UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, 2018 |
ORFor the fiscal year ended December 31, 2020
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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)
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| Florida | | 65-0039856 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1661 Worthington Road, Suite 100 | | 33409 |
West Palm Beach, Florida | 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:
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Common Stock, $.01 par value | | New York Stock Exchange (NYSE) |
(Title of each class)class | Trading Symbol(s) | (Name of each exchange on which registered)registered |
| Common Stock, $0.01 Par Value | OCN | New York Stock Exchange |
Securities registered pursuant to Section 12 (g) of the Act: Not applicable.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 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:
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| 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o☐ No x
Aggregate market value of the voting and non-voting common equity of the registrant held by nonaffiliatesnon-affiliates as of June 30, 2018: $524,401,2462020: $84,455,889
Number of shares of common stock outstanding as of February 22, 2019: 133,918,69316, 2021: 8,687,750 shares
DOCUMENTS INCORPORATED BY REFERENCE: Portions of our definitive Proxy Statement with respect to our Annual Meeting of Shareholders, which is currently scheduled to be held on May 30, 2019,25, 2021, are incorporated by reference into Part III, Items 10 - 14.
OCWEN FINANCIAL CORPORATION
20182020 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this report, including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.
TheseForward-looking statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identifymay be identified by a reference to a future period or by the use of forward-looking terminology. Forward-looking statements are typically identified by terminologywords such as “may,” “will,” “should,”“expect”, “believe”, “foresee”, “anticipate”, “intend”, “estimate”, “goal”, “strategy”, “plan” “target” and “project” or conditional verbs such as “will”, “may”, “should”, “could”, “intend,” “consider,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue”“would” or the negative of suchthese terms, or other comparable terminology.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, 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 lookingforward-looking statements and this may happen again. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed in “Risk Factors”Part I, Item 1A., Risk Factors and the following:
•uncertainty relating to the continuing impacts of the Coronavirus Disease 2019 (COVID-19) pandemic, including with respect to the response of the U.S. government, state governments, the Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac) (together, the GSEs), the Government National Mortgage Association (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;
•our ability to consummate the private placement of senior secured notes with Oaktree Capital Management L.P. and its affiliates (Oaktree);
•our ability to consummate on favorable terms or at all the additional debt financing that is a condition to issuance and sale of the senior secured notes to Oaktree;
•our ability to satisfy the other conditions precedent to the issuance and sale of the senior secured notes to Oaktree;
•our ability to refinance or redeem our corporate debt, including the Senior Secured Term Loan, the 6.375% senior unsecured notes due 2021, and the 8.375% senior secured second lien notes due 2022;
•our ability to obtain regulatory approvals and satisfy the closing conditions under the Transaction Agreement relating to our mortgage servicing right (MSR) joint venture with Oaktree and the timing for doing so;
•our ability to deploy the proceeds of the senior secured notes, if issued to Oaktree, in suitable investments at appropriate returns;
•the extent to which the MSR joint venture (if and when closed), other recent transactions and our enterprise sales initiatives will generate additional subservicing volume;
•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 Home Equity Conversion Mortgage (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 as a result of forbearance plans and moratoria on evictions and foreclosure proceedings;
•our ability to continue to improve our financial performance through cost re-engineering initiatives and other actions;
•our ability to continue 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;
•uncertainty related to claims, litigation, cease and desist orders and investigations brought by government agencies and private parties regarding our servicing, foreclosure, modification, origination and other practices, including uncertainty related to past, present or future investigations, litigation, cease and desist orders and settlements with state regulators, the Consumer Financial Protection Bureau (CFPB), State Attorneys General, the Securities and Exchange Commission (SEC), the Department of Justice or the Department of Housing and Urban Development (HUD) and actions brought under the False Claims Act by private parties on behalf of the United States of America regarding incentive and other payments made by governmental entities;;
•adverse effects on our business becauseas a result of regulatory investigations, litigation, cease and desist orders or settlements;
settlements and the reactions to the announcement of such investigations, litigation, cease and desist orders or settlements by key counterparties, or others, including lenders, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac,GSEs and together with Fannie Mae, the GSEs) and the Government National Mortgage Association (Ginnie Mae);Ginnie Mae;
•our ability to comply with the terms of our settlements;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;
•uncertainty related to changes in legislation, regulations, government programs and policies, industry initiatives, best servicing and lending practices, and media scrutiny of our business and industry;
•our ability to interpret correctly and comply with liquidity, net worth and other financial and other requirements of regulators, the GSEs 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 Macthe GSEs and Ginnie Mae and maintain our seller/servicer and other statuses with them;
the adequacy of our financial resources, including our sources of liquidity and ability to sell, fund and recover advances, repay borrowings and comply with the terms of our debt agreements, including the financial and other covenants contained in them;
our ability to interpret correctly and comply with liquidity, net worth and other financial and other requirements of regulators as well as those set forth in our debt and other agreements;
our ability to invest available funds at adequate risk-adjusted returns;
uncertainty regarding regulatory restrictions on our ability to repurchase our own stock;
•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 andor other security measuressystems or breach of our privacy protections, including any failure to protect customers’ data;
volatility in •our stock price;
the characteristics ofreliance on our technology vendors to adequately maintain and support our systems, including our servicing portfolio, including prepayment speeds along with delinquencysystems, loan originations and advance rates;
financial reporting systems, and uncertainty relating to our ability to contain and reducetransition to alternative vendors, if necessary, without incurring significant cost or disruption to our operating costs;operations;
our ability to successfully modify delinquent loans, manage foreclosures and sell foreclosed properties;
uncertainty related to legislation, regulations, regulatory agency actions, regulatory examinations, government programs and policies, industry initiatives and evolving best servicing practices;
the dependence of our business on New Residential Investment Corp. (NRZ), our largest client and the source for a substantial portion of our advance funding for non-prime, subprime or private-label (commonly referred to as non-Agency) mortgage servicing rights (MSRs);
our ability to timely transfer MSRs under our agreements with NRZ and our ability to maintain our long-term relationship with NRZ;
our ability to successfully integrate PHH Corporation (PHH) and its business, and to realize the strategic objectives and other benefits of the acquisition at the time anticipated or at all, including our ability to integrate, maintain and enhance PHH’s servicing, subservicing and other business relationships, including its relationship with NRZ;
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• | our ability to transition loan servicing to the Black Knight Financial Services, Inc. (Black Knight) LoanSphere MSP® servicing system (Black Knight MSP) within the time and cost parameters anticipated and without significant disruptions to our customers and operations;
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Our ability to replenish and grow our portfolio, including our ability to identify and acquire MSRs that deliver appropriate economic returns through such means as bulk and mini-bulk purchases of MSRs (i.e., purchases of large and small batches of MSRs), the GSE’s (collectively referred to as Agency) co-issue programs (where a lender transfers the servicing rights for a mortgage loan to Ocwen at the same time it sells the loan to the Fannie Mae, Freddie Mac or Ginnie Mae), executing servicer call rights (i.e., rights of the servicer to acquire the remaining loans in a pool of loans subject to an RMBS trust once the pool reaches a set threshold, generally 10% of the original pool size) and expanding into other lending channels;
•the loss of the services of our senior managers and our ability to execute effective chief executive and chief financial officer leadership transitions;key employees;
uncertainty related to general economic and market conditions, delinquency rates, home prices and disposition timelines on foreclosed properties;
•uncertainty related to the actions of loan owners and guarantors, including mortgage-backed securities investors, the GSEs, 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 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;
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;
uncertainty related to our relationships with third party vendors, including Altisource Portfolio Solutions S.A. (Altisource) and the status of our agreements with them as we transition to a new servicing system;
•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 meet capital requirements established by, or agreed with, regulators or counterparties;
•our ability to effectively restructuretransform our operations in response to changing business needs, including our ability to do so in an environment of significant uncertainty regarding the impact of the U.S.without unanticipated adverse tax code on our plans to move certain assets out of the United States Virgin Islands (USVI);consequences;
our ability to protect and maintain our technology systems and our ability to adapt such systems for future operating environments; and
•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, including under “Risk Factors.” 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.
PART I
ITEM 1. BUSINESS
When we use the terms “Ocwen,” “OCN,” “we,” “us” and “our,” we are referring to Ocwen Financial Corporation and its consolidated subsidiaries.
OVERVIEW
We are a financial services company that services and originates loans.mortgage loans, through our primary brands, PHH Mortgage and Liberty Reverse Mortgage. We have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors. This long-standing core competency will continue to be a guiding principle as we move forward. Our near-term priority isseek to return to profitability in the shortest timeframe possible within an appropriate risk and compliance environment. We believegrow our acquisition of PHH provides us with the opportunity to transform into a stronger, more efficient company better able to serve our customers and clients, and positions us for a return to growth.
On October 4, 2018, we completed our acquisition of PHH. The aggregate consideration paid to the former holders of PHH common stock was $358.4 million in cash, with $325.0 million funded from PHH’s cash on hand and $33.4 million funded from Ocwen’s cash on hand. The transaction was initially cash and book value accretive, with PHH having an opening cash balance of $423.1 million, $64.7 million more than the purchase price. The purchase price we negotiated contemplated that PHH would incur losses after the acquisition date. PHH’s net loss from continuing operations of $24.8 million is included in our consolidated statements of operations from the date of acquisition through December 31, 2018.
We have established a set of initiatives to achieve our objective of returning to growth and profitability. Our phase one initiatives address our critical near-term challenges. These include:
Execute on the PHH integration to create value;
Reengineer our cost structure;
Establish funding for growth;
Replenish portfolio runoff and restore growth focus; and,
Fulfill our regulatory commitments and resolve remaining legacy matters.
We believe the acquisition of PHH will provide the following benefits to enable the execution of the phase one initiatives:
Accelerate our transition to Black Knight MSP versus a de novo implementation;
Reduce fixed costs, on a combined basis, through reductions in duplicative corporate overhead and other costs;
Improve economies of scale through growth in our servicing portfolio; and,
Provide a foundation to enable the combined business to resume new business and growth activities that will, at a minimum, offset portfolio runoff.
Key to achieving our cost synergies are the elimination of redundant corporate overhead and completion of the loan transfers to Black Knight MSP. We have successfully completed two transfers, totaling approximately 240,000 loans as of February 27, 2019. The remaining portfolio will be transferred in multiple waves with the final transfer targeted to be completed in the second quarter of 2019. Our integration plans call for extensive pre- and post-transfer testing, quality checks and customer communications and support. To the extent any unexpected challenges are encountered, our transfer timeline may be extended. In addition to eliminating the dual servicing system environment, once we have completed the loan transfers to Black Knight MSP, we plan to drive further expense reductions through greater utilization of the cost advantages of our off-shore infrastructure and reductions in on-shore costs.
While certain restrictions remain, and while we continue to work to satisfy the remaining conditions, we are able to resume some growth activities following our acquisition of PHH. With the easing of restrictions, we intend to pursue origination and acquisition activities that will, at a minimum, replenish our expected annual portfolio runoff. We intend to pursue growth in a responsible and disciplined manner, with return targets that are prudent and aligned with our core competencies. We believe our core competency serving underserved and at-risk borrowers will provide a competitive advantage for certain acquisitions of MSRs. We are also working prudently to expand products and programs to serve underserved customers, including self-employed borrowers and borrowers who ‘just miss’ qualifying for GSE programs, and we are evaluating opportunities to re-enter forward correspondent and other lending channels.
Our phase two initiatives will focus on ensuring sustainability. These include:
Digitizing our business model;
Diversifying our business model by leveraging our core competencies; and,
Rebuilding our reputation.
We believe leveraging technology to deliver superior accuracy, cost, speed and customer satisfaction is critical to our long- term success. Once we have completed our transition to Black Knight MSP, we will focus our technology efforts on improving
our operating performance by, among others, implementing cognitive technologies to automate repetitive low complexity tasks, and improve our customer experience through implementing digital interfaces. These technologies exist today and are being used throughout the consumer finance industry.
As part of our cost re-engineering plans, we expect to reduce total staffing levels significantly and to close a number of our U.S. facilities. We believe these steps are necessary in order to drive stronger financial performance and, in the longer term, simplify our operations. By the end of 2019, we intend to be primarily operating out of four U.S. and USVI locations: West Palm Beach, FL, Mount Laurel, NJ, Rancho Cordova, CA, and St. Croix, USVI.performance.
We are headquartered in West Palm Beach, Florida with offices located throughoutand operations in the U.S., in the United States (U.S.) and in the USVI and operationsVirgin Islands, in India and the Philippines. At December 31, 2020, approximately 70% of our workforce is located outside the U.S. Ocwen Financial Corporation is a Florida corporation organized in February 1988. With our predecessors, we have been servicing residential mortgage loans since 1988. We have been originating forward mortgage loans since 2012 and reverse mortgage loans since 2013. We currently provide solutions through our primary operating, wholly-owned subsidiary, PHH Mortgage Corporation (PMC).
As of December 31, 2020, our public shareholders collectively held 8,536,869 shares or 98.3% of our common stock.
BUSINESS LINESMODEL AND SEGMENTS
Ocwen’s business model is designed to create value and maximize returns for our shareholders, and effectively allocate our resources. Following the acquisition and integration of PHH Corporation (PHH) in late 2018 and 2019, we have transformed into a better balanced and more diversified business. We seek to create value for shareholders through growth, operational efficiency and high quality operational execution. Our core competencies revolve around our Servicing business and Lendingwe aggressively pursue growth of our servicing portfolio through origination and purchase of servicing volume from multiple sources.
Our servicing portfolio is comprised of three components with different economics - our owned MSRs, our subservicing portfolio, and the NRZ servicing portfolio. We invest our capital to fund purchases and originations of our owned MSRs and servicing advances, for which we establish a targeted return on investment. Our net return includes servicing revenue net of servicing costs, less MSR portfolio runoff, and less our MSR and advance funding cost. Our subservicing portfolio generates a relatively more stable source of revenue. While subservicing fees are relatively lower, we do not incur any significant capital utilization or funding of advances. Our NRZ servicing portfolio is effectively a subservicing relationship - See New Residential Investment Corp. Relationship. We target a balanced mix of our primary linesportfolio between servicing and subservicing based on capital allocation and returns. Our servicing operations and customer interactions do not differentiate whether loans are serviced or subserviced. Our leadership and experience in dealing with distressed economic conditions and non-performing loans allowed us to quickly adapt to the COVID-19 pandemic and provide payment relief and assistance to borrowers enduring financial hardship, in a relatively seamless manner to subservicing clients and investors.
Our growth strategy is built on our relationships with borrowers, lenders and other market participants. We develop these relationships to grow our existing owned MSR portfolio, or develop new subservicing arrangements. We purchase MSRs through bulk portfolio purchases, through flow purchase agreements with our network of business. Ourmortgage companies and financial institutions, and through participation in the Agency Cash Window (or Co-Issue) programs. In order to diversify our sources of servicing and reduce our reliance on others, we have been developing our origination of MSRs through different channels, including our portfolio recapture channel, retail, wholesale and correspondent lending.
The chart below summarizes our current business model:
We report our activities in three segments, Servicing, Originations (previously Lending) and Corporate Items and Other that reflect other business activities that are currently individually insignificant are includedinsignificant. Our business segments reflect the internal reporting that we use to evaluate operating performance of services and to assess the allocation of our resources. The financial information of our segments is presented in our financial statements in Note 23 — Business Segment Reporting and discussed in the Corporate Itemsindividual business operations sections of Management’s Discussion and Other segment.Analysis of Financial Condition and Results of Operations.
Servicing
Our Servicing business is primarily comprised of our core residential forward mortgage servicing business that currently accounts for the majority of our total revenues, our reverse mortgage servicing business, and currently accounts for most of our total revenues.small commercial mortgage servicing business. Our servicing clients include some of the largest financial institutions in the U.S., including the GSEs, Ginnie Mae, NRZ and non-Agency residential mortgage-backed securities (RMBS) trusts. As of December 31, 2018,2020, our residential servicing portfolio consisted of 1,562,2381,107,582 loans with an unpaid principal balance (UPB) of $256.0$188.8 billion.
Servicing involves the collection of principal and interest payments from borrowers, the administration of tax and insurance escrow accounts, the collection of insurance claims, the management of loans that are delinquent or in foreclosure or bankruptcy, including making servicing advances, evaluating loans for modification and other loss mitigation activities and, if necessary, foreclosure referrals and the sale of the underlying mortgaged property following foreclosure (REO) on behalf of mortgage loan investors or other servicers. Master servicing involves the collection of payments from servicers and the distribution of funds to investors in mortgage and asset-backed securities and whole loan packages. We earn contractual monthly servicing fees (which are typically payable as a percentage of UPB) pursuant to servicing agreements as well as other ancillary fees relating to our servicing activities such as late fees and, in certain circumstances, REO referral commissions.
We own MSRs outright, where we typically receive all the servicing economics, and we subservice on behalf of other institutions that own the MSRs, or Rights to MSRs, in which case we typically earn a smaller fee for performing the subservicing activities. Special servicing is a form of subservicing where we generally manage only delinquent loans on behalf of a loan owner. We typically earn subservicing and special servicing fees either as a percentage of UPB or on a per loan basis.basis based on delinquency status.
Servicing advances are an important component of our business and are amounts that we, as servicer, are required to advance to, or on behalf of, our servicing clients if we do not receive such amounts from borrowers. These amounts include principal and interest payments, property taxes and insurance premiums and amounts to maintain, repair and market real estate properties on behalf of our servicing clients. Most of our advances have the highest reimbursement priority such that we are entitled to repayment of the advances from the loan or property liquidation proceeds before most other claims on these proceeds. The costs incurred in meeting advancing obligations consist principally of the interest expense incurred in financing the advance receivables and the costs of arranging such financing. Under subservicing agreements, Ocwen is promptly reimbursed by the owners of the MSRs who generally finance the advances and incur the associated financing cost.
Reducing delinquencies is important to our business because it enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Performing loans also require less work and thus are generally less costly to service. While increasing borrower participation in loan modification programs is a critical component of our ability to reduce delinquencies, borrower compliance with those modifications is also an important factor.
While we have been successful in reducing
Our servicing portfolio naturally decreases over time as homeowners make regularly scheduled mortgage payments, prepay loans prior to maturity, refinance with a mortgage loan not serviced by us or involuntarily liquidate through foreclosure or other liquidation process. In addition, existing clients may determine to terminate their servicing and subservicing arrangements with us and transfer the size and costs ofservicing to others. Therefore, our ability to maintain or grow our servicing operations in line with declines in our residential servicing portfolio, in order to return to sustainable profitability, we believe we will need to increaserevenue or the size of our servicing portfolio. While certain restrictions remain, and while we continueportfolio depends on our ability to workacquire the right to satisfy the remaining conditions, we are able to resume some growth activities. With the easing of restrictions, we intend to pursue origination and acquisition activities that will,service or subservice additional mortgage loans at a minimum, replenishrate that exceeds portfolio runoff and any client terminations. Our Originations segment is focused on profitably replenishing and growing our expected annual portfolio runoff.servicing and subservicing portfolios.
LendingOriginations
In 2018,The primary source of revenue of our Lending business originated or purchased forwardOriginations segment (previously Lending) is our gain on sale of loans. We originate and reversepurchase residential mortgage loans withthat we sell to Agencies or securitize on a UPB of $870.3 million and $593.7 million, respectively. These loans were acquired through three primary channels: directly withservicing retained basis, thereby generating a mortgage customers (retail), through correspondent lender relationships (correspondent) and through broker relationships (wholesale). Per-loan
margins vary by channel, with correspondent typically being the lowest margin and retail the highest. We exited the forward lending correspondent and wholesale channels in the second and fourth quarters of 2017, respectively.servicing rights. Our forward lending business is primarily focused on portfolio recapture (i.e., refinancing loans in our servicing portfolio).
Our forward mortgage loans are conventional (conforming to the underwriting standards of the GSEs, collectively Agency loans) and government-insured loans (insured by the FHA or VA). After origination, weWe generally package and sell the loans in the secondary mortgage market, through GSE and Ginnie Mae guaranteed securitizations and whole loan transactions. We originate forward mortgage loans directly with customers (recapture channel) as well as through correspondent lending arrangements since the second quarter of 2019. We originate reverse mortgage loans in all three channels, through our correspondent lending arrangements, broker relationships (wholesale) and retail channels. In addition to our originated MSRs, we acquire MSRs through multiple channels, including flow purchase agreements, the GSE Cash Window programs and bulk MSR purchases.
In 2020, our Originations business originated or purchased forward and reverse mortgage loans with a UPB of $7.0 billion and $941.6 million, respectively. Per-loan margins vary by channel, with correspondent typically retainbeing the associated MSRs on securitizations, providinglowest margin and retail the highest. As part of our internal management reporting we renamed the Lending segment as Originations effective in the first quarter 2020, without any other changes to our operating and reporting segments. In addition, effective with the fourth quarter of 2020, we report the results of Reverse Servicing within the Servicing segment (previously within Originations), to align with the change in the management of the business with a source of new MSRsand change in the internal management reporting. Historical segment information has been recast to replenish our servicing portfolio and partially offsetconform to the impact of amortization and prepayments, i.e., portfolio runoff. Whole loan transactions are generally completed on a servicing released basis.current segment structure.
We also originate and purchase Home Equity Conversion Mortgages (HECM or reverse mortgage loans), which are generally insured by the FHA, through our Liberty Home Equity Solutions, Inc. (Liberty) operations. Loans originated under this program are generally guaranteed by the FHA, which provides investors with protection against risk of borrower default. The reverse mortgage channel provides both current period and future period gain on sale revenue from new originations because of subsequent tail draws taken by the borrower. While we focus on current period reported earnings, we also utilize our market experience to invest in future asset value when returns are at attractive levels. These future cash flows are not guaranteed but viewed as probable given our historic asset quality and slow prepayment speeds.
Retail Lending. We originate forward and reverse mortgage loans directly with borrowers through our retail lending business. Our forward lending business benefits from our significant servicing portfolio by offering refinance options to qualified borrowers seeking to lower their mortgage payments. Depending on borrower eligibility, we refinance eligible customers into conforming or government-insured products. We are focused on increasing recapture rates on our existing servicing portfolio to grow this business. We also are increasing our ability to originate retail loans to non-Ocwen servicing customers through various marketing channels and a centralized call center.channels. Through lead campaigns and direct marketing, the retail channel seeks to convert leads into loans in a cost-efficient manner. We are focused on increasing recapture rates on our existing servicing portfolio to grow this business.
Correspondent Lending. Our reverse correspondent lending operation purchases mortgage loans that have been originated by a network of approved third-party lenders. We are currently evaluating re-entering the forward correspondent lending channel.
Wholesale Lending. We originate reverse mortgage loans through a network of approved brokers. Brokers are subject to a formal approval and monitoring process. We underwrite all loans originated through this channel consistent with the underwriting standards required by the ultimate investor prior to funding.
All the lenders participating in our correspondent lending program are approved by senior management members of our lending and compliancerisk management teams. We also employ an ongoing monitoring and renewal process for participating lenders that includes an evaluation of the performance of the loans they have sold to us. We perform a variety of pre- and post-funding review procedures to ensure that the loans we purchase conform to our requirements and to the requirements of the investors to whom we sell loans.
Wholesale Lending. We originate reverse mortgage loans through a network of approved brokers. Brokers are subject to a formal approval and monitoring process. We underwrite all loans originated through this channel consistent with the underwriting standards required by the ultimate investor prior to funding.
We provide customary origination representations and warranties to investors in connection with our loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved originators relating to loans we purchase through our correspondent lending channel. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur.
MSR Purchases. We purchase MSRs through flow purchase agreements, the GSE Cash Window programs and bulk MSR purchases. The results of operations for each ofGSE Cash Window programs we participate in, and purchase MSR from, allow mortgage companies and financial institutions to sell whole loans to the respective agency and sell the MSR to the winning bidder servicing released. In addition, we partner with other originators to replenish our reportable operating segments (Servicing, LendingMSR through flow purchase agreements. We do not provide any origination representations and Corporate Items and Other) are includedwarranties in the individual business operations sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Financial information related to reportable operating segments is provided in Note 22 — Business Segment Reporting.connection with our MSR purchases through MSR flow purchase agreements or GSE Cash Window programs.
REGULATION
Our business is subject to extensive oversight and regulation by federal, state and local governmental authorities, including the CFPB, HUD and various state agencies that license and conduct examinations of our loan servicing, origination and collection activities. In addition, we operate under a number of regulatory settlements that subject us to ongoing reporting and other obligations. From time to time, we also receive requests (including requests in the form of subpoenas and civil investigative demands) from federal, state and local agencies for records, documents and information relating to the policies, procedures and practices of our loan servicing, origination and collection activities. The GSEs and their conservator, the Federal Housing Finance Authority (FHFA), Ginnie Mae, the United States Treasury Department, various investors, non-Agency securitization trustees and others also subject us to periodic reviews and audits.
In the current regulatory environment, we have faced and expect to continue to face heightened regulatory and public scrutiny as an organization as well as stricter and more comprehensive regulation of the entire mortgage sector. We continue to work diligently to assess and understand the implications of the regulatory environment in which we operate and to meet the requirements of this constantly changing environment. We devote substantial resources to regulatory compliance, while, at the same time, striving to meet the needs and expectations of our customers, clients and other stakeholders. Our actual or alleged failure to comply with applicable federal, stateSee Item 1A. Risk Factors – Legal and local laws, regulations and licensing requirements could lead to any of the following:
loss of our licenses and approvals to engage in our servicing and lending businesses;
governmental investigations and enforcement actions;
administrative fines and penalties and litigation;
civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities;
breaches of covenants and representations under our servicing, debt or other agreements;
damage to our reputation;
inability to raise capital; or
inability to execute on our business strategy.
In addition to amounts paid to resolve regulatory matters, we incur costs to comply with the terms of such resolutions, including the costs of third-party firms to monitor our compliance with such resolutions. We recognized $177.5 million in such third-party monitoring costs relating to the 2013 Ocwen National Mortgage Settlement, our 2014 settlement with the New York Department of Financial Services (NY DFS) and our 2015 settlement with the California Department of Business Oversight (CA DBO). Further, as described below, the costs of complying with our regulatory settlements include the costs of conducting an escrow analysis, Maryland organizational assessments, Massachusetts data integrity audits, and transition to Black Knight MSP. The remediation of errors identified during the escrow analysis could result in payments, credits or other actions to remediate such errors and other actions could be taken against us by regulators or others with respect to such errors.Regulatory Risks for further information.
We must comply with a large number of federal, state and local consumer protection laws including, among others, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Equal Credit Opportunity Act, as well as individual state laws pertaining to licensing, general mortgage origination and servicing practices and foreclosure, and federal and local bankruptcy rules. These statutes apply to many facets of our business, including loan origination, default servicing and collections, use of credit reports, safeguarding of non-public personally identifiable information about our customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes and regulations are enacted, promulgated, amended, interpreted and enforced.
In recent years, the general trend among federal, state and local lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings with regard to residential mortgage lenders and servicers. The CFPB continues to take a very active role in the mortgage industry, and its rule-making and regulatory agenda relating to loan servicing and origination continues to evolve. Individual states have also been active, as have other regulatory organizations such as the Multistate Mortgage Committee (MMC), a multistate coalition of various mortgage banking regulators. We also believe there has been a shift among certain regulators towards a broader view of the scope of regulatory oversight responsibilities with respect to mortgage lenders and servicers. In addition to their traditional focus on licensing and examination matters, certain regulators have begun to make observations, recommendations or demands with respect to areas such as corporate governance, safety and soundness and risk and compliance management.
The CFPB and state regulators have also focused on the use and adequacy of technology in the mortgage servicing industry.industry, privacy concerns and other topical issues, such as likely discontinuation of the London Interbank Offered Rate (LIBOR), communications from debt collectors, and the ability of borrowers to repay mortgage loans. In 2016, the CFPB issued a special edition supervision report that stressed the need for mortgage servicers to assess and make necessary improvements to their information technology systems to ensure compliance with the CFPB’s mortgage servicing requirements. In October 2020 and December 2020, respectively, the CFPB issued final rules revising Regulation F, which implements the Fair Debt Collection Practices Act and which will take effect on November 30, 2021. In December 2020, the CFPB issued two final rules which will become effective on March 1, 2021, one of which amended the definition of a general qualified mortgage loan under Regulation Z and the other of which created a new category of “seasoned” qualified mortgages. The NY DFSNew York Department of Financial Services (NY DFS) also issued Cybersecurity Requirements for Financial Services Companies, which took effect in 2017, and which required banks, insurance companies, and other financial services institutions regulated by the NY DFS to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.
Likewise, the NY DFS has directed New regulatoryYork-regulated depository and legislative measures, or changes in enforcement practices, including those relatednon-depository institutions, insurers and pension funds to submit their plans for managing the risks relating to the technologylikely discontinuation of LIBOR. Similarly, the California Consumer Privacy Act, which was enacted in 2018 and became effective on January 1, 2020, created new consumer rights relating to the access to, deletion of, and sharing of personal information. In November 2020, California voters approved Proposition 24, thereby enacting the California Privacy Rights Act, which creates additional privacy protections above and beyond the California Consumer Privacy Act, most of which will take effect on January 1, 2023. Further, in 2020 we use, could, either individuallybecame subject to additional regulations and requirements as the GSEs, Ginnie Mae, the United States Treasury Department and state regulators responded to the COVID-19 pandemic. In March 2020, the CARES Act was signed into law, allowing borrowers affected by COVID-19 to request temporary loan forbearance for federally backed
mortgage loans. In addition, multiple forbearance programs, moratoria of foreclosure and eviction and other requirements to assist borrowers enduring financial hardship due to COVID-19 were implemented by states, agencies and regulators.
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. The minimum net worth requirements to which our licensed entities are subject are unique to each state and type of license. In addition, we receive information requests and other inquiries, both formal and informal in nature, from our state regulators as part of their general regulatory oversight of our servicing and lending businesses. We also engage with state attorneys general and the CFPB and, on occasion, we engage with other federal agencies, including the Department of Justice and various inspectors general on various matters, including responding to information requests and other inquiries. Many of our regulatory engagements arise from a complaint that the entity is investigating, although some are formal investigations or proceedings. The GSEs and their conservator, FHFA, HUD, FHA, VA, Ginnie Mae, the United States Treasury Department, and others also subject us to periodic reviews and audits. See Item 1A. Risk Factors – Legal and Regulatory Risks for further information.
In recent years, we have been subject to significant state and federal regulatory actions against us, including the following:
•We are currently in litigation with the CFPB after the CFPB filed a lawsuit in the aggregate, require significant changesfederal district court for the Southern District of Florida against Ocwen, Ocwen Mortgage Servicing, Inc. (OMS) and Ocwen Loan Servicing, LLC (OLS) alleging violations of federal consumer financial laws relating to our servicing business.
•In October 2020, we announced that we had reached an agreement to resolve a lawsuit filed in April 2017 by the Florida Attorney General and the State of Florida Office of Financial Regulation regarding certain legacy servicing activities. Pursuant to that agreement, Ocwen was required to pay the State of Florida $5.16 million within 60 days of the Court entering the final consent judgment between the parties. Ocwen then has an additional two years to provide debt forgiveness totaling at least $1.0 million to certain Florida borrowers. If Ocwen is unable to do so by the completion of the two-year period, it will owe the State of Florida an additional $1.0 million. We anticipate that we will be able to satisfy the debt forgiveness obligation and therefore do not presently anticipate that the additional $1.0 million payment will be required. In addition, Ocwen agreed to certain late fee waivers, a targeted loan modification program for certain eligible Florida borrowers, and certain non-monetary reporting and handling obligations. Ocwen did not admit any fault or liability as part of the settlement. Ocwen satisfied the monetary portions of the settlement in December 2020. Although we believe we had strong defenses to all of Florida’s claims, this was an opportunity to resolve one of Ocwen’s remaining significant legacy matters, and to do so without incurring further expense in preparing for trial.
•In addition, we have previously settled state regulatory actions against us by 29 states and the District of Columbia after these states and the District of Columbia alleged deficiencies in our compliance with laws and regulations relating to our servicing and lending activities, we have entered into regulatory settlements with the NY DFS and the California Department of Business Oversight (CA DBO) relating to our servicing practices and other aspects of our business, practices, impose additional costs on us, limit our product offerings, limit our abilityand we have entered into a settlement agreement with the MMC and consent orders with certain state attorneys general to efficiently pursue business opportunities, negatively impact asset values or reduce our revenues.
resolve and close out findings of an MMC examination of PMC’s legacy mortgage servicing practices.
We arehave incurred, and will continue to incur significant costs to comply with the terms of the settlements into which we have entered. In addition, the restrictions imposed under these settlements have significantly impacted how we run our business and will continue to do so.
We continue to be subject to a number of ongoing federal and state regulatory examinations, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions, which could result in further adverse regulatory action against us.
To the extent that an examination, audit or other regulatory engagement identifies an alleged failure by us to comply with applicable laws, regulations or licensing requirements, or if allegations are made that we have failed to comply with applicable laws, regulations or licensing requirements or the commitments we have made in connection with our regulatory settlements (whether such allegations are made through administrative actions such as cease See Item 1A. Risk Factors – Legal and desist orders, through legal proceedings or otherwise) or if other regulatory actions of a similar or different nature are taken in the future against us, this could lead to (i) administrative fines and penalties and litigation, (ii) loss of our licenses and approvals to engage in our servicing and lending businesses, (iii) governmental investigations and enforcement actions, (iv) civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) damage to our reputation, (vii) inability to raise capital or otherwise fund our operations and (viii) inability to execute on our business strategy. Any of these occurrences could increase our operating expenses and reduce our revenues, hamper our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.Regulatory Risks for further information.
Finally, there are a number of foreign laws and regulations that are applicable to our operations outside of the U.S., including laws and regulations that govern licensing, employment, safety, taxes and insurance and laws and regulations that govern the creation, continuation and the winding up of companies as well as the relationships between shareholders, our corporate entities, the public and the government in these countries. Non-compliance
COMPETITION
The financial services markets in which we operate are highly competitive and fragmented. We compete with large and small financial services companies, including bank and non-bank entities, in the servicing, lending and MSR transaction markets. Our competitors include large banks, such as Wells Fargo, JPMorgan Chase, Bank of America and Citibank, large non-bank servicers such as Mr. Cooper and PennyMac Loan Services, market disruptors such as Quicken Loans and Loan Depot who are aggressively investing in the digital transformation of their business platforms, and real estate investment trusts, including New Residential Investment Corp.
In the servicing industry, we compete based on price, quality and risk appetite. Potential counterparties also (1) assess our regulatory compliance track record and examine our systems and processes for maintaining and demonstrating regulatory compliance, (2) consider our customer satisfaction rankings, and (3) consider our third-party servicer ratings. Certain of our competitors, especially large banks, may have substantially lower costs of capital and greater financial resources, which makes it challenging to compete. We believe that our competitive strengths flow from our ability to control and drive down delinquencies using proprietary processes, our lower cost to service non-performing loans and our deep know-how as a long-time operator of servicing loans. Notwithstanding these strengths, we have suffered reputational damage as a result of our regulatory settlements and the associated scrutiny of our business. We believe this has weakened our competitive position against both our bank and non-bank servicing competitors.
In the lending industry, we face intense competition in most areas, including rates, margin, fees, customer service and name recognition. Some of our competitors, including the larger banks, have substantially lower costs of capital and strong retail presence, which makes it challenging to compete. In addition, with the proliferation of smartphones and technological changes enabling improved payment systems and cheaper data storage, newer market participants, often called “disruptors,” are reinventing aspects of the financial industry and capturing profit pools previously enjoyed by existing market participants. As a result, the lending industry could become even more competitive if new market participants are successful in capturing market share from existing market participants such as ourselves. We believe our competitive strengths flow from our existing customer relationships and from our focus on providing strong customer service.
The reverse lending market faces many of the same competitive pressures as the forward market. In addition, the reverse market is significantly smaller than the forward market with a higher market share concentration among the top five Ginnie Mae HMBS issuers. These higher concentration levels can, at times, lead to significant price competition. We believe our competitive advantage flows from the long tenure of Liberty Home Equity Solutions, Inc. (Liberty)in the industry (Liberty began operations in 2004 and we currently operate under the brand name Liberty Reverse Mortgage), which provides us with significant experience and contributes to our name recognition, our strategic partnerships and our use of technology to produce higher levels of productivity to drive down per-loan costs.
THIRD-PARTY SERVICER RATINGS
Like other servicers, we are the subject of mortgage servicer ratings or rankings (collectively, ratings) issued and revised from time to time by rating agencies including Moody’s Investors Service, Inc. (Moody’s), S&P Global Ratings, Inc. (S&P) and Fitch Ratings, Inc. (Fitch). Favorable ratings from these agencies are important to the conduct of our loan servicing and lending businesses.
The following table summarizes our key servicer ratings:
| | | | | | | | | | | | | | | | | |
| PHH Mortgage Corporation |
| Moody’s | | S&P | | Fitch |
| Residential Prime Servicer | SQ3 | | Average | | RPS3 |
| Residential Subprime Servicer | SQ3 | | Average | | RPS3 |
| Residential Special Servicer | SQ3 | | Average | | RSS3 |
| Residential Second/Subordinate Lien Servicer | SQ3 | | Average | | RPS3 |
| Residential Home Equity Servicer | — | | — | | RPS3 |
| Residential Alt-A Servicer | — | | — | | RPS3 |
| Master Servicer | SQ3 | | Average | | RMS3 |
| Ratings Outlook | N/A | | Stable | | Negative |
| | | | | |
| Date of last action | August 29, 2019 | | December 27, 2019 | | March 24, 2020 |
In addition to servicer ratings, each of the agencies will from time to time assign an outlook (or a ratings watch such as Moody’s review status) to the rating status of a mortgage servicer. A negative outlook is generally used to indicate that a rating “may be lowered,” while a positive outlook is generally used to indicate a rating “may be raised.” On March 24, 2020, Fitch placed all U.S RMBS servicer ratings on Negative outlook resulting from a rapidly evolving economic and operating environment due to the sudden impact of the COVID-19 virus.
Downgrades in servicer ratings could adversely affect our ability to service loans, sell or finance servicing advances and could impair our ability to consummate future servicing transactions or adversely affect our dealings with lenders, other contractual counterparties, and regulators, including our ability to maintain our status as an approved servicer by Fannie Mae and Freddie Mac. The servicer rating requirements of Fannie Mae do not necessarily require or imply immediate action, as
Fannie Mae has discretion with respect to whether we are in compliance with their requirements and what actions it deems appropriate under the circumstances if we fall below their desired servicer ratings.
See Item 1A. Risk Factors - Risks Relating to Our Business for further discussion of the adverse effects that a failure to maintain minimum servicer ratings could have on our business, financing activities, financial condition or results of operations.
NEW RESIDENTIAL INVESTMENT CORP. RELATIONSHIP
Ocwen has a legacy relationship with NRZ and we acquired PMC’s legacy relationship with NRZ when we acquired PHH in October 2018. As a result, we service loans on behalf of NRZ under various agreements, including traditional subservicing agreements, where NRZ is the legal owner of the MSRs, and in connection with Rights to MSRs, where Ocwen retains legal title to the underlying MSRs but NRZ has generally assumed risks and rewards consistent with an MSR owner. See Note 10 — Rights to MSRs.
NRZ is our largest servicing client, accounting for $67.1 billion of UPB or 36% of the UPB of our total servicing portfolio as of December 31, 2020, approximately 62% of all delinquent loans that Ocwen serviced, and approximately 30% of our total servicing and subservicing fees in 2020, net of servicing fees remitted to NRZ (excluding ancillary income). Through April 2020, we have benefited from the amortization of $334.2 million deferred upfront lump-sum cash payments that we received from NRZ in 2017 and 2018 when we renegotiated certain aspects of the legacy Ocwen agreements. We recognized other income of $34.2 million and $95.1 million due to the amortization of these lump sum payments in 2020 and 2019, respectively.
On February 20, 2020, we received a notice of termination from NRZ with respect to the legacy PMC subservicing agreement. This termination was for convenience and not for cause, and provided for loan deboarding fees to be paid by NRZ. We continued to service these loans until deboarding on October 1, 2020. A total of 270,218 loans were deboarded representing $34.3 billion of UPB.
The legacy Ocwen agreements have an initial term ending in July 2022. The underlying loans are almost exclusively non-Agency loans, involving a higher level of operational and regulatory risk, and requiring substantial direct and oversight staffing relative to Agency loans. NRZ may terminate the agreements for convenience, subject to Ocwen’s right to receive a termination fee and 180 days’ notice at any time during the initial term. The termination fee is calculated as specified in the Ocwen agreements, and is a discounted percentage of the expected revenues that would be owed to Ocwen over the remaining contract term based on certain portfolio run off assumptions. After the initial term, these agreements can be renewed for three-month terms at NRZ’s option. In addition to a base servicing fee, we receive ancillary income, which primarily includes late fees, loan modification fees and Speedpay® fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. NRZ receives all float earnings and deferred servicing fees related to delinquent borrower payments, as well as certain REO-related income, including REO referral commissions. As legal MSR owner, or in compliance with the Rights to MSRs agreements, NRZ is responsible for financing all servicing advance obligations in connection with the loans underlying the MSRs.
In the ordinary course, we regularly share information with NRZ and discuss various aspects of our relationship. With respect to the Rights to MSRs, our existing agreements provide that the Rights to MSRs could (i) remain in the existing Rights to MSR structure, (ii) be acquired by Ocwen or (iii) be sold or transferred to a third party together with Ocwen’s title to the related MSRs. In addition, the Rights to MSRs could be transferred to NRZ under the Transfer Agreement and become subserviced by PMC. It is possible that NRZ could exercise its rights to early terminate for convenience some or all of the legacy Ocwen servicing agreements. In addition, the agreements may not be renewed in July 2022. In our business planning efforts, we have assessed the potential impact of such actions by NRZ in light of the current and predicted future economics of the NRZ relationship generally. 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 early termination rights, we would need to rapidly scale our servicing business.
ALTISOURCE VENDOR RELATIONSHIP
Ocwen is a party to a number of long-term agreements with Altisource S.à r.l., and certain of other subsidiaries of Altisource Portfolio Solutions, S.A. (Altisource), including a Services Agreement, under which Altisource provides various services, such as property valuation services, property preservation and inspection services and title services, among other things. This agreement expires August 31, 2025 and includes renewal provisions. Ocwen and Altisource have also entered into a Master Services Agreement pursuant to which Altisource currently provides title services to Ocwen for reverse mortgage loans. Ocwen also has a General Referral Fee Agreement with Altisource pursuant to which Ocwen receives referral fees which are paid out of the commission that would otherwise be paid to Altisource as the selling broker in connection with real estate sales services provided by Altisource. However, for MSRs that transferred to NRZ, as well as those subject to our Rights to MSRs agreements with NRZ, we are not entitled to REO referral commissions.
In February 2019, Ocwen and Altisource signed a Binding Term Sheet, which among other things, confirmed Altisource’s cooperation with the deboarding of loans from Altisource’s REALServicing servicing system to Black Knight MSP. The
Binding Term Sheet also amended certain provisions in the Services Agreement. After certain conditions have been met and where Ocwen has the right to select the services provider, Ocwen agreed to use Altisource to provide the types of services that Altisource currently provides under the Services Agreement for at least 90% of services for all portfolios for which Ocwen is the servicer or subservicer, except that Altisource will be the provider for all such services for the portfolios: (i) acquired by Ocwen pursuant to loan servicing under agreements from Homeward (acquired in 2012) or assigned and assumed by Ocwen from Residential Capital, LLC, et al (assets acquired in 2013); and (ii) acquired from Ocwen, excluding certain portfolios in which PHH has an interest, by NRZ or its affiliates prior to the date of the Binding Term Sheet. The Binding Term Sheet also sets forth a framework for negotiating additional service level changes under the Services Agreement in the future. As specified in the Binding Term Sheet, if Altisource fails certain performance standards for specified periods of time, then Ocwen may terminate Altisource as a provider for the applicable service(s), subject to Altisource’s right to cure. For certain claims arising from service referrals received by Altisource after the effective date of the Binding Term Sheet, the provisions include reciprocal indemnification obligations in the event of negligence by either party, and Altisource’s indemnification of Ocwen in the event of breach by Altisource of its obligations under the Services Agreement. The limitations of liability provisions include an exception for losses either party suffers as a result of third-party claims.
Certain services provided by Altisource under these agreements are charged to the borrower and/or mortgage loan investor. Accordingly, such services, while derived from our loan servicing portfolio, are not reported as expenses by Ocwen. These services include residential property valuation, residential property preservation and inspection services, title services and real estate sales-related services.
OAKTREE RELATIONSHIP
We have recently established a strategic alliance with Oaktree Capital Management L.P. and certain of its affiliates and managed investment vehicles (collectively Oaktree) that we expect will support refinancing our corporate debt and help advance our growth initiatives. The Oaktree relationship includes the launch of an MSR investment vehicle to scale up our servicing business in a capital efficient manner and investments in our debt and equity to support a comprehensive refinancing at the corporate level and our growth.
On December 21, 2020, we entered into a transaction agreement with Oaktree to form a joint venture for the purpose of investing in GSE MSRs that PMC will subservice. Oaktree and Ocwen will hold 85% and 15% of the venture, respectively, and have agreed to invest equity up to $250 million over three years. The closing of the transaction is expected to occur in the first half of 2021. Upon closing, Ocwen also agreed to issue to Oaktree up to 4.9% of Ocwen’s then outstanding common stock at a price of $23.15 per share, and to issue to Oaktree warrants to purchase additional common stock equal to 3% of Ocwen’s then outstanding common stock at a purchase price of $24.31 per share, subject to anti-dilution adjustments.
On February 9, 2021, we executed an agreement with Oaktree to issue to Oaktree in a private placement $285 million of Ocwen senior secured notes in two separate tranches. The initial tranche of $199.5 million senior secured notes is subject to certain conditions, including, but not limited to, the contemporaneous consummation by Ocwen or one of its subsidiaries of an additional debt financing not to exceed $450 million. The additional $85.5 million tranche is also subject to certain conditions, including, but not limited to, the closing of the MSR joint venture with Oaktree. Upon issuance of the initial tranche of senior secured notes, Ocwen agreed to issue to Oaktree warrants to purchase common stock equal to 12.0% of Ocwen’s then outstanding common stock at an exercise price of $26.82 per share, subject to anti-dilution adjustments.
The net proceeds before expenses from the issuance to Oaktree of the initial tranche of senior secured notes and the warrants will be $175.0 million (after $24.5 million of original issue discount) and are expected to be used, together with the proceeds from the additional debt financing, to repay in full an aggregate of $498 million of existing indebtedness, including Ocwen’s $185.0 million Senior Secured Term Loan, $21.5 million 6.375% senior unsecured notes due 2021 and $291.5 million 8.375% senior secured second lien notes due 2022. The net proceeds before expenses from the issuance to Oaktree of the additional tranche of senior secured notes and the warrants will be approximately $75.0 million (after $10.5 million of original issue discount) and are expected to be used to fund our investment in the MSR joint venture and for general corporate purposes, including to accelerate the growth of our Originations and Servicing businesses.
There can be no assurance that the conditions to the issuance to Oaktree of the senior secured notes will be met, or that any additional debt financing will be consummated. See the Liquidity and Capital Resources section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Note 25 – Commitments, and Note 28 — Subsequent Events to the Consolidated Financial Statements for additional information.
USVI OPERATIONS
The majority of our USVI operations and assets were transferred to the U.S. during 2019 as a result of our legal entity simplification. Our current USVI operations support our three segments, including a Servicing call center for customer call and home retention.
In 2012, Ocwen formed OMS under the laws of the USVI in a federally recognized economic development zone where qualified entities are eligible for certain tax benefits granted by the USVI Economic Development Commission(“EDC Benefits”). We were approved as a Category IIA service business, and are therefore entitled to receive significant benefits that may have a favorable impact on our effective tax rate. We conducted a substantial portion of our servicing business through OLS, a wholly-owned subsidiary of OMS. Although we are eligible for a reduced tax rate in the USVI, the reduced tax rate has not provided Ocwen with a foreign tax benefit in recent tax years as we have been incurring taxable losses in the USVI.
During 2019, OLS merged into PMC. As a result of this reorganization, the majority of our USVI operations and assets were transferred to the U.S. We plan to continue to maintain some operations in the USVI. However, it is possible that we may not be able to retain our qualifications for the EDC Benefits, or that our past and future EDC Benefits could be adversely impacted by our reorganization,or that changes in U.S. federal, state, local, territorial or USVI taxation statutes or applicable regulations may cause a reduction in or an elimination of the value of the EDC Benefits, all of which could result in an increase to our tax expense, including a loss of anticipated income tax refunds, and, therefore, adversely affect our financial condition and results of operations.
HUMAN CAPITAL RESOURCES
We believe the success of our organization is highly dependent on the quality and engagement of our human capital resources. Our workforce is dedicated to creating positive outcomes for homeowners, communities and investors through caring service and innovative solutions. We strive to develop a working environment and culture that fosters our company values:
•Integrity: Do What’s Right – Always
•Service Excellence: Delight Our Customers with Exceptional Service
•People: Develop, Grow and Value All Employees
•Teamwork: Succeed Together as a Global Team
•Embracing Change: Value Innovation and New Thinking
We had a total of approximately 5,000 employees at December 31, 2020. At December 31, 2020, approximately 1,500 of our employees were employed in the U.S. and USVI, and approximately 3,500 of our employees were employed in our operations in India and the Philippines. Of our foreign-based employees, more than 70% were engaged in our Servicing operations as of December 31, 2020. Ocwen currently operates through a secure remote workforce model for approximately 98% of its global workforce due to the COVID-19 pandemic.
Our Board of Directors and executive leadership team places significant focus on our human capital resources, ensuring our culture enables employees to consistently demonstrate our company values. Important attributes of our human capital strategy include:
Diversity and Inclusion (D&I). We are committed to be a globally diverse and inclusive workplace where every voice is heard. Diversity, inclusiveness and respect are integral parts of our culture and work environment. D&I training for all employees and unconscious bias training for leaders are mandatory parts of our learning programs to increase awareness, and employees at all levels are annually evaluated on sustaining an inclusive work environment. The pillars of our diversity program are:
•Leadership: Embrace and foster a culture of inclusion throughout the Company and be held accountable for achieving diversity and inclusion goals and objectives.
•Workforce: Attract, develop, retain and advance the best and brightest from all walks of life and backgrounds at all levels of the Company.
•Vendor Diversity: Achieve a range of suppliers, vendors and service providers who align with our diversity and inclusion strategies.
•Community Engagement; Ensure that Ocwen has a significant presence in and supports a core group of diverse, community-based organizations and philanthropies.
As of December 31, 2020, 44% of our employees globally are women, and 36% of our U.S. leadership roles (Director and above) are filled by women. 59% of our U.S. employees are women and 45% are people of color. Our affinity groups like the Ocwen Global Women’s Network (OGWN) and mentoring programs, when coupled with a culture of appreciation, help provide a comprehensive ecosystem for diversity to flourish.
Talent Development. We continue to foster an environment in which every team member has the opportunity to grow and achieve his or her professional goals, with support and encouragement. We regularly measure employee engagement – our employees’ pride, energy and optimism that fuels their effort – and implement action plans that respond to employee feedback. Our most recent employee survey indicated 81% favorable engagement levels. Our training platform focuses not only on the technical domain skills essential to role success, but includes competency-based programs to develop leadership capabilities and skills needed for the future. In 2020, our voluntary turnover was 15.4%. Succession planning occurs annually and is reviewed by the CEO and the Compensation and Human Capital Committee. Strategic talent reviews to identify, develop and promote top talent are part of our performance management processes.
Rewards. Our total rewards (compensation and benefits) programs are developed to attract, motivate and retain employees. They demonstrate the value the employee provides to the organization, are competitive to the marketplace, and connect directly to key business strategies. Our compensation programs, including salaries and short- and long-term incentives, are centered on our pay-for-performance philosophy, aligning the interests of employees and stakeholders by rewarding both individual and overall company performance. Ocwen’s health and welfare benefit programs strive to keep employees productive and engaged at work by serving the total well-being of employees and their families. We are committed to and regularly evaluate our practices to ensure pay is fair and equitable, and competitive to the marketplace.
Environmental, Social and Governance (ESG) Practices
We are committed to conducting our business in a way that is mindful of our environmental impact, our impacts on homeowners, our employees and the communities in which we operate, and the highest standards of corporate governance.
Environmental Impact. In December 2020, we announced we remain committed to a primarily remote post-COVID-19 working model that will result in less than one-third of employees commuting to work on a daily basis, significantly reducing the use of natural resources in our facilities and reducing carbon emissions by eliminating a daily commute for thousands of our employees. We recycle office supplies at all U.S. facilities, are converting to LED lighting, and are in the process of transforming to digital mailrooms to reduce paper usage.
Social Responsibility. Ocwen participates in a variety of community outreach and homeowner assistance programs and events with local and national organizations around the country. We remain focused on areas still suffering the effects of the 2008 housing crisis as well those impacted by COVID-19. Since the onset of the pandemic, we implemented a virtual borrower outreach program in partnership with the NAACP and our Community Advisory Council to support borrowers impacted by COVID-19, with 40 borrower outreach events completed in 2020. In addition to giving back to our communities through corporate-level donations, our employee Corporate Social Responsibility group volunteers plan events focused on giving back to our local communities.
Corporate Governance. We ensure all employees, including members of management, are fully trained in and continuously comply with our robust governance policies, including our code of business conduct and ethics, insider trading prevention policy, anti-money laundering program, “Suspicious Activity Report” filing requirements, fraud risk management policy, whistleblower protections, and vendor audit procedures. With the exception of our Chief Executive Officer, our Board of Directors is fully independent of management, and all directors are re-elected annually. In addition to a committee structure that fully meets the governance requirements of the New York Stock Exchange (NYSE), our Board of Directors includes a Risk and Compliance Committee to oversee Ocwen’s risk management, compliance management, information security and privacy programs.
AVAILABLE INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available free of charge through our website (www.ocwen.com) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, including Ocwen, that file electronically with the SEC. The address of that site is www.sec.gov. We have also posted on our website, and have available in print upon request (1) the charters for our Audit Committee, Compensation and Human Capital Committee, Nomination/Governance Committee and Risk and Compliance Committee, (2) our Corporate Governance Guidelines, (3) our Code of Business Conduct and Ethics and (4) our Code of Ethics for Senior Financial Officers. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to or waiver of the Code of Ethics for Senior Financial Officers, as well as any amendment to the Code of Business Conduct and Ethics or waiver thereto applicable to any executive officer or director. We may post information that is important to investors on our website. The information provided on our website is not part of this report and is, therefore, not incorporated herein by reference.
ITEM 1A. RISK FACTORS
An investment in our common stock involves significant risk. We describe below the most significant risks that management believes affect or could affect us. Understanding these risks is important to understanding any statement in this Annual Report and to evaluating an investment in our common stock. You should carefully read and consider the risks and uncertainties described below together with all the other information included or incorporated by reference in this Annual Report before you make any decision regarding an investment in our common stock. You should also consider the information set forth above under “Forward Looking Statements.” If any of the following risks actually occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose some or all of your investment. While the following discussion provides a description of some of the important risks that could cause our results to vary materially from those expressed in public statements or documents, other factors besides those discussed within this Annual Report or elsewhere in other of our reports filed with or furnished to the SEC could also affect our business or results.
Summary of Risk Factors
As a non-bank mortgage company, we are exposed in the normal course of business to multiple risks shared by other participants in our industry.In addition, some of the risks we face are unique to Ocwen or such risks could have a different or greater impact on Ocwen than on other companies. These risks could adversely impact our business, regulatory or agency approval, financial condition, liquidity, results of operations, ability to grow and reputation, and are summarized below. This summary is intended to supplement, and should not be considered a substitute for, the complete Risk Factors that follow.
Legal and Regulatory Risks
•Failure to operate our business in compliance with complex legal or regulatory requirements or contractual obligations, including those in response to the COVID-19 pandemic
•Adverse litigation outcomes with the CFPB or other legal matters
•Adverse changes to GSE and Ginnie Mae business models, initiatives and other actions
Risks Related to Our Financial Performance, Financing Our Business, Liquidity and Net Worth, and the Economy
•Inability to consummate the transactions we have entered into with Oaktree, including the private placement of senior secured notes and the MSR asset vehicle transaction
•Inability to consummate the additional debt funding that is a condition of the Oaktree debt investment on favorable terms or at all
•Inability to execute our strategic plan to return to profitability or pursue business or asset acquisitions
•Inability to access capital to meet the financing requirements of our business, or noncompliance with our debt agreements or covenants
•Inability to obtain sufficient servicer advance financing necessary to meet the financing requirements due to increased delinquencies or forbearance plans
•Inability to fund our tail commitments, securitize our Home Equity Conversion Mortgages (HECM or reverse mortgage loans) or fund our Home Equity Conversion Mortgage-Backed Securities (HMBS) repurchase obligations
•Failure to satisfy minimum net worth and liquidity requirements established by regulators, GSEs, Ginnie Mae, lenders, or other counterparties
•Inability to appropriately manage liquidity, interest rate and foreign currency exchange risks, including ineffective hedging strategies
•Economic slowdown or downturn, a capital market disruption, or a deterioration of the housing market, including but not limited to, in the states where we have some concentration of our business
•Inability to acquire additional profitable client relationships
•Inability to meet future advance financing obligations if NRZ were to fail to comply with its servicing advance obligations under the subservicing agreement
Operational Risks and Other Risks Related to Our Business
•Disruption in our operations or technology systems due to the failure or disagreements of our service providers to fulfill their obligations under their agreements with us, including but not limited to Black Knight
•Failure to adequately update our technology systems and processes, and interruption or delay in our operations due to cybersecurity breaches or system failures
•Adverse changes in political or economic stability or government policies in India, the Philippines or the U.S. Virgin Islands (USVI)
•Disruption in our operations, including in India, the Philippines, the USVI and Florida, resulting from severe weather or natural disaster events
•Material increase in loan put-backs and related liabilities for breaches of representations and warranties regarding sold loans or MSRs
•Heightened reputational risk due to media and regulatory scrutiny of companies that originate and securitize reverse mortgages
•Incurrence of losses by our captive reinsurance entity from catastrophic events, particularly in areas where a significant portion of the insured properties are located
•Incurrence of litigation costs and related losses if the validity of a foreclosure action is challenged by a borrower or if a court overturns a foreclosure
•Failure to maintain minimum servicer ratings and impairment of our ability to sell or fund servicing advances, access financing, consummate future servicing transactions, and maintain our status as an approved servicer by the GSEs
•Volatility of our earnings due to MSR valuation changes, financial instrument valuation changes and other factors
•Loss of the confidence of investors and counterparties if we fail to reasonably estimate the fair value of our assets and liabilities or our internal controls over financial reporting are found to be inadequate
•Changes in the method of determining LIBOR, or its replacement with an alternative reference rate
Tax Risks
•Failure to retain or collect the tax benefits provided by the USVI, or certain past income becoming subject to increased United States federal income taxation
•Inability to utilize our net operating losses carryforwards and other deferred tax assets due to “ownership change” as defined in Section 382 of the Internal Revenue Code or other factors
General Risks - Risks Relating to Ownership of Our Common Stock
•Substantial volatility in our common stock price
•The vote by large shareholders of their shares to influence matters requiring shareholder approval in a way that management does not believe represents the best interests of all shareholders
•The issuance of additional securities authorized by the board of directors that causes dilution and depresses the price of our securities
•Future offerings of debt securities that are senior to our common stock in liquidation, or equity securities that are senior to our common stock in respect of liquidation and distributions
•Certain provisions in our organizational documents and regulatory restrictions may make takeovers more difficult, and significant investments in our common stock may be restricted
Legal and Regulatory Risks
The business in which we engage is complex and heavily regulated. If we fail to operate our business in compliance with both existing and future regulations, our business, reputation, financial condition or results of operations could be materially and adversely affected.
Our business is subject to extensive regulation by federal, state and local governmental authorities, including the CFPB, HUD, the SEC and various state agencies that license and conduct examinations of our servicing and lending activities. In addition, we operate under a number of regulatory settlements that subject us to ongoing reporting and other obligations. See the next risk factor below for additional detail concerning these regulatory settlements. From time to time, we also receive requests (including requests in the form of subpoenas and civil investigative demands) from federal, state and local agencies for records, documents and information relating to our servicing and lending activities. The GSEs (and their conservator, the FHFA), Ginnie Mae, the United States Treasury Department, various investors, non-Agency securitization trustees and others also subject us to periodic reviews and audits.
In the current regulatory environment, we have faced and expect to continue to face heightened regulatory and public scrutiny as an organization as well as stricter and more comprehensive regulation of the entire mortgage sector. We must devote substantial resources to regulatory compliance, and we incurred, and expect to continue to incur, significant ongoing costs to comply with new and existing laws and governmental regulation of our business. If we fail to effectively manage our regulatory and contractual compliance, the resources we are required to devote and our compliance expenses would likely increase. Any
significant delay or complication in fulfilling our regulatory commitments and resolving remaining legacy matters may jeopardize our ability to return to profitability.
We must comply with a large number of federal, state and local consumer protection laws including, among others, the Dodd-Frank Act, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, RESPA, TILA, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Equal Credit Opportunity Act, as well as individual state licensing and foreclosure laws and federal and local bankruptcy rules. These statutes apply to many facets of our business, including loan origination, default servicing and collections, use of credit reports, safeguarding of non-public personally identifiable information about our customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes and regulations are enacted, promulgated, amended, interpreted and enforced. In addition, we must maintain an effective corporate governance and compliance management system. See “Business - Regulation” for additional information regarding our regulators and the laws that apply to us.
We must structure and operate our business to comply with applicable laws and regulations and the terms of our regulatory settlements. This can require judgment with respect to the requirements of such laws and regulations and such settlements. While we endeavor to engage proactively with our regulators in an effort to ensure we do so correctly, if we fail to interpret correctly the requirements of such laws and regulations or the terms of our regulatory settlements, we could be found to be in breach of such laws, regulations or settlements.
Our actual or alleged failure to comply with the terms of our regulatory settlements or applicable federal, state and local consumer protection laws, regulations and licensing requirements could lead to any of the following:
•administrative fines and penalties and litigation;
•loss of our licenses and approvals to engage in our servicing and lending businesses;
•governmental investigations and enforcement actions;
•civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities;
•breaches of covenants and representations under our servicing, debt or other agreements;
•damage to our reputation;
•inability to raise capital or otherwise secure the necessary financing to operate the business and refinance maturing liabilities;
•changes to our operations that may otherwise not occur in the normal course, and that could cause us to incur significant costs; or
•inability to execute on our business strategy.
Any of these outcomes could materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
In recent years, the general trend among federal, state and local lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings with regard to residential mortgage lenders and servicers. The CFPB continues to take a very active role in the mortgage industry, and its rule-making and regulatory agenda relating to loan servicing and originations continues to evolve. Individual states, including New York and California, have also been active, as have other regulatory organizations such as the MMC. We also believe there has been a shift among certain regulators towards a broader view of the scope of regulatory oversight responsibilities with respect to mortgage originators and servicers. In addition to their traditional focus on licensing and examination matters, certain regulators have begun to make observations, recommendations or demands with respect to such areas as corporate governance, safety and soundness, and risk and compliance management. We must endeavor to work cooperatively with our regulators to understand all their concerns if we are to be successful in our business.
The CFPB and state regulators have also increasingly focused on the use, and adequacy, of technology in the mortgage servicing industry, privacy concerns and other topical issues, such as likely discontinuation of LIBOR and communications from debt collectors and the ability of borrowers to repay mortgage loans. In 2016, the CFPB issued a special edition supervision report that stressed the need for mortgage servicers to assess and make necessary improvements to their information technology systems in order to ensure compliance with the CFPB’s mortgage servicing requirements. See Business - Regulation for a description of recent rules issued by the CFPB and NY DFS and recent legislation adopted in California.
Presently, a level of heightened uncertainty exists with respect to the future of regulation of mortgage lending and servicing, including the future of the Dodd Frank Act and CFPB. We cannot predict the specific legislative or executive actions that may result or what actions federal or state regulators might take in response to potential changes to the Dodd Frank Act or to the federal regulatory environment generally. Such actions could impact the industry generally or us specifically, could impact our relationships with other regulators, and could adversely impact our business and limit our ability to reach an
appropriate resolution with the CFPB, with which we are engaged to attempt to resolve certain concerns relating to our mortgage servicing practices, as described in the next risk factor.
New regulatory and legislative measures, or changes in enforcement practices, including those related to the technology we use, could, either individually or in the aggregate, require significant changes to our business practices, impose additional costs on us, limit our product offerings, limit our ability to efficiently pursue business opportunities, negatively impact asset values or reduce our revenues. Accordingly, they could materially and adversely affect our business and our financial condition, liquidity and results of operations.
Finally, the regulations and requirements to which we are subject have been changing rapidly as the GSEs, Ginnie Mae, the United States Treasury Department and state regulators have responded to the COVID-19 pandemic. On March 27, 2020, the CARES Act was signed into law, allowing borrowers affected by COVID-19 to request temporary loan forbearance for federally backed mortgage loans. Multiple forbearance programs, moratoria of foreclosure and eviction and other requirements to assist borrowers enduring financial hardship due to COVID-19 are being issued by states, agencies and regulators. These requirements vary across jurisdiction, may conflict in some circumstances, and can be complex to interpret and implement, and could cause us to incur additional expense. If we are unable to comply with, or face allegations that we are in breach of, applicable laws, regulations or other requirements, we may face regulatory action, including fines, penalties, and restrictions on our business. In addition, we could face litigation and reputational damage. Any of these risks could have a material adverse impact on our business, financial condition, liquidity and results of operations. If the COVID-19 pandemic is prolonged or intensifies due to the emergence of additional viral strains or otherwise, it may lead to a further increase in regulations, which could exacerbate these risks and their adverse impacts.
Governmental bodies have taken regulatory and legal actions against us in the past and may in the future impose regulatory fines or penalties or impose additional requirements or restrictions on our activities that could increase our operating expenses, reduce our revenues or otherwise adversely affect our business, financial condition, liquidity, results of operations, ability to grow and reputation.
We are subject to a number of ongoing federal and state regulatory examinations, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions that could result in further adverse actionsregulatory action against us, including (i) restrictions on our operations in these counties, (ii) fines, penalties or sanctions or (iii) reputational damage.certain matters summarized below. See Note 24 — Regulatory Requirements and Note 26 — Contingencies to the Consolidated Financial Statements.
CFPB
In April 2017, the CFPB filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, Ocwen Mortgage Servicing, Inc. (OMS)OMS and Ocwen Loan Servicing, LLC (OLS)OLS alleging violations of federal consumer financial laws relating to our servicing business dating back to 2014. The CFPB’s claims include allegations regarding (1) the adequacy of Ocwen’s servicing system and integrity of Ocwen’s mortgage servicing data, (2) Ocwen’s foreclosure practices and (3) various purported servicer errors with respect to borrower escrow accounts, hazard insurance policies, timely cancellation of private mortgage insurance, and handling of customer complaints, and marketing of optional products.complaints. The CFPB alleges violations of unfair, deceptive acts or abusive practices, as well as violations of specific laws or regulations. The CFPB does not claim specific monetary damages, although it does seek consumer relief, disgorgement of allegedly improper gains, and civil money penalties. WeWhile we believe we have factual and legal defenses to the CFPB’s allegations and are vigorously defending ourselves.
Prior toourselves, the CFPB instituting legal proceedings, we had been engaged with the CFPB in efforts to resolve the matter. We have recorded $12.5 million as of December 31, 2018 as a result of these discussions. If we are successful in defending ourselves against the CFPB, it is possible that our losses could be less than $12.5 million. It is also possible that we could incur losses that materially exceed the amount accrued, and the resolutionoutcome of the matters raised by the CFPB, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our business and could have a material adverse impact on our business, reputation, financial condition, liquidity and results of operations. We cannot currently estimate the amount, if any, of reasonably possible loss above amounts previously accrued.
State Licensing and State Attorneys General and Other Matters
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. The minimum net worth requirements to which our licensed entities are subject are unique to each state and type of license. We believe our licensed entities were in compliance with all of their minimum net worth requirements at December 31, 2018.2020. However, it is possible that regulators could disagree with our calculations, and one state regulator has disagreed with our calculation for a prior year period; we are currently discussinghave discussed the matter with the regulator.regulator, including why we believe we were in compliance with the applicable net worth requirements. Failure to satisfy any of the requirements to which our licensed entities are subject could result in a variety of regulatory actions ranging from a fine, a directive requiring a certain step to be taken, a suspension or, ultimately, a revocation of a license, any of which could have a material adverse impact on our results of operations and financial condition. In addition, we receive information requests and other inquiries, both formal and informal in nature, from our state regulators as part of their general regulatory oversight of our servicing and lending businesses. We also regularly engage with state attorneys general and the CFPB and, on occasion, we engage with other federal agencies, including the Department of Justice and various inspectors general on various matters, including responding to information requests and other inquiries. Many of our regulatory engagements arise from a complaint that the entity is investigating, although some are formal investigations or proceedings. The GSEs and their conservator, FHFA, HUD, FHA,
VA, Ginnie Mae, the United States Treasury Department, and others also subject us to periodic reviews and audits. We have in the past resolved, and may in the future resolve, matters via consent orders or payment of monetary amounts to settle issues identified in connection with examinations or regulatory or other oversight activities, and such resolutions could have material and adverse effects on our business, reputation, operations, results of operations and financial condition.
In April 2017 and shortly thereafter, mortgage and banking regulatory agencies from 29 states and the District of Columbia took regulatory actions against OLS and certain other Ocwen companies that alleged deficiencies in our compliance with laws
and regulations relating to our servicing and lending activities. In general, theThese regulatory actions generally took the form of orders styled as “cease and desist orders,”orders” and we use that termprohibited a range of actions relating to refer to all the orders for ease of reference; for ease of reference, we also include the District of Columbia as a state when we reference states below. All the ceaseour lending and desist orders were applicable to OLS, but additional Ocwen entities were named in some orders, including Ocwen Financial Corporation, OMS, Homeward Residential, Inc. (Homeward) and Liberty. Following the issuance of the orders, we reached agreements with certain regulatory agencies to obtain delays in the enforcement of certain terms or exceptions to certain terms contained in the cease and desist orders. Additionally, we revised our operations based on the terms of the orders while we sought to negotiate resolutions.
servicing activities. We entered into agreements with all 29 states plus the District of Columbia to resolve these regulatory actions. These agreements generally contained the following key terms (the Multi-State Common Settlement Terms):
Ocwen would not acquire any new residential MSRs until April 30, 2018.
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• | Ocwen would develop a plan of action and milestones regarding its transition from the REALServicing® servicing system to an alternate servicing system and, with certain exceptions, would not board any new loans onto the REALServicing system.
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In the event that Ocwen chose to merge with or acquire an unaffiliated company or its assets in order to effectuate a transfer of loans from the REALServicing system, Ocwen was required to comply with regulatory notice and waiting period requirements.
Ocwen would engage a third-party auditor to perform an analysis with respect to our compliance with certain federal and state laws relating to escrow by testing approximately 9,000 loan files relating to residential real property in various states, and Ocwen would develop corrective action plans for any errors identified by the third-party auditor.
Ocwen would develop and submit for review a plan to enhance our consumer complaint handling processes.
Ocwen would provide financial condition reporting on a confidential basis as part of each state’s supervisory framework through September 2020.Terms.
In addition, to the terms described above, Ocwen entered into settlements with certain states, including on October 15, 2020, with the Florida Attorney General and the Florida Office of Financial Regulation, on different or additional terms, which include making additional communications with and for borrowers, certain restrictions, certain review, reporting and remediation obligations, and the following additional terms:
Ocwen agreed with the Connecticut Department of Banking to pay certain amounts only in the event we fail to comply with certain requirements under our agreement with Connecticut.
In its agreement with the Maryland Office of the Commissioner of Financial Regulation, Ocwen agreed to complete an independent management assessment and enterprise risk assessment and to a prohibition, with certain de minimis exceptions, on repurchases of our stock until December 7, 2018. Ocwen also agreed to make certain paymentsmonetary payments.
We have incurred and will continue to Maryland, to provide remediation to certain borrowers in the form of cash payments or credits and to pay certain amounts only in the event we fail to comply with certain requirements under our agreement with Maryland.
Ocwen agreed with the Massachusetts Division of Banks to pay $1.0 million to the Commonwealth of Massachusetts Mortgage Education Trust. Ocwen and the Massachusetts regulatory agency also agreed on a schedule pursuant to which we will regain eligibility to acquire residential MSRs on Massachusetts loans (including loans originated by Ocwen) as it meets certain thresholds in its transition to a new servicing system. All restrictions on Massachusetts MSR acquisitions will be lifted when Ocwen completes the second phase of a three-phase data integrity audit which will be conducted by an independent third-party following completion of Ocwen’s servicing system transition. The first phase of this audit, which was required to be completed prior to transitioning any Massachusetts loans to a new servicing system, has already been completed.
Ocwen agreed with the Nebraska Department of Banking and Finance until April 30, 2019, to limit its growth through acquisition from correspondent relationships to no more than ten percent per year for Nebraska loans (based on the total number of loans held at the prior calendar year-end).
In addition to the payments described above, we will also incur, significant costs complying with the terms of these settlements including in connection withto the escrow analysis, Maryland organizational assessments, Massachusetts data integrity audits,
and transition to Black Knight MSP. The remediation of errors identified during the escrow analysis could result in payments, creditsextent that legal or other actions to remediate such errors and other actions could beare taken against us by regulators or others with respect to such errors.
Although we have resolved all of the administrative actions taken by state regulatorsmatters, they could result in April 2017 and shortly thereafter, we have not resolved all of the legal actions. In April 2017, and concurrent with the issuance of the cease and desist orders and the filing of the CFPB lawsuit discussed above, two state attorneys general took actions against us relating to our servicing practices. The Florida Attorney General, together with the Florida Office of Financial Regulation, filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, OMS and OLS alleging violations of federal and state consumer financial laws relating to our servicing business. These claims are similar to the claims made by the CFPB. The Florida lawsuit seeks injunctive and equitable relief,additional costs and civil money penalties in excess of $10,000 per confirmed violation of the applicable statute. As previously disclosed, the Massachusetts Attorney General had sent us a civil investigative demand requesting information relating to various aspects of our servicing practices, including lender-placed insurance and property preservation fees. Subsequently, the Massachusetts Attorney General filed a lawsuit against OLS in the Superior Court for the Commonwealth of Massachusetts alleging violations of state consumer financial laws relating to our servicing business, including with respect to our activities relating to lender-placed insurance and property preservation fees. The Massachusetts Attorney General’s lawsuit seeks injunctive and equitable relief, costs, and civil money penalties of $5,000 per confirmed violation of the applicable statute. While we endeavor to negotiate appropriate resolutions in these two matters, we are vigorously defending ourselves, as we believe we have valid defenses to the claims made in both lawsuits. The outcome of these two lawsuits, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our businessother adverse impacts and could behave a materially adverse toimpact on our business, reputation, financial condition, liquidity and results of operations.
Certain of the state regulators’ cease and desist orders referenced a confidential supervisory memorandum of understanding (MOU) that we entered into with the MMC and six states relating to a servicing examination from 2013 toto 2015. The MOU contained various provisions relating to servicing practices and safety and soundness aspects of the regulatory review, as a step toward closing the 2013 - 2015 examination. Ocwen responded to the MOU items and continues to provide certain reports andAmong other information pursuant to the MOU. There were no monetary or other penalties imposed under the MOU. However,things, the MOU prohibited us from repurchasing stock during the development of a going forward plan and, thereafter, except as permitted by the plan. We prepared and submitted a plan in 2016 that contained no stock repurchase restrictions and, therefore, we do not believe we are currently restricted from repurchasing stock. However,We requested confirmation from the signatories of the MOU that they agree with this interpretation, and received affirmative responses from the MMC may not agree with our interpretation. For this reason, and onfive states, and a response declining to take a legal position from the basis of our progress to date responding to our obligations under the MOU, we have requested that the MOU be terminated. To the extent that we cannot terminate the MOU, we may remain subject to a share repurchase restriction and continued reporting obligations.remaining state.
In January 2018, prior to our acquisition of PHH, PHH Mortgage Corporation (PMC)PMC entered into a settlement agreement with the MMC and consent orders with certain state attorneys general to resolve and close out findings of an MMC examination of PMC’s legacy mortgage servicing practices. Under the terms of these settlements, PMC agreed to comply with certain servicing standards, to conduct testing of compliance with such servicing standards for a period of three years, and to report to the MMC regarding the same. To the extent PMC does not comply with the terms of the servicing standards, the MMC or state attorneys general could take regulatory action against us, including imposing fines or penalties or otherwise restricting our business activities.
We continue to work with the NY DFS to address matters they continue to raise with us as well as to fulfill our commitments under the 2017 NY Consent Order and PHH acquisition conditional approval. To the extent that we fail to address adequately any concerns raised by the NY DFS or fail to fulfill our commitments to the NY DFS, the NY DFS could take regulatory action against us, including imposing fines or penalties or otherwise restricting our business activities. Any such actions could have a material adverse impact on our business, financial condition liquidity and results of operations.
Other MattersTHIRD-PARTY SERVICER RATINGS
Like other servicers, we are the subject of mortgage servicer ratings or rankings (collectively, ratings) issued and revised from time to time by rating agencies including Moody’s Investors Service, Inc. (Moody’s), S&P Global Ratings, Inc. (S&P) and Fitch Ratings, Inc. (Fitch). Favorable ratings from these agencies are important to the conduct of our loan servicing and lending businesses.
The following table summarizes our key servicer ratings:
| | | | | | | | | | | | | | | | | |
| PHH Mortgage Corporation |
| Moody’s | | S&P | | Fitch |
| Residential Prime Servicer | SQ3 | | Average | | RPS3 |
| Residential Subprime Servicer | SQ3 | | Average | | RPS3 |
| Residential Special Servicer | SQ3 | | Average | | RSS3 |
| Residential Second/Subordinate Lien Servicer | SQ3 | | Average | | RPS3 |
| Residential Home Equity Servicer | — | | — | | RPS3 |
| Residential Alt-A Servicer | — | | — | | RPS3 |
| Master Servicer | SQ3 | | Average | | RMS3 |
| Ratings Outlook | N/A | | Stable | | Negative |
| | | | | |
| Date of last action | August 29, 2019 | | December 27, 2019 | | March 24, 2020 |
In addition to servicer ratings, each of the agencies will from time to time assign an outlook (or a ratings watch such as Moody’s review status) to the rating status of a mortgage servicer. A negative outlook is generally used to indicate that a rating “may be lowered,” while a positive outlook is generally used to indicate a rating “may be raised.” On March 24, 2020, Fitch placed all U.S RMBS servicer ratings on Negative outlook resulting from a rapidly evolving economic and operating environment due to the sudden impact of the COVID-19 virus.
Downgrades in servicer ratings could adversely affect our ability to service loans, sell or finance servicing advances and could impair our ability to consummate future servicing transactions or adversely affect our dealings with lenders, other contractual counterparties, and regulators, including our ability to maintain our status as an approved servicer by Fannie Mae and Freddie Mac. The servicer rating requirements of Fannie Mae do not necessarily require or imply immediate action, as
Fannie Mae has discretion with respect to whether we are in compliance with their requirements and what actions it deems appropriate under the circumstances if we fall below their desired servicer ratings.
See Item 1A. Risk Factors - Risks Relating to Our Business for further discussion of the adverse effects that a failure to maintain minimum servicer ratings could have on our business, financing activities, financial condition or results of operations.
NEW RESIDENTIAL INVESTMENT CORP. RELATIONSHIP
Ocwen has a legacy relationship with NRZ and we acquired PMC’s legacy relationship with NRZ when we acquired PHH in October 2018. As a result, we service loans on behalf of NRZ under various agreements, including traditional subservicing agreements, where NRZ is the legal owner of the MSRs, and in connection with Rights to MSRs, where Ocwen retains legal title to the underlying MSRs but NRZ has generally assumed risks and rewards consistent with an MSR owner. See Note 10 — Rights to MSRs.
NRZ is our largest servicing client, accounting for $67.1 billion of UPB or 36% of the UPB of our total servicing portfolio as of December 31, 2020, approximately 62% of all delinquent loans that Ocwen serviced, and approximately 30% of our total servicing and subservicing fees in 2020, net of servicing fees remitted to NRZ (excluding ancillary income). Through April 2020, we have benefited from the amortization of $334.2 million deferred upfront lump-sum cash payments that we received from NRZ in 2017 and 2018 when we renegotiated certain aspects of the legacy Ocwen agreements. We recognized other income of $34.2 million and $95.1 million due to the amortization of these lump sum payments in 2020 and 2019, respectively.
On occasion,February 20, 2020, we received a notice of termination from NRZ with respect to the legacy PMC subservicing agreement. This termination was for convenience and not for cause, and provided for loan deboarding fees to be paid by NRZ. We continued to service these loans until deboarding on October 1, 2020. A total of 270,218 loans were deboarded representing $34.3 billion of UPB.
The legacy Ocwen agreements have an initial term ending in July 2022. The underlying loans are almost exclusively non-Agency loans, involving a higher level of operational and regulatory risk, and requiring substantial direct and oversight staffing relative to Agency loans. NRZ may terminate the agreements for convenience, subject to Ocwen’s right to receive a termination fee and 180 days’ notice at any time during the initial term. The termination fee is calculated as specified in the Ocwen agreements, and is a discounted percentage of the expected revenues that would be owed to Ocwen over the remaining contract term based on certain portfolio run off assumptions. After the initial term, these agreements can be renewed for three-month terms at NRZ’s option. In addition to a base servicing fee, we receive ancillary income, which primarily includes late fees, loan modification fees and Speedpay® fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. NRZ receives all float earnings and deferred servicing fees related to delinquent borrower payments, as well as certain REO-related income, including REO referral commissions. As legal MSR owner, or in compliance with the Rights to MSRs agreements, NRZ is responsible for financing all servicing advance obligations in connection with the loans underlying the MSRs.
In the ordinary course, we regularly share information with NRZ and discuss various aspects of our relationship. With respect to the Rights to MSRs, our existing agreements provide that the Rights to MSRs could (i) remain in the existing Rights to MSR structure, (ii) be acquired by Ocwen or (iii) be sold or transferred to a third party together with Ocwen’s title to the related MSRs. In addition, the Rights to MSRs could be transferred to NRZ under the Transfer Agreement and become subserviced by PMC. It is possible that NRZ could exercise its rights to early terminate for convenience some or all of the legacy Ocwen servicing agreements. In addition, the agreements may not be renewed in July 2022. In our business planning efforts, we have assessed the potential impact of such actions by NRZ in light of the current and predicted future economics of the NRZ relationship generally. 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 early termination rights, we would need to rapidly scale our servicing business.
ALTISOURCE VENDOR RELATIONSHIP
Ocwen is a party to a number of long-term agreements with Altisource S.à r.l., and certain of other subsidiaries of Altisource Portfolio Solutions, S.A. (Altisource), including a Services Agreement, under which Altisource provides various services, such as property valuation services, property preservation and inspection services and title services, among other things. This agreement expires August 31, 2025 and includes renewal provisions. Ocwen and Altisource have also entered into a Master Services Agreement pursuant to which Altisource currently provides title services to Ocwen for reverse mortgage loans. Ocwen also has a General Referral Fee Agreement with Altisource pursuant to which Ocwen receives referral fees which are paid out of the commission that would otherwise be paid to Altisource as the selling broker in connection with real estate sales services provided by Altisource. However, for MSRs that transferred to NRZ, as well as those subject to our Rights to MSRs agreements with NRZ, we are not entitled to REO referral commissions.
In February 2019, Ocwen and Altisource signed a Binding Term Sheet, which among other things, confirmed Altisource’s cooperation with the deboarding of loans from Altisource’s REALServicing servicing system to Black Knight MSP. The
Binding Term Sheet also amended certain provisions in the Services Agreement. After certain conditions have been met and where Ocwen has the right to select the services provider, Ocwen agreed to use Altisource to provide the types of services that Altisource currently provides under the Services Agreement for at least 90% of services for all portfolios for which Ocwen is the servicer or subservicer, except that Altisource will be the provider for all such services for the portfolios: (i) acquired by Ocwen pursuant to loan servicing under agreements from Homeward (acquired in 2012) or assigned and assumed by Ocwen from Residential Capital, LLC, et al (assets acquired in 2013); and (ii) acquired from Ocwen, excluding certain portfolios in which PHH has an interest, by NRZ or its affiliates prior to the date of the Binding Term Sheet. The Binding Term Sheet also sets forth a framework for negotiating additional service level changes under the Services Agreement in the future. As specified in the Binding Term Sheet, if Altisource fails certain performance standards for specified periods of time, then Ocwen may terminate Altisource as a provider for the applicable service(s), subject to Altisource’s right to cure. For certain claims arising from service referrals received by Altisource after the effective date of the Binding Term Sheet, the provisions include reciprocal indemnification obligations in the event of negligence by either party, and Altisource’s indemnification of Ocwen in the event of breach by Altisource of its obligations under the Services Agreement. The limitations of liability provisions include an exception for losses either party suffers as a result of third-party claims.
Certain services provided by Altisource under these agreements are charged to the borrower and/or mortgage loan investor. Accordingly, such services, while derived from our loan servicing portfolio, are not reported as expenses by Ocwen. These services include residential property valuation, residential property preservation and inspection services, title services and real estate sales-related services.
OAKTREE RELATIONSHIP
We have recently established a strategic alliance with Oaktree Capital Management L.P. and certain of its affiliates and managed investment vehicles (collectively Oaktree) that we expect will support refinancing our corporate debt and help advance our growth initiatives. The Oaktree relationship includes the launch of an MSR investment vehicle to scale up our servicing business in a capital efficient manner and investments in our debt and equity to support a comprehensive refinancing at the corporate level and our growth.
On December 21, 2020, we entered into a transaction agreement with Oaktree to form a joint venture for the purpose of investing in GSE MSRs that PMC will subservice. Oaktree and Ocwen will hold 85% and 15% of the venture, respectively, and have agreed to invest equity up to $250 million over three years. The closing of the transaction is expected to occur in the first half of 2021. Upon closing, Ocwen also agreed to issue to Oaktree up to 4.9% of Ocwen’s then outstanding common stock at a price of $23.15 per share, and to issue to Oaktree warrants to purchase additional common stock equal to 3% of Ocwen’s then outstanding common stock at a purchase price of $24.31 per share, subject to anti-dilution adjustments.
On February 9, 2021, we executed an agreement with Oaktree to issue to Oaktree in a private placement $285 million of Ocwen senior secured notes in two separate tranches. The initial tranche of $199.5 million senior secured notes is subject to certain conditions, including, but not limited to, the contemporaneous consummation by Ocwen or one of its subsidiaries of an additional debt financing not to exceed $450 million. The additional $85.5 million tranche is also subject to certain conditions, including, but not limited to, the closing of the MSR joint venture with Oaktree. Upon issuance of the initial tranche of senior secured notes, Ocwen agreed to issue to Oaktree warrants to purchase common stock equal to 12.0% of Ocwen’s then outstanding common stock at an exercise price of $26.82 per share, subject to anti-dilution adjustments.
The net proceeds before expenses from the issuance to Oaktree of the initial tranche of senior secured notes and the warrants will be $175.0 million (after $24.5 million of original issue discount) and are expected to be used, together with the proceeds from the additional debt financing, to repay in full an aggregate of $498 million of existing indebtedness, including Ocwen’s $185.0 million Senior Secured Term Loan, $21.5 million 6.375% senior unsecured notes due 2021 and $291.5 million 8.375% senior secured second lien notes due 2022. The net proceeds before expenses from the issuance to Oaktree of the additional tranche of senior secured notes and the warrants will be approximately $75.0 million (after $10.5 million of original issue discount) and are expected to be used to fund our investment in the MSR joint venture and for general corporate purposes, including to accelerate the growth of our Originations and Servicing businesses.
There can be no assurance that the conditions to the issuance to Oaktree of the senior secured notes will be met, or that any additional debt financing will be consummated. See the Liquidity and Capital Resources section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Note 25 – Commitments, and Note 28 — Subsequent Events to the Consolidated Financial Statements for additional information.
USVI OPERATIONS
The majority of our USVI operations and assets were transferred to the U.S. during 2019 as a result of our legal entity simplification. Our current USVI operations support our three segments, including a Servicing call center for customer call and home retention.
In 2012, Ocwen formed OMS under the laws of the USVI in a federally recognized economic development zone where qualified entities are eligible for certain tax benefits granted by the USVI Economic Development Commission(“EDC Benefits”). We were approved as a Category IIA service business, and are therefore entitled to receive significant benefits that may have a favorable impact on our effective tax rate. We conducted a substantial portion of our servicing business through OLS, a wholly-owned subsidiary of OMS. Although we are eligible for a reduced tax rate in the USVI, the reduced tax rate has not provided Ocwen with a foreign tax benefit in recent tax years as we have been incurring taxable losses in the USVI.
During 2019, OLS merged into PMC. As a result of this reorganization, the majority of our USVI operations and assets were transferred to the U.S. We plan to continue to maintain some operations in the USVI. However, it is possible that we may not be able to retain our qualifications for the EDC Benefits, or that our past and future EDC Benefits could be adversely impacted by our reorganization,or that changes in U.S. federal, state, local, territorial or USVI taxation statutes or applicable regulations may cause a reduction in or an elimination of the value of the EDC Benefits, all of which could result in an increase to our tax expense, including a loss of anticipated income tax refunds, and, therefore, adversely affect our financial condition and results of operations.
HUMAN CAPITAL RESOURCES
We believe the success of our organization is highly dependent on the quality and engagement of our human capital resources. Our workforce is dedicated to creating positive outcomes for homeowners, communities and investors through caring service and innovative solutions. We strive to develop a working environment and culture that fosters our company values:
•Integrity: Do What’s Right – Always
•Service Excellence: Delight Our Customers with Exceptional Service
•People: Develop, Grow and Value All Employees
•Teamwork: Succeed Together as a Global Team
•Embracing Change: Value Innovation and New Thinking
We had a total of approximately 5,000 employees at December 31, 2020. At December 31, 2020, approximately 1,500 of our employees were employed in the U.S. and USVI, and approximately 3,500 of our employees were employed in our operations in India and the Philippines. Of our foreign-based employees, more than 70% were engaged in our Servicing operations as of December 31, 2020. Ocwen currently operates through a secure remote workforce model for approximately 98% of its global workforce due to the COVID-19 pandemic.
Our Board of Directors and executive leadership team places significant focus on our human capital resources, ensuring our culture enables employees to consistently demonstrate our company values. Important attributes of our human capital strategy include:
Diversity and Inclusion (D&I). We are committed to be a globally diverse and inclusive workplace where every voice is heard. Diversity, inclusiveness and respect are integral parts of our culture and work environment. D&I training for all employees and unconscious bias training for leaders are mandatory parts of our learning programs to increase awareness, and employees at all levels are annually evaluated on sustaining an inclusive work environment. The pillars of our diversity program are:
•Leadership: Embrace and foster a culture of inclusion throughout the Company and be held accountable for achieving diversity and inclusion goals and objectives.
•Workforce: Attract, develop, retain and advance the best and brightest from all walks of life and backgrounds at all levels of the Company.
•Vendor Diversity: Achieve a range of suppliers, vendors and service providers who align with our diversity and inclusion strategies.
•Community Engagement; Ensure that Ocwen has a significant presence in and supports a core group of diverse, community-based organizations and philanthropies.
As of December 31, 2020, 44% of our employees globally are women, and 36% of our U.S. leadership roles (Director and above) are filled by women. 59% of our U.S. employees are women and 45% are people of color. Our affinity groups like the Ocwen Global Women’s Network (OGWN) and mentoring programs, when coupled with a culture of appreciation, help provide a comprehensive ecosystem for diversity to flourish.
Talent Development. We continue to foster an environment in which every team member has the opportunity to grow and achieve his or her professional goals, with support and encouragement. We regularly measure employee engagement – our employees’ pride, energy and optimism that fuels their effort – and implement action plans that respond to employee feedback. Our most recent employee survey indicated 81% favorable engagement levels. Our training platform focuses not only on the technical domain skills essential to role success, but includes competency-based programs to develop leadership capabilities and skills needed for the future. In 2020, our voluntary turnover was 15.4%. Succession planning occurs annually and is reviewed by the CEO and the Compensation and Human Capital Committee. Strategic talent reviews to identify, develop and promote top talent are part of our performance management processes.
Rewards. Our total rewards (compensation and benefits) programs are developed to attract, motivate and retain employees. They demonstrate the value the employee provides to the organization, are competitive to the marketplace, and connect directly to key business strategies. Our compensation programs, including salaries and short- and long-term incentives, are centered on our pay-for-performance philosophy, aligning the interests of employees and stakeholders by rewarding both individual and overall company performance. Ocwen’s health and welfare benefit programs strive to keep employees productive and engaged at work by serving the total well-being of employees and their families. We are committed to and regularly evaluate our practices to ensure pay is fair and equitable, and competitive to the marketplace.
Environmental, Social and Governance (ESG) Practices
We are committed to conducting our business in a way that is mindful of our environmental impact, our impacts on homeowners, our employees and the communities in which we operate, and the highest standards of corporate governance.
Environmental Impact. In December 2020, we announced we remain committed to a primarily remote post-COVID-19 working model that will result in less than one-third of employees commuting to work on a daily basis, significantly reducing the use of natural resources in our facilities and reducing carbon emissions by eliminating a daily commute for thousands of our employees. We recycle office supplies at all U.S. facilities, are converting to LED lighting, and are in the process of transforming to digital mailrooms to reduce paper usage.
Social Responsibility. Ocwen participates in a variety of community outreach and homeowner assistance programs and events with local and national organizations around the country. We remain focused on areas still suffering the effects of the 2008 housing crisis as well those impacted by COVID-19. Since the onset of the pandemic, we implemented a virtual borrower outreach program in partnership with the NAACP and our Community Advisory Council to support borrowers impacted by COVID-19, with 40 borrower outreach events completed in 2020. In addition to giving back to our communities through corporate-level donations, our employee Corporate Social Responsibility group volunteers plan events focused on giving back to our local communities.
Corporate Governance. We ensure all employees, including members of management, are fully trained in and continuously comply with our robust governance policies, including our code of business conduct and ethics, insider trading prevention policy, anti-money laundering program, “Suspicious Activity Report” filing requirements, fraud risk management policy, whistleblower protections, and vendor audit procedures. With the exception of our Chief Executive Officer, our Board of Directors is fully independent of management, and all directors are re-elected annually. In addition to a committee structure that fully meets the governance requirements of the New York Stock Exchange (NYSE), our Board of Directors includes a Risk and Compliance Committee to oversee Ocwen’s risk management, compliance management, information security and privacy programs.
AVAILABLE INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available free of charge through our website (www.ocwen.com) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, including Ocwen, that file electronically with the SEC. The address of that site is www.sec.gov. We have also posted on our website, and have available in print upon request (1) the charters for our Audit Committee, Compensation and Human Capital Committee, Nomination/Governance Committee and Risk and Compliance Committee, (2) our Corporate Governance Guidelines, (3) our Code of Business Conduct and Ethics and (4) our Code of Ethics for Senior Financial Officers. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to or waiver of the Code of Ethics for Senior Financial Officers, as well as any amendment to the Code of Business Conduct and Ethics or waiver thereto applicable to any executive officer or director. We may post information that is important to investors on our website. The information provided on our website is not part of this report and is, therefore, not incorporated herein by reference.
ITEM 1A. RISK FACTORS
An investment in our common stock involves significant risk. We describe below the most significant risks that management believes affect or could affect us. Understanding these risks is important to understanding any statement in this Annual Report and to evaluating an investment in our common stock. You should carefully read and consider the risks and uncertainties described below together with all the other information included or incorporated by reference in this Annual Report before you make any decision regarding an investment in our common stock. You should also consider the information set forth above under “Forward Looking Statements.” If any of the following risks actually occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose some or all of your investment. While the following discussion provides a description of some of the important risks that could cause our results to vary materially from those expressed in public statements or documents, other factors besides those discussed within this Annual Report or elsewhere in other of our reports filed with or furnished to the SEC could also affect our business or results.
Summary of Risk Factors
As a non-bank mortgage company, we are exposed in the normal course of business to multiple risks shared by other participants in our industry.In addition, some of the risks we face are unique to Ocwen or such risks could have a different or greater impact on Ocwen than on other companies. These risks could adversely impact our business, regulatory or agency approval, financial condition, liquidity, results of operations, ability to grow and reputation, and are summarized below. This summary is intended to supplement, and should not be considered a substitute for, the complete Risk Factors that follow.
Legal and Regulatory Risks
•Failure to operate our business in compliance with complex legal or regulatory requirements or contractual obligations, including those in response to the COVID-19 pandemic
•Adverse litigation outcomes with the CFPB or other legal matters
•Adverse changes to GSE and Ginnie Mae business models, initiatives and other actions
Risks Related to Our Financial Performance, Financing Our Business, Liquidity and Net Worth, and the Economy
•Inability to consummate the transactions we have entered into with Oaktree, including the private placement of senior secured notes and the MSR asset vehicle transaction
•Inability to consummate the additional debt funding that is a condition of the Oaktree debt investment on favorable terms or at all
•Inability to execute our strategic plan to return to profitability or pursue business or asset acquisitions
•Inability to access capital to meet the financing requirements of our business, or noncompliance with our debt agreements or covenants
•Inability to obtain sufficient servicer advance financing necessary to meet the financing requirements due to increased delinquencies or forbearance plans
•Inability to fund our tail commitments, securitize our Home Equity Conversion Mortgages (HECM or reverse mortgage loans) or fund our Home Equity Conversion Mortgage-Backed Securities (HMBS) repurchase obligations
•Failure to satisfy minimum net worth and liquidity requirements established by regulators, GSEs, Ginnie Mae, lenders, or other counterparties
•Inability to appropriately manage liquidity, interest rate and foreign currency exchange risks, including ineffective hedging strategies
•Economic slowdown or downturn, a capital market disruption, or a deterioration of the housing market, including but not limited to, in the states where we have some concentration of our business
•Inability to acquire additional profitable client relationships
•Inability to meet future advance financing obligations if NRZ were to fail to comply with its servicing advance obligations under the subservicing agreement
Operational Risks and Other Risks Related to Our Business
•Disruption in our operations or technology systems due to the failure or disagreements of our service providers to fulfill their obligations under their agreements with us, including but not limited to Black Knight
•Failure to adequately update our technology systems and processes, and interruption or delay in our operations due to cybersecurity breaches or system failures
•Adverse changes in political or economic stability or government policies in India, the Philippines or the U.S. Virgin Islands (USVI)
•Disruption in our operations, including in India, the Philippines, the USVI and Florida, resulting from severe weather or natural disaster events
•Material increase in loan put-backs and related liabilities for breaches of representations and warranties regarding sold loans or MSRs
•Heightened reputational risk due to media and regulatory scrutiny of companies that originate and securitize reverse mortgages
•Incurrence of losses by our captive reinsurance entity from catastrophic events, particularly in areas where a significant portion of the insured properties are located
•Incurrence of litigation costs and related losses if the validity of a foreclosure action is challenged by a borrower or if a court overturns a foreclosure
•Failure to maintain minimum servicer ratings and impairment of our ability to sell or fund servicing advances, access financing, consummate future servicing transactions, and maintain our status as an approved servicer by the GSEs
•Volatility of our earnings due to MSR valuation changes, financial instrument valuation changes and other factors
•Loss of the confidence of investors and counterparties if we fail to reasonably estimate the fair value of our assets and liabilities or our internal controls over financial reporting are found to be inadequate
•Changes in the method of determining LIBOR, or its replacement with an alternative reference rate
Tax Risks
•Failure to retain or collect the tax benefits provided by the USVI, or certain past income becoming subject to increased United States federal income taxation
•Inability to utilize our net operating losses carryforwards and other deferred tax assets due to “ownership change” as defined in Section 382 of the Internal Revenue Code or other factors
General Risks - Risks Relating to Ownership of Our Common Stock
•Substantial volatility in our common stock price
•The vote by large shareholders of their shares to influence matters requiring shareholder approval in a way that management does not believe represents the best interests of all shareholders
•The issuance of additional securities authorized by the board of directors that causes dilution and depresses the price of our securities
•Future offerings of debt securities that are senior to our common stock in liquidation, or equity securities that are senior to our common stock in respect of liquidation and distributions
•Certain provisions in our organizational documents and regulatory restrictions may make takeovers more difficult, and significant investments in our common stock may be restricted
Legal and Regulatory Risks
The business in which we engage is complex and heavily regulated. If we fail to operate our business in compliance with both existing and future regulations, our business, reputation, financial condition or results of operations could be materially and adversely affected.
Our business is subject to extensive regulation by federal, state and local governmental authorities, including the CFPB, HUD, the SEC and various state agencies that license and conduct examinations of our servicing and lending activities. In addition, we operate under a number of regulatory settlements that subject us to ongoing reporting and other obligations. See the next risk factor below for additional detail concerning these regulatory settlements. From time to time, we also receive requests (including requests in the form of subpoenas and civil investigative demands) from federal, state and local agencies for records, documents and information relating to our servicing and lending activities. The GSEs (and their conservator, the FHFA), Ginnie Mae, the United States Treasury Department, various investors, non-Agency securitization trustees and others also subject us to periodic reviews and audits.
In the current regulatory environment, we have faced and expect to continue to face heightened regulatory and public scrutiny as an organization as well as stricter and more comprehensive regulation of the entire mortgage sector. We must devote substantial resources to regulatory compliance, and we incurred, and expect to continue to incur, significant ongoing costs to comply with new and existing laws and governmental regulation of our business. If we fail to effectively manage our regulatory and contractual compliance, the resources we are required to devote and our compliance expenses would likely increase. Any
significant delay or complication in fulfilling our regulatory commitments and resolving remaining legacy matters may jeopardize our ability to return to profitability.
We must comply with a large number of federal, government on various matters. For example, OLS received a letter fromstate and local consumer protection laws including, among others, the Department of Justice, Civil Rights Division, notifying OLS thatDodd-Frank Act, the Department of Justice had initiated a general investigation into OLS’s policies and procedures to determine whether violations ofGramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, RESPA, TILA, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, by OLS might exist. the Homeowners Protection Act, the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Equal Credit Opportunity Act, as well as individual state licensing and foreclosure laws and federal and local bankruptcy rules. These statutes apply to many facets of our business, including loan origination, default servicing and collections, use of credit reports, safeguarding of non-public personally identifiable information about our customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes and regulations are enacted, promulgated, amended, interpreted and enforced. In addition, we must maintain an effective corporate governance and compliance management system. See “Business - Regulation” for additional information regarding our regulators and the laws that apply to us.
We continuemust structure and operate our business to provide informationcomply with applicable laws and regulations and the terms of our regulatory settlements. This can require judgment with respect to the Departmentrequirements of Justicesuch laws and regulations and such settlements. While we endeavor to engage proactively with our regulators in an effort to ensure we do so correctly, if we fail to interpret correctly the requirements of such laws and regulations or the terms of our regulatory settlements, we could be found to be in breach of such laws, regulations or settlements.
Our actual or alleged failure to comply with the terms of our regulatory settlements or applicable federal, state and local consumer protection laws, regulations and licensing requirements could lead to any of the following:
•administrative fines and penalties and litigation;
•loss of our licenses and approvals to engage in our servicing and lending businesses;
•governmental investigations and enforcement actions;
•civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities;
•breaches of covenants and representations under our servicing, debt or other agreements;
•damage to our reputation;
•inability to raise capital or otherwise secure the necessary financing to operate the business and refinance maturing liabilities;
•changes to our operations that may otherwise not occur in the normal course, and that could cause us to incur significant costs; or
•inability to execute on our business strategy.
Any of these outcomes could materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
In recent years, the general trend among federal, state and local lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings with regard to residential mortgage lenders and servicers. The CFPB continues to take a very active role in the mortgage industry, and its rule-making and regulatory agenda relating to loan servicing and originations continues to evolve. Individual states, including New York and California, have also been active, as have other regulatory organizations such as the MMC. We also believe there has been a shift among certain regulators towards a broader view of the scope of regulatory oversight responsibilities with respect to mortgage originators and servicers. In addition to their traditional focus on licensing and examination matters, certain regulators have begun to make observations, recommendations or demands with respect to such areas as corporate governance, safety and soundness, and risk and compliance management. We must endeavor to work cooperatively with our regulators to understand all their concerns if we are to be successful in our business.
The CFPB and state regulators have also increasingly focused on the use, and adequacy, of technology in the mortgage servicing industry, privacy concerns and other topical issues, such as likely discontinuation of LIBOR and communications from debt collectors and the ability of borrowers to repay mortgage loans. In 2016, the CFPB issued a special edition supervision report that stressed the need for mortgage servicers to assess and make necessary improvements to their information technology systems in order to ensure compliance with the CFPB’s mortgage servicing requirements. See Business - Regulation for a description of recent rules issued by the CFPB and NY DFS and recent legislation adopted in California.
Presently, a level of heightened uncertainty exists with respect to the future of regulation of mortgage lending and servicing, including the future of the Dodd Frank Act and CFPB. We cannot predict the specific legislative or executive actions that may result or what actions federal or state regulators might take in response to potential changes to the Dodd Frank Act or to the federal regulatory environment generally. Such actions could impact the industry generally or us specifically, could impact our relationships with other regulators, and could adversely impact our business and limit our ability to reach an
appropriate resolution with the CFPB, with which we are engaged in ongoing discussions with the Department of Justiceto attempt to resolve certain concerns relating to this inquiry.our mortgage servicing practices, as described in the next risk factor.
New regulatory and legislative measures, or changes in enforcement practices, including those related to the technology we use, could, either individually or in the aggregate, require significant changes to our business practices, impose additional costs on us, limit our product offerings, limit our ability to efficiently pursue business opportunities, negatively impact asset values or reduce our revenues. Accordingly, they could materially and adversely affect our business and our financial condition, liquidity and results of operations.
Finally, the regulations and requirements to which we are subject have been changing rapidly as the GSEs, Ginnie Mae, the United States Treasury Department and state regulators have responded to the COVID-19 pandemic. On March 27, 2020, the CARES Act was signed into law, allowing borrowers affected by COVID-19 to request temporary loan forbearance for federally backed mortgage loans. Multiple forbearance programs, moratoria of foreclosure and eviction and other requirements to assist borrowers enduring financial hardship due to COVID-19 are being issued by states, agencies and regulators. These requirements vary across jurisdiction, may conflict in some circumstances, and can be complex to interpret and implement, and could cause us to incur additional expense. If we are unable to comply with, or face allegations that we are in breach of, applicable laws, regulations or other requirements, we may face regulatory action, including fines, penalties, and restrictions on our business. In addition, Ocwen was named aswe could face litigation and reputational damage. Any of these risks could have a defendantmaterial adverse impact on our business, financial condition, liquidity and results of operations. If the COVID-19 pandemic is prolonged or intensifies due to the emergence of additional viral strains or otherwise, it may lead to a further increase in a HUD administrative complaint filed by a non-profit organization alleging discriminationregulations, which could exacerbate these risks and their adverse impacts.
Governmental bodies have taken regulatory and legal actions against us in the mannerpast and may in which the company maintains REO propertiesfuture impose regulatory fines or penalties or impose additional requirements or restrictions on our activities that could increase our operating expenses, reduce our revenues or otherwise adversely affect our business, financial condition, liquidity, results of operations, ability to grow and reputation.
We are subject to a number of ongoing federal and state regulatory examinations, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions that could result in minority communities. In February 2018, this matter was administratively closed;further adverse regulatory action against us, including certain matters summarized below. See Note 24 — Regulatory Requirements and similar claims were filed in federal court. We believe these claims are without merit and intendNote 26 — Contingencies to vigorously defend ourselves.the Consolidated Financial Statements.
CFPB
In April 2017, the CFPB filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, receivedOMS and OLS alleging violations of federal consumer financial laws relating to our servicing business dating back to 2014. The CFPB’s claims include allegations regarding (1) the adequacy of Ocwen’s servicing system and integrity of Ocwen’s mortgage servicing data, (2) Ocwen’s foreclosure practices and (3) various purported servicer errors with respect to borrower escrow accounts, hazard insurance policies, timely cancellation of private mortgage insurance, and handling of customer complaints. The CFPB alleges violations of unfair, deceptive acts or abusive practices, as well as violations of specific laws or regulations. The CFPB does not claim specific monetary damages, although it does seek consumer relief, disgorgement of allegedly improper gains, and civil money penalties. While we believe we have factual and legal defenses to the CFPB’s allegations and are vigorously defending ourselves, the outcome of the matters raised by the CFPB, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our business and could have a subpoenamaterial adverse impact on our business, reputation, financial condition, liquidity and results of operations.
State Licensing and State Attorneys General
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. The minimum net worth requirements to which our licensed entities are subject are unique to each state and type of license. We believe our licensed entities were in compliance with all of their minimum net worth requirements at December 31, 2020. However, it is possible that regulators could disagree with our calculations, and one state regulator has disagreed with our calculation for a prior year period; we have discussed the matter with the regulator, including why we believe we were in compliance with the applicable net worth requirements. Failure to satisfy any of the requirements to which our licensed entities are subject could result in a variety of regulatory actions ranging from a fine, a directive requiring a certain step to be taken, a suspension or, ultimately, a revocation of a license, any of which could have a material adverse impact on our results of operations and financial condition.
In April 2017 and shortly thereafter, mortgage and banking regulatory agencies from 29 states and the District of Columbia took regulatory actions against OLS and certain other Ocwen companies that alleged deficiencies in our compliance with laws
and regulations relating to our servicing and lending activities. These regulatory actions generally took the form of orders styled as “cease and desist orders” and prohibited a range of actions relating to our lending and servicing activities. We entered into agreements with all 29 states plus the District of Columbia to resolve these regulatory actions. These agreements generally contained the Multi-State Common Settlement Terms.
In addition, Ocwen entered into settlements with certain states, including on October 15, 2020, with the Florida Attorney General and the Florida Office of Inspector GeneralFinancial Regulation, on different or additional terms, which include making additional communications with and for borrowers, certain restrictions, certain review, reporting and remediation obligations, and requirements to make certain monetary payments.
We have incurred and will continue to incur, significant costs complying with the terms of HUD requestingthese settlements to the productionextent that legal or other actions are taken against us by regulators or others with respect to matters, they could result in additional costs or other adverse impacts and could have a materially adverse impact on our business, reputation, financial condition, liquidity and results of documentation related to lender-placed insurance arrangements with a mortgage insurer and the amounts paid for such insurance. We understand that other servicers in the industry have received similar subpoenas. In May 2016, Ocwen received a subpoena from the Office of Inspector General of HUD requesting the production of documentation related to HECM loans originated by Liberty. We understand that other lenders in the industry have received similar subpoenas. In May 2017, Ocwen received a subpoena from the Officeoperations.
Certain of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) requesting the productionstate regulators’ cease and desist orders referenced a confidential supervisory memorandum of documents related to Ocwen’s participation from 2009 to the present in the Treasury Department’s Making Home Affordable Program and its Home Affordable Modification Program (HAMP). We have been providing documents and information in response to these subpoenas.
New York Department of Financial Services
In March 2017,understanding (MOU) that we entered into a consent order with the NY DFS (the 2017 NY Consent Order)MMC and six states relating to a servicing examination from 2013 to 2015. Among other things, the MOU prohibited us from repurchasing stock during the development of a going forward plan and, thereafter, except as permitted by the plan. We submitted a plan in 2016 that provided forcontained no stock repurchase restrictions and, therefore, we do not believe we are currently restricted from repurchasing stock. We requested confirmation from the terminationsignatories of the engagement ofMOU that they agree with this interpretation, and received affirmative responses from the MMC and five states, and a monitor appointed pursuantresponse declining to an earlier 2014 consent order and for us to address certain concerns raised bytake a legal position from the NY DFS that primarily relateremaining state.
In January 2018, prior to our acquisition of PHH, PMC entered into a settlement agreement with the MMC and consent orders with certain state attorneys general to resolve and close out findings of an MMC examination of PMC’s legacy mortgage servicing operations, as well as for uspractices. Under the terms of these settlements, PMC agreed to comply with certain reportingservicing standards, to conduct testing of compliance with such servicing standards for a period of three years, and other obligations. In addition, in connectionto report to the MMC regarding the same. To the extent PMC does not comply with the NY DFS’ approval in September 2018,terms of the servicing standards, the MMC or state attorneys general could take regulatory action against us, including imposing fines or penalties or otherwise restricting our acquisition of PHH, we agreed to satisfy certain post-closing requirements, including reporting obligations and record retention and other requirements relating to the transfer of loans collateralized by New York property (New York loans) onto Black Knight MSP and certain requirements with respect to the evaluation and supervision of management of both Ocwen Financial Corporation and PMC. In addition, we are prohibited from boarding any additional loans onto the current REALServicing system and we must transfer all New York loans off the REALServicing system by April 30, 2020. The conditional approval also modified a preexisting restriction on our ability to acquire MSRs such that the restriction applies only to New York loans and, with respect to New York loans, provides that Ocwen may not increase its aggregate portfolio of New York loans serviced or subserviced by Ocwen by more than 2% per year (based on the unpaid principal balance of loans serviced at the prior calendar year-end). This restriction will remain in place until the NY DFS determines that all loans serviced on the REALServicing system have been successfully migrated to Black Knight MSP and that Ocwen has developed a satisfactory infrastructure to board sizable portfolios of MSRs.business activities.
We continue to work with the NY DFS to address matters they continue to raise with us as well as to fulfill our commitments under the 2017 NY Consent Order and PHH acquisition conditional approval. To the extent that we fail to address adequately any concerns raised by the NY DFS or fail to fulfill our commitments to the NY DFS, the NY DFS could take regulatory action against us, including imposing fines or penalties or otherwise restricting our business activities. Any such actions could have a material adverse impact on our business, financial condition liquidity and results of operations.
California Department of Business Oversight
On February 17, 2017, OLS and two other subsidiaries, Ocwen Business Solutions, Inc. (OBS) and Ocwen Financial Solutions Private Limited (OFSPL), reached an agreement, in three consent orders (collectively, the 2017 CA Consent Order), with the CA DBO that terminated an earlier 2015 consent order and resolved open matters between the CA DBO and OLS, OBS and OFSPL, including certain matters relating to OLS’ servicing practices and the licensed activities of OBS and OFSPL. We have certain remaining reporting and other obligations under the 2017 CA Consent Order. Pursuant to the 2017 CA Consent Order, the CA DBO has engaged a third-party administrator who, at the expense of the CA DBO, has commenced work to confirm that Ocwen has completed certain commitments under the 2017 CA Consent Order. Still outstanding, however, is our completion of $198.0 million in debt forgiveness for California borrowers by June 30, 2019. As of December 31, 2018, we estimate that we have approximately $15.0 million of debt forgiveness remaining to complete. Based on internal forecasting, we currently believe that we will be able to complete this requirement by June 30, 2019. However, if we are unable to complete this requirement by the deadline or obtain an extension, the 2017 CA Consent Order obligates us to pay the remaining amount to the CA DBO in cash. Our debt forgiveness activities take place as we modify loans - our loan modifications are designed to be sustainable for homeowners while providing a net present value for mortgage loan investors that is superior to that of foreclosure. Debt forgiveness as part of a loan modification is determined on a case-by-case basis in accordance with the applicable servicing agreement. Debt forgiveness does not involve an expense to Ocwen other than the operating expense incurred in arranging the modification, which is part of Ocwen’s role as loan servicer. If the CA DBO were to allege that we failed to comply with our obligations under the 2017 CA Consent Order or that we otherwise were in breach of applicable laws, regulations or licensing requirements, the CA DBO could also take regulatory actions against us, including imposing fines or penalties or otherwise restricting our business activities. Any such actions could have a material adverse impact on our business, financial condition liquidity and results of operations.
COMPETITION
The financial services markets in which we operate are highly competitive. We compete with large and small financial services companies, including bank and non-bank entities, in the servicing and lending markets. Our competitors include large banks, such as Wells Fargo, JPMorgan Chase, Bank of America and Citibank, large non-bank servicers such as Mr. Cooper and Ditech Financial, market disruptors such as Quicken Loans, SunTrust Mortgage and Regions Mortgage who are aggressively investing in the digital transformation of their business platforms, and real estate investment trusts, including New Residential Investment Corp.
In the servicing industry, we compete based on price, quality and counterparty risk. Potential counterparties also (1) assess our regulatory compliance track record and examine our systems and processes for maintaining and demonstrating regulatory compliance, (2) consider our customer satisfaction rankings, and (3) consider our third-party servicer ratings. Certain of our competitors, especially large banks, may have substantially lower costs of capital and greater financial resources, which makes it challenging to compete. We believe that our competitive strengths flow from our ability to control and drive down delinquencies using proprietary processes and our lower cost to service non-performing, non-Agency loans. Notwithstanding
these strengths, we have suffered reputational damage as a result of our regulatory settlements and the associated scrutiny of our business. We believe this has weakened our competitive position against both our bank and non-bank servicing competitors.
In the lending industry, we face intense competition in most areas, including product offerings, rates, fees and customer service. Some of our competitors, including the larger banks, have substantially lower costs of capital and strong retail presence, which makes it challenging to compete. In addition, with the proliferation of smartphones and technological changes enabling improved payment systems and cheaper data storage, newer market participants, often called “disruptors,” are reinventing aspects of the financial industry and capturing profit pools previously enjoyed by existing market participants. As a result, the lending industry could become even more competitive if new market participants are successful in capturing market share from existing market participants such as ourselves. We believe our competitive strengths flow from our existing role as a mortgage servicer, which provides us with an existing customer relationship to capture refinance volume from our servicing portfolio and from our customer service.
The reverse lending market faces many of the same competitive pressures as the forward market. In addition, the reverse market is significantly smaller than the forward market with a higher market share concentration among the top five Ginnie Mae HMBS issuers. These higher concentration levels can, at times, lead to significant price competition. We believe our competitive advantage flows from Liberty’s long tenure in the industry (Liberty began operations in 2004), which provides us with significant experience and contributes to our name recognition, our strategic partnerships and our use of technology to produce higher levels of productivity to drive down per-loan costs.
THIRD-PARTY SERVICER RATINGS
Like other servicers, we are the subject of mortgage servicer ratings or rankings (collectively, ratings) issued and revised from time to time by rating agencies including Moody’s Investors Service, Inc. (Moody’s), S&P Global Ratings, Inc. (S&P) and Fitch Ratings, Inc. (Fitch). Favorable ratings from these agencies are important to the conduct of our loan servicing and lending businesses.
The following table summarizes our key ratings by these rating agencies:
|
| | | | | | | | | | | | | | | | |
| Ocwen Loan Servicing, LLC | | PHH Mortgage Corporation |
| Moody’s | | S&P | | Fitch | | Moody’s | | S&P | | Fitch |
| Residential Prime Servicer | SQ3-SQ3 | | Average | | RPS3- | | — | | — | | RPS3 |
Residential Primary Servicer | — | | — | | — | | SQ3 | | Average | | RPS3 |
| Residential Subprime Servicer | SQ3-SQ3 | | Average | | RPS3- | | SQ3 | | Average | | —RPS3 |
| Residential Special Servicer | SQ3-SQ3 | | Average | | RSS3- | | SQ3 | | Average | | RPS3RSS3 |
| Residential Second/Subordinate Lien Servicer | SQ3-SQ3 | | Average | | RPS3- | | SQ3 | | Average | | RPS3 |
| Residential Home Equity Servicer | — | | — | | RPS3- | | — | | — | | RPS3 |
| Residential Alt-A Servicer | — | | — | | RPS3- | | — | | — | | RPS3 |
Master ServicingServicer | SQ3 | | Average | | RMS3- | | — | | — | | —RMS3 |
| Ratings Outlook | N/A | | Stable | | Stable | | N/A | | Stable | | StableNegative |
| | | | | | | | | | | |
Date of last action (1) | AprilAugust 29, 2019 | | December 27, 2019 | | March 24, 2017 | | February 26, 2018 | | July 27, 2018 | | October 30, 2018 | | October 8, 2018 | | November 1, 20182020 |
| |
(1) | Moody’s placed the OLS servicer ratings on Watch for Downgrade on April 24, 2017. |
In addition to servicer ratings, each of the rating agencies will from time to time assign an outlook (or a ratings watch such as Moody’s review status) to the rating status of a mortgage servicer. A negative outlook is generally used to indicate that a rating “may be lowered,” while a positive outlook is generally used to indicate a rating “may be raised.” On March 24, 2020, Fitch placed all U.S RMBS servicer ratings on Negative outlook resulting from a rapidly evolving economic and operating environment due to the sudden impact of the COVID-19 virus.
Downgrades in servicer ratings could adversely affect our ability to service loans, sell or finance servicing advances and could impair our ability to consummate future servicing transactions or adversely affect our dealings with lenders, other contractual counterparties, and regulators, including our ability to maintain our status as an approved servicer by Fannie Mae and Freddie Mac. The servicer rating requirements of Fannie Mae do not necessarily require or imply immediate action, as
Fannie Mae has discretion with respect to whether we are in compliance with their requirements and what actions it deems appropriate under the circumstances if we fall below their desired servicer ratings.
See Item 1A. Risk Factors - Risks Relating to Our Business for further discussion of the adverse effects that a failure to maintain minimum servicer ratings could have on our business, financing activities, financial condition or results of operations.
NEW RESIDENTIAL INVESTMENT CORP. RELATIONSHIP
NRZ is our largest servicing counterparty, and consequently our servicing business is highly dependent on our continuedOcwen has a legacy relationship with NRZ. NRZ related servicing accounted for 51% of the UPB of residential assets serviced as of December 31,and we acquired PMC’s legacy relationship with NRZ when we acquired PHH in October 2018. WeAs a result, we service loans on behalf of NRZ under various agreements, including traditional subservicing agreements, where NRZ is the legal owner of the MSRs, and in connection with Rights to MSRs, where Ocwen retains legal title to the underlying MSRs but NRZ has generally assumed risks and rewards consistent with an MSR owner, and traditional subservicing agreements, where owner. See Note 10 — Rights to MSRs.
NRZ is our largest servicing client, accounting for $67.1 billion of UPB or 36% of the legal MSR owner. As legal MSR owner, or in compliance with the Rights to MSRs agreements, NRZ is responsible to finance allUPB of our total servicing advance obligations in connection with the loans underlying the MSRs. Atportfolio as of December 31, 2020, approximately 62% of all delinquent loans that Ocwen serviced, and approximately 30% of our total servicing and subservicing fees in 2020, net of servicing fees remitted to NRZ (excluding ancillary income). Through April 2020, we have benefited from the amortization of $334.2 million deferred upfront lump-sum cash payments that we received from NRZ in 2017 and 2018 such servicing advanceswhen we renegotiated certain aspects of the legacy Ocwen agreements. We recognized other income of $34.2 million and $95.1 million due to the amortization of these lump sum payments in 2020 and 2019, respectively.
On February 20, 2020, we received a notice of termination from NRZ with respect to the legacy PMC subservicing agreement. This termination was for convenience and not for cause, and provided for loan deboarding fees to be paid by NRZ. We continued to service these loans until deboarding on October 1, 2020. A total of 270,218 loans were approximately $2.7 billion.deboarded representing $34.3 billion of UPB.
The legacy Ocwen subservicing agreement hasagreements have an initial five-year term ending in July 2022. The underlying loans are almost exclusively non-Agency loans, involving a higher level of operational and regulatory risk, and requiring substantial direct and oversight staffing relative to Agency loans. NRZ may terminate the agreements for convenience, subject to Ocwen’s right to receive a termination fee and proper180 days’ notice at any time during the initial five-year term. The subservicing agreementtermination fee is calculated as specified in the Ocwen agreements, and is a discounted percentage of the expected revenues that would be owed to Ocwen over the remaining contract term based on certain portfolio run off assumptions. After the initial term, these agreements can be renewed for three-month terms at NRZ’s option. In addition to a base servicing fee, we receive ancillary income, which primarily includes late fees, loan modification fees and Speedpay®Speedpay® fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. NRZ receives all float earnings and deferred servicing fees related to delinquent borrower payments, as well as certain REO-related income, including REO referral commissions. As legal MSR owner, or in compliance with the Rights to MSRs agreements, NRZ is responsible for financing all servicing advance obligations in connection with the loans underlying the MSRs.
We are currently working towards obtainingIn the remaining third-party consents to transfer legal title toordinary course, we regularly share information with NRZ for alland discuss various aspects of the MSRs such that in the future the relationship will be purely a subservicingour relationship. With respect to itsthe Rights to MSRs, interests, NRZ hasour existing agreements provide that the rightRights to sell its servicing rightsMSRs could (i) remain in the existing Rights to MSR structure, (ii) be acquired by Ocwen or (iii) be sold or transferred to a third party if these third-party consents are not obtainedtogether with Ocwen’s title to the related MSRs. In addition, the Rights to MSRs could be transferred to NRZ under the Transfer Agreement and Ocwen does not elect to purchase NRZ’s servicing rights. Ifbecome subserviced by PMC. It is possible that NRZ sellscould exercise its servicing rights to a third party,early terminate for convenience some or all of the transaction can only be completed if the third-party buyer can obtain the necessary third-party consents to transfer the MSRs as required pursuant to the underlyinglegacy Ocwen servicing agreements. In addition, the agreements may not be renewed in July 2022. In our business planning efforts, we have assessed the potential impact of such actions by NRZ also has the obligation to use reasonable efforts to encourage such third-party buyer to enter into a subservicing agreement with Ocwen. However, Ocwen would lose future compensation for subservicing, if no subservicing agreement were ultimately entered into with the third-party buyer.
The PHH subservicing agreement has an initial three-year term, ending June 2020, and contain certain transfer and termination provisions whereby NRZ has the ability to terminate over the three-year term, beginning with the ability to terminate with respect to 25%in light of the loans covered thereby in June 2018current and 25% beginning in June 2019.predicted future economics of the NRZ has not provided noticerelationship generally. 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 early termination under this 25% termination provision. The PHH subservicing agreement automatically renews for successive one-year terms. Both NRZ and PHH have the rightrights, we would need to terminate the subservicing agreement without cause with proper notice. In addition to a baserapidly scale our servicing fee based on the delinquency status of each loan, we also receive and ancillary income, which primarily includes late fees, loan modification fees and Speedpay fees.business.
ALTISOURCE VENDOR RELATIONSHIP
EachOcwen is a party to a number of Ocwen Financial Corporationlong-term agreements with Altisource S.à r.l., and OMS are parties tocertain of other subsidiaries of Altisource Portfolio Solutions, S.A. (Altisource), including a Services Agreement, a Technology Products Services Agreement, an Intellectual Property Agreement and a Data Center and Disaster Recovery Services Agreement with a subsidiary of Altisource. Under the Services Agreements,under which Altisource provides residentialvarious services, such as property valuation services, property preservation and inspection services and title services, among other things. Altisource provides certain technology products and support services under the Technology Products Services Agreements and the Data Center and Disaster Recovery Services Agreements, including licensing us the REALServicing loan servicing system under a statement of work under the Technology Products Services Agreements. These agreements expireThis agreement expires August 31, 2025.2025 and includes renewal provisions. Ocwen and Altisource have also entered into a Master Services Agreement pursuant to which Altisource currently provides title services to Liberty andOcwen for reverse mortgage loans. Ocwen also has a General Referral Fee agreementAgreement with Altisource pursuant to which Ocwen receives referral fees thatwhich are paid out of the commission that would otherwise be paid to Altisource as the selling broker in connection with certain real estate sales.sales services provided by Altisource. However, for MSRs that transferred to NRZ, as well as those subject to our Rights to MSRs agreements with NRZ, we are not entitled to REO referral commissions.
We are currently in the process of transitioning to Black Knight MSP to REALServicing. OnIn February 22, 2019, Ocwen and Altisource S.à r.l (a subsidiary of Altisource) signed a Binding Term Sheet, which among other things, confirmsconfirmed Altisource’s cooperation with the de-boardingdeboarding of loans from Altisource’s REALServicing servicing system to Black Knight’s MSP servicing system.Knight MSP. The
Binding Term Sheet also includes provisions regarding assuring that data is accurately transferred to Ocwen, including Ocwen having the ability to verify data accuracy and having continued access to the REALServicing system for an acceptable period of time. We have successfully completed two transfers of loans to Black Knight MSP, totaling approximately 240,000 loans, as of February 27, 2019.
The Binding Term Sheet also amendsamended certain provisions set forth in the Services Agreements.Agreement. After certain conditions have been met and where Ocwen has the right to select the services provider, Ocwen willagreed to use Altisource to provide the types of services that Altisource currently provides under the Services AgreementsAgreement for at least 90% of services for all portfolios for which Ocwen is the servicer or subservicer, except that Altisource will be the provider for all such services for the portfolios: (i) acquired by Ocwen pursuant to loan servicing under agreements from Homeward (acquired in 2012) or assigned and assumed by Ocwen from Residential Capital, LLC, et al (assets acquired in 2013); and (ii) acquired from Ocwen, excluding certain portfolios in which PHH has an interest, by NRZ or its affiliates prior to the date of the Binding Term Sheet. Notwithstanding the foregoing, Altisource will be the provider of mortgage charge-off collections services under the Services
Agreements. The Binding Term Sheet also sets forth a framework for negotiating additional service level changes under the Services Agreement in the future. As specified in the Binding Term Sheet, if Altisource fails certain performance standards for specified periods of time, then Ocwen may terminate Altisource as a provider for the applicable service(s), subject to Altisource’s right to cure. For certain claims arising from service referrals received by Altisource after the effective date of the Binding Term Sheet, the provisions include reciprocal indemnification obligations in the event of negligence by either Partyparty, and Altisource’s indemnification obligations of Ocwen in the event of any breach by Altisource of its obligations under the Services Agreements.Agreement. The limitations of liability provisions include an exception for losses either party suffers as a result of third-party claims.
Certain services provided by Altisource under these agreements are charged to the borrower and/or mortgage loan investor. Accordingly, such services, while derived from our loan servicing portfolio, are not reported as expenses by Ocwen. These services include residential property valuation, residential property preservation and inspection services, title services and real estate sales-related services.
OAKTREE RELATIONSHIP
We have recently established a strategic alliance with Oaktree Capital Management L.P. and certain of its affiliates and managed investment vehicles (collectively Oaktree) that we expect will support refinancing our corporate debt and help advance our growth initiatives. The Oaktree relationship includes the launch of an MSR investment vehicle to scale up our servicing business in a capital efficient manner and investments in our debt and equity to support a comprehensive refinancing at the corporate level and our growth.
On December 21, 2020, we entered into a transaction agreement with Oaktree to form a joint venture for the purpose of investing in GSE MSRs that PMC will subservice. Oaktree and Ocwen will hold 85% and 15% of the venture, respectively, and have agreed to invest equity up to $250 million over three years. The closing of the transaction is expected to occur in the first half of 2021. Upon closing, Ocwen also agreed to issue to Oaktree up to 4.9% of Ocwen’s then outstanding common stock at a price of $23.15 per share, and to issue to Oaktree warrants to purchase additional common stock equal to 3% of Ocwen’s then outstanding common stock at a purchase price of $24.31 per share, subject to anti-dilution adjustments.
On February 9, 2021, we executed an agreement with Oaktree to issue to Oaktree in a private placement $285 million of Ocwen senior secured notes in two separate tranches. The initial tranche of $199.5 million senior secured notes is subject to certain conditions, including, but not limited to, the contemporaneous consummation by Ocwen or one of its subsidiaries of an additional debt financing not to exceed $450 million. The additional $85.5 million tranche is also subject to certain conditions, including, but not limited to, the closing of the MSR joint venture with Oaktree. Upon issuance of the initial tranche of senior secured notes, Ocwen agreed to issue to Oaktree warrants to purchase common stock equal to 12.0% of Ocwen’s then outstanding common stock at an exercise price of $26.82 per share, subject to anti-dilution adjustments.
The net proceeds before expenses from the issuance to Oaktree of the initial tranche of senior secured notes and the warrants will be $175.0 million (after $24.5 million of original issue discount) and are expected to be used, together with the proceeds from the additional debt financing, to repay in full an aggregate of $498 million of existing indebtedness, including Ocwen’s $185.0 million Senior Secured Term Loan, $21.5 million 6.375% senior unsecured notes due 2021 and $291.5 million 8.375% senior secured second lien notes due 2022. The net proceeds before expenses from the issuance to Oaktree of the additional tranche of senior secured notes and the warrants will be approximately $75.0 million (after $10.5 million of original issue discount) and are expected to be used to fund our investment in the MSR joint venture and for general corporate purposes, including to accelerate the growth of our Originations and Servicing businesses.
There can be no assurance that the conditions to the issuance to Oaktree of the senior secured notes will be met, or that any additional debt financing will be consummated. See the Liquidity and Capital Resources section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Note 25 – Commitments, and Note 28 — Subsequent Events to the Consolidated Financial Statements for additional information.
USVI OPERATIONS
As part of an initiative to reorganize the ownership and managementThe majority of our global servicingUSVI operations and assets were transferred to the U.S. during 2019 as a result of our legal entity simplification. Our current USVI operations support our three segments, including a Servicing call center for customer call and operations under a single entity and cost-effectively expand our U.S.-based origination and servicing activities,home retention.
In 2012, Ocwen formed OMS in 2012 under the laws of the USVI where OMS is incorporated and has its principal place of business. OMS is headquartered in Christiansted, St. Croix, USVI and is located in a federally recognized economic development zone where qualified entities are eligible for certain tax benefits. We refer to these benefits as “EDC Benefits” as they are granted by the USVI Economic Development Commission (EDC)(“EDC Benefits”). We were approved as a Category IIA service business, and are therefore entitled to receive significant benefits that may have a favorable impact on our effective tax rate. These benefits, among others, enable us to avail ourselvesWe conducted a substantial portion of a credit of 90% of income taxes on certain qualified income related to our servicing business. The exemption was granted asbusiness through OLS, a wholly-owned subsidiary of October 1, 2012 and is available for a period of 30 years until expiration on September 30, 2042.OMS. Although we are eligible for a reduced tax rate in the USVI, the reduced tax rate has not provided Ocwen with a foreign tax benefit in recent tax years as we have been incurring taxable losses in the USVI.
In connection with the acquisition of PHH and our overall corporate simplification and cost reduction efforts, we are planning a legal entity reorganization that will involve our two primary licensed entities,During 2019, OLS and Homeward mergingmerged into PHH’s primary licensed entity, PMC. As a result of this reorganization, a portionthe majority of our USVI operations and assets will bewere transferred to the U.S. We plan to continue to maintain some operations andin the USVI. However, it is possible that we may not be able to retain our qualifications for the EDC Benefits, or that our past and future EDC Benefits could be adversely impacted by our reorganization,or that changes in theU.S. federal, state, local, territorial or USVI until, through and after the reorganization. We expect the reorganization to resulttaxation statutes or applicable regulations may cause a reduction in efficiencies and operational cost savings through reduced complexity and a simplification of our global structure.
On December 22, 2017, significant revisions to the Internal Revenue Code of 1986, as amended, were signed into law (Tax Act). The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reductionor an elimination of the U.S. corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), and a new minimum tax enacted to prevent companies from stripping earnings outvalue of the U.S. through U.S. tax deductible payments made to foreign affiliates. The reduction in the statutory U.S. federal rate is expected to positively impact our future U.S. after-tax earnings. However, the ultimate impactEDC Benefits, all of the Tax Act on our future after tax earnings is subject to the effect of other complex provisions in the Tax Act, including the Base Erosion and Anti-Abuse Tax (BEAT), Global Intangible Low-Taxed Income (GILTI), and revised interest deductibility limitations. It is possible that the impact of these provisionswhich could significantly reduce the benefit of the reduction in the statutory U.S. federal rate and may also negatively impact the tax advantages received from the EDC Benefits. In addition, Ocwen is continuing to evaluate the impact of the new tax legislation and guiding regulations (which are still being promulgated and finalized) on its global tax position. Certain provisions of the new tax laws and regulations are currently expected to result in an increase to our currenttax expense, including a loss of anticipated income tax obligations.refunds, and, therefore, adversely affect our financial condition and results of operations.
EMPLOYEESHUMAN CAPITAL RESOURCES
We believe the success of our organization is highly dependent on the quality and engagement of our human capital resources. Our workforce is dedicated to creating positive outcomes for homeowners, communities and investors through caring service and innovative solutions. We strive to develop a working environment and culture that fosters our company values:
•Integrity: Do What’s Right – Always
•Service Excellence: Delight Our Customers with Exceptional Service
•People: Develop, Grow and Value All Employees
•Teamwork: Succeed Together as a Global Team
•Embracing Change: Value Innovation and New Thinking
We had a total of approximately 7,200 and 7,6005,000 employees at December 31, 2018 and 2017, respectively. We maintain operations in the U.S., USVI, India and the Philippines.2020. At December 31, 2018,2020, approximately 4,1001,500 of our employees were locatedemployed in the U.S. and USVI, and approximately 3,500 of our employees were employed in our operations in India and approximately 500 were based in the Philippines. Of our foreign-based employees, more than 80%70% were engaged in our Servicing operations as of December 31, 2018. Because2020. Ocwen currently operates through a secure remote workforce model for approximately 98% of its global workforce due to the COVID-19 pandemic.
Our Board of Directors and executive leadership team places significant focus on our human capital resources, ensuring our culture enables employees to consistently demonstrate our company values. Important attributes of our human capital strategy include:
Diversity and Inclusion (D&I). We are committed to be a globally diverse and inclusive workplace where every voice is heard. Diversity, inclusiveness and respect are integral parts of our culture and work environment. D&I training for all employees and unconscious bias training for leaders are mandatory parts of our learning programs to increase awareness, and employees at all levels are annually evaluated on sustaining an inclusive work environment. The pillars of our diversity program are:
•Leadership: Embrace and foster a culture of inclusion throughout the Company and be held accountable for achieving diversity and inclusion goals and objectives.
•Workforce: Attract, develop, retain and advance the best and brightest from all walks of life and backgrounds at all levels of the large numberCompany.
•Vendor Diversity: Achieve a range of suppliers, vendors and service providers who align with our diversity and inclusion strategies.
•Community Engagement; Ensure that Ocwen has a significant presence in and supports a core group of diverse, community-based organizations and philanthropies.
As of December 31, 2020, 44% of our employees globally are women, and 36% of our U.S. leadership roles (Director and above) are filled by women. 59% of our U.S. employees are women and 45% are people of color. Our affinity groups like the Ocwen Global Women’s Network (OGWN) and mentoring programs, when coupled with a culture of appreciation, help provide a comprehensive ecosystem for diversity to flourish.
Talent Development. We continue to foster an environment in which every team member has the opportunity to grow and achieve his or her professional goals, with support and encouragement. We regularly measure employee engagement – our employees’ pride, energy and optimism that fuels their effort – and implement action plans that respond to employee feedback. Our most recent employee survey indicated 81% favorable engagement levels. Our training platform focuses not only on the technical domain skills essential to role success, but includes competency-based programs to develop leadership capabilities and skills needed for the future. In 2020, our voluntary turnover was 15.4%. Succession planning occurs annually and is reviewed by the CEO and the Compensation and Human Capital Committee. Strategic talent reviews to identify, develop and promote top talent are part of our performance management processes.
Rewards. Our total rewards (compensation and benefits) programs are developed to attract, motivate and retain employees. They demonstrate the value the employee provides to the organization, are competitive to the marketplace, and connect directly to key business strategies. Our compensation programs, including salaries and short- and long-term incentives, are centered on our pay-for-performance philosophy, aligning the interests of employees and stakeholders by rewarding both individual and overall company performance. Ocwen’s health and welfare benefit programs strive to keep employees productive and engaged at work by serving the total well-being of employees and their families. We are committed to and regularly evaluate our practices to ensure pay is fair and equitable, and competitive to the marketplace.
Environmental, Social and Governance (ESG) Practices
We are committed to conducting our business in India,a way that is mindful of our operations could beenvironmental impact, our impacts on homeowners, our employees and the communities in which we operate, and the highest standards of corporate governance.
Environmental Impact. In December 2020, we announced we remain committed to a primarily remote post-COVID-19 working model that will result in less than one-third of employees commuting to work on a daily basis, significantly reducing the use of natural resources in our facilities and reducing carbon emissions by eliminating a daily commute for thousands of our employees. We recycle office supplies at all U.S. facilities, are converting to LED lighting, and are in the process of transforming to digital mailrooms to reduce paper usage.
Social Responsibility. Ocwen participates in a variety of community outreach and homeowner assistance programs and events with local and national organizations around the country. We remain focused on areas still suffering the effects of the 2008 housing crisis as well those impacted by significant changesCOVID-19. Since the onset of the pandemic, we implemented a virtual borrower outreach program in partnership with the NAACP and our Community Advisory Council to support borrowers impacted by COVID-19, with 40 borrower outreach events completed in 2020. In addition to giving back to our communities through corporate-level donations, our employee Corporate Social Responsibility group volunteers plan events focused on giving back to our local communities.
Corporate Governance. We ensure all employees, including members of management, are fully trained in and continuously comply with our robust governance policies, including our code of business conduct and ethics, insider trading prevention policy, anti-money laundering program, “Suspicious Activity Report” filing requirements, fraud risk management policy, whistleblower protections, and vendor audit procedures. With the political or economic conditions in India or in the political or regulatory climate in the U.S. with respect to U.S. businesses engaging in foreign operations. If we had to curtail or cease our operations in India and transfer some or all of these operations to another geographic area, we could incur significant transition costs as well as higher future overhead costs that could materially and adversely affect our results of operations.
SUBSIDIARIES
For a listingexception of our significant subsidiaries, referChief Executive Officer, our Board of Directors is fully independent of management, and all directors are re-elected annually. In addition to Exhibit 21.1a committee structure that fully meets the governance requirements of this Annual Report on Form 10-K.the New York Stock Exchange (NYSE), our Board of Directors includes a Risk and Compliance Committee to oversee Ocwen’s risk management, compliance management, information security and privacy programs.
AVAILABLE INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available free of charge through our website (www.ocwen.com) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The SEC maintains an Internet site that contains reports,
proxy and information statements and other information regarding issuers, including Ocwen, that file electronically with the SEC. The address of that site is www.sec.gov. We have also posted on our website, and have available in print upon request (1) the charters for our Audit Committee, Compensation and Human Capital Committee, Nomination/Governance Committee Compliance Committee,and Risk Committee and Independent ReviewCompliance Committee, (2) our Corporate Governance Guidelines, (3) our Code of Business Conduct and Ethics and (4) our Code of Ethics for Senior Financial Officers. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to or waiver of the Code of Ethics for Senior Financial Officers, as well as any amendment to the Code of Business Conduct and Ethics or waiver thereto applicable to any executive officer or director. We may post information that is important to investors on our website. The information provided on our website is not part of this report and is, therefore, not incorporated herein by reference.
