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OCN Ocwen Financial

Filed: 4 May 21, 5:02pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from: ____________________ to ____________________
Commission File No. 1-13219
OCWEN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0039856
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1661 Worthington Road, Suite 100 33409
West Palm Beach,Florida
(Address of principal executive office) (Zip Code)
(561) 682-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par ValueOCNNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes No x
Number of shares of common stock outstanding as of April 30, 2021: 8,708,271 shares




OCWEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 

1


FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this report, including statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.
Forward-looking statements may be identified by a reference to a future period or by the use of forward-looking terminology. Forward-looking statements are typically identified by words such as “expect”, “believe”, “foresee”, “anticipate”, “intend”, “estimate”, “goal”, “strategy”, “plan”, “target” and “project” or conditional verbs such as “will”, “may”, “should”, “could” or “would” or the negative of these terms, although not all forward-looking statements contain these words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Readers should bear these factors in mind when considering forward-looking statements and should not place undue reliance on such statements. Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those suggested by such statements. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed or referenced under Part II, Item 1A, Risk Factors and the following:
uncertainty relating to the continuing impacts of the Coronavirus 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;
the extent to which our mortgage servicing right (MSR) joint venture with Oaktree Capital Management L.P. and its affiliates (Oaktree), other recent transactions and our enterprise sales initiatives will generate additional subservicing volume;
our ability to deploy the proceeds of the senior secured notes in suitable investments at appropriate returns;
our ability to close announced bulk acquisitions of MSRs, including the ability to obtain regulatory approvals, enter into definitive financing arrangements, and satisfy closing conditions, and the timing for doing so;
our ability to enter into definitive agreements relating to MSR acquisitions and other transactions under negotiation or subject to letters of intent;
the timing of our MSR joint venture’s receipt of Fannie Mae approval;
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);
adverse effects on our business as a result of regulatory investigations, litigation, cease and desist orders or settlements and the reactions of key counterparties, including lenders, the GSEs and Ginnie Mae;
our ability to comply with the terms of our settlements with regulatory agencies and the costs of doing so;
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;
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the extent to which a recent judicial interpretation of the Fair Debt Collection Practices Act may require us to modify our business practices and expose us to increased expense and litigation risk;
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, the GSEs and Ginnie Mae and maintain our seller/servicer and other statuses with them;
our servicer and credit ratings as well as other actions from various rating agencies, including the impact of prior or future downgrades of our servicer and credit ratings;
failure of our information technology or other security systems or breach of our privacy protections, including any failure to protect customers’ data;
our reliance on our technology vendors to adequately maintain and support our systems, including our servicing systems, loan originations and financial reporting systems, and uncertainty relating to our ability to transition to alternative vendors, if necessary, without incurring significant cost or disruption to our operations;
the loss of the services of our senior managers and key employees;
uncertainty related to the actions of loan owners and guarantors, including mortgage-backed securities investors, 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;
our ability to realize anticipated future gains from future draws on existing loans in our reverse mortgage portfolio;
our ability to effectively manage our exposure to interest rate changes and foreign exchange fluctuations;
our ability to effectively transform our operations in response to changing business needs, including our ability to do so without unanticipated adverse tax consequences;
uncertainty related to the political or economic stability of the United States and of the foreign countries in which we have operations; and
our ability to maintain positive relationships with our large shareholders and obtain their support for management proposals requiring shareholder approval.
Further information on the risks specific to our business is detailed within this report and our other reports and filings with the SEC including our Annual Report on Form 10-K for the year ended December 31, 2020 and our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K since such date. Forward-looking statements speak only as of the date they were made and we disclaim any obligation to update or revise forward-looking statements whether because of new information, future events or otherwise.


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PART I – FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 March 31, 2021December 31, 2020
Assets  
Cash and cash equivalents$259,108 $284,802 
Restricted cash (amounts related to variable interest entities (VIEs) of $9,809 and $16,791)77,319 72,463 
Mortgage servicing rights (MSRs), at fair value1,400,217 1,294,817 
Advances, net (amounts related to VIEs of $623,570 and $651,576)786,678 828,239 
Loans held for sale ($500,814 and $366,364 carried at fair value)517,823 387,836 
Loans held for investment, at fair value (amounts related to VIEs of $8,820 and $9,770)7,053,194 7,006,897 
Receivables, net178,209 187,665 
Premises and equipment, net14,369 16,925 
Other assets ($17,307 and $25,476 carried at fair value) (amounts related to VIEs of $3,221 and $4,544)484,871 571,483 
Total assets$10,771,788 $10,651,127 
Liabilities and Equity  
Liabilities  
Home Equity Conversion Mortgage-Backed Securities (HMBS) related borrowings, at fair value$6,778,195 $6,772,711 
Advance match funded liabilities (related to VIEs)550,437 581,288 
Other financing liabilities, at fair value (amounts related to VIEs of $8,820 and $9,770)559,184 576,722 
Other secured borrowings, net1,066,022 1,069,161 
Senior notes, net542,927 311,898 
Other liabilities ($10,012 and $4,638 carried at fair value)835,013 923,975 
Total liabilities10,331,778 10,235,755 
Commitments and Contingencies (Notes 20 and 21)00
Stockholders’ Equity  
Common stock, $.01 par value; 13,333,333 shares authorized; 8,701,530 and 8,687,750 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively87 87 
Additional paid-in capital572,500 556,062 
Accumulated deficit(123,139)(131,682)
Accumulated other comprehensive loss, net of income taxes(9,438)(9,095)
Total stockholders’ equity440,010 415,372 
Total liabilities and stockholders’ equity$10,771,788 $10,651,127 

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

4


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
For the Three Months Ended March 31,
20212020
Revenue
Servicing and subservicing fees$171,738 $211,483 
Reverse mortgage revenue, net21,826 22,797 
Gain on loans held for sale, net5,721 13,331 
Other revenue, net8,309 6,231 
Total revenue207,594 253,842 
MSR valuation adjustments, net21,208 (174,120)
Operating expenses
Compensation and benefits68,281 60,728 
Servicing and origination27,470 20,256 
Professional services17,322 25,637 
Technology and communications13,143 15,193 
Occupancy and equipment8,852 11,969 
Other expenses4,561 3,431 
Total operating expenses139,629 137,214 
Other income (expense)
Interest income3,936 5,395 
Interest expense(28,452)(29,982)
Pledged MSR liability expense(37,850)(6,594)
Loss on extinguishment of debt(15,458)
Other, net290 1,328 
Total other expense, net(77,534)(29,853)
Income (loss) before income taxes11,639 (87,345)
Income tax expense (benefit)3,096 (61,856)
Net income (loss)$8,543 $(25,489)
Earnings (loss) per share
Basic$0.98 $(2.84)
Diluted$0.96 $(2.84)
Weighted average common shares outstanding
Basic8,688,009 8,990,589 
Diluted8,877,492 8,990,589 

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

5


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
 For the Three Months Ended March 31,
 20212020
Net income (loss)$8,543 $(25,489)
Other comprehensive income, net of income taxes:  
Change in unfunded pension plan obligation liability(367)46 
Other24 36 
Comprehensive income (loss)$8,200 $(25,407)



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

6


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(Dollars in thousands)


 Common StockAdditional Paid-in Capital(Accumulated Deficit) Retained EarningsAccumulated Other Comprehensive Income (Loss), Net of Income TaxesTotal
 SharesAmount
Balance at December 31, 20208,687,750 $87 $556,062 $(131,682)$(9,095)$415,372 
Net income— — — 8,543 — 8,543 
Issuance of common stock warrants, net of issuance costs— — 15,753 — — 15,753 
Equity-based compensation and other13,780 685 — — 685 
Other comprehensive loss, net of income taxes— — — — (343)(343)
Balance at March 31, 20218,701,530 $87 $572,500 $(123,139)$(9,438)$440,010 
Balance at December 31, 20198,990,816 $90 $558,057 $(138,542)$(7,594)$412,011 
Net loss— — — (25,489)— (25,489)
Cumulative effect of adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13— — — 47,038 — 47,038 
Repurchase of common stock(377,484)(4)(4,601)— — (4,605)
Equity-based compensation and other25,486 820 — — 820 
Other comprehensive income, net of income taxes— — — — 82 82 
Balance at March 31, 20208,638,818 $86 $554,276 $(116,993)$(7,512)$429,857 



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

7


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Three Months Ended March 31,
20212020
Cash flows from operating activities  
Net income (loss)$8,543 $(25,489)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:  
MSR valuation adjustments, net(21,208)174,120 
Loss (gain) on sale of MSRs, net25 (286)
Provision for bad debts6,545 4,879 
Depreciation2,859 3,997 
Amortization of debt issuance costs and discount1,624 2,662 
Equity-based compensation expense863 746 
Loss on extinguishment of debt15,458 
Loss (gain) on valuation of Pledged MSR financing liability1,551 (30,697)
Net gain on valuation of loans held for investment and HMBS-related borrowings(6,513)(17,910)
Gain on loans held for sale, net(5,721)(13,331)
Origination and purchase of loans held for sale(3,333,999)(831,474)
Proceeds from sale and collections of loans held for sale3,179,487 843,178 
Changes in assets and liabilities:  
Decrease in advances, net38,704 29,428 
(Increase) decrease in receivables and other assets, net(2,447)13,642 
(Decrease) increase in other liabilities(13,245)18,033 
Other, net(2,833)(521)
Net cash (used in) provided by operating activities(130,307)170,977 
Cash flows from investing activities  
Origination of loans held for investment(326,735)(294,932)
Principal payments received on loans held for investment315,105 175,095 
Purchase of MSRs(41,556)(29,828)
Proceeds from sale of real estate2,306 2,814 
Other, net(1,952)(476)
Net cash used in investing activities(52,832)(147,327)
Cash flows from financing activities  
Repayment of advance match funded liabilities, net(30,851)(53,158)
Repayment of other financing liabilities(18,566)(50,427)
Proceeds from (repayment of) mortgage loan warehouse facilities, net157,720 (43,103)
Proceeds from MSR financing facilities64,098 61,028 
Repayment of MSR financing facilities(44,661)(115,447)
Repayment of Senior notes(319,156)
Proceeds from issuance of Senior notes and warrants572,944 
Repayment of senior secured term loan (SSTL) borrowings(188,700)(126,066)
Payment of debt issuance costs(6,795)(7,267)
Proceeds from sale of Home Equity Conversion Mortgages (HECM, or reverse mortgages) accounted for as a financing (HMBS-related borrowings)287,830 312,249 
Repayment of HMBS-related borrowings(311,562)(172,429)
Repurchase of common stock(4,605)
Other, net(33)
Net cash provided by (used in) financing activities162,301 (199,258)
Net decrease in cash, cash equivalents and restricted cash(20,838)(175,608)
Cash, cash equivalents and restricted cash at beginning of year357,265 492,340 
Cash, cash equivalents and restricted cash at end of period$336,427 $316,732 
Supplemental non-cash investing and financing activities:  
Recognition of gross right-of-use asset and lease liability:
Right-of-use asset$292 $2,695 
Lease liability292 2,695 
Transfers of loans held for sale to real estate owned (REO)$2,052 $768 
Transfer from loans held for investment to loans held for sale901 578 
Derecognition of MSRs and financing liabilities:
MSRs$$(263,344)
Financing liability - MSRs pledged (Rights to MSRs)(263,344)
Recognition of future draw commitments for HECM loans at fair value upon adoption of FASB ASU No. 2016-13$$47,038 
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited consolidated balance sheets and the unaudited consolidated statements of cash flows:
March 31, 2021March 31, 2020
Cash and cash equivalents$259,108 $263,555 
Restricted cash and equivalents:
Debt service accounts15,930 15,868 
Other restricted cash61,389 37,309 
Total cash, cash equivalents and restricted cash reported in the statements of cash flows$336,427 $316,732 

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

8


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Dollars in thousands, except per share data and unless otherwise indicated)
 
