 | | New production reserves | 75 | 104 | | Charge-offs and other | (573) | (1,844) | | Ending balance | 46,614 | 17,546 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Ocwen's financial condition, results of operations, and strategic initiatives OVERVIEW Management outlines the company's key strategic initiatives aimed at achieving growth and profitability following the PHH acquisition - Ocwen's residential mortgage servicing portfolio consisted of 1,534,351 loans with a UPB of $251.1 billion at March 31, 2019[278] - The company's five key initiatives to achieve growth and profitability include: 1) successful integration of PHH and Black Knight MSP transition, 2) cost re-engineering, 3) servicing portfolio replenishment, 4) balance sheet management, and 5) fulfilling regulatory commitments[279][280][281][286][287][289] - Cost re-engineering efforts aim to reduce total staffing levels by over 2,100 by the end of 2019 (900 already reduced by March 31, 2019) and consolidate U.S. facilities, targeting $340.0 million in expense reductions[281][282] - Ocwen closed MSR acquisitions with $4.9 billion UPB in Q1 2019 and was awarded approximately $25.5 billion UPB for Q2 2019, aiming to maintain a servicing portfolio of at least $260.0 billion UPB[286] Results of Operations and Financial Condition This section provides a consolidated summary of financial results, highlighting the impact of the PHH acquisition Results of Operations Summary (Three Months Ended March 31) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | 303,888 | 260,257 | 17% | | MSR valuation adjustments, net | 108,998 | 17,129 | 536% | | Compensation and benefits | 94,696 | 78,075 | 21% | | Professional services | 3,441 | 37,770 | (91)% | | Total Expenses | 280,105 | 206,501 | 36% | | Interest expense | (70,445) | (50,810) | 39% | | Net income (loss) attributable to Ocwen stockholders | (44,494) | 2,548 | n/m | | Income (loss) before income taxes | (41,084) | 4,965 | (965)% | - The PHH acquisition contributed $77,936 thousand in total revenue and $120,073 thousand in total expenses for Q1 2019, resulting in a $26,346 thousand loss before income taxes from PHH operations[293] Financial Condition Summary (March 31, 2019 vs. December 31, 2018) | Metric | March 31, 2019 ($ thousands) | December 31, 2018 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Assets | 9,537,210 | 9,394,216 | 2% | | Total Liabilities | 9,025,616 | 8,839,511 | 2% | | Total Stockholders' Equity | 511,594 | 554,705 | (8)% | | Cash | 263,188 | 329,132 | (20)% | - Other revenue, net, increased by $12.1 million (66%) in Q1 2019, largely due to $14.5 million favorable net change in fair values of HECM reverse mortgage loans and related HMBS financing liability[296] SEGMENT RESULTS OF OPERATIONS This section details the financial performance of the Servicing, Lending, and Corporate Items and Other segments Servicing The Servicing segment reported a significant pre-tax loss in Q1 2019, driven by higher MSR valuation adjustments and interest expense Servicing Segment Results (Three Months Ended March 31) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | 259,274 | 226,096 | 15% | | MSR valuation adjustments, net | 108,914 | 16,975 | 542% | | Total Expenses | 265,898 | 171,095 | 55% | | Interest expense | (54,698) | (34,517) | 58% | | Income (loss) before income taxes | (57,503) | 20,484 | (381)% | Residential Assets Serviced (UPB at March 31) | Category | 2019 ($ thousands) | 2018 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Performing loans | 239,373,994 | 157,796,653 | 52% | | Non-performing loans | 9,763,305 | 12,653,359 | (23)% | | Non-performing real estate | 1,943,441 | 2,938,864 | (34)% | | Total UPB | 251,080,740 | 173,388,876 | 45% | - NRZ is the largest servicing client, accounting for 50% of the UPB and 73% of loan servicing and subservicing fee revenue as of March 31, 2019[315] - Total completed loan modifications decreased by 29% in Q1 2019 compared to Q1 2018, due to the expiration of government-sponsored programs and fewer non-performing loans[327][332] Lending The Lending segment's income increased significantly, driven by favorable fair value adjustments on HECM reverse mortgage loans Lending Segment Results (Three Months Ended March 31) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | 41,091 | 29,195 | 41% | | Gain on loans held for sale, net | 16,370 | 18,808 | (13)% | | Other revenue, net | 24,721 | 10,387 | 138% | | Total Expenses | 21,331 | 20,296 | 5% | | Income before income taxes | 19,860 | 8,770 | 126% | Loan Production by Channel (Three Months Ended March 31) | Loan Type | 2019 ($ thousands) | 2018 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Forward loans | 211,247 | 215,763 | (2)% | | Reverse loans | 141,292 | 163,853 | (14)% | | Total Loan Production | 352,539 | 379,616 | (7)% | - The increase in other