ITEM 1A. RISK FACTORS
An investment in our common stock involves significant risk. We describe below the most significant risks that management believes affect or could affect us. Understanding these risks is important to understanding any statement in this Annual Report and to evaluating an investment in our common stock. You should carefully read and consider the risks and uncertainties described below together with all the other information included or incorporated by reference in this Annual Report before you make any decision regarding an investment in our common stock. You should also consider the information set forth above under “Forward Looking Statements.” If any of the following risks actually occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose some or all of your investment. While the following discussion provides a description of some of the important risks that could cause our results to vary materially from those expressed in public statements or documents, other factors besides those discussed within this Annual Report or elsewhere in other of our reports filed with or furnished to the SEC could also affect our business or results.
Summary of Risk Factors
As a non-bank mortgage company, we are exposed in the normal course of business to multiple risks shared by other participants in our industry.In addition, some of the risks we face are unique to Ocwen or such risks could have a different or greater impact on Ocwen than on other companies. These risks could adversely impact our business, regulatory or agency approval, financial condition, liquidity, results of operations, ability to grow and reputation, and are summarized below. This summary is intended to supplement, and should not be considered a substitute for, the complete Risk Factors that follow.
Legal and Regulatory Risks
•Failure to operate our business in compliance with complex legal or regulatory requirements or contractual obligations, including those in response to the COVID-19 pandemic
•Adverse litigation outcomes with the CFPB or other legal matters
•Adverse changes to GSE and Ginnie Mae business models, initiatives and other actions
Risks Related to Our Financial Performance, Financing Our Business, Liquidity and Net Worth, and the Economy
•Inability to consummate the transactions we have entered into with Oaktree, including the private placement of senior secured notes and the MSR asset vehicle transaction
•Inability to consummate the additional debt funding that is a condition of the Oaktree debt investment on favorable terms or at all
•Inability to execute our strategic plan to return to profitability or pursue business or asset acquisitions
•Inability to access capital to meet the financing requirements of our business, or noncompliance with our debt agreements or covenants
•Inability to obtain sufficient servicer advance financing necessary to meet the financing requirements due to increased delinquencies or forbearance plans
•Inability to fund our tail commitments, securitize our Home Equity Conversion Mortgages (HECM or reverse mortgage loans) or fund our Home Equity Conversion Mortgage-Backed Securities (HMBS) repurchase obligations
•Failure to satisfy minimum net worth and liquidity requirements established by regulators, GSEs, Ginnie Mae, lenders, or other counterparties
•Inability to appropriately manage liquidity, interest rate and foreign currency exchange risks, including ineffective hedging strategies
•Economic slowdown or downturn, a capital market disruption, or a deterioration of the housing market, including but not limited to, in the states where we have some concentration of our business
•Inability to acquire additional profitable client relationships
•Inability to meet future advance financing obligations if NRZ were to fail to comply with its servicing advance obligations under the subservicing agreement
Operational Risks and Other Risks Related to Our Business
•Disruption in our operations or technology systems due to the failure or disagreements of our service providers to fulfill their obligations under their agreements with us, including but not limited to Black Knight
•Failure to adequately update our technology systems and processes, and interruption or delay in our operations due to cybersecurity breaches or system failures
•Adverse changes in political or economic stability or government policies in India, the Philippines or the U.S. Virgin Islands (USVI)
•Disruption in our operations, including in India, the Philippines, the USVI and Florida, resulting from severe weather or natural disaster events
•Material increase in loan put-backs and related liabilities for breaches of representations and warranties regarding sold loans or MSRs
•Heightened reputational risk due to media and regulatory scrutiny of companies that originate and securitize reverse mortgages
•Incurrence of losses by our captive reinsurance entity from catastrophic events, particularly in areas where a significant portion of the insured properties are located
•Incurrence of litigation costs and related losses if the validity of a foreclosure action is challenged by a borrower or if a court overturns a foreclosure
•Failure to maintain minimum servicer ratings and impairment of our ability to sell or fund servicing advances, access financing, consummate future servicing transactions, and maintain our status as an approved servicer by the GSEs
•Volatility of our earnings due to MSR valuation changes, financial instrument valuation changes and other factors
•Loss of the confidence of investors and counterparties if we fail to reasonably estimate the fair value of our assets and liabilities or our internal controls over financial reporting are found to be inadequate
•Changes in the method of determining LIBOR, or its replacement with an alternative reference rate
Tax Risks
•Failure to retain or collect the tax benefits provided by the USVI, or certain past income becoming subject to increased United States federal income taxation
•Inability to utilize our net operating losses carryforwards and other deferred tax assets due to “ownership change” as defined in Section 382 of the Internal Revenue Code or other factors
General Risks - Risks Relating to Government RegulationOwnership of Our Common Stock
•Substantial volatility in our common stock price
•The vote by large shareholders of their shares to influence matters requiring shareholder approval in a way that management does not believe represents the best interests of all shareholders
•The issuance of additional securities authorized by the board of directors that causes dilution and Financialdepresses the price of our securities
•Future offerings of debt securities that are senior to our common stock in liquidation, or equity securities that are senior to our common stock in respect of liquidation and distributions
•Certain provisions in our organizational documents and regulatory restrictions may make takeovers more difficult, and significant investments in our common stock may be restricted
Legal and Regulatory ReformsRisks
The business in which we engage is complex and heavily regulated. If we fail to operate our business in compliance with both existing and future regulations, our business, reputation, financial condition or results of operations could be materially and adversely affected.
Our business is subject to extensive regulation by federal, state and local governmental authorities, including the CFPB, HUD, the SEC and various state agencies that license and conduct examinations of our servicing and lending activities. In addition, we operate under a number of regulatory settlements that subject us to ongoing reporting and other obligations. See the next risk factor below for additional detail concerning these regulatory settlements. From time to time, we also receive requests (including requests in the form of subpoenas and civil investigative demands) from federal, state and local agencies for records, documents and information relating to our servicing and lending activities. The GSEs (and their conservator, the FHFA), Ginnie Mae, the United States Treasury Department, various investors, non-Agency securitization trustees and others also subject us to periodic reviews and audits.
In the current regulatory environment, we have faced and expect to continue to face heightened regulatory and public scrutiny as an organization as well as stricter and more comprehensive regulation of the entire mortgage sector. We must devote substantial resources to regulatory compliance, and we incurred, and expect to continue to incur, significant ongoing costs to comply with new and existing laws and governmental regulation of our business. If we fail to effectively manage our regulatory and contractual compliance, the resources we are required to devote and our compliance expenses would likely increase. We have identifiedAny
significant delay or complication in fulfilling our regulatory commitments and resolving remaining legacy matters as a key initiative in the first phase of our plan to return to profitability while executing the integration with PHH. Any significant delay or complication in fulfilling our regulatory commitments may jeopardize our ability to return to profitability and to obtain the anticipated benefits of our acquisition of PHH.profitability.
We must comply with a large number of federal, state and local consumer protection laws including, among others, the Dodd-Frank Act, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, RESPA, TILA, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Equal Credit Opportunity Act, as well as individual state licensing and foreclosure laws and federal and local bankruptcy rules. These statutes apply to many facets of our business, including loan origination, default servicing and collections, use of credit reports, safeguarding of non-public personally identifiable information about our customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes and regulations are enacted, promulgated, amended, interpreted and enforced. In addition, we must maintain an effective corporate governance and compliance management system. See “Business - Regulation” for additional information regarding our regulators and the laws that apply to us.
To be successful, weWe must structure and operate our business to comply with applicable laws and regulations and the terms of our regulatory settlements. This can require judgment with respect to the requirements of such laws and regulations and such
settlements. While we endeavor to engage regularlyproactively with our regulators in an effort to ensure we do so correctly, if we fail to interpret correctly the requirements of such laws and regulations or the terms of our regulatory settlements, we could be found to be in breach of such laws, regulations or settlements.
Our actual or alleged failure to comply with the terms of our regulatory settlements or applicable federal, state and local consumer protection laws, regulations and licensing requirements could lead to any of the following:
•administrative fines and penalties and litigation;
•loss of our licenses and approvals to engage in our servicing and lending businesses;
•governmental investigations and enforcement actions;
•civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities;
•breaches of covenants and representations under our servicing, debt or other agreements;
•damage to our reputation;
•inability to raise capital or otherwise secure the necessary financing to operate the business;business and refinance maturing liabilities;
•changes to our operations that may otherwise not occur in the normal course, and that could cause us to incur significant transition costs; or
•inability to execute on our business strategy.
Any of these outcomes could materially and adversely affect our business, and ourreputation, financial condition, liquidity and results of operations.
In recent years, the general trend among federal, state and local lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings with regard to residential mortgage lenders and servicers. The CFPB continues to take a very active role in the mortgage industry, and its rule-making and regulatory agenda relating to loan servicing and originations continues to evolve. Individual states, including New York and California, have also been active, as have other regulatory organizations such as the MMC. We also believe there has been a shift among certain regulators towards a broader view of the scope of regulatory oversight responsibilities with respect to mortgage originators and servicers. In addition to their traditional focus on licensing and examination matters, certain regulators have begun to make observations, recommendations or demands with respect to such areas as corporate governance, safety and soundness, and risk and compliance management. We must endeavor to work cooperatively with our regulators to understand all their concerns if we are to be successful in our business.
FollowingThe CFPB and state regulators have also increasingly focused on the 2018 Congressional elections,use, and adequacy, of technology in the mortgage servicing industry, privacy concerns and other topical issues, such as likely discontinuation of LIBOR and communications from debt collectors and the ability of borrowers to repay mortgage loans. In 2016, the CFPB issued a special edition supervision report that stressed the need for mortgage servicers to assess and make necessary improvements to their information technology systems in order to ensure compliance with the CFPB’s mortgage servicing requirements. See Business - Regulation for a description of recent rules issued by the CFPB and NY DFS and recent legislation adopted in California.
Presently, a level of heightened uncertainty exists with respect to the future of regulation of mortgage lending and servicing, including the future of the Dodd Frank Act and CFPB. We cannot predict the specific legislative or executive actions that may result or what actions federal or state regulators might take in response to potential changes to the Dodd Frank Act or to the federal regulatory environment generally. Such actions could impact the industry generally or us specifically, could impact our relationships with other regulators, and could adversely impact our business and limit our ability to reach an
appropriate resolution with the CFPB, with which we are engaged to attempt to resolve certain concerns relating to our mortgage servicing practices, as described in the next risk factor.
The CFPB and state regulators have also increasingly focused on the use, and adequacy, of technology in the mortgage servicing industry. In 2016, the CFPB issued a special edition supervision report that stressed the need for mortgage servicers to assess and make necessary improvements to their information technology systems in order to ensure compliance with the CFPB’s mortgage servicing requirements. The NY DFS also issued Cybersecurity Requirements for Financial Services Companies, effective in 2017, which require banks, insurance companies, and other financial services institutions regulated by the NY DFS to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.
New regulatory and legislative measures, or changes in enforcement practices, including those related to the technology we use, could, either individually or in the aggregate, require significant changes to our business practices, impose additional costs on us, limit our product offerings, limit our ability to efficiently pursue business opportunities, negatively impact asset values or reduce our revenues. Accordingly, they could materially and adversely affect our business and our financial condition, liquidity and results of operations.
Finally, the regulations and requirements to which we are subject have been changing rapidly as the GSEs, Ginnie Mae, the United States Treasury Department and state regulators have responded to the COVID-19 pandemic. On March 27, 2020, the CARES Act was signed into law, allowing borrowers affected by COVID-19 to request temporary loan forbearance for federally backed mortgage loans. Multiple forbearance programs, moratoria of foreclosure and eviction and other requirements to assist borrowers enduring financial hardship due to COVID-19 are being issued by states, agencies and regulators. These requirements vary across jurisdiction, may conflict in some circumstances, and can be complex to interpret and implement, and could cause us to incur additional expense. If we are unable to comply with, or face allegations that we are in breach of, applicable laws, regulations or other requirements, we may face regulatory action, including fines, penalties, and restrictions on our business. In addition, we could face litigation and reputational damage. Any of these risks could have a material adverse impact on our business, financial condition, liquidity and results of operations. If the COVID-19 pandemic is prolonged or intensifies due to the emergence of additional viral strains or otherwise, it may lead to a further increase in regulations, which could exacerbate these risks and their adverse impacts.
Governmental bodies have taken regulatory and legal actions against us in the past and may in the future impose regulatory fines or penalties or impose additional requirements or restrictions on our activities that could increase our operating expenses, reduce our revenues or otherwise adversely affect our business, financial condition, liquidity, results of operations, ability to grow and reputation.
We are subject to a number of ongoing federal and state regulatory examinations, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions that could result in further adverse regulatory action against us. Theseus, including certain matters are summarized below. See Note 24 — Regulatory Requirements and Note 26 — Contingencies to the Consolidated Financial Statements.
CFPB
In April 2017, the CFPB filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, OMS and OLS alleging violations of federal consumer financial laws relating to our servicing business dating back to 2014. The CFPB’s claims include allegations regarding (1) the adequacy of Ocwen’s servicing system and integrity of Ocwen’s mortgage servicing data, (2) Ocwen’s foreclosure practices and (3) various purported servicer errors with respect to borrower escrow accounts, hazard insurance policies, timely cancellation of private mortgage insurance, and handling of customer complaints, and marketing of optional products.complaints. The CFPB alleges violations of unfair, deceptive acts or abusive practices, as well as violations of specific laws or regulations. The CFPB does not claim specific monetary damages, although it does seek consumer relief, disgorgement of allegedly improper gains, and civil money penalties. While we believe we have factual and legal defenses to the CFPB’s allegations and are vigorously defending ourselves, it is possible that resolutionthe outcome of the matters raised by the CFPB, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our business and could have a material adverse impact on our business, reputation, financial condition, liquidity and results of operations.
State Licensing and State Attorneys General
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. The minimum net worth requirements to which our licensed entities are subject are unique to each state and type of license. We believe our licensed entities were in compliance with all of their minimum net worth requirements at December 31, 2018.2020. However, it is possible that regulators could disagree with our calculations, and one state regulator has disagreed with our calculation for a prior year period; we are currently discussinghave discussed the matter with the regulator.regulator, including why we believe we were in compliance with the applicable net worth requirements. Failure to satisfy any of the requirements to which our licensed entities are subject could result in a variety of regulatory actions ranging from a fine, a directive requiring a certain step to be taken, a suspension or, ultimately, a revocation of a license, any of which could have a material adverse impact on our results of operations and financial condition.
In April 2017 and shortly thereafter, mortgage and banking regulatory agencies from 29 states and the District of Columbia took regulatory actions against OLS and certain other Ocwen companies that alleged deficiencies in our compliance with laws
and regulations relating to our servicing and lending activities. These regulatory actions generally took the form of orders styled as “cease and desist orders” and prohibited a range of actions relating to our lending and servicing activities.
We entered into agreements with all 29 states plus the District of Columbia to resolve these regulatory actions. These agreements generally contained the Multi-State Common Settlement Terms.
In addition, to the terms described above, Ocwen entered into settlements with certain states, including on October 15, 2020, with the Florida Attorney General and the Florida Office of Financial Regulation, on different or additional terms, which include making additional communications with and for borrowers, certain restrictions, certain review, reporting and remediation obligations, and requirements to make certain monetary payments.
We have incurred and will alsocontinue to incur, significant costs complying with the terms of these settlements including in connection withto the escrow analysis and the transition to Black Knight MSP. In addition, the remediation of errors identified during the escrow analysis could result in payments, creditsextent that legal or other actions to remediate such errors and other actions could beare taken against us by regulators or others with respect to such errors.
Although we have resolved all of the administrative actions taken by state regulatorsmatters, they could result in April 2017 and shortly thereafter, we have not resolved all of the legal actions. In April 2017, and concurrent with the issuance of the cease and desist orders and the filing of the CFPB lawsuit discussed above, two state attorneys general took actions against us relating to our servicing practices. The Florida Attorney General, together with the Florida Office of Financial Regulation, filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, OMS and OLS alleging violations of federal and state consumer financial laws relating to our servicing business. These claims are similar to the claims made by the CFPB. The Florida lawsuit seeks injunctive and equitable relief,additional costs and civil money penalties in excess of $10,000 per confirmed violation of the applicable statute. As previously disclosed, the Massachusetts Attorney General had sent us a civil investigative demand requesting information relating to various aspects of our servicing practices, including lender-placed insurance and property preservation fees. Subsequently, the Massachusetts Attorney General filed a lawsuit against OLS in the Superior Court for the Commonwealth of Massachusetts alleging violations of state consumer financial laws relating to our servicing business, including with respect to our activities relating to lender-placed insurance and property preservation fees. The Massachusetts Attorney General’s lawsuit seeks injunctive and equitable relief, costs, and civil money penalties of $5,000 per confirmed violation of the applicable statute. While we endeavor to negotiate appropriate resolutions in these two matters, we are vigorously defending ourselves, as we believe we have valid defenses to the claims made in both lawsuits. The outcome of these two lawsuits, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our businessother adverse impacts and could behave a materially adverse toimpact on our business, reputation, financial condition, liquidity and results of operations.
Certain of the state regulators’ cease and desist orders referenced the MOUa confidential supervisory memorandum of understanding (MOU) that we entered into with the MMC and six states relating to a servicing examination from 2013 toto 2015. The MOU contained various provisions relating to servicing practices and safety and soundness aspects of the regulatory review, as a step toward closing the 2013 - 2015 examination. Ocwen responded to the MOU items and continues to provide certain reports andAmong other information pursuant to the MOU.
There were no monetary or other penalties imposed under the MOU. However,things, the MOU prohibited us from repurchasing stock during the development of a going forward plan and, thereafter, except as permitted by the plan. We prepared and submitted a plan in 2016 that contained no stock repurchase restrictions and, therefore, we do not believe we are currently restricted from repurchasing stock. However,We requested confirmation from the signatories of the MOU that they agree with this interpretation, and received affirmative responses from the MMC may not agree with our interpretation. For this reason, and onfive states, and a response declining to take a legal position from the basis of our progress to date responding to our obligations under the MOU, we have requested that the MOU be terminated. To the extent that we cannot terminate the MOU, we may remain subject to a share repurchase restriction and continued reporting obligations.remaining state.
In January 2018, prior to our acquisition of PHH, PMC entered into a settlement agreement with the MMC and consent orders with certain state attorneys general to resolve and close out findings of an MMC examination of PMC’s legacy mortgage servicing practices. Under the terms of these settlements, PMC agreed to comply with certain servicing standards, to conduct testing of compliance with such servicing standards for a period of three years, and to report to the MMC regarding the same. To the extent PMC does not comply with the terms of the servicing standards, the MMC or state attorneys general could take regulatory action against us, including imposing fines or penalties or otherwise restricting our business activities.
We continue to work with the NY DFS to address matters they continue to raise with us as well as to fulfill our commitments under the 2017 NY Consent Order and PHH acquisition conditional approval. To the extent that we fail to address adequately any concerns raised by the NY DFS or fail to fulfill our commitments to the NY DFS, the NY DFS could take regulatory action against us, including imposing fines or penalties or otherwise restricting our business activities. Any such actions could have a material adverse impact on our business, financial condition liquidity and results of operations.
Pursuant to the 2017 CA Consent Order, we continue to work on completing our debt forgiveness obligations. As of December 31, 2018, we estimate that we have approximately $15.0 million of debt forgiveness remaining to complete. Based on internal forecasting, we currently believe that we will be able to complete this requirement by June 30, 2019. However, if we are unable to complete this requirement by the deadline or obtain an extension, the 2017 CA Consent Order obligates us to pay the remaining amount to the CA DBO in cash. If the CA DBO were to allege that we failed to comply with our obligations under the 2017 CA Consent Order or that we otherwise were in breach of applicable laws, regulations or licensing requirements, the CA DBO could also take regulatory actions against us, including imposing fines or penalties or otherwise restricting our business activities. Any such actions could have a material adverse impact on our business, financial condition liquidity and results of operations.
Other Matters
On occasion, we engage with agencies of the federal government on various matters, including the Department of Justice, the Office of Inspector General of HUD, SIGTARP and SIGTARP.the VA Office of the Inspector General. In addition to the expense of responding to subpoenas and other requests for information from such agencies, in the event that any of these engagements result in allegations of wrongdoing by us, we may incur fines or penalties or significant legal expenses defending ourselves against such allegations.
In recent years, we have also entered into significant settlements with the NY DFS, and the CA DBO, and the 2013 OcwenOcwen National Mortgage Settlement. These settlements involved payments of significant monetary amounts, ongoing monitoring by third-party firms for which we were financially responsible and other restrictions on our business. For example, we recognized $177.5 million in third-party monitoring costs alone relating to these settlements.settlements between 2014 and 2017. While we are not currently subject to active monitorships under these settlements, we remain obligated to comply with the commitments made to our regulators and if we violate those commitments one or more of these entities could take regulatory action against us. In addition, to the extent we are unable to avoidAny future settlements or other regulatory actions against us could have a material adverse impact on our business, reputation, operating results, liquidity and financial condition will continue to be adversely affected.
To the extent that an examination or other regulatory engagement results in an alleged failure by us to comply with applicable laws, regulations or licensing requirements, or if allegations are made that we have failed to comply with applicable laws, regulations or licensing requirements or the commitments we have made in connection with our regulatory settlements (whether such allegations are made through administrative actions such as cease and desist orders, through legal proceedings or otherwise) or if other regulatory actions of a similar or different nature are taken in the future against us, this could lead to (i) administrative fines, and penalties and litigation, (ii) loss of our licenses and approvals to engage in our servicing and lending businesses, (iii) governmental investigations and enforcement actions, (iv) civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) damage to our reputation, (vii) inability to raise capital or otherwise fundsecure the necessary funding to operate the business, (viii) changes to our operations that may otherwise not occur in
the normal course, and (viii)that could cause us to incur significant costs, and (ix) inability to execute on our business strategy. Any of these occurrencesoutcomes could increase
our operating expenses and reduce our revenues, hamper our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
Our regulatory settlements and public allegations regarding our business practices by regulators and other third parties may affect other regulators’, rating agencies’, and rating agencies’creditors’ perceptions, as well as our overall public reputation, all of which can have a directcould adversely impact on our financial results and ongoing operations.
Our regulatory settlements and public allegations regarding our business practices by regulators and other third parties may affect other regulators’, rating agencies’ and rating agencies’creditors’ perceptions of us. As a result, our ordinary course interactions with regulators may be adversely affected. We may incur additional compliance costs and management time may be diverted from other aspects of our business to address regulatory issues. It is possible that we may incur additional fines or penalties or even that we could lose the licenses and approvals necessary to engage in our servicing and lending businesses. In addition, certain regulators have begun to make observations, recommendations or demands with respect to areas such as corporate governance, safety and soundness and risk and compliance management, which could require us to incur additional expense or which could result in the imposition of additional obligationsrequirements such as liquidity and capital requirements or restrictions on business conduct such as engaging in stock repurchases.
Further, our ability to serve and retain customers and conduct business transactions with our counterparties could be adversely affected to To the extent our public reputation is damaged. Our failure to address,that rating agencies or to appear to fail to address, the various regulatory and operational challenges facing Ocwen could give rise to further reputational risk and cause additional harm tocreditors perceive us and our business prospects. Reputational issues include, but are not limited to:
negative news about Ocwen or the mortgage industry generally;
compliance with legal and regulatory requirements;
ethical issues, including alleged deceptive or unfair servicing or lending practices;
our practices relating to collections, foreclosures, property preservation, modifications, loans impacted by natural disasters, escrow and insurance;
consumer privacy issues;
consumer financial fraud issues;
data security issues related to our customers or employees;
cybersecurity issues and cyber incidents, whether actual, threatened, or perceived;
recordkeeping;
customer service or consumer complaints;
the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our businesses;
a downgrade of or negative watch warning on any ofnegatively, our servicer or credit ratings;ratings could be adversely impacted and our access to funding could be limited.
appropriately addressing potential conflicts of interest; and
general company performance.
The proliferation of social media websites as well asIf regulators allege that we do not comply with the personal use of social media by our employees and others, including personal blogs and social network profiles, also may increase the risk that negative, inappropriate or unauthorized information may be posted or released publicly that could harm our reputation or have other negative consequences, including as a resultterms of our employees interacting with our customers in an unauthorized manner in various social media outlets. The failure to address,regulatory settlements, or the perception thatif we have failed to address any of these issues appropriatelyenter into future regulatory settlements, it could give rise to increased regulatory action, which could adversely affect our results of operations.
Cybersecurity breaches or system failures may interrupt or delaysignificantly impact our ability to provide services to our customers, expose our businessmaintain and our customers to harm and otherwise adversely affect our operations.
Disruptions and failures of our systems or those of our vendors may interrupt or delay our ability to provide services to our customers, expose us to remedial costs and reputational damage, and otherwise adversely affect our operations. The secure transmission of confidential information over the Internet and other electronic distribution and communication systems is essential to our maintaining consumer confidence in certain of our services. We have programs in place to detect and respond to security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. None of the cybersecurity incidents we have experienced to date has been material to our business, financial condition or operations.
In addition, consumers generally are concerned with security breaches and privacy on the Internet, and Congress or individual states could enact new laws regulating the use of technology in our business that could adversely affect us or result in significant compliance costs. As such, the NY DFS Cybersecurity Regulation requires New York insurance companies, banks, and other regulated financial services institutions - including Ocwen as a non-bank financial services company licensed in the state of New York - to assess their cybersecurity risk profile. In particular, regulated entities are required, among other things, to adopt the core requirements of a cybersecurity program, including a cybersecurity policy, effective access privileges, cybersecurity risk assessments, training and monitoring for all authorized users, and appropriate governance processes. This
regulation also requires regulated entities to submit notices to the NY DFS of any security breaches or other cybersecurity events, and to certify their compliance with all aspects of the regulation on an annual basis. Ocwen has enhanced its existing cybersecurity program in order to comply with these requirements.
Security breaches, computer viruses, cyberattacks, hacking and other acts of vandalism are increasing in frequency and sophistication, and could result in a compromise or breach of the technology that we use to protect our borrowers’ personal information and transaction data and other information that we must keep secure. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a cyberattack, a spike in transaction volume or unforeseen catastrophic events, potentially resulting in data loss and adversely affecting our ability to process these transactions. If one or more of such events occurs, this could potentially jeopardize data integrity or confidentiality of information processed and stored in, or transmitted through, our computer systems and networks, which could result in our facing significant losses, reputational damage and legal liabilities.
Our regulatory settlements have significantly reduced the size ofgrow our servicing portfolio and harmed our reputation with potential future customers.portfolio.
Our servicing portfolio naturally decreases over time as homeowners make regularly scheduled mortgage payments, prepay loans prior to maturity, refinance with a mortgage loan not serviced by us or involuntarily liquidate through foreclosure or other liquidation process. Our ability to maintain or grow the size of our servicing portfolio depends on our ability to acquire the right to service or subservice additional pools of mortgage loans or to originate additional loans for which we retain the MSRs.
OurHistorically, our regulatory settlements have significantly impacted our ability to maintain or grow our servicing portfolio because we agreed to certain restrictions that effectively prohibited future bulk acquisitions of residential servicing. While certain of these restrictions have been eased in connection with our resolution of state regulatory matters and acquisition of PHH, we are still restricted in our ability to grow our portfolio under the terms of our agreements with the NY DFS, the Massachusetts Division of Banks, and the Nebraska Department of Banking and Finance.DFS. If we are unable to satisfy the conditions of the regulatory commitments we made to these and other regulators, or if a future regulatory settlement restricts our ability to acquire MSRs, we will be unable to grow or even maintain the size of our servicing portfolio through acquisitions and our business could be materially and adversely affected. Moreover, even when regulatory restrictions are lifted, the reputational damage done by these actions may inhibit our ability to acquire new business.
We have identified replenishing portfolio runoff and restoring a growth focus as key initiatives in the first phase of our plan to return to profitability while executing the integration with PHH. An inability to execute on these initiatives may jeopardize our ability to return to profitability and to obtain the anticipated benefits of our acquisition of PHH.
If we are unable to respond timely and effectively to routine or other regulatory examinations and borrower complaints, our business and financial conditions may be adversely affected.
Regulatory examinations by state and federal regulators are part of our ordinary course business activities. If we are unable to respond effectively to regulatory examinations, our business and financial conditions may be adversely affected. For example, our January 2015 consent order with the CA DBO which has now been terminated, arose out of an alleged failure to respond adequately to requests from the CA DBO as part of a routine regulatory examination. If, inIn addition, we receive various escalated borrower complaints and inquiries from our state and federal regulators and state Attorneys General and are required to respond within the future,time periods prescribed by such entities. If we fail to respond effectively and timely to regulatory examinations and escalations, legal action could be taken against us by such regulators and, as a result, we may incur fines or penalties or we could lose the licenses and approvals necessary to engage in our servicing and lending businesses. We could also suffer from reputational harm and become subject to private litigation.
The Dodd-Frank Act has significantly impacted our business and may continue to do so, and new rules and regulations or more stringent interpretations of existing rules and regulations by the CFPB could result in increased compliance costs and, potentially, regulatory action against us.
The Dodd-Frank Act and regulation by the CFPB, which the Dodd-Frank Act created, impact our business in the areas of mortgage servicing, loan origination, sales and securitization.
We have devoted substantial resources and incurred significant compliance costs responding to the Dodd-Frank Act and the rules and regulations issued thereunder, including CFPB rules. We expect to continue to do so. If we fail to comply with the Dodd-Frank Act and the rules and regulations issued thereunder, including CFPB rules and subsequent amendments, we could be subject to financial penalties, restrictions on our business activities, private litigation, breaches of our contractual obligations to counterparties (including our debt agreements) and adverse actions by the GSEs or other entities, any of which could have a material adverse effect on our business, financial position, results of operations or cash flows.
Private legal proceedings and related costs alleging failures to comply with applicable laws or regulatory requirements could adversely affect our financial condition and results of operations.
We are subject to variouspending private legal proceedings, including purported class actions, challenging whether certain of our loan servicing practices and other aspects of our business comply with applicable laws and regulatory requirements. For
example, we are currently a defendant in various matters alleging that (1) certain fees imposed on borrowers relating to payment processing, payment facilitation, or payment convenience violate state laws similar to the Fair Debt Collection Practices Act, (FDCPA), (2) we violated the Telephone Consumer Protection Act by using an automated telephone dialing system to call class members’ cell phones without their consent, (3) we committed securities fraud in connection with certain of our public disclosures, (4) certain fees we assess on borrowers are marked up improperly in violation of applicable state and federal law, (3) we breached fiduciary duties we purportedly owe to benefit plans due to the discretion we exercise in servicing certain securitized mortgage loans and (5) the solicitation and marketing to borrowers of(4) certain ancillary products was unfair and deceptive.legacy mortgage reinsurance arrangements violated RESPA.In the future, we are likely to become subject to other private legal proceedings alleging failures to comply with applicable laws and regulations, including putative class actions, in the ordinary course of our business. While we do not currently believe that the resolution of the vast majority of the legal proceedings we face will have a material adverse effect on our financial condition or results of operations, we cannot express a view with respect to all of these proceedings. The outcome of any pending legal matter is never
certain, and it is possible that adverse results in private legal proceedings could materially and adversely affect our financial results and operations. We have paid significant amounts to settle private legal proceedings in recent periods and paid significant amounts in legal and other costs in connection with defending ourselves in such proceedings. To the extent we are unable to avoid such costs in future periods, our business, financial position, results of operations and cash flows could be materially and adversely affected.
Non-compliance with laws and regulations could lead to termination of servicing agreements or defaults under our debt agreements.
Most of our servicing agreements and debt agreements contain provisions requiring compliance with applicable laws and regulations. While the specific language in these agreements takes many forms and materiality qualifiers are often present, if we fail to comply with applicable laws and regulations, we could be terminated as a servicer and defaults could be triggered under our debt agreements, which could materially and adversely affect our revenues, cash flows, liquidity, business and financial condition. We could also suffer reputational damage and trustees, lenders and other counterparties could cease wanting to do business with us.
If new laws and regulations lengthen foreclosure times or introduce new regulatory requirements regarding foreclosure procedures, our operating costs and liquidity requirements could increase and we could be subject to regulatory action.
When a mortgage loan that we service is in foreclosure, we are generally required to continue to advance delinquent principal and interest to the securitization trust and to make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent that we determine that such amounts are recoverable. These servicing advances are generally recovered when the delinquency is resolved.resolved or upon liquidation. Regulatory actions that lengthen the foreclosure process will increase the amount of servicing advances that we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred during the foreclosure process.
Increased regulatory scrutiny and new laws and procedures could cause us to adopt additional compliance measures and incur additional compliance costs in connection with our foreclosure processes. We may incur legal and other costs responding to regulatory inquiries or any allegation that we improperly foreclosed on a borrower. We could also suffer reputational damage and could be fined or otherwise penalized if we are found to have breached regulatory requirements.
GSE and Ginnie Mae initiatives and other actions may affect our financial condition and results of operations.
Due to the significant role that the GSEs play in the secondary mortgage market, new initiatives and other actions that they may implement could become prevalent in the mortgage servicing industry generally. To the extent that FHFA and/or the GSEs implement reforms that materially affect the market not only for conventional and/or government-insured loans but also the non-qualifying loan markets, such reforms could have a material adverse effect on the creation of new MSRs, the economics or performance of any MSRs that we acquire, servicing fees that we can charge and costs that we incur to comply with new servicing requirements.
In addition, our ability to generate revenues through mortgage loan sales to institutional investors depends to a significant degree on programs administered by the GSEs, Ginnie Mae, and others that facilitate the issuance of MBS in the secondary market. These entities play a critical role in the residential mortgage industry and we have significant business relationships with many of them. If it is not possible for us to complete the sale or securitization of certain of our mortgage loans due to changes in GSE and Ginnie Mae programs, we may lack liquidity to continue to fund mortgage loans and our revenues and margins on new loan originations would be materially and negatively impacted.
Our plans to acquire MSRs will require approvals and cooperation by the GSEs and Ginnie Mae. Should approval or cooperation be withheld, we would have difficulty meeting our MSR acquisition objectives.
There are various proposals that deal with the future of the GSEs, including with respect to their ownership and role in the mortgage market, as well as proposals to implement GSE reforms relating to borrowers, lenders and investors in the mortgage market. Thus, the long-term future of the GSEs remains uncertain. Any change in the ownership of the GSEs, or in their programs or role within the mortgage market, could materially and adversely affect our business, liquidity, financial position and results of operations.
Federal and state legislative and GSE initiatives in residential mortgage-backed securities, or RMBS, and securitizations may adversely affect our financial condition and results of operations.
There are federal and state legislative and GSE initiatives that could adversely affect our loan origination business and secured asset financing arrangements. For instance, the risk retention requirements under the Dodd-Frank Act require securitization sponsors to retain a portion of the credit risk of the securitized assets, subject to certain exemptions. The risk retention requirement could result in higher costs of certain lending operations and impose on us additional compliance requirements to meet servicing and originations criteria for securitized mortgage loans. Additionally, the amendments to Regulation AB and other regulations applicable asset-backed securities (ABS) adopted by the SEC pursuant to the Dodd-Frank Act and other relevant regulations have increased and may further increase compliance costs for ABS issuers, such as ourselves, which will in turn increase our cost of funding and operations.
If we fail to comply with the TILA-RESPA Integrated Disclosure (TRID) rules, our business and operations could be materially and adversely affected and our plans to expand our lending business could be adversely impacted.
The TRID rules include requirements relating to consumer facing disclosure and waiting periods to allow consumers to reconsider committing to loans after receiving required disclosures. If we fail to comply with the TRID rules, we may be unable to sell loans that we originate or purchase, or we may be required to sell such loans at a discount compared to other loans. We also could be subject to repurchase or indemnification claims from purchasers of such loans, including the GSEs. Additionally, loans might stay on our warehouse lines for longer periods before sale, which would increase our liquidity needs, holding costs and interest expense. We could also be subject to regulatory actions or private lawsuits.
In response to the TRID rules, we have implemented significant modifications and enhancements to our loan production processes and systems, and we continue to devote significant resources to TRID compliance. As regulatory guidance and enforcement and the views of the GSEs and other market participants such as warehouse loan lenders evolve, we may need to modify further our loan production processes and systems in order to adjust to evolution in the regulatory landscape and successfully operate our lending business. In such circumstances, if we are unable to make the necessary adjustments, our business and operations could be adversely affected and we may not be able to execute on our plans to grow our lending business.
Failure to comply with the Home Mortgage Disclosure Act (HMDA) and related CFPB regulations could adversely impact our business.
HMDA requires financial institutions to report certain mortgage data in an effort to provide the regulators and the public with information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The data points include information related to the loan applicant/borrower (e.g., age, ethnicity, race and credit score), the underwriting process, loan terms and fees, lender credits and interest rate, among others. The scope of the information available to the public could increase fair lending regulatory scrutiny and third-party plaintiff litigation, as the changes will expand the ability of regulators and third parties to compare a particular lender to its peers in an effort to determine differences among lenders in certain demographic borrower populations. We have devoted, and will need to devote, significant resources to establishing systems and processes for complying with HMDA on an ongoing basis. If we are not successful in capturing and reporting the new HMDA data, and analyzing and correcting any adverse patterns, we could be exposed to regulatory actions and private litigation against us, we could suffer reputational damage and we could incur losses, any of which could materially and adversely impact our business, financial condition and results of operations.
As a participant in the now ended HAMP program, we are subject to review by SIGTARP, which could adversely affect our business, reputation, and financial condition.
A significant portion of Ocwen’s loan modifications in recent years have been in connection with the now ended HAMP program. SIGTARP has indicated that it is assessing potential unlawful conduct by servicers in the HAMP program. In May 2017, we received a subpoena from SIGTARP requesting various documents and information relating to Ocwen’s participation in the HAMP program, and we have been providing documents and information in response to that subpoena. If SIGTARP were to allege breaches of the HAMP program, such allegations could be referred to the enforcement authorities within the Department of the Treasury or the Department of Justice and if such enforcement authorities elected to take action against Ocwen, it could adversely affect our business, reputation and financial condition, regardless of the outcome of any such enforcement action.
If we fail to satisfy minimum net worth and liquidity requirements established by regulators, GSEs, Ginnie Mae, lenders, or other counterparties, our business, financing activities, financial condition or results of operations could be materially and adversely affected.
As a result of our servicing and loan origination activities, we are subject to minimum net worth and liquidity requirements established by state regulators, GSEs, Ginnie Mae, lenders, and other counterparties. We have been incurring losses for the last
five years, which has eroded our net worth. In addition, we must structure our business so each subsidiary satisfies the net worth and liquidity requirements applicable to it, which can be challenging.
The minimum net worth and liquidity requirements to which our licensed entities are subject vary by state and type of license. We must also satisfy the minimum net worth and liquidity requirements of the GSEs and Ginnie Mae in order to maintain our approved status with such agencies and the minimum net worth and liquidity requirements set forth in our agreements with our lenders.
Minimum net worth requirements and liquidity are generally calculated using specific formulas that often exclude various items, such as intangible assets or certain intercompany receivables. Changes to these formulas have the potential to significantly affect net worth and liquidity calculations, and increases to the minimum required thresholds have the potential to cause non-compliance, both of which could imperil our ability to satisfy future minimum net worth and liquidity requirements. We believe our licensed entities were in compliance with all of their minimum net worth requirements at December 31, 2018. However, it is possible that regulators could disagree with our calculations, and one state regulator has disagreed with our calculation for a prior year period; we are currently discussing the matter with the regulator.
If we fail to satisfy minimum net worth requirements, absent a waiver or other accommodation, we could lose our licenses or have other regulatory action taken against us, we could lose our ability to sell and service loans to or on behalf of the GSEs or Ginnie Mae, or it could trigger a default under our debt agreements. Any of these occurrences could have a material adverse effect on our business, financing activities, financial condition or results of operations.
There may be material changes to the laws, regulations, rules or practices applicable to reverse mortgage programs sponsored by HUD and FHA, and securitized by Ginnie Mae, which could materially and adversely affect us and the reverse mortgage industry as a whole.
The reverse mortgage industry is largely dependent upon rules and regulations implemented by HUD, FHA and Ginnie Mae. There can be no guarantee that HUD/FHA will retain Congressional authorization to continue the HECM program, which provides FHA government insurance for qualifying HECM loans, or that they will not make material changes to the laws, regulations, rules or practices applicable to reverse mortgage programs. For example, HUD previously implemented certain lending limits for the HECM program, and added credit-based underwriting criteria designed to assess a borrower’s ability and willingness to satisfy future tax and insurance obligations. In addition, Ginnie Mae’s participation in the reverse mortgage industry may be subject to economic and political changes that cannot be predicted. Any of the aforementioned circumstances could materially and adversely affect the performance of our reverse mortgage business and the value of our common stock.
Regulators continue to be active in the reverse mortgage space, including due to the perceived susceptibility of older borrowers to be influenced by deceptive or misleading marketing activities. Regulators have also focused on appraisal practices because reverse mortgages are largely dependent on collateral valuation. If we fail to comply with applicable laws and regulations relating to the origination of reverse mortgages, we could be subject to adverse regulatory actions, including potential fines, penalties or sanctions, and our business, reputation, financial condition and results of operations could be materially and adversely affected.
Violations of predatory lending and/or servicing laws could negatively affect our business.
Various federal, state and local laws have been enacted that are designed to discourage predatory lending and servicing practices. The federal Home Ownership and Equity Protection Act of 1994 (HOEPA) prohibits inclusion of certain provisions in residential loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain additional disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than are those in HOEPA. In addition, under the anti-predatory lending laws of some states, the origination of certain residential loans, including loans that are not classified as “high cost” loans under HOEPA or other applicable law, must satisfy a net tangible benefits test with respect to the related borrower. A failure by us to comply with these laws, to the extent we originate, service or acquire residential loans that are non-compliant with HOEPA or other predatory lending or servicing laws, could subject us, as an originator or a servicer, or as an assignee, in the case of acquired loans, to monetary penalties and could result in the borrowers rescinding the affected loans. Lawsuits have been brought in various states making claims against originators, servicers and assignees of high cost loans for violations of state law. Named defendants in these cases have included numerous participants within the secondary mortgage market. If we are found to have violated predatory or abusive lending laws, defaults could be declared under our debt or servicing agreements, we could suffer reputational damage, and we could incur losses, any of which could materially and adversely impact our business, financial condition and results of operations.
Failure to comply with FHA underwriting guidelines could adversely impact our business.
We must comply with FHA underwriting guidelines in order to successfully originate FHA loans. If we fail to do so, we may not be able collect on FHA insurance. In addition, we could be subject to allegations of violations of the False Claims Act asserting that we submitted claims for FHA insurance on loans that had not been underwritten in accordance with FHA
underwriting guidelines. If we are found to have violated FHA underwriting guidelines, we could face regulatory penalties and damages in litigation, suffer reputational damage, and we could incur losses due to an inability to collect on such insurance, any of which could materially and adversely impact our business, financial condition and results of operations.
Failure to comply with United States and foreign laws and regulations applicable to our global operations could have an adverse effect on our business, financial position, results of operations or cash flows.
As a business with a global workforce, we need to ensure that our activities, including those of our foreign subsidiaries,operations, comply with applicable United States and foreign laws and regulations. Various states have implemented regulations which
specifically restrict the ability to perform certain servicing and originations functions offshore and, from time to time, various state regulators have scrutinized the operations of our foreign subsidiaries. For example, as previously disclosed, in 2016, two of our foreign subsidiaries entered into a Consent Order with the Washington State Department of Financial Institutions relating to the activities of those entities in Washington State under the Washington Consumer Loan Act. Our failure to comply with applicable laws and regulations could, among other things, result in restrictions on our operations, loss of licenses, fines, penalties or reputational damage and have an adverse effect on our business.
Failure to comply with the S.A.F.E. Act could adversely impact our business.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the S.A.F.E. Act) requires the individual licensing and registration of those engaged in the business of loan origination. The S.A.F.E. Act is designed to improve accountability on the part of loan originators, combat fraud and enhance consumer protections by encouraging states to establish a national licensing system and minimum qualification requirements for applicants. Thus, Ocwen must ensure proper licensing for all employees who participate in certain specified loan origination activities. Failure to comply with the S.A.F.E. Act licensing requirements could adversely impact Ocwen’s origination business.
Risks RelatingRelated to Our Financial Performance, Financing Our Business, Liquidity and Net Worth and the Economy
There canWe may be no assuranceunable to consummate our previously announced transactions with Oaktree.
On February 10, 2021, we announced that we entered an agreement with Oaktree to issue $285 million principal amount of Senior Secured Notes, in two separate tranches. See Note 28 – Subsequent Events. Closing of the first tranche is subject to conditions including, but not limited to, the contemporaneous consummation by us or one of our strategiessubsidiaries of an additional debt financing of up to $450 million. Conditions to the closing of the second tranche include, among others, the closing of the MSR joint venture with affiliates of Oaktree, which joint venture transaction is also subject to closing conditions, including regulatory approvals. See Note 25 — Commitments, Oaktree MAV Transaction. Our ability to consummate the additional debt financing, whether on favorable terms or at all, depends on factors outside our control, including market and interest rate conditions, the financial condition of our potential lenders, and perceptions by third parties of Ocwen or our industry, and cannot be guaranteed. Similarly, our receipt of regulatory approvals relating to the MSR joint venture cannot be guaranteed. If we cannot meet the conditions to the issuance and sale of one or both tranches of the Oaktree notes, it could adversely impact our financial condition, liquidity and results of operations. These adverse impacts could be compounded by reputational damage and negative publicity which could result from a failure to close, which could impair our ability to access sources of liquidity on acceptable terms, worsen the perception of Ocwen by counterparties, and materially adversely affect our ability to execute on our business plan.
Our strategic plan to return to profitability willmay not be successful.
We are facing certain challenges and uncertainties that could have significant adverse effects on our business, financial condition, liquidity and results of operations. The ability of management to appropriately address these challenges and uncertainties in a timely manner is critical to our ability to operate our business successfully.
LossesHistorical losses have significantly eroded stockholders’ equity and weakened our financial condition. Our near-term priority isWe have established a set of key initiatives to returnachieve our objective of returning to sustainable profitability in the shortest timeframe possible within an appropriate risk and compliance environment. While we believe our acquisitionSee Management’s Discussion and Analysis of PHH provides us with the opportunity to transform into a stronger, more efficient company better able to serve our customersFinancial Condition and clients, and positions us for a return to growth, we believe we must execute on five key initiatives in order to drive stronger financial performance. First, we must successfully execute on the integrationResults of PHH’s business with ours, including a smooth transition onto Black Knight MSP. Second, we must re-engineer our cost structure to go beyond eliminating redundant costs through the integration process. Third, we must fulfill our regulatory commitments and resolve our remaining legal and regulatory matters on satisfactory terms. Fourth, we must replenish our servicing portfolio through expanding our lending business and permissible MSR acquisitions that are prudent and well-executed with appropriate financial return targets. Finally, we must ensure that we continue to manage our balance sheet to provide a solid platform for executing on our growth and other initiatives.Operations-Overview-Business Initiatives.
There can be no assurance that we will be successful in executingsuccessfully execute on these initiatives. Further, there can be no assuranceinitiatives, or that even if we do execute on these initiatives we will be able to return to profitability. In addition to successful operational execution of our key initiatives, our success will also depend on market conditions and other factors outside of our control.control, including continued access to capital. If we continue to experience losses, our share price, business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
If we are unable to obtain sufficient capital to meet the financing requirements of our business, or if we fail to comply with our debt agreements,our business, financing activities, financial condition and results of operations will be adversely affected.
Our business requires substantial amounts of capital and our financing strategy includes the use of leverage. Accordingly, our ability to finance our operations and repay maturing obligations rests in large part on our ability to continue to borrow money at reasonable rates. If we are unable to maintain adequate financing, or other sources of capital are not available, we could be forced to suspend, curtail or reduce our operations,revenue generating objectives, which could harm our revenues, results of operations, liquidity, financial condition and business prospects. Our ability to borrow money is affected by a variety of factors including:
•limitations imposed on us by existing lending and similardebt agreements that contain restrictive covenants that may limit our ability to raise additional debt;
liquidity in the •credit markets;market conditions;
•the strength of the lenders from whom we borrow;
•lenders’ perceptions of us or our sector;
•corporate credit and servicer ratings from rating agencies; and
•limitations on borrowing under our MSR and advance facilities and mortgage loan warehouse facilities due to structural features in these facilities and the amount of eligible collateral that is pledged.
In addition, our advance facilities are revolving facilities, and in a typical monthly cycle, we repay up to one-thirda portion of the borrowings under these facilities from collections. During the remittance cycle, which starts in the middle of each month, we depend on our lenders to provide the cash necessary to make the advances that we are required to make as servicer. If one or more of these lenders were to restrict our ability to access these revolving facilities or were to fail, we may not have sufficient funds to meet our obligations. We typically require significantly more liquidity to meet our advance funding obligations than our available cash on hand.
Our advance financing facilities are comprised of (i) revolving notes issued to globallarge financial institutions that generally have a revolving period of less than two years,12 months, and (ii) term notes issued to institutional investors with one-, two- and three-year revolving periods. At December 31, 2018,2020, we had $778.3$581.3 million outstanding under these facilities. The revolving periods for variable funding notes with a total maximum borrowing capacity of $290.0$320.0 million end in 2019.June 2021.
In the event we are unable to renew, replace or extend the revolving period of one or more of these advance financing facilities, we would no longer have access to available borrowing capacity and repayment of the outstanding balances on the revolving and term notes must begin at the end of the applicable revolving period and end of the term, respectively. In addition, we use mortgage loan warehouse facilities to fund newly originated loans on a short-term basis until they are sold to secondary market investors, including GSEs or other third-party investors. Currently, our master repurchase and participation agreements for financing new loan originations generally have 364-daymaximum terms of 364 days, and similar to the revolving notes in the advance financing facilities, they are typically renewed, replaced or extended annually. At December 31, 2018,2020, we had $155.7$451.7 million outstanding under these warehouse financing arrangements, all under agreements maturing in 2019.2021.
In 2019, we entered into three separate MSR financing arrangements related to loans we service for (i) Fannie Mae and Freddie Mac, (ii) Ginnie Mae, and (iii) private investors (PLS MSRs). The Fannie Mae/Freddie Mac and Ginnie Mae facilities were provided through bank commitments and had total capacity of $250.0 million and $125.0 million and borrowed amounts of $210.8 million and $112.0 million, respectively at December 31, 2020. The PLS MSR financing was issued as an amortizing note structure to capital markets investors with an initial principal amount of $100.0 million. The Fannie Mae/Freddie Mac and Ginnie Mae facilities terminate in June 2021 and December 2021, respectively and the PLS MSR facility matures in November 2024. MSR financing structures have become more common in recent years and investor appetite has evolved in both the bank and capital markets. As a result, MSR financing has become a lower cost funding alternative to corporate loans and bonds. Despite these positive developments, MSR financing is not as readily available as secured match funded facilities for servicing advances and whole loans via warehouse facilities. In addition, MSR financing may require a higher level of issuer scrutiny despite being principally an asset-based financing structure.
Our MSR financing facilities provide funding based on an advance rate of MSR value that is subject to periodic mark-to-market valuation adjustments. In the normal course, MSR value is expected to decline over time due to run off of the loan balances in our servicing portfolio. As a result, we anticipate having to repay a portion of our MSR debt over a given time period. The requirements to repay MSR debt including those due to unfavorable fair value adjustment may require us to allocate a substantial amount of our available liquidity or future cash flows to meet these requirements. To the extent we are unable to generate sufficient cash flows from operations to meet these requirements, we may be more constrained to invest in our business and fund other obligations, and our business, financing activities, liquidity, financial condition and results of operations will be adversely affected.
We currently plan to renew, replace or extend all theseof the above debt agreements consistent with our historical experience. There can be no assurance that we will be able to renew, replace or extend all our debt agreements on appropriate terms or at all and, if we fail to do so, we may not have adequate sources of funding for our business.
Our debt agreements contain various qualitative and quantitative covenants, including financial covenants, covenants to operate in material compliance with applicable laws, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring additional debt, paying dividends, repurchasing or redeeming capital stock, transferring assets or making loans, investments or acquisitions. As a result of the covenants to which we are subject, we may be limited in the manner in which we conduct our business and may be limited in our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, noncompliance with our covenants, nonpayment of principal or interest, material misrepresentations, the occurrence of a material adverse effect or change, insolvency, bankruptcy, certain material judgments and changes of control. Covenants and defaults of this type are commonly found in debt agreements such as ours. Certain of these covenants and defaults are open to subjective interpretation
and, if our interpretation were contested by a lender, a court may ultimately be required to determine compliance or lack thereof. In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations and other legal remedies.
An actual or alleged default under any of our debt agreements, negative ratings action by a rating agency (including as a result of our increased leverage or erosion of net worth), the perception of financial weakness, an adverse action by a regulatory authority or GSE, a lengthening of foreclosure timelines or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and make it difficult for us to renew existing credit facilities or obtain new lines of credit. Any or all the above could have an adverse effect on our business, financing activities, financial condition and results of operations.
We may be unable to obtain sufficient servicer advance financing necessary to meet the financing requirements of our business, which could adversely affect our liquidity position and result in a loss of servicing rights.
We currently fund a substantial portion of our servicing advance obligations through our servicing advance facilities. Under normal market conditions, mortgage servicers typically have been able to renew or refinance these facilities. However, market conditions or lenders’ perceptions of us at the time of any renewal or refinancing may mean that we are unable to renew or refinance our advance financing facilities or obtain additional facilities on favorable terms or at all.
Our servicingIf we fail to satisfy minimum net worth and liquidity requirements established by regulators, GSEs, Ginnie Mae, lenders, or other counterparties, our business, is highly dependent on our continued relationship with NRZ, our largest client. NRZ-related servicing constituted approximately 51% of the Ocwen servicing portfolio by UPB as of December 31, 2018. Our agreements
with NRZ provide NRZ with certain termination and transfer rights. Should NRZ choose to exercise these rights, we could be materially and adversely impacted due to the large proportion of our servicing portfolio to which these rights apply.
Under agreements relating to subservicing and Rights to MSRs for loans with approximately $130.5 billion in outstanding UPB as of December 31, 2018 (representing 51% of the Ocwen servicing portfolio), any failure under a financial covenant could result in NRZ terminating Ocwen as subservicer under the subservicing agreements or in directing the transfer of servicing away from Ocwen under the Rights to MSRs agreements. Similarly, failure by Ocwen to meet operational requirements, including service levels, critical reporting and other obligations, could also result in termination or transfer for cause. A termination for cause and transfer of servicing could materially and adversely affect Ocwen’sfinancing activities, financial condition and share value.
Further, under our 2017 subservicing agreement with NRZ, at any time during the initial five-year term, NRZ may terminate these agreements for convenience, subject to Ocwen’s right to receive a termination fee and proper notice. In addition, under the 2018 agreements relating to NRZ’s Rights to MSRs, NRZ has the right to sell its servicing rights to a third-party if third-party consents to transfer the MSRs to NRZ are not obtained and Ocwen does not elect to purchase NRZ’s servicing rights. If NRZ sells its servicing rights to a third party, the transaction can only be completed if the third-party buyer can obtain the necessary third-party consents to transfer the MSRs. NRZ also has the obligation to use reasonable efforts to encourage such third-party buyer to enter into a subservicing agreement with Ocwen. Ocwen may lose future compensation for subservicing, however, if no subservicing agreement is ultimately entered into with the third-party buyer.
PHH also has a substantial relationship with NRZ that we assumed as a result of the PHH acquisition. As part of the sale of substantially all of PHH’s MSRs and related servicing advances to NRZ, PHH entered into a subservicing agreement with NRZ for the subservicing of the loans to which the MSRs relate for an initial three-year period beginning June 2017, subject to certain transfer and termination provisions. The loans subject to the subservicing agreement represent $42.3 billion in UPB as of December 31, 2018. NRZ has the ability to terminate portions of the subservicing agreement over the three-year term, beginning with the ability to terminate with respect to 25% of the loans covered thereby in June 2018 and 25% beginning in June 2019. If NRZ terminates this relationship, in full or in part, it could have a material adverse impact on our revenue. In addition, the sale transaction has not been completed with respect to loans representing $3.4 billion in UPB and $73.3 million of servicing advances as of December 31, 2018. There is a risk that the sale of these remaining assets may not be completed, in which case we would not receive the sale proceeds.
Because of the large percentage of our servicing business that is represented by agreements with NRZ that provide NRZ with the termination or transfer rights described above, our financial condition could be materially and adversely affected if NRZ exercised a significant portion of these rights. More generally, if NRZ were to decline to continue doing business with us and we were unable to develop relationships with new servicing clients on a similar scale, our servicing business, results of operations and financial condition could be materially and adversely affected.
As a result of our servicing and loan origination activities, we are subject to minimum net worth and liquidity requirements established by state regulators, GSEs, Ginnie Mae, lenders, and other counterparties. We have been incurring losses for the last five years, which has eroded our net worth. In addition, we must structure our business so each subsidiary satisfies the net worth and liquidity requirements applicable to it, which can be challenging.
The minimum net worth and liquidity requirements to which our licensed entities are subject vary by state and type of license. We must also satisfy the minimum net worth and liquidity requirements of the GSEs and Ginnie Mae in order to maintain our approved status with such agencies and the minimum net worth and liquidity requirements set forth in our agreements with our lenders.
Minimum net worth requirements and liquidity are generally calculated using specific adjustments that may require interpretation or judgment. Changes to these adjustments have the potential to significantly affect net worth and liquidity calculations and imperil our ability to satisfy future minimum net worth and liquidity requirements. We believe our licensed entities were in compliance with all of their minimum net worth requirements at December 31, 2020. However, it is possible that regulators could disagree with our calculations, and one state regulator has disagreed with our calculation for a prior year period; we have discussed the matter with the regulator, including why we believe we are in compliance with the applicable net worth requirements. If NRZ were towe fail to comply with its servicing advance obligations under its agreements withsatisfy minimum net worth requirements, absent a waiver or other accommodation, we could lose our licenses or have other regulatory action taken against us, we could lose our ability to sell and service loans to or on behalf of the GSEs or Ginnie Mae, or it could materially and adversely affect us.
Under the Rights to MSRs agreements, NRZ is responsible for financing all servicing advance obligations in connection with the loans underlying the MSRs. At December 31, 2018, such servicing advances were approximately $2.3 billion. However, under the Rights to MSRs structure, we are contractually requiredtrigger a default under our servicing agreements with the RMBS trusts to make the relevant servicing advances even if NRZ does not perform its contractual obligations to fund those advances. Therefore, if NRZ were unable to meet its advance financing obligations, we would remain obligated to meet our advance financing obligations with respect to the loans underlyingdebt agreements. Any of these Rights to MSRs, which could materially and adversely affect our liquidity, financial condition and servicing operations.
NRZ currently uses advance financing facilities to fund a substantial portion of the servicing advances that NRZ is contractually obligated to make pursuant the Rights to MSRs agreements. Although we are not an obligor or guarantor under NRZ’s advance financing facilities, we are a party to certain of the facility documents as the entity performing the work of servicing the underlying loans on which advances are being financed. As such, we make certain representations, warranties and covenants, including representations and warranties in connection with our sale of advances to NRZ. If we were to make representations or warranties that were untrue or if we were otherwise to fail to comply with our contractual obligations, we could become subject to claims for damages or events of default under such facilities could be asserted.
A failure to maintain minimum servicer ratingsoccurrences could have ana material adverse effect on our business, financing activities, financial condition or results of operations.
S&P, Moody’s, Fitch and others rate us as a mortgage servicer. Failure to maintain minimum servicer ratings could adversely affect our ability to sell or fund servicing advances going forward, could affect the terms and availability of debt financing facilities that we may seek in the future, and could impair our ability to consummate future servicing transactions or adversely affect our dealings with lenders, other contractual counterparties and regulators, including our ability to maintain our
status as an approved servicer by Fannie Mae and Freddie Mac. The servicer rating requirements of Fannie Mae do not necessarily require or imply immediate action, as Fannie Mae has discretion with respect to whether we are in compliance with their requirements and what actions it deems appropriate under the circumstances in the event that we fall below their desired servicer ratings.
Certain of our servicing agreements require that we maintain specified servicer ratings. Out of 3,140 non-Agency servicing agreements, 697 with $25.9 billion of UPB as of December 31, 2018 have minimum servicer ratings criteria. As a result of our current servicer ratings, termination rights have been triggered in 171 of these non-Agency servicing agreements. This represents approximately $8.2 billion in UPB as of December 31, 2018, or approximately 7% of our total non-Agency servicing portfolio. While the holders of these termination rights have not exercised them to date, they have not waived the right to do so, and we could, in the future, be subject to terminations either as a result of servicer ratings downgrades or future adverse actions by ratings agencies, which could have an adverse effect on our business, financing activities, financial condition and results of operations. Downgrades in our servicer ratings could also affect the terms and availability of advance financing facilities that we may seek in the future. Our failure to maintain minimum or specified ratings could adversely affect our dealings with contractual counterparties, including GSEs, and regulators, any of which could have a material adverse effect on our business, financing activities, financial condition and results of operations.
An economic slowdown or a deterioration of the housing market could increase both interest expense on servicing advances and operating expenses and could cause a reduction in income from, and the value of, our servicing portfolio.
During any period in which a borrower is not making payments, we are required under most of our servicing agreements to advance our own funds to meet contractual principal and interest remittance requirements for investors, pay property taxes and insurance premiums and process foreclosures. We also advance funds to maintain, repair and market real estate properties on behalf of investors. Most of our advances have the highest standing and are “top of the waterfall” so that we are entitled to repayment from respective loan or REO liquidations proceeds before most other claims on these proceeds, and in the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool level proceeds. Consequently, the primary impact of an increase in advances is through increased interest expense as we finance a large portion of servicing advance obligations.
Higher delinquencies also increase our cost to service loans, as loans in default require more intensive effort to bring them current or manage the foreclosure process. An increase in delinquencies may delay the timing of revenue recognition because we recognize servicing fees as earned, which is generally upon collection of payments from borrowers or proceeds from REO liquidations. An increase in delinquencies also generally leads to lower balances in custodial and escrow accounts (float balances) and lower net earnings on custodial and escrow accounts (float earnings). Additionally, an increase in delinquencies in our GSE servicing portfolio will result in lower revenue because we collect servicing fees from GSEs only on performing loans.
Foreclosures are involuntary prepayments resulting in a reduction in UPB. This may result in higher amortization expense as well as charges to recognize impairment and declines in the value of our MSRs.
Adverse economic conditions could also negatively impact our lending businesses. For example, declining home prices and increasing loan-to-value ratios may preclude many potential borrowers from refinancing their existing loans. Further, an increase in prevailing interest rates could decrease originations volume.
Any of the foregoing could adversely affect our business, financial condition and results of operations.
A significant increase in prepayment speeds could adversely affect our financial results.
Prepayment speed is a significant driver of our business. Prepayment speed is the measurement of how quickly borrowers pay down the UPB of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. Prepayment speeds have a significant impact on our servicing fee revenues, our expenses and on the valuation of our MSRs as follows:
Revenue. If prepayment speeds increase, our servicing fees will decline more rapidly than anticipated because of the greater decrease in the UPB on which those fees are based. The reduction in servicing fees would be somewhat offset by increased float earnings because the faster repayment of loans will result in higher float balances that generate the float earnings. Conversely, decreases in prepayment speeds result in increased servicing fees but lead to lower float balances and float earnings.
Expenses. Amortization of MSRs is one of our largest operating expenses. Since we amortize servicing rights in proportion to total expected income over the life of a portfolio, an increase in prepayment speeds leads to increased amortization expense as we revise downward our estimate of total expected income. Faster prepayment speeds also result in higher compensating interest expense, which represents the difference between the full month of interest we are required to remit in the month a loan pays off and the amount of interest we collect from the borrower for that
month. Decreases in prepayment speeds lead to decreased amortization expense as the period over which we amortize MSRs is extended. Slower prepayment speeds also lead to lower compensating interest expense.
Valuation of MSRs. We base the price we pay for MSRs and the rate of amortization of those rights on, among other things, our projection of the cash flows from the related pool of mortgage loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speeds were significantly greater than expected, the fair value of our MSRs, which we carry at fair value, could decrease. When the fair value of these MSRs decreases, we record a loss on fair value, which also has a negative impact on our financial results. Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method.
If we do not comply with our obligations under our servicing agreements or if others allege non-compliance, our business and results of operations may be harmed.
We have contractual obligations under the servicing agreements pursuant to which we service mortgage loans. Many of our servicing agreements require adherence to general servicing standards, and certain contractual provisions delegate judgment over various servicing matters to us. Our servicing practices, and the judgments that we make in our servicing of loans, could be questioned by parties to these agreements, such as trustees or master servicers, or by investors in the trusts which own the mortgage loans (or other third parties). As a result, we could become subject to litigation claims seeking damages or other remedies arising from alleged breaches of our servicing agreements. Indeed, several trustees are currently defending themselves against claims by RMBS investors that the trustees failed to properly oversee mortgage servicers-including Ocwen-in the servicing of hundreds of trusts. Trustees subject to those suits have informed Ocwen that they may seek indemnification for losses they suffer as a result of the filings.
If we do not comply with our servicing agreements, we may be terminated as servicer, or we may be required to make indemnification or other payments or provide other remedies. Such actions may have a significant negative impact on our profitability and lead to lower earnings in the future. Even if such allegations against us lack merit, we may have to spend additional resources and devote additional management time to contesting such allegations, which would reduce the resources available to address, and the time management is able to devote to, other issues.
In addition, OLS, Homeward, Liberty and PMC are parties to seller/servicer agreements and/or subject to guidelines and regulations (collectively, seller/servicer obligations) with one or more of the GSEs, HUD, FHA, VA and Ginnie Mae. These seller/servicer obligations include financial covenants that include capital requirements related to tangible net worth, as defined by the applicable agency, an obligation to provide audited consolidated financial statements within 90 days of the applicable entity’s fiscal year end as well as extensive requirements regarding servicing, selling and other matters. To the extent that these requirements are not met or waived, the applicable agency may, at its option, utilize a variety of remedies including requirements to 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. To date, none of these agencies has communicated any material sanction, suspension or prohibition in connection with our seller/servicer obligations. We believe we were in compliance with the related net worth requirements at December 31, 2018. Our non-Agency servicing agreements also contain requirements regarding servicing practices and other matters, and a failure to comply with these requirements could have an adverse impact on our business. See Note 25 — Contingencies for additional information relating to our recent interactions with Ginnie Mae as a result of the state regulatory actions discussed in that note.
GSEs or Ginnie Mae may curtail or terminate our ability to sell, service or securitize newly originated loans to them.
As noted in the prior risk factor, if we do not comply with our seller/servicer obligations, the GSEs or Ginnie Mae may utilize a variety of remedies against us. Such remedies include curtailment of our ability to sell newly originated loans or even termination of our ability to sell, service or securitize such loans altogether.
Technology or process failures could damage our business operations or reputation, harm our relationships with key stakeholders and lead to regulatory sanctions or penalties.
Operational risk is inherent in virtually all of our activities. While we have established and maintain an overall risk framework that is designed to balance strong corporate oversight with well-defined independent risk management, we continue to be subject to some degree of operational risk. Our business is substantially dependent on our ability to process and monitor a large number of transactions, many of which are complex, across various parts of our business. These transactions often must adhere to the terms of a complex set of legal and regulatory standards, as well as the terms of our servicing and other agreements. In addition, given the volume of transactions that we process and monitor, certain errors may be repeated or compounded before they are discovered and rectified. For example, in the area of borrower correspondence, in 2014, problems were identified with our letter dating processes such that erroneously dated letters were sent to borrowers, which damaged our reputation and relationships with borrowers, regulators, important counterparties and other stakeholders. Because in an average
month we mail over 2 million letters, a process problem such as erroneous letter dating has the potential to negatively affect many parts of our business and have widespread negative implications.
We are responsible for developing and maintaining sophisticated operational systems and infrastructure, which is challenging. The CFPB and other regulators have emphasized their focus on the importance of servicers’ and lenders’ systems and infrastructure operating effectively. If our systems and infrastructure fail to operate effectively, such failures could damage our business and reputation, harm our relationships with key stakeholders and lead to regulatory sanctions or penalties.
We are similarly dependent on our employees. We could be materially adversely affected if an employee or employees, acting alone or in concert with non-affiliated third parties, causes a significant operational break-down or failure, either because of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems, including, without limitation, by means of cyberattack or denial-of-service attack. Third parties with which we do business could also be sources of operational risk to us, including risks relating to break-downs or failures of such parties’ own systems or employees. Any of these occurrences could diminish our ability to operate one or more of our businesses, potential liability to clients, reputational damage and regulatory intervention, all of which could materially adversely affect us.
Certain of our operational systems and infrastructure are provided by third-party vendors. If any of these vendors fail to provide us with effective operational systems and infrastructure or appropriate levels of service, we could also be required to take legal action against or replace such vendors, which could be costly, involve a diversion of management time and energy and lead to operational disruptions.
We are dependent on Altisource and other vendors for much of our technology and other services.
Our vendor relationships subject us to a variety of risks. We have significant exposure to third-party risks, as we are dependent on vendors for a number of key services, including our servicing system that runs on an information technology system that we license under agreements with Altisource. Our servicing business operates on this system and we have used it for many years. In 2017, we entered into an agreement with Black Knight pursuant to which we plan to transition to Black Knight MSP during 2019. On February 22, 2019, Ocwen and Altisource S.à r.l (a subsidiary of Altisource) signed a Binding Term Sheet (the Term Sheet), which among other things, confirms Altisource’s cooperation with the de-boarding of loans from Altisource’s REALServicing servicing system to Black Knight’s MSP servicing system.
In addition to the Term Sheet, Ocwen and Altisource S.à r.l also entered into a letter agreement confirming that, except in relation to Ocwen’s transfer off of the REALServicing technology beginning in February 2019 or termination of the REALServicing statement of work, each party reserves its rights and remedies in the event of any disputes between them. While the Term Sheet does not restrict Ocwen’s rights to sell MSRs in any way, the letter agreement specifically includes a reservation of each party’s rights to assert damage claims against the other party regarding such transactions including any transfer by Ocwen to NRZ (or its affiliates) or any third party of the rights to designate a vendor. Ocwen does not believe its agreements with Altisource restrict Ocwen’s rights to sell MSRs or to restrict Ocwen from allowing an owner of MSRs, or owner of the economics thereto, the right to designate vendors. As such, Ocwen believes any asserted claims by Altisource against Ocwen arising from Ocwen’s sale of MSRs or related to the rights to designate a vendor to a third party, would be without merit and we have so informed Altisource. However, if Altisource were to assert such claims against us, such disputes could cause us to incur costs, divert the attention of management, and potentially disrupt our operations which rely on Altisource-provided services, regardless of whether such claims were ultimately resolved in our favor.
If Altisource were to fail to properly fulfill its contractual obligations to us, including through a failure to provide services at the required level to maintain and support our systems, or if Altisource were to become unable to fulfill such obligations, our business and operations would suffer. In addition, if Altisource fails to develop and maintain its technology so as to provide us with an effective and competitive platform, our business could suffer. Similarly, we are reliant on other vendors for the proper maintenance and support of our technological systems and our business and operations would suffer if these vendors do not perform as required. If Altisource or our other vendors do not adequately maintain and support our systems, including our servicing systems, loan originations and financial reporting systems, our business and operations could be materially and adversely affected.
Altisource and other vendors supply us with other services in connection with our business activities such as property preservation and inspection services and valuation services. In the event that a vendor’s activities do not comply with the applicable servicing criteria, we could be exposed to liability as the servicer and it could negatively impact our relationships with our servicing clients, borrowers or regulators, among others. In addition, if our current vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations.
In addition to our reliance on the vendors discussed above, our business is reliant on a number of technological vendors that provide services such as integrated cloud applications and financial institutions that provide essential banking services on a
daily basis. Even short-terms interruptions in the services provided by these vendors and financial institutions could be disruptive to our business and cause us financial loss. Significant or prolonged disruptions in the ability of these companies to provide services to us could have a material adverse impact on our operations.
We have undergone and continue to undergo significant change to our technology infrastructure and business processes. Failure to adequately update our systems and processes could harm our ability to run our business and adversely affect our results of operations.
We are currently making, and will continue to make, technology investments and process improvements to improve or replace the information processes and systems that are key to managing our business, to improve our compliance management system, and to reduce costs. Additionally, as part of the transition to Black Knight MSP and the integration of our information processes and systems with PHH, we have undergone and continue to undergo significant changes to our technology infrastructure and business processes. Failure to select the appropriate technology investments, or to implement them correctly and efficiently, could have a significant negative impact on our operations.
If our transition to a new servicing system does not go as planned, we could experience disruptions in our operations, and our relationships with regulators and our regulatory compliance could be negatively impacted.
As described above, we have entered into an agreement with Black Knight pursuant to which we plan to transition to Black Knight MSP during 2019. We are highly dependent on the successful functioning of our servicing system in order to operate our loan servicing business effectively and in compliance with our regulatory and contractual obligations. Implementing a large-scale transition to a new technology product such as a new servicing system is inherently complex and involves significant operational risk, including with respect to technical deficiencies that may impact customer data. We expect to devote significant capital and human resources to implementing this transition, and we may experience decreases in productivity and increased costs as our employees implement and become familiar with the new system. Further, both the costs and length of time required to implement the transition may exceed our expectations. Because PHH currently utilizes Black Knight MSP for its servicing operations, Ocwen intends to transfer the loans it services to PHH’s Black Knight MSP versus a separate instance of Black Knight MSP as it believes such a transfer can happen sooner and with less implementation and transfer risk. While we believe that such a transition poses less risk, it will still be subject to the operational and other risks summarized above. Accordingly, if our transition to Black Knight MSP does not go as planned, our business, financial condition and results of operations could be materially and adversely affected. In addition, delays or other issues with our transition to Black Knight MSP could negatively impact our relationships with regulators and our regulatory compliance.
Disagreements with vendors, service providers or other contractual counterparties could materially and adversely affect our business, financing activities, financial condition or results of operations.
We are dependent on Altisource and other vendors and service providers for much of our technology and other services and on banks, NRZ and other financing sources to finance our business. Certain provisions of the agreements underlying our relationships with our vendors, service providers, financing sources and other contractual counterparties could be open to subjective interpretation. Disagreements with these counterparties, including disagreements over contract interpretation, could lead to business disruptions or could result in litigation or arbitration or mediation proceedings, any of which could be expensive and divert senior management’s attention from other matters. While we have been able to resolve disagreements with these counterparties in the past, if we were unable to resolve a disagreement, a court, arbitrator or mediator might be required to resolve the matter and there can be no assurance that the outcome of a material disagreement with a contractual counterparty would not materially and adversely affect our business, financing activities, financial condition or results of operations.
Loan putbacks and related liabilities for breaches of representations and warranties regarding sold loans could adversely affect our business.
We have exposure to representation, warranty and indemnification obligations because of our lending, sales and securitization activities, and in certain instances, we have assumed these obligations on loans we service. Our contracts with purchasers of originated loans contain provisions that require indemnification or repurchase of the related loans under certain circumstances. While the language in the purchase contracts varies, such contracts generally contain provisions that require us to indemnify purchasers of its loans or repurchase such loans if:
representations and warranties concerning loan quality, contents of the loan file or loan underwriting circumstances are inaccurate;
adequate mortgage insurance is not secured within a certain period after closing;
a mortgage insurance provider denies coverage; or
there is a failure to comply, at the individual loan level or otherwise, with regulatory requirements.
Additionally, in one of the servicing contracts that Homeward acquired in 2008 from Freddie Mac involving non-prime mortgage loans, it assumed the origination representations and warranties even though it did not originate the loans.
At December 31, 2018, we had outstanding representation and warranty repurchase demands of $51.3 million UPB (316 loans).
We believe that, because of the current market environment, many purchasers of residential mortgage loans are particularly aware of the conditions under which originators must indemnify or repurchase loans and under which such purchasers would benefit from enforcing any indemnification rights and repurchase remedies they may have.
If home values decrease, our realized loan losses from loan repurchases and indemnifications may increase as well. As a result, our liability for repurchases may increase beyond our current expectations. Depending on the magnitude of any such increase, our business, financial condition and results of operations could be adversely affected.
Liabilities relating to our past sales of Agency MSRs could adversely affect our business.
We have made representations, warranties and covenants relating to our past sales of Agency MSRs. In addition, PHH has also conducted past sales of Agency MSRs, including the sales of its Fannie Mae and Freddie Mac MSRs to NRZ, and we acquired these contractual liabilities in connection with our acquisition of PHH. To the extent that we (or PHH, as applicable) have made inaccurate representations or warranties or fail to perform our covenants, we could incur liability to the purchasers of these MSRs pursuant to the contractual provisions of our sale agreements. In addition, transfers of servicing are subject to regulation under federal consumer finance laws, including CFPB rules implementing RESPA that require servicers to, among other things, maintain policies and procedures that are reasonably designed to facilitate the transfer of accurate information and documents during mortgage servicing transfers and properly evaluate loss mitigation applications that are in process at the time of transfer. The CFPB has advised mortgage servicers that its examiners will be carefully reviewing servicers’ compliance with these and other regulations applicable to servicing transfers, and state mortgage regulators have supervisory power over any licensed institutions involved in a transaction. Accordingly, we devote significant time and resources to our compliance efforts and to engaging with such regulators in connection with our transfers of mortgage servicing, and we expect to continue to do so. If we fail to comply with regulations relating to servicing transfers in connection with dispositions of MSRs, we could be subject to adverse regulatory actions, which could materially and adversely affect our business.
We are highly dependent on an experienced senior management team, including our President and Chief Executive Officer, and the loss of the services of one or more of our senior officers could have a material adverse effect on us. In addition, high turnover of management and non-management employees could harm our business.
We are highly dependent on an experienced management team. We do not maintain key man life insurance relating to our President and Chief Executive Officer, Glen A. Messina, or any of our other executive officers. The loss of the services of Mr. Messina or any of our other senior officers could have a material adverse effect on us. We could also be harmed by legal actions brought by former senior officers after they have ceased employment with Ocwen.
In 2018, we experienced elevated management turnover, including the departure of our former President and Chief Executive Officer, Ronald M. Faris, and our former Chief Financial Officer, Michael R. Bourque, Jr. In addition, as we integrate business units following the PHH acquisition, we are experiencing significant turnover among both management and non-management employees. While planned departures form part of our plan to capture acquisition synergies, there is a risk that employee departures, even if planned, could lead to operational disruptions or other adverse impacts on our business. If we are unable to retain key talent as we execute the integration, it could impair our ability to obtain the anticipated benefits of the PHH acquisition.
The human capital and site closure components of our cost re-engineering efforts could disrupt operations, impair morale and productivity, and generate negative publicity, which could have a material adverse effect on our operations, business and financial performance.
As part of our cost re-engineering plans, we expect to reduce total staffing levels significantly and to close a number of our U.S. facilities. While we believe these steps are necessary in order to drive stronger financial performance and, in the longer term, simplify our operations, the process of closing these facilities will add complexity to our operations in the short term and divert management and employee attention from our other initiatives. In addition, the reduction in our workforce may negatively impact employee morale. It is possible that critical employees may seek other employment, or that employees needed to assist with the transition will depart prior to their scheduled departure dates. Further, it is possible that we have misjudged the number or allocation of positions needed to run our operations efficiently and critical functions could be understaffed. Finally, the potential negative publicity accompanying the site closures and workforce reductions may invite increased regulatory inquiries. Any of the above risks, or a combination of these risks, could impair our ability to realize anticipated integration synergies and result in a material adverse effect on our business and operating results.
An inability to attract and retain qualified personnel could harm our business, financial condition and results of operations.
Our future success also depends, in part, on our ability to identify, attract and retain highly skilled servicing, lending, finance, risk, compliance and technical personnel. We face intense competition for qualified individuals from numerous financial services and other companies, some of which have far greater resources and better reputations than we do. We may be
unable to identify, attract and retain suitably qualified individuals, or we may be required to pay increased compensation in order to do so. If we were to be unable to attract and retain the qualified personnel we need to succeed, our business, financial condition and results of operations could suffer.
Our operations are vulnerable to disruptions resulting from severe weather events.
Our operations are vulnerable to disruptions resulting from severe weather events, including our operations in India, the Philippines, the USVI and Florida. Approximately 4,100, or 57%, of our employees as of December 31, 2018 are located in India. During 2017 and 2018, severe flooding caused disruptions to our operations in both India and the Philippines, and we remain vulnerable to future events of flooding and severe weather. In addition, OLS and OMS maintain their headquarters in St. Croix, in the USVI, where we also operate a call center. During 2017, two major hurricanes disrupted our operations in St. Croix for an extended period of time and we faced additional expense resulting from the evacuation of personnel and from property damage. Further, weather-related damage in St. Croix has made living there more burdensome, which could negatively impact our ability to retain and attract qualified personnel. The occurrence of severe weather events in the future could have a significant adverse effect on our business and results of operations.
We are subject to, among other things, requirements regarding the effectiveness of our internal controls over financial reporting. If our internal controls over financial reporting are found to be inadequate, our financial condition and results of operations and the trading price of our common stock may be materially and adversely affected.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires us to evaluate and report on our internal control over financial reporting. As previously disclosed, in connection with the restatement of our consolidated financial statements for the year ended December 31, 2016, we identified a material weakness in internal control over financial reporting as a result of which we determined our disclosure controls and procedures were not effective. In response to changes implemented by management, and subsequent testing and evaluation, we consider this material weakness to be remediated and have concluded that these controls are operating effectively. However, we cannot be certain that any measures that we implemented will ensure adequate controls over our financial processes and reporting in the future. Even if we conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (GAAP), because of their inherent limitations, internal controls over financial reporting may not prevent or detect fraud or misstatements. Fraud or misstatement could adversely affect our financial condition and results of operations. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations. In addition, investors could lose confidence in our financial reports and the trading price of our common stock may be adversely affected if our internal controls over financial reporting are found by management or by our independent registered public accounting firm not to be adequate.
We have operations in India and the Philippines that could be adversely affected by changes in the political or economic stability of these countries or by government policies in India, the Philippines or the U.S.
Approximately 4,100, or 57%, of our employees as of December 31, 2018 are located in India. A significant change in India’s economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally and our business in particular. The political or regulatory climate in the U.S. or elsewhere also could change so that it would not be lawful or practical for us to use international operations in the manner in which we currently use them. For example, changes in regulatory requirements could require us to curtail our use of lower-cost operations in India to service our businesses. If we had to curtail or cease our operations in India and transfer some or all of these operations to another geographic area, we could incur significant transition costs as well as higher future overhead costs that could materially and adversely affect our results of operations.
We may need to increase the levels of our employee compensation more rapidly than in the past to retain talent in India. Unless we can continue to enhance the efficiency and productivity of our employees, wage increases in the long term may negatively impact our financial performance.
Political activity or other changes in the political or economic stability in India could affect our ability to operate our business effectively. For example, political protests disrupted our Indian operations in multiple cities for a number of days during 2018. Depending on the frequency and intensity of similar occurrences in the future, our Indian operations could be significantly adversely affected.
Our operations in the Philippines are less substantial than our operations in India. However, they are still at risk of being affected by the same types of risks that affect our Indian operations. If they were to be so affected, our business could be materially and adversely affected.
There are a number of foreign laws and regulations that are applicable to our operations in India and the Philippines, including laws and regulations that govern licensing, employment, safety, taxes and insurance and laws and regulations that
govern the creation, continuation and winding up of companies as well as the relationships between shareholders, our corporate entities, the public and the government in these countries. Non-compliance with the laws and regulations of India or the Philippines could result in (i) restrictions on our operations in these countries, (ii) fines, penalties or sanctions or (iii) reputational damage.
The industry in which we operate is highly competitive, and, to the extent we fail to meet these competitive challenges, it would have a material adverse effect on our business, financial position, results of operations or cash flows.
We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory or technological changes. Competition to service mortgage loans and for mortgage loan originations comes primarily from commercial banks and savings institutions and non-bank lenders and mortgage servicers. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources, and typically have access to greater financial resources and lower funding costs. While our acquisition of PHH is anticipated to help us increase scale and utilize resources more efficiently, we continue to face competitive disadvantages. Further, our competitors that are national banks may also benefit from a federal exemption from certain state regulatory requirements that is applicable to depository institutions. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of revenue generating options (e.g., originating types of loans that we choose not to originate) and establish more favorable relationships than we can. With the proliferation of smartphones and technological changes enabling improved payment systems and cheaper data storage, newer market participants, often called “disruptors,” are reinventing aspects of the financial industry and capturing profit pools previously enjoyed by existing market participants. As a result, the lending industry could become even more competitive if new market participants are successful in capturing market share from existing market participants such as ourselves. Competition to service residential loans may result in lower margins. Because of the relatively limited number of servicing clients, our failure to meet the expectations of any significant client could materially impact our business. Ocwen has suffered reputational damage as a result of our regulatory settlements and the associated scrutiny of our business. We believe this may have weakened our competitive position against both our bank and non-bank mortgage servicing competitors. These competitive pressures could have a material adverse effect on our business, financial condition or results of operations.
We originate and securitize reverse mortgages, which subjects us to risks that could have a material adverse effect on our business, reputation, liquidity, financial condition and results of operations.
We originate, securitize and service reverse mortgages although we have retained third parties to subservice the reverse mortgages. The reverse mortgage business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. Generally, a reverse mortgage is a loan available to seniors aged 62 or older that allows homeowners to borrow money against the value of their home. No repayment of the mortgage is required until a default event under the terms of the mortgage occurs, the borrower dies, the borrower moves out of the home or the home is sold. A decline in the demand for reverse mortgages may reduce the number of reverse mortgages we originate and adversely affect our ability to sell reverse mortgages in the secondary market. Although foreclosures involving reverse mortgages generally occur less frequently than forward mortgages, loan defaults on reverse mortgages leading to foreclosures may occur if borrowers fail to occupy the home as their primary residence, maintain their property or fail to pay taxes or home insurance premiums. A general increase in foreclosure rates may adversely impact how reverse mortgages are perceived by potential customers and thus reduce demand for reverse mortgages. Additionally, we could become subject to negative headline risk in the event that loan defaults on reverse mortgages lead to foreclosures or evictions of the elderly. The HUD HECM reverse mortgage program has in the past responded to scrutiny around similar issues by implementing rule changes, and may do so in the future. It is not possible to predict whether any such rule changes would negatively impact us. All of the above factors could have a material adverse effect on our business, reputation, liquidity, financial condition and results of operations.
If we are unable to fund our tail commitments or securitize our HECM loans (including tails), this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We have originated and continue to service HECM loans under which the borrower has additional undrawn borrowing capacity in the form of undrawn lines of credit. We are obligated to fund future borrowings drawn on that capacity. As of December 31, 2018, our commitment to fund additional borrowing capacity was $1.4 billion. In addition, we are required to pay mortgage insurance premiums on behalf of HECM borrowers. We normally fund these obligations on a short-term basis using our cash resources, and from time to time securitize these amounts (along with our servicing fees) through the issuance of tails. If our cash resources are insufficient to fund these amounts and we are unable to fund them through the securitization of such tails, this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Reinsuring risk through our captive reinsurance entity could adversely impact our results of operation and financial condition.
If our captive reinsurance entity incurs losses from a severe catastrophe or series of catastrophes, particularly in areas where a significant portion of the insured properties are located, claims that result could substantially exceed our expectations, which could adversely impact our results of operation and financial condition.
A significant portion of our business is in the states of California, Florida, Texas, New York and Illinois, and our business may be significantly harmed by a slowdown in the economy or the occurrence of a natural disaster in those states.
A significant portion of the mortgage loans that we service and originate are secured by properties in California, Florida, Texas, New York and Illinois. Any adverse economic conditions in these markets, including a downturn in real estate values, could increase loan delinquencies. Delinquent loans are more costly to service and require us to advance delinquent principal and interest and to make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent that we determine that such amounts are recoverable. We could also be adversely affected by business disruptions triggered by natural disasters or acts or war or terrorism in these geographic areas.
We may incur litigation costs and related losses if the validity of a foreclosure action is challenged by a borrower or if a court overturns a foreclosure.
We may incur costs if we are required to, or if we elect to, execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. We may incur litigation costs if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to a title insurer of the property sold in foreclosure. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans. In addition, if certain documents required for a foreclosure action are missing or defective, we could be obligated to cure the defect or repurchase the loan. A significant increase in litigation costs could adversely affect our liquidity, and our inability to be reimbursed for servicing advances could adversely affect our business, financial condition or results of operations.
Our earnings may be subject to volatility.
Our operating results have been and may in the future be significantly affected by inter-period variations in our results of operations, including variations due to expense fluctuations, sales or acquisitions of MSRs or changes in the value of MSRs due to, among other factors, increases or decreases in prepayment speeds, delinquencies or defaults.
Certain non-recurring gains and losses have significantly affected our operating results in the past, and non-recurring gains and losses may affect our operating results in future periods, resulting in substantial inter-period variations in financial performance. In particular, our financial results for the year ended December 31, 2018 reflect substantial costs relating to the integration of PHH, including costs relating to severance agreements and technology transitions. These costs may continue to have a significant impact on our future financial results.
We use estimates in measuring or determining the fair value of certainthe majority of our assets and liabilities. If our estimates prove to be incorrect, we may be required to write down the value of these assets or write up the value of these liabilities, which could adversely affect our earnings.
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events based on information available at the time of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows.
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.
At December 31, 2018, 77%2020, 82% and 73%72% of our consolidated total assets and liabilities are measured at fair value, respectively, on a recurring and nonrecurring basis, 97%96% and 100% of which are considered Level 3 valuations.valuations, including our MSR portfolio. Our largest Level 3 asset and liability carried at fair value on a recurring basis is Loans held for investment - reverse mortgages and the related secured financing. We pool home equity conversion mortgages (reverse mortgages) into Ginnie Mae Home Equity Conversion Mortgage-Backed Securities (HMBS). Because the transferssecuritization of reverse mortgagesmortgage loans do not qualify for sale accounting, we account for these transfers as secured financings and classify the transferred reverse mortgages as Loans held
for investment - reverse mortgages and recognize the related Financing liabilities. Holders of HMBS have no recourse against our assets, except for standard representations and warranties and our contractual obligations to service the reverse mortgages and HMBS.
We estimate the fair value of our assets and liabilities utilizing assumptions that we believe are appropriate and are used by market participants. We generally engage third party valuation experts to support our fair value determination for Level 3 assets and liabilities. The methodology used to estimate these values is complex and uses asset- and liability-specific data and market inputs for assumptions including interest and discount rates, collateral status and expected future performance and liquidity dates.performance. If these assumptions prove to be inaccurate, if market conditions change or if errors are found in our models, the value of certain of our assets may decrease, which could adversely affect our business, financial condition and results of operations, including through negative impacts on our ability to satisfy minimum net worth and liquidity covenants.
Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of our valuation methodologies. If changes to interest rates or other factors cause prepayment speeds to increase more than estimated, delinquency and default levels are higher than anticipated or financial market illiquidity is greater than anticipated, we may be required to adjust the value of certain assets or liabilities, which could adversely affect our business, financial condition and results of operations.
Our hedging strategies may not be successful in mitigating our exposure to interest rate risk.
As of December 31, 2018, we have interest rate caps in place that limit our exposure to increases in interest rates on our match funded advance financing facilities. We currently have no economic hedge positions open to hedge our fair value MSRs. If we acquire additional servicing or subservicing rights in the future, there is no assurance that we will be able to obtain the fixed rate financing that would be necessary to protect us from the effect of rising interest rates. Therefore, we may consider utilizing various derivative financial instruments to protect against the effects of rising rates. In addition, we may use interest rate swaps, U.S. Treasury futures, forward contracts and other derivative instruments to hedge our interest rate exposure on loans and MSRs measured at fair value. We have entered into forward mortgage backed securities trades to hedge our mortgage loans held for sale at fair value and to hedge interest rate lock commitments (IRLCs) on loans that we have agreed to originate at a specified fixed or variable rate.
Nevertheless, no hedging strategy can completely protect us. The derivative financial instruments that we select may not have the effect of reducing our interest rate risks. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could increase our risks and losses. In addition, hedging strategies involve transaction and other costs. We cannot be assured that our hedging strategies and the derivatives that we use will adequately offset the risks of interest rate volatility or that our hedging transactions will not result in or magnify losses.
We are exposed to liquidity, interest rate and foreign currency exchange risks among other risks.
We are exposed to liquidity risk primarily because of the highly variable daily cash requirements to support our servicing business, including the requirement to make advances pursuant to our servicing contractsagreements and the process of remitting borrower payments to the custodial accounts.collecting and applying recoveries of advances. We are also exposed to liquidity risk due to potential accelerated repayment of our debt depending on the performance of the underlying collateral, including the fair value of MSRs, and certain covenants, among other factors. We are also exposed to liquidity and interest rate risk by our decision to originate and finance mortgage loans and sell mortgage loansthe timing of their subsequent sales into the secondary market. Further, as discussed below, the economic hedges that we have entered into in order to limit MSR fair value change exposure may include instruments that require margin, thereby leading to liquidity distributions should the hedge instrument lose value. In general, we finance our operations through operating cash flows and various other sources of funding, including match funded borrowing agreements, secured lines of credit and repurchase agreements. We believe that we will have adequate financing for the next twelve months.
We are exposed to interest rate risk to the degree that our interest-bearing liabilities mature or reprice at different speeds, or on different bases, than our interest earning assets or when financed assets are not interest-bearing. Our servicing business is characterized by non-interest earning assets financed by interest-bearing liabilities. Among theServicing advances are among our more significant non-interest earning assets are servicing advances and MSRs.assets. At December 31, 2018,2020, we had total advances and match funded advances of $1.2 billion.$828.2 million. We are also exposed to interest rate risk because a portion of our advance financing and other outstanding debt at December 31, 20182020 is at variable rate.rates. Rising interest rates may increase our interest expense. Earnings on float balances partially offset this variability.these higher funding costs. At December 31, 2018,2020, we had no interest rate swaps in place to hedge our exposure to rising interest rates but we have interest rate caps in place as required by certain of our advance financing arrangements.servicing activities.
TheOur MSRs, thatwhich we carry at fair value, are subject to substantial interest rate risk, asprimarily because the mortgage loans underlying the servicing rights permit the borrowers to prepay the loans. We may enter intoA decrease in interest rates generally increases prepayment speeds and vice versa. As a result, the valuation assumptions for MSRs are highly correlated to changes across the yield curve. An interest rate decrease could result in an array of fair value changes, the severity of which would depend on several factors, including the magnitude of the change, whether the decrease is across specific rate tenors or a parallel change across the entire yield curve, and impact from market-side adjustments, among others. Beginning in September 2019, we implemented a hedging strategy using economic hedges (derivatives that do not qualify as hedges for accounting purposes) including interest rate swaps, U.S. Treasury futures and forward contracts to minimizepartially offset the effects of losschanges in value of these MSRs associated with increased prepayment activity that generally results from declining interest rates. We currently have no economic hedges in place to minimize the effects on our MSRs carried at fair value of increased prepayment activityour MSRs due to interest rate changes. However, as discussed below, there can be no assurance that our hedging strategy will be effective in the eventpartially mitigating our exposure to changes in fair value of decliningour MSRs due to interest rates.rate changes.
In our lending business, we are subject to interest rate and price risk on our pipeline (i.e., interest rate loan commitments (IRLCs) and mortgage loans held for salesale) from the loan fundingcommitment date up until the date the commitment expires, or the loan is sold into the secondary market. Generally, the fair value of a loanthe pipeline will decline in value when interest rates increase and will rise in value when interest rates decrease. To mitigate this risk, we enter into forward mortgage-backed securities trades to provide an economic hedge against those changes in fair value on mortgage loans held for sale. IRLCs represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage
applicant, whereby the interest rate is set prior to funding. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. Our interest rate exposure on these derivative loan commitments isour pipeline had previously been economically hedged with freestanding derivatives such as forward contracts. We also enter into forward contracts with respectBeginning in September 2019, this exposure is no longer
individually hedged, but rather used as an offset to fixed or variable rate loan commitments.our MSR fair value exposure and managed as part of our MSR hedging strategy described above.
We are exposed to foreign currency exchange rate risk in connection with our investment in non-U.S. dollar currency operations to the extent that our foreign exchange positions remain unhedged. Our operations in the Philippines and India expose us to foreign currency exchange rate risk.
WeWhile we have established policies and procedures intended to identify, monitor and manage the risks described above, and other risks to which we are subject. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management. However, we cannot guaranteeassure you that our risk management policies and procedures will be effective,effective. Further, such policies and to the extent theyprocedures are not designed to mitigate or eliminate all of the risks we face. As a result, these risks could materially and adversely affect our business, financial condition and results of operations.
Our hedging strategy may not be successful in partially mitigating our exposure to interest rate risk.
Our hedging strategy may not be as effective as desired due to the actual performance of an MSR differing from the expected performance. While we actively track the actual performance of our MSRs across rate change environments, there is potential for our economic hedges to underperform. The underperformance may be a result of various factors, including the following: available hedge instruments have a different profile than the underlying asset, the duration of the hedge is different from the MSR, the convexity of the hedge is not proportional to the valuation change of the MSR asset, the counterparty with which we have traded has failed to deliver under the terms of the contract, or we fail to renew the hedge position in a timely or efficient manner.
Unexpected changes in market rates or secondary liquidity may have a materially adverse impact on the cash flow or operating performance of the Company. The expected hedge coverage profiled may not correlate to the asset as desired, resulting in poorer performance than had we not hedged at all. In addition, hedging strategies involve transaction and other costs. We cannot be assured that our hedging strategy and the derivatives that we use will adequately offset the risks of interest rate volatility or that our hedging transactions will not result in or magnify losses.
GSE and Ginnie Mae initiatives and other actions may affect our financial condition and results of operations.
Due to the significant role that the GSEs play in the secondary mortgage market, new initiatives and other actions that they may implement could become prevalent in the mortgage servicing industry generally. To the extent that FHFA and/or the GSEs implement reforms that materially affect the market not only for conventional and/or government-insured loans but also the non-qualifying loan markets, such reforms could have a material adverse effect on the creation of new MSRs, the economics or performance of any MSRs that we acquire, servicing fees that we can charge and costs that we incur to comply with new servicing requirements.
In addition, our ability to generate revenues through mortgage loan sales to institutional investors depends to a significant degree on programs administered by the GSEs, Ginnie Mae, and others that facilitate the issuance of MBS in the secondary market. These entities play a critical role in the residential mortgage industry and we have significant business relationships with many of them. If it is not possible for us to complete the sale or securitization of certain of our mortgage loans due to changes in GSE and Ginnie Mae programs, we may lack liquidity to continue to fund mortgage loans and our revenues and margins on new loan originations would be materially and negatively impacted.
Our plans to acquire MSRs will require approvals and cooperation by the GSEs and Ginnie Mae. Should approval or cooperation be withheld, we would have difficulty meeting our MSR acquisition objectives.
There are various proposals that deal with the future of the GSEs, including with respect to their ownership and role in the mortgage market, as well as proposals to implement GSE reforms relating to borrowers, lenders and investors in the mortgage market. Thus, the long-term future of the GSEs remains uncertain. Any change in the ownership of the GSEs, or in their programs or role within the mortgage market, could materially and adversely affect our business, liquidity, financial position and results of operations.
An economic slowdown or a deterioration of the housing market could increase both interest expense on servicing advances and operating expenses and could cause a reduction in income from, and the value of, our servicing portfolio.
During any period in which a borrower is not making payments, we are required under most of our servicing agreements to advance our own funds to meet contractual principal and interest remittance requirements for investors, pay property taxes and insurance premiums and process foreclosures. We also advance funds to maintain, repair and market real estate properties on behalf of investors. Most of our advances have the highest standing and are “top of the waterfall” so that we are entitled to repayment from respective loan or REO liquidations proceeds before most other claims on these proceeds, and in the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool level proceeds. Consequently, the primary impacts of an increase in advances are generally increased interest expense as we finance a large portion of servicing advance obligations and a decline in the fair value of MSRs as the projected funding cost of existing and future expected servicing advances is a component of the fair value of MSRs. Our liquidity is also negatively impacted because
we must fund the portion of our advance obligations that is not financed. Our liquidity would be more severely impacted if we were unable to continue to finance a large portion of servicing advance obligations.
Higher delinquencies also decrease the fair value of MSRs and increase our cost to service loans, as loans in default require more intensive effort to bring them current or manage the foreclosure process. An increase in delinquencies may delay the timing of revenue recognition because we recognize servicing fees as earned, which is generally upon collection of payments from borrowers or proceeds from REO liquidations. An increase in delinquencies also generally leads to lower balances in custodial and escrow accounts (float balances) and lower net earnings on custodial and escrow accounts (float earnings). Additionally, an increase in delinquencies in our GSE servicing portfolio will result in lower revenue because we collect servicing fees from GSEs only on performing loans.
Foreclosures are involuntary prepayments resulting in a reduction in UPB. This may also result in declines in the value of our MSRs.
Adverse economic conditions could also negatively impact our lending businesses. For example, declining home prices and increasing loan-to-value ratios may preclude many borrowers from refinancing their existing loans or obtaining new loans.
Any of the foregoing could adversely affect our business, liquidity, financial condition and results of operations.
A significant increase in prepayment speeds could adversely affect our financial results.
Prepayment speed is a significant driver of our business. Prepayment speed is the measurement of how quickly borrowers pay down the UPB of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. Prepayment speeds have a significant impact on our servicing fee revenues, our expenses and on the valuation of our MSRs as follows:
•Revenue. If prepayment speeds increase, our servicing fees will decline more rapidly than anticipated because of the greater decrease in the UPB on which those fees are based. The reduction in servicing fees would be somewhat offset by increased float earnings because the faster repayment of loans will result in higher float balances that generate the float earnings. Conversely, decreases in prepayment speeds result in increased servicing fees but lead to lower float balances and float earnings.
•Expenses. Faster prepayment speeds result in higher compensating interest expense, which represents the difference between the full month of interest we are required to remit in the month a loan pays off and the amount of interest we collect from the borrower for that month. Slower prepayment speeds also lead to lower compensating interest expense.
•Valuation of MSRs. The fair value of MSRs is based on, among other things, projection of the cash flows from the related pool of mortgage loans. The expectation of prepayment speeds is a significant assumption underlying those cash flow projections from the perspective of market participants. Increases or decreases in interest rates have an impact on prepayment rates. If prepayment speeds were significantly greater than expected, the fair value of our MSRs, which we carry at fair value, could decrease. When the fair value of these MSRs decreases, we record a loss on fair value, which also has a negative impact on our financial results.
Operational Risks and Other Risks Related to Our Business
If we do not comply with our obligations under our servicing agreements or if others allege non-compliance, our business and results of operations may be harmed.
We have contractual obligations under the servicing agreements pursuant to which we service mortgage loans. Our non-Agency servicing agreements generally contain detailed provisions regarding servicing practices, reporting and other matters. In addition, PMC is party to seller/servicer agreements and/or subject to guidelines and regulations (collectively, seller/servicer obligations) with one or more of the GSEs, HUD, FHA, VA and Ginnie Mae. These seller/servicer obligations include financial covenants that include capital requirements related to tangible net worth, as defined by the applicable agency, an obligation to provide audited consolidated financial statements within 90 days of the applicable entity’s fiscal year end as well as extensive requirements regarding servicing, selling and other matters. To the extent that these requirements are not met or waived, the applicable agency may, at its option, utilize a variety of remedies including requirements to 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.
Many of our servicing agreements require adherence to general servicing standards, and certain contractual provisions delegate judgment over various servicing matters to us. Our servicing practices, and the judgments that we make in our servicing of loans, could be questioned by parties to these agreements, such as GSEs, Ginnie Mae, trustees or master servicers, or by investors in the trusts which own the mortgage loans or other third parties. As a result, we could be required to repurchase mortgage loans, make whole or otherwise indemnify such mortgage loan investors or other parties. Advances that we have made could be unrecoverable. We could also be terminated as servicer or become subject to litigation or other claims seeking
damages or other remedies arising from alleged breaches of our servicing agreements. For example, we are currently involved in a dispute with a former subservicing client relating to alleged violations of our contractual agreements, including that we did not properly submit mortgage insurance and other claims for reimbursement. We are presently engaged in a dispute resolution process relating to these claims. We are unable to predict the outcome of this dispute or the size of any loss we might incur. In addition, several trustees are currently defending themselves against claims by RMBS investors that the trustees failed to properly oversee mortgage servicers - including Ocwen - in the servicing of hundreds of trusts. Trustees subject to those suits have informed Ocwen that they may seek indemnification for losses they suffer as a result of the filings.
Any of the foregoing could have a significant negative impact on our business, financial condition and results of operations. Even if allegations against us lack merit, we may have to spend additional resources and devote additional management time to contesting such allegations, which would reduce the resources available to address, and the time management is able to devote to, other matters.
GSEs or Ginnie Mae may curtail or terminate our ability to sell, service or securitize newly originated loans to them.
As noted in the prior risk factor, if we do not comply with our seller/servicer obligations, the GSEs or Ginnie Mae may utilize a variety of remedies against us. Such remedies include curtailment of our ability to sell newly originated loans or even termination of our ability to sell, service or securitize such loans altogether. Any such curtailment or termination would likely have a material adverse impact on our business, liquidity, financial condition and results of operations.
A significant reduction in, or the total loss of, our remaining NRZ-related servicing would significantly impact our business, liquidity, financial condition and results of operations.
NRZ is our largest servicing client, accounting for 36% of the UPB in our servicing portfolio as of December 31, 2020. On February 20, 2020, we received a notice of termination from NRZ with respect to the legacy PMC subservicing agreement and completed the deboarding of those loans on October 1, 2020. It is possible that NRZ could exercise its rights to terminate for convenience some or all of the legacy Ocwen servicing agreements.
In addition, under the legacy Ocwen agreements, any failure under a financial covenant could result in NRZ terminating Ocwen as subservicer under the subservicing agreements or in directing the transfer of servicing away from Ocwen under the Rights to MSRs agreements. Similarly, failure by Ocwen to meet operational requirements, including service levels, critical reporting and other obligations, could also result in termination or transfer for cause. In addition, if there is a change of control to which NRZ did not consent, NRZ could terminate for cause and direct the transfer of servicing away from Ocwen. A termination for cause and transfer of servicing could materially and adversely affect Ocwen’s business, liquidity, financial condition and results of operations.
Further, under our Rights to MSRs agreements, in certain circumstances, NRZ has the right to sell its Rights to MSRs to a third-party and require us to transfer title to the related MSRs, subject to an Ocwen option to acquire at a price based on the winning third-party bid rather than selling to the third party. If NRZ sells its Rights to MSRs to a third party, the transaction can only be completed if the third-party buyer can obtain the necessary third-party consents to transfer the MSRs. NRZ also has the obligation to use reasonable efforts to encourage such third-party buyer to enter into a subservicing agreement with Ocwen. Ocwen may lose future compensation for subservicing, however, if no subservicing agreement is ultimately entered into with the third-party buyer.
Because of the large percentage of our servicing business that is represented by the legacy Ocwen agreements with NRZ that provide NRZ with the termination or transfer rights described above, our business, financial condition, results of operations would be significantly impacted if NRZ exercised all or a significant portion of these rights. If this were to occur, we anticipate that we would need to substantially restructure many aspects of our servicing business as well as the related corporate support functions to address our smaller servicing portfolio, which would likely be a complex and expensive undertaking.Such a restructuring of our operations could divert management attention and financial resources required to execute on other strategic objectives, which could delay or prevent our growth or otherwise negatively impact the execution of our plans to return to profitability. In addition, it is possible that the unwinding of all or a significant portion of our relationship may not occur in an orderly or timely manner, which could be disruptive and could result in us incurring additional costs or even in disagreements with NRZ relating to our respective rights and obligations.
More generally, if NRZ were to decline to continue doing business with us and we were unable to develop relationships with new servicing clients on a similar scale or otherwise acquire sufficient replacement servicing, our business, liquidity, results of operations and financial condition could be materially and adversely affected. In addition, if NRZ were to take actions to limit or terminate our relationship, that could impact perceptions of other servicing clients, lenders, GSEs, regulators or others, which could cause them to take actions that materially and adversely impact our business, liquidity, results of operations and financial condition.
If NRZ were to fail to comply with its servicing advance obligations under its agreements with us, it could materially and adversely affect us.
Under the Rights to MSRs agreements, NRZ is responsible for financing all servicing advance obligations in connection with the loans underlying the MSRs. At December 31, 2020, such servicing advances made by NRZ were approximately $575.9 million. However, under the Rights to MSRs structure, we are contractually required under our servicing agreements with the RMBS trusts to make the relevant servicing advances even if NRZ does not perform its contractual obligations to fund those advances. Therefore, if NRZ were unable to meet its advance financing obligations, we would remain obligated to meet any future advance financing obligations with respect to the loans underlying these Rights to MSRs, which could materially and adversely affect our liquidity, financial condition and servicing operations.
NRZ currently uses advance financing facilities to fund a substantial portion of the servicing advances that NRZ is contractually obligated to make pursuant to the Rights to MSRs agreements. Although we are not an obligor or guarantor under NRZ’s advance financing facilities, we are a party to certain of the facility documents as the entity performing the work of servicing the underlying loans on which advances are being financed. As such, we make certain representations, warranties and covenants, including representations and warranties in connection with our sale of advances to NRZ. If we were to make representations or warranties that were untrue or if we were otherwise to fail to comply with our contractual obligations, we could become subject to claims for damages or events of default under such facilities could be asserted.
Technology or process failures or employee misconduct could damage our business operations or reputation, harm our relationships with key stakeholders and lead to regulatory sanctions or penalties.
We are responsible for developing and maintaining sophisticated operational systems and infrastructure, which is challenging. As a result, operational risk is inherent in virtually all of our activities. In addition, the CFPB and other regulators have emphasized their focus on the importance of servicers’ and lenders’ systems and infrastructure operating effectively. If our systems and infrastructure fail to operate effectively, such failures could damage our business and reputation, harm our relationships with key stakeholders and lead to regulatory sanctions or penalties.
Our business is substantially dependent on our ability to process and monitor a large number of transactions, many of which are complex, across various parts of our business. These transactions often must adhere to the terms of a complex set of legal and regulatory standards, as well as the terms of our servicing and other agreements. In addition, given the volume of transactions that we process and monitor, certain errors may be repeated or compounded before they are discovered and rectified. For example, in the area of borrower correspondence, in 2014, problems were identified with our letter dating processes such that erroneously dated letters were sent to borrowers, which damaged our reputation and relationships with borrowers, regulators, important counterparties and other stakeholders. Because in an average month we mail over 2 million letters, a process problem such as erroneous letter dating has the potential to negatively affect many parts of our business and have widespread negative implications.
We are similarly dependent on our employees. We could be materially adversely affected if an employee or employees, acting alone or in concert with non-affiliated third parties, causes a significant operational break-down or failure, either because of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems, including by means of cyberattack or denial-of-service attack. In addition to direct losses from such actions, we could be subject to regulatory sanctions or suffer harm to our reputation, financial condition, customer relationships, and ability to attract future customers or employees. Employee misconduct could prompt regulators to allege or to determine based upon such misconduct that we have not established adequate supervisory systems and procedures to inform employees of applicable rules or to detect and deter violations of such rules. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent misconduct may not be effective in all cases. Misconduct by our employees, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our reputation and our business.
Third parties with which we do business could also be sources of operational risk to us, including risks relating to break-downs or failures of such parties’ own systems or employees. Any of these occurrences could diminish our ability to operate one or more of our businesses or lead to potential liability to clients, reputational damage or regulatory intervention. We could also be required to take legal action against or replace third-party vendors, which could be costly, involve a diversion of management time and energy and lead to operational disruptions. Any of these occurrences could materially adversely affect us.
We are dependent on Black Knight and other vendors for much of our technology, business process outsourcing and other services.
Our vendor relationships subject us to a variety of risks. We have significant exposure to third-party risks, as we are dependent on vendors, including Black Knight, for a number of key services.
We use the Black Knight MSP servicing system pursuant to a seven-year agreement with Black Knight, and we are highly dependent on the successful functioning of it to operate our loan servicing business effectively and in compliance with our regulatory and contractual obligations. It would be difficult, costly and complex to transfer all of our loans to another servicing
system in the event Black Knight failed to perform under its agreements with us and any such transfer would take considerable time. Any such transfer would also likely be subject us to considerable scrutiny from regulators, GSEs, Ginnie Mae and other counterparties.
If Black Knight were to fail to properly fulfill its contractual obligations to us, including through a failure to provide services at the required level to maintain and support our systems, our business and operations would suffer. In addition, if Black Knight fails to develop and maintain its technology so as to provide us with an effective and competitive servicing system, our business could suffer. Similarly, we are reliant on other vendors for the proper maintenance and support of our technological systems and our business and operations would suffer if these vendors do not perform as required. If our vendors do not adequately maintain and support our systems, including our servicing systems, loan originations and financial reporting systems, our business and operations could be materially and adversely affected.
Altisource and other vendors supply us with other services in connection with our business activities such as property preservation and inspection services and valuation services. In the event that a vendor’s activities do not comply with the applicable servicing criteria, we could be exposed to liability as the servicer and it could negatively impact our relationships with our servicing clients, borrowers or regulators, among others. In addition, if our current vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations.
In addition to our reliance on the vendors discussed above, our business is reliant on a number of technological vendors that provide services such as integrated cloud applications and financial institutions that provide essential banking services on a daily basis. Even short-terms interruptions in the services provided by these vendors and financial institutions could be disruptive to our business and cause us financial loss. Significant or prolonged disruptions in the ability of these companies to provide services to us could have a material adverse impact on our operations.
We have undergone and continue to undergo significant change to our technology infrastructure and business processes. Failure to adequately update our systems and processes could harm our ability to run our business and adversely affect our results of operations.
We are currently making, and will continue to make, technology investments and process improvements to improve or replace the information processes and systems that are key to managing our business, to improve our compliance management system, and to reduce costs. Additionally, as part of the transition to Black Knight MSP and the integration of our information processes and systems with PHH, we have undergone and continue to undergo significant changes to our technology infrastructure and business processes. Failure to select the appropriate technology investments, or to implement them correctly and efficiently, could have a significant negative impact on our operations.
Disagreements with vendors, service providers or other contractual counterparties could materially and adversely affect our business, financing activities, financial condition or results of operations.
We rely on services provided by Black Knight, Altisource and other vendors to operate our business effectively and in compliance with applicable regulatory and contractual obligations and on banks, NRZ and other financing sources to finance our business. Certain provisions of the agreements underlying our relationships with our vendors, service providers, financing sources and other contractual counterparties could be open to subjective interpretation. Disagreements with these counterparties, including disagreements over contract interpretation, could lead to business disruptions or could result in litigation or arbitration or mediation proceedings, any of which could be expensive and divert senior management’s attention from other matters. While we have been able to resolve disagreements with these counterparties in the past, if we were unable to resolve a disagreement, a court, arbitrator or mediator might be required to resolve the matter and there can be no assurance that the outcome of a material disagreement with a contractual counterparty would not materially and adversely affect our business, financing activities, financial condition or results of operations.
In February 2019, Ocwen and Altisource signed a Binding Term Sheet, which among other things, confirmed Altisource’s cooperation with the de-boarding of loans from Altisource’s REALServicing servicing system to Black Knight’s MSP servicing system. In addition, Ocwen and Altisource entered into a letter agreement confirming that, except in relation to Ocwen’s transfer off of the REALServicing technology beginning in February 2019 or termination of the REALServicing statement of work, each party reserves its rights and remedies in the event of any disputes between them. While the Binding Term Sheet does not restrict Ocwen’s rights to sell MSRs in any way, the letter agreement specifically includes a reservation of each party’s rights to assert damage claims against the other party regarding such transactions including any transfer by Ocwen to NRZ (or its affiliates) or any third party of the rights to designate a vendor. Ocwen does not believe its agreements with Altisource restrict Ocwen’s rights to sell MSRs or restrict Ocwen from allowing an owner of MSRs, or owner of the economics thereto, the right to designate vendors. As such, Ocwen believes any asserted claims by Altisource against Ocwen arising from Ocwen’s sale of MSRs or related to the rights to designate a vendor to a third party, would be without merit and we have so informed Altisource. However, if Altisource were to assert such claims against us, such disputes could cause us to incur costs, divert the
attention of management, and potentially disrupt our operations which rely on Altisource-provided services, regardless of whether such claims were ultimately resolved in our favor.
Cybersecurity breaches or system failures may interrupt or delay our ability to provide services to our customers, expose our business and our customers to harm and otherwise adversely affect our operations.
Disruptions and failures of our systems or those of our vendors may interrupt or delay our ability to provide services to our customers, expose us to remedial costs and reputational damage, and otherwise adversely affect our operations. The secure transmission of confidential information over the Internet and other electronic distribution and communication systems is essential to our maintaining consumer confidence in certain of our services. We have programs in place to detect and respond to security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. While none of the cybersecurity incidents that we have experienced to date have had a material adverse impact on our business, financial condition or operations, we cannot assure that future incidents will not so impact us.
Security breaches, computer viruses, cyberattacks, hacking and other acts of vandalism are increasing in frequency and sophistication, and could result in a compromise or breach of the technology that we use to protect our borrowers’ personal information and transaction data and other information that we must keep secure. Our financial, accounting, data processing or other operating systems and facilities (or those of our vendors) may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a cyberattack, a spike in transaction volume or unforeseen catastrophic events, potentially resulting in data loss and adversely affecting our ability to process transactions or otherwise operate our business. If one or more of these events occurs, this could potentially jeopardize data integrity or confidentiality of information processed and stored in, or transmitted through, our computer systems and networks. Any failure, interruption or breach in our cyber security could result in reputational harm, disruption of our customer relationships, or an inability to originate and service loans and otherwise operate our business. Further, any of these cyber security and operational risks could expose us to lawsuits by customers for identity theft or other damages resulting from the misuse of their personal information and possible financial liability, any of which could have a material adverse effect on our results of operations, financial condition and liquidity.
Regulators may impose penalties or require remedial action if they identify weaknesses in our systems, and we may be required to incur significant costs to address any identified deficiencies or to remediate any harm caused. A number of states have specific reporting and other requirements with respect to cybersecurity in addition to applicable federal laws. For instance, the NY DFS Cybersecurity Regulation requires New York insurance companies, banks, and other regulated financial services institutions - including certain Ocwen entities licensed in the state of New York - to assess their cybersecurity risk profile. Regulated entities are required, among other things, to adopt the core requirements of a cybersecurity program, including a cybersecurity policy, effective access privileges, cybersecurity risk assessments, training and monitoring for all authorized users, and appropriate governance processes. This regulation also requires regulated entities to submit notices to the NY DFS of any security breaches or other cybersecurity events, and to certify their compliance with the regulation on an annual basis. In addition, consumers generally are concerned with security breaches and privacy on the Internet, and Congress or individual states could enact new laws regulating the use of technology in our business that could adversely affect us or result in significant compliance costs.
As part of our business, we may share confidential customer information and proprietary information with customers, vendors, service providers, and business partners. The information systems of these third parties may be vulnerable to security breaches as these third parties may not have appropriate security controls in place to protect the information we share with them. If our confidential information is intercepted, stolen, misused, or mishandled while in possession of a third party, it could result in reputational harm to us, loss of customer business, and additional regulatory scrutiny, and it could expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of operations, financial condition and liquidity.
Damage to our reputation could adversely impact our financial results and ongoing operations.
Our ability to serve and retain customers and conduct business transactions with our counterparties could be adversely affected to the extent our reputation is damaged. Our failure to address, or to appear to fail to address, the various regulatory, operational and other challenges facing Ocwen could give rise to reputational risk that could cause harm to us and our business prospects. Reputational issues may arise from the following, among other factors:
•negative news about Ocwen or the mortgage industry generally;
•allegations of non-compliance with legal and regulatory requirements;
•ethical issues, including alleged deceptive or unfair servicing or lending practices;
•our practices relating to collections, foreclosures, property preservation, modifications, interest rate adjustments, loans impacted by natural disasters, escrow and insurance;
•consumer privacy concerns;
•consumer financial fraud;
•data security issues related to our customers or employees;
•cybersecurity issues and cyber incidents, whether actual, threatened, or perceived;
•customer service or consumer complaints;
•legal, reputational, credit, liquidity and market risks inherent in our businesses;
•a downgrade of or negative watch warning on any of our servicer or credit ratings; and
•alleged or perceived conflicts of interest.
The proliferation of social media websites as well as the personal use of social media by our employees and others, including personal blogs and social network profiles, also may increase the risk that negative, inappropriate or unauthorized information may be posted or released publicly that could harm our reputation or have other negative consequences, including as a result of our employees interacting with our customers in an unauthorized manner in various social media outlets. The failure to address, or the perception that we have failed to address, any of these issues appropriately could give rise to increased regulatory action, which could adversely affect our results of operations.
The industry in which we operate is highly competitive, and, to the extent we fail to meet these competitive challenges, it would have a material adverse effect on our business, financial position, results of operations or cash flows.
We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory or technological changes. Competition to service mortgage loans and for mortgage loan originations comes primarily from commercial banks and savings institutions and non-bank lenders and mortgage servicers. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources, and lower funding costs. Further, our competitors that are national banks may also benefit from a federal exemption from certain state regulatory requirements that is applicable to depository institutions. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of revenue generating options (e.g., originating types of loans that we choose not to originate) and establish more favorable relationships than we can. With the proliferation of smartphones and technological changes enabling improved payment systems and cheaper data storage, newer market participants, often called “disruptors,” are reinventing aspects of the financial industry and capturing profit pools previously enjoyed by existing market participants. As a result, the lending industry could become even more competitive if new market participants are successful in capturing market share from existing market participants such as ourselves. Competition to service mortgage loans may result in lower margins. Because of the relatively limited number of servicing clients, our failure to meet the expectations of any significant client could materially impact our business. Ocwen has suffered reputational damage as a result of our regulatory settlements and the associated scrutiny of our business. We believe this may have weakened our competitive position against both our bank and non-bank mortgage servicing competitors. These competitive pressures could have a material adverse effect on our business, financial condition or results of operations.
An inability to attract and retain qualified personnel could harm our business, financial condition and results of operations.
Our future success depends, in part, on our ability to identify, attract and retain highly skilled servicing, lending, finance, risk, compliance and technical personnel. We face intense competition for qualified individuals from numerous financial services and other companies, some of which have greater resources, better recent financial performance, fewer regulatory challenges and better reputations than we do.
In addition, the current low interest rate environment has created an increase in refinancing and home purchase activities, creating high demand for originations underwriters and processing staff that has resulted in increased competition for qualified personnel and upward pressure on compensation levels.
If we are unable to attract and retain the personnel necessary to conduct our originations business, or other operations, or ifthe costs of doing so rise significantly, it could negatively impact our financial condition and results of operations.
We have operations in India and the Philippines that could be adversely affected by changes in the political or economic stability of these countries or by government policies in India, the Philippines or the U.S.
Approximately 3,100, or 62%, of our employees as of December 31, 2020 are located in India. A significant change in India’s economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally and our business in particular. The political or regulatory climate in the U.S. or elsewhere also could change so that it would not be lawful or practical for us to use international operations in the manner in which we currently use them. For example, changes in regulatory requirements could require us to curtail our use of lower-cost operations in India to service our businesses. If we had to curtail or cease our operations in India and transfer some or all of these operations to another geographic area, we could incur significant transition costs as well as higher future overhead costs that could materially and adversely affect our results of operations.
We may need to increase the levels of our employee compensation more rapidly than in the past to retain talent in India. Unless we can continue to enhance the efficiency and productivity of our employees, wage increases in the long-term may negatively impact our financial performance.
Political activity or other changes in political or economic stability in India could affect our ability to operate our business effectively. For example, political protests disrupted our Indian operations in multiple cities for a number of days during 2018. While we have implemented and maintain business continuity plans to reduce the disruption such events cause to our critical operations, we cannot guarantee that such plans will eliminate any negative impact on our business. Depending on the frequency and intensity of future occurrences of instability, our Indian operations could be significantly adversely affected.
Our operations in the Philippines are less substantial than our operations in India. However, they are still at risk of being affected by the same types of risks that affect our Indian operations. If they were to be so affected, our business could be materially and adversely affected.
There are a number of foreign laws and regulations that are applicable to our operations in India and the Philippines, including laws and regulations that govern licensing, employment, safety, taxes and insurance and laws and regulations that govern the creation, continuation and winding up of companies as well as the relationships between shareholders, our corporate entities, the public and the government in these countries. Non-compliance with the laws and regulations of India or the Philippines could result in (i) restrictions on our operations in these countries, (ii) fines, penalties or sanctions or (iii) reputational damage.
Our operations are vulnerable to disruptions resulting from severe weather events.
Our operations are vulnerable to disruptions resulting from severe weather events, including our operations in India, the Philippines, the USVI and Florida. Approximately 3,100, or 62%, of our employees as of December 31, 2020 are located in India. In recent years, severe weather events caused disruptions to our operations in India, the Philippines, and the USVI and we incurred expense resulting from the evacuation of personnel and from property damage. While we have implemented and maintain business continuity plans to reduce the disruption such events cause to our critical operations, we cannot guarantee that such plans will eliminate any negative impact on our business, including the cost of evacuation and repairs. Consequently, the occurrence of severe weather events in the future could have a significant adverse effect on our business and results of operations.
Pursuit of business or asset acquisitions exposes us to financial, execution and operational risks that could adversely affect us.
This risk factor discusses certain general risks raised by acquisitions. See “Risks Relating to the Integration of PHH” below for a discussion of certain specific risks relating to our 2018 acquisition of PHH.
We are actively looking for opportunities to grow our business through acquisitions of businesses and assets. The performance of the businesses and assets we acquire through acquisitions may not match the historical performance of our other assets. Nor can we assure you that the businesses and assets we may acquire will perform at levels meeting our expectations. We may find that we overpaid for the acquired businessbusinesses or assets or that the economic conditions underlying our acquisition decision have changed. For example, in 2014, we recognized an impairment loss of the full carrying value of goodwill totaling $420.2 million, which was primarily associated with certain large acquisitions in prior years. It may also take several quarters or longer for us to fully integrate newly acquired business and assets into our business, during which period our results of operations and financial condition may be negatively affected. Further, certain one-time expenses associated with such acquisitions may have a negative impact on our results of operations and financial condition. We cannot assure you that acquisitions will not adversely affect our liquidity, results of operations and financial condition.
The risks associated with acquisitions include, among others:
•unanticipated issues in integrating servicing, information, communications and other systems;
•unanticipated incompatibility in servicing, lending, purchasing, logistics, marketing and administration methods;
•unanticipated liabilities assumed from the acquired business;
•not retaining key employees; and
•the diversion of management’s attention from ongoing business concerns.
The acquisition integration process can be complicated and time consuming and could potentially be disruptive to borrowers of loans serviced by the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its borrowers, we may not realize the anticipated economic benefits of particular acquisitions within our expected timeframe, or we could lose subservicing business or employees of the acquired business. In addition, integrating operations may involve significant reductions in headcount or the closure of facilities, which may be disruptive to operations and impair employee morale. Through acquisitions, we may enter into business lines in which we have not previously operated. Such acquisitions could require additional integration costs and efforts, including significant time from senior management. We may not be able to achieve the synergies we anticipate from acquired businesses, and we may not be able to grow acquired businesses in the manner we anticipate. In fact, the businesses we acquire could decrease in size, even if the integration process is successful.
Further, prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices that we considered to be acceptable, and we expect that we will experience this condition in the future. In addition, to finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or we could raise additional equity capital, which could dilute the interests of our existing shareholders.
The timing of closing of our acquisitions is often uncertain. We have in the past and may in the future experience delays in closing our acquisitions, or certain tranchesaspects of them. For example, we and the applicable seller are often required to obtain certain regulatory and contractual consents as a prerequisite to closing, such as the consents of Fannie Mae or Freddie Mac,GSEs, the FHFA, andRMBS trustees to RMBS securitization trusts.or regulators. Accordingly, even if we and the applicable seller are efficient and proactive, the actions of third parties can impact the timing under which such consents are obtained. We and the applicable seller may not be able to obtain all the required consents, which may mean that we are unable to acquire all the assets that we wish to acquire. Regulators may have questions relating to aspects of our acquisitions and we may be required to devote time and resources responding to those questions. It is also possible that we will expend considerable resources in the pursuit of an acquisition that, ultimately, either does not close or is terminated.
Risks RelatingLoan put-backs and related liabilities for breaches of representations and warranties regarding sold loans could adversely affect our business.
We have exposure to representation, warranty and indemnification obligations relating to our lending, sales and securitization activities, and in certain instances, we have assumed these obligations on loans we service. Our contracts with purchasers of originated loans generally contain provisions that require indemnification or repurchase of the related loans under certain circumstances. While the language in the purchase contracts varies, such contracts generally contain provisions that require us to indemnify purchasers of loans or repurchase such loans if:
•representations and warranties concerning loan quality, contents of the loan file or loan underwriting circumstances are inaccurate;
•adequate mortgage insurance is not secured within a certain period after closing;
•a mortgage insurance provider denies coverage; or
•there is a failure to comply, at the individual loan level or otherwise, with regulatory requirements.
We believe that many purchasers of residential mortgage loans are particularly aware of the conditions under which originators must indemnify or repurchase loans and under which such purchasers would benefit from enforcing any indemnification rights and repurchase remedies they may have.
At December 31, 2020, we had outstanding representation and warranty repurchase demands of $41.2 million UPB (250 loans).
If home values decrease, our realized loan losses from loan repurchases and indemnifications may increase as well. As a result, our liability for repurchases may increase beyond our current expectations. Depending on the magnitude of any such increase, our business, financial condition and results of operations could be adversely affected.
We originate and securitize reverse mortgages, which subjects us to risks that could have a material adverse effect on our business, reputation, liquidity, financial condition and results of operations.
We originate, securitize and service reverse mortgages and we have retained third parties to subservice the reverse mortgages. The reverse mortgage business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. Generally, a reverse mortgage is a loan available to seniors aged 62 or older that allows homeowners to borrow money against the value of their home. No repayment of the mortgage is required until a default event under the terms of the mortgage occurs, the borrower dies, the borrower moves out of the home or the home is sold. A decline in the demand for reverse mortgages may reduce the number of reverse mortgages we originate and adversely affect our ability to sell reverse mortgages in the secondary market. Although foreclosures involving reverse mortgages generally occur less frequently than forward mortgages, loan defaults on reverse mortgages leading to foreclosures may occur if borrowers fail to occupy the home as their primary residence, maintain their property or fail to pay taxes or home insurance premiums. A general increase in foreclosure rates may adversely impact how reverse mortgages are perceived by potential customers and thus reduce demand for reverse mortgages. Additionally, we could become subject to negative headline risk in the event that loan defaults on reverse mortgages lead to foreclosures or evictions of the elderly. The HUD HECM reverse mortgage program has in the past responded to scrutiny around similar issues by implementing rule changes, and may do so in the future. It is not possible to predict whether any such rule changes would negatively impact us. All of the above factors could have a material adverse effect on our business, reputation, liquidity, financial condition and results of operations.
If we are unable to fund our tail commitments or securitize our HECM loans (including tails), this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We have originated and continue to service HECM loans under which the borrower has additional undrawn borrowing capacity in the form of undrawn lines of credit. We are obligated to fund future borrowings drawn on that capacity. As of December 31, 2020, our commitment to fund additional borrowing capacity was $2.0 billion. In addition, we are required to pay mortgage insurance premiums on behalf of HECM borrowers. We normally fund these obligations on a short-term basis using our cash resources, and regularly securitize these amounts (along with our servicing fees) through the issuance of tails. In January 2021, we renewed our $50.0 million revolving credit facility to fund HECM tail advances. However, to the Integrationextent our funding commitments exceed our borrowing capacity under this facility, or if we are unable to renew this 364-day facility on acceptable terms, we will be dependent on our cash resources to meet these commitments. If our cash resources are insufficient to fund these amounts and we are unable to fund them through the securitization of PHHsuch tails, this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our HMBS repurchase obligations may reduce our liquidity, and if we are unable to comply with such obligations, it could materially adversely affect our business, financial condition, and results of operations.
As an HMBS issuer, we assume the obligation to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount (MCA repurchases). Active repurchased loans are assigned to HUD and payment is typically received within 60 days of repurchase. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount. We bear the risk of exposure if the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Inactive repurchased loans (the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments) are generally liquidated through foreclosure and subsequent sale of REO, with a claim filed with HUD for recoverable remaining principal and advance balances. The recovery timeline for inactive repurchased loans depends on various factors, including foreclosure status at the time of repurchase, state-level foreclosure timelines, and the post-foreclosure REO liquidation timeline. The timing and amount of our obligations with respect to MCA repurchases are uncertain as repurchase is dependent largely on circumstances outside of our control. MCA repurchases are expected to continue to increase due to the seasoning of our portfolio, and the increased flow of HECMs and REO that are reaching 98% of their maximum claim amount.
If we do not have sufficient liquidity to comply with our Ginnie Mae repurchase obligations, Ginnie Mae could take adverse action against us, including terminating us as an approved HMBS issuer. In addition, if we are required to purchase a significant number of loans with respect to which the outstanding principal balances exceed HUD’s maximum claim amount, we could be required to absorb significant losses on such loans following assignment to HUD or, in the case of inactive loans, liquidation and subsequent claim for HUD reimbursement. Further, during the periods in which HUD reimbursement is pending, our liquidity will be reduced by the repurchase amounts and we will have reduced resources with which to further other business objectives. For all of the foregoing reasons, our liquidity, business, financial condition, and results of operations could be materially and adversely impacted by our HMBS repurchase obligations.
Liabilities relating to our past sales of Agency MSRs could adversely affect our business.
We have made representations, warranties and covenants relating to our past sales of Agency MSRs, including sales made by PHH before we acquired it. To the extent that we (including PHH prior to its acquisition by us) made inaccurate representations or warranties or if we fail otherwise to comply with our sale agreements, we could incur liability to the purchasers of these MSRs pursuant to the contractual provisions of these agreements.
Reinsuring risk through our captive reinsurance entity could adversely impact our results of operation and financial condition.
If our captive reinsurance entity incurs losses from a severe catastrophe or series of catastrophes, particularly in areas where a significant portion of the insured properties are located, claims that result could substantially exceed our expectations, which could adversely impact our results of operation and financial condition.
A significant portion of our business is in the states of California, Florida, Texas, New York and Illinois, and our business may be significantly harmed by a slowdown in the economy or the occurrence of a natural disaster in those states.
A significant portion of the mortgage loans that we service and originate are secured by properties in California, Florida, Texas, New York and Illinois. Any adverse economic conditions in these markets, including a downturn in real estate values, could increase loan delinquencies. Delinquent loans are more costly to service and require us to advance delinquent principal and interest and to make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent that we determine that such amounts are recoverable. We could also be adversely affected by business disruptions triggered by natural disasters or acts or war or terrorism in these geographic areas.
We may not successfully integrateincur litigation costs and related losses if the businessesvalidity of Ocwena foreclosure action is challenged by a borrower or if a court overturns a foreclosure.
We may incur costs if we are required to, or if we elect to, execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. We may incur litigation costs if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to a title insurer of the property sold in foreclosure. These costs and PHH, which would impair our ability to return to profitability and execute on key initiatives throughout Ocwen.
Successfully integrating the business, operations, and personnel of Ocwen and PHH is critical in order for us to create value, reengineer our cost structure, restore our focus on growth, and fulfill our regulatory commitments. If we cannot execute an efficient and effective integration process, itliabilities may not be possiblelegally or otherwise reimbursable to capture the expected synergies of our acquisition of PHHus, particularly to the extent they relate to securitized mortgage loans. In addition, if certain documents required for a foreclosure action are missing or on the timeframe, anticipated. The integration of businesses is complex and time-consuming. The difficulties thatdefective, we could be encountered include with respectobligated to cure the following:
maintaining subservicing and other business relationships;
integrating operations and systems, including integration of information technology systemsdefect or repurchase the loan. A significant increase in litigation costs could adversely affect our liquidity, and our planned transition to Black Knight MSP;
management’s ability to train and integrate personnel;
coordinating geographically dispersed organizations;
distraction of management and employees from operations and strategic initiatives;
changes or conflicts in corporate culture;
retaining existing customers and attracting new customers;
retaining existing employees and attracting new employees; and
inefficiencies associated with the integration and management of the operations of the two companies.
In addition, there have been and will continueinability to be integration costs and non-recurring transaction costs. These costs include fees paidreimbursed for servicing advances could adversely affect our business, financial condition or results of operations.
A failure to legal, financial, accounting and other advisors, as well as the costs associated with combining operations, such as severance payments and the costs of executing technology transitions, and such costs may be significant.
An inability to realize the full extent of the anticipated benefits of the acquisition, including estimated cost synergies, as well as any delays encountered in the integration process and realizing such benefits,maintain minimum servicer ratings could have an adverse effect uponon our revenues, levelbusiness, financing activities, financial condition or results of expensesoperations.
S&P, Moody’s, Fitch and operating results, which may materiallyothers rate us as a mortgage servicer. Failure to maintain minimum servicer ratings could adversely affect our ability to sell or fund servicing advances going forward, could affect the valueterms and availability of debt financing facilities that we may seek in the future, and could impair our ability to consummate future servicing transactions or adversely affect our dealings with lenders, other contractual counterparties and regulators, including our ability to maintain our status as an approved servicer by Fannie Mae and Freddie Mac. The servicer rating requirements of Fannie Mae do not necessarily require or imply immediate action, as Fannie Mae has discretion with respect to whether we are in compliance with their requirements and what actions it deems appropriate under the circumstances in the event that we fall below their desired servicer ratings.
Certain of our sharesservicing agreements require that we maintain specified servicer ratings. As a result of common stock.
Continuing uncertainties associated withour current servicer ratings, termination rights have been triggered in some non-Agency servicing agreements. While the PHH acquisition may cause a lossholders of employees or customersthese termination rights have not exercised them to date, they have not waived the right to do so, and may otherwise affectwe could, in the future, business and operationsbe subject to terminations either as a result of Ocwen and the combined company.
Continuing uncertainty about the effect of the PHH acquisition on employees and customers mayservicer ratings downgrades or future adverse actions by ratings agencies, which could have an adverse effect on Ocwen as we proceed with our integration plans. For instance, as noted above, following the acquisitionbusiness, financing activities, financial condition and results of PHH, we have experienced significant turnover of both management and non-management employees. These uncertainties may impairoperations. Downgrades in our ability to retain and motivate key personnel andservicer ratings could also cause our servicing clients, suppliers, licensees, partnersaffect the terms and availability of advance financing or other business partners to defer entering into contracts with, making other decisions concerning, or seeking to change existing business relationships with Ocwen. Because Ocwen depends on the experience and industry knowledge of its executives and other key personnel to execute their business plans,debt facilities that we may be unableseek in the future. Our failure to meetmaintain minimum or specified ratings could adversely affect our strategic objectives.
Ocwen assumed alldealings with contractual counterparties, including GSEs, Ginnie Mae and regulators, any of PHH’s liabilities upon completion of the PHH acquisition, which could have a material adverse effect on Ocwen’sour business, financing activities, financial condition orand results of operation,operations. To date, terminations as servicer as a result of a breach of any of these provisions have been minimal.
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates, our business, and financial markets as a whole.
On July 27, 2017, the Financial Conduct Authority in the U.K. announced that it would phase out LIBOR as a benchmark by the end of 2021. However, for U.S dollar LIBOR, it now appears that the relevant date may be deferred to June 30, 2023 for certain tenors (including overnight and one, three, six and 12 months), at which time the LIBOR administrator has indicated that it intends to cease publication of U.S. dollar LIBOR. Despite this potential deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. Our debt agreements that presently reference LIBOR provide that upon LIBOR’s phase out, the applicable lender may select the replacement rate at its sole discretion. While under some agreements, the lender’s choice of replacement rate must be reasonable and/or market-based, under other agreements, our only option if we disagree with the lender’s benchmark rate will be to terminate the agreement, which could otherwise reducebe difficult due to our reliance on the anticipated benefitssource of funding or for other reasons.
There are indications that some market participants may adopt the Secured Overnight Financing Rate (SOFR) as a replacement for LIBOR. However, it is uncertain at this time the extent to Ocwen ofwhich SOFR may be widely accepted. In general, there remains substantial uncertainty relating to the acquisition.
Upon completion ofprocess and timeline for developing LIBOR alternatives, how widely any given alternative will be adopted by parties in the acquisition of PHH, Ocwen assumed all of PHH’s liabilities by operation of law. Similarfinancial markets, and the extent to Ocwenwhich alternative benchmarks may be subject to volatility or present risks and challenges that LIBOR does not. It is possible that we will disagree with our contractual counterparties over which alternative benchmark to adopt, which could make renewing or replacing our debt facilities and other mortgage loan servicersagreements more complex. In addition, to the extent the adoption of a benchmark alternative impacts the interest rates payable by borrowers, it could lead to borrower complaints and lenders, PHH and its subsidiaries are routinely, and currently, defendants in various legal proceedings that arise in the ordinary course of PHH's business, including class action proceedings. These proceedings are generally based on alleged violations of federal, state and local laws and regulations governing mortgage servicing and lending activities, and contractual obligations. Similar to Ocwen and other mortgage loan servicers and lenders, PHH and its subsidiaries are also routinely, and currently, subject to government and regulatory examinations, investigations and inquiries or other requests for information. The outcome of any legal or regulatory matter is inherentlylitigation. Consequently, it remains difficult to predict or estimatethe effects of the phase-out of LIBOR and the ultimate timeuse of alternative benchmarks may have on our business or on the overall financial markets. If LIBOR alternatives re-allocate risk among parties in a way that is disadvantageous to resolve anymarket participants such matter may be protracted. In addition,as Ocwen, if there is disagreement among market participants, including borrowers, over which alternative benchmark to adopt, or if uncertainty relating to the outcome in one or more legal or regulatory matters may affect the outcome of other pending or threatened legal or regulatory matters. The ultimate resolution of any particular legal or regulatory matter, whether through negotiated settlement, court rulings or otherwise,LIBOR phase-out disrupts financial markets, it could behave a material to Ocwen’s business, reputation,adverse effect on our financial condition, liquidity andposition, results of operations, and liquidity.
Increased reporting on corporate responsibility, specifically related to environmental, social and governance (ESG) matters, may impose additional costs and expose us to new risks if we are perceived to lag behind our peers.
Public ESG and sustainability reporting is becoming more broadly expected by investors, shareholders and other third parties. Certain organizations that provide corporate governance and other corporate risk information to investors and shareholders have developed, and others may in the future develop, scores and ratings to evaluate companies and investment funds based upon ESG or “sustainability” metrics. Many investment funds focus on positive ESG business practices and sustainability scores when making investments and may consider a company’s ESG or sustainability scores as a reputational or other factor in making an investment decision. In addition, investors, particularly institutional investors, use these scores to benchmark companies against their peers and if a company is perceived as lagging, these investors may engage with such company to improve ESG disclosure or performance and may also make voting decisions, or take other actions, to hold these companies and their boards of directors accountable. Board diversity is an ESG topic that is, in particular, receiving heightened attention by investors, shareholders, lawmakers and listing exchanges. Certain states have passed laws requiring companies to meet certain gender and ethnic diversity requirements on their boards of directors. We may face reputational damage in the event our corporate responsibility initiatives or objectives do not meet the standards set by our investors, shareholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating from third party rating services. A low ESG or sustainability rating by a third-party rating service could otherwise reducealso result in the anticipated benefitsexclusion of our common stock from consideration by certain investors who may elect to Ocwen of the PHH acquisition.invest with our competition instead. Ongoing focus on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose us to new risks.