Note 1 - Organization and Basis of Presentation
Organization
Ocwen Financial Corporation (NYSE: OCN) (Ocwen, OFC, we, us and our) is a non-bank mortgage servicer and originator providing solutions to homeowners, investors and others through its primary operating subsidiary, PHH Mortgage Corporation (PMC). We are headquartered in West Palm Beach, Florida with offices and operations in the United States (U.S.), the United States Virgin Islands (USVI), India and the Philippines. Ocwen is a Florida corporation organized in February 1988.
Ocwen directly or indirectly owns all of the outstanding common stock of its operating subsidiaries, including PMC since its acquisition on October 4, 2018, Ocwen Financial Solutions Private Limited (OFSPL) and Ocwen USVI Services, LLC (OVIS).
We perform servicing activities related to our own MSR portfolio (primary) and on behalf of other servicers (subservicing), the largest being New Residential Investment Corp. (NRZ), and investors (primary and master servicing), including the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs), the Government National Mortgage Association (Ginnie Mae) and private-label securitizations (PLS, or non-Agency). As a subservicer or primary servicer, we may be required to make advances for certain property tax and insurance premium payments, default and property maintenance payments and principal and interest payments on behalf of delinquent borrowers to mortgage loan investors before recovering them from borrowers. Most, but not all, of our subservicing agreements provide for us to be reimbursed for any such advances by the owner of the servicing rights. Advances made by us as primary servicer are generally recovered from the borrower or the mortgage loan investor. As master servicer, we collect mortgage payments from primary servicers and distribute the funds to investors in the mortgage-backed securities. To the extent the primary servicer does not advance the scheduled principal and interest, as master servicer we are responsible for advancing the shortfall, subject to certain limitations.
We 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 or GSE) loans and government-insured (Federal Housing Administration (FHA) or Department of Veterans Affairs (VA)) forward mortgage loans, generally with servicing retained. The GSEs or Ginnie Mae guarantee these mortgage securitizations. We originate and purchase Home Equity Conversion Mortgage (HECM) loans, or reverse 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.
We had a total of approximately 4,900 employees at March 31, 2021 of which approximately 3,000 were located in India and approximately 400 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, approximately 69% were engaged in supporting our loan servicing operations as of March 31, 2021.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions of the Securities and Exchange Commission (SEC) to Form 10-Q and SEC Regulation S-X, Article 10, Rule 10-01 for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations and other data for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2021. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.
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 this Quarterly Report on Form 10-Q to give effect
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to the reverse stock split as if it occurred at the beginning of the first period presented. See Note 13 – Equity for additional information.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, income taxes and the provision for losses that may arise from contingencies including litigation proceedings. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.
Recently Adopted Accounting Standards
Income Taxes (ASC Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12)
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 Topic 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 on January 1, 2021 did not have a material impact on our consolidated financial statements.
Debt—Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity's Own Equity—Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (ASU 2020-06)
The amendments in this ASU simplify the accounting for certain financial instruments with characteristics of liabilities and equity by reducing the number of accounting models for convertible debt and convertible preferred stock instruments. In addition, this ASU amended the derivative guidance for the “own stock” scope exception and certain aspects when calculating earnings per share. The amendments in this ASU affect entities that issue convertible instruments and/or contracts in an entity’s own equity.
The amendments in this ASU are effective on January 1, 2022, with early adoption permitted on January 1, 2021. Our early adoption of this standard on January 1, 2021 did not have a material impact on our consolidated financial statements.
Investments—Equity Securities (ASC Topic 321), Investments—Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815) (ASU 2020-01)
The amendments in this ASU affect all entities that apply the guidance in ASC Topics 321, 323, and 815 and (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. The amendments clarify that forward or option contracts to purchase investments that will be accounted for using the equity method that do not meet the definition of a derivative under ASC Topic 815 are in the scope of ASC Topic 321. Therefore, when the purchase contract is considered a forward or option contract in the scope of this guidance, the investor would account for changes in the contract’s fair value prior to closing through earnings, unless the contract qualifies for the measurement alternative and it is elected. If the measurement alternative is elected, the change in the fair value of the contract would be reflected in earnings upon closing. In addition, if there are observable transactions or impairments before closing, the guidance would require remeasurement of the contract to fair value.
The guidance in this ASU also specifies that when applying the measurement alternative in ASC Topic 321, observable
transactions include those transactions by the investor that result in the application or discontinuation of the equity method
of accounting.
The amendments under this ASU are effective prospectively. Our adoption of this standard on January 1, 2021 did not have a material impact on our consolidated financial statements.
Note 2 – Securitizations and Variable Interest Entities
We securitize, sell and service forward and reverse residential mortgage loans and regularly transfer financial assets in connection with asset-backed financing arrangements. We have aggregated these transfers of financial assets and asset-backed financing arrangements using special purpose entities (SPEs) or variable interest entities (VIEs) into three groups: (1)
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securitizations of residential mortgage loans, (2) financings of advances and (3) MSR financings. Financing transactions that do not use SPEs or VIEs are disclosed in Note 11 – Borrowings.
Securitizations of Residential Mortgage Loans
Transfers of Forward Loans
We sell or securitize forward loans that we originate or purchase from third parties, generally in the form of mortgage-backed securities guaranteed by the GSEs or Ginnie Mae. Securitization typically occurs within 30 days of loan closing or purchase. We act only as a fiduciary and do not have a variable interest in the securitization trusts. As a result, we account for these transactions as sales upon transfer.
The following table presents a summary of cash flows received from and paid to securitization trusts related to transfers of loans accounted for as sales that were outstanding:
 Three Months Ended March 31,
20212020
Proceeds received from securitizations$3,248,918 $820,001 
Servicing fees collected (1)13,178 12,252 
Purchases of previously transferred assets, net of claims reimbursed(3,239)(2,607)
$3,258,857 $829,646 
(1)We receive servicing fees based upon the securitized loan balances and certain ancillary fees, all of which are reported in Servicing and subservicing fees in the unaudited consolidated statements of operations.
In connection with these transfers, we retained MSRs of $34.3 million and $6.6 million during the three months ended March 31, 2021 and 2020, 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:
March 31, 2021December 31, 2020
Carrying value of assets
MSRs, at fair value$194,600 $137,029 
Advances140,720 143,361 
UPB of loans transferred (1)20,175,148 18,062,856 
Maximum exposure to loss$20,510,468 $18,343,246 
(1)Includes $4.0 billion and $4.1 billion of loans delivered to Ginnie Mae as of March 31, 2021 and December 31, 2020, respectively, and includes loan modifications delivered through the Ginnie Mae Early Buyout Program (EBO).
At March 31, 2021 and December 31, 2020, 5.5% and 6.8%, respectively, of the transferred residential loans that we service were 60 days or more past due, including 60 days or more past due loans under forbearance. This includes 15.2% and 17.1%, respectively, of loans delivered to Ginnie Mae that are 60 days or more past due.
Transfers of Reverse Mortgages
We pool HECM loans into HMBS that we sell into the secondary market with servicing rights retained or we sell the loans to third parties with servicing rights released. We have determined that loan transfers in the HMBS program do not meet the definition of a participating interest because of the servicing requirements in the product that require the issuer/servicer to absorb some level of interest rate risk, cash flow timing risk and incidental credit risk. As a result, the transfers of the HECM loans do not qualify for sale accounting, and therefore, we account for these transfers as financings. Under this accounting treatment, the HECM loans are classified as Loans held for investment, at fair value, on our unaudited consolidated balance sheets. Holders of participating interests in the HMBS have no recourse against the assets of Ocwen, except with respect to standard representations and warranties and our contractual obligation to service the HECM loans and the HMBS.
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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. Holders of the debt issued by the SPEs have recourse only to the assets of the SPE for satisfaction of the debt.
The table below presents the carrying value and classification of the assets and liabilities of the advance financing facilities:
March 31, 2021December 31, 2020
Match funded advances (Advances, net)$623,570 $651,576 
Debt service accounts (Restricted cash)7,186 14,195 
Unamortized deferred lender fees (Other assets)2,957 4,253 
Prepaid interest (Other assets)263 291 
Advance match funded liabilities550,437 581,288 
MSR Financings using SPEs
In 2019, we entered into a 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.
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. We have the power to direct the activities of the VIEs that most significantly impact the VIE’s economic performance given that we are the servicer of the Agency MSRs that result in cash flows to the trusts. In addition, we have designed the trusts at inception to facilitate the third-party funding facility under which we have the obligation to absorb the losses of the VIEs that could be potentially significant to the VIEs.
The table below presents the carrying value and classification of the assets and liabilities of the Agency MSR financing facility:
March 31, 2021December 31, 2020
MSRs pledged (MSRs, at fair value)$584,872 $476,371 
Unamortized deferred lender fees (Other assets)606 1,183 
Debt service account (Restricted cash)213 211 
Outstanding borrowings (Other secured borrowings, net)250,000 210,755 
In 2019, we issued Ocwen Excess Spread-Collateralized Notes, Series 2019-PLS1 Class A (PLS Notes) secured by certain of PMC’s private label MSRs (PLS MSRs). An SPE, PMC PLS ESR Issuer LLC (PLS Issuer), was established in this connection as a wholly owned subsidiary of PMC. 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. We have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance given that we are the servicer of the MSRs that result in cash flows to PLS Issuer. In addition, PMC has designed PLS Issuer at inception to facilitate the funding for general corporate purposes. Separately, in return for the participation interests, PMC received the proceeds from issuance of the PLS Notes. PMC is the sole member of PLS Issuer, thus PMC has the obligation to absorb the losses of the VIE that could be potentially significant to the VIE.
The table below presents the carrying value and classification of the assets and liabilities of the PLS Notes facility:
March 31, 2021December 31, 2020
MSRs pledged (MSRs, at fair value)$123,422 $129,204 
Debt service account (Restricted cash)2,410 2,385 
Outstanding borrowings (Other secured borrowings, net)62,297 68,313 
Unamortized debt issuance costs (Other secured borrowings, net)764 894 
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Note 3 – Fair Value
Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.
The carrying amounts and the estimated fair values of our financial instruments and certain of our nonfinancial assets measured at fair value on a recurring or non-recurring basis or disclosed, but not measured, at fair value are as follows:
  March 31, 2021December 31, 2020
 LevelCarrying ValueFair ValueCarrying ValueFair Value
Financial assets     
Loans held for sale
Loans held for sale, at fair value (a) (e)3, 2$500,814 $500,814 $366,364 $366,364 
Loans held for sale, at lower of cost or fair value (b)317,009 17,009 21,472 21,472 
Total Loans held for sale$517,823 $517,823 $387,836 $387,836 
Loans held for investment
Loans held for investment - Reverse mortgages (a)3$7,044,374 $7,044,374 $6,997,127 $6,997,127 
Loans held for investment - Restricted for securitization investors (a)38,820 8,820 9,770 9,770 
Total loans held for investment$7,053,194 $7,053,194 $7,006,897 $7,006,897 
Advances, net (c)3$786,678 $786,678 $828,239 $828,239 
Receivables, net (c)3178,209 178,209 187,665 187,665 
Mortgage-backed securities (a)31,613 1,613 2,019 2,019 
Corporate bonds (a)2211 211 211 211 
Financial liabilities:     
Advance match funded liabilities (c)3$550,437 $550,862 $581,288 $581,997 
Financing liabilities:
HMBS-related borrowings (a)3$6,778,195 $6,778,195 $6,772,711 $6,772,711 
Financing liability - MSRs pledged (Rights to MSRs) (a)3550,364 550,364 566,952 566,952 
Financing liability - Owed to securitization investors (a)38,820 8,820 9,770 9,770 
Total Financing liabilities$7,337,379 $7,337,379 $7,349,433 $7,349,433 
Other secured borrowings:
Senior secured term loan (c) (d)2$$$179,776 $184,639 
Mortgage warehouse and MSR financing (c) (d)31,066,022 1,037,199 889,385 858,573 
Total Other secured borrowings$1,066,022 $1,037,199 $1,069,161 $1,043,212 
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  March 31, 2021December 31, 2020
 LevelCarrying ValueFair ValueCarrying ValueFair Value
Senior notes:
Senior notes (c) (d) (f)2391,377 399,537 311,898 320,879 
OFC Senior notes due 2027 (c) (d) (f)3151,550 180,318 
Total Senior notes$542,927 $579,855 $311,898 $320,879 
Derivative financial instrument assets (liabilities)     
Interest rate lock commitments (a)3$14,589 $14,589 $22,706 $22,706 
Forward trades - Loans held for sale (a)2(52)(52)(50)(50)
TBA / Forward mortgage-backed securities (MBS) trades (a)1480 480 (4,554)(4,554)
Interest rate swap futures (a)1(9,532)(9,532)504 504 
Other3(14)(14)
MSRs (a)3$1,400,217 $1,400,217 $1,294,817 $1,294,817 
(a)Measured at fair value on a recurring basis.
(b)Measured at fair value on a non-recurring basis.
(c)Disclosed, but not measured, at fair value. 
(d)The carrying values are net of unamortized debt issuance costs and discount. See Note 11 – Borrowings for additional information.
(e)Loans repurchased from Ginnie Mae securitizations with a fair value of $71.4 million and $51.1 million at March 31, 2021 and December 31, 2020, respectively, are classified as Level 3. The remaining balance of loans held for sale at fair value is classified as Level 2.
(f)On March 4, 2021, PMC completed the issuance and sale of $400.0 million aggregate principal amount of senior secured notes. Fair value is based on valuation data obtained from a pricing service. Therefore, these notes are classified as Level 2. Additionally on March 4, 2021, Ocwen completed the private placement of $199.5 million aggregate principal amount of senior secured second lien notes. These notes are classified as Level 3 as we determine fair value based on valuations provided by third parties involved in the issuance and placement of the notes. These methodologies are consistent with our current fair value policies. See Note 11 – Borrowings for additional information.
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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 InvestorsFinancing Liability - Owed to Securitization InvestorsLoans Held for Sale - Fair ValueMortgage-Backed SecuritiesIRLCs
Three months ended March 31, 2021
Beginning balance$9,770 $(9,770)$51,072 $2,019 $22,706 
Purchases, issuances, sales and settlements 
Purchases58,916 
Issuances134,370 
Sales(32,889)
Settlements(950)950 
Transfers (to) from:
Loans held for sale, at fair value(128,564)
Other assets(96)
 (950)950 25,931 5,806 
Change in fair value included in earnings(5,640)(406)(13,923)
Calls and other
 (5,636)(406)(13,923)
Ending balance$8,820 $(8,820)$71,367 $1,613 $14,589 
Loans Held for Investment - Restricted for Securitization InvestorsFinancing Liability - Owed to Securitization InvestorsLoans Held for Sale - Fair ValueMortgage-Backed SecuritiesIRLCs
Three months ended March 31, 2020
Beginning balance$23,342 $(22,002)$$2,075 $
Settlements(781)637 — — 
Change in fair value included in earnings(405)— 
Transfers in and / or out of Level 325,582 — 10,478 
Ending balance$22,561 $(21,365)$25,582 $1,670 $10,478 
A rollforward of the beginning and ending balances of Loans Held for Investment and HMBS-related borrowings, MSRs and Financing liability - MSRs pledged that we measure at fair value on a recurring and non-recurring basis is provided in Note 5 – Reverse Mortgages, Note 7 – Mortgage Servicing and Note 8 — Rights to MSRs, respectively.
During the three months ended March 31, 2021, there have been no changes to the methodologies that we use in estimating fair values or classifications under the valuation hierarchy as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. The significant unobservable assumptions that we make to estimate the fair value of significant assets and liabilities classified as Level 3 and measured at fair value on a recurring or non-recurring basis are provided below.
Loans Held for Sale
The fair value of loans we purchased from Ginnie Mae guaranteed securitizations is estimated using both observable and unobservable inputs, including published forward Ginnie Mae 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 Held for Investment - Reverse Mortgages
Reverse mortgage loans held for investment are carried at fair value and classified as Level 3 within the valuation hierarchy. Significant unobservable assumptions include voluntary prepayment speeds, defaults and discount rate. The
15