revenue was largely driven by $14.5 million in favorable fair value adjustments on HECM reverse mortgage loans and related HMBS financing liabilities[353][354] - Ocwen expects to re-enter the correspondent channel in Q2 2019 to drive higher loan production[344] - Effective June 1, 2019, Ocwen will no longer perform portfolio recapture on behalf of NRZ, with no material negative impact expected on pre-tax earnings[345] Corporate Items and Other This segment's loss before income taxes improved significantly due to a large recovery from a service provider Corporate Items and Other Segment Results (Three Months Ended March 31) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | 3,523 | 4,966 | (29)% | | Compensation and benefits | 41,851 | 28,943 | 45% | | Professional services | (8,327) | 19,955 | (142)% | | Total Expenses (before allocations) | 52,154 | 66,527 | (22)% | | Loss before income taxes | (3,441) | (24,289) | (86)% | - Professional services expense decreased by $28.3 million (142%) in Q1 2019, primarily due to a $30.7 million recovery from a service provider[365] - Compensation and benefits expense increased by $12.9 million (45%) due to PHH compensation and benefits and $19.2 million in severance and retention costs[364] - CRL premium revenue decreased by 26% due to a decline in the average number of foreclosed real estate properties in the servicing portfolio[363] LIQUIDITY AND CAPITAL RESOURCES This section details the company's sources and uses of funds, debt covenants, credit ratings, and cash flow activities Overview Ocwen actively monitors its liquidity position and believes it has sufficient resources to meet obligations for the next twelve months - Unrestricted cash decreased from $329.1 million at December 31, 2018, to $263.2 million at March 31, 2019[368] - The SSTL was increased by $120.0 million in March 2019, providing incremental liquidity[368] - Available borrowing capacity under advance financing facilities increased to $175.6 million at March 31, 2019, from $46.7 million at December 31, 2018[372] - Maximum borrowing capacity under warehouse facilities was $1.3 billion at March 31, 2019, with $229.5 million available on a committed basis[373] - Management believes the company has sufficient liquidity and access to adequate sources of new capital to meet obligations and fund operations for the next twelve months[375] Sources of Funds Ocwen's primary sources of funds include servicing fees, advance collections, and various financing facilities - Primary sources of funds include servicing fees, advance collections, match funded advance financing facilities, other borrowings (e.g, warehouse facilities), and sales/securitizations of originated loans[380] - Advance financing facilities utilize revolving variable funding notes (12-18 month terms) and term notes (1-3 year maturities)[376] - Mortgage loan warehouse facilities fund newly originated loans on a short-term basis, typically with 364-day terms, repaid from secondary market sales[377] Use of Funds Ocwen's primary uses of funds include operating costs, integration expenses, MSR acquisitions, and debt repayments - Primary uses of funds include operating costs, interest payments, re-engineering and integration costs, funding advances, MSR and other asset acquisitions, loan funding, and debt repayments[382] - The SSTL facility agreement requires prepayment with 100% of net cash proceeds from certain asset sales, subject to reinvestment within 270 days[382] Outlook Ocwen faces approximately $720.4 million in debt maturities within the next 12 months, which it expects to renew, replace, or extend - Approximately $720.4 million of debt is outstanding under facilities coming due in the next 12 months as of March 31, 2019[383] - Key maturities include $499.4 million outstanding under advance financing facilities and $88.6 million under mortgage loan warehouse facilities, plus $97.5 million of PHH Senior Notes[383] - Recent financing activities include renewing a $50.0 million mortgage loan warehouse agreement, entering a new $300.0 million mortgage loan warehouse facility, and amending the SSTL for an additional $120.0 million term loan[385] Covenants Ocwen's debt agreements contain various covenants, and the company believes it is in compliance with all of them - Debt agreements include financial covenants, compliance with laws, and restrictions on activities like incurring debt, paying dividends, or transferring assets[386] - Breaches or defaults could lead to termination of funding, acceleration of obligations, and enforcement of liens[386] - Ocwen believes it is in compliance with all qualitative and quantitative covenants in its debt agreements as of the filing date[387] Credit Ratings Ocwen's credit ratings are Caa1 from Moody's and B- from S&P, and lower ratings can increase borrowing costs Long-term Corporate