Risks Relating to
Tax MattersRisks
Failure to retain the tax benefits provided by the USVI would adversely affect our financial condition and results of operations.
During 2019, in connection with our acquisition of PHH, overall corporate simplification and cost reduction efforts, we executed a legal entity reorganization whereby OLS, through which we previously conducted a substantial portion of our servicing business, was merged into PMC. OLS was previously the wholly-owned subsidiary of OMS, which was incorporated and headquartered in the USVI prior to its merger with Ocwen USVI Services, LLC, an entity which is incorporatedalso organized and headquartered in the USVI. The USVI has an EDCEconomic Development Commission (EDC) that provides EDC Benefits to certain qualified businesses that enable us to avail ourselves of significant tax benefits for a 30-year period.to qualified businesses. OMS received its
certificate to operate as a company qualified for EDC Benefitsbenefits in October 2012. It is possible2012 and as a result received significant tax benefits. Following our legal entity reorganization, we are no longer able to avail ourselves of favorable tax treatment for our USVI operations on a going forward basis. However, if the EDC were to determine that we may not be ablefailed to retainconduct our USVI operations in compliance with EDC qualifications for the EDC Benefits, or that changes in U.S. federal, state, local, territorial or USVI taxation statutes or applicable regulations may cause a reduction in or an elimination ofprior to our reorganization, the value of the EDC Benefits, all of whichbenefits corresponding to the period prior to the reorganization could resultbe reduced or eliminated, resulting in an increase to our tax expense,expense. In addition, under our agreement with the EDC, we remain obligated to continue to operate Ocwen USVI Services, LLC in compliance with EDC requirements through 2042. If we fail to maintain our EDC qualification, we could be alleged to be in violation of our EDC commitments and therefore,the EDC could take adverse action against us, which could include demands for payment and reimbursement of past tax benefits, and it could result in the loss of anticipated income tax refunds. If any of these events were to occur, it could adversely affect our financial condition and results of operations. Additionally, if the USVI were to undergo a financial reorganization, it is possible that the EDC Benefits could be adversely impacted as a part of any such reorganization, which could jeopardize our ability to return to profitability.
We may be subject to increased United States federal income taxation.
OMS iswas incorporated under the laws of the USVI and intends to operateoperated in a manner that will causecaused a substantial amount of its net income to be treated as not related to a trade or business within the United States, which will causecaused such income to be exempt from current United States federal income taxation. However, because there are no definitive standards provided by the Internal Revenue Code (the Code), regulations or court decisions as to the specific activities that constitute being engaged in the conduct of a trade or business within the United States, and as any such determination is essentially factual in nature, we cannot assure you that the IRS will not successfully assert that OMS iswas engaged in a trade or business within the United States with respect to that income.
If the IRS were to successfully assert that OMS hashad been engaged in a trade or business within the United States with respect to that income in any taxable year, it may become subject to current United States federal income taxation on such income. In addition, changes in the Code,Our tax returns and positions are subject to review and audit by federal and state statutes, regulations or court decisions relevant to the various aspects of our business such as various international tax reform proposals being considered by Congress could increase our tax expense.
The recently enacted comprehensive tax reform legislation could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35%taxing authorities. An unfavorable outcome to a flat rate of 21%, limitation of the tax deduction for interest expense and net operating loss carryforwards, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S.audit could result in higher tax on foreign earnings (subject to certain important exceptions), a new minimum tax enacted to prevent companies from stripping earnings out of the U.S. through U.S. tax deductible payments made to foreign affiliates, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and our business and financial condition could be adversely affected.
In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse.
Changes in taxation and the ability to quantify such changes could adversely affect Ocwen’s financial results.
Ocwen is subject to taxation by the various taxing authorities at the Federal, state and local levels where it does business, both in the U.S. and outside the U.S. Legislation or regulation, which could affect Ocwen’s tax burden, could be enacted by any of these governmental authorities. Ocwen cannot predict the timing or extent of such tax-related developments, which could have a negative impact on the financial results.expense.
Any “ownership change” as defined in Section 382 of the Internal Revenue Code could substantially limit our ability to utilize our net operating losses carryforwards.carryforwards and other deferred tax assets.
As of December 31, 2018,2020, Ocwen had U.S. federal and USVI net operating loss (NOL) carryforwards of approximately $428.1$191.2 million, which we estimate to be worth approximately $57.2$40.0 million to Ocwen under our present assumptions related to
Ocwen’s various relevant jurisdictional tax rates as a result of recently passed tax legislation (which assumptions reflect a significant degree of uncertainty). As of December 31, 2018,2020, Ocwen had state NOL and state tax credit carryforwards which we estimate to be worth approximately $67.3 million, and foreign tax credit carryforwards of $29.9$0.1 million in the U.S. jurisdiction. As of December 31, 2020, Ocwen had disallowed interest under Section 163(j) of $92.8 million in the U.S. jurisdiction. NOL carryforwards, Section 163(j) disallowed interest carryforwards and certain built-in losses or deductions may be subject to annual limitations under Internal Revenue Code Section 382 (Section 382) (or comparable provisions of foreign or state law) in the event that certain changes in ownership were to occur as measured under Section 382. In addition, tax credit carryforwards may be subject to annual limitations under Internal Revenue Code Section 383 (Section 383). We periodically evaluate whether certain changes in ownership have occurred as measured under Section 382 that would limit our ability to utilize our NOL andNOLs, tax credit carryforwards.carryforwards, deductions and/or certain built-in losses. If it is determined that an ownership change(s) has occurred, there may be annual limitations on the use of these NOL carryforwards, certain built-in losses or deductions, and tax credit carryforwards under Sections 382 and 383 (or comparable provisions of foreign or state law). We
Ocwen and PHH have evaluatedboth experienced historical ownership changes that have caused the use of certain tax attributes to be limited and have resulted in the write-off of certain of these attributes based on our inability to use them in the carryforward periods defined under tax law. Ocwen continues to monitor the ownership in its stock to evaluate whether we experienced anany additional ownership change as measured underchanges have occurred that would further limit our ability to utilize certain tax attributes. As such, our analysis regarding the amount of tax attributes that may be available to offset taxable income in the future without restrictions imposed by Section 382 and determined that an ownership change did occur in January 2015 and in December 2017 in the U.S. jurisdiction, which also results in an ownership change under Section 382 in the USVI jurisdiction. This determination was made based on information available as of the date of our Form 10-K filing for the fiscal year ended December 31, 2018. Duemay continue to the Section 382 and 383 limitations and the maximum carryforward period for our NOLs and tax credits, we will be unable to fully recognize certain
deferred tax assets. Accordingly, as of December 31, 2018, we have reduced our gross deferred tax asset related to our NOLs by $160.9 million, our foreign tax credit deferred tax asset by $29.5 million and corresponding valuation allowance by $55.7 million. The realization of all or a portion of our deferred income tax assets (including NOLs and tax credits) is dependent upon the generation of future taxable income during the statutory carryforward periods. In addition, the limitation on the utilization of our NOL and tax credit carryforwards could result in Ocwen incurring a current tax liability in future tax years.evolve. Our inability to utilize our pre-ownership change NOL carryforwards, Section 163(j) disallowed interest carryforwards, any future recognized built-in losses or deductions, and tax credit carryforwards could have an adverse effect on our financial condition, results of operations and cash flows. Finally, any future changes in our ownership or sale of our stock could further limit the use of our NOLs and tax credits in the future.
As part of our Section 382 evaluation and consistent with the rules provided within Section 382, Ocwen relies strictly on the existence or absence, as well as the information contained in certain publicly available documents (e.g., Schedule 13D, Schedule 13G or other documents filed with the SEC) to identify shareholders that own a 5-percent or greater interest in Ocwen stock throughout the period tested. Further, Ocwen relies on such public filings to identify dates in which such 5-percent shareholders acquired, disposed, or otherwise transacted in Ocwen common stock. As the requirement for filing such notices of ownership from the SEC is to report beneficial ownership, as opposed to actual economic ownership of the stock of Ocwen, certain SEC filings may not represent ownership in Ocwen stock that should be considered in determining whether Ocwen experienced an ownership change under the Section 382 rules. Notwithstanding the preceding sentences (regarding Ocwen’ s ability to rely on the existence and absence of information in publicly filed Schedules 13D and 13G), the rules prescribed in Section 382 and the regulations thereunder provide that Ocwen may (but is not required to) seek additional clarification from shareholders filing such Schedules 13D and 13G if there are questions or uncertainty regarding the true economic ownership of shares reported in such filing (whether due to ambiguity in the filing, an overly complex ownership structure, the type of instruments owned and reported in the filings, etc.) (often referred to “actual knowledge” questionnaires). Such information can be sought on a filer by filer basis (i.e., there is no requirement that if actual knowledge is sought with respect to one shareholder, actual knowledge must be sought with respect to all shareholders that filed schedules 13D or 13G). While the seeking of actual knowledge can be beneficial in some instances it may be detrimental in others. Once such actual knowledge is received, Section 382 requires the inclusion of such actual knowledge, even if such inclusion is detrimental to the conclusion reached.
Ocwen has performed its analysis of the rules under Section 382 and, based on all currently available information, identified it experienced an ownership change for Section 382 purposes in January 2015 and December 2017. Prior to 2018, Ocwen was aware of shareholder activity in 2015 and 2017 that may have caused a Section 382 ownership change(s), but determined that additional information could potentially be obtained from certain shareholders that would indicate a Section 382 ownership change had not occurred. In completing this analysis, Ocwen identified several shareholders that filed a schedule 13G during the period disclosing a greater than 5-percent interest in Ocwen stock where beneficial versus economic ownership of the stock was unclear and Ocwen therefore requested further details. As of the date of this Form 10-K, Ocwen has not received all requested responses from selected shareholders, and will continue to consider such shareholders as economic owners of Ocwen’s stock until actual knowledge is otherwise received.
Ocwen is continuing to monitor the ownership in its stock to evaluate information that will become available later in 2019 and that may result in a different outcome for Section 382 purposes and our future cash tax obligations. As part of this monitoring, Ocwen periodically evaluates whether it is appropriate and beneficial to retroactively seek actual knowledge on certain previously identified and included 5-percent shareholders, whereby, depending on the responses received, Ocwen may conclude that either the January 2015 or December 2017 Section 382 ownership changes may have instead occurred on a different date, or did not occur at all. As such, our analysis regarding the amount of tax attributes that may be available to offset taxable income in the future without restrictions imposed by Section 382 may continue to evolve.
The planned reorganization of our USVI operations could adversely affect our business and financial condition.
In connection with our acquisition of PHH, overall corporate simplification and cost reduction efforts, we are planning a legal entity reorganization whereby two primary licensed entities would be merged into PHH. As a result of this reorganization, a portion of our USVI operations and assets will be transferred to the U.S. At this time, we expect the reorganization to result in efficiencies and operational cost savings through reduced complexity and a simplification of our global structure.
Although we expect the reorganization to result in efficiencies and operational cost savings, it is uncertain how the reorganization will ultimately impact Ocwen from a U.S. federal, state and USVI income tax perspective. We are continuing to evaluate the impact of the new U.S. tax legislation and guiding regulations (which are still being promulgated and finalized) on its global tax position. It is possible that our interpretation of the new tax legislation and related guidance that has been provided to date, and for which we are relying on to conclude upon the tax consequences of the reorganization and the future business operations, will not be consistent with final guidance provided by the IRS. In addition, the reorganization of the USVI operations could result in a write-down of our net deferred tax assets, including our NOL carryforwards, as well as a permanent loss of our EDC Benefits in the USVI. Finally, the IRS or the Bureau of Internal Revenue (BIR) may challenge our conclusions regarding the taxation associated with the reorganization and future business operations which could result in an increase to our
current income tax obligations. The reorganization and future business operations could have an adverse effect on our financial condition, results of operations and cash flows due to the uncertainty of how the new U.S. tax legislation will impact our global tax position, as well as the other factors noted above.
Risks Relating to Ownership of Our Common Stock
Our common stock price experiences substantial volatility and has dropped significantly on a number of occasions in recent periods, which may affect your ability to sell our common stock at an advantageous price.
The market price of our shares of common stock has been, and may continue to be, volatile. For example, the closing market price of our common stock on the New York Stock Exchange fluctuated during 20182020 between $1.23$4.65 per share and $4.75$31.03 per share, retroactively adjusted for the effect of the 1-for-15 reverse stock split completed in August 2020, and the closing stock price on February 22, 201916, 2021 was $2.00$28.98 per share. Therefore, the volatility and recent decline in our stock price may affect your ability to sell our common stock at an advantageous price. Market price fluctuations in our common stock may be due to factors both within and outside our control, including regulatory action,or legal actions, acquisitions, dispositions or other material public announcements or speculative trading in our stock (e.g., traders “shorting” our common stock), as well as a variety of other factors including, but not limited to those set forth under “Risk Factors” and “Forward-Looking��Forward-Looking Statements.”
In addition, the stock markets in general, including the New York Stock Exchange, have, at times, experienced extreme price and trading fluctuations. These fluctuations have resulted in volatility in the market prices of securities that often has been unrelated or disproportionate to changes in operating performance. These broad market fluctuations may adversely affect the market prices of our common stock.
When the market price of a company's shares drops significantly, shareholders often institute securities class action lawsuits against the company. A lawsuit against us, even if unsuccessful, could cause us to incur substantial costs and could divert the time and attention of our management and other resources. Further, if the average closing price of our stock over thirty consecutive trading days were to fall below $1.00, as it did during the second quarter of 2020, we would need to take immediate steps to avoid de-listing by the New York Stock Exchange. Such measures could cause us to incur substantial costs and divert management attention, and could include implementing a reverse stock split such as we implemented in August 2020, which would entail additional risk, and success in preventing de-listing would not be assured.
We have several large shareholders, and such shareholders may vote their shares to influence matters requiring shareholder approval.
Based on SEC filings, certain shareholders, such as investors Deer Park Road Management Company, LP and Leon G. Cooperman, own or control significant amounts of our common stock. These and our other large shareholders each have the ability to vote a meaningful percentage of our outstanding common stock on all matters put to a vote of our shareholders. As a result, these shareholders could influence matters requiring shareholder approval, including the amendment of our articles of incorporation, the approval of mergers or similar transactions and the election of directors. For instance, we held a special meeting of shareholders in November 2018 in order to implement an amendment to our articles of incorporation that management believed was necessary to help us preserve certain tax assets, but in part due to the fact that we did not receive the vote of several large shareholders, the proposal was not adopted by our shareholders. If, in the future, situations arise in which management and certain large shareholders have divergent views, we may be unable to take actions management believes to be in the best interests of Ocwen.
Further, certain of our large shareholders also hold significant percentages of stock in companies with which we do business. It is possible these interlocking ownership positions could cause these shareholders to take actions based on factors other than solely what is in the best interests of Ocwen.
Our board of directors may authorize the issuance of additional securities that may cause dilution and may depress the price of our securities.
Our charter permits our board of directors, without our stockholders’ approval, to:
•authorize the issuance of additional common stock or preferred stock in connection with future equity offerings or acquisitions of securities or other assets of companies; and
•classify or reclassify any unissued common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares, including the issuance of shares of preferred stock that have preference rights over the common stock and existing preferred stock with respect to dividends, liquidation, voting and other matters or shares of common stock that have preference rights over common stock with respect to voting.
While any such issuance would be subject to compliance with the terms of our debt and other agreements, our issuance of additional securities could be substantially dilutive to our existing stockholders and may depress the price of our common stock.
Future offerings of debt securities, which would be senior to our common stock in liquidation, or equity securities, which would dilute our existing stockholders’ interests and may be senior to our common stock in liquidation or for the purposes of distributions, may harm the market price of our securities.
We will continue to seek to access the capital markets from time to time and, subject to compliance with our other contractual agreements, may make additional offerings of term loans, debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes, preferred stock or common stock. We are not precluded by the terms of our charter from issuing additional indebtedness. Accordingly, we could become more highly leveraged, resulting in an increase in debt service obligations that could harm our ability to make expected distributions to stockholders and in an increased risk of default on our obligations. If we were to liquidate, holders of our debt and lenders with respect to other borrowings would receive a distribution of our available assets before the holders of our common stock. Additional equity offerings by us may dilute our existing stockholders’ interest in us or reduce the market price of our existing securities. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Further, conditions could require that we accept less favorable terms for the issuance of our securities in the future. Thus, our existing stockholders will bear the risk of our future offerings reducing the market price of our securities and diluting their ownership interest in us.
Because of certain provisions in our organizational documents and regulatory restrictions, takeovers may be more difficult, possibly preventing you from obtaining an optimal share price. In addition, significant investments in our common stock may be restricted, which could impact demand for, and the trading price of, our common stock.
Our amended and restated articles of incorporation provide that the total number of shares of all classes of capital stock that we have authority to issue is 22033.3 million, of which 20013.3 million are common shares and 20 million are preferred shares. Our board of directors has the authority, without a vote of the shareholders, to establish the preferences and rights of any preferred or other class or series of shares to be issued and to issue such shares. The issuance of preferred shares could delay or prevent a change in control. Since our board of directors has the power to establish the preferences and rights of the preferred shares without a shareholder vote, our board of directors may give the holders of preferred shares preferences, powers and rights, including voting rights, senior to the rights of holders of our common shares. In addition, our bylaws include provisions that, among other things, require advance notice for raising business or making nominations at meetings, which could impact the ability of a third party to acquire control of us or the timing of acquiring such control.
Third parties seeking to acquire us or make significant investments in us must do so in compliance with state regulatory requirements applicable to licensed mortgage servicers and lenders. Many states require change of control applications for acquisitions of “control” as defined under each state’s laws and regulation, which may apply to an investment without regard to the intent of the investor. For example, New York has a control presumption triggered at 10% ownership of the voting stock of the licensee or of any person that controls the licensee. In addition, we have licensed insurance subsidiaries in New York and Vermont. Accordingly, there can be no effective change in control of Ocwen unless the person seeking to acquire control has made the relevant filings and received the requisite approvals in New York and Vermont. These regulatory requirements may discourage potential acquisition proposals or investments, may delay or prevent a change in control of us and may impact demand for, and the trading price of, our common stock.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Ocwen Financial Corporation is headquartered in West Palm Beach, Florida, at 1661 Worthington Road, Suite 100, We have offices and facilities in the United States, the U.S. Virgin Islands, India and the Philippines, all of which are leased. The following table sets forth information relating to our principal facilities at December 31, 2018:
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| Location | | Owned/Leased | | Square Footage |
| Principal executive offices | | | | |
| West Palm Beach, Florida | | Leased | | 51,546 |
|
St. Croix, USVI (1) | | Leased | | 6,904 |
|
| | | | |
| Document storage and imaging facility | | | | |
| West Palm Beach, Florida | | Leased | | 51,931 |
|
| | | | |
| Business operations and support offices | | | | |
| U.S. facilities: | | | | |
| | | | |
Mt. Laurel, New Jersey (2)(1) | | Leased | | 483,896 |
|
Waterloo, Iowa (3) (4) | | Owned | | 154,980 |
|
Addison, Texas (5) | | Leased | | 137,992 |
|
Fort Washington, Pennsylvania (1) (4) | | Leased | | 77,026 |
|
Westampton, New Jersey (2) | | Leased | | 71,164 |
|
Rancho Cordova, California (1) (6)(2) | | Leased | | 53,107 |
|
Bannockburn, Illinois (2)Houston, Texas (3) | | Leased | | 36,1889,653 |
|
Houston, Texas (4) (7) | | Leased | | 18,822 |
|
St. Croix, USVI (8)(4) | | Leased | | 6,096 |
|
| | | | |
Offshore facilities (4) | | | | |
Bangalore, India | | Leased | | 128,606 |
|
Mumbai, India | | Leased | | 96,696 |
|
Pune, India (9) | | Leased | | 88,683 |
|
Manila, Philippines | | Leased | | 39,329 |
|
| |
(1)Offshore facilities (4) | Approximately two-thirds of the space in these facilities is currently unused as a result of reductions in headcount. |
| | |
(2)Bangalore, India (5) | We acquired these facilities in connection with our acquisition of PHH. The Mt. Laurel, New Jersey facility includes two buildings, one with 376,122 square feet of space supporting our servicing and lending operations, as well as our corporate functions, and one with 107,774 square feet of space which is subleased. The Westampton, New Jersey and Bannockburn, Illinois facilities are currently unoccupied and we are exploring sublease options. | Leased | | 128,606 | |
| Mumbai, India (6) | | Leased | | 96,696 | |
| Pune, India (7) | | Leased | | 44,328 | |
| Manila, Philippines | | Leased | | 39,329 | |
| | | | |
(3)Former operations and support offices no longer utilized | We currently occupy approximately one-fourth of the space in this facility. |
| | |
(4) | Primarily supports Servicing operations. |
| | |
(5) | We currently occupy approximately one-half of this facility and have entered into an amendment to the lease agreement for a reduction in leased square footage to 39,646 effective April 2019. |
| | |
(6)Westampton, New Jersey (8) | Primarily supports Lending operations. | Leased | | 71,164 | |
| Addison, Texas (9) | | Leased | | 39,646 | |
| | | | |
(7) | We partially terminated the lease for this facility during 2017 and entered into a sublease agreement for a portion of the space. The lease of the existing facility will expire in 2019. We have entered into a lease agreement for a smaller facility in Houston, Texas. |
| | |
(8) | This facility primarily operates as a call center and approximately one-third of the space is currently unused as a result of reductions in the headcount. |
| |
(9) | We have ceased using approximately 22,000 square feet of the Pune, India facility as a result of a reduction in headcount. |
In addition(1)The Mt. Laurel facility includes two buildings, one with 376,122 square feet of space supporting our servicing and lending operations, as well as our corporate functions. We ceased using 124,795 square feet as a result of the reduction in headcount in 2019, and ceased using an additional 119,132 square feet in 2020. The second building has 107,774 square feet of space, all of which is subleased.
(2)Primarily supports reverse lending operations. We have provided a termination notice to the facilities listedsurrender this facility by June 2021. We are in the table above,process of identifying a smaller facility in California.
(3)Primarily supports commercial and reverse servicing operations.
(4)Primarily supports servicing operations.
(5)We have provided a termination notice to surrender 41,373 square feet of the space by May 2021.
(6)We have provided a termination notice to surrender this facility by June 2021. We will be relocating to a managed service office with less capacity effective June 2021.
(7)We have provided a termination notice to surrender this facility by March 2021. We will be relocating to a managed service office with less capacity effective February 2021.
(8)Former PHH facility is currently subleased until the lease expires in December 2021.
(9)The lease expires in 2025 and is currently being marketed for sublease.
We regularly evaluate current and projected space requirements, considering the constraints of our existing lease agreements and the expected scale of our businesses. As part of our reengineering initiatives, we also lease other small facilitiesabandoned 153,844 and 398,057 square feet in Houston, Texas; Glendale, California; Orlando, Florida; Scottsdale, Arizona; Irvine, California; Atlanta, Georgia2020 and Winston Salem, North Carolina.
2019, respectively - refer toNote 3 — Severance and Restructuring Chargesto our consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
See Note 2524 — Regulatory Requirements andNote 26 — Contingencies to the Consolidated Financial Statements. That information is incorporated into this item by reference.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Price Range of Our Common Stock
The common stock of Ocwen Financial Corporation is traded under the symbol “OCN” on the New York Stock Exchange (NYSE).NYSE.
Dividends
We have never declared or paid cash dividends on our common stock. We currently do not intend to pay cash dividends in the foreseeable future but intend to reinvest earnings in our business. The timing and amount of any future dividends will be determined by our Board of Directors and will depend, among other factors, upon our earnings, financial condition, cash requirements, the capital requirements of subsidiaries and investment opportunities at the time any such payment is considered. In addition, the covenants relating to certain of our borrowings contain limitations on our payment of dividends. Our Board of Directors has no obligation to declare dividends on our common stock under Florida law or our amended and restated articles of incorporation.
Stock Return Performance
The following graph compares the cumulative total return on the common stock of Ocwen Financial Corporation since December 31, 2013,2015, with the cumulative total return on the stocks included in Standard & Poor’s 500 Market Index and Standard & Poor’s Diversified Financials Market Index. The graph assumes that $100 was invested in our common stock and in each index on December 31, 2015 and the reinvestment of all dividends.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Period Ending |
| Index | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 |
| Ocwen Financial Corporation | | $ | 100.00 | | | $ | 77.67 | | | $ | 45.10 | | | $ | 19.31 | | | $ | 19.74 | | | $ | 27.77 | |
| S&P 500 | | $ | 100.00 | | | $ | 109.54 | | | $ | 130.81 | | | $ | 122.65 | | | $ | 158.07 | | | $ | 183.77 | |
| S&P 500 Diversified Financials | | $ | 100.00 | | | $ | 118.83 | | | $ | 146.55 | | | $ | 130.39 | | | $ | 160.18 | | | $ | 175.84 | |
(1)Copyright ©2017 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. S&P 500® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC, a division of S&P Global (S&P); DOW JONES is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC. S&P Dow Jones Indices LLC, Dow Jones, S&P and their respective affiliates (S&P Dow Jones Indices) makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and S&P Dow Jones Indices and its third-party licensors shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. All data and information is provided by S&P DJI "as is". Past performance is not an indication or guarantee of future results. |
| | | | | | | | | | | | | | | | | | |
| | | Period Ending |
| Index | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 |
| Ocwen Financial Corporation | | 100.00 |
| | 27.23 |
| | 12.57 |
| | 9.72 |
| | 5.64 |
| | 2.42 |
|
| S&P 500 | | 100.00 |
| | 111.39 |
| | 110.58 |
| | 121.13 |
| | 144.65 |
| | 135.63 |
|
| S&P 500 Diversified Financials | | 100.00 |
| | 115.17 |
| | 103.34 |
| | 122.80 |
| | 151.45 |
| | 134.75 |
|
| |
(1) | Copyright ©2017 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. S&P 500® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC, a division of S&P Global (S&P); DOW JONES is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC. S&P Dow Jones Indices LLC, Dow Jones, S&P and their respective affiliates (S&P Dow Jones Indices) makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and S&P Dow Jones Indices and its third-party licensors shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. All data and information is provided by S&P DJI "as is". Past performance is not an indication or guarantee of future results.
|
Number of Holders of Common Stock
On February 22, 2019, 133,918,69316, 2021, 8,687,750 shares of our common stock were outstanding and held by approximately 9459 holders of record. Such number of stockholders does not reflect the number of individuals or institutional investors holding our stock in nominee name through banks, brokerage firms and others.
Unregistered Sales of Equity Securities and Use of Proceeds
All unregistered sales of equity securities have been previously reported.
Purchases of Equity Securities by the Issuer and Affiliates
There were noOn February 3, 2020, Ocwen’s Board of Directors authorized an open market share repurchase program for an aggregate amount of up to $5.0 million of Ocwen’s issued and outstanding shares of common stock. Ocwen purchased $4.5 million of shares prior to the program’s termination on February 3, 2021.
Information regarding repurchases of our common stock during 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total number of shares purchased (1) | | Average price paid per share (1) (2) | | Total number of shares purchased as part of a publicly announced repurchase program (1) | | Approximate dollar value of shares that may yet be purchased under the repurchase program |
| January 1 - January 31 | — | | | $ | — | | | — | | | $ | 5.0 | million |
| February 1 - February 29 | — | | | $ | — | | | — | | | $ | 5.0 | million |
| March 1 - March 31 | 377,484 | | | $ | 11.8995 | | | 377,484 | | | $ | 0.5 | million |
(1)Adjusted retroactively to give effect to the fourth1-for-15 reverse stock split which became effective on August 13, 2020.
(2)Price paid per share does not reflect payment of commissions totaling $0.1 million.
We did not repurchase any shares of our common stock under this program subsequent to the first quarter of 2020 through the year ended December 31, 2018.termination date.
| |
ITEM 6. | SELECTED FINANCIAL DATA (Dollars in thousands, except per share data and unless otherwise indicated) |
ITEM 6. SELECTED FINANCIAL DATA (Dollars in millions, except per share data and unless otherwise indicated)
The selected historical consolidated financial information set forth below should be read in conjunction with Business, Management’s Discussion and Analysis of Financial Condition and Results of Operations, our Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. The historical financial information presented may not be indicative of our future performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Selected Balance Sheet Data | | | | | | | | | | |
| Total Assets | | $ | 10,651.1 | | | $ | 10,406.2 | | | $ | 9,394.2 | | | $ | 8,403.2 | | | $ | 7,655.7 | |
| Loans held for sale | | $ | 387.8 | | | $ | 275.3 | | | $ | 242.6 | | | $ | 238.4 | | | $ | 314.0 | |
| Loans held for investment | | 7,006.9 | | | 6,292.9 | | | 5,498.7 | | | 4,715.8 | | | 3,565.7 | |
| Advances, net | | 828.2 | | | 1,056.5 | | | 1,186.7 | | | 1,356.4 | | | 1,709.8 | |
| Mortgage servicing rights | | 1,294.8 | | | 1,486.4 | | | 1,457.1 | | | 1,008.8 | | | 1,043.0 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total Liabilities | | $ | 10,235.8 | | | $ | 9,994.2 | | | $ | 8,839.5 | | | $ | 7,856.3 | | | $ | 7,000.4 | |
| HMBS-related borrowings | | $ | 6,772.7 | | | $ | 6,063.4 | | | $ | 5,380.4 | | | $ | 4,601.6 | | | $ | 3,433.8 | |
| Other financing liabilities | | 576.7 | | | 972.6 | | | 1,062.1 | | | 520.9 | | | 497.9 | |
| Advance match funded liabilities | | 581.3 | | | 679.1 | | | 778.3 | | | 998.6 | | | 1,281.0 | |
| Long-term other secured borrowings | | 545.6 | | | 511.3 | | | 632.7 | | | 704.1 | | | 799.5 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total equity | | $ | 415.4 | | | $ | 412.0 | | | $ | 554.7 | | | $ | 546.9 | | | $ | 655.3 | |
| | | | | | | | | | |
Residential Loans and Real Estate
Serviced or Subserviced for Others | | | | | | | | | | |
| Count | | 1,107,582 | | | 1,419,943 | | | 1,562,238 | | | 1,221,695 | | | 1,393,766 | |
| UPB (in billions) | | $ | 188.8 | | | $ | 212.4 | | | $ | 256.0 | | | $ | 179.4 | | | $ | 209.1 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Selected Balance Sheet Data | | |
| | |
| | |
| | |
| | |
|
| Total Assets | | $ | 9,394,216 |
| | $ | 8,403,164 |
| | $ | 7,655,663 |
| | $ | 7,380,308 |
| | $ | 8,243,662 |
|
| Loans held for sale | | $ | 242,622 |
| | $ | 238,358 |
| | $ | 314,006 |
| | $ | 414,046 |
| | $ | 488,612 |
|
| Loans held for investment | | 5,498,719 |
| | 4,715,831 |
| | 3,565,716 |
| | 2,488,253 |
| | 1,550,141 |
|
| Advances and match funded advances | | 1,186,676 |
| | 1,356,393 |
| | 1,709,846 |
| | 2,151,066 |
| | 3,303,356 |
|
| Mortgage servicing rights | | 1,457,149 |
| | 1,008,844 |
| | 1,042,978 |
| | 1,138,569 |
| | 1,913,992 |
|
| | | | | | | | | | | |
| Total Liabilities | | $ | 8,839,511 |
| | $ | 7,856,290 |
| | $ | 7,000,380 |
| | $ | 6,525,670 |
| | $ | 7,202,497 |
|
| HMBS-related borrowings | | $ | 5,380,448 |
| | $ | 4,601,556 |
| | $ | 3,433,781 |
| | $ | 2,391,362 |
| | $ | 1,444,252 |
|
| Other financing liabilities | | 1,127,613 |
| | 593,518 |
| | 579,031 |
| | 697,893 |
| | 814,389 |
|
| Match funded liabilities | | 778,284 |
| | 998,618 |
| | 1,280,997 |
| | 1,584,049 |
| | 2,090,247 |
|
| Long-term other borrowings | | 567,171 |
| | 631,501 |
| | 718,373 |
| | 734,763 |
| | 1,611,531 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total equity (3) | | $ | 554,705 |
| | $ | 546,874 |
| | $ | 655,283 |
| | $ | 854,638 |
| | $ | 1,041,165 |
|
| | | | | | | | | | | |
Residential Loans and Real Estate Serviced or Subserviced for Others | | |
| | |
| | |
| | |
| | |
|
| Count | | 1,562,238 |
| | 1,221,695 |
| | 1,393,766 |
| | 1,624,762 |
| | 2,486,038 |
|
| UPB | | $ | 256,000,490 |
| | $ | 179,352,553 |
| | $ | 209,092,130 |
| | $ | 250,966,112 |
| | $ | 398,727,727 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Selected Results of Operations Data | | | | | | | | | |
| Revenue | | | | | | | | | |
| Servicing and subservicing fees | $ | 737.3 | | | $ | 975.5 | | | $ | 937.1 | | | $ | 991.6 | | | $ | 1,188.2 | |
| Gain on loans held for sale, net | 137.2 | | | 38.3 | | | 37.3 | | | 57.2 | | | 51.0 | |
| Reverse mortgage revenue, net | 60.7 | | | 86.3 | | | 60.2 | | | 75.5 | | | 71.7 | |
| Other revenue, net | 25.6 | | | 23.3 | | | 28.4 | | | 70.3 | | | 76.2 | |
| Total revenue | 960.9 | | | 1,123.4 | | | 1,063.0 | | | 1,194.6 | | | 1,387.2 | |
| | | | | | | | | |
| MSR valuation adjustments, net | (251.9) | | | (120.9) | | | (153.5) | | | (53.0) | | | (124.0) | |
| | | | | | | | | |
| Operating expenses | 575.7 | | | 673.9 | | | 779.0 | | | 945.7 | | | 1,099.2 | |
| | | | | | | | | |
| Other income (expense) | | | | | | | | | |
| Interest expense | (109.4) | | | (114.1) | | | (103.4) | | | (126.9) | | | (178.2) | |
| Pledged MSR liability expense | (152.3) | | | (372.1) | | | (171.7) | | | (236.3) | | | (234.4) | |
| Bargain purchase gain (1) | — | | | (0.4) | | | 64.0 | | | — | | | — | |
| Other, net | 22.7 | | | 31.5 | | | 9.0 | | | 23.3 | | | 42.3 | |
| Other expense, net | (239.0) | | | (455.1) | | | (202.0) | | | (339.9) | | | (370.3) | |
| | | | | | | | | |
| Loss from continuing operations before income taxes | (105.7) | | | (126.5) | | | (71.5) | | | (144.0) | | | (206.4) | |
| Income tax expense (benefit) | (65.5) | | | 15.6 | | | 0.5 | | | (15.5) | | | (7.0) | |
| Loss from continuing operations | (40.2) | | | (142.1) | | | (72.0) | | | (128.5) | | | (199.4) | |
| Income from discontinued operations, net of tax | — | | | — | | | 1.4 | | | — | | | — | |
| Net loss | (40.2) | | | (142.1) | | | (70.6) | | | (128.5) | | | (199.4) | |
| Net loss (income) attributable to non-controlling interests | — | | | — | | | (0.2) | | | 0.5 | | | (0.4) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net loss attributable to Ocwen stockholders | $ | (40.2) | | | $ | (142.1) | | | $ | (70.8) | | | $ | (128.0) | | | $ | (199.8) | |
| | | | | | | | | |
| Earnings (loss) per share - Basic and Diluted (2) | | | | | | | | | |
| Continuing operations | $ | (4.59) | | | $ | (15.86) | | | $ | (8.10) | | | $ | (15.10) | | | $ | (24.17) | |
| Discontinued operations | $ | — | | | $ | — | | | $ | 0.16 | | | $ | — | | | $ | — | |
| Total attributable to Ocwen stockholders | $ | (4.59) | | | $ | (15.86) | | | $ | (7.94) | | | $ | (15.10) | | | $ | (24.17) | |
| | | | | | | | | |
| Weighted average common shares outstanding (2) | | | | | | | | | |
| Basic | 8,748,725 | | | 8,962,961 | | | 8,913,558 | | | 8,472,138 | | | 8,266,047 | |
| Diluted (3) | 8,748,725 | | | 8,962,961 | | | 8,913,558 | | | 8,472,138 | | | 8,266,047 | |
(1)Recognized in connection with the acquisition of PHH on October 4, 2018. See Note 2 — Business Acquisition to the Consolidated Financial Statements for additional information.
(2)In August 2020, Ocwen implemented a reverse stock split of its shares of common stock in a ratio of one-for-15. The number of shares and earnings/loss per share amounts have been retroactively adjusted for all years presented to give effect to the reverse stock split as if it occurred at the beginning of the first period presented. See Note 16 — Stockholders’ Equity for additional information.
(3)For 2016 - 2020, we have excluded the effect of all dilutive or potentially dilutive shares from the computation of diluted earnings per share because of the anti-dilutive effect of our reported net loss.
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Selected Operations Data | | |
| | |
| | |
| | |
| | |
|
| Revenue | | |
| | |
| | |
| | |
| | |
|
| Servicing and subservicing fees | | $ | 934,336 |
| | $ | 989,376 |
| | $ | 1,186,620 |
| | $ | 1,531,797 |
| | $ | 1,894,175 |
|
| Gain on loans held for sale, net | | 77,743 |
| | 103,402 |
| | 90,391 |
| | 134,969 |
| | 134,297 |
|
| Other | | 50,966 |
| | 101,798 |
| | 110,152 |
| | 74,332 |
| | 82,853 |
|
| Total revenue | | 1,063,045 |
| | 1,194,576 |
| | 1,387,163 |
| | 1,741,098 |
| | 2,111,325 |
|
| | | | | | | | | | | |
| Expenses (1) | | 932,496 |
| | 998,645 |
| | 1,223,254 |
| | 1,478,184 |
| | 2,035,208 |
|
| | | | | | | | | | | |
| Other income (expense) | | |
| | |
| | |
| | |
| | |
|
| Interest expense | | (275,041 | ) | | (363,238 | ) | | (412,583 | ) | | (482,373 | ) | | (541,757 | ) |
| Bargain purchase gain (4) | | 64,036 |
| | — |
| | — |
| | — |
| | — |
|
| Gain on sale of mortgage servicing rights, net (5) | | 1,325 |
| | 10,537 |
| | 8,492 |
| | 83,921 |
| | — |
|
| Other, net | | 7,655 |
| | 12,797 |
| | 33,821 |
| | 5,677 |
| | 22,481 |
|
| Other expense, net | | (202,025 | ) | | (339,904 | ) | | (370,270 | ) | | (392,775 | ) | | (519,276 | ) |
| | | | | | | | | | | |
| Loss from continuing operations before income taxes | | (71,476 | ) | | (143,973 | ) | | (206,361 | ) | | (129,861 | ) | | (443,159 | ) |
| Income tax expense (benefit) (6) | | 529 |
| | (15,516 | ) | | (6,986 | ) | | 116,851 |
| | 26,396 |
|
| Loss from continuing operations | | (72,005 | ) | | (128,457 | ) | | (199,375 | ) | | (246,712 | ) | | (469,555 | ) |
| Income from discontinued operations, net of tax | | 1,409 |
| | — |
| | — |
| | — |
| | — |
|
| Net loss | | (70,596 | ) | | (128,457 | ) | | (199,375 | ) | | (246,712 | ) | | (469,555 | ) |
| Net loss (income) attributable to non-controlling interests | | (176 | ) | | 491 |
| | (387 | ) | | (305 | ) | | (245 | ) |
| Net income (loss) attributable to Ocwen stockholders | | (70,772 | ) | | (127,966 | ) | | (199,762 | ) | | (247,017 | ) | | (469,800 | ) |
| Preferred stock dividends (2) | | — |
| | — |
| | — |
| | — |
| | (1,163 | ) |
| Deemed dividend related to beneficial conversion feature of preferred stock (2) | | — |
| | — |
| | — |
| | — |
| | (1,639 | ) |
| Net income (loss) attributable to Ocwen common stockholders | | $ | (70,772 | ) | | $ | (127,966 | ) | | $ | (199,762 | ) | | $ | (247,017 | ) | | $ | (472,602 | ) |
| | | | | | | | | | | |
| Earnings (loss) per share - Basic and Diluted | | |
| | |
| | |
| | |
| | |
|
| Continuing operations | | $ | (0.54 | ) | | $ | (1.01 | ) | | $ | (1.61 | ) | | $ | (1.97 | ) | | $ | (3.60 | ) |
| Discontinued operations | | $ | 0.01 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total attributable to Ocwen stockholders | | $ | (0.53 | ) | | $ | (1.01 | ) | | $ | (1.61 | ) | | $ | (1.97 | ) | | $ | (3.60 | ) |
| | | | | | | | | | | |
| Weighted average common shares outstanding | | |
| | |
| | |
| | |
| | |
|
| Basic | | 133,703,359 |
| | 127,082,058 |
| | 123,990,700 |
| | 125,315,889 |
| | 131,362,284 |
|
| Diluted (7) | | 133,703,359 |
| | 127,082,058 |
| | 123,990,700 |
| | 125,315,889 |
| | 131,362,284 |
|
| |
(1) | We recognized a goodwill impairment loss of $420.2 million in 2014, representing the entire carrying value of goodwill in our Servicing and Lending segments. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share amounts and unless otherwise indicated)
| |
(2) | We issued 162,000 shares of Series A Perpetual Convertible Preferred Stock in December 2012 as partial consideration for the acquisition of Homeward. In September 2013, 100,000 of the preferred shares were converted to 3,145,640 shares of Ocwen common stock, which we subsequently repurchased for $157.9 million. In July 2014, the remaining 62,000 preferred shares were converted into 1,950,296 shares of common stock, which we subsequently repurchased for $72.3 million. Holders of the preferred shares were entitled to receive mandatory and cumulative dividends payable quarterly. |
| |
(3) | Prior to the expiration of a common stock repurchase program on July 31, 2016, we completed the repurchase of 991,985 shares, 625,705 shares and 10,420,396 shares for a total purchase price of $5.9 million, $4.1 million, and $310.2 million during 2016, 2015 and 2014, respectively. |
| |
(4) | Recognized in connection with the acquisition of PHH on October 4, 2018. See Note 2 — Business Acquisition to the Consolidated Financial Statements for additional information.
|
| |
(5) | During 2018, 2017, 2016 and 2015, we sold certain of our MSRs relating to loans with a UPB of $901.3 million, $219.4 million, $3.7 billion and $87.6 billion, respectively. |
| |
(6) | Income tax expense for 2015 includes a $97.1 million provision to establish valuation allowances relating to deferred tax assets in our U.S. and USVI tax jurisdictions. See Note 19 — Income Taxes to the Consolidated Financial Statements for additional information.
|
| |
(7) | We computed the effect of preferred stock on diluted earnings per share using the if-converted method. For 2014 - 2018, we have excluded the effect of all dilutive or potentially dilutive shares from the computation of diluted earnings per share because of the anti-dilutive effect of our reported net loss. |
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, unless otherwise indicated) |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as other portionssection of this Form 10-K may contain certain statements that constitute forward-looking statements within the meaninggenerally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of the federal securities laws. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could”, “intend,” “consider,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Forward-looking statements by their nature address matters2018 items and year-to-year comparisons between 2019 and 2018 that are to different degrees, uncertain. Our business has been undergoing substantial change, which has magnified such risks and uncertainties. You 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. You should consider all uncertainties and risks discussed or referencedincluded in this report, including those under “Forward-Looking Statements”Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 1A, Risk Factors, as well as those discussed in any subsequent SEC filings.7 of our Annual Report on Form 10-K for the year ended December 31, 2019.
OVERVIEW
We are a financial services company that services and originates mortgage loans. The majorityWe are a leading mortgage special servicer, servicing 1,107,582 loans with a total UPB of our revenues are generated from our residential mortgage servicing business. As$188.81 billion on behalf of more than 4,179 investors and 127 subservicing clients as of December 31, 2018,2020 . We service all mortgage loan classes, including conventional, government-insured and non-Agency loans. Our Originations business is part of our residential mortgagebalanced business model to generate gains on loan sales and profitable returns, and to support the replenishment and the growth of our servicing portfolio consisted of 1,562,238 loans with a UPB of $256.0 billion. Inportfolio. Through our lending business,recapture, retail, correspondent and wholesale channels, we originate purchase, sell and securitizepurchase conventional and government-insured forward and reverse mortgage loans. Our forward lending business is focusedloans that we sell or securitize on the retail channel, primarilya servicing retained basis. In addition, we grow our mortgage servicing volume through MSR flow purchase agreements, GSE Cash Window programs, bulk MSR purchase transactions, and subservicing agreements.
We have built a multi-channel, scalable origination platform that creates sustainable sources of replenishment and growth of our servicing portfolio, recapture. During 2018,as detailed in the table below. We determine our lending businesstarget returns for each channel, however, the channel and delivery selection is generally our clients’ decision.
We selectively sourced our MSR originations and purchases and subservicing in 2020 through diversified channels, as detailed below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2020 vs 2019
$ Change | | |
| $ In billions | Quarter Ended March 31st | | Quarter Ended June 30th | | Quarter Ended September 30th | | Quarter Ended December 31st | | | | Year Ended December 31st | | Year Ended December 31st | | | |
| Recapture (1) | $ | 0.20 | | | $ | 0.32 | | | $ | 0.37 | | | $ | 0.43 | | | | | $ | 1.31 | | | $ | 0.66 | | | $ | 0.65 | | | |
| Correspondent (1) | 0.51 | | | 0.66 | | | 1.93 | | | 2.59 | | | | | 5.69 | | | 0.49 | | | 5.20 | | | |
| Flow and GSE Cash Window MSR purchases (3) | 1.34 | | | 2.84 | | | 4.20 | | | 6.73 | | | | | 15.11 | | | 0.91 | | | 14.20 | | | |
| Reverse originations (2) | 0.23 | | | 0.21 | | | 0.23 | | | 0.27 | | | | | 0.94 | | | 0.73 | | | 0.21 | | | |
| Total | 2.28 | | | 4.03 | | | 6.72 | | | 10.01 | | | | | 23.05 | | | 2.79 | | | 20.26 | | | |
| Bulk MSR purchases (3) | 1.54 | | | — | | | — | | | 15.02 | | | | | 16.57 | | | 14.62 | | | 1.95 | | | |
| Total MSR additions | 3.82 | | | 4.03 | | | 6.72 | | | 25.04 | | | | | 39.62 | | | 17.41 | | | 22.21 | | | |
| Subservicing additions (4) | 3.14 | | | 4.59 | | | 4.43 | | | 5.08 | | | | | 17.24 | | | 8.68 | | | 8.56 | | | |
| Total servicing additions | $ | 6.96 | | | $ | 8.62 | | | $ | 11.15 | | | $ | 30.11 | | | | | $ | 56.86 | | | $ | 26.09 | | | $ | 30.77 | | | |
(1)Represents the UPB of loans that have been originated or purchased forwardduring the respective periods and for which we recognize a new MSR on our consolidated balance sheets upon sale or securitization.
(2)Represents the UPB of reverse mortgage loans withthat have been securitized on a servicing retained basis. The loans are recognized on our consolidated balance sheets under GAAP without any separate recognition of MSRs.
(3)Represents the UPB of $870.3loans for which the MSR is purchased.
(4)Interim subservicing, excluding the volume UPB associated with short-term interim subservicing for some clients as a support to their originate-to-sell business, where loans are boarded and de-boarded within the same quarter.
COVID-19 Pandemic Impact on our 2020 Financial Performance
In March 2020, the WHO categorized the Coronavirus Disease 2019 (COVID-19) as a pandemic and the COVID-19 outbreak was declared a national emergency in the U.S. The pandemic has adversely affected economic conditions since March 2020, with high levels of unemployment, and has created uncertainties about the duration and magnitude of the economic downturn. Our financial performance in 2020 has been affected by the pandemic, mostly due to large losses on MSRs and lower revenue in our Servicing business, partially offset by the growth and profitability of our Originations business, as discussed further below. Furthermore, the CARES Act allowed us to recognize income tax benefits in 2020 mostly due to the carryback of a portion of our prior net operating losses.
Determining the COVID-19 impact on our financial performance requires management to use judgment, including the estimation of those impacts that are directly attributable to COVID-19 factors. The below discussion includes some comparisons with the financial performance of 2019 and selected noteworthy items to isolate the impact of certain COVID-19 factors and may not be complete.
First, we recorded a $129.1 million fair value loss on our MSR portfolio in our Servicing segment due to rate and $593.7assumption updates in 2020 driven by record low interest rates fostering refinancing and voluntary prepayments, partially offset by $44.9 million respectively.gains on our MSR macro-hedge strategy.
On October 4, 2018, we completedSecond, the financial performance of our acquisition of PHH. PHH’sServicing business was negatively affected by the loans placed under forbearance, the moratorium on foreclosures and other market conditions. We recognized $51.7 million lower ancillary income in our Servicing segment in 2020 as compared to 2019, with $37.6 million lower float earnings, lower late and collection fees, and lower deferred servicing portfolio consisted of 537,225 residentialfee collections. The CARES Act signed in March 2020 allows borrowers with federally backed mortgage loans with a UPBwho are affected by COVID-19 to request temporary loan forbearance, for up to 180 days if requested by the borrower. Borrowers may request an additional forbearance period of $119.3 billionup to 180 days for FHA and VA guaranteed loans. During any period of forbearance, servicers must also provide related protection, including, but not limited to, suspension of late fees. In addition, servicers are restricted from pursuing certain foreclosure and eviction activity on the date of acquisition. PHH originated $109.9 million of UPB in residentialall occupied, federally backed mortgage loans inuntil at least March 31, 2021.
Although PLS loans are not explicitly covered under the forward lending retail channel during the post-acquisition period through December 31, 2018.
We believe this acquisition will enable usCARES Act, these loans are subject to achieve the following key strategicvarious requirements and expectations from state Governors, regulators, and Attorneys General to assist borrowers enduring financial benefits:
Accelerate Ocwen’s transitionhardship due to Black Knight MSP;
Reduce fixed costs,COVID-19 with forbearance, moratoria on a combined basis, through reductions in corporate overheadforeclosure sales and other costs;
Improve economies of scale; and,
Provide a foundation to enable the combined business to resume new business and growth activities that will, at a minimum, offset portfolio runoff.
We recognized a bargain purchase gain, net of tax, of $64.0 million in connection with the acquisition of PHH. The bargain purchase gain results from the fair value of PHH’s net assets exceeding the purchase price we paid. The purchase price we negotiated contemplated that PHH would incur losses after the acquisition date. PHH net losses from continuing operations of $24.8 million are included in our consolidated statements of operations from the date of acquisition through December 31, 2018. The transaction was initially cash and book value accretive, with PHH having an opening cash balance of $423.1 million, $64.7 million more than the purchase price. There can be no assurances that the desired strategic and financial benefits of the acquisition will be realized.
The approval of NY DFS for the acquisition imposed certain post-closing requirements on Ocwen, including certain reporting obligations and certain record retentionevictions and other requirements, relatingsome of which apply regardless of whether the borrower has requested assistance. Ocwen provides payment relief to the planned transfer of New York loans onto Black Knight MSPsuch borrowers in accordance with these requirements and expectations, as well as certainour servicing agreements. For example, we generally grant eligible borrowers an initial three months of forbearance and related protection, including suspension of late fees, as well as suspension of foreclosure and eviction activity.
Generally, borrowers are required to repay their suspended or reduced mortgage payments after the forbearance period ends unless an alternate loss mitigation solution is reached, which we anticipate will include extensions of forbearance, payment deferrals, repayment plans, and loan modifications, depending on the borrower’s situation, account status, and applicable investor guidelines. Before the completion of each period of forbearance, Ocwen attempts to contact the borrowers to assess their ability to resume making payments and discuss other options which may be available if their hardship persists.
As of December 31, 2020, we managed 81,900 loans under forbearance, 23,100 of which related to our owned MSRs (excluding NRZ), or 7.39% of our total portfolio and 4.52% of our owned MSR servicing portfolio (excluding NRZ), respectively. The number of loans under forbearance peaked at the end of the second quarter of 2020 and decreased progressively since, while remaining at an elevated level at year end as illustrated by the below chart of forbearance plans during COVID-19 for our owned MSR portfolio (excluding NRZ) by investor.
Third, offsetting the above negative impact of COVID-19 on our financial performance, our Originations business generated $117.6 million incremental revenues, including $53.8 million incremental gain on loan sale from our Recapture channel. The low interest rate environment discussed above and the continued execution of our originations strategy have led to significantly increased volume in 2020. We continue to recapture, replenish and grow our owned MSR portfolio (excluding NRZ’s MSR portfolio), net of runoff and voluntary prepayments. In addition, we opportunistically purchased MSRs at a discount to fair value in the COVID-19 market conditions and recorded gains on revaluation.
We operate through a secure remote workforce model for approximately 98% of our global workforce and continue to adhere to COVID-19 health and safety-related requirements with respectand best practices across all of our locations. While our operations have not been significantly affected, we incurred an estimated $16.4 million of additional operating expenses in 2020 due to our adjustment to the managementCOVID-19 environment, including additional compensation, technology equipment and legal consulting fees among others, $6.3 million of PMC,which is recorded in our Servicing segment.
Looking ahead, the spread of the COVID-19 pandemic may continue. The disruption created by the pandemic and the measures being taken have given rise to elevated unemployment levels. As of today, uncertainties related to the duration and severity of the economic downturn remain, without any indications of a licensed subsidiaryrapid recovery. The business disruption triggered by COVID-19 could ultimately have a material and adverse effect on our business, financial condition, liquidity or results of PHH.operations.
Importantly,Business Initiatives
In 2021, we have established five key operating objectives to drive improved value for shareholders, as our near-term priority remains to return to sustainable profitability. The five objectives are focused on:
•Accelerating growth, by expanding our client base, our product offering and by leveraging our MSR asset vehicle with Oaktree;
•Strengthening recapture performance, by expanding our operating capacity;
•Improving our cost leadership position, by driving productivity and efficiencies, with our technology and continuous improvement initiatives;
•Maintaining high quality operational execution, through our technology and continuous improvement initiatives, and our commitment to employee engagement and customer satisfaction; and
•Expanding servicing and other revenue opportunities.
Historical losses have significantly eroded stockholders’ equity and weakened our financial condition. With the NY DFS also eased its restrictions on Ocwen’s ability to acquire MSRs to allow certain acquisitionsacquisition and integration of MSRs that are boarded onto the Black Knight MSP servicing system subject to annual portfolio growth limitations until such time as the NY DFS determines that all loans have been successfully migrated to Black Knight MSPPHH in late 2018 and that Ocwen has developed a satisfactory infrastructure to board sizeable portfolios of MSRs.
We have2019, we established a set of key business initiatives intended to achieve our objective of returning to growth and profitability. First, we must successfully execute on the integration of PHH’s business with ours, including a smooth transition onto the Black Knight MSP servicing system which includes loan boarding, payment processing, escrow administration, and default management, among other functions. Second, we must re-engineer our cost structure to go beyond eliminating redundant costs. Third, we must fulfill our regulatory commitments and resolve our remaining legal and regulatory matters on satisfactory terms. Fourth, we must replenish our servicing portfolio through expanding our lending business and making permissible MSR acquisitions that are prudent and well-executed within appropriate financial return targets. Finally, we must ensure that we continue to manage our balance sheet to provide a solid platform for executing on our growth and other initiatives.
While we strengthened our cash position through amendments to our agreements with NRZ and the PHH acquisition, until we return to sustainable profitability continuing losses will erode our available liquidity which could negatively impact our ability to invest in growthwithin an appropriate risk and investment opportunities, including our ability to acquire MSRs.
Our business, operating resultscompliance environment. We have successfully executed on these initiatives and financial condition have been significantly impacted by regulatory actions against usachievements throughout 2020, and by significant litigation matters. Shouldwe believe they were the number or scope of regulatory or legal actions against us increase or expand or should we be unable to reach reasonable resolutions in existing regulatory and legal matters, our business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected, even if we are successful in our ongoing efforts to optimize our cost structure and improve ourfoundation for driving stronger financial performance.
These initiatives and accomplishments included the following:
| | | | | | | | |
| 2018/2019 Initiatives | | Accomplishments |
| Expanding our Originations business to replenish and grow our servicing portfolio | | We have built a multi-channel, scalable originations platform and have replenished and grown our owned servicing portfolio in 2020. We selectively acquired MSRs that meet or exceed our minimum targeted investment returns, with $16.6 billion UPB in bulk transactions and $15.1 billion UPB through our now well established participation to the GSE Cash Window programs. We successfully re-entered the forward lending correspondent channel in the second quarter of 2019 with $5.7 billion UPB in 2020. We have reduced our client concentration risk with NRZ. |
| | |
| Driving continuous cost improvement to maintain an industry cost competitive position | | With the acquisition and integration of PHH in late 2018 and 2019, we successfully implemented cost reduction and continuous improvement initiatives, resulting in approximately $100 million lower operating expenses in 2020 as compared to 2019, and approximately $200 million as compared to 2018. Our continuous cost improvement efforts were focused on reducing operating and overhead costs through facility rationalization, optimizing strategic sourcing and actions and off-shore utilization, lean process design, simplification, automation and other technology-enabled productivity enhancements. |
| | |
| Effectively managing our balance sheet to ensure adequate liquidity, finance our ongoing business needs and provide a solid platform for executing on our growth initiatives | | We have managed our liquidity and financing obligations through the most challenging time of the COVID-19 and have enhanced our existing balance sheet and cost of funds. For example, we have extended to May 2022 and prepaid $126.1 million on our senior secured term loan (SSTL) and reduced our OMART cost of funds. We have concluded our strategic review process and announced an expansion of our strategic alliance with Oaktree Capital to support the refinancing of our corporate debt maturing in 2021 and 2022 and to provide capital to accelerate our growth trajectory. In addition, we have established the MSR Asset Vehicle (MAV) to support the future growth of our servicing volume with the most efficient capital allocation for us. |
| | |
| Fulfilling our regulatory commitments and resolving remaining legacy and regulatory matters | | On October 15, 2020, we resolved our legacy regulatory matter with the State of Florida Office of the Attorney General and Office of Financial Regulation. Ocwen has now resolved all state regulatory actions from April 2017. The legacy CFPB litigation matter remains pending. We have participated in mediation and settlement discussions with the CFPB, however, the parties were unable to reach a resolution of the litigation on satisfactory terms. |
Operations Summary
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Revenue | | | | | | | | | |
| Servicing and subservicing fees | $ | 934,336 |
| | $ | 989,376 |
| | $ | 1,186,620 |
| | (6 | )% |
| (17 | )% |
| Gain on loans held for sale, net | 77,743 |
| | 103,402 |
| | 90,391 |
| | (25 | ) |
| 14 |
|
| Other revenue, net | 50,966 |
| | 101,798 |
| | 110,152 |
| | (50 | ) |
| (8 | ) |
| Total revenue | 1,063,045 |
| | 1,194,576 |
| | 1,387,163 |
| | (11 | ) |
| (14 | ) |
| | | | | | | | | | |
| Expenses | | | | | | |
|
|
|
|
|
| Compensation and benefits | 298,036 |
| | 358,994 |
| | 381,340 |
| | (17 | ) | | (6 | ) |
| Professional services | 165,554 |
| | 229,451 |
| | 305,586 |
| | (28 | ) | | (25 | ) |
| MSR valuation adjustments, net | 153,457 |
| | 52,962 |
| | 124,029 |
| | 190 |
| | (57 | ) |
| Servicing and origination | 131,297 |
| | 141,496 |
| | 188,750 |
| | (7 | ) | | (25 | ) |
| Technology and communications | 98,241 |
| | 100,490 |
| | 110,333 |
| | (2 | ) | | (9 | ) |
| Occupancy and equipment | 59,631 |
| | 66,019 |
| | 80,191 |
| | (10 | ) | | (18 | ) |
| Other expenses | 26,280 |
| | 49,233 |
| | 33,025 |
| | (47 | ) | | 49 |
|
| Total expenses | 932,496 |
| | 998,645 |
| | 1,223,254 |
| | (7 | ) | | (18 | ) |
| | | | | | | | | | |
| Other income (expense) | |
| | |
| | |
| |
|
| |
|
|
| Interest income | 14,026 |
| | 15,965 |
| | 19,083 |
| | (12 | ) | | (16 | ) |
| Interest expense | (275,041 | ) | | (363,238 | ) | | (412,583 | ) | | (24 | ) |
| (12 | ) |
| Bargain purchase gain | 64,036 |
| | — |
| | — |
| | n/m |
| | n/m |
|
| Gain on sale of mortgage servicing rights, net | 1,325 |
| | 10,537 |
| | 8,492 |
| | (87 | ) | | 24 |
|
| Other, net | (6,371 | ) | | (3,168 | ) | | 14,738 |
| | 101 |
|
| (121 | ) |
| Other expense, net | (202,025 | ) | | (339,904 | ) | | (370,270 | ) | | (41 | ) |
| (8 | ) |
| | | | | | | | | | |
| Loss from continuing operations before income taxes | (71,476 | ) | | (143,973 | ) | | (206,361 | ) | | (50 | ) |
| (30 | ) |
| Income tax expense (benefit) | 529 |
| | (15,516 | ) | | (6,986 | ) | | (103 | ) |
| 122 |
|
| Loss from continuing operations | (72,005 | ) | | (128,457 | ) | | (199,375 | ) | | (44 | ) |
| (36 | ) |
| Income from discontinued operations, net of income taxes | 1,409 |
| | — |
| | — |
| | n/m |
| | n/m |
|
| Net loss | (70,596 | ) | | (128,457 | ) | | (199,375 | ) | | (45 | ) | | (36 | ) |
| Net loss (income) attributable to non-controlling interests | (176 | ) | | 491 |
| | (387 | ) | | (136 | ) | | (227 | ) |
| Net loss attributable to Ocwen stockholders | $ | (70,772 | ) | | $ | (127,966 | ) | | $ | (199,762 | ) | | (45 | ) | | (36 | ) |
| | | | | | | | | | |
| Segment income (loss) from continuing operations before taxes: | | | | | | | | | |
| Servicing | $ | (31,948 | ) | | $ | 46,680 |
| | $ | 3,364 |
| | (168 | )% | | n/m |
|
| Lending | 11,154 |
| | (4,431 | ) | | 131 |
| | (352 | ) | | n/m |
|
| Corporate Items and Other | (50,682 | ) | | (186,222 | ) | | (209,856 | ) | | (73 | ) | | (11 | ) |
| | $ | (71,476 | ) | | $ | (143,973 | ) | | $ | (206,361 | ) | | (50 | ) | | (30 | ) |
| n/m: not meaningful | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | % Change |
| 2020 | | 2019 | | 2018 | | | | | | 2020 vs. 2019 | | 2019 vs. 2018 |
| Revenue | | | | | | | | | | | | | |
| Servicing and subservicing fees | $ | 737.3 | | | $ | 975.5 | | | $ | 937.1 | | | | | | | (24) | % | | 4 | % |
| Gain on loans held for sale, net | 137.2 | | | 38.3 | | | 37.3 | | | | | | | 258 | | | 3 | |
| Reverse mortgage revenue, net | 60.7 | | | 86.3 | | | 60.2 | | | | | | | (30) | | | 43 | |
| Other revenue, net | 25.6 | | | 23.3 | | | 28.4 | | | | | | | 10 | | | (18) | |
| Total revenue | 960.9 | | | 1,123.4 | | | 1,063.0 | | | | | | | (14) | | | 6 | |
| | | | | | | | | | | | | |
| MSR valuation adjustments, net | (251.9) | | | (120.9) | | | (153.5) | | | | | | | 108 | | | (21) | |
| | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | |
| Compensation and benefits | 265.3 | | | 313.5 | | | 298.0 | | | | | | | (15) | | | 5 | |
| Professional services | 106.9 | | | 102.6 | | | 165.6 | | | | | | | 4 | | | (38) | |
| Servicing and origination | 77.3 | | | 109.0 | | | 131.3 | | | | | | | (29) | | | (17) | |
| Technology and communications | 59.6 | | | 79.2 | | | 98.2 | | | | | | | (25) | | | (19) | |
| Occupancy and equipment | 47.5 | | | 68.1 | | | 59.6 | | | | | | | (30) | | | 14 | |
| Other expenses | 19.2 | | | 1.5 | | | 26.3 | | | | | | | n/m | | (94) | |
| Total operating expenses | 575.7 | | | 673.9 | | | 779.0 | | | | | | | (15) | | | (13) | |
| | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | |
| Interest income | 16.0 | | | 17.1 | | | 14.0 | | | | | | | (6) | | | 22 | |
| Interest expense | (109.4) | | | (114.1) | | | (103.4) | | | | | | | (4) | | | 10 | |
| Pledged MSR liability expense | (152.3) | | | (372.1) | | | (171.7) | | | | | | | (59) | | | 117 | |
| Gain on repurchase of senior secured notes | — | | | 5.1 | | | — | | | | | | | (100) | | | n/m |
| Bargain purchase gain | — | | | (0.4) | | | 64.0 | | | | | | | (100) | | | (101) | |
| | | | | | | | | | | | | |
| Other, net | 6.7 | | | 9.3 | | | (5.0) | | | | | | | (28) | | | (286) | |
| Total other expense, net | (239.0) | | | (455.1) | | | (202.0) | | | | | | | (47) | | | 125 | |
| | | | | | | | | | | | | |
| Loss from continuing operations before income taxes | (105.7) | | | (126.5) | | | (71.5) | | | | | | | (16) | | | 77 | |
| Income tax expense (benefit) | (65.5) | | | 15.6 | | | 0.5 | | | | | | | (520) | | | n/m |
| Loss from continuing operations, net of tax | (40.2) | | | (142.1) | | | (72.0) | | | | | | | (72) | | | 97 | |
| Income from discontinued operations, net of tax | — | | | — | | | 1.4 | | | | | | | n/m | | (100) | |
| Net loss | (40.2) | | | (142.1) | | | (70.6) | | | | | | | (72) | | | 101 | |
| Net income attributable to non-controlling interests | — | | | — | | | (0.2) | | | | | | | n/m | | (100) | |
| Net loss attributable to Ocwen stockholders | $ | (40.2) | | | $ | (142.1) | | | $ | (70.8) | | | | | | | (72) | | | 101 | |
| | | | | | | | | | | | | |
| Segment income (loss) from continuing operations before taxes: | | | | | | | | | | | | | |
| Servicing | $ | (75.8) | | | $ | (72.7) | | | $ | (47.1) | | | | | | | 4 | % | | 54 | % |
| Lending | 104.2 | | | (12.2) | | | (22.7) | | | | | | | (954) | | | (46) | |
| Corporate Items and Other | (134.1) | | | (41.6) | | | (1.7) | | | | | | | 222 | | | n/m |
| $ | (105.7) | | | $ | (126.5) | | | $ | (71.5) | | | | | | | (16) | | | 77 | |
| n/m: not meaningful | | | | | | | | | | | | | |
Our 2018 results include the post-acquisition results of PHH. The following table provides details of the PHH results by segment:
|
| | | | | | | | | | | | | | | | |
| Results of Operations | | Servicing | | Lending | | Corporate Items and Other | | PHH Consolidated |
| Revenue | | | | | | | |
|
| Servicing and subservicing fees | | $ | 66,826 |
| | $ | — |
| | $ | 1,105 |
| | $ | 67,931 |
|
| Gain on loans held for sale, net | | — |
| | 3,997 |
| | — |
| | 3,997 |
|
| Other revenue | | (534 | ) | | 624 |
| | 469 |
| | 559 |
|
| Total revenue | | 66,292 |
| | 4,621 |
| | 1,574 |
| | 72,487 |
|
| | | | | | | | | |
| Expenses | | | | | | | |
|
| Compensation and benefits | | 11,131 |
| | 4,675 |
| | 10,311 |
| | 26,117 |
|
| Professional services | | 759 |
| | (47 | ) | | 9,364 |
| | 10,076 |
|
| MSR valuation adjustments, net | | 25,713 |
| | — |
| | — |
| | 25,713 |
|
| Servicing and origination | | 7,937 |
| | 870 |
| | 212 |
| | 9,019 |
|
| Technology and communications | | 3,847 |
| | 186 |
| | 3,842 |
| | 7,875 |
|
| Occupancy and equipment | | 3,951 |
| | 574 |
| | 1,552 |
| | 6,077 |
|
| Corporate overhead allocations | | 17,177 |
| | 184 |
| | (17,361 | ) | | — |
|
| Other expenses | | (1,328 | ) | | 828 |
| | 500 |
| | — |
|
| Total expenses | | 69,187 |
| | 7,270 |
| | 8,420 |
| | 84,877 |
|
| | | | | | | | | |
| Other income (expense): | | | | | | | | |
| Interest income | | 1 |
| | 548 |
| | 362 |
| | 911 |
|
| Interest expense | | (17,263 | ) | | (401 | ) | | (1,441 | ) | | (19,105 | ) |
| Other, net | | (1,005 | ) | | 82 |
| | (15 | ) | | (938 | ) |
| Other income (income) expense, net | | (18,267 | ) | | 229 |
| | (1,094 | ) | | (19,132 | ) |
| | | | | | | | | |
| Loss from continuing operations before income taxes | | $ | (21,162 | ) | | $ | (2,420 | ) | | $ | (7,940 | ) | | $ | (31,522 | ) |
Year Ended December 31, 20182020 versus 20172019
Servicing and subservicing fees for 2018 were $55.0Revenue
Total revenue was $960.9 million in 2020, $162.5 million or 6%,14% lower than 2017, primarily2019, mostly due to portfolio runoffdeclines in servicing fee revenue and a decline in completed modifications,reverse mortgage revenue, offset in part by thean increase in the portfolio resulting from the acquisition of PHH.gain on loans held for sale. Servicing and subservicing fee revenue earned on the acquired PHH portfolio during the post-acquisition period was $67.9 million. The number of completed modifications declined in 2018 compared to 2017 primarily because of the expiration of the HAMP program on December 31, 2016. Revenue recognized in connection with loan modifications was $59.4decreased $238.2 million for 2018or 24%, as compared to $97.22019, including a $193.3 million in 2017.
The $25.7 million, or 25% decline in Gainsservicing fees collected on behalf of NRZ, primarily due to a lower serviced UPB as a result of run-off and an increase in non-paying forbearance loans as a result of the COVID-19 pandemic. The decline in servicing fees collected on behalf of NRZ is partially offset by a decline in servicing fees remitted to NRZ that are separately reported as Pledged MSR liability expense (Other expense), with a $34.5 million net decline in the NRZ servicing fee retained in 2020 as compared to 2019. The $98.9 million increase in gain on loans held for sale is mostly due to the increase in forward loan production, from both our correspondent channel that we re-started in the second quarter of 2019 and our recapture channel, fueled by industry-wide refinance activity. Reverse mortgage revenue, net in 2018 isdecreased $25.6 million, or 30%, as compared to 2019, largely due to the change in our accounting policy related to tails. Tails include accrued interest and insurance premiums on loans together with the commitments to fund borrower draws that we regularly securitize. We recorded a decrease$31.2 million gain on tails upon their funding and securitization in total loan production offset2019 and nil in part by higher margins, primarily2020 due to operatingour fair value election. We recorded $24.7 million lower fair value gains on our securitized reverse mortgage portfolio and HMBS related borrowings and $28.5 million higher origination gain in the higher margin forward lending retail channel exclusively2020.
MSR Valuation Adjustments, Net
We reported a $251.9 million loss in 2018. Forward lending originations declined asMSR valuation adjustments, net in 2020, driven by a result of our exit from the forward lending correspondent and wholesale channels in 2017 and rising interest rates which reduced refinance volume, offset in part by retail channel volume generated by PHH during the post-acquisition period. Changes to the FHA HECM program for originations after October 1, 2017 have negatively impacted reverse lending origination volume across all channels.
Other revenue for 2018 declined $50.8$173.3 million or 50%, largely due to a $31.1 million decline in REO referral commissions in connection with the transfer of the rights to such commissions to NRZ effective with the New RMSR Agreements,portfolio runoff and a $6.5$106.2 million decline in CRL premium revenue consistent with the decline in the number of foreclosed real estate properties in the servicing portfolio. A $5.7 million reduction in loan origination fees on lower lending segment production volumes and a $5.0 million unfavorable net change in the fair values of our HECM reverse mortgage loans and the related HMBS financing liabilityloss due to rising interest rates also contributed to the decline in Other revenue.
interest rates, partially offset by $27.5 million favorable fair value gain from our MSR valuation adjustments, net, increased $100.5hedging strategy. The $131.0 million or 190%,additional loss in 2020 as compared to 2017,2019 is primarily because 2017 includeddue to a $116.3 million additional loss on the NRZ pledged MSR and $14.7 million additional loss on our owned MSRs. The $116.3 million additional loss on the NRZ pledged MSR is offset by an $86.7additional gain recorded as MSR pledged liability expense, and was mostly due to a $147.1 million favorable impactassumption update recorded in 2019, partially offset by a lower runoff on the NRZ MSR. The lower runoff is driven by the derecognition of MSRs in February 2020 with the termination of the PMC agreement by NRZ. The $14.7 million additional loss on our owned MSR is driven by lower interest rates in 2020 with increased runoff and fair value losses due to rates, partially offset by the effects of our MSR hedging strategy implemented in September 2019, and the revaluation gains of MSR opportunistically purchased at a benchmarking update relateddiscount to our non-Agency MSRs carried at fair value. In addition, MSR valuation adjustments increased $25.7 million in 2018value due to the impact of higher runoff resulting from the acquisition of MSRs from PHH. Fair value adjustments are largely offset by corresponding fair value adjustments related to the NRZ financing liabilities, which are recorded in interest expense.COVID-19 distressed environment.
Excluding MSR valuation adjustments, net, total expenses were $166.6 million, or 18%, lower as compared to 2017. Total expenses for 2018, excluding MSR valuation adjustments, includes $59.2 million attributable to PHH.Compensation and Benefits
Compensation and benefits expense for 2018, which included $26.1 million attributable to PHH, declined $61.0decreased $48.2 million, or 17%15%, as compared to 2019, largely due to cost re-engineering initiatives and the scaling of our workforce to our volumes. Servicing compensation and benefits decreased by $30.4 million, mostly due to a 19% reduction16% decline in U.S.-basedaverage total Ocwen headcount offset in part by a $6.7 millionand an increase in related severance expense for 2018. These declines are largely the result of our effortsoffshore-to-total headcount ratio from 67% to align72%, driving down our average compensation cost. Originations compensation and benefits increased by $18.4 million, mostly due to additional commissions and incentive compensation and additional headcount to accompany our record production levels in 2020. We reduced our servicing operations and corporate segment with the size of our servicing portfolio, as well as the strategic decisions executedaverage Corporate headcount by 19% globally, driving down base compensation by $14.3 million in late 2017 and early 2018 to exit the automotive capital services business and the forward lending correspondent and wholesale channels. U.S.-based headcount at December 31, 2018 includes 991 PHH employees.
Professional services expense, including $10.1 million attributed to PHH, was $63.9 million, or 28%, lower for 20182020 as compared to same period2019. We also recognized $35.7 million of 2017 primarily due to a $78.5 million decline in legal expenses, a $6.4 million decrease in monitor expensescompensation and a $2.7 million reduction in fees incurredbenefits costs during 2019 in connection with our conversion of NRZ’s Rights2019 cost re-engineering plan, as compared to MSRs to fully-owned MSRs, offset$9.7 million in part by $13.7 million of fees2020 related to the acquisition of PHH. Professional services expense for 2017 included significant litigation settlement-related costs incurred in connection with a securities law matter and a TCPA matter. The CA Auditor and NY Operations Monitor appointments were terminated in 2017.our 2020 re-engineering initiatives. We are not currently incurring anyrecorded $6.7 million additional compensation expenses related to regulatory monitors.COVID-19 in 2020.
Servicing and Origination Expense
Servicing and origination expense decreased $10.2$31.7 million, or 7%29%, as compared to 20172019 primarily due to a $33.6$32.8 million decrease in servicing expenses. This decline was largely the result of a reduction in government-insured claim loss provisions and a general decline in servicer-related expenses that was primarily driven by a reduction in our servicing portfolio. The reduction in government-insured claim loss provisions is due to the combined effect of a decline in claim volumes, partially due to COVID-19, and lower loss severity, mostly driven by a reduction in the foreclosure and liquidation timeline of loans. The government-insured claim loss provisions recorded in the prior year on reinstated or modified loans along2019 included claims of a legacy portfolio with a decline in claims and a $3.2 million reduction in reinsurance commissions due to the decline in foreclosed real estate properties in our servicing portfolio. Offsetting these declines, Servicing and origination expense in 2017 included a recovery of $28.5 million of losses related to a settlement of outstanding claims that arose from indemnification obligations in connection with our acquisition of MSRs and related servicing advances in 2013.higher severity loans. Government-insured claim loss provisions are generally offset by changes in the fair value of the corresponding MSRs.MSRs, which are recorded in MSR valuation adjustments, net. The decrease is also attributable to $9.1 million improved advance recoveries, which decreased loss severity rates used in the computation of advance reserves, and the recovery of $3.1 million of expenses in connection with a settlement from a mortgage insurer as well as a $6.8 million release of indemnification reserves related to such settlement.
Other Operating Expenses
Professional services expense increased $4.2 million, or 4%, as compared to 2019 primarily due to the $34.7 million recovery in 2019 of prior expenses from service providers and a mortgage insurer, offset by a $21.4 million decline in legal fees for settlements and defense, and a $6.4 million decline in other professional fees. The decline in legal fees was largely the result of the recovery of $8.0 million prior expenses in connection with a settlement from a mortgage insurer, and a general decline in accruals for expenses related to litigation matters in 2020. Other professional services expense decreased in 2020 as a
result of the expenses incurred in 2019 relating to the PHH integration and legal entity reorganization, partially offset by $5.1 million of COVID-19 related expenses in 2020.
Technology and communication and Occupancy and equipment expenses declinedexpense decreased $19.6 million, or 25%, as compared to 20172019 primarily because we no longer license the REALServicing servicing system from Altisource following our transition to Black Knight MSP in June 2019. Our expenses decreased as a result of other factors, including a decline in capitalized technology investments, our closure of U.S. facilities in 2019 and the effects of our other cost reduction efforts, which include bringing technology services in-house and re-engineering initiatives. Depreciation expense decreased $5.0 million as compared to 2019. Technology and communication expenses in 2020 included $3.1 million of COVID-19 related expenses.
Occupancy and equipment expense decreased $20.6 million, or 30%, as compared to 2019, primarily due to the results of our cost reduction efforts, which include consolidating vendors and closing and consolidating certain facilities. These reductions were offset by $7.9facilities, and the effect of the decline in the size of the servicing portfolio on various expenses such as postage and mailing services. We partially abandoned two of our leased properties and decided to vacate other leased properties prior to the contractual maturity date of the lease agreements resulting in the recognition of facility-related costs totaling $6.0 million, and $6.1 million, respectively, of PHH costs incurred during the post-acquisition period.
The $23.0 million, or 47%, decrease in Other expenses as compared to 2017 is due in large part to a $6.8$6.6 million chargeof similar costs recognized in 20172019 in connection with our decision to write-off the carrying value of internally-developed software used in our wholesale forward lending business, a $6.2vacate other leased properties. Depreciation expense, postage and mailing costs, rent expense and interest on lease liabilities declined $7.8 million, decline in the provision for losses on automotive dealer financing notes, a $5.9$3.9 million, reduction in advertising expenses$3.8 million and a $3.0$1.9 million, decline in bank charges due to higher earnings credits which offset these charges.
Interest expense declined $88.2 million, or 24%,respectively, as compared to 2017 primarily because2019. Occupancy and equipment expense in 2020 included $1.4 million of the $64.6COVID-19 related expenses.
Other expenses increased $17.7 million decline in the change in fair value of the NRZ financing liabilities, a $15.8 million decrease in interest on match funded liabilities, consistent with the decline in servicing advances, and a $9.1 million decrease in interest on borrowings under our mortgage loan warehouse facilities due to lower forward lending production volumes. Changes in the fair value of the NRZ financing liabilities offset, to a large extent, changes in the fair value of our MSRs which are recorded in MSR valuation adjustments, net.
The decline in interest expense on the NRZ financing liabilities was due to runoff of the NRZ servicing portfolio and a $60.6 million increase in net favorable fair value adjustments as compared to 2017. Interest2019 primarily due to a $14.4 million provision release in 2019 for indemnification obligations that was largely the result of favorable updates to default, defect and severity assumptions relative to historical performance, and a $7.2 million expense for 2017 includes the effectrecovery recorded in 2019 in connection with a settlement with a mortgage insurer, partially offset by $2.8 million lower travel expenses in 2020 due to COVID-19.
In February 2020, we announced our intention to implement certain cost re-engineering initiatives in 2020 to generate further cost savings. Our continuous cost improvement efforts were focused on reducing operating and overhead costs through facility rationalization, strategic sourcing and actions, off-shore utilization, lean process design, simplification, automation and other technology-enabled productivity enhancement. We have incurred a total of unfavorable valuation$27.6 million re-engineering costs in 2020, including $6.2 million facility-related expenses reported as Occupancy and assumption updates relatedequipment, $9.7 million Compensation and benefits costs and $6.7 million Professional services costs. In 2019, we incurred a total of $65.0 million PHH integration and re-engineering costs, including $10.1 million facility-related expenses, $35.7 million severance, retention and other employee-related costs and $19.1 million Professional services costs.
Other Income (Loss)
Pledged MSR liability expense decreased $219.8 million as compared to our non-Agency MSRs carried at fair value, which increased the value of the NRZ financing liability by $83.3 million and which was recognized as interest expense, offset in part by2019, mostly due to a $37.6$116.3 million favorable fair value adjustment onchange and a $158.8 million decline in servicing fee remittance. The decline in net servicing fee remittance to NRZ was driven by the NRZ financing liability in connection with the transfer of legal ownership of MSRs to NRZ. Interest expense for 2018 includes a $16.6 million favorable fair value adjustment related to the $279.6 million lump-sum upfront payment we received in January 2018 in accordance with the termsrunoff of the New RMSR Agreements.portfolio and the termination of the PMC agreement by NRZ in February 2020, which also reduced the servicing fees collected on behalf of NRZ. Partially offsetting the decrease in Pledged MSR liability expense was $60.9 million lower amortization gain of the lump sum payment received from NRZ in 2017 and 2018, as the amortization ended in April 2020.
Income Tax Benefit (Expense)
Although we incurred a pre-tax loss from continuing operations for 20182020 of $71.5$105.7 million, we recorded an income tax expensebenefit of $0.5$65.5 million primarily due to $64.0 million of estimated income tax benefit to be recognized under the mixCARES Act as a result of earnings among differentmodification of the tax jurisdictionsrules to allow the carryback of NOLs arising in 2018, 2019 and 2020 tax years to the five prior tax years and the increase to the business interest expense limitation under IRC Section 163(j). We collected $51.4 million in 2020, which represents the tax refund associated with different statutorythe NOLs generated in 2018 carried back to prior tax rates. years.
Our overall effective tax rates for 20182020 and 20172019 were (0.7)%62.0% and 10.8%(12.4)%, respectively. Under our transfer pricing agreements, our operations in India and Philippines are guaranteedcompensated on a profit oncost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from continuing operations these foreign operations have taxable income, which is subject to statutory tax rates in these jurisdictions that are significantly higher than the U.S. statutory rate of 21%. Income tax expense for 2018 includes additional expense related to the Tax Act that was partially offset by a reduction in expense related to the tax effects of intra-entity asset transfers that are no longer recognized
effective with our adoption of ASU 2016-16 on January 1, 2018 as well as the income tax benefit of $7.2 million we recognized related to the reversal of uncertain tax position liabilities upon the expiration of the statute of limitations. We recognized a $22.7 million income tax benefit in 2017 related to the reversal of an uncertain tax position liability upon expiration of the statute of limitations.
Year Ended December 31, 2017 versus 2016
Servicing and subservicing fees for 2017 were $197.2 million, or 17%, lower than 2016, primarily due to portfolio runoff and a decline in the number of completed modifications in large part due to the expiration of the HAMP program on December 31, 2016. The average UPB and average number of assets in our residential portfolio declined 14% and 13%, respectively, as compared to 2016.
Gains on loans held for sale for 2017 increased $13.0 million, or 14%, as compared to 2016. Gains on loans held for sale from our lending operations increased $19.1 million, primarily because of higher origination volume and margins in our reverse lending business.
MSR valuation adjustments, net, decreased $71.1 million as compared to 2016 due to a $75.7 million decrease in fair value losses on our non-Agency MSRs and a $14.2 million decrease in impairment charges related to our government-insured MSRs, offset by an $18.8 million increase in amortization on our Agency MSRs. The decrease in fair value loss is due to the $86.7 million impact in 2017 of a benchmarking assumption update related to our non-Agency MSRs carried at fair value which was based on a recommendation from our third-party valuation expert and reflects an upward trend in market pricing for non-Agency MSRs similar in profile to Ocwen’s portfolio. The decline in impairment for 2017 reflects the recoverability of certain advances on various privately-held government-insured loans. The increase in amortization expense primarily resulted from a $27.5 million benefit recognized during 2016 related to the sale of non-performing loans conveyed to HUD as part of the Aged Delinquent Portfolio Loan Sale (ADPLS) program while there was no corresponding benefit in 2017.
Excluding MSR valuation adjustments, net, expenses for 2017 were $153.5 million, or 14%, lower than 2016.
Compensation and benefits expense declined $22.3 million, or 6%, as average headcount declined by 14%, including a 12% reduction in U.S.-based headcount. The decline in headcount occurred principally in our Servicing business where headcount declined by 20%, including an 18% reduction in the U.S.
Professional services expenses declined $76.1 million, or 25%. Monitor expenses for 2017 were $6.4 million, a $75.3 million decline from the prior year primarily due to reduced costs related to the CA Auditor, whose appointment was terminated in February 2017, and the NY Operations Monitor, whose appointment was terminated in April 2017.
Servicing and origination expense decreased $47.3 million, or 25%, primarily due to a decrease in government-insured claim loss provisions and the recovery of $28.5 million of losses related to a settlement of outstanding claims that arose from indemnification obligations in connection with our acquisition of MSRs and related servicing advances in 2013. Government-insured claim losses in 2016 included the accelerated recognition of $34.8 million of expenses related to our participation in HUD’s ADPLS and HUD Note Sale programs, which were largely offset by a benefit in amortization expense recognized in MSR valuation adjustments, net. Government-insured claim loss provision in 2017 included $17.0 million in connection with re-performing government-insured loans for which certain advances are no longer recoverable.
Occupancy and equipment expense declined by $14.2 million, or 18%, largely because of the effect of the decline in the size of the servicing portfolio on various expenses, particularly postage and other delivery services, and the effect of consolidating facilities. Technology and communications expense declined by $9.8 million, or 9%, because of efforts to bring technology services in-house and the effects of a declining servicing portfolio on technology fees.
Other expenses increased by $16.2 million, or 49%, due in part to a $6.8 million charge recognized in 2017 to write-off the carrying value of internally-developed software used in our wholesale forward lending business in connection with our decision to exit that channel and sell the furniture, fixtures and equipment located at our Westborough, Massachusetts facility, where this business was located. Advertising costs were $3.5 million higher in 2017, primarily related to our Lending segment.
Interest expense for 2017 declined $49.3 million, or 12%, as compared to the prior year primarily due to a $20.1 million reduction in interest related to our Senior Secured Term Loan (SSTL) facility and a $19.3 million reduction in interest on match funded liabilities. In 2016, in connection with entering into an amended and restated SSTL facility, we recognized previously unamortized debt issuance costs related to the prior SSTL facility as well as discount related to the new SSTL facility. Lower interest expense on our match funded advance financing facilities is consistent with the decline in servicing advances and the effect of the higher amortization of facility costs in 2016.
The decline in interest expense is also due to a $6.3 million decline in interest related to financing liabilities primarily because 2016 included $10.5 million of additional payments to NRZ, which are recognized as interest expense, to compensate NRZ for certain increased costs associated with a 2015 downgrade of our S&P servicer rating. Interest expense on the NRZ financing liabilities increased by $1.9 million primarily due to changes in the fair value of NRZ financing liabilities due to
valuation and assumption updates which increased the value of the NRZ financing liabilities by $83.3 million and which was recognized as interest expense. This more than offset the reduction in interest expense on the NRZ financing liabilities driven by declines in the value of the NRZ financing liability because of the decline in the average UPB of the NRZ servicing portfolio due to runoff, and the $42.0 million reduction in fair value of the NRZ financing liability recognized in connection with the transfer of legal title to MSRs (including $37.6 million recognized at the time of the initial transfer). This reduction was primarily driven by the characteristics of Rights to MSRs with a UPB of $15.9 billion that were converted to fully-owned MSRs during the year, relative to the $54.6 million lump sum payment received from NRZ. For the Rights to MSRs that were converted on September 1, 2017, the characteristics of the underlying MSRs did not correspond to the weighted average loan characteristics used to determine the lump sum payment, resulting in a decline in the fair value of the financing liability primarily due to the transferred MSRs having a contractual servicing fee rate of 33.4 bps as compared to the weighted average of 47.1 bps used to develop the lump sum payment schedule.
Other, net for 2017 declined $17.9 million primarily because 2016 includes $14.8 million received in connection with the execution of clean-up call rights related to five small-balance commercial mortgage securitization trusts.
Although the pre-tax loss for 2017 declined by $62.4 million, or 30% to $144.0 million, the income tax benefit increased $8.5 million, or 122%, to $15.5 million. This is primarily due to the income tax benefit recognized on the reversal of the liability for a portion of our uncertain tax positions upon the expiration of the statute of limitations in September 2017. The change is also due to the mix of earnings among different tax jurisdictions with different statutory tax rates, which impacts the amount of the tax benefit or expense recorded. The overall effective tax rate for 2017 was 10.8%, compared to 3.4% for 2016. This rate change primarily resulted from the tax benefit recognized on the reversal of uncertain tax positions during 2017, as compared to additional income tax expense recognized during 2016 related to uncertain tax positions, offset in part by a decrease in tax benefits resulting from our inability to carry back current losses that are being generated in the U.S. and USVI tax jurisdictions.
Financial Condition Summary
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | | | |
| | 2020 | | 2019 | | $ Change | | % Change |
| Cash and cash equivalents | $ | 284.8 | | | $ | 428.3 | | | $ | (143.5) | | | (34) | % |
| Restricted cash | 72.5 | | | 64.0 | | | 8.5 | | | 13 | |
| MSRs, at fair value | 1,294.8 | | | 1,486.4 | | | (191.6) | | | (13) | |
| Advances, net | 828.2 | | | 1,056.5 | | | (228.3) | | | (22) | |
| Loans held for sale | 387.8 | | | 275.3 | | | 112.5 | | | 41 | |
| Loans held for investment, at fair value | 7,006.9 | | | 6,292.9 | | | 714.0 | | | 11 | |
| Receivables | 187.7 | | | 201.2 | | | (13.5) | | | (7) | |
| Other assets | 588.4 | | | 601.5 | | | (13.1) | | | (2) | |
| Total assets | $ | 10,651.1 | | | $ | 10,406.2 | | | $ | 244.9 | | | 2 | % |
| | | | | | | |
| Total Assets by Segment | | | | | | | |
| Servicing | $ | 9,847.6 | | | $ | 9,580.5 | | | $ | 267.1 | | | 3 | % |
| Originations | 379.2 | | | 257.4 | | | 121.8 | | | 47 | |
| Corporate Items and Other | 424.3 | | | 568.3 | | | (144.0) | | | (25) | |
| $ | 10,651.1 | | | $ | 10,406.2 | | | $ | 244.9 | | | 2 | % |
| | | | | | | |
| HMBS-related borrowings, at fair value | $ | 6,772.7 | | | $ | 6,063.4 | | | $ | 709.3 | | | 12 | |
| Advance match funded liabilities | 581.3 | | | 679.1 | | | (97.8) | | | (14) | |
| Other financing liabilities, at fair value | 576.7 | | | 972.6 | | | (395.9) | | | (41) | |
| SSTL and other secured borrowings, net | 1,069.2 | | | 1,025.8 | | | 43.4 | | | 4 | |
| Senior notes, net | 311.9 | | | 311.1 | | | 0.8 | | | — | |
| Other liabilities | 924.0 | | | 942.2 | | | (18.2) | | | (2) | |
| Total liabilities | 10,235.8 | | | 9,994.2 | | | 241.6 | | | 2 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total stockholders’ equity | 415.4 | | | 412.0 | | | 3.4 | | | 1 | |
| | | | | | | |
| Total liabilities and equity | $ | 10,651.1 | | | $ | 10,406.2 | | | $ | 245.0 | | | 2 | % |
| | | | | | | |
| Total Liabilities by Segment | | | | | | | |
| Servicing | $ | 9,163.5 | | | $ | 8,945.1 | | | $ | 218.4 | | | 2 | % |
| Originations | 428.5 | | | 264.1 | | | 164.4 | | | 62 | |
| Corporate Items and Other | 643.7 | | | 785.0 | | | (141.3) | | | (18) | |
| $ | 10,235.8 | | | 9,994.2 | | | $ | 241.5 | | | 2 | % |
| | | | | | | |
| Book value per share (1) | $ | 47.81 | | | $ | 45.83 | | | $ | 1.98 | | | 4 | % |
|
| | | | | | | | | | | | | | |
| | December 31, | | | | |
| | 2018 | | 2017 | | $ Change | | % Change |
| Cash | $ | 329,132 |
| | $ | 259,655 |
| | $ | 69,477 |
| | 27 | % |
| Restricted cash | 67,878 |
| | 42,905 |
| | 24,973 |
| | 58 |
|
| Mortgage servicing rights ($1,457,149 and $671,962 carried at fair value) | 1,457,149 |
| | 1,008,844 |
| | 448,305 |
| | 44 |
|
| Advances and match funded advances | 1,186,676 |
| | 1,356,393 |
| | (169,717 | ) | | (13 | ) |
| Loans held for sale ($176,525 and $214,262 carried at fair value) | 242,622 |
| | 238,358 |
| | 4,264 |
| | 2 |
|
| Loans held for investment, at fair value | 5,498,719 |
| | 4,715,831 |
| | 782,888 |
| | 17 |
|
| Other assets ($7,568 and $8,900 carried at fair value) | 612,040 |
| | 781,178 |
| | (169,138 | ) | | (22 | ) |
| Total assets | $ | 9,394,216 |
| | $ | 8,403,164 |
| | $ | 991,052 |
| | 12 | % |
| | | | | | | | |
| Total Assets by Segment | | | | | | | |
| Servicing | $ | 3,306,208 |
| | $ | 3,033,243 |
| | $ | 272,965 |
| | 9 | % |
| Lending | 5,603,481 |
| | 4,945,456 |
| | 658,025 |
| | 13 |
|
| Corporate Items and Other | 484,527 |
| | 424,465 |
| | 60,062 |
| | 14 |
|
| | $ | 9,394,216 |
| | $ | 8,403,164 |
| | $ | 991,052 |
| | 12 | % |
| | | | | | | | |
| HMBS-related borrowings, at fair value | $ | 5,380,448 |
| | $ | 4,601,556 |
| | $ | 778,892 |
| | 17 |
|
| Match funded liabilities | 778,284 |
| | 998,618 |
| | (220,334 | ) | | (22 | ) |
| Other financing liabilities ($1,057,671 and $508,291 carried at fair value) (amounts related to VIEs of $24,815 and $0) | 1,127,613 |
| | 593,518 |
| | 534,095 |
| | 90 |
|
| SSTL and other secured borrowings | 382,538 |
| | 545,850 |
| | (163,312 | ) | | (30 | ) |
| Senior notes | 448,727 |
| | 347,338 |
| | 101,389 |
| | 29 |
|
| Other liabilities ($4,986 and $635 carried at fair value) | 721,901 |
| | 769,410 |
| | (47,509 | ) | | (6 | ) |
| Total liabilities | 8,839,511 |
| | 7,856,290 |
| | 983,221 |
| | 13 |
|
| | | | | | | | |
| Total Ocwen stockholders’ equity | 554,705 |
| | 545,040 |
| | 9,665 |
| | 2 |
|
| Non-controlling interest in subsidiaries | — |
| | 1,834 |
| | (1,834 | ) | | (100 | ) |
| Total equity | 554,705 |
| | 546,874 |
| | 7,831 |
| | 1 |
|
| Total liabilities and equity | $ | 9,394,216 |
| | $ | 8,403,164 |
| | $ | 991,052 |
| | 12 | % |
| | | | | | | | |
| Total Liabilities by Segment | | | | | | | |
| Servicing | $ | 2,437,383 |
| | $ | 2,233,431 |
| | $ | 203,952 |
| | 9 | % |
| Lending | 5,532,069 |
| | 4,861,928 |
| | 670,141 |
| | 14 |
|
| Corporate Items and Other | 870,059 |
| | 760,931 |
| | 109,128 |
| | 14 |
|
| | $ | 8,839,511 |
| | $ | 7,856,290 |
| | $ | 983,221 |
| | 13 | % |
Changes in the compositionTotal assets increased by $244.9 million, or 2%, between December 31, 2019 and balance ofDecember 31, 2020 with multiple offsetting changes within our asset categories. First, our total assets and liabilities during 2018 are principally attributable to the acquisition of PHH and the impact of our ongoing reverse mortgage securitization activity, which are accounted for as secured financings, increasing Loansincreased with an additional $714.0 million loans held for investment, and HMBS-related borrowings. On October 4, 2018, we acquired assets with an aggregate fair valueor 11%, mostly due to the continued growth of $1.2 billion, including $325.0our reverse mortgage business. Second, the $112.5 million increase in our loans held for sale portfolio is mostly due to higher production volumes. Third, our cash balance decreased by $126.1 million to prepay a portion of PHH cash usedthe outstanding SSTL balance on January 27, 2020. Fourth, the MSR portfolio decreased by $191.6 million or 13%, due to fund the acquisition, consisting primarily$263.7 million derecognition of MSRs in February 2020 upon termination by NRZ of the PMC subservicing agreement, a $251.9 million MSR valuation loss due to the decline in interest rates, mostly recognized in the first quarter of 2020 due to the distressed COVID-19 market conditions, partially offset by our MSR replenishment. Fifth, servicing advances declined $228.3 million due to significant payoff activity and loans. We also assumeda decline in the non-performing loans in our servicing portfolio by $2.2 billion in UPB, replaced by newer-production performing loans for which our advances are lower.
Total liabilities increased $241.6 million, or 2%, with a fair valuesimilar effects as described above. First, our HMBS-related borrowings increased by $709.3 million due to the continued growth of $769.7 million, including anour reverse mortgage business and its securitization. Second, borrowings under our mortgage warehouse facilities and MSR financing liability and senior unsecured notes. See Note 2 — Business Acquisitionfacilities increased $186.0 million, offset in part by our $126.1 million prepayment of the SSTL on January 27, 2020. Third, the $395.9 million decline in Other financing liabilities is mostly due to the Consolidated Financial Statements for additional information. Match$263.7 million derecognition of NRZ pledged MSR liability in February 2020 upon termination of the PMC subservicing agreement, and MSR valuation adjustments due to interest rates. Fourth, advance match funded liabilities declined during 2018decreased $97.8 million consistent with lower advances and match funded advances consistent with our decliningthe decline in servicing portfolio. advances.
Total equity increased $82.0$3.4 million during 20182020 mostly due to a $47.0 million adjustment to stockholders’ equity on January 1, 2020 as a result of the effect of our election to measure future reverse mortgage draw commitments at fair value election for MSRs previously accounted for usingin conjunction with the amortization method, lessapplication of the netnew credit loss recognized
foraccounting standard, offset by the year. The$40.2 million net loss for 2020, and our repurchase of shares of our common stock during the year included a bargain purchase gain of $64.0 million in connection with the PHH acquisition. The bargain purchase gain represents the excess of the fair value of the assets acquired and liabilities assumed over the purchase price.first quarter.
SEGMENT RESULTS OF OPERATIONS
We report our activities in three segments, Servicing, Originations (previously Lending) and Corporate Items and Other that reflect other business activities that are currently individually insignificant. Our business segments reflect the internal reporting that we use to evaluate operating performance and to assess the allocation of our resources. Effective with the fourth quarter of 2020, we report the results of Reverse Servicing in the Servicing segment. Historically, the Reverse Servicing business was included in the reported results of the Originations segment. This realignment of our business segments is consistent with a change in our internal management reporting to the chief operating decision maker and the management of the business and risks. Segment results for 2019 and 2018 have been recast to conform to the current segment structure. Reverse Servicing generated Revenue and Income before income taxes of $63.4 million and $53.0 million, respectively, in 2019. For 2018, Revenue and Income before income taxes were $41.7 million and $33.8 million, respectively. Reverse Servicing assets consist primarily of securitized Loans held for investment - Reverse Mortgages, at fair value.
Servicing
We earn contractual monthly servicing fees pursuant to servicing agreements, which are typically payable as a percentage of UPB, as well as ancillary fees, including late fees, modification incentive fees, REO referral commissions, float earnings and SpeedpaySpeedpay/collection fees. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions that own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Per-loan fees typically vary based on type of investor and on delinquency status. As of December 31, 2020, we serviced 1.1 million mortgage loans with an aggregate UPB of $188.8 billion. The average UPB of loans serviced during 2020 declined by 15% or $33.8 billion compared to 2019, mostly due to termination of the PMC agreement by NRZ and deboarding of the loans by October 1, 2020, and portfolio runoff, net of newly originated and purchased MSRs.
We are actively pursuing actions to manage the size of our servicing portfolio through expanding our originations business and selectively purchasing MSRs based on our capital availability that are prudent and well-executed with appropriate financial return targets. We closed MSR purchases with $31.7 billion UPB during 2020. We expect to continue to focus on acquiring Agency and government-insured MSR portfolios that meet or exceed our minimum targeted investment returns. We re-entered the forward lending correspondent channel in the second quarter of 2019 to support the growth of our MSR portfolio and we continue to pursue a number of other MSR purchase options, including driving improved recapture rates within our existing servicing portfolio. We acquired new subservicing in the fourth quarter of 2020 through our enterprise sales. We entered into a subservicing agreement with a new subservicing client that we expect to amount to $13 billion of UPB. In addition, we entered into an agreement with Oaktree to launch an MSR joint-venture, or MAV, where PMC would subservice the loans. Both agreements are expected to generate new subservicing volume in 2021.
NRZ is our largest subservicing client, accounting for 36% and 45% of the UPB and loan count in our servicing portfolio as of December 31, 2020, respectively, and approximately 62% of all delinquent loans that Ocwen serviced. NRZ servicing fees retained by Ocwen represented approximately 30% and 36% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ, for 2020 and 2019, respectively (excluding ancillary income). Consistent with a subservicing relationship, NRZ is responsible for funding the advances we service for NRZ. On February 20, 2020, we received a notice of termination from NRZ with respect to the PMC MSR Agreements, and all loans were deboarded by October 1, 2020. This termination was for convenience and not for cause.
In late 2017 and early 2018, we renegotiated ourthe Ocwen agreements with NRZ to more closely align with a typical subservicing arrangement whereby we receive a base servicing fee and certain ancillary fees, primarily late fees, loan modification fees and Speedpay fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. We received upfront cash payments in 2018 and 2017 of $279.6 million and $54.6 million, and $279.6 millionrespectively, from NRZ in connection with the resulting 2017 and 2018 amendments.New RMSR Agreements. These upfront payments generally representrepresented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue
Ocwen willwould receive under the renegotiated agreements. While the aggregate economics of these agreements will be similarThese upfront payments received from NRZ were deferred and recorded within Other income (expense) as they amortized through the remaining term of the original agreements cash receipts will be lower in future periods as a result of the upfront payments.(April 30, 2020).
Our MSR portfolio is carried at fair value.value, with changes in fair value recorded in MSR valuation adjustments, net. The value of our MSRs areis typically correlated to changes in interest rates; as interest rates rise,decrease, the value of the servicing portfolio typically risesdecreases as a result of lowerhigher anticipated prepayment speeds. In the current market rate environment, we believe we have limited incrementalThe sensitivity of MSR fair value that can be realized even asto interest rates increase absent comparableis typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of approximately 15 years, exhibiting little response to movements in market transaction data supporting higher valuation multiples, which are already at historic highs.interest rates. Valuation is also impacted by loan delinquency rates whereby as delinquency rates decline,rise, the value of the servicing portfolio rises. While wedeclines.
For those MSR sale transactions with NRZ that do not hedge changes inachieve sale accounting treatment, we present on a gross basis the pledged MSR as an asset and the corresponding liability amount pledged MSR liability on our balance sheet. Similarly, we present the total servicing fees and the fair value of our MSRs, changes inrelated to the MSR sale transactions with NRZ within Servicing and subservicing fees, net and MSR valuation adjustment, net. Net servicing fee remittance to NRZ and the fair value changes of anythe pledged MSR liability are separately presented within Pledged MSR liability expense and are offset by the two corresponding amounts presented in other statement of operations line items. We record both our pledged MSRs and the associated MSR liability at fair value, elected MSR financing liabilities, which are recorded in interest expense in our consolidated statements of operations, will partially offset the changes in fair value of the related MSRs.pledged MSR liability were offset by the changes in fair value of the associated MSRs pledged, presented in MSR valuation adjustments, net.
Loan Resolutions
We have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors. Reducing delinquencies also enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Loan resolution activities address the pipeline of delinquent loans and generally lead to (i) modification of the loan terms, (ii) repayment plan alternatives, (iii) a discounted payoff of the loan (e.g., a “short sale”), or (iv) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting REO. Loan modifications must be made in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon, or even forbid, loan modifications. To select an appropriate loan modification option for a borrower, we perform a structured analysis, using a proprietary model, of all options using information provided by the borrower as well as external data, including recent broker price opinions to value the mortgaged property. Our proprietary model includes, among other things, an assessment of re-default risk.
Our future financial performance will be less impacted by loan resolutions because, under our NRZ agreements, NRZ receives all deferred servicing fees. Deferred servicing fees related to delinquent borrower payments were $241.8$169.2 million at December 31, 2018,2020, of which $198.4$131.8 million were attributable to NRZ agreements.
Advance Obligation
As a servicer, we are generally obligated to advance funds in the event borrowers are delinquent on their monthly mortgage related payments. We advance principal and interest (P&I Advances), taxes and insurance (T&I Advances) and legal fees, property valuation fees, property inspection fees, maintenance costs and preservation costs on properties that have been foreclosed (Corporate Advances). For certain loans in non-Agency securitization trusts, we have the ability to cease making P&I advances and immediately recover advances previously made from the general collections of the respective trust if we determine that our P&I Advancesadvances cannot be recovered from the projected future cash flows, we generally have the right to cease making P&I Advances, declare advances, where permitted includingflows. With T&I and Corporate advances, in excess of net proceeds to be non-recoverable and, in most cases, immediately recover any such excess advances from the general collection accounts of the respective trust. With T&I and Corporate Advances, we continue to advance if net future cash flows exceed projected future advances without regard to advances already made.
Most of our advances have the highest reimbursement priority (i.e., they are “top of the waterfall”) so that we are entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were
issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. The costs incurred in meeting these obligations consist principally of the interest expense incurred in financing the servicing advances. Most but not all, subservicing agreements, including our agreements with NRZ, provide for more rapidprompt reimbursement of any advances from the owner of the servicing rights. Refer to Note 25 — Commitments to the Consolidated Financial Statements for further description of servicer advance obligations.
Significant Variables
Aggregate UPB and Loan Count. Servicing fees are generally expressed as a percentage of UPB and subservicing fees are generallyearned on a per-loan basis or expressed as a percentage of UPB or earned on a per-loan basis.UPB. Aggregate UPB and loan count decline as a result of portfolio run-off and increase to the extent we retain MSRs from new originations or engage in MSR acquisitions, to the extent permitted.
Operating Efficiency. Our operating results are heavily dependent on our ability to scale our operations to cost-effectively and efficiently perform servicing activities in accordance with our servicing agreements. To the extent we are unable to process a high volume of transactions consistently and systematically, the cost of our servicing activities increases and has a negative impact on our operating results. To the extent we are unable to complete servicing activities in accordance with the requirements of our servicing agreements, we may incur additional costs or fail to recover otherwise reimbursable costs and advances.
Delinquencies. Delinquencies impact our results of operations and operating cash flows. Non-performing loans are more expensive to service because the loss mitigation activities that we must undertake to keep borrowers in their homes or to foreclose, if necessary, are costlier than the activities required to service a performing loan. These loss mitigation activities include increased contact with the borrower for collection and the development of forbearance plans or loan modifications by highly skilled associates who command higher compensation as well as the higher compliance costs associated with these, and similar, activities. While the higher cost is somewhat offset by ancillary fees, for severely delinquent loans or loans that enter the foreclosure process the incremental revenue opportunities are generally not sufficient to cover our increased costs.
In addition, when borrowers are delinquent, the amount of funds that we are required to advance to the investors increases. We incur significant costs to finance those advances. We utilize servicing advance financing facilities, which are asset-backed (i.e., match funded liabilities) securitization facilities, to finance a portion of our advances. As a result, increased delinquencies result in increased interest expense.
Prepayment Speed. The rate at which portfolio UPB declines can have a significant impact on our business. Items reducing UPB include normal principal payments (runoff), refinancing, loan modifications involving forgiveness of principal, voluntary property sales and involuntary property sales such as foreclosures. Prepayment speed impacts future servicing fees, amortization and valuation of MSRs, float earnings on float balances and interest expense on advances. Increases in anticipated lifetime prepayment speeds generally cause MSR valuation adjustments to increase because MSRs are valued based on total expected servicing income over the life of a portfolio. The converse is true when expectations for prepayment speeds decrease.
Reverse Mortgage Revenue
The activities and financial performance related to reverse mortgage loans that are securitized and classified as held for investment, at fair value, together with the HMBS-related borrowings, at fair value (internally identified as our Reverse Servicing business) are reflected in the Servicing segment, consistent with how the activities are managed and internally reported beginning in 2020. Segment results for 2019 and 2018 have been recast to conform to the current segment presentation. Once a reverse mortgage loan is securitized, our activities are generally consistent with other loan servicing as described above, with the following variations.
Under the terms of ARM-based HECM loan agreements, the borrowers have additional borrowing capacity of $2.0 billion at December 31, 2020. These draws or tails are funded by the servicer and can be subsequently securitized. We do not incur any substantive underwriting, marketing or compensation costs in connection with any future draws, although we must maintain sufficient capital resources and available borrowing capacity to ensure that we are able to fund these future draws.
As an HMBS issuer, we assume certain obligations related to each security issued. In addition to our obligation to fund tails, the most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once they reach 98% of the maximum claim amount (MCA repurchases or active buyouts). Active repurchased loans are assigned to HUD and payment is received from HUD through a claims process. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount; we bear the risk of exposure if the outstanding balance on a loan exceeds the maximum claim amount. Inactive repurchased loans or buyouts (loans that are in default for one of the following reasons - title conveyances or the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments) are generally liquidated through foreclosure and subsequent sale of REO. State specific foreclosure and REO liquidation timelines have a significant impact on the timing and amount of our recovery. If we are unable to sell the property securing the inactive reverse loan for an acceptable price within the timeframe established by HUD (six months), we are required to make an appraisal-based claim to HUD. In such cases, HUD reimburses us for the loan balance, eligible expenses and interest, less the appraised value of the underlying property. Thereafter, all the risks and costs associated with maintaining and liquidating the property remains with us; we may incur additional losses on REO properties as they progress through the liquidation processes related to delayed timelines due to market conditions, sales commissions, property preservation costs or property tax and insurance advances. The significance of future losses associated with appraisal-based claims is dependent upon the volume of inactive loans, condition of foreclosed properties and the general real estate market.
The reverse mortgage revenue reported within the Servicing segment includes the net fair value changes of securitized reverse mortgage loans held for investment and HMBS-related borrowings. We elected the fair value accounting election for both our reverse mortgage loans held for investment and the HMBS-related borrowings. The fair value changes include the contractual interest income earned on securitized reverse mortgage loans, net of interest expense on HMBS-related borrowings, and the change in fair value of these assets and liabilities. The fair value of reverse mortgage loans held for investment includes
gains on future tails as a result of our fair value elections. Tails are participations in previously securitized HECMs and are created by additions to principal for borrower draws on lines-of-credit (scheduled and unscheduled), interest, servicing fees, and mortgage insurance premiums.
The fair value of our HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, with lower interest rates extending the timeline to liquidation. HECM loans have a longer duration than HMBS-related borrowings as a result of the future draw commitments, and our obligations as issuer of HMBS to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM loan is equal to 98% of the maximum claim amount.
The following table presents selected results of operations of our Servicing segment. The amounts presented are before the elimination of balances and transactions with our other segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
| Revenue | | | | | | | | | |
| Servicing and subservicing fees: | | | | | | | | | |
| Residential | $ | 727.7 | | | $ | 970.3 | | | $ | 930.0 | | | (25) | % | | 4 | % |
| Commercial | 3.5 | | | 3.8 | | | 5.5 | | | (8) | | | (31) | |
| 731.2 | | | 974.2 | | | 935.5 | | | (25) | | | 4 | |
| Gain on loans held for sale, net | 14.7 | | | 5.4 | | | 6.0 | | | 172 | | | (10) | |
| Reverse mortgage revenue, net | 7.6 | | | 63.5 | | | 44.1 | | | (88) | | | 44 | |
| Other revenue, net | 4.2 | | | 5.4 | | | 7.3 | | | (22) | | | (25) | |
| Total revenue | 757.7 | | | 1,048.5 | | | 992.9 | | | (28) | | | 6 | |
| | | | | | | | | |
| MSR valuation adjustments, net | (276.3) | | | (120.9) | | | (153.5) | | | 129 | | | (21) | |
| | | | | | | | | |
| Operating expenses | | | | | | | | | |
| Compensation and benefits | 113.6 | | | 144.0 | | | 154.5 | | | (21) | | | (7) | |
| Servicing and origination | 68.4 | | | 101.3 | | | 114.6 | | | (32) | | | (12) | |
| Professional services | 28.1 | | | 42.2 | | | 53.6 | | | (33) | | | (21) | |
| Occupancy and equipment | 31.0 | | | 44.3 | | | 42.6 | | | (30) | | | 4 | |
| Technology and communications | 25.2 | | | 32.6 | | | 45.6 | | | (23) | | | (28) | |
| Corporate overhead allocations | 61.0 | | | 197.9 | | | 211.7 | | | (69) | | | (7) | |
| Other expenses | 4.5 | | | (14.3) | | | 5.9 | | | (131) | | | (342) | |
| Total operating expenses | 331.9 | | | 548.0 | | | 628.6 | | | (39) | | | (13) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other income (expense) | | | | | | | | | |
| Interest income | 7.1 | | | 10.1 | | | 7.1 | | | (30) | | | 42 | |
| Interest expense | (90.7) | | | (102.5) | | | (90.8) | | | (12) | | | 13 | |
| Pledged MSR liability expense | (152.5) | | | (372.2) | | | (172.3) | | | (59) | | | 116 | |
| Gain on sale of MSRs, net | — | | | 0.5 | | | 1.3 | | | (100) | | | (66) | |
| | | | | | | | | |
| Other, net | 10.8 | | | 11.8 | | | (3.2) | | | (8) | | | (469) | |
| Total other expense, net | (225.3) | | | (452.3) | | | (257.9) | | | (50) | | | 75 | |
| | | | | | | | | |
| Loss from continuing operations before income taxes | $ | (75.8) | | | $ | (72.7) | | | $ | (47.1) | | | 4 | % | | 54 | % |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Revenue | | | | | | | | | |
| Servicing and subservicing fees: | | | | | | | | | |
| Residential | $ | 929,969 |
| | $ | 982,929 |
| | $ | 1,177,795 |
| | (5 | )% | | (17 | )% |
| Commercial | 5,548 |
| | 7,700 |
| | 9,606 |
| | (28 | ) | | (20 | ) |
| | 935,517 |
| | 990,629 |
| | 1,187,401 |
| | (6 | ) | | (17 | ) |
| Gain on loans held for sale, net | 8,435 |
| | 11,458 |
| | 17,034 |
| | (26 | ) | | (33 | ) |
| Other revenue | 7,272 |
| | 39,203 |
| | 42,724 |
| | (81 | ) | | (8 | ) |
| Total revenue | 951,224 |
| | 1,041,290 |
| | 1,247,159 |
| | (9 | ) | | (17 | ) |
| | | | | | | | | | |
| Expenses | | | | | | | | | |
| Compensation and benefits | 145,574 |
| | 160,514 |
| | 185,972 |
| | (9 | ) | | (14 | ) |
| Professional services | 53,643 |
| | 66,523 |
| | 104,038 |
| | (19 | ) | | (36 | ) |
| MSR valuation adjustments, net | 152,983 |
| | 52,689 |
| | 123,720 |
| | 190 |
| | (57 | ) |
| Servicing and origination | 114,597 |
| | 119,569 |
| | 163,310 |
| | (4 | ) | | (27 | ) |
| Technology and communications | 45,535 |
| | 46,238 |
| | 52,197 |
| | (2 | ) | | (11 | ) |
| Occupancy and equipment | 42,511 |
| | 47,419 |
| | 60,371 |
| | (10 | ) | | (21 | ) |
| Corporate overhead allocations | 211,701 |
| | 221,049 |
| | 215,300 |
| | (4 | ) | | 3 |
|
| Other expenses | 5,923 |
| | 2,383 |
| | 5,669 |
| | 149 |
| | (58 | ) |
| Total expenses | 772,467 |
| | 716,384 |
| | 910,577 |
| | 8 |
| | (21 | ) |
| | | | | | | | | | |
| Other income (expense) | | | | | | | | | |
| Interest income | 5,383 |
| | 783 |
| | (109 | ) | | 587 |
| | (818 | ) |
| Interest expense | (214,172 | ) | | (293,595 | ) | | (357,413 | ) | | (27 | ) | | (18 | ) |
| Gain on sale of mortgage servicing rights, net | 1,325 |
| | 10,537 |
| | 8,492 |
| | (87 | ) | | 24 |
|
| Other, net | (3,241 | ) | | 4,049 |
| | 15,812 |
| | (180 | ) | | (74 | ) |
| Total other expense, net | (210,705 | ) | | (278,226 | ) | | (333,218 | ) | | (24 | ) | | (17 | ) |
| | | | | | | | | | |
| Income (loss) from continuing operations before income taxes | $ | (31,948 | ) | | $ | 46,680 |
| | $ | 3,364 |
| | (168 | ) | | n/m |
| n/m: not meaningful | | | | | | | | | |
The following table provides selected operating statistics for our Servicing segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | % Change |
| 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
| Residential Assets Serviced at December 31 | | | | | | | | | |
| Unpaid principal balance (UPB) in billions: | | | | | | | | | |
| Performing loans (1) | $ | 177.6 | | | $ | 198.9 | | | $ | 243.4 | | | (11) | % | | (18) | % |
| Non-performing loans | 10.3 | | | 11.2 | | | 10.4 | | | (8) | | | 8 | |
| Non-performing real estate | 0.9 | | | 2.2 | | | 2.2 | | | (59) | | | — | |
| Total | $ | 188.8 | | | $ | 212.4 | | | $ | 256.0 | | | (11) | | | (17) | |
| | | | | | | | | |
| Conventional loans (2) | $ | 77.0 | | | $ | 95.3 | | | $ | 127.1 | | | (19) | % | | (25) | % |
| Government-insured loans | 34.8 | | | 30.1 | | | 27.7 | | | 16 | | | 9 | |
| Non-Agency loans | 77.0 | | | 87.0 | | | 101.3 | | | (11) | | | (14) | |
| Total | $ | 188.8 | | | $ | 212.4 | | | $ | 256.0 | | | (11) | | | (17) | |
| | | | | | | | | |
| Servicing portfolio (5) | $ | 97.4 | | | $ | 76.7 | | | $ | 72.4 | | | 27 | % | | 6 | % |
| Subservicing portfolio | 24.3 | | | 17.1 | | | 53.1 | | | 42 | | | (68) | |
| NRZ (3) (6) | 67.1 | | | 118.6 | | | 130.5 | | | (43) | | | (9) | |
| $ | 188.8 | | | $ | 212.4 | | | $ | 256.0 | | | (11) | | | (17) | |
| | | | | | | | | |
| Prepayment speed (CPR) (4 ) | | | | | | | | | |
| 12-month % Voluntary CPR | 15 | % | | 11 | % | | 11 | % | | 36 | % | | — | % |
| 12-month % Involuntary CPR | 2 | | | 2 | | | 2 | | | — | | | — | |
| Total 12-month % CPR | 20 | | | 16 | | | 13 | | | 25 | | | 23 | |
| | | | | | | | | |
| Number (in 000’s): | | | | | | | | | |
| Performing loans (1) | 1,048.7 | | | 1,344.9 | | | 1,499.0 | | | (22) | % | | (10) | % |
| Non-performing loans | 52.2 | | | 60.7 | | | 52.3 | | | (14) | | | 16 | |
| Non-performing real estate | 6.7 | | | 14.3 | | | 11.0 | | | (53) | | | 30 | |
| Total | 1,107.6 | | | 1,419.9 | | | 1,562.2 | | | (22) | | | (9) | |
| | | | | | | | | |
| Conventional loans (2) | 349.6 | | | 607.9 | | | 677.9 | | | (42) | % | | (10) | % |
| Government-insured loans | 201.9 | | | 185.1 | | | 182.6 | | | 9 | | | 1 | |
| Non-Agency loans | 556.1 | | | 627.0 | | | 701.7 | | | (11) | | | (11) | |
| Total | 1,107.6 | | | 1,419.9 | | | 1,562.2 | | | (22) | | | (9) | |
| | | | | | | | | |
| Servicing portfolio | 511.6 | | | 472.8 | | | 455.7 | | | 8 | % | | 4 | % |
| Subservicing portfolio | 96.3 | | | 77.3 | | | 155.6 | | | 25 | | | (50) | |
| NRZ (3) | 499.6 | | | 869.9 | | | 951.0 | | | (43) | | | (9) | |
| 1,107.6 | | | 1,419.9 | | | 1,562.2 | | | (22) | | | (9) | |
| | | | | | | | | |
| n/m: not meaningful | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1)Performing loans include those loans that are less than 90 days past due and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing.
(2)Conventional loans at December 31, 2020 include 89,458 prime loans with a UPB of $16.1 billion which we service or subservice. This compares to 111,246 prime loans with a UPB of $20.4 billion at December 31, 2019. Prime loans are generally good credit quality loans that meet GSE underwriting standards.
(3)Loans serviced or subserviced pursuant to our agreements with NRZ.
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | % Change |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Residential Assets Serviced at December 31 | | | | | | | | | |
| Unpaid principal balance (UPB): | | | | | | | | | |
| Performing loans (1) | $ | 243,389,883 |
| | $ | 162,719,030 |
| | $ | 185,609,163 |
| | 50 | % | | (12 | )% |
| Non-performing loans | 10,375,639 |
| | 13,474,741 |
| | 19,336,037 |
| | (23 | ) | | (30 | ) |
| Non-performing real estate | 2,234,968 |
| | 3,158,783 |
| | 4,146,930 |
| | (29 | ) | | (24 | ) |
| Total | $ | 256,000,490 |
| | $ | 179,352,554 |
| | $ | 209,092,130 |
| | 43 |
| | (14 | ) |
| | | | | | | | | | |
| Conventional loans (2) | $ | 127,054,262 |
| | $ | 49,325,697 |
| | $ | 60,965,841 |
| | 158 | % |
| (19 | )% |
| Government-insured loans | 27,651,315 |
| | 21,260,275 |
| | 22,971,342 |
| | 30 |
| | (7 | ) |
| Non-Agency loans | 101,294,913 |
| | 108,766,582 |
| | 125,154,947 |
| | (7 | ) |
| (13 | ) |
| Total | $ | 256,000,490 |
| | $ | 179,352,554 |
| | $ | 209,092,130 |
| | 43 |
|
| (14 | ) |
| |
|
| |
|
| |
|
| | | | |
| Percent of total UPB: | | | | | | | | | |
| Servicing portfolio | 28 | % | | 42 | % | | 41 | % | | (33 | )% | | 2 | % |
| Subservicing portfolio | 21 |
| | 1 |
| | 2 |
| | n/m |
| | (50 | ) |
| NRZ (3) | 51 |
| | 57 |
| | 57 |
| | (11 | ) | | — |
|
Non-performing residential assets
serviced | 5 |
| | 9 |
| | 11 |
| | (44 | ) | | (18 | ) |
| | | | | | | | | | |
| Number: | | | | | | | | | |
| Performing loans (1) | 1,498,960 |
| | 1,137,012 |
| | 1,274,560 |
| | 32 | % | | (11 | )% |
| Non-performing loans | 52,291 |
| | 69,135 |
| | 97,744 |
| | (24 | ) | | (29 | ) |
| Non-performing real estate | 10,987 |
| | 15,548 |
| | 21,462 |
| | (29 | ) | | (28 | ) |
| Total | 1,562,238 |
| | 1,221,695 |
| | 1,393,766 |
| | 28 |
| | (12 | ) |
| | | | | | | | | | |
| Conventional loans (2) | 677,927 |
| | 298,564 |
| | 355,615 |
| | 127 | % |
| (16 | )% |
| Government-insured loans | 182,595 |
| | 156,090 |
| | 168,598 |
| | 17 |
| | (7 | ) |
| Non-Agency loans | 701,716 |
| | 767,041 |
| | 869,553 |
| | (9 | ) | | (12 | ) |
| Total | 1,562,238 |
| | 1,221,695 |
| | 1,393,766 |
| | 28 |
| | (12 | ) |
| | | | | | | | | | |
| Percent of total number: | | | | | | | | | |
| Servicing | 29 | % | | 39 | % | | 39 | % | | (26 | )% | | — | % |
| Subservicing | 10 |
| | 2 |
| | 2 |
| | 400 |
| | — |
|
| NRZ (3) | 61 |
| | 59 |
| | 59 |
| | 3 |
| | — |
|
Non-performing residential assets
serviced | 4 |
| | 7 |
| | 9 |
| | (43 | ) | | (22 | ) |
| | | | | | | | | | |
(5)Includes $6.7 billion UPB of reverse mortgage loans that are recognized in our consolidated balance sheet at December 31, 2020.
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | % Change |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Residential Assets Serviced for the Years Ended December 31 | | | | | | | | | |
| Average UPB | | | | | | | | | |
| Servicing | $ | 72,280,774 |
| | $ | 80,929,759 |
| | $ | 93,338,072 |
| | (11 | )% | | (13 | )% |
| Subservicing | 15,930,871 |
| | 3,830,034 |
| | 6,598,449 |
| | 316 |
| | (42 | ) |
| NRZ (3) | 104,773,894 |
| | 110,117,808 |
| | 127,985,378 |
| | (5 | ) | | (14 | ) |
| | $ | 192,985,539 |
| | $ | 194,877,601 |
| | $ | 227,921,899 |
| | (1 | ) |
| (14 | ) |
| | | | | | | | | | |
| Prepayment speed (average CPR) | 13 | % | | 15 | % | | 14 | % | | (13 | )% | | 7 | % |
| % Voluntary | 82 |
| | 81 |
| | 79 |
| | 1 |
| | 3 |
|
| % Involuntary | 18 |
| | 21 |
| | 20 |
| | (14 | ) | | 5 |
|
| % CPR due to principal modification | 1 |
| | 1 |
| | 2 |
| | — |
| | (50 | ) |
| | | | | | | | | | |
| Average number | | | | | | |
|
| |
|
|
| Servicing | 463,529 |
| | 516,736 |
| | 587,527 |
| | (10 | )% | | (12 | )% |
| Subservicing | 53,043 |
| | 28,794 |
| | 43,865 |
| | 84 |
| | (34 | ) |
| NRZ (3) | 748,440 |
| | 765,048 |
| | 868,003 |
| | (2 | ) | | (12 | ) |
| | 1,265,012 |
| | 1,310,578 |
| | 1,499,395 |
| | (3 | ) | | (13 | ) |
| | | | | | | | | | |
| Residential Servicing and Subservicing Fees for the Years Ended December 31 | | | | | | | | | |
| Loan servicing and subservicing fees | | | | | | | | | |
| Servicing | $ | 224,176 |
| | $ | 254,907 |
| | $ | 288,937 |
| | (12 | )% | | (12 | )% |
| Subservicing | 8,904 |
| | 7,690 |
| | 21,340 |
| | 16 |
| | (64 | ) |
| NRZ | 539,039 |
| | 549,411 |
| | 633,545 |
| | (2 | ) | | (13 | ) |
| | 772,119 |
| | 812,008 |
| | 943,822 |
| | (5 | ) | | (14 | ) |
| Late charges | 61,125 |
| | 61,455 |
| | 66,355 |
| | (1 | ) | | (7 | ) |
| HAMP fees | 14,312 |
| | 43,274 |
| | 110,331 |
| | (67 | ) | | (61 | ) |
| Custodial accounts (float earnings) | 40,274 |
| | 24,973 |
| | 8,782 |
| | 61 |
| | 184 |
|
| Loan collection fees | 18,501 |
| | 22,733 |
| | 27,171 |
| | (19 | ) | | (16 | ) |
| Other | 23,188 |
| | 18,486 |
| | 21,334 |
| | 25 |
| | (13 | ) |
| | $ | 929,519 |
| | $ | 982,929 |
| | $ | 1,177,795 |
| | (5 | ) | | (17 | ) |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | % Change |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Interest Expense on NRZ Financing Liability (4) | | | | | | | | | |
| Servicing fees collected on behalf of NRZ | $ | 539,039 |
| | $ | 549,411 |
| | $ | 633,545 |
| | (2 | )% | | (13 | )% |
| Less: Subservicing fee retained by Ocwen | 142,334 |
| | 295,192 |
| | 337,727 |
| | (52 | ) | | (13 | ) |
| Net servicing fees remitted to NRZ | 396,705 |
| | 254,219 |
| | 295,818 |
| | 56 |
| | (14 | ) |
| Less: Reduction (increase) in financing liability | | | | | | |
|
| |
|
|
| Changes in fair value: | | | | | | | | | |
| Original Rights to MSRs Agreements | 171 |
| | (83,300 | ) | | (2,580 | ) | | (100 | ) | | n/m |
|
| 2017 Agreements and New RMSR Agreements | 14,369 |
| | 42,018 |
| | — |
| | (66 | ) | | n/m |
|
| PHH MSR Agreements | 4,729 |
| | — |
| | — |
| | | | |
| | 19,269 |
| | (41,282 | ) | | (2,580 | ) | | | | |
| | | | | | | | | | |
| Runoff, settlement and other: | | | | | | | | | |
| Original Rights to MSRs Agreements | 50,620 |
| | 57,264 |
| | 63,997 |
| | (12 | ) | | (11 | ) |
| 2017 Agreements and New RMSR Agreements | 136,700 |
| | 1,926 |
| | — |
| | n/m |
| | n/m |
|
| PHH MSR Agreements | 18,446 |
| | — |
| | — |
| | | | |
| | 205,766 |
| | 59,190 |
| | 63,997 |
| | | | |
| | | | | | | | | | |
| | $ | 171,670 |
| | $ | 236,311 |
| | $ | 234,401 |
| | (27 | ) | | 1 |
|
| | | | | | | | | | |
| Number of Completed Modifications | | | | | | | | | |
| HAMP | 1,288 |
| | 12,726 |
| | 42,024 |
| | (90 | )% | | (70 | )% |
| Non-HAMP | 38,257 |
| | 32,956 |
| | 32,896 |
| | 16 |
| | — |
|
| Total | 39,545 |
| | 45,682 |
| | 74,920 |
| | (13 | ) | | (39 | ) |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | % Change |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Financing Costs | | | | | | | | | |
| Average balance of advances and match funded advances | $ | 1,214,436 |
| | $ | 1,502,530 |
| | $ | 1,930,776 |
| | (19 | )% | | (22 | )% |
| Average borrowings | | | | | | |
|
| |
|
|
| Match funded liabilities | 736,974 |
| | 1,048,944 |
| | 1,445,232 |
| | (30 | ) | | (27 | ) |
| Financing liabilities | 744,523 |
| | 556,066 |
| | 636,361 |
| | 34 |
| | (13 | ) |
| Other secured borrowings | 5,542 |
| | 21,053 |
| | 357,227 |
| | (74 | ) | | (94 | ) |
| Interest expense on borrowings | | | | | | |
|
| |
|
|
| Match funded liabilities | 30,706 |
| | 45,379 |
| | 66,879 |
| | (32 | ) | | (32 | ) |
| Financing liabilities | 177,355 |
| | 242,514 |
| | 248,834 |
| | (27 | ) | | (3 | ) |
| Other secured borrowings | 1,373 |
| | 1,946 |
| | 35,364 |
| | (29 | ) | | (94 | ) |
| Effective average interest rate | | | | | | |
|
| |
|
|
| Match funded liabilities | 4.17 | % | | 4.33 | % | | 4.63 | % | | (4 | ) | | (6 | ) |
| Financing liabilities (4) | 23.82 |
| | 43.61 |
| | 39.10 |
| | (45 | ) | | 12 |
|
| Other secured borrowings | 24.77 |
| | 9.25 |
| | 9.90 |
| | 168 |
| | (7 | ) |
Facility costs included in interest
expense | $ | 5,242 |
| | $ | 7,450 |
| | $ | 32,206 |
| | (30 | ) | | (77 | ) |
| Discount amortization included in interest expense | — |
| | 727 |
| | 2,680 |
| | (100 | ) | | (73 | ) |
| Average 1-month LIBOR | 2.45 | % | | 1.08 | % | | 0.50 | % | | 127 |
| | 116 |
|
| | | | | | | | | | |
| Average Employment | | | | | | | | | |
| India and other | 4,097 |
| | 5,090 |
| | 6,399 |
| | (20 | )% | | (20 | )% |
| U. S. | 1,128 |
| | 1,187 |
| | 1,455 |
| | (5 | ) | | (18 | ) |
| Total | 5,225 |
| | 6,277 |
| | 7,854 |
| | (17 | ) | | (20 | ) |
| | | | | | | | | | |
| Collections on loans serviced for others | $ | 33,889,656 |
| | $ | 36,707,425 |
| | $ | 41,047,887 |
| | (8 | )% | | (11 | )% |
| |
(1) | Performing loans include those loans that are current (less than 90 days past due) and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing. |
| |
(2) | Conventional loans at December 31, 2018 include 115,299 prime loans with a UPB of $19.6 billion which we service or subservice. This compares to 138,288 prime loans with a UPB of $24.3 billion at December 31, 2017, and 166,558 prime loans with a UPB of $30.8 billion at December 31, 2016. |
| |
(3) | Loans serviced by Ocwen for which the Rights to MSRs have been sold to NRZ, including loans that have been converted to fully-owned MSRs. |
| |
(4) | The effective average interest rate on the financing liability that we recognized in connection with the sales of Rights to MSRs to NRZ is 26.00%, 51.03% and 48.41% for the years ended December 31, 2018, 2017 and 2016, respectively. Interest expense on financing liabilities for 2016 includes $10.5 million of fees incurred relating to our agreement to compensate NRZ through June 2016 for certain increased costs associated with its servicing advance financing facilities that were the direct result of a downgrade of our S&P servicer rating in 2015. |
(6)Includes $3.1 billion UPB of subserviced loans at December 31, 2020.
The following table provides information regardingselected operating statistics related to our reverse mortgage loans reported within our Servicing segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | % Change |
| 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
| Reverse Mortgage Loans at December 31 | | | | | | | | | |
| Unpaid principal balance (UPB) in millions: | | | | | | | | | |
| Loans held for investment (1) | $ | 6,299.6 | | | $ | 5,658.3 | | | $ | 4,985.0 | | | 11 | % | | 14 | % |
| Active Buyouts (2) | 28.4 | | | 10.2 | | | 2.4 | | | 178 | | | 325 | |
| Inactive Buyouts (2) | 60.9 | | | 26.4 | | | 15.7 | | | 131 | | | 68 | |
| Total | $ | 6,389.0 | | | $ | 5,694.9 | | | $ | 5,003.1 | | | 12 | | | 14 | |
| | | | | | | | | |
| Inactive buyouts % to total | 0.95 | % | | 0.46 | % | | 0.31 | % | | 107 | | | 48 | |
| | | | | | | | | |
| Future draw commitments (UBP) in millions: | 2,044.4 | | | 1,937.4 | | | 1,426.8 | | | 6 | | | 36 | |
| | | | | | | | | |
| Fair value in millions: | | | | | | | | | |
| Loans held for investment (1) | $ | 6,872.3 | | | $ | 6,120.9 | | | $ | 5,446.8 | | | 12 | | | 12 | |
| HMBS related borrowings | 6,772.7 | | | 6,063.4 | | | 5,380.4 | | | 12 | | | 13 | |
| Net asset value | $ | 99.6 | | | $ | 57.5 | | | $ | 66.4 | | | 73 | | | (13) | |
| | | | | | | | | |
| Future Value (3) | $ | — | | | $ | 47.0 | | | $ | 68.1 | | | (100) | | | (31) | |
(1)Securitized loans only; excludes unsecuritized loans as reported within the changes inOriginations segment.
(2)Buyouts are reported as Loans held for sale, Accounts Receivable or REO depending on the loan and foreclosure status.
(3)Future Value represented the unrecognized net present value of estimated future cash flows from customer draws of the reverse mortgage loans (tails) and projected performance assumptions based on historical experience and industry benchmarks discounted at 12% related to HECM loans originated prior to January 1, 2019. On January 1, 2020, we made an irrevocable election to account for tails at fair value and recognized the $47.0 million Future Value through stockholders’ equity. Excludes the fair value of future draw commitments related to HECM loans purchased or originated after December 31, 2018 that we elected to carry at fair value.
The following table provides selected operating statistics related to advances for our Servicing segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Advances by investor type | Principal and Interest | | Taxes and Insurance | | Foreclosures, bankruptcy, REO and other | | Total | | Principal and Interest | | Taxes and Insurance | | Foreclosures, bankruptcy, REO and other | | Total |
| Conventional | $ | 4 | | $ | 30 | | $ | 5 | | $ | 38 | | $ | 4 | | $ | 20 | | $ | 27 | | $ | 51 |
| Government-insured | 1 | | 55 | | 28 | | 84 | | — | | 47 | | 26 | | 73 |
| Non-Agency | 272 | | 279 | | 155 | | 705 | | 410 | | 354 | | 168 | | 932 |
| Total, net | $ | 277 | | $ | 365 | | $ | 187 | | $ | 828 | | $ | 415 | | $ | 420 | | $ | 221 | | $ | 1,056 |
The following table provides the rollforward of activity of our portfolio of residential assets serviced for the years ended December 31:31, that includes MSR and subserviced loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of UPB (in billions) | | Count (in 000’s) |
| | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Portfolio at beginning of year | $ | 212.4 | | | $ | 256.0 | | | $ | 179.4 | | | 1,419.9 | | | 1,562.2 | | | 1,221.7 | |
| Acquisition of PHH | — | | | — | | | 119.3 | | | — | | | — | | | 537.2 | |
| Other portfolio additions(1)(2) | 57.2 | | | 26.1 | | | 9.4 | | | 194.5 | | | 100.6 | | | 41.0 | |
| Total additions | 57.2 | | | 26.1 | | | 128.7 | | | 194.5 | | | 100.6 | | | 578.2 | |
| Sales | (0.2) | | | (1.2) | | | (0.6) | | | (1.6) | | | (8.3) | | | (3.3) | |
| Servicing transfers (2) (3) | (40.2) | | | (30.3) | | | (23.0) | | | (303.1) | | | (48.5) | | | (73.9) | |
| Runoff | (40.3) | | | (38.3) | | | (28.5) | | | (202.1) | | | (186.0) | | | (160.4) | |
| Portfolio at end of year | $ | 188.8 | | | $ | 212.3 | | | $ | 256.0 | | | 1,107.6 | | | 1,420.0 | | | 1,562.3 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Amount of UPB | | Count |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Portfolio at beginning of year | $ | 179,352,554 |
| | $ | 209,092,130 |
| | $ | 250,966,112 |
| | 1,221,695 |
| | 1,393,766 |
| | 1,624,762 |
|
| Acquisition of PHH | 119,343,351 |
| | — |
| | — |
| | 537,225 |
| | — |
| | — |
|
| Other portfolio additions | 9,407,627 |
| | 4,032,225 |
| | 7,050,635 |
| | 41,035 |
| | 18,974 |
| | 33,812 |
|
| | 128,750,978 |
| | 4,032,225 |
| | 7,050,635 |
| | 578,260 |
| | 18,974 |
| | 33,812 |
|
| Sales | (588,985 | ) | | (219,398 | ) | | (3,720,176 | ) | | (3,343 | ) | | (979 | ) | | (19,515 | ) |
| Servicing transfers | (23,010,564 | ) | | (2,497,672 | ) | | (9,440,877 | ) | | (73,934 | ) | | (12,617 | ) | | (47,356 | ) |
| Runoff | (28,503,493 | ) | | (31,054,731 | ) | | (35,763,564 | ) | | (160,440 | ) | | (177,449 | ) | | (197,937 | ) |
| Portfolio at end of year | $ | 256,000,490 |
| | $ | 179,352,554 |
| | $ | (41,873,982 | ) | | 1,562,238 |
| | 1,221,695 |
| | 1,393,766 |
|
The key drivers(1)Additions include purchased MSRs on portfolios consisting of our servicing segment operating results for 2018, as compared to 2017, continues to be the effects of portfolio runoff and the expiration of the HAMP modification program on December 31, 2016 offset, in part, by the effects of cost improvements achieved in aligning our servicing operations more appropriately to the size of our servicing portfolio. In connection with the HAMP program expiry, borrowers who had requested assistance or to whom an offer of assistance had been extended as of December 31, 2016 had until September 30, 2017 to finalize their modification. We continue to earn HAMP success fees for HAMP modifications that remain less than 90 days delinquent at the first-, second- and third-year anniversary of the start of the trial modification.
On October 4, 2018, we completed the PHH acquisition. We added 537,22546,794 loans with a UPB of $119.3$15.8 billion that have not yet transferred to our portfolio. We believe the acquisition will improve our servicing segment results as it enables us to accelerate our transition to Black Knight MSP®MSP servicing system as of December 31, 2020. These loans are scheduled to transfer onto Black Knight MSP by April 1, 2021. Because we have legal title to the MSRs, the UPB and achieve better economiescount of scale. In connectionthe loans are included in our reported servicing portfolio. The seller continues to subservice the loans on an interim basis between the transaction closing date and the servicing transfer date.