conditional prepayment speed assumption displayed in the table below is inclusive of voluntary (repayment or payoff) and involuntary (inactive/delinquent status and default) prepayments. The discount rate assumption is primarily based on an assessment of current market yields on reverse mortgage loan and tail securitizations, expected duration of the asset and current market interest rates.
Significant unobservable assumptionsMarch 31,
2021
December 31,
2020
Life in years
Range0.9 to 7.90.9 to 8.0
Weighted average5.55.9 
Conditional prepayment rate, including voluntary and involuntary prepayments
Range10.7% to 37.6%10.6% to 28.8%
Weighted average16.5 %15.4 %
Discount rate2.4 %1.9 %
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 partially offset by the effects of changes in the assumptions used to value the HMBS-related borrowings that are associated with these loans.
MSRs
MSRs are carried at fair value and classified within Level 3 of the valuation hierarchy. The fair value is determined using the mid-point of the range of prices provided by third-party valuation experts, without adjustment, except in the event we have a potential or completed sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is recorded at the estimated sale price.
A change in the valuation inputs or assumptions may result in a significantly higher or lower fair value measurement. Changes in market interest rates predominantly impact the fair value for Agency MSRs via prepayment speeds by altering the borrower refinance incentive and the non-Agency MSRs due to the impact on advance costs. The significant unobservable assumptions used in the valuation of these MSRs include prepayment speeds, delinquency rates, cost to service and discount rates.
Significant unobservable assumptionsMarch 31, 2021December 31, 2020
AgencyNon-AgencyAgencyNon-Agency
Weighted average prepayment speed10.0 %11.4 %11.8 %11.5 %
Weighted average lifetime delinquency rate2.6 %27.8 %3.0 %28.0 %
Weighted average discount rate9.2 %11.5 %9.2 %11.4 %
Weighted average cost to service (in dollars)$76 $270 $79 $270 
Because the mortgages underlying these MSRs permit the borrowers to prepay the loans, the value of the MSRs generally tends to diminish in periods of declining interest rates, an improving housing market or expanded product availability (as prepayments increase) and increase in periods of rising interest rates, a deteriorating housing market or reduced product availability (as prepayments decrease). The following table summarizes the estimated change in the value of the MSRs as of March 31, 2021 given hypothetical shifts in lifetime prepayments and yield assumptions:
Adverse change in fair value10%20%
Weighted average prepayment speeds$(42,029)$(82,863)
Weighted average discount rate(30,387)(58,785)
The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at March 31, 2021 are increased prepayment speeds and an increase in the yield assumption.
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Financing Liabilities
HMBS-Related Borrowings
HMBS-related borrowings are carried at fair value and classified as Level 3 within the valuation hierarchy. These borrowings are not actively traded, and therefore, quoted market prices are not available.
Significant unobservable assumptions include yield spread and discount rate. The yield spread and discount rate assumption for these liabilities are primarily based on an assessment of current market yields for newly issued HMBS, expected duration and current market interest rates.
Significant unobservable assumptionsMarch 31,
2021
December 31,
2020
Life in years
Range0.9 to 8.00.9 to 8.0
Weighted average5.95.9 
Conditional prepayment rate
Range10.7% to 37.6%10.6% to 28.8%
Weighted average16.5 %15.4 %
Discount rate2.3 %1.7 %
Significant increases or decreases in any of these assumptions in isolation could result in a significantly higher or lower fair 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)
These liabilities carried at fair value and classified as Level 3 within the valuation hierarchy. We determine the fair value of the pledged MSR liability consistent with the mid-point of the range of prices provided by third-party valuation experts for the related MSR.
Significant unobservable assumptionsMarch 31,
2021
December 31,
2020
Weighted average prepayment speed11.4 %11.5 %
Weighted average delinquency rate29.5 %29.8 %
Weighted average discount rate11.5 %11.4 %
Weighted average cost to service (in dollars)$286 $287 
Significant increases or decreases in these assumptions in isolation would result in a significantly higher or lower fair value.
Derivative Financial Instruments
Interest rate lock commitments (IRLCs) are classified as Level 3 assets as fallout rates were determined to be significant unobservable assumptions.
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Note 4 – Loans Held for Sale
Loans Held for Sale - Fair ValueThree Months Ended March 31,
20212020
Beginning balance$366,364 $208,752 
Originations and purchases3,333,901 831,474 
Proceeds from sales(3,169,015)(805,202)
Principal collections(5,418)(6,833)
Transfers from (to):
Loans held for investment, at fair value901 578 
Receivables, net(8,633)(31,302)
REO (Other assets)(2,052)(768)
Gain (loss) on sale of loans(13,732)6,418 
Decrease in fair value of loans(5,256)(1,642)
Other3,754 2,117 
Ending balance (1)
$500,814 $203,592 
(1)At March 31, 2021 and 2020, the balances include $(12.0) million and $(9.4) million, respectively, of fair value adjustments.

Loans Held for Sale - Lower of Cost or Fair ValueThree Months Ended March 31,
20212020
Beginning balance - before Valuation Allowance$27,652 $73,160 
Purchases98 
Proceeds from sales(4,840)(30,492)
Principal collections(214)(651)
Transfers from (to):
Receivables, net266 
Gain on sale of loans389 1,842 
Other(614)5,079 
Ending balance - before Valuation Allowance22,471 49,204 
Beginning balance - Valuation Allowance$(6,180)$(6,643)
Provision703 (570)
Transfer to (from) Liability for indemnification obligations (Other liabilities)15 (25)
Sales of loans457 
Ending balance - Valuation Allowance(5,462)(6,781)
Ending balance, net$17,009 $42,423 
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Gain on Loans Held for Sale, NetThree Months Ended March 31,
20212020
Gain on sales of loans, net
MSRs retained on transfers of forward mortgage loans$34,260 $6,561 
Gain (loss) on sale of forward mortgage loans(18,567)6,418 
Gain on sale of repurchased Ginnie Mae loans4,900 1,842 
 20,593 14,821 
Change in fair value of IRLCs(8,618)5,714 
Change in fair value of loans held for sale(4,981)159 
Gain (loss) on economic hedge instruments (1)(7,192)
Other(1,273)(171)
$5,721 $13,331 
(1)Excludes $35.4 million gain on inter-segment economic hedge derivative presented within MSR valuation adjustments, net for the three months ended March 31, 2021. Third-party derivatives are hedging the net exposure of MSR and pipeline, and the change in fair value of derivatives are reported within MSR valuation adjustments, net. Inter-segment derivatives are established to transfer risk and allocate hedging gains/losses to the pipeline separately from the MSR portfolio. Refer to Note 18 – Business Segment Reporting.
Note 5 – Reverse Mortgages
Three Months Ended March 31,
20212020
Loans Held for Investment - Reverse MortgagesHMBS - Related BorrowingsLoans Held for Investment - Reverse MortgagesHMBS - Related Borrowings
Beginning balance$6,997,127 $(6,772,711)$6,269,596 $(6,063,434)
Cumulative effect of fair value election (1)— — 47,038 — 
Originations326,735 — 294,932 — 
Securitization of HECM loans accounted for as a financing— (287,830)— (312,249)
Additional proceeds from securitization of HECM loans and tails— (12,565)— (8,414)
Repayments (principal payments received)(314,153)311,562 (175,095)172,429 
Transfers to:
Loans held for sale, at fair value(901)— (578)— 
Receivables, net(116)— (129)— 
Other assets(111)— (265)— 
Change in fair value included in earnings35,793 (16,651)133,322 (111,423)
Ending Balance$7,044,374 $(6,778,195)$6,568,821 $(6,323,091)
Securitized loans (pledged to HMBS-Related Borrowings)$6,874,880 $(6,778,195)$6,438,810 $(6,323,091)
Unsecuritized loans169,494 130,011 
Total$7,044,374 $6,568,821 
(1)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.