Credit Ratings (March 31, 2019) | Rating Agency | Rating | Review Status / Outlook | Date of last action | | :--- | :--- | :--- | :--- | | Moody's | Caa1 | Stable | December 11, 2018 | | S&P | B– | Negative | June 18, 2018 | - Additional actions by credit rating agencies could materially impact liquidity and funding, potentially changing borrowing terms[389] Cash Flows Financing activities shifted from providing cash in Q1 2018 to using cash in Q1 2019, influenced by debt repayments and securitizations - Operating cash flow is primarily impacted by operating results, changes in servicing advance balances, mortgage loan production, and timing of loan sales/securitizations[390] Cash Flow Summary (Three Months Ended March 31) | Activity | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | 100,664 | 99,411 | | Net cash used in investing activities | (151,343) | (135,911) | | Net cash (used in) provided by financing activities | (19,764) | 56,367 | - In Q1 2019, investing activities used $151.3 million, primarily for HECM reverse mortgages ($104.6 million) and MSR purchases ($48.6 million)[393] - Financing activities in Q1 2019 used $19.8 million, including net repayments on match funded liabilities ($128.9 million) and MSRs pledged ($50.1 million), partially offset by reverse mortgage securitization proceeds ($210.6 million) and SSTL increase ($120.0 million)[394] CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS This section outlines the company's contractual obligations and key off-balance sheet arrangements - Ocwen believes it has adequate resources to fund all unfunded commitments and meet contractual obligations, which primarily include borrowings, interest payments, leases, and loan commitments[398] - Off-balance sheet arrangements include mortgage loan repurchase and indemnification obligations, unconsolidated Special Purpose Entities (SPEs), notional amounts of derivatives, and non-cancelable operating leases[400] - As an HMBS issuer, Ocwen has obligations to purchase loans out of Ginnie Mae securitization pools (MCA repurchases) once the outstanding principal balance reaches 98% of the maximum claim amount[403] CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section discusses the critical accounting policies and estimates that require significant management judgment Fair Value Measurements A significant portion of Ocwen's assets and liabilities are measured using Level 3 inputs, requiring considerable judgment Assets and Liabilities Measured at Fair Value (March 31, 2019) | Category | Amount ($ thousands) | % of Total | | :--- | :--- | :--- | | Assets at fair value | 7,383,673 | 77% | | Liabilities at fair value | 6,594,675 | 73% | | Assets at fair value using Level 3 inputs | 7,224,954 | 98% (of assets at fair value) | | Liabilities at fair value using Level 3 inputs | 6,590,466 | 100% (of liabilities at fair value) | - The increase in Level 3 assets and liabilities at fair value is primarily due to reverse mortgage originations and securitizations, and the fair value election on MSRs[410] Valuation of MSRs Ocwen accounts for its entire MSR portfolio at fair value, with valuations highly sensitive to key assumptions like prepayment speeds and discount rates - All MSRs are accounted for using the fair value measurement method, with valuation based on independent third-party experts and discounted cash flow models[412][413] Key Assumptions for MSR Valuation (March 31, 2019, 5-year projection) | Metric | Conventional | Government Insured | Non-Agency | | :--- | :--- | :--- | :--- | | Weighted average prepayment speed | 10.3% | 12.9% | 15.5% | | Weighted average delinquency | 3.8% | 15.5% | 27.6% | | Weighted average cost to service | $77 | $132 | $290 | | Discount rate | 9.0% | 9.1% | 12.7% | - Increases in prepayment speeds, delinquencies, or discount rates generally reduce MSR value, while increases in interest rate assumptions can increase interest expense but also float earnings[414] Allowance for Losses on Servicing Advances and Receivables Ocwen records an allowance for losses on servicing advances and government-insured loan claims based on collectability assessments - An allowance for losses on servicing advances is recorded based on collectability, historical rates, and loan characteristics[415] - Allowance for losses on servicing advances was $23,135 thousand at March 31, 2019[415] - An allowance for losses on government-insured loan claims (receivables) was $51,280 thousand at March 31, 2019[416] Income Taxes A full valuation allowance was recognized on U.S. and USVI deferred tax assets, and NOL carryforwards are subject to annual limitations - Ocwen recognized a full valuation allowance of $46,300 thousand on U.S. deferred tax assets and $21,300 thousand on USVI deferred tax assets at December 31, 2018, due to cumulative losses[423] - NOL carryforwards