(2)Excludes the volume UPB associated with short-term interim subservicing for some clients as a support to their originate-to-sell business, where loans are boarded and deboarded within the acquisition,same quarter.
(3)Includes 270,218 deboarded loans with a UPB of $34.3 billion related to the NY DFS eased certain restrictionstermination of the subservicing agreement between NRZ and PMC on our abilityFebruary 20, 2020. Refer to acquire MSRs subjectNote 10 — Rights to annual portfolio growth and other limitations. We expect to pursue origination and acquisition activities that will, at a minimum, replenish our expected annual portfolio runoff.MSRs.
Year Ended December 31, 20182020 versus 20172019
Servicing and Subservicing Fees
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
| Loan servicing and subservicing fees | | | | | | | | | |
| Servicing | $ | 216.2 | | | $ | 227.5 | | | $ | 227.7 | | | (5) | % | | — | % |
| Subservicing | 28.9 | | | 15.4 | | | 8.9 | | | 88 | | | 73 | |
| NRZ | 383.7 | | | 577.0 | | | 539.0 | | | (34) | | | 7 | |
| Servicing and subservicing fees | 628.8 | | | 820.0 | | | 775.6 | | | (23) | | | 6 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Ancillary income | 102.5 | | | 154.2 | | | 159.9 | | | (34) | | | (4) | |
| Total | $ | 731.2 | | | $ | 974.2 | | | $ | 935.5 | | | (25) | | | 4 | |
The 25% decline in total servicing and subservicing fees in 2020 as compared to 2019 is driven by two main factors: the reduction in fees collected on behalf of NRZ, as further discussed below, and the reduction in ancillary and float income which was mostly due to the COVID-19 environment and lower interest rates.
Servicing fees declined $11.3 million or 5% as compared to 2019. As our average volume serviced (MSRs owned) increased by 3% year-over-year, the decline in revenue is mostly due to the shortfall of servicing fee collections on loans under forbearance, and lower collection of deferred servicing fees. We do not recognize any servicing fees on GSE loans under forbearance that were not paying during the period, and have a shortfall of one month of servicing fees for PLS loans under forbearance. We typically collect deferred servicing fees upon loan liquidation and the moratorium and restrictions on foreclosures reduced our collection in 2020 as compared to 2019. The deferral of servicing fee collections due to forbearance is not expected to significantly impact our total cumulative revenue over the life of the loan but will reduce near-term revenue and cash flow. The delay in servicing fee collection is expected to be partially offset by lower runoff in our MSR portfolio, as the deferred servicing fees generally remain projected as future cash flows in the MSR valuation model.
Subservicing fees increased by $13.4 million as compared to 2019, mostly explained by the PMC subservicing agreement with NRZ. Upon notice of termination by NRZ on February 20, 2020, the servicing fees collected on behalf of NRZ net of the remittance to NRZ has been reported as subservicing fees instead of NRZ MSR servicing fees in prior periods, with $15.9 million recognized in 2020. Ocwen performed subservicing of these loans subject to termination and earned subservicing fee revenue declined by $53.0 million, or 5%, due to portfolio runoff offset in part byuntil loan deboarding, which occurred on September 1 and October 1, 2020.
The following table below presents the increase in the portfolio resulting from the acquisitionrespective drivers of PHH. Servicingresidential and commercial loan servicing and subservicing fee revenuefees.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| | 2020 | | 2019 | | 2018 | | 2020 vs 2019 | | 2019 vs 2018 |
| Servicing and subservicing fee | | | | | | | | | |
| Servicing fee | $ | 216.2 | | $ | 227.5 | | $ | 227.7 | | (5) | % | | — | % |
| Average servicing fee (% of UPB) | 0.28 | | 0.30 | | 0.32 | | (7) | % | | (6) | % |
| | | | | | | | | |
| Subservicing fee (1) | $ | 28.9 | | $ | 15.4 | | $ | 8.9 | | 88 | | | 73 | % |
| Average monthly fee per loan (in dollars) | $ | 9 | | $ | 12 | | $ | 14 | | (25) | | | (14) | % |
| | | | | | | | | |
| Residential assets serviced | | | | | | | | | |
| Average UPB ($ in billions): | | | | | | | | | |
| Servicing portfolio | $ | 78.30 | | | $ | 76.14 | | | $ | 72.28 | | | 3 | % | | 5 | % |
| Subservicing portfolio | 19.84 | | | 31.23 | | | 15.93 | | | (36) | | | 96 | % |
| NRZ | 100.46 | | | 125.07 | | | 104.77 | | | (20) | | | 19 | % |
| Total | $ | 198.60 | | | $ | 232.44 | | | $ | 192.98 | | | (15) | % | | 20 | % |
| | | | | | | | | |
| Average number (in 000’s): | | | | | | | | | |
| Servicing portfolio | 466.1 | | 471.8 | | 463.5 | | (1) | % | | 2 | % |
| Subservicing portfolio | 268.5 | | 106.2 | | 53.0 | | 153 | | | 100 | % |
| NRZ | 561.6 | | 913.2 | | 748.4 | | (39) | | | 22 | % |
| 1,296.2 | | 1,491.2 | | 1,264.9 | | (13) | % | | 18 | % |
(1)Subservicing fees for the year ended December 31, 2020 includes $15.9 million of fees earned on the acquired PHHNRZ PMC MSR Agreements upon receiving the notice of cancellation in February 2020.
The NRZ servicing fee includes the servicing fee collected on behalf of NRZ relating to the MSRs sold but not derecognized from our balance sheet. Under GAAP, we present servicing fees collected and remitted on a gross basis, with the servicing fees remitted to NRZ reported as Pledged MSR liability expense. The NRZ collected fees declined by $193.3 million as compared to 2019.
The decline in the NRZ fee collection is driven by the decline in the average UPB of 20% as compared to 2019. The volume decline is mostly explained by the NRZ portfolio runoff and the derecognition of the MSRs in connection with the termination of the PMC agreement by NRZ on February 20, 2020. As the NRZ relationship is effectively a subservicing agreement, the COVID-19 environment, loans under forbearance and the fee collection do not impact our financial results to the same extent as for serviced loans with our owned MSRs.
The following table presents both servicing fees collected and subservicing fees retained by Ocwen under the NRZ agreements, together with the previously recognized amortization gain of the lump-sum payments received in connection with the 2017 Agreements and New RMSR Agreements. See Note 10 — Rights to MSRs for further information.
| | | | | | | | | | | | | | | | | |
| NRZ Servicing and Subservicing Fees | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Servicing fees collected on behalf of NRZ | $ | 383.7 | | | $ | 577.0 | | | $ | 539.0 | |
| Servicing fees remitted to NRZ (1) | (278.8) | | | (437.7) | | | (396.7) | |
| Retained subservicing fees on NRZ agreements (2) | $ | 104.8 | | | $ | 139.3 | | | $ | 142.3 | |
| Amortization gain of the lump-sum cash payments received (including fair value change) (1) (3) | 34.2 | | | 95.1 | | | 148.9 | |
| Total retained subservicing fees and amortization gain of lump-sum payments (including fair value change) | $ | 139.0 | | | $ | 234.4 | | | $ | 291.2 | |
| | | | | |
| Average NRZ UPB (in billions) (4) | $ | 100.5 | | | $ | 125.1 | | | $ | 104.8 | |
| Average retained subservicing fees as a % of NRZ UPB (excluding amortization gain of lump-sum cash payments) | 0.10 | % | | 0.11 | % | | 0.14 | % |
(1)Reported within Pledged MSR liability expense.
(2)Excludes the servicing fees of loans under the PMC Servicing Agreement after February 20, 2020 due to the notice of termination by NRZ, and subservicing fees earned under subservicing agreements.
(3)In 2017 and early 2018, we renegotiated the Ocwen agreements with NRZ to more closely align with a typical subservicing arrangement whereby we receive a base servicing fee and certain ancillary fees, primarily late fees, loan modification fees and Speedpay fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. We received upfront cash payments in 2018 and 2017 of $279.6 million and $54.6 million, respectively, from NRZ in connection with the resulting 2017 and New RMSR Agreements. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue Ocwen received under the renegotiated agreements. These upfront payments received from NRZ were deferred and recorded within Other income (expense), Pledged MSR liability expense, as they amortized through the term of the original agreements (April 2020). See Note 10 — Rights to MSRs for further information.
(4)Excludes the UPB of loans subserviced under the PMC Servicing Agreement after February 20, 2020 due to the notice of termination by NRZ, and excludes the UPB of loans under subservicing agreements.
The following table presents the detail of our ancillary income:
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| Years Ended December 31, | | % Change |
| Ancillary Income | 2020 | | 2019 | | 2018 | | 2020 vs 2019 | | 2019 vs 2018 |
| Late charges | $ | 47.7 | | | $ | 57.2 | | | $ | 61.5 | | | (17) | % | | (7) | % |
| Custodial accounts (float earnings) | 9.9 | | | 47.5 | | | 40.4 | | | (79) | | | 18 | |
| Loan collection fees | 13.0 | | | 15.5 | | | 18.4 | | | (16) | | | (16) | |
| HAMP fees | 0.6 | | | 5.5 | | | 14.3 | | | (90) | | | (62) | |
| Other | 31.3 | | | 28.5 | | | 25.4 | | | 10 | | | 12 | |
| Ancillary income | $ | 102.5 | | | $ | 154.2 | | | $ | 159.9 | | | (34) | % | | (4) | % |
| | | | | | | | | |
| Number of completed modifications | 28,322 | | | 25,754 | | | 39,545 | | | 10 | % | | (35) | % |
| Revenue recognized in connection with loan modifications | $ | 30.2 | | | 38.5 | | | 59.4 | | | (22) | | | (35) | |
Ancillary income declined by $51.7 million, as compared to 2019 primarily due to a $37.6 million, or 79% decline in float income that was $66.8 million duringmainly due to lower interest rates. The average 1-month LIBOR rate dropped over 120 basis points as compared to 2019. The combined effect of lower servicing volume, the post-acquisition period.COVID-19 environment restricting late fees or collection fees on loans under forbearance, and lower modification fees also contributed to the decline in ancillary income. Revenue recognized in connection with loan modifications, declined 39% to $59.4including HAMP fees and other fees, decreased $8.3 million for 2018 as compared to $97.2 million in 2017 due primarily to the expiration of the HAMP programprogram.
Reverse Mortgage Revenue, Net
Reverse mortgage revenue, net is comprised of the net change in fair value of securitized loans held for investment and HMBS-related borrowings. The decline of $55.9 million, or 88%, as compared to 2019 is primarily attributable to the fair value election for future draw commitments and the unfavorable assumption updates due to the COVID-19 environment and increased prepayments.
We recorded a $31.2 million gain on tail draws upon their funding and securitization in 2019 and nil in 2020 due to our fair value election. On January 1, 2020, we elected fair value accounting for future draw commitments on HECM reverse mortgage loans purchased or originated before December 31, 2016.2018. The fair value election resulted in the one-time recognition of $47.0 million gain through stockholders’ equity on January 1, 2020. Under this accounting treatment, the fair value of tail draws is recorded together with the loan at the time of lock within the Originations segment, while any subsequent change in fair value is recorded within the Servicing segment. As such, during 2020 we did not recognize any gain on tail draws in the Servicing segment.
Other revenue declined $31.9We recorded an additional $21.1 million or 81%,fair value loss in 2020 as compared to 2019 due to a $31.1 million declineunfavorable assumption updates and higher actual prepayments. The unfavorable assumption updates in REO referral commissions resulting from2020 were primarily related to elevated levels of projected prepayments in the transfermarket, lower tail gains and other COVID-specific updates, including higher mortality and inactive status or delinquency. We did not record any significant change in fair value of securitized loans held for investment net of HMBS-related borrowings relating to interest rates and spreads between 2019 and 2020.
MSR Valuation Adjustments, Net
The following table summarizes the rights to such commissions to NRZ effective with the New RMSR Agreements.
MSR valuation adjustments, net increased $100.3reported in our Servicing segment, with the breakdown of the total MSRs recorded on our balance sheet between our owned MSR and the pledged MSRs transferred to NRZ that did not achieve sale accounting treatment:
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| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Total (1) | Owned MSR (1) | Pledged MSR (2) (NRZ) | | Total (1) | Owned MSR (1) | Pledged MSR (2) (NRZ) | | Total (1) | Owned MSR (1) | Pledged MSR (2) (NRZ) |
| Runoff | $ | (173.3) | | $ | (109.5) | | $ | (63.8) | | | $ | (215.4) | | $ | (102.0) | | $ | (113.4) | | | $ | (159.3) | | $ | (82.0) | | $ | (77.3) | |
| Rate and assumption change (1) | (147.9) | | (129.1) | | (18.8) | | | 94.0 | | (53.1) | | 147.1 | | | 5.9 | | 10.8 | | (4.9) | |
| Hedging gain | 44.9 | | 44.9 | | — | | | 0.5 | | 0.5 | | — | | | — | | — | | — | |
| Total | $ | (276.3) | | $ | (193.7) | | $ | (82.6) | | | $ | (120.9) | | $ | (154.6) | | $ | 33.8 | | | $ | (153.5) | | $ | (71.2) | | $ | (82.2) | |
(1)Excludes gains of $41.7 million for the year ended December 31, 2020 (nil in 2019) on the revaluation of MSRs purchased in disorderly markets, that is reported in the Originations segment.
(2)For those MSR sale transactions with NRZ that do not achieve sale accounting treatment, we present gross the pledged MSR as an asset and the corresponding liability amount pledged MSR liability on our balance sheet. Because we record both our pledged MSRs with NRZ and the associated MSR liability at fair value, the changes in fair value of the pledged MSR liability are offset by the changes in fair value of the associated pledged MSR asset, presented in MSR valuation adjustments, net. Although fair value changes are separately presented in our statement of operations, we are not exposed to any fair value changes of the MSR pledged to NRZ. See Note 10 — Rights to MSRs for further information.
We reported a $276.3 million loss in MSR valuation adjustments, net in 2020, with a $193.7 million loss on our owned MSRs and an $82.6 million loss on the MSRs transferred and pledged to NRZ.
The $193.7 million loss on our owned MSRs in 2020 is comprised of $109.5 million portfolio runoff and a $129.1 million loss due to changes in interest rates and assumptions, partially offset by a $44.9 million hedging gain. The elevated portfolio runoff is driven by high prepayments of our GSE portfolio due to historically low interest rates, with a 98 basis point decline in the 10-year swap rate during 2020, and an 81 basis-point decline in 2019. We implemented a MSR macro-hedge strategy in the fourth quarter of 2019 to partially protect us against interest rate volatility. Refer to the Market Risk sections for further detail on our hedging strategy and its effectiveness.
Ocwen replenished and grew its GSE portfolio in 2020 with total originations and purchases of $36.2 billion UPB of MSR or 66% of the GSE owned portfolio at December 31, 2020, resulting in a weighted average coupon of 3.40% as compared to 4.26% as of December 31, 2019. MSR runoff due to prepayment is generally lower with lower mortgage loan portfolio coupons. Comparatively, most of the non-Agency MSR portfolio relates to loans originated pre-2008 financial crisis and are
less sensitive to interest rates. The following table provides information regarding the changes in the fair value and the UPB of our portfolio of owned MSRs during 2020, with the breakdown by investor type.
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| Fair Value | | UPB ($ in billions) |
| GSEs | | Ginnie Mae | | Non-
Agency | | Total | | GSEs | | Ginnie Mae | | Non-
Agency | | Total |
| Beginning balance | $ | 307.2 | | | $ | 99.0 | | | $ | 165.1 | | | $ | 571.3 | | | $ | 30.0 | | | $ | 14.4 | | | $ | 26.6 | | | $ | 71.0 |
| Additions | | | | | | | | | | | | | | | |
| New cap. | 62.0 | | | 6.7 | | | — | | | 68.7 | | | 6.3 | | | 0.6 | | | — | | | 6.9 |
| Purchases (1) | 267.0 | | | 18.8 | | | 3.1 | | | 288.9 | | | 30.0 | | | 1.6 | | | 0.4 | | | 32.0 |
| Sales/servicing transfers | (1.3) | | | (0.2) | | | (0.1) | | | (1.6) | | | (0.2) | | | — | | | — | | | (0.2) |
| Sales/calls | — | | | — | | | — | | | — | | | (0.1) | | | — | | | — | | | (0.1) |
| Change in fair value: | | | | | | | | | | | | | | | |
| Runoff | (70.7) | | | (11.6) | | | (29.0) | | | (111.3) | | | (10.9) | | | (3.5) | | | (4.9) | | | (19.3) |
| Assumptions (2) | (56.3) | | | (37.3) | | | 5.4 | | | (88.2) | | | — | | | — | | | — | | | — |
| Ending balance | $ | 507.9 | | | $ | 75.4 | | | $ | 144.5 | | | $ | 727.8 | | | $ | 55.1 | | $ | 13.1 | | $ | 22.1 | | $ | 90.3 |
Fair value
(% of UPB) | 0.92 | % | | 0.58 | % | | 0.65 | % | | 0.81 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
(1)Includes $15.0 billion UPB of GSE MSRs purchased in bulk transactions in December 2020.
(2)Includes gains of $41.7 million on the revaluation of MSRs purchased in COVID-19 market conditions, that is reported in the Originations segment.
The $82.6 million loss on the MSRs transferred to NRZ does not affect our net income as it is offset by a corresponding $82.6 million gain on the pledged MSR liability, reported as Pledged MSR liability expense. The factors underlying the fair value loss of the NRZ Pledged MSR and its variance between 2019 and 2020 are similar to our owned MSR, discussed above, with the exception of the fair value gain due to assumptions on non-Agency MSR (NRZ pledged) reported in 2019, and the lower UPB due to the termination of the PMC servicing agreement by NRZ in February 2020.
Compensation and Benefits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| 2020 | | 2019 | | 2018 | | 2020 vs 2019 | | 2019 vs 2018 |
| Compensation and benefits | $ | 113.6 | | | $ | 144.0 | | | $ | 154.5 | | | (21) | % | | (7) | % |
| | | | | | | | | |
| Average Employment - Servicing | | | | | | | | | |
| India and other | 2,880 | | | 3,360 | | | 4,097 | | | (14) | % | | (18) | |
| U.S. | 730 | | | 1,158 | | | 1,128 | | | (37) | | | 3 | |
| Total | 3,610 | | | 4,518 | | | 5,225 | | | (20) | | | (14) | |
Compensation and benefits expense declined $30.4 million, or 186%21% as compared to 2019 due to our efforts to re-engineer our cost structure and align headcount in our servicing operations with the size of our servicing portfolio. Salaries and benefit expenses declined $28.6 million and $6.1 million, respectively, due to a 20% lower average servicing headcount, as compared to 2019, and the change in the composition of our headcount with relatively more offshore, and less U.S. resources. Offshore headcount, whose average compensation cost is relatively lower, increased from 74% to 80% of total headcount, compared to 2019. A $3.6 million decline in commissions also contributed to the decline in expense. Partially offsetting these declines are $1.5 million of costs related to our 2020 re-engineering initiatives, $3.0 million incremental incentive compensation and $4.2 million of compensation expenses related to COVID-19.
Servicing Expense
Servicing expense primarily includes claim losses and interest curtailments on government-insured loans and provision expense for advances and servicing representation and warranties. Servicing expense declined $32.8 million, or 32%, as compared to 2017, primarily because 2017 included an $86.7 million favorable impact of a benchmarking update related to our non-Agency MSRs carried at fair value. In addition, MSR valuation adjustments increased $25.7 million in 2018 due to the impact of higher runoff resulting from the acquisition of MSRs from PHH. Fair value adjustments are largely offset by corresponding fair value adjustments related to the NRZ financing liabilities, which are recorded in interest expense.
Expenses, excluding MSR valuation adjustments, net, were $44.2 million, or 7%, lower as compared to 2017. Servicing segment expenses for 2018, excluding MSR valuation adjustments, net, includes $43.5 million of expenses attributable to PHH.
Despite the additional PHH expenses, Compensation and benefits and Occupancy and equipment expenses declined and Technology and communications expenses decreased only slightly, reflecting the effects of our pre-acquisition cost improvement initiatives. Compensation and benefits expense for 2018, including $11.1 million attributable to PHH, declined $14.9 million, or 9% as compared to 2017. Average servicing headcount declined 17% including the increase in headcount attributable to the acquisition of PHH, which consists of 623 U.S. employees at December 31, 2018.
Servicing and origination expense declined $5.0 million, or 4%, as compared to 20172019 primarily due to a $33.6$13.0 million decrease in government-insured claim loss provisions due to additional reserves recorded in the prior year on reinstated or modified loans along withand a general decline in other servicer-related expenses that was primarily driven by a 13% reduction in the average number of loans in our servicing portfolio. The reduction in government-insured claim loss provisions is due to the combined effect of a decline in claims, mostly due to the volumeCOVID-19 moratorium, and lower loss severity, mostly driven by a reduction in the foreclosure and liquidation timeline of claims. Offsetting thisloans. The government-insured claim loss provisions recorded in 2019
included claims of a legacy portfolio with higher severity loans. Government-insured claim loss provisions are generally offset by changes in the fair value of the corresponding MSRs, which are recorded in MSR valuation adjustments, net. The decrease is also attributable to $9.1 million improved advance recoveries, which decreased loss severity rates used in the computation of advance reserves, and the recovery of $3.1 million previously recognized as Servicing and origination expense in 2017 includedconnection with a recoverysettlement from a mortgage insurer as well as a $6.8 million release of $28.5 million of lossesindemnification reserves related to a settlement of outstanding claims that arose from indemnification obligations in connection with our acquisition of MSRssuch settlement.
Other Operating Expenses
Occupancy and related servicing advances in 2013, as described below. PHH incurred Servicing and origination expenses of $7.9 million during the post-acquisition period.
The $12.9equipment expense decreased $13.3 million, or 19%30% in 2020, as compared to 2019. The decrease is largely due to the effect of the decline in the size of the servicing portfolio on various direct and allocated expenses, including postage and mailing services, which declined by $4.6 million, and the decline in our overall occupancy and equipment expenses due to certain facility closures as part of the integration of PHH.
Professional services expense is primarilydeclined $14.0 million, or 33%, as compared to 2019 due to a $13.6$14.5 million decline in legal fees largely due to declines in legal expenses relating to the PHH integration and litigation and a $4.9 million reductiondecline in fees incurred in connection with the conversion of NRZ’s Rights to MSRs to fully-owned MSRs. In connection with the conversionProfessional services expenses in 2020 included $1.6 million of NRZ’s Rights to MSRs, we are responsible for the first $5.0 million and 50% of all subsequent fees incurred.COVID-19 related expenses
PHH contributed Technology and communications and Occupancy and equipment expenses of $3.8communication expense declined $7.4 million, and $4.0 million, respectively.or 23%, as compared to 2019. The costs savings were driven by our servicing platform integration as we no longer license the REALServicing servicing system from Altisource following our transition to Black Knight MSP beginning in June 2019.
Corporate overhead allocations declined $9.3$136.9 million, despite $17.2 millionas compared to 2019, primarily due to lower compensation and benefits, technology expenses, legal fees, and occupancy and equipment costs. The relative weight of PHHaverage headcount to the consolidated organization declined as compared to 2019. Furthermore, the allocation methodology of corporate overhead expense allocations,was updated in the first quarter 2020 and resulted in lower expenses being allocated to the Servicing segment. Refer to the Corporate Items and Other segment discussion.
Other expenses increased $18.8 million as compared to 2019 primarily due to headcount reductionsa lower provision for indemnification obligations in 2019 that was largely a result of the reversal of a portion of the liability for representation and other cost improvement actions we have takenwarranty obligations related to reduce corporate expenses.favorable updates to default, defect and severity assumptions relative to historical performance. In addition, Other expenses for 2019 also includes a $7.2 million expense recovery in connection with a settlement with a mortgage insurer.
Other Income (Expense)
Other income (expense) includes primarily net interest expense and the pledged MSR liability expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| 2020 | | 2019 | | 2018 | | 2020 vs 2019 | | 2019 vs 2018 |
| Interest Expense | | | | | | | | | |
| Advance match funded liabilities | $ | 24.1 | | | $ | 26.9 | | | $ | 30.7 | | | (10) | % | | (12) | % |
| | | | | | | | | |
| Other secured borrowings | 21.3 | | | 11.6 | | | 6.3 | | | 84 | | | 84 | % |
| Corporate debt interest expense allocation | 38.2 | | | 54.9 | | | 49.0 | | | (30) | | | 12 | % |
| Escrow and other | 7.0 | | | 9.1 | | | 4.8 | | | (23) | | | 90 | % |
| Total interest expense | $ | 90.7 | | | $ | 102.5 | | | $ | 90.8 | | | (12) | % | | 13 | % |
| | | | | | | | | |
| Average balances | | | | | | | | | |
| Average balance of advances | $ | 891.3 | | | $ | 1,006.3 | | | $ | 1,214.4 | | | (11) | % | | (17) | % |
| Advance match funded liabilities | 603.7 | | | 671.8 | | | 737.0 | | | (10) | | | (9) | % |
| | | | | | | | | |
| Other secured borrowings | 376.2 | | | 191.5 | | | 74.6 | | | 96 | | | 157 | % |
| Effective average interest rate | | | | | | | | | n/m |
| Advance match funded liabilities | 4.00 | % | | 4.00 | % | | 4.17 | % | | — | % | | (4) | % |
| | | | | | | | | |
| Other secured borrowings | 5.66 | | | 6.08 | | | 8.48 | | | (7) | | | (28) | % |
| | | | | | | | | |
| | | | | | | | | |
| Average one-month LIBOR | 0.52 | % | | 1.75 | % | | 2.45 | % | | (70) | % | | (29) | % |
Interest expense declined by $79.4$11.9 million, or 27%12%, compared to 2017 due to a $65.2 million decrease in interest expense on the fair value elected NRZ financing liabilities and a $14.7 million decrease in interest on match funded liabilities, consistent with the decline in servicing advances.
2019. The decline in interest expense related to the NRZ financing liabilities was due to runoff of the NRZ servicing portfolio and a $60.6 million increase in net favorable fair value adjustments as compared to 2017. Interest expense for 2017 includes the effect of unfavorable valuation and assumption updates related to our non-Agency MSRs carried at fair value, which increased the value of the NRZ financing liability by $83.3 million and which was recognized as interest expense, offset in part by a $37.6 million favorable fair value adjustment on the NRZ financing liability recognized in connection with the transfer of MSRs to NRZ. Interest expense for 2018 includes a $16.6 million favorable fair value adjustment related to the $279.6 million lump-sum upfront payment we received in January 2018 in accordance with the terms of the New RMSR Agreements. Interest expense on NRZ financing liabilities for 2018 includes $16.9 million attributable to PHH.
Year Ended December 31, 2017 versus 2016
Servicing and subservicing fee revenue declined $196.8 million, or 17%, as the average UPB and the average number of assets in our residential servicing and subservicing portfolio declined by 14% and 13%, respectively, due to portfolio runoff.
Total completed modifications decreased 39% as compared to 2016. The portion of modifications completed under HAMP, including streamlined HAMP, as a percentage of total modifications decreased to 28% in 2017 as compared to 56% for the prior year because of the expiration of the HAMP program on December 31, 2016. Revenue recognized in connection with loan modifications declined to $97.2 million for 2017 as compared to $197.5 million for 2016.
Expenses, excluding MSR valuation adjustments, net, were $123.2 million, or 16%, lower in 2017 as compared to 2016.
MSR valuation adjustments, net decreased $71.0 million due to a $75.7 million decrease in fair value losses on our non-Agency MSRs and a $14.2 million decrease in impairment charges related to our government-insured MSRs as well as the effects of portfolio runoff, offset by an $18.8 million increase in amortization of our Agency MSRs. The decrease in fair value losses is primarily due to the $86.7 million impactdecline in 2017the amount of debt used to fund servicing advances and other servicing assets, as reflected in the decline in the interest expense allocation from the Corporate segment. This decline was offset in part by an increase in interest expense on new MSR financing facilities entered into during the third and fourth quarters of 2019.
Pledged MSR liability expense relates to the MSR sale agreements with NRZ that do not achieve sale accounting and are presented on a benchmarking assumption update relatedgross basis in our financial statements. See Note 10 — Rights to our non-Agency MSRs carried atto the Consolidated Financial Statements. Pledged MSR liability expense includes the servicing fee remittance to NRZ and the fair value which was based on a recommendation from our third-party valuation expert and reflected an upward trend in market pricing on non-Agency MSRs similar in profile to Ocwen’s portfolio. For 2017, we reversed impairment charges of $3.4 million, primarily reflecting the recoverability of certain advances on various privately-held government-insured loans. This compares to the recognition of $10.8 million of impairment charges for 2016. The increase in amortization expense resulted from a $27.5 million benefit recognized in 2016 related to the sale of non-performing loans conveyed to HUD as partchanges of the ADPLS program, which was partially offsetpledged MSR liability.
The following table provides information regarding the Pledged MSR liability expense:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Net servicing fee remitted to NRZ (1) | $ | 278.8 | | | $ | 437.7 | | | $ | 396.7 | |
| Pledged MSR liability fair value (gain) loss (2) | (82.6) | | | 33.8 | | | (82.2) | |
| 2017/18 lump sum amortization gain | (34.2) | | | (95.1) | | | (148.9) | |
| Other | (9.6) | | | (4.2) | | | 6.7 | |
| Pledged MSR liability expense | $ | 152.4 | | | $ | 372.2 | | | $ | 172.3 | |
(1)Offset by lower runoff from a smaller portfolio and slower prepayment speeds on Agency loans.
corresponding amount recorded in Servicing and origination expense decreasedsubservicing fee. See table below.
(2)Offset by $43.7 million, or 27%, in 2017. This decrease was primarily due to a decline in government-insured claim loss provisions and the recovery of $28.5 million of losses related to a settlement of outstanding claims that arose from indemnification obligations in connection with our acquisition of MSRs and related servicing advances in 2013. Government-insured claim losses in 2016 included the accelerated recognition of $34.8 million of expenses related to our participation in HUD’s ADPLS and HUD Note Sale programs, which were largely offset by a benefit in amortization expensecorresponding amount recorded in MSR valuation adjustments, net. Government-insured claim loss provision in 2017 included $17.0See table below.
Pledged MSR liability expense decreased $219.7 million in connection with re-performing government-insured loans for which certain advances were no longer recoverable.
Professional services expense declined $37.5 million, or 36%,as compared to 2019, largely due to a $35.8$116.3 million favorable fair value change and a $158.8 million decline in legal expenses thatservicing fee remittance. Pledged MSR liability expense for 2019 included an unfavorable fair value adjustment resulting from, among other factors, an update to our MSR fair value assumptions associated with improved collateral performance and market trade activity. The decline in net servicing fee remittance to NRZ was principallydriven by the resultrunoff of expenses incurred in 2016 defending ourselves in proceedings alleging violationsthe portfolio and the termination of federal, state and local laws and regulations governing our servicing activities, including claims filed under the False Claims Act, which were settledPMC agreement by NRZ in February 2017. Professional services2020, which also reduced the servicing fees collected on behalf of NRZ. Refer to the above discussions of MSR valuation adjustments, net (Pledged MSR to NRZ) and Servicing and subservicing fee (NRZ).
Partially offsetting the decrease in Pledged MSR liability expense forwas $60.9 million lower amortization gain related to the lump-sum cash payments received from NRZ in 2017 includes fees incurred in connection with converting NRZ’s Rights to MSRs to fully-owned MSRs.
The 18% reduction in average U.S. based headcount and the migration of certain operations offshore, where we believe we realize cost efficiencies while maintaining operational effectiveness, enabled reductions in Compensation and benefits expense of $25.5 million, or 14%.
Occupancy and equipment expense declined $13.0 million, or 21%, largely because of the effect of the decline in the average number of loans in our servicing portfolio and various cost improvement initiatives with respect to certain expenses, principally the cost of postage and other delivery services. Technology and communication expense declined by $6.0 million, or 11%, because of our efforts to bring technology services in-house and the effects of a declining servicing portfolio on technology fees.
Interest expense declined by $63.8 million, or 18%, primarily2018. This decrease is due to the December 2016 transferlump-sum payments being fully amortized at the end of the SSTL from Servicingsecond quarter of 2020. Refer to Corporate Items and Other when we entered into an amended and restated SSTL facility agreement and lower match funded liabilities and related commitmentthe above discussion of NRZ servicing fees. Interest expense recognized on
The table below reflects the SSTL in the Servicing segment in 2016 was $33.1 million, including amortizationcondensed consolidated statement of debt issuance costs and discount. Interest on match funded liabilities decreased by $21.5 million, consistentoperations together with the decline inamounts related to the NRZ pledged MSRs that offset each other (nil impact on net income/loss). The table provides information related to the impact of the accounting for the NRZ relationship that did not achieve sale accounting treatment, and is not intended to reflect the profitability of the NRZ relationship. Net servicing advancesfee remittance and pledged MSR fair value changes are presented on a servicing portfolio that is smallergross basis and better performing.
Interest expense related to financing liabilities declinedare offset by $6.3 million primarilycorresponding amounts presented in other statement of operations line items. In addition, because 2016 included $10.5 million of additional payments to NRZ as a result of a 2015 downgrade towe record both our S&P servicer rating. Interest expense onpledged MSRs and the NRZ financing liabilities increased by $1.9 million primarily due to changes in the fair value of NRZ financing liabilities due to valuation and assumption updates related to our non-Agency MSRs carriedassociated pledged MSR liability at fair value, which increased the value of the NRZ financing liability by $83.3 million and which was recognized as interest expense. This more than offset the reduction in interest expense on the NRZ financing liabilities driven by declines in the value of the NRZ financing liability because of the decline in the average UPB of the NRZ servicing portfolio due to runoff, and the $42.0 million reductionchanges in fair value of the NRZ financingpledged MSR liability recognized in connection with the transferred MSRs (including $37.6 million recognized at the time of the initial transfer). This reduction was primarily drivenwere offset by the characteristics of Rights to MSRs with a UPB of $15.9 billion that were converted to fully-owned MSRs during the year, relative to the $54.6 million lump sum payment received from NRZ. For the Rights to MSRs that were converted on September 1, 2017, the characteristics of the underlying MSRs did not correspond to the weighted average loan characteristics used to determine the lump sum payment, resultingchanges in a decline in the fair value of the financing liability.MSRs pledged, presented in MSR valuation adjustments, net. Accordingly, only the lump sum amortization gain and the amount reported in “Other” in the table above affect our net earnings.
Other, net for 2017 declined primarily because 2016 includes $14.8 million received in connection with the execution of clean-up call rights related to five small-balance commercial mortgage securitization trusts. During 2017 and 2016, we recognized net gains of $10.5 million and $8.5 million on sales of MSRs relating to loans with a UPB of $219.4 million and $3.7 billion, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Statement of Operations | | NRZ Pledged MSR-related Amounts | | Statement of Operations | | NRZ Pledged MSR-related Amounts | | Statement of Operations | | NRZ Pledged MSR-related Amounts |
| Total revenue | $ | 960.9 | | | $ | 278.8 | | | $ | 1,123.4 | | | $ | 437.7 | | | $ | 1,063.0 | | | $ | 396.7 | |
| MSR valuation adjustments, net | (251.9) | | | (82.6) | | | (120.9) | | | 33.8 | | | (153.5) | | | (82.2) | |
| Total operating expenses | 575.7 | | | — | | | 673.9 | | | — | | | 779.0 | | | — | |
| Total other expense, net | (239.0) | | | (196.3) | | | (455.1) | | | (471.4) | | | (202.0) | | | (314.5) | |
| Loss before income taxes | $ | (105.7) | | | $ | — | | | $ | (126.5) | | | $ | — | | | $ | (71.5) | | | $ | — | |
Originations
We originate and purchase loans and MSRs through multiple channels, including recapture, retail, wholesale, correspondent, flow MSR purchase agreements, the GSE Cash Window programs and bulk MSR purchases.
We originate or purchase conventional loans (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency) and government-insured (FHA or VA) forward mortgage loans. We generally sell and securitize loans through our forward lending operations. Givenon a servicing-retained basis. The GSEs and Ginnie Mae guarantee these mortgage securitizations. We originate HECM loans, or reverse mortgages, that are mostly insured by the 2017 strategic shift in our forward lending activities, our efforts in 2018 were principally focusedFHA and we are an approved issuer of HECM mortgage-backed securities (HMBS) that are guaranteed by Ginnie Mae.
Our recapture channel focuses on targeting existing Ocwen customers by offering them competitive mortgage refinance opportunities (i.e., portfolio recapture), where permitted by the governing servicing and pooling agreement. In doing so, we generate revenues for our forward lending business and protect the servicing portfolio by retaining these customers. Under the terms of our agreements with NRZ, to the extent we refinance a loan underlying the MSRs subject to these agreements, we are obligated to transfer such recaptured MSR to NRZ under the terms of a separate subservicing agreement.
A portion of our servicing portfolio is susceptible to refinance activity during periods of declining interest rates. Our recapture lending activity partially mitigates this risk. Origination volume and related gains have historically offset,are a natural economic hedge, to a certain degree, to the economic impact of declining MSR values as interest rates decline. UnderEffective June 1, 2019, we no longer perform any portfolio recapture on behalf of NRZ. Previously under the terms of our agreements with NRZ, agreements, NRZ has the right to directly solicit the MSRs we service on their behalf for mortgage refinances. To the extent we solicitrefinanced a loan underlying the NRZ portfolio,MSRs subject to these agreements, we incur the full costs of the origination process; however, as noted above, thewere obligated to transfer such recaptured MSR is transferred to NRZ so we do not gain an MSR through such originations. Nor are we compensated forunder the transferterms of a separate subservicing agreement.
We re-entered the MSR to NRZ. As a result, the economics are weaker for these types of originations. Should NRZ choose to perform these portfolio recapture activitiesforward lending correspondent channel in the future,second quarter of 2019 to drive higher servicing portfolio replenishment. We purchase closed loans from our funded forward lending volume would likely be negatively impacted butnetwork of correspondent sellers and sell and securitize them. As of December 31, 2020, we do not believe the reduction in origination volume will have any material adverse impact on our results of operations.client relationships with 131 approved correspondent sellers, or 85 new sellers since December 31, 2019.
We originate and purchase reverse mortgagesmortgage loans through our reverseretail, wholesale and correspondent lending operationschannels, under the guidelines of the HECM reverse mortgage insurance program of HUD. Loans originated under this program are generally guaranteedinsured by the FHA, which provides investors with protection against risk of borrower default. In the second half of 2019, we started originating proprietary reverse mortgage loans that are not FHA-insured and are sold servicing-released to third parties. The financial statement impact of these non-HECM loans was negligible in 2019 and 2020. We retain the servicing rights to reverse HECM loans securitized through the Ginnie Mae HMBS program. We have originatedprogram; however, the securitization program fails sale accounting such that the underlying HECM loans under which the borrowers have additional borrowing capacity of $1.4 billion at December 31, 2018. These draws are funded by the servicernot de-recognized upon securitization. The activities and can be subsequently securitized or sold (Future Value). We do not incur any substantive underwriting, marketing or compensation costs in connection with any future draws, although we must maintain sufficient capital resources and available borrowing
capacityfinancial performance related to ensure that we are able to fund these future draws. We recognize this Future Value over time as future draws are securitized or sold. At December 31, 2018, unrecognized Future Value is estimated to be $68.1 million.
In 2018, our Lending business originated or purchased forward and reverse mortgage loans with a UPB of $870.3 million and $593.7 million, respectively. PHH originated $109.9 million of UPB in residential mortgage loansthat are securitized (internally referred to as Reverse Servicing business) are reflected in the forward lending retail channel duringServicing segment, consistent with how the post-acquisition period through December 31, 2018. Historically, loansactivities are managed and internally reported beginning in 2020. Segment results for 2019 and 2018 have been acquired through three primary channels: correspondent lender relationships, broker relationships (wholesale) and directly with mortgage customers (retail). Per-loan margins vary by channel, with correspondent typically beingrecast to conform to the lowest margin and retail the highest.current segment presentation. See Note 23 — Business Segment Reporting for further information.
After origination, we package and sell the loans in the secondary mortgage market, through GSE and Ginnie Mae securitizations on a servicing retained basis and through whole loan transactions on a servicing released basis. Lending revenues mostly include interest income earned for the period the loans are held by us, gain on sale revenue, which represents the difference between the origination value and the sale value of the loan including its MSR value, and fee income earned at origination. As the securitizations of reverse mortgage loans do not achieve sale accounting treatment and the reverse mortgage loans are classified as loans held for investment, at fair value, reverse mortgage revenues include the fair value changes of the loan from lock date to securitization date. No gain or loss is recognized upon securitization. Securitized loans are reflected within the Servicing segment.
We provide customary origination representations and warranties to investors in connection with our loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved originators relating to loans we purchase through our correspondent lending channel.lenders. We recognize the fair value of the liability for our representations and warranties at the time of sale. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the mortgage loan investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur. We actively monitor our counterparty risk associated with our network of correspondent lenders-sellers.
As an HMBS issuer,We purchase MSRs through flow purchase agreements, the GSE Cash Window programs and bulk MSR purchases. The GSE Cash Window programs we assume certain obligations relatedparticipate in, and purchase MSR from, allow mortgage companies and financial institutions to each security issued. The most significant obligation is the requirement to purchasesell whole loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount (MCA repurchases). Active repurchased loans are assigned to HUD and payment is received from HUD, typically within 60 days of repurchase. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount. We bear the risk of exposure if the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Inactive repurchased loans (the borrower is deceased, no longer occupies the property or is delinquent on taxrespective agency and insurance payments) are generally liquidated through foreclosure and subsequent sale of real estate owned. State specific foreclosure and REO liquidation timelines have a significant impact on the timing and amount of our recovery. If we are unable to sell the property underlying an inactive reverse loan for an acceptable priceMSR to the winning bidder servicing released. In addition, we partner with other originators to replenish our MSR through flow purchase agreements. We do not provide any origination representations and warranties in connection with our MSR purchases through MSR flow purchase agreements or GSE Cash Window programs. As of December 31, 2020, we have client relationships with 322 sellers, including 191 MSR co-issue and flow sellers and 131 correspondent sellers.
We initially recognize our MSR origination with the associated economics in our Originations business, and subsequently transfer the MSR to our Servicing segment at fair value. Our Servicing segment reflects all subsequent performance associated with the MSR, including funding cost, run-off and other fair value changes.
We source additional servicing volume through our subservicing and interim servicing agreements and we intend to grow our subservicing business through our enterprise sales. We do not report any revenue or gain associated with subservicing, as it is reported within the timeframe established by HUD, weServicing segment. However, sales efforts and certain costs - marginal compensation and benefits - are required to make an appraisal-based claim to HUD. In such cases, HUD reimburses us formanaged and reported within the loan balance, eligible expenses and interest, less the appraised value of the underlying property. Thereafter, all the risks and costs associated with maintaining and liquidating the property remains with us. We may incur additional losses on REO properties as they progress through the claims and liquidation processes. The significance of future losses associated with appraisal-based claims is dependent upon the volume of inactive loans, condition of foreclosed properties and the general real estate market.Originations segment.
Significant Variables
Economic Conditions. General economic conditions impact the capacity for consumer credit and the supply of capital. More specifically, employment and home prices are variables that can each have a material impact on mortgage volume. Employment levels, the level of wages and the stability of employment are underlying factors that impact credit qualification. The effect of home prices on lending volumes is significant and complex. As home prices go up, home equity increases and this improves the position of existing homeowners either to refinance or to sell their home, which often leads to a new home purchase and a new forward mortgage loan, or in the case of a reverse mortgage, increase the size of the mortgage loan available and the number of potential borrowers. However, if home prices increase rapidly, the effect on affordability for first-time and move-up buyers can dampen the demand for mortgage loans. The more restrictive standards for loan to value (LTV) ratios, debt to income (DTI) ratios and employment that characterize the current market amplify the significance and sensitivity of the housing market and related mortgage lending volumes to employment levels and home prices.
Market Size and Composition. Changes in mortgage rates directly impact the demand for both purchase and refinance forward mortgages. Small changes in mortgage rates directly impact housing affordability for both first-time and move-up home buyers and affect their ability to purchase a home. For refinance loans, current market mortgage rates must be considered relative to the rates on the current mortgage debt outstanding. As the time and cost to refinance has decreased, relatively small reductions in mortgage rates can trigger higher refinancing activity. Given the large size of U.S. residential forward mortgage debt outstanding, the impact of mortgage rate changes can drive significant swings in mortgage refinance volume. A December 2018 Fannie Mae forecast projects a decline in mortgage originations of 1% from 2018 to 2019, including a decline in refinance volume of approximately 10%. Declines in aggregate mortgage market and refinance volume will generally make growing our Lending business more difficult.
Market size is likewise impacted by changes to existing, or development of new, GSE or other government sponsored programs. Changes in GSE or HUD guidelines and costs and the availability of alternative financing sources, such as non-Agency proprietary loans and traditional home equity loans, impact borrower demand for forward and reverse mortgages.
In August 2017, the FHFA announced an extension of the Home Affordable Refinance Program (HARP) to December 31, 2018. This program allowed borrowers with loans sold to Fannie Mae or Freddie Mac prior to June 1, 2009 to refinance through a simplified process with broader underwriting guidelines, most notably, higher LTV ratios. Since the HARP program was introduced, it has provided a boost to lending volumes and higher relative margins by providing broader refinance opportunities and more effective portfolio recapture.
Effective in October 2017, HUD and FHA changed the amount of mortgage insurance premium paid by borrowers, lowered the lending interest rate floor and updated the principal limit factors, all of which put downward pressure on the amount of proceeds a borrower would receive. Since these changes were implemented, new endorsements, a proxy for market size, have declined 27.0% during the reporting period according to the HUD HECM Endorsement Summary Reports. To the extent the benefits of a reverse mortgage are reduced, or become less attractive to borrowers, lending volumes and margins will continue to be negatively impacted.
Investor Demand. The liquidity of the secondary market impacts the size of the market by defining loan attributes and credit guidelines for loans that investors are willing to buy and at what price. In recent years, the GSEs have been the dominant providers of secondary market liquidity for forward mortgages, keeping the product and credit spectrum relatively homogeneous and risk averse (higher credit standards).
Margins. Changes in pricing margin are closely correlated with changes in market size. As loan demand and market capacity move out of alignment, pricing adjusts. In a growing market, margins expand and in a contracting market, margins tighten as lenders seek to keep their production at or close to full capacity. Managing capacity and cost is critical as volumes change. The challenge is greatest in the higher cost channels. Among our channels, our costsmargins per loan are highest in the retail channel and lowest in the reverse lending correspondent channel. We work directly with the borrower to process, underwrite and close loans in our retail and reverse wholesale channels. In our retail channel, we also identify the customer and take loan applications. As a result, our retail channel is the most people- and cost-intensive and experiences the greatest volume volatility.
The following table presents the results of operations of the Lendingour Originations segment. The amounts presented are before the elimination of balances and transactions with our other segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
| Revenue | | | | | | | | | |
| Gain on loans held for sale, net | $ | 105.2 | | | $ | 32.9 | | | $ | 31.3 | | | 220 | % | | 5 | % |
| Reverse mortgage revenue, net | 53.1 | | | 22.9 | | | 16.1 | | | 132 | | | 42 | |
| Other revenue, net | 21.0 | | | 6.0 | | | 4.5 | | | 251 | | | 33 | |
| Total revenue | 179.3 | | | 61.7 | | | 52.0 | | | 191 | | | 19 | |
| | | | | | | | | |
| MSR valuation adjustments, net | 41.7 | | | — | | | — | | | n/m | | n/m |
| | | | | | | | | |
| Operating expenses | | | | | | | | | |
| Compensation and benefits | 62.2 | | | 43.8 | | | 37.4 | | | 42 | | | 17 | |
| Servicing and origination | 7.2 | | | 7.0 | | | 16.4 | | | 3 | | | (57) | |
| Occupancy and equipment | 5.4 | | | 6.4 | | | 6.0 | | | (16) | | | 7 | |
| Technology and communications | 5.5 | | | 3.2 | | | 1.9 | | | 72 | | | 68 | |
| Professional services | 9.3 | | | 1.3 | | | 1.2 | | | 615 | | | 8 | |
| Corporate overhead allocations | 18.2 | | | 6.0 | | | 3.7 | | | 203 | | | 63 | |
| Other expenses | 6.5 | | | 4.8 | | | 6.7 | | | 35 | | | (28) | |
| Total operating expenses | 114.4 | | | 72.5 | | | 73.3 | | | 58 | | | (1) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other income (expense) | | | | | | | | | |
| Interest income | 7.0 | | | 5.2 | | | 4.4 | | | 35 | | | 20 | |
| Interest expense | (9.8) | | | (7.6) | | | (7.3) | | | 29 | | | 4 | |
| | | | | | | | | |
| Other, net | 0.4 | | | 0.9 | | | 1.6 | | | (56) | | | (44) | |
| Total other income (expense), net | (2.5) | | | (1.5) | | | (1.4) | | | 67 | | | 7 | |
| | | | | | | | | |
| Income (loss) from continuing operations before income taxes | $ | 104.2 | | | $ | (12.2) | | | $ | (22.7) | | | (954) | | | (46) | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Revenue | | | | | | | | | |
| Gain on loans held for sale, net | | | | | | | | | |
| Forward loans | $ | 30,212 |
| | $ | 38,128 |
| | $ | 42,210 |
| | (21 | )% | | (10 | )% |
| Reverse loans | 39,096 |
| | 53,679 |
| | 30,448 |
| | (27 | ) | | 76 |
|
| | 69,308 |
| | 91,807 |
| | 72,658 |
| | (25 | ) | | 26 |
|
| Other revenue, net | 24,364 |
| | 35,668 |
| | 39,705 |
| | (32 | ) | | (10 | ) |
| Total revenue | 93,672 |
| | 127,475 |
| | 112,363 |
| | (27 | ) | | 13 |
|
| | | | |
| | | | | | |
| Expenses | | | | | | | | | |
| Compensation and benefits | 46,404 |
| | 74,299 |
| | 73,921 |
| | (38 | ) | | 1 |
|
| Professional services | 1,206 |
| | 2,359 |
| | 2,035 |
| | (49 | ) | | 16 |
|
| MSR Valuation adjustments, net | 474 |
| | 273 |
| | 309 |
| | 74 |
| | (12 | ) |
| Servicing and origination | 16,447 |
| | 17,716 |
| | 16,423 |
| | (7 | ) | | 8 |
|
| Technology and communications | 1,936 |
| | 2,534 |
| | 3,849 |
| | (24 | ) | | (34 | ) |
| Occupancy and equipment | 6,070 |
| | 4,778 |
| | 5,458 |
| | 27 |
| | (12 | ) |
| Corporate overhead allocations | 3,691 |
| | 3,981 |
| | 4,215 |
| | (7 | ) | | (6 | ) |
| Other expenses | 6,678 |
| | 22,118 |
| | 7,989 |
| | (70 | ) | | 177 |
|
| Total expenses | 82,906 |
| | 128,058 |
| | 114,199 |
| | (35 | ) | | 12 |
|
| | | | | | | | | | |
| Other income (expense) | | | | | | | | | |
| Interest income | 6,061 |
| | 10,914 |
| | 15,300 |
| | (44 | ) | | (29 | ) |
| Interest expense | (6,639 | ) | | (13,893 | ) | | (14,398 | ) | | (52 | ) | | (4 | ) |
| Other, net | 966 |
| | (869 | ) | | 1,065 |
| | (211 | ) | | (182 | ) |
| Other income (expense), net | 388 |
| | (3,848 | ) | | 1,967 |
| | (110 | ) | | (296 | ) |
| | | | | | | | | | |
| Income (loss) from continuing operations before income taxes | $ | 11,154 |
| | $ | (4,431 | ) | | $ | 131 |
| | (352 | ) | | n/m |
|
| n/m: not meaningful | | | | | | | | | |
|
| | | | | | | | | | |
| | December 31, | | |
| | 2018 | | 2017 | | % Change |
| Short-term loan funding commitments | | | | | |
| Forward loans | $ | 132,076 |
| | $ | 81,710 |
| | 62 | % |
| Reverse loans | 18,099 |
| | 14,630 |
| | 24 |
|
| | | | | | |
| Future draw commitment (UPB) (1) | 1,426,814 |
| | 1,401,484 |
| | 2 | % |
| | | | | | |
| Future Value (2) | 68,075 |
| | 70,683 |
| | (4 | )% |
The following table provides selected operating statistics for our LendingOrigination segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| UPB in millions | 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
| Loan Production by Channel | | | | | | | | | |
| Forward loans | | | | | | | | | |
| Correspondent | $ | 5,685.5 | | | $ | 494.0 | | | $ | 0.4 | | | n/m | | n/m |
| Recapture | 1,309.8 | | | 656.6 | | | 868.1 | | | 99 | | | (24) | |
| Wholesale | — | | | — | | | 1.8 | | | n/m | | (100) | |
| $ | 6,995.3 | | | $ | 1,150.6 | | | $ | 870.3 | | | 508 | | | 32 | |
| | | | | | | | | |
| | | | | | | | | |
| % Purchase production | 20 | | | 18 | | | 4 | | | 11 | | | 350 | |
| % Refinance production | 80 | | | 82 | | | 96 | | | (2) | | | (15) | |
| | | | | | | | | |
| Reverse loans (1) | | | | | | | | | |
| Correspondent | $ | 470.3 | | | $ | 411.6 | | | $ | 360.4 | | | 14 | % | | 14 | % |
| Wholesale | 300.5 | | | 238.2 | | | 170.9 | | | 26 | | | 39 | |
| Retail | 170.8 | | | 79.6 | | | 62.4 | | | 115 | | | 28 | |
| $ | 941.6 | | | $ | 729.4 | | | $ | 593.7 | | | 29 | | | 23 | |
| | | | | | | | | |
| MSR Purchases by Channel (Forward only) | | | | | | | | | |
| GSE Cash Window / Flow MSR purchases | 15,111.6 | | | 908.3 | | | — | | | n/m | | n/m |
| Bulk MSR purchases | 16,566.2 | | | 14,616.7 | | | 144.3 | | | 13 | | | n/m |
| $ | 31,677.8 | | | $ | 15,525.0 | | | $ | 144.3 | | | 104 | | | n/m |
| | | | | | | | | |
| Total (2) | $ | 39,614.7 | | | $ | 17,405.0 | | | $ | 1,608.3 | | | 128 | | | 982 | |
| | | | | | | | | |
| Short-term loan commitment (at year end) | | | | | | | | |
| Forward loans | $ | 619.7 | | | $ | 204.0 | | | 132.1 | | | 204 | % | | 54 | % |
| Reverse loans | 11.7 | | | 28.5 | | | 18.1 | | | (59) | | | 57 | |
| | | | | | | | | |
| Average Employment - Originations | | | | | | | | | |
| U.S. | 461 | | | 387 | | | 425 | | | 19 | % | | (9) | % |
| India and other | 177 | | | 97 | | | 131 | | | 82 | | | (26) | |
| Total | 638 | | | 484 | | | 556 | | | 32 | | | (13) | |
(1)Loan production excludes reverse mortgage loan draws by borrowers disbursed subsequent to origination.
(2)Excludes interim subservicing.
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Loan Production by Channel | | | | | | | | | |
| Forward loans | | | | | | | | | |
| Retail | $ | 868,110 |
| | $ | 857,772 |
| | $ | 422,586 |
| | 1 | % | | 103 | % |
| Correspondent | 408 |
| | 487,462 |
| | 1,730,360 |
| | (100 | ) | | (72 | ) |
| Wholesale | 1,750 |
| | 1,173,022 |
| | 2,035,375 |
| | (100 | ) | | (42 | ) |
| | $ | 870,268 |
| | $ | 2,518,256 |
| | $ | 4,188,321 |
| | (65 | ) | | (40 | ) |
| | | | | | | | | | |
| % HARP production | 7 | % | | 8 | % | | 4 | % | | (13 | )% | | 100 | % |
| % Purchase production | 4 |
| | 33 |
| | 35 |
| | (88 | ) | | (6 | ) |
| % Refinance production | 96 |
| | 67 |
| | 65 |
| | 43 |
| | 3 |
|
| | | | | | | | | | |
| Reverse loans | | | | | | | | | |
| Correspondent | $ | 360,394 |
| | $ | 495,091 |
| | $ | 398,486 |
| | (27 | )% | | 24 | % |
| Wholesale | 170,875 |
| | 382,220 |
| | 291,163 |
| | (55 | ) | | 31 |
|
| Retail | 62,389 |
| | 164,439 |
| | 135,843 |
| | (62 | ) | | 21 |
|
| | $ | 593,658 |
| | $ | 1,041,750 |
| | $ | 825,492 |
| | (43 | ) | | 26 |
|
| | | | | | | | | | |
| Average Employment | | | | | | | | | |
| U.S. | 425 |
| | 698 |
| | 700 |
| | (39 | )% | | — | % |
| India and other | 131 |
| | 234 |
| | 147 |
| | (44 | ) | | 59 |
|
| Total | 556 |
| | 932 |
| | 847 |
| | (40 | ) | | 10 |
|
| |
(1) | We do not incur any substantive underwriting, marketing or compensation costs in connection with any future draws. We recognize this Future Value over time as future draws are securitized or sold. |
| |
(2) | Future Value represents the net present value of estimated future cash flows from customer draws of the loans and projected performance assumptions based on historical experience and industry benchmarks discounted at 12%. |
Our Lending segment resultsGain on Loans Held for 2018, as compared to 2017, were primarily driven by rising interest rates and reverse lending HECM program changes and the related impacts on loan production, revenue and expenses. Rising interest rates in 2018 have negatively impacted our forward retail business with industry refinance volumes down 29% in 2018 according to the Fannie Mae Housing Forecast Report. Changes to the HECM program for originations after October 1, 2017 have negatively impacted industry, and Ocwen, originations. According to the HUD HECM Endorsement Summary Report, industry endorsements, or the number of new HECM loans insured by the FHA during the reporting period, totaled 41,736, 56,912 and 48,794 during 2018, 2017 and 2016, respectively. This represents a decline of 27% for 2018 as compared to 2017, and an increase of 17% for 2017 as compared to 2016.Sale
Year Ended December 31, 2018 versus 2017
Total revenue for 2018 decreased $33.8 million, or 27%, as total loan production dropped $2.1 billion, or 59%, driven primarily by our exit from the forward lending correspondent and wholesale channels. The resulting $7.9 million, or 21%, decline in forward lending gainfollowing table provides information regarding Gain on loans held for sale was offsetby channel and the related origination volume and margin:
| | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | % Change |
| 2020 | | 2019 | | | | 2020 vs 2019 | | |
| Gain on Loans Held for Sale (1) | | | | | | | | | |
| Correspondent | $ | 18.6 | | | $ | 0.1 | | | | | n/m | | |
| Recapture | 86.6 | | | 32.8 | | | | | 164 | | | |
| $ | 105.2 | | | $ | 32.9 | | | | | 220 | % | | |
| % Gain on Sale Margin (2) | | | | | | | | | |
| Correspondent | 0.32 | % | | 0.02 | % | | | | n/m | | |
| Recapture | 5.55 | | | 5.00 | | | | | 11 | | | |
| 1.42 | % | | 2.65 | % | | | | (46) | % | | |
| Origination UPB (3) | | | | | | | | | |
| Correspondent | $ | 5,851.1 | | | $ | 584.6 | | | | | 901 | % | | |
| Recapture | 1,560.4 | | | 655.5 | | | | | 138 | | | |
| $ | 7,411.5 | | | $ | 1,240.1 | | | | | 498 | % | | |
(1)Includes realized gains on loan sales and related new MSR capitalization, changes in part by slightly higher production and marginsfair value of IRLCs, changes in our retail channel. The forward lending retail channel includes $109.9 millionfair value of production volume generated by PHH during the post-acquisition period. Reverse lending gain on loans held for sale declined by $14.6 million, or 27%, dueand economic hedging gains and losses.
(2)Ratio of gain on Loans held for sale to a 43% decline in loan production which was lower across all channels, partially offset by higher margins. Other revenue declined $11.3 million, or 32%, due to a $5.0 million reductionvolume UPB -see (3) below. Note that the ratio differs from the day-one gain on sale margin upon lock.
(3)Defined as the UPB of loans funded in the netperiod plus the change in the fair values of HECM reverse mortgage loans and the related HMBS financing liability. Rising interest rates reduce the average life of our HECM reverse mortgage loans as adjustable rate mortgage (ARM) borrowers reach their maximum loan amount faster, reducing projected service fees, net of subservicing fees, and available future draws, and accelerating loan resolutions. Origination fees, recorded in Other revenue, declined $5.7 million due to lower lending segment volumes.
Total expenses for 2018 decreased $45.2 million, or 35%, as compared to 2017. The $27.9 million, or 38% decrease in Compensation and benefits expense is due to a reduction in headcount and a decline in commissions on lower forward and reverse lending origination volume. Partially offsetting this decrease was $4.7 million of Compensation and benefits expense
incurred by PHH during the post-acquisition period. Total average headcount of the Lending segment decreased 40% as compared to 2017, reflecting the strategic shift in our forward lending activities and lower origination volumeperiod in the reverse lending channels. The $15.4 million decline in Other expenses is primarily attributable to the $6.8 million charge we recognized in 2017 to write-off the carrying valuepull-through adjusted UPB of internally-developed Loan Operating System (LOS) software used in our wholesale forward lending business. Also contributing to the decline in Other expenses, advertising expense declined $5.6 million and the provision for indemnification obligations declined $2.0 million in line with lower loan production.IRLCs.
The decline in interest income and interest expense as compared to 2017 is primarily the result of the overall decline in loan production.
Year Ended December 31, 2017 versus 2016
Total revenue increased by $15.1 million, or 13%, in 2017 despite the $1.5 billion, or 29%, decline in total loan production. GainsGain on loans held for sale, net, increased $19.1$72.3 million, or 26%220%, as compared to 2019, mostly due to higher gainsthe significant increase (approximately 500%) in our loan production volume. The $5.8 billion new production volume increase in 2020 is driven by both our correspondent channel that we re-started in the reverse lending business as a resultsecond quarter of 2019 and our recapture channel. Our pipeline, or lock commitments, significantly increased origination volume and improved margin rates. Gainsin 2020 benefit from the refinance opportunities in the forward lending business decreased duemarket driven by mortgage rate decrease to lower margin rates in all channels and lower volumehistorical low levels. Both margins in the correspondent and wholesalerecapture channels which was partially offset bywere higher in 2020, as compared to 2019, due to significant volatility attributed to the rate rally and COVID-19 related market disruption. The lower average gain on sale margin is mainly due to our channel mix, with an increase in retail volume. Otherincreased relative weight of our lower-margin correspondent production.
Reverse Mortgage Revenue, Net
The following table provides information regarding the Reverse mortgage revenue, decreased $4.0 million, or 10%, in 2017 primarily becausenet of a $2.3 million decrease in the excess of changes in theOriginations segment that comprises fair value changes of our HECMthe pipeline and unsecuritized reverse mortgage loans held for investment, over changesat fair value, together with volume and margin:
| | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change | |
| 2020 | | 2019 | | 2020 vs 2019 | | | |
| Origination UPB (1) | $ | 915.4 | | | $ | 731.4 | | | 25 | % | | | |
| Origination margin (2) | 5.81 | % | | 3.12 | % | | 86 | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Reverse mortgage revenue, net (Originations) (3) | $ | 53.1 | | | $ | 22.9 | | | 132 | % | | | |
(1)Defined as the UPB of loans funded in the period plus the change in the period in the pull-through adjusted UPB of IRLCs.
(2)Ratio of Originations gain to origination UPB - see (1) above.
(3)Includes gain on new origination, and loan fees and other.
We reported $53.1 million Reverse mortgage revenue, net in 2020, a $30.3 million or 132% increase as compared to 2019. As detailed in the above table, the increase is driven by both a volume increase and a higher average margin. The higher average margin increase is mostly driven by a change to the channel mix,in addition to market related dynamics driving
margins upward in 2020 that we anticipate to abate in 2020 as margins normalize and originations mix wherein the lower margin, higher volume channels weigh down the average margin.
Other revenue, net
Other revenue, net increased $15.0 million as compared to 2019 primarily due to higher fees earned on increased loan origination volume and setup fees earned for loans boarded on our servicing platform, mostly driven by the increased volume of our correspondent channel and flow MSR purchases.
MSR Valuation Adjustments, Net
MSR valuation adjustments, net includes a gain of $41.7 million in 2020 (nil in 2019)due to the revaluation gains on certain MSRs opportunistically purchased through bulk MSR purchases, the GSE Cash Window programs, and flow purchases. Due to the market dislocation created by the COVID-19 environment, we seized the opportunity to purchase certain MSRs with a purchase price at a discount to fair value. Opportunities for fair value discount or margins were larger in the early period of the HMBS financing liabilitypandemic and have reduced as markets start to normalize. In addition, as an increase in guarantee fees incurredaggregator of MSRs, we recognized valuation adjustments for differences in the reverse lending channelexit markets in accordance with the accounting fair value guidance. We report such initial margin gains, including due to portfolio expansion. Direct acquisition costs, a componentthe revaluation to mid-point of Gain on loans held for sale, net, are offset by origination fee income thatthe bid-ask spread, within the Originations segment since the segment’s business objective is included in Other revenue.the sourcing of new MSRs at targeted returns. We transfer the MSR from the Originations segment to the Servicing segment at fair value upon closing.
TotalOperating Expenses
Operating expenses increased $13.9$41.9 million, or 12%58%, in 2017. Other expenses increased $14.1 million, or 177%, drivenas compared to 2019, primarily by the $6.8 million write-off of the carrying value of our LOS software useddue to increases in our wholesale forward lending business, a $5.3direct expenses, including an $18.4 million increase in the provision for indemnification due in part toCompensation and benefits, a reversal of the liability in 2016, and a $3.8$12.2 million increase in advertising costs across both forwardcorporate overhead allocations and reverse channels. Total average headcount ofan $8.0 million increase in Professional services. Certain expenses are variable, and as a result, as origination volume increased so did the Lending segment increased 10% over 2016 due to increased offshore hiringrelated expenses. Examples include commissions, recorded in both the forward and reverse lending businesses. Despite this increase, Compensation and benefits expense, certain outsourced services to support the surge in our Originations business recorded in Professional services, and advertising expense recorded in Other expenses. Total average headcount increased only $0.432% as compared to 2019, reflecting increases in staffing levels as part of our initiative to increase volume, including our re-entry into the forward lending correspondent channel in the second quarter of 2019, offset in part by our PHH integration and cost re-engineering initiatives. The $18.4 million, or 1%,42% increase in Compensation and benefits expense as commissionscompared to 2019 is largely due to increased headcount and bonuses declined on lower forward lendinghigher origination volume. ServicingSalaries and originationbenefits expenses increased by $6.2 million, and commissions were $6.1 million higher. In addition, Compensation and benefit expense increased $1.3for 2020 includes $2.4 million or 8%. This was due in part to increased subservicing costs related to Ginnie Mae portfolio expansionour 2020 re-engineering initiatives and $1.6 million incremental incentive compensation. The $12.2 million increase in corporate overhead allocations is mostly attributed to the increase in our origination volume and the increase in the reverse lending channel. In addition, reverse lending generated higher volume which resultedrelative weight of average headcount to the consolidated organization, as compared to 2019. The increase in higher transactional costs. The effect of these increases wascorporate overhead allocations due to the allocation drivers is partially offset by lower Servicing and origination expense in the forward lending channel due to lower volume.effects of our cost re-engineering initiatives.
Other Income (Expense)
Interest income which consists primarily of interest earned on newly-originated and purchased loans prior to sale to investors, declined $4.4 million, or 29%, in 2017 consistent with lower origination volume in our forward lending business.investors. Interest expense is incurred to finance the mortgage loans. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, commonly referred to as warehouse lines of credit.lines. The difference betweenincreases in interest income and interest expense will fluctuateas compared to 2019 is primarily the result of the increase in the average held-for-sale loan and warehouse debt balances, due to a variety of economic factors.increased loan production volumes.
Corporate Items and Other
Corporate Items and Other includes revenues and expenses of corporate support services, our reinsurance business CRL, discontinued operations and inactive entities, and our other business activities that are currently individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash, andgain on repurchases of debt, interest expense on corporate debt.debt and foreign currency exchange gains or losses. Interest expense on direct asset-backed financings are recorded in the respective Servicing and Originations segments, while interest expense on the SSTL and the Senior Notes is recorded in Corporate Items and Other and was not allocated.Beginning in the third quarter of 2020, we began allocating interest expense, excluding amortization of debt issuance costs and discount, on such corporate debt used to fund servicing advances and other servicing assets from Corporate Items and Other to Servicing. The interest expense related to the corporate debt has been allocated to the Servicing segment for prior periods to conform to the current period presentation. Our cash balances are included in Corporate Items and Other.
Corporate support services include finance, facilities, human resources, internal audit, legal, risk and compliance and technology functions. Corporate support services costs, specifically compensation and benefits and professional services expense, have been, and continue to be, significantly impacted by regulatory actions against us and by significant litigation matters. As part of our drive to return to profitability as soon as possible, we will seek to reduce our corporate support services expenses while complying with our legal and regulatory obligations. We anticipate that our ability to return to sustainable profitability will be significantly impacted by the degree to which
we can reduce these costs going forward. Corporate Items and Other also includes severance, retention, facility-related and other expenses incurred related to our re-engineering initiatives and have not been allocated to other segments.
CRL, our wholly-owned captive reinsurance subsidiary, provides re-insurance related to coverage on REO properties owned or serviced by us. CRL assumes a quota share of REO insurance coverage written by a third-party insurer under a blanket policy issued to OLS.PMC. The underlying REO policy provides coverage for direct physical loss on commercial and residential properties, subject to certain limitations. Under the terms of the reinsurance agreement, CRL assumes a 40%50% quote share of premiums and all related losses and loss adjustment expenses incurred by the third-party insurer.insurer, effective June 2020, and 40% through May 2020. The initial term of the reinsurance agreement excludes properties located in the State of New York and has an expiration date ofexpired December 31, 2020 although it may be terminated by either party at any time with thirty days’ advance written notice.and was automatically renewed for an additional one-year term.
Certain expenses incurred by corporate support services that are not directly attributable to a segment are allocated to the Servicing and LendingOriginations segments.
Beginning in the first quarter of 2020, we updated our methodology to allocate overhead costs incurred by corporate support services to the Servicing and Originations segments which now incorporates the utilization of various measurements primarily based on time studies, personnel volumes and service consumption levels. In 2019, corporate support services costs were primarily allocated based on relative segment size. Support service costs not allocated to the Servicing and Originations segments are retained in the Corporate Items and Other segment along with certain other costs including certain litigation and settlement related expenses or recoveries, costs related to our re-engineering initiatives, and other costs related to operating as a public company.
The following table presents selected results of operations of Corporate Items and Other. The amounts presented are before the elimination of balances and transactions with our other segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| | 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
| Revenue | | | | | | | | | |
| Premiums (CRL) | $ | 6.2 | | | $ | 12.9 | | | $ | 16.6 | | | (52) | % | | (22) | % |
| Other revenue | 0.4 | | | 0.3 | | | 1.6 | | | 54 | | | (83) | |
| Total revenue | 6.6 | | | 13.2 | | | 18.1 | | | (50) | | | (27) | |
| | | | | | | | | |
| Operating expenses | | | | | | | | | |
| Compensation and benefits | 89.6 | | | 125.7 | | | 106.1 | | | (29) | | | 19 | |
| Professional services | 69.4 | | | 59.2 | | | 110.7 | | | 17 | | | (47) | |
| | | | | | | | | |
| Technology and communications | 28.9 | | | 43.4 | | | 50.8 | | | (34) | | | (15) | |
| Occupancy and equipment | 11.1 | | | 17.4 | | | 11.1 | | | (36) | | | 57 | |
| Servicing and origination | 1.7 | | | 0.7 | | | 0.3 | | | 124 | | | (94) | |
| Other expenses | 8.2 | | | 11.0 | | | 13.7 | | | (25) | | | (20) | |
| Total operating expenses before corporate overhead allocations | 208.8 | | | 257.4 | | | 292.5 | | | (19) | | | (12) | |
| | | | | | | | | |
| Corporate overhead allocations | | | | | | | | | |
| Servicing segment | (61.0) | | | (197.9) | | | (211.7) | | | (69) | | | (7) | |
| Lending segment | (18.2) | | | (6.0) | | | (3.7) | | | 202 | | | 63 | |
| Total operating expenses | 129.5 | | | 53.5 | | | 77.1 | | | 142 | | | (31) | |
| | | | | | | | | |
| Other income (expense), net | | | | | | | | | |
| Interest income | 1.9 | | | 1.8 | | | 2.6 | | | 9 | | | (31) | |
| Interest expense | (8.9) | | | (4.0) | | | (5.3) | | | 121 | | | (24) | |
| Bargain purchase gain | — | | | (0.4) | | | 64.0 | | | (100) | | | (101) | |
| Gain on repurchase of senior secured notes | — | | | 5.1 | | | — | | | (100) | | | n/m |
| Other, net | (4.3) | | | (3.8) | | | (4.1) | | | 13 | | | (8) | |
| Total other (expense) income, net | (11.2) | | | (1.3) | | | 57.2 | | | 775 | | | (102) | |
| | | | | | | | | |
| Loss from continuing operations before income taxes | $ | (134.1) | | | $ | (41.6) | | | $ | (1.7) | | | 222 | | | n/m |
| n/m: not meaningful | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Revenue | | | | | | |
|
| |
|
|
| Premiums (CRL) | $ | 16,603 |
| | $ | 23,114 |
| | $ | 25,413 |
| | (28 | )% | | (9 | )% |
| Other revenue | 1,546 |
| | 2,697 |
| | 2,233 |
| | (43 | ) | | 21 |
|
| Total revenue | 18,149 |
| | 25,811 |
| | 27,646 |
| | (30 | ) | | (7 | ) |
| | | | | | | | | | |
| Expenses | | | | | | | | | |
| Compensation and benefits | 106,058 |
| | 124,181 |
| | 121,447 |
| | (15 | ) | | 2 |
|
| Professional services | 110,705 |
| | 160,569 |
| | 199,513 |
| | (31 | ) | | (20 | ) |
| Servicing and origination | 253 |
| | 4,211 |
| | 9,017 |
| | (94 | ) | | (53 | ) |
| Technology and communications | 50,770 |
| | 51,718 |
| | 54,648 |
| | (2 | ) | | (5 | ) |
| Occupancy and equipment | 11,050 |
| | 13,822 |
| | 14,362 |
| | (20 | ) | | (4 | ) |
| Other expenses | 13,679 |
| | 24,732 |
| | 19,011 |
| | (45 | ) | | 30 |
|
| Total expenses before corporate overhead allocations | 292,515 |
| | 379,233 |
| | 417,998 |
| | (23 | ) | | (9 | ) |
| Corporate overhead allocations | | | | | | | | | |
| Servicing segment | (211,701 | ) | | (221,049 | ) | | (215,300 | ) | | (4 | ) | | 3 |
|
| Lending segment | (3,691 | ) | | (3,981 | ) | | (4,215 | ) | | (7 | ) | | (6 | ) |
| Total expenses | 77,123 |
| | 154,203 |
| | 198,483 |
| | (50 | ) | | (22 | ) |
| | | | | | | | | | |
| Other income (expense), net | | | | | | | | | |
| Interest income | 2,582 |
| | 4,268 |
| | 3,892 |
| | (40 | ) | | 10 |
|
| Interest expense | (54,230 | ) | | (55,750 | ) | | (40,772 | ) | | (3 | ) | | 37 |
|
| Bargain purchase gain | 64,036 |
| | — |
| | — |
| | n/m |
| | n/m |
|
| Other, net | (4,096 | ) | | (6,348 | ) | | (2,139 | ) | | (35 | ) | | 197 |
|
| Other income (expense), net | 8,292 |
| | (57,830 | ) | | (39,019 | ) | | (114 | ) | | 48 |
|
| | | | | | | | | | |
| Loss from continuing operations before income taxes | $ | (50,682 | ) | | $ | (186,222 | ) | | $ | (209,856 | ) | | (73 | ) | | (11 | ) |
| n/m: not meaningful | | | | | | | | | |
Year Ended December 31, 2018 versus 2017Revenue
CRL premium revenue decreased 28%$6.7 million, or 52%, as compared to 2017 as a result of a 28%2019 primarily due to the 54% decline in the average number of foreclosed real estatecovered REO properties in our servicing portfolio, consistent with the 53% decline in the total number of REO properties in our Servicing portfolio. Factors contributing to the decline in covered properties include the current moratoria and restrictions on foreclosure procedures due to COVID-19, and the GSE removal of REO coverage requirements.
Expenses before allocations, including $25.8 million attributable to PHH, declined $86.7Compensation and Benefits
Compensation and benefits expense decreased $36.2 million, or 23%29%, as compared to 2017.2019 mostly due to $35.7 million of severance and retention costs recognized in 2019 in connection with the PHH integration and cost re-engineering plan. The effects of other factors impacting Compensation and benefits expense were largely offsetting. Salaries and benefit expenses declined $14.3 million and $4.3 million, respectively, due to the effects of a 19% decrease in average corporate headcount, including a 40% decrease in average onshore headcount from 511 to 308. These cost savings were largely offset by $5.9 million compensation and benefit costs related to our 2020 re-engineering initiatives, $8.7 million incremental incentive compensation and $1.6 million additional compensation expenses related to COVID-19.
Professional Services
Professional services expense including $9.4 million in PHH expenses, declined $49.9increased $10.3 million, or 31%17%, as compared to 20172019, primarily due to the $34.7 million recovery in 2019 of prior expenses from a service provider and mortgage insurer, offset in part by $19.5 million other professional services expenses incurred in 2019 related to our cost reengineering plan, and a $6.9 million decrease in legal expenses. The net decline in legal expenses is largely due to an $8.0 million recovery in 2020 of prior expenses from a mortgage insurer and a reduction in litigation expenses, partially offset by an additional accrual for the CFPB and Florida matters in 2020. Professional services expense for 2020 includes $3.5 million of COVID-19 related expenses.
Other Operating Expenses
Technology and communications expense decreased $14.5 million, or 34%, as compared to 2019, primarily due to $4.4 million termination fees recorded in 2019 relating to PHH integration, a $4.0 million decline in depreciation expense, and a $3.4 million decline in telephone expense. Technology and communications expense for 2020 includes $3.1 million of COVID-19 related expenses. The expense reductions are primarily due to a $64.4decline in capitalized technology investments, the closure of U.S. facilities and our other cost reduction efforts which included bringing technology services in-house and re-engineering initiatives.
Occupancy and equipment expense decreased $6.3 million decrease in legal feesor 36%, as compared to 2019. The expense reduction is primarily due to the results of our cost reduction efforts, which include consolidating vendors and settlements. Professional servicesclosing and consolidating certain facilities. The expense for 2017reduction is mostly related to depreciation expense, rent expense and interest on lease liabilities, net of the allocation of occupancy costs to other segments. In 2019, occupancy and equipment expense included significant litigation settlement-related costs incurred in connection with a securities law matterPHH expenses and a TCPA matter. Legal fees for 2018 include $9.6 millionaccelerated amortization of fees incurredROU assets in connection with our compliance withdecision to vacate leased properties prior to the Multi-State Common Settlement Terms, particularlycontractual maturity date of the third-party auditlease agreements. In 2020, we partially abandoned two of our compliance with certain federalleased properties and state laws relatingdecided to escrow. See Note 25 — Contingenciesvacate other leased properties prior to contractual maturity, resulting in the Consolidated Financial Statementsrecognition of facility-related costs totaling $6.0 million, versus $6.6 million of similar costs recognized in 2019. Occupancy and equipment expense for additional information regarding our obligations under the agreements we entered into with 29 states and the District2020 includes $0.9 million of ColumbiaCOVID-19 related expenses.
Total operating expenses, after corporate overhead allocation, increased by $76.0 million, or 142%, as compared to resolve certain regulatory actions. Monitor expenses decreased $6.4 million2019, primarily due to the termination$34.7 million recovery in 2019 of amounts previously recognized as expense from a service provider, which was not allocated, $19.2 million costs related to our 2020 re-engineering initiatives, and the CA Auditor and NY Operations Monitor engagementseffect of our updated methodology to allocate overhead costs which we implemented in 2017. Partially offsetting these declines, we incurred $13.72020. Operating expenses for 2020 include $9.3 million of direct costs during 2018COVID-19 related toexpenses. These increases in expenses were partially offset by the acquisitioneffects of PHH.
Declines in Compensation and benefits, Technology and communications and Occupancy and equipment expenses as compared to 2017 are primarily attributable to headcount reductions and other actions we have taken to reduce our costs, including bringing technology services in-house, closing and consolidating certain facilities, and our exit from the automotive capital services business. These declines were offset in part by Compensation and benefits and Technology and
communications expense of $10.3 million and $3.8 million, respectively, attributable to PHH. The $18.1 million, or 15%, reduction in Compensation and benefits expense primarily resulted from a 21% decline in average headcount and our other cost reduction efforts, as well as $65.0 million of costs recognized in spite of2019 in connection with the PHH integration and cost re-engineering plan.
Other Income (Expense)
Interest expense increased $4.8 million, or 121%, as compared to 2019. A $16.6 million decrease in interest expense allocated to the Servicing segment and an $11.8 million decline in interest expense before allocation resulted in a $4.8 million increase in headcount attributedinterest expense retained in the Corporate Items and Other segment. Interest expense allocated to the PHH acquisition (192 U.S. employees at December 31, 2018). Lower salariesServicing segment amounted to $38.2 million and benefits$54.9 million in 2020 and 2019, respectively. The interest allocation represents a charge for the financing of MSRs and servicing advances which are funded by corporate debt. The $11.8 million decline in interest expense before allocation was primarily due to the reduction$126.1 million prepayment of the outstanding SSTL balance in headcount were offsetJanuary 2020, the maturity of $97.5 million of our 7.375% senior unsecured notes in part by a $6.7September 2019, and the repurchase of $39.4 million increaseof our 8.375% senior secured notes in related severance expense for 2018.July and August 2019.
The $4.0 million, or 94%, decrease in Servicing and origination expense is largely the result of a $3.2 million decline in reinsurance commissions incurred by CRL during 2018 due to the decline in the covered portfolio and a decline in the ceding commission rate from 9% in 2017 to 5% in 2018.
Other expenses declined $11.1 million, or 45%, primarily due to a $6.2 million decline in the provision for losses on automotive dealer financing notes and a $2.2 million decline in the provision for indemnification.
We recognized a bargain purchase gain net of tax, of $64.0 million in 2018 in connection with the acquisition of PHH representing the excess of the net assets acquired over the consideration paid. The purchase price we negotiated contemplated that PHH would incur losses after the acquisition date. The PHH net loss from continuing operations of $24.8 million is included in our consolidated statements of operations from the date of acquisition through December 31, 2018. See Note 2 — Business Acquisition to the Consolidated Financial Statements for additional information.
The $2.3In 2019, we repurchased a total of $39.4 million declineof our 8.375% Senior secured notes in Other,the open market for a price of $34.3 million and recognized a gain of $5.1 million.
FOURTH QUARTER RESULTS
(Unaudited consolidated statements of operations)
| | | | | | | | | | | | | | | | | | | |
| Quarters Ended December 31, | | % Change |
| 2020 | | 2019 | | | | 2020 vs. 2019 |
| Revenue | | | | | | | |
| Servicing and subservicing fees | $ | 168.9 | | | $ | 230.4 | | | | | (27) | % |
| Gain on loans held for sale, net | 44.5 | | | 12.0 | | | | | 271 | |
| Reverse mortgage revenue, net | 9.7 | | | 13.4 | | | | | (28) | |
| Other revenue, net | 8.0 | | | 5.8 | | | | | 38 | |
| Total revenue | 231.0 | | | 261.6 | | | | | (12) | |
| | | | | | | |
| MSR valuation adjustments, net | (20.6) | | | 0.8 | | | | | n/m |
| | | | | | | |
| Operating expenses | | | | | | | |
| Compensation and benefits | 69.9 | | | 63.1 | | | | | 11 | |
| Professional services | 29.1 | | | 25.4 | | | | | 15 | |
| Servicing and origination | 16.7 | | | 22.2 | | | | | (25) | |
| Technology and communications | 12.4 | | | 18.1 | | | | | (31) | |
| Occupancy and equipment | 9.8 | | | 15.6 | | | | | (37) | |
| Other expenses | 6.2 | | | (5.1) | | | | | (222) | |
| Total operating expenses | 144.2 | | | 139.3 | | | | | 4 | |
| | | | | | | |
| Other income (expense) | | | | | | | |
| Interest income | 3.2 | | | 4.6 | | | | | (30) | |
| Interest expense | (25.8) | | | (29.5) | | | | | (13) | |
| Pledged MSR liability expense | (46.7) | | | (68.8) | | | | | (32) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other, net | 2.1 | | | 7.8 | | | | | (73) | |
| Other expense, net | (67.1) | | | (85.9) | | | | | (22) | |
| | | | | | | |
| Income (loss) before income taxes | (0.8) | | | 37.2 | | | | | (102) | |
| Income tax expense | 6.4 | | | 2.4 | | | | | 167 | |
| Net income (loss) | $ | (7.2) | | | $ | 34.8 | | | | | (121) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Segment income (loss) before taxes: | | | | | | | |
| Servicing | $ | (1.5) | | | $ | 53.5 | | | | | (103) | % |
| Originations | 33.0 | | | (0.2) | | | | | n/m |
| Corporate Items and Other | (32.3) | | | (16.0) | | | | | 102 | |
| $ | (0.8) | | | $ | 37.2 | | | | | (102) | |
| n/m: not meaningful | | | | | | | |
We reported a net loss of $7.2 million for 2018 isthe fourth quarter of 2020 as compared to $34.8 million net income for the fourth quarter of 2019. On a pre-tax basis, our results were near breakeven for the fourth quarter of 2020 ($0.8 million loss).
Total revenue was $30.6 million, or 12% lower in the fourth quarter of 2020 as compared to the fourth quarter of 2019 primarily due to a $7.3 million decreasedecline in fair value lossesservicing fee revenue, offset in part by an increase in gain on mortgage-backed securities offsetloans held for sale. The decline in Servicing and subservicing fees was mostly driven by a $4.9 million decrease in foreign currency remeasurement losses. Higher interest rates, runoff of the underlying mortgage loans and updates to key assumptions from our third-party valuation expert contributed to the decline in the fair valueservicing fees collected on behalf of our mortgage-backed securities in 2017. Fair value gains (losses) on mortgage-backed securities were $0.6 million and $(6.8) million in 2018 and 2017, respectively. The higher foreign currency remeasurement losses in 2018 are primarily attributable to depreciation of the India Rupee against the U.S. Dollar. Foreign currency exchange gains (losses) were $(3.2) million and $1.7 million for 2018 and 2017, respectively. While we do not currently hedge our foreign currency exposure, we do maintain India Rupee denominated investments in higher-yielding term deposits to partially offset our exposure.
Year Ended December 31, 2017 versus 2016
The $38.8 million, or 9%, decrease in expenses before allocations isNRZ, primarily due to a $38.9 million declinelower serviced UPB as a result of the NRZ portfolio runoff and the derecognition of the MSRs in Professional services expense, which resulted from a $75.3 million decrease in regulatory monitoring costs and a $5.3 million decrease in consulting fees offset in part by a $44.4 million increase in legal fees and settlements. The expenses we incurred related to monitorships under our NY DFS, CA DBO and Ocwen National Mortgage settlements decreased from $81.7 million in 2016 to $6.4 million in 2017 in lineconnection with the termination of the CA AuditorPMC agreement by NRZ on February 20, 2020. Also, ancillary income declined largely due to lower interest rates. While the average UPB of our total servicing portfolio increased 11% as compared to the fourth quarter of 2019, a significant amount of portfolio additions occurred at or near the end of the quarter and NY Operations Monitor engagements in 2017. Thegenerated minimal or no servicing fee revenue. Gain on loans held for sale, net, increased $32.5 million largely due to the $2.4 billion increase in legal fees and settlementstotal forward loan production, primarily the correspondent channel.
We reported a net $20.6 million loss on MSR valuation adjustments, net in the fourth quarter of 2020 compared to a $0.8 million net gain for the fourth quarter of 2019. The net loss reported in the fourth quarter of 2020 includes a $41.3 million loss due to runoff, a favorable $32.5 million gain mostly due to rates, partially offset by a $11.7 million hedging loss. The $21.4 million decline is primarily due to $43.6 million lower gains in the settlementfourth quarter of litigation relating2020 related to interest rates and assumptions, net of hedging loss, and a $22.2 million favorable impact from lower portfolio runoff. The 10-year swap rate increased 21 basis points in the fourth quarter of 2020 as compared to a securities law33 basis-point increase in the fourth quarter of 2019. Fair value adjustments to our MSRs are offset, in part, by fair value adjustments related to the NRZ financing liabilities, which are recorded in Pledged MSR liability expense. The lower runoff in the fourth quarter of 2020 is mostly driven by the termination of the NRZ PHH servicing agreement in February 2020 and TCPAelevated voluntary prepayments.
Operating expenses increased $4.8 million, or 4%,as compared with the fourth quarter of 2019. Operating expenses for the fourth quarter of 2020 includes $13.1 million of accruals for losses recorded in Professional services expense related to the CFPB matter, and $3.3 million of COVID-19 related expenses. Severance, retention, facility-related and other expenses related to our cost re-engineering plans of $5.9 million and $14.4 million were recognized in the fourth quarter of 2020 and 2019, respectively. Our cost reduction efforts include eliminating redundant costs through the integration process including headcount reductions, facility closures and legal entity reorganization as well as fees incurredbringing technology services in-house. The effects of a 5% reduction in connection with our legal defense related to regulatory actions takentotal average headcount on or shortly after April 20, 2017Compensation and benefits expense was more than offset by higher commissions on higher loan origination volume, as well as higher retention and incentive compensation costs. Operating expenses for the CFPB, mortgagefourth quarter of 2020 and banking regulatory agencies from 29 states and the District2019 are net of Columbia and two state attorneys general.
Servicing and origination expense declined by $4.8 million, or 53%, primarily due to a decrease in reinsurance commissions incurred by CRL, which were $3.9recoveries of $11.9 million and $8.8 million for 2017 and 2016, respectively.
Interest expense in 2017 increased by $15.0 million, or 37%, primarily becauserespectively of our transfer of the SSTL from the Servicing segment to the Corporate Items and Other segment when we entered into an amended and restated SSTL facility agreementamounts recognized as expenses in December 2016. In December 2016, we also exchanged $346.9 million of 6.625% Senior Unsecured Notes due 2019 for a like amount of 8.375% Senior Second Lien Notes due 2022. Interest expense recognized on the SSTL in the Corporate Items and Other segment in 2017 was $23.7 million, including amortization of debt issuance costs and discount. As disclosed below, interest expense for 2016 included the recognition of $5.1 million of interest expense for fees paid in connection with the exchange of senior notes and $9.1 million of previously unamortized debt issuance costs and discount related to the renewal of the SSTL facility.prior periods.
Other, net includes fair value gains (losses) on mortgage-backed securities of $(6.8) million and $0.4 million in 2017 and 2016, respectively. Higher interest rates, runoff of the underlying mortgage loans and updates to key assumptions from our third-party valuation expert contributed to the decline in the fair value of our mortgage-backed securities to $1.6 million as of December 31, 2017.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We closely monitorare actively engaged with our liquidity positionlenders and ongoing funding requirements,as a result, have successfully completed at market terms the following with respect to our current and anticipated financing needs:
•On January 22,2020, we regularly monitordid not renew and project cash flow by periodlet terminate a $50.0 million uncommitted warehouse facility used to mitigate liquidity risk.fund reverse mortgage loan draws.
In assessing our liquidity outlook, our primary focus is on six measures:
Financial projections for ongoing business revenues, costs and net income;
Anticipated amounts and timing of integration costs;
Requirements for maturing liabilities compared to amounts generated from maturing assets and operating cash flow;
Projected future acquisitions of MSRs to, at a minimum, replenish portfolio runoff;
The change in advances and match funded advances compared•On January 27, 2020, we executed an amendment to the change in match funded liabilities and availableSSTL agreement which provided for a net prepayment of $126.1 million to reduce the maximum borrowing capacity including capacity for cyclicalto $200.0 million, extended the maturity date to May 15, 2022, reduced the contractual quarterly principal payment from $6.4 million to $5.0 million and monthly peak funding dates; andmodified the interest rate.
Projected funding requirements of new investment and business initiatives.
At December 31, 2018, our cash position was $329.1 million compared to $259.7 million at December 31, 2017. We invest cash in excess of our immediate operating needs primarily in money market deposit accounts. •On October 4, 2018,March 12, 2020, we completed our acquisition of PHH. This transaction was initially cash and book value accretive, with PHH having an opening cash balance of $423.1 million, $64.7 million more than the purchase price of $358.4 million. Upon the closing of the transaction, we assumed $119.1 million of senior unsecured notes, representing $97.5 million of PHH’s 7.375% Senior Notes due 2019 and $21.5 million of PHH’s 6.375% Senior Notes due 2021. Ocwen also assumedentered into a mortgage repurchase facility with maximum borrowing of $200.0loan warehouse agreement to fund reverse mortgage loan draws by borrowers subsequent to origination. Under this agreement, the lender provides financing for up to $100.0 million to PMC on an uncommitted basis. There were no borrowings outstanding underIn October 2020, the maturity date was extended to October 29, 2021 and the capacity was temporarily increased to $150.0 million until November 15, 2020 when it was reduced to $100.0 million. Concurrently, we reduced the maximum borrowing capacity of another reverse mortgage loan warehouse agreement from $100.0 million to $1.0 million in connection with Liberty’s transfer of substantially all of its assets, liabilities, contracts and employees to PMC effective March 15, 2020. On August 10, 2020, the maturity date of this agreement was extended to August 13, 2021.
•On May 7, 2020, we renewed the OMART variable funding advance financing facility through June 30, 2021 and increased the borrowing capacity from $200.0 million to $500.0 million. On August 17, 2020, we reduced the total borrowing capacity of the OMART variable-rate notes from $500.0 million to $250.0 million in conjunction with the issuance of new fixed-rate term notes disclosed above.
•On May 7, 2020, we renewed the OFAF advance financing facility through June 30, 2021 and increased the borrowing capacity from $60.0 million to $70.0 million.
•On May 7, 2020, we renewed a mortgage loan warehouse agreement with a maximum borrowing capacity of $175.0 million ($110.0 million of which is committed) through June 30, 2021. On November 25, 2020, we upsized this facility by $100.0 million, which increased the total committed borrowing capacity to $160.0 million.
•On May 7, 2020 we renewed the Agency MSR financing facility through June 30, 2021 and reduced the borrowing capacity from $300.0 million to $250.0 million.
•On June 25, 2020, we renewed and amended a mortgage loan warehouse agreement with an original maximum borrowing capacity of $300.0 million through June 24, 2021 and reduced the borrowing capacity to $210.0 million (a $90 million committed repurchase agreement and a $120.0 million uncommitted participation agreement).
•On June 30, 2020, we amended the Ginnie Mae MSR facility to include servicing advances as eligible collateral, upsized the borrowing capacity to $127.5 million from $100 million, and accelerated the maturity to December 20, 2020. On December 23, 2020, the maturity date was extended to December 27, 2021 and the borrowing capacity was reduced to $125.0 million.
•On August 12, 2020, we issued new OMART fixed-rate term notes with a total borrowing capacity of $475.0 million and an amortization date of August 15, 2022. The existing fixed-rate term notes with a total borrowing capacity of $470.0 million were redeemed on August 17, 2020.
•On September 30, 2020, we entered into a $100.0 million uncommitted repurchase agreement to finance the purchase of EBO loans from Ginnie Mae. This agreement does not have any stated maturity date, however, each transaction has a maximum duration of four years. The cost of this line is set at each transaction date and is based on the acquisitioninterest rate on the collateral.
•On November 19, 2020, we renewed a mortgage loan warehouse agreement with a total borrowing capacity of $250.0 million to November 18, 2021. The interest rate for this facility was increased to one-month LIBOR plus 3.25% for borrowings secured by forward mortgage loans and one-month LIBOR plus 350% for reverse mortgage loan borrowings.
•On December 24, 2020, we extended the maturity date or at December 31, 2018.of the $50.0 million warehouse facility used to fund reverse tails to January 15, 2021, when it was extended for an additional year.
We have strengthened•On February 1, 2021, the borrowing capacity was temporarily increased on our cash position by monetizing a portion$100.0 million reverse mortgage loan facility to $150.0 million until February 28, 2021 when it will be reduced to $100.0 million.
See Note 14 — Borrowingsto the Consolidated Financial Statements for additional information.
A summary of our future revenue streamborrowing capacity under our NRZ agreements. We received lump-sum payments of $54.6 millionadvance facilities, mortgage warehouse facilities and $279.6 million in September 2017 and January 2018, respectively, under our agreements with NRZ. These lump-sum payments generally represent the net present value of the excess of the future revenue stream we would have received under our original agreements with NRZ over the revenue stream we now receive under our current agreements. We are effectively amortizing these lump-sum payments through our statements of operations fromMSR financing facilities is as follows at the dates such lump-sum payments were received throughindicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Total Borrowing Capacity (1) | | Available Borrowing Capacity - Committed (1) | | Available Borrowing Capacity - Uncommitted (1) | | Total Borrowing Capacity (1) | | Available Borrowing Capacity - Committed (1) | | Available Borrowing Capacity - Uncommitted (1) |
| Advance facilities | $ | 795.0 | | $ | 213.7 | | $ | — | | $ | 730.0 | | $ | 50.9 | | $ | — |
| Mortgage loan warehouse facilities | 1,037.0 | | 186.9 | | 398.4 | | 1,125.0 | | 108.4 | | 684.4 |
| MSR financing facilities | 375.0 | | 39.2 | | 13.0 | | 400.0 | | 180.0 | | — |
| Total | $ | 2,207.0 | | $ | 439.8 | | $ | 411.4 | | $ | 2,255.0 | | $ | 339.3 | | $ | 684.4 |
(1)Total Borrowing Capacity represents the end of the initial term of the original agreements,maximum amount which is generally April 2020. We are endeavoringcan be borrowed, subject to invest these lump sum payments in our business to achieve targeted investment returns within our risk appetite that will replace the foregone revenue stream and we have also deployed excess cash to reduce secured borrowings as we source these investment opportunities.
Establishing funding for growth is a key initiative to achieving our objective of returning to growth and profitability. We regularly evaluate capital structure options that we believe will most effectively provide the necessary capacity to invest in growth, address upcoming debt maturities and accommodate our business needs. For example, we are currently evaluating various options related to our SSTL, including upsizing the facility, as well as other funding structures that we believe will optimize our capital structure and access to capital. Historical losses have significantly eroded our stockholder’s equity and weakened our financial condition. To the extent we are not successful in achieving our objective of returning to profitability, funding continuing losses will limit our opportunities to grow our business.eligible collateral. Available Borrowing Capacity represents Total Borrowing Capacity less outstanding borrowings.
The available borrowing capacity under our advance financing facilities has decreasedincreased by $104.2$162.8 million from $151.0 million atas compared to December 31, 20172019 due to $46.7the $65.0 million at December 31, 2018 as we reducednet increase in total borrowing capacity and the size of these facilities to better align with our anticipated future usage. Our ability to continue to pledge collateral under our advance financing facilities depends on the performance of the advances, among other factors.$97.8 million decline in outstanding borrowings. At December 31, 2018,2020, none ofcould be funded under the available borrowing capacity could be used based on the amount of eligible collateral that had been pledged to our advance financing facilities.
At December 31, 2018, we had maximumWe may utilize committed borrowing capacity under our mortgage warehouse facilities of $1.0 billion. Ofand MSR financing facilities to the borrowing capacity extended on a committed basis, $194.6 million was available atextent we have sufficient eligible collateral to borrow against and otherwise satisfy the applicable conditions to funding. At December 31, 2018, and $62.4 million of the available2020, we had no committed borrowing capacity, could have been used based on the amount of eligible collateral, that could be pledged.and no uncommitted borrowing capacity. Uncommitted amounts ($674.7 million available at December 31, 2018) can be advanced solely at the discretion of the lender, and there can be no assurance that any uncommitted amounts will be available to us at any particular time.
At December 31, 2018, $32.42020, our unrestricted cash position was $284.8 million compared to $428.3 million at December 31, 2019. Throughout 2020, we voluntarily paid down or foregone borrowings on our facilities to reduce interest costs. We typically invest cash in excess of uncommittedour immediate operating needs in deposit accounts and other liquid assets.
We closely monitor our liquidity position and ongoing funding requirements, and we regularly monitor and project cash flows over various time horizons as a way to anticipate and mitigate liquidity risk. As uncertainties in market conditions decline, we will continue to seek to optimize our cash management and may reduce our unrestricted cash position to further fund our growth.
In assessing our liquidity outlook, our primary focus is on available cash on hand, unused available funding and the following six forecast measures:
•Financial projections for ongoing net income, excluding the impact of non-cash items, and working capital needs including loan repurchases;
•Requirements for amortizing and maturing liabilities compared to sources of cash;
•The projected change in advances compared to the projected borrowing capacity couldto fund such advances under our facilities, including capacity for monthly peak needs;
•Projected funding requirements for acquisitions of MSRs and other investment opportunities;
•Potential payments or recoveries related to legal and regulatory matters, insurance, taxes and MSR transactions; and
•Funding capacity for whole loans and tail draws under our reverse mortgage commitments subject to warehouse eligibility requirements.
COVID-19 Update
The COVID-19 environment created unprecedented changes in the economy, volatility in the capital markets, and uncertainties in the mortgage industry. As of today, while market conditions have stabilized and our prior scenario planning has proven somewhat conservative, uncertainties related to the duration, severity and impact of the economic downturn remain. Two critical factors affect our liquidity management in the current COVID-19 environment: our increased advancing requirements as servicer during each investor remittance period, and the uncertainties of daily margin calls on our collateralized debt facilities and derivative instruments.
First, as servicer, we are required to advance to investors the loan P&I installments not collected from borrowers for those delinquent loans, including those on forbearance. We also advance T&I and Corporate advances on properties that are in default or have been used basedforeclosed. Our obligations to make these advances are governed by servicing agreements or guides, depending on investors or guarantor. As subservicer, we are also required to make P&I, T&I and Corporate advances on behalf of servicers following the amountservicing agreements or guides. However, servicers are generally required to reimburse us within 30 days of eligibleour advancing under the terms of the subservicing agreements, and we are generally reimbursed by NRZ the same day we fund P&I advances, or within no more than three days for servicing advances and certain P&I advances under the Ocwen agreements. Refer to Note 25 — Commitments to the Consolidated Financial Statements for further description of servicer advance obligations.
Second, we are generally subject to daily margining requirements under the terms of our MSR financing facilities and daily cash calls for our TBAs and interest rate swap futures. Declines in fair value of our MSRs due to declines in market interest rates, assumption updates or other factors require that we provide additional collateral that could be pledged, assumingto our lenders were willingunder MSR financing facilities. Similarly, declines in fair value of our derivative instruments require that we provide additional collateral to do so.the clearing counterparties.
We are requiredfocused on ensuring that we have sufficient liquidity sources to maintain certain minimum levelscontinue to operate through the pandemic as well as after. As such, in 2020 we increased the total borrowing capacity of cashour OMART and OFAF advance financing facilities from $730.0 million to $795.0 million and extended the amortization dates to June 2021 and August 2022. We also amended our Ginnie Mae MSR facility to include servicing advances as eligible collateral and increased the total borrowing capacity from $100.0 million to $125.0 million. We continuously evaluate alternative financings to diversify our sources of funds, optimize maturities and reduce our funding cost.
Regarding the current maturities of our borrowings, as of December 31, 2020, we have approximately $949.0 million of debt outstanding that would either come due, begin amortizing or require partial repayment in the next 12 months. This amount is comprised of $21.5 million 6.375% senior unsecured notes, $20.0 million in contractual repayments of our SSTL, $451.7 million of borrowings under forward and reverse mortgage warehouse facilities, $106.3 million of variable funding and term notes under advance financing facilities that will enter their respective amortization periods, $322.8 million outstanding under our debt agreementsAgency and portionsGinnie Mae MSR financing facilities and $26.7 million of our cash balances are held in our non-U.S. subsidiaries. We would have to repatriatescheduled principal amortization on the cash heldPLS Notes secured by our non-U.S. subsidiaries, potentially with tax consequences and in compliance with applicable laws, should we wish to utilize that cash in the U.S.PLS MSRs.
We have considered the impact of financial projections on our liquidity analysis and have evaluated the appropriateness of the key assumptions in our forecast such as revenues, expenses, our assessmentfinancial forecasts. As part of the likely impact of open regulatory matters, recurring and nonrecurring costs and sales of assets. Wethis analysis, we have analyzed ouralso assessed the cash requirements and financial obligations. Based upon these evaluations and analysis, we believe that we have sufficient liquidity and access to adequate sources of new capital to meet our obligations and fund our operations for the next twelve months.
Sources of Funds
Our primary sources of funds for near-term liquidity are:
Collections of servicing fees and ancillary revenues;
Collections of advances in excess of payments;
Proceeds from match funded advance financing facilities;
Proceeds from other borrowings, including warehouse facilities; and
Proceeds from sales and securitizations of originated loans and repurchased loans.
Servicing advances are an important component ofoperate our business and represent amounts that we, as servicer, are required to advance to, or on behalfservice our financial obligations coming due. We have assessed the range of our servicing clients if we do not receive such amounts from borrowers. Our use of advance financing facilities is integral to our servicing advance financing strategy. Revolving variable funding notes issued by our advance financing facilities to large global financial institutions have revolving periods of 12 to 18 months. Term notes are generally issued to institutional investors with one-, two- or three-year maturities.
We use mortgage loan warehouse facilities to fund newly originated loans on a short-term basis until they are sold to secondary market investors, including GSEs or other third-party investors. These warehouse facilities are structured as repurchase or participation agreements under which ownershippotential impacts of the loans is temporarily transferredCOVID-19 pandemic on our financial projections and projected liquidity under base case, adverse and severely adverse scenarios. We believe the recent issuances, renewals and amendments we have executed will provide sufficient liquidity in all
of these scenarios. We expect to renew, replace or extend our borrowings to the lender. Currently,extent necessary to finance our master repurchase and participation agreements generally have maximum terms of 364-days. The funds are typically repaid using the proceeds from the sale of the loansbusiness on or prior to the secondary market investors, usually within 30 days.
We also rely on the secondary mortgage market as a source of long-term capital to supporttheir respective maturities consistent with our lending operations. Substantially all of the mortgage loans that we originate or purchase are sold or securitized in the secondary mortgage market in the form of residential mortgage backed securities guaranteed by Fannie Mae or Freddie Mac and, in the case of mortgage backed securities guaranteed by Ginnie Mae, are mortgage loans insured or guaranteed by the FHA or VA.historical experience.
Collateral
Our assets held as collateral related to secured borrowings, committed under sale or other contractual obligations and which may be subject to a secured lien under the SSTL are as follows at December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | |
| | Total Assets | | Collateral for Secured Borrowings | | Sale Commitments | | Other Commitments (1) | | Other (2) |
| Cash | $ | 329,132 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 329,132 |
|
| Restricted cash | 67,878 |
| | 26,626 |
| | — |
| | 41,252 |
| | — |
|
| Mortgage servicing rights | 1,457,149 |
| | 985,576 |
| | 9,867 |
| | — |
| | 461,706 |
|
| Advances, net | 249,382 |
| | 11,162 |
| | 31,216 |
| | — |
| | 207,004 |
|
| Match funded assets | 937,294 |
| | 937,294 |
| | — |
| | — |
| | — |
|
| Loans held for sale | 242,622 |
| | 143,704 |
| | — |
| | — |
| | 98,918 |
|
| Loans held for investments | 5,498,719 |
| | 5,440,535 |
| | — |
| | — |
| | 58,184 |
|
| Receivables, net | 198,262 |
| | — |
| | — |
| | — |
| | 198,262 |
|
| Premises and equipment, net | 33,417 |
| | — |
| | — |
| | — |
| | 33,417 |
|
| Other assets | 379,567 |
| | — |
| | — |
| | 320,032 |
| | 59,535 |
|
| Assets related to discontinued operations | 794 |
| | — |
| | — |
| | — |
| | 794 |
|
| Total Assets | $ | 9,394,216 |
| | $ | 7,544,897 |
| | $ | 41,083 |
| | $ | 361,284 |
| | $ | 1,446,952 |
|
| |
(1) | Other Commitments includes Restricted cash and deposits held as collateral to support certain contractual obligations, and Contingent loan repurchase assets related to the Ginnie Mae early buyout program for which a corresponding liability is recognized in Other liabilities. |
| |
(2) | The borrowings under the SSTL are secured by a first priority security interest in substantially all of the assets of Ocwen, OLS, PHH, PMC and the other guarantors thereunder, excluding among other things, 35% of the voting capital stock of foreign subsidiaries, securitization assets and equity interests of securitization entities, assets securing permitted funding indebtedness and non-recourse indebtedness, REO assets, Agency MSRs with respect to which an acknowledgment agreement acknowledging such security interest has not been obtained, as well as other customary carve-outs (collectively, the Collateral). The Collateral is subject to certain permitted liens set forth under the SSTL and related security agreement. The Senior Secured Notes are guaranteed by Ocwen and the other guarantors that guarantee the SSTL, and the borrowings under the Senior Secured Notes are secured by a second priority security interest in the Collateral. Security interests securing borrowings under the SSTL and Senior Secured Notes may include amounts presented in Other as well as certain assets presented in Collateral for Secured Borrowings and Sale Commitments, subject to |
permitted liens as defined in the applicable debt documents. The amounts presented here may differ in their calculation and are not intended to represent amounts that may be used in connection with covenants under the applicable debt documents.
Use of Funds
Our primary uses of funds are:in normal course include:
•Payment of interestoperating costs and operating costs;corporate expenses;
Payment of integration costs;
•Payments for advances in excess of collections;
•Investing in our servicing and lendingoriginations businesses, including MSR and other asset acquisitions;
Funding of originated•Originated and repurchased loans, including scheduled and unscheduled equity draws on reverse mortgage loans;
•Payment of margin calls under our MSR financing facilities and derivative instruments;
•Repayments of borrowings, including match funded liabilitiesunder our MSR financing, advance financing and warehouse facilities;facilities, and payment of interest expense; and
Working•Net negative working capital and other general corporate purposes.cash outflows.
Under the terms of our SSTL facility agreement, subject to certain exceptions, we are required to prepay the SSTL with certain percentage amounts of excess cash flow as defined and 100% of the net cash proceeds from certain permitted asset sales, subject to our ability to reinvest such proceeds in our business within 270 days of receipt. During 2018, we voluntarily prepaid $50.0 million
Sources of the SSTL balanceFunds
Our primary sources of funds for the purposenear-term liquidity in normal course include:
•Collections of reducing interest costs.servicing fees and ancillary revenues;
Outlook•Collections of advances in excess of new advances;
Regarding the current maturities•Proceeds from match funded advance financing facilities;
•Proceeds from other borrowings, including warehouse facilities and MSR financing facilities;
•Proceeds from sales and securitizations of originated loans and repurchased loans; and
•Net positive working capital from changes in other assets and liabilities.
Servicing advances are an important component of our borrowings,business and represent amounts that we, as of December 31, 2018, we have approximately $898.3 million of debt outstanding under coming due in the next 12 months. The revolving periodsservicer, are required to advance to, or on behalf of, our servicing clients if we do not receive such amounts from borrowers. Our use of advance financing facilities is integral to our cash and liquidity management strategy. Revolving variable funding and term notes underissued by our advance financing facilities to financial institutions typically have a revolving period of 12 months. Term notes are generally issued to institutional investors with one-, two- or three-year revolving periods. Additionally, certain of our financing and subservicing agreements permit us to retain advance collections for a total borrowing capacityperiod ranging from one to two business days before remittance, thus providing a source of $290.0 millionshort-term liquidity.
We use mortgage loan repurchase and $385.0 million, respectively,participation facilities (commonly called warehouse lines) to fund newly-originated loans on a short-term basis until they are scheduledsold to end during 2019, subjectsecondary market investors, including GSEs or other third-party investors, and to renewal, replacementfund repurchases of certain Ginnie Mae forward loans, HECM loans, second-lien loans and other types of loans. Warehouse facilities are structured as repurchase or extension. Total borrowings outstanding on these notes was $628.3 million at December 31, 2018. We had $155.7 million outstandingparticipation agreements under which ownership of the loans is temporarily transferred to the lender. These facilities contain eligibility criteria that include aging and concentration limits by loan type among other provisions. Currently, our master repurchase and participation agreements generally have maximum terms of 364-days. The funds are typically repaid using the proceeds from the sale of the loans to the secondary market investors, usually within 30 days.
We also rely on the secondary mortgage market as a source of consistent liquidity to support our lending operations. Substantially all of the mortgage loans that we originate or purchase are sold or securitized in the secondary mortgage market in the form of residential mortgage backed securities guaranteed by Fannie Mae or Freddie Mac and, in the case of mortgage backed securities guaranteed by Ginnie Mae, are mortgage loans insured or guaranteed by the FHA, VA or United States Department of Agriculture (USDA).
We regularly evaluate financing structure options that we believe will most effectively provide the necessary capacity to support our investment plans, address upcoming debt maturities and accommodate our business needs. We have entered into an agreement with Oaktree Capital Management L.P. (Oaktree) to launch an MSR funding vehicle, MAV, in the first half of 2021 to accelerate the growth of our servicing volume. We also recently entered into an agreement with Oaktree in connection with an additional investment in Ocwen. See Capital Resources Outlook below, Note 25 — Commitments and Note 28 — Subsequent Events for additional information regarding this agreement. Our financing new loan originationsstructure actions are targeted at optimizing access to capital and loan repurchasesdebt financing, improving our cost of funds, enhancing financial flexibility, bolstering liquidity and reducing funding risk while maintaining leverage within our risk tolerances. Historical losses have significantly eroded our stockholders’ equity and weakened our financial condition. To the extent we are not successful in achieving our objective of returning to profitability, funding continuing losses will limit our opportunities to grow our business through capital investment.
Capital Resources Outlook
On February 9, 2021 we announced the conclusion of the strategic process we began in May 2020. As a result of this process, we have reached an agreement with Oaktree for a $250.0 million cash investment into Ocwen. This investment is in addition to the previously announced strategic alliance to launch MSR Asset Vehicle, LLC (MAV). These combined investments from Oaktree are expected to contribute approximately $460.0 million into Ocwen and the MSR joint venture to fund growth and strengthen the corporate capital structure.
The debt investment by Oaktree will be structured as senior secured notes. The investment with be an aggregate of $285.0 million principal, with $250.0 million proceeds and $35.0 million of original issue discount (OID) and is subject to certain conditions, including, but not limited to, the contemporaneous consummation by Ocwen or one of its subsidiaries of an additional debt financing not to exceed $450.0 million. The Oaktree notes will bear interest at 12% cash or 13.25% payment-in-kind (PIK), with some limitations on PIK. The investment will be made in two tranches with the first investment of $199.5 million on a date mutually agreed and subject to certain conditions, including the refinancing of our corporate debt. In preparation for this refinancing and investment by Oaktree, on February 2, 2021, we submitted notices of redemption to the trustees of the 6.375% PHH notes and the 8.375% senior secured second lien notes, according to the indentures governing the notes, subject to a “financing condition”. We intend to use $100.0 million of the proceeds from the first tranche of the Oaktree notes to repay a portion of our corporate debt. The second investment of $85.5 million is subject to the launching of MAV and a minimum total net worth of $360.0 million at Ocwen Financial Corporation. We expect to use proceeds from the second tranche of the Oaktree notes to fund our investment in the MAV joint venture and for general corporate purposes, including to accelerate growth of our Originations and Servicing businesses.
If we are successful in the corporate debt refinancing, we expect we will reduce corporate indebtedness at the PHH and PMC level by approximately $100 million, extend overall corporate debt maturities by over three years, and provide greater financial flexibility than we currently have. As part of the MAV transaction and Oaktree financing, we have agreed to issue warrants to Oaktree to purchase shares of our common stock equal to 12.0% of our then outstanding common stock at an exercise price of $26.82 per share, subject to anti-dilution adjustments.In addition, Oaktree will have the option to purchase up to 4.9% of our fully diluted outstanding common stock at the closing of the MAV transaction at a purchase price of $23.15 per share and Oaktree will be issued warrants to purchase additional common stock equal to 3% of our then outstanding common stock at a purchase price of $24.31 per share, subject to anti-dilution adjustments.
There can be no assurance that the issuance and sale of the senior secured notes to Oaktree, or the additional debt refinancing, will be consummated. Similarly, there can be no assurance regarding the timing of the execution of such transactions, or that the anticipated benefits of such transactions will be realized. See Note 28 — Subsequent Events.
Collateral
Our assets held as collateral related to secured borrowings, committed under sale or other contractual obligations and which may be subject to a secured lien under the SSTL are as follows at December 31, 2018, all2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Collateral for Secured Borrowings | | | | | |
| Assets | Total | | Match Funded Liabilities | | Financing Liabilities | | Mortgage Loan Warehouse/MSR Facilities | | Sales and Other Commitments | | Other | |
| Cash | $ | 284.8 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 284.8 | | |
| Restricted cash | 72.5 | | | 14.2 | | | — | | | 5.9 | | | 52.3 | | | — | | |
| MSRs (1) | 1,294.8 | | | — | | | 567.0 | | | 728.4 | | | — | | | — | | |
| Advances, net | 828.2 | | | 651.6 | | | — | | | 82.1 | | | — | | | 94.5 | | |
| Loans held for sale | 387.8 | | | — | | | — | | | 359.1 | | | — | | | 28.7 | | |
| Loans held for investment | 7,006.9 | | | — | | | 6,882.0 | | | 96.3 | | | — | | | 28.6 | | |
| Receivables, net | 187.7 | | | — | | | — | | | 47.2 | | | — | | | 140.5 | | |
| Premises and equipment, net | 16.9 | | | — | | | — | | | — | | | — | | | 16.9 | | |
| Other assets | 571.5 | | | — | | | — | | | 6.3 | | | 497.6 | | | 67.5 | | |
| Total assets | $ | 10,651.1 | | | $ | 665.8 | | | $ | 7,449.0 | | | $ | 1,325.5 | | | $ | 549.9 | | | $ | 661.5 | | |
| | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | |
| HMBS - related borrowings | $ | 6,772.7 | | | $ | — | | | $ | 6,772.7 | | | $ | — | | | $ | — | | | $ | — | | |
| Other financing liabilities | 576.7 | | | — | | | 576.7 | | | — | | | — | | | — | | |
| Match funded liabilities | 581.3 | | | 581.3 | | | — | | | — | | | — | | | — | | |
| Other secured borrowings, net | 1,069.2 | | | — | | | — | | | 890.3 | | | — | | | 178.9 | | |
| Senior notes, net | 311.9 | | | — | | | — | | | — | | | — | | | 311.9 | | |
| Other liabilities | 924.0 | | | — | | | — | | | — | | | 497.6 | | | 426.4 | | |
| Total Liabilities | $ | 10,235.8 | | | $ | 581.3 | | | $ | 7,349.4 | | | $ | 890.3 | | | $ | 497.6 | | | $ | 917.2 | | |
| | | | | | | | | | | | |
| Total Equity | $ | 415.3 | | | | | | | | | | | | |
(1)Certain MSR cohorts with a net negative fair value of which matures in 2019. Finally, in addition to scheduled repayments of $16.8$0.6 million under our Senior Secured Term Loan, $97.5 million of PHH’s 7.375% Senior Notes are also due 2019.
We believe that we will be able to renew, replace or extend our debt agreements to the extent necessary to finance our business before or as they become due, consistent with our historical experience.
We are actively engaged with our lenders and as a result, have successfully completed the following with respect to our current and anticipated financing needs:
Through multiple transactions over the course of 2018, we amended and refinanced our Ocwen Master Advance Receivables Trust (OMART) and Ocwen Freddie Advance Funding (OFAF) advance facilities and we paid off and terminated our Ocwen Servicer Advance Receivables Trust (OSART) advance facility. We reduced the maximum borrowing capacity under our advance facilities from $1.1 billion at December 31, 2017 to $825.0 million at December 31, 2018 in line with the decline in advance balances and rebalanced the mix of variable and term notes. We also modified the facilities to add PMC as a seller. The weighted average interest rate on our outstanding borrowings under these facilities increased to 3.61% at December 31, 2018 from 3.16% at December 31, 2017.
Through multiple transactions over the course of 2018, we extended or renewed mortgage warehouse and repurchase agreements supporting our origination and loan repurchase activities. We increased our maximum borrowing capacity to $1.0 billion, $300.0 million on a committed basis, at December 31, 2018 from $687.5 million, $237.5 million on a committed basis, at December 31, 2017. These changes were executed to ensure the availability of liquidity to fund the growth in our forward and reverse lending businesses.
In December 2018, we repurchased $16.0 million of our 8.375% Senior Secured Second Lien Notes that mature in November 2022 at a price of 96%.
On December 21, 2018, we redeemed the remaining $3.1 million of our 6.625% Senior unsecured notes due in May 2019, at a redemption price of 100.0% of the outstanding principal balance plus accrued and unpaid interest.
On January 23, 2018, we voluntarily terminated our Automotive Capital Asset Receivables Trust (ACART) Loan Series 2017-1 automotive dealer floor plan loan agreement pursuant to our exit of the automotive capital services line of business.
On February 4, 2019, we entered into a master participation agreement under which the lender will provide $300.0 million of borrowing capacity on an uncommitted basis for loan originations.
Our liquidity forecast requires management to use judgment and estimates and includes factors that may be beyond our control. Additionally, our business has been undergoing substantial change, which has magnified the uncertainties that are inherent in the forecasting process. Our actual results could differ materially from our estimates. If we were to default under any of our debt agreements, it could become very difficult for us to renew, replace or extend some or all of our debt agreements. Challenges to our liquidity position could have a material adverse effect on our operating results and financial
condition and could cause us to take actions that would be outsidepresented as Other are excluded from the normal courseeligible collateral of our operationsthe facilities and are comprised of $16.3 million of positive fair value related to generate additional liquidity.RMBS and $16.9 million of negative fair value related to private EBO and PLS MSRs.
See Note 14 — Borrowings for information on assets held as collateral related to secured borrowings, committed under sale or other contractual obligations and which may be subject to a secured lien under the SSTL.
Covenants
Our debt agreements contain various qualitative and quantitative covenants including financial covenants, covenants to operate in material compliance with applicable laws and regulations, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring additional debt, paying dividends, repurchasing or redeeming capital stock, transferring assets or making loans, investments or acquisitions. Because of the covenants to which we are subject, we may be limited in the manner in which we conduct our business and may be limited in our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, nonpayment of principal or interest, noncompliance with our covenants, breach of representations, the occurrence of a material adverse change, insolvency, bankruptcy, certain material judgments and litigation and changes of control. See Note 14 — Borrowingsto the Consolidated Financial Statements for additional information regarding our covenants.
Covenants and default provisions of this type are commonly found in debt agreements such as ours. Certain of these covenants and default provisions are open to subjective interpretation and, if our interpretation were contested by a lender, a
court may ultimately be required to determine compliance or lack thereof. In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations, and other legal remedies, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We believe that we are in compliance with the qualitative and quantitative covenants in our debt agreements as of the date this Annual Report on Form 10-K is filed with the SEC. Given the current market conditions created by the COVID-19 pandemic, there are no assurances we will be able to maintain compliance with our covenants.
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a company, security or obligation.company’s debt obligations. Lower ratings generally result in higher borrowing costs and reduced access to capital markets. The following table summarizes our current ratings and outlook by the respective nationally recognized rating agencies. A securitiescredit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time.
| | | | | | | | | | | | | | | | | | | | | | | | |
| Rating Agency | | | | Long-term Corporate Rating | | | | Review Status / Outlook | | Date of last action |
| Moody’s | | | | Caa1 | | | | Negative | | September 11, 2019 |
| S&P | | | | B- | | | | Negative | | July 23, 2020 |
| | | | | | |
Rating Agency | | Long-term Corporate Rating | | Review Status / Outlook | | Date of last action |
Moody’s | | Caa1 | | Stable | | December 11, 2018 |
S&P | | B- | | Negative | | June 18, 2018 |
Fitch | | Withdrew (1) | | Withdrew (1) | | July 25, 2018 |
| |
(1) | Withdrawn as a result of our decision to allow our annual contract with Fitch for corporate ratings to expire as part of our ongoing efforts to reduce costs. |
As of December 31, 2018, the S&P long-term corporate rating was “B-”. On December 11, 2018, Moody’s affirmed the long-term corporate rating of “Caa1”. On July 25, 2018, Fitch affirmed23, 2020, S&P removed the long-term issuer defaultCreditWatch with negative implications that was placed on our ratings on April 3, 2020 as a result of uncertainty around the financial impacts resulting from COVID-19. S&P revised the rating to a Negative Outlook based on our reported preliminary results for the second quarter that showed sufficient liquidity to manage servicing advance requirements from COVID-19-related forbearances, including nearly $314 million of “B-”cash and withdrew all corporateover $750 million of credit availability on our servicing advance, MSR, and mortgage warehouse lines. On August 21, 2020, Moody’s reaffirmed their ratings. In addition, Ocwen has been able to maintain cushion on its tangible net worth debt covenants. It is possible that additional actions by credit rating agencies could have a material adverse impact on our liquidity and funding position, including materially changing the terms on which we may be able to borrow money.
Cash Flows
Our operating cash flow is primarily impacted by operating results, changes in our servicing advance balances, the level of mortgage loan production, and the timing of sales and securitizations of mortgage loans.loans, and the margin calls required under our MSR financing facilities or derivative instruments. We classify proceeds from the sale of servicing advances, including advances sold in connection with the sale of MSRs, purchase of MSRs through flow purchase agreements, GSE Cash Window and bulk acquisitions as investing activity. We classify changes in HECM loans held for investment as investing activity and changes in the related HMBS secured financingborrowings as financing activity.
Our NRZ agreements have a significant impact on our consolidated statements of cash flows. Because the lump-sum payments we received in connection with our 2017 Agreements and New RMSR Agreements arewere recorded as secured financings, additions to, and reductions in, the balance of those secured financings arewere recognized as financing activity in our consolidated statements of cash flows.flows through April 2020. Excluding the impact of changes to the secured financings attributed to changes in fair value, changes in the balance of these secured financings are reflected in cash flows from operating activities despite having no impact on our consolidated cash balance. Net cash provided by operating activities for the years ended December 31, 2020, 2019 and 2018 2017 and 2016 includes $136.7$35.1 million, $1.9$101.0 million and $0,$134.5 million, respectively, of such cash flows and they were offset by corresponding amounts in net cash used in financing activities in the same periods. Similarly, in the third and fourth quarters of 2018, amounts of $33.8
million and $32.4 million, respectively, were reflected in cash flows from operating activities and they were offset by corresponding amounts in net cash used in financing activities in the same periods.
Cash flows for the year ended December 31, 20182020
Our operating activities provided $272.6$261.0 million of cash largely due to $258.9$213.3 million of net collections of servicing advances. Netadvances, mostly P&I advances, partially offset by net cash paid on loans held for sale during the year was $90.1of $121.5 million.
Our investing activities used $344.9$527.9 million of cash. The primary uses of cash in our investing activities include net cash outflows in connection with our HECM reverse mortgages of $520.0 million. Cash inflows include net cash of $64.7$258.9 million, and restricted cash of $38.8$273.2 million acquired in connection with acquisition of PHH, net proceeds of $33.0 million on dealer financing notes issued by our automotive capital services business, which we decided to exit in January 2018, and the receipt of $41.1 million of net proceeds from the sale of MSRs and related advances.purchase MSRs.
Our financing activities provided $166.7$131.8 million of cash. Cash inflows include $948.9$1.2 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, less repayments on the related financing liability of $935.8 million. In addition, we increased borrowings under our mortgage loan warehouse facilities and MSR financing facilities by $119.5 million and $68.5 million, respectively. Cash outflows include repayments of $141.1 million on the SSTL, $97.8 million of net repayments on advance match funded liabilities, and $101.8 million of net payments on the financing liabilities related to MSRs pledged. In addition, we also paid $7.7 million of debt issuance costs related to our SSTL facility amendment and repurchased shares of our common stock for $4.6 million.
Cash flows for the year ended December 31, 2019
Our operating activities provided $151.9 million of cash largely due to $105.1 million of net collections of servicing advances. Net cash paid on loans held for sale during the year was $108.8 million.
Our investing activities used $587.4 million of cash. The primary uses of cash in our investing activities include net cash outflows in connection with our HECM reverse mortgages of $467.4 million. Cash outflows also include $145.7 million to purchase MSRs.
Our financing activities provided $530.8 million of cash. Cash inflows include $962.1 million received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, less repayments on the related financing liability of $392.0$549.6 million. We increased borrowings under the SSTL through the issuance of an additional term loan of $120.0 million (before a discount of $0.9 million), less repayments of $25.4 million. In January 2018, Ocwen received a lump-sum payment of $279.6addition, we increased borrowings under our mortgage loan warehouse facilities by $176.5 million in accordance with the terms of the New RMSR Agreements.and borrowed $314.4 million under new MSR financing facilities. Cash outflows include $220.3$99.2 million of net repayments on advance match funded liabilities as a result of advance recoveries, $211.8$214.4 million of net payments on the financing liabilityliabilities related to MSRs pledged, $66.8 million of repayments on the SSTL and $18.5$131.8 million to redeem and repurchase seniorSenior notes. In addition, we reduced borrowings under our mortgage loan warehouse facilities by $100.1 million.
Cash flows for the year ended December 31, 2017
Our operating activities provided $409.0 million of cash largely due to $330.1 million of net collections of servicing advances. Net cash paid on loans held for sale during the year was $33.1 million.
Our investing activities used $839.2 million of cash. The primary uses of cash in our investing activities include net cash outflows relating to our HECM reverse mortgages of $833.2 million, net cash outflows of $11.4 million relating to our automotive capital services business and additions to premises and equipment of $9.1 million. Cash inflows include the receipt of $13.7 million of net proceeds from the sale of MSRs and related advances.
Our financing activities provided $430.4 million of cash. Cash inflows include $1.3 billion received in connection with our reverse mortgage securitizations, less repayments on the related financing liability of $418.5 million. In 2017, we received $54.6 million of lump sum payments from NRZ following receipt of the required third-party consents and transfer of legal title to the MSRs underlying certain Rights to MSRs. Also, Ocwen sold to NRZ 6,075,510 shares of newly-issued Ocwen common stock in July 2017 for $13.9 million of proceeds. Cash outflows include $282.4 million of net repayments on match funded liabilities as a result of advance recoveries and $36.8 million of repayments on the SSTL. In addition, we reduced borrowings under our mortgage loan warehouse facilities by $95.1 million.
Cash flows for the year ended December 31, 2016
Our operating activities provided $421.2 million of cash largely due to $452.4 million of net collections of servicing advances. Net cash paid on loans held for sale during the year was $120.6 million.
Our investing activities used $791.6 million of cash. The primary uses of cash in our investing activities included net cash outflows related to our HECM reverse mortgages of $855.2 million, net cash outflows of $35.0 million relating to our automotive capital services business and additions to premises and equipment of $33.5 million. Additions to premises and equipment in 2016 were driven largely by investments in technology infrastructure as we have moved to reduce our dependence on third-party service providers. Cash inflows include the receipt of $150.1 million of net proceeds from the sale of MSRs and related advances.
Our financing activities provided $316.2 million of cash. Cash inflows included $1.1 billion received in connection with our reverse mortgage securitizations, less repayments on the related financing liability of $230.0 million. Cash outflows include $303.1 million of net repayments on match funded liabilities as a result of advance recoveries and $76.4 million of repayments on the SSTL. Cash outflows for the year also include the repurchase of 991,985 shares of common stock under our stock repurchase program for $5.9 million prior to its expiration on July 31, 2016.
RISK MANAGEMENT
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established policies and procedures intended to identify, assess, monitor and manage the types of risk to which we are subject, including strategic, market, credit, liquidity and operational risks.
Our Chief Risk and Compliance Officer is responsible for the design, implementation and oversight of our global risk management and compliance programs. Risks unique to our businesses are governed through various management processes
and governance committees to oversee risk and related control activities across the company and provide a framework for potential issues to be identified, assessed and remediated under the direction of senior executives from our business, finance, risk, compliance, internal audit and law departments, as applicable. Information is aggregated and reports on risk matters are made to the Board of Directors, its Risk and Compliance Committee or its other committees, as applicable, to enable the Board of Directors and its committees to fulfill itstheir governance and oversight responsibilities.
Strategic Risk
We are exposed to risk with respect to the strategic initiatives we need to undertake in order to return to growth and profitability. Strategic risk represents the risk to shareholder or enterprise value, current or future earnings, capital and liquidity from adverse business decisions and/or improper implementation of business strategies. Management is responsible for developing and implementing business strategies that leverage our core competencies and are appropriately structured, resourced and executed. Oversight for our strategic actions is provided by the Board of Directors. Our performance, relative to our business plans and our longer-term strategic plans, is reviewed by management and the Board of Directors.
To achieve our near-term financial objectives, we believe we need to execute on the PHH integration to create value, reengineer our cost structure, establish funding for growth, replenish portfolio runoff and restore growth focus and fulfill our regulatory commitments and resolve remaining legacy matters.key business initiatives discussed above under “Overview”. Our ability to achieve our objectives is highly dependent on the success of our business relationships with our critical counterparties like the GSEs, FHFA, Ginnie Mae, our lenders, regulators, significant customers and our ability to attract new customers, bothall of which are impacted by our capability to adequately address the competitive challenges we may face. There can be no assurance that we will be successful in executing on these initiatives. Further, there can be no assurance that even if we execute on these initiatives we will be able to return to profitability. In addition to successful operational execution of our key initiatives, our success will also depend on market conditions and other factors outside of our control. If we continue to experience losses, our share price, business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
Market Risk
Interest Rates
Our principal market risk exposure is tothe impact of interest rate risk due to the impactchanges on our mortgage-related assets and commitments, including MSRs, loans held for sale, loans held for investment and interest rate lock commitments (IRLCs). ChangesIn addition, changes in interest rates could materially and adversely affect our volume of mortgage loan originations or reduce theresult in MSR fair value of our MSRs.changes. We also have exposure to the effects of changes in interest rates on our floating-rate borrowings, including advance financing facilities.
Interest rate risk is a function of (i) the timing of re-pricing and (ii) the dollar amount of assets and liabilities that re-price at various times. We are exposed to interest rate risk to the extent that our interest rate sensitiverate-sensitive liabilities mature or re-price at different speeds, or on different bases, than interest-earning assets.
Our management level Credit andmanagement-level Market Risk Committee establishes and maintains policies that govern our hedging program, including such factors as our targetmarket volatility, duration and interest rate sensitivity measures, targeted hedge ratio,ratios, the hedge instruments that we are permitted to use in our hedging activities and the counterparties with whom we are permitted to enter into hedging transactions.transactions and our liquidity risk profile. See Note 1617 — Derivative Financial Instruments and Hedging Activities to the Consolidated Financial Statements for additional information regarding our use of derivatives.
Home Prices
Inactive reverse mortgage loansOur market risk exposure may also be affected by the phase-out of LIBOR, expected to occur by the end of 2021. However, for U.S dollar LIBOR, it now appears that the relevant date may be deferred to June 30, 2023 for certain tenors (including overnight and one, three, six and 12 months), at which time the maximum claim amountLIBOR administrator has not been met are generally foreclosedindicated that it intends to cease publication of U.S. dollar LIBOR. Despite this potential deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. Many of our debt facilities incorporate LIBOR. These facilities either mature prior to the end of 2021 (or June 30, 2023) or have terms in place that provide for an alternative to LIBOR upon on behalf of Ginnie Maeits phase-out. As we renew or replace these debt facilities, we will need to work with our counterparties to incorporate alternative benchmarks. There is presently substantial uncertainty relating to the real estate owned remainingprocess and timeline for developing LIBOR alternatives, how widely any given alternative will be adopted by parties in the related HMBS until liquidation. Inactive MCA repurchased loans are generally foreclosed uponfinancial markets, and liquidated by the HMBS issuer. Although active and inactive reverse mortgage loans are insured by FHA, we may incur expenses and losses in the process of repurchasing and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines. In addition, in certain circumstances, weextent to which alternative benchmarks may be subject to real estate pricevolatility or present risks and challenges that LIBOR does not. Consequently, it is difficult to predict what effect, if any, the phase-out of LIBOR and the use of alternative benchmarks may have on our business or on the overall financial markets. If LIBOR alternatives re-allocate risk among parties in a way that is disadvantageous to market participants such as Ocwen, or if uncertainty relating to the extent weLIBOR phase-out disrupts financial markets, it could have a material adverse effect on our financial position, results of operations, and liquidity.
MSR Hedging Strategy
MSRs are unablecarried at fair value with changes in fair value being recorded in earnings in the period in which the changes occur. The fair value of MSRs is subject to liquidate real estate owned withinchanges in market interest rates and prepayment speeds. Beginning in September 2019, management implemented a hedging strategy to partially offset the FHA program guidelines.changes in fair value of our net MSR portfolio attributable to interest rate changes. As a general matter, the impact of interest rates on the fair value of our MSR portfolio is naturally offset by other exposures, including our loan pipeline and our economic MSR value embedded in our reverse mortgage loan portfolio. Our hedging strategy is targeted at mitigating the residual exposure, which we refer to as our net MSR portfolio seasons,exposure. We define our net MSR portfolio exposure as follows:
•our more interest rate-sensitive Agency MSR portfolio,
•less the Agency MSRs subject to our agreements with NRZ (See Note 10 — Rights to MSRs),
•less the unsecuritized reverse mortgage loans and tails classified as held-for-investment,
•less the asset value for securitized HECM loans net of the corresponding HMBS-related liability, and
•less the net value of our held for sale loan portfolio and lock commitments (pipeline).
We determine and monitor daily the hedge coverage based on the duration and interest rate sensitivity measures of our net MSR portfolio exposure, considering market and liquidity conditions. During 2020, our hedging strategy was targeted to provide partial coverage of our net MSR portfolio exposure of approximately 50%. The changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate changes due to the partial hedge coverage and other factors.
The following table illustrates the composition of our net MSR portfolio exposure at December 31, 2020 with the associated interest rate sensitivity for a hypothetical, instantaneous decrease in interest rate of 25 basis points assuming a parallel shift in interest rate yield curves (refer to the description below under Sensitivity Analysis). The amounts based on market risk sensitive measures are hypothetical and presented for illustrative purposes only. Changes in fair value cannot be extrapolated because the relationship to the change in fair value may not be linear.
| | | | | | | | | | | |
| Fair value at December 31, 2020 | | Hypothetical change in fair value due to 25 bps rate decrease |
| Agency MSR - interest rate sensitive | $ | 579.0 | | | $ | (30.9) | |
| | | |
| | | |
| | | |
| Asset value of securitized HECM loans, net of HMBS-related liability | 99.5 | | | 3.5 | |
| Loans held for investment - Unsecuritized HECM loans and tails | 124.9 | | | — | |
| Loans held for sale | 366.4 | | | 3.8 | |
| Pipeline IRLCs | 22.7 | | | (0.4) | |
| Natural hedges (sum of the above) | | | 6.9 | |
| Hypothetical 30% offset by hedging instruments (1) | | | 7.2 | |
| Total hedge position (2) (3) | | | $ | 14.1 | |
| | | |
| Hypothetical residual exposure to changes in interest rates | | | $ | (16.8) | |
(1)Hypothetical 30% offset is calculated in the above table as a percentage of the net MSR exposure, that is, the Agency MSR less natural hedges, i.e., pipeline and economic MSR of reverse mortgage loans.
(2)Total hedge position is defined as the sum of the fair value changes of hedging derivatives and the volume MCA repurchases increases,fair value changes of natural hedges due to interest rate risks, i.e., pipeline and economic MSR of reverse mortgage loans.
(3)We define our hedge coverage ratio as the total hedge position (derivatives and natural hedges) as a percentage of the Agency MSR exposure, or45% in the above table.
We use forward trades of MBS or Agency TBAs with different banking counterparties and exchange-traded interest rate swap futures as hedging instruments. These derivative instruments are not designated as accounting hedges. TBAs, or To-Be-Announced securities are actively traded, forward contracts to this risk will increase.purchase or sell Agency MBS on a specific future date. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations.
The TBAs and interest rate swap futures are subject to margin requirements. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating could require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.
MSRs and MSR Financing Liabilities
Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. Effective with this election, ourOur entire portfolio of MSRs is accounted for using the fair value measurement method. MSRs are subject to interest rate risk as the mortgage loans underlying the MSRs permit borrowers to prepay their loans. The fair value of MSRs generally decreases in periods where interest rates are declining, as prepayments increase, and increasegenerally increases in periods where interest rates are increasing, as prepayments decrease.
While the majority of our non-Agency MSRs have been sold to NRZ, these transactions did not initially qualify as sales and are accounted for as secured financings.financings until such time as the transactions meet the requirements for sale accounting treatment and are derecognized from our consolidated balance sheet. We have elected fair value accounting for these MSR financing liabilities. Through these transactions, the majority of the risks and rewards of ownership of the MSRs transferred to NRZ, including interest rate risk. Changes in the fair value of the MSRs sold to NRZ are offset by a corresponding change in the fair value of the MSR financing liabilities, which are recognized as a component of interest expense onin our consolidated statements of operations.
Loans Held for Sale, Loans Held for Investment and IRLCs
In our lendingOriginations business, newly-originated forward mortgage loans held for sale and newly originated reverse mortgage loans held for investment that we have elected to carry at fair value and IRLCs are subject to the effects of changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. IRLCs represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage loan applicant, whereby the interest rate on the loan is set prior to funding. We are exposed to interest rate risk and related price risk
during the period from the date of the lock commitment through (i) the lock commitment cancellation or expiration date or (ii) through the date of sale of the resulting loan into the secondary mortgage market. Loan commitments for forward loans generally range from 5 to 90 days, but the majority of our commitments are for 60 days. Our holding period for forward mortgage loans from funding to sale is typically less than 30 days. Loan commitments for reverse mortgage loans range from 10 to 30 days. The majority of our reverse loans are variable rate loan commitments. OurThis interest rate exposure ishad historically been economically hedged with freestanding derivatives, including forward sales of agency “to be announced” securities (TBAs) and forward mortgage-backed securities (Forward MBS). Beginning in September 2019, this exposure is not individually hedged, but rather used as an offset to our MSR exposure and managed as part of our MSR hedging strategy described above.
We elected fair value accounting for newly repurchased loans from securitization trusts or investors after January 1, 2020. We may repurchase loans that have been modified, to facilitate loss reduction strategies, or as otherwise obligated as a Ginnie Mae servicer.