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Reverse Mortgage Revenue, netThree Months Ended March 31,
20212020
Gain on new originations (1)$17,107 $16,784 
Change in fair value of securitized loans held for investment and HMBS-related borrowings, net2,035 5,115 
Change in fair value included in earnings, net19,142 21,899 
Loan fees and other2,684 898 
$21,826 $22,797 
(1)Includes the changes in fair value of newly originated loans held for investment in the period through securitization date.
Note 6 – Advances
 March 31, 2021December 31, 2020
Principal and interest$258,428 $277,132 
Taxes and insurance348,659 364,593 
Foreclosures, bankruptcy, REO and other185,750 192,787 
 792,837 834,512 
Allowance for losses(6,159)(6,273)
Advances, net$786,678 $828,239 
The following table summarizes the activity in net advances:
Three Months Ended March 31,
 20212020
Beginning balance$828,239 $1,056,523 
New advances203,400 243,545 
Sales of advances(133)(228)
Collections of advances and other(244,942)(277,585)
Net decrease in allowance for losses114 2,552 
Ending balance$786,678 $1,024,807 
    
Allowance for LossesThree Months Ended March 31,
20212020
Beginning balance$6,273 $9,925 
Provision1,502 (761)
Net charge-offs and other(1,616)(1,791)
Ending balance$6,159 $7,373 
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Note 7 – Mortgage Servicing
MSRs – Fair Value Measurement MethodThree Months Ended March 31,
20212020
AgencyNon-AgencyTotalAgencyNon-AgencyTotal
Beginning balance$578,957 $715,860 $1,294,817 $714,006 $772,389 $1,486,395 
Sales and other transfers(56)(56)
Additions:
Recognized on the sale of residential mortgage loans34,260 34,260 5,930 5,930 
Purchase of MSRs36,778 36,778 31,490 31,490 
Servicing transfers and adjustments (1)29 (557)(528)(263,630)(893)(264,523)
Changes in fair value:
Changes in valuation inputs or assumptions (2)82,486 1,529 84,015 (166,532)5,871 (160,661)
Realization of expected cash flows (2)(23,847)(25,278)(49,125)(27,037)(21,310)(48,347)
Ending balance$708,663 $691,554 $1,400,217 $294,227 $756,001 $1,050,228 
(1)Servicing transfers and adjustments include a $263.7 million derecognition of MSRs effective with the February 20, 2020 notice of termination of the subservicing agreement between NRZ and PMC. See Note 8 — Rights to MSRs for further information.
(2)Effective January 1, 2021, changes in fair value due to actual vs. model variances are presented as Changes in valuation inputs or assumptions. Activity for the three months ended March 31,2020 in the table above has been recast to conform to current year disclosure, resulting in a $4.5 million loss reclassified from Realization of expected cash flows to Changes in valuation inputs or assumptions.
MSR UPB
March 31, 2021December 31, 2020March 31, 2020
Owned MSRs91,284,985 $90,174,495 $70,741,200 
NRZ pledged MSRs (1)61,841,181 64,061,198 70,914,910 
Total MSR UPB$153,126,166 $154,235,693 $141,656,110 
(1)MSRs subject to sale agreements with NRZ that do not meet sale accounting criteria. See Note 8 — Rights to MSRs.
We purchased MSRs with a UPB of $6.0 billion and $2.9 billion during the three months ended March 31, 2021 and 2020, respectively. We sold MSRs with a UPB of $7.2 million and $17.6 million during the three months ended March 31, 2021 and 2020, respectively, mostly to Freddie Mac under the Voluntary Partial Cancellation (VPC) program for delinquent loans.
At March 31, 2021, the S&P Global Ratings, Inc.’s (S&P’s) servicer ratings outlook for PMC is stable. On March 24, 2020, Fitch Ratings, Inc. (Fitch) placed all U.S Residential Mortgage Backed Securities (RMBS) servicer ratings on Outlook Negative, resulting from a rapidly evolving economic and operating environment due to the sudden impact of the COVID-19 virus. On April 28, 2021, Fitch affirmed PMC’s servicer ratings and revised its outlook from Negative to Stable as PMC’s performance in this evolving environment has not raised any elevated concerns. According to Fitch, the affirmation and stable outlook reflected PMC’s diligent response to the coronavirus pandemic and its impact on servicing operations, effective enterprise-wide risk environment and compliance management framework, satisfactory loan servicing performance metrics, special servicing expertise, and efficient servicing technology. The ratings also consider the financial condition of PMC’s parent, OFC.
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Servicing RevenueThree Months Ended March 31,
20212020
Loan servicing and subservicing fees
Servicing$63,892 $55,408 
Subservicing3,487 5,190 
NRZ80,385 119,669 
147,764 180,267 
Ancillary income
Late charges9,231 14,639 
Custodial accounts (float earnings)1,008 6,141 
Loan collection fees2,949 4,256 
Recording fees3,651 2,558 
Other, net7,135 3,622 
23,974 31,216 
 $171,738 $211,483 
Float balances (balances in custodial accounts, which represent collections of principal and interest that we receive from borrowers) are held in escrow by unaffiliated banks and are excluded from our unaudited consolidated balance sheets. Float balances amounted to $2.4 billion, $1.7 billion and $1.9 billion at March 31, 2021, December 31, 2020 and March 31, 2020, respectively.
Note 8 — Rights to MSRs
Ocwen and PMC 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 PMC 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 agreements, the transactions did not initially qualify for sale accounting treatment which resulted in such transactions being accounted for as secured financings. Until such time as the transaction qualifies as a sale for accounting purposes, we continue to recognize the MSRs and related financing liability on our consolidated balance 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 unaudited consolidated statements of operations. Changes in fair value of the Rights to MSRs are recognized in MSR valuation adjustments, net in the unaudited consolidated statements of operations. Changes in fair value of the MSR related financing liability are reported in Pledged MSR liability expense.
The following tables present selected assets and liabilities recorded on our unaudited consolidated balance sheets as well as the impacts to our unaudited consolidated statements of operations in connection with our NRZ agreements.
Balance SheetsMarch 31, 2021December 31, 2020
MSRs, at fair value$550,364 $566,952 
Due from NRZ (Receivables): Advance funding, subservicing fees and reimbursable expenses11,653 4,611 
Due to NRZ (Other liabilities)$94,535 $94,691 
Financing liability - MSRs pledged, at fair value: Original Rights to MSRs Agreements550,364 566,952 



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Three Months Ended March 31,
20212020
Statements of Operations
Servicing fees collected on behalf of NRZ$80,385 $119,669 
Less: Subservicing fee retained by Ocwen23,991 29,331 
Net servicing fees remitted to NRZ56,394 90,338 
Less: Reduction (increase) in financing liability
Changes in fair value:
Original Rights to MSRs Agreements (1)(1,551)(7,068)
2017 Agreements and New RMSR Agreements(903)
PMC MSR Agreements40,720 
(1,551)32,749 
Runoff and settlement:
Original Rights to MSRs Agreements (1)17,616 15,741 
2017 Agreements and New RMSR Agreements25,142 
PMC MSR Agreements7,492 
17,616 48,375 
Other2,479 2,620 
Pledged MSR liability expense$37,850 $6,594 
(1) Effective January 1, 2021, changes in fair value due to actual vs. model variances are presented as Changes in valuation inputs or assumptions. Activity for the three months ended March 31,2020 in the table above has been recast to conform to current year disclosure, resulting in a $2.0 million gain reclassified from Runoff and settlement to Changes in fair value.

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Three Months Ended
March 31, 2021March 31, 2020
Financing Liability - MSRs PledgedOriginal Rights to MSRs AgreementsOriginal Rights to MSRs Agreements2017 Agreements and New RMSR AgreementsPMC MSR AgreementsTotal
Beginning Balance$566,952 $603,046 $35,445 $312,102 $950,593 
Sales— — — (226)(226)
Changes in fair value:
Original Rights to MSRs Agreements (2)1,551 7,068 — — 7,068 
2017 Agreements and New RMSR Agreements— — 903 — 903 
PMC MSR Agreements— — — (40,720)(40,720)
Runoff and settlement:
Original Rights to MSRs Agreements (2)(17,616)(15,741)— — (15,741)
2017 Agreements and New RMSR Agreements— — (25,142)— (25,142)
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(523)(2,668)— — (2,668)
2017 Agreements and New RMSR Agreements— — (1,227)— (1,227)
Ending Balance$550,364 $591,705 $9,979 $$601,684 
(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.
(2)Effective January 1, 2021, changes in fair value due to actual vs. model variances are presented as Changes in valuation inputs or assumptions. Activity for the three months ended March 31,2020 in the table above has been recast to conform to current year disclosure, resulting in a $2.0 million gain reclassified from Runoff and settlement to Changes in fair value.