are subject to annual limitations under Internal Revenue Code Section 382 due to ownership changes in January 2015 and December 2017[425][426][429] - The Section 382 limitations could result in Ocwen being unable to fully utilize certain deferred tax assets and potentially incurring current tax liabilities in future tax years[426] Indemnification Obligations Ocwen has exposure to representation, warranty, and indemnification obligations arising from its lending, sales, and securitization activities - Exposure to representation, warranty, and indemnification obligations arises from lending, sales, securitization, and servicing activities[431] - Liabilities are initially recognized at fair value, with subsequent estimations based on industry data, loss severity, and historical rescission rates[431] Litigation Ocwen establishes liabilities for probable and reasonably estimable losses from litigation matters based on current information - Liabilities are established for probable and reasonably estimable losses from litigation matters, including settlements and judgments[432] Going Concern Ocwen evaluates whether conditions exist that raise substantial doubt about its ability to continue as a going concern - Ocwen evaluates going concern within one year after financial statement issuance, assessing conditions that raise substantial doubt about its ability to continue operations[433] - Management's plans to mitigate substantial doubt are considered if they are probable of implementation and probable of alleviating the doubt within the evaluation period[434] RECENT ACCOUNTING DEVELOPMENTS This section details the impact of recently adopted accounting standards, particularly the new leasing guidance - Ocwen adopted new leasing guidance (ASU 2016-02, 2018-10, 2018-11, 2019-01) on January 1, 2019, resulting in a $16 thousand cumulative-effect adjustment to retained earnings and a $66.2 million increase in both total assets and total liabilities[436] - Other recently issued ASUs adopted on January 1, 2019, did not have a material impact on the consolidated financial statements[437] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses Ocwen's exposure to various market risks, primarily interest rate risk, and its management strategies Interest Rates The company's principal market risk is interest rate exposure, which impacts a wide range of mortgage-related assets and liabilities - Ocwen's principal market exposure is to interest rate risk, which impacts mortgage-related assets (MSRs, loans held for sale/investment, IRLCs) and commitments, as well as borrowings[439] - The management-level Market Risk Committee establishes and maintains policies for the hedging program, including target hedge ratio and permitted instruments[441] Home Prices The company is exposed to real estate price risk, particularly within its reverse mortgage loan portfolio - Ocwen is exposed to real estate price risk, particularly for inactive reverse mortgage loans and MCA repurchases, where expenses and losses may not be reimbursable by FHA[443] - Exposure to this risk will increase as the reverse mortgage portfolio seasons and MCA repurchases rise[443] MSRs and MSR Financing Liabilities The fair value of MSRs is highly sensitive to interest rate changes, with financing liabilities providing a partial offset - MSRs are subject to interest rate risk; their fair value generally decreases with declining interest rates (due to increased prepayments) and increases with rising rates[444] - MSR financing liabilities, primarily from NRZ transactions, are fair valued, and changes in their fair value partially offset changes in the fair value of the related MSRs[445] Loans Held for Sale, Loans Held for Investment and IRLCs Interest rate and price risks associated with loan origination activities are managed through a hedging program - Newly-originated forward mortgage loans held for sale, reverse mortgage loans held for investment, and Interest Rate Lock Commitments (IRLCs) are subject to interest rate and price risk[446] - This exposure is hedged with freestanding derivatives, such as forward sales of agency 'to be announced' securities (TBAs) and forward mortgage-backed securities (Forward MBS)[446] Loans Held for Investment and HMBS-related Borrowings The fair value of the HECM loan portfolio and related borrowings is sensitive to market interest rate fluctuations - The fair value of the HECM loan portfolio held for investment decreases as market rates rise and increases as market rates fall[447] - Higher interest rates accelerate the loan balance reaching the 98% maximum claim amount liquidation event, while lower rates extend it[447] - Net servicing income on the existing securitized HECM portfolio acts as a partial hedge for forward MSR value sensitivity[448] Match Funded Liabilities The company monitors interest rate risk on