Loans Held for Investment and HMBS-related Borrowings
In ourWe elected fair value accounting for the entire reverse mortgage business,HECM loans, which are held for investment, together with the HMBS-related borrowings. We also elected fair value accounting for non-cancellable draw commitments (tails) of our HECM loans. The fair value of our HECM loan portfolio which is held for investment, decreases as market interest rates rise and increases as market rates fall. The primary contributors to the portfolio earnings are estimated securitization gains on future interest and mortgage insurance premium balance accruals, servicing fee income net of subservicing fees and losses, and repurchase funding requirements related to the 98% MCA liquidation. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, with lower interest rates extending the timeline to liquidation.
The assetfair value forof our HECM loan portfolio net of the fair value of the HMBS-related borrowings comprise the fair value of reverse mortgage loans and tails that are unsecuritized at the balance sheet date (reverse pipeline) and the fair value of securitized HECM loans net of the corresponding HMBS-related liabilityborrowings that represent the reverse mortgage economic MSR (HMSR) for securitized loans is comprised of net servicing income on the existing securitized HECM portfolio which we currently do not hedge, but which actsrisk management purposes. Both reverse assets (reverse pipeline and HMSR) act as a partial hedge for our forward MSR value sensitivity. Due to this characteristic, beginning in September 2019, this exposure is used as an offset to our MSR exposure and managed as part of our MSR hedging strategy described above.
Advance Match Funded Liabilities
We monitor the effect of increases in interest rates on the interest paid on our variable ratevariable-rate advance financing debt. Earnings on cash and float balances are a partial offset to our exposure to changes in interest expense. Based on the extent to which the projected excess of our interest expense on variable rate debt exceeds interest income on our cash and float balances require, we would consider hedging this exposure with interest rate swaps or other derivative instruments. We may purchase interest rate caps as economic hedges (not designated as a hedge for accounting purposes) ifwhen required by our advance financing arrangements.
Sensitivity Analysis
Fair Value MSRs, Loans Held for Sale, Loans Held for Investment and Related Derivatives
The following table summarizes the estimated change in the fair value of our MSRs, HECM loans held for investment and loans held for sale that we have elected to carry at fair value as well as any related derivatives at December 31, 20182020, given hypothetical instantaneous parallel shifts in the yield curve. We used December 31, 20182020 market rates to perform the sensitivity analysis. The estimates are based on the marketinterest rate risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship to the change in fair value may not be linear.
|
| | | | | | | |
| | Change in Fair Value |
| | Down 25 bps | | Up 25 bps |
| HECM Loans held for investment | $ | 2,999 |
| | $ | (2,950 | ) |
| Loans held for sale | 813 |
| | (973 | ) |
| Forward MBS trades | (807 | ) | | 975 |
|
| Total loans held for sale and related derivatives | 3,005 |
| | (2,948 | ) |
| | | | |
| MSRs (1) | (48,874 | ) | | 8,078 |
|
| MSRs, embedded in pipeline | (29 | ) | | 28 |
|
| Total MSRs | (48,903 | ) | | 8,106 |
|
| | | | |
| Total, net | $ | (45,898 | ) | | $ | 5,158 |
|
85
| |
(1) | Primarily reflects the impact of market rate changes on projected prepayments on the Agency MSR portfolio and on advance funding costs on the non-Agency MSR portfolio carried at fair value. During the fourth quarter of 2018, the decline in market rates resulted in a full downward sensitivity and limited upward sensitivity. The addition of PHH also significantly increased sensitivity on the Agency MSR portfolio. |
| | | | | | | | | | | |
| Change in Fair Value |
| Down 25 bps | | Up 25 bps |
| Asset value of securitized HECM loans, net of HMBS-related borrowing | $ | 3.5 | | | $ | (3.0) | |
| Loans held for investment - Unsecuritized HECM loans and tails | 0.05 | | | (0.04) | |
| Loans held for sale | 3.8 | | | (5.8) | |
| TBA / Forward MBS trades / Interest rate swap futures | (2.8) | | | 4.0 | |
| Total | 4.6 | | | (4.8) | |
| | | |
| MSRs (1) | (30.6) | | | 31.4 | |
| MSRs, embedded in pipeline | (0.4) | | | 0.2 | |
| Total MSRs (2) | (31.0) | | | 31.6 | |
| Derivatives related to MSRs | 11.2 | | (11.0) | |
| Total MSRs and related derivatives | (19.8) | | | 20.6 | |
| Total, net | $ | (15.3) | | | $ | 15.8 | |
(1)Primarily reflects the impact of market interest rate changes on projected prepayments on the Agency MSR portfolio and on advance funding costs on the non-Agency MSR portfolio carried at fair value. Fair value adjustments to our MSRs are offset, in part, by fair value adjustments related to the NRZ financing liabilities, which are recorded in Pledged MSR liability expense.
(2)Forward mortgage loans only.
Borrowings
The majority of the debt used to finance much of our operations is exposed to interest rate fluctuations. We may purchase interest rate swaps and interest rate caps to minimize future interest rate exposure from increases in 1-month LIBOR interest rates.rates, or when required by the financing agreements.
Based on December 31, 20182020 balances, if interest rates were to increase by 1% on our variable rate debt and interest earning cash and float balances, we estimate a net positive impact of approximately $10.8$12.3 million resulting from an increase of $20.2$22.4 million in annual interest income and an increase of $9.4$10.1 million in annual interest expense. The increase
Foreign Currency Exchange Rate Risk
Our operations in interest expense reflectsIndia and the Philippines expose us to foreign currency exchange rate risk to the extent that our foreign exchange positions remain unhedged. Depending on the magnitude and risk of our positions we may enter into forward exchange contracts to hedge against the effect of our hedging activities, which would offset $2.4 millionchanges in the value of the increaseIndia Rupee or Philippine Peso.
Home Prices
Inactive reverse mortgage loans for which the maximum claim amount has not been met are generally foreclosed upon on behalf of Ginnie Mae with the REO remaining in interest onthe related HMBS until liquidation. Inactive MCA repurchased loans are generally foreclosed upon and liquidated by the HMBS issuer. Although active and inactive reverse mortgage loans are insured by FHA, we may incur expenses and losses in the process of repurchasing and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines. In addition, in certain circumstances, we may be subject to real estate price risk to the extent we are unable to liquidate REO within the FHA program guidelines. As our variable rate debt.reverse mortgage portfolio seasons, and the volume of MCA repurchases increases, our exposure to this risk will increase.
Interest Rate Sensitive Financial Instruments
The tables below present the notional amounts of our financial instruments that are sensitive to changes in interest rates categorized by expected maturity and the related fair value of these instruments at December 31, 20182020 and 2017.2019. We use certain assumptions to estimate the expected maturity and fair value of these instruments. We base expected maturities upon contractual maturity and projected repayments and prepayments of principal based on our historical experience. The actual maturities of these instruments could vary substantially if future prepayments differ from our historical experience. Average interest rates are based on the contractual terms of the instrument and, in the case of variable rate instruments, reflect estimates of applicable forward rates. The averages presented represent weighted averages.
| | | | Expected Maturity Date at December 31, 2018 | | | | | | Expected Maturity Date at December 31, 2020 | | | | |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | There- after | | Total Balance | | Fair Value (1) | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | There- after | | Total Balance | | Fair Value (1) |
| Rate-Sensitive Assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Rate-Sensitive Assets: | | | | | | | | | | | | | | | |
| Interest-earning cash | $ | 266,235 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 266,235 |
| | $ | 266,235 |
| Interest-earning cash | $ | 261,515 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 261,515 | | | $ | 261,515 | |
| Average interest rate | 2.31 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 2.31 | % | | |
| Average interest rate | 0.30 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 0.30 | % | | |
| Loans held for sale, at fair value | 176,525 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 176,525 |
| | 176,525 |
| Loans held for sale, at fair value | 366,364 | | | — | | | — | | | — | | | — | | | — | | | 366,364 | | | 366,364 | |
| Average interest rate | 7.33 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 7.33 | % | | |
| Average interest rate | 3.33 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 3.33 | % | | |
| Loans held for sale, at lower of cost or fair value (2) | 8,858 |
| | — |
| | 24 |
| | — |
| | 272 |
| | 56,943 |
| | 66,097 |
| | 66,097 |
| Loans held for sale, at lower of cost or fair value (2) | 153 | | | — | | | 473 | | | 6 | | | 17 | | | 20,823 | | | 21,472 | | | 21,472 | |
| Average interest rate | 5.00 | % | | — | % | | 8.97 | % | | — | % | | 5.51 | % | | 4.89 | % | | 4.91 | % | | |
| Average interest rate | 5.00 | % | | — | % | | 5.51 | % | | 4.61 | % | | 3.50 | % | | 4.21 | % | | 4.23 | % | | |
| Loans held for investment | 575,744 |
| | 510,835 |
| | 546,782 |
| | 614,592 |
| | 691,203 |
| | 2,559,563 |
| | 5,498,719 |
| | 5,472,199 |
| Loans held for investment | 396,408 | | | 385,882 | | | 729,032 | | | 1,550,187 | | | 1,392,130 | | | 2,543,488 | | | 6,997,127 | | | 6,997,127 | |
| Average interest rate | 4.95 | % | | 4.89 | % | | 4.84 | % | | 4.85 | % | | 4.93 | % | | 4.99 | % | | 4.85 | % | | | Average interest rate | 3.26 | % | | 3.46 | % | | 3.64 | % | | 3.52 | % | | 3.53 | % | | 3.44 | % | | 3.39 | % | |
| Debt service accounts and interest-earning time deposits | 27,569 |
| | 235 |
| | 160 |
| | — |
| | — |
| | — |
| | 27,964 |
| | 27,964 |
| Debt service accounts and interest-earning time deposits | 20,451 | | | 283 | | | — | | | — | | | — | | | — | | | 20,734 | | | 20,734 | |
| Average interest rate | 0.24 | % | | 12.61 | % | | 7.65 | % | | — | % | | — | % | | — | % | | 0.39 | % | | |
| Average interest rate | 0.09 | % | | 5.55 | % | | — | % | | — | % | | — | % | | — | % | | 0.17 | % | | |
| Total rate-sensitive assets | $ | 1,054,931 |
| | $ | 511,070 |
| | $ | 546,966 |
| | $ | 614,592 |
| | $ | 691,475 |
| | $ | 2,616,506 |
| | $ | 6,035,540 |
| | $ | 6,009,020 |
| Total rate-sensitive assets | $ | 1,044,891 | | | $ | 386,165 | | | $ | 729,505 | | | $ | 1,550,193 | | | $ | 1,392,147 | | | $ | 2,564,311 | | | $ | 7,667,212 | | | $ | 7,667,212 | |
| Percent of total | 17.48 | % | | 8.47 | % | | 9.06 | % | | 10.18 | % | | 11.46 | % | | 43.35 | % | | 100.00 | % | | |
| Percent of total | 13.63 | % | | 5.04 | % | | 9.51 | % | | 20.22 | % | | 18.16 | % | | 33.45 | % | | 100.00 | % | | |
| | | | | | | | | | | | | | | | | |
| Rate-Sensitive Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Rate-Sensitive Liabilities: | | | | | | | | | | | | | | | |
| Match funded liabilities | $ | 628,284 |
| | $ | 150,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 778,284 |
| | $ | 776,485 |
| Match funded liabilities | $ | 106,288 | | | $ | 475,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 581,288 | | | $ | 581,997 | |
| Average interest rate | 3.57 | % | | 3.81 | % | | — | % | | — | % | | — | % | | — | % | | 3.61 | % | | | Average interest rate | 4.10 | % | | 1.49 | % | | — | % | | — | % | | — | % | | — | % | | 1.96 | % | |
| Senior notes | 97,521 |
| | — |
| | 21,543 |
| | 330,878 |
| |
| | — |
| | 449,942 |
| | 426,147 |
| Senior notes | 21,543 | | | 291,509 | | | — | | | — | | | — | | | — | | | 313,052 | | | 320,879 | |
| Average interest rate | 7.38 | % | | — | % | | 6.38 | % | | 8.38 | % | | — | % | | — | % | | 8.07 | % | | | Average interest rate | 6.38 | % | | 8.38 | % | | — | % | | — | % | | — | % | | — | % | | 8.24 | % | |
| SSTL and other borrowings (3) (4) | 172,463 |
| | 214,750 |
| |
| | — |
| | — |
| | — |
| | 387,213 |
| | 383,162 |
| SSTL and other borrowings (3) (4) | 821,141 | | | 206,662 | | | — | | | — | | | — | | | 47,476 | | | 1,075,279 | | | 1,043,212 | |
| Average interest rate | 2.96 | % | | 6.50 | % | | — | % | | — | % | | — | % | | — | % | | 5.49 | % | | | Average interest rate | 3.91 | % | | 6.48 | % | | — | % | | — | % | | — | % | | — | % | | 4.55 | % | |
| Total rate-sensitive liabilities | $ | 898,268 |
| | $ | 364,750 |
| | $ | 21,543 |
| | $ | 330,878 |
| | $ | — |
| | $ | — |
| | $ | 1,615,439 |
| | $ | 1,585,794 |
| Total rate-sensitive liabilities | $ | 948,972 | | | $ | 973,171 | | | $ | — | | | $ | — | | | $ | — | | | $ | 47,476 | | | $ | 1,969,619 | | | $ | 1,946,088 | |
| Percent of total | 55.61 | % | | 22.58 | % | | 1.33 | % | | 20.48 | % | | — | % | | — | % | | 100.00 | % | | |
| Percent of total | 48.18 | % | | 49.41 | % | | — | % | | — | % | | — | % | | 2.41 | % | | 100.00 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Expected Maturity Date at December 31, 2020 (Notional Amounts) | | | | |
| | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | There- after | | Total
Balance | | Fair
Value (1) |
| Rate-Sensitive Derivative Financial Instruments: | | | | | | | | | | | | | | | |
| Derivative assets (liabilities) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Forward MBS trades | 50,000 | | | — | | | — | | | — | | | — | | | — | | | $ | 50,000 | | | $ | (50) | |
| Average coupon | 2.40 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 2.40 | % | | |
| TBA / Forward MBS Trades | 400,000 | | | — | | | — | | | — | | | — | | | — | | | 400,000 | | | (4,554) | |
| Average coupon | 2.22 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 2.22 | % | | |
| Derivatives futures | 593,500 | | | — | | | — | | | — | | | — | | | — | | | 593,500 | | | 504 | |
| Average coupon | 0.75 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 0.75 | % | | |
| IRLCs | 631,405 | | | — | | | — | | | — | | | — | | | — | | | 631,405 | | | 22,706 | |
| Average coupon | 2.89 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 2.89 | % | | |
| Total derivatives, net | $ | 1,674,905 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,674,905 | | | $ | 18,606 | |
| Forward LIBOR curve (5) | 0.14 | % | | 0.13 | % | | 0.20 | % | | 0.36 | % | | 0.60 | % | | 0.86 | % | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Expected Maturity Date at December 31, 2018 (Notional Amounts) | | | | |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | There- after | | Total Balance | | Fair Value (1) |
| Rate-Sensitive Derivative Financial Instruments: | | | | | | | | | | | | | | | |
| Derivative assets (liabilities) | | | | | | | | | | | | | | | |
| Interest rate caps | $ | 240,833 |
| | $ | 19,167 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 260,000 |
| | $ | 678 |
|
| Average strike rate | 1.98 | % | | 3.00 | % | | — | % | | — | % | | — | % | | — | % | | 2.06 | % | | |
| Forward MBS trades | 165,363 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | $ | 165,363 |
| | $ | (4,983 | ) |
| Average coupon | 4.02 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 4.02 | % | | |
| IRLCs | 150,175 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 150,175 |
| | 3,871 |
|
| Total derivatives, net | $ | 556,371 |
| | $ | 19,167 |
| | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 575,538 |
|
| $ | (434 | ) |
| Forward LIBOR curve (5) | 2.50 | % | | 2.49 | % | | 2.35 | % | | 2.37 | % | | 2.44 | % | | 2.53 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Expected Maturity Date at December 31, 2019 | | | | |
| | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | There- after | | Total Balance | | Fair Value (1) |
| Rate-Sensitive Assets: | | | | | | | | | | | | | | | |
| Interest-earning cash | $ | 433,224 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 433,224 | | | $ | 433,224 | |
| Average interest rate | 1.74 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 1.74 | % | | |
| Loans held for sale, at fair value | 208,752 | | | — | | | — | | | — | | | — | | | — | | | 208,752 | | | 208,752 | |
| Average interest rate | 5.41 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 5.41 | % | | |
| Loans held for sale, at lower of cost or fair value (2) | 5,009 | | | 6 | | | — | | | 559 | | | 203 | | | 60,740 | | | 66,517 | | | 66,517 | |
| Average interest rate | 4.67 | % | | 5.29 | % | | — | % | | — | % | | 5.52 | % | | 7.06 | % | | 4.42 | % | | |
| Loans held for investment | 258,058 | | | 275,651 | | | 608,912 | | | 1,231,545 | | | 1,566,200 | | | 2,329,230 | | | 6,269,596 | | | 6,269,596 | |
| Average interest rate | 4.77 | % | | 4.57 | % | | 4.71 | % | | 4.92 | % | | 4.91 | % | | 4.95 | % | | 4.82 | % | | |
| Debt service accounts and interest-earning time deposits | 23,463 | | | 203 | | | — | | | — | | | — | | | — | | | 23,666 | | | 23,666 | |
| Average interest rate | 0.11 | % | | 9.90 | % | | — | % | | — | % | | — | % | | — | % | | 0.17 | % | | |
| Total rate-sensitive assets | $ | 928,506 | | | $ | 275,860 | | | $ | 608,912 | | | $ | 1,232,104 | | | $ | 1,566,403 | | | $ | 2,389,970 | | | $ | 7,001,755 | | | $ | 7,001,755 | |
| Percent of total | 13.26 | % | | 3.94 | % | | 8.70 | % | | 17.60 | % | | 22.37 | % | | 34.13 | % | | 100.00 | % | | |
| | | | | | | | | | | | | | | |
| Rate-Sensitive Liabilities: | | | | | | | | | | | | | | | |
| Match funded liabilities | $ | 394,109 | | | $ | 285,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 679,109 | | | $ | 679,507 | |
| Average interest rate | 3.02 | % | | 2.53 | % | | — | % | | — | % | | — | % | | — | % | | 2.81 | % | | |
| Senior notes | — | | | 21,543 | | | 291,509 | | | — | | | — | | | — | | | 313,052 | | | 270,022 | |
| Average interest rate | — | % | | 6.38 | % | | 8.38 | % | | — | % | | — | % | | — | % | | 8.24 | % | | |
| SSTL and other borrowings (3) (4) | 832,078 | | | 98,971 | | | 41,663 | | | — | | | — | | | 57,594 | | | 1,030,306 | | | 1,010,789 | |
| Average interest rate | 4.96 | % | | 3.71 | % | | — | % | | — | % | | 5.07 | % | | — | % | | 4.74 | % | | |
| Total rate-sensitive liabilities | $ | 1,226,187 | | | $ | 405,514 | | | $ | 333,172 | | | $ | — | | | $ | — | | | $ | 57,594 | | | $ | 2,022,467 | | | $ | 1,960,318 | |
| Percent of total | 60.63 | % | | 20.05 | % | | 16.47 | % | | — | % | | — | % | | 2.85 | % | | 100.00 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Expected Maturity Date at December 31, 2019 (Notional Amounts) | | | | |
| | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | There- after | | Total
Balance | | Fair
Value (1) |
| Rate-Sensitive Derivative Financial Instruments: | | | | | | | | | | | | | | | |
| Derivative assets (liabilities) | | | | | | | | | | | | | | | |
| Interest rate caps | $ | 27,083 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 27,083 | | | $ | — | |
| Average strike rate | 3.00 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 3.00 | % | | |
| Forward MBS trades | 60,000 | | | — | | | — | | | — | | | — | | | — | | | 60,000 | | | (92) | |
| Average coupon | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | |
| TBA / Forward MBS Trades | 1,200,000 | | | — | | | — | | | — | | | — | | | — | | | 1,200,000 | | | 1,121 | |
| Average coupon | 3.00 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 3.00 | % | | |
| IRLCs | 232,566 | | | — | | | — | | | — | | | — | | | — | | | 232,566 | | | 4,878 | |
| Average coupon | 3.97 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 3.97 | % | | |
| Total derivatives, net | $ | 1,519,649 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,519,649 | | | $ | 5,907 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Forward LIBOR curve (5) | 1.76 | % | | 1.51 | % | | 1.48 | % | | 1.58 | % | | 1.68 | % | | 1.78 | % | | | | |
(1)See Note 5 — Fair Value to the Consolidated Financial Statements for additional fair value information on financial instruments.
(2)Net of valuation allowances and including non-performing loans. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Expected Maturity Date at December 31, 2017 | | | | |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | There- after | | Total Balance | | Fair Value (1) |
| Rate-Sensitive Assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Interest-earning cash | $ | 99,627 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 99,627 |
| | $ | 99,627 |
|
| Average interest rate | 1.73 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 1.73 | % | | |
|
| Loans held for sale, at fair value | 214,262 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 214,262 |
| | 214,262 |
|
| Average interest rate | 4.05 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 4.05 | % | | |
|
| Loans held for sale, at lower of cost or fair value (2) | 697 |
| | 288 |
| | 21 |
| | 22 |
| | — |
| | 23,068 |
| | 24,096 |
| | 24,096 |
|
| Average interest rate | 15.24 | % | | 5.64 | % | | 3.69 | % | | 5.00 | % | | — | % | | 4.08 | % | | 4.43 | % | | |
|
| Loans held for investment | 340,231 |
| | 401,232 |
| | 445,182 |
| | 524,383 |
| | 628,859 |
| | 2,375,944 |
| | 4,715,831 |
| | 4,715,831 |
|
| Average interest rate | 4.71 | % | | 4.67 | % | | 4.75 | % | | 4.86 | % | | 4.95 | % | | 4.88 | % | | 4.29 | % | | |
| Debt service accounts and interest-earning time deposits | 38,039 |
| | — |
| | 250 |
| | 140 |
| | 36 |
| | — |
| | 38,465 |
| | 38,465 |
|
| Average interest rate | 0.64 | % | | — | % | | 12.80 | % | | 8.01 | % | | 7.96 | % | | — | % | | 0.39 | % | | |
|
| Total rate-sensitive assets | $ | 692,856 |
| | $ | 401,520 |
| | $ | 445,453 |
| | $ | 524,545 |
| | $ | 628,895 |
| | $ | 2,399,012 |
| | $ | 5,092,281 |
| | $ | 5,092,281 |
|
| Percent of total | 13.61 | % | | 7.88 | % | | 8.75 | % | | 10.30 | % | | 12.35 | % | | 47.11 | % | | 100.00 | % | | |
|
| | | | | | | | | | | | | | | | |
| Rate-Sensitive Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Match funded liabilities | $ | 739,036 |
| | $ | 259,582 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 998,618 |
| | $ | 992,698 |
|
| Average interest rate | 5.11 | % | | 3.35 | % | | — | % | | — | % | | — | % | | — | % | | 3.25 | % | | |
|
| Senior notes | — |
| | 3,122 |
| | — |
| | — |
| | 346,878 |
| | — |
| | 350,000 |
| | 358,422 |
|
| Average interest rate | — | % | | 6.63 | % | | — | % | | — | % | | 8.38 | % | | — | % | | 8.36 | % | | |
| SSTL and other borrowings (3) (4) | 272,532 |
| | 16,750 |
| | 264,751 |
| | — |
| | — |
| | — |
| | 554,033 |
| | 555,523 |
|
| Average interest rate | 0.37 | % | | 6.00 | % | | 5.62 | % | | — | % | | — | % | | — | % | | 5.22 | % | | |
|
| Total rate-sensitive liabilities | $ | 1,011,568 |
| | $ | 279,454 |
| | $ | 264,751 |
| | $ | — |
| | $ | 346,878 |
| | $ | — |
| | $ | 1,902,651 |
| | $ | 1,906,643 |
|
| Percent of total | 53.17 | % | | 14.69 | % | | 13.91 | % | | — | % | | 18.23 | % | | — | % | | 100.00 | % | | |
|
(4)Amounts are exclusive of any related discount or unamortized debt issuance costs. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Expected Maturity Date at December 31, 2017 (Notional Amounts) | | | | |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | There- after | | Total Balance | | Fair Value (1) |
| Rate-Sensitive Derivative Financial Instruments: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Derivative assets (liabilities) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Interest rate caps | $ | 134,167 |
| | $ | 240,833 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 375,000 |
| | $ | 2,056 |
|
| Average strike rate | 1.48 | % | | 1.47 | % | | — | % | | — | % | | — | % | | — | % | | 1.47 | % | | |
|
| Forward MBS trades | 240,823 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 240,823 |
| | (545 | ) |
| Average coupon | 3.64 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 3.64 | % | | |
| IRLCs | 96,339 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 96,339 |
| | 3,283 |
|
| Total derivatives, net | $ | 471,329 |
| | $ | 240,833 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 712,162 |
| | $ | 4,794 |
|
| Forward LIBOR curve (5) | 1.77 | % | | 2.14 | % | | 2.22 | % | | 2.22 | % | | 2.29 | % | | 2.49 | % | | |
| | |
|
| |
(1) | See Note 4 — Fair Value to the Consolidated Financial Statements for additional fair value information on financial instruments.
|
| |
(2) | Net of valuation allowances and including non-performing loans. |
| |
(3) | Excludes financing liabilities that result from sales of assets that do not qualify as sales for accounting purposes and, therefore, are accounted for as secured financings, which have no contractual maturity and are amortized over the life of the related assets. |
| |
(4) | Amounts are exclusive of any related discount or unamortized debt issuance costs. |
| |
(5) | Average 1-Month LIBOR for the periods indicated. |
Liquidity Risk
We are exposed to liquidity risk through our ongoing needs to originate and finance mortgage loans, sell mortgage loans into secondary markets, retain and finance MSRs, make and finance advances, fund and sell additional future draws by borrowers under variable rate HECM loans, meet our HMBS issuer obligations with respect to MCA repurchases, repay maturing debt, meet our contractual obligations and otherwise fund our operations. Liquidity is an essential component of our ability to operate and grow our business; therefore, it is crucial that we maintain adequate levels of excess liquidity to fund our businesses during normal economic cycles and events of market stress.
We estimate how our liquidity needs may be impacted by a number of factors, including fluctuations in asset and liability levels due to our business strategy, asset valuations, changes in our businesscash flows from operations, levels of interest rates, debt service requirements including contractual amortization and maturities, and unanticipated events, including legal and regulatory expenses. We also assess market conditions and capacity for debt issuance in the various markets
that we access to fund our business needs. We have established internal processes to anticipate future cash needs and continuously monitor the availability of funds pursuant to our existing debt arrangements. We monitor MSR asset valuations monthly and communicate closely with our lenders for this asset class to ensure adequate liquidity is maintained for mark-to-market valuation changes within MSR financing facilities. We manage this risk in multiple ways, including but not limited to engaging in MSR hedging activities, and maintaining liquidity earmarks at levels to support potential changes in MSR fair values.
Establishing funding for growth is a key initiative to achieving our objective of returning to growth and profitability. We regularly evaluate capital structure options that we believe will most effectively provide the necessary capacity to invest in growth,support our investment objectives, address upcoming debt maturities and contractual amortization, and accommodate our business needs. Our objective is to maximize the total investment capacity for each dollar of cash invested through diversification of our funding sources and alternatives to optimizewhile optimizing cost, advance rates and terms. Historical losses have significantly eroded our stockholder’sstockholders’ equity and weakened our financial condition. To the extent we are not successful in achieving our near-term objective of returning to profitability, funding continuing losses will crowd outlimit opportunities to grow our business.
We address liquidity risk by maintaining borrowing capacity in excess of our expected needs and by extending the tenor of our financing arrangements.arrangements from time to time. For example, to fund additional advance obligations, we have typically “upsized” existing advance facilities or entered into new advance facilities in anticipation of the funding obligation and then pledged additional advances to support the borrowing. In general, we finance our operationsassets and operating requirements through cash on hand, operating cash flow, advance financing facilities and other secured borrowings.
Operational Risk
Operational risk is inherent in each of our business lines and related support activities. This risk can manifest itself in various ways, including process execution errors, clerical or technological failures or errors, business interruptions and frauds, all of which could cause us to incur losses. Operational risk includes the following key risks:
•legal risk, as we can have legal disputes with borrowers or counterparties;
•compliance risk, as we are subject to many federal and state rules and regulations;
•third-party risk, as we have many processes that have been outsourced to third parties;
•information technology risk, as we operate many information systems that depend on proper functioning of hardware and software;
•information security risk, as our information systems and associates handle personal financial data of borrowers.
To manageThe Board of Directors provides direction to senior executives by setting our organization’s risk appetite, and delegates to our Chief Executive Officer and senior executives the primary ownership and responsibility for operational risk, we have a dedicated team of operational risk managers that oversees these risks daily, assisted by the third-party risk management and information security departments.control. Senior executives in our risk department oversee the establishment of policies and control frameworks that are designed, executed and administered to provide a sound and well-controlled operational environment.environment in accordance with our risk appetite framework. We mandate training for our employees in respect to these policies, require business line change management control oversight, and process, and we conduct operating targeted control assessment/reviews on a regular basis. Risk issues identified are tracked in our Governance, Risk and Compliance (GRC) system.system, Process Unity. Remediation and assurance testing are also tracked in our GRC system. We also have several channels for employees to report operational and/or technological issues affecting their operations to management, the operational risk or compliance teams or the Board.
We seek to embed a culture of compliance and business line responsibility for managing operational and compliance risks in our enterprise-wide approach toward risk management. Ocwen has adopted a “Three Lines of Defense” model to enable risks and controls to be properly managed on an on-going basis. The model delineates business line management's accountabilities and responsibilities over risk management and the control environment and includes mechanisms to assess the effectiveness of executing these responsibilities.
The first line of defense comprises predominantlyconsists of business line management, dedicated control directors and quality assurance personnel who are accountable and responsible for their day-to-day activities, processes and controls. The first line of defense is responsible for ensuring that key risks within their activities and operations are identified, assessed, mitigated and monitored by an appropriate control environment that is commensurate with the operations risk profile.
The second line of defense is independent from the business and comprises predominantly the corporate functions, such asa Risk Management function (including Third-Party Risk and Information Security) and a Compliance function, which are responsible for:
•providing assurance, oversight, and credible challenge over the effectiveness of the risk and control activities conducted by the first line;
•establishing frameworks to identify and measure the risks being taken by different parts of the business; and
•monitoring risk levels, through key indicators and oversight/assurance programs.and testing programs; and
•provide periodic reporting to Senior Management and the Board of Directors for transparency.
The third line of defense, Internal Audit, provides independent assurance as to the effectiveness of the design, implementation and embedding of the risk management frameworks, as well as the management of the risks and controls by the first line and control oversight by the second line. The Internal Audit function provides periodic reporting on its activities to Senior Management and the Board of Directors for transparency.
All business units and overhead functions are subject to unrestricted audits by our internal audit department. Internal audit is granted unrestricted access to our records, physical properties, systems, management and employees in order to perform
these audits. The internal audit department reports to the Audit Committee of the Board and assists the Audit Committee in fulfilling its governance and oversight responsibility.
We have annual risk and control self-assessment (RCSA) programs in which we map company-wide business processes to identify risks and related controls in each process. Controls are tested for efficiency and efficacy and improved, if necessary. We monitor these risks and controls through risk coverage teams and quality assurance metrics.
Compliance risk is managed through an enterprise-wide compliance risk management program designed to monitor, detect and deter compliance issues. Our compliance and risk management policies assign primary responsibility and accountability for the management of compliance risk in the lines of business to business line management.
Information Security Risk oversight is performed by our Chief Information Security Officer. Ocwen’s information security plans are developed to meet or exceed Federal Financial Institutions Examination Council standards.
Credit Risk
Consumer Credit Risk
The typical obligor credit-related risks inherent in maintaining a mortgage loan portfolio as an investment tend to impact us less than a typical long-term investor because we generally sell the mortgage loans that we originate in the secondary market shortly after origination through GSE and Ginnie Mae guaranteed securitizations and whole loan transactions. We are exposed to early payment defaults from the time that we originate a loan to the time that the loan is sold in the secondary market or shortly thereafter. Early payment defaults are monitored and loans are audited by our quality assurance teams for origination defects. Our exposure to early payment defaults remains very limited and we do not anticipate material losses from this exposure.
Servicing costs are generally higher on higher credit risk loans. In addition, higher credit risk loans are generally affected to a greater extent by an economic downturn or a deterioration of the housing market. An increase in delinquencies and foreclosure rates generally results in increased advances for delinquent principal and interest, taxes and insurance, foreclosure costs and the upkeep of vacant property in foreclosure. Interest expense on advances and higher operating expenses decrease the value of our servicing portfolio. We track the credit risk profile of our servicing portfolio, including the recoverability of advances, with a view to ensuring that changes in portfolio credit risk are identified on a timely basis.
We have loan repurchase and indemnification obligations arising from potential breaches of the representation and warranty provisions in connection with loans we sell in the secondary market. In the event of a breach of these representations and warranties, we may be required to repurchase a mortgage loan or indemnify the purchaser, and we may bear any subsequent loss on the mortgage loan.
We endeavor to minimize our losses from loan repurchases and indemnifications by focusing on originating high qualityfully compliant mortgage loans and closely monitoring investor and agency eligibility requirements for loan sales. Our quality assurance teams perform independent auditstesting related to the processing and underwriting of mortgage loans to investor guidelines prior to closing, as well as after the closing but before the sale of loans, to identify potential repurchase exposures due to breach of representations and warranties. In addition, we perform a comprehensive review of the loan files where we receive investor requests for repurchase and indemnification to establish the validity of the claims and determine our obligation. In limited circumstances, we may retain the full risk of loss on loans sold to the extent that the liquidation value of the asset collateralizing the loan is insufficient to cover the loan itself and associated servicing expenses. In instances where we have purchased loans from third parties, we usually have the ability to recover the loss from the third-party originator.
Counterparty Credit Risk
Counterparty credit risk represents the potential loss that may occur because a party to a transaction fails to perform according to the terms of the contract. We regularly evaluate the financial position and creditworthiness of our counterparties and disperse risk among multiple counterparties to the extent possible. We manage derivative counterparty credit risk by entering into financial instrument transactions through national exchanges, primary dealers or approved counterparties and using mutual margining agreements whenever possible to limit potential exposure.
NRZ is contractually obligated, pursuant to our agreements with them related to the Rights to MSRs, to make all advances required in connection with the loans underlying such MSRs. If NRZ’s advance financing facilities do not perform as envisaged or should NRZ otherwise be unable to meets its advance financing obligations, we would be required to meet our advance
financing obligations with respect to the loans underlying these Rights to MSRs, which could materially and adversely affect our liquidity, financial condition and servicing operations.
Counterparty credit risk exists with our third-party originators, including our correspondent lenders, from whom we purchase originated mortgage loans. The third-party originators make certain representations and warranties to us when we acquire the mortgage loan from them, and they agree to reimburse us for losses incurred due to an origination defect. We become exposed to losses for origination defects if the third-party originator is not able to reimburse us for losses incurred for indemnification or repurchase. We mitigate this
risk by monitoring purchase levels from our third-party originators (to reduce concentration risk), by performing regular quality control reviews of the third-party originators’ underwriting standards and by regular reviews of the creditworthiness of third-party originators.
Concentration Risk
Our Servicing segment has exposure to concentration risk and client retention risk. As of December 31, 2018,2020, our servicing portfolio included significant client relationships with NRZ which represented 51%36% and 61%45% of our servicing portfolio UPB and loan count, respectively. The termNRZ servicing portfolio accounts for approximately 62% of all delinquent loans that Ocwen services. During 2020, NRZ-related servicing fees retained by Ocwen represented approximately 30% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ (excluding ancillary income). The current terms of our agreements with NRZ extend through June 2020 (PHH agreements) and July 2022 (Ocwen(legacy Ocwen agreements); however,.
On February 20, 2020, we received a notice of termination from NRZ with respect to the PMC subservicing agreement. This termination was for convenience and not for cause, and provided for loan deboarding fees to be paid by NRZ. As the sale accounting criteria were met upon the notice of termination, the MSRs and the Rights to MSRs were derecognized from our balance sheet on February 20, 2020 without any gain or loss on derecognition. We continued to service these loans until deboarding, accounting for them as a subservicing relationship. Accordingly, we recognized subservicing fees associated with the subservicing agreement subsequent to February 20, 2020 and have not reported any servicing fees collected on behalf of, and remitted to NRZ, any change in fair value, runoff and settlement in financing liability thereafter. On September 1, 2020, 133,718 loans representing $18.2 billion were deboarded and the remaining 136,500 loans representing $16.0 billion of UPB were deboarded on October 1, 2020.
Currently, subject to proper notice (generally180 days) and the payment of termination fees, NRZ has rights to terminate the rightlegacy Ocwen agreements for convenience.
In the ordinary course, we regularly share information with NRZ and discuss various aspects of our relationship. At times, we discuss modifications to transfer, without cause, 25%our relationship that we believe could be to our mutual benefit as our respective businesses evolve over time. We also discuss alternatives to the outcomes contemplated under our agreements when they were originally executed as facts and circumstances change over time. Examples of these discussions include our discussions with respect to the Rights to MSRs. As part of these discussions, we discussed several potential changes to existing contracts. It is possible that NRZ could exercise its rights to terminate for convenience some or all of the PHH units beginninglegacy Ocwen servicing agreements. As of December 31, 2020, these agreements accounted for approximately 36% of our servicing portfolio.
Given the NRZ concentration in June 2018, and an additional 25%our servicing segment, senior management has been monitoring two main risks associated with our NRZ relationship, in addition to its strategic component. First, management has been monitoring the profitability of the units beginningNRZ servicing agreements. As performing loans in June 2019. Thethe NRZ servicing portfolio have run-off, delinquencies have remained high, resulting in a relatively elevated average cost per loan. Because the NRZ portfolio contains a high percentage of delinquent accounts, it has an inherently high level of potential operational and compliance risk and requires a disproportionately high level of operating staff, oversight support infrastructure and overhead which drives the elevated average cost per loan. We actively pursue cost re-engineering initiatives to continue to reduce our cost-to-service and our corporate overhead, as well as pursue actions to grow our non-NRZ servicing portfolio.
Second, because NRZ has rights to terminate for convenience subject to certain conditions, senior management has been monitoring our risks associated with a potential early termination or non-renewal of some or all of the Ocwen legacy agreements with NRZ. Management developed stress scenarios to assess the operational and financial impact of such termination scenarios, and the necessary mitigating actions. Management’s responses to the different scenarios are all based on the appropriate right-sizing or restructuring of our operations and include, but are not limited to the adequate reduction of direct servicing agreements,resources, the closure of certain facilities in different locations to rationalize property utilization, the appropriate planning of loan deboarding, and the potential reduction in corporate support functions without impairing our ability to effectively operate in a controlled environment.
It is possible that the unwinding of all or othera significant reductionsportion of our relationship with NRZ may not occur in an orderly or timely manner, which could be disruptive and could result in us incurring additional costs or even in disagreements with NRZ relating to our respective rights and obligations. Furthermore, if NRZ were to take actions to limit or terminate our relationship,
that could impact perceptions of other servicing portfolio,clients, lenders, GSEs or others, which could cause them to take actions that materially and adversely affectimpact our business, financial condition andliquidity, results of operations.operations and financial condition.
Market conditions, including interest rates and future economic projections, could impact investor demand to hold MSRs, which may result in our loss of additional subservicing relationships, or significantly decrease the number of loans under such relationships.
The mortgaged properties securing the residential loans that we service are geographically dispersed throughout all 50 states, the District of Columbia and two U.S. territories. The five largest concentrations of properties are located in California, Florida, Texas, New York Florida, New Jersey and Texas, which, taken together, comprise 39%Illinois, comprising 42% of the number of loans serviced at December 31, 2018.2020. California has the largest concentration with 13%15% of the total loans serviced.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations
We believe that we have adequate resourcescertain contractual obligations which require us to fund all unfunded commitmentsmake cash payments. At December 31, 2020, such contractual obligations were primarily comprised of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than
One Year | | After One Year
Through Three
Years | | After Three
Years
Through
Five Years | | After Five
Years | | Total |
| Senior secured term loan (1) | $ | 20,000 | | | $ | 165,000 | | | $ | — | | | $ | — | | | $ | 185,000 | |
| Senior notes (1) | 21,543 | | | 291,509 | | | — | | | — | | | 313,052 | |
| Other secured borrowings (1) | 801,141 | | | 41,662 | | | — | | | 47,476 | | | 890,279 | |
| Contractual interest payments (2) | 61,819 | | | 28,116 | | | 659 | | | — | | | 90,594 | |
| Originate/purchase mortgages or securities | 631,405 | | | — | | | — | | | — | | | 631,405 | |
| Reverse mortgage equity draws (3) | 2,044,421 | | | — | | | — | | | — | | | 2,044,421 | |
| Operating leases | 14,618 | | | 12,929 | | | 1,351 | | | — | | | 28,898 | |
| | $ | 3,594,947 | | | $ | 539,216 | | | $ | 2,010 | | | $ | 47,476 | | | $ | 4,183,649 | |
(1)Amounts are exclusive of any related discount, unamortized debt issuance costs or fair value adjustment. Excludes match funded liabilities as these represent debt where the holders only have recourse to the extent requiredassets that collateralize the debt and meet all contractual obligationssuch assets are not available to satisfy general claims against Ocwen. Also excludes financing liabilities that result from sales of assets that do not qualify as they come due. The following table sets forth certainsales for accounting purposes and, therefore, are accounted for as secured financings. See Note 14 — Borrowings to the Consolidated Financial Statements for additional information regarding amounts we owerelated to others under contractual obligationsthese excluded borrowings.
(2)Represents estimated future interest payments on MSR financing facilities, warehouse lines, senior notes and the SSTL, based on applicable interest rates as of December 31, 2018:2020.
(3)Represents additional equity draw obligations in connection with reverse mortgage loans originated or purchased. Because these draws can be made in their entirety, we have classified them as due in less than one year at December 31, 2020.
|
| | | | | | | | | | | | | | | | | | | |
| | Less Than One Year | | After One Year Through Three Years | | After Three Years Through Five Years | | After Five Years | | Total |
| Senior secured term loan (1) | $ | 16,750 |
| | $ | 214,750 |
| | $ | — |
| | $ | — |
| | $ | 231,500 |
|
| Senior notes (1) | 97,521 |
| | 21,543 |
| | 330,878 |
| | — |
| | 449,942 |
|
| Contractual interest payments (2) | 50,888 |
| | 72,084 |
| | 24,247 |
| | — |
| | 147,219 |
|
| Originate/purchase mortgages or securities | 145,193 |
| | — |
| | — |
| | — |
| | 145,193 |
|
| Reverse mortgage equity draws (3) | 1,426,814 |
| | — |
| | — |
| | — |
| | 1,426,814 |
|
| Operating leases | 16,622 |
| | 30,089 |
| | 16,330 |
| | 1,409 |
| | 64,450 |
|
| | $ | 1,753,788 |
| | $ | 338,466 |
| | $ | 371,455 |
| | $ | 1,409 |
| | $ | 2,465,118 |
|
| |
(1) | Amounts are exclusive of any related discount, unamortized debt issuance costs or fair value adjustment. Excludes match funded liabilities and borrowings under mortgage loan warehouse facilities as these represent debt where the holders only have recourse to the assets that collateralize the debt and such assets are not available to satisfy general claims against Ocwen. Also excludes financing liabilities that result from sales of assets that do not qualify as sales for accounting purposes and, therefore, are accounted for as secured financings. See Note 13 — Borrowings to the Consolidated Financial Statements for additional information related to these excluded borrowings.
|
| |
(2) | Represents estimated future interest payments on senior notes and the SSTL, based on applicable interest rates as of December 31, 2018. |
| |
(3) | Represents additional equity draw obligations in connection with reverse mortgage loans originated or purchased by Liberty. Because these draws can be made in their entirety, we have classified them as due in less than one year at December 31, 2018. |
As of December 31, 2018,2020, we had recorded gross unrecognized tax benefits of $9.6$20.6 million and an additional $4.1$3.4 million for gross interest and penalties classified as liabilities.penalties. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities, including whether or not these tax liabilities will be paid; therefore, such amounts are not included in the above contractual obligation table.
Our forecasting with respect to our ability to satisfy our contractual obligations, including but not limited to our servicing advance obligations, requires management to use judgment and estimates and includes factors that may be beyond our control. Additionally, our business has been undergoing substantial change, which has magnifiedcontrol, such as the uncertainties that are inherent inconditions created by the forecasting process.COVID-19 pandemic. Our actual results could differ materially from our estimates, and if this were to occur, it could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Off-Balance Sheet Arrangements
In the normal course of business, we engage in transactions with a variety of financial institutions and other companies that are not reflected on our balance sheet. We are subject to potential financial loss if the counterparties to our off-balance sheet transactions are unable to complete an agreed upon transaction. We manage counterparty credit risk by entering into financial instrument transactions through national exchanges, primary dealers or approved counterparties and through the use of mutual margining agreements whenever possible to limit potential exposure. We regularly evaluate the financial position and creditworthiness of our counterparties. Our off-balance sheet arrangements include mortgage loan repurchase and
indemnification obligations, unconsolidated special purpose entities (SPEs) (a type of variable interest entity or VIE) and notional amounts of our derivatives. We have also entered into non-cancelable operating leases principally for our office facilities.
Mortgage Loan Repurchase and Indemnification Liabilities. We have exposure to representation, warranty and indemnification obligations in our capacity as a loan originator and servicer. We recognize the fair value of representation and warranty obligations in connection with originations upon sale of the loan or upon completion of an acquisition. Thereafter, the estimation of the liability considers probable future obligations based on industry data of loans of similar type segregated by year of origination and estimated loss severity based on current loss rates for similar loans. Our historical loss severity considers the historical loss experience that we incur upon sale or liquidation of a repurchased loan as well as current market conditions. See Note 34 — Securitizations and Variable Interest Entities,, Note 1415 — Other Liabilities and Note 2526 — Contingencies to the Consolidated Financial Statements for additional information.
Unfunded Lending Commitments. We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $2.0 billion at December 31, 2020. This additional borrowing capacity is available on a scheduled or unscheduled payment basis. See Note 25 — Commitments to the Consolidated Financial Statements for additional information.
HMBS Issuer Obligations. As an HMBS issuer, we assume certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount (MCA repurchases). Active repurchased loans are assigned to HUD and payment is received from HUD, typically within 60 days of repurchase. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount. We bear the risk of exposure if the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Inactive repurchased loans (the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments) are generally liquidated through foreclosure and subsequent sale of REO, with a claim filed with HUD for recoverable remaining principal and advance balances. See Note 25 — Commitments to the Consolidated Financial Statements for additional information.
Involvement with VIEs. We use SPEs and VIEs for a variety of purposes but principally in the financing of our servicing advances, and in the securitization of mortgage loans.loans and in the financing of our MSRs. We include VIEs in our consolidated financial statements if we determine we are the primary beneficiary. See Note 34 — Securitizations and Variable Interest Entities to the Consolidated Financial Statements for additional information.
We generally use match funded securitization facilities to finance our servicing advances. The SPEs to which the receivables for servicing advances are transferred in the securitization transaction are included in our consolidated financial statements either because we have the majority equity interest in the SPE or because we are the primary beneficiary where the SPE is a VIE. Holders of the debt issued by the SPEs have recourse only to the assets of the SPEs for satisfaction of the debt.
Derivatives. We record all derivatives at fair value on our consolidated balance sheets. We use these derivatives primarily to manage our interest rate risk. The notional amounts of our derivative contracts do not reflect our exposure to credit loss. Generally, our derivative instruments require daily margin calls. See Note 1617 — Derivative Financial Instruments and Hedging Activities to the Consolidated Financial Statements for additional information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events based on information available at the date of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. We have processes in place to monitor these judgments and assumptions, and management is required to review critical accounting policies and estimates with the Audit Committee of the Board of Directors. Our significant accounting policies and critical accounting estimates are described in Note 1 — Organization, Business Environment, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain instruments in our statement of operations and to determine fair value disclosures. Refer to Note 45 — Fair Value to the Consolidated Financial Statements for the fair value hierarchy, descriptions of valuation methodologies used to measure significant assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized.utilized, and sensitivity analyses. We follow the fair value hierarchy to prioritize the inputs utilized to measure fair value.value and classify instruments as Level 3 when the valuation technique requires significant unobservable inputs or assumptions. We review and modify, as necessary, our fair value hierarchy classifications on a quarterly basis. As such, there may be reclassifications between hierarchy levels.The determination of the fair value of these Level 3 financial assets and liabilities
and MSRs requires significant management judgment and estimation. The following table summarizes assets and liabilities measured at fair value on a recurring and nonrecurring basis and the amounts measured using Level 3 inputs:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Loans held for sale | $ | 242,622 |
| | $ | 238,358 |
|
| Loans held for investment | 5,498,719 |
| | 4,715,831 |
|
| MSRs - recurring basis | 1,457,149 |
| | 671,962 |
|
| MSRs - nonrecurring basis, net (1) | — |
| | 133,227 |
|
| Derivative assets | 4,552 |
| | 5,429 |
|
| Mortgage-backed securities | 1,502 |
| | 1,592 |
|
| U.S. Treasury notes and corporate bonds | 1,514 |
| | 1,880 |
|
| Assets at fair value | $ | 7,206,058 |
| | $ | 5,768,279 |
|
| As a percentage of total assets | 77 | % | | 69 | % |
| Financing liabilities | | | |
| HMBS-related borrowings | 5,380,448 |
| | 4,601,556 |
|
| Financing liability - MSRs pledged | 1,032,856 |
| | 508,291 |
|
| Financing liability - Owed to securitization investors | 24,815 |
| | — |
|
| | 6,438,119 |
| | 5,109,847 |
|
| Derivative liabilities | 4,986 |
| | 635 |
|
| Liabilities at fair value | $ | 6,443,105 |
| | $ | 5,110,482 |
|
| As a percentage of total liabilities | 73 | % | | 65 | % |
| Assets at fair value using Level 3 inputs | $ | 7,024,145 |
| | $ | 5,548,764 |
|
| As a percentage of assets at fair value | 97 | % | | 96 | % |
| Liabilities at fair value using Level 3 inputs | $ | 6,438,119 |
| | $ | 5,109,847 |
|
| As a percentage of liabilities at fair value | 100 | % | | 100 | % |
| |
(1) | The balance represents our impaired government-insured stratum of MSRs previously accounted for using the amortization method, which were measured at fair value on a nonrecurring basis. The carrying value of this stratum is net of a valuation allowance of $24.8 million at December 31, 2017. |
Assets at fair value using Level 3 inputs increased during 2018 primarily due to reverse mortgage originations, the fair value election on our remaining portfolio of amortization method MSRs and the MSRs acquired in our acquisition of PHH. Liabilities at fair value using Level 3 inputs increased primarily in connection with reverse mortgage securitizations, which we account for as secured financings, and a liability for sales of MSRs that are accounted for as a secured borrowing which we assumed in connection with the acquisition of PHH.
Our net economic exposure to Loans held for investment - Reverse mortgages and the related Financing liabilities (HMBS-related borrowings) is limited to the residual value we retain. Changes in inputs used to value the loans held for investment are largely offset by changes in the value of the related secured financing. | | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Loans held for sale | $ | 387.8 | | | $ | 275.3 | |
| Loans held for investment - Reverse mortgages | 6,997.1 | | | 6,269.6 | |
| Mortgage Servicing Rights | 1,294.8 | | | 1,486.4 | |
| Other | 35.2 | | | 31.9 | |
| Assets at fair value | $ | 8,715.0 | | | $ | 8,063.1 | |
| As a percentage of total assets | 82 | % | | 77 | % |
| Assets at fair value using Level 3 inputs | $ | 8,376.8 | | | $ | 7,847.9 | |
| As a percentage of assets at fair value | 96 | % | | 97 | % |
| | | |
| HMBS-related borrowings | 6,772.7 | | | 6,063.4 | |
| Financing liability - MSRs pledged | 567.0 | | | 950.6 | |
| Other | 14.4 | | | 22.0 | |
| Liabilities at fair value | $ | 7,354.1 | | | $ | 7,036.1 | |
| As a percentage of total liabilities | 72 | % | | 70 | % |
| Liabilities at fair value using Level 3 inputs | $ | 7,349.5 | | | $ | 7,036.0 | |
| As a percentage of liabilities at fair value | 100 | % | | 100 | % |
We have various internal controls in place to ensure the appropriateness of fair value measurements. Significant fair value measures are subject to analysis and management review and approval. Additionally, we utilize a number of operational controls to ensure the results are reasonable, including comparison, or “back testing,” of model results against actual performance and monitoring the market for recent trades, including our own price discovery in connection with potential and completed sales, and other market information that can be used to benchmark inputs or outputs. Considerable judgment is used in forming conclusions about Level 3 inputs such as interest rate movements, prepayment speeds delinquencies, credit losses and discount rates. Changes to these inputs could have a significant effect on fair value measurements.
Valuation of Reverse Mortgage Loans Held for Investment
Reverse mortgage loans are insured by the FHA and Amortizationtransferred into Ginnie Mae guaranteed securities (or HMBS) that we sell into the secondary market. Loan transfers in these Ginnie Mae securitizations do not qualify for sale accounting and are recorded as secured borrowings. We have elected to record both loans held for investment and the corresponding HMBS borrowings at fair value. Our net exposure to reverse mortgages and the HMBS-related borrowings is limited to the residual value we retain, including future draw commitments. Changes in the fair value of the loans held for investment are largely offset by changes in the value of the related secured financing. As of December 31, 2020, we reported $6.87 billion securitized loans held for investment at fair value and $6.77 billion HMBS-related borrowings at fair value, with a residual, net asset value of $99.5 million. In 2020, we recognized a $7.6 million gain as the net change in fair value of securitized loans held for investment and HMBS-related borrowings, and a $46.3 million gain on new originations of reverse mortgage loans (pre-securitization).
The fair value of both reverse mortgage loans held for investment and corresponding HMBS-related borrowings is based primarily on discounted cash flow methodologies. Inputs to the discounted cash flows of these assets include future draws and tail spread gains, voluntary prepayments, defaults and discount rate.The determination of fair value requires management judgment due to the significant unobservable assumptions, including voluntary prepayment speeds, defaults and discount rate.
We engage third-party valuation experts to support our valuation and provide observations and assumptions related to market activities. We evaluate the reasonableness of our fair value estimate and assumptions using historical experience, or cash flow backtesting, adjusted for prevailing market conditions and benchmarks with third-party expert valuations. We believe that our back-testing and benchmarking procedures provide reasonable assurance that the fair value used in our consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
The following table provides the range and weighted average of significant unobservable assumptions used (expressed as a percentage of UPB) by class projected for the five-year period beginning December 31, 2020:
| | | | | | | | | | | |
| December 31, |
| Significant unobservable assumptions | 2020 | | 2019 |
| Life in years | | | |
| Range | 0.9 to 8.0 | | 2.4 to 7.8 |
| Weighted average | 5.9 | | | 6.0 |
| Conditional prepayment rate (1) | | | |
| Range | 10.6% to 28.8% | | 7.8% to 28.3% |
| Weighted average | 15.4 | % | | 14.6 | % |
| Discount rate | 1.9 | % | | 2.8 | % |
(1)Includes voluntary and involuntary prepayments.
Valuation of MSRs
MSRs are assets that represent the right to service a portfolio of mortgage loans. We originate MSRs from our lending activities and obtainacquire MSRs through flow purchase agreements, GSE Cash Window programs, bulk purchases, asset acquisitions or business combinations. For initial measurement, acquired and originated MSRs are initially measured at fair value. Subsequent to acquisition or origination, we electWe elected to account for MSRs using either the amortization method or the fair value measurement method. For MSRs accounted for using the amortization measurement method, we assess servicing assets or liabilities for impairment or increased obligation based on fair value on a
quarterly basis. We group our MSRs by stratum for impairment testing based on the predominant risk characteristics of the underlying mortgage loans. Historically, our strata had been defined as conventional loans (i.e. conforming to the underwriting standards of Fannie Mae or Freddie Mac), government-insured loans (insured by FHA or VA) and non-Agency loans (i.e. all private label primary and master serviced).
Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. Effective with this election, our entire portfolio of MSRs is accounted for using the fair value measurement method. This irrevocable election appliesAs of December 31, 2020, we reported a $1,294.8 million fair value of MSRs. In 2020, we recognized a $106.2 million fair value loss due to all subsequently acquired or originated servicing assetschanges in valuation inputs and liabilities that have characteristics consistent with each of these classes. assumptions.
We recorded a cumulative-effect adjustment of $82.0 million to retained earnings as of January 1, 2018 to reflect the excess ofdetermine the fair value of MSRs primarily using discounted cash flow methodologies. The significant estimated future cash inflows for MSRs include servicing fees, late fees, float earnings and other ancillary fees and cash outflows include the Agency MSRs over their carrying amount. The government-insured MSRs were impaired by $24.8 million at December 31, 2017; therefore, these MSRs are already effectively carried at fair value. At December 31, 2017,cost of servicing, the UPBcost of financing servicing advances and net carrying value of Agency MSRs for which the fair value election was made was $40.9 billion and $336.9 million, respectively. At December 31, 2017, the UPB and net carrying value of government-insured MSRs for which the fair value election was made was $16.9 billion and $133.2 million, respectively.
compensating interest payments. The determination of the fair value of MSRs requires management judgment duerelating to the number ofsignificant unobservable assumptions that underlie the valuation. We estimate the fair value of our MSRs using a process based upon the use of independent third-party valuation, experts and supported by commercially available discounted cash flow models and analysis of current market data. The key assumptions used in the valuation of these MSRs includeincluding prepayment speeds, loanspeed, delinquency rates, cost to service and discount rates.rate. Our judgement is informed by the transactions we observe in the market, by our actual portfolio performance and by the advice and information we obtained from our valuation experts, amongst other factors.
To assist us in the determination of fair value, 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 a 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 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, and we perform additional verification and analytical procedures. We evaluate the reasonableness of our third-party experts’ assumptions using historical experience adjusted for prevailing market conditions and benchmarks with third-party expert valuation and market participant surveys. We believe that our procedures provide reasonable assurance that the fair value used in our consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
The following table provides the range of key assumptions and weighted average of significant unobservable assumptions used (expressed as a percentage of UPB) by class projected for the five-year period beginning December 31, 2018:2020:
| | | | Conventional | | Government-Insured | | Non-Agency | | Conventional | | Government-Insured | | Non-Agency |
| Prepayment speed | | Prepayment speed | | | | | |
| Range | 6.2% to 11.5% | | 7.9% to 15.5% | | 12.4% to 20.6% | Range | 8.8% to 21.1% | | 9.0% to 24.2% | | 8.6% to 15.0% |
| Weighted average | 8.9% | | 11.2% | | 15.5% | Weighted average | 13.1% | | 15.5% | | 11.3% |
| Delinquency | | Delinquency | |
| Range | 3.6% to 4.1% | | 14.9% to 16.9% | | 19.7% to 25.6% | Range | 1.6% to 3.5% | | 6.8% to 17.9% | | 27.7% to 29.4% |
| Weighted average | 3.9% | | 15.8% | | 23.4% | Weighted average | 1.9% | | 8.8% | | 28.1% |
| Cost to service | | |
| Cost to service (in dollars) | | Cost to service (in dollars) | |
| Range | $77 to $78 | | $131 to $139 | | $169 to $264 | Range | $72 to $73 | | $102 to $122 | | $226 to $272 |
| Weighted average | $77 | | $134 | | $230 | Weighted average | $72 | | $109 | | $261 |
| Discount rate | 9.1% | | 9.2% | | 12.5% | Discount rate | 9.0% | | 10.1% | | 11.4% |
Changes in these assumptions are generally expected to affect our results of operations as follows:
•Increases in prepayment speeds generally reduce the value of our MSRs as the underlying loans prepay faster which causes accelerated MSR amortization,portfolio runoff, higher compensating interest payments and lower overall servicing fees, partially offset by a lower overall cost of servicing, increased float earnings on higher float balances and lower interest expense on lower servicing advance balances.
•Increases in delinquencies generally reduce the value of our MSRs as the cost of servicing increases during the delinquency period, and the amounts of servicing advances and related interest expense also increase.
•Increases in the discount rate reduce the value of our MSRs due to the lower overall net present value of the net cash flows.
•Increases in interest rate assumptions will increase interest expense for financing servicing advances although this effect is partially offset because rate increases will also increase the amount of float earnings that we recognize.
The following table provides information related to the sensitivity of our MSR fair value estimate to a 10% adverse change in key valuation inputs as of December 31, 2018:
|
| | | | | | | | | | | |
| | Conventional | | Government-Insured | | Non-Agency |
| Prepayment speed | $ | (49,300 | ) | | $ | (9,542 | ) | | $ | (64,526 | ) |
| Delinquency | (14,535 | ) | | (7,448 | ) | | (67,291 | ) |
| Cost to service | (17,575 | ) | | (7,358 | ) | | (73,596 | ) |
| Discount rate | (28,128 | ) | | (4,144 | ) | | (35,110 | ) |
Allowance for Losses on Servicing Advances and Receivables
Advances are generally fully reimbursed under the terms of servicing agreements. However, servicing advances may include claimable (with investors) but non-recoverable expenses, for example due to servicer error, such as lack of reasonable documentation as to the type and amount of advances. We record an allowance for losses on servicing advances throughas a charge to earnings to the extent that we believe that a portion of advances are uncollectible under the provisions of each servicing contract taking into consideration, among other factors, our historical collection rates, probability of default, cure or modification, length of delinquency and the amount of the advance. We continually assess collectibilitycollectability using proprietary cash flow projection models that incorporate a number of different factors, depending on the characteristics of the mortgage loan or pool, including, for example, the probable loan liquidation path, estimated time to a foreclosure sale, estimated costs of foreclosure action, estimated future property tax payments and the estimated value of the underlying property net of estimated carrying costs, commissions and closing costs. At December 31, 2018,2020, the allowance for losses on servicing advances was $23.3 million.$6.3 million, which represents 1% of total servicing advances.
We record an allowance for losses on receivables in our Servicing business, including related to defaulted FHA or VA insured loans repurchased from Ginnie Mae guaranteed securitizations (government-insured loan claims). This allowance represents management’s estimate of incurredexpected lifetime credit losses and is maintained at a level that management considers adequate based upon continuing assessments of collectibility,collectability, current trends, and historical loss experience.experience, and reasonable and supportable forecasts. At December 31, 2018,2020, the allowance for losses on receivables related to government-insured claims was $52.5 million.$38.3 million, which represents 28% of total government-insured claims receivables.
We adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as amended, on January 1, 2020. The 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.
The transition adjustment related to the allowance for losses on servicing advances and receivables did not result in any significant adjustment to our financial statements.
Determining an allowance for losses involves degrees ofmanagement judgment and assumptions that, given similar information at any given point, may result in a different but reasonable estimate.
Income Taxes
In December 2017, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin (SAB) 118 (as further clarified by Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2018-05, Income Taxes (Topic 740): “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”), which provides guidance on accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date of December 22, 2017 for companies to complete the accounting under Accounting Standards Codification (ASC) 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements and should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. We adopted the guidance of SAB 118 as of December 31, 2017. We finalized our provisional amounts under SAB 118 in the fourth quarter of 2018. See Note 19 — Income Taxes to the Consolidated Financial Statements for additional information on the Tax Act and the impact on our consolidated financial statements.
We record a tax provision for the anticipated tax consequences of the reported results of operations. We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates in each jurisdiction that applies to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. In these evaluations, we gave more significant weight to objective evidence, such as our actual financial condition and historical results of operations, as compared to subjective evidence, such as projections of future taxable income or losses.
For the three-year periods ended December 31, 20182020 and 2017,2019, the USVI filing jurisdiction was in a material cumulative loss position. The U.S. jurisdiction iswas also in a three-year cumulative loss position as of December 31, 20182020 and 2017.2019. We recognize that cumulative losses in recent years is an objective form of negative evidence in assessing the need for a valuation allowance and that such negative evidence is difficult to overcome. Other factors considered in these evaluations are estimates
of future taxable income, future reversals of temporary differences, tax character and the impact of tax planning strategies that may be implemented, if warranted.
As a result of these evaluations, we recognized a full valuation allowance of $46.3$182.7 million and $62.9$199.5 million on our U.S. deferred tax assets at December 31, 20182020 and 2017,2019, respectively, and a full valuation allowance of $21.3$0.4 million and $43.9$0.4 million on our USVI deferred tax assets at December 31, 20182020 and 2017,2019, respectively. The U.S. and USVI jurisdictional deferred tax assets are not considered to be more likely than not realizable based on all available positive and negative evidence. We intend to continue maintaining a full valuation allowance on our deferred tax assets in both the U.S. and USVI until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period in which the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the profitability that we achieve.
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
NOL carryforwards may be subject to annual limitations under Internal Revenue Code Section 382 (Section 382) (or comparable provisions of foreign or state law) in the event that certain changes in ownership were to occur. In addition, tax credit carryforwards may be subject to annual limitations under Internal Revenue Code Section 383 (Section 383). We periodically evaluate our NOL and tax credit carryforwards and whether certain changes in ownership have occurred as measured under Section 382 that would limit our ability to utilize a portion of our NOL and tax credit carryforwards. If it is determined that an ownership change(s) has occurred, there may be annual limitations on the use of these NOL and tax credit carryforwards under Sections 382 and 383 (or comparable provisions of foreign or state law).
WeOcwen and PHH have evaluated whether weboth experienced anhistorical ownership change as measured under Section 382,changes that have caused the use of certain tax attributes to be limited and during 2018 determined that an ownership change did occur in January 2015 and in December 2017have resulted in the U.S. jurisdiction, which also results in an ownership change under Section 382write-off of certain of these attributes based on our inability to use them in the USVI jurisdiction. This determination was made based on information available as of the date of our Form 10-K filing for the fiscal year ended December 31, 2018. Due to the Section 382 and 383 limitations and the maximum carryforward period for our NOLs and tax credits, we will be unable to fully recognize certain deferred tax assets. Accordingly, as of December 31, 2018, we have reduced our gross deferred tax asset related to our NOLs by $160.9 million, our foreign tax credit deferred tax asset by $29.5 million and corresponding valuation allowance by $55.7 million. The realization of all or a portion of our deferred income tax assets (including NOLs and tax credits) is dependent upon the generation of future taxable income during the statutory carryforward periods. In addition, the limitation on the utilization of our NOL and tax credit carryforwards could result in Ocwen incurring a current tax liability in future tax years. Our inability to utilize our pre-ownership change NOL carryforwards, any future recognized built-in losses or deductions, and tax credit carryforwards could have an adverse effect on our financial condition, results of operations and cash flows.
As part of our Section 382 evaluation and consistent with the rules provided within Section 382, Ocwen relies strictly on the existence or absence, as well as the information contained in certain publicly available documents (e.g., Schedule 13D, Schedule 13G or other documents filed with the SEC) to identify shareholders that own a 5-percent or greater interest in Ocwen stock throughout the period tested. Further, Ocwen relies on such public filings to identify dates in which such 5-percent shareholders acquired, disposed, or otherwise transacted in Ocwen common stock. As the requirement for filing such notices of ownership from the SEC is to report beneficial ownership, as opposed to actual economic ownership of the stock of Ocwen, certain SEC filings may not represent ownership in Ocwen stock that should be considered in determining whether Ocwen experienced an ownership changeperiods defined under the Section 382 rules. Notwithstanding the preceding sentences (regarding Ocwen’ s ability to rely on the existence and absence of information in publicly filed Schedules 13D and 13G), the rules prescribed in Section 382 and the regulations thereunder provide thattax laws. Ocwen may (but is not required to) seek additional clarification from shareholders filing such Schedules 13D and 13G if there are questions or uncertainty regarding the true economic ownership of shares reported in such filing (whether due to ambiguity in the filing, an overly complex ownership structure, the type of instruments owned and reported in the filings, etc.) (often referred to “actual knowledge” questionnaires). Such information can be sought on a filer by filer basis (i.e., there is no requirement that if actual knowledge is sought with respect to one shareholder, actual knowledge must be sought with respect to all shareholders that filed schedules 13D or 13G). While the seeking of actual knowledge can be beneficial in some instances it may be detrimental in others. Once such actual knowledge is received, Section 382 requires the inclusion of such actual knowledge, even if such inclusion is detrimental to the conclusion reached.
Ocwen has performed its analysis of the rules under Section 382 and, based on all currently available information, identified it experienced an ownership change for Section 382 purposes in January 2015 and December 2017. Prior to 2018, Ocwen was aware of shareholder activity in 2015 and 2017 that may have caused a Section 382 ownership change(s), but determined that additional information could potentially be obtained from certain shareholders that would indicate a Section
382 ownership change had not occurred. In completing this analysis, Ocwen identified several shareholders that filed a schedule 13G during the period disclosing a greater than 5-percent interest in Ocwen stock where beneficial versus economic ownership of the stock was unclear, and Ocwen therefore requested further details. As of the date of this Form 10-K, Ocwen has not received all requested responses from selected shareholders, and will continue to consider such shareholders as economic owners of Ocwen’s stock until actual knowledge is otherwise received.
Ocwen is continuingcontinues to monitor the ownership in its stock to evaluate information that will become available later in 2019 and that may result in a different outcome for Section 382 purposes and our future cash tax obligations. As part of this monitoring, Ocwen periodically evaluates whether it is appropriate and beneficial to retroactively seek actual knowledge on certain previously identified and included 5-percent shareholders, whereby, depending on the responses received, Ocwen may conclude that either the January 2015 or December 2017 Section 382any additional ownership changes may have instead occurred on a different date, or did not occur at all.that would further limit its ability to utilize certain tax attributes. As such, our analysis regarding the amount of tax attributes that may be available to offset taxable income in the future without restrictions imposed by Section 382 may continue to evolve.
Indemnification Obligations
We have exposure to representation, warranty and indemnification obligations because of our lending, sales and securitization activities, our acquisitions to the extent we assume one or more of these obligations, and in connection with our servicing practices. We initially recognize these obligations at fair value. Thereafter, the estimation of the liability considers probable future obligations based on industry data of loans of similar type segregated by year of origination, to the extent applicable, and estimated loss severity based on current loss rates for similar loans, our historical rescission rates and the current pipeline of unresolved demands. Our historical loss severity considers the historical loss experience that we incur upon sale or liquidation of a repurchased loan as well as current market conditions. We monitor the adequacy of the overall liability and
make adjustments, as necessary, after consideration of other qualitative factors including ongoing dialogue and experience with our counterparties. As of December 31, 2020, we have recorded a liability for representation and warranty obligations and similar indemnification obligations of $40.4 million. See Note 26 — Contingencies for additional information.
Litigation
In the ordinary course of business, we are a defendant in, or a party or potential party to, many threatened and pending litigation matters. We monitor our litigation matters, including advice from external legal counsel, and regularly perform assessments of these matters for potential loss accrual and disclosure. We establish liabilities for settlements, judgments on appeal and filed and/or threatened claims for which we believe it is probable that a loss has been or will be incurred and the amount can be reasonably estimated.estimated based on current information regarding these matters. Where we determine that a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. Management’s assessment involves the use of estimates, assumptions, and judgments, including progress of the matter, prior experience, available defenses, and the advice of legal counsel and other experts. Accruals are adjusted as more information becomes available or when an event occurs requiring a change.It is possible that we will incur losses relating to threatened and pending litigation that materially exceed the amount accrued. Our accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was $38.9 million at December 31, 2020. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded at December 31, 2020.
Going Concern
In accordance with ASC 205-40, Presentation of Financial Statements - Going Concern, we evaluate whether there are conditions that are known or reasonably knowable that raise substantial doubt about our ability to continue as a going concern within one year after the date that our financial statements are issued. We perform a detailed review and analysis of relevant quantitative and qualitative information from across our organization in connection with this evaluation. To support this effort, senior management from key business units reviews and assesses the following information:
•our current financial condition, including liquidity sources at the date that the financial statements are issued (e.g., available liquid funds and available access to credit, including covenant compliance);
•our conditional and unconditional obligations due or anticipated within one year after the date that the financial statements are issued (regardless of whether those obligations are recognized in our financial statements);
•funds necessary to maintain operations considering our current financial condition, obligations and other expected cash flows within one year after the date that the financial statements are issued (i.e., financial forecasting); and
•other conditions and events, when considered in conjunction with the above items, that may adversely affect our ability to meet obligations within one year after the date that the financial statements are issued (e.g., negative financial trends, indications of possible financial difficulties, internal matters such as a need to significantly revise operations and external matters such as adverse regulatory/regulatory or legal proceedings, adverse counterparty actions or rating agency decisions)decisions, and our client concentration).
Our evaluation of whether it is probable that we will be unable to meet our obligations as they become due within one year after the date that our financial statements are issued involves a degree of judgment, including about matters that are, to different degrees, uncertain.
If such conditions exist, management evaluates its plans that when implemented would mitigate the condition(s) and alleviate the substantial doubt about our ability to continue as a going concern. Such plans are considered only if information available as of the date that the financial statements are issued indicates both of the following are true:
•it is probable management’s plans will be implemented within the evaluation period; and
•it is probable management’s plans, when implemented individually or in the aggregate, will mitigate the condition(s) that raise substantial doubt about our ability to continue as a going concern in the evaluation period.
Our evaluation of whether it is probable that management’s plans will be effectively implemented within the evaluation period is based on the feasibility of implementation of management’s plans in light of our specific facts and circumstances.
Our evaluation of whether it is probable that our plans, individually or in the aggregate, will be implemented in the evaluation period involves a degree of judgment, including about matters that are, to different degrees, uncertain.
Based on our evaluation, we have determined that there are no conditions that are known or reasonably knowable that raise substantial doubt about our ability to continue as a going concern within one year after the date that our Consolidated Financial Statements for the year ended December 31, 2020 are issued.
RECENT ACCOUNTING DEVELOPMENTS
Recent Accounting Pronouncements
Listed below are recent ASUs that weWe adopted new credit loss guidance (ASU 2016-13, as amended) on January 1, 2019. 2020 by applying the guidance at the adoption date with a cumulative-effect adjustment to the opening balance of Retained earnings in the period of adoption. The transition adjustment resulted in an adjustment to the opening balance of retained earnings of $47.0 million and we increased our loans held for investment by $47.0 million, representing the recognition of certain non-cancellable draw commitments (tails) associated with our reverse mortgage loans. For additional information, see Note 1 — Organization, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements for additional information.
Our adoption of the other standards listed below willon January 1, 2020 did not have a material impact on our consolidated financial statements.statements:
ASU 2016-02: Leases
ASU 2017-08: Receivables: Nonrefundable Fees•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)
ASU 2018-02: Income Statement•Fair Value Measurement: Disclosure Framework - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
ASU 2018-09: Codification Improvements
In additionChanges to the above recently issued ASUs, listed below are ASUs that we adopted in 2018. We adopted ASU 2016-16 on a modified retrospective basis by recording a cumulative-effect reduction of $5.6 million to retained earnings. Our adoption of the pronouncements listed below did not have a material effect on our consolidated financial statements. Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
ASU 2014-09: Revenue from Contracts with Customers
ASU 2016-01: Financial Instruments: Recognition and Measurement of Financial Assets and Financial LiabilitiesITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASU 2016-15: Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
ASU 2016-16: Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
ASU 2016-18: Statement of Cash Flows: Restricted Cash
ASU 2017-01: Business Combinations: Clarifying the Definition of a Business
ASU 2017-09: Compensation: Stock Compensation
ASU 2018-03: Financial Instruments: Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10)
For additional information, see Note 1 — Organization, Business Environment, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Refer to the Market Risk sections of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for our quantitative and qualitative disclosures about market risk.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this section is contained in the Consolidated Financial Statements of Ocwen Financial Corporation and Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, beginning on Page F-1.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A. | CONTROLS AND PROCEDURES |
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision of and with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the end of the period covered by this Annual Report. Based on such evaluation, management concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial reporting as of December 31, 2018,2020, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). Based on that evaluation, our management concluded that, as of December 31, 2018,2020, internal control over financial reporting is effective based on criteria established in Internal Control—Integrated Framework issued by the COSO.
We acquired PHH on October 4, 2018, as discussed in Note 2 — Business Acquisition to the Consolidated Financial Statements. As permitted by the SEC staff’s Frequently Asked Questions 3 on Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports (revised September 24, 2007), our management excluded from our assessment on internal control over financial reporting effectiveness as of December 31, 2018, PHH’s internal control over financial reporting associated with consolidated total assets of approximately 8.5%, and consolidated total revenues of approximately 6.8%, included in our consolidated financial statements as of and for the year ended December 31, 2018. We will include PHH in our assessment of the effectiveness of internal control over financial reporting beginning in fiscal 2019.
The effectiveness of Ocwen’s internal control over financial reporting as of December 31, 20182020 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report that appears herein.
Limitations on the Effectiveness of Controls
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting during our fiscal quarter ended December 31, 20182020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 9B. | OTHER INFORMATION |
ITEM 9B. OTHER INFORMATION
There was no information required to be reported on Form 8-K during the fourth quarter of the year covered by this Form 10-K that was not so reported.
PART III
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ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the information contained under the captions “Election of Directors-Nominees for Director,” “Executive Officers Who Are Not Directors,” “Board of Directors and Corporate Governance-Committees of the Board of Directors-Audit Committee”, “Security Ownership of Certain Beneficial Owners and Related Shareholder Matters-Section 16(a) Beneficial Ownership Reporting Compliance” and “Board of Directors and Corporate Governance-Code of Ethics” in our definitive Proxy Statement with respect to our 20192021 Annual Meeting, which we intend to file with the SEC no later than April, 30 2019.2021.
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ITEM 11. | EXECUTIVE COMPENSATION |
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information contained under the captions “Executive Compensation” and “Board of Directors Compensation” in our definitive Proxy Statement with respect to our 20192021 Annual Meeting, which we intend to file with the SEC no later than April, 30 2019.2021.
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the information contained under the captions “Security Ownership of Certain Beneficial Owners and Related Shareholder Matters-Beneficial Ownership of Equity Securities” and “Equity Compensation Plan Information” in our definitive Proxy Statement with respect to our 20192021 Annual Meeting, which we intend to file with the SEC no later than April, 30 2019.
2021.
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ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the information contained under the captions “Board of Directors and Corporate Governance-Independence of Directors” and “Business Relationships and Related Transactions” in our definitive Proxy Statement with respect to our 20192021 Annual Meeting, which we intend to file with the SEC no later than April, 30 2019.2021.
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ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to the information contained under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in our definitive Proxy Statement with respect to our 20192021 Annual Meeting, which we intend to file with the Securities and Exchange Commission no later than April, 30 2019.2021.
PART IV
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ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(1) and (2) Financial Statements and Schedules. The information required by this section is contained in the Consolidated Financial Statements of Ocwen Financial Corporation and Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, beginning on Page F-1.
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| | | | Asset Purchase Agreement between Ocwen Loan Servicing, LLC, and Residential Capital, LLC, Residential Funding Company, LLC, GMAC Mortgage, LLC, Executive Trustee Services, LLC, ETS of Washington, Inc., EPRE LLC, GMACM Borrower LLC, and RFC Borrower LLC dated as of November 2, 2012 (2) |
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| | | | Sale Supplement, dated as of July 1, 2013, to the Master Servicing Rights Purchase Agreement, dated as of October 1, 2012, between Ocwen Loan Servicing, LLC, HLSS Holdings, LLC and Home Loan Servicing Solutions, Ltd. (14) |
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| | | | Amendment, dated as of September 30, 2013, to the Sale Supplement, dated as of July 1, 2013, to the Master Servicing Rights Purchase Agreement, dated as of October 1, 2012, between Ocwen Loan Servicing, LLC, HLSS Holdings, LLC and Home Loan Servicing Solutions, Ltd. (15) |
| | | | Amendment, dated as of September 30, 2013, to the Subservicing Supplement, dated as of July 1, 2013, to the Master Subservicing Agreement, dated as of October 1, 2012, between Ocwen Loan Servicing, LLC and HLSS Holdings LLC (15) |
| | | | Amendment, dated as of February 4, 2014, to the Sale Supplement dated as of July 1, 2013, the Sale Supplement dated February 10, 2012 and various other sale supplements, between Ocwen Loan Servicing, LLC, HLSS Holdings, LLC and Home Loan Servicing Solutions, Ltd. (6) |
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| | | | Amended and Restated Senior Secured Term Loan Facility Agreement, dated as of December 5, 2016, by and among Ocwen Loan Servicing, LLC, as Borrower, Ocwen Financial Corporation, as Parent, Certain Subsidiaries of Ocwen Financial Corporation, as Subsidiary Guarantors, the Lender Parties thereto, and Barclays Bank PLC, as Administrative Agent and Collateral Agent (21)(16) |
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| | | | Master Agreement for the Purchase and Sale of Servicing Rights, dated as of July 23, 2017December 28, 2016, by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC, andbetween New Residential Mortgage LLC, (24)PHH Mortgage Corporation and, for limited purposes, PHH Corporation (32) |
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| | 101.INS | | XBRL Instance Document (filed herewith) |
| | 101.SCH | | XBRL Taxonomy Extension Schema Document (filed herewith) |
| | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith) |
| | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document (filed herewith) |
| | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document (filed herewith) |
| | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith) |
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* | Management contract or compensatory plan or agreement. |
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† | The schedules and exhibits referenced in the Agreement and Plan of have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any referenced schedules will be furnished supplementally to the SEC upon request. |
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†† | Portions of this exhibit have been omitted pursuant to a request for confidential treatment. |
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(1) | Incorporated by referencefollowing financial statements from the similarly described exhibit included with the Registrant’s Form 8-K filed on October 5, 2012. |
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(2) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on November 8, 2012. |
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(3) | Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2018 filed on May 2, 2018. |
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(4) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on April 4, 2013. |
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(5) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2017 filed on August 3, 2017. |
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(6) | Incorporated by reference from the similarly described exhibit included with the Registrant’sCompany’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 3, 2014.2020 were formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. |
| |
(7)104 | Incorporated by reference | The cover page from the similarly described exhibit included with the Registrant’s Form 8-K filed on February 19, 2016. |
| |
(8) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on May 13, 2014. |
| |
(9) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2016 filed on April 28, 2016. |
| |
(10) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on August 12, 2009. |
| |
(11) | Incorporated by reference from the similarly described exhibit included with the Registrant’sCompany’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 16, 2005.2020, formatted in iXBRL (included as Exhibit 101). |
| |
(12) | Incorporated by reference from the similarly described exhibit to our definitive Proxy Statement with respect to our 2007 Annual Meeting of Shareholders as filed on March 30, 2007. |
| |
(13) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on April 18, 2013. |
| |
(14) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on July 8, 2013. |
| |
(15) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2013 filed on November 5, 2013. |
| |
(16) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on April 6, 2015. |
| |
(17) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on February 19, 2013. |
| |
(18) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2014 filed on May 2, 2014. |
| |
(19) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on January 20, 2015. |
| |
(20) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on March 26, 2015. |
| |
(21) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on December 6, 2016. |
| |
(22) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 filed February 23, 2017. |
| |
(23) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on May 24, 2017. |
| |
(24) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2017 filed on November 2, 2017. |
| |
(25) | Incorporated by reference to the similarly described exhibit included with PHH Corporation's Quarterly Report on Form 10-Q for the period ended June 30, 2017 filed on August 9, 2017. |
| |
(26) | Incorporated by reference to the similarly described exhibit to PHH Corporation's Annual Report on Form 10-K for the year ended December 31, 2017 filed on March 1, 2018. |
| |
(27) | Incorporated by reference to the similarly described exhibit included with the Registrant’s Form 8-K filed on February 12, 2018. |
| |
(28) | Incorporated by reference to the similarly described exhibit included with the Registrant’s Form 8-K filed on April 19, 2018. |
| |
(29) | Incorporated by reference to the similarly described exhibit included with the Registrant’s Form 8-K filed on May 29, 2018. |
| |
(30) | Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on January 17, 2012. |
| |
(31) | Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on October 4, 2018. |
| |
(32) | Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on August 23, 2012. |
| |
(33) | Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on August 20, 2013. |
| |
(34) | Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on July 5, 2017. |
| |
(35) | Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2018 filed on November 6, 2018. |
| |
(36) | Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on December 28, 2016. |
| |
(37) | Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on June 19, 2017. |
| |
(38) | Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on May 25, 2016. |
| |
(39) | Incorporated by reference to the similarly described exhibit to PHH Corporation’s Annual Report on Form 10-K filed on February 27, 2015. |
* Management contract or compensatory plan or agreement.
† Certain schedules and exhibits have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any referenced schedules will be furnished supplementally to the SEC upon request.
†† Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
††† Certain confidential information contained in this agreement has been omitted because it is not material and would be competitively harmful if publicly disclosed. | |
ITEM 16. | FORM 10-K SUMMARY |
†††† Certain schedules and exhibits have been omitted in accordance with Item 601(a)(5) of Regulation S-K. A copy of any referenced schedules will be furnished supplementally to the SEC upon request.
(1)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on October 5, 2012.
(2)Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K filed for the year ended December 31, 2018 filed on February 27, 2019.
(3)Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2018 filed on May 2, 2018.
(4)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on April 4, 2013.
(5)Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 3, 2014.
(6)Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2019 filed on May 7, 2019.
(7)Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2019 filed on August 6, 2019.
(8)Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on March 18, 2019.
(9)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on August 12, 2009.
(10)Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 16, 2005.
(11)Incorporated by reference from the similarly described exhibit to our definitive Proxy Statement with respect to our 2007 Annual Meeting of Shareholders as filed on March 30, 2007.
(12)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on April 18, 2013.
(13)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on February 19, 2013.
(14)Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2014 filed on May 2, 2014.
(15)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on March 26, 2015.
(16)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on December 6, 2016.
(17)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on May 24, 2017.
(18)Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2017 filed on November 2, 2017.
(19)Incorporated by reference to the similarly described exhibit included with the Registrant’s Form 8-K filed on April 19, 2018.
(20)Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on January 17, 2012.
(21)Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on October 4, 2018.
(22)Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on August 20, 2013.
(23)Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on July 5, 2017.
(24)Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2018 filed on November 6, 2018.
(25)Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2016 filed on April 28, 2016.
(26)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on January 27, 2020.
(27)Incorporated by reference from the Description of Capital Stock included in the Registrant’s Registration Statement on Form S-3 filed on May 9, 2013.
(28)Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 filed on May 8, 2020.
(29)Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 filed on August 4, 2020.
(30)Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2020 filed on November 3, 2020.
(31)Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on February 25, 2019.
(32)Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on December 28, 2016.
ITEM 16. FORM 10-K SUMMARY
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| Ocwen Financial Corporation |
| | |
| Ocwen Financial Corporation |
| By: | | |
| By: | /s/ Glen A. Messina |
| | Glen A. Messina |
| | President and Chief Executive Officer
|
Date: February 27, 201919, 2021 | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
|
| | | | | | | |
| /s/ Phyllis R. Caldwell | | Date: February 27, 201919, 2021 |
| Phyllis R. Caldwell, Chair of the Board of Directors | | |
| | |
| /s/ Glen A. Messina | | Date: February 27, 201919, 2021 |
Glen A. Messina, President, Chief Executive Officer and Director
(principal executive officer)
| | |
| | |
| /s/ Alan J. Bowers | | Date: February 27, 201919, 2021 |
| Alan J. Bowers, Director | | |
| | |
| /s/ Jacques J. Busquet | | Date: February 27, 201919, 2021 |
| Jacques J. Busquet, Director | | |
| | |
/s/ Carol J. GalanteKevin Stein | | Date: February 27, 201919, 2021 |
Carol J. Galante,Kevin Stein, Director | | |
| | |
/s/ Robert J. LipsteinJenne K. Britell | | Date: February 27, 201919, 2021 |
Robert J. Lipstein,Jenne K. Britell, Director | | |
| | |
/s/ Robert A. Salcetti | | Date: February 27, 2019 |
Robert A. Salcetti, Director | | |
| | |
| /s/ DeForest B. Soaries, Jr. | | Date: February 27, 201919, 2021 |
| DeForest B. Soaries, Jr., Director | | |
| | |
/s/ Catherine M. DondzilaJune C. Campbell | | Date: February 27, 201919, 2021 |
Catherine M. Dondzila,June C. Campbell, Executive Vice President and Chief Financial Officer
(principal financial officer) | | |
| | |
| /s/ Francois Grunenwald | | Date: February 19, 2021 |
Francois Grunenwald, Senior Vice President and Chief Accounting Officer
(principal financial officer and principal accounting officer) | | |
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
December 31, 2018
2020
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
December 31, 20182020
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| | | | |
| Page |
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| Consolidated Financial Statements: | |
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Consolidated Balance Sheets at December 31, 20182020 and 20172019 | |
| |
Consolidated Statements of Operations for the years ended December 31, 2018, 20172020, 2019 and 20162018 | |
| |
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018, 20172020, 2019 and 20162018 | |
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Consolidated Statements of Changes in Equity for the years ended December 31, 2018, 20172020, 2019 and 20162018 | |
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Consolidated Statements of Cash Flows for the years ended December 31, 2018, 20172020, 2019 and 20162018 | |
| |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholdersshareholders and the Board of Directors of Ocwen Financial Corporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ocwen Financial Corporation and subsidiaries (the “Company”) as of December 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive loss, changes in equity, and cash flows for each of the three years in the period ended December 31, 2018,2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2019,19, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for measurement of credit losses on financial instruments and made an irrevocable fair value election for certain financial instruments in 2020 due to the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Fair Value - Mortgage Servicing Rights — Refer to Notes 5 and 9 to the financial statements
Critical Audit Matter Description
The Company has elected to account for its mortgage servicing rights (“MSRs”) at fair value. The determination of the fair value of MSRs requires management judgment due to the significant unobservable assumptions that underlie the valuation. The Company estimates the fair value of its MSRs with the assistance of independent third-party valuation experts that use discounted cash flow models and analysis of current market data. The significant unobservable assumptions used in the valuation of MSRs include prepayment speeds, cost to service, and discount rates. The Company’s MSRs balance was $1.295 billion at December 31, 2020, which are classified as Level 3 in the valuation hierarchy. A change in the significant unobservable valuation assumptions utilized might result in a significantly higher or lower fair value measurement.
We identified the valuation of MSRs as a critical audit matter because of (i) the significant judgments made by management in determining the prepayment speeds, cost to service, and discount rates assumptions, and (ii) the high degree of auditor
judgment and an increased extent of effort when performing audit procedures to evaluate the appropriateness of these significant unobservable valuation assumptions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the significant unobservable valuation assumptions used by management to estimate the fair value of the Company’s MSRs included the following, among others:
•We tested the operating effectiveness of controls over management’s valuation of MSRs and management’s evaluation of the reasonableness of the significant unobservable assumptions, including those related to the determination and supervision of their third-party valuation experts, data utilized in the third-party valuation expert's model, and the determination of (1) prepayment speeds (2) cost to service and (3) discount rates assumptions.
•We subjected the data utilized in the valuation model to substantive audit procedures on a sample basis by confirming balances with borrowers, obtaining and inspecting loan origination documents, and obtaining and inspecting supporting documentation for loan activity.
•With the assistance of our fair value specialists, we inquired of the Company’s third-party valuation specialists regarding the reasonableness of the valuation assumptions and the appropriateness of the valuation model.
•We evaluated management’s ability to reasonably estimate fair value by comparing management’s assumptions and the overall fair value to market surveys.
•We assessed the consistency by which management has applied significant valuation assumptions.
Fair Value – Loans Held for Investment — Refer to Notes 5 and 7 to the financial statements
Critical Audit Matter Description
The Company has elected to account for its reverse residential mortgage loans that are classified as loans held for investment (“reverse mortgages”) at fair value. The fair value of reverse mortgages is 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 future draw commitments on HECM loans. The Company’s reverse mortgage balance was $6.997 billion at December 31, 2020, which is classified as Level 3 in the valuation hierarchy. A change in the valuation assumptions utilized might result in a significantly higher or lower fair value measurement.
We identified the valuation of reverse mortgages as a critical audit matter because of (i) the significant judgments made by management in determining the voluntary prepayment speeds, default rates, and discount rate assumptions, all of which are unobservable, and (ii) the high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the appropriateness of these significant unobservable valuation assumptions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the significant unobservable valuation assumptions used by management to estimate the fair value of the Company’s reverse mortgages included the following, among others:
•We tested the operating effectiveness of controls over management’s valuation of reverse mortgages and management’s evaluation of the reasonableness of the significant unobservable assumptions, data utilized in the valuation model, and their determination of (1) voluntary prepayments (2) defaults and (3) discount rate.
•We subjected the data utilized in the valuation model to substantive audit procedures on a sample basis by confirming balances with borrowers, obtaining and inspecting loan origination documents, and obtaining and inspecting supporting documentation for loan activity.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and significant assumptions used, including whether the significant assumptions were appropriate and consistent with what market participants would use in the valuation of reverse mortgages.
•We assessed the consistency by which management has applied significant unobservable valuation assumptions.
|
| |
| /s/ DELOITTE & TOUCHE LLP |
|
New York, New YorkNY |
February, 27, 201919 2021 |
| We have served as the Company’s auditor since 2009. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholdersshareholders and the Board of Directors of Ocwen Financial Corporation:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Ocwen Financial Corporation and subsidiaries (the “Company”) as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018,2020, of the Company and our report dated February 27, 2019,19, 2021, expressed an unqualified opinion on those financial statements.
As described in Management’s Reportstatements and included an explanatory paragraph regarding the Company’s adoption of accounting standards update (ASU) 2016-13: Financial Instruments - Credit Losses: Measurement of Credit Losses on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at PHH Corporation, which was acquired on October 4, 2018 and whose financial statements constitute 9% of consolidated total assets and 7% of consolidated revenues as of and for the year ended December 31, 2018. Accordingly, our audit did not include the internal control over financial reporting at PHH Corporation.Instruments (CECL).
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
| |
| /s/ DELOITTE & TOUCHE LLP |
|
New York, New YorkNY |
February 27, 201919, 2021 |
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
| | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| Assets | | | |
| Cash and cash equivalents | $ | 284,802 | | | $ | 428,339 | |
| Restricted cash (amounts related to variable interest entities (VIEs) of $16,791 and $20,434) | 72,463 | | | 64,001 | |
| Mortgage servicing rights, at fair value | 1,294,817 | | | 1,486,395 | |
| Advances, net (amounts related to VIEs of $651,576 and $801,990) | 828,239 | | | 1,056,523 | |
| | | |
| Loans held for sale ($366,364 and $208,752 carried at fair value) | 387,836 | | | 275,269 | |
| Loans held for investment, at fair value (amounts related to VIEs of $9,770 and $23,342) | 7,006,897 | | | 6,292,938 | |
| Receivables, net | 187,665 | | | 201,220 | |
| | | |
| Premises and equipment, net | 16,925 | | | 38,274 | |
| Other assets ($25,476 and $8,524 carried at fair value) (amounts related to VIEs of $4,544 and $3,132) | 571,483 | | | 563,240 | |
| | | |
| Total assets | $ | 10,651,127 | | | $ | 10,406,199 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Liabilities | | | |
| Home Equity Conversion Mortgage-Backed Securities (HMBS) - related borrowings, at fair value | $ | 6,772,711 | | | $ | 6,063,435 | |
| Other financing liabilities, at fair value (amounts related to VIEs of $9,770 and $22,002) | 576,722 | | | 972,595 | |
| Advance match funded liabilities (related to VIEs) | 581,288 | | | 679,109 | |
| Other secured borrowings, net | 1,069,161 | | | 1,025,791 | |
| Senior notes, net | 311,898 | | | 311,085 | |
| Other liabilities ($4,638 and $100 carried at fair value) | 923,975 | | | 942,173 | |
| | | |
| Total liabilities | 10,235,755 | | | 9,994,188 | |
| | | |
| Commitments and Contingencies (Notes 25 and 26) | 0 | | 0 |
| | | |
| | | |
| | | |
| | | |
| Stockholders’ Equity | | | |
| | | |
| Common stock, $.01 par value; 13,333,333 shares authorized; 8,687,750 and 8,990,816 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively | 87 | | | 90 | |
| Additional paid-in capital | 556,062 | | | 558,057 | |
| Accumulated deficit | (131,682) | | | (138,542) | |
| Accumulated other comprehensive loss, net of income taxes | (9,095) | | | (7,594) | |
| | | |
| | | |
| Total stockholders’ equity | 415,372 | | | 412,011 | |
| Total liabilities and stockholders’ equity | $ | 10,651,127 | | | $ | 10,406,199 | |
|
| | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| Assets | |
| | |
|
| Cash | $ | 329,132 |
| | $ | 259,655 |
|
| Restricted cash (amounts related to VIEs of $20,968 and $21,922) | 67,878 |
| | 42,905 |
|
| Mortgage servicing rights ($1,457,149 and $671,962 carried at fair value) | 1,457,149 |
| | 1,008,844 |
|
| Advances, net | 249,382 |
| | 211,793 |
|
| Match funded assets (related to variable interest entities (VIEs)) | 937,294 |
| | 1,177,357 |
|
| Loans held for sale ($176,525 and $214,262 carried at fair value) | 242,622 |
| | 238,358 |
|
| Loans held for investment, at fair value (amounts related to VIEs of $26,520 and $0) | 5,498,719 |
| | 4,715,831 |
|
| Receivables, net | 198,262 |
| | 199,529 |
|
| Premises and equipment, net | 33,417 |
| | 37,006 |
|
| Other assets ($7,568 and $8,900 carried at fair value)(amounts related to VIEs of $2,874 and $5,437) | 379,567 |
| | 511,886 |
|
| Assets related to discontinued operations | 794 |
| | — |
|
| Total assets | $ | 9,394,216 |
| | $ | 8,403,164 |
|
| | | | |
| Liabilities and Equity | |
| | |
|
| Liabilities | |
| | |
|
| HMBS-related borrowings, at fair value | $ | 5,380,448 |
| | $ | 4,601,556 |
|
| Other financing liabilities ($1,057,671 and $508,291 carried at fair value) (amounts related to VIEs of $24,815 and $0) | 1,127,613 |
| | 593,518 |
|
| Match funded liabilities (related to VIEs) | 778,284 |
| | 998,618 |
|
| Other secured borrowings, net | 382,538 |
| | 545,850 |
|
| Senior notes, net | 448,727 |
| | 347,338 |
|
| Other liabilities ($4,986 and $635 carried at fair value) | 703,636 |
| | 769,410 |
|
| Liabilities related to discontinued operations | 18,265 |
| | — |
|
| Total liabilities | 8,839,511 |
| | 7,856,290 |
|
| | | | |
| Commitments and Contingencies (Notes 24 and 25) |
|
| |
|
|
| | | | |
| Equity | |
| | |
|
| Ocwen Financial Corporation (Ocwen) stockholders’ equity | | | |
| Common stock, $.01 par value; 200,000,000 shares authorized; 133,912,425 and 131,484,058 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively | 1,339 |
| | 1,315 |
|
| Additional paid-in capital | 554,056 |
| | 547,057 |
|
| Retained earnings (accumulated deficit) | 3,567 |
| | (2,083 | ) |
| Accumulated other comprehensive loss, net of income taxes | (4,257 | ) | | (1,249 | ) |
| Total Ocwen stockholders’ equity | 554,705 |
| | 545,040 |
|
| Non-controlling interest in subsidiaries | — |
| | 1,834 |
|
| Total equity | 554,705 |
| | 546,874 |
|
| Total liabilities and equity | $ | 9,394,216 |
| | $ | 8,403,164 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-5
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Revenue | | | | | |
| Servicing and subservicing fees | $ | 737,320 | | | $ | 975,507 | | | $ | 937,083 | |
| Gain on loans held for sale, net | 137,236 | | | 38,300 | | | 37,336 | |
| Reverse mortgage revenue, net | 60,726 | | | 86,309 | | | 60,237 | |
| Other revenue, net | 25,630 | | | 23,259 | | | 28,389 | |
| Total revenue | 960,912 | | | 1,123,375 | | | 1,063,045 | |
| | | | | |
| MSR valuation adjustments, net | (251,921) | | | (120,876) | | | (153,457) | |
| | | | | |
| Operating expenses | | | | | |
| Compensation and benefits | 265,295 | | | 313,508 | | | 298,036 | |
| Servicing and origination | 77,265 | | | 109,007 | | | 131,297 | |
| Professional services | 106,872 | | | 102,638 | | | 165,554 | |
| Technology and communications | 59,592 | | | 79,166 | | | 98,241 | |
| Occupancy and equipment | 47,503 | | | 68,146 | | | 59,631 | |
| Other expenses | 19,177 | | | 1,474 | | | 26,280 | |
| Total operating expenses | 575,704 | | | 673,939 | | | 779,039 | |
| | | | | |
| | | | | |
| | | | | |
| Other income (expense) | | | | | |
| Interest income | 15,999 | | | 17,104 | | | 14,026 | |
| Interest expense | (109,367) | | | (114,129) | | | (103,371) | |
| Pledged MSR liability expense | (152,334) | | | (372,089) | | | (171,670) | |
| Gain on repurchase of senior secured notes | 0 | | | 5,099 | | | 0 | |
| Bargain purchase gain | 0 | | | (381) | | | 64,036 | |
| | | | | |
| Other, net | 6,731 | | | 9,345 | | | (5,046) | |
| Total other expense, net | (238,971) | | | (455,051) | | | (202,025) | |
| | | | | |
| Loss from continuing operations before income taxes | (105,684) | | | (126,491) | | | (71,476) | |
| Income tax expense (benefit) | (65,506) | | | 15,634 | | | 529 | |
| Loss from continuing operations, net of tax | (40,178) | | | (142,125) | | | (72,005) | |
| Income from discontinued operations, net of tax | 0 | | | 0 | | | 1,409 | |
| Net loss | (40,178) | | | (142,125) | | | (70,596) | |
| Net income attributable to non-controlling interests | 0 | | | 0 | | | (176) | |
| Net loss attributable to Ocwen stockholders | $ | (40,178) | | | $ | (142,125) | | | $ | (70,772) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Earnings (loss) per share attributable to Ocwen stockholders - Basic and Diluted | | | | | |
| Continuing operations | $ | (4.59) | | | $ | (15.86) | | | $ | (8.10) | |
| Discontinued operations | 0 | | | 0 | | | 0.16 | |
| $ | (4.59) | | | $ | (15.86) | | | $ | (7.94) | |
| Weighted average common shares outstanding | | | | | |
| Basic | 8,748,725 | | | 8,962,961 | | | 8,913,558 | |
| Diluted | 8,748,725 | | | 8,962,961 | | | 8,913,558 | |
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Revenue | | | | | |
| Servicing and subservicing fees | $ | 934,336 |
| | $ | 989,376 |
| | $ | 1,186,620 |
|
| Gain on loans held for sale, net | 77,743 |
| | 103,402 |
| | 90,391 |
|
| Other revenue, net | 50,966 |
| | 101,798 |
| | 110,152 |
|
| Total revenue | 1,063,045 |
| | 1,194,576 |
| | 1,387,163 |
|
| | | | | | |
| Expenses | | | | | |
| Compensation and benefits | 298,036 |
| | 358,994 |
| | 381,340 |
|
| Professional services | 165,554 |
| | 229,451 |
| | 305,586 |
|
| MSR valuation adjustments, net | 153,457 |
| | 52,962 |
| | 124,029 |
|
| Servicing and origination | 131,297 |
| | 141,496 |
| | 188,750 |
|
| Technology and communications | 98,241 |
| | 100,490 |
| | 110,333 |
|
| Occupancy and equipment | 59,631 |
| | 66,019 |
| | 80,191 |
|
| Other expenses | 26,280 |
| | 49,233 |
| | 33,025 |
|
| Total expenses | 932,496 |
| | 998,645 |
| | 1,223,254 |
|
| | | | | | |
| Other income (expense) | | | | | |
| Interest income | 14,026 |
| | 15,965 |
| | 19,083 |
|
| Interest expense | (275,041 | ) | | (363,238 | ) | | (412,583 | ) |
| Bargain purchase gain | 64,036 |
| | — |
| | — |
|
| Gain on sale of mortgage servicing rights, net | 1,325 |
| | 10,537 |
| | 8,492 |
|
| Other, net | (6,371 | ) | | (3,168 | ) | | 14,738 |
|
| Total other expense, net | (202,025 | ) | | (339,904 | ) | | (370,270 | ) |
| | | | | | |
| Loss from continuing operations before income taxes | (71,476 | ) | | (143,973 | ) | | (206,361 | ) |
| Income tax expense (benefit) | 529 |
| | (15,516 | ) | | (6,986 | ) |
| Loss from continuing operations, net of tax | (72,005 | ) | | (128,457 | ) | | (199,375 | ) |
| Income from discontinued operations, net of tax | 1,409 |
| | — |
| | — |
|
| Net loss | (70,596 | ) | | (128,457 | ) | | (199,375 | ) |
| Net (income) loss attributable to non-controlling interests | (176 | ) | | 491 |
| | (387 | ) |
| Net loss attributable to Ocwen stockholders | $ | (70,772 | ) | | $ | (127,966 | ) | | $ | (199,762 | ) |
| | | | | |
| Earnings (loss) per share attributable to Ocwen stockholders - Basic and Diluted | | | | | |
| Continuing operations | $ | (0.54 | ) | | $ | (1.01 | ) | | $ | (1.61 | ) |
| Discontinued operations | 0.01 |
| | — |
| | — |
|
| | $ | (0.53 | ) | | $ | (1.01 | ) | | $ | (1.61 | ) |
| | | | | |
| Weighted average common shares outstanding | | | | | |
| Basic | 133,703,359 |
| | 127,082,058 |
| | 123,990,700 |
|
| Diluted | 133,703,359 |
| | 127,082,058 |
| | 123,990,700 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-6
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Net loss | $ | (40,178) | | | $ | (142,125) | | | $ | (70,596) | |
| Other comprehensive income (loss), net of income taxes | | | | | |
| | | | | |
| | | | | |
| Reclassification adjustment for losses on cash flow hedges included in net income | 158 | | | 147 | | | 149 | |
| Change in unfunded pension plan obligation liability | (1,620) | | | (3,442) | | | (3,219) | |
| Other | (39) | | | (42) | | | 61 | |
| Comprehensive loss | (41,679) | | | (145,462) | | | (73,605) | |
| Comprehensive income attributable to non-controlling interests | 0 | | | 0 | | | (176) | |
| Comprehensive loss attributable to Ocwen stockholders | $ | (41,679) | | | $ | (145,462) | | | $ | (73,781) | |
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net loss | $ | (70,596 | ) | | $ | (128,457 | ) | | $ | (199,375 | ) |
| Other comprehensive income, net of income taxes | |
| | |
| | |
|
| Reclassification adjustment for losses on cash flow hedges included in net income (1) | 149 |
| | 201 |
| | 313 |
|
| Other: | | | | | |
| Change in unfunded pension plan obligation liability | (3,219 | ) | | — |
| | — |
|
| Other | 61 |
| | — |
| | — |
|
| Comprehensive loss | (73,605 | ) | | (128,256 | ) | | (199,062 | ) |
| Comprehensive (income) loss attributable to non-controlling interests | (176 | ) | | 491 |
| | (387 | ) |
| Comprehensive loss attributable to Ocwen stockholders | $ | (73,781 | ) | | $ | (127,765 | ) | | $ | (199,449 | ) |
| |
(1) | These losses are reclassified to Other, net in the Consolidated Statements of Operations. |
The accompanying notes are an integral part of these consolidated financial statements
F-7
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 20172020, 2019 and 20162018
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ocwen Stockholders | | | | |
| | Common Stock | | Additional Paid-in
Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss, Net of Taxes | | Non-controlling Interest in Subsidiaries | | Total |
| | Shares | | Amount | | | | | |
| Balance at January 1, 2018 | 8,765,604 | | | $ | 88 | | | $ | 548,284 | | | $ | (2,083) | | | $ | (1,249) | | | $ | 1,834 | | | $ | 546,874 | |
| Net income (loss) | — | | | — | | | — | | | (70,772) | | | — | | | 176 | | | (70,596) | |
| | | | | | | | | | | | | |
| Cumulative effect of fair value election - MSRs, net of income taxes | — | | | — | | | — | | | 82,043 | | | — | | | — | | | 82,043 | |
| Cumulative effect of adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-16 | — | | | — | | | — | | | (5,621) | | | — | | | — | | | (5,621) | |
| Issuance of common stock | 125,000 | | | 1 | | | 5,718 | | | — | | | — | | | — | | | 5,719 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Equity-based compensation and other | 36,891 | | | 0 | | | 1,304 | | | — | | | — | | | — | | | 1,304 | |
| Capital distribution to non-controlling interest | — | | | — | | | — | | | — | | | — | | | (822) | | | (822) | |
| Purchase of non-controlling interest | — | | | — | | | — | | | — | | | — | | | (1,188) | | | (1,188) | |
| Other comprehensive loss, net of income taxes | — | | | — | | | — | | | — | | | (3,008) | | | — | | | (3,008) | |
| Balance at December 31, 2018 | 8,927,495 | | | 89 | | | 555,306 | | | 3,567 | | | (4,257) | | | 0 | | | 554,705 | |
| Net loss | — | | | — | | | — | | | (142,125) | | | — | | | 0 | | | (142,125) | |
| Cumulative effect on adoption of FASB ASU 2016-02 Leases | — | | | — | | | — | | | 16 | | | — | | | — | | | 16 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Equity-based compensation and other | 63,321 | | | 1 | | | 2,751 | | | — | | | — | | | — | | | 2,752 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other comprehensive loss, net of income taxes | — | | | — | | | — | | | — | | | (3,337) | | | — | | | (3,337) | |
| Balance at December 31, 2019 | 8,990,816 | | | 90 | | | 558,057 | | | (138,542) | | | (7,594) | | | 0 | | | 412,011 | |
| Net loss | — | | | — | | | — | | | (40,178) | | | — | | | 0 | | | (40,178) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Cumulative effect of adoption of FASB ASU No. 2016-13 | — | | | — | | | — | | | 47,038 | | | — | | | — | | | 47,038 | |
| Repurchase of common stock | (377,484) | | | (4) | | | (4,601) | | | — | | | — | | | — | | | (4,605) | |
| Additional shares issued on reverse stock split rounding | 4,692 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Equity-based compensation and other | 69,726 | | | 1 | | | 2,606 | | | — | | | — | | | — | | | 2,607 | |
| | | | | | | | | | | | | |
| Other comprehensive loss, net of income taxes | — | | | — | | | — | | | — | | | (1,501) | | | — | | | (1,501) | |
| Balance at December 31, 2020 | 8,687,750 | | | $ | 87 | | | $ | 556,062 | | | $ | (131,682) | | | $ | (9,095) | | | $ | 0 | | | $ | 415,372 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ocwen Stockholders | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss), Net of Taxes | | Non-controlling Interest in Subsidiaries | | Total |
| | Shares | | Amount | | | | | |
| Balance at December 31, 2015 | 124,774,516 |
| | $ | 1,248 |
| | $ | 526,148 |
| | $ | 325,929 |
| | $ | (1,763 | ) | | $ | 3,076 |
| | $ | 854,638 |
|
| Net income (loss) | — |
| | — |
| | — |
| | (199,762 | ) | | — |
| | 387 |
| | (199,375 | ) |
| Repurchase of common stock | (991,985 | ) | | (10 | ) | | (5,880 | ) | | — |
| | — |
| | — |
| | (5,890 | ) |
| Exercise of common stock options | 69,805 |
| | 1 |
| | 441 |
| | — |
| | — |
| | — |
| | 442 |
|
| Equity-based compensation and other | 135,824 |
| | 1 |
| | 6,292 |
| | — |
| | — |
| | — |
| | 6,293 |
|
| Capital distribution to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | (1,138 | ) | | (1,138 | ) |
| Other comprehensive income, net of income taxes | — |
| | — |
| | — |
| | — |
| | 313 |
| | — |
| | 313 |
|
| Balance at December 31, 2016 | 123,988,160 |
| | 1,240 |
| | 527,001 |
| | 126,167 |
| | (1,450 | ) | | 2,325 |
| | 655,283 |
|
| Net income (loss) | — |
| | — |
| | — |
| | (127,966 | ) | | — |
| | (491 | ) | | (128,457 | ) |
| Cumulative effect of adoption of FASB Accounting Standards Update No. 2016-09 | — |
| | — |
| | 284 |
| | (284 | ) | | — |
| | — |
| | — |
|
| Issuance of common stock | 6,700,510 |
| | 67 |
| | 15,258 |
| | — |
| | — |
| | — |
| | 15,325 |
|
| Equity-based compensation and other | 795,388 |
| | 8 |
| | 4,514 |
| | — |
| | — |
| | — |
| | 4,522 |
|
| Other comprehensive income, net of income taxes | — |
| | — |
| | — |
| | — |
| | 201 |
| | — |
| | 201 |
|
| Balance at December 31, 2017 | 131,484,058 |
| | 1,315 |
| | 547,057 |
| | (2,083 | ) | | (1,249 | ) | | 1,834 |
| | 546,874 |
|
| Net income (loss) | — |
| | — |
| | — |
| | (70,772 | ) | | — |
| | 176 |
| | (70,596 | ) |
| Issuance of common stock | 1,875,000 |
| | 19 |
| | 5,700 |
| | — |
| | — |
| | — |
| | 5,719 |
|
| Cumulative effect of fair value election - Mortgage servicing rights, net of taxes | — |
| | — |
| | — |
| | 82,043 |
| | — |
| | — |
| | 82,043 |
|
| Cumulative effect of adoption of FASB Accounting Standards Update No. 2016-16 | — |
| | — |
| | — |
| | (5,621 | ) | | — |
| | — |
| | (5,621 | ) |
| Equity-based compensation and other | 553,367 |
| | 5 |
| | 1,299 |
| | — |
| | — |
| | — |
| | 1,304 |
|
| Capital distribution to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | (822 | ) | | (822 | ) |
| Purchase of non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | (1,188 | ) | | (1,188 | ) |
| Other comprehensive income, net of income taxes | — |
| | — |
| | — |
| | — |
| | (3,008 | ) | | — |
| | (3,008 | ) |
| Balance at December 31, 2018 | 133,912,425 |
| | $ | 1,339 |
| | $ | 554,056 |
| | $ | 3,567 |
| | $ | (4,257 | ) | | $ | — |
| | $ | 554,705 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-8
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Cash flows from operating activities | | | | | |
| Net loss | $ | (40,178) | | | $ | (142,125) | | | $ | (70,596) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| MSR valuation adjustments, net | 251,921 | | | 120,876 | | | 153,457 | |
| Gain on sale of MSRs, net | (184) | | | (453) | | | (1,325) | |
| | | | | |
| Provision for bad debts | 25,637 | | | 34,867 | | | 49,180 | |
| Depreciation | 19,121 | | | 31,911 | | | 27,202 | |
| | | | | |
| | | | | |
| Amortization of debt issuance costs and discount | 6,992 | | | 4,512 | | | 4,104 | |
| Gain on repurchase of senior secured notes | 0 | | | (5,099) | | | 0 | |
| | | | | |
| Provision for (reversal of) valuation allowance on deferred tax assets | 27,880 | | | 32,470 | | | (23,347) | |
| Decrease (increase) in deferred tax assets other than provision for valuation allowance | (29,254) | | | (29,350) | | | 20,058 | |
| Equity-based compensation expense | 2,401 | | | 2,697 | | | 2,366 | |
| (Gain) loss on valuation of Pledged MSR financing liability | (17,853) | | | 152,986 | | | (19,269) | |
| | | | | |
| Net gain on valuation of loans held for investment and HMBS-related borrowings | (10,078) | | | (55,869) | | | (18,698) | |
| Bargain purchase gain | 0 | | | 381 | | | (64,036) | |
| Gain on loans held for sale, net | (137,236) | | | (38,300) | | | (32,722) | |
| Origination and purchase of loans held for sale | (7,552,026) | | | (1,488,974) | | | (1,715,190) | |
| Proceeds from sale and collections of loans held for sale | 7,430,544 | | | 1,380,138 | | | 1,625,116 | |
| Changes in assets and liabilities: | | | | | |
| Decrease in advances and match funded advances | 213,293 | | | 105,052 | | | 258,899 | |
| Decrease in receivables and other assets, net | 114,089 | | | 126,881 | | | 144,310 | |
| | | | | |
| Decrease in other liabilities | (34,181) | | | (72,182) | | | (69,207) | |
| Other, net | (9,914) | | | (8,479) | | | 2,276 | |
| Net cash provided by operating activities | 260,974 | | | 151,940 | | | 272,578 | |
| | | | | |
| Cash flows from investing activities | | | | | |
| | | | | |
| Origination of loans held for investment | (1,203,645) | | | (1,026,154) | | | (920,476) | |
| Principal payments received on loans held for investment | 944,699 | | | 558,720 | | | 400,521 | |
| Purchase of MSRs | (273,197) | | | (145,668) | | | (5,433) | |
| Proceeds from sale of MSRs | 248 | | | 4,984 | | | 7,276 | |
| Acquisition of advances in connection with the purchase of MSRs | (14) | | | (1,457) | | | — | |
| | | | | |
| Proceeds from sale of advances and match funded advances | 809 | | | 14,186 | | | 33,792 | |
| Proceeds from sale of real estate | 7,525 | | | 7,548 | | | 9,546 | |
| Additions to premises and equipment | (4,110) | | | (1,954) | | | (9,016) | |
| Net cash acquired in the acquisition of PHH | 0 | | | 0 | | | 64,692 | |
| Restricted cash acquired in the acquisition of PHH | 0 | | | 0 | | | 38,813 | |
| Issuance of automotive dealer financing notes | 0 | | | 0 | | | (19,642) | |
| Collections of automotive dealer financing notes | 0 | | | 0 | | | 52,598 | |
| | | | | |
| | | | | |
| Other, net | (190) | | | 2,357 | | | 2,464 | |
| Net cash used in investing activities | (527,875) | | | (587,438) | | | (344,865) | |
| | | | | |
| Cash flows from financing activities | | | | | |
| Repayment of match funded liabilities, net | (97,821) | | | (99,175) | | | (220,334) | |
| Repayment of other financing liabilities | (101,771) | | | (218,783) | | | (219,999) | |
| | | | | |
| Proceeds from (repayments of) mortgage loan warehouse facilities, net | 119,489 | | | 176,511 | | | (128,036) | |
| Proceeds from MSR financing facilities | 369,024 | | | 343,641 | | | 162,617 | |
| Repayment of MSR financing facilities | (300,553) | | | (39,420) | | | (173,969) | |
| Repayment and repurchase of senior notes | 0 | | | (131,791) | | | (18,482) | |
| Proceeds from issuance of additional senior secured term loan (SSTL) | — | | | 119,100 | | | — | |
| Repayment of SSTL borrowing | (141,067) | | | (25,433) | | | (66,750) | |
| Payment of debt issuance costs | (7,701) | | | (2,813) | | | — | |
| Proceeds from sale of MSRs accounted for as a financing | 0 | | | 0 | | | 279,586 | |
| Proceeds from sale of Home Equity Conversion Mortgages (HECM, or reverse mortgages) accounted for as a financing (HMBS-related borrowings) | 1,232,641 | | | 962,113 | | | 948,917 | |
| Repayment of HMBS-related borrowings | (935,778) | | | (549,600) | | | (391,985) | |
| | | | | |
| | | | | |
| Repurchase of common stock | (4,605) | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| Capital distribution to non-controlling interest | 0 | | | 0 | | | (822) | |
| Purchase of non-controlling interest | 0 | | | 0 | | | (1,188) | |
| Other, net | (32) | | | (3,522) | | | (2,818) | |
| Net cash provided by financing activities | 131,826 | | | 530,828 | | | 166,737 | |
| | | | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (135,075) | | | 95,330 | | | 94,450 | |
| Cash, cash equivalents and restricted cash at beginning of year | 492,340 | | | 397,010 | | | 302,560 | |
| Cash, cash equivalents and restricted cash at end of year | $ | 357,265 | | | $ | 492,340 | | | $ | 397,010 | |
| | | | | |
| Supplemental cash flow information | | | | | |
| Interest paid | $ | 97,023 | | | $ | 111,144 | | | $ | 100,165 | |
| Income tax payments (refunds), net | (43,469) | | | 4,075 | | | 10,957 | |
| | | | | |
| Supplemental non-cash investing and financing activities | | | | | |
| Initial consolidation (subsequent deconsolidation) of mortgage-backed securitization trusts (VIEs): | | | | | |
| Loans held for investment | $ | (10,715) | | | $ | 0 | | | $ | 28,373 | |
| Other financing liabilities | (9,519) | | | 0 | | | 26,643 | |
| | | | | |
| | | | | |
| | | | | |
| Derecognition of MSRs and financing liabilities: | | | | | |
| MSRs | $ | (263,664) | | | 0 | | | 0 | |
| Financing liability - MSRs pledged (Rights to MSRs) | (263,664) | | | 0 | | | 0 | |
| Recognition of future draw commitments for HECM loans at fair value upon adoption of FASB ASU No. 2016-13 | 47,038 | | | 0 | | | 0 | |
| Transfers from loans held for investment to loans held for sale | 3,084 | | | 1,892 | | | 1,038 | |
| Transfers of loans held for sale to real estate owned (REO) | 3,657 | | | 6,636 | | | 4,241 | |
| Issuance of common stock in connection with litigation settlement | 0 | | | 0 | | | 5,719 | |
| | | | | |
| Cumulative effect adjustment for election of fair value for MSRs previously accounted for using the amortization method | 0 | | | 0 | | | 82,043 | |
| Recognition of gross right-of-use asset and lease liability: | | | | | |
| Right-of-use asset | 3,724 | | | 66,231 | | | 0 | |
| Lease liability | 2,902 | | | 66,247 | | | 0 | |
| | | | | |
| Supplemental business acquisition information | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Fair value of assets acquired | $ | 0 | | | $ | 262 | | | $ | 1,192,155 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Fair value of liabilities assumed | 0 | | | 643 | | | 769,723 | |
| Total identifiable net assets acquired | 0 | | | (381) | | | 422,432 | |
| Bargain purchase gain related to acquisition of PHH | 0 | | | (381) | | | 64,036 | |
| Total consideration | 0 | | | 0 | | | 358,396 | |
| Less: Cash consideration paid by PHH | 0 | | | 0 | | | (325,000) | |
| Cash consideration paid by Ocwen | 0 | | | 0 | | | 33,396 | |
| Cash acquired from PHH | 0 | | | 0 | | | 98,088 | |
| Net cash acquired by Ocwen | $ | 0 | | | $ | 0 | | | $ | 64,692 | |
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities | |
| | |
| | |
|
| Net loss | $ | (70,596 | ) | | $ | (128,457 | ) | | $ | (199,375 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | |
| | |
|
| MSR valuation adjustments, net | 153,457 |
| | 52,962 |
| | 124,029 |
|
| Gain on sale of mortgage servicing rights, net | (1,325 | ) | | (10,537 | ) | | (8,492 | ) |
| Provision for bad debts | 49,180 |
| | 76,828 |
| | 81,079 |
|
| Depreciation | 27,202 |
| | 26,886 |
| | 25,338 |
|
| Loss on write-off of fixed assets, net | — |
| | 8,502 |
| | — |
|
| Amortization of debt issuance costs | 2,921 |
| | 2,738 |
| | 25,662 |
|
| Provision for (reversal of) valuation allowance on deferred tax assets | (23,347 | ) | | (29,979 | ) | | 15,639 |
|
| Decrease (increase) in deferred tax assets other than provision for valuation allowance | 20,058 |
| | 30,710 |
| | (11,119 | ) |
| Equity-based compensation expense | 2,366 |
| | 5,624 |
| | 5,181 |
|
| (Gain) loss on valuation of financing liability | (19,269 | ) | | 41,282 |
| | — |
|
| (Gain) loss on trading securities | (527 | ) | | 6,756 |
| | (335 | ) |
| Net gain on valuation of mortgage loans held for investment and HMBS-related borrowings | (18,698 | ) | | (23,733 | ) | | (26,016 | ) |
| Bargain purchase gain | (64,036 | ) | | — |
| | — |
|
| Gain on loans held for sale, net | (32,722 | ) | | (53,209 | ) | | (65,649 | ) |
| Origination and purchase of loans held for sale | (1,715,190 | ) | | (3,695,163 | ) | | (6,090,432 | ) |
| Proceeds from sale and collections of loans held for sale | 1,625,116 |
| | 3,662,065 |
| | 5,969,812 |
|
| Changes in assets and liabilities: | |
| | |
| | |
|
| Decrease in advances and match funded advances | 258,899 |
| | 330,052 |
| | 452,435 |
|
| Decrease in receivables and other assets, net | 144,310 |
| | 199,209 |
| | 128,398 |
|
| Decrease in other liabilities | (69,207 | ) | | (100,650 | ) | | (7,143 | ) |
| Other, net | 3,986 |
| | 7,135 |
| | 2,216 |
|
| Net cash provided by operating activities | 272,578 |
| | 409,021 |
| | 421,228 |
|
| | | | | | |
| Cash flows from investing activities | |
| | |
| | |
|
| Origination of loans held for investment | (920,476 | ) | | (1,277,615 | ) | | (1,098,758 | ) |
| Principal payments received on loans held for investment | 400,521 |
| | 444,388 |
| | 243,596 |
|
| Net cash acquired in the acquisition of PHH | 64,692 |
| | — |
| | — |
|
| Restricted cash acquired in the acquisition of PHH | 38,813 |
| | — |
| | — |
|
| Purchase of mortgage servicing rights | (5,433 | ) | | (1,658 | ) | | (17,356 | ) |
| Proceeds from sale of mortgage servicing rights | 7,276 |
| | 4,234 |
| | 47,044 |
|
| Proceeds from sale of advances and match funded advances | 33,792 |
| | 9,446 |
| | 103,017 |
|
| Issuance of automotive dealer financing notes | (19,642 | ) | | (174,363 | ) | | (100,722 | ) |
| Collections of automotive dealer financing notes | 52,598 |
| | 162,965 |
| | 65,688 |
|
| Additions to premises and equipment | (9,016 | ) | | (9,053 | ) | | (33,518 | ) |
| Proceeds from sale of real estate | 9,546 |
| | 3,147 |
| | 11,069 |
|
| Other, net | 2,464 |
| | (707 | ) | | (11,679 | ) |
| Net cash used in investing activities | (344,865 | ) | | (839,216 | ) | | (791,619 | ) |
| | | | | | |
| Cash flows from financing activities | |
| | |
| | |
|
| Repayment of match funded liabilities, net | (220,334 | ) | | (282,379 | ) | | (303,052 | ) |
| Proceeds from mortgage loan warehouse facilities and other secured borrowings | 2,991,261 |
| | 7,215,264 |
| | 9,242,671 |
|
| Repayments of mortgage loan warehouse facilities and other secured borrowings | (3,417,398 | ) | | (7,431,763 | ) | | (9,463,063 | ) |
| Repurchase of senior notes, net | (18,482 | ) | | — |
| | — |
|
| Payment of debt issuance costs | — |
| | (841 | ) | | (11,136 | ) |
| Proceeds from sale of mortgage servicing rights accounted for as a financing | 279,586 |
| | 54,601 |
| | — |
|
| Proceeds from sale of reverse mortgages (HECM loans) accounted for as a financing (HMBS-related borrowings) | 948,917 |
| | 1,281,543 |
| | 1,086,795 |
|
| Repayment of HMBS-related borrowings | (391,985 | ) | | (418,503 | ) | | (230,045 | ) |
| Issuance of common stock | — |
| | 13,913 |
| | — |
|
| Repurchase of common stock | — |
| | — |
| | (5,890 | ) |
| Capital distribution to non-controlling interest | (822 | ) | | — |
| | — |
|
| Purchase of non-controlling interest | (1,188 | ) | | — |
| | — |
|
| Other | (2,818 | ) | | (1,478 | ) | | (49 | ) |
| Net cash provided by financing activities | 166,737 |
| | 430,357 |
| | 316,231 |
|
| | | | | | |
| Net increase (decrease) in cash and restricted cash | 94,450 |
| | 162 |
| | (54,160 | ) |
| Cash and restricted cash at beginning of year | 302,560 |
| | 302,398 |
| | 356,558 |
|
| Cash and restricted cash at end of year | $ | 397,010 |
| | $ | 302,560 |
| | $ | 302,398 |
|
| | | | | | |
| Supplemental cash flow information | |
| | |
| | |
|
| Interest paid | $ | 271,835 |
| | $ | 364,702 |
| | $ | 389,638 |
|
| Income tax payments (refunds), net | 10,957 |
| | (23,501 | ) | | 19,715 |
|
| | | | | | |
| Supplemental non-cash investing and financing activities | |
| | |
| | |
|
| Initial consolidation of mortgage-backed securitization trusts (VIEs): | | | | | |
| Loans held for investment | $ | 28,373 |
| | $ | — |
| | $ | — |
|
| Other financing liabilities | 26,643 |
| | — |
| | — |
|
| Transfers from loans held for investment to loans held for sale | 1,038 |
| | 3,803 |
| | — |
|
| Transfers of loans held for sale to real estate owned | 4,241 |
| | 875 |
| | 7,675 |
|
| Issuance of common stock in connection with litigation settlement | 5,719 |
| | 1,937 |
| | — |
|
| Exchange of senior unsecured notes for senior secured notes | — |
| | — |
| | 346,878 |
|
| | | | | | |
| Supplemental business acquisition information | | | | | |
| Fair value of assets acquired | $ | 1,192,155 |
| | — |
| | — |
|
| Fair value of liabilities assumed | 769,723 |
| | — |
| | — |
|
| Total identifiable net assets acquired | 422,432 |
| | — |
| | — |
|
| Bargain purchase gain related to acquisition of PHH | 64,036 |
| | — |
| | — |
|
| Total consideration | 358,396 |
| | — |
| | — |
|
| Less: Cash consideration paid by PHH | (325,000 | ) | | — |
| | — |
|
| Cash consideration paid by Ocwen | 33,396 |
| | — |
| | — |
|
| Cash acquired from PHH | 98,088 |
| | — |
| | — |
|
| Net cash acquired by Ocwen | $ | 64,692 |
| | $ | — |
| | $ | — |
|
The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sums to the total of the same such amounts reported in the consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| Cash and cash equivalents | $ | 284,802 | | | $ | 428,339 | | | $ | 329,132 | |
| Restricted cash and equivalents: | | | | | |
| Debt service accounts | 20,141 | | | 23,276 | | | 26,626 | |
| Other restricted cash | 52,322 | | | 40,725 | | | 41,252 | |
| Total cash, cash equivalents and restricted cash reported in the statements of cash flows | $ | 357,265 | | | $ | 492,340 | | | $ | 397,010 | |
|
| | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| Cash | $ | 329,132 |
| | $ | 259,655 |
| | $ | 256,549 |
|
| Restricted cash and equivalents: | | | | | |
| Debt service accounts | 26,626 |
| | 33,726 |
| | 42,822 |
|
| Other restricted cash | 41,252 |
| | 9,179 |
| | 3,027 |
|
| Total cash and restricted cash reported in the statements of cash flows | $ | 397,010 |
| | $ | 302,560 |
| | $ | 302,398 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-9
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 20172020, 2019 AND 20162018
(Dollars in thousands, except per share data and unless otherwise indicated)
Note 1 — Organization, Business Environment, Basis of Presentation and Significant Accounting Policies
Organization
Ocwen Financial Corporation (NYSE: OCN) (Ocwen, we, us and our) is a financial services holding company which,non-bank mortgage servicer and originator providing solutions to homeowners, investors and others through its subsidiaries, originates and services loans.primary operating subsidiary, PHH Mortgage Corporation (PMC). We are headquartered in West Palm Beach, Florida with offices located throughoutand operations in the United States (U.S.) and in, the United States Virgin Islands (USVI) and with operations located in, India and the Philippines. Ocwen is a Florida corporation organized in February 1988.
Ocwen owns all of the common stock of its primary operating subsidiaries, Ocwen Mortgage Servicing, Inc. (OMS) and PHH Corporation (PHH), and directly or indirectly owns all of the outstanding common stock of its other primary operating subsidiaries: Ocwen Loan Servicing, LLC (OLS), PHH Mortgage Corporation (PMC),subsidiaries, including PMC since its acquisition on October 4, 2018, Ocwen Financial Solutions Private Limited (OFSPL), Homeward Residential, Inc. (Homeward) and Ocwen USVI Services, LLC (OVIS). On March 13, 2020, as part of Ocwen's legal entity restructuring, Ocwen’s wholly-owned subsidiary Liberty Home Equity Solutions, Inc. (Liberty). and PMC entered into an 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 (non-Agency)(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 source our servicing portfolio through multiple channels, including recapture, retail, wholesale, correspondent, flow MSR purchase agreements, the GSE Cash Window programs and bulk MSR purchases. We originate, sell and securitize conventional (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans)or GSE) loans and government-insured (Federal Housing Administration (FHA) or Department of Veterans Affairs (VA)) forward mortgages.mortgage loans, generally servicing retained. The GSEs or Ginnie Mae guarantee these mortgage securitizations. We originate Home Equity Conversion Mortgages (HECM,Mortgage (HECM) loans, or reverse mortgages)mortgages, that are mostly insured by the FHA and we are an approved issuer of Home Equity Conversion Mortgage-Backed Securities (HMBS) that are guaranteed by Ginnie Mae. In addition to our originated MSRs, we acquire MSRs through flow purchase agreements, the GSE Cash Window programs and bulk MSR purchases, and we acquire new subservicing through our enterprise sales.
We had a total of approximately 7,2005,000 employees at December 31, 20182020 of which approximately 4,1003,100 were located in India and approximately 500400 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, more than 80%70% were engaged in supporting our loan servicing operations as of December 31, 2018.2020.
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. 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.
Losses have significantly eroded stockholders’ equity and weakened our financial condition. Our near-term priority is to return to profitability in the shortest timeframe possible within an appropriate risk and compliance environment. We believe our acquisition of PHH provides us with the opportunity to transform into a stronger, more efficient company better able to serve our customers and clients, and positions us for a return to growth and profitability. See Note 2 — Business Acquisition and Note 23 — Regulatory Requirements for additional information regarding the acquisition of PHH.
Now that we have consummated our acquisition of PHH, if we can execute on five key initiatives, we believe we will drive stronger financial performance. First, we must successfully execute on the integration of PHH’s business with ours, including a smooth transition onto the Black Knight Financial Services, Inc. (Black Knight) LoanSphere MSP® servicing system (Black Knight MSP). Second, we must re-engineer our cost structure to go beyond eliminating redundant costs through the integration process. Third, we must fulfill our regulatory commitments and resolve our remaining legal and regulatory matters on satisfactory terms. Fourth, we must replenish our servicing portfolio through expanding our lending business and permissible MSR acquisitions that are prudent and well-executed with appropriate financial return targets.
Finally, we must ensure that we continue to manage our balance sheet to provide a solid platform for executing on our growth and other initiatives.
We believe the PHH acquisition will provide the following benefits to enable the execution of the phase one initiatives:
Accelerate our transition to Black Knight MSP versus a de novo implementation;
Reduce fixed costs, on a combined basis, through reductions in duplicative corporate overhead and other costs;
Improve economies of scale through growth in our servicing portfolio; and,
Provide a foundation to enable the combined business to resume new business and growth activities that will, at a minimum, offset portfolio runoff.
The New York Department of Financial Services (NY DFS) has eased its restriction on Ocwen’s ability to acquire MSRs to allow certain acquisitions of MSRs that are boarded onto Black Knight MSP subject to annual portfolio growth limitations until such time as the NY DFS determines that all loans have been successfully migrated to Black Knight MSP and that Ocwen has developed a satisfactory infrastructure to board sizeable portfolios of MSRs.
Our business, operating results and financial condition have been significantly impacted in recent periods by regulatory actions against us and by significant litigation matters. Should the number or scope of regulatory or legal actions against us increase or expand or should we be unable to reach reasonable resolutions in existing regulatory and legal matters, our business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected, even if we are successful in our ongoing efforts to drive stronger financial performance. See Note 23 — Regulatory Requirements and Note 25 — Contingencies for further information.
Regarding the current maturities of our borrowings, as of December 31, 2018, we have approximately $0.9 billion of debt outstanding under facilities coming due in the next 12 months. Portions of our match funded facilities and all of our mortgage loan warehouse facilities have 364-day terms consistent with market practice. We have historically renewed these facilities on or before their expiration in the ordinary course of financing our business. We expect to renew, replace or extend all such borrowings to the extent necessary to finance our business on or prior to their respective maturities consistent with our historical experience.
Our debt agreements contain various qualitative and quantitative events of default provisions that include, among other things, noncompliance with covenants, breach of representations, or the occurrence of a material adverse change. 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, OLS, Homeward, 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 13 — Borrowings, Note 23 — Regulatory Requirements and Note 25 — Contingencies for further information.
Basis of Presentation and Significant Accounting Policies
Consolidation and Basis of Presentation
Principles of Consolidation
Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (GAAP).
Our consolidated financial statements include the accounts of Ocwen, its majority-ownedwholly-owned subsidiaries and any variable interest entity (VIE) for which we have determined that we are the primary beneficiary. We apply the equity method of accounting to investments when the entity is not a VIE, andwhere we are able to exercise significant influence, but not control, over the policies and procedures of the entity but own 50% or less of the voting securities. Our statements of operations and consolidated balance sheets include
the accounts and results of PHH Corporation (PHH) and its subsidiaries from thesince acquisition date ofon October 4, 2018 through December 31, 2018. See Note 2 — Business Acquisition for additional information.
We have eliminated intercompany accounts and transactions in consolidation.
Foreign Currency Translation
The functional currency of each of our foreign subsidiaries is the U.S. dollar. Re-measurement adjustments of foreign-denominated amounts to U.S. dollars are included in Other, net in our consolidated statements of operations.
Reverse Stock Split
In August 2020, Ocwen implemented a reverse stock split of its shares of common stock in a ratio of one-for-15. The number of shares, loss per share amounts, repurchase price per share amounts, and Common stock and Additional paid-in capital balances have been retroactively adjusted for all periods presented in these consolidated financial statements to give effect to the reverse stock split as if it occurred at the beginning of the first period presented. See Note 16 — Stockholders’ Equity for additional information.
Reclassifications
Certain amounts in theIn our consolidated balance sheet at December 31, 2017, consolidated statements of operations for 20172019, and 2016, andour consolidated statements of cash flows for 20172019 and 20162018, we have been reclassifiedmade the following changes to conform to the current yearpresentation:
•Within the Total assets section of our consolidated balance sheet, we combined Match funded advances and Advances to present all servicing-related advances as a single line item.
•Within the Cash flows from financing activities section of our consolidated statements of cash flows, we now separately present proceeds and repayments on mortgage loan warehouse facilities, net, MSR financing facilities and other financing liabilities. These amounts were previously reported as Proceeds from (Repayment of) mortgage loan warehouse facilities and other secured borrowings.
The above presentation as follows:
|
| | | | | | | | | | |
| | December 31, 2017 | | |
| Balance sheet | | | |
| | From | Other assets | | | |
| | | Debt service accounts | $ | 33,726 |
| |
|
| | | Other restricted cash | 9,179 |
| |
|
| | To | Restricted cash | 42,905 |
| |
|
| | | | | | | |
| | | | | Years ended December 31, |
| | | | | 2017 | | 2016 |
| Statements of Operations | | | |
| | From | Servicing and origination expense | | | |
| | | Impairment charge (reversal) on MSRs | $ | (3,366 | ) | | $ | 10,813 |
|
| | | Loss on valuation of MSRs, at fair value | 4,540 |
| | 80,238 |
|
| | From | Amortization of MSRs | 51,788 |
| | 32,978 |
|
| | To | MSR valuation adjustments, net | 52,962 |
| | 124,029 |
|
| | | | | | | |
| Statements of Cash Flows | | | |
| | Operating activities | | | |
| | From | Amortization of MSRs | $ | 51,788 |
| | $ | 32,978 |
|
| | From | Loss on valuation of MSRs, at fair value | 4,540 |
| | 80,238 |
|
| | From | Impairment charge (reversal) on MSRs | (3,366 | ) | | 10,813 |
|
| | To | MSR valuation adjustments, net | 52,962 |
| | 124,029 |
|
| | | | | | | |
| | From | Realized and unrealized gains on derivative financial instruments | 191 |
| | 1,724 |
|
| | To | Other, net | 191 |
| | 1,724 |
|
| | | | | | | |
| | Investing activities | | | |
| | From | Other, net | 3,147 |
| | 11,069 |
|
| | To | Proceeds from sale of real estate | 3,147 |
| | 11,069 |
|
These reclassificationschanges had no impact on total assets in ourconsolidatedbalance sheet,or total expensesliabilities in our consolidated statements of operations orbalance sheet and no impact on operating, investing and financing cash flows from operating, investing or financing activities in our consolidated statements of cash flows.
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 the assets acquired and liabilities assumed in connection with the PHH acquisition, fair value measurements, allowance for losses, income taxes, the provision for potential losses that may arise from litigation proceedings,indemnification obligations, litigation-related obligations, and our going concern evaluation. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.
Significant Accounting Policies
Cash and cash equivalents
Cash and cash equivalents includes both interest-bearing and non-interest-bearing demand deposits with financial institutions that have original maturities of 90 days or less.
Restricted Cash
Restricted cash includes amounts specifically designated to repay debt, to provide over-collateralization for secured borrowings and match funded debt facilities, and to provide additional collateral to support certain obligations, including letters of credit.
Mortgage Servicing Rights
MSRs are assets representing our right to service portfolios of mortgage loans. We retainrecognize MSRs onwhen originated or purchased loans when they are securitized or sold in the secondary market. We also acquire MSRs through flow purchase agreements, GSE Cash Window programs, and bulk acquisition transactions, or through asset purchases or business combination transactions. The unpaid principal balance (UPB) of the loans underlying the MSRs is not included on our consolidated balance sheet.sheets. For servicing retained in connection with the securitization of reverse mortgage loans accounted for as secured financings, we do not recognize an MSR.
All newly acquired or retained MSRs are initially measured at fair value. To the extent any portfolio contract is not expected to compensate us adequately for performing the servicing, we would recognize a servicing liability. We define contracts as Agency, government-insured or non-Agency (commonly referred to as non-prime, subprime or private-label loans)
based on their general comparability with regard toapplicable servicing guidelines, underwriting standards and borrower risk characteristics. We identify classes of servicing assets and servicing liabilities based on the availability of market inputs used in determining their fair value and our methods for managing their risks. Servicing assets are not recognized for subservicing arrangements entered into with the entity that owns the MSRs.
Subsequent to acquisition, weWe account for servicing assets and servicing liabilities using the amortization method or the fair value measurement method. Any fair value election is irrevocable. Once a fair value election is made for a particular class of MSRs, that election applies to all subsequently acquired or originated servicing assets and liabilities with characteristics consistent with the class. At the start of any fiscal year, a company may elect to transfer servicing assets and servicing liabilities from a class measured using the amortization method to a class measured at fair value. Furthermore, if a new class is created, and no servicing assets or servicing liabilities that would belong to that class have previously been recognized, electing to subsequently measure that new class at fair value, is permitted at the date those servicing assets or servicing liabilities are initially recognized.