As of March 31, 2021, 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)$13,673,665 
NRZ servicer of record (MSR title transferred to NRZ) - Ocwen MSR (1)48,153,327 
Ocwen subservicer2,505,208 
Total NRZ UPB$64,332,200 
(1)The MSR sale transactions did not achieve sale accounting treatment.
(2)NRZ’s associated outstanding servicing advances were approximately $535.5 million as of March 31, 2021.
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.
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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 ending 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. Under the new agreements, following receipt of the required consents and transfer of the MSRs, Ocwen subservices the mortgage loans underlying the transferred MSRs pursuant to the 2017 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 represented 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 expected 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 unaudited consolidated statements of operations.
On August 17, 2018, Ocwen and NRZ entered into certain amendments (i) to the New RMSR Agreements to include 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 and the Agency Subservicing Agreement.
At any time during the Initial Term, NRZ may terminate the Subservicing Agreements and Servicing Addendum for convenience, subject to Ocwen’s right to receive a termination fee and 180 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 Agreements and Servicing Addendum for additional three-month periods by providing proper notice. Following the Initial Term, the Subservicing Agreements and Servicing Addendum can be cancelled by Ocwen on an annual basis. NRZ and Ocwen have the ability to terminate the Subservicing Agreements 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 Agreements and Servicing Addendum, in addition to a base servicing fee, Ocwen receives certain ancillary fees, primarily 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 receives all float earnings and deferred servicing fees related to delinquent borrower payments, as well as being entitled to receive certain REO related income including REO referral commissions.
As of March 31, 2021, the UPB of MSRs subject to the Servicing Agreements and the New RMSR Agreements is $64.3 billion, including $13.7 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 $13.7 billion Rights to MSRs may (i) be acquired by Ocwen at a price determined in accordance with the terms of the New RMSR Agreements, at the option of Ocwen, or (ii) be sold, together with Ocwen’s title to those MSRs, to a third party in accordance with the terms of the New RMSR Agreements, subject to an additional Ocwen option to acquire at a price based on the winning third-party bid rather than selling to the third party. If the Rights to MSRs are 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 $13.7 billion New RMSR Agreements for convenience, in whole but not in part, subject to payment of a termination fee and 180 days’ notice. If NRZ exercises this termination right, NRZ has the option of seeking (i) the transfer of the MSRs through a sale to a third party of its
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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 NRZ would continue to own the economic rights and obligations related to the MSRs. In the case of option (i), we have a purchase 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 and reimbursement of expenses. We may also agree on alternative arrangements that are not contemplated under our existing agreements or that are variations of those contemplated under our existing agreements.
PMC Transactions
On December 28, 2016, PMC entered into an agreement to sell substantially all of its MSRs, and the related servicing advances, to NRM (the 2016 PMC Sale Agreement). In connection with this agreement, on December 28, 2016, PMC also entered into a subservicing agreement with NRZ which was subsequently amended and restated as of March 29, 2019 (together with the 2016 PMC Sale Agreement, the PMC MSR Agreements). The PMC subservicing agreement had 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.
On February 20, 2020, we received a notice of termination from NRZ with respect to the PMC servicing 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 serviced these loans until deboarding in October 2020 representing $34.2 billion of UPB, and accounted 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 of UPB were deboarded and the remaining 136,500 loans representing $16.0 billion of UPB were deboarded on October 1, 2020.
Note 9 – Receivables
 March 31, 2021December 31, 2020
Servicing-related receivables:
Government-insured loan claims - Forward$101,598 $103,058 
Government-insured loan claims - Reverse29,138 32,887 
Due from custodial accounts18,596 19,393 
Subservicing fees and reimbursable expenses - Due from NRZ11,653 4,611 
Reimbursable expenses11,360 4,970 
Other4,850 1,087 
177,195 166,006 
Income taxes receivable39,233 57,503 
Other receivables2,828 3,200 
219,256 226,709 
Allowance for losses(41,047)(39,044)
 $178,209 $187,665 
At March 31, 2021 and December 31, 2020, the allowance for losses primarily related to receivables of our Servicing business. The allowance for losses related to FHA- or VA-insured loans repurchased from Ginnie Mae guaranteed securitizations (government-insured claims) was $40.4 million and $38.3 million at March 31, 2021 and December 31, 2020, respectively. The government-insured claims that do not exceed HUD, VA or FHA insurance limits are guaranteed by the U.S. government.
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Allowance for Losses - Government-Insured Loan ClaimsThree Months Ended March 31,
20212020
Beginning balance$38,339 $56,868 
Provision4,958 5,072 
Charge-offs and other, net(2,860)(3,837)
Ending balance$40,437 $58,103 
Note 10 – Other Assets
 March 31, 2021December 31, 2020
Contingent loan repurchase asset$399,126 $480,221 
Prepaid expenses26,725 21,176 
Derivatives, at fair value15,483 23,246 
Prepaid representation, warranty and indemnification claims - Agency MSR sale15,173 15,173 
REO8,827 7,771 
Prepaid lender fees, net7,071 9,556 
Deferred tax asset, net3,634 3,543 
Security deposits2,072 2,222 
Mortgage backed securities, at fair value1,613 2,019 
Other5,147 6,556 
 $484,871 $571,483 
Note 11 – Borrowings
Advance Match Funded LiabilitiesBorrowing CapacityMarch 31, 2021December 31, 2020
Borrowing TypeMaturity (1)Amort. Date (1)TotalAvailable (2)Weighted Average Interest RateBalanceWeighted Average Interest RateBalance
Advance Receivables Backed Notes - Series 2015-VF5 (3)Jun. 2051Jun. 2021$250,000 $190,479 4.22 %$59,521 4.26 %$89,396 
Advance Receivables Backed Notes, Series 2020-T1 (4)Aug. 2052Aug. 2022475,000 1.49 %475,000 1.49 %475,000 
Total Ocwen Master Advance Receivables Trust (OMART)725,000 190,479 1.79 %534,521 1.93 %564,396 
Ocwen Freddie Advance Funding (OFAF) - Advance Receivables Backed Notes, Series 2015-VF1 (5)
Jun. 2051Jun. 202170,000 54,084 3.22 %15,916 3.26 %16,892 
$795,000 $244,563 1.83 %$550,437 1.96 %$581,288 
(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.
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(2)Borrowing capacity under the OMART and OFAF facilities is available to us provided that we have sufficient eligible collateral to pledge. At March 31, 2021, NaN of the available borrowing capacity of the OMART and OFAF advance financing notes could be used based on the amount of eligible collateral.
(3)Interest is computed based on the lender’s cost of funds plus a margin of 400 bps.
(4)The weighted average rate of the notes at March 31, 2021 is 1.49%, with rates on the individual classes of notes ranging from 1.28% to 5.42%.
(5)Interest is computed based on the lender’s cost of funds plus a margin of 300 bps.
Financing LiabilitiesOutstanding Balance
Borrowing TypeCollateralInterest RateMaturityMarch 31, 2021December 31, 2020
HMBS-related borrowings, at fair value (1)Loans held for investment1ML + 245 bps (1)(1)$6,778,195 $6,772,711 
Other financing liabilities, at fair value
MSRs pledged (Rights to MSRs), at fair value:
Original Rights to MSRs AgreementsMSRs(2)(2)550,364 566,952 
Financing liability - Owed to securitization investors, at fair value:
Residential Asset Securitization Trust 2003-A11 (RAST 2003-A11) (3)Loans held for investment4.25% - 5.75% fixed; 1ML plus 0.45% variableOct. 20338,820 9,770 
Total Other financing liabilities, at fair value559,184 576,722 
$7,337,379 $7,349,433 
(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 sheets 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 in Ginnie Mae guaranteed HMBS have no maturity dates, and the borrowings mature as the related loans are repaid. Interest rate is a weighted average based on the pass-through rate of the loans. See Note 2 – Securitizations and Variable Interest Entities.
(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. See Note 8 — Rights to MSRs for additional information.
(3)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 2 – Securitizations and Variable Interest Entities.
Other Secured BorrowingsAvailable Borrowing CapacityOutstanding Balance
Borrowing TypeCollateralInterest Rate (1)MaturityUncommittedCommitted (2)March 31, 2021December 31, 2020
SSTL (3)(3)1-Month Euro-dollar rate + 600 bps with a Eurodollar floor of 100 bps (3)May 2022 (3)$$$$185,000 
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Other Secured BorrowingsAvailable Borrowing CapacityOutstanding Balance
Borrowing TypeCollateralInterest Rate (1)MaturityUncommittedCommitted (2)March 31, 2021December 31, 2020
Master repurchase agreement (4)Loans held for sale (LHFS)1ML + 220 - 375 bpsJune 202285,109 189,891 195,773 
Mortgage warehouse agreement (5)LHFS (reverse)Greater of 1ML + 250 bps or 3.50%August 20211,000 
Master repurchase agreement (6)LHFS (forward and reverse)1ML + 325 bps forward; 1ML + 350 bps reverseNov. 202150,000 38,660 161,340 80,081 
Master repurchase agreement (7)N/ASOFR + 190 bps; SOFR floor 25 bpsN/A50,000 
Participation agreement (8)LHFS(8)June 2021120,000 
Master repurchase agreement (8)LHFS(8)June 202149,231 40,769 63,281 
Master repurchase agreementLHFS1 ML + 250 bpsJune 20211,000 
Mortgage warehouse agreement (9)LHFS1ML + 350 bps; Floor 5.25%Jan. 202235,042 14,958 11,715 
Mortgage warehouse agreement (10)LHFS (reverse)1ML + 250 bps; 3.25% floorOct. 2021519 99,481 73,134 
Mortgage warehouse agreement (11)LHFS(11)N/A48,671 51,329 27,729 
Master repurchase agreement (12)LHFS1ML + 150 - 200 bps; Floor 250 bpsN/A51,664 
Total mortgage loan warehouse facilities2.93% (17)354,299 124,933 609,432 451,713 
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Other Secured BorrowingsAvailable Borrowing CapacityOutstanding Balance
Borrowing TypeCollateralInterest Rate (1)MaturityUncommittedCommitted (2)March 31, 2021December 31, 2020
Agency MSR financing facility (13)MSRs, Advances1ML + 450 bpsJune 2021250,000 210,755 
Ginnie Mae MSR financing facility (14)MSRs, Advances1ML + 450 bps; 1ML floor 0.50%Dec. 202125,216 99,784 112,022 
Ocwen Excess Spread-Collateralized Notes, Series 2019-PLS1 (15)MSRs5.07%Nov. 202462,297 68,313 
Secured Notes, Ocwen Asset Servicing Income Series, Series 2014-1 (16)MSRs(16)Feb. 202845,273 47,476 
Total MSR financing facilities4.77% (17)25,216 457,354 438,566 
$379,515 $124,933 1,066,786 1,075,279 
Unamortized debt issuance costs - SSTL and PLS Notes (18)(764)(5,761)
Discount - SSTL(357)
$1,066,022 $1,069,161 
Weighted average interest rate3.68 %4.55 %
(1)1ML was 0.11% and 0.14% at March 31, 2021 and December 31, 2020, 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 March 31, 2021 based on the amount of eligible collateral that could be pledged.
(3)On March 4, 2021, we repaid in full the $185.0 million outstanding principal balance. The prepayment resulted in our recognition of an $8.4 million loss on debt extinguishment, including a prepayment premium of 2% of the outstanding principal balance, or $3.7 million.
(4)The maximum borrowing under this agreement is $275.0 million, of which $160.0 million is available on a committed basis and the remainder is available at the discretion of the lender. On March 31, 2021, we renewed the facility and the maturity date was extended to June 30, 2022.
(5)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.
(6)The maximum borrowing under this agreement is $250.0 million, of which $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.
(7)The lender provides financing for up to $50.0 million at the discretion of the lender. The agreement has no stated maturity date. Interest on this facility is based on the Secured Overnight Financing Rate (SOFR).
(8)This facility is comprised of two lines, a $120.0 million uncommitted participation agreement and a $90.0 million committed repurchase agreement. 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% for new originations and 3.75% for Ginnie Mae modifications, while the loans are financed under both the participation and repurchase agreements.
(9)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.
(10)Under this agreement, the lender provides financing for up to $100.0 million on an uncommitted basis. On February 1, 2021, the borrowing capacity was temporarily increased from $100.0 million to $150.0 million until February 28, 2021 when it was reduced to $100.0 million. On March 30, 2021, the borrowing capacity was temporarily increased to $150.0 million effective April 1, 2021 until May 30, 2021.
(11)This facility provides up to $100.0 million of uncommitted borrowing capacity. 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.
(12)We entered into a repurchase agreement on March 29, 2021 which provides borrowing at our discretion up to a certain maximum amount of capacity on a rolling 30-day committed basis. This facility is structured as a gestation repurchase facility whereby dry Agency mortgage loans are sold to a trust which trust issues a trust certificate that is pledged as the collateral for the borrowings.
(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. The maximum amount which we may borrow pursuant to the repurchase agreements is $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 2 – Securitizations and Variable Interest Entities for additional information. We are subject to daily margining requirements
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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. On March 31, 2021, the facility was upsized to $350.0 million, the interest rate reduced to 1ML plus 325bps, and the maturity was renewed to June 30, 2022. These changes became effective on April 15, 2021.
(14)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. The borrowing capacity is $125.0 million on an uncommitted basis. 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 2 – Securitizations and Variable Interest Entities for 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.
(17)Weighted average interest rate at March 31, 2021, excluding the effect of debt issuance costs and discount.
(18)Balance at December 31, 2020 includes $4.9 million related to SSTL.
Senior NotesInterest RateMaturityOutstanding Balance
March 31, 2021December 31, 2020
PMC Senior Secured Notes7.875%March 2026$400,000 $
OFC Senior Secured Notes (1)12% paid in cash or 13.25% paid-in-kind (see below)March 2027199,500 
PHH Senior Notes6.375%August 202121,543 
PMC Senior Secured Notes8.375%November 2022291,509 
Principal balance599,500 313,052 
Discount (2)
PMC Senior Secured Notes(2,025)
OFC Senior Secured Notes (1)(40,707)
(42,732)
Unamortized debt issuance costs (2)
PMC Senior Secured Notes(6,598)(968)
OFC Senior Secured Notes(7,243)
(13,841)(968)
Fair value adjustments(186)
$542,927 $311,898 
(1)At date of issuance on March 4, 2021, the discount included $24.5 million original issue discount (OID) on the OFC Senior Secured Notes and $16.5 million of additional discount related to the concurrent issuance of warrants. See below for additional information.
(2)The discount and debt issuance costs are being amortized to interest expense through the maturity of the respective notes.
Redemption of 6.375% Senior Unsecured Notes due 2021 and 8.375% Senior Secured Notes due 2022
On March 4, 2021, we redeemed all of PHH’s outstanding 6.375% Senior Notes due August 2021 at a price of 100% of the principal amount, plus accrued and unpaid interest, and all of PMC’s 8.375% Senior Secured Notes due November 2022 at a price of 102.094% of the principal amount, plus accrued and unpaid interest. The redemption resulted in our recognition of a $7.1 million loss on debt extinguishment.
Issuance of 7.875% Senior Secured Notes due 2026
On March 4, 2021, PMC completed the issuance and sale of $400.0 million aggregate principal amount of 7.875% senior secured notes due March 15, 2026 (the PMC Senior Secured Notes) at a discount of $2.1 million. The PMC Senior Secured Notes are guaranteed on a senior secured basis by Ocwen and PHH (together, the Guarantors) and were sold in an offering exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act).
Interest on the PMC Senior Secured Notes accrues at a rate of 7.875% per annum and is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021.
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On or after March 15, 2023, PMC may redeem some or all of the PMC Senior Secured Notes at its option at the following redemption prices, plus accrued and unpaid interest, if any, on the notes redeemed to, but excluding, the redemption date if redeemed during the 12-month period beginning on March 15th of the years indicated below:
Redemption YearRedemption Price
2023103.938 %
2024101.969 
2025 and thereafter100.000 
Prior to March 15, 2023, PMC may, on any one or more occasions, redeem some or all of the PMC Senior Secured Notes at its option at a redemption price equal to 100% of the principal amount of the notes being redeemed, plus a “make-whole” premium equal to the greater of (i) 1.0% of the then outstanding principal amount of such note and (ii) the excess of (1) the present value at the redemption date of the sum of (A) the redemption price of the note at March 15, 2023 (such redemption price is set forth in the table above) plus (B) all required interest payments due on such notes through March 15, 2023 (excluding accrued but unpaid interest), such present value to be computed using a discount rate equal to the Treasury Rate (as defined in the Indenture) as of such redemption date plus 50 basis points; over (2) the then outstanding principal amount of such notes, plus accrued and unpaid interest, if any, on the notes redeemed to, but excluding, the redemption date.
In addition, on or prior to March 15, 2023, PMC may also redeem up to 35.0% of the principal amount of all of the PMC Senior Secured Notes originally issued under the Indenture (including any additional PMC Senior Secured Notes issued under the Indenture) using the net proceeds of certain equity offerings at a redemption price equal to 107.875% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of redemption (subject to the rights of holders of notes on the relevant regular record date to receive interest due on the relevant interest payment date that is on or prior to the applicable date of redemption); provided that: (i) at least 65.0% of the principal amount of all PMC Senior Secured Notes issued under the Indenture remains outstanding immediately after any such redemption; and (ii) PMC makes such redemption not more than 120 days after the consummation of any such equity offering.
The Indenture contains customary covenants for debt securities of this type that limit the ability of PHH and its restricted subsidiaries (including PMC) to, among other things, (i) incur or guarantee additional indebtedness, (ii) incur liens, (iii) pay dividends on or make distributions in respect of PHH’s capital stock or make other restricted payments, (iv) make investments, (v) consolidate, merge, sell or otherwise dispose of certain assets, and (vi) enter into transactions with Ocwen’s affiliates.
Issuance of OFC Senior Secured Notes
On March 4, 2021, Ocwen completed the private placement of $199.5 million aggregate principal amount of senior secured notes (the OFC Senior Secured Notes) with an OID of $24.5 million to certain special purpose entities owned by funds and accounts managed by Oaktree Capital Management, L.P. (the Oaktree Investors). The OFC Senior Secured Notes were issued pursuant to a Note and Warrant Purchase Agreement, dated February 9, 2021, between Ocwen and the Oaktree Investors. Concurrent with the issuance of the OFC Senior Secured Notes, Ocwen issued to the Oaktree Investors warrants to purchase 1,184,768 shares of its common stock at an exercise price of $26.82 per share, subject to antidilution adjustments. On March 4, 2021, the $175.0 million of total proceeds, net of OID, was allocated $158.5 million to the OFC Senior Secured Notes and $16.5 million to the warrants on a relative fair value basis. The warrants are accounted for as equity instruments and reported as Additional Paid-in Capital in our consolidated balance sheet, net of $0.8 million of allocated debt issuance costs. See Note 13 – Equity for additional information regarding the warrants.
The OFC Senior Secured Notes mature on March 4, 2027 with no amortization of principal. Interest is payable quarterly in arrears on the last business day of each March, June, September and December and accrues at the rate of 12% per annum to the extent interest is paid in cash or 13.25% per annum to the extent interest is “paid-in-kind” through an increase in the principal amount or the issuance of additional notes (PIK Interest). Prior to March 4, 2022, all of the interest on the OFC Senior Secured Notes may, at our option, be paid as PIK Interest. On or after March 4, 2022, 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 OFC 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.
The OFC Senior Secured Notes are solely the obligation of Ocwen. The OFC Senior Secured Notes are secured by a pledge of substantially all of the assets of Ocwen, including a pledge of the equity of Ocwen’s subsidiaries held directly by Ocwen. The lien on Ocwen’s assets securing the OFC Senior Secured Notes is junior to the lien securing Ocwen’s guarantee of the 7.875% PMC Senior Secured Notes described above. The OFC Senior Secured Notes are not guaranteed by any of Ocwen’s subsidiaries nor are they secured by a pledge or lien on any assets of Ocwen’s subsidiaries.
Prior to March 4, 2026, we are permitted to redeem the OFC Senior Secured Notes in whole or in part at any time at a redemption price equal to par, plus a make-whole premium, plus accrued and unpaid interest. On and after March 4, 2026, we
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will be permitted to redeem the OFC Senior Secured Notes in whole or in part at any time at a redemption price equal to par plus accrued and unpaid interest.
The OFC Senior Secured Notes have two financial maintenance covenants: (1) a minimum book value of 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 OFC Senior Secured Notes also have affirmative and negative covenants and events of default that are customary for debt securities of this type.
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a company’s debt obligation. At March 31, 2021, the S&P issuer credit rating for Ocwen was “B-”. On February 24, 2021, concurrent with the launch of the PMC bond offering, S&P reaffirmed the ratings at B- and changed the outlook from Negative to Stable. Moody’s reaffirmed their ratings of Caa1 and revised their outlook to Stable from Negative on February 24, 2021. 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 affirmative and negative covenants. Collectively, these covenants include:
Financial covenants, including, but not limited to, specified levels of net worth and liquidity;
Covenants to operate in material compliance with applicable laws;
Restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional forms of debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, 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 other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries or of PHH or PMC and their respective subsidiaries, creating liens on assets to secure debt, and 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.
As of March 31, 2021, the most restrictive consolidated net worth requirement contained in our debt agreements is a minimum of $275.0 million book value of consolidated common stockholders’ equity, as defined, under the Note Purchase Agreement for the OFC Senior Secured Notes. The most restrictive liquidity requirement under our debt agreements is for a minimum of $125.0 million in consolidated liquidity, as defined, under certain of our advance match funded debt and mortgage warehouse agreements.
We believe we were in compliance with all of the covenants in our debt agreements as of the date of these unaudited consolidated financial statements.
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Note 12 – Other Liabilities
March 31, 2021December 31, 2020
Contingent loan repurchase liability$399,126 $480,221 
Due to NRZ - Advance collections, servicing fees and other94,535 94,691 
Other accrued expenses63,648 87,898 
Liability for indemnification obligations43,289 41,920 
Accrued legal fees and settlements40,356 38,932 
Servicing-related obligations39,930 35,237 
Checks held for escheat39,842 35,654 
Liability for uncertain tax positions24,386 16,188 
Lease liability23,922 27,393 
MSR purchase price holdback16,140 20,923 
Derivatives, at fair value10,012 4,638 
Liability for unfunded India gratuity plan5,797 6,051 
Accrued interest payable5,502 4,915 
Liability for unfunded pension obligation12,587 12,662 
Other15,941 16,652 
$835,013 $923,975 
Note 13 – Equity
On February 3, 2020, Ocwen’s Board of Directors authorized a share repurchase program for an aggregate amount of up to $5.0 million of Ocwen’s issued and outstanding shares of common stock. During the three months ended March 31, 2020, we completed the repurchase of 377,484 shares of common stock in the open market under this program at prevailing market prices for a total purchase price of $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.
Effective August 13, 2020, Ocwen implemented a one-for-15 reverse stock split of all outstanding shares of its common stock and 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 nearest whole share in lieu of such fractional shares, with an aggregate 4,692 additional shares issued. The number of outstanding shares was reduced from 130,013,696 to 8,672,272 and 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 $0.01 par value per share of common stock remained unchanged.
As disclosed in Note 11 – Borrowings, concurrent with the issuance of the OFC Senior Secured Notes on March 4, 2021, Ocwen issued to Oaktree warrants to purchase 1,184,768 shares of its common stock (which amount, upon exercise of the warrants, would be equal to 12% of Ocwen’s outstanding common stock as of the date of issuance of the warrants) at an exercise price of $26.82 per share, subject to antidilution adjustments. The warrants may be exercised at any time from the date of issuance through March 4, 2027. In lieu of a cash exercise price, the holder of the warrants may elect a net share exercise whereby the number of shares of common stock received upon exercise is reduced by the number of shares equivalent to the exercise price based on the fair market value of the stock, as defined. The warrants may not be exercised if Oaktree’s ownership of Ocwen’s common stock 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 Ocwen non-voting perpetual preferred stock convertible into one share of Ocwen common stock. While the warrants will not be registered, we entered into a registration rights agreement with Oaktree pursuant to which we will register for resale the shares of common stock issuable upon exercise of the warrants within 18 months after March 4, 2021. On March 4, 2021, the $16.5 million allocated fair value of the warrants was reported as Additional Paid-in Capital in our consolidated balance sheet, net of allocated debt issuance costs of $0.8 million.
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Note 14 – Derivative Financial Instruments and Hedging Activities
The table below summarizes the fair value, notional and maturity of derivative instruments. The notional amount of our contracts does not represent our exposure to credit loss. None of the derivatives were designated as a hedge for accounting purposes as of or during the three months ended March 31, 2021 and 2020.
March 31, 2021December 31, 2020
MaturitiesNotionalFair valueMaturitiesNotionalFair value
Derivative Assets
Forward sales of Reverse loansApr. 2021 to May .2021$70,000 $100 Jan. 2021$30,000 $34 
Forward loans IRLCsJul. 2021916,930 13,622 Apr. 2021619,713 22,224 
Reverse loans IRLCsApr. 202150,197 967 Jan. 202111,692 482 
TBA forward MBS tradesApr. 2021 to May .2021590,000 794 N/A
Interest rate swap futuresN/AMar. 2021593,500 504 
OtherN/A
Total$1,627,127 $15,483 $1,254,905 $23,246 
Derivative Liabilities
Forward sales of Reverse loansApr. 2021$35,000 $(152)Jan. 2021$20,000 $(84)
TBA forward MBS tradesApr. 202110,000 (314)Jan. 2021400,000 (4,554)
Interest rate swap futuresJun. 20211,400,000 (9,532)N/A
OtherN/A(14)N/A
Total$1,445,000 $(10,012)$420,000 $(4,638)
The table below summarizes the net gains and losses of our derivative instruments recognized in our consolidated statement of operations.
Three Months Ended March 31, 2021Three Months Ended March 31, 2020
Gain / (Loss)Gain / (Loss)
AmountFinancial Statement LineAmountFinancial Statement Line
Derivative Assets (Liabilities)
Forward loans IRLCs$(8,602)Gain on loans held for sale, net$5,714 Gain on loans held for sale, net
Reverse loans IRLCs485 Reverse mortgage revenue, net(115)Reverse mortgage revenue, net
Interest rate swap futures and TBA forward MBS tradesGain on loans held for sale, net (Economic hedge)(7,192)Gain on loans held for sale, net (Economic hedge)
Interest rate swap futures and TBA forward MBS trades(13,682)MSR valuation adjustments, net35,291 MSR valuation adjustments, net
Forward sales of Reverse loans(2)Reverse mortgage revenue, net(143)Reverse mortgage revenue, net
Other(16)Gain on loans held for sale, netGain on loans held for sale, net
Total$(21,816)$33,555 
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Interest Rate Risk
MSR Hedging
MSRs are carried 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 changes in market interest rates and prepayment speeds, among other factors. 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 8 — 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 IRLCs (pipeline).
In the first quarter of 2021, we have included in our net MSR portfolio exposure to be hedged the exposure related to expected future MSR bulk acquisitions subject to letters of intent, representing approximately $68 billion of UPB. The expected future MSR bulk acquisitions subject to non-binding letters of intent were not recognized as an asset or liability in our financial statements as of March 31, 2021.
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 March 31, 2021, 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 our unaudited 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.
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 had previously been economically hedged with freestanding derivatives such as forward contracts. 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.
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 had 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 were primarily used to fix the forward sales price that would 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
When required by our advance financing arrangements, we purchase 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 fixed-rate debt.
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. Depending on the magnitude and risk of our positions we may enter into any forward
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exchange contracts to hedge against the effect of changes in the value of the India Rupee or Philippine Peso. We currently do not hedge our foreign currency exposure with derivative instruments. Foreign currency remeasurement exchange gains (losses) were $0.2 million and $(0.9) million during the three months ended March 31, 2021 and 2020, respectively, and are reported in Other, net in the consolidated statements of operations.
Note 15 – Interest Expense
Three Months Ended March 31,
20212020
Senior notes$9,495 $6,661 
Mortgage loan warehouse facilities5,283 3,460 
MSR financing facilities4,572 5,037 
Advance match funded liabilities4,496 5,665 
SSTL2,957 6,794 
Other1,649 2,365 
 $28,452 $29,982 
Note 16 – 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 the time, we estimated that modifications to the tax rules for the carryback of NOLs and business interest expense limitations would result in U.S. and USVI federal net tax refunds of approximately $62.9 million and $1.9 million, respectively, and as such we recognized an income tax benefit of $64.8 million in our unaudited consolidated financial statements for the three months ended March 31, 2020.
The income tax benefit recognized represents the release of valuation allowances against certain NOL and Section 163(j) deferred tax assets that were realized as a result of certain provisions of the CARES Act as well as permanent income tax benefit related to the carryback of NOLs created in a tax year that was subject to U.S. federal tax at 21% to a tax year subject to tax at 35%.
We recognized income tax expense, exclusive of the impact of the CARES Act recognized in 2020, of $3.1 million and $2.9 million for the three months ended March 31, 2021 and 2020, respectively, due to the mix of earnings among different tax jurisdictions with different statutory tax rates. Under our transfer pricing agreements, our operations in India, Philippines, and USVI are compensated on a cost-plus basis for the services they provide, such that even when we incur a consolidated pre-tax loss from continuing operations these foreign operations generate taxable income, which is subject to statutory tax rates in these jurisdictions that are significantly higher than the U.S. statutory rate of 21%.