its variable rate advance financing debt, using float earnings as a partial offset - Ocwen monitors the effect of interest rate increases on its variable rate advance financing debt[449] - Earnings on cash and float balances partially offset this exposure, and interest rate caps may be purchased as economic hedges if required by financing arrangements[449] Interest Rate Sensitive Financial Instruments This section presents the carrying and fair values of the company's interest rate-sensitive assets and liabilities Rate-Sensitive Assets (March 31, 2019) | Asset Category | Carrying Value ($ thousands) | Fair Value ($ thousands) | | :--- | :--- | :--- | | Interest-earning cash | 248,342 | 248,342 | | Loans held for sale, at fair value | 153,140 | 153,140 | | Loans held for sale, at lower of cost or fair value | 69,547 | 69,547 | | Loans held for investment, at fair value | 5,726,917 | 5,726,917 | | U.S. Treasury notes | 1,068 | 1,068 | | Debt service accounts and time deposits | 23,460 | 23,460 | | Total rate-sensitive assets | 6,222,474 | 6,222,474 | Rate-Sensitive Liabilities (March 31, 2019) | Liability Category | Carrying Value ($ thousands) | Fair Value ($ thousands) | | :--- | :--- | :--- | | Match funded liabilities | 649,384 | 649,121 | | HMBS-related borrowings, at fair value | 5,614,688 | 5,614,688 | | SSTL and other secured borrowings | 436,982 | 442,749 | | Senior notes | 448,143 | 430,918 | | Total rate-sensitive liabilities | 7,149,197 | 7,137,476 | Rate-Sensitive Derivative Financial Instruments (March 31, 2019) | Derivative Type | Notional Balance ($ thousands) | Fair Value ($ thousands) | | :--- | :--- | :--- | | Interest rate caps | 193,750 | 276 | | IRLCs | 117,770 | 3,982 | | Forward MBS trades | 105,500 | (4,126) | | Derivatives, net | | 132 | Sensitivity Analysis A sensitivity analysis shows the estimated net impact of parallel yield curve shifts on key financial instruments Sensitivity to Yield Curve Shifts (March 31, 2019) | Instrument | Down 25 bps ($ thousands) | Up 25 bps ($ thousands) | | :--- | :--- | :--- | | HECM loans held for investment | 2,537 | (3,334) | | Loans held for sale | 732 | (873) | | Forward MBS trades | (702) | 827 | | Total loans held for sale and related derivatives | 2,567 | (3,380) | | MSRs | (52,499) | 51,408 | | Total, net | (49,932) | 48,028 | - A 25 basis point downward shift in the yield curve is estimated to result in a net negative impact of $(49,932) thousand, while an upward shift of 25 basis points is estimated to result in a net positive impact of $48,028 thousand[456] Borrowings A 1% increase in interest rates is estimated to have a net positive impact on earnings due to float income exceeding increased expense - Ocwen's variable rate debt is exposed to interest rate fluctuations, and the company may use interest rate swaps and caps for hedging[457] - A 1% increase in interest rates on variable rate debt and interest-earning cash/float balances is estimated to have a net positive impact of approximately $14.1 million[458] Item 4. Controls and Procedures Management concluded that Ocwen's disclosure controls and procedures were effective as of March 31, 2019 - Disclosure controls and procedures were evaluated as effective as of March 31, 2019, ensuring material information is known and reported timely[459][460] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2019[461] PART II - OTHER INFORMATION This part includes information on legal proceedings, risk factors, exhibits, and report signatures Item 1. Legal Proceedings This item incorporates by reference the detailed information on legal proceedings from the Notes to the Unaudited Consolidated Financial Statements - Detailed information on legal proceedings is incorporated by reference from Note 19 – Regulatory Requirements and Note 21 – Contingencies[463] Item 1A. Risk Factors This item refers readers to the Annual Report on Form 10-K for a comprehensive description of the most significant risks affecting the company - Significant risks affecting the company are detailed in Part I of the Annual Report on Form 10-K for December 31, 2018, and subsequent SEC filings[464] - Readers should carefully review these risks, as their occurrence could materially and adversely affect the business and stock value[464] Item 6. Exhibits This item lists the exhibits filed with the Form 10-Q, including key corporate governance and financial agreements - Key exhibits include the Binding Term Sheet with Altisource S.à r.l., Ocwen Financial Corporation and Ocwen Mortgage Servicing, Inc., and the Joinder and Amendment Agreement for the Senior Secured Term Loan[466] Signatures The report is signed by the Executive Vice President and Chief Financial Officer, certifying its submission - The report was signed by June C. Campbell, Executive Vice President and Chief Financial Officer, on May 7, 2019[469]