For servicing assets or liabilities that we account for using the amortization method, we amortize the balances in proportion to, and over the period of, estimated net servicing income (if servicing revenues exceed servicing costs) or net servicing loss (if servicing costs exceed servicing revenues). Estimated net servicing income is primarily driven by the estimated future cash flows of the underlying mortgage loan portfolio, which, absent new purchases, declines over time from prepayments and scheduled loan amortization. We adjust MSR amortization prospectively in response to changes in estimated projections of future cash flows. We stratify servicing assets or liabilities based upon one or more of the predominant risk characteristics of the underlying portfolios and assess servicing assets or liabilities for impairment or increased obligation by determining the difference, if any, between the carrying amount and estimated fair value at each reporting date. We recognize any impairment, or increased obligation, through a valuation allowance which is adjusted to reflect subsequent changes in the measurement of impairment and reported in earnings (MSR valuation adjustments, net) in the period in which the changes occur. We do not recognize fair value in excess of the carrying amount of servicing assets for any stratum.
For servicing assets or liabilities that we account for using the fair value measurement method (fair value election), we measure the balances at fair value at each reporting date and report changes in fair value in earnings (MSR valuation adjustments, net) in the period in which the changes occur. Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. Effective with this election, our entire portfolio of MSRs is accounted for using the fair value measurement method. We recorded a cumulative-effect adjustment of $82.0 million to retained earnings as of January 1, 2018 to reflect the excess of the fair value over the carrying amount. See Note 89 — Mortgage Servicing for additional information.
We earn fees for servicing and subservicing mortgage loans. We collect servicing and subservicing fees, generally expressed as a percent of UPB or fee per loan by loan performing status, from the borrowers’ payments. In addition to servicing and subservicing fees, we also report late fees, prepayment penalties, float earnings and other ancillary fees as revenue in Servicing and subservicing fees in our consolidated statements of operations. We recognize servicing and subservicing fees as revenue when the fees are earned, which is generally when the borrowers’ payments are collected or when loans are modified or liquidated through the sale of the underlying real estate collateral or otherwise.
Advances and Match Funded Advances
During any period in which a borrower does not make payments, servicing and subservicing agreements may require that we advance our own funds to meet contractual principal and interest remittance requirements for the investors, to pay property taxes and insurance premiums and to process foreclosures. We also advance funds to maintain, repair and market foreclosed real estate properties on behalf of investors. These advances are made pursuant to the terms of each servicing and subservicing contract. Each servicing and subservicing contract is associated with specific loans, identified as a pool.
When we make an advance on a loan under each servicing or subservicing contract, we are entitled to recover that advance either from the borrower, for reinstated and performing loans, or from guarantors (GSEs), insurers (FHA/VA) and investors, for modified and liquidated loans. Most of our servicing and subservicing contracts provide that the advances made under the respective agreement have priority over all other cash payments from the proceeds of the loan, and in the majority of cases, the proceeds of the pool of loans that are the subject of that servicing or subservicing contract. As a result, we are entitled to repayment from loan proceeds before any interest or principal is paid on the bonds, and in the majority of cases, advances in excess of loan proceeds may be recovered from pool level proceeds.
Servicing advances are financial assets subject to the credit loss allowance model under ASC 326: Financial Instruments - Credit Losses (CECL), effective January 1, 2020. The allowance for expected credit losses is estimated 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. Expected credit losses on advances are expected to be nil, or de minimis, as advances are generally fully reimbursable or recoverable under the terms of the servicing agreements. GSE and government-insured advances are subject to implicit and government guarantees, respectively, regarding advance reimbursement and the non-Agency pooling and servicing agreement terms regarding advance recovery, the credit loss history and the expectation over the remaining life of the advance portfolio support a zero allowance for credit loss.
Servicing advances may also include 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. Such servicer errors result in the determination that the advance is uncollectible and represent operational losses resulting from not complying with servicing guidelines as established by the respective party (i.e., trustee, master servicer, investor, mortgage insurer). We establish an allowance for such operational losses through a charge to earnings (Servicing and origination expense) to the extent we believe that a portion of advances are uncollectible under the provisions of each servicing contract taking into consideration, among other factors, probability of cure or modification, length of delinquency and the amount of the advance. We are generally only obligated to advance funds to the extent that we believe the advances are recoverable from expected proceeds from the loan. We continuallyalso assess collectibilitycollectability using proprietary cash flow projection models that incorporate a number of different factors, depending on the characteristics of the mortgage loan or pool, including, for example, estimated time to a foreclosure sale, estimated costs of foreclosure action, estimated future property tax payments and the estimated value of the underlying property net of estimated carrying costs, commissions and closing costs.
Under the terms of our subservicing agreements, we are generally reimbursed by our subservicing clients on a monthly or more frequent basis. For those advances that have been reimbursed, i.e., that are off-balance sheet, if a loss contingency is probable and reasonably estimable, we recognize a loss contingency accrual for the amount of advances deemed uncollectible caused by our failure to comply with the subservicing agreements or our servicing practices. We report such loss contingency within Other liabilities - Liability for indemnification obligations.
Loans Held for Sale
Loans held for sale include forward and reverse mortgage loans that we do not intend to hold until maturity. We report loans held for sale at either fair value or the lower of cost or fair value computed on an aggregate basis. ForResidential forward and reverse mortgage loans that we measureintend to sell are carried at the lower of cost or fair value, we account for any excess of cost over fair value as a valuation allowance and include changes inresult of a fair value election. In addition, effective
January 1, 2020, repurchased loans by our Servicing business, including those loans we repurchase from Ginnie Mae guaranteed securitizations pursuant to Ginnie Mae servicing guidelines, are accounted for under the valuation allowance in Other, net, in the consolidated statements of operations in the period in which the change occurs. fair value election.For loans that we elected to measure at fair value on a recurring basis, we report changes in fair value in Gain on loans held for sale, net in the consolidated statements of operations in the period in which the changes occur. These loans are expected to be sold into the secondary market to the GSEs, or into Ginnie Mae guaranteed securitizations.securitizations or to third-party investors. For the legacy portfolio of loans measured at the lower of cost or fair value, we account for any excess of cost over fair value as a valuation allowance and include changes in the valuation allowance in Other, net, in the consolidated statements of operations in the period in which the change occurs.
We report any gain or loss on the transfer of loans held for sale in Gain on loans held for sale, net in the consolidated statements of operations along with the changes in fair value of the loans and the gain or loss on any related derivatives. When loans are sold or securitized with servicing retained, the gain on sale includes the MSR retained as non-cash proceeds at the date of sale. We include all changes in loans held for sale and related derivative balances in operating activities in the consolidated statements of cash flows.
We accrue interest income as earned. We place loans on non-accrual status after any portion of principal or interest has been delinquent for more than 89 days, or earlier if management determines the borrower is unable to continue performance. When we place a loan on non-accrual status, we reverse the interest that we have accrued but not yet received. We return loans to accrual status only when we reinstate the loan and there is no significant uncertainty as to collectability.
Loans Held for Investment
Newly originated reverse residential mortgage loans that are insured by the FHA and pooled into Ginnie Mae guaranteed securities that we sell into the secondary market with servicing rights retained are classified as loans held for investment. We have elected to measure these loans at fair value.value, with changes in fair value reported in Reverse mortgage revenue, net in the consolidated statements of operations. Loan transfers in these Ginnie Mae securitizations do not meet the definition of a participating interest and as a result, the transfers of the reverse mortgages do not qualify for sale accounting. Therefore, we account for these transfers as financings, with the reverse mortgages classified as Loans held for investment, at fair value, on our consolidated balance sheets, with no gain or loss recognized on the transfer.
Effective January 1, 2019, we elected to fair value future draw commitments for HECM loans purchased or originated after December 31, 2018. The value of future draw commitments for HECM loans purchased or originated before January 1, 2019 were recognized as the draws were securitized or sold. Effective January 1, 2020, in connection with the adoption of Accounting Standard Update (ASU) 2016-13 and ASU 2019-04: Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (CECL), we made an irrevocable fair value election on all future draw commitments for HECM loans that were purchased or originated before January 1, 2019. We recorded cumulative-effect adjustments of $47.0 million to retained earnings as of January 1, 2020, to reflect the excess of the fair value over the carrying amount.
Upfront costs and fees related to loans held for investment, including broker fees, are recognized in Gain on loans held for sale,Reverse mortgage revenue, net in the statement of operations as incurred and are not capitalized. Premiums on loans purchased via the correspondent channel are capitalized upon origination because they represent part of the purchase price. However, the loans are subsequently measured at fair value on a recurring basis.
We record the proceeds from the transfer of assets as secured borrowings (HMBS-related borrowings) in Financing liabilities and recognize no gain or loss on the transfer. We measure the HECM loans and HMBS-related borrowings at fair value on a recurring basis. The changes in fair value of the HECM loans and HMBS-related borrowings are included in OtherReverse mortgage revenue, net in our consolidated statements of operations. Included in net fair value gainschanges on the HECM loans and related HMBS borrowings are the net interest income that we expect to be collected on the HECM loans and the interest
expense that we expect to be paid on the HMBS-related borrowings. In addition, reverse mortgage revenue, net includes the fair value changes of the interest rate lock commitments related to reverse mortgage loans. We report originations and collections of HECM loans in investing activities in the consolidated statements of cash flows. We report net fair value gains on HECM loans and the related HMBS borrowings as an adjustment to the net cash provided by or used in operating activities in the consolidated statements of cash flows. Proceeds from securitizations of HECM loans and payments on HMBS-related borrowings are included in financing activities in the consolidated statements of cash flows.
Transfers of Financial Assets and MSRs
We securitize, sell and service forward and reverse residential mortgage loans. Securitization transactions typically involve the use of VIEs and are accounted for either as sales or as secured financings. We typically retain economic interests in the securitized assets in the form of servicing rights and obligations. In order to efficiently finance our assets and operations and create liquidity, we may sell servicing advances, MSRs or the right to receive certain servicing fees relating to MSRs (Rights to MSRs).
In order to determine whether or not a VIE is required to be consolidated, we consider our ongoing involvement with the VIE. In circumstances where we have both the power to direct the activities that most significantly impact the performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be significant, we would conclude that we would consolidate the entity, which precludes us from recording an accounting sale in connection with the transfer of the financial assets. In the case of a consolidated VIE, we continue to report the underlying residential mortgage loans or servicing advances, and we record the securitized debt on our consolidated balance sheet.
In the case of transfers where either one or both of the power or economic criteria above are not met, we evaluate whether a sale has occurred for accounting purposes. In order to recognize a sale, the transferred assets must be legally isolated, not be constrained by restrictions from further transfer and be deemed to be beyond our control. If the transfer does not meet any of these three criteria, the transaction is accounted for consistent with a secured financing. In certain situations, we may have continuing involvement in transferred loans through our retained servicing. Transactions involving retained servicing would still be eligible for sale accounting, as we have ceded effective control of these loans to the purchaser. Subsequent to the determination that a transaction does not meet the accounting sale criteria, we may determine that we meet the criteria. In the event we subsequently meet the accounting sale criteria, we derecognize the transferred assets and related liabilities.
In connection with the Ginnie Mae early buyout program, our agreements provide either that: (a) we have the right, but not the obligation, to repurchase previously transferred mortgage loans under certain conditions, including the mortgage loans becoming eligible for pooling under a program sponsored by Ginnie Mae; or (b) we have the obligation to repurchase previously transferred mortgage loans that have been subject to a successful trial modification before any permanent modification is made. Once these conditions are met, we have effectively regained control over the mortgage loan(s), and under GAAP, must re-recognize the loans on our consolidated balance sheets and establish a corresponding repurchase liability. With respect to those loans that we have the right, but not the obligation, to repurchase under the applicable agreement, this requirement applies regardless of whether we have any intention to repurchase the loan. We re-recognize the loans in Other assets and a corresponding liability in Other liabilities.
In the case of transfers of MSRs and Rights to MSRs where we retain the right to subservice, we defer any related gain or loss and amortize the balance over the life of the subservicing agreement.
Gains or losses on off-balance sheet securitizations take into consideration any retained interests, including servicing rights and representation and warranty obligations, both of which are initially recorded at fair value at the date of sale in Gain on loans held for sale, net, in our consolidated statements of operations.
Derivative Financial Instruments
We use derivative instruments to manage the fair value changes in our MSRs, interest rate lock commitments and loan portfolios which are exposed to interest rate risk. We do not use derivative instruments for trading or speculative purposes. We recognize all derivative instruments at fair value on our consolidated balance sheets in Other assets and Other liabilities. Derivative instruments are generally entered into as economic hedges against changes in the fair value of a recognized asset or liability and are not designated as hedges for accounting purposes. We generally report the changes in fair value of such derivative instruments in the same line item in the consolidated statement of operations as the changes in fair value of the related asset or liability. For all other derivative instruments not designated as a hedging instrument, we report changes in fair value in Other, net.
Premises and Equipment, Leases
We report premises and equipment at cost and, except for land, depreciate them over their estimated useful lives on a straight-line basis as follows:
| | | | | |
| Computer hardware and software | 2 – 3 years |
| |
Computer softwareBuildings | 2 – 340 years |
Computer hardware | 3 years |
Buildings | 40 years |
| Leasehold improvements | Term of the lease not to exceed useful life |
| Right of Use (ROU) assets | Term of the lease not to exceed useful life |
| Furniture and fixtures | 5 years |
| Office equipment | 5 years |
Our leases include non-cancelable operating leases for premises and equipment. At lease commencement and renewal date, we estimate the ROU assets and lease liability at present value using our estimated incremental borrowing rate. We amortize the balance of the ROU assets and recognize interest on the lease liability. Our lease liability represents the present value of the
lease payments and is reduced as we make cash payments on our lease obligations. Our ROU lease assets are evaluated for impairment in accordance with ASC 360, Premises and Equipment.
Litigation
We monitor our legal matters, including advice from external legal counsel, and periodically perform assessments of these matters for potential loss accrual and disclosure. We establish a liability for settlements, judgments on appeal and filed and/or threatened claims for which we believe that it is probable that a loss has been or will be incurred and the amount can be reasonably estimated. We recognize legal costs associated with loss contingencies in Professional services expense in the consolidated statement of operations as incurred.
Stock-Based Compensation
We initially measure the cost of employee services received in exchange for ana stock-based award of equity instruments based onas the grant-date fair value of the award.award on the grant date. For awards which must be settled in cash and are therefore classified as liabilities rather than equity in the consolidated balance sheet, fair value is subsequently remeasured and fair value changes are reported as compensation expense at each reporting date. For equity awards with a service condition, we recognize the cost as compensation expense ratably over the vesting period. For equity awards with a market condition, we recognize the cost as compensation expense ratably over the expected life of the option that is derived from an options pricing model. When equity awards with a market condition meet their vesting requirements, any unrecognized compensation at the vesting date is recognized ratably over the vesting period. For equity awards with both a market condition and a service condition for vesting, we recognize cost as compensation expense over the requisite service period for each tranche of the award using the graded-vesting method.
Income Taxes
We file consolidated U.S. federal income tax returns. We allocate consolidated income tax among all subsidiaries included in the consolidated return as if each subsidiary filed a separate return or, in certain cases, a consolidated return.
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Additionally, we adjust deferred taxes to reflect estimated tax rate changes. We conduct periodic evaluations to determine whether it is more likely than not that some or all of our deferred tax assets will not be realized. Among the factors considered in this evaluation are estimates of future earnings, the future reversal of temporary differences and the impact of tax planning strategies that we can implement if warranted. We provide a valuation allowance for any portion of our deferred tax assets that, more likely than not, will not be realized. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.audit, based on the technical merits of the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties related to income tax matters in Income tax expense.
In December 2017, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin (SAB) 118 (as further clarified by FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118), which provides guidance on accounting for the income tax effects of the Tax Cuts and Jobs Act (Tax Act) signed into law by the President of the United States on December 22, 2017. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (ASC) 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements and should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. We adopted the guidance of SAB 118 as of December 31, 2017. We2017 and finalized our provisional amounts recognized under SAB 118 in the fourth quarter of 2018. See Note 1920 — Income Taxes for additional information.
Basic and Diluted Earnings per Share
We calculate basic earnings per share based upon the weighted average number of shares of common stock outstanding during the year. We calculate diluted earnings per share based upon the weighted average number of shares of common stock outstanding and all dilutive potential common shares outstanding during the year. The computation of diluted earnings per share includes the estimated impact of the exercise of the outstanding options to purchase common stock using the treasury stock method.
Going Concern
In accordance with FASB ASC 205-40, Presentation of Financial Statements - Going Concern, we evaluate whether there are conditions that are known or reasonably knowable such as those discussed in the “Business Environment” section, that raise substantial doubt about our ability to continue as a going concern within one year after the date that our financial statements are issued.
Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The assessment of our ability to meet our future obligations is inherently judgmental, subjective and susceptible to change. Our assessment considers information including, but not limited to, our financial condition, liquidity sources, obligations coming due within one year after the financial statements are issued, funds necessary to maintain current operations and any negative financial trends or other indicators of possible financial difficulty, including adverse regulatory or legal proceedings, adverse counterparty actions or rating agency decisions, and management’s plans to address these matters.our client concentration.
We considered both qualitative and quantitative factors as part ofBased on our assessmentevaluation, we have determined that werethere are no conditions that are known or reasonably knowable that raise substantial doubt about our ability to continue as ofa going concern within one year after the date that our financial statements were issued,for the year ended December 31, 2020 are issued.
Accounting Standards Adopted in 2020
Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04)
This standard provides for optional expedients and concluded that when considering management’s plansother guidance regarding the accounting related to mitigate, conditionsmodifications of contracts, hedging relationships and events consideredother transactions affected by the expected phase-out of the London Inter-bank Offered Rate (LIBOR) by the end of 2021 (or June 30, 2023 for U.S. dollar LIBOR of certain tenors). This guidance is effective upon issuance in the aggregateMarch 2020 through December 31, 2022 and allows for retrospective application to contract modifications as early as January 1, 2020. We elected to retrospectively adopt this ASU as of January 1, 2020 which resulted in no immediate impact on our consolidated financial statements. Although we do not indicate that it is probable that Ocwen will be unable to meet its obligations duringhave any hedge accounting relationships, many of our debt facilities and loan agreements incorporate LIBOR as the evaluation period.
Recently Adopted Accounting Standards
Revenue from Contracts with Customers (ASU 2014-09)
This ASU clarifies the principles for recognizing revenuereferenced interest rate. Some of these facilities and creates a common revenue standard. Under this ASU, an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity shall recognize revenue through the following five-step process:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction priceloan agreements either mature prior to the performance obligationsend of 2021 (or June 30, 2023) or have terms in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The guidance inplace that provide for an alternative to LIBOR upon its phase-out. We do not anticipate that this standard does not apply to financial instruments and other contractual rights or obligations within the scope of FASB ASC 860, Transfers and Servicing, among other ASC topics. As a result, our adoption of this standard on a modified retrospective basis on January 1, 2018 did notwill have a material impact on our consolidated financial statements.
Leases (ASU 2016-02, ASU 2018-10 and ASU 2018-11)
This ASU requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months, regardless of whether the lease is classified as a finance or operating lease. Additional disclosures of the amount, timing and uncertainty of cash flows arising from leases will be required.
We adopted the new leasing guidance on January 1, 2019 by applying the guidance at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We currently expect the transition adjustment to result in an insignificant adjustment to the opening balance of retained earnings and we estimate that we will increase both our total assets and total liabilities by approximately $60 million, representing the gross recognition of the right-of-use assets and lease liabilities. We elected a package of practical expedients which provided us transition relief when assessing leases that commenced prior to the adoption date, including determining whether existing contracts are or contain leases, the classification of such leases as operating or financing, and the accounting for initial direct costs. For short-term leases, we recognize lease payments on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. Our current minimum commitments under noncancelable operating leases as of December 31, 2018 are described in Note 24 — Commitments.
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16)
This ASU requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. Previously, recognition of current and deferred income taxes for an intra-entity transfer was prohibited until the asset had been sold to an outside party. We adopted this standard on a modified retrospective basis on January 1, 2018 by recording a cumulative-effect reduction of $5.6 million to retained earnings.
Statement of Cash Flows: Restricted Cash (ASU 2016-18)
This ASU clarifies how changes in restricted cash are classified and presented in the statement of cash flows under ASC 230. This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements. The amendments in this update have been applied using a retrospective transition method to each period presented. Our revision of the consolidated statements of cash flows for the years ended December 31, 2017 and 2016 to conform to the new standard resulted in a
decrease in Net cash provided by operating activities of $2.9 million and $53.4 million, respectively (reduction in the line item Decrease in receivables and other assets, net).
Receivables: Nonrefundable Fees and Other Costs (ASU 2017-08)
This ASU amends the amortization period for certain purchased callable debt securities held at a premium. This standard shortens the amortization period for the premium to the earliest call date, rather than generally amortizing the premium as an adjustment of yield over the contractual life of the instrument. Our adoption of this standard on January 1, 2019 will not have a material impact on our consolidated financial statements.
Compensation: Stock Compensation (ASU 2017-09)
This ASU reduces both diversity in practice as well as cost and complexity when applying the modification accounting guidance in FASB ASC Topic 718, Compensation -- Stock Compensation, to a change to the terms or conditions of a share-based payment award. Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements.
Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02)
This ASU provides entities with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded. Our adoption of this standard on January 1, 2019 did not have a material impact on our consolidated financial statements.
Accounting Standards Issued but Not Yet Adopted
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13)2016-13 and ASU 2019-04)
This ASU will require timelierrequires the remeasurement and recording of expected lifetime credit losses on loans and other financial instruments. This standard alignsinstruments measured at amortized cost and replaces the accounting with the economics of lending by requiring banks and other lending institutions to immediately record the full amount ofexisting incurred loss model for credit losses that are expected in their loan portfolios.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. This
We adopted this standard will be effective for us on January 1, 2020 by applying the guidance at the adoption date with early application permitted. We are currently evaluating the effect of adopting this standard.
Fair Value Measurement: Disclosure Framework - Changesa cumulative-effect adjustment to the Disclosure Requirementsopening balance of retained earnings. We used the modified retrospective method for Fair Value Measurement (ASU 2018-13)
This ASU modifiesall financial assets in scope of the disclosure requirements onstandard. 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 measurements in FASB ASC Topic 820, Fair Value Measurement. The main provisions in this update include removalelection for certain financial instruments within the scope of the following disclosure requirements from this ASC: 1) the amount of and reasons for transfers between Level 1 and Level 2 ofstandard. We elected 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 lossesoption for the period included in other comprehensivefuture 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 for recurring Level 3 fair value measurements held at the endtaxes) to retained earnings as 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.
This standard will be effective for us on January 1, 2020 with early application permitted onto recognize the fair value as of that date. We did not record any removed or modified disclosures andsignificant net tax effect related to be applied prospectively for onlythis adjustment as the most recent interim or annual period presentedincrease in the initial fiscal yeardeferred 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 adoption,retained earnings. Our measurement of lifetime expected credit losses is based on relevant qualitative and to allow a delayed adoption of the additional disclosures until the effective date. We are currently evaluating the effect of adopting this standard.quantitative information about past events, including historical loss experience, current conditions, and reasonable and supportable forecasts that affect collectability.
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 consolidated financial statements.
Compensation - Retirement Benefits - Defined Benefit Plans: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14)
This ASU modifies the disclosure requirements for defined benefit plans in FASB ASC Subtopic 715-20, Compensation-Retirement Benefits-Defined Benefit Plans-General. The main provisions in this ASU include removal of the following disclosure requirements: 1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, 2) the amount and timing of plan assets expected to be returned to the employer, 3) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, and 4) the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.
This ASU adds disclosure requirements to report 1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and 2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU clarifies disclosure requirements in paragraph 715-20-50-3, which state that the 1) projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and 2) accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets should be disclosed for defined benefit plans.
Our adoption of this standard on January 1, 2020 did not have a material impact on our consolidated financial statements. Upon adoption, we elected to apply the amendments in this ASU prospectively.
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 willadds 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 consolidated financial statements.
Accounting Standards Issued but Not Adopted in 2020
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 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.
Our adoption of this standard was effective for us on January 1, 2020, with early adoption permitted, including adoption in any interim period. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the effect of adopting this standard.2021 and did not have a material impact on our consolidated financial statements.
Note 2 — Business Acquisition
On October 4, 2018, we completed our acquisition of PHH, a non-bank servicer with established servicing and origination recapture capabilities. As a result of the acquisition, PHH became a wholly owned subsidiary of Ocwen.
The acquisition has been accounted for under the acquisition method of accounting pursuant to ASC 805, Business Combinations. Assets acquired and liabilities assumed are recorded at their fair value as of the date of acquisition based on management’s estimates using currently available information. The results of PHH operations are included in Ocwen’s consolidated statements of operations from the date of acquisition. For U.S. income tax purposes, the acquisition of PHH is treated as a stock purchase.
The aggregate consideration paid to the former holders of PHH common stock was $358.4 million in cash and was funded by a combination of PHH cash on hand of $325.0 million and Ocwen cash on hand of $33.4 million. At the closing, there were 32,581,485 shares of PHH common stock, par value $0.01, outstanding, all of which were converted into the right to receive $11.00 in cash per share. In connection with the acquisition, all outstanding options to purchase PHH common stock and all PHH equity awards with performance-based vesting conditions were cancelled without any consideration or cash payment. All other PHH equity awards were cancelled in exchange for a cash payment equal to $11.00 per share underlying the award.
We have recognized a bargain purchase gain, net of tax, of $64.0$63.7 million ($64.0 million in 2018) in connection with the acquisition. The bargain purchase gain results from the fair value of PHH’s net assets exceeding the purchase price we paid. The purchase price we negotiated contemplated that PHH would incur losses after the acquisition date. To the extent those losses are realized, they will beare included in our consolidated statements of operations.
Costs incurred in connection with the transaction are expensed as incurred and are reported in Professional services in the consolidated statements of operations. Such costs were $13.7 million during 2018.
Purchase Price Allocation
The purchase price allocation provided in the table below reflects the fair value of assets acquired and liabilities assumed in the acquisition of PHH, with the excess of total identifiable net assets over total consideration paid recorded as a bargain purchase gain. Independent valuation specialists conducted analyses to assist management in determining the fair value of certain acquired assets and assumed liabilities. Management is responsible for these third-party valuations and appraisals. The methodologies that we use and key assumptions that we made to estimate the fair value of the acquired assets and assumed debt are described in Note 4 — Fair Value.
|
| | | |
| Purchase Price Allocation | October 4, 2018 |
| Cash | $ | 423,088 |
|
| Restricted cash | 38,813 |
|
| Mortgage servicing rights | 518,127 |
|
| Advances, net | 96,163 |
|
| Loans held for sale | 42,324 |
|
| Receivables, net | 46,838 |
|
| Premises and equipment, net | 15,203 |
|
| Real estate owned | 3,289 |
|
| Other assets | 6,293 |
|
| Assets related to discontinued operations | 2,017 |
|
| Financing liabilities (MSRs pledged, at fair value) | (481,020 | ) |
| Other secured borrowings, net | (27,594 | ) |
| Senior notes, net (Senior unsecured notes) | (120,624 | ) |
| Accrued legal fees and settlements | (9,960 | ) |
| Other accrued expenses | (36,889 | ) |
| Loan repurchase and indemnification liability | (27,736 | ) |
| Unfunded pension liability | (9,815 | ) |
| Other liabilities | (34,131 | ) |
| Liabilities related to discontinued operations | (21,954 | ) |
| Total identifiable net assets | 422,432 |
|
| Total consideration paid to seller | (358,396 | ) |
| Bargain purchase gain | $ | 64,036 |
|
In a business combination, the initial allocation of the purchase price is considered preliminary and therefore subject to change until the end of the measurement period (not to exceed one year from the acquisition date). Because the measurement period is still open, certain fair value estimates may change once all information necessary to make a final fair value assessment has been received.
Post-Acquisition Results of Operations
The following table presents the results of operations of PHH that are included in our consolidated statements of operations from the acquisition date of October 4, 2018 through December 31, 2018:
|
| | | | |
| Revenues | | $ | 72,487 |
|
| Expenses | | 84,877 |
|
| Other income (expense) | | (19,132 | ) |
| Income tax benefit | | (6,711 | ) |
| Net loss from continuing operations | | $ | (24,811 | ) |
| | | | | | | | |
| Revenues | | $ | 72,487 | |
| Expenses | | 84,877 | |
| Other income (expense) | | (19,132) | |
| Income tax benefit | | (6,711) | |
| Net loss from continuing operations | | $ | (24,811) | |
Pro Forma Results of Operations (Unaudited)
The following table presents supplemental pro forma information for Ocwen as if the PHH Acquisition occurred on January 1, 2017. Pro forma adjustments for 2018 include:
Fair value•Increase in MSR valuation adjustments, net of $24.4 million and $(16.9) million in 2018 and 2017, respectively, to conform the accounting for MSRs to the valuation policies of Ocwen related to acquired MSRs;
•Adjust interest expense for a total net impact of $30.6 million and $(73.8) million in 2018 and 2017, respectively.million. The pro forma adjustments primarily pertain to fair value adjustments of $31.4 million and $(79.3) million in 2018 and 2017, respectively, related to the assumed MSR secured liability using valuation assumptions consistent with Ocwen's methodology;
Report the bargain purchase gain of $64.0 million as if the acquisition had occurred in 2017 rather than 2018;
Report Ocwen and PHH acquisition-related charges of $18.5 million for professional services as if they had been incurred in 2017 rather than 2018;
•Adjust depreciation expense to amortize internally developed software acquired from PHH on a straight-line basis for the years presented based on a useful life of three years;
•Adjust revenue for a total net impactincrease of $120.6 million and $134.6 million in 2018 and 2017, respectively, which primarily include adjusting servicing and subservicing fees for $127.7 million and $97.0 million in 2018 and 2017, respectively, to gross up activity related to PHH MSRs sold accounted for as secured borrowings consistent with Ocwen’s presentation. The offset to these adjustments are interest income and interest expense, with no net effect on earnings.
•Income tax benefit of $0.3 million and $0.2 million in 2018 and 2017, respectively, to record lower 2018 current federal tax under the new base erosion and anti-abuse tax (BEAT) provision of the Tax Act assuming Ocwen and PHH would file a consolidated federal tax return beginning January 1, 2017 and the benefit of the additional acquisition-related charges as if they had been incurred in 2017.2017, based on management’s estimate of the blended applicable statutory tax rates and observing the continued need for a valuation allowance.
The following proforma adjustments were reported as if the acquisition had occurred in 2017 rather than 2018: |
| | | | | | | |
| | 2018 | | 2017 |
| | (Unaudited) | | (Unaudited) |
| Revenues | $ | 1,305,972 |
| | $ | 1,785,408 |
|
| Loss from continuing operations, net of tax attributable to Ocwen common stockholders | $ | (201,382 | ) | | $ | (356,824 | ) |
•Report Ocwen and PHH acquisition-related charges of $18.5 million for professional services as if they had been incurred in 2017 rather than 2018;
| | | | | |
| 2018 |
| (Unaudited) |
| Revenues | $ | 1,305,972 | |
| Loss from continuing operations, net of tax attributable to Ocwen common stockholders | $ | (201,382) | |
| |
The pro forma consolidated results presented above are not indicative of what Ocwen’s consolidated results would have been had we completed the acquisition on the date indicated due to a number of factors, including but not limited to expected reductions in servicing, origination and overhead costs through the realization of targeted cost synergies and improved
economies of scale, the impact of incremental costs to integrate the two companies and differences in servicing practices and cost structures between Ocwen and PHH. In addition, the pro forma consolidated results do not purport to project combined future operating results of Ocwen and PHH nor do they reflect the expected realization of any cost savings associated with the acquisition of PHH.
Discontinued Operations
Note 3 — Severance and Restructuring Charges
In November 2016, PHH announced its plan2020, we executed certain cost re-engineering initiatives to exitgenerate further cost savings, some of which qualify as restructuring charges under GAAP, including the private label solutions (PLS) business,partial abandonment of certain leased properties and in February 2017, PHH announced its intention to operate as a smaller business that is focused solely on subservicing and portfolio retention services, and exit the Real Estate channel.additional severance costs. As a result PHH wouldof these initiatives, we accelerated the depreciation of facility lease ROU assets and leasehold improvements by $3.3 million, recorded $6.3 million of facility and other related exit the PLS business through the run-offcosts, and accrued $3.4 million of operations, and exit the Real Estate channel through the sale of certain assets of PHH Home Loans, LLC (PHH Home Loans) and its subsidiaries and subsequent run-off of the operations. Those exit activities were substantially complete prior to our acquisition of PHH, and as such, the results of PLS and Real Estate have been presented as discontinued operations in the consolidated statement of operations and consolidated statement of comprehensive income (loss), and are excluded from continuing operations and segment results for the post-acquisition period.
Results of Operations
The results of discontinued operations for the post-acquisition period (October 4, 2018, throughemployee severance costs. At December 31, 2018) are summarized below:
|
| | | |
| Net revenues | $ | 413 |
|
| Total expenses (1) | (996 | ) |
| Income before income taxes | 1,409 |
|
| Income tax expense (benefit) | — |
|
| Income from discontinued operations | $ | 1,409 |
|
(1) Total expenses are shown net of a severance expense reversal that occurred as a result of voluntary post-acquisition employee departures and amortization of2020, our remaining facility exit costs.
There was no gain or loss directly attributed to the completion of the disposal of these businesses.
Assets and Liabilities
The carrying amounts of major classes of assets and liabilities related to discontinued operations consisted of the following at December 31, 2018:
|
| | | |
| Assets | |
| Mortgage loans held for sale | $ | 650 |
|
| Accounts receivable, net | 144 |
|
| Total assets related to discontinued operations | $ | 794 |
|
| | |
| Liabilities | |
| Other liabilities (1) | 18,265 |
|
| Total liabilities related to discontinued operations | $ | 18,265 |
|
(1) The primary component of Other liabilities is an exit cost liability which includes $14.9and employee severance cost liability are $3.5 million of facility exit costs related to vacating certain facilities.
Cash Flows
The cash flows related to discontinued operations have not been segregatedand $0.2 million, respectively, and are included in Other accrued expenses, a component of Other liabilities. The majority of expenses were incurred within the Corporate Items and Other segment.
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 PHH 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 December 31, 2020 and 2019 is $2.0 million and $11.9 million, respectively, and is included in Other accrued expenses, a component of Other liabilities.
The following table provides a summary of the aggregate activity of the liability for the re-engineering plan costs incurred in the year ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| Employee-related | | Facility-related | | Other | | Total |
| Balance at January 1, 2019 | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Charges | 35,704 | | | 10,133 | | | 19,133 | | | 64,970 | |
| Payments / Other | (29,449) | | | (7,202) | | | (16,414) | | | (53,065) | |
| | | | | | | |
| Balance at December 31, 2019 | 6,255 | | | 2,931 | | | 2,719 | | | 11,905 | |
| Payments | (6,247) | | | (960) | | | (2,719) | | | (9,925) | |
| Balance at December 31, 2020 | $ | 8 | | | $ | 1,971 | | | $ | 0 | | | $ | 1,980 | |
The expenses were all incurred within the Corporate Items and Other segment. Employee-related costs and facility-related costs are reported in Compensation and benefits expense and Occupancy and equipment expense, respectively, in the consolidated statementstatements of cash flows for the post-acquisition period. There were no significant adjustments necessary to reconcile Net loss to net cash provided by operating activities that relate to discontinued operations. Other costs are primarily reported in Professional services expense and Other expenses.
Note 34 — 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 securitizationstransfers of financial assets 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) financings of automotive dealer financing notes.
We have determinedMSR financings. Financing transactions that the special purpose entities (SPEs) createddo not use SPEs or VIEs are disclosed in connection with our match funded asset financing facilities are variable interest entities (VIEs) for which we are the primary beneficiary.Note 14 — Borrowings.
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.
SecuritizationsLoans Held for Sale
Loans held for sale include forward and reverse mortgage loans that we do not intend to hold until maturity. We report loans held for sale at either fair value or the lower of cost or fair value computed on an aggregate basis. Residential Mortgage Loansforward and reverse mortgage loans that we intend to sell are carried at fair value as a result of a fair value election. In addition, effective
January 1, 2020, repurchased loans by our Servicing business, including those loans we repurchase from Ginnie Mae guaranteed securitizations pursuant to Ginnie Mae servicing fees based uponguidelines, are accounted for under the securitized loan balances and certain ancillary fees, all of which are reportedfair value election.For loans that we elected to measure at fair value on a recurring basis, we report changes in Servicing and subservicing feesfair value in Gain on loans held for sale, net in the consolidated statements of operations.
Transfers of Forward Loans
We sell or securitize forward loans that we originate or purchased from third parties, generallyoperations in the form of mortgage-backed securities guaranteed byperiod in which the changes occur. These loans are expected to be sold into the secondary market to the GSEs, into Ginnie Mae guaranteed securitizations or Ginnie Mae. Securitization typically occurs within 30 daysto third-party investors. For the legacy portfolio of loan closingloans measured at the lower of cost or purchase. We act only as a fiduciary and do not have a variable interest in the securitization trusts. As a result,fair value, we account for these transactionsany excess of cost over fair value as sales upon transfer.a valuation allowance and include changes in the valuation allowance in Other, net, in the consolidated statements of operations in the period in which the change occurs.
The following table presents a summaryWe report any gain or loss on the transfer of loans held for sale in Gain on loans held for sale, net in the consolidated statements of operations along with the changes in fair value of the loans and the gain or loss on any related derivatives. When loans are sold or securitized with servicing retained, the gain on sale includes the MSR retained as non-cash proceeds at the date of sale. We include all changes in loans held for sale and related derivative balances in operating activities in the consolidated statements of cash flows received fromflows.
We accrue interest income as earned. We place loans on non-accrual status after any portion of principal or interest has been delinquent for more than 89 days, or earlier if management determines the borrower is unable to continue performance. When we place a loan on non-accrual status, we reverse the interest that we have accrued but not yet received. We return loans to accrual status only when we reinstate the loan and paidthere is no significant uncertainty as to securitization trusts related to transfers of loans accountedcollectability.
Loans Held for as sales that were outstanding:Investment
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Proceeds received from securitizations | $ | 1,290,682 |
| | $ | 3,256,625 |
| | $ | 5,197,071 |
|
| Servicing fees collected | 45,046 |
| | 41,509 |
| | 14,616 |
|
| Purchases of previously transferred assets, net of claims reimbursed | (4,395 | ) | | (5,948 | ) | | (1,271 | ) |
| | $ | 1,331,333 |
| | $ | 3,292,186 |
| | $ | 5,210,416 |
|
In connection with these transfers, we retained MSRs of $8.3 million, $20.7 million and $37.2 million during 2018, 2017 and 2016, respectively. We securitize forward andNewly originated reverse residential mortgage loans involving the GSEs and loansthat are insured by the FHA or VA throughand pooled into 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.
The following table presents the carrying amounts of our assets that relate to our continuing involvement with forward loans that we have transferred with servicing rights retained as well as our maximum exposure to loss including the UPB of the transferred loans.
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Carrying value of assets | | | |
| MSRs ($132,774 and $227 carried at fair value) | $ | 132,774 |
| | $ | 98,059 |
|
| Advances and match funded advances | 138,679 |
| | 57,636 |
|
| UPB of loans transferred | 15,600,971 |
| | 12,077,635 |
|
| Maximum exposure to loss | $ | 15,872,424 |
| | $ | 12,233,330 |
|
At December 31, 2018 and 2017, 8.3% and 8.9%, 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 HMBSMae guaranteed securities that we sell into the secondary market with servicing rights retained or we sell theare classified as loans to third parties with servicing rights released.held for investment. We have determined that loanelected to measure these loans at fair value, with changes in fair value reported in Reverse mortgage revenue, net in the consolidated statements of operations. Loan transfers in the HMBS programthese Ginnie Mae securitizations 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. Asas a result, the transfers of the HECM loansreverse mortgages do not qualify for sale accounting, and therefore,accounting. Therefore, we account for these transfers as financings. Under this accounting treatment,financings, with the HECM loans arereverse mortgages classified as Loans held for investment, at fair value, on our consolidated balance sheets. Holderssheets, with no gain or loss recognized on the transfer.
Effective January 1, 2019, we elected to fair value future draw commitments for HECM loans purchased or originated after December 31, 2018. The value of participating interestsfuture draw commitments for HECM loans purchased or originated before January 1, 2019 were recognized as the draws were securitized or sold. Effective January 1, 2020, in connection with the adoption of Accounting Standard Update (ASU) 2016-13 and ASU 2019-04: Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (CECL), we made an irrevocable fair value election on all future draw commitments for HECM loans that were purchased or originated before January 1, 2019. We recorded cumulative-effect adjustments of $47.0 million to retained earnings as of January 1, 2020, to reflect the excess of the fair value over the carrying amount.
Upfront costs and fees related to loans held for investment, including broker fees, are recognized in Reverse mortgage revenue, net in the statement of operations as incurred and are not capitalized. Premiums on loans purchased via the correspondent channel are capitalized upon origination because they represent part of the purchase price. However, the loans are subsequently measured at fair value on a recurring basis.
We record the proceeds from the transfer of assets as secured borrowings (HMBS-related borrowings) in Financing liabilities and recognize no gain or loss on the transfer. We measure the HECM loans and HMBS-related borrowings at fair value on a recurring basis. The changes in fair value of the HECM loans and HMBS-related borrowings are included in Reverse mortgage revenue, net in our consolidated statements of operations. Included in net fair value changes on the HECM loans and related HMBS have no recourse againstborrowings are the assets of Ocwen, except with respectnet interest income that we expect to standard representations and warranties and our contractual obligation to servicebe collected on the HECM loans and the HMBS.
At December 31, 2018 and 2017, Loans held for investment included $68.4 million and $83.8 million, respectively, of originated loans which had not yet been pledged as collateral. See Note 4 — Fair Value and Note 13 — Borrowings for additional information.
Financings of Advances
Match funded advances 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 isinterest expense on the primary beneficiaryHMBS-related borrowings. In addition, reverse mortgage revenue, net includes the fair value changes of the SPE. These SPEs issue debt supported byinterest rate lock commitments related to reverse mortgage loans. We report originations and collections on the transferred advances, and we refer to this debt as Match funded liabilities.
We make transfers to these SPEsof HECM loans 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 match funded debt until the payment dates specifiedinvesting activities in the indenture are classified as debt service accounts within Other assets in our consolidated balance sheets. The balances also include amounts that have been set aside from the proceedsstatements 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 facilities are held in the name of the SPE created in connection with the facility.
cash flows. We classify the transferred advancesreport net fair value gains on our consolidated balance sheets as a component of Match funded assetsHECM loans and the related liabilitiesHMBS borrowings as Match funded liabilities. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the SPE. Holders of the debt issued by these entities have recourse onlyan adjustment to the net cash provided by or used in operating activities in the consolidated statements of cash flows. Proceeds from securitizations of HECM loans and payments on HMBS-related borrowings are included in financing activities in the consolidated statements of cash flows.
Transfers of Financial Assets and MSRs
We securitize, sell and service forward and reverse residential mortgage loans. Securitization transactions typically involve the use of VIEs and are accounted for either as sales or as secured financings. We typically retain economic interests in the securitized assets in the form of the SPE for satisfaction of the debt. Theservicing rights and obligations. In order to efficiently finance our assets and liabilities ofoperations and create liquidity, we may sell servicing advances, MSRs or the advance financing SPEs are comprised solely of Match funded advances, Restricted cash (debt service accounts), Match funded liabilities and amounts dueright to affiliates. Amounts duereceive certain servicing fees relating to affiliates are eliminated in consolidation inMSRs (Rights to MSRs).
In order to determine whether or not a VIE is required to be consolidated, we consider our consolidated balance sheets.
Mortgage-Backed Securitizations
The table below presentsongoing involvement with the carrying value and classification of the assets and liabilities of two consolidated mortgage-backed securitization trusts included in our consolidated balance sheet at December 31, 2018 as a result of residual securities issued by the trust that we acquired during the third quarter of 2018.
|
| | | |
| Loans held for investment, at fair value - Restricted for securitization investors | $ | 26,520 |
|
| Financing liability - Owed to securitization investors, at fair value | 24,815 |
|
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,VIE. In circumstances where we have both the abilitypower to direct the activities that most significantly impact the performance of the trust.
Upon consolidation ofVIE and the securitization trusts,obligation to absorb losses or the right to receive benefits that could be significant, we elected to applywould conclude that we would consolidate the measurement alternative to ASC Topic 820, Fair Value Measurement for collateralized financing entities. The measurement alternative requires a reporting entity, to usewhich precludes us from recording an accounting sale in connection with the more observable of the fair valuetransfer of the financial assets. In the case of a consolidated VIE, we continue to report the underlying residential mortgage loans or servicing advances, and we record the securitized debt on our consolidated balance sheet.
In the case of transfers where either one or both of the power or economic criteria above are not met, we evaluate whether a sale has occurred for accounting purposes. In order to recognize a sale, the transferred assets ormust be legally isolated, not be constrained by restrictions from further transfer and be deemed to be beyond our control. If the financial liabilitiestransfer does not meet any of these three criteria, the transaction is accounted for consistent with a secured financing. In certain situations, we may have continuing involvement in transferred loans through our retained servicing. Transactions involving retained servicing would still be eligible for sale accounting, as we have ceded effective control of these loans to measure both the financialpurchaser. Subsequent to the determination that a transaction does not meet the accounting sale criteria, we may determine that we meet the criteria. In the event we subsequently meet the accounting sale criteria, we derecognize the transferred 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.related liabilities.
Holders of the debt issued by these 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. At December 31, 2018, MSRs were $0.2 million and our $1.7 million investment in the residual securities of the trusts was eliminated in consolidation. Advances outstanding at December 31, 2018 were $1.2 million.
Financings of Automotive Dealer Financing Notes
Match funded automotive dealer financing notes resulted from our transfers of short-term, inventory-secured loans to car dealers to an SPE in exchange for cash. We consolidated this SPE because we determined that Ocwen is the primary beneficiary of the SPE. The SPE issued debt supported by collections on the transferred loans. In January 2018, we exited the independent used car dealer floor plan lending business conducted through Automotive Capital Services, Inc. (ACS).
We made transfers to the SPE in accordanceconnection with the terms ofGinnie Mae early buyout program, our agreements provide either that: (a) we have the automotive capital asset receivables financing facility agreements, whichright, but not the obligation, to repurchase previously transferred mortgage loans under certain conditions, including the mortgage loans becoming eligible for pooling under a program sponsored by Ginnie Mae; or (b) we terminated in January 2018 in connection with our decisionhave the obligation to exitrepurchase previously transferred mortgage loans that have been subject to a successful trial modification before any permanent modification is made. Once these conditions are met, we have effectively regained control over the business. We classifiedmortgage loan(s), and under GAAP, must re-recognize the transferred loans on our consolidated balance sheets asand establish a componentcorresponding repurchase liability. With respect to those loans that we have the right, but not the obligation, to repurchase under the applicable agreement, this requirement applies regardless of Match fundedwhether we have any intention to repurchase the loan. We re-recognize the loans in Other assets and a corresponding liability in Other liabilities.
In the case of transfers of MSRs and Rights to MSRs where we retain the right to subservice, we defer any related liabilities as Match funded liabilities. The SPE used collectionsgain or loss and amortize the balance over the life of the pledgedsubservicing agreement.
Gains or losses on off-balance sheet securitizations take into consideration any retained interests, including servicing rights and representation and warranty obligations, both of which are initially recorded at fair value at the date of sale in Gain on loans to repay principal and interest and to pay the expenses of the SPE. Holders of the debt issued by the SPE had recourse only to the assets of the SPEheld for satisfaction of the debt. The assets and liabilities of the automotive capital asset receivables financing SPE were comprised solely of Match funded automotive dealer financing notes, Restricted cash (debt service accounts), Match funded liabilities and amounts due to affiliates. Amounts due to affiliates have been eliminated in consolidationsale, net, in our consolidated balance sheets.statements of operations.
Derivative Financial Instruments 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 significantuse derivative instruments to manage the fair value measurement.
The carrying amountschanges in our MSRs, interest rate lock commitments and the estimated fair values of our financialloan portfolios which are exposed to interest rate risk. We do not use derivative instruments and certain of our nonfinancial assets measuredfor trading or speculative purposes. We recognize all derivative instruments at fair value on a recurring or non-recurring basis or disclosed, but not carried, atour consolidated balance sheets in Other assets and Other liabilities. Derivative instruments are generally entered into as economic hedges against changes in the fair value of a recognized asset or liability and are not designated as follows:
|
| | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | | | 2018 | | 2017 |
| | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Financial assets: | | | |
| | |
| | |
| | |
|
| Loans held for sale: | | | | | | | | | |
| Loans held for sale, at fair value (a) | 2 | | $ | 176,525 |
| | $ | 176,525 |
| | $ | 214,262 |
| | $ | 214,262 |
|
| Loans held for sale, at lower of cost or fair value (b) | 3 | | 66,097 |
| | 66,097 |
| | 24,096 |
| | 24,096 |
|
| Total Loans held for sale | | | $ | 242,622 |
| | $ | 242,622 |
| | $ | 238,358 |
| | $ | 238,358 |
|
| Loans held for investment, at fair value | | | | | | | | | |
| Loans held for investment - Reverse mortgages (a) | 3 | | $ | 5,472,199 |
| | $ | 5,472,199 |
| | $ | 4,715,831 |
| | $ | 4,715,831 |
|
| Loans held for investment - Restricted for securitization investors (a) | 3 | | 26,520 |
| | 26,520 |
| | — |
| | — |
|
| Total loans held for investment | | | 5,498,719 |
| | 5,498,719 |
| | 4,715,831 |
| | 4,715,831 |
|
| | | | | | | | | | |
| Advances (including match funded) (c) | 3 | | 1,186,676 |
| | 1,186,676 |
| | 1,356,393 |
| | 1,356,393 |
|
| Automotive dealer financing notes (including match funded) (c) | 3 | | — |
| | — |
| | 32,757 |
| | 32,590 |
|
| Receivables, net (c) | 3 | | 198,262 |
| | 198,262 |
| | 199,529 |
| | 199,529 |
|
| Mortgage-backed securities, at fair value (a) | 3 | | 1,502 |
| | 1,502 |
| | 1,592 |
| | 1,592 |
|
| U.S. Treasury notes (a) | 1 | | 1,064 |
| | 1,064 |
| | 1,567 |
| | 1,567 |
|
| Corporate bonds (a) | 2 | | 450 |
| | 450 |
| | 313 |
| | 313 |
|
| | | | | | | | | | |
| Financial liabilities: | | | |
| | |
| | |
| | |
|
| Match funded liabilities (c) | 3 | | $ | 778,284 |
| | $ | 776,485 |
| | $ | 998,618 |
| | $ | 992,698 |
|
| Financing liabilities: | | | | | | | | | |
| HMBS-related borrowings, at fair value (a) | 3 | | $ | 5,380,448 |
| | $ | 5,380,448 |
| | $ | 4,601,556 |
| | $ | 4,601,556 |
|
| Financing liability - MSRs pledged, at fair value (a) | 3 | | 1,032,856 |
| | 1,032,856 |
| | 508,291 |
| | 508,291 |
|
| Financing liability - Owed to securitization investors, at fair value (a) | 3 | | 24,815 |
| | 24,815 |
| | — |
| | — |
|
| Other (c) | 3 | | 69,942 |
| | 53,570 |
| | 85,227 |
| | 65,202 |
|
| Total Financing liabilities | | | $ | 6,508,061 |
| | $ | 6,491,689 |
| | $ | 5,195,074 |
| | $ | 5,175,049 |
|
| Other secured borrowings: | | | | | | | | | |
| Senior secured term loan (c) (d) | 2 | | $ | 226,825 |
| | $ | 227,449 |
| | $ | 290,068 |
| | $ | 299,741 |
|
| Other (c) | 3 | | 155,713 |
| | 155,713 |
| | 255,782 |
| | 255,782 |
|
| Total Other secured borrowings | | | $ | 382,538 |
| | $ | 383,162 |
| | $ | 545,850 |
| | $ | 555,523 |
|
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | | | 2018 | | 2017 |
| Senior notes: | | | | | | | | | |
| Senior unsecured notes (c) (d) | 2 | | $ | 119,924 |
| | $ | 119,258 |
| | $ | 3,122 |
| | $ | 2,872 |
|
| Senior secured notes (c) (d) | 2 | | 328,803 |
| | 306,889 |
| | 344,216 |
| | 355,550 |
|
| Total Senior notes | | | $ | 448,727 |
| | $ | 426,147 |
| | $ | 347,338 |
| | $ | 358,422 |
|
| | | | | | | | | | |
| Derivative financial instrument assets (liabilities), at fair value (a): | | | |
| | |
| | |
| | |
|
| Interest rate lock commitments | 2 | | $ | 3,871 |
| | $ | 3,871 |
| | $ | 3,283 |
| | $ | 3,283 |
|
| Forward mortgage-backed securities | 1 | | (4,983 | ) | | (4,983 | ) | | (545 | ) | | (545 | ) |
| Interest rate caps | 3 | | 678 |
| | 678 |
| | 2,056 |
| | 2,056 |
|
| | | | | | | | | | |
| Mortgage servicing rights: | | | | | | | | | |
| Mortgage servicing rights, at fair value (a) | 3 | | $ | 1,457,149 |
| | $ | 1,457,149 |
| | $ | 671,962 |
| | $ | 671,962 |
|
| Mortgage servicing rights, at amortized cost (e) | 3 | | — |
| | — |
| | 336,882 |
| | 418,745 |
|
| Total Mortgage servicing rights | | | $ | 1,457,149 |
| | $ | 1,457,149 |
| | $ | 1,008,844 |
| | $ | 1,090,707 |
|
| |
(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 13 — Borrowings for additional information.
|
| |
(e) | Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. The balance at December 31, 2017 includes the impaired government-insured stratum of amortization method MSRs, which was measured at fair value on a non-recurring basis and reported net of the valuation allowance. At December 31, 2017, the carrying value of this stratum was $158.0 million before applying the valuation allowance of $24.8 million. |
The following tables present a reconciliation ofhedges for accounting purposes. We generally report the changes in fair value of Level 3 assets and liabilities that we measure atsuch derivative instruments in the same line item in the consolidated statement of operations as the changes in fair value of the related asset or liability. For all other derivative instruments not designated as a hedging instrument, we report changes in fair value in Other, net.
Premises and Equipment, Leases
We report premises and equipment at cost and, except for land, depreciate them over their estimated useful lives on a recurring basis:straight-line basis as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Held for Investment - Reverse Mortgages | | HMBS-Related Borrowings | | Loans Held for Inv. - Restricted for Securitiza-
tion Investors | | Financing Liability - Owed to Securitiza -
tion Investors | | Mortgage-Backed Securities | | Financing Liability - MSRs Pledged | | Derivatives | | MSRs |
| Year Ended December 31, 2018 | | | | | | | | | | | | | | |
| Beginning balance | $ | 4,715,831 |
| | $ | (4,601,556 | ) | | $ | — |
| | $ | — |
| | $ | 1,592 |
| | $ | (508,291 | ) | | $ | 2,056 |
| | $ | 671,962 |
|
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | |
| | |
|
| Purchases | — |
| | — |
| | — |
| | — |
| | — |
| | (667 | ) | | 95 |
| | 13,712 |
|
| Recognized (assumed) in connection with the acquisition of PHH | — |
| | — |
| | — |
| | — |
| | — |
| | (481,020 | ) | | — |
| | 518,127 |
|
| Issuances (1) | 920,476 |
| | (948,917 | ) | | — |
| | — |
| | — |
| | (279,586 | ) | | — |
| | — |
|
| Consolidation of mortgage-backed securitization trusts | — |
| | — |
| | 28,373 |
| | (26,643 | ) | | — |
| | — |
| | — |
| | — |
|
| Sales | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,240 | ) |
| Settlements | (400,521 | ) | | 391,985 |
| | (1,853 | ) | | 1,828 |
| | — |
| | 211,766 |
| | (371 | ) | | (5,880 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Held for Investment - Reverse Mortgages | | HMBS-Related Borrowings | | Loans Held for Inv. - Restricted for Securitiza-
tion Investors | | Financing Liability - Owed to Securitiza -
tion Investors | | Mortgage-Backed Securities | | Financing Liability - MSRs Pledged | | Derivatives | | MSRs |
| Year Ended December 31, 2018 | | | | | | | | | | | | | | |
| Transfers (to) from: | | | | | | | | | | | | | | | |
| MSRs carried at amortized cost, net of valuation allowance | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 418,925 |
|
| Loans held for sale, at fair value | (1,039 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Receivables, net | (158 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other assets | (411 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | 518,347 |
| | (556,932 | ) | | 26,520 |
| | (24,815 | ) | | — |
| | (549,507 | ) | | (276 | ) | | 938,644 |
|
| | | | | | | | | | | | | | | | |
| Total realized and unrealized gains (losses) (2) | | | | | | | | | | | | | |
| | |
|
| Included in earnings (1): | | | | | | | | | | | | | | | |
| Change in fair value | 238,021 |
| | (221,960 | ) | | — |
| | — |
| | (90 | ) | | 19,269 |
| | (1,102 | ) | | (153,457 | ) |
| Calls and other | — |
| | — |
| | — |
| | — |
| | — |
| | 5,673 |
| | — |
| | — |
|
| Included in Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | 238,021 |
| | (221,960 | ) | | — |
| | — |
| | (90 | ) | | 24,942 |
| | (1,102 | ) | | (153,457 | ) |
| Transfers in and / or out of Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Ending balance | $ | 5,472,199 |
| | $ | (5,380,448 | ) | | $ | 26,520 |
| | $ | (24,815 | ) | | $ | 1,502 |
| | $ | (1,032,856 | ) | | $ | 678 |
| | $ | 1,457,149 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Held for Investment - Reverse Mortgages | | HMBS-Related Borrowings | | Mortgage-Backed Securities | | Financing Liability - MSRs Pledged | | Derivatives | | MSRs |
| Year Ended December 31, 2017 | | | | | | | | | | |
| Beginning balance | $ | 3,565,716 |
| | $ | (3,433,781 | ) | | $ | 8,342 |
| | $ | (477,707 | ) | | $ | 1,836 |
| | $ | 679,256 |
|
| Purchases, issuances, sales and settlements | | | | | | | | | |
| | |
|
| Purchases | — |
| | — |
| | — |
| | — |
| | 655 |
| | — |
|
| Issuances | 1,277,615 |
| | (1,281,543 | ) | | — |
| | (54,601 | ) | | — |
| | (2,214 | ) |
| Sales | — |
| | — |
| | — |
| | — |
| | — |
| | (540 | ) |
| Settlements | (444,388 | ) | | 418,503 |
| | — |
| | 59,190 |
| | (445 | ) | | — |
|
| Transfers (to) from: | | | | | | | | | | | |
| Loans held for sale, at fair value | (3,803 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Receivables, net | (3,583 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Other assets | (1,929 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| | 823,912 |
| | (863,040 | ) | | — |
| | 4,589 |
| | 210 |
| | (2,754 | ) |
| Total realized and unrealized gains (losses) (2) | | | | | | | | | |
| | |
|
| Included in earnings (1): | | | | | | | | | | | |
| Change in fair value | 326,203 |
| | (304,735 | ) | | (6,750 | ) | | (41,282 | ) | | 10 |
| | (4,540 | ) |
| Calls and other | — |
| | — |
| | — |
| | 6,109 |
| | — |
| | — |
|
| Included in Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | 326,203 |
| | (304,735 | ) | | (6,750 | ) | | (35,173 | ) | | 10 |
| | (4,540 | ) |
| Transfers in and / or out of Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Ending balance | $ | 4,715,831 |
| | $ | (4,601,556 | ) | | $ | 1,592 |
| | $ | (508,291 | ) | | $ | 2,056 |
| | $ | 671,962 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Held for Investment - Reverse Mortgages | | HMBS-Related Borrowings | | Mortgage-Backed Securities | | Financing Liability - MSRs Pledged | | Derivatives | | MSRs |
| Year Ended December 31, 2016 | | | | | | | | | | |
| Beginning balance | $ | 2,488,253 |
| | $ | (2,391,362 | ) | | $ | 7,985 |
| | $ | (541,704 | ) | | $ | 2,042 |
| | $ | 761,190 |
|
| Purchases, issuances, sales and settlements | | | | | | | | | |
| | |
| Purchases | — |
| | — |
| | — |
| | — |
| | 1,337 |
| | — |
|
| Issuances | 1,107,046 |
| | (1,086,795 | ) | | — |
| | — |
| | — |
| | (1,548 | ) |
| Sales | — |
| | — |
| | — |
| | — |
| | — |
| | (148 | ) |
| Settlements | (243,596 | ) | | 230,045 |
| | — |
| | 63,997 |
| | (156 | ) | | — |
|
| | 863,450 |
| | (856,750 | ) | | — |
| | 63,997 |
| | 1,181 |
| | (1,696 | ) |
| Total realized and unrealized gains (losses) | | | | | | | | | |
| | |
| Included in earnings | | | | | | | | | | | |
| Change in fair value | 214,013 |
| | (185,669 | ) | | 357 |
| | — |
| | (1,387 | ) | | (80,238 | ) |
| Included in Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | 214,013 |
| | (185,669 | ) | | 357 |
| | — |
| | (1,387 | ) | | (80,238 | ) |
| Transfers in and / or out of Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Ending balance | $ | 3,565,716 |
| | $ | (3,433,781 | ) | | $ | 8,342 |
| | $ | (477,707 | ) | | $ | 1,836 |
| | $ | 679,256 |
|
| | | | | |
| Computer hardware and software | 2 – 3 years |
| |
(1)Buildings | On January 18, 2018, Ocwen received a lump-sum payment of $279.6 million in accordance with terms40 years
|
| Leasehold improvements | Term of the agreements with NRZ. A $16.6 million reduction in the fair valuelease not to exceed useful life |
| Right of Use (ROU) assets | Term of the Financing Liability - MSRs Pledged was recognized in connection with the receipt of the lump-sum payment. See Note 9 — Rightslease not to MSRs. |
| exceed useful life |
(2)Furniture and fixtures | On September 1, 2017, Ocwen transferred MSRs with UPB of $15.9 billion to NRZ and received a lump-sum payment of $54.6 million. A reduction in the fair value of the Financing Liability - MSRs Pledged of $37.6 million was recognized at the time of the initial transfer of the MSRs. See Note 9 — Rights to MSRs.
|
| 5 years |
(3)Office equipment | Total gains (losses) attributable to derivative financial instruments still held at December 31, 2018 and 2017 and 2016 were $(1.1) million, $0.1 million and $0.3 million for 2018, 2017 and 2016, respectively. Total losses for 2018, 2017 and 2016 attributable to MSRs still held at December 31, 2018, 2017 and 2016 were $153.5 million, $4.5 million and $78.3 million, respectively.5 years |
The methodologies thatOur leases include non-cancelable operating leases for premises and equipment. At lease commencement and renewal date, we useestimate the ROU assets and key assumptions thatlease liability at present value using our estimated incremental borrowing rate. We amortize the balance of the ROU assets and recognize interest on the lease liability. Our lease liability represents the present value of the
lease payments and is reduced as we make to estimatecash payments on our lease obligations. Our ROU lease assets are evaluated for impairment in accordance with ASC 360, Premises and Equipment.
Litigation
We monitor our legal matters, including advice from external legal counsel, and periodically perform assessments of these matters for potential loss accrual and disclosure. We establish a liability for settlements, judgments on appeal and filed and/or threatened claims for which we believe that it is probable that a loss has been or will be incurred and the amount can be reasonably estimated. We recognize legal costs associated with loss contingencies in Professional services expense in the consolidated statement of operations as incurred.
Stock-Based Compensation
We initially measure the cost of employee services received in exchange for a stock-based award as the fair value of the award on the grant date. For awards which must be settled in cash and are therefore classified as liabilities rather than equity in the consolidated balance sheet, fair value is subsequently remeasured and fair value changes are reported as compensation expense at each reporting date. For equity awards with a service condition, we recognize the cost as compensation expense ratably over the vesting period. For equity awards with a market condition, we recognize the cost as compensation expense ratably over the expected life of the option that is derived from an options pricing model. When equity awards with a market condition meet their vesting requirements, any unrecognized compensation at the vesting date is recognized ratably over the vesting period. For equity awards with both a market condition and a service condition for vesting, we recognize cost as compensation expense over the requisite service period for each tranche of the award using the graded-vesting method.
Income Taxes
We file consolidated U.S. federal income tax returns. We allocate consolidated income tax among all subsidiaries included in the consolidated return as if each subsidiary filed a separate return or, in certain cases, a consolidated return.
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Additionally, we adjust deferred taxes to reflect estimated tax rate changes. We conduct periodic evaluations to determine whether it is more likely than not that some or all of our deferred tax assets will not be realized. Among the factors considered in this evaluation are estimates of future earnings, the future reversal of temporary differences and the impact of tax planning strategies that we can implement if warranted. We provide a valuation allowance for any portion of our deferred tax assets that, more likely than not, will not be realized. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit, based on the technical merits of the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties related to income tax matters in Income tax expense.
In December 2017, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin (SAB) 118 (as further clarified by FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118), which provides guidance on accounting for the income tax effects of the Tax Cuts and Jobs Act (Tax Act) signed into law by the President of the United States on December 22, 2017. We adopted the guidance of SAB 118 as of December 31, 2017 and finalized our provisional amounts recognized under SAB 118 in the fourth quarter of 2018. See Note 20 — Income Taxes for additional information.
Basic and Diluted Earnings per Share
We calculate basic earnings per share based upon the weighted average number of shares of common stock outstanding during the year. We calculate diluted earnings per share based upon the weighted average number of shares of common stock outstanding and all dilutive potential common shares outstanding during the year. The computation of diluted earnings per share includes the estimated impact of the exercise of the outstanding options to purchase common stock using the treasury stock method.
Going Concern
In accordance with FASB ASC 205-40, Presentation of Financial Statements - Going Concern, we evaluate whether there are conditions that are known or reasonably knowable that raise substantial doubt about our ability to continue as a going concern within one year after the date that our financial statements are issued.
Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The assessment of our ability to meet our future obligations is inherently judgmental, subjective and susceptible to change. Our assessment considers information including, but not limited to, our financial condition, liquidity sources, obligations coming due within one year after the financial statements are issued, funds necessary to maintain current operations and any negative financial trends or other indicators of possible financial difficulty, including adverse regulatory or legal proceedings, adverse counterparty actions or rating agency decisions, and our client concentration.
Based on our evaluation, we have determined that there are no conditions that are known or reasonably knowable that raise substantial doubt about our ability to continue as a going concern within one year after the date that our financial statements for the year ended December 31, 2020 are issued.
Accounting Standards Adopted in 2020
Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04)
This standard provides for optional expedients and other guidance regarding the accounting related to modifications of contracts, hedging relationships and other transactions affected by the expected phase-out of the London Inter-bank Offered Rate (LIBOR) by the end of 2021 (or June 30, 2023 for U.S. dollar LIBOR of certain tenors). This guidance is effective upon issuance in March 2020 through December 31, 2022 and allows for retrospective application to contract modifications as early as January 1, 2020. We elected to retrospectively adopt this ASU as of January 1, 2020 which resulted in no immediate impact on our consolidated financial statements. Although we do not have any hedge accounting relationships, many of our debt facilities and loan agreements incorporate LIBOR as the referenced interest rate. Some of these facilities and loan agreements either mature prior to the end of 2021 (or June 30, 2023) or have terms in place that provide for an alternative to LIBOR upon its phase-out. We do not anticipate that this standard will have a material impact on our consolidated financial statements.
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13 and ASU 2019-04)
This ASU requires the remeasurement 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 the 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.
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 consolidated financial statements.
Compensation - Retirement Benefits - Defined Benefit Plans: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14)
This ASU modifies the disclosure requirements for defined benefit plans in FASB ASC Subtopic 715-20, Compensation-Retirement Benefits-Defined Benefit Plans-General. The main provisions in this ASU include removal of the following disclosure requirements: 1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, 2) the amount and timing of plan assets expected to be returned to the employer, 3) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, and 4) the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.
This ASU adds disclosure requirements to report 1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and 2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU clarifies disclosure requirements in paragraph 715-20-50-3, which state that the 1) projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and liabilities measured at2) accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets should be disclosed for defined benefit plans.
Our adoption of this standard on January 1, 2020 did not have a material impact on our consolidated financial statements. Upon adoption, we elected to apply the amendments in this ASU prospectively.
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 consolidated financial statements.
Accounting Standards Issued but Not Adopted in 2020
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 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.
Our adoption of this standard was effective for us on January 1, 2021 and did not have a material impact on our consolidated financial statements.
Note 2 — Business Acquisition
On October 4, 2018, we completed our acquisition of PHH, a non-bank servicer with established servicing and origination recapture capabilities. As a result of the acquisition, PHH became a wholly owned subsidiary of Ocwen.
The acquisition has been accounted for under the acquisition method of accounting pursuant to ASC 805, Business Combinations. Assets acquired and liabilities assumed are recorded at their fair value as of the date of acquisition based on management’s estimates using currently available information. The results of PHH operations are included in Ocwen’s consolidated statements of operations from the date of acquisition. For U.S. income tax purposes, the acquisition of PHH is treated as a stock purchase.
The aggregate consideration paid to the former holders of PHH common stock was $358.4 million in cash and was funded by a combination of PHH cash on hand of $325.0 million and Ocwen cash on hand of $33.4 million. At the closing, there were 32,581,485 shares of PHH common stock, par value $0.01, outstanding, all of which were converted into the right to receive $11.00 in cash per share. In connection with the acquisition, all outstanding options to purchase PHH common stock and all PHH equity awards with performance-based vesting conditions were cancelled without any consideration or cash payment. All other PHH equity awards were cancelled in exchange for a cash payment equal to $11.00 per share underlying the award.
We recognized a bargain purchase gain, net of tax, of $63.7 million ($64.0 million in 2018) in connection with the acquisition. The bargain purchase gain results from the fair value of PHH’s net assets exceeding the purchase price we paid. The purchase price we negotiated contemplated that PHH would incur losses after the acquisition date. To the extent those losses are realized, they are included in our consolidated statements of operations.
Costs incurred in connection with the transaction are expensed as incurred and are reported in Professional services in the consolidated statements of operations. Such costs were $13.7 million during 2018.
Operations
The following table presents the results of operations of PHH that are included in our consolidated statements of operations from the acquisition date of October 4, 2018 through December 31, 2018:
| | | | | | | | |
| Revenues | | $ | 72,487 | |
| Expenses | | 84,877 | |
| Other income (expense) | | (19,132) | |
| Income tax benefit | | (6,711) | |
| Net loss from continuing operations | | $ | (24,811) | |
Pro Forma Results of Operations (Unaudited)
The following table presents supplemental pro forma information for Ocwen as if the PHH Acquisition occurred on January 1, 2017. Pro forma adjustments for 2018 include:
•Increase in MSR valuation adjustments, net of $24.4 million to conform the accounting for MSRs to the valuation policies of Ocwen related to acquired MSRs;
•Adjust interest expense for a total net impact of $30.6 million. The pro forma adjustments primarily pertain to fair value adjustments of $31.4 million related to the assumed MSR secured liability using valuation assumptions consistent with Ocwen's methodology;
•Adjust depreciation expense to amortize internally developed software acquired from PHH on a recurring or non-recurringstraight-line basis based on a useful life of three years;
•Adjust revenue for a total net increase of $120.6 million which primarily include adjusting servicing and those disclosed,subservicing fees for $127.7 million to gross up activity related to PHH MSRs sold accounted for as secured borrowings consistent with Ocwen’s presentation. The offset to these adjustments are interest income and interest expense, with no net effect on earnings.
•Income tax benefit of $0.3 million to record lower 2018 current federal tax under the new base erosion and anti-abuse tax (BEAT) provision of the Tax Act assuming Ocwen and PHH would file a consolidated federal tax return beginning January 1, 2017 and the benefit of the additional acquisition-related charges as if they had been incurred in 2017, based on management’s estimate of the blended applicable statutory tax rates and observing the continued need for a valuation allowance.
The following proforma adjustments were reported as if the acquisition had occurred in 2017 rather than 2018:
•Report the bargain purchase gain of $63.7 million as if the acquisition had occurred in 2017 rather than 2018;
•Report Ocwen and PHH acquisition-related charges of $18.5 million for professional services as if they had been incurred in 2017 rather than 2018;
| | | | | |
| 2018 |
| (Unaudited) |
| Revenues | $ | 1,305,972 | |
| Loss from continuing operations, net of tax attributable to Ocwen common stockholders | $ | (201,382) | |
| |
The pro forma consolidated results presented above are not indicative of what Ocwen’s consolidated results would have been had we completed the acquisition on the date indicated due to a number of factors, including but not carried,limited to expected reductions in servicing, origination and overhead costs through the realization of targeted cost synergies and improved
economies of scale, the impact of incremental costs to integrate the two companies and differences in servicing practices and cost structures between Ocwen and PHH. In addition, the pro forma consolidated results do not purport to project combined future operating results of Ocwen and PHH nor do they reflect the expected realization of any cost savings associated with the acquisition of PHH.
Note 3 — Severance and Restructuring Charges
In 2020, we executed certain cost re-engineering initiatives to generate further cost savings, some of which qualify as restructuring charges under GAAP, including the partial abandonment of certain leased properties and additional severance costs. As a result of these initiatives, we accelerated the depreciation of facility lease ROU assets and leasehold improvements by $3.3 million, recorded $6.3 million of facility and other related exit costs, and accrued $3.4 million of employee severance costs. At December 31, 2020, our remaining facility exit cost liability and employee severance cost liability are $3.5 million and $0.2 million, respectively, and are included in Other accrued expenses, a component of Other liabilities. The majority of expenses were incurred within the Corporate Items and Other segment.
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 PHH 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 fair valueDecember 31, 2020 and 2019 is $2.0 million and $11.9 million, respectively, and is included in Other accrued expenses, a component of Other liabilities.
The following table provides a summary of the aggregate activity of the liability for the re-engineering plan costs incurred in the year ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| Employee-related | | Facility-related | | Other | | Total |
| Balance at January 1, 2019 | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Charges | 35,704 | | | 10,133 | | | 19,133 | | | 64,970 | |
| Payments / Other | (29,449) | | | (7,202) | | | (16,414) | | | (53,065) | |
| | | | | | | |
| Balance at December 31, 2019 | 6,255 | | | 2,931 | | | 2,719 | | | 11,905 | |
| Payments | (6,247) | | | (960) | | | (2,719) | | | (9,925) | |
| Balance at December 31, 2020 | $ | 8 | | | $ | 1,971 | | | $ | 0 | | | $ | 1,980 | |
The expenses were all incurred within the Corporate Items and Other segment. Employee-related costs and facility-related costs are described below.reported in Compensation and benefits expense and Occupancy and equipment expense, respectively, in the consolidated statements of operations. Other costs are primarily reported in Professional services expense and Other expenses.
Note 4 — 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 transfers of financial assets 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 14 — Borrowings.
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.
Loans Held for Sale
Loans held for sale include forward and reverse mortgage loans that we do not intend to hold until maturity. We report loans held for sale at either fair value or the lower of cost or fair value computed on an aggregate basis. Residential forward and reverse mortgage loans that we intend to sell are carried at fair value as a result of a fair value election. In addition, effective
January 1, 2020, repurchased loans by our Servicing business, including those loans we repurchase from Ginnie Mae guaranteed securitizations pursuant to Ginnie Mae servicing guidelines, are accounted for under the fair value election.For loans that we elected to measure at fair value on a recurring basis, we report changes in fair value in Gain on loans held for sale, net in the consolidated statements of operations in the period in which the changes occur. These loans are expected to be sold into the secondary market to the GSEs, into Ginnie Mae guaranteed securitizations or to third-party investors. For the legacy portfolio of loans measured at the lower of cost or fair value, we account for any excess of cost over fair value as a valuation allowance and include changes in the valuation allowance in Other, net, in the consolidated statements of operations in the period in which the change occurs.
We report any gain or loss on the transfer of loans held for sale in Gain on loans held for sale, net in the consolidated statements of operations along with the changes in fair value of the loans and the gain or loss on any related derivatives. When loans are sold or securitized with servicing retained, the gain on sale includes the MSR retained as non-cash proceeds at the date of sale. We include all changes in loans held for sale and related derivative balances in operating activities in the consolidated statements of cash flows.
We accrue interest income as earned. We place loans on non-accrual status after any portion of principal or interest has been delinquent for more than 89 days, or earlier if management determines the borrower is unable to continue performance. When we place a loan on non-accrual status, we reverse the interest that we have accrued but not yet received. We return loans to accrual status only when we reinstate the loan and there is no significant uncertainty as to collectability.
Loans Held for Investment
Newly originated reverse mortgage loans that are insured by the FHA and pooled into Ginnie Mae guaranteed securities that we sell into the secondary market with servicing rights retained are classified as loans held for investment. We have elected to measure these loans at fair value, with changes in fair value reported in Reverse mortgage revenue, net in the consolidated statements of operations. Loan transfers in these Ginnie Mae securitizations do not meet the definition of a participating interest and as a result, the transfers of the reverse mortgages do not qualify for sale accounting. Therefore, we account for these transfers as financings, with the reverse mortgages classified as Loans held for investment, at fair value, on our consolidated balance sheets, with no gain or loss recognized on the transfer.
Effective January 1, 2019, we elected to fair value future draw commitments for HECM loans purchased or originated after December 31, 2018. The value of future draw commitments for HECM loans purchased or originated before January 1, 2019 were recognized as the draws were securitized or sold. Effective January 1, 2020, in connection with the adoption of Accounting Standard Update (ASU) 2016-13 and ASU 2019-04: Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (CECL), we made an irrevocable fair value election on all future draw commitments for HECM loans that were purchased or originated before January 1, 2019. We recorded cumulative-effect adjustments of $47.0 million to retained earnings as of January 1, 2020, to reflect the excess of the fair value over the carrying amount.
Upfront costs and fees related to loans held for investment, including broker fees, are recognized in Reverse mortgage revenue, net in the statement of operations as incurred and are not capitalized. Premiums on loans purchased via the correspondent channel are capitalized upon origination because they represent part of the purchase price. However, the loans are subsequently measured at fair value on a recurring basis.
We record the proceeds from the transfer of assets as secured borrowings (HMBS-related borrowings) in Financing liabilities and recognize no gain or loss on the transfer. We measure the HECM loans and HMBS-related borrowings at fair value on a recurring basis. The changes in fair value of the HECM loans and HMBS-related borrowings are included in Reverse mortgage revenue, net in our consolidated statements of operations. Included in net fair value changes on the HECM loans and related HMBS borrowings are the net interest income that we expect to be collected on the HECM loans and the interest expense on the HMBS-related borrowings. In addition, reverse mortgage revenue, net includes the fair value changes of the interest rate lock commitments related to reverse mortgage loans. We report originations and collections of HECM loans in investing activities in the consolidated statements of cash flows. We report net fair value gains on HECM loans and the related HMBS borrowings as an adjustment to the net cash provided by or used in operating activities in the consolidated statements of cash flows. Proceeds from securitizations of HECM loans and payments on HMBS-related borrowings are included in financing activities in the consolidated statements of cash flows.
Transfers of Financial Assets and MSRs
We securitize, sell and service forward and reverse residential mortgage loans. Securitization transactions typically involve the use of VIEs and are accounted for either as sales or as secured financings. We typically retain economic interests in the securitized assets in the form of servicing rights and obligations. In order to efficiently finance our assets and operations and create liquidity, we may sell servicing advances, MSRs or the right to receive certain servicing fees relating to MSRs (Rights to MSRs).
In order to determine whether or not a VIE is required to be consolidated, we consider our ongoing involvement with the VIE. In circumstances where we have both the power to direct the activities that most significantly impact the performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be significant, we would conclude that we would consolidate the entity, which precludes us from recording an accounting sale in connection with the transfer of the financial assets. In the case of a consolidated VIE, we continue to report the underlying residential mortgage loans or servicing advances, and we record the securitized debt on our consolidated balance sheet.
In the case of transfers where either one or both of the power or economic criteria above are not met, we evaluate whether a sale has occurred for accounting purposes. In order to recognize a sale, the transferred assets must be legally isolated, not be constrained by restrictions from further transfer and be deemed to be beyond our control. If the transfer does not meet any of these three criteria, the transaction is accounted for consistent with a secured financing. In certain situations, we may have continuing involvement in transferred loans through our retained servicing. Transactions involving retained servicing would still be eligible for sale accounting, as we have ceded effective control of these loans to the purchaser. Subsequent to the determination that a transaction does not meet the accounting sale criteria, we may determine that we meet the criteria. In the event we subsequently meet the accounting sale criteria, we derecognize the transferred assets and related liabilities.
In connection with the Ginnie Mae early buyout program, our agreements provide either that: (a) we have the right, but not the obligation, to repurchase previously transferred mortgage loans under certain conditions, including the mortgage loans becoming eligible for pooling under a program sponsored by Ginnie Mae; or (b) we have the obligation to repurchase previously transferred mortgage loans that have been subject to a successful trial modification before any permanent modification is made. Once these conditions are met, we have effectively regained control over the mortgage loan(s), and under GAAP, must re-recognize the loans on our consolidated balance sheets and establish a corresponding repurchase liability. With respect to those loans that we have the right, but not the obligation, to repurchase under the applicable agreement, this requirement applies regardless of whether we have any intention to repurchase the loan. We re-recognize the loans in Other assets and a corresponding liability in Other liabilities.
In the case of transfers of MSRs and Rights to MSRs where we retain the right to subservice, we defer any related gain or loss and amortize the balance over the life of the subservicing agreement.
Gains or losses on off-balance sheet securitizations take into consideration any retained interests, including servicing rights and representation and warranty obligations, both of which are initially recorded at fair value at the date of sale in Gain on loans held for sale, net, in our consolidated statements of operations.
Derivative Financial Instruments
We use derivative instruments to manage the fair value changes in our MSRs, interest rate lock commitments and loan portfolios which are exposed to interest rate risk. We do not use derivative instruments for trading or speculative purposes. We recognize all derivative instruments at fair value on our consolidated balance sheets in Other assets and Other liabilities. Derivative instruments are generally entered into as economic hedges against changes in the fair value of a recognized asset or liability and are not designated as hedges for accounting purposes. We generally report the changes in fair value of such derivative instruments in the same line item in the consolidated statement of operations as the changes in fair value of the related asset or liability. For all other derivative instruments not designated as a hedging instrument, we report changes in fair value in Other, net.
Premises and Equipment, Leases
We report premises and equipment at cost and, except for land, depreciate them over their estimated useful lives on a straight-line basis as follows:
| | | | | |
| Computer hardware and software | 2 – 3 years |
| |
| Buildings | 40 years |
| Leasehold improvements | Term of the lease not to exceed useful life |
| Right of Use (ROU) assets | Term of the lease not to exceed useful life |
| Furniture and fixtures | 5 years |
| Office equipment | 5 years |
Our leases include non-cancelable operating leases for premises and equipment. At lease commencement and renewal date, we estimate the ROU assets and lease liability at present value using our estimated incremental borrowing rate. We amortize the balance of the ROU assets and recognize interest on the lease liability. Our lease liability represents the present value of the
lease payments and is reduced as we make cash payments on our lease obligations. Our ROU lease assets are evaluated for impairment in accordance with ASC 360, Premises and Equipment.
Litigation
We monitor our legal matters, including advice from external legal counsel, and periodically perform assessments of these matters for potential loss accrual and disclosure. We establish a liability for settlements, judgments on appeal and filed and/or threatened claims for which we believe that it is probable that a loss has been or will be incurred and the amount can be reasonably estimated. We recognize legal costs associated with loss contingencies in Professional services expense in the consolidated statement of operations as incurred.
Stock-Based Compensation
We initially measure the cost of employee services received in exchange for a stock-based award as the fair value of the award on the grant date. For awards which must be settled in cash and are therefore classified as liabilities rather than equity in the consolidated balance sheet, fair value is subsequently remeasured and fair value changes are reported as compensation expense at each reporting date. For equity awards with a service condition, we recognize the cost as compensation expense ratably over the vesting period. For equity awards with a market condition, we recognize the cost as compensation expense ratably over the expected life of the option that is derived from an options pricing model. When equity awards with a market condition meet their vesting requirements, any unrecognized compensation at the vesting date is recognized ratably over the vesting period. For equity awards with both a market condition and a service condition for vesting, we recognize cost as compensation expense over the requisite service period for each tranche of the award using the graded-vesting method.
Income Taxes
We file consolidated U.S. federal income tax returns. We allocate consolidated income tax among all subsidiaries included in the consolidated return as if each subsidiary filed a separate return or, in certain cases, a consolidated return.
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Additionally, we adjust deferred taxes to reflect estimated tax rate changes. We conduct periodic evaluations to determine whether it is more likely than not that some or all of our deferred tax assets will not be realized. Among the factors considered in this evaluation are estimates of future earnings, the future reversal of temporary differences and the impact of tax planning strategies that we can implement if warranted. We provide a valuation allowance for any portion of our deferred tax assets that, more likely than not, will not be realized. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit, based on the technical merits of the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties related to income tax matters in Income tax expense.
In December 2017, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin (SAB) 118 (as further clarified by FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118), which provides guidance on accounting for the income tax effects of the Tax Cuts and Jobs Act (Tax Act) signed into law by the President of the United States on December 22, 2017. We adopted the guidance of SAB 118 as of December 31, 2017 and finalized our provisional amounts recognized under SAB 118 in the fourth quarter of 2018. See Note 20 — Income Taxes for additional information.
Basic and Diluted Earnings per Share
We calculate basic earnings per share based upon the weighted average number of shares of common stock outstanding during the year. We calculate diluted earnings per share based upon the weighted average number of shares of common stock outstanding and all dilutive potential common shares outstanding during the year. The computation of diluted earnings per share includes the estimated impact of the exercise of the outstanding options to purchase common stock using the treasury stock method.
Going Concern
In accordance with FASB ASC 205-40, Presentation of Financial Statements - Going Concern, we evaluate whether there are conditions that are known or reasonably knowable that raise substantial doubt about our ability to continue as a going concern within one year after the date that our financial statements are issued.
Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The assessment of our ability to meet our future obligations is inherently judgmental, subjective and susceptible to change. Our assessment considers information including, but not limited to, our financial condition, liquidity sources, obligations coming due within one year after the financial statements are issued, funds necessary to maintain current operations and any negative financial trends or other indicators of possible financial difficulty, including adverse regulatory or legal proceedings, adverse counterparty actions or rating agency decisions, and our client concentration.
Based on our evaluation, we have determined that there are no conditions that are known or reasonably knowable that raise substantial doubt about our ability to continue as a going concern within one year after the date that our financial statements for the year ended December 31, 2020 are issued.
Accounting Standards Adopted in 2020
Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04)
This standard provides for optional expedients and other guidance regarding the accounting related to modifications of contracts, hedging relationships and other transactions affected by the expected phase-out of the London Inter-bank Offered Rate (LIBOR) by the end of 2021 (or June 30, 2023 for U.S. dollar LIBOR of certain tenors). This guidance is effective upon issuance in March 2020 through December 31, 2022 and allows for retrospective application to contract modifications as early as January 1, 2020. We elected to retrospectively adopt this ASU as of January 1, 2020 which resulted in no immediate impact on our consolidated financial statements. Although we do not have any hedge accounting relationships, many of our debt facilities and loan agreements incorporate LIBOR as the referenced interest rate. Some of these facilities and loan agreements either mature prior to the end of 2021 (or June 30, 2023) or have terms in place that provide for an alternative to LIBOR upon its phase-out. We do not anticipate that this standard will have a material impact on our consolidated financial statements.
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13 and ASU 2019-04)
This ASU requires the remeasurement 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 the 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.
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 consolidated financial statements.
Compensation - Retirement Benefits - Defined Benefit Plans: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14)
This ASU modifies the disclosure requirements for defined benefit plans in FASB ASC Subtopic 715-20, Compensation-Retirement Benefits-Defined Benefit Plans-General. The main provisions in this ASU include removal of the following disclosure requirements: 1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, 2) the amount and timing of plan assets expected to be returned to the employer, 3) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, and 4) the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.
This ASU adds disclosure requirements to report 1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and 2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU clarifies disclosure requirements in paragraph 715-20-50-3, which state that the 1) projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and 2) accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets should be disclosed for defined benefit plans.
Our adoption of this standard on January 1, 2020 did not have a material impact on our consolidated financial statements. Upon adoption, we elected to apply the amendments in this ASU prospectively.
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 consolidated financial statements.
Accounting Standards Issued but Not Adopted in 2020
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 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.
Our adoption of this standard was effective for us on January 1, 2021 and did not have a material impact on our consolidated financial statements.
Note 2 — Business Acquisition
On October 4, 2018, we completed our acquisition of PHH, a non-bank servicer with established servicing and origination recapture capabilities. As a result of the acquisition, PHH became a wholly owned subsidiary of Ocwen.
The acquisition has been accounted for under the acquisition method of accounting pursuant to ASC 805, Business Combinations. Assets acquired and liabilities assumed are recorded at their fair value as of the date of acquisition based on management’s estimates using currently available information. The results of PHH operations are included in Ocwen’s consolidated statements of operations from the date of acquisition. For U.S. income tax purposes, the acquisition of PHH is treated as a stock purchase.
The aggregate consideration paid to the former holders of PHH common stock was $358.4 million in cash and was funded by a combination of PHH cash on hand of $325.0 million and Ocwen cash on hand of $33.4 million. At the closing, there were 32,581,485 shares of PHH common stock, par value $0.01, outstanding, all of which were converted into the right to receive $11.00 in cash per share. In connection with the acquisition, all outstanding options to purchase PHH common stock and all PHH equity awards with performance-based vesting conditions were cancelled without any consideration or cash payment. All other PHH equity awards were cancelled in exchange for a cash payment equal to $11.00 per share underlying the award.
We recognized a bargain purchase gain, net of tax, of $63.7 million ($64.0 million in 2018) in connection with the acquisition. The bargain purchase gain results from the fair value of PHH’s net assets exceeding the purchase price we paid. The purchase price we negotiated contemplated that PHH would incur losses after the acquisition date. To the extent those losses are realized, they are included in our consolidated statements of operations.
Costs incurred in connection with the transaction are expensed as incurred and are reported in Professional services in the consolidated statements of operations. Such costs were $13.7 million during 2018.
Operations
The following table presents the results of operations of PHH that are included in our consolidated statements of operations from the acquisition date of October 4, 2018 through December 31, 2018:
| | | | | | | | |
| Revenues | | $ | 72,487 | |
| Expenses | | 84,877 | |
| Other income (expense) | | (19,132) | |
| Income tax benefit | | (6,711) | |
| Net loss from continuing operations | | $ | (24,811) | |
Pro Forma Results of Operations (Unaudited)
The following table presents supplemental pro forma information for Ocwen as if the PHH Acquisition occurred on January 1, 2017. Pro forma adjustments for 2018 include:
•Increase in MSR valuation adjustments, net of $24.4 million to conform the accounting for MSRs to the valuation policies of Ocwen related to acquired MSRs;
•Adjust interest expense for a total net impact of $30.6 million. The pro forma adjustments primarily pertain to fair value adjustments of $31.4 million related to the assumed MSR secured liability using valuation assumptions consistent with Ocwen's methodology;
•Adjust depreciation expense to amortize internally developed software acquired from PHH on a straight-line basis based on a useful life of three years;
•Adjust revenue for a total net increase of $120.6 million which primarily include adjusting servicing and subservicing fees for $127.7 million to gross up activity related to PHH MSRs sold accounted for as secured borrowings consistent with Ocwen’s presentation. The offset to these adjustments are interest income and interest expense, with no net effect on earnings.
•Income tax benefit of $0.3 million to record lower 2018 current federal tax under the new base erosion and anti-abuse tax (BEAT) provision of the Tax Act assuming Ocwen and PHH would file a consolidated federal tax return beginning January 1, 2017 and the benefit of the additional acquisition-related charges as if they had been incurred in 2017, based on management’s estimate of the blended applicable statutory tax rates and observing the continued need for a valuation allowance.
The following proforma adjustments were reported as if the acquisition had occurred in 2017 rather than 2018:
•Report the bargain purchase gain of $63.7 million as if the acquisition had occurred in 2017 rather than 2018;
•Report Ocwen and PHH acquisition-related charges of $18.5 million for professional services as if they had been incurred in 2017 rather than 2018;
| | | | | |
| 2018 |
| (Unaudited) |
| Revenues | $ | 1,305,972 | |
| Loss from continuing operations, net of tax attributable to Ocwen common stockholders | $ | (201,382) | |
| |
The pro forma consolidated results presented above are not indicative of what Ocwen’s consolidated results would have been had we completed the acquisition on the date indicated due to a number of factors, including but not limited to expected reductions in servicing, origination and overhead costs through the realization of targeted cost synergies and improved
economies of scale, the impact of incremental costs to integrate the two companies and differences in servicing practices and cost structures between Ocwen and PHH. In addition, the pro forma consolidated results do not purport to project combined future operating results of Ocwen and PHH nor do they reflect the expected realization of any cost savings associated with the acquisition of PHH.
Note 3 — Severance and Restructuring Charges
In 2020, we executed certain cost re-engineering initiatives to generate further cost savings, some of which qualify as restructuring charges under GAAP, including the partial abandonment of certain leased properties and additional severance costs. As a result of these initiatives, we accelerated the depreciation of facility lease ROU assets and leasehold improvements by $3.3 million, recorded $6.3 million of facility and other related exit costs, and accrued $3.4 million of employee severance costs. At December 31, 2020, our remaining facility exit cost liability and employee severance cost liability are $3.5 million and $0.2 million, respectively, and are included in Other accrued expenses, a component of Other liabilities. The majority of expenses were incurred within the Corporate Items and Other segment.
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 PHH 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 December 31, 2020 and 2019 is $2.0 million and $11.9 million, respectively, and is included in Other accrued expenses, a component of Other liabilities.
The following table provides a summary of the aggregate activity of the liability for the re-engineering plan costs incurred in the year ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| Employee-related | | Facility-related | | Other | | Total |
| Balance at January 1, 2019 | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Charges | 35,704 | | | 10,133 | | | 19,133 | | | 64,970 | |
| Payments / Other | (29,449) | | | (7,202) | | | (16,414) | | | (53,065) | |
| | | | | | | |
| Balance at December 31, 2019 | 6,255 | | | 2,931 | | | 2,719 | | | 11,905 | |
| Payments | (6,247) | | | (960) | | | (2,719) | | | (9,925) | |
| Balance at December 31, 2020 | $ | 8 | | | $ | 1,971 | | | $ | 0 | | | $ | 1,980 | |
The expenses were all incurred within the Corporate Items and Other segment. Employee-related costs and facility-related costs are reported in Compensation and benefits expense and Occupancy and equipment expense, respectively, in the consolidated statements of operations. Other costs are primarily reported in Professional services expense and Other expenses.
Note 4 — 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 transfers of financial assets 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 14 — Borrowings.
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:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Proceeds received from securitizations | $ | 7,533,284 | | | $ | 1,248,837 | | | $ | 1,290,682 | |
| Servicing fees collected (1) | 47,230 | | | 50,326 | | | 45,046 | |
| Purchases of previously transferred assets, net of claims reimbursed | (6,933) | | | (4,602) | | | (4,395) | |
| $ | 7,573,581 | | | $ | 1,294,561 | | | $ | 1,331,333 | |
(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 consolidated statements of operations.
In connection with these transfers, we retained MSRs of $68.7 million, $7.5 million and $8.3 million during 2020, 2019 and 2018, 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.
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:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Carrying value of assets | | | |
| MSRs, at fair value | $ | 137,029 | | | $ | 109,581 | |
| | | |
| Advances | 143,361 | | | 141,829 | |
| UPB of loans transferred | 18,062,856 | | | 14,490,984 | |
| Maximum exposure to loss | $ | 18,343,246 | | | $ | 14,742,394 | |
At December 31, 2020 and 2019, 6.8% 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 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.
Financings of Advances using SPEs
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 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 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 consolidated balance sheets.
MSR Financings using SPEs
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 SPEs (trusts) were established in connection with this facility. On July 1, 2019, we also 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. On May 7, 2020 we renewed the facility through June 30, 2021 and reduced the borrowing capacity from $300.0 million to $250.0 million. We pledged the membership interest of the depositor for our OMART advance financing facility as additional collateral to this facility.
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 secured by a lien on the related Agency MSRs. In addition, Ocwen guarantees the obligations under the facility.
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:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| | | |
| MSRs pledged (MSRs, at fair value) | $ | 476,371 | | | $ | 245,533 | |
| Unamortized deferred lender fees (Other assets) | 1,183 | | | 946 | |
| Debt service account (Restricted cash) | 211 | | | 100 | |
| Outstanding borrowings (Other secured borrowings, net) | 210,755 | | | 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:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| | | |
| MSRs pledged (MSRs, at fair value) | $ | 129,204 | | | $ | 146,215 | |
| Debt service account (Restricted cash) | 2,385 | | | 3,002 | |
| Outstanding borrowings (Other secured borrowings, net) | 68,313 | | | 94,395 | |
| Unamortized debt issuance costs (Other secured borrowings, net) | 894 | | | 1,208 | |
| | | |
Mortgage-Backed Securitizations
The table below presents the carrying value and classification of the assets and liabilities of consolidated mortgage-backed securitization trusts included in our consolidated balance sheets as a result of residual securities issued we acquired in 2018 which were issued by the trusts.
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Loans held for investment, at fair value - Restricted for securitization investors | $ | 9,770 | | | $ | 23,342 | |
| Financing liability - Owed to securitization investors, at fair value | 9,770 | | | 22,002 | |
We 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.
Holders of the debt issued by the consolidated 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.
In June 2020, we sold beneficial interests consisting of residual securities with a fair value of $1.2 million that we held in one of the consolidated securitization trusts. Effective with the sale, Ocwen deconsolidated the trust as it is no longer the primary beneficiary.
Note 5 — 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | | 2020 | | 2019 |
| | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Financial assets: | | | | | | | | | |
| Loans held for sale | | | | | | | | | |
| Loans held for sale, at fair value (a) (e) | 3, 2 | | $ | 366,364 | | | $ | 366,364 | | | $ | 208,752 | | | $ | 208,752 | |
| Loans held for sale, at lower of cost or fair value (b) | 3 | | 21,472 | | | 21,472 | | | 66,517 | | | 66,517 | |
| Total Loans held for sale | | | $ | 387,836 | | | $ | 387,836 | | | $ | 275,269 | | | $ | 275,269 | |
| Loans held for investment | | | | | | | | | |
| Loans held for investment - Reverse mortgages (a) | 3 | | $ | 6,997,127 | | | $ | 6,997,127 | | | $ | 6,269,596 | | | $ | 6,269,596 | |
| Loans held for investment - Restricted for securitization investors (a) | 3 | | 9,770 | | | 9,770 | | | 23,342 | | | 23,342 | |
| Total loans held for investment | | | 7,006,897 | | | 7,006,897 | | | 6,292,938 | | | 6,292,938 | |
| | | | | | | | | |
| Advances, net (c) | 3 | | 828,239 | | | 828,239 | | | 1,056,523 | | | 1,056,523 | |
| Receivables, net (c) | 3 | | 187,665 | | | 187,665 | | | 201,220 | | | 201,220 | |
| Mortgage-backed securities (a) | 3 | | 2,019 | | | 2,019 | | | 2,075 | | | 2,075 | |
| | | | | | | | | |
| Corporate bonds (a) | 2 | | 211 | | | 211 | | | 441 | | | 441 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | | 2020 | | 2019 |
| | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Financial liabilities: | | | | | | | | | |
| Advance match funded liabilities (c) | 3 | | $ | 581,288 | | | $ | 581,997 | | | $ | 679,109 | | | $ | 679,507 | |
| Financing liabilities: | | | | | | | | | |
| HMBS-related borrowings (a) | 3 | | $ | 6,772,711 | | | $ | 6,772,711 | | | $ | 6,063,435 | | | $ | 6,063,435 | |
| Financing liability - MSRs pledged (Rights to MSRs) (a) | 3 | | 566,952 | | | 566,952 | | | 950,593 | | | 950,593 | |
| Financing liability - Owed to securitization investors (a) | 3 | | 9,770 | | | 9,770 | | | 22,002 | | | 22,002 | |
| | | | | | | | | |
| Total Financing liabilities | | | $ | 7,349,433 | | | $ | 7,349,433 | | | $ | 7,036,030 | | | $ | 7,036,030 | |
| Other secured borrowings: | | | | | | | | | |
| Senior secured term loan (c) (d) | 2 | | $ | 179,776 | | | $ | 184,639 | | | $ | 322,758 | | | $ | 324,643 | |
| Mortgage warehouse and MSR financing (c) | 3 | | 889,385 | | | 858,573 | | | 703,033 | | | 686,146 | |
| Total Other secured borrowings | | | $ | 1,069,161 | | | $ | 1,043,212 | | | $ | 1,025,791 | | | $ | 1,010,789 | |
| Senior notes: | | | | | | | | | |
| Senior unsecured notes (c) (d) | 2 | | $ | 21,357 | | | $ | 20,625 | | | $ | 21,046 | | | $ | 13,821 | |
| Senior secured notes (c) (d) | 2 | | 290,541 | | | 300,254 | | | 290,039 | | | 256,201 | |
| Total Senior notes | | | $ | 311,898 | | | $ | 320,879 | | | $ | 311,085 | | | $ | 270,022 | |
| | | | | | | | | |
| Derivative financial instrument assets (liabilities) | | | | | | | | | |
| Interest rate lock commitments (a) (f) | 3, 2 | | $ | 22,706 | | | $ | 22,706 | | | $ | 4,878 | | | $ | 4,878 | |
| | | | | | | | | |
| Forward trades - Loans held for sale (a) | 1 | | (50) | | | (50) | | | (21) | | | (21) | |
| TBA / Forward mortgage-backed securities (MBS) trades and futures- MSR hedging (a) | 1 | | (4,554) | | | (4,554) | | | 1,121 | | | 1,121 | |
| Derivatives futures (a) | 1 | | 504 | | | 504 | | | 0 | | | 0 | |
| | | | | | | | | |
| | | | | | | | | |
| MSRs (a) | 3 | | $ | 1,294,817 | | | $ | 1,294,817 | | | $ | 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 14 — Borrowings for additional information.
(e)Loans repurchased from Ginnie Mae securitizations with a fair value of $51.1 million at December 31, 2020 are classified as Level 3. The remaining balance of loans held for sale at fair value at December 31, 2020 is classified as Level 2. The entire balance of Loans held for sale at fair value at December 31, 2019 was classified as Level 2.
(f)Level 3 at December 31, 2020 and Level 2 at December 31, 2019.
The following tables present a reconciliation of the changes in fair value of Level 3 assets and liabilities that we measure at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitiza -
tion Investors | | Loans Held for Sale - Fair Value | | Mortgage-Backed Securities | | | | IRLCs | | | | |
| Year Ended December 31, 2020 | | | | | | | | | | | | | | | | | | |
| Beginning balance | | | | | $ | 23,342 | | | $ | (22,002) | | | 0 | | | $ | 2,075 | | | | | $ | 0 | | | | | |
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | | | | | | | |
| Purchases | | | | | — | | | — | | | 162,589 | | | — | | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Issuances | | | | | — | | | — | | | — | | | — | | | | | 286,992 | | | | | |
| De-consolidation of mortgage-backed securitization trusts | | | | | (10,715) | | | 9,519 | | | — | | | — | | | | | — | | | | | |
| Sales | | | | | — | | | — | | | (137,780) | | | — | | | | | — | | | | | |
| Settlements | | | | | (2,857) | | | 2,857 | | | — | | | — | | | | | — | | | | | |
| Transfers to: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Loans held for sale, at fair value | | | | | — | | | — | | | — | | | — | | | | | (285,198) | | | | | |
| Receivables, net | | | | | — | | | — | | | (969) | | | — | | | | | 0 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | (13,572) | | | 12,376 | | | 23,840 | | | 0 | | | | | 1,794 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Change in fair value included in earnings | | | | | — | | | (144) | | | 1,650 | | | (56) | | | | | 10,434 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Transfers in and / or out of Level 3 | | | | | — | | | — | | | 25,582 | | | — | | | | | 10,478 | | | | | |
| Ending balance | | | | | $ | 9,770 | | | $ | (9,770) | | | $ | 51,072 | | | $ | 2,019 | | | | | $ | 22,706 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitiza -
tion Investors | | Mortgage-Backed Securities | | | | Derivatives - Interest Rate Caps | | | | |
| Year Ended December 31, 2019 | | | | | | | | | | | | | | | | |
| Beginning balance | | | | | $ | 26,520 | | | $ | (24,815) | | | $ | 1,502 | | | | | $ | 678 | | | | | |
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | | | | | |
| Purchases | | | | | — | | | — | | | — | | | | | — | | | | | |
| | | | | | | | | | | | | | | | | |
| Issuances | | | | | — | | | — | | | — | | | | | — | | | | | |
| | | | | | | | | | | | | | | | | |
| Sales | | | | | — | | | — | | | — | | | | | — | | | | | |
| Settlements | | | | | (3,178) | | | 2,813 | | | — | | | | | — | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | (3,178) | | | 2,813 | | | 0 | | | | | 0 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Change in fair value included in earnings | | | | | — | | | — | | | 573 | | | | | (678) | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Transfers in and / or out of Level 3 | | | | | — | | | — | | | — | | | | | — | | | | | |
| Ending balance | | | | | $ | 23,342 | | | $ | (22,002) | | | $ | 2,075 | | | | | $ | 0 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitiza -
tion Investors | | Mortgage-Backed Securities | | | | Derivatives - Interest Rate Caps | | | | |
| Year Ended December 31, 2018 | | | | | | | | | | | | |
| Beginning balance | $ | 0 | | | $ | 0 | | | $ | 1,592 | | | | | $ | 2,056 | | | | | |
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | |
| Purchases | — | | | — | | | — | | | | | 95 | | | | | |
| Issuances | — | | | — | | | — | | | | | — | | | | | |
| Consolidation of mortgage-backed securitization trusts | 28,373 | | | (26,643) | | | — | | | | | — | | | | | |
| Sales | — | | | — | | | — | | | | | — | | | | | |
| Settlements | (1,853) | | | 1,828 | | | — | | | | | (371) | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | 26,520 | | | (24,815) | | | 0 | | | | | (276) | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Change in fair value | — | | | — | | | (90) | | | | | (1,102) | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Transfers in and / or out of Level 3 | — | | | — | | | — | | | | | — | | | | | |
| Ending balance | $ | 26,520 | | | $ | (24,815) | | | $ | 1,502 | | | | | $ | 678 | | | | | |
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 repurchasepurchase 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. TheseEffective January 1, 2020, we elected to classify any repurchased loans as loans held for sale at fair value as 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).Modified and EBO loans purchased before January 1, 2020 are classified as loans held for sale at the lower of cost or fair value, in the case of modified loans, as we expect to redeliver (sell) the loans to new Ginnie Mae guaranteed securitizations.value. The fair value of these loans is estimated using both observable and unobservable inputs, including published forward Ginnie Mae prices. prices or existing sale contracts, as well as estimated default, prepayment, and discount rates. The significant unobservable input in estimating fair value is the estimated default rate. Accordingly, these repurchased Ginnie Mae loans are classified as Level 3 within the valuation hierarchy.
Loans repurchased in connection with loan resolution activities are modified or otherwise remediated through loss mitigation activities or are reclassified toclassified 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.
For all other loans held for sale, which we report at the lower of cost or fair value, market illiquidity has reduced the availability of observable pricing data. When we enter into an agreement to sell a loan or pool of loans to an investor at a set price, we value the loan or loans at the commitment price.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 basedetermine 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. flows, including future draw commitments for HECM loans. Inputs of the discounted cash flows of these assets include future draws and tail spread gains, voluntary prepayments, defaults, and discount rate. On January 1, 2019, we made an irrevocable fair value election on all future draw commitments for HECM loans that werepurchased 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.
We engage third-party valuation experts to support our valuation and provide observations and assumptions related to market activities. We evaluate the reasonableness of our fair value estimate and assumptions using historical experience, or cash flow backtesting, adjusted for prevailing market conditions and benchmarks with third-party expert valuations.
Significant unobservable assumptions include expectedvoluntary prepayment speeds, defaults and delinquency ratesdiscount rate. The conditional prepayment speed assumption displayed in the table below is inclusive of voluntary (repayment or payoff) and cumulative loss curves.involuntary (inactive/delinquent status and default) prepayments. The discount rate assumption for these assets is primarily based on an assessment of current market yields on newly originated reverse mortgage loans,loan and tail securitizations, expected duration of the asset and current market interest rates.
| | | | | | | | | | | |
| December 31, |
| Significant unobservable assumptions | 2020 | | 2019 |
| Life in years | | | |
| Range | 0.9 to 8.0 | | 2.4 to 7.8 |
| Weighted average | 5.9 | | | 6.0 | |
| Conditional prepayment rate (1) | | | |
| Range | 10.6% to 28.8% | | 7.8% to 28.3% |
| Weighted average | 15.4 | % | | 14.6 | % |
| Discount rate | 1.9 | % | | 2.8 | % |
|
| | | | | |
| | December 31, |
| Significant valuation assumptions | 2018 | | 2017 |
| Life in years | | | |
| Range | 3.0 to 7.6 |
| | 4.4 to 8.1 |
|
| Weighted average | 5.9 |
| | 6.4 |
|
| Conditional repayment rate | | | |
| Range | 6.8% to 38.4% |
| | 5.4% to 51.9% |
|
| Weighted average | 14.7 | % | | 13.1 | % |
| Discount rate | 3.4 | % | | 3.2 | % |
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 largelypartially 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 forfrom 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.
Mortgage Servicing RightsMSRs
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.
Third-partyWe 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. TheWhile the models and related assumptions used by the valuation experts are owned and managed byproprietary to them, and, in many cases, the significant inputs used in the valuation techniques are not reasonably available to us. However, we understand the processesmethodologies 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 consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
We evaluate the reasonableness of our third-party experts’ assumptions using historical experience adjusted for prevailing market conditions. Assumptions used in the valuation of MSRs include:
|
| | | | | | | | | | |
| • | Mortgage prepayment speeds | • | Delinquency rates |
| • | Cost of servicing | • | Interest rate used for computing float earnings |
| • | Discount rate | • | Compensating interest expense |
| • | Interest rate used for computing the cost of financing servicing advances | • | Collection rate of other ancillary fees |
| • | Curtailment on advances | | |
Fair Value MSRs
MSRs are carried at fair value areand classified within Level 3 of the valuation hierarchy. The fair value is equal todetermined 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 disclosedrecorded at the estimated sale price. Fair value reflects actual Ocwen sale prices for orderly transactions where available in lieu of independent third-party valuations. Our valuation process includes discussions of bid pricing with the third-party valuation experts and presumably are contemplated along with other market-based transactions in their model validation.
A change in the valuation inputs utilized by the valuation experts mightor assumptions may result in a significantly higher or lower fair value measurement. Changes in market interest rates tend topredominantly impact the fair value for Agency MSRs via prepayment speeds by altering the borrower refinance incentive and the non-Agency MSRs via a market rate indexed cost ofdue to the impact on advance funding. Other keycosts. The significant unobservable assumptions used in the valuation of these MSRs include prepayment speeds, delinquency rates, cost to service and discount rates.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| Significant unobservable assumptions | 2020 | | 2019 |
| Agency | | Non-Agency | | Agency | | Non-Agency |
| Weighted average prepayment speed | 11.8 | % | | 11.5 | % | | 11.7 | % | | 12.2 | % |
| Weighted average delinquency rate | 3.0 | % | | 28.0 | % | | 3.2 | % | | 27.3 | % |
| Weighted average discount rate | 9.2 | % | | 11.4 | % | | 9.3 | % | | 11.3 | % |
| Weighted average cost to service (in dollars) | $ | 79 | | | $ | 270 | | | $ | 85 | | | $ | 277 | |
|
| | | | | | | | | | | | | | | |
| | December 31, |
| Significant valuation assumptions | 2018 | | 2017 |
| | Agency | | Non-Agency | | Agency | | Non-Agency |
| Weighted average prepayment speed | 8.5 | % | | 15.4 | % | | 8.1 | % | | 16.6 | % |
| Weighted average delinquency rate | 6.6 | % | | 27.1 | % | | 1.0 | % | | 28.5 | % |
| Advance financing cost | 5-year swap |
| | 5-yr swap plus 2.75% |
| | 5-year swap |
| | 5-yr swap plus 2.75% |
|
| 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 | 9.1 | % | | 12.8 | % | | 9.0 | % | | 13.0 | % |
| Weighted average cost to service (in dollars) | $ | 90 |
| | $ | 297 |
| | $ | 64 |
| | $ | 305 |
|
| | | | | | | | | | | |
| Adverse change in fair value | 10% | | 20% |
| Weighted average prepayment speeds | $ | (39,478) | | | $ | (76,100) | |
| Weighted average discount rate | (24,362) | | | (47,227) | |
| |
(1) | Valuation assumptions for Agency MSRs at December 31, 2018 include assumptions for MSRs we carried at amortized cost at December 31, 2017. Effective January 1, 2018, we elected fair value accounting for our remaining MSRs that we had previously carried at amortized cost. |
Amortized Cost MSRs
Prior to ourThe sensitivity analysis measures the potential impact on fair value election on January 1, 2018 for our remaining portfolio of MSRs carried at amortized cost, we estimated the fair value using a process that involved either actual sale prices obtained or the use of independent third-party valuation experts, supported by commercially available discounted cash flow models and analysis of current market data. To provide greater price transparency to investors, we disclosed actual Ocwen sale prices for orderly transactions where available in lieu of third-party valuations.
|
| | | |
| Significant valuation assumptions | December 31, 2017 |
| Weighted average prepayment speed | 8.8 | % |
| Weighted average delinquency rate | 10.9 | % |
| Advance financing cost | 5-year swap |
|
| Interest rate for computing float earnings | 5-year swap |
|
| Weighted average discount rate | 9.2 | % |
| Weighted average cost to service (in dollars) | $ | 108 |
|
We performed an impairment analysisvalues based on hypothetical changes, which in the difference betweencase of our portfolio at December 31, 2020 are increased prepayment speeds and an increase in the carrying amount and fair value after grouping the underlying loans into the applicable strata, which we defined as conventional and government-insured.yield assumption.
Advances
We value advances at their net realizable value, which generally approximates fair value, becausevalue. 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 do not bear interest.reported as a component of the fair value of the 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.
Automotive Dealer Financing Notes
We estimate the fair value of our automotive dealer financing notes using unobservable inputs within an internally developed cash flow model. Key inputs included projected repayments, interest and fee receipts, deferrals, delinquencies, recoveries and charge-offs of the notes within the portfolio. The projected cash flows are then discounted at a rate commensurate with the risk of the estimated cash flows to derive the fair value of the portfolio.
|
| | |
Significant valuation assumptions | December 31, 2017 |
Weighted average life in months | 2.2 |
|
Average note rate | 8.5 | % |
Discount rate | 10.0 | % |
Loan loss rate | 21.5 | % |
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 consolidated statements of operations.
U.S. Treasury Notes
We classify U.S. Treasury notes as trading securities and account for them at fair value on a recurring basis. We base the fair value on quoted prices in active markets to which we have access. Changes in the fair value of our investment in U.S. Treasury notes are recognized in Other, net in the 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 estimate principal repaymentsassume the notes are refinanced at the end of match funded liabilities during the amortization period based ontheir revolving periods, consistent with how we manage our historical advance collection rates and taking into consideration any plans to refinance the notes.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 using a discounted cash flow approach, by discounting the projected recovery of principal interest and advancesinterest over the estimated life of the borrowing at a market rate commensurate with the risk of the estimated cash flows.
We engage third-party valuation experts to support our valuation and provide observations and assumptions related to market activities. We evaluate the reasonableness of our fair value estimate and assumptions using historical experience, or cash flow backtesting, adjusted for prevailing market conditions and benchmarks with third-party expert valuations.
Significant unobservable assumptions include prepayments,yield spread and discount raterate. The yield spread and borrower mortality rates. The discount rate assumption for these liabilities isare primarily based on an assessment of current market yields for newly issued HMBS, expected duration and current market interest rates.
| | | | | | | December 31, |
| | December 31, | |
| Significant valuation assumptions | 2018 | | 2017 | |
| Life in years | | | | |
| Significant unobservable assumptions | | Significant unobservable assumptions | 2020 | | 2019 |
| Live in years | | Live in years | | | |
| Range | 3.0 to 7.6 |
| | 4.4 to 8.1 |
| Range | 0.9 to 8.0 | | 2.4 to 7.8 |
| Weighted average | 5.9 |
| | 6.4 |
| Weighted average | 5.9 | | | 6.0 |
| Conditional repayment rate | | | | |
| Conditional prepayment rate | | Conditional prepayment rate | |
| Range | 6.8% to 38.4% |
| | 5.4% to 51.9% |
| Range | 10.6% to 28.8% | | 7.8% to 28.3% |
| Weighted average | 14.7 | % | | 13.1 | % | Weighted average | 15.4 | % | | 14.6 | % |
| Discount rate | 3.3 | % | | 3.11 | % | Discount rate | 1.7 | % | | 2.7 | % |
Significant increases or decreases in any of these assumptions in isolation wouldcould result in a significantly higher or lower fair value.value, respectively. The effects of changes in the assumptions used to value the HMBS-related borrowings are partially offset by the effects of changes in the assumptions used to value the associated pledged loans held for investment, excluding future draw commitments.
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. Because we carry all MSRs at fair value, changes in the Financing Liability - MSRs Pledged value are partially offset by changes in the fair value of the related MSRs. See Note 9 — Rights to MSRs for additional information.
| | | | December 31, | | December 31, |
| Significant valuation assumptions | 2018 | | 2017 | Significant valuation assumptions | 2020 | | 2019 |
| Weighted average prepayment speed | 13.9 | % | | 17.0 | % | Weighted average prepayment speed | 11.5 | % | | 11.9 | % |
| Weighted average delinquency rate | 20.3 | % | | 28.9 | % | Weighted average delinquency rate | 29.8 | % | | 20.3 | % |
| Advance financing cost | 5-year swap plus 0% to 2.75% |
| | 5-year swap plus 2.75% |
| |
| Interest rate for computing float earnings | 5-year swap minus 0% to 0.50% |
| | 5-year swap minus 0.50% |
| |
| Weighted average discount rate | 12.0 | % | | 13.7 | % | Weighted average discount rate | 11.4 | % | | 10.7 | % |
| Weighted average cost to service (in dollars) | $ | 234 |
| | $ | 311 |
| Weighted average cost to service (in dollars) | $ | 287 | | | $ | 223 | |
Significant increases or decreases in these assumptions in isolation would result in a significantly higher or lower fair value.
Secured Notes
We issued Ocwen Asset Servicing Income Series (OASIS), Series 2014-1 Notes secured by Ocwen-owned MSRs relating to Freddie Mac mortgages. We accounted for this transaction as a financing. We determine the fair value based on bid prices provided by third parties involved in the issuance and placement of the notes.
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 Senior Secured Term Loan (SSTL),SSTL, we basedbase the fair value on quotedvaluation 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 a market with limited trading activity.the issuance and placement of the notes.
Senior Notes
We base the fair value on quoted prices in a market with limited trading activity.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 arewere classified within Level 2 of the valuation hierarchy as the primary component of the price iswas 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 December 31, 2020, IRLCs are classified as Level 3 assets as fallout rates were determined to be significant unobservable assumptions.
We enterentered 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.value until August 2019 and, beginning in September 2019, to hedge of our net MSR portfolio. We use derivative instruments, including forward trades of MBS or Agency TBAs and exchange-traded interest rate swap futures, as economic hedging instruments. Forward MBS trades are primarily used to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Forward contracts, 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.
Note 56 — Loans Held for Sale
| | | | | | | | | | | | | | | | | |
| Loans Held for Sale - Fair Value | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance | $ | 208,752 | | | $ | 176,525 | | | $ | 214,262 | |
| Originations and purchases | 7,552,026 | | | 1,168,885 | | | 944,627 | |
| Proceeds from sales | (7,344,151) | | | (1,124,247) | | | (1,019,211) | |
| Principal collections | (25,976) | | | (23,116) | | | (20,774) | |
| Acquired in connection with the acquisition of PHH | 0 | | | 0 | | | 42,324 | |
| Transfers from (to): | | | | | |
| Loans held for investment, at fair value | 3,084 | | | 1,892 | | | 1,038 | |
| | | | | |
| Receivables | (85,001) | | | (2,480) | | | (1,132) | |
| REO (Other assets) | (3,657) | | | (2,520) | | | (1,886) | |
| Gain on sale of loans | 50,248 | | | 25,253 | | | 34,724 | |
| (Decrease) increase in fair value of loans | 1,075 | | | (589) | | | (13,435) | |
| Other | 9,964 | | | (10,851) | | | (4,012) | |
| Ending balance (1) (2) | $ | 366,364 | | | $ | 208,752 | | | $ | 176,525 | |
(1)At December 31, 2020, 2019 and 2018, the balances include $(6.7) million, $(7.8) million and $(7.2) million, respectively, of fair value adjustments.
(2)At December 31, 2020, the balances include $51.1 million of loans that we repurchased from Ginnie Mae guaranteed securitizations pursuant to Ginnie Mae servicing guidelines. As disclosed in Note 5 — Fair Value, effective January 1, 2020, we elected to classify repurchased loans as Loans held for sale at fair value. See table below. 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 | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance | $ | 66,517 | | | $ | 66,097 | | | $ | 24,096 | |
| Purchases (1) | 0 | | | 320,089 | | | 770,563 | |
| Proceeds from sales | (58,575) | | | (221,471) | | | (569,718) | |
| Principal collections | (1,842) | | | (11,304) | | | (15,413) | |
| Transfers from (to): | | | | | |
| Receivables, net | 61 | | | (104,635) | | | (155,586) | |
| REO (Other assets) | 0 | | | (4,116) | | | (2,355) | |
| | | | | |
| Gain on sale of loans | 11,189 | | | 4,974 | | | 3,659 | |
| Decrease (increase) in valuation allowance | 463 | | | 4,926 | | | (4,251) | |
| Other | 3,659 | | | 11,957 | | | 15,102 | |
| Ending balance (2) | $ | 21,472 | | | $ | 66,517 | | | $ | 66,097 | |
(1)We elected the fair value option for all newly repurchased loans after December 31, 2019.
(2)At December 31, 2020, 2019 and 2018, the balances include $12.5 million, $60.6 million and $51.8 million, respectively, of loans that we repurchased from Ginnie Mae guaranteed securitizations pursuant to Ginnie Mae servicing guidelines.
|
| | | | | | | | | | | |
| Loans Held for Sale - Fair Value | Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 214,262 |
| | $ | 284,632 |
| | $ | 309,054 |
|
| Originations and purchases | 944,627 |
| | 2,678,372 |
| | 4,211,871 |
|
| Proceeds from sales | (1,019,211 | ) | | (2,785,422 | ) | | (4,236,158 | ) |
| Principal collections | (20,774 | ) | | (4,867 | ) | | (11,620 | ) |
| Acquired in connection with the acquisition of PHH | 42,324 |
| | — |
| | — |
|
| Transfers from (to): | | | | | |
| Loans held for investment, at fair value | 1,038 |
| | 3,803 |
| | — |
|
| Loans held for sale - Lower of cost or fair value | — |
| | — |
| | 3,266 |
|
| Receivables | (1,132 | ) | | — |
| | — |
|
| Real estate owned (Other assets) | (1,886 | ) | | — |
| | — |
|
| Gain on sale of loans | 34,724 |
| | 35,429 |
| | 13,421 |
|
| Increase (decrease) in fair value of loans | (13,435 | ) | | 151 |
| | (7,030 | ) |
| Other | (4,012 | ) | | 2,164 |
| | 1,828 |
|
| Ending balance (1) | $ | 176,525 |
| | $ | 214,262 |
| | $ | 284,632 |
|
| | | | | | | | | | | | | | | | | |
| Valuation Allowance - Loans Held for Sale at Lower of Cost or Fair Value | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance | $ | 6,643 | | | $ | 11,569 | | | $ | 7,318 | |
| Provision | 1,144 | | | 2,537 | | | 4,033 | |
| Transfer from Liability for indemnification obligations (Other liabilities) | 68 | | | 403 | | | 2,021 | |
| Sales of loans | (1,675) | | | (7,866) | | | (1,824) | |
| Other | 0 | | | 0 | | | 21 | |
| Ending balance | $ | 6,180 | | | $ | 6,643 | | | $ | 11,569 | |
| |
(1) | At December 31, 2018, 2017 and 2016, the balances include $(7.2) million, $5.0 million and $4.9 million, respectively, of fair value adjustments. |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| Gains on Loans Held for Sale, Net | 2020 | | 2019 | | 2018 |
| Gain on sales of loans, net | | | | | |
| MSRs retained on transfers of forward mortgage loans | $ | 68,734 | | | $ | 7,458 | | | $ | 7,412 | |
| | | | | |
| Gain on sale of forward mortgage loans | 45,459 | | | 25,310 | | | 34,216 | |
| Gain on sale of repurchased Ginnie Mae loans | 15,947 | | | 4,764 | | | 3,659 | |
| | | | | |
| | 130,140 | | | 37,532 | | | 45,287 | |
| Change in fair value of IRLCs | 17,479 | | | 756 | | | 3,809 | |
| Change in fair value of loans held for sale | 2,280 | | | 3,005 | | | (11,569) | |
| (Loss) gain on economic hedge instruments | (10,069) | | | (2,689) | | | 136 | |
| Other | (2,594) | | | (304) | | | (327) | |
| $ | 137,236 | | | $ | 38,300 | | | $ | 37,336 | |
|
| | | | | | | | | | | |
| Loans Held for Sale - Lower of Cost or Fair Value | Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 24,096 |
| | $ | 29,374 |
| | $ | 104,992 |
|
| Purchases | 770,563 |
| | 1,016,791 |
| | 1,878,561 |
|
| Proceeds from sales | (569,718 | ) | | (861,569 | ) | | (1,699,427 | ) |
| Principal collections | (15,413 | ) | | (10,207 | ) | | (22,607 | ) |
| Transfers from (to): | | | | | |
| Receivables, net | (155,586 | ) | | (171,797 | ) | | (256,336 | ) |
| Real estate owned (Other assets) | (2,355 | ) | | (875 | ) | | (7,675 | ) |
| Loans held for sale - Fair value | — |
| | — |
| | (3,266 | ) |
| Gain on sale of loans | 3,659 |
| | 11,683 |
| | 24,565 |
|
| (Increase) decrease in valuation allowance | (4,251 | ) | | 2,746 |
| | 4,594 |
|
| Other | 15,102 |
| | 7,950 |
| | 5,973 |
|
| Ending balance (1) | $ | 66,097 |
| | $ | 24,096 |
| | $ | 29,374 |
|
| |
(1) | At December 31, 2018, 2017 and 2016, the balances include $51.8 million, $19.6 million and $24.8 million, 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. |
Note 7 – Reverse Mortgages
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings | | Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings | | Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings |
| Beginning balance | $ | 6,269,596 | | | $ | (6,063,435) | | | $ | 5,472,199 | | | $ | (5,380,448) | | | $ | 4,715,831 | | | $ | (4,601,556) | |
| Cumulative effect of fair value election (2) | 47,038 | | | — | | | — | | | — | | | — | | | — | |
| Originations | 1,203,645 | | | — | | | 1,026,154 | | | — | | | 920,476 | | | — | |
| Securitization of HECM loans accounted for as a financing (incl. realized fair value changes) | — | | | (1,273,575) | | | — | | | (981,199) | | | — | | | (990,039) | |
| Repayments (principal payments received) | (944,699) | | | 935,778 | | | (558,720) | | | 549,600 | | | (400,521) | | | 391,985 | |
| Transfers to: | | | | | | | | | | | |
| Loans held for sale, at fair value | (3,084) | | | — | | | (1,892) | | | — | | | (1,039) | | | — | |
| Receivables, net | (236) | | | — | | | (327) | | | — | | | (158) | | | — | |
| REO (Other assets) | (511) | | | — | | | (513) | | | — | | | (411) | | | — | |
| Change in fair value (1) | 425,378 | | | (371,479) | | | 332,695 | | | (251,388) | | | 238,021 | | | (180,838) | |
| Ending Balance | $ | 6,997,127 | | | $ | (6,772,711) | | | $ | 6,269,596 | | | $ | (6,063,435) | | | $ | 5,472,199 | | | $ | (5,380,448) | |
| Securitized loans (pledged to HMBS-Related Borrowings) | $ | 6,872,252 | | | $ | (6,772,711) | | | $ | 6,120,933 | | | $ | (6,063,435) | | | $ | 5,446,768 | | | $ | (5,380,448) | |
| Unsecuritized loans | 124,875 | | | | | 148,663 | | | | | $ | 25,431 | | | |
| Total | $ | 6,997,127 | | | | | $ | 6,269,596 | | | | | $ | 5,472,199 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(1)The change in fair value adjustments on Loans held for investment for 2020 and 2019 includes $19.8 million and $12.2 million, respectively, in connection with the fair value election for future draw commitments (tails) on HECM reverse mortgage loans purchased or originated after December 31, 2018.
(2)In conjunction with the adoption of ASU 2016-13, we elected the fair value option for future draw commitments (tails) on HECM reverse mortgage loans purchased or originated before December 31, 2018, which resulted in the recognition of the fair value of such tails through stockholders’ equity on January 1, 2020.
| | | | | | | | | | | | | | | | | |
| Reverse Mortgage Revenue, net | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Gain on new originations (1) | $ | 46,326 | | | $ | 17,849 | | | $ | 13,064 | |
| Change in fair value of securitized loans held for investment and HMBS-related borrowings, net | 7,573 | | | 63,459 | | | 44,119 | |
| Loan fees and other | 6,827 | | | 5,001 | | | 3,054 | |
| $ | 60,726 | | | $ | 86,309 | | | $ | 60,237 | |
(1)Includes the changes in fair value of newly originated loans held for investment in the period through securitization date.
|
| | | | | | | | | | | |
| Valuation Allowance - Loans Held for Sale at Lower of Cost or Fair Value | Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 7,318 |
| | $ | 10,064 |
| | $ | 14,658 |
|
| Provision | 4,033 |
| | 3,109 |
| | 3,599 |
|
| Transfer from Liability for indemnification obligations (Other liabilities) | 2,021 |
| | 3,246 |
| | 2,368 |
|
| Sales of loans | (1,824 | ) | | (9,415 | ) | | (10,208 | ) |
| Other | 21 |
| | 314 |
| | (353 | ) |
| Ending balance | $ | 11,569 |
| | $ | 7,318 |
| | $ | 10,064 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| Gains on Loans Held for Sale, Net | 2018 | | 2017 | | 2016 |
| Gain on sales of loans, net | | | | | |
| MSRs retained on transfers of forward loans | $ | 7,412 |
| | $ | 20,900 |
| | $ | 36,049 |
|
| Fair value gains related to transfers of reverse mortgage loans, net | 45,020 |
| | 50,194 |
| | 24,742 |
|
| Gain on sale of repurchased Ginnie Mae loans | 3,659 |
| | 11,683 |
| | 24,565 |
|
| Other, net | 29,603 |
| | 31,470 |
| | 7,952 |
|
| | 85,694 |
| | 114,247 |
| | 93,308 |
|
| Change in fair value of IRLCs | 3,809 |
| | (3,089 | ) | | (55 | ) |
| Change in fair value of loans held for sale | (11,569 | ) | | 1,475 |
| | 4,595 |
|
| Loss on economic hedge instruments | 136 |
| | (8,529 | ) | | (6,592 | ) |
| Other | (327 | ) | | (702 | ) | | (865 | ) |
| | $ | 77,743 |
| | $ | 103,402 |
| | $ | 90,391 |
|
Note 68 — Advances
| | | | December 31, | | December 31, |
| | 2018 | | 2017 | | 2020 | | 2019 |
| Principal and interest | $ | 43,671 |
| | $ | 20,207 |
| Principal and interest | $ | 277,132 | | | $ | 414,846 | |
| Taxes and insurance | 160,373 |
| | 144,454 |
| Taxes and insurance | 364,593 | | | 422,383 | |
| Foreclosures, bankruptcy and other | 68,597 |
| | 63,597 |
| |
| Foreclosures, bankruptcy, REO and other | | Foreclosures, bankruptcy, REO and other | 192,787 | | | 229,219 | |
| | 272,641 |
| | 228,258 |
| | 834,512 | | | 1,066,448 | |
| Allowance for losses | (23,259 | ) | | (16,465 | ) | Allowance for losses | (6,273) | | | (9,925) | |
| | $ | 249,382 |
| | $ | 211,793 |
| |
| Advances, net | | Advances, net | $ | 828,239 | | | $ | 1,056,523 | |
The following table summarizes the activity in net advances:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance | $ | 1,056,523 | | | $ | 1,186,676 | | | $ | 1,389,150 | |
| Asset acquisition | 14 | | | 1,457 | | | 0 | |
| Acquired in connection with the acquisition of PHH | 0 | | | 0 | | | 96,163 | |
| Transfer to Other assets | 0 | | | 0 | | | (36,896) | |
| New advances | 890,389 | | | 671,673 | | | 684,538 | |
| Sales of advances | (834) | | | (11,791) | | | (32,081) | |
| Collections of advances and other | (1,121,505) | | | (804,826) | | | (910,039) | |
| Net decrease (increase) in allowance for losses (1) | 3,652 | | | 13,334 | | | (4,159) | |
| | | | | |
| Ending balance | $ | 828,239 | | | $ | 1,056,523 | | | $ | 1,186,676 | |
(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.
| | | | | | | | | | | | | | | | | |
| Allowance for Losses | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance | $ | 9,925 | | | $ | 23,259 | | | $ | 16,465 | |
| | | | | |
| Provision | 7,790 | | | 3,220 | | | 5,732 | |
| Net charge-offs and other (1) | (11,442) | | | (16,554) | | | 1,062 | |
| Ending balance | $ | 6,273 | | | $ | 9,925 | | | $ | 23,259 | |
(1)Net change for the year ended December 31, 2019 includes $18.0 million allowance related to sold advances presented in Other liabilities (Liability for indemnification obligations).
Note 9 — Mortgage Servicing
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 211,793 |
| | $ | 257,882 |
| | $ | 444,298 |
|
| Acquired in connection with the acquisition of PHH | 96,163 |
| | — |
| | — |
|
| Transfers to match funded advances | (71,623 | ) | | — |
| | — |
|
| Sales (1) | (32,081 | ) | | (444 | ) | | (24,631 | ) |
| Collections, charge-offs and other, net | 51,924 |
| | (67,132 | ) | | (165,734 | ) |
| Net (increase) decrease in allowance for losses | (6,794 | ) | | 21,487 |
| | 3,949 |
|
| Ending balance | $ | 249,382 |
| | $ | 211,793 |
| | $ | 257,882 |
|
| |
(1) | Servicing advances sold primarily in connection with sales of MSRs which met the requirements for sale accounting and which were derecognized from our financial statements at the time of the sale. |
|
| | | | | | | | | | | |
| Allowance for Losses | Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 16,465 |
| | $ | 37,952 |
| | $ | 41,901 |
|
| Provision | 5,732 |
| | 21,429 |
| | (2,043 | ) |
| Net charge-offs and other | 1,062 |
| | (42,916 | ) | | (1,906 | ) |
| Ending balance | $ | 23,259 |
| | $ | 16,465 |
| | $ | 37,952 |
|
Note 7 — Match Funded Assets
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Advances: | | | |
| Principal and interest | $ | 412,897 |
| | $ | 523,248 |
|
| Taxes and insurance | 374,853 |
| | 439,857 |
|
| Foreclosures, bankruptcy, real estate and other | 149,544 |
| | 181,495 |
|
| | 937,294 |
| | 1,144,600 |
|
| | | | |
| Automotive dealer financing notes (1) | — |
| | 35,392 |
|
| Allowance for losses (1) | — |
| | (2,635 | ) |
| | — |
| | 32,757 |
|
| | | | |
| | $ | 937,294 |
| | $ | 1,177,357 |
|
| |
(1) | In January 2018, we terminated our automotive dealer loan financing facility. Automotive dealer financing notes not pledged to our automotive dealer loan financing facility are reported as Other assets. See Note 12 — Other Assets.
|
The following table summarizes the activity in match funded assets:
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | Advances | | Automotive Dealer Financing Notes | | Advances | | Automotive Dealer Financing Notes | | Advances |
| Beginning balance | $ | 1,144,600 |
| | $ | 32,757 |
| | $ | 1,451,964 |
| | $ | — |
| | $ | 1,706,768 |
|
| Transfers from advances | 71,623 |
| | — |
| | — |
| | — |
| | — |
|
| Transfer (to) from other assets | — |
| | (36,896 | ) | | — |
| | 25,180 |
| | — |
|
| Sales | — |
| | — |
| | (691 | ) | | — |
| | (8,923 | ) |
| New advances (collections), net | (278,929 | ) | | 1,504 |
| | (306,673 | ) | | 10,212 |
| | (245,881 | ) |
| Decrease (increase) in allowance for losses | — |
| | 2,635 |
| | — |
| | (2,635 | ) | | — |
|
| Ending balance | $ | 937,294 |
| | $ | — |
| | $ | 1,144,600 |
| | $ | 32,757 |
| | $ | 1,451,964 |
|
| |
Note 8 — Mortgage Servicing
| |
|
| | | | | | | | | | | |
| Mortgage Servicing Rights – Amortization Method | Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 336,882 |
| | $ | 363,722 |
| | $ | 377,379 |
|
| Fair value election - transfer to MSRs carried at fair value (1) | (361,670 | ) | | — |
| | — |
|
| Additions recognized in connection with asset acquisitions | — |
| | 1,658 |
| | 17,356 |
|
| Additions recognized on the sale of mortgage loans | — |
| | 20,738 |
| | 37,230 |
|
| Sales | — |
| | (1,066 | ) | | (24,452 | ) |
| Servicing transfers and adjustments | — |
| | 252 |
| | — |
|
| | (24,788 | ) | | 385,304 |
| | 407,513 |
|
| Decrease (increase) in impairment valuation allowance (1) (2) | 24,788 |
| | 3,366 |
| | (10,813 | ) |
| Amortization (1) | — |
| | (51,788 | ) | | (32,978 | ) |
| Ending balance | $ | — |
| | $ | 336,882 |
| | $ | 363,722 |
|
| | | | | | |
| Estimated fair value at end of year | $ | — |
| | $ | 418,745 |
| | $ | 467,911 |
|
| |
(1) | Effective January 1, 2018, we elected fair value accounting forDuring each period, we remeasure our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. This irrevocable election applies to all subsequently acquired or originated servicing assets and liabilities that have characteristics consistent with each of these classes. We recorded a cumulative-effect adjustment of $82.0 million to retained earnings as of January 1, 2018 to reflect the excess of the fair value of the Agency MSRs over their carrying amount. We also recognized the tax effect of this adjustment through an increase in retained earnings of $6.8 million and a deferred tax asset for the same amount. However, we established a full valuation allowance on the resulting deferred tax asset through a reduction in retained earnings. The government-insured MSRs were impaired by $24.8 million at December 31, 2017; therefore, these MSRs were already effectively carried at fair value. |
| |
(2) | Impairment of MSRs is recognized in MSR valuation adjustments, net in the consolidated statements of operations for 2017 and 2016. Impairment valuation allowance balance of $24.8 million was reclassified to reduce the carrying value of the related MSRs on January 1, 2018 in connection with our fair value election. See Note 4 — Fair Value for additional information regarding impairment and the valuation allowance.
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage Servicing Rights – Fair Value Measurement Method | Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| | Agency | | Non-Agency | | Total | | Agency | | Non-Agency | | Total | | Agency | | Non-Agency | | Total |
| Beginning balance | $ | 11,960 |
| | $ | 660,002 |
| | $ | 671,962 |
| | $ | 13,357 |
| | $ | 665,899 |
| | $ | 679,256 |
| | $ | 15,071 |
| | $ | 746,119 |
| | $ | 761,190 |
|
| Fair value election - transfer from MSRs carried at amortized cost | 336,882 |
| | — |
| | 336,882 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Cumulative effect of fair value election | 82,043 |
| | — |
| | 82,043 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Sales | (4,748 | ) | | (1,492 | ) | | (6,240 | ) | | — |
| | (540 | ) | | (540 | ) | | (3 | ) | | (145 | ) | | (148 | ) |
| Additions: | | | | | | | | | | | | | | | | | |
| Recognized on the sale of residential mortgage loans | 8,279 |
| | — |
| | 8,279 |
| | 162 |
| | — |
| | 162 |
| | — |
| | — |
| | — |
|
| Recognized in connection with the acquisition of PHH | 494,348 |
| | 23,779 |
| | 518,127 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Purchase of MSRs | 5,433 |
| | — |
| | 5,433 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Servicing transfers and adjustments | (1,047 | ) | | (4,833 | ) | | (5,880 | ) | | — |
| | (2,376 | ) | | (2,376 | ) | | — |
| | (1,548 | ) | | (1,548 | ) |
| Changes in fair value (1): | | | | | | | | | | |
| | | | | |
|
| Changes in valuation inputs or other assumptions | 11,558 |
| | (5,705 | ) | | 5,853 |
| | 243 |
| | 86,721 |
| | 86,964 |
| | 305 |
| | — |
| | 305 |
|
| Realization of expected future cash flows and other changes | (79,121 | ) | | (80,189 | ) | | (159,310 | ) | | (1,802 | ) | | (89,702 | ) | | (91,504 | ) | | (2,016 | ) | | (78,527 | ) | | (80,543 | ) |
| Ending balance | $ | 865,587 |
| | $ | 591,562 |
| | $ | 1,457,149 |
| | $ | 11,960 |
| | $ | 660,002 |
| | $ | 671,962 |
| | $ | 13,357 |
| | $ | 665,899 |
| | $ | 679,256 |
|
| |
(1) | Changes in fair value are recognized in MSR valuation adjustments, net in the consolidated statements of operations. |
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 that we carry 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, partially offset by the remeasurement of December 31, 2018 given hypothetical shifts in lifetime prepayments and yield assumptions:the MSR fair value within MSR valuation adjustments, net.
|
| | | | | | | |
| | Adverse change in fair value |
| | 10% | | 20% |
| Weighted average prepayment speeds | $ | (122,911 | ) | | $ | (237,916 | ) |
| Discount rate (option-adjusted spread) | (43,410 | ) | | (84,631 | ) |
F-34
The sensitivity analysis measures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage Servicing Rights – Fair Value Measurement Method | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Agency | | Non-Agency | | Total | | Agency | | Non-Agency | | Total | | Agency | | Non-Agency | | Total |
| Beginning balance | $ | 714,006 | | | $ | 772,389 | | | $ | 1,486,395 | | | $ | 865,587 | | | $ | 591,562 | | | $ | 1,457,149 | | | $ | 11,960 | | | $ | 660,002 | | | $ | 671,962 | |
| Fair value election - Transfer from MSRs carried at amortized cost | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 336,882 | | | 0 | | | 336,882 | |
| Cumulative effect of fair value election | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 82,043 | | | 0 | | | 82,043 | |
| Sales | 0 | | | (143) | | | (143) | | | (3,578) | | | (766) | | | (4,344) | | | (4,748) | | | (1,492) | | | (6,240) | |
| Additions: | | | | | | | | | | | | | | | | | |
| Recognized on the sale of residential mortgage loans | 68,734 | | | 0 | | | 68,734 | | | 8,795 | | | 0 | | | 8,795 | | | 8,279 | | | 0 | | | 8,279 | |
| Recognized in connection with the acquisition of PHH | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 494,348 | | | 23,779 | | | 518,127 | |
| Purchase of MSRs | 285,134 | | | 0 | | | 285,134 | | | 153,505 | | | 0 | | | 153,505 | | | 5,433 | | | 0 | | | 5,433 | |
| Servicing transfers and adjustments (1) | (266,248) | | | 403 | | | (265,845) | | | 0 | | | (7,309) | | | (7,309) | | | (1,047) | | | (4,833) | | | (5,880) | |
| Changes in fair value (2): | | | | | | | | | | | | | | | | | |
| Changes in valuation inputs or assumptions | (133,072) | | | 26,870 | | | (106,202) | | | (171,050) | | | 265,003 | | | 93,953 | | | 11,558 | | | (5,705) | | | 5,853 | |
| Realization of expected future cash flows and other changes | (89,597) | | | (83,659) | | | (173,256) | | | (139,253) | | | (76,101) | | | (215,354) | | | (79,121) | | | (80,189) | | | (159,310) | |
| Ending balance | $ | 578,957 | | | $ | 715,860 | | | $ | 1,294,817 | | | $ | 714,006 | | | $ | 772,389 | | | $ | 1,486,395 | | | $ | 865,587 | | | $ | 591,562 | | | $ | 1,457,149 | |
(1)Servicing transfers and adjustments include a $263.7 million derecognition of MSRs/Rights to MSRs effective with the potential impact onFebruary 20, 2020 notice of termination of the PMC subservicing agreement by NRZ. See Note 10 — Rights to MSRs for further information.