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Note 17 – 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 period. 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 restricted stock awards, stock options and warrants as determined using the treasury stock method. For the three months ended March 31, 2020, 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.
Three Months Ended March 31,
20212020
Basic earnings (loss) per share
Net income (loss)$8,543 $(25,489)
Weighted average shares of common stock8,688,009 8,990,589 
Basic earnings (loss) per share$0.98 $(2.84)
Diluted earnings (loss) per share
Net income (loss)$8,543 $(25,489)
Weighted average shares of common stock8,688,009 8,990,589 
Effect of dilutive elements
Common stock warrants34,309 
Common stock awards155,174 
Dilutive weighted average shares of common stock8,877,492 8,990,589 
Diluted earnings (loss) per share$0.96 $(2.84)
Stock options and common stock awards excluded from the computation of diluted earnings (loss) per share
Anti-dilutive (1)180,225 249,188 
Market-based (2)157,581 125,397 
(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 13 – 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 18 – 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. Our reportable business segments consist of Servicing, Originations, and Corporate Items and Other. During the three months ended March 31, 2021, there have been no changes to our business segments as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Effective with the fourth quarter of 2020, we have reported the results of Reverse Servicing within the Servicing segment. Previously, 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 2020 have been recast to conform to the current segment presentation. Reverse Servicing generated Revenue and Income before income taxes of $16.0 million and $12.2 million, respectively, for the three months ended March 31, 2020. Reverse Servicing assets consist primarily of securitized Loans held for investment - Reverse Mortgages.
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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. We allocate overhead costs incurred by corporate support services to the Servicing and Originations segments which incorporates the utilization of various measurements primarily based on time studies, personnel volumes and service consumption levels. Support services 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. We allocate a portion of interest income to each business segment, including interest earned on cash balances.
Interest expense on direct asset-backed financings are recorded in the respective Servicing and Originations segments. Beginning in the third quarter of 2020, we began allocating interest expense on corporate debt, including the SSTL and Senior Notes, used to 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 periods prior to the third quarter of 2020 to conform to the current period presentation. The interest expense allocation is $10.5 million for the three months ended March 31, 2020.
As a result of our risk management strategy to hedge the interest rate risk of our net MSR portfolio, the fair value changes of third-party derivative instruments are reported within MSR valuation adjustments, net. For management segment reporting purposes, we establish inter-segment derivative instruments to transfer the risks and allocate the associated fair value changes of derivatives between Servicing and Originations, and specifically between MSR valuation adjustments, net and Gain on loans held for sale, net (Gain/loss on economic hedge instruments). The inter-segment derivative fair value changes are eliminated in the consolidated financial statements in the Corporate Elimination column in the table below.
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Financial information for our segments is as follows:
Three Months Ended March 31, 2021
Results of Operations ServicingOriginationsCorporate Items and OtherCorporate Eliminations (1)Business Segments Consolidated
Servicing and subservicing fees$169,354 $2,384 $$$171,738 
Reverse mortgage revenue, net2,035 19,791 21,826 
Gain on loans held for sale, net3,521 37,593 (35,393)5,721 
Other revenue, net502 6,518 1,289 8,309 
Revenue175,412 66,286 1,289 (35,393)207,594 
MSR valuation adjustments, net(22,690)8,505 35,393 21,208 
Operating expenses82,753 37,328 19,548 139,629 
Other (expense) income:
Interest income1,257 2,566 113 3,936 
Interest expense(20,309)(3,552)(4,591)(28,452)
Pledged MSR liability expense(37,883)33 (37,850)
Loss on extinguishment of debt(15,458)(15,458)
Other452 50 (212)290 
Other expense, net(56,483)(936)(20,115)(77,534)
Income (loss) before income taxes$13,486 $36,527 $(38,374)$$11,639 
Three Months Ended March 31, 2020
Results of Operations ServicingOriginationsCorporate Items and OtherCorporate Eliminations (1)Business Segments Consolidated
Servicing and subservicing fees$211,469 $$13 $$211,483 
Reverse mortgage revenue, net16,673 6,124 22,797 
Gain on loans held for sale, net229 13,102 13,331 
Other revenue, net1,159 2,445 — 2,627 6,231 
Revenue229,530 21,672 2,640 253,842 
MSR valuation adjustments, net(174,448)328 (174,120)
Operating expenses84,479 22,952 29,783 137,214 
Other (expense) income:
Interest income2,529 1,623 1,243 5,395 
Interest expense(24,581)(2,433)(2,968)(29,982)
Pledged MSR liability expense(6,623)29 (6,594)
Other3,655 (22)(2,305)1,328 
Other expense, net(25,020)(832)(4,001)(29,853)
Loss before income taxes$(54,417)$(1,784)$(31,144)$$(87,345)
(1)Corporate Eliminations for the three months ended March 31, 2021 includes an inter-segment derivatives elimination of $35.4 million with a corresponding offset in MSR valuation adjustments, net; nil for the three months ended March 31, 2020.
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Total AssetsServicingOriginationsCorporate Items and OtherBusiness Segments Consolidated
March 31, 2021$9,869,673 $525,610 $376,505 $10,771,788 
December 31, 2020$9,847,603 $379,233 $424,291 $10,651,127 
March 31, 2020$9,321,628 $205,198 $459,198 $9,986,024 