(2)Changes in fair values based on hypothetical changes, whichvalue are recognized in MSR valuation adjustments, net in the caseconsolidated statements of our portfolio at December 31, 2018 are increased prepayment speeds and a decrease in the yield assumption.operations.
MSR UPB
Portfolio of Assets Serviced | | | | | | | | | | | | | | | | | |
| UPB at December 31, |
| 2020 | | 2019 | | 2018 |
| Owned MSRs | $ | 90,174,495 | | | $ | 70,973,496 | | | $ | 68,236,270 | |
| NRZ pledged MSRs (1) | 64,061,198 | | | 108,837,877 | | | 126,643,940 | |
| Total MSR UPB | $ | 154,235,693 | | | $ | 179,811,373 | | | $ | 194,880,210 | |
The following table presents the composition of our residential primary servicing and subservicing portfolios as measured by UPB, including foreclosed real estate and small-balance commercial loans. The servicing portfolio represents loans for which we own the servicing rights while subservicing represents all other loans. The UPB of assets serviced for others are(1)MSRs subject to sale agreements with NRZ that do not included on our consolidated balance sheets.meet sale accounting criteria. See Note 10 — Rights to MSRs.
|
| | | |
| UPB at December 31, 2018 | |
|
| Servicing (3) | $ | 72,378,693 |
|
| Subservicing (3) | 53,104,560 |
|
| NRZ (1) (3) | 130,517,237 |
|
| | $ | 256,000,490 |
|
| UPB at December 31, 2017 | |
|
| Servicing | $ | 75,469,327 |
|
| Subservicing | 2,063,669 |
|
| NRZ (1) | 101,819,557 |
|
| | $ | 179,352,553 |
|
| UPB at December 31, 2016 | |
|
| Servicing | $ | 86,049,298 |
|
| Subservicing (2) | 4,330,084 |
|
| NRZ (1) | 118,712,748 |
|
| | $ | 209,092,130 |
|
| |
(1) | UPB of loans for which the Rights to MSRs have been sold to NRZ, including those for which third-party consents have been received and the MSRs have been transferred to NRZ. |
| |
(2) | Excludes $92.9 million of large-balance commercial foreclosed real estate. During 2017, we sold or transferred servicing on the remaining managed assets. |
| |
(3) | Includes $6.3 billion, $51.3 billion and $42.3 billion UPB of loans serviced, subserviced or subserviced on behalf of NRZ, respectively, added to the portfolio in connection with the PHH acquisition. |
We soldpurchased MSRs relating to loans with a UPB of $31.7 billion, $14.6 billion and $144.1 million during 2020, 2019 and 2018, respectively. We sold MSRs with a UPB of $80.0 million, $140.8 million and $901.3 million $219.4during 2020, 2019 and 2018, respectively, mostly to Freddie Mac under the Voluntary Partial Cancellation (VPC) program for delinquent loans. We sold non-Agency MSRs with a UPB of $140.8 million and $3.7 billion during 2018, 2017 and 2016, respectively.2019.
A significant portion of the servicing agreements for our non-Agency servicing portfolio contain provisions where we could be terminated as servicer without compensation upon the failure of the serviced loans to meet certain portfolio delinquency or cumulative loss thresholds. As a result of the economic downturn beginning in 2007 - 2008, the portfolio delinquency and/or cumulative loss threshold provisions have been breached in many private-label securitizations in our non-Agency servicing portfolio. To date, terminations as servicer as a result of a breach of any of these provisions have been minimal.
At December 31, 2018,2020, the S&P Global Ratings, Inc.’s (S&P) and Fitch Ratings, Inc.’s (Fitch) servicer ratings outlook for both OLS and PHHPMC is stable. Moody’s Investors Service,On March 24, 2020, Fitch Ratings, Inc.’s (Moody’s) (Fitch) placed all U.S Residential Mortgage Backed Securities (RMBS) servicer ratings for OLS are on Watch for Downgrade.Outlook Negative, resulting from a rapidly evolving economic and operating environment due to the sudden impact of the COVID-19
virus. Downgrades in servicer ratings could adversely affect our ability to service loans, sell or finance servicing advances and could impair our ability to consummate future servicing transactions or adversely affect our dealings with lenders, other contractual counterparties, and regulators, including our ability to maintain our status as an approved servicer by Fannie Mae and Freddie Mac. The servicer rating requirements of Fannie Mae do not necessarily require or imply immediate action, as Fannie Mae has discretion with respect to whether we are in compliance with their requirements and what actions it deems appropriate under the circumstances in the event that we fall below their desired servicer ratings.
Certain of our servicing agreements require that we maintain specified servicer ratings from rating agencies such as Moody’s and S&P. At December 31, 2018, non-Agency servicing agreements with a UPB of $25.9 billion have minimum servicer ratings criteria. As a result of our current servicer ratings, termination rights have been triggered in non-Agency servicing agreements with a UPB of $8.2 billion, or 7% of our total non-Agency servicing portfolio. To date, terminations as servicer as a result of a breach of any of these provisions have been minimal.
The geographic distributionconcentration of the UPB and count of residential loans and real estate we serviced at December 31, 20182020 was as follows:
| | | | | | | | | | | |
| | Amount | | Count |
| California | $ | 38,640,172 | | | 144,717 | |
| New York | 13,474,135 | | | 56,917 | |
| Florida | 11,443,408 | | | 86,518 | |
| New Jersey | 8,564,107 | | | 39,287 | |
| Texas | 7,476,092 | | | 73,382 | |
| Other | 74,637,779 | | | 556,596 | |
| | $ | 154,235,693 | | | 957,417 | |
|
| | | | | | |
| | Amount | | Count |
| California | $ | 56,455,157 |
| | 201,058 |
|
| New York | 25,411,051 |
| | 101,444 |
|
| Florida | 20,345,407 |
| | 134,335 |
|
| New Jersey | 13,711,894 |
| | 65,263 |
|
| Texas | 11,858,287 |
| | 111,512 |
|
| Other | 128,218,694 |
| | 948,626 |
|
| | $ | 256,000,490 |
| | 1,562,238 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| Servicing Revenue | 2020 | | 2019 | | 2018 |
| Loan servicing and subservicing fees | | | | | |
| Servicing | $ | 216,263 | | | $ | 227,490 | | | $ | 227,639 | |
| Subservicing | 28,886 | | | 15,459 | | | 8,904 | |
| NRZ | 383,685 | | | 577,015 | | | 539,039 | |
| Total loan servicing and subservicing fees | 628,834 | | | 819,964 | | | 775,582 | |
| Ancillary income | | | | | |
| Late charges | 47,687 | | | 57,194 | | | 61,453 | |
| Home Affordable Modification Program (HAMP) fees (1) | 565 | | | 5,538 | | | 14,312 | |
| Custodial accounts (float earnings) | 9,939 | | | 47,562 | | | 40,115 | |
| Loan collection fees | 12,919 | | | 15,539 | | | 18,392 | |
| Other | 37,376 | | | 29,710 | | | 27,229 | |
| Total ancillary income | 108,486 | | | 155,543 | | | 161,501 | |
| | $ | 737,320 | | | $ | 975,507 | | | $ | 937,083 | |
(1)The HAMP expired on December 31, 2016. Borrowers who had requested assistance or to whom an offer of assistance had been extended as of that date had until September 30, 2017 to finalize their modification. We continue to earn HAMP success fees for HAMP modifications that remain less than 90 days delinquent at the first-, second- and third-year anniversary of the start of the trial modification.
|
| | | | | | | | | | | |
| Years Ended December 31, |
| Servicing Revenue | 2018 | | 2017 | | 2016 |
| Loan servicing and subservicing fees | | | | | |
| Servicing | $ | 224,892 |
| | $ | 257,419 |
| | $ | 293,210 |
|
| Subservicing | 8,904 |
| | 7,775 |
| | 21,427 |
|
| NRZ | 539,039 |
| | 549,411 |
| | 633,545 |
|
| | 772,835 |
| | 814,605 |
| | 948,182 |
|
| Late charges | 61,453 |
| | 61,763 |
| | 66,709 |
|
| Home Affordable Modification Program (HAMP) fees (1) | 14,312 |
| | 43,310 |
| | 110,367 |
|
| Custodial accounts (float earnings) | 40,115 |
| | 25,237 |
| | 8,969 |
|
| Loan collection fees | 18,392 |
| | 22,770 |
| | 27,213 |
|
| Other | 27,229 |
| | 21,691 |
| | 25,180 |
|
| | $ | 934,336 |
| | $ | 989,376 |
| | $ | 1,186,620 |
|
| |
(1) | The HAMP expired on December 31, 2016. Borrowers who had requested assistance or to whom an offer of assistance had been extended as of that date had until September 30, 2017 to finalize their modification. We continue to earn HAMP success fees for HAMP modifications that remain less than 90 days delinquent at the first-, second- and third-year anniversary of the start of the trial modification. |
Float balances (balances in custodial accounts, which represent collections of principal and interest that we receive from borrowers) are held in escrow by an unaffiliated bankbanks and are excluded from our consolidated balance sheets. Float balances amounted to $1.7$1.74 billion, $1.5$1.71 billion and $2.1$1.68 billion at December 31, 2018, 20172020, 2019 and 2016,2018, respectively.
In 2016 we executed clean-up calls on five small-balance commercial mortgage securitization trusts, which resulted in our recognizing income of $14.8 million related to the value of the underlying collateral held by the trusts, which we reported in Other, net, in the consolidated statements of operations. Simultaneously with the execution of the clean-up calls, we sold the acquired commercial loans and foreclosed properties to a third party, repaid the holders of the debt securities issued by the trusts and recognized a gain of $2.8 million equal to the discount on the repurchase price of the loans which we reported in Gain on loans held for sale, net.
Note 910 — Rights to MSRs
Ocwen and PHH havePMC entered into agreements to sell MSRs or Rights to MSRs and the related servicing advances to NRZ, and in all cases have been retained by NRZ as subservicer. In the case of Ocwen Rights to MSRs transactions, while the majority of the risks and rewards of ownership were transferred in 2012 and 2013, legal title was retained by Ocwen, causing the Rights to MSRs transactions to be accounted for as secured financings. In the case of the PHHPMC transactions, and for those Ocwen MSRs where consents were subsequently received and legal title was transferred to NRZ, due to the length of the non-cancellable term of the subservicing agreement,agreements, the transactions dodid not qualify as afor sale and areaccounting treatment which resulted in such transactions being accounted for as secured financings. AsUntil such time as the transaction qualifies as a result,sale for accounting purposes, we continue to recognize the MSRs and related financing liability on our consolidated balance sheet,sheets, as well as the full amount of servicing revenue and changes in the fair value of the MSRs and related financing liability in our consolidated statements of operations.
NRZ is our largest servicing client, accounting for 51% Changes in fair value of the UPBRights to MSRs are recognized in MSR valuation adjustments, net in the consolidated statements of residential assets serviced and 70%operations. Changes in fair value of our loan servicing and subservicing fee revenue as of and for the year ended December 31, 2018, respectively. MSR related financing liability are reported in Pledged MSR liability expense.
The following table presents thetables present selected assets and liabilities recorded on our consolidated balance sheets as well as the impacts to our consolidated statements of operations in connection with our NRZ agreements.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Balance Sheets | | | | | |
| MSRs, at fair value (1) | $ | 566,952 | | | $ | 915,148 | | | $ | 894,002 | |
| Due from NRZ (Receivables) | | | | | |
| Sales and transfers of MSRs (2) | 0 | | | 24,167 | | | 23,757 | |
| Advance funding, subservicing fees and reimbursable expenses | 4,611 | | | 9,197 | | | 30,845 | |
| $ | 4,611 | | | $ | 33,364 | | | $ | 54,602 | |
| | | | | |
| Due to NRZ (Other liabilities) | $ | 94,691 | | | $ | 63,596 | | | $ | 53,001 | |
| Financing liability - MSRs pledged, at fair value | | | | | |
| Original Rights to MSRs Agreements | $ | 566,952 | | | $ | 603,046 | | | $ | 436,511 | |
| 2017 Agreements and New RMSR Agreements | 0 | | | 35,445 | | | 138,854 | |
| PMC MSR Agreements (1) | 0 | | | 312,102 | | | 457,491 | |
| $ | 566,952 | | | $ | 950,593 | | | $ | 1,032,856 | |
| | | | | |
| Statements of Operations | | | | | |
| Servicing fees collected on behalf of NRZ (1) | $ | 383,685 | | | $ | 577,015 | | | $ | 539,039 | |
| Less: Subservicing fee retained (1) | 104,848 | | | 139,343 | | | 142,334 | |
| Net servicing fees remitted to NRZ | 278,837 | | | 437,672 | | | 396,705 | |
| | | | | |
| Less: Reduction (increase) in financing liability | | | | | |
| Changes in fair value: | | | | | |
| Original Rights to MSRs Agreements | (21,964) | | | (229,198) | | | 171 | |
| 2017 Agreements and New RMSR Agreements | (903) | | | (5,866) | | | 14,369 | |
| PMC MSR Agreements (1) | 40,720 | | | 82,078 | | | 4,729 | |
| 17,853 | | | (152,986) | | | 19,269 | |
| Runoff and settlement: | | | | | |
| Original Rights to MSRs Agreements | 56,302 | | | 48,729 | | | 58,837 | |
| 2017 Agreements and New RMSR Agreements | 35,121 | | | 101,003 | | | 134,509 | |
| PMC MSR Agreements (1) | 7,492 | | | 64,631 | | | 18,420 | |
| 98,915 | | | 214,363 | | | 211,766 | |
| | | | | |
| Other | 9,735 | | | 4,206 | | | (6,000) | |
| | | | | |
| Pledged MSR liability expense | $ | 152,334 | | | $ | 372,089 | | | $ | 171,670 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Balance Sheets | | | | | |
| MSRs, at fair value | $ | 894,002 |
| | $ | 499,042 |
| | $ | 477,707 |
|
| Due from NRZ | 25,196 |
| | 14,924 |
| | 21,873 |
|
| Due to NRZ (1) | 53,001 |
| | 98,493 |
| | 83,248 |
|
| Financing liability - MSRs pledged, at fair value | 1,032,856 |
| | 508,291 |
| | 477,707 |
|
| | | | | | |
| Statements of Operations | | | | | |
| Servicing fees collected on behalf of NRZ | $ | 539,039 |
| | $ | 549,411 |
| | $ | 633,545 |
|
| Less: Subservicing fee retained | 142,334 |
| | 295,192 |
| | 337,727 |
|
| Net servicing fees remitted to NRZ | 396,705 |
| | 254,219 |
| | 295,818 |
|
| Less: Reduction (increase) in financing liability | | | | | |
| Changes in fair value: | | | | | |
| Original Rights to MSRs Agreements | 171 |
| | (83,300 | ) | | (2,580 | ) |
| 2017 Agreements and New RMSR Agreements | 14,369 |
| | 42,018 |
| | — |
|
| PHH MSR Agreements | 4,729 |
| | — |
| | — |
|
| | 19,269 |
| | (41,282 | ) | | (2,580 | ) |
| Runoff, settlement and other: | | | | | |
| Original Rights to MSRs Agreements | 50,620 |
| | 57,264 |
| | 63,997 |
|
| 2017 Agreements and New RMSR Agreements | 136,700 |
| | 1,926 |
| | — |
|
| PHH MSR Agreements | 18,446 |
| | — |
| | — |
|
| | 205,766 |
| | 59,190 |
| | 63,997 |
|
| | | | | | |
| Interest expense | $ | 171,670 |
| | $ | 236,311 |
| | $ | 234,401 |
|
(2)Balance represented the holdback of proceeds from PMC MSR sales and transfers to address indemnification claims and mortgage loan document deficiencies. These sales were executed by PMC prior to Ocwen’s acquisition of PHH.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Financing Liability - MSRs Pledged | Original Rights to MSRs Agreements | | 2017 Agreements and New RMSR Agreements | | PMC MSR Agreements | | Total |
| Beginning balance | $ | 603,046 | | | $ | 35,445 | | | $ | 312,102 | | | $ | 950,593 | |
| Additions | — | | | — | | | — | | | — | |
| Sales | — | | | — | | | (226) | | | (226) | |
| Changes in fair value: | | | | | | | |
| Original Rights to MSRs Agreements | 21,964 | | | — | | | — | | | 21,964 | |
| 2017 Agreements and New RMSR Agreements | — | | | 903 | | | — | | | 903 | |
| PMC MSR Agreements | — | | | — | | | (40,720) | | | (40,720) | |
| Runoff and settlement: | | | | | | | |
| Original Rights to MSRs Agreements | (56,302) | | | — | | | — | | | (56,302) | |
| 2017 Agreements and New RMSR Agreements | — | | | (35,121) | | | — | | | (35,121) | |
| PMC MSR Agreements | — | | | — | | | (7,492) | | | (7,492) | |
| Derecognition of Pledged MSR financing liability due to termination of PMC MSR Agreements | — | | | — | | | (263,664) | | | (263,664) | |
| Calls (1): | | | | | | | |
| Original Rights to MSRs Agreements | (1,756) | | | — | | | — | | | (1,756) | |
| 2017 Agreements and New RMSR Agreements | — | | | (1,227) | | | — | | | (1,227) | |
| PMC MSR Agreements | — | | | — | | | — | | | — | |
| Ending balance | $ | 566,952 | | | $ | 0 | | | $ | 0 | | | $ | 566,952 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Financing Liability - MSRs Pledged | Original Rights to MSRs Agreements | | 2017 Agreements and New RMSR Agreements | | PMC MSR Agreements | | Total |
| Beginning balance | $ | 436,511 | | | $ | 138,854 | | | $ | 457,491 | | | $ | 1,032,856 | |
| Additions | — | | | — | | | 1,276 | | | 1,276 | |
| | | | | | | |
| | | | | | | |
| Sales | — | | | — | | | 44 | | | 44 | |
| Changes in fair value: | | | | | | | |
| Original Rights to MSRs Agreements | 229,198 | | | — | | | — | | | 229,198 | |
| 2017 Agreements and New RMSR Agreements | — | | | 5,866 | | | — | | | 5,866 | |
| PMC MSR Agreements | — | | | — | | | (82,078) | | | (82,078) | |
| Runoff and settlement: | | | | | | | |
| Original Rights to MSRs Agreements | (48,730) | | | — | | | — | | | (48,730) | |
| 2017 Agreements and New RMSR Agreements | — | | | (101,003) | | | — | | | (101,003) | |
| PMC MSR Agreements | — | | | — | | | (64,631) | | | (64,631) | |
| Calls (1): | — | | | — | | | — | | | |
| Original Rights to MSRs Agreements | (13,933) | | | — | | | — | | | (13,933) | |
| 2017 Agreements and New RMSR Agreements | — | | | (8,272) | | | — | | | (8,272) | |
| PMC MSR Agreements | — | | | — | | | 0 | | | 0 | |
| Ending balance | $ | 603,046 | | | $ | 35,445 | | | $ | 312,102 | | | $ | 950,593 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| Financing Liability - MSRs Pledged | Original Rights to MSRs Agreements | | 2017 Agreements and New RMSR Agreements | | PMC MSR Agreements | | Total |
| Beginning balance | $ | 499,042 | | | $ | 9,249 | | | $ | 0 | | | $ | 508,291 | |
| Additions | — | | | — | | | 667 | | | 667 | |
| Assumed in connection with the acquisition of PHH | — | | | — | | | 481,020 | | | 481,020 | |
| Receipt of lump-sum cash payments | — | | | 279,586 | | | — | | | 279,586 | |
| | | | | | | |
| Changes in fair value: | | | | | | | |
| Original Rights to MSRs Agreements | (171) | | | — | | | — | | | (171) | |
| 2017 Agreements and New RMSR Agreements | — | | | (14,369) | | | — | | | (14,369) | |
| PMC MSR Agreements | — | | | — | | | (4,729) | | | (4,729) | |
| Runoff and settlement: | | | | | | | |
| Original Rights to MSRs Agreements | (58,837) | | | — | | | — | | | (58,837) | |
| 2017 Agreements and New RMSR Agreements | — | | | (134,509) | | | — | | | (134,509) | |
| PMC MSR Agreements | — | | | — | | | (18,420) | | | (18,420) | |
| Calls (1): | | | | | | | |
| Original Rights to MSRs Agreements | (3,523) | | | — | | | — | | | (3,523) | |
| 2017 Agreements and New RMSR Agreements | — | | | (1,103) | | | — | | | (1,103) | |
| PMC MSR Agreements | — | | | — | | | (1,047) | | | (1,047) | |
| Ending balance | $ | 436,511 | | | $ | 138,854 | | | $ | 457,491 | | | $ | 1,032,856 | |
(1)Represents the carrying value of MSRs in connection with call rights exercised by NRZ, for MSRs transferred to NRZ under the 2017 Agreements and New RMSR Agreements, or by Ocwen at NRZ’s direction, for MSRs underlying the Original Rights to MSRs Agreements. Ocwen derecognizes the MSRs and the related financing liability upon collapse of the securitization.
As of December 31, 2020, the UPB of loans serviced on behalf of NRZ comprised the following:
| | | | | |
| Ocwen servicer of record (MSR title retained by Ocwen) - Ocwen MSR (1) (2) | Amounts collected on behalf$ | 14,114,602 | |
| NRZ servicer of record (MSR title transferred to NRZ) - Ocwen MSR (1) | 49,866,082 | |
| Ocwen subservicer | 3,130,704 | |
Total NRZ for advances and servicing fees.UPB at December 31, 2020 | $ | 67,111,388 | |
(1)The MSR sale transactions did not achieve sale accounting treatment.
(2)NRZ’s associated outstanding servicing advances were approximately $575.9 million as of December 31, 2020.
Ocwen Transactions
Prior to the transfer of legal title under the Master Servicing Rights Purchase Agreement dated as of October 1, 2012, as amended, and certain Sale Supplements, as amended (collectively, the Original Rights to MSRs Agreements), Ocwen agreed to service the mortgage loans underlying the MSRs on the economic terms set forth in the Original Rights to MSRs Agreements. After the transfer of legal title as contemplated under the Original Rights to MSRs Agreements, Ocwen was to service the mortgage loans underlying the MSRs as subservicer on substantially the same economic terms.
On July 23, 2017 and January 18, 2018, we entered into a series of agreements with NRZ that collectively modify, supplement and supersede the arrangements among the parties as set forth in the Original Rights to MSRs Agreements. The July 23, 2017 agreements, as amended, include a Master Agreement, a Transfer Agreement and the Subservicing Agreement between Ocwen and New Residential Mortgage LLC (NRM), a subsidiary of NRZ, relating to non-agency loans (the NRM Subservicing Agreement) (collectively, the 2017 Agreements) pursuant to which the parties agreed, among other things, to undertake certain actions to facilitate the transfer from Ocwen to NRZ of Ocwen’s legal title to the remaining MSRs that were subject to the Original Rights to MSRs Agreements and under which Ocwen would subservice mortgage loans underlying the MSRs for an initial term of five yearsending July 2022 (the Initial Term).
On January 18, 2018, the parties entered into new agreements (including a Servicing Addendum) regarding the Rights to MSRs related to MSRs that remained subject to the Original Rights to MSRs Agreements as of January 1, 2018 and amended
the Transfer Agreement (collectively, New RMSR Agreements) to accelerate the implementation of certain parts of our arrangements in order to achieve the intent of the 2017 Agreements sooner. Upon receivingUnder the new agreements, following receipt of the required consents and transferringtransfer of the MSRs, Ocwen will subservicesubservices the mortgage loans underlying the transferred MSRs pursuant to the 2017 Agreements.
Agreements and the August 2018 subservicing agreement with NewRez LLC dba Shellpoint Mortgage Servicing (Shellpoint) described below.
Ocwen received lump-sum cash payments of $54.6 million and $279.6 million in September 2017 and January 2018 in accordance with the terms of the 2017 Agreements and New RMSR Agreements, respectively. These upfront payments generally representrepresented the net present value of the difference between the future revenue stream Ocwen would have received under the Original Rights to MSRs Agreements and the future revenue stream Ocwen expectsexpected to receive under the 2017 Agreements and the New RMSR Agreements. We recognized the cash received as a financing liability that we accounted for at fair value through the term of the original agreements (April 2020). Changes in fair value were recognized in Pledged MSR liability expense in the consolidated statements of operations.
On August 17, 2018, Ocwen and NRZ entered into certain amendments (i) to the New RMSR Agreements to include New Penn Financial, LLC dba Shellpoint, Mortgage Servicing (Shellpoint), a subsidiary of NRZ, as a party to which legal title to the MSRs could be transferred after related consents are received, (ii) to add a Subservicing Agreement between Ocwen and Shellpoint relating to non-agency loans (the Shellpoint Subservicing Agreement), (iii) to add an Agency Subservicing Agreement between Ocwen and NRM relating to agency loans (the Agency Subservicing Agreement), and (iv) to conform the New RMSR Agreements and the NRM Subservicing Agreement to certain of the terms of the Shellpoint Subservicing Agreement between Ocwen and Shellpoint.
In the event the required third-party consents are not obtained with respect to any dates specified in, and in accordance with the process set forth in, the New RMSR Agreements, such MSRs will either: (i) remain subject to the New RMSR Agreements at the option of NRZ, (ii) be acquired by Ocwen at a price determined in accordance with the terms of the New RMSR Agreements, or (iii) be sold to a third party in accordance with the terms of the New RMSR Agreements.Agency Subservicing Agreement.
At any time during the Initial Term, NRZ may terminate the Subservicing AgreementAgreements and Servicing Addendum for convenience, subject to Ocwen’s right to receive a termination fee and proper180 days’ notice. The termination fee is calculated as specified in the Subservicing Agreements and Servicing Addendum, and is a discounted percentage of the expected revenues that would be owed to Ocwen over the remaining contract term based on certain portfolio run off assumptions.
Following the Initial Term, NRZ may extend the term of the Subservicing AgreementAgreements and Servicing Addendum for additional three-monththree-month periods by providing proper notice. Following the Initial Term, the Subservicing AgreementAgreements and Servicing Addendum can be cancelled by Ocwen on an annual basis. NRZ and Ocwen have the ability to terminate the Subservicing AgreementAgreements and Servicing Addendum for cause if certain specified conditions occur. The terminations must be terminations in whole (i.e., cover all the loans under the relevant Subservicing Agreement or Servicing Addendum) and not in part, except for limited circumstances specified in the agreements. In addition, if NRZ terminates any of the NRM or Shellpoint Subservicing Agreements or the Servicing Addendum for cause, the other agreements will also terminate automatically.
Under the terms of the Subservicing AgreementAgreements and Servicing Addendum, in addition to a base servicing fee, Ocwen will continue to receivereceives certain ancillary income, whichfees, primarily includes late fees, loan modification fees and convenience or Speedpay® fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. NRZ will receivereceives all float earnings and deferred servicing fees related to delinquent borrower payments, as well as bebeing entitled to receive certain real estate owned (REO)REO related income including REO referral commissions.
Prior to January 18, 2018,As of December 31, 2020, the UPB of MSRs as to which necessary transfer consents had not yet been obtained continued to be subject to the Servicing Agreements and the New RMSR Agreements is $67.1 billion, including $16.3 billion for which title has not transferred to NRZ. As the third-party consents required for title to the MSRs to transfer were not obtained by May 31, 2019, the New RMSR Agreements set forth a process under which NRZ’s $16.3 billion Rights to MSRs may (i) be acquired by Ocwen at a price determined in accordance with the terms of the agreements entered intoNew RMSR Agreements, at the option of Ocwen, or (ii) be sold, together with Ocwen’s title to those MSRs, to a third party in 2012 and 2013. Underaccordance with the 2012 and 2013 agreements,terms of the servicing fees payable underNew RMSR Agreements, subject to an additional Ocwen option to acquire at a price based on the servicing agreements underlyingwinning third-party bid rather than selling to the third party. If the Rights to MSRs were apportioned betweenare not transferred pursuant to these alternatives, then the Rights to MSRs will remain subject to the New RMSR Agreements.
In addition, as noted above, during the Initial Term, NRZ has the right to terminate the $16.3 billion New RMSR Agreements for convenience, in whole but not in part, subject to payment of a termination fee and us.180 days’ notice. If NRZ retained a fee based onexercises this termination right, NRZ has the UPBoption of seeking (i) the transfer of the loans serviced,MSRs through a sale to a third party of its Rights to MSRs (together with a transfer of Ocwen’s title to those MSRs) or (ii) a substitute RMSR arrangement that substantially replicates the Rights to MSRs structure (a Substitute RMSR Arrangement) under which we would transfer title to the MSRs to a successor servicer and OLS received certain fees, includingNRZ would continue to own the economic rights and obligations related to the MSRs. In the case of option (i), we have a performancepurchase option as specified in the New RMSR Agreements. If NRZ is not able to sell the Rights to MSRs or establish a Substitute RMSR Arrangement with another servicer, NRZ has the right to revoke its termination notice and re-instate the Servicing Addendum or to establish a subservicing arrangement whereby the MSRs remaining subject to the New RMSR Agreements would be transferred to up to three subservicers who would subservice under Ocwen’s oversight. If such a subservicing arrangement were established, Ocwen would receive an oversight fee basedand reimbursement of expenses. We may also agree on servicing fees paid less an amount calculated based on the amountalternative arrangements that are not contemplated under our existing agreements or that are variations of servicing advances and the cost of financing those advances.contemplated under our existing agreements.
PMC Transactions
On December 28, 2016, PHHPMC entered into an agreement to sell substantially all of its MSRs, and the related servicing advances, to New Residential Mortgage LLC, a wholly-owned subsidiary of NRZ.NRM (the 2016 PMC Sale Agreement). In connection with this agreement, on December 28, 2016, PHHPMC also entered into a subservicing agreement with NRZ (collectively,which was subsequently amended and restated as of March 29, 2019 (together with the PHH2016 PMC Sale Agreement, the PMC MSR Agreements). The PHHPMC subservicing agreement hashad an initial term of three years from the initial transaction date of June 16, 2017, subject to certain transfer and termination provisions. The MSR sale transaction did not originally achieve sale accounting treatment.
Through its acquisitionOn February 20, 2020, we received a notice of PHH on October 4, 2018, Ocwen recognized MSRs of $42.3 billion UPB relatedtermination from NRZ with respect to the PHH MSRs Agreements.PMC subservicing agreement. This termination was for convenience and not for cause, and provided for loan deboarding fees to be paid by NRZ. As the sale accounting criteria were met upon the notice of December 31, 2018, $3.5 billion UPB of private-investortermination, the MSRs and related advances remain committedthe Rights to be sold to New Residential under the PHH MSRs Agreements.
Atwere derecognized from our balance sheet on February 20, 2020 without any timegain or loss on derecognition. We serviced these loans until deboarding, and accounted for them as a subservicing relationship. Accordingly, during each2020, we recognized subservicing fees of the second and third years of the initial term, and subject to the payment of the applicable deboarding fee, NRZ may terminate an amount not to exceed 25% of the underlying mortgage loans$15.9 million associated with proper notice. The PHH MSR Agreements automatically renew for successive one-year terms unless either party provides notice of termination. NRZ and PHH each have the ability to terminate the subservicing agreement for cause if certain specified conditions occur.
subsequent to February 20, 2020 and have not reported any servicing fees collected on behalf of, and remitted to NRZ, any change in fair value, runoff and settlement in financing liability thereafter. On September 1, 2020, 133,718 loans representing $18.2 billion of UPB were deboarded and the remaining 136,500 loans representing $16.0 billion of UPB were deboarded on October 1, 2020.
Note 1011 — Receivables
| | | | | | | | | | | |
| December 31, |
| | 2020 | | 2019 |
| Servicing-related receivables: | | | |
| Government-insured loan claims - Forward | $ | 103,058 | | | $ | 122,557 | |
| Government-insured loan claims - Reverse | 32,887 | | | 14,123 | |
| Due from custodial accounts | 19,393 | | | 27,175 | |
| Reimbursable expenses | 4,970 | | | 13,052 | |
| Advance funding, subservicing fees and reimbursable expenses - Due from NRZ | 4,611 | | | 9,197 | |
| | | |
| Sales and transfers of MSRs - Due from NRZ | 0 | | | 24,167 | |
| Other | 1,087 | | | 4,970 | |
| 166,006 | | | 215,241 | |
| Income taxes receivable | 57,503 | | | 37,888 | |
| Other receivables | 3,200 | | | 5,963 | |
| 226,709 | | | 259,092 | |
| Allowance for losses | (39,044) | | | (57,872) | |
| | $ | 187,665 | | | $ | 201,220 | |
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Servicing-related receivables: | | | |
| Government-insured loan claims, net | $ | 105,258 |
| | $ | 114,971 |
|
| Due from NRZ | 25,196 |
| | 14,924 |
|
| Amount due on sales of MSRs (1) | 30,148 |
| | 1,037 |
|
| Reimbursable expenses | 11,508 |
| | 31,709 |
|
| Due from custodial accounts | 9,060 |
| | 36,122 |
|
| Other | 7,012 |
| | 10,922 |
|
| | 188,182 |
| | 209,685 |
|
| Income taxes receivable | 45,987 |
| | 36,831 |
|
| Other receivables | 17,672 |
| | 19,600 |
|
| | 251,841 |
| | 266,116 |
|
| Allowance for losses | (53,579 | ) | | (66,587 | ) |
| | $ | 198,262 |
| | $ | 199,529 |
|
| |
(1) | Balance represents the holdback of proceeds from MSR sales and transfers to address indemnification claims and mortgage loan document deficiencies. The balance at December 31, 2018 includes $29.5 million of receivables acquired in connection with the acquisition of PHH that relate to sales executed by PHH prior to the acquisition date. |
At December 31, 20182020 and 2017,2019, the allowance for losses primarily related to receivables of our Servicing business. AllowanceThe allowance for losses related to defaulted FHA- or VA-insured loans repurchased from Ginnie Mae guaranteed securitizations (government-insured loan claims) was $52.5$38.3 million and $53.3$56.9 million at December 201831, 2020 and 2017,2019, respectively. This allowance represents management’s estimate of incurred losses and is maintained at a level that management considers adequate based upon continuing assessments of collectibility, current trends, and historical loss experience.The government-insured loan claims are guaranteed by the U.S. government.
| | | | | | | | | | | | | | | | | |
| Allowance for Losses - Government-Insured Loan Claims | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance | $ | 56,868 | | | $ | 52,497 | | | $ | 53,340 | |
| Provision | 18,145 | | | 29,034 | | | 37,352 | |
| Charge-offs and other, net | (36,674) | | | (24,663) | | | (38,195) | |
| Ending balance | $ | 38,339 | | | $ | 56,868 | | | $ | 52,497 | |
|
| | | | | | | | | | | |
| Allowance for Losses - Government-Insured Loan Claims | Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 53,340 |
| | $ | 53,258 |
| | $ | 20,571 |
|
| Provision | 37,352 |
| | 40,424 |
| | 61,322 |
|
| Charge-offs and other, net | (38,195 | ) | | (40,342 | ) | | (28,635 | ) |
| Ending balance | $ | 52,497 |
| | $ | 53,340 |
| | $ | 53,258 |
|
Note 1112 — Premises and Equipment
| | | | | | | | | | | |
| December 31, |
| | 2020 | | 2019 |
| Computer hardware | $ | 33,585 | | | $ | 32,747 | |
| Operating lease ROU assets | 26,930 | | | 31,329 | |
| Leasehold improvements | 21,272 | | | 22,019 | |
| Computer software | 16,371 | | | 24,377 | |
| Office equipment | 6,958 | | | 6,929 | |
| Furniture and fixtures | 3,463 | | | 3,506 | |
| Buildings | 0 | | | 8,550 | |
| Other | 123 | | | 44 | |
| | 108,702 | | | 129,501 | |
| Less accumulated depreciation and amortization | (91,777) | | | (91,227) | |
| | $ | 16,925 | | | $ | 38,274 | |
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Computer software | $ | 46,029 |
| | $ | 43,137 |
|
| Computer hardware | 34,240 |
| | 29,848 |
|
| Leasehold improvements | 27,798 |
| | 23,425 |
|
| Buildings | 9,689 |
| | 9,689 |
|
| Office equipment | 7,370 |
| | 8,071 |
|
| Furniture and fixtures | 4,674 |
| | 4,141 |
|
| Other | 818 |
| | 1,364 |
|
| | 130,618 |
| | 119,675 |
|
| Less accumulated depreciation and amortization | (97,201 | ) | | (82,669 | ) |
| | $ | 33,417 |
| �� | $ | 37,006 |
|
Note 1213 — Other Assets
| | | | | | | | | | | |
| December 31, |
| | 2020 | | 2019 |
| Contingent loan repurchase asset | $ | 480,221 | | | $ | 492,900 | |
| Derivatives, at fair value | 23,246 | | | 6,007 | |
| Prepaid expenses | 21,176 | | | 21,996 | |
| Prepaid representation, warranty and indemnification claims - Agency MSR sale | 15,173 | | | 15,173 | |
| Prepaid lender fees, net | 9,556 | | | 8,647 | |
| REO | 7,771 | | | 8,556 | |
| Deferred tax assets, net | 3,543 | | | 2,169 | |
| Security deposits | 2,222 | | | 2,163 | |
| Mortgage-backed securities, at fair value | 2,019 | | | 2,075 | |
| | | |
| | | |
| Other | 6,556 | | | 3,554 | |
| | $ | 571,483 | | | $ | 563,240 | |
Note 14 — Borrowings
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Contingent loan repurchase asset | $ | 302,581 |
| | $ | 431,492 |
|
| Other prepaid expenses | 27,647 |
| | 22,559 |
|
| Prepaid representation, warranty and indemnification claims - Agency MSR sale | 15,173 |
| | 20,173 |
|
| Real estate | 7,368 |
| | 3,070 |
|
| Prepaid lender fees, net (1) | 6,589 |
| | 9,496 |
|
| Deferred tax assets, net | 5,289 |
| | 2,000 |
|
| Derivatives, at fair value | 4,552 |
| | 5,429 |
|
| Security deposits | 2,278 |
| | 3,019 |
|
| Mortgage-backed securities, at fair value | 1,502 |
| | 1,592 |
|
| Interest-earning time deposits | 1,338 |
| | 4,739 |
|
| Prepaid income taxes (2) | — |
| | 5,621 |
|
| Other | 5,250 |
| | 2,696 |
|
| | $ | 379,567 |
| | $ | 511,886 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advance Match Funded Liabilities | | Borrowing Capacity | | December 31, 2020 | | December 31, 2019 |
| Borrowing Type | | Maturity (1) | | Amorti-zation Date (1) | | Total | | Available (2) | | Weighted Average Int. Rate | | Balance | | Weighted Average Int. Rate | | Balance |
| Advance Financing Facilities | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Advance Receivables Backed Notes - Series 2015-VF5 (3) | | Jun. 2051 | | Jun. 2021 | | $ | 250,000 | | | $ | 160,604 | | | 4.26 | % | | $ | 89,396 | | | 3.36 | % | | $ | 190,555 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Advance Receivables Backed Notes, Series 2020-T1 (4) | | Aug. 2052 | | Aug. 2022 | | 475,000 | | | 0 | | | 1.49 | | | 475,000 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Advance Receivables Backed Notes, Series 2019-T1 (4) | | Aug. 2050 | | Aug. 2020 | | 0 | | | 0 | | | 0 | | | 0 | | | 2.62 | | | 185,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Advance Receivables Backed Notes, Series 2019-T2 (4) | | Aug. 2051 | | Aug. 2021 | | 0 | | | 0 | | | 0 | | | 0 | | | 2.53 | | | 285,000 | |
| Total Ocwen Master Advance Receivables Trust (OMART) | | | | | | 725,000 | | | 160,604 | | | 1.93 | % | | 564,396 | | | 2.79 | % | | 660,555 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Ocwen Freddie Advance Funding (OFAF) - Advance Receivables Backed Notes, Series 2015-VF1 (5) | | Jun. 2051 | | Jun. 2021 | | 70,000 | | | 53,108 | | | 3.26 | | | 16,892 | | | 3.53 | | | 18,554 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | $ | 795,000 | | | $ | 213,712 | | | 1.96 | % | | $ | 581,288 | | | 2.81 | % | | $ | 679,109 | |
| |
(1) | We amortize these costs to the earlier of the scheduled amortization date, contractual maturity date or prepayment date of the debt. |
| |
(2) | We recognized the balance of prepaid income taxes as a cumulative-effect reduction of retained earnings upon adoption of ASU 2016-16 on January 1, 2018. See Note 1 — Organization, Business Environment, Basis of Presentation and Significant Accounting Policies for additional information.
|
Automotive dealer(1)The amortization date of our facilities is the date on which the revolving period ends under each advance facility note and repayment of the outstanding balance must begin if the note is not renewed or extended. The maturity date is the date on which all outstanding balances must be repaid. In all of our advance facilities, there are multiple notes outstanding. For each note, after the amortization date, all collections that represent the repayment of advances pledged to the facility must be applied ratably to each outstanding amortizing note to reduce the balance and as such the collection of advances allocated to the amortizing note may not be used to fund new advances.
(2)Borrowing capacity under the OMART and OFAF facilities is available to us provided that we have sufficient eligible collateral to pledge. At December 31, 2020, NaN of the available borrowing capacity of the OMART and OFAF advance financing notes not pledged to our former automotive dealer loan financing facility were reported as Other assets. We ceased new lending and terminatedcould be used based on the amount of eligible collateral.
(3)On May 7, 2020, we renewed this facility through June 30, 2021, and increased the total borrowing capacity of the Series 2015-VF5 variable notes from $200.0 million to $500.0 million, with interest computed based on the lender’s cost of funds plus a margin of 400 bps. On August 17, 2020, we reduced the total borrowing capacity to $250.0 million in January 2018. There were no remainingconjunction with the issuance of new fixed-rate term notes outstandingwith a borrowing capacity of $475.0 million, as disclosed in (4) below.
(4)On August 12, 2020, we issued fixed-rate term notes with a total borrowing capacity of $475.0 million (Series 2020 T-1). The weighted average rate of the notes at December 31, 2018. At December 31, 2017,2020 is 1.49% with rates on the balanceindividual classes of the notes was $0, net of an allowance of $7.7 million. Changes in the allowance are as follows: |
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 7,664 |
| | $ | 4,371 |
| | $ | 27 |
|
| Provision | (265 | ) | | 3,293 |
| | 4,344 |
|
| Charge-offs and other | (7,399 | ) | | — |
| | — |
|
| Ending balance | $ | — |
| | $ | 7,664 |
| | $ | 4,371 |
|
Note 13 — Borrowings
|
| | | | | | | | | | | | | | | | | | | | | | |
Match Funded Liabilities
| | | | | | | | December 31, 2018 | | December 31, 2017 |
| Borrowing Type | | Maturity (1) | | Amorti-zation Date (1) | | Available Borrowing Capacity (2) | | Weighted Average Interest Rate (3) | | Balance | | Weighted Average Interest Rate (3) | | Balance |
| Advance Financing Facilities | | | | | | | | | | | | | | |
| Advance Receivables Backed Notes, Series 2014-VF4 (4) | | Aug. 2048 | | Aug. 2018 | | $ | — |
| | — | % | | $ | — |
| | 4.29 | % | | $ | 67,095 |
|
| Advance Receivables Backed Notes - Series 2015-VF5 (4) | | Dec. 2049 | | Dec. 2019 | | 8,441 |
| | 4.06 |
| | 216,559 |
| | 4.29 |
| | 67,095 |
|
| Advance Receivables Backed Notes - Series 2016-T1 (5) | | Aug. 2048 | | Aug. 2018 | | — |
| | — |
| | — |
| | 2.77 |
| | 265,000 |
|
| Advance Receivables Backed Notes - Series 2016-T2 (5) | | Aug. 2049 | | Aug. 2019 | | — |
| | 2.99 |
| | 235,000 |
| | 2.99 |
| | 235,000 |
|
| Advance Receivables Backed Notes - Series 2017-T1 (5) | | Sep. 2048 | | Sep. 2018 | | — |
| | — |
| | — |
| | 2.64 |
| | 250,000 |
|
| Advance Receivables Backed Notes, Series 2018-T1 (5) | | Aug. 2049 | | Aug. 2019 | | — |
| | 3.50 |
| | 150,000 |
| | — |
| | — |
|
| Advance Receivables Backed Notes, Series 2018-T2 (5) | | Aug. 2050 | | Aug. 2020 | | — |
| | 3.81 |
| | 150,000 |
| | — |
| | — |
|
| Total Ocwen Master Advance Receivables Trust (OMART) | | | | | | 8,441 |
| | 3.56 |
| | 751,559 |
| | 3.02 |
| | 884,190 |
|
| | | | | | | | | | | | | | | |
Ocwen Servicer Advance Receivables Trust III (OSART III) - Advance Receivables Backed Notes, Series 2014-VF1 (6) | | Dec. 2048 | | Dec. 2018 | | — |
| | — |
| | — |
| | 4.63 |
| | 33,768 |
|
| | | | | | | | | | | | | | | |
Ocwen Freddie Advance Funding (OFAF) - Advance Receivables Backed Notes, Series 2015-VF1 (7) | | Jun. 2049 | | Jun. 2019 | | 38,275 |
| | 5.03 |
| | 26,725 |
| | 3.54 |
| | 56,078 |
|
| Total Servicing Advance Financing Facilities | | | | | | 46,716 |
| | 3.61 | % | | 778,284 |
| | 3.16 | % | | 974,036 |
|
| | | | | | | | | | | | | | | |
Automotive Capital Asset Receivables Trust (ACART) - Loan Series 2017-1 (8) | | Feb. 2021 | | Feb. 2019 | | — |
| | — | % | | — |
| | 6.77 | % | | 24,582 |
|
| | | | | | | | | | | | | | | |
| | | | | | | $ | 46,716 |
| | 3.61 | % | | $ | 778,284 |
| | 3.25 | % | | $ | 998,618 |
|
| |
(1) | The amortization date of our facilities is the date on which the revolving period ends under each advance facility note and repayment of the outstanding balance must begin if the note is not renewed or extended. The maturity date is the date on which all outstanding balances must be repaid. In all of our advance facilities, there are multiple notes outstanding. For each note, after the amortization date, all collections that represent the repayment of advances pledged to the facility must be applied to reduce the balance of the note outstanding, and any new advances are ineligible to be financed. |
| |
(2) | Borrowing capacity is available to us provided that we have eligible collateral to pledge. Collateral may only be pledged to one facility. At December 31, 2018, none of the available borrowing capacity of our advance financing notes could be used based on the amount of eligible collateral that had been pledged. |
| |
(3) | 1ML was 2.50% and 1.56% at December 31, 2018 and 2017, respectively. |
| |
(4) | Effective January 1, 2018, the borrowing capacity of the Series 2014-VF4 and the Series 2015-VF5 variable rate notes were each reduced from $105.0 million to $70.0 million. The interest rate was based on 1ML, with a ceiling of 125 basis points (bps) plus a margin of 235 to 635 bps. On July 13, 2018, we increased the borrowing capacity of the Series 2015-VF5 variable notes to $225.0 million and extended the amortization date to December 15, 2019, with interest computed based on the lender’s cost of funds plus a margin of 105 to 250 bps. The increased capacity was used on July 16, 2018 to redeem the Series 2016-T1 term notes with an outstanding balance of $265.0 million and an amortization date of August 15, 2018. We also voluntarily terminated the Series 2014-VF4 variable notes on July 16, 2018.
|
| |
(5) | Under the terms of the agreement, we must continue to borrow the full amount of the Series 2016-T2, 2018-T1 and 2018-T2ranging from 1.28% to 5.42%. The Series 2019-T1 and 2019-T2 fixed-rate term notes until the amortization date. If there is insufficient eligible collateral to support the level of borrowing, the excess cash proceeds in an amount necessary to make up the deficit are not distributed to Ocwen but are held by the trustee, and interest expense continues to be based on the full amount of the outstanding notes. The Series 2016-T2, 2018-T1 and 2018-T2 term notes have a total combined borrowing capacity of $535.0 million. Rates on the individual classes of notes range from 2.72% to 4.53%. The Series |
2016-T1 and Series 2017-T1 term notes were redeemed on July 16, 2018 and August 14, 2018, respectively. On August 15, 2018, we issued two $150.0 million fixed-rate term notes (Series 2018 T-1 and Series 2018-T2) with amortization dates of August 15, 2019 and August 17, 2020.
(5)On May 7, 2020, respectivelywe renewed this facility through June 30, 2021 and increased the borrowing capacity from $60.0 million to $70.0 million with interest computed based on the lender’s cost of funds plus a margin of 300 bps.
| |
(6) | We voluntarily terminated the Series 2014-VF1 variable notes on December 5, 2018. The maximum borrowing capacity under this facility was $55.0 million. There was a ceiling of 300 bps for 3ML in determining the interest rate for these variable rate notes. Rates on the individual notes were based on the lender’s cost of funds plus a margin of 235 to 475 bps. |
| |
(7) | On June 7, 2018, borrowing capacity was reduced from $110.0 million to $65.0 million with interest computed based on the lender’s cost of funds plus a margin of 180 to 450 bps. There is a ceiling of 300 bps for 3ML in determining the interest rate for these variable rate notes.
|
| |
(8) | On January 23, 2018, we voluntarily terminated the Loan Series 2017-1 Notes. |
Pursuant | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financing Liabilities | | | | | | | | Outstanding Balance at December 31, |
| Borrowing Type | | Collateral | | Interest Rate | | Maturity | | 2020 | | 2019 |
| HMBS-related borrowings, at fair value (1) | | Loans held for investment | | 1ML + 245 bps | | (1) | | $ | 6,772,711 | | | $ | 6,063,435 | |
| | | | | | | | | | |
| Other financing liabilities, at fair value | | | | | | | | | | |
| MSRs pledged (Rights to MSRs), at fair value: | | | | | | | | | | |
| Original Rights to MSRs Agreements (2) | | MSRs | | (2) | | (2) | | 566,952 | | | 603,046 | |
| 2017 Agreements and New RMSR Agreements (3) | | MSRs | | (3) | | (3) | | 0 | | | 35,445 | |
| PMC MSR Agreements (2) | | MSRs | | (2) | | (2) | | 0 | | | 312,102 | |
| | | | | | | | 566,952 | | | 950,593 | |
| Financing liability - Owed to securitization investors, at fair value: | | | | | | | | | | |
| IndyMac Mortgage Loan Trust (INDX 2004-AR11) (4) | | Loans held for investment | | (4) | | (4) | | 0 | | | 9,794 | |
| Residential Asset Securitization Trust 2003-A11 (RAST 2003-A11) (4) | | Loans held for investment | | (4) | | (4) | | 9,770 | | | 12,208 | |
| | | | | | | | 9,770 | | | 22,002 | |
| Total Other financing liabilities, at fair value | | | | | | | | 576,722 | | | 972,595 | |
| | | | | | | | | | |
| | | | | | | | $ | 7,349,433 | | | $ | 7,036,030 | |
(1)Represents amounts due to the holders of beneficial interests in Ginnie Mae guaranteed HMBS which did not qualify for sale accounting treatment of HECM loans. Under this accounting treatment, the HECM loans securitized with Ginnie Mae remain on our consolidated balance sheet and the proceeds from the sale are recognized as a financing liability, which is recorded at fair value consistent with the related HECM loans. The beneficial interests have no maturity dates, and the borrowings mature as the related loans are repaid.
(2)This pledged MSR liability is recognized due to the accounting treatment of MSR sale transactions with NRZ which did not qualify as sales for accounting purposes. Under this accounting treatment, the MSRs transferred to NRZ remain on the consolidated balance sheet and the proceeds from the sale are recognized as a financing liability, which is recorded at fair value consistent with the related MSRs. This financing liability has no contractual maturity or repayment schedule. The PMC liability was derecognized upon termination of the agreement by NRZ on February 20, 2020. See Note 10 — Rights to MSRsfor additional information.
(3)Represented a liability which arose in connection with lump sum payments received in 2017 Agreementsupon transfer of legal title of the MSRs related to the Rights to MSRs transactions to NRZ and in 2018 in connection with the execution of the New RMSR Agreements NRZ is obligated to fund new servicing advances with respect toas compensation for foregoing certain payments under the MSRs underlying the Rights to MSRs. We are dependent upon NRZ for funding the servicing advance obligations forOriginal Rights to MSRs where we are the servicer. NRZ currently uses advance financing facilities in order to fund a substantial portionAgreements. The balance of the servicing advances that they are contractually obligatedliability was adjusted each reporting period to purchase pursuant to ourits fair value through the term of the original agreements with them. As of December 31, 2018, we were the servicer ofon April 30, 2020. See Note 10 — Rights to MSRs for additional information.
(4)Consists of securitization debt certificates due to third parties that represent beneficial interests in trusts that we include in our consolidated financial statements, as more fully described in Note 4 — Securitizations and Variable Interest Entities. In June 2020, we sold to NRZ pertaining to $88.3 billionthe beneficial interests held in UPBthe INDX 2004-AR11 securitization trust and deconsolidated the associated outstanding servicing advancestrust. The certificates in the RAST 2003-A11 Trust pay interest based on fixed rates ranging between 4.25% and 5.75% and a variable rate based on 1ML plus 0.45%. The maturity of the certificates occurs upon maturity of the loans held by the trust. The remaining loans in the RAST 2003-A11 Trust have maturity dates extending through October 2033.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Secured Borrowings | | | | | | Available Borrowing Capacity | | Outstanding Balance December 31, | | |
| Borrowing Type | | Collateral | | Interest Rate (1) | | Maturity | | Uncommitted | | Committed (2) | | 2020 | | 2019 | | |
| SSTL (3) | | (3) | | 1-Month Euro-dollar rate + 600 bps; Euro-dollar floor 100 bps (3) | | May 2022 | | $ | 0 | | | $ | 0 | | | $ | 185,000 | | $ | 326,066 | | |
| | | | | | | | | | | | | | | | |
| Master repurchase agreement (4) | | Loans held for sale (LHFS) | | 1ML + 220 - 375 bps | | June 2021 | | 79,227 | | | 0 | | | 195,773 | | 91,573 | | |
| Mortgage warehouse agreement (5) | | LHFS (reverse) | | Greater of 1ML + 250 bps or 3.50%; LIBOR floor 0% | | August 2021 | | 0 | | | 1,000 | | | 0 | | | 72,443 | | |
| Master repurchase agreement (6) | | LHFS (forward and reverse) | | 1ML + 325 bps forward; 1ML + 350 bps reverse | | Nov. 2021 | | 50,000 | | | 119,919 | | | 80,081 | | 139,227 | | |
| Master repurchase agreement (7) | | LHFS (reverse) | | Prime + 0%; 4.0% floor | | January 2020 | | 0 | | | 0 | | | 0 | | | 898 | | |
| Master repurchase agreement (8) | | N/A | | SOFR + 190 bps; SOFR floor 25 bps | | N/A | | 50,000 | | | 0 | | | 0 | | | 0 | | |
| Participation agreement (9) | | LHFS | | (9) | | June 2021 | | 120,000 | | | 0 | | | 0 | | 17,304 | | |
| Master repurchase agreement (9) | | LHFS | | (9) | | June 2021 | | 0 | | | 26,719 | | | 63,281 | | 0 | | | |
| Master repurchase agreement | | LHFS | | 1 ML + 250 bps | | March 2021 | | 0 | | | 1,000 | | | 0 | | | 0 | | | |
| Mortgage warehouse agreement (10) | | LHFS | | 1ML + 350 bps; 5.25% floor | | Jan. 2022 | | 0 | | | 38,285 | | | 11,715 | | 10,780 | | |
| Mortgage warehouse agreement (11) | | LHFS (reverse) | | 1ML + 250 bps; 3.25% floor | | Oct. 2021 | | 26,866 | | | 0 | | | 73,134 | | 0 | | | |
| Mortgage warehouse agreement (12) | | LHFS | | (12) | | N/A | | 72,271 | | | 0 | | | 27,729 | | 0 | | | |
| Total Mortgage loan warehouse facilities | | 3.33% (17) | | | | 398,364 | | | 186,923 | | | 451,713 | | 332,225 | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Secured Borrowings | | | | | | Available Borrowing Capacity | | Outstanding Balance December 31, | | |
| Borrowing Type | | Collateral | | Interest Rate (1) | | Maturity | | Uncommitted | | Committed (2) | | 2020 | | 2019 | | |
| Agency MSR financing facility (13) | | MSRs, Advances | | 1ML + 450 bps | | June 2021 | | 0 | | | 39,245 | | | 210,755 | | 147,706 | | |
| Ginnie Mae MSR financing facility (14) | | MSRs, Advances | | 1ML + 450 bps; 0.50% floor | | Dec. 2021 | | 12,978 | | | 0 | | | 112,022 | | 72,320 | | |
| Ocwen Excess Spread-Collateralized Notes, Series 2019-PLS1 (15) | | MSRs | | 5.07% | | Nov. 2024 | | 0 | | | 0 | | | 68,313 | | 94,395 | | |
| Secured Notes, Ocwen Asset Servicing Income Series Notes, Series 2014-1 (16) | | MSRs | | (16) | | Feb. 2028 | | 0 | | | 0 | | | 47,476 | | 57,594 | | |
| Total MSR financing facilities | | 4.82% (17) | | | | 12,978 | | | 39,245 | | | 438,566 | | 372,015 | | |
| | | | | | | | $ | 411,342 | | | $ | 226,168 | | | 1,075,279 | | 1,030,306 | | |
| Unamortized debt issuance costs - SSTL and PLS Notes (18) | | (5,761) | | (3,381) | | |
| Discount - SSTL | | (357) | | (1,134) | | |
| | | | | | | | | | | | $ | 1,069,161 | | $ | 1,025,791 | | |
| | | | | | | | | | | | | | | | |
| Weighted average interest rate | | 4.55 | % | | 4.74 | % | | |
(1)1ML was 0.14% and 1.76% at December 31, 2020 and 2019, respectively.
(2)Of the borrowing capacity on mortgage loan warehouse facilities extended on a committed basis, NaN of the available borrowing capacity could be used at December 31, 2020 based on the amount of eligible collateral that could be pledged.
(3)On January 27, 2020, we entered into a Joinder and Second Amendment Agreement (the Amendment) which amends the Amended and Restated SSTL Facility Agreement dated as of such date were approximately $2.7 billion. Should NRZ’s advance financing facilities fail to performDecember 5, 2016, as envisaged or should NRZ otherwise be unable to meet its advance funding obligations, our liquidity, financial conditionamended by a Joinder and business could be materially and adversely affected. As the servicer, we are contractually required under our servicing agreements to make certain servicing advances even if NRZ does not perform its contractual obligations to fund those advances. See Note 9 — Rights to MSRsAmendment Agreement dated as of March 18, 2019. The Amendment provided for additional information.
In addition, although we are not an obligor or guarantor under NRZ’s advance financing facilities, we are a party to certainnet prepayment of $126.1 million of the outstanding balance at December 31, 2019 such that the facility documents ashas a maximum outstanding balance of $200.0 million. The Amendment also (i) extended the servicermaturity of the underlyingremaining outstanding loans on which advances are being financed. Asunder the servicer, we make certain representations, warranties and covenants, including representations and warranties in connection with advances subsequently soldSSTL to or reimbursed by, NRZ.
|
| | | | | | | | | | | | | | |
| Financing Liabilities | | | | | | | | Outstanding Balance at December 31, |
| Borrowing Type | | Collateral | | Interest Rate | | Maturity | | 2018 | | 2017 |
| HMBS-Related Borrowings, at fair value (1) | | Loans held for investment | | 1ML + 260 bps | | (1) | | $ | 5,380,448 |
| | $ | 4,601,556 |
|
| | | | | | | | | | | |
| Other Financing Liabilities | | | | | | | | | | |
| MSRs pledged, at fair value | | | | | | | | | | |
| Original Rights to MSRs Agreements | | MSRs | | (2) | | (2) | | 436,511 |
| | 499,042 |
|
| 2017 Agreements and New RMSR Agreements | | MSRs | | (3) | | (3) | | 138,854 |
| | 9,249 |
|
| PHH MSR Agreements | | MSRs | | (4) | | (4) | | 457,491 |
| | — |
|
| | | | | | | | | 1,032,856 |
| | 508,291 |
|
| Secured Notes, Ocwen Asset Servicing Income Series, Series 2014-1 (5) | | MSRs | | (5) | | Feb. 2028 | | 65,523 |
| | 72,575 |
|
| Financing liability - Owed to securitization investors, at fair value: | | | | | | | | | | |
| IndyMac Mortgage Loan Trust (INDX 2004-AR11) (6) | | Loans held for investment | | (6) | | (6) | | 11,012 |
| | — |
|
| Residential Asset Securitization Trust 2003-A11 (RAST 2003-A11) (6) | | Loans held for investment | | (6) | | (6) | | 13,803 |
| | — |
|
| | | | | | | | | 24,815 |
| | — |
|
| Advances pledged (7) | | Advances on loans | | (7) | | (7) | | 4,419 |
| | 12,652 |
|
| | | | | | | | | 1,127,613 |
| | 593,518 |
|
| | | | | | | | | | | |
| | | | | | | | | $ | 6,508,061 |
| | $ | 5,195,074 |
|
| |
(1) | Represents amounts due to the holders of beneficial interests in Ginnie Mae guaranteed HMBS. The beneficial interests have no maturity dates, and the borrowings mature as the related loans are repaid. |
| |
(2) | This financing liability has no contractual maturity or repayment schedule. The balance of the liability is adjusted each reporting period to its fair value based on the present value of the estimated future cash flows underlying the related MSRs. |
| |
(3) | This financing liability arose in connection with lump sum payments received upon transfer of legal title of the MSRs related to the Rights to MSRs transactions to NRZ in September 2017. In connection with the execution of the New RMSR Agreements in January 2018, we received a lump sum payment of $279.6 million as compensation for foregoing certain payments under the Original Rights to MSRs Agreements. The balance of the liability is adjusted each reporting period to its fair value based on the present value of the estimated future cash flows. The expected maturity of the liability is April 30, 2020, the date through which we were scheduled to be the servicer on loans underlying the Rights to MSRs per the Original Rights to MSRs Agreements. |
| |
(4) | Represents a liability for sales of MSRs that are accounted for as a secured borrowing which we assumed in connection with the acquisition of PHH. Under this accounting treatment, the MSRs transferred to NRZ remain on the consolidated balance sheet and the proceeds from the sale are recognized as a secured liability. We elected to record the liability at fair value consistent with the related MSRs. |
| |
(5) | OASIS noteholders are entitled to receive a monthly payment equal to the sum of: (a) 21 basis points of the UPB of the reference pool of Freddie Mac mortgages; (b) any termination payment amounts; (c) any excess refinance amounts; and (d) the note redemption amounts, each as defined in the indenture supplement for the notes. Monthly amortization of the liability is estimated using the proportion of monthly projected service fees on the underlying MSRs as a percentage of lifetime projected fees, adjusted for the term of the notes. |
| |
(6) | Consists of securitization debt certificates due to third parties that represent beneficial interests in trusts that we include in our unaudited consolidated financial statements, as more fully described in Note 3 — Securitizations and Variable Interest Entities. The holders of these certificates have no recourse against the assets of Ocwen. The certificates in the INDX 2004-AR11 Trust pay interest based on variable rates which are generally based on weighted average net mortgage rates and which range between 3.68% and 4.26% at December 31, 2018. The certificates in the RAST 2003-A11 Trust pay interest based on fixed rates ranging between 4.25% and 5.75% and a variable rate based on 1ML plus 0.45%. The maturity of the certificates occurs upon maturity of the loans held by the trust. The remaining loans in the INDX 2004-AR11 Trust and RAST 2003-A11 Trust have maturity dates extending through November 2034 and October 2033, respectively.
|
| |
(7) | Certain sales of advances did not qualify for sales accounting treatment and were accounted for as a financing. This financing liability has no contractual maturity. The effective interest rate is based on 1ML plus a margin of 450 bps. |
|
| | | | | | | | | | | | | | | | | | |
| Other Secured Borrowings | | | | | | | | | | Outstanding Balance at December 31, |
| Borrowing Type | | Collateral | | Interest Rate | | Termination / Maturity | | Available Borrowing Capacity (1) | | 2018 | | 2017 |
| SSTL (2) | | (2) | | 1-Month Euro-dollar rate + 500 bps with a Eurodollar floor of 100 bps (2) | | Dec. 2020 | | $ | — |
| | $ | 231,500 |
| | $ | 298,251 |
|
| | | | | | | | | | | | | |
| Mortgage loan warehouse facilities | | | | | | | | | | | | |
| Repurchase agreement (3) | | Loans held for sale (LHFS) | | 1ML + 195 - 300 bps | | Sep. 2019 | | 25,307 |
| | 74,693 |
| | 8,221 |
|
| Participation agreements (4) | | LHFS | | N/A | | (4) | | — |
| | 42,331 |
| | 161,433 |
|
| Mortgage warehouse agreement (5) | | LHFS (reverse mortgages) | | 1ML + 275 bps; 1ML floor of 350 bps | | Aug. 2019 | | — |
| | 8,009 |
| | 32,042 |
|
| Master repurchase agreement (6) | | LHFS (forward and reverse mortgages) | | 1ML + 225 bps forward; 1ML + 275 bps reverse | | Dec. 2019 | | 169,320 |
| | 30,680 |
| | 54,086 |
|
| Master repurchase agreement (7) | | LHFS (reverse mortgages) | | Prime + 0.0% (4.0% floor) | | Jan. 2020 | | — |
| | — |
| | — |
|
| Master repurchase agreement (8) | | N/A | | 1ML + 170bps | | N/A | | — |
| | — |
| | — |
|
| | | | | | | | | 194,627 |
| | 155,713 |
| | 255,782 |
|
| | | | | | | | | | | | | |
| | | | | | | | | $ | 194,627 |
| | 387,213 |
| | 554,033 |
|
| Unamortized debt issuance costs - SSTL | | (3,098 | ) | | (5,423 | ) |
| Discount - SSTL | | (1,577 | ) | | (2,760 | ) |
| | | | | | | | |
|
| | $ | 382,538 |
| | $ | 545,850 |
|
| | | | | | | | | | | | | |
| Weighted average interest rate | | 5.49 | % | | 5.22 | % |
| |
(1) | Available borrowing capacity for our mortgage loan warehouse facilities does not consider the amount of the facility that the lender has extended on an uncommitted basis. Of the borrowing capacity extended on a committed basis, $62.4 million could be used at December 31, 2018 based on the amount of eligible collateral that could be pledged. |
| |
(2) | Under the terms of the Amended and Restated Senior Secured Term Loan Facility Agreement with an original borrowing capacity of $335.0 million, we may request increases to the loan amount of up to $100.0 million, with additional increases subject to certain limitations. We are required to make quarterly principal payments of $4.2 million on the SSTL. |
BorrowingsMay 15, 2022, (ii) provides that the loans under the SSTL bear interest at the election of Ocwen,one-month Eurodollar Rate or the Base Rate (as defined in the SSTL), at a rate per annum equal to either (a) the base rate (the greatest of (i) the prime rate in effect on such day, (ii) the federal funds rate in effect on such day plus 0.50% and (iii) 1ML,our option, plus a margin of 4.00% and subject6.00% per annum for Eurodollar Rate loans or 5.00% per annum for Base Rate loans (increasing to a base rate floor of 2.00% or (b) 1ML, plus a margin of 5.00%6.50% per annum for Eurodollar Rate loans or 5.50% per annum for Base Rate loans on January 27, 2021), (iii) provides for a prepayment premium of 2.00% until January 27, 2022 and subject(iv) requires quarterly principal payments of $5.0 million. The applicable interest rate was 7.0% at December 31, 2020.
(4)The maximum borrowing under this agreement is $275.0 million, of which $110.0 million is available on a committed basis and the remainder is available at the discretion of the lender.
(5)On March 12, 2020, we voluntarily reduced the maximum borrowing capacity from $100.0 million to $1.0 million to in connection with Liberty’s transfer of substantially all of its assets, liabilities, contracts and employees to PMC effective March 15, 2020. On August 10, 2020, the maturity date of this agreement was extended to August 13, 2021. The participation agreement allows the lender to acquire a 1ML floor100% beneficial interest in the underlying mortgage loans. The transaction does not qualify for sale accounting treatment and is accounted for as a secured borrowing.
(6)The maximum borrowing under this agreement is $250.0 million, of 1.00%. Towhich $200.0 million is available on a committed basis and the remainder is available on an uncommitted basis. The agreement allows the lender to acquire a 100% beneficial interest in the underlying mortgage loans. The transaction does not qualify for sale accounting treatment and is accounted for as a secured borrowing. On November 19, 2020, the maturity date we have elected option (b)was extended to determineNovember 18, 2021 and the interest rate.
| |
(3) | On September 28, 2018, we renewed this facility through September 27, 2019. In connection with the renewal, we increased the maximum borrowing amount from $137.5 million to $175.0 million, of which $100.0 million is available on a committed basis and the remainder is available at the discretion of the lender. |
| |
(4) | Under these participation agreements, the lender provides financing for a combined total of $250.0 million at the discretion of the lender. The participation agreements allow the lender to acquire a 100% beneficial interest in the underlying mortgage loans. The transaction does not qualify for sale accounting treatment and is accounted for as a secured borrowing. The lender earns the stated interest rate of the underlying mortgage loans while the loans are financed under the participation agreement. On May 31, 2018, we renewed these facilities through April 30, 2019 ($175.0 million) and May 31, 2019 ($75.0 million). |
rate was increased to 1ML plus 3.25% for borrowings secured by forward mortgage loans and 1ML plus 3.50% for reverse mortgage loans.
(7)This facility expired on January 22, 2020 and was not renewed.
| |
(5) | Under this participation agreement, the lender provides financing for $100.0 million at the discretion of the lender. The participation agreement allows the lender to acquire a 100% beneficial interest in the underlying mortgage loans. The transaction does not qualify for sale accounting treatment and is accounted for as a secured borrowing. On August 15, 2018, we renewed these facilities through August 15, 2019. |
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(6) | On December 7, 2018, we renewed this facility through December 6, 2019. In connection with the renewal, we increased the maximum borrowing amount from $150.0 million to $250.0 million, of which $200.0 million is available on a committed basis and the remainder is available at the discretion of the lender. The agreement allows the lender to acquire a 100% beneficial interest in the underlying mortgage loans. The transaction does not qualify for sale accounting treatment and is accounted for as a secured borrowing. |
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(7) | Under this agreement, t(8)The lender provides financing for up to $50.0 million at the discretion of the lender. On January 23, 2019, we renewed this facility through January 22, 2020. |
| |
(8) | This agreement was originally entered into by PHH and subsequently assumed by Ocwen in connection with its acquisition of PHH. The lender provides financing for up to $200.0 million at the discretion of the lender. The agreement has no stated maturity date.
|
In addition to $50.0 million at the above mortgage loan warehouse facilities, we entered into a master participationdiscretion of the lender. The agreement has no stated maturity date. Interest on February 4, 2019 under whichthis facility is based on the Secured Overnight Financing Rate (SOFR).
(9)Under the original terms, the lender will provideprovided $300.0 million of borrowing capacity on an uncommitted basis. On June 25, 2020, this facility was amended to be comprised of two lines, a $120.0 million uncommitted participation agreement and a $90.0 million committed repurchase agreement. The maturity date of the facility was extended to June 24, 2021. The agreements allow the lender to acquire a 100% beneficial interest in the underlying mortgage loans. The transactions do not qualify for sale accounting treatment and are accounted for as secured borrowings. The lender earns the stated interest rate of the underlying mortgage loans less 35 bps with a floor of 3.50%, while the loans are financed under both the participation and repurchase agreements.
(10)Under this agreement, the lender provides financing for up to $50.0 million on a committed basis. On January 15, 2021, the maturity date of this facility was extended to January 15, 2022.
(11)On March 12, 2020, we entered into a mortgage loan warehouse agreement to fund reverse mortgage loan draws by borrowers subsequent to origination. Under this agreement, the lender provides financing for up to $100.0 million on an uncommitted basis. In October 2020, the maturity date was extended to October 24, 2021 and the capacity was temporarily increased to $150.0 million until
December 4, 2020 when it was reduced to $100.0 million. On February 1, 2021, the capacity was temporarily increased to $150.0 million until February 28, 2021 when it will be reduced to $100.0 million.
(12)On September 30, 2020, we entered into a $100.0 million uncommitted repurchase agreement to finance the purchase of EBO loans from Ginnie Mae. The agreement has no stated maturity date, however each transaction has a maximum duration of four years. The cost of this line is set at each transaction date and is based on the interest rate on the collateral.
(13)PMC’s obligations under this facility are secured by a lien on the related MSRs. Ocwen guarantees the obligations of PMC under this facility. On May 7, 2020, we renewed the facility through June 30, 2021 and reduced the maximum amount which we may borrow pursuant to the repurchase agreements from $300.0 million to $250.0 million on a committed basis. We also pledged the membership interest of the depositor for our OMART advance financing facility as additional collateral to this facility. See Note 4 — Securitizations and Variable Interest Entities for additional information. We are subject to daily margining requirements under the terms of our MSR financing facilities. Declines in fair value of our MSRs due to declines in market interest rates, assumption updates or other factors require that we provide additional collateral to our lenders under these facilities.
(14)In connection with this facility, PMC entered into a repurchase agreement pursuant to which PMC has sold a participation certificate representing certain economic interests in the Ginnie Mae MSRs and has agreed to repurchase such participation certificate at a future date at the repurchase price set forth in the repurchase agreement. PMC’s obligations under this facility are secured by a lien on the related Ginnie Mae MSRs. Ocwen guarantees the obligations of PMC under the facility. On June 30, 2020, we amended the facility to increase the borrowing capacity from $100.0 million to $127.5 million on an uncommitted basis, accelerate the maturity date to finance single family mortgage loans heldDecember 27, 2020 and include Ginnie Mae servicing advances as additional collateral. On December 23, 2020, the maturity date was extended to December 27, 2021 and the borrowing capacity was reduced to $125.0 million. See (13) above regarding daily margining requirements.
(15) PLS Issuer’s obligations under the facility are secured by a lien on the related PLS MSRs. Ocwen guarantees the obligations of PLS Issuer under the facility. The Class A PLS Notes issued pursuant to the credit agreement had an initial principal amount of $100.0 million and amortize in accordance with a pre-determined schedule subject to modification under certain events. See Note 4 — Securitizations and Variable Interest Entities for sale.additional information. See (13) above regarding daily margining requirements.
(16)OASIS noteholders are entitled to receive a monthly payment equal to the sum of: (a) 21 basis points of the UPB of the reference pool of Freddie Mac mortgages; (b) any termination payment amounts; (c) any excess refinance amounts; and (d) the note redemption amounts, each as defined in the indenture supplement for the notes. Monthly amortization of the liability is estimated using the proportion of monthly projected service fees on the underlying MSRs as a percentage of lifetime projected fees, adjusted for the term of the notes. |
| | | | | | | | | | | |
Senior Notes
| | | | | Outstanding Balance at December 31, |
| | Interest Rate | | Maturity | | 2018 | | 2017 |
| Senior unsecured notes: | | | | | | | |
| Ocwen (1) | 6.625% | | May 2019 | | $ | — |
| | $ | 3,122 |
|
| PHH (2) | 7.375% | | Sep. 2019 | | 97,521 |
| | — |
|
| PHH (2) | 6.375% | | Aug. 2021 | | 21,543 |
| | — |
|
| | | | | | 119,064 |
| | 3,122 |
|
| | | | | | | | |
| Senior secured notes (3) | 8.375% | | Nov. 2022 | | 330,878 |
| | 346,878 |
|
| | | | | | 449,942 |
| | 350,000 |
|
| Unamortized debt issuance costs | | (2,075 | ) | | (2,662 | ) |
| Fair value adjustments (2) | | | | | 860 |
| | — |
|
| | | | | | $ | 448,727 |
| | $ | 347,338 |
|
| |
(1) | On December 21, 2018, we redeemed all of the remaining Senior unsecured notes due in May 2019, at a redemption price of 100.0% of the outstanding principal balance plus accrued and unpaid interest. |
| |
(2) | These notes were originally issued by PHH and subsequently assumed by Ocwen in connection with its acquisition of PHH. We recorded the notes at their respective fair values on the date of acquisition, and we are amortizing the resulting fair value adjustments over the remaining term of the notes. We have the option to redeem the notes due in August 2021, in whole or in part, on or after January 1, 2019 at a redemption price equal to 100.0% of the principal amount plus any accrued and unpaid interest. |
| |
(3) | In 2016, OLS completed a debt-for-debt exchange offer whereby OLS issued $346.9 million aggregate principal amount of 8.375% Senior Secured Second Lien Notes that mature November 15, 2022 (Senior Secured Notes) in exchange for $346.9 million aggregate principal amount (or 99.1%) of Ocwen’s Senior Unsecured Notes. Interest is payable semiannually on each May 15 and November 15, and commenced on May 15, 2017. In December 2018, Ocwen repurchased $16.0 million of the Senior Secured Notes at a price of 96.0%. |
(18)Includes $4.9 million and $2.2 million at December 31, 2020 and 2019, respectively, related to SSTL.
| | | | | | | | | | | | | | | | | | | | | | | |
Senior Notes
| | | | | Outstanding Balance at December 31, |
| Interest Rate | | Maturity | | 2020 | | 2019 |
| Senior unsecured notes (1) (3) | 6.375% | | Aug. 2021 | | 21,543 | | | 21,543 | |
| Senior secured notes (2) (3) | 8.375% | | Nov. 2022 | | 291,509 | | | 291,509 | |
| | | | | 313,052 | | | 313,052 | |
| Unamortized debt issuance costs | | (968) | | | (1,470) | |
| Purchase accounting fair value adjustments (1) | | | | | (186) | | | (497) | |
| | | | | $ | 311,898 | | | $ | 311,085 | |
(1)These notes were originally issued by PHH and subsequently assumed by Ocwen in connection with its acquisition of PHH. We are amortizing the fair value purchase accounting adjustments over the remaining term of the notes. We have the option to redeem the notes, in whole or in part, at a redemption price equal to 100.0% of the principal amount plus any accrued and unpaid interest.
(2)During July and August 2019, we repurchased a total of $39.4 million of our 8.375% Senior secured notes in the open market for a price of $34.3 million. We recognized a gain of $5.1 million on these repurchases which is reported in Gain on repurchases of senior secured notes in the consolidated statement of operations.
(3)See Note 28 — Subsequent Events for information regarding our intention to redeem our senior notes.
At any time, OLSwe may redeem all or a part of the 8.375% Senior Secured Notes,secured notes, upon not less than 30 nor more than 60 days’ notice at a specified redemption price, plus accrued and unpaid interest to the date of redemption. OLSWe may redeem all or a part of the Senior Secured Notesthese notes at the redemption prices (expressed as percentages of principal amount) specified in the Indenture. The redemption pricesIndenture of 102.094% during the twelve-month periodsperiod beginning on November 15th of each year are as follows:
|
| | | |
| Year | | Redemption Price |
| 2018 | | 106.281 | % |
| 2019 | | 104.188 |
|
| 2020 | | 102.094 |
|
| 2021 and thereafter | | 100.000 |
|
Upon a change of control (as defined in the Indenture), OLS iswe are required to make an offer to the holders of the 8.375% Senior Secured Notessecured notes to repurchase all or a portion of each holder’s Senior Secured Notesnotes at a purchase price equal to 101.0% of the principal amount of the Senior Secured Notesnotes purchased plus accrued and unpaid interest to the date of purchase.
The Indenture contains certain covenants, including, but not limited to, limitations and restrictions on Ocwen’s ability and the ability of its restricted subsidiaries (including PMC as the surviving entity in the merger with OLS) to (i) incur additional debt or issue preferred stock; (ii) pay dividends or make distributions on or purchase equity interests of Ocwen (iii) repurchase or redeem subordinated debt prior to maturity; (iv) make investments or other restricted payments; (v) create liens on assets to secure debt of OLSPMC or any Guarantor; (vi) sell or transfer assets; (vii) enter into transactions with affiliates; and (viii) enter into mergers, consolidations, or sales of all or substantially all of the assets of Ocwen and its restricted subsidiaries, taken as a
whole. As of the date of the Indenture, all of Ocwen’s subsidiaries are restricted subsidiaries. The restrictive covenants set forth in the Indenture are subject to important exceptions and qualifications. Many of the restrictive covenants will be suspended if (i) the Senior Secured Notes achieve an investment grade rating from both Moody’s and S&P and (ii) no default or event of default has occurred and is continuing under the Indenture. Covenants that are suspended as a result of achieving these ratings will again apply if one or both of Moody’s and S&P withdraws its investment grade rating or downgrades the rating assigned to the Senior Secured Notes below an investment grade rating.
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a company, security orcompany’s debt obligation. At December 31, 2018,2020, the S&P long-term corporateissuer credit rating for Ocwen was “B-”. On December 11, 2018,April 13, 2020, S&P placed Ocwen’s ratings outlook on CreditWatch with negative implications due to the uncertain economic impact of COVID-19 on liquidity. The CreditWatch was removed on July 23, 2020 and the Outlook was revised to Negative. On August 21, 2020, Moody’s affirmed the long-term corporate rating of “Caal” and revised the outlook to stable from negative. On July 25, 2018, Fitch affirmed the long-term issuer default rating of “B-” and withdrew all corporatereaffirmed their ratings. It is possible that additional actions by credit rating agencies could have a material adverse impact on our liquidity and funding position, including materially changing the terms on which we may be able to borrow money.
Covenants
Under the terms of our debt agreements, we are subject to various qualitative and quantitative covenants. Collectively, these covenants include:
•Financial covenants;
•Covenants to operate in material compliance with applicable laws;
•Restrictions on our ability to engage in various activities, including but not limited to incurring additional forms of debt, paying dividends or making distributions on or purchasing equity interests of Ocwen, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or acquisitions or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries, creating liens on assets to secure debt of OLS or any Guarantor,guarantor, entering into transactions with affiliates;
•Monitoring and reporting of various specified transactions or events, including specific reporting on defined events affecting collateral underlying certain debt agreements; and
•Requirements to provide audited financial statements within specified timeframes, including requirements that Ocwen’s financial statements and the related audit report be unqualified as to going concern.
Many of the restrictive covenants arising from the indenture for the Senior Secured Notes will be suspended if the Senior Secured Notes achieve an investment-grade rating from both Moody’s and S&P and if no default or event of default has occurred and is continuing.
Financial covenants in certain of our debt agreements require that we maintain, among other things:
•a 40% loan to collateral value ratio (i.e., the ratio of total outstanding loans under the SSTL to certain collateral and other assets as defined under our SSTL,the SSTL) as of the last date of any fiscal quarter; and
•specified levels of tangible net worth and liquidity atliquidity.
Certain financial covenants were added as part of the OLS level.amendment and extension of our SSTL on January 27, 2020. These include i) maintaining a minimum unencumbered asset coverage ratio (i.e., the ratio of unrestricted cash and certain first priority perfected collateral to total outstanding loans under the SSTL) as of the last day of any fiscal quarter of 200% increasing to 225% after December 31, 2020 and ii) maintaining minimum unrestricted cash of $125.0 million as of the last day of each fiscal quarter.
As of December 31, 2018,2020, the most restrictive consolidated tangible net worth requirements contained in our debt agreements were for a minimum of $275.0$200.0 million in consolidated tangible net worth, as defined, at Ocwen under certain of our advance match funded debt, MSR financing facilities and mortgage warehouse agreements. The most restrictive liquidity requirements were for a minimum of $125.0 million in consolidated liquidity, as defined, under certain of our advance match funded debt and mortgage warehouse agreements. In addition, as amended, the SSTL limits our capacity to repurchase our securities and prepay certain junior debt to a combined total of our$10.0 million, among other debt agreements.restrictions. Our current repurchase capacity has been reduced to the extent of repurchases executed under Ocwen’s share repurchase program announced in February 2020. See Note 16 — Stockholders’ Equity for additional information regarding share repurchases.
As a result of the covenants to which we are subject, we may be limited in the manner in which we conduct our business and may be limited in our ability to engage in favorable business and investment activities or raise additionalcertain types of capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, nonpayment of principal or interest, noncompliance with our covenants, breach of
representations, the occurrence of a material adverse change, insolvency, bankruptcy, certain material judgments and changes of control.
Covenants and default provisions of this type are commonly found in debt agreements such as ours. Certain of these covenants and default provisions are open to subjective interpretation and, if our interpretation was contested by a lender, a court may ultimately be required to determine compliance or lack thereof. In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to
comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations and other legal remedies. Our lenders can waive their contractual rights in the event of a default.
We believe that we arewere in compliance with all of the qualitative and quantitative covenants in our debt agreements as of the date of these financial statements.
Collateral
Our assets held as collateral related to secured borrowings, committed under sale or other contractual obligations and which may be subject to secured liens under the SSTL and Senior Secured Notes are as follows at December 31, 2018:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Collateral for Secured Borrowings | | | | | |
| Total Assets | | Match Funded Liabilities | | Financing Liabilities | | Mortgage Loan Warehouse/MSR Facilities | | Sales and Other Commitments (1) | | Other (2) | |
| Cash | $ | 284,802 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 284,802 | | |
| Restricted cash | 72,463 | | | 14,195 | | | 0 | | | 5,945 | | | 52,323 | | | 0 | | |
| MSRs (3) | 1,294,817 | | | 0 | | | 566,952 | | | 728,420 | | | 0 | | | 0 | | |
| Advances, net | 828,239 | | | 651,576 | | | 0 | | | 82,147 | | | 0 | | | 94,516 | | |
| Loans held for sale | 387,836 | | | 0 | | | 0 | | | 359,131 | | | 0 | | | 28,705 | | |
| Loans held for investment | 7,006,897 | | | 0 | | | 6,882,022 | | | 96,302 | | | 0 | | | 28,573 | | |
| Receivables, net | 187,665 | | | 0 | | | 0 | | | 47,187 | | | 0 | | | 140,478 | | |
| Premises and equipment, net | 16,925 | | | 0 | | | 0 | | | 0 | | | 0 | | | 16,925 | | |
| Other assets | 571,483 | | | 0 | | | 0 | | | 6,334 | | | 497,616 | | | 67,533 | | |
| Total assets | $ | 10,651,127 | | | $ | 665,771 | | | $ | 7,448,974 | | | $ | 1,325,466 | | | $ | 549,939 | | | $ | 661,532 | | |
(1)Sales and Other Commitments include Restricted cash and deposits held as collateral to support certain contractual obligations, and Contingent loan repurchase assets related to the Ginnie Mae EBO program for which a corresponding liability is recognized in Other liabilities.
(2)The borrowings under the SSTL are secured by a first priority security interest in substantially all of the assets of Ocwen, PHH, PMC and the other guarantors thereunder, excluding among other things, 35% of the voting capital stock of foreign subsidiaries, securitization assets and equity interests of securitization entities, assets securing permitted funding indebtedness and non-recourse indebtedness, REO assets, as well as other customary carve-outs (collectively, the Collateral). The Collateral is subject to certain permitted liens set forth under the SSTL and related security agreement. The Senior Secured Notes are guaranteed by Ocwen and the other guarantors that guarantee the SSTL, and the borrowings under the Senior Secured Notes are secured by a second priority security interest in the Collateral. Assets securing borrowings under the SSTL and Senior Secured Notes may include amounts presented in Other as well as certain assets presented in Collateral for Secured Borrowings and Sales and Other Commitments, subject to permitted liens as defined in the applicable debt documents. The amounts presented here may differ in their calculation and are not intended to represent amounts that may be used in connection with covenants under the applicable debt documents.
(3)MSRs pledged as collateral for secured borrowings in connection with the Rights to MSRs transactions with NRZ which are accounted for as secured financings. Certain MSR cohorts with a negative fair value of $0.6 million that would be presented as Other are excluded from the eligible collateral of the facilities and are comprised of $16.3 million of positive fair value related to RMBS and $16.9 million of negative fair value related to private EBO and PLS MSRs.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Collateral for Secured Borrowings | | | | |
| | Total Assets | | Match Funded Liabilities | | Financing Liabilities | | Mortgage Loan Warehouse Facilities | | Sales and Other Commitments (1) | | Other (2) |
| Cash | $ | 329,132 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 329,132 |
|
| Restricted cash | 67,878 |
| | 20,968 |
| | — |
| | 5,658 |
| | 41,252 |
| | — |
|
| Mortgage servicing rights | 1,457,149 |
| | — |
| | 985,576 |
| | — |
| | 9,867 |
| | 461,706 |
|
| Advances, net | 249,382 |
| | — |
| | 11,162 |
| | — |
| | 31,216 |
| | 207,004 |
|
| Match funded assets | 937,294 |
| | 937,294 |
| | — |
| | — |
| | — |
| | — |
|
| Loans held for sale | 242,622 |
| | — |
| | — |
| | 143,704 |
| | — |
| | 98,918 |
|
| Loans held for investment | 5,498,719 |
| | — |
| | 5,406,968 |
| | 33,567 |
| | — |
| | 58,184 |
|
| Receivables, net | 198,262 |
| | — |
| | — |
| | — |
| | — |
| | 198,262 |
|
| Premises and equipment, net | 33,417 |
| | — |
| | — |
| | — |
| | — |
| | 33,417 |
|
| Other assets | 379,567 |
| | — |
| | — |
| | — |
| | 320,032 |
| | 59,535 |
|
| Assets related to discontinued operations | 794 |
| | — |
| | — |
| | — |
| | — |
| | 794 |
|
| Total Assets | $ | 9,394,216 |
| | $ | 958,262 |
| | $ | 6,403,706 |
| | $ | 182,929 |
| | $ | 402,367 |
| | $ | 1,446,952 |
|
| |
(1) | Sales and Other Commitments include MSRs and related advances committed under sale agreements, Restricted cash and deposits held as collateral to support certain contractual obligations, and Contingent loan repurchase assets related to the Ginnie Mae early buyout program for which a corresponding liability is recognized in Other liabilities. |
| |
(2) | The borrowings under the SSTL are secured by a first priority security interest in substantially all of the assets of Ocwen, OLS, PHH, PMC and the other guarantors thereunder, excluding among other things, 35% of the voting capital stock of foreign subsidiaries, securitization assets and equity interests of securitization entities, assets securing permitted funding indebtedness and non-recourse indebtedness, REO assets, Agency MSRs with respect to which an acknowledgment agreement acknowledging such security interest has not been obtained, as well as other customary carve-outs (collectively, the Collateral). The Collateral is subject to certain permitted liens set forth under the SSTL and related security agreement. The Senior Secured Notes are guaranteed by Ocwen and the other guarantors that guarantee the SSTL, and the borrowings under the Senior Secured Notes are secured by a second priority security interest in the Collateral. Security interests securing borrowings under the SSTL and Senior Secured Notes may include amounts presented in Other as well as certain assets presented in Collateral for Secured Borrowings and Sales and Other Commitments, subject to permitted liens as defined in the applicable debt documents. The amounts presented here may differ in their calculation and are not intended to represent amounts that may be used in connection with covenants under the applicable debt documents. |
Maturities of Borrowings and Management’s Plans to Address Maturing Borrowings
Certain of our borrowings mature within one year of the date of issuance of these financial statements. Based on management’s evaluation, we expect to renew, replace or extend all such borrowings to the extent necessary to finance our business on or prior to their respective maturities consistent with our historical experience.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expected Maturity Date (1) (2) (3) | | | | |
| 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total
Balance | | Fair
Value |
| Advance match funded liabilities | $ | 106,288 | | | $ | 475,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 581,288 | | | $ | 581,997 | |
| Other secured borrowings | 821,141 | | | 206,662 | | | 0 | | | 0 | | | 0 | | | 47,476 | | | 1,075,279 | | | 1,043,212 | |
| Senior notes | 21,543 | | | 291,509 | | | 0 | | | 0 | | | 0 | | | 0 | | | 313,052 | | | 320,879 | |
| $ | 948,972 | | | $ | 973,171 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 47,476 | | | $ | 1,969,619 | | | $ | 1,946,088 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Expected Maturity Date (1) (2) (3) | | | |
| | 2019 | | 2020 | | 2021 | | 2022 | | Total
Balance | | Fair
Value |
| Match funded liabilities | $ | 628,284 |
| | $ | 150,000 |
| | $ | — |
| | $ | — |
| | $ | 778,284 |
| | $ | 776,485 |
|
| Other secured borrowings | 172,463 |
| | 214,750 |
| |
| | — |
| | 387,213 |
| | 383,162 |
|
| Senior notes | 97,521 |
| | — |
| | 21,543 |
| | 330,878 |
| | 449,942 |
| | 426,147 |
|
| | $ | 898,268 |
| | $ | 364,750 |
| | $ | 21,543 |
| | $ | 330,878 |
| | $ | 1,615,439 |
| | $ | 1,585,794 |
|
| |
(1) | Amounts are exclusive of any related discount, unamortized debt issuance costs or fair value adjustment. |
| |
(2) | For match funded liabilities, the Expected Maturity Date is the date on which the revolving period ends for each advance financing facility note and repayment of the outstanding balance must begin if the note is not renewed or extended. |
| |
(3) | Excludes financing liabilities recognized in connection with asset sales transactions accounted for as financings, including $1.0 billion recorded in connection with sales of Rights to MSRs and MSRs and $5.4 billion recorded in connection with the securitizations of HMBS. These financing liabilities have no contractual maturity and are amortized over the life of the underlying assets. |
(1)Amounts are exclusive of any related discount, unamortized debt issuance costs or fair value adjustment. Note 14 — Other Liabilities(2)For match funded liabilities, the Expected Maturity Date is the date on which the revolving period ends for each advance financing facility note and repayment of the outstanding balance must begin if the note is not renewed or extended.
(3)Excludes financing liabilities recognized in connection with asset sales transactions accounted for as financings, including $567.0 million recorded in connection with sales of Rights to MSRs and MSRs and $6.8 billion recorded in connection with the securitizations of HMBS. These financing liabilities have no contractual maturity and are amortized over the life of the underlying assets. |
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Contingent loan repurchase liability | $ | 302,581 |
| | $ | 431,492 |
|
| Other accrued expenses | 99,739 |
| | 75,088 |
|
| Accrued legal fees and settlements | 62,763 |
| | 51,057 |
|
| Due to NRZ - Advance collections and servicing fees | 53,001 |
| | 98,493 |
|
| Liability for indemnification obligations | 51,574 |
| | 23,117 |
|
| Servicing-related obligations | 41,922 |
| | 36,296 |
|
| Checks held for escheat | 20,686 |
| | 19,306 |
|
| Liability for uncertain tax positions | 13,739 |
| | 3,252 |
|
| Liability for unfunded pension obligation | 12,683 |
| | 165 |
|
| Accrued interest payable | 7,209 |
| | 5,172 |
|
| Liability for mortgage insurance contingency | 6,820 |
| | 6,820 |
|
| Derivatives, at fair value | 4,986 |
| | 635 |
|
| Deferred revenue | 4,441 |
| | 3,463 |
|
| Other | 21,492 |
| | 15,054 |
|
| | $ | 703,636 |
| | $ | 769,410 |
|
|
| | | | | | | | | | | |
| Accrued Legal Fees and Settlements | Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 51,057 |
| | $ | 93,797 |
| | $ | 74,922 |
|
| Accrual for probable losses (1) | 19,774 |
| | 131,113 |
| | 74,943 |
|
| Payments (2) | (12,983 | ) | | (174,941 | ) | | (47,754 | ) |
| Assumed in connection with the acquisition of PHH | 9,960 |
| | — |
| | — |
|
| Issuance of common stock in settlement of litigation (3) | (5,719 | ) | | (1,937 | ) | | — |
|
| Net increase (decrease) in accrued legal fees | (1,917 | ) | | 482 |
| | (6,231 | ) |
| Other | 2,591 |
| | 2,543 |
| | (2,083 | ) |
| Ending balance | $ | 62,763 |
| | $ | 51,057 |
| | $ | 93,797 |
|
| |
(1) | Consists of amounts accrued for probable losses in connection with legal and regulatory settlements and judgments. Such amounts are reported in Professional services expense in the consolidated statements of operations. |
| |
(2) | Includes cash payments made in connection with resolved legal and regulatory matters. |
| |
(3) | See Note 15 — Equity for additional information.
|
Note 15 — Other Liabilities
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Contingent loan repurchase liability | $ | 480,221 | | | $ | 492,900 | |
| Due to NRZ - Advance collections and servicing fees | 94,691 | | | 63,596 | |
| Other accrued expenses | 87,898 | | | 67,241 | |
| Liability for indemnification obligations | 41,920 | | | 52,785 | |
| Accrued legal fees and settlements | 38,932 | | | 30,663 | |
| Checks held for escheat | 35,654 | | | 31,959 | |
| Servicing-related obligations | 35,237 | | | 88,167 | |
| Lease liability | 27,393 | | | 44,488 | |
| MSR purchase price holdback | 20,923 | | | 9,129 | |
| Liability for uncertain tax positions | 16,188 | | | 17,197 | |
| Liability for unfunded pension obligation | 12,662 | | | 13,383 | |
| Liability for unfunded India gratuity plan | 6,051 | | | 5,331 | |
| Accrued interest payable | 4,915 | | | 5,964 | |
| Derivatives, at fair value | 4,638 | | | 100 | |
| Liability for mortgage insurance contingency | 0 | | | 6,820 | |
| | | |
| | | |
| Other | 16,652 | | | 12,450 | |
| $ | 923,975 | | | $ | 942,173 | |
| | | | | | | | | | | | | | | | | |
| Accrued Legal Fees and Settlements | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance | $ | 30,663 | | | $ | 62,763 | | | $ | 51,057 | |
| Accrual for probable losses (1) | 26,468 | | | 3,011 | | | 19,774 | |
| Payments (2) | (14,826) | | | (30,356) | | | (12,983) | |
| Assumed in connection with the acquisition of PHH | 0 | | | 0 | | | 9,960 | |
| Issuance of common stock in settlement of litigation (3) | 0 | | | 0 | | | (5,719) | |
| Net increase (decrease) in accrued legal fees | (3,433) | | | (4,884) | | | (1,917) | |
| Other | 60 | | | 129 | | | 2,591 | |
| Ending balance | $ | 38,932 | | | $ | 30,663 | | | $ | 62,763 | |
(1)Consists of amounts accrued for probable losses in connection with legal and regulatory settlements and judgments. Such amounts are reported in Professional services expense in the consolidated statements of operations.
(2)Includes cash payments made in connection with resolved legal and regulatory matters.
(3)See Note 16 — Stockholders’ Equity for additional information.
Note 16 — Stockholders’ Equity
Common Stock
During 2016, we completed the repurchase of 991,985 shares of common stock in the open market for a total purchase price of $5.9 million under a program authorized byOn February 3, 2020, Ocwen’s Board of Directors in October 2013authorized a share repurchase program for the repurchasean aggregate amount of up to an aggregate of $500.0$5.0 million of Ocwen’s issued and outstanding shares of common stock. From inception of this program through its expiration in July 2016,During the three months ended March 31, 2020, we completed the repurchase of 13,163,793377,484 shares of common stock in the open market under this program at prevailing market prices for an aggregatea total purchase price of $380.3 million.$4.5 million for an average price paid per share of $11.90. In addition, Ocwen paid $0.1 million in commissions. The repurchased shares were formally retired as of March 31, 2020. No additional shares were repurchased prior to the program’s expiration on February 3, 2021.
In 2017,On April 8, 2020, Ocwen and NRZ entered intowas notified by the New York Stock Exchange (the NYSE) that the average per share trading price of its common stock was below the NYSE’s continued listing standard rule relating to minimum average share price. The NYSE generally requires that a share purchase agreement pursuant to whichcompany’s common stock trade at a minimum average closing price of $1.00 over a consecutive 30 trading-day period. Effective August 13, 2020, Ocwen sold NRZ 6,075,510implemented a one-for-15 reverse stock split of all outstanding shares of newly-issued Ocwenits common stock for $13.9 million. Ocwenand reduced the number of authorized shares of common stock by the same proportion. Shareholders entitled to receive fractional shares of common stock received shares rounded up to the sales proceedsnearest whole share in lieu of such fractional shares, with an aggregate 4,692 additional shares issued. The number of outstanding shares was reduced from NRZ on July 24, 2017130,013,696 to 8,672,272 and issued the authorized shares from 200,000,000 to 13,333,333 effective August 13, 2020, with giving effect to the rounding up of fractional shares. The shares have not been registered under$0.01 par value per share of common stock remained unchanged. On September 1, 2020, Ocwen was notified by the Securities Act of 1933 and were issued and sold in reliance uponNYSE that it has regained compliance with the exemption from registration contained in Section 4(a)(2) of the Act and Rule 506(b) promulgated thereunder.NYSE’s continued listing standard rule relating to minimum average share price.
In 2017, Ocwen agreed to issue an aggregate of 2,500,000166,667 shares of common stock in connection with a mediated settlement of litigation. Ocwen issued 625,00041,667 of the shares in December 2017 and the remaining 1,875,000125,000 shares in January 2018. The shares have not been registered under the Securities Act of 1933 and were issued in reliance upon the exemption from registration set forth in Section 3(a)(10) of the Act.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss (AOCL), net of income taxes, were as follows:
| | | | | | | | | | | |
| December 31, |
| | 2020 | | 2019 |
| Unfunded pension plan obligation, net | $ | 8,409 | | | $ | 6,789 | |
| Unrealized losses on cash flow hedges, net | 674 | | | 832 | |
| Other | 12 | | | (27) | |
| | $ | 9,095 | | | $ | 7,594 | |
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Unfunded pension plan obligation | $ | 3,347 |
| | $ | 128 |
|
| Unrealized losses on cash flow hedges | 979 |
| | 1,128 |
|
| Other | (69 | ) | | (7 | ) |
| | $ | 4,257 |
| | $ | 1,249 |
|
Note 1617 — Derivative Financial Instruments and Hedging Activities
CertainThe table below summarizes the fair value, notional and maturity of our current derivative agreements are not exchange-traded, exposing us to credit loss in the event of nonperformance by the counterparty to the agreements. We manage counterparty credit risk by entering into financial instrument transactions through primary dealers or approved counterparties and the use of mutual margining agreements whenever possible to limit potential exposure. We regularly evaluate the financial position and creditworthiness of our counterparties.instruments. The notional amount of our contracts does not represent our exposure to credit loss.
The following table summarizes derivative activity, including the derivatives used in each of our identified hedging programs. None of the derivatives waswere designated as a hedge for accounting purposes at December 31, 2018:
|
| | | | | | | | | | | |
| | | | Interest Rate Risk |
| | | | IRLCs and Loans Held for Sale | | Borrowings |
| | IRLCs | | Forward MBS Trades | | Interest Rate Caps |
| Notional balance at December 31, 2017 | $ | 96,339 |
| | $ | 240,823 |
| | $ | 375,000 |
|
| Additions | 1,288,938 |
| | 404,162 |
| | 173,750 |
|
| Assumed in connection with the acquisition of PHH | 50,731 |
| | — |
| | — |
|
| Amortization | — |
| | — |
| | (288,750 | ) |
| Maturities | (1,014,466 | ) | | (479,622 | ) | | — |
|
| Terminations | (271,367 | ) | | — |
| | — |
|
| Notional balance at December 31, 2018 | $ | 150,175 |
| | $ | 165,363 |
| | $ | 260,000 |
|
|
| | | | | | | | | | | |
| | | | | | |
| Maturity | Jan. 2019 to Mar. 2019 | | Mar. 2019 | | May 2019 to May 2020 |
| | | | | | |
| Fair value of derivative assets (liabilities) (1) at: | |
| | |
| | |
|
| December 31, 2018 | $ | 3,871 |
| | $ | (4,983 | ) | | $ | 678 |
|
| December 31, 2017 | 3,283 |
| | (545 | ) | | 2,056 |
|
| | | | | | |
| Gains (losses) on derivatives during the years ended: | Gain on loans held for sale, net | | Other, net |
| December 31, 2018 | $ | 3,809 |
| | $ | 136 |
| | $ | (841 | ) |
| December 31, 2017 | (3,089 | ) | | (8,529 | ) | | 10 |
|
| |
(1) | Derivatives are reported at fair value in Other assetsas of or in Other liabilities on our consolidated balance sheets. |
As loans are originated and sold or as loan commitments expire, our forward MBS trade positions mature and are replaced by new positions based upon new loan originations and commitments and expected time to sell.
Foreign Currency Exchange Rate Risk
Our operations in India and the Philippines expose us to foreign currency exchange rate risk to the extent that our foreign exchange positions remain unhedged. We have not entered into any forward exchange contracts during the reported periods to hedge against the effect of changes in the value of the India Rupee or Philippine Peso. Foreign currency remeasurement exchange gains (losses) were $(3.2) million, $1.7 million and $0.2 million during the years ended December 31, 2018, 20172020 and 2016, respectively,2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| | Maturities | Notional | Fair value | | Maturities | Notional | Fair value |
| Derivative Assets | | | | | | | | |
| Forward sales of Reverse loans | | Jan. 2021 | $ | 30,000 | | $ | 34 | | | Jan. 2020 | $ | 40,000 | | $ | 8 | |
| Forward loans IRLCs | | Apr. 2021 | 619,713 | | 22,224 | | | Mar. 2020 | 204,020 | | 4,745 | |
| Reverse loans IRLCs | | Jan. 2021 | 11,692 | | 482 | | | Jan. 2020 | 28,546 | | 133 | |
| TBA forward MBS trades | | N/A | 0 | | 0 | | | Jan to Mar. 2020 | 1,200,000 | | 1,121 | |
| Interest rate swap futures | | Mar. 2021 | 593,500 | | 504 | | | N/A | 0 | | 0 | |
| Other | | | 0 | | 2 | | | N/A | 0 | | 0 | |
| Total | | | $ | 1,254,905 | | $ | 23,246 | | | | $ | 1,472,566 | | $ | 6,007 | |
| | | | | | | | |
| Derivative Liabilities | | | | | | | | |
| Forward sales of Reverse loans | | Jan. 2021 | $ | 20,000 | | $ | (84) | | | Jan. 2020 | $ | 20,000 | | $ | (29) | |
| TBA forward MBS trades | | Jan. 2021 | 400,000 | | (4,554) | | | N/A | 0 | | 0 | |
| | | | | | | | |
| Borrowings - Interest rate caps | | N/A | 0 | | 0 | | | May 2020 | 27,083 | | 0 | |
| Other | | N/A | 0 | | 0 | | | N/A | 0 | | (71) | |
| Total | | | $ | 420,000 | | $ | (4,638) | | | | $ | 47,083 | | $ | (100) | |
The table below summarizes the net gains and losses of our derivative instruments recognized in our consolidated statement of operations.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| Gain / (Loss) | | Gain / (Loss) |
| Amount | Financial Statement Line | | Amount | Financial Statement Line |
| Derivative Instruments | | | | | |
| Forward loans IRLCs | $ | 17,479 | | Gain on loans held for sale, net | | $ | 756 | | Gain on loans held for sale, net |
| Reverse loans IRLCs | 349 | | Reverse mortgage revenue, net | | 543 | | Reverse mortgage revenue, net |
| Forward LHFS trades | 0 | | | | (3,833) | | Gain on loans held for sale, net (Economic hedge) |
| Interest rate swap futures and TBA forward MBS trades | (10,140) | | Gain on loans held for sale, net (Economic hedge) | | 471 | | Gain on loans held for sale, net (Economic hedge) |
|
| Interest rate swap futures and TBA forward MBS trades | 27,538 | | MSR valuation adjustments, net | | 525 | | MSR valuation adjustments, net |
|
| Forward sales of Reverse loans | (29) | | Reverse mortgage revenue, net | | 91 | | Reverse mortgage revenue, net |
| Borrowings - interest rate caps | 0 | | Other, net | | (358) | | Other, net |
| Other | 73 | | Gain on loans held for sale, net | | 673 | | Gain on loans held for sale, net (Economic hedge) |
| $ | 35,270 | | | | $ | (1,132) | | |
Interest Rate Risk
MSR Hedging
MSRs are reportedcarried at fair value with changes in Other,fair value being recorded in earnings in the period in which the changes occur. The fair value of MSRs is subject to changes in market interest rates and prepayment speeds, among other factors. Beginning in September 2019, management implemented a hedging strategy to partially offset the changes in fair value of our net MSR portfolio to interest rate changes. We define our net MSR portfolio exposure as follows:
•our more interest rate-sensitive Agency MSR portfolio,
•less the Agency MSRs subject to our agreements with NRZ (See Note 10 — Rights to MSRs),
•less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings, and
•less the net value of our held for sale loan portfolio and interest rate lock commitments (pipeline).
We determine and monitor daily a hedge coverage based on the duration and interest rate sensitivity measures of our net MSR portfolio exposure, considering market and liquidity conditions. At December 31, 2020, our hedging strategy provides for a partial coverage of our net MSR portfolio exposure.
We use forward trades of MBS or Agency TBAs with different banking counterparties and exchange-traded interest rate swap futures as hedging instruments. These derivative instruments are not designated as accounting hedges. TBAs, or To-Be-Announced securities are actively traded, forward contracts to purchase or sell Agency MBS on a specific future date. Interest rate swap futures are exchange-traded and centrally cleared.We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in theour consolidated statements of operations.
The losses in 2018TBAs and interest rate swap futures are primarily attributedsubject to depreciationmargin requirements. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties, based on daily value changes of the India Rupee against the U.S. Dollar.instruments. Changes in market factors, including interest rates, and our credit rating could require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.
Interest Rate Risk
Interest Rate Lock Commitments
A loan commitment binds us (subject to the loan approval process) to fund the loan at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. The borrower is not obligated to obtain the loan; thus, we are subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Our interest rate exposure on these derivative loan commitments ishad previously been economically hedged with freestanding derivatives such as forward contracts. We enter into forward contracts with respectBeginning in September 2019, this exposure is not individually hedged, but rather used as an offset to both fixedour MSR exposure and variable rate loan commitments.managed as part of our MSR hedging strategy described above.
Loans Held for Sale, at Fair Value
Mortgage loans held for sale that we carry at fair value are subject to interest rate and price risk from the loan funding date until the date the loan is sold into the secondary market. Generally, the fair value of a loan will decline in value when interest rates increase and will rise in value when interest rates decrease. To mitigate this risk, we enterhad previously entered into forward MBS trades to provide an economic hedge against those changes in fair value on mortgage loans held for sale. Forward MBS trades arewere primarily used to fix the forward sales price that willwould be realized upon the sale of mortgage loans into the secondary market. Beginning in September 2019, this exposure is not individually hedged, but rather used as an offset to our MSR exposure and managed as part of our MSR hedging strategy described above.
Advance Match Funded Liabilities
AsWhen required by certain of our advance financing arrangements, we have purchasedpurchase interest rate caps to minimize future interest rate exposure from increases in the interest on our variable rate debt as a result of increases in the index, such as 1ML, which is used in determining the interest rate on the debt. We currently do not hedge our fixedfixed-rate debt with derivative instruments.
Foreign Currency Exchange Rate Risk
Our operations in India and the Philippines expose us to foreign currency exchange rate debt.
Includedrisk to the extent that our foreign exchange positions remain unhedged. Depending on the magnitude and risk of our positions, we may enter into forward exchange contracts to hedge against the effect of changes in AOCL atthe value of the India Rupee or Philippine Peso. We currently do not hedge our foreign currency exposure with derivative instruments. Foreign currency remeasurement exchange losses were $1.0 million, $0.2 million and $3.2 million during the years ended December 31, 2020, 2019 and 2018, respectively, and 2017, respectively, were $1.1 million and $1.2 million of deferred unrealized losses, before taxes of $0.1 million and $0.1 million, respectively, on interest rate swaps that we had designated as cash flow hedges. These deferred lossesare reported in AOCL are amortized to Other, net in the consolidated statements of operations.
Note 17 — Interest Income
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Loans held for sale | $ | 10,756 |
| | $ | 11,100 |
| | $ | 15,774 |
|
| Automotive dealer financing notes | 420 |
| | 3,069 |
| | 1,534 |
|
| Interest earning cash deposits and other | 2,850 |
| | 1,796 |
| | 1,775 |
|
| | $ | 14,026 |
| | $ | 15,965 |
| | $ | 19,083 |
|
Note 18 — Interest ExpenseIncome
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Loans held for sale | $ | 13,929 | | | $ | 14,669 | | | $ | 10,756 | |
| Interest earning cash deposits and other | 2,070 | | | 2,435 | | | 3,270 | |
| | | | | |
| $ | 15,999 | | | $ | 17,104 | | | $ | 14,026 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Financing liabilities | | | | | |
| NRZ | $ | 171,670 |
| | $ | 236,311 |
| | $ | 234,401 |
|
| Other financing liabilities | 5,013 |
| | 6,203 |
| | 14,433 |
|
| | 176,683 |
| | 242,514 |
| | 248,834 |
|
| Match funded liabilities | 31,870 |
| | 47,624 |
| | 66,879 |
|
| Senior notes | 31,280 |
| | 29,806 |
| | 30,012 |
|
| Other secured borrowings | 30,465 |
| | 39,531 |
| | 60,469 |
|
| Other | 4,743 |
| | 3,763 |
| | 6,389 |
|
| | $ | 275,041 |
| | $ | 363,238 |
| | $ | 412,583 |
|
Note 19 — Interest Expense
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | | | | |
| Senior notes | $ | 26,634 | | | $ | 31,804 | | | $ | 31,280 | |
| Advance match funded liabilities | 24,122 | | | 26,902 | | | 31,870 | |
| Other secured borrowings | 51,589 | | | 46,278 | | | 35,412 | |
| | | | | |
| Other | 7,022 | | | 9,145 | | | 4,809 | |
| | $ | 109,367 | | | $ | 114,129 | | | $ | 103,371 | |
Note 20 — Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The CARES Act includes several significant business tax provisions that, among other things, temporarily repealed the taxable income limitation for certain net operating losses (NOL) and allows businesses to carry back NOLs arising in 2018, 2019, and 2020 tax years to the five prior tax years, accelerated refunds of previously generated corporate Alternative Minimum Tax (AMT) credits, and adjusted the business interest expense limitation under section 163(j) from 30% to 50% of Adjusted Taxable Income (ATI) for 2019 and 2020 tax years.
Based on information available at this time, we estimate that modifications to the tax rules for the carryback of NOLs and business interest expense limitations will result in U.S. and USVI federal net tax refunds of approximately $62.6 million and $1.4 million, respectively, and as such we recognized an income tax benefit of $64.0 million in our consolidated financial statements for the year ended December 22, 2017,31, 2020.As of December 31, 2020, we collected $51.4 million, which represents the tax refund associated with the NOLs generated in 2018 carried back to prior tax years, and recognized a $24.0 million receivable which represents the tax refund associated with the NOLs generated in 2019. We collected this $24.0 million tax refund receivable from the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act), which made broad and complex changes to the U.S. federal corporateInternal Revenue Service in January 2021.
The income tax rules. The Tax Act amendsbenefit recognized represents the Internal Revenue Code to reduce tax rates, requires companies to pay a one-time transition tax on earningsrelease of valuation allowances against certain foreign subsidiaries that were previously tax deferredNOL and creates new taxes on certain foreign-sourced earnings, among other provisions. For businesses, the Tax Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The rate reduction took effect on January 1, 2018.
The reduction in the statutory U.S. federal rate is expected to positively impact our future U.S. after-tax earnings. However, the ultimate impact is subject to the effect of other complex provisions in the Tax Act (including the BEAT, Global Intangible Low-Taxed Income (GILTI), and revised interest deductibility limitations). We are continuing to evaluate the impact of the new U.S. tax legislation and guiding regulations (which are still being promulgated and finalized) on our global tax position. It is possible that any impact of these provisions could significantly reduce the benefit of the reduction in the statutory U.S. federal rate.
SAB 118 Measurement Period
We applied the guidance in SAB 118 when accounting for the enactment date effects of the Tax Act in 2017 and throughout 2018. At December 31, 2017, we had not completed our accounting for all of the enactment-date income tax effects of the Tax Act under ASC 740, Income Taxes; therefore, we recorded provisional amounts related to the one-time deemed repatriation tax (Transition Tax) liability related to the undistributed earnings of certain foreign subsidiaries that were not previously taxed and adjustedSection 163(j) deferred tax assets and liabilitiesthat are now more likely than not to account for the reduction in the statutory U.S. federal rate. At December 31, 2018, we have now completed our accounting for allbe realizable as a result of certain provisions of the enactment-date income tax effects of the Tax Act. As further discussed below, during 2018, we recognized adjustments to the provisional amounts recorded at December 31, 2017, which produced changes in the amount of deferred tax assets recorded in the U.S. and USVI jurisdictions. As the net deferred tax assets in these jurisdictions have full valuation allowances, the adjustments to the provisional amounts recorded under SAB 118 do not have an impact on our consolidated statements of financial position or consolidated statements of operations.
One-Time Transition Tax
Under the Tax Act, the transition to a new territorial tax system caused Ocwen to incur a Transition Tax on our total post-1986 undistributed earnings and profits (E&P) of our non-U.S. subsidiaries, the tax on which we previously deferred from U.S. income taxes under U.S. law. The amount of the Transition Tax was dependent upon many factors, including the accumulated E&P of Ocwen’s non-U.S. subsidiaries, our ability and willingness to utilize foreign tax credits and/or net operating loss (NOL) carryforwards, and 2017 taxable income or loss amounts in the U.S. and non-U.S. jurisdictions. We recorded a provisional amount for our one-time Transition Tax liability in our December 31, 2017 financial statements as a reduction to the U.S. federal NOL carryforward of $16.9 million. The reduction of the NOL deferred tax asset resulted in an offsetting release of the valuation allowance.
Due to the various factors affecting the calculation, our decision regarding how best to utilize the foreign tax credits and/or NOL carryforwards was subject to change as we continued to wait for further guidance and analyze additional information necessary to finalize the calculations and maximize the long-term value to Ocwen. Upon further analysis of the TaxCARES Act as well as notices and regulations issued and proposed bya permanent income tax benefit related to the U.S. Departmentcarryback of the Treasury and the Internal Revenue Service, we finalized our calculations of the Transition Tax liabilityNOLs created in 2018. We increased our December 31, 2017 provisional amount by increasing foreigna tax credits by $19.9 million and further reducing theyear that was subject to U.S. federal NOL carryforward by $51.7 million. As the
net deferred tax asset in the U.S. jurisdiction hasat 21% to a full valuation allowance, the recording of the changes to these deferred tax assets does not have an impact on our consolidated balance sheets or consolidated statements of operations.
Deferred Tax Assets & Liabilities
As a result of the reduction in the corporate income tax rate, we revalued our U.S. and USVI net deferred tax assets at December 31, 2017. We recorded a provisional decrease to our net deferred tax assets in the U.S. and USVI jurisdictions of $36.1 million and $26.6 million, respectively, due to the change in the corporate tax rate. Upon further analysis of certain aspects of the Tax Act as well as notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service and refinement of our calculations during the 12 months ended December 31, 2018, we adjusted our provisional amount by recording an increase to our net deferred tax assets in the U.S. and USVI jurisdictions of $6.0 million and $4.6 million, respectively. This increase resulted in a net decrease to the deferred tax assets in the U.S. and USVI jurisdictions of $30.1 million and $22.0 million, respectively. As the net deferred tax assets in these jurisdictions have full valuation allowances, the revaluation of our net deferred tax assets does not have an impact on our consolidated balance sheets or consolidated statements of operations.
Global Intangible Low-Taxed Income (GILTI)
The Tax Act subjects a U.S. shareholderyear subject to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Because we were evaluating the provision of GILTI at December 31, 2017, we recorded no GILTI-related deferred taxes in 2017. After further consideration in the current year, we have elected to account for GILTI in the year the tax is incurred.35%.
For income tax purposes, the components of lossincome (loss) from continuing operations before taxes were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Domestic | $ | (118,043) | | | $ | (93,487) | | | $ | 11,477 | |
| Foreign | 12,359 | | | (33,004) | | | (82,953) | |
| | $ | (105,684) | | | $ | (126,491) | | | $ | (71,476) | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Domestic | $ | 11,477 |
| | $ | (75,143 | ) | | $ | (130,920 | ) |
| Foreign | (82,953 | ) | | (68,830 | ) | | (75,441 | ) |
| | $ | (71,476 | ) | | $ | (143,973 | ) | | $ | (206,361 | ) |
The components of income tax benefitexpense (benefit) were as follows:
| | | | Years Ended December 31, | | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
| Current: | |
| | |
| | |
| Current: | | | | | |
| Federal | $ | (7,670 | ) | | $ | (21,859 | ) | | $ | (8,025 | ) | Federal | $ | (67,080) | | | $ | 873 | | | $ | (7,670) | |
| State | 356 |
| | (3,938 | ) | | 460 |
| State | 348 | | | 4,460 | | | 356 | |
| Foreign | 11,132 |
| | 9,550 |
| | 5,099 |
| Foreign | 2,600 | | | 7,181 | | | 11,132 | |
| | 3,818 |
| | (16,247 | ) | | (2,466 | ) | | (64,132) | | | 12,514 | | | 3,818 | |
| Deferred: | |
| | |
| | |
| Deferred: | | | | | |
| Federal | 23,991 |
| | 27,289 |
| | (22,054 | ) | Federal | (25,762) | | | (40,429) | | | 23,991 | |
| State | 319 |
| | 702 |
| | 4,701 |
| State | (2,047) | | | (914) | | | 319 | |
| Foreign | (4,252 | ) | | 2,719 |
| | (2,806 | ) | Foreign | (1,445) | | | 11,993 | | | (4,252) | |
| Provision for (reversal of) valuation allowance on deferred tax assets | (23,347 | ) | | (29,979 | ) | | 15,639 |
| Provision for (reversal of) valuation allowance on deferred tax assets | 27,880 | | | 32,470 | | | (23,347) | |
| | (3,289 | ) | | 731 |
| | (4,520 | ) | | (1,374) | | | 3,120 | | | (3,289) | |
| Total | $ | 529 |
| | $ | (15,516 | ) | | $ | (6,986 | ) | Total | $ | (65,506) | | | $ | 15,634 | | | $ | 529 | |
Ocwen is a global company with operations in the USVI, India and the Philippines, among other jurisdictions. In the effective tax rate reconciliation, we first calculate income tax expense attributable to worldwide continuing operations at the U.S. statutory tax rate. The foreign tax rate differential therefore represents the difference in tax expense between jurisdictional income taxed at the U.S. statutory rate and each respective jurisdictional statutory rate. As a majority of our income is subject to tax in the USVI at a significantly lower tax rate, the foreign tax rate differential component of our effective tax rate reconciliation is often the most significant adjusting item to our global rate.
Income tax expense (benefit) differs from the amounts computed by applying the U.S. Federal corporate income tax rate as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Expected income tax expense (benefit) at statutory rate | $ | (22,194) | | | $ | (26,563) | | | $ | (15,010) | |
| Differences between expected and actual income tax expense: | | | | | |
| CARES Act | (63,954) | | | 0 | | | 0 | |
| Provision for (reversal of) valuation allowance on deferred tax assets (1) | 27,880 | | | 32,470 | | | (23,347) | |
| Provision for (reversal of) liability for uncertain tax positions | (2,033) | | | 4,198 | | | (3,987) | |
| Other provision to return differences | (3,347) | | | 1,242 | | | (6,559) | |
| Foreign tax differential including effectively connected income (2) | (2,511) | | | 15,979 | | | 22,990 | |
| | | | | |
| State tax, after Federal tax benefit | (1,700) | | | (784) | | | 675 | |
| Executive compensation disallowance | 594 | | | 1,344 | | | 959 | |
| Excess tax benefits from share-based compensation | 424 | | | 381 | | | (356) | |
| Other permanent differences | 382 | | | 66 | | | 122 | |
| Foreign tax credit (generation) utilization | (13) | | | 263 | | | (25,601) | |
| | | | | |
| Revaluation of deferred tax assets related to legal entity mergers | (2) | | | (25,509) | | | 0 | |
| U.S. Tax Reform - Global Intangible Low-Taxed Income (GILTI) inclusion | 182 | | | 11,859 | | | 0 | |
| U.S. Tax Reform - Change in Federal rate | 0 | | | 0 | | | (10,666) | |
| U.S. Tax Reform - Transition Tax | 0 | | | 0 | | | 14,412 | |
| U.S. Tax Reform - BEAT Tax | 0 | | | (555) | | | 1,076 | |
| Reduction in tax attributes for Section 382 & 383 limitations | 0 | | | 0 | | | 55,668 | |
| Bargain purchase gain disallowance | 0 | | | 80 | | | (13,448) | |
| Subpart F income | 0 | | | 0 | | | 3,222 | |
| Other | 786 | | | 1,163 | | | 379 | |
| Actual income tax expense (benefit) | $ | (65,506) | | | $ | 15,634 | | | $ | 529 | |
(1)The benefit recorded for the provision for valuation allowance in 2018 relates primarily to a reduction in the valuation allowance necessary as a result of the reduction in tax attributes due to Section 382 & 383 limitations. This benefit is partially offset by an
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Expected income tax expense (benefit) at statutory rate (1) | $ | (15,010 | ) | | $ | (50,391 | ) | | $ | (72,225 | ) |
| Differences between expected and actual income tax expense (2): | |
| | |
| | |
|
| Bargain purchase gain disallowance | (13,448 | ) | | — |
| | — |
|
| Reduction in tax attributes for Section 382 & 383 limitations | 55,668 |
| | — |
| | — |
|
| U.S. Tax Reform - Change in Federal rate | (10,666 | ) | | 62,758 |
| | — |
|
| U.S. Tax Reform - Transition Tax | 14,412 |
| | 34,846 |
| | — |
|
| U.S. Tax Reform - BEAT Tax | 1,076 |
| | — |
| | — |
|
| Foreign tax differential including effectively connected income (3) | 22,990 |
| | (12,140 | ) | | 39,249 |
|
| Provision for (reversal of) liability for uncertain tax positions | (3,987 | ) | | (16,925 | ) | | 2,236 |
|
| Provision for (reversal of) valuation allowance on deferred tax assets (4) | (23,347 | ) | | (29,979 | ) | | 15,639 |
|
| Provision for liability for intra-entity transactions | — |
| | 2,484 |
| | 3,357 |
|
| State tax, after Federal tax benefit | 675 |
| | (3,938 | ) | | 250 |
|
| Excess tax benefits from share-based compensation | (356 | ) | | (3,701 | ) | | — |
|
| Other permanent differences | 122 |
| | (267 | ) | | (138 | ) |
| Foreign tax credit (generation) utilization | (25,601 | ) | | — |
| | 3,214 |
|
| Executive compensation disallowance | 959 |
| | 221 |
| | 425 |
|
| Subpart F income | 3,222 |
| | 2,824 |
| | 228 |
|
| Other provision to return differences | (6,559 | ) | | 221 |
| | (1,334 | ) |
| Other | 379 |
| | (1,529 | ) | | 2,113 |
|
| Actual income tax expense (benefit) | $ | 529 |
| | $ | (15,516 | ) | | $ | (6,986 | ) |
| |
(1) | The U.S. Federal corporate income tax rate is 21% beginning January 1, 2018 and was 35% untilincrease in valuation allowance necessary for current year losses and for adjustments to provisional amounts recorded under SAB 118 at December 31, 2017 when accounting for the effects of tax reform passed on December 22, 2017. |
| |
(2) | ASC 740-10-50 and SEC Regulation S-X, Rule 4-08(h) require the disclosure of significant reconciling items in the effective tax rate reconciliation schedule. We have prepared the 2018 effective tax rate reconciliation consistent with prior years, taking into account the materiality of reconciling items, comparability with prior years and the usefulness of the information. |
| |
(3) | The foreign tax differential includes a benefit recognized in 2018, 2017 and 2016 for taxable losses earned by OMS which are taxable in the U.S. as effectively connected income (ECI). The impact of ECI to income tax benefit for 2018, 20176 and 2016 was $3.3 million, $28.5 million and $7.4 million, respectively. |
| |
(4) | The benefit recorded for the provision for valuation allowance in 2017 relates primarily to the reduction in the valuation allowance necessary as a result of revaluing our deferred tax assets due to U.S. tax reform and the reduction in the corporate tax rate. This benefit is partially offset by an increase in valuation allowance necessary for current year losses. The provision for valuation allowance in 2016 primarily relates to the recording of the valuation allowance on both the U.S. and USVI net deferred tax assets as of December 31, 2016. |
(2)The foreign tax differential includes expense recognized in 2019 and a benefit recognized in 2018 for taxable income or losses earned by Ocwen Mortgage Servicing, Inc. (OMS) prior to the merger of OMS into OVIS in 2019, which are taxable in the U.S. as effectively connected income (ECI). The impact of ECI to income tax expense (benefit) for 2019 and 2018 was $2.6 million and $(3.3) million, respectively.
Net deferred tax assets were comprised of the following:
| | | | December 31, |
| | | | 2020 | | 2019 |
| Deferred tax assets | | Deferred tax assets | | | |
| Net operating loss carryforwards - federal and foreign | | Net operating loss carryforwards - federal and foreign | $ | 40,557 | | | $ | 64,817 | |
| Net operating loss carryforwards and credits - state and local | | Net operating loss carryforwards and credits - state and local | 67,293 | | | 70,254 | |
| Interest expense disallowance | | Interest expense disallowance | 23,112 | | | 12,423 | |
| Reserve for servicing exposure | | Reserve for servicing exposure | 10,273 | | | 7,711 | |
| Accrued legal settlements | | Accrued legal settlements | 9,200 | | | 6,028 | |
| Partnership losses | | Partnership losses | 7,316 | | | 7,029 | |
| Stock-based compensation expense | | Stock-based compensation expense | 6,486 | | | 5,297 | |
| Accrued incentive compensation | | Accrued incentive compensation | 6,240 | | | 5,063 | |
| Accrued other liabilities | | Accrued other liabilities | 5,722 | | | 6,377 | |
| Lease liabilities | | Lease liabilities | 4,943 | | | 5,459 | |
| Intangible asset amortization | | Intangible asset amortization | 4,541 | | | 4,946 | |
| Foreign deferred assets | | Foreign deferred assets | 3,731 | | | 3,620 | |
| Tax residuals and deferred income on tax residuals | | Tax residuals and deferred income on tax residuals | 2,968 | | | 2,885 | |
| Foreign tax credit | | Foreign tax credit | 107 | | | 94 | |
| | | | December 31, | |
| | 2018 | | 2017 | |
| Deferred tax assets | |
| | |
| |
| Net operating loss carryforward | $ | 31,587 |
| | $ | 59,271 |
| |
| Reserve for servicing exposure | 10,331 |
| | 1,312 |
| |
| Accrued other liabilities | 8,966 |
| | 3,239 |
| |
| Foreign deferred assets | 7,142 |
| | 6,769 |
| |
| Partnership losses | 6,681 |
| | 5,360 |
| |
| Stock-based compensation expense | 5,610 |
| | 4,202 |
| |
| Interest expense disallowance | 4,773 |
| | 2,032 |
| |
| Intangible asset amortization | 4,579 |
| | 5,541 |
| |
| Accrued incentive compensation | 4,527 |
| | 4,798 |
| |
| Accrued legal settlements | 4,350 |
| | 3,602 |
| |
| | Bad debt and allowance for loan losses | 3,498 |
| | 2,383 |
| Bad debt and allowance for loan losses | 0 | | | 2,530 | |
| Tax residuals and deferred income on tax residuals | 2,905 |
| | 2,569 |
| |
| Foreign tax credit | 357 |
| | 4,262 |
| |
| Mortgage servicing rights amortization | — |
| | 3,664 |
| |
| Deferred income | | Deferred income | 0 | | | 8,493 | |
| Other | 8,832 |
| | 4,951 |
| Other | 5,928 | | | 8,708 | |
| | 104,138 |
| | 113,955 |
| | 198,417 | | | 221,734 | |
| Deferred tax liabilities | |
| | |
| Deferred tax liabilities | | | |
| Mortgage servicing rights amortization | 27,860 |
| | — |
| Mortgage servicing rights amortization | 8,123 | | | 16,358 | |
| Bad debt and allowance for loan losses | | Bad debt and allowance for loan losses | 1,951 | | | 0 | |
| Foreign undistributed earnings | 2,059 |
| | 4,858 |
| Foreign undistributed earnings | 287 | | | 1,615 | |
| Other | 804 |
| | 49 |
| Other | 864 | | | 1,151 | |
| | 30,723 |
| | 4,907 |
| | 11,225 | | | 19,124 | |
| | 73,415 |
| | 109,048 |
| | 187,192 | | | 202,610 | |
| Valuation allowance | (68,126 | ) | | (107,048 | ) | Valuation allowance | (183,649) | | | (200,441) | |
| Deferred tax assets, net | $ | 5,289 |
| | $ | 2,000 |
| Deferred tax assets, net | $ | 3,543 | | | $ | 2,169 | |
As of December 31, 2018,2020, we had a U.S. net deferred tax asset, net of $46.3 million and a USVI net deferred tax asset of $21.3 million.liability, including $182.7 million in the U.S.
Valuation Allowances
We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. In these evaluations, we gave more significant weight to objective evidence, such as our actual financial condition and historical results of operations, as compared to subjective evidence, such as projections of future taxable income or losses. Both the U.S. and USVI jurisdictions are in a three-year cumulative loss position as of December 31, 2018.2020. Other factors considered in these evaluations are estimates of future taxable income, future reversals of temporary differences, taxable income in prior carryback years, tax character and the impact of tax planning strategies that may be implemented, if warranted.
As a result of these evaluations, we recorded a valuation allowance of $46.3$182.7 million and $62.9$199.5 million on our U.S. net deferred tax assets at December 31, 20182020 and 2017,2019, respectively, and a valuation allowance of $21.3$0.4 million and $43.9$0.4 million on our USVI net deferred tax assets at December 31, 20182020 and 2017,2019, respectively. These U.S. and USVI jurisdictional deferred tax assets are not considered to be more likely than not realizable based on all available positive and negative evidence. We intend
to continue maintaining a full valuation allowance on our deferred tax assets in both the U.S. and USVI until there is sufficient evidence to support the reversal of all or some portion of these allowances.
Net Operating Loss Carryforwards
At December 31, 2018,2020, we had U.S. NOL carryforwards and USVI NOL carryforwards of $133.0$190.5 million, and $134.2state NOL and tax credit carryforwards valued at $67.3 million.
These U.S. federal and state NOL carryforwards will expire beginning 20202021 through 20372040 with U.S. federal NOLs generated in 2018after 2017 never expiring. We believe that it is more likely than not that the benefit from certain U.S. federal and USVIstate NOL carryforwards will not be realized. In recognition of this risk, we have provided a total valuation allowance of $27.9$40.0 million and $3.1$67.3 million on the deferred tax assets relating to thesethe U.S. federal and USVIstate NOL carryforwards, respectively. If our assumptions change and we determine we will
be able to realize these NOLs, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets as of December 31, 20182020 will be accounted for as a reduction of income tax expense. Additionally, $334.5 million of USVI NOLs have been carried back to offset prior period tax due in the USVI and we have, therefore, reflected the tax-effect of this attribute as a component of$12.9 million income taxes receivable. We also have U.S. and USVI capital loss carryforwards of $0.7$7.9 million and $0.2 million, respectively, at December 31, 20182020 against which a valuation allowance has been recorded.
Change of Control: Annual Limitations on Utilization of Tax Attributes
NOL carryforwards may be subject to annual limitations under Internal Revenue Code Section 382 (Section 382) (or comparable provisions of foreign or state law) in the event that certain changes in ownership were to occur. We periodically evaluate our NOL carryforwards and whether certain changes in ownership have occurred that would limit our ability to utilize a portion of our NOL and tax credit carryforwards. If it is determined that an ownership change(s) has occurred, there may be annual limitations on the use of these NOL and tax credit carryforwards under Section 382 (or comparable provisions of foreign or state law).
Generally, a Section 382 ownership change occurs if, over a rolling three-year period, there has been an aggregate increase of 50 percentage points or more in the percentage of our stock owned by one or more “5-percent shareholders.” Ownership for Section 382 purposes is determined primarily by an economic test, while the SEC definition of beneficial ownership focuses generally on the right to vote or control disposition of the shares. In general, the Section 382 economic test looks to who has the right to receive dividends paid with respect to shares, and who has the right to receive proceeds from the sale or other disposition of shares. Section 382 also contains certain constructive ownership rules, which generally attribute ownership of stock held by estates, trusts, corporations, partnerships or other entities to the ultimate indirect individual owner of the shares, or to related individuals. Generally, a person’s direct or indirect economic ownership interest in shares (rather than record title, voting control or other factors) is taken into account for Section 382 purposes.
For purposes of determining the existence and identity of, and the amount of stock owned by any shareholder, the Internal Revenue Service permits us to rely on the existence or absence of filings with the SEC of Schedules 13D, 13F and 13G (or similar filings) as of any date, subject to our actual knowledge of the ownership of our common stock. Investors who file a Schedule 13G or Schedule 13D (or list our common stock in their Schedules 13F) may beneficially own 5% or more of our common stock for SEC reporting purposes but nonetheless may not be Section 382 “5-percent shareholders” and therefore their beneficial ownership will not result in a Section 382 ownership change.
We have evaluated whether we experienced an ownership change, as defined under Section 382, and determined that an ownership change did occur in the U.S. jurisdiction in January 2015 and in December 2017, which also results in an ownership change under Section 382 in the USVI jurisdiction. This determinationIn addition, a Section 382 ownership change occurred at PHH when Ocwen acquired the stock of PHH in October 2018. PHH was made based on information availablea loss corporation as ofdefined under Section 382 at the date of our Form 10-K filing for the fiscal year ended Decemberacquisition. PHH also had an existing Section 382 ownership change on March 31, 2018. For certain states, an additional Section 382 ownership change occurred on August 9, 2017. These Section 382 ownership changes may limit our ability to fully utilize NOLs, tax credit carryforwards, deductions and/or certain built-in losses that existed as of each respective ownership change date in various jurisdictions.
Due to the Section 382 and 383 limitations and the maximum carryforward period for our NOLs and tax credits, we will be unable to fully recognize certain deferred tax assets. Accordingly, as of December 31, 2018, we have reduced our gross deferred tax asset related to our U.S. federal and USVI NOLs by $160.9 million, our foreign tax credit deferred tax asset by $29.5 million, and corresponding valuation allowance by $55.7 million. The realization of all or a portion of our remaining deferred income tax assets (including NOLs and tax credits) is dependent upon the generation of future taxable income during the statutory carryforward periods. In addition, the limitation on the utilization of our NOL and tax credit carryforwards could result in Ocwen incurring a current tax liability in future tax years. Our inability to utilize our pre-ownership change NOL carryforwards, any future recognized built-in losses or deductions, and tax credit carryforwards could have an adverse effect on our financial condition, results of operations and cash flows.
As part of our Section 382 evaluation and consistent with the rules provided within Section 382, Ocwen relies strictly on the existence or absence, as well as the information contained in certain publicly available documents (e.g., Schedule 13D, Schedule 13G or other documents filed with the SEC) to identify shareholders that own a 5-percent or greater interest in Ocwen stock throughout the period tested. Further, Ocwen relies on such public filings to identify dates in which such 5-percent shareholders acquired, disposed, or otherwise transacted in Ocwen common stock. As the requirement for filing such notices of ownership from the SEC is to report beneficial ownership, as opposed to actual economic ownership of the stock of Ocwen, certain SEC filings may not represent ownership in Ocwen stock that should be considered in determining whether Ocwen experienced an ownership change under the Section 382 rules. Notwithstanding the preceding sentences (regarding Ocwen’ s ability to rely on the existence and absence of information in publicly filed Schedules 13D and 13G), the rules prescribed in Section 382 and the regulations thereunder provide that Ocwen may (but is not required to) seek additional clarification from shareholders filing such Schedules 13D and 13G if there are questions or uncertainty regarding the true economic ownership of shares reported in such filing (whether due to ambiguity in the filing, an overly complex ownership structure, the type of instruments owned and reported in the filings, etc.) (often referred to “actual knowledge” questionnaires). Such information can be sought on a filer by filer basis (i.e., there is no requirement that if actual knowledge is sought with respect to one shareholder, actual knowledge must be sought with respect to all shareholders that filed schedules 13D or 13G). While the seeking of actual knowledge can be beneficial in some instances it may be detrimental in others. Once such actual knowledge
is received, Section 382 requires the inclusion of such actual knowledge, even if such inclusion is detrimental to the conclusion reached.
Ocwen has performed its analysis of the rules under Section 382 and, based on all currently available information, identified it experienced an ownership change for Section 382 purposes in January 2015 and December 2017. Prior to 2018, Ocwen was aware of shareholder activity in 2015 and 2017 that may have caused a Section 382 ownership change(s), but determined that additional information could potentially be obtained from certain shareholders that would indicate a Section 382 ownership change had not occurred. In completing this analysis, Ocwen identified several shareholders that filed a schedule 13G during the period disclosing a greater than 5-percent interest in Ocwen stock where beneficial versus economic ownership of the stock was unclear, and Ocwen therefore requested further details. As of the date of this Form 10-K, Ocwen has not received all requested responses from selected shareholders, and will continue to consider such shareholders as economic owners of Ocwen’s stock until actual knowledge is otherwise received.