Depreciation and Amortization ExpenseServicingOriginationsCorporate Items and OtherBusiness Segments Consolidated
Three months ended March 31, 2021
Depreciation expense$209 $24 $2,626 $2,859 
Amortization of debt issuance costs and discount129 1,495 1,624 
Three months ended March 31, 2020
Depreciation expense$215 $37 $3,745 $3,997 
Amortization of debt issuance costs and discount112 2,550 2,662 
Note 19 – 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.
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 and local laws, and federal and local bankruptcy rules. These laws and regulations apply to all facets of our business, including, but not limited to, licensing, loan 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. These complex requirements can and do change as laws and regulations are enacted, promulgated, amended, interpreted and enforced, and 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. The 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.
In addition, a number of foreign laws and regulations apply to our operations outside of the U.S., including laws and regulations that govern licensing, privacy, 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.
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. We are also subject to
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seller/servicer obligations under agreements with the GSEs, HUD, FHA, VA and Ginnie Mae, including capital requirements related to tangible net worth, as defined by the applicable agency, an obligation to provide audited financial statements within 90 days of the applicable entity’s fiscal year end as well as extensive requirements regarding servicing, selling and other matters. We believe our licensed entities were in compliance with all of their minimum net worth requirements at March 31, 2021. 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 UPB of assets serviced by PMC. Under the applicable formula, the required minimum net worth was $272.0 million at March 31, 2021. PMC’s net worth was $524.2 million at March 31, 2021. The most restrictive of the various liquidity requirements for licensing and seller/servicer obligations referenced above was $27.2 million at March 31, 2021. PMC’s liquid assets were $227.0 million at March 31, 2021.
We have faced and expect to continue to face heightened regulatory and public scrutiny as an organization and have entered into a number of significant settlements with federal and state 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 with applicable 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 and (ix) inability to execute on our business strategy, which could have a material adverse impact on our business, reputation, results of operations, liquidity and financial condition.
New York Department of Financial Services (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 NY Consent Order) and the terms of the NY DFS’ conditional approval in September 2018 of our acquisition of 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 Financial 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 and PMC. In addition, we were prohibited from boarding any additional loans onto the REALServicing system and we were required to transfer all New York loans off the REALServicing system by April 30, 2020. The conditional approval also restricts our ability to acquire MSRs with respect to New York loans, so that Ocwen may not increase its aggregate portfolio of New York loans serviced or subserviced by Ocwen by more than 2% per 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 raise with us as well as to fulfill our commitments under the NY Consent Order and PHH acquisition conditional approval.
California Department of Financial Protection and Innovation (CA DFPI). In January 2015 and February 2017, Ocwen Loan Servicing, LLC (OLS) entered into consent orders with the CA DFPI (formerly known as the California Department of Business Oversight) relating to our alleged failure to produce certain information and documents during a routine licensing examination and relating to alleged servicing practices. We have completed all of our obligations under each of these consent orders. In October 2020, we entered into a consent order with the CA DFPI in order to resolve a legacy PHH examination finding and, in conjunction therewith, agreed to pay $62,000 (sixty-two thousand dollars) in penalties. We continue to work with the CA DFPI to address matters they raise with us as well as to fulfill our commitments under the consent order.
Note 20 — Commitments
Unfunded Lending Commitments
We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $2.1 billion at March 31, 2021. This additional borrowing capacity is available on a scheduled or unscheduled payment basis. During the three months ended March 31, 2021, we funded $47.8 million out of the $2.0 billion borrowing capacity as of December 31, 2020. We also had short-term commitments to lend $916.9 million and $50.2 million in connection with our forward and reverse mortgage loan IRLCs, respectively, outstanding at March 31, 2021. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, referred to as warehouse lines.
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HMBS Issuer Obligations
As an HMBS issuer, we are required to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of a reverse mortgage loan is equal to or greater than 98% of the maximum claim amount (MCA repurchases), or when they become inactive (the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments).
Activity with regard to HMBS repurchases, primarily MCA repurchases, are as follows:
Three Months Ended March 31, 2021
ActiveInactiveTotal
NumberAmountNumberAmountNumberAmount
Beginning balance141 $29,852 317 $56,449 458 $86,301 
Additions66 16,448 66 14,422 132 30,870 
Recoveries, net (1)(58)(16,805)(39)(3,828)(97)(20,633)
Transfers(12)(3,727)12 3,727 
Changes in value(897)(888)
Ending balance137 $25,777 356 $69,873 493 $95,650 
(1)Includes amounts received upon assignment of loan to HUD, loan payoff, REO liquidation and claim proceeds less any amounts charged off as unrecoverable.
NRZ Relationship
Our Servicing segment has exposure to concentration risk and client retention risk. As of March 31, 2021, 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 64% of all delinquent loans that Ocwen services. The current terms of our agreements with NRZ extend through July 2022. Currently, subject to proper notice (generally 180 days’ notice), the payment of termination fees and certain other provisions, NRZ has rights to terminate the legacy Ocwen agreements for convenience.
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, which will be conducted through MSR Asset Vehicle, LLC (MAV), for the purpose of 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 second quarter 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.
At closing, OMH and Ocwen will initially hold 85% and 15%, respectively, in MAV, which 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 use in connection with eligible MSR investments and operating expenses. Following the execution of the Transaction Agreement and until the parties have contributed their respective aggregate $250.0 million capital contributions, Ocwen has an obligation to provide 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 for a per-loan subservicing fee and certain other ancillary fees as set forth in the Subservicing Agreement.
Ocwen has agreed to sell to Oaktree and certain affiliates up to 4.9%, at Oaktree’s sole discretion, of Ocwen’s outstanding common stock at a price of $23.15 per share, and to 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), in each case, upon closing of the MAV transaction with Oaktree and subject to other customary closing conditions. 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 of the MAV transaction, to participate in certain future equity financings of Ocwen in an amount that would allow Oaktree to maintain its fully-diluted ownership
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percentage of Ocwen as a result of its investment in Ocwen’s common stock and warrants. Ocwen and Oaktree have agreed to enter into a securities purchase agreement (the Securities Purchase Agreement) and warrant agreement (Warrant Agreement) at closing of the MAV transaction 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 22 – Subsequent Events for information regarding the closing of the MAV transaction on May 3, 2021.
Note 21 – 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 FDCPA, the RESPA, the 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 FDCPA and similar state laws, (2) 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 (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
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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 $40.4 million at March 31, 2021. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded at March 31, 2021.
As 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, Morris v. PHH Mortgage Corp., filed in March 2020 in the United States District Court for the Southern District of Florida, alleging that PMC’s practice of charging a fee to borrowers who voluntarily choose to use certain optional expedited payment options violates the FDCPA and its state law analogs. Several similar putative class actions have been filed against PMC and Ocwen since July 2019. Following mediation, PMC agreed to the terms of a settlement agreement to resolve all claims in the Morris matter. A motion requesting preliminary approval of the settlement was filed on August 25, 2020. 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 settlement. Following the preliminary approval hearing, PMC and plaintiffs renegotiated portions of the settlement agreement to address several questions raised by the Court, and subsequently filed a renewed motion for preliminary approval. 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. Ocwen cannot guarantee that the proposed settlement will receive final approval and in the absence of such approval, Ocwen cannot predict the eventual outcome of the Morris proceeding and similar putative class actions.
In addition, we continue to be involved in legacy matters arising prior to Ocwen’s October 2018 acquisition of PHH, including a putative class action filed in 2008 in the United States District Court for the Eastern District of California 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. See Munoz v. PHH Mortgage Corp. et al., No. 1:08-cv-00759-DAD-BAM (E.D. Ca.). In June 2015, the court certified a class of borrowers who obtained loans with private mortgage insurance through PHH’s captive reinsurance arrangement between June 2, 2007 and December 31, 2009. PHH has asserted numerous defenses to the merits of the case. On August 12, 2020, the Court granted, in part, Plaintiffs’ Motion for Partial Summary Judgment. The only issue remaining for trial is whether the reinsurance services provided by PHH’s captive reinsurance subsidiary, Atrium, were actually provided in order for the safe harbor provision of RESPA to apply. A pre-trial conference was held on February 1, 2021. The Court declined to set a trial date due to COVID issues and strained judicial resources. Instead, the Court will resume the Pre-Trial Conference on May 24, 2021, to determine when a trial may be feasible. PHH accrued $2.5 million when the case was filed in 2008 and that amount is included in the $40.4 million legal and regulatory accrual referenced above. At this time, Ocwen is unable to predict the outcome of this 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.
The same plaintiffs who filed a TCPA class action against Ocwen subsequently filed a similar class action against trustees of RMBS trusts based on vicarious liability for Ocwen’s alleged non-compliance with the TCPA. Although they have yet to take any formal action, the trustees have indicated their intent to seek indemnification from Ocwen based on the vicarious liability claims. However, a recent Supreme Court decision significantly undercuts the predominant theory of liability under the TCPA, and should provide even greater defenses on which the Company can rely when defending existing lawsuits or any additional lawsuits that may be filed. Nevertheless, given the recency of this Supreme Court decision, and the lack of opportunity for lower courts to interpret and apply it, it remains difficult to predict 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.
Ocwen is a defendant in a certified class action in the 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. See Weiner v. Ocwen Financial Corp., et al.; 2:14-cv-02597-MCE-DB. Ocwen’s motion for summary judgment, filed in June 2019, was denied in May 2020; however, the court did rule that plaintiff’ recoverable damages are limited to out-of-pocket costs, i.e., the amount of marked-up fees actually paid, rather than the entire cost of the valuation that plaintiffs sought. A jury trial was scheduled for August 30, 2021, however on April 12, 2021, the case was reassigned to a new district judge and we are anticipating the new judge will advise soon on any changes to the schedule. At this time, Ocwen is unable to predict the outcome of this 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
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defend against this lawsuit. If our efforts to defend this 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. See HSBC Bank USA, N.A. v. PHH Mortgage Corp.; (Supreme Court of the State of N.Y.; Index No. 655868/2020). 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 three lawsuits 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 and third litigation. We believe we have strong factual and legal defenses to Mr. Cooper’s claims and are vigorously defending ourselves. 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, 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 been sued by an RMBS trustee in response to an 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 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. We are unable at this time to predict what, if any, actions any trustee will take in response to an 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 event 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, reputation, financial condition, liquidity and results of operations.
Regulatory
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. 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.
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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, Ocwen Mortgage Servicing, Inc. (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 practices, as well as violations of other 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. 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.
On March 4, 2021, the court issued an order granting in part and reserving ruling in part on Ocwen’s motion for summary judgment. In that order, the court granted Ocwen summary judgment on 9 of 10 counts in the CFPB’s amended complaint, finding that the CFPB’s allegations were barred under the principles of claim preclusion or res judicata to the extent those claims are premised on servicing activity occurring prior to February 26, 2017 and are covered by a 2014 Consent Judgment entered by the United States District Court for the District of Columbia. The court held that to the extent counts 1-9 concern servicing activity occurring after the expiration of the NMS consent judgment on February 26, 2017, res judicata is not a bar and therefore ordered the CFPB to submit a supplemental statement concerning its intent to pursue claims for servicing activity post-dating the expiration of the NMS Consent Judgment. As to the remaining count, the court denied the summary judgment motions of both parties, concluding that the summary judgment record revealed a genuine issue of fact. In a subsequently-filed position statement, the CFPB stated it would not be pursuing counts 1–9 for any conduct that took place after February 26, 2017, and on April 19, 2021, the CFPB filed its Second Amended Complaint to remove count 10 as well as allegations in counts 1-9 concerning servicing activity that occurred after February 26, 2017. On April 21, 2021, the court entered final judgment in our favor, denied all pending motions as moot, and closed the case. The CFPB has filed a notice of appeal.
Our current accrual with respect to this matter is included in the $40.4 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
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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 administrative 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. These administrative actions were applicable to OLS, but additional Ocwen entities were named in some actions, including Ocwen Financial Corporation, OMS, Homeward, Liberty, OFSPL and Ocwen Business Solutions, Inc. (OBS).
As discussed further below, we have now resolved all of the state regulatory 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 completing 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, completing a third-party escrow review and ongoing 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 agreement with the State of Massachusetts.
Concurrent with the initiation of the administrative actions and the filing of the CFPB lawsuit discussed above, 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, 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 court 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 partial motion to dismiss the amended complaint in December 2019. On April 22, 2020, the court granted our motion and dismissed Count V of the 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.
On October 15, 2020, we announced that we had reached an agreement to resolve 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 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 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 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.
Our accrual with respect to the administrative and legal actions initiated in April 2017 is included in the $40.4 million litigation and regulatory matters accrual referenced above. We have also incurred, and will continue to incur costs to comply with the terms of the settlements we have entered into, including the costs of conducting an escrow review, Maryland organizational assessments and Massachusetts data integrity audits, and costs relating to the transition to Black 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 could result in additional costs or other adverse impacts. If we fail to comply with the
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terms of our settlements, additional legal or other 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) and 6 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 contained no stock repurchase restrictions and, therefore, we do not believe we are currently restricted from repurchasing stock. We requested confirmation from the signatories of the MOU that they agree with this interpretation, and received affirmative responses from the MMC and five states, and a response declining to take a legal position from the 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. The Department of Justice has informed us that it has decided not to take enforcement action related to this 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 Ocwen 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 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 April 2019, PMC received a subpoena from the VA Office of the Inspector General requesting the production of documentation related to the origination and underwriting of loans guaranteed by the Veterans Benefits Administration. We understand that other servicers in the industry have received similar subpoenas.
Loan Put-Back and Related Contingencies
We have exposure to representation, warranty and indemnification obligations relating to our Originations business, including lending, sales and securitization activities, and relating to our servicing practices.
At March 31, 2021 and March 31, 2020, we had outstanding representation and warranty repurchase demands of $53.6 million UPB (275 loans) and $44.7 million UPB (277 loans), respectively. 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 and similar indemnification obligations:
Three Months Ended March 31,
20212020
Beginning balance (1)$40,374 $50,838 
Provision (reversal) for representation and warranty obligations400 (768)
New production liability1,273 170 
Charge-offs and other (2)(358)(3,161)
Ending balance (1)$41,689 $47,079 
(1)The liability for representation and warranty obligations and compensatory fees for foreclosures is reported in Other liabilities (a component of Liability for indemnification obligations) on our unaudited consolidated balance sheets.
(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.
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 March 31, 2021.
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Other
Ocwen, on its own behalf and on behalf of various mortgage loan investors, is 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 five 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 purchased MSRs or other assets. 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 22 – Subsequent Events
On May 3, 2021, pursuant to the previously disclosed Transaction Agreement dated December 21, 2020 (see Note 20 — Commitments), we entered into a definitive agreement with special purpose entities owned by funds and accounts managed by Oaktree Capital Management, L.P. (collectively Oaktree) to operate an MSR investment joint venture, MSR Asset Vehicle LLC (MAV). Ocwen contributed MAV, which had total member’s equity of approximately $5 million on May 3, 2021, to an intermediate holding company held by Oaktree, MAV Canopy HoldCo I, LLC (MAV Canopy), and received 15% of MAV Canopy. We obtained all necessary approvals or non-objection confirmations from state regulators, Freddie Mac and Fannie Mae to close the MAV transaction. MAV is currently approved to purchase Freddie Mac MSRs throughout the continental United States, with the exception of one state. We expect to receive Fannie Mae’s approval to purchase Fannie Mae MSRs in the near future and continue working to finalize 1 remaining state regulatory approval.
In connection with closing, we issued Oaktree 426,705 shares of our common stock, representing 4.9% of our outstanding common stock, at a price per share of $23.15 for an aggregate purchase price of approximately $9.9 million, and 261,248 four-year warrants to purchase shares of our common stock at a price per share of $24.31 in consideration of the transaction.
The closing of the MAV transaction also satisfied the remaining closing condition to the issuance to Oaktree of the second tranche of the OFC Senior Secured Notes in an aggregate principal amount of $85.5 million. The net proceeds before expenses from the closing of the tranche of OFC Senior Secured Notes were approximately $75.0 million (after $10.5 million of OID) and are expected to be used to fund our investment in MAV, investments in MSRs and for general corporate purposes.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share amounts and unless otherwise indicated)