Ocwen is continuing to monitor the ownership in its stock to evaluate information that will become available later in 20192021 and that may result in a different outcome for Section 382 purposes and our future cash tax obligations. As part of this monitoring, Ocwen periodically evaluates whether it is appropriate and beneficial to retroactively seek actual knowledge on certain previously identified and included 5-percent shareholders, whereby, depending on the responses received, Ocwen may conclude that either the January 2015 or December 2017 Section 382 ownership changes may have instead occurred on a different date, or did not occur at all. As such, our analysis regarding the amount of tax attributes that may be available to offset taxable income in the future without restrictions imposed by Section 382 may continue to evolve.
Uncertain Tax Positions
Our major jurisdiction tax years that remain subject to examination are our U.S. federal tax return for the years ended December 31, 20142017 through the present, our USVI corporate tax return for the years ended December 31, 2013 through the present, and our India corporate tax returns for the years ended March 31, 2010 through the present. We are currently under audit in the USVI jurisdiction for tax years 2013 - 2016 due to the carryback of losses generated in 2015 and 2016 to tax years 2013 and 2014, respectively.
A reconciliation of the beginning and ending amountamounts of the total liabilityunrecognized tax benefits for uncertain tax position is as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Beginning balance | $ | 10,589 | | | $ | 9,622 | | | $ | 2,281 | |
| Additions for tax positions of current year | 0 | | | 207 | | | 412 | |
| Additions for tax positions of prior years | 15,242 | | | 3,110 | | | 1,354 | |
| Reductions for tax positions of prior years | (219) | | | 0 | | | (236) | |
| Reductions for settlements | (3,067) | | | (1,293) | | | (3,188) | |
| Lapses in statute of limitations | (1,907) | | | (1,057) | | | (4,109) | |
| Additions - PHH acquisition | 0 | | | 0 | | | 13,108 | |
| Ending balance (1) | $ | 20,638 | | | $ | 10,589 | | | $ | 9,622 | |
(1)$12.8 million of the balance at December 31, 2020 is included in the Liability for uncertain tax positions in Other liabilities, with the remaining $7.8 million balance included as a reduction of Income taxes receivable in Receivables. The balance at December 31, 2019 is as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 2,281 |
| | $ | 16,994 |
| | $ | 32,548 |
|
| Additions - PHH acquisition | 13,108 |
| | — |
| | — |
|
| Additions for tax positions of current year | 412 |
| | — |
| | — |
|
| Additions for tax positions of prior years | 1,354 |
| | 2,281 |
| | — |
|
| Reductions for tax positions of prior years | (236 | ) | | — |
| | — |
|
| Reductions for settlements | (3,188 | ) | | (387 | ) | | (14,420 | ) |
| Lapses in statute of limitations | (4,109 | ) | | (16,607 | ) | | (1,134 | ) |
| Ending balance | $ | 9,622 |
| | $ | 2,281 |
| | $ | 16,994 |
|
We recognized total interest and penalties of $2.9$(1.6) million, $5.1$2.7 million and $1.0$2.9 million as income tax benefitexpense or (benefit) in 2018, 20172020, 2019 and 2016,2018, respectively. At December 31, 20182020 and 2017,2019, accruals for interest and penalties were $4.1$3.4 million and $1.0$6.6 million, respectively.respectively, and are included in the Liability for uncertain tax positions in Other liabilities. As of December 31, 20182020 and 2017,2019, we had a liabilityunrecognized tax benefits for uncertain tax positions, excluding accrued interest and penalties, of $9.6$20.6 million and $2.3$10.6 million, respectively, all of which if recognized would affect the effective tax rate.
It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to activities of the Internal Revenue Service or other taxing authorities, including proposed assessments of additional tax, possible settlement of audit issues, or the expiration of applicable statutes of limitations. We believe that it is reasonably possible that a decrease of up to $9.6$11.6 million in unrecognized tax benefits may be necessary within the next 12 months.
Undistributed Foreign Earnings and Non-U.S. Jurisdictions
As of December 31, 2018,2020, we have recognized a deferred tax liability of $2.1$0.3 million for India and Philippinesforeign subsidiary undistributed earnings of $11.7 million. With the exception of India and Philippines subsidiary earnings, weearnings. We do not consider the remainder of our foreign subsidiary undistributed earnings to be indefinitely invested outside the U.S. based on our specific plans for reinvestment. Should we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely reinvested. Federal income tax expense has been recognized on these reinvested foreign earnings as a result of the Tax Act. Determination of the amount of unrecognized
deferred tax liability with respect to items such as foreign withholding taxes, state income tax expense or foreign exchange gain or loss on these reinvested foreign earnings is not practicable.
OMS is headquartered in Christiansted, St. Croix, USVI and is located in a federally recognized economic development zone where qualified entities are eligible for certain benefits. We refer to these benefits as “EDC benefits” as they are granted by the USVI Economic Development Commission. We were approved as a Category IIA service business, and are therefore entitled to receive benefits that may have a favorable impact on our effective tax rate. These benefits, among others, enable us to avail ourselves of a credit of 90% of income taxes on certain qualified income related to our servicing business. The exemption was granted as of October 1, 2012 and is available for a period of 30 years until expiration on September 30, 2042. The EDC benefits had no impact on our current foreign tax benefit in 2018 and 2017 because we are incurring current losses in the USVI and do not have carryback potential for these losses. As a result, no current benefit can be recognized for these losses. The impact of these EDC benefits decreased our current foreign tax benefit by $62.7 million related to 2016 USVI losses. The detriment of these EDC benefits on diluted earnings per share was $(0.51) for 2016.
Note 2021 — Basic and Diluted Earnings (Loss) per Share
Basic earnings or loss per share excludes common stock equivalents and is calculated by dividing net income or loss attributable to Ocwen common stockholders by the weighted average number of common shares outstanding during the year. We calculate diluted earnings or loss per share by dividing net income or loss attributable to Ocwen by the weighted average number of common shares outstanding including the potential dilutive common shares related to outstanding stock options and restricted stock awards. For 2018, 20172020, 2019 and 2016,2018, we have excluded the effect of all stock options and common stock awards from the computation of diluted loss per share because of the anti-dilutive effect of our reported net loss.
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Loss from continuing operations, net of tax attributable to Ocwen common stockholders | $ | (72,181 | ) | | $ | (127,966 | ) | | $ | (199,762 | ) |
| Income from discontinued operations, net of tax | 1,409 |
| | — |
| | — |
|
| Net loss attributable to Ocwen stockholders | $ | (70,772 | ) | | $ | (127,966 | ) | | $ | (199,762 | ) |
| | | | | | |
| Weighted average shares of common stock outstanding - Basic and Diluted | 133,703,359 |
| | 127,082,058 |
| | 123,990,700 |
|
| | | | | | |
| Earnings (loss) per share - Basic and Diluted | | | | | |
| Continuing operations | $ | (0.54 | ) | | $ | (1.01 | ) | | $ | (1.61 | ) |
| Discontinued operations | $ | 0.01 |
| | $ | — |
| | $ | — |
|
| Total attributable to Ocwen stockholders | $ | (0.53 | ) | | $ | (1.01 | ) | | $ | (1.61 | ) |
| | | | | | |
| Stock options and common stock awards excluded from the computation of diluted earnings per share | | | | | |
| Anti-dilutive (1) | 4,989,725 |
| | 5,487,164 |
| | 7,176,089 |
|
| Market-based (2) | 670,829 |
| | 862,446 |
| | 795,456 |
|
F-58
| |
(1) | Includes stock options that are anti-dilutive because their exercise price was greater than the average market price of Ocwen’s stock, and stock awards that are anti-dilutive based on the application of the treasury stock method. |
| |
(2) | Shares that are issuable upon the achievement of certain market-based performance criteria related to Ocwen’s stock price. |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Loss from continuing operations, net of tax attributable to Ocwen common stockholders | $ | (40,178) | | | $ | (142,125) | | | $ | (72,181) | |
| Income from discontinued operations, net of tax | 0 | | | 0 | | | 1,409 | |
| Net loss attributable to Ocwen stockholders | $ | (40,178) | | | $ | (142,125) | | | $ | (70,772) | |
| | | | | |
| Weighted average shares of common stock outstanding - Basic and Diluted | 8,748,725 | | | 8,962,961 | | | 8,913,558 | |
| | | | | |
| Earnings (loss) per share - Basic and Diluted | | | | | |
| Continuing operations | $ | (4.59) | | | $ | (15.86) | | | $ | (8.10) | |
| Discontinued operations | $ | 0 | | | $ | 0 | | | $ | 0.16 | |
| Total attributable to Ocwen stockholders | $ | (4.59) | | | $ | (15.86) | | | $ | (7.94) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Stock options and common stock awards excluded from the computation of diluted earnings per share | | | | | |
| Anti-dilutive (1) | 199,079 | | | 211,175 | | | 332,648 | |
| Market-based (2) | 125,395 | | | 52,480 | | | 44,722 | |
(1)Includes stock options that are anti-dilutive because their exercise price was greater than the average market price of Ocwen’s stock, and stock awards that are anti-dilutive based on the application of the treasury stock method.
(2)Shares that are issuable upon the achievement of certain market-based performance criteria related to Ocwen’s stock price.
As disclosed in Note 2116 — Stockholders’ Equity, Ocwen implemented a reverse stock split in a ratio of one-for-15 effective on August 13, 2020. The above computations of earnings (loss) per share reflect the number of common stock shares after consideration for the reverse stock split. All common share and loss per share amounts have been adjusted retrospectively to give effect to the reverse stock split as if it occurred at the beginning of the first period presented.
Note 22 — Employee Compensation and Benefit Plans
We maintain defined contribution plans to provide post-retirement benefits to our eligible employees and two non-contributory defined benefit pension plans which are frozen and cover certain eligible active and former eligible employees. We also maintain additional incentive compensation plans for certain employees. We designed these plans to facilitate a pay-for-performance culture, further align the interests of our officers and key employees with the interests of our shareholders and to assist in attracting and retaining employees vital to our long-term success. These plans are summarized below.
Defined Contribution Savings Plans
We maintainsponsor defined contribution savings plans for eligible employees in the U.S (401(k) plans)plan) and India (Provident Fund). We sponsor separate defined contribution plans for Ocwen, PHH Corporation and PHH Home Loans that provide certain eligible employees an opportunity to accumulate funds for retirement.
Contributions of participating employees to the plans are matched on the basis specified by these plans. The employeeFor the 401(k) plans, we match percentage ranges from 50% of each employee’s contributions, limited to
2%, to 100%the first 6% of each eligible participant’s salary deferred upcontribution to 4% of such participant’s eligible compensation per pay periodthe 401(k) plans with maximum aggregate matching of $10,800$8,550 for 2018.2020. For the Provident Fund, both the employee and the employer are required to make minimum contributions to the fund at a predetermined rate (currently 12%) applied to a portion of the employee's salary. Employers are not required to make contributions beyond this minimum.
Our contributions to these plans were $4.8$5.2 million, $5.3$5.9 million and $4.9$4.8 million for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, respectively.
Defined Benefit Pension Plans
Ocwen and PHH sponsorsponsors different non-contributory defined benefit pension planplans for which benefits are based on an employee’s years of credited service and a percentage of final average compensation, or as otherwise described by the plan. Both defined benefit pension plans were assumed as part of business acquisitions and are frozen, wherein the plans only accrue additional benefits for a limited number of employees and no additional employees are eligible for participation in the plans.
The following table shows the total change in the benefit obligation, plan assets and funded status for the pension plans:
| | | | | | | | | | | | | | | |
| | December 31, | | | | |
| 2020 | | 2019 | | | | |
| Benefit obligation | $ | 58,965 | | | $ | 54,603 | | | | | |
| Fair value of plan assets | 46,303 | | | 41,220 | | | | | |
| Unfunded status recognized in Other liabilities | $ | (12,662) | | | $ | (13,383) | | | | | |
| | | | | | | |
| Amounts recognized in Accumulated other comprehensive income | $ | 8,484 | | | $ | 6,864 | | | | | |
The rate used to discount the projected benefit obligation of the PHH pension plan decreased from 3.25% in 2019 to 2.25% in 2020, resulting in an increase of $6.8 million in the plan’s benefit obligation. The net periodic benefit cost related to the defined benefit pension plans, included in Other expenses, was $(0.2) million, $(2.0) million and $0.4 million for 2020, 2019 and 2018 respectively.
As of December 31, 2020, future expected benefit payments to be made from the assets of the defined benefit pension plans is $2.9 million, for each of the years ending December 31, 2021 and 2023, $2.8 million for each of the years ending December 31, 2022 and 2024 and $3.0 million for the year ending December 31, 2025. The expected benefit payments to be made for the subsequent five years ending December 31, 2026 through 2030 are $15.7 million.
Ocwen contributes to the defined benefit pension plans amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws as well as additional amounts at their discretion. Our contributions to the defined benefit pension plans were $2.1 million, $0.8 million and $0.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. On October 4, 2018, Ocwen assumed all benefit obligations associated with PHH’s defined benefit pension plan as a result of its completed acquisition of PHH.PHH and no contribution was required to be made during the post-acquisition period ended December 31, 2018.
Gratuity Plan
In accordance with India law, OFSPL provides for a defined benefit retirement plan (Gratuity Plan) covering all of its employees in India. The Gratuity Plan provides a lump-sum payment to vested employees at retirement or termination of employment based upon the respective employee’s salary and years of employment. OFSPL provides for the gratuity benefitthrough actuarially determined valuations.
The following table shows the total change in the benefit obligation, plan assets and funded status for the pension plans:Gratuity Plan:
| | | | | | | | | | | | | | | |
| | December 31, | | | | |
| 2020 | | 2019 | | | | |
| Benefit obligation | $ | 6,091 | | | $ | 5,370 | | | | | |
| Fair value of plan assets | 40 | | | 39 | | | | | |
| Unfunded status recognized in Other liabilities | $ | (6,051) | | | $ | (5,331) | | | | | |
| | | | | | | |
|
| | | |
| | December 31, 2018 |
| Benefit obligation | $ | 49,122 |
|
| Fair value of plan assets | 36,439 |
|
| Unfunded status recognized in Other liabilities | $ | (12,683 | ) |
| | |
| Amounts recognized in Accumulated other comprehensive income | $ | 3,422 |
|
The net periodic benefit cost related to the defined benefit pension plans is $0.4 million for the year ended December 31, 2018 and not significant forDuring the years ended December 31, 20172020, 2019 and2016, respectively 2018, benefits of $0.8 million, $0.9 million, and is included in Other expenses.
$0.3 million were paid by OFSPL. As of December 31, 2018,2020, future expected benefit payments to be made from the defined benefit pension plan’s assets of the Gratuity Plan, which reflect expected future service, is $2.7$1.1 million, for the year ending December 31, 2019, $2.8$1.0 million, $0.8 million, $0.8 million and $0.6 million for the years ending December 31, 2020 through 2021, 2022, 2023, 2024 and $2.7 million for the years ending December 31, 2022 through 2023.2025, respectively. The expected benefit payments to be made for the subsequent five years ending December 31, 20242026 through 20282030 are $15.4$2.1 million.
Both Ocwen and PHH’s policy is to contribute amounts to the defined benefit pension plans sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws and additional amounts at their discretion. Our contributions to the Ocwen plan were $0.2 million, $0.1 million and $0.1 million for the years ended December 31, 2018, 2017 and 2016, respectively. No contributions were required to be made to the PHH plan during the post-acquisition period ended December 31, 2018, and contributions are not expected to be significant for the year ended December 31, 2019.
Annual Incentive Plan
The Ocwen Financial Corporation Amended 1998 Annual Incentive Plan and the 2017 Performance Incentive Plan (the 2017 Equity Plan) are our primary incentive compensation plans for executives and other eligible employees. Previously issued equity awards remain outstanding under the 2007 Equity Incentive Plan (the 2007 Equity Plan). Under the terms of these plans, participants can earn cash and equity-based awards as determined by the Compensation and Human Capital Committee of the Board of Directors (the Committee). The awards are based on objective and subjective performance criteria established by the Committee. The Committee may at its discretion adjust performance measurements to reflect significant unforeseen events. We recognized $20.5$25.7 million, $24.5$16.6 million and $25.5$20.5 million of compensation expense during 2018, 20172020, 2019 and 2016,2018, respectively, related to annual incentive compensation awarded in cash.
The 2007 Equity Plan and the 2017 Equity Plan authorize the grant of stock options, restricted stock, stock units or other equity-based awards, including cash-settled awards, to employees. Effective with the approval of the 2017 Equity Plan by Ocwen shareholders on May 24, 2017, no new awards have been, or will be, granted under the 2007 Equity Plan. The number of remaining shares available for award grants under the 2007 Equity Plan became available for award grants under the 2017 Equity Plan effective upon shareholder approval. At December 31, 2018,2020, there were 7,917,804249,746 shares of common stock remaining available for future issuance under these plans. Effective August 13, 2020, Ocwen implemented a one-for-15 reverse stock split. The number of units, exercise price, fair value, and market price conditions have been retroactively adjusted for all periods presented to give effect to the reverse stock split as if it occurred at the beginning of the first period presented. See Note 16 — Stockholders’ Equity for additional information.
Equity Awards
Outstanding equity awards granted under these plansthe 2007 Equity Plan and the 2017 Equity Plan had the following characteristics in common:
|
| | | | | | | | | | | | | |
| Type of Award | | Percent of Total Equity Award | | Vesting Period |
20082011 - 2014 Awards: | | | | |
| Options: | | | | |
Service Condition:Servicing Condition - Time-based | | 43 | % | |
Time-based | | 25 | % | | Ratably over four years (25% on each of the four anniversaries of the grant date) |
| Market Condition: | |
|
| |
|
| Market performance-based | | 50 |
| | Over three years beginning with 25% vesting on the date that the stock price has at least doubled over the exercise price and the compounded annual gain over the exercise price is at least 20% and then ratably over three years (25% on each of the next three anniversaries of the achievement of the market condition) |
| Extraordinary market performance-based | | 257 |
| | Over three years beginning with 25% vesting on the date that the stock price has at least tripled over the exercise price and the compounded annual gain over the exercise price is at least 25% and then ratably over three years (25% on each of the next three anniversaries of the achievement of the market condition) |
| Total Award | | 100 | % | | |
| | | | |
| 2015 - 2016 Awards: | | | | |
| Options: | | | | |
Service Condition:Condition - Time-based | | 100 | % | |
Time-based | | 35 | % | | Ratably over four years (25% vesting on each of the first four anniversaries of the grant date.) |
Stock Units: | | | | |
Service Condition:2017 - 2020 Awards: | | | | |
Time-basedOptions: | | 16 |
| |
| Service Condition - Time-based | | 9 | % | | Ratably over three years (1/3 vesting on each of the first three anniversaries of the grant date). |
| Stock Units: | | | | |
| Service Condition - Time-based | | 47 | | | Over fourthree years with 1/3 vesting on each of the 2nd, 3rd and 4thfirst three anniversaries of the grant date. |
| Market Condition: | | | | |
| Time-based vesting schedule and Market performance-based vesting date | | 4918 |
| | Vest over four years with 25% vesting on each of the four anniversaries of the grant date. However, none are considered vested until the first trading day (if any) on or before the 4th anniversary of the award date on which the average stock price equals or exceeds the price set in the individual award agreement, at which time all units that have met their time-based vesting schedule vest immediately with the remainder vesting in accordance with their time-based schedule. |
Total Award | | 100 | % | | |
| | | | |
2016 - 2018 Awards: | | | | |
Options: | | | | |
Service Condition: | | | | |
Time-based | | 9 | % | | Ratably over three years (1/3 vesting on each of the first three anniversaries of the grant date). |
Stock Units: | | | | |
Service Condition: | | | | |
Time-based | | 55 |
| | Over three years with 1/3 vesting on each of the first three anniversaries of the grant date. |
Market Condition: | | | | |
| Time-based vesting schedule and Market performance-based vesting date | | 3626 |
| | Vest over four years with 25% vestingCliff-vest 100% after three years. Vesting of units credited based on each ofTotal Shareholder Return (TSR) for any performance period is subject to continued service through the four anniversaries of the grant date. However, none are considered vested until the first trading day (if any) on or before the 4ththird anniversary of the award date on which the average stock price equalsgrant. There is no interim or exceeds the price set in the individual award agreement, at which time all unitsratable vesting. The number of performance-based awards that have met their time-based vesting schedulewill vest immediately with the remainder vesting in accordance with their time-based schedule.
is determined by Ocwen’s TSR, either absolute or relative to Ocwen’s compensation peer group, during each performance period. |
| Total Award | | 100 | % | | |
The contractual term of all options granted is ten years from the grant date, except where employment terminates by reason of death, disability or retirement, in which case, the agreement may provide for an earlier termination of the options. The terms
of the market-based options do not include a retirement provision. Stock units have a three-year or four-year term. If the market conditions are not met by the third or fourth anniversary of the award of stock units, those units terminate on that date.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| Stock Options | 2020 | | 2019 | | 2018 |
| | Number of
Options | | Weighted
Average
Exercise
Price | | Number of
Options | | Weighted
Average
Exercise
Price | | Number of
Options | | Weighted
Average
Exercise
Price |
| Outstanding at beginning of year | 131,962 | | | $ | 282.30 | | | 139,507 | | | $ | 288.30 | | | 447,244 | | | $ | 149.55 | |
| Granted (1) | — | | | — | | | 3,427 | | | 31.20 | | | 23,226 | | | 54.90 | |
| Exercised | — | | | — | | | — | | | — | | | — | | | — | |
| Forfeited / Expired (2) | (7,096) | | | 423.80 | | | (10,972) | | | 280.35 | | | (330,963) | | | 84.30 | |
Outstanding at end of year (3)(4) | 124,866 | | | $ | 274.30 | | | 131,962 | | | $ | 282.30 | | | 139,507 | | | $ | 288.30 | |
| | | | | | | | | | | |
| Exercisable at end of year (3)(4)(5) | 110,484 | | | $ | 283.08 | | | 105,384 | | | $ | 302.40 | | | 101,336 | | | $ | 319.35 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| Stock Options | 2018 | | 2017 | | 2016 |
| | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
| Outstanding at beginning of year | 6,708,655 |
| | $ | 9.97 |
| | 6,926,634 |
| | $ | 9.88 |
| | 7,151,225 |
| | $ | 10.10 |
|
| Granted (1) | 348,385 |
| | 3.66 |
| | — |
| | — |
| | — |
| | — |
|
| Exercised (2) | — |
| | — |
| | — |
| | — |
| | (69,805 | ) | | 5.81 |
|
| Forfeited / Expired (4) | (4,964,441 | ) | | 5.62 |
| | (217,979 | ) | | 7.16 |
| | (154,786 | ) | | 21.80 |
|
Outstanding at end of year (5)(6) | 2,092,599 |
| | $ | 19.22 |
| | 6,708,655 |
| | $ | 9.97 |
| | 6,926,634 |
| | $ | 9.88 |
|
| | | | | | | | | | | | |
| Exercisable at end of year (5)(6)(7) | 1,520,039 |
| | $ | 21.29 |
| | 6,234,830 |
| | $ | 8.87 |
| | 6,344,958 |
| | $ | 8.71 |
|
(1)Stock options granted in 2019 include 2,212 options awarded to Ocwen’s Chief Financial Officer at a strike price of $32.55 equal to the closing price of our common stock on the effective date of her employment. Stock options granted in 2018 include 17,799 options awarded to Ocwen’s current Chief Executive Officer (CEO) at an exercise price of $61.80 equal to the closing price of our common stock on the effective date of his employment, which was the closing date of the PHH acquisition.
| |
(1) | Stock(2)Includes 0 and 4,913 options which expired unexercised in 2020 and 2019, because their exercise price was greater than the market price of Ocwen’s stock. (3)At December 31, 2020, 5,167 options granted in 2018 include 266,990 options awarded to Ocwen’s current Chief Executive Officer at an exercise price of $4.12 equal to the closing price of our common stock on the effective date of his employment, which was the closing date of the PHH acquisition. |
| |
(2) | The weighted average grant date fair value of stock options granted in 2018 was $2.63. |
| |
(3) | The total intrinsic value of stock options exercised, which is defined as the amount by which the market value of the stock on the date of exercise exceeds the exercise price was $0.1 million in 2016. |
| |
(4) | Includes 4,719,750 options which expired unexercised in 2018 because their exercise price was greater than the market price of Ocwen’s stock. |
| |
(5) | At December 31, 2018, 160,000 options with a market condition for vesting based on an average common stock trading price of $38.94, had not met their performance criteria. Outstanding and exercisable stock options at December 31, 2018 have a net aggregate intrinsic value of $0. A total of 870,939 market-based options were outstanding at December 31, 2018, of which 710,939 were exercisable. |
| |
(6) | At December 31, 2018, the weighted average remaining contractual term of options outstanding and options exercisable was 5.02 years and 3.87 years, respectively. |
| |
(7) | The total fair value of stock options that vested and became exercisable during 2018, 2017 and 2016, based on grant-date fair value, was $0.6 million, $0.7 million and $1.1 million, respectively. |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| Stock Units | 2018 | | 2017 | | 2016 |
| | Number of
Stock Units | | Weighted
Average
Grant Date Fair Value | | Number of
Stock Units | | Weighted
Average
Grant Date Fair Value | | Number of
Stock Units | | Weighted
Average
Grant Date Fair Value |
| Unvested at beginning of year | 2,753,918 |
| | $ | 3.69 |
| | 2,752,054 |
| | $ | 3.91 |
| | 835,730 |
| | $ | 10.00 |
|
| Granted (1)(2) | 1,809,373 |
| | 3.57 |
| | 971,761 |
| | 2.56 |
| | 2,184,100 |
| | 2.19 |
|
| Vested (3)(4) | (796,856 | ) | | 2.78 |
| | (896,272 | ) | | 3.26 |
| | (26,666 | ) | | 32.56 |
|
| Forfeited/Cancelled (1) | (819,635 | ) | | 4.57 |
| | (73,625 | ) | | 2.20 |
| | (241,110 | ) | | 6.17 |
|
| Unvested at end of year (5)(6) | 2,946,800 |
| | $ | 3.75 |
| | 2,753,918 |
| | $ | 3.69 |
| | 2,752,054 |
| | $ | 3.91 |
|
| |
(1) | Upon the resignation of Ocwen’s former Chief Executive Officer on June 30, 2018, 377,525 unvested stock units which would have been forfeited immediately were modified to allow continued vesting in accordance with the original terms. This had the equivalent effect of canceling the original award and granting a new award. |
| |
(2) | Stock units granted in 2018 include 983,010 units granted to Ocwen’s current Chief Executive Officer on the effective date of his employment, which was the closing date of the PHH acquisition. |
| |
(3) | The total intrinsic value of stock units vested, which is defined as the market value of the stock on the date of vesting, was $3.3 million, $4.6 million and $0.1 million for 2018, 2017 and 2016, respectively. |
| |
(4) | The total fair value of the stock units that vested during 2018, 2017 and 2016, based on grant-date fair value, was $2.2 million, $2.9 million and $0.9 million, respectively. |
| |
(5) | Excluding the 510,829 market-based stock awards that have not met their performance criteria, the net aggregate intrinsic value of stock awards outstanding at December 31, 2018 was $3.3 million. At December 31, 2018, 377,806, 40,000 and 93,023 stock units |
with a market condition for vesting based on an average common stock trading price of $16.26, $11.72$484.19, had not met their performance criteria. Outstanding and $5.80exercisable stock options at December 31, 2020 have a net aggregate intrinsic value of $0. A total of 51,563 market-based options were outstanding at December 31, 2020, of which 46,396 were exercisable.
(4)At December 31, 2020, the weighted average remaining contractual term of options outstanding and options exercisable was 3.06 years and 2.66 years, respectively.
(5)The total fair value of stock options that vested and became exercisable during 2020, 2019 and 2018, based on grant-date fair value, was $0.3 million, $0.6 million and $0.6 million, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| Stock Units - Equity Awards | 2020 | | 2019 | | 2018 |
| | Number of
Stock Units | | Weighted
Average
Grant Date Fair Value | | Number of
Stock Units | | Weighted
Average
Grant Date Fair Value | | Number of
Stock Units | | Weighted
Average
Grant Date Fair Value |
| Unvested at beginning of year | 177,275 | | | $ | 39.45 | | | 196,453 | | | $ | 56.25 | | | 183,595 | | | $ | 55.35 | |
| Granted (1)(2) | 150,000 | | | 8.78 | | | 83,797 | | | 30.00 | | | 120,625 | | | 53.55 | |
| Vested (3)(4) | (62,954) | | | 42.25 | | | (75,846) | | | 46.20 | | | (53,124) | | | 41.70 | |
| Forfeited/Cancelled (1) | (2,674) | | | 26.85 | | | (27,129) | | | 143.70 | | | (54,642) | | | 68.55 | |
| Unvested at end of year (5)(6) | 261,647 | | | $ | 21.74 | | | 177,275 | | | $ | 39.45 | | | 196,453 | | | $ | 56.25 | |
(1)Upon the resignation of Ocwen’s former CEO on June 30, 2018, 25,168 unvested stock units which would have been forfeited immediately were modified to allow continued vesting in accordance with the original terms. This had the equivalent effect of canceling the original award and granting a new award.
(2)Stock units granted in 2020 and 2019 include 150,000 and 75,377 units, respectively, granted to Ocwen’s CEO under the new long-term incentive (LTI) program described below. Stock units granted in 2018 include 65,534 units granted to Ocwen’s current CEO on the effective date of his employment, which was the closing date of the PHH acquisition.
(3)The total intrinsic value of stock units vested, which is defined as the market value of the stock on the date of vesting, was $1.0 million, $2.1 million and $3.3 million for 2020, 2019 and 2018, respectively.
(4)The total fair value of the stock units that vested during 2020, 2019 and 2018, based on grant-date fair value, was $2.7 million, $3.5 million and $2.2 million, respectively.
(5)Excluding the 125,395 market-based stock awards that have not met their performance criteria, the net aggregate intrinsic value of stock awards outstanding at December 31, 2020 was $3.9 million. At December 31, 2020, 2,666, 6,201 and 3,840 stock units with a market condition for vesting based on an average common stock trading price of $175.80, $87.00 and $65.10, respectively, as well as 37,688 stock units requiring an average common stock trading price of $38.34 to vest a minimum of 50% of units, had not yet met the market condition.
| |
(6) | At December 31, 2018, the weighted average remaining contractual term of share units outstanding was 2.46 years.
condition (and time-vesting requirements, where applicable). The performance for 75,000 stock units is measured based on TSR relative to Ocwen’s compensation peer group TSR over the four performance periods. (6)At December 31, 2020, the weighted average remaining contractual term of share units outstanding was 1.4 years. Liability Awards In 2019, Ocwen established an LTI program in connection with changes made by the Committee to the compensation structure of Ocwen’s executives. The LTI program is designed to promote actions and decisions aligned with our strategic objectives and reward our executives and other program participants for long-term value creation for our shareholders in a manner that is consistent with our pay-for-performance philosophy. The awards granted under the LTI program are cash-settled to avoid share dilution, except that awards granted to Ocwen’s Chief Executive Officer will be settled in shares of common stock. The program includes both a time-vesting component for retention purposes and a performance component to align with pay-for-performance objectives, using TSR as the performance metric. In 2019, performance was based on absolute TSR; in 2020, performance is measured based on TSR relative to Ocwen’s compensation peer group. The LTI awards are granted under the 2017 Equity Plan. A total of 326,453 awards were granted in 2019 under the LTI, of which 251,076 were cash-settled awards and 75,377 were equity-settled awards granted to Ocwen’s CEO as disclosed above. A total of 693,896 awards were granted in 2020 under the LTI, of which 543,896 were cash-settled awards and 150,000 were equity-settled awards granted to Ocwen’s CEO. On September 10, 2020, the Committee granted one-time long-term incentive awards to certain Ocwen executives. A total of 57,891 cash-settled time-based awards were granted with a vesting period of 18 months from the date of grant, subject to continued employment and other conditions. Of the awards granted under the LTI program in 2020 and 2019, 50% and 74%, respectively, were performance-based with a market condition and the remaining 50% and 26%, respectively, were time-based. The time-based awards vest equally on the first, second and third anniversaries of the award grant date if the continued employment condition is met. The recurring annual performance-based awards cliff-vest 100% after three years subject to meeting the performance conditions and continuing employment. Certain one-time transitional performance-based awards granted in 2019 vest equally on the first, second and third anniversaries of the award grant date subject to meeting the performance conditions and continuing employment. Because the cash-settled awards must be settled in cash, they are classified as liabilities (Other liabilities) in the consolidated balance sheets and remeasured at fair value at each reporting date with adjustments recorded as Compensation expense in the consolidated statements of operations. | | | | | | | | | | | | | Years Ended December 31, | | Stock Units - Liability Awards | 2020 | | 2019 | | Unvested units at beginning of year | 243,441 | | | 0 | | | Granted | 601,787 | | | 251,076 | | | Vested | (21,909) | | | 0 | | | Forfeited/Cancelled | (94,954) | | | (7,635) | | | Conversion of fractional stock units on reverse stock split | 8 | | | 0 | | | Unvested units at end of year | 728,373 | | | 243,441 | |
The number of performance-based awards that will vest under the LTI program awards for 2020 is determined by Ocwen’s TSR relative to its compensation peer group (18 companies selected by the Committee) during each performance period. Median (50th percentile) TSR performance will earn the target number of performance-based awards. The award uses four distinct weighted performance periods to measure overall performance – three annual periods ending March 30, 2021, 2022, 2023 and one three-year period ending March 30, 2023. Note that the awards do not vest at the end of each performance period. Vesting of units credited based on the TSR for any performance period is subject to continued service through the third anniversary of the grant date. There is no interim or ratable vesting. The number of performance-based awards that will vest under 2019 annual LTI program is determined by Ocwen’s total TSR over a three-year performance period ending March 29, 2022. The 2019 transitional performance-based awards vest in separate tranches based on the TSR, as defined, over one, two and three-year annual performance periods ending March 29, 2020, 2021 and 2022. For all performance-based awards, the number of units earned depends on the level of performance achieved (Threshold = 50%; Target = 100%; Maximum = 200%, with results between levels interpolated). No units will be awarded for performance below the Threshold level. TSR is calculated using the average closing stock prices during the 30 trading days up to and including the beginning and end date of each performance period.
|
Compensation expense related to equity-basedall stock-based awards is initially measured basedat fair value on the grant-date fair value of the awardsgrant date using an appropriate valuation model based on the vesting conditions of the awards. Awards classified as liabilities are subsequently remeasured at fair value at each reporting date, as described above. The fair value of the time-based option awards was determined using the Black-Scholes options pricing model, while a lattice (binomial) model was used to determine the fair value of the market-based option awards. Lattice (binomial) models incorporate ranges of assumptions for inputs. Stock unit awards with only a service condition are valued at their intrinsic value, which is the market value of the stock on the date of the award. The fair value of Stock unit awards with both a service condition and a market-based vesting condition is based on the output of a Monte Carlo simulation.
The following assumptions were used to value awards:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | | |
| | | 2020 | | 2019 | | | 2018 | | | | | |
| | | Monte Carlo | | Black-Scholes | Monte Carlo | | | Black-Scholes | Monte Carlo | | | | | | | | |
| Risk-free interest rate | | 0.08% - 0.29% | | 2.60% | 1.16% - 2.40% | | | 2.79% – 3.14% | 1.15% – 1.18% | | | | | | | | |
| Expected stock price volatility (1) | | 88.7% - 94.1% | | 68% | 72.5% - 75.9% | | | 67% | 71% - 74% | | | | | | | | |
| Expected dividend yield | | —% | | —% | —% | | | —% | —% | | | | | | | | |
| Expected life (in years) (2) | | (3) | | 8.5 | (3) | | | 8.5 | (3) | | | | | | | | |
| Contractual life (in years) | | N/A | | N/A | N/A | | | N/A | N/A | | | | | | | | |
| Fair value | | $24.36 - $38.75 | | $20.55 - $23.25 | $26.25 - $33.75 | | | $22.95 - $44.40 | $27.60 - $72.00 | | | | | | | | |
|
| | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | Black-Scholes | Monte Carlo | | Monte Carlo | | Monte Carlo |
| Risk-free interest rate | 2.79% – 3.14% | 1.15% – 1.18% | | 1.12% – 1.18% | | 1.12% |
| Expected stock price volatility (1) | 67% | 71% - 74% | | 71% - 77% | | 77% |
| Expected dividend yield | —% | —% | | —% | | —% |
| Expected life (in years) (2) | 8.5 | (3) | | (3) | | (3) |
| Contractual life (in years) | N/A | N/A | | N/A | | N/A |
| Fair value | $1.53 - $2.96 | $1.84 - $4.80 | | $2.00 - $4.80 | | $2.00 |
| |
(1) | We generally estimate volatility based on the historical volatility of Ocwen’s common stock over the most recent period that corresponds with the estimated expected life of the option. For stock awards valued using a Monte Carlo simulation, volatility is computed as a blend of historical volatility and implied volatility based on traded options on Ocwen’s common stock. |
| |
(2) | For the options valued using the Black-Scholes model we determined the expected life based on historical experience with similar awards, giving consideration to the contractual term, exercise patterns and post vesting forfeitures. The expected term of the options valued using the lattice (binomial) model is derived from the output of the model. The lattice (binomial) model incorporates exercise assumptions based on analysis of historical data. For all options, the expected life represents the period of time that options granted were expected to be outstanding at the date of the award. |
| |
(3) | The stock units that contain both a service condition and a market-based condition are valued using the Monte Carlo simulation. The expected term is derived from the output of the simulation and represents the expected time to meet the market-based vesting condition. For equity awards with both service and market conditions, the requisite service period is the longer of the derived or explicit service period. In this case, the explicit service condition (vesting period) is the requisite service period, and the graded vesting method is used for expense recognition. |
(2)For the options valued using the Black-Scholes model we determined the expected life based on historical experience with similar awards, giving consideration to the contractual term, exercise patterns and post vesting forfeitures. The expected term of the options valued using the lattice (binomial) model is derived from the output of the model. The lattice (binomial) model incorporates exercise assumptions based on analysis of historical data. For all options, the expected life represents the period of time that options granted were expected to be outstanding at the date of the award. No option awards were granted during the year ended December 31, 2020.
(3)The stock units that contain both a service condition and a market-based condition are valued using the Monte Carlo simulation. The expected term is derived from the output of the simulation and represents the expected time to meet the market-based vesting condition. For equity awards with both service and market conditions, the requisite service period is the longer of the derived or explicit service period. In this case, the explicit service condition (vesting period) is the requisite service period, and the graded vesting method is used for expense recognition.
The following table sets forth equity-basedsummarizes Ocwen's stock-based compensation related to stock optionsexpense included as a component of Compensation and stock awards andbenefits expense in the related excess tax benefit:consolidated statements of operations:
| | | | | | | | | | Years Ended December 31, |
| | Years Ended December 31, | | 2020 | | 2019 | | 2018 |
| | 2018 | | 2017 | | 2016 | |
| Equity-based compensation expense | | | | | | |
| Compensation expense - Equity awards | | Compensation expense - Equity awards | | | | | |
| Stock option awards | $ | (368 | ) | | $ | 1,457 |
| | $ | 1,644 |
| Stock option awards | $ | (431) | | | $ | (121) | | | $ | (368) | |
| Stock awards | 2,734 |
| | 4,167 |
| | 3,537 |
| Stock awards | 2,832 | | | 2,818 | | | 2,734 | |
| Excess tax benefit related to share-based awards | 294 |
| | 3,701 |
| | 686 |
| |
| | | | $ | 2,401 | | | $ | 2,697 | | | $ | 2,366 | |
| | Compensation expense - Liability awards | | Compensation expense - Liability awards | 5,642 | | | 1,082 | | | 0 | |
| | (Tax deficiency) excess tax benefit related to share-based awards | | (Tax deficiency) excess tax benefit related to share-based awards | (424) | | | (381) | | | 294 | |
As of December 31, 2018,2020, unrecognized compensation costs related to non-vested stock options amounted to $0.9$0.3 million, which will be recognized over a weighted-average remaining requisite service period of 2.560.81 years. Unrecognized compensation costs related to non-vested stock units as of December 31, 20182020 amounted to $5.0$3.3 million, which will be recognized over a weighted-average remaining life of 2.461.40 years. Unrecognized compensation costs related to unvested liability awards as of December 31, 2020 amounted to $15.7 million, which will be recognized over a weighted-average remaining life of 1.54 years.
Note 2223 — Business Segment Reporting
Our business segments reflect the internal reporting that we use to evaluate operating performance of services and to assess the allocation of our resources. A brief description of our current business segments is as follows:
Servicing. This segment is primarily comprised of our core residential mortgage servicing business and currently accountsaccounted for most79% of our total revenues.revenues in 2020. We provide residential and commercial mortgage loan servicing, special servicing and asset management services. We earn fees for providing these services to owners of the mortgage loans and foreclosed real estate. In most cases, we provide these services either because we purchased the MSRs from the owner of the mortgage, retained the MSRs on the sale or securitization of residential mortgage loans or because we entered into a subservicing or special servicing agreement with the entity that owns the MSR. Our residential servicing portfolio includes both forward and reverse conventional, government-insured and non-Agency loans.mortgage loans, including the reverse mortgage loans classified as loans held for investment on our balance sheet. Non-Agency loans include subprime loans, which represent residential loans that generally did not qualify under GSE guidelines or have subsequently become delinquent.
Lending.Effective with the fourth quarter of 2020, we report the results of Reverse Servicing within the Servicing segment. Historically, the Reverse Servicing business was included in the reported results of the Originations segment. This alignment of our business segments is consistent with a change in the management of the business and a change in the internal management reporting to the chief operating decision maker. Segment results for 2019 and 2018 have been recast to conform to the current segment presentation. Reverse Servicing generated Revenue and Income before income taxes of $63.4 million and $53.0 million, respectively, in 2019, and $41.7 million and $33.8 million, respectively in 2018. Reverse Servicing assets consist primarily of securitized Loans held for investment - Reverse Mortgages.
Originations. The LendingOriginations segment (previously Lending) purchases and originates conventional and government-insured residential forward and reverse mortgage loans.loans through multiple channels. The loans are typically sold shortly after origination into a liquid market on a servicing retained (securitization) or servicing released (sale to a third party) basis. We originate forward mortgage loans directly with customers (retail(recapture channel) in forward lending as well as through correspondent lending arrangements since the second quarter of 2019. We originate reverse mortgage loans in all three channels through our correspondent lending arrangements, broker relationships (wholesale) and retail channels. In addition to our originated MSRs, we acquire MSRs through multiple channels, including flow purchase agreements, the GSE Cash Window programs and bulk MSR purchases. Accordingly, as part of reverse mortgage lending. In 2017,our internal management reporting we closed our forward correspondent lending channel and exitedrenamed the forward wholesale lending business due to higher liquidity and capital requirements versusLending segment as Originations effective in the available liquidity at the time. We wrote off the capitalized balancefirst quarter of software developed internally for the forward wholesale lending business and recorded a loss of $6.8 million in Other expenses in 2017. We continue to originate loans through our forward retail lending channel as well as through all three channels of reverse mortgage lending.2020.
Corporate Items and Other. Corporate Items and Other includes revenues and expenses of corporate support services, CR Limited (CRL), our wholly-owned captive reinsurance subsidiary, discontinued operations and inactive entities, business activities that are individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash and interest expense on unallocated corporate debt. Corporate Items and Other also includes severance, retention, facility-related and other expenses incurred in 2019 and 2020 related to our cost re-engineering initiatives. Our cash balances are included in Corporate Items and Other. CRL provides re-insurance related to coverage on foreclosed real estate properties owned or serviced by us.
Revenues and expenses directly associated with each respective business segments are included in determining its results of operations. We allocate certain expenses incurred by corporate support services that are not directly attributable to a segment to each business segment. Beginning in 2020, we updated our methodology to allocate overhead costs incurred by corporate support services to the Servicing and Originations segments, which now incorporates the utilization of various measurements primarily based on time studies, personnel volumes and service consumption levels. In January 2018, we decidedprior periods, corporate support services costs were primarily allocated based on relative segment size. Support services costs not allocated to exit the ACS businessServicing and have liquidatedOriginations segments are retained in the Corporate Items and Other segment along with certain other costs including certain litigation and settlement related expenses or recoveries, costs related to our portfolio of inventory-secured loansre-engineering plan, and other costs related to independent used car dealers.
operating as a public company. We allocate a portion of interest income to each business segment, including interest earned on cash balancesbalances.
Interest expense on direct asset-backed financings are recorded in the respective Servicing and short-term investments. We also allocate expenses incurred byOriginations segments. Beginning in the third quarter of 2020, we began allocating interest expense on corporate support servicesdebt, including the SSTL and Senior Notes, used to each business segment.fund servicing advances and other servicing assets from Corporate Items and Other to Servicing. Amortization of debt issuance costs and discount are excluded from the interest expense allocation. The interest expense related to the corporate debt has been allocated to the Servicing segment for prior periods to conform to the current period presentation. The interest expense allocation for 2020, 2019 and 2018 is $38.2 million, $54.9 million and $49.0 million, respectively.
Financial information for our segments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Results of Operations | | Servicing | | Originations | | Corporate Items and Other | | | | Business Segments Consolidated |
| Year Ended December 31, 2020 | | | | | | | | | | |
| Revenue (1) | | $ | 757,665 | | | $ | 179,298 | | | $ | 23,949 | | | | | $ | 960,912 | |
| | | | | | | | | | |
| MSR valuation adjustments, net (1) | | (276,252) | | | 41,699 | | | (17,368) | | | | | (251,921) | |
| | | | | | | | | | |
| Operating expenses (2) | | 331,885 | | | 114,357 | | | 129,462 | | | | | 575,704 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other income (expense): | | | | | | | | | | |
| Interest income | | 7,061 | | | 7,008 | | | 1,930 | | | | | 15,999 | |
| Interest expense | | (90,671) | | | (9,837) | | | (8,859) | | | | | (109,367) | |
| Pledged MSR liability expense | | (152,454) | | | 0 | | | 120 | | | | | (152,334) | |
| Other, net | | 10,752 | | | 351 | | | (4,372) | | | | | 6,731 | |
| Other expense, net | | (225,312) | | | (2,478) | | | (11,181) | | | | | (238,971) | |
| | | | | | | | | | |
| Income (loss) before income taxes | | $ | (75,784) | | | $ | 104,162 | | | $ | (134,062) | | | | | $ | (105,684) | |
| | | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | | | | | |
| Revenue | | $ | 1,048,490 | | | $ | 61,698 | | | $ | 13,187 | | | | | $ | 1,123,375 | |
| | | | | | | | | | |
| MSR valuation adjustments, net | | (120,864) | | | (12) | | | 0 | | | | | (120,876) | |
| | | | | | | | | | |
| Operating expenses (2)(3) | | 547,976 | | | 72,457 | | | 53,506 | | | | | 673,939 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other income (expense): | | | | | | | | | | |
| Interest income | | 10,085 | | | 5,243 | | | 1,776 | | | | | 17,104 | |
| Interest expense | | (102,525) | | | (7,590) | | | (4,014) | | | | | (114,129) | |
| Pledged MSR liability expense | | (372,172) | | | 0 | | | 0 | | | | | (372,172) | |
| Gain on repurchase of senior secured notes | | 0 | | | 0 | | | 5,099 | | | | | 5,099 | |
| Bargain purchase gain | | 0 | | | 0 | | | (381) | | | | | (381) | |
| Other, net | | 12,294 | | | 892 | | | (3,758) | | | | | 9,428 | |
| Other expense, net | | (452,318) | | | (1,455) | | | (1,278) | | | | | (455,051) | |
| | | | | | | | | | |
| Loss before income taxes | | $ | (72,668) | | | $ | (12,226) | | | $ | (41,597) | | | | | $ | (126,491) | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| Results of Operations | | Servicing | | Lending | | Corporate Items and Other | | Corporate Eliminations | | Business Segments Consolidated |
| Year Ended December 31, 2018 | | | | | | | | | | |
| Revenue (1) | | $ | 951,224 |
| | $ | 93,672 |
| | $ | 18,149 |
| | $ | — |
| | $ | 1,063,045 |
|
| | | | | | | | | | | |
| Expenses (1) | | 772,467 |
| | 82,906 |
| | 77,123 |
| | — |
| | 932,496 |
|
| | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | |
| Interest income | | 5,383 |
| | 6,061 |
| | 2,582 |
| | — |
| | 14,026 |
|
| Interest expense | | (214,172 | ) | | (6,639 | ) | | (54,230 | ) | | — |
| | (275,041 | ) |
| Bargain purchase gain | | — |
| |
|
| | 64,036 |
| |
|
| | 64,036 |
|
| Gain on sale of mortgage servicing rights, net | | 1,325 |
| | — |
| | — |
| | — |
| | 1,325 |
|
| Other, net (1) | | (3,241 | ) | | 966 |
| | (4,096 | ) | | — |
| | (6,371 | ) |
| Other income (expense), net | | (210,705 | ) | | 388 |
| | 8,292 |
| | — |
| | (202,025 | ) |
| | | | | | | | | | | |
| Income (loss) from continuing operations before income taxes | | $ | (31,948 | ) | | $ | 11,154 |
| | $ | (50,682 | ) | | $ | — |
| | $ | (71,476 | ) |
| | | | | | | | | | | |
| Year Ended December 31, 2017 | | | | | | | | | | |
| Revenue (1) | | $ | 1,041,290 |
| | $ | 127,475 |
| | $ | 25,811 |
| | $ | — |
| | $ | 1,194,576 |
|
| | | | | | | | | | | |
| Expenses (1) | | 716,384 |
| | 128,058 |
| | 154,203 |
| | — |
| | 998,645 |
|
| | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | |
| Interest income | | 783 |
| | 10,914 |
| | 4,268 |
| | — |
| | 15,965 |
|
| Interest expense | | (293,595 | ) | | (13,893 | ) | | (55,750 | ) | | — |
| | (363,238 | ) |
| Gain on sale of mortgage servicing rights, net | | 10,537 |
| | — |
| | — |
| | — |
| | 10,537 |
|
| Other, net (1) | | 4,049 |
| | (869 | ) | | (6,348 | ) | | — |
| | (3,168 | ) |
| Other income (expense), net | | (278,226 | ) | | (3,848 | ) | | (57,830 | ) | | — |
| | (339,904 | ) |
| | | | | | | | | | | |
| Income (loss) from continuing operations before income taxes | | $ | 46,680 |
| | $ | (4,431 | ) | | $ | (186,222 | ) | | $ | — |
| | $ | (143,973 | ) |
| | | | | | | | | | | |
| Year Ended December 31, 2016 | | | | | | | | | | |
| Revenue (1) | | $ | 1,247,159 |
| | $ | 112,363 |
| | $ | 27,646 |
| | $ | (5 | ) | | $ | 1,387,163 |
|
| | | | | | | | | | | |
| Expenses (1) | | 910,577 |
| | 114,199 |
| | 198,483 |
| | (5 | ) | | 1,223,254 |
|
| | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | |
| Interest income | | (109 | ) | | 15,300 |
| | 3,892 |
| | — |
| | 19,083 |
|
| Interest expense | | (357,413 | ) | | (14,398 | ) | | (40,772 | ) | | — |
| | (412,583 | ) |
| Gain on sale of mortgage servicing rights | | 8,492 |
| | — |
| | — |
| | — |
| | 8,492 |
|
| Other, net (1) | | 15,812 |
| | 1,065 |
| | (2,139 | ) | | — |
| | 14,738 |
|
| Other income (expense), net | | (333,218 | ) | | 1,967 |
| | (39,019 | ) | | — |
| | (370,270 | ) |
| | | | | | | | | | | |
| Income (loss) from continuing operations before income taxes | | $ | 3,364 |
| | $ | 131 |
| | $ | (209,856 | ) | | $ | — |
| | $ | (206,361 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Results of Operations | | Servicing | | Originations | | Corporate Items and Other | | | | Business Segments Consolidated |
| Year Ended December 31, 2018 | | | | | | | | | | |
| Revenue | | $ | 992,913 | | | $ | 51,983 | | | $ | 18,149 | | | | | $ | 1,063,045 | |
| | | | | | | | | | |
| MSR valuation adjustments, net | | (153,457) | | | 0 | | | 0 | | | | | (153,457) | |
| | | | | | | | | | |
| Operating expenses (2) | | 628,613 | | | 73,303 | | | 77,123 | | | | | 779,039 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other income (expense): | | | | | | | | | | |
| Interest income | | 7,079 | | | 4,365 | | | 2,582 | | | | | 14,026 | |
| Interest expense | | (90,787) | | | (7,311) | | | (5,273) | | | | | (103,371) | |
| Pledged MSR liability expense | | (172,342) | | | 672 | | | 0 | | | | | (171,670) | |
| Bargain purchase gain | | 0 | | | 0 | | | 64,036 | | | | | 64,036 | |
| Other, net | | (1,858) | | | 908 | | | (4,096) | | | | | (5,046) | |
| Other income (expense), net | | (257,908) | | | (1,366) | | | 57,249 | | | | | (202,025) | |
| | | | | | | | | | |
| Loss from continuing operations before income taxes | | $ | (47,065) | | | $ | (22,686) | | | $ | (1,725) | | | | | $ | (71,476) | |
(1)Revenue in the Corporate Items and Other segment for 2020 includes an inter-segment derivatives elimination of $17.4 million with a corresponding offset in MSR valuation adjustments, net.
(2)Compensation and benefits expense in the Corporate Items and Other segment for 2020, 2019 and 2018includes $2.7 million, $20.3 million and $11.9 million, respectively, of severance expense attributable to PHH integration-related headcount reductions of primarily U.S.-based employees in 2019, as well as our overall efforts to reduce costs.
(3)Included in the Corporate Items and Other segment for 2019, we recorded in Professional services expense a recovery from a service provider of $30.7 million during the first quarter of amounts previously recognized as expense. |
| | | | | | | | | | | | | | | | | | | | |
| Total Assets | | Servicing | | Lending | | Corporate Items and Other | | Corporate Eliminations | | Business Segments Consolidated |
| December 31, 2018 | | $ | 3,306,208 |
| | $ | 5,603,481 |
| | $ | 484,527 |
| | $ | — |
| | $ | 9,394,216 |
|
| | | | | | | | | | | |
| December 31, 2017 | | 3,033,243 |
| | 4,945,456 |
| | 424,465 |
| | — |
| | 8,403,164 |
|
| | | | | | | | | | | |
| December 31, 2016 | | 3,312,371 |
| | 3,863,862 |
| | 479,430 |
| | — |
| | 7,655,663 |
|
| |
(1) | Inter-segment billings for services rendered to other segments are recorded as revenues, as contra-expense or as other income, depending on the type of service that is rendered. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Assets | | Servicing | | Originations | | Corporate Items and Other | | | | Business Segments Consolidated |
| December 31, 2020 | | $ | 9,847,603 | | | $ | 379,233 | | | $ | 424,291 | | | | | $ | 10,651,127 | |
| | | | | | | | | | |
| December 31, 2019 | | 9,580,466 | | | 257,416 | | | 568,317 | | | | | 10,406,199 | |
| | | | | | | | | | |
| December 31, 2018 | | 8,762,681 | | | 147,008 | | | 484,527 | | | | | 9,394,216 | |
|
| | | | | | | | | | | | | | | | |
| Depreciation and Amortization Expense | | Servicing | | Lending | | Corporate Items and Other | | Business Segments Consolidated |
| Year Ended December 31, 2018: | | |
| | |
| | |
| | |
|
| Depreciation expense | | $ | 4,601 |
| | $ | 103 |
| | $ | 22,498 |
| | $ | 27,202 |
|
| Amortization of debt discount | | — |
| | — |
| | 1,183 |
| | 1,183 |
|
| Amortization of debt issuance costs | | — |
| | — |
| | 2,921 |
| | 2,921 |
|
| | | | | | | | | |
| Year Ended December 31, 2017: | | |
| | |
| | |
| | |
|
| Depreciation expense | | $ | 5,797 |
| | $ | 194 |
| | $ | 20,895 |
| | $ | 26,886 |
|
| Amortization of mortgage servicing rights | | 51,515 |
| | 273 |
| | — |
| | 51,788 |
|
| Amortization of debt discount | | — |
| | — |
| | 1,114 |
| | 1,114 |
|
| Amortization of debt issuance costs | | — |
| | — |
| | 2,738 |
| | 2,738 |
|
| | | | | | | | | |
| Year Ended December 31, 2016: | | |
| | |
| | |
| | |
|
| Depreciation expense | | $ | 6,804 |
| | $ | 228 |
| | $ | 18,306 |
| | $ | 25,338 |
|
| Amortization of mortgage servicing rights | | 32,669 |
| | 309 |
| | — |
| | 32,978 |
|
| Amortization of debt discount | | 727 |
| | — |
| | 3,450 |
| | 4,177 |
|
| Amortization of debt issuance costs | | 13,455 |
| | — |
| | 12,207 |
| | 25,662 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and Amortization Expense | | Servicing | | Originations | | Corporate Items and Other | | Business Segments Consolidated |
| Year Ended December 31, 2020: | | | | | | | | |
| Depreciation expense | | $ | 857 | | | $ | 128 | | | $ | 18,136 | | | $ | 19,121 | |
| Amortization of debt discount and issuance costs | | 470 | | | 0 | | | 6,522 | | | 6,992 | |
| | | | | | | | |
| | | | | | | | |
| Year Ended December 31, 2019: | | | | | | | | |
| Depreciation expense | | $ | 1,925 | | | $ | 93 | | | $ | 29,893 | | | $ | 31,911 | |
| Amortization of debt discount and issuance costs | | 71 | | | 0 | | | 4,441 | | | 4,512 | |
| | | | | | | | |
| | | | | | | | |
| Year Ended December 31, 2018: | | | | | | | | |
| Depreciation expense | | $ | 4,601 | | | $ | 103 | | | $ | 22,498 | | | $ | 27,202 | |
| Amortization of debt discount and issuance costs | | 0 | | | 0 | | | 4,104 | | | 4,104 | |
| | | | | | | | |
Note 2324 — Regulatory Requirements
Our business is subject to extensive regulation and supervision by federal, state and local governmental authorities, including the Consumer Financial Protection Bureau (CFPB), HUD, the SEC and various state agencies that license and conduct examinations of our servicing and lending activities. In addition, we operate under a number of regulatory settlements
that subject us to ongoing reporting and other obligations. From time to time, we also receive requests (including requests in the form of subpoenas and civil investigative demands) from federal, state and local agencies for records, documents and information relating to our servicing and lending activities. The GSEs (and their conservator, the Federal Housing Finance Authority (FHFA)), Ginnie Mae, the United States Treasury Department, various investors, non-Agency securitization trustees and others also subject us to periodic reviews and audits.
In the current regulatory environment, we have faced and expect to continue to face heightened regulatory and public scrutiny as an organization as well as stricter and more comprehensive regulation of the entire mortgage sector. We continue to work diligently to assess and understand the implications of the evolving regulatory environment in which we operate and to meet its requirements. We devote substantial resources to regulatory compliance, while, at the same time, striving to meet the needs and expectations of our customers, clients and other stakeholders. Our failure to comply with applicable federal, state and local laws, regulations and licensing requirements could lead to (i) administrative fines and penalties and litigation, (ii) loss of our licenses and approvals to engage in our servicing and lending businesses, (iii) governmental investigations and enforcement actions, (iv) civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) damage to our reputation, (vii) inability to raise capital or otherwise fund our operations and (viii) inability to execute on our business strategy. In addition to amounts paid to resolve regulatory matters, we could incur costs to comply with the terms of such resolutions, including, but not limited to, the costs of audits, reviews and third-party firms to monitor our compliance with such resolutions. We recognized $177.5 million in such third-party monitoring costs in connection with the 2013 Ocwen
National Mortgage Settlement, our 2014 settlement with the New York Department of Financial Services (NY DFS) and our 2015 settlement with the California Department of Business Oversight (CA DBO).
We must comply with a large number of federal, state and local consumer protection and other laws and regulations, including, among others, the CARES Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Telephone Consumer Protection Act (TCPA), the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act (FDCPA), the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, as well as individual state licensing and foreclosure laws, individual state and local laws, relating to registration of vacant or foreclosed properties, and federal and local bankruptcy rules. These laws and regulations apply to manyall facets of our business, including, but not limited to, licensing, loan origination,originations, consumer disclosures, default servicing and collections, foreclosure, filing of claims, registration of vacant or foreclosed properties, handling of escrow accounts, payment application, interest rate adjustments, assessment of fees, loss mitigation, use of credit reports, and safeguarding of non-public personally identifiable information about our customers, foreclosure and claims handling, investment of, and interest payments on, escrow balances and escrow payment features and fees assessed on borrowers, and they mandate certain disclosures and notices to borrowers.customers. These complex requirements can and do change as laws and regulations are enacted, promulgated, amended, interpreted and enforced, including through CFPB interpretive bulletins and other regulatory pronouncements.the requirements applicable to our business have been changing especially rapidly in response to the COVID-19 pandemic. In addition, the actions of legislative bodies and regulatory agencies relating to a particular matter or business practice may or may not be coordinated or consistent. As a result, ensuring ongoing compliance with applicable legal and regulatory requirements can be challenging. Over the past decade, theThe general trend among federal, state and local legislative bodies and regulatory agencies as well as state attorneys general has been toward increasing laws, regulations, investigative proceedings and enforcement actions with regard to residential real estate lenders and servicers. New regulatory and legislative measures, or changes in enforcement practices, including those related to the technology we use, could, either individually or in the aggregate, require significant changes to our business practices, impose additional costs on us, limit our product offerings, limit our ability to efficiently pursue business opportunities, negatively impact asset values or reduce our revenues. Accordingly, they could materially and adversely affect our business and our financial condition, liquidity and results of operations.
As further described below and in Note 25 — Contingencies, in recent years Ocwen has entered intoIn addition, a number of significant settlements with federalforeign laws and state regulators and state attorneys general that have imposed additional requirements on our business. For example, we have made various commitments relating to the process of moving loans off the REALServicing® servicing system and onto Black Knight MSP, we have engaged a third-party auditor to perform an analysis with respectregulations apply to our compliance with certain federaloperations outside of the U.S., including laws and stateregulations that govern licensing, privacy, employment, safety, taxes and insurance and laws relating toand regulations that govern the escrowcreation, continuation and the winding up of mortgage loan payments, we have revised various aspects ofcompanies as well as the relationships between shareholders, our complaint handling processescorporate entities, the public and we have extensive review and reporting obligations to various regulatory bodies with respect to various matters, including our financial condition. We devote significant management time and resources to compliance withthe government in these additional requirements. These requirements are generally unique to Ocwen and, while certain of our competitors may have entered into regulatory-related settlements of their own, our competitors are generally not subject to either the same specific or the same breadth of additional requirements to which we are subject.countries.
Ocwen has various subsidiaries that are licensed to originate and/or service forward and reverse mortgage loans in those jurisdictions in which they operate and which require licensing. Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements and satisfying minimum net worth requirements and non-financial requirements such as satisfactory completion of examinations relating to the licensee’s compliance with applicable laws and regulations. Failure to satisfy any of the requirements to which our licensed entities are subject could result in a variety of regulatory actions ranging from a fine, a directive requiring a certain step to be taken, entry into a consent order, a suspension or, ultimately, a revocation of a license, any of which could have a material adverse impact on our business, reputation, results of operations and financial condition. The minimum net worth requirements to which our licensed entities are subject are unique to each state and type of license. We believe our licensed entities were in compliance with all of their minimum net worth requirements at December 31, 2018.
OLS, Homeward and LibertyWe are also subject to seller/servicer obligations under agreements with one or more of the GSEs, HUD, FHA, VA and Ginnie Mae. These seller/servicer obligations contain financial requirements,Mae, including capital requirements related to tangible net worth, as defined by the applicable agency, an obligation to provide audited consolidated financial statements within 90 days of the applicable entity’s fiscal year end as well as extensive requirements regarding servicing, selling and other matters. To the extent that these requirements are not met or waived, the applicable agency may, at its option, utilize a variety of remedies including requirements to 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. To date, none of these counterparties has communicated any material sanction, suspension or prohibition in connection with our seller/servicer obligations. See Note 25 — Contingencies for additional information relating to our recent interactions with Ginnie Mae as a result of the state regulatory actions discussed in that note. We believe weour licensed entities were in compliance with applicableall of their minimum net worth requirements at December 31, 2018.2020. Our non-Agency servicing agreements also contain requirements regarding servicing
practices and other matters, and a failure to comply with these requirements could have a material adverse impact on our business.
The most restrictive of the various net worth requirements for licensing and seller/servicer obligations referenced above is based on the totalUPB of assets of OLS, andserviced by PMC. Under the applicable formula, the required minimum net worth was $172.3$269.8 million at December 31, 2018.2020. PMC’s net worth was $352.9 million at December 31, 2020. The most restrictive of the various liquidity requirements for licensing and seller/servicer obligations referenced above was $27.5 million at December 31, 2020. PMC’s liquid assets were $257.8 million at December 31, 2020.
In addition,We have faced and expect to continue to face heightened regulatory and public scrutiny as an organization and have entered into a number of foreign lawssignificant settlements with federal and regulations applystate regulators and state attorneys general that have imposed additional requirements on our business. Our failure to comply with our settlement obligations to our regulators or withapplicable federal, state and local laws, regulations, licensing requirements and agency guidelines could lead to (i) administrative fines, penalties, sanctions or litigation, (ii) loss of our licenses and approvals to engage in our servicing and lending businesses, (iii) governmental investigations and enforcement actions, (iv) civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) additional costs to address these matters and comply with the terms of any resulting resolutions, (vii) suspension or termination of our approved agency seller/servicer status,(viii)inability to raise capital or otherwise fund our operations outside of the U.S., including laws and regulations that govern licensing, employment, safety, taxes and insurance and laws and regulations that govern the creation, continuation and the winding up of companies as well as the relationships between shareholders, our corporate entities, the public and the government in these countries. Non-compliance with these laws and regulations could result in adverse actions against us, including (i) restrictions(ix) inability to execute on our business strategy, which could have a material adverse impact on our business, reputation, results of operations, in these countries, (ii) fines, penalties or sanctions or (iii) reputational damage.liquidity and financial condition.
New York Department of Financial Services. In March 2017, we entered into a consent orderServices (NY DFS). We operate pursuant to certain regulatory requirements with the NY DFS, including obligations arising under a consent order entered into in March 2017 (the 2017 NY Consent Order) that provided forand the terminationterms of the engagement of a monitor appointed pursuant to an earlier 2014 consent order and for us to address certain concerns raised by the NY DFS that primarily relate to our servicing operations, as well as for us to comply with certain reporting and other obligations. In addition, in connection with the NY DFS’ conditional approval in September 2018 of our acquisition of PHH, we agreed to satisfy certain post-closing requirements, including PHH. The conditional approval includes
reporting obligations and record retention and other requirements relating to the transfer of loans collateralized by New York property (New York loans) onto our servicing system, the Black Knight MSPFinancial Services, Inc. (Black Knight) LoanSphere MSP® servicing system (Black Knight MSP), and certain requirements with respect to the evaluation and supervision of management of both Ocwen Financial Corporation and PHH Mortgage Corporation.PMC. In addition, we arewere prohibited from boarding any additional loans onto the current REALServicing system and we mustwere required to transfer all New York loans off the REALServicing system by April 30, 2020. The conditional approval also modified a preexisting restriction onrestricts our ability to acquire MSRs such that the restriction applies only to New York loans and, with respect to New York loans, providesso that Ocwen may not increase its aggregate portfolio of New York loans serviced or subserviced by Ocwen by more than 2% per year (based on the unpaid principal balance of loans serviced at the prior calendar year-end).year. This restriction will remain in place until the NY DFS determines that all loans serviced on the REALServicing system have been successfully migrated to Black Knight MSP and that Ocwen has developed a satisfactory infrastructure to board sizable portfolios of MSRs.
We transferred all loans onto Black Knight MSP in 2019 and no longer service any loans on the REALServicing system. We believe we have complied with all terms of the PHH acquisition conditional approval to date. We continue to work with the NY DFS to address matters they continue to raise with us as well as to fulfill our commitments under the 2017 NY Consent Order and PHH acquisition conditional approval. To the extent that we fail to address adequately any concerns raised by the NY DFS or fail to fulfill our commitments to the NY DFS, the NY DFS could take regulatory action against us, including imposing fines or penalties or otherwise restricting our business activities. Any such actions could have a material adverse impact on our business, financial condition liquidity and results of operations.
California Department of Business Oversight.Oversight (CA DBO).In January 2015 and February 2017, OLS entered into a consent order (the 2015 CA Consent Order)orders with the CA DBO relating to our alleged failure to produce certain information and documents during a routine licensing examination. In February 2017, we entered into another consent order with the CA DBO (the 2017 CA Consent Order) that terminated the 2015 CA Consent Orderexamination and resolved open matters between us and the CA DBO.relating to alleged servicing practices. We believe that we have completed those obligationsall of the 2017 CA Consent Order that have already come due, and we have so notified the CA DBO. We have certain remaining reporting and other obligations under the 2017 CA Consent Order. Pursuant to the 2017 CA Consent Order, the CA DBO has engaged a third-party administrator who, at the expense of the CA DBO, has commenced work to confirm that Ocwen has completed certain commitments under the 2017 CA Consent Order. Still outstanding, however, is our completion of $198.0 million in debt forgiveness for California borrowers by June 30, 2019. As of December 31, 2018, we estimate that we have approximately $15.0 million of debt forgiveness remaining to complete. Based on internal forecasting, we currently believe that we will be able to complete this requirement by June 30, 2019. However, if we are unable to complete this requirement by the deadline or obtain an extension, the 2017 CA Consent Order obligates us to pay the remaining amount to the CA DBO in cash. Our debt forgiveness activities take place as we modify loans - our loan modifications are designed to be sustainable for homeowners while providing a net present value for mortgage loan investors that is superior to that of foreclosure. Debt forgiveness as part of a loan modification is determined on a case-by-case basis in accordance with the applicable servicing agreement. Debt forgiveness does not involve an expense to Ocwen other than the operating expense incurred in arranging the modification, which is part of Ocwen’s role as loan servicer. If the CA DBO were to allege that we failed to comply with our obligations under the 2017 CA Consent Order or that we otherwise were in breacheach of applicable laws, regulations or licensing requirements, the CA DBO could also take regulatory actions against us, including imposing fines or penalties or otherwise restricting our business activities. Any such actions could have a material adverse impact on our business, financial condition liquidity and results of operations.
Separately, in June 2018,these consent orders. In October 2020, we entered into a consent order with the CA DBO in order to resolve a legacy PHH examination finding stemming from a lending examination of Homeward. Pursuantand, in conjunction therewith, agreed to pay $62,000 (sixty-two thousand dollars) in penalties. We continue to work with the consent order, we consentedCA DBO to a finding that certain records maintained by Homeward were not in complianceaddress matters they raise with certain California statutory requirements. Homeward cooperated in the examination, timely produced requested documents and records, and confirmed that no borrowers were overchargedus as a result. No fines or penalties were payablewell as to fulfill our commitments under the consent order.
Note 2425 — Commitments
Servicer Advance Obligations
In the normal course of business as servicer or master servicer, we are required to advance loan principal and interest payments (P&I), property taxes and insurance premiums (T&I) on behalf of the borrower, if delinquent or delinquent and under a forbearance plan. We also advance legal fees, inspection, maintenance, and preservation costs (Corporate advances) on properties that are in default or have been foreclosed. Our obligations to make these advances are governed by servicing agreements or guides, depending on investors or guarantor.
For PLS loans, generally, we may stop advancing for P&I once future advances are deemed non-recoverable from the net proceeds of the property, although we are generally obligated to continue T&I and Corporate advances until the loan is brought current or until completion of a foreclosure and sale of the REO, in which case, we generally recover our advances from the net proceeds of the property or the pool level proceeds, i.e., generally after the completion of the foreclosure and sale of the REO. For loans in forbearance, Ocwen provides monthly payment deferrals throughout the forbearance period which advance the due date and move the resulting missed payments to or near the loan’s maturity as a non-interest bearing balance. As such, Ocwen does not expect to be out of pocket cash for P&I and T&I advances for any more than one month for eligible PLS loans in forbearance that were not significantly delinquent at the time forbearance was applied to the account.
For Ginnie Mae loans, we are required to make advances for the life of the loan without regard to whether we will be able to recover those payments from cure, liquidation proceeds, insurance proceeds, or late payments. We may stop advancing P&I by purchasing loans out of the pool when they are more than 90 days delinquent. To the extent there are excess funds in the custodial accounts, we are permitted to borrow from these amounts if P&I advances are required for our P&I remittance. We are also required to advance both T&I and Corporate advances until cure or liquidation. For loans in forbearance, we advance P&I while the forbearance plan is active. Reimbursement of such P&I advance is expected after the forbearance period ends, through loan resolution, cure or liquidation.
For GSE loans, we are required to advance interest payments until the borrower is 120 days delinquent for Fannie Mae loans and P&I until borrower resolution or liquidation for Freddie Mac loans. For Freddie Mac loans, servicers may submit claims for T&I and Corporate advances upon borrower resolution or liquidation. For Fannie Mae loans, we can submit reimbursement claims for certain T&I and Corporate advances after incurring the expense. T&I and Corporate advancing on GSE loans continues until the completion of the foreclosure sale. For GSE loans in forbearance, once we have advanced four months of missed payments on a loan, we have no further obligation to advance scheduled payments as the loan will be moved into an “Actual/Actual” remittance status. Reimbursement of such P&I advance is expected after the forbearance period ends, through loan resolution, cure or liquidation. We are required to make T&I and Corporate advances for loans in forbearance until the loan is brought current or until completion of a foreclosure, but we can submit reimbursement claims for certain T&I and Corporate advances after incurring the expense on Fannie Mae loans. Freddie Mac requires servicers to wait until borrower resolution or liquidation to submit claims for T&I and Corporate advances.
As subservicer, we are required to make P&I, T&I and Corporate advances on behalf of servicers following the servicing agreements or guides. Servicers are generally required to reimburse us within 30 days of our advancing under the terms of the
subservicing agreements. We are generally reimbursed by NRZ the same day we fund P&I advances, or within no more than three days for servicing advances and certain P&I advances under the Ocwen agreements.
NRZ is obligated to fund new servicing advances with respect to the MSRs underlying the Rights to MSRs (RMSR), pursuant to the 2017 Agreements and New RMSR Agreements. NRZ has the responsibility to fund advances for loans where they own the MSR, i.e., are the servicer of record. We are dependent upon NRZ for funding the servicing advance obligations for Rights to MSRs where we are the servicer of record. As the servicer of record, we are contractually required under our servicing agreements to make certain servicing advances even if NRZ does not perform its contractual obligations to fund those advances. NRZ currently uses advance financing facilities in order to fund a substantial portion of the servicing advances that they are contractually obligated to purchase pursuant to our agreements with them. If NRZ were unable to meet its advance funding obligations, we would remain obligated to meet any future advance financing obligations with respect to the loans underlying these Rights to MSRs, which could materially and adversely affect our liquidity, financial condition, results of operations and servicing business.
Unfunded Lending Commitments
We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $1.4$2.0 billion and $1.9 billion at December 31, 2018.2020 and 2019, respectively. This additional borrowing capacity is available on a scheduled or unscheduled payment basis. In 2020, we funded $197.0 million out of this $1.9 billion borrowing capacity as of December 31, 2019. We also had short-term commitments to lend $132.1$619.7 million and $18.1$11.7 million in connection with our forward and reverse mortgage loan IRLCs, respectively, outstanding at December 31, 2018.2020. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, commonly referred to as warehouse lines.
HMBS Issuer Obligations
As an HMBS issuer, we assume certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount (MCA repurchases). Active repurchased loans are assigned to HUD and payment is received from HUD, typically within 60 days of repurchase. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount. We bear the risk of exposure if the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Inactive repurchased loans (the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments) are generally liquidated through foreclosure and subsequent sale of REO.REO, with a claim filed with HUD for recoverable remaining principal and advance balances. The recovery timeline for inactive repurchased loans depends on various factors, including foreclosure status at the time of repurchase, state-level foreclosure timelines, and the post-foreclosure REO liquidation timeline.
The timing and amount of our obligation with respect to MCA repurchases is uncertain as repurchase is dependent largely on circumstances outside of our control including the amount and timing of future draws and the status of the loan. MCA repurchases are expected to continue to increase due to the increased flow of HECMs and REO that are reaching 98% of their maximum claim amount. Activity with regard to HMBS repurchases, including MCA repurchases, follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Active | | Inactive | | Total |
| Number | | Amount | | Number | | Amount | | Number | | Amount |
| Beginning balance | 62 | | | $ | 10,546 | | | 258 | | | $ | 25,147 | | | 320 | | | $ | 35,693 | |
| Additions (1) | 222 | | | 59,589 | | | 295 | | | 44,847 | | | 517 | | | 104,436 | |
| Recoveries, net (2) | (134) | | | (38,093) | | | (245) | | | (12,246) | | | (379) | | | (50,339) | |
| Transfers | (9) | | | (2,233) | | | 9 | | | 2,233 | | | 0 | | | 0 | |
| Changes in value | 0 | | | 43 | | | 0 | | | (3,532) | | | 0 | | | (3,489) | |
| Ending balance | 141 | | | $ | 29,852 | | | 317 | | | $ | 56,449 | | | 458 | | | $ | 86,301 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Active | | Inactive | | Total |
| | Number | | Amount | | Number | | Amount | | Number | | Amount |
| Beginning balance, December 31, 2017 | — |
| | $ | — |
| | 137 |
| | $ | 9,141 |
| | 137 |
| | $ | 9,141 |
|
| Additions (1) | 14 |
| | 2,979 |
| | 140 |
| | 12,012 |
| | 154 |
| | 14,991 |
|
| Recoveries, net (2) | (2 | ) | | (496 | ) | | (27 | ) | | (6,141 | ) | | (29 | ) | | (6,637 | ) |
| Transfers | (2 | ) | | (436 | ) | | 2 |
| | 436 |
| | — |
| | — |
|
| Changes in value | — |
| | — |
| | — |
| | (615 | ) | | — |
| | (615 | ) |
| Ending balance, December 31, 2018 | 10 |
| | $ | 2,047 |
| | 252 |
| | $ | 14,833 |
| | 262 |
| | $ | 16,880 |
|
(2)Includes amounts received upon assignment of loan to HUD, loan payoff, REO liquidation and claim proceeds less any amounts charged off as unrecoverable.
| |
(1) | Total repurchases during the year ended December 31, 2018, includes 59 loans totaling $11.4 million related to MCA repurchases. |
| |
(2) | Includes amounts received upon assignment of loan to HUD, loan payoff, REO liquidation and claim proceeds less any amounts charged off as unrecoverable. |
Active loan repurchases are classified as Accounts receivableReceivables as reimbursement from HUD is generally received within 60 days and are initially recorded at fair value. Inactive loan repurchases are classified as Loans held for sale and are initially recorded at fair value. Loans are reclassified to REO in Other assets or Accounts receivableReceivables as the loans move through the resolution process and permissible claims are submitted to HUD for reimbursement. Loans held for sale repurchased prior to October 1, 2018Receivables are carried at the lower of cost or fair value. Accounts receivable is valued at net realizable value. REO is valued at the estimated value of the underlying property less cost to sell.
Our business is currently dependent on many of the services and products provided by a subsidiary of Altisource Portfolio Solutions, S.A. (Altisource) under long-term agreements, many of which include renewal provisions.
Each of Ocwen and OMS are parties to a Services Agreement, a Technology Products Services Agreement, an Intellectual Property Agreement and a Data Center and Disaster Recovery Services Agreement with Altisource. Under the Services Agreements, Altisource provides various business process outsourcing services, such as valuation services and property preservation and inspection services, among other things. Altisource provides certain technology products and support services under the Technology Products Services Agreements and the Data Center and Disaster Recovery Services Agreements. These agreements expire August 31, 2025. Ocwen and Altisource have also entered into a Master Services Agreement pursuant to which Altisource currently provides title services to Liberty. Ocwen also has a General Referral Fee Agreement with Altisource pursuant to which Ocwen receives referral fees which are paid out of the commission that would otherwise be paid to Altisource as the selling broker in connection with real estate sales services provided by Altisource. However, for MSRs that transferred to NRZ in September 2017, as well as those subject to the New RMSR Agreements we entered into in January 2018, we are not entitled to REO referral commissions.
Our servicing system runs on an information technology system that we license from Altisource pursuant to a statement of work under the Technology Products Services Agreements. If Altisource were to fail to fulfill its contractual obligations to us, including through a failure to provide services at the required level to maintain and support our systems, or if Altisource were to become unable to fulfill such obligations, our business and operations would suffer. We are currently in the process of transitioning to Black Knight MSP from REALServicing. On February 22, 2019, Ocwen and Altisource S.à r.l (a subsidiary of Altisource) signed a Binding Term Sheet, which among other things, confirms Altisource’s cooperation with the de-boarding of loans from Altisource’s REALServicing servicing system to Black Knight’s MSP servicing system. The Binding Term Sheet also includes provisions regarding assuring that data is accurately transferred to Ocwen, including Ocwen having the ability to verify data accuracy and having continued access to the REALServicing system for an acceptable period of time.
The Binding Term Sheet also amends certain provisions in the Services Agreements. After certain conditions have been met and where Ocwen has the right to select the services provider, Ocwen will use Altisource to provide the types of services that Altisource currently provides under the Services Agreements for at least 90% of services for all portfolios for which Ocwen is the servicer or subservicer, except that Altisource will be the provider for all such services for the portfolios: (i) acquired by Ocwen pursuant to loan servicing under agreements from Homeward (acquired in 2012) or assigned and assumed by Ocwen from Residential Capital, LLC, et al (assets acquired in 2013); and (ii) acquired from Ocwen, excluding certain portfolios in which PHH Corporation has an interest, by NRZ or its affiliates prior to the date of the Binding Term Sheet. Notwithstanding the foregoing, Altisource will be the provider of mortgage charge-off collections services under the Services Agreements. The Binding Term Sheet also sets forth a framework for negotiating additional service level changes in the future. As specified in the Binding Term Sheet, if Altisource fails certain performance standards for specified periods of time, then Ocwen may terminate Altisource as a provider for the applicable service(s), subject to Altisource’s right to cure. For certain claims arising from referrals received by Altisource after the effective date of the Binding Term Sheet, the provisions include reciprocal indemnification obligations in the event of negligence by either Party and Altisource’s indemnification obligations of Ocwen in the event of any breach by Altisource of its obligations under the Services Agreements. The limitations of liability provisions include an exception for losses either party suffers as a result of third party claims.
Certain services provided by Altisource under these agreements are charged to the borrower and/or mortgage loan investor. Accordingly, such services, while derived from our loan servicing portfolio, are not reported as expenses by Ocwen. These services include residential property valuation, residential property preservation and inspection services, title services and real estate sales-related services. Similar to other vendors, in the event that Altisource’s activities do not comply with the applicable servicing criteria, we could be exposed to liability as the servicer and it could negatively impact our relationships with our servicing clients, borrowers or regulators, among others. Under certain circumstances, we would have recourse under our contractual agreements with Altisource if we were to experience adverse consequences as a result of Altisource’s non-compliance with applicable servicing criteria.
Lease Commitments
We lease certain of our premises and equipment under non-cancelable operating leases with terms expiring through 2025 exclusive of renewal option periods. Our annual aggregate minimum rental commitments under theseAt December 31, 2020, the weighted average remaining term of our leases arewas 2.4 years. A maturity analysis of our lease liability as of December 31, 2020 is summarized as follows:
| | | | | |
| 2021 | $ | 14,618 | |
| 2022 | 10,960 | |
| 2023 | 1,969 | |
| 2024 | 697 | |
| 2025 | 654 | |
| Thereafter | 0 | |
| 28,898 | |
| Less: Adjustment to present value | (1,505) | |
| Total lease payments, net | $ | 27,393 | |
|
| | | |
| 2019 | $ | 17,808 |
|
| 2020 | 16,674 |
|
| 2021 | 15,787 |
|
| 2022 | 13,971 |
|
| 2023 | 3,545 |
|
| Thereafter | 1,409 |
|
| | 69,194 |
|
| Less: Sublease income | (4,744 | ) |
| Total minimum lease payments, net | $ | 64,450 |
|
InOperating lease cost for 2020 and 2019 and rent expense for 2018 was $14.6 million, $26.1 million and $16.6 million, respectively. The operating lease cost for 2020 and 2019 includes $1.6 million and $5.4 million, respectively, of variable lease expense.
Restricted cash includes a $23.2 million deposit as collateral for an irrevocable standby letter of credit issued in connection with business acquisitions we completed in prior years, we assumedone of our leased facilities. This letter of credit requirement under the obligation for the lease agreements associated with certain facilities. The rental commitments in the table above for operating leases include the remaining amounts due through the earlierterms of the lease expiration date oragreement is primarily the early termination date. In connection withresult of PHH acquisition, we assumednot meeting certain credit rating criteria prior to the obligation foracquisition. The required amount of the letter of credit will be reduced each month beginning in January 2021 through the lease expiration on December 31, 2022.
NRZ Relationship
Our Servicing segment has exposure to concentration risk and client retention risk. As of December 31, 2020, our servicing portfolio included significant client relationships with NRZ which represented 36% and 45% of our servicing portfolio UPB and loan count, respectively, and approximately 62% of all delinquent loans that Ocwen services. The current terms of our agreements associated with NRZ extend through July 2022. Currently, subject to proper notice (generally 180 days’ notice), the payment of termination fees and certain facilities. The minimum rental commitments inother provisions, NRZ has rights to terminate the table above include facility lease obligationslegacy Ocwen agreements for convenience. Because of $7.7 million, $7.1 million, $6.9 millionthe 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. Selected assets and $6.6 million forliabilities recorded on our consolidated balance sheets as well as the years 2019, 2020, 2021 and 2022, respectively, relatedimpacts to agreements assumedour consolidated statements of operations in connection with our NRZ agreements are disclosed in Note 10 — Rights to MSRs.
Oaktree MAV (MSR Asset Vehicle, LLC) Transaction
On December 21, 2020, Ocwen entered into a transaction agreement (the Transaction Agreement) with Oaktree Capital Management L.P. and certain affiliates (collectively Oaktree) and OCW MAV Holdings, LLC (OMH), a special purpose entity managed by Oaktree. The Transaction Agreement provides for Ocwen and OMH to form a strategic relationship for the acquisitionpurpose of PHH.investing in MSRs pertaining to mortgage loans held or securitized by Fannie Mae and Freddie Mac, subject to certain terms and conditions. The Transaction Agreement includes customary representations, warranties, covenants and closing conditions, including receipt of required regulatory approvals. The closing of the transaction is expected to occur in the first half of 2021. The Transaction Agreement may be terminated on or prior to closing by mutual written agreement of Ocwen and OMH, and upon the occurrence of certain conditions including if the closing has not occurred by July 1, 2021, subject to the ability of either OMH or Ocwen to extend such date for up to an additional 60 days to obtain any outstanding required regulatory approvals.
We converted rental commitmentsAt closing, OMH and Ocwen will initially hold 85% and 15%, respectively, in what is presently a wholly owned subsidiary of OMH. The parties have agreed to invest up to $250.0 million, contributed on a pro rata basis, over a term of three years following closing (subject to extension) for our facilities outsideuse in connection with eligible MSR investments and operating expenses. Following the U.S.execution of the Transaction Agreement and until the parties have contributed their respective aggregate $250.0 million capital contributions, Ocwen has an obligation to U.S. dollars usingprovide an indirect subsidiary of OMH with a “first look” at opportunities presented to Ocwen or its affiliates to acquire Fannie Mae and Freddie Mac MSRs that meet certain criteria.
Effective as of closing, PMC will enter into a subservicing agreement (Subservicing Agreement) with an indirect subsidiary of OMH to service the mortgage loans underlying the MSRs in exchange ratesfor a per-loan subservicing fee and certain other ancillary fees as set forth in effectthe Subservicing Agreement.
Upon closing and subject to other customary closing conditions, Ocwen agreed to sell to Oaktree and certain affiliates up to 4.9%, at December 31, 2018. Rent expense for 2018, 2017Oaktree’s sole discretion, of Ocwen’s outstanding common stock at a price of $23.15 per share, and 2016 was $16.0 million, $17.9 millionto issue to Oaktree warrants to purchase from Ocwen additional common stock equal to 3% of Ocwen’s outstanding common stock at a purchase price of $24.31 per share (subject to anti-dilution adjustments). The warrants expire four years after their issue date. Ocwen also agreed to grant Oaktree a pre-emptive right, effective from the date of the Transaction Agreement until 90 days after closing, to participate in certain future equity financings of Ocwen in an amount that would allow Oaktree to maintain its fully-diluted ownership percentage of Ocwen as a result of its investment in Ocwen’s common stock and $20.0 million, respectively.
warrants. Ocwen and Oaktree agreed to enter into a securities purchase agreement (the Securities Purchase Agreement) and warrant agreement (Warrant Agreement) at closing to reflect these transactions. The Securities Purchase Agreement and the Warrant Agreement provide that the ownership of Oaktree and its affiliates in Ocwen’s common stock on an as-converted basis may not exceed 19.9% at any time without receipt of shareholder approval subject to applicable NYSE listing rules.
See Note 28 — Subsequent Events.
Note 2526 — Contingencies
When we become aware of a matter involving uncertainty for which we may incur a loss, we assess the likelihood of any loss. If a loss contingency is probable and the amount of the loss can be reasonably estimated, we record an accrual for the loss. In such cases, there may be an exposure to potential loss in excess of the amount accrued. Where a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. If a reasonable estimate of loss cannot be made, we do not accrue for any loss or disclose any estimate of exposure to potential loss even if the potential loss could be material and adverse to our business, reputation, financial condition and results of operations. An assessment regarding the ultimate outcome of any such matter involves judgments about future events, actions and circumstances that are inherently uncertain. The actual outcome could differ materially. Where we have retained external legal counsel or other professional advisers, such advisers assist us in making such assessments.
Litigation
In the ordinary course of business, we are a defendant in, or a party or potential party to, many threatened and pending legal proceedings, including proceedings brought by regulatory agencies (discussed further under “Regulatory” below), those brought on behalf of various classes of claimants, and those brought derivatively on behalf of Ocwen against certain current or former officers and directors or others. In addition, we may be a party or potential party to threatened or pending legal proceedings brought by fair-housing advocates, commercial counterparties, including claims by parties who provide trustee services, parties to whom we have sold MSRs or other assets, parties on whose behalf we service mortgage loans, and parties who provide ancillary services including property preservation and other post-foreclosure related services.
The majority of these proceedings are based on alleged violations of federal, state and local laws and regulations governing our mortgage servicing and lending activities, including, among others, the Dodd-Frank Act, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act (FDCPA),FDCPA, the Real Estate Settlement Procedures Act,RESPA, the Truth in Lending Act,TILA, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the TCPA, the Equal Credit Opportunity Act, as well as individual state licensing and foreclosure laws and federal and local bankruptcy rules. Such proceedings include wrongful foreclosure and eviction actions, payment misapplication actions, allegations of wrongdoing in connection with lender-placed insurance and mortgage reinsurance arrangements, claims relating to our property preservation activities, claims related to REO management, claims relating to our written and telephonic communications with our borrowers such as claims under the TCPA and individual state laws, claims related to our payment, escrow and other processing operations, claims relating to fees imposed on borrowers relating to payment processing, payment facilitation or payment convenience, claims related to ancillary products marketed and sold to borrowers, claims related to call recordings,and claims regarding certifications of our legal compliance related to our participation in certain government programs. In some of these proceedings, claims for substantial monetary damages are asserted against us. For example, we are currently a defendant in various matters alleging that (1) certain fees imposed on borrowers relating to payment processing, payment facilitation or payment convenience violate the Fair Debt Collection Practices Act (FDCPA),FDCPA and similar state laws, (2) we violated the Telephone Consumer Protection Act by using an automated telephone dialing system to call class members’ cell phones without their consent, (3) we committed securities fraud in connection with certain of our public disclosures, (4) certain fees we assess on borrowers are marked up improperly in violation of applicable state and federal law, (5) the solicitation and marketing to borrowers of certain ancillary products was unfair and deceptive and (6) that(3) we breached fiduciary duties we purportedly owe to benefit plans due to the discretion we exercise in servicing certain securitized mortgage loans.loans and (4) certain legacy mortgage reinsurance arrangements violated RESPA. In the future, we are likely to become subject to other private legal proceedings alleging failures to comply with applicable laws and regulations, including putative class actions, in the ordinary course of our business.
In view of the inherent difficulty of predicting the outcome of any threatened or pending legal proceedings, particularly where the claimants seek very large or indeterminate damages, including punitive damages, or where the matters present novel legal theories or involve a large number of parties, we generally cannot predict what the eventual outcome of such proceedings will be, what the timing of the ultimate resolution will be, or what the eventual loss, if any, will be. Any material adverse resolution could materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
Where we determine that a loss contingency is probable in connection with a pending or threatened legal proceeding and the amount of our loss can be reasonably estimated, we record an accrual for the loss. We have accrued for losses relating to threatened and pending litigation that we believe are probable and reasonably estimable based on current information regarding these matters. Where we determine that a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. It is possible that we will incur losses relating to threatened and pending litigation that materially exceed the amount accrued. Our accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was $62.8$38.9 million at December 31, 2018.2020. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded at December 31, 20182020.
In 2014, plaintiffs filedAs previously disclosed, we are subject to individual lawsuits relating to our FDCPA compliance and putative state law class actions based on the FDCPA and state laws similar to the FDCPA. Ocwen has recently agreed to a settlement in principle of a putative class action against Ocwen, Morris v. PHH Mortgage Corp., filed in March 2020 in the United States District Court for the NorthernSouthern District of Alabama,Florida, alleging that Ocwen violatedPMC’s practice of charging a fee to borrowers who voluntarily choose to use certain optional expedited payment options violates the FDCPA by charging borrowers a convenience fee for making certain loan
payments. See McWhorter et al. v. Ocwen Loan Servicing, LLC (N.D. Ala.). The plaintiffs are seeking statutory damages under the FDCPA, compensatory damages and injunctive relief. The presiding court previously ruled on Ocwen’s motions to dismiss,its state law analogs. Several similar putative class actions have been filed against PMC and Ocwen answeredsince July 2019. Following mediation, PMC agreed to the operative complaint. Ocwen subsequently entered into anterms of a settlement agreement in principle to resolve this matter, andall claims in January 2019, the presiding court grantedMorris matter. A motion requesting preliminary approval of the parties’settlement was filed on August 25, 2020. Ocwen expects final approval of the Morris settlement will resolve the claims of the substantial majority of the putative class members described in the other similar cases that Ocwen is defending. Several third parties, including a group of State Attorneys General, have filed papers opposing preliminary approval, and these third parties could ultimately file objections to the proposed class settlement. While Ocwen believescannot guarantee that it has sound legalthe proposed settlement will receive final approval and factual defenses, we agreed to this settlement in principle in order to avoid the uncertainabsence of such approval, Ocwen cannot predict the eventual outcome of litigationthe Morris proceeding and the additional expense and demands on the time of its senior management that such litigation would involve. There can be no assurance that the court will finally approve the settlement. In the event the settlement is not finally approved, the litigation would continue, and we would vigorously defend the allegations made against Ocwen. Our accrual with respect to this matter is included in the $62.8 million legal and regulatory accrual referenced above. We cannot currently estimate the amount, if any, of reasonably possible loss above the amount accrued.
Ocwen has been named insimilar putative class actions and individual actions relatedactions.
In addition, we continue to its compliance with the TCPA. Generally, plaintiffsbe involved in these actions allege that Ocwen knowingly and willfully violated the TCPA by using an automated telephone dialing systemlegacy matters arising prior to call class members’ cell phones without their consent. In July 2017, Ocwen entered into an agreement in principle to resolve two suchOcwen’s October 2018 acquisition of PHH, including a putative class actions, which have been consolidatedaction filed in 2008 in the United States District Court for the NorthernEastern District of Illinois. See SnyderCalifornia against PHH and related entities in alleging that PHH’s legacy mortgage reinsurance arrangements between its captive reinsurer, Atrium Insurance Corporation, and certain mortgage insurance providers violated RESPA. Following numerous pre-trial developments, trial in the case, captioned Munoz v. Ocwen Loan Servicing, LLC (N.D. Ill.); Beecroft v. Ocwen Loan Servicing, LLC (N.D. Ill.)PHH Corp. et al. Subject to final approval by, will likely be scheduled in 2021. PHH accrued $2.5 million when the court,case was filed in 2008 and that amount is included in the settlement will include the establishment of a settlement fund to be distributed to impacted borrowers that submit claims for settlement benefits pursuant to a claims administration process.
While Ocwen believes that it has sound$38.9 million legal and factual defenses, Ocwen agreed to this settlement in principle in order to avoid the uncertain outcome of litigation and the additional expense and demands on the time of its senior management that such litigation would involve. In October 2017, the court preliminarily approved the settlement and, thereafter, we paid the settlement amount into an escrow account held by the settlement administrator. However, in September 2018, the Court denied the motion for final approval. In November 2018, the parties engaged in mediation to address the issues raised by the Court in its denial order. The parties thereafter reached a revised agreement, and in January 2019, the Court indicated it intended to grant the parties’ renewed motion for final approval, but to date has not yet done so. Additional lawsuits may be filed against us in relation to these matters.regulatory accrual referenced above. At this time, Ocwen is unable to predict the outcome of these existing lawsuitsthis lawsuit or any additional lawsuits that may be filed, the possible loss or range of loss, if any, associated with the resolution of such lawsuits or the potential impact such lawsuits may have on us or our operations. Ocwen intends to vigorously defend against this lawsuit. If our efforts to defend this lawsuit are not successful, our business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
Ocwen is involved in a TCPA class action that involves claims against trustees of RMBS trusts based on vicarious liability for Ocwen’s alleged non-compliance with the TCPA. The trustees have sought indemnification from Ocwen based on the vicarious liability claims. Additional lawsuits have been and may be filed against us in relation to our TCPA compliance. At this time, Ocwen is unable to predict the outcome of existing lawsuits or any additional lawsuits that may be filed, the possible loss or range of loss, if any, above the amount accrued or the potential impact such lawsuits may have on us or our operations. Ocwen intends to vigorously defend against these lawsuits. If our efforts to defend these lawsuits are not successful, our business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
We have previously disclosedIn another TCPA action, plaintiffs Saber Ahmed and John Monteleone filed a putative nationwide class action against HSBC Bank USA, N.A. and PHH in California federal court in 2015. See Ahmed v. HSBC Bank USA, N.A. and PHH Mortgage Corp., Case No. 5:16-cv-02057-JGB-DTB. Plaintiffs alleged that PHH and HSBC violated the TCPA by using an automatic telephone dialing system to call borrowers on their cell phones without express consent and/or with consent revoked. The parties agreed to settle the matter for $2.4 million, inclusive of all costs and fees. The settlement received the final approval from the Court on December 30, 2019 and the settlement of the consolidated securities fraud class action lawsuit that contained allegations in connection with the restatements of our 2013 and first quarter 2014 financial statements, among other matters, in the United States District Court for the Southern District of Florida captioned In re amount was paid on February 6, 2020.
Ocwen Financial Corporation Securities Litigation (S.D. Fla.) (such consolidated lawsuit, the Securities Class Action). In December 2017, the Court approved our settlement of this matter. Pursuant to the settlement, we paid $49.0 million (of which $14.0 million was recovered from insurance proceeds) and agreed to issue an aggregate of 2,500,000 shares of our common stock to members of the class and their counsel. Ocwen issued 625,000 of the shares in December 2017, and the remaining 1,875,000 shares in January 2018.
In March 2018 and April 2018, respectively, Ocwen was named asis a defendant in two separate “opt-out” securities fraud actions brought on behalf of certain putative shareholders of Ocwen based on similar allegations to those containeda certified class action in the Securities Class Action.U.S. District Court in the Eastern District of California where the plaintiffs claim Ocwen marked up fees for property valuations and title searches in violation of California state law. SeeBrahman Partners et al. Weiner v. Ocwen Financial CorporationCorp., et al. (S.D. Fla.) and Owl Creek et al. v. Ocwen Financial Corporation et al.(S.D. Fla.)al. In February; 2:14-cv-02597-MCE-DB. Ocwen’s motion for summary judgment, filed in June 2019, was denied in May 2020; however, the parties entered into definitive settlement agreementscourt did rule that plaintiff’ recoverable damages are limited to resolve both “opt-out” matters. The parties have alertedout-of-pocket costs, i.e., the presiding courts in both mattersamount of their settlements, andmarked-up fees actually paid, rather than the cases have been dismissed with prejudice. Our accrual with respect to these matters is included in the $58.2 million legal and regulatory accrual referenced above. While Ocwen believes that it has sound legal and factual defenses, we agreed to these settlements in order to avoid the uncertain outcome of litigation and the additional expense and demands on the time of its senior management that such litigation would involve.
We have previously disclosed that as a resultentire cost of the federal and state regulatory actions taken in April 2017 and shortly thereafter, which are described below under “Regulatory”, and the impact on our stock price, several putative securities fraud class action lawsuits were filed against Ocwen and certain of its officersvaluation that contain allegations in connection with Ocwen’s statements concerning its effortsplaintiffs sought. The court has
scheduled a jury trial to satisfy the evolving regulatory environment, and the resources it devoted to regulatory compliance, among other matters. Those lawsuits were consolidated in the United States District Court for the Southern District of Florida in the matter captioned Carvelli v. Ocwen Financial Corporation et al. (S.D. Fla.). In April 2018, the court in Carvelli granted our motion to dismiss, and dismissed the consolidated case with prejudice. Plaintiffs thereafter filed a notice of appeal, and that appeal remains pending. Ocwen and the other defendants intend to defend themselves vigorously. Additional lawsuits may be filed against us in relation to these matters.begin August 30, 2021. At this time, Ocwen is unable to predict the outcome of this existing lawsuit or any additional lawsuits that may be filed, the possible loss or range of loss, if any, associated with the resolution of such lawsuits or the potential impact such lawsuits may have on us or our operations. If additional lawsuits are
filed, Ocwen intends to vigorously defend itself against such lawsuits.this lawsuit. If our efforts to defend the existing lawsuit or any futurethis lawsuit are not successful, our business, financial condition liquidity and results of operations could be materially and adversely affected. Ocwen may have affirmative indemnification rights and/or other claims against third parties related to the allegations in the lawsuit. Although we may pursue these claims, we cannot currently estimate the amount, if any, of recoveries from these third parties.
From time to time we are also subject to indemnification claims from contractual parties (i) on whose behalf we service or subservice loans, or did so in the past and (ii) to whom we sold loans or MSRs. We are currently involved in a dispute with a former subservicing client, HSBC Bank USA, N.A. (HSBC), which filed a complaint in the Supreme Court of the State of New York against PHH. HSBC’s claims relate to alleged breaches of agreements entered into under a prior subservicing arrangement. We believe we have strong factual and legal defenses to all of HSBC’s claims and are vigorously defending the action. Ocwen is currently unable to predict the outcome of this dispute or estimate the size of any loss which could result from a potential resolution reached through litigation or otherwise. We are also currently involved in a pair of disputes pending in the Supreme Court of the State of New York with a purchaser of MSRs, Mr. Cooper (formerly Nationstar Mortgage Holdings Inc.), who alleges breaches of representations and warranties made by PHH in the MSR sale agreements. The initial complaint filed in the first case was dismissed in its entirety, but Mr. Cooper has since appealed that ruling, filed an amended complaint in that case, and commenced the second litigation. PHH is vigorously defending itself. We have also received demands for indemnification for alleged breaches of representations and warranties from parties to whom we sold loans and we are currently a defendant in an adversary proceeding brought by a bankruptcy plan administrator seeking to enforce its right to contractual indemnification for the sale of allegedly defective mortgage loans.
Over the past several years, lawsuits have been filed by RMBS trust investors alleging that the trustees and master servicers breached their contractual and statutory duties by (i) failing to require loan servicers to abide by their contractual obligations; (ii) failing to declare that certain alleged servicing events of default under the applicable contracts occurred; and (iii) failing to demand that loan sellers repurchase allegedly defective loans, among other things. Ocwen has received several letters from trustees and master servicers purporting to put Ocwen on notice that the trustees and master servicers may ultimately seek indemnification from Ocwen in connection with the litigations. Ocwen has not yet been impleaded into any of these cases, but it has produced and continues to produce documents to the parties in response to third-party subpoenas.
Ocwen has, however, been impleaded as a third-party defendant into five consolidated loan repurchase cases first filed against Nomura Credit & Capital, Inc. in 2012 and 2013. Ocwen is vigorously defending itself in those cases against allegations by the mortgage loan seller-defendant that Ocwen failed to inform its contractual counterparties that it had discovered defective loans in the course of servicing them and had otherwise failed to service the loans in accordance with accepted standards. Ocwen is unable at this time to predict the ultimate outcome of these matters, the possible loss or range of loss, if any, associated with the resolution of these matters or any potential impact they may have on us or our operations. If, however, we were required to compensate claimants for losses related to the alleged loan servicing breaches, then our business, liquidity,reputation, financial condition, liquidity and results of operations could be adversely affected.
In addition, several RMBS trustees have received notices of events of default alleging material failures by servicers to comply with applicable servicing agreements. Although Ocwen has not yet been sued by an RMBS trustee in response to a noticean event of default notice, there is a risk that Ocwen could be replaced as servicer as a result of said notices, that the trustees could take legal action on behalf of the trust certificateholders,certificate holders, or, under certain circumstances, that the RMBS investors who issue notices of event of default could seek to press their allegations against Ocwen, independent of the trustees. Previously, one such group of affiliated RMBS investors sought to direct one trustee to bring suit against Ocwen. The trustee declined to bring suit, and the RMBS investors instead brought suit against Ocwen directly. The trial court dismissed the RMBS investors’ suit with prejudice in 2018. The RMBS investors thereafter appealed the court’s dismissal, and on February 13, 2019, the appellate court affirmed the trial court’s dismissal. It is unknown whether the RMBS investors will attempt to further appeal this matter; Ocwen will continue to vigorously defend itself. We are unable at this time to predict what, if any, actions any trustee will take in response to a noticean event of default notice, nor can we predict at this time the potential loss or range of loss, if any, associated with the resolution of any noticesevent of default notice or the potential impact on our operations. If Ocwen were to be terminated as servicer, or other related legal actions were pursued against Ocwen, it could have an adverse effect on Ocwen’s business, financing activities,reputation, financial condition, liquidity and results of operations.
Regulatory
We are subject to a number of ongoing federal and state regulatory examinations, cease and desist orders, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions. Where we determine that a loss contingency is probable in connection with a regulatory matter and the amount of our loss can be reasonably estimated, we record an accrual for the loss. Where we determine that a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. It is possible that we will incur losses relating to regulatory matters that materially exceed any accrued amount. Predicting the outcome of any regulatory matter is inherently difficult and we generally cannot predict the eventual outcome of any regulatory matter or the eventual loss, if any, associated with the outcome.
To the extent that an examination, audit or other regulatory engagement results in an alleged failure by us to comply with applicable laws, regulations or licensing requirements, or if allegations are made that we have failed to comply with applicable laws, regulations or licensing requirements or the commitments we have made in connection with our regulatory settlements (whether such allegations are made through administrative actions such as cease and desist orders, through legal proceedings or otherwise) or if other regulatory actions of a similar or different nature are taken in the future against us, this could lead to (i) administrative fines and penalties and litigation, (ii) loss of our licenses and approvals to engage in our servicing and lending businesses, (iii) governmental investigations and enforcement actions, (iv) civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) damage to our reputation, (vii) inability to raise capital or otherwise fund our operations and (viii) inability to execute on our business strategy. Any of these occurrences could increase our operating expenses and reduce our revenues, hamper our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
CFPB
In April 2017, the CFPB filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, OMS and OLS alleging violations of federal consumer financial laws relating to our servicing business dating back to 2014. The CFPB’s claims include allegations regarding (1) the adequacy of Ocwen’s servicing system and integrity of Ocwen’s mortgage servicing data, (2) Ocwen’s foreclosure practices and (3) various purported servicer errors with respect to borrower escrow accounts, hazard insurance policies, timely cancellation of private mortgage insurance, handling of customer complaints, and marketing of optional products. The CFPB alleges violations of laws prohibiting unfair, deceptive or abusive acts or abusive practices, as well as violations of specificother laws or regulations. The CFPB does not claim specific monetary damages, although it does seek consumer relief, disgorgement of allegedly improper gains, and civil money penalties. We believe we have factual and legal defenses to the CFPB’s allegations and are vigorously defending ourselves. In September 2019, the court issued a ruling on our motion to dismiss, granting it in part and denying it in part. The court granted our motion dismissing the entire complaint without prejudice because the court found that the CFPB engaged in impermissible “shotgun pleading,” holding that the CFPB must amend its complaint to specifically allege and distinguish the facts between all claims. The CFPB filed an amended complaint in October 2019, and we filed our answer and affirmative defenses in November 2019. Ocwen and the CFPB completed a summary judgment briefing on September 4, 2020. The parties participated in a mediation session on October 23, 2020, and held additional settlement discussions following the conclusion of the mediation session, however, the parties were unable to reach a resolution of the litigation. We do not anticipate a decision on summary judgment until mid-2021. To the extent the summary judgment ruling does not conclude the case and we do not otherwise resolve the matter before trial, we presently anticipate a trial will take place in the second half of 2021 or later.
Prior to the initiation of legal proceedings, we had been engaged with the CFPB in efforts to resolve the matter. We are taking all reasonable and prudent actions to resolve the CFPB matter in the shortest time frame possible that would result in an acceptable financial outcome for our stakeholders. The Court has consolidated both the CFPB and recorded $12.5 million asFlorida matters for trial, but has removed them from the October 2020 trial calendar and will reset the trial for a later date. As noted below, however, because the Florida matter is now resolved, when the Court schedules the bench trial it will only include the claims of December 31, 2016 as a result of these discussions.the CFPB. Our current accrual with respect to this matter, which we increased by $13.1 million in the fourth quarter of 2020 in connection with our efforts to resolve the litigation, is included in the $62.8$38.9 million legal and regulatory accrual referenced above. The outcome of the matters raised by the CFPB, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our business and could have a material adverse impact on our business, reputation, financial condition, liquidity and results of operations.
State Licensing, State Attorneys General and Other Matters
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. Failure to satisfy any of the requirements to which our licensed entities are subject could result in a variety of regulatory actions ranging from a fine, a directive requiring a certain step to be taken, entry into a consent order, a suspension or ultimately a revocation of a license, any of which could have a material adverse impact on our results of operations and financial condition. In addition, we receive information requests and other inquiries, both formal and informal in nature, from our state financial regulators as part of their general regulatory oversight of our servicing and lending businesses. We also regularly engage with state attorneys general and the CFPB and, on occasion, we engage with other federal agencies, including the Department of Justice and various inspectors general on various matters, including responding to information requests and other inquiries. Many of our regulatory engagements arise from a complaint that the entity is investigating, although some are formal investigations or proceedings. The GSEs (and their conservator, FHFA), HUD, FHA, VA, Ginnie Mae, the United States Treasury Department, and others also subject us to periodic reviews and audits. We have in the past resolved, and may in the future resolve, matters via consent
orders, payments of monetary amounts and other agreements in order to settle issues identified in connection with examinations or other oversight activities, and such resolutions could have material and adverse effects on our business, reputation, operations, results of operations and financial condition.
In April 2017 and shortly thereafter, mortgage and banking regulatory agencies from 29 states and the District of Columbia took regulatoryadministrative actions against OLS and certain other Ocwen companies that alleged deficiencies in our compliance with laws and regulations relating to our servicing and lending activities. An additional state regulator brought legal action together with that state’s attorney general, as described below. In general, the regulatoryThese administrative actions took the form of orders styled as “cease and desist orders,” and we use that term to refer to all of the orders for ease of reference; for ease of reference we also include the District of Columbia as a state when we reference states below. All of the cease and desist orders were applicable to OLS, but additional Ocwen entities were named in some orders,actions, including Ocwen Financial Corporation, OMS, Homeward, Liberty, OFSPL and Ocwen Business Solutions, Inc. (OBS).
We entered into agreements with all 29 states plus the District of Columbia to resolve these regulatory actions. These agreements generally contained the following key terms (the Multi-State Common Settlement Terms):
Ocwen would not acquire any new residential MSRs until April 30, 2018.
Ocwen would develop a plan of action and milestones regarding its transition from the REALServicing servicing system to an alternate servicing system and, with certain exceptions, would not board any new loans onto the REALServicing system.
In the event that Ocwen chose to merge with or acquire an unaffiliated company or its assets in order to effectuate a transfer of loans from the REALServicing system, Ocwen was required to comply with regulatory notice and waiting period requirements.
Ocwen would engage a third-party auditor to perform an analysis with respect to our compliance with certain federal and state laws relating to escrow by testing approximately 9,000 loan files relating to residential real property in various states, and Ocwen would develop corrective action plans for any errors identified by the third-party auditor.
Ocwen would develop and submit for review a plan to enhance our consumer complaint handling processes.
Ocwen would provide financial condition reporting on a confidential basis as part of each state’s supervisory framework through September 2020.
In addition to the terms described above, Ocwen entered into settlements with certain states on different or additional terms, which include making additional communications with and for borrowers, certain restrictions, certain review, reporting and remediation obligations, and the following additional terms:
Ocwen agreed with the Connecticut Department of Banking to pay certain amounts only in the event we fail to comply with certain requirements under our agreement with Connecticut.
In its agreement with the Maryland Office of the Commissioner of Financial Regulation, Ocwen agreed to complete an independent management assessment and enterprise risk assessment and to a prohibition, with certain de minimis exceptions, on repurchases of our stock until December 7, 2018. Ocwen also agreed to make certain payments to Maryland, to provide remediation to certain borrowers in the form of cash payments or credits and to pay certain amounts only in the event we fail to comply with certain requirements under our agreement with Maryland.
Ocwen agreed with the Massachusetts Division of Banks to pay $1.0 million to the Commonwealth of Massachusetts Mortgage Education Trust. Ocwen and the Massachusetts regulatory agency also agreed on a schedule pursuant to which we will regain eligibility to acquire residential MSRs on Massachusetts loans (including loans originated by Ocwen) as it meets certain thresholds in its transition to a new servicing system. All restrictions on Massachusetts MSR acquisitions will be lifted when Ocwen completes the second phase of a three-phase data integrity audit which will be conducted by an independent third-party following completion of Ocwen’s servicing system transition. The first phase of this audit, which was required to be completed prior to transitioning any Massachusetts loans to a new servicing system, has already been completed.
Ocwen agreed with the Nebraska Department of Banking and Finance until April 30, 2019, to limit its growth through acquisition from correspondent relationships to no more than ten percent per year for Nebraska loans (based on the total number of loans held at the prior calendar year-end).
Accordingly,As discussed further below, we have now resolved all of the administrative actions (but not all of the legal actions, which are described below) taken by state regulatorsregulatory matters arising in April 2017. In resolving these matters, we entered into agreements containing certain restrictions and commitments with respect to the operation of our business and our regulatory compliance activities, including restrictions and conditions relating to acquisitions of MSRs, a transition to an alternate loan servicing system from the REALServicing system, engagement of third-party auditors, escrow and data testing, error remediation, and financial condition reporting. In some instances, we also provided borrower financial remediation and made payments to state regulators.
We have taken substantial steps toward fulfilling our commitments under the agreements described above, including transferringcompleting the transfer of loans to Black Knight MSP, completing pre-transfer and post-transfer data integrity audits, developing and implementing certain enhancements to our consumer complaint process, engagingcompleting a third-party auditor who is currently performing escrow-related testing,escrow review and complying withongoing reporting and information sharing. We continue to be subject to obligations under these agreements, including completing the final phase of a data integrity audit under our other information sharing and reporting obligations.
In April 2017 and shortly thereafter, and concurrentagreement with the issuanceState of Massachusetts.
Concurrent with the initiation of the cease and desist ordersadministrative actions and the filing of the CFPB lawsuit discussed above, two state attorneys general took actions against us relating to our servicing practices. Thethe Florida Attorney General, together with the Florida Office of Financial Regulation, filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, OMS and OLS alleging violations of federal and state consumer financial laws relating to our servicing business. These claims are similar to the claims made by the CFPB. The Florida lawsuit seeks injunctive and equitable relief, costs, and civil money penalties in excess of $10,000 (ten thousand dollars) per confirmed violation of the applicable statute.
In September 2019, the court issued its ruling on our motion to dismiss, granting it in part and denying it in part. The Massachusetts Attorney Generalcourt granted our motion dismissing the entire complaint without prejudice because the court found that the plaintiffs engaged in impermissible “shotgun pleading,” holding that the plaintiffs must amend their complaint to specifically allege and distinguish the facts between all claims. The plaintiffs filed an amended complaint in November 2019. We filed a lawsuit against OLSpartial motion to dismiss the amended complaint in December 2019. On April 22, 2020, the Superior Court for the Commonwealth of Massachusetts alleging violations of state consumer financial laws relating tocourt granted our servicing business, including with respect to our activities relating to lender-placed insurancemotion and property preservation fees. Previously, the Massachusetts Attorney General had sent us a civil investigative demand requesting information relating to various aspects of our servicing practices, including lender-placed insurance and property preservation fees. The Massachusetts Attorney General’s lawsuit seeks injunctive and equitable relief, costs, and civil money penalties of $5,000 per confirmed violationdismissed Count V of the applicable statute.amended complaint with prejudice holding the plaintiff failed to plead an actionable claim under the Florida Deceptive and Unfair Trade Practices Act. On May 6, 2020, Ocwen filed its answer and affirmative defenses to the amended complaint. Ocwen and the plaintiffs completed a summary judgment briefing on September 4, 2020.
WhileOn October 15, 2020, we endeavorannounced that we had reached an agreement to negotiate appropriate resolutions in theseresolve the Florida plaintiffs’ lawsuit. Pursuant to that agreement, Ocwen was required to pay the State of Florida $5.2 million within 60 days of the Court entering the final consent judgment between the parties.Ocwen then has an additional two matters,years to provide debt forgiveness totaling at least $1.0 million to certain Florida borrowers.If Ocwen is unable to do so, then two years from now it will owe the State of Florida an additional $1.0 million. We anticipate that we are vigorously defending ourselves,will be able to satisfy the debt forgiveness obligation and therefore do not presently anticipate that the additional $1.0 million payment will be required. In addition, Ocwen agreed to certain late fee waivers, a targeted loan modification program for certain eligible Florida borrowers, and certain non-monetary reporting and handling obligations. Ocwen did not admit any fault or liability as part of the settlement. An Amended Final Consent Judgment was entered on October 27, 2020 and Ocwen satisfied the monetary portions of the settlement on December 17, 2020. Although we believe we have validhad strong defenses to theall of Florida’s claims, madethis was an opportunity to resolve one of Ocwen’s remaining significant legacy matters, and to do so without incurring further expense in both lawsuits. The outcome of these two lawsuits, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our business and could be materially adverse to our business, reputation, financial condition, liquidity and results of operations. We cannot currently estimate the amount, if any, of reasonably possible loss related to these matters above amounts currently accrued.preparing for trial.
Our accrual with respect to the administrative and legal actions initiated in April 2017 is included in the $62.8$38.9 million litigation and regulatory matters accrual referenced above. We have also incurred, and will alsocontinue to incur costs complyingto comply with the terms of the settlements we have entered into, including in connection with the costs of conducting an escrow review, Maryland organizational assessments and Massachusetts data integrity audits, and costs relating to the transition to a new servicing system. For example, withBlack Knight MSP. With respect to the escrow review, the third-party auditor has issued its final report and we have completed all required remediation measures required as part of that review. In addition, it is possible that legal or other actions could be taken against us with respect to such errors, which is currently underway, we will incur remediationcould result in additional costs to the extent that errors are identified which require remediation.or other adverse impacts. If we fail to comply with the terms of our settlements, additional administrativelegal or legal regulatoryother actions could be taken against us. Such actions could have a materially adverse impact on our business, reputation, financial condition, liquidity and results of operations.
Certain of the state regulators’ cease and desist orders referenced a confidential supervisory memorandum of understanding (MOU) that we entered into with the Multistate Mortgage Committee (MMC), a multistate coalition of various mortgage
banking regulators, and six6 states relating to a servicing examination
from 2013 to 2015. The MOU contained various provisions relating to servicing practices and safety and soundness aspects of the regulatory review, as a step toward closing the 2013 - 2015 examination. Ocwen responded to the MOU items and continues to provide certain reports andAmong other information pursuant to the MOU. There were no monetary or other penalties imposed under the MOU. However,things, the MOU prohibited us from repurchasing stock during the development of a going forward plan and, thereafter, except as permitted by the plan. We prepared and submitted a plan in 2016 that contained no stock repurchase restrictions and, therefore, we do not believe we are currently restricted from repurchasing stock. However,We requested confirmation from the signatories of the MOU that they agree with this interpretation, and received affirmative responses from the MMC may not agree with our interpretation. For this reason, and on5 states, and a response declining to take a legal position from the basis of our progress to date responding to our obligations under the MOU, we have requested that the MOU be terminated. To the extent that we cannot terminate the MOU, we may remain subject to a share repurchase restriction and continued reporting obligations.remaining state.
On occasion, we engage with agencies of the federal government on various matters. For example, OLS received a letter from the Department of Justice, Civil Rights Division, notifying OLS that the Department of Justice had initiated a general investigation into OLS’s policies and procedures to determine whether violations of the Servicemembers Civil Relief Act by OLS might exist. We continue to provide information to theThe Department of Justice and we are engaged in ongoing discussions with the Department of Justice relatinghas informed us that it has decided not to take enforcement action related to this inquiry.matter at this time and has, consequently, closed its investigation. In addition, Ocwen was named as a defendant in a HUD administrative complaint filed by a non-profit organization alleging discrimination in the manner in which the companyOcwen maintains REO properties in minority communities. In February 2018, this matter was administratively closed, and similar claims were filed in federal court. We believe these claims are without merit and intend to vigorously defend ourselves.
In May 2016, Ocwen received a subpoena from the Office of Inspector General of HUD requesting the production of documentation related to HECM loans originated by Liberty. We understand that other lenders in the industry have received similar subpoenas. In April 2017, Ocwen received a subpoena from the Office of Inspector General of HUD requesting the production of documentation related to lender-placed insurance arrangements with a mortgage insurer and the amounts paid for such insurance. We understand that other servicers in the industry have received similar subpoenas. In May 2016, Ocwen received a subpoena from the Office of Inspector General of HUD requesting the production of documentation related to HECM loans originated by Liberty. We understand that other lenders in the industry have received similar subpoenas. In May 2017, Ocwen received a subpoena from the Office of the Special Inspector General for the Troubled Asset Relief Program requesting documents and information related to Ocwen’s participation from 2009 to the present in the Treasury Department’s Making Home Affordable Program and its HAMP. We have been providing documents and information in response to these subpoenas.
In July 2017, weApril 2019, PMC received a lettersubpoena from Ginnie Mae in which Ginnie Mae informed us that the state regulators’ cease and desist orders discussed above create a material change in Ocwen’s business status under Chapter 3VA Office of the Ginnie Mae MBS Guide,Inspector General requesting the production of documentation related to the origination and underwriting of loans guaranteed by the Veterans Benefits Administration. We understand that Ginnie Mae had accordingly declared an event of default under Guaranty Agreements between Ocwen and Ginnie Mae. Inother servicers in the letter, Ginnie Mae notified Ocwen that it would forbear from immediately exercising any rights relating to this matter. In a letter dated August 1, 2018, Ginnie Mae informed us that, based on Ocwen’s progress resolving its state regulatory matters, Ginnie Mae considered the matter satisfied, subject to our compliance with ongoing reporting requirements relating to our state regulatory settlements and transition to Black Knight MSP.industry have received similar subpoenas.
Adverse actions by Ginnie Mae could materially and adversely impact our business, reputation, financial condition, liquidity and results of operations, including if Ginnie Mae were to terminate us as an issuer or servicer of Ginnie Mae securities or otherwise take action indicating that such a termination was planned. For example, such actions could make financing our business more difficult, including by making future financing more expensive or if a lender were to allege a default under our debt agreements, which could trigger cross-defaults under all of our other material debt agreements.
Loan Put-Back and Related Contingencies
Our contracts with purchasers of originated loans contain provisions that require indemnification or repurchase of the related loans under certain circumstances. While the language in the purchase contracts varies, they generally contain provisions that require us to indemnify purchasers of related loans or repurchase such loans if:
•representations and warranties concerning loan quality, contents of the loan file or loan underwriting circumstances are inaccurate;
•adequate mortgage insurance is not secured within a certain period after closing;
•a mortgage insurance provider denies coverage; or
•there is a failure to comply, at the individual loan level or otherwise, with regulatory requirements.
We received origination representations and warranties from our network of approved originators in connection with loans we purchased through our correspondent lending channel. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur.
We believe that, as a result of the current market environment,historical actions by investors, many purchasers of residential mortgage loans are particularly aware of the conditions under which originators must indemnify or repurchase loans and under which such purchasers would benefit from enforcing any indemnification rights and repurchase remedies they may have.
In our lendingOriginations business, we have exposure to indemnification risks and repurchase requests. In our servicing business, claims alleging that we did not comply with our servicing obligations may require us to repurchase mortgage loans, make whole or otherwise indemnify investors or other parties. If home values were to decrease, our realized loan losses from loan repurchases and indemnifications may increase as well. As a result, our liability for repurchases may increase beyond our current expectations. If we are required to indemnify or repurchase loans that we originate and sell, or where we have assumed this risk on loans that we service, as discussed above, in either case resulting in losses that exceed our related liability, our business, financial condition and results of operations could be adversely affected.
We have exposure to origination representation, warranty and indemnification obligations because ofrelating to our lending, sales and securitization activities and in connection with our servicing practices.activities. We initially recognize these obligations at fair value. Thereafter, the estimation of the liability considers probable future obligations based on industry data of loans of similar type segregated by year of origination, to the extent applicable, and estimated loss severity based on current loss rates for similar loans, our historical rescission rates and the current pipeline of unresolved demands. Our historical loss severity considers the historical loss experience that we incur upon loan sale or collateral liquidation of a repurchased loan as well as current market conditions. We have exposure to servicing representation, warranty and indemnification obligations relating to our servicing practices. We record an accrual for a loss contingency if the loss contingency is probable and the amount can be reasonably estimated. We monitor the adequacy of the overall liability and make
adjustments, as necessary, after consideration of our historical losses and other qualitative factors including ongoing dialogue and experience with our counterparties.
At December 31, 20182020 and 2017,2019, we had outstanding representation and warranty repurchase demands of $51.3$41.2 million UPB (316(250 loans) and $30.8$47.0 million UPB (180(285 loans), respectively. Outstanding representation and warranty repurchase demands at December 31, 2018 include $32.3 million UPB (211 loans) assumed in connection with the acquisition of PHH. We review each demand and monitor through resolution, primarily through rescission, loan repurchase or make-whole payment.
The following table presents the changes in our liability for representation and warranty obligations compensatory fees for foreclosures that may ultimately exceed investor timelines and similar indemnification obligations:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance (1) | $ | 50,838 | | | $ | 49,267 | | | $ | 19,229 | |
| Provision (reversal) for representation and warranty obligations | (7,783) | | | (11,701) | | | 4,649 | |
| New production reserves | 2,596 | | | 304 | | | 7,437 | |
| Obligation assumed in connection with the acquisition of PHH | 0 | | | 0 | | | 27,736 | |
| | | | | |
| Charge-offs and other (2) (3) | (5,277) | | | 12,968 | | | (9,784) | |
| Ending balance (1) | $ | 40,374 | | | $ | 50,838 | | | $ | 49,267 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 19,229 |
| | $ | 24,285 |
| | $ | 36,615 |
|
| Provision for representation and warranty obligations | 4,649 |
| | (1,371 | ) | | (4,060 | ) |
| New production reserves | 7,437 |
| | 702 |
| | 864 |
|
| Obligation assumed in connection with the acquisition of PHH | 27,736 |
| | — |
| | — |
|
| Payments made in connection with sales of MSRs | — |
| | — |
| | (1,320 | ) |
| Charge-offs and other (1) | (9,784 | ) | | (4,387 | ) | | (7,814 | ) |
| Ending balance | $ | 49,267 |
| | $ | 19,229 |
| | $ | 24,285 |
|
| |
(1) | Includes principal and interest losses realized in connection with repurchased loans, make-whole, indemnification and fee payments and settlements net of recoveries, if any. |
(2)Includes principal and interest losses realized in connection with repurchased loans, make-whole, indemnification and fee payments and settlements net of recoveries, if any.
(3)Includes $18.0 million liability for representation and warranty obligations related to sold advances previously presented as allowance for losses. See Note 8 — Advances.
We believe that it is reasonably possible that losses beyond amounts currently recorded for potential representation and warranty obligations and other claims described above could occur, and such losses could have an adverse impact on our results of operations, financial condition or cash flows. However, based on currently available information, we are unable to estimate a range of reasonably possible losses above amounts that have been recorded at December 31, 20182020.
Other
OLS,Ocwen, on its own behalf and on behalf of various mortgage loan investors, has beenis engaged in a variety of activities to seek payments from mortgage insurers for unpaid claims, including claims where the mortgage insurers paid less than the full claim amount. Ocwen believes that many of the actions by mortgage insurers were in violation of the applicable insurance policies and insurance law. In some cases, Ocwen has entered into tolling agreements, initiated arbitration or litigation, engaged in settlement discussions, or taken other similar actions. To date, Ocwen has settled with threefive mortgage insurers, and expects the ultimate outcome to result in recovery of additional unpaid claims, although we cannot quantify the likely amount at this time.
We may, from time to time, have affirmative indemnification and other claims against service providers and parties from whom we acquiredpurchased MSRs or other assets. We collected $29.9 million during the quarter ended December 31, 2017 under one such claim in connection with the acquisition of MSRs and advances in 2013. Although we pursue these claims, we cannot currently estimate the amount, if any, of further recoveries.
Similarly, from time to time, indemnification and other claims are made against us by parties to whom we sold MSRs or other assets or by parties on whose behalf we service mortgage loans. We cannot currently estimate the amount, if any, of reasonably possible loss above amounts recorded.
Note 2627 — Quarterly Results of Operations (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Quarters Ended |
| | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 |
| Revenue | $ | 231,011 | | | $ | 249,035 | | | $ | 227,024 | | | $ | 253,842 | |
| MSR valuation adjustments, net (1) | (20,553) | | | (33,814) | | | (23,434) | | | (174,120) | |
| Operating expenses | 144,159 | | | 149,522 | | | 144,809 | | | 137,214 | |
| | | | | | | |
| Other income (expense), net | (67,108) | | | (77,073) | | | (64,937) | | | (29,853) | |
| Income (loss) before income taxes | (809) | | | (11,374) | | | (6,156) | | | (87,345) | |
| Income tax expense (benefit) | 6,414 | | | (1,954) | | | (8,110) | | | (61,856) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net income (loss) attributable to Ocwen stockholders | $ | (7,223) | | | $ | (9,420) | | | $ | 1,954 | | | $ | (25,489) | |
| | | | | | | |
Earnings (loss) per share attributable to Ocwen stockholders (2) | | | | | | | |
| Basic | $ | (0.83) | | | $ | (1.09) | | | $ | 0.23 | | | $ | (2.84) | |
| Diluted | (0.83) | | | (1.09) | | | 0.23 | | | (2.84) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended |
| December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 |
| Revenue | $ | 261,634 | | | $ | 283,515 | | | $ | 274,338 | | | $ | 303,888 | |
| MSR valuation adjustments, net (1) | 829 | | | 134,561 | | | (147,268) | | | (108,998) | |
| Operating expenses | 139,321 | | | 179,285 | | | 184,226 | | | 171,107 | |
| | | | | | | |
| Other income (expense), net | (85,899) | | | (277,108) | | | (27,177) | | | (64,867) | |
| Income (loss) before income taxes | 37,243 | | | (38,317) | | | (84,333) | | | (41,084) | |
| Income tax expense | 2,370 | | | 4,450 | | | 5,404 | | | 3,410 | |
| Net income (loss) attributable to Ocwen stockholders | $ | 34,873 | | | $ | (42,767) | | | $ | (89,737) | | | $ | (44,494) | |
| | | | | | | |
Earnings (loss) per share attributable to Ocwen stockholders (2) | | | | | | | |
| Basic | $ | 3.88 | | | $ | (4.77) | | | $ | (10.01) | | | $ | (4.98) | |
| Diluted | 3.87 | | | (4.77) | | | (10.01) | | | (4.98) | |
(1)Positive valuation adjustments indicated in the above table represent fair value gains, and negative valuation adjustments represent fair value losses.
(2)Earnings (loss) per share amounts have been adjusted retrospectively to give effect to the one-for-15 reverse stock spliteffective on August 13, 2020 as if it occurred at the beginning of the first period presented.
Note 28 — Subsequent Events
Notice of early redemption of senior secured notes
On February 2, 2021, we gave notice of our intention to redeem on March 4, 2021 the outstanding 6.375% Senior Notes due August 2021 at a price of 100% of the principal amount, plus accrued and unpaid interest, and the 8.375% Senior Secured Second Lien Notes due November 2022 at a price of 102.094% of the principal amount, plus accrued and unpaid interest. The redemption on March 4, 2021 would result in the recognition of an estimated $7.1 million loss on debt extinguishment. Our obligation to redeem the notes is contingent upon our completion of a debt financing that will provide funds sufficient to pay the redemption price in full for the respective notes. Accordingly, the March 4, 2021 redemption date may be extended until the financing conditions are satisfied or waived, in our sole discretion. If the financing conditions are not satisfied, we may elect to rescind the notice of redemption for such notes, terminate the redemption, and return any tendered notes to the holders.
Announcement of financing transactions
On February 9, 2021, we reached a definitive agreement with certain funds and accounts managed by Oaktree Capital Management, L.P. and affiliates (collectively Oaktree) pursuant to which we agreed to issue, and Oaktree agreed to purchase, in a private placement $285.0 million principal amount of Senior Secured Notes, in two separate tranches. The $199.5 million
|
| | | | | | | | | | | | | | | |
| | Quarters Ended |
| | December 31, 2018 (1) | | September 30,
2018 | | June 30,
2018 | | March 31,
2018 |
| Revenue | $ | 310,929 |
| | $ | 238,278 |
| | $ | 253,581 |
| | $ | 260,257 |
|
| Expenses | 302,819 |
| | 217,526 |
| | 205,650 |
| | 206,501 |
|
| Other expense, net (2) | (15,873 | ) | | (61,025 | ) | | (76,336 | ) | | (48,791 | ) |
| Income (loss) from continuing operations before income taxes | (7,763 | ) | | (40,273 | ) | | (28,405 | ) | | 4,965 |
|
| Income tax expense (benefit) | (4,012 | ) | | 845 |
| | 1,348 |
| | 2,348 |
|
| Income (loss) from continuing operations | (3,751 | ) | | (41,118 | ) | | (29,753 | ) | | 2,617 |
|
| Income from discontinued operations, net of income taxes | 1,409 |
| | — |
| | — |
| | — |
|
| Net income (loss) | (2,342 | ) | | (41,118 | ) | | (29,753 | ) | | 2,617 |
|
| Net income attributable to non-controlling interests | — |
| | (29 | ) | | (78 | ) | | (69 | ) |
| Net income (loss) attributable to Ocwen stockholders | $ | (2,342 | ) | | $ | (41,147 | ) | | $ | (29,831 | ) | | $ | 2,548 |
|
| | | | | | | | |
| Earnings (loss) per share attributable to Ocwen stockholders - Basic and Diluted | | | | | | | |
| Continuing operations | $ | (0.03 | ) | | $ | (0.31 | ) | | $ | (0.22 | ) | | $ | 0.02 |
|
| Discontinued operations | 0.01 |
| | — |
| | — |
| | — |
|
| | $ | (0.02 | ) | | $ | (0.31 | ) | | $ | (0.22 | ) | | $ | 0.02 |
|
| |
(1) | The quarter ended December 31, 2018 includes the results of operations of PHH from the acquisition date of October 4, 2018 through December 31, 2018. See Note 2 — Business Acquisition for additional information.
|
| |
(2) | Includes a bargain purchase gain, net of tax, of $64.0 million recognized during the quarter ended December 31, 2018 in connection with the acquisition of PHH. |
issuance and sale of the initial Senior Secured Notes to Oaktree is subject to certain conditions, including, but not limited to, the contemporaneous consummation by us or one of our subsidiaries of an additional debt financing not to exceed $450.0 million. The issuance and sale of the additional $85.5 million Senior Secured Notes will occur within one year after the initial Senior Secured Notes issuance, and is subject to certain conditions, including, but not limited to, (i) Ocwen having a book value of common equity of at least $360.0 million and (ii) the closing of the MSR joint venture with affiliates of Oaktree. See Note 25 — Commitments, Oaktree MAV Transaction. |
| | | | | | | | | | | | | | | |
| | Quarters Ended |
| | December 31,
2017 | | September 30,
2017 | | June 30,
2017 | | March 31,
2017 |
| Revenue | $ | 276,770 |
| | $ | 284,642 |
| | $ | 311,300 |
| | $ | 321,864 |
|
| Expenses (1) (2) | 168,303 |
| | 273,479 |
| | 280,480 |
| | 276,383 |
|
| Other expense, net (1) | (153,781 | ) | | (37,716 | ) | | (72,428 | ) | | (75,979 | ) |
| Loss before income taxes | (45,314 | ) | | (26,553 | ) | | (41,608 | ) | | (30,498 | ) |
| Income tax expense (benefit) | (51 | ) | | (20,418 | ) | | 2,828 |
| | 2,125 |
|
| Net loss | (45,263 | ) | | (6,135 | ) | | (44,436 | ) | | (32,623 | ) |
| Net loss (income) attributable to non-controlling interests | 780 |
| | (117 | ) | | (71 | ) | | (101 | ) |
| Net loss attributable to Ocwen stockholders | $ | (44,483 | ) | | $ | (6,252 | ) | | $ | (44,507 | ) | | $ | (32,724 | ) |
| | | | | | | | |
| Loss per share attributable to Ocwen stockholders - Basic and Diluted | | | | | | | |
| Continuing operations | $ | (0.34 | ) | | $ | (0.05 | ) | | $ | (0.36 | ) | | $ | (0.26 | ) |
| Discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | $ | (0.34 | ) | | $ | (0.05 | ) | | $ | (0.36 | ) | | $ | (0.26 | ) |
| |
(1) | A benchmarking valuation assumption update related to our non-Agency MSRs carried at fair value resulted in an $84.4 million increase in value and reduction in related losses (reported in MSR valuation adjustments, net) during the quarter ended December 31, 2017. This reflected an upward trend in market pricing on non-Agency MSRs similar in profile to Ocwen’s portfolio. This valuation assumption update also resulted in a largely offsetting increase of $73.4 million in the value of the NRZ financing liability which was recognized as Interest expense.
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Concurrent with the issuance of the initial Senior Secured Notes, we will issue to Oaktree warrants to purchase shares of our common stock equal to 12% of our then outstanding common stock at an exercise price of $26.82 per share, subject to antidilution adjustments. The warrants may not be exercised if the ownership of Oaktree would exceed 19.9% without prior shareholder approval, or 9.9% without prior regulatory approvals. If these limitations apply, Oaktree would have the right to exercise the warrants to purchase shares of non-voting preferred stock of Ocwen. While the warrants will not be registered, we agreed to enter into a registration rights agreement with Oaktree pursuant to which we will to register for resale the shares issuable upon exercise of the warrants.
The gross proceeds from the initial Senior Secured Notes and warrants are expected to be approximately $199.5 million, before deducting underwriting discount and other estimated issuance costs. The net proceeds from the initial Senior Secured Notes and warrants, together with the net proceeds from the additional debt financing that is a condition to issuance of the initial Senior Secured Notes, are expected to repay in full an aggregate of $498.1 million of indebtedness, including our Senior Secured Term Loan due May 2022, all of PMC’s outstanding 6.375% senior unsecured notes due August 2021 and PHH’s 8.375% senior secured second lien notes due November 2022. The net proceeds from the additional Senior Secured Notes are expected to be used to fund the Company’s investment in the MSR joint venture. Remaining proceeds are expected to be used for general corporate purposes, including to accelerate growth of our originations and servicing businesses. The early redemption of the SSTL, the 6.375% senior unsecured notes and the 8.375% senior secured second lien notes is expected to result in the recognition of an estimated $15.5 million loss on debt extinguishment.
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(2) | The Senior Secured Notes will include the following additional terms: •The Senior Secured Notes will have a six-year term with no amortization of principal and accrue at the rate of 12% per annum if paid in cash or 13.25% per annum if “paid-in-kind” through an increase in the principal amount or the issuance of additional Senior Secured Notes (PIK Interest). Prior to the first anniversary, all of the interest on the Senior Secured Notes may, at our option, be payable as PIK Interest. After the first anniversary, a minimum amount of interest will be required to be paid in cash equal to the lesser of (i) 7% per annum of the outstanding principal amount of the Senior Secured Notes and (ii) the total amount of unrestricted cash of Ocwen and its subsidiaries less the greater of $125.0 million and the minimum liquidity amounts required by any agency. •We will be permitted to redeem the Senior Secured Notes in whole or in part at any time at a redemption price equal to par, plus accrued and unpaid interest, and, if redeemed prior to the fifth anniversary of their issuance, plus a make-whole premium. Upon a change of control of Ocwen, we will be required to offer to repurchase the Senior Secured Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest. •The Senior Secured Notes will be solely the obligation of Ocwen, with a pledge of substantially all of its assets that is expected to be junior to the lien securing the additional debt financing. The Senior Secured Notes will not be guaranteed by any of the Ocwen’s subsidiaries nor secured by a pledge or lien on any assets of Ocwen’s subsidiaries. •The Senior Secured Notes will have two financial maintenance covenants: (1) a minimum book value of our stockholders’ equity of not less than $275.0 million and (2) a minimum amount of unrestricted cash of not less than $50.0 million at any time. The Senior Secured Notes also will have affirmative and negative covenants and events of default that are customary for debt securities of this type. •We will be required to pay Oaktree a $35.0 million alternate transaction fee if the Initial Senior Secured Notes are not issued by August 9, 2021, or if we incur or issue additional indebtedness or we issue or sell any equity interests in certain alternative transactions to parties other than Oaktree which generate proceeds in excess of $100.0 million. There can be no assurance that the conditions to the issuance and sale of the Senior Secured Notes to Oaktree will be met, or that any additional debt financing will be consummated.
Includes the recovery of $28.5 million of losses during the quarter ended December 31, 2017 related to a settlement of outstanding claims that arose from indemnification obligations in connection with our acquisition of MSRs and related servicing advances in 2013. We had recognized such losses on advances in prior periods and recorded the 2017 recovery in Servicing and origination expense.
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