Effective February 10, 2021, the SEC issued Release No. 33-10890 adopting amendments to Regulation S-K to modernize, simplify and enhance certain financial disclosure requirements. This release amends, among other items, Item 303 of Regulation S-K (Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A). While adoption is not required until fiscal years ending on or after August 9, 2021, we have elected to adopt the amended Item 303 of Regulation S-K commencing with this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021. As a result, we compare our quarterly results to the immediately preceding quarter instead of the corresponding quarter of the preceding year.. We believe it is helpful to compare our quarterly results to the immediately preceding quarter, because the mortgage industry and our business can be affected by a rapidly changing environment. In addition, we continuously transform our operations and internally measure our performance relative to the most recent period. Accordingly, we believe a comparison of our results of operations to the immediately preceding quarter provides a more relevant and meaningful analysis for investors to assess our performance than a comparison to the corresponding quarter of the preceding year. As required, we continue to compare our year-to-date results to the preceding year-to-date results.
OVERVIEW
General
We are a financial services company that services and originates mortgage loans. We are a leading mortgage special servicer, servicing approximately 1.1 million loans with a total UPB of $179.4 billion on behalf of more than 4,000 investors
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and 126 subservicing clients. We service all mortgage loan classes, including conventional, government-insured and non-Agency loans. Our originations business is part of our balanced business model to generate gains on loan sales and profitable returns, and to support the replenishment and the growth of our servicing portfolio. Through our recapture, retail, correspondent and wholesale channels, we originate and purchase conventional and government-insured forward and reverse mortgage loans that we sell or securitize on a 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 operate a multi-channel, scalable origination platform that creates sustainable sources of replenishment and growth of our servicing portfolio, as detailed in the table below. We determine our target returns for each channel, however, the channel and delivery selection is generally our clients’ decision.
The table below summarizes the new volume of Originations by channel, in the current quarter, compared with the preceding quarter and the same quarter of the prior year. The new volume of Originations is a key driver of our net Originations segment revenue and expenses, together with margins, and a key driver of the replenishment and growth of our Servicing segment. In the first quarter of 2021, our Originations volume remained mostly consistent with the prior quarter ($9.4 billion vs $10.0 billion) despite increased competition, including within the GSE Cash Window programs. We closed large bulk MSR acquisitions in the fourth quarter of 2020 that aggregated to $15.0 billion, In March 2021, we entered into non-binding letters of intent to acquire MSRs in bulk, representing approximately $54.0 billion of UPB, that we expect to close in the third quarter of 2021. In addition, in April 2021, we entered into an agreement to acquire MSR in bulk approximating $13.6 billion, that we expect to close in the second quarter of 2021.
$ in billionsUPB
Quarter Ended March 31, 2021Quarter Ended December 31, 2020Quarter Ended March 31, 2020
Mortgage servicing originations
Recapture MSR (1)$0.56 $0.43 $0.20 
Correspondent MSR (1)2.63 2.59 0.51 
Flow and GSE Cash Window MSR purchases (3)5.99 6.73 1.34 
Reverse mortgage servicing (2)0.26 0.27 0.23 
Total servicing originations9.44 10.01 2.28 
Bulk MSR purchases (3)— 15.02 1.54 
Total servicing additions9.44 25.04 3.82 
Subservicing additions (4)4.09 5.08 3.14 
Total servicing and subservicing UPB additions (2)$13.53 $30.11 $6.96 
(1)Represents the UPB of loans that have been originated or purchased during 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 that 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 loans 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.
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The following table summarizes the average volume of our Servicing segment during the current quarter, compared with the preceding quarter and the same quarter of the prior year. The volume of Servicing is a key driver of our net Servicing revenue and expenses. In the first quarter of 2021, we have increased our owned MSR portfolio and maintained our subservicing volume despite significant MSR runoff due to historical refinancing activities by borrowers. In addition to runoff, the NRZ portfolio declined as a result of the termination by NRZ of the PMC servicing agreement resulting in the deboarding of loans with $34.2 billion of UPB in September and October 2020.
$ in billionsAverage UPB
Quarter Ended March 31, 2021Quarter Ended December 31, 2020Quarter Ended March 31, 2020
Owned MSR$90.476.6$67.5
NRZ65.872.3118.1
Subservicing22.723.016.8
Reverse mortgage loans6.76.75.5
Commercial and other servicing0.70.71.0
Total$186.3$179.4$208.9
Financial Highlights
Results of operations for the first quarter of 2021
Net income of $9 million, or $0.98 per share basic and $0.96 per share diluted
Servicing fee revenue of $172 million
Originations gain on sale of $38 million
Financial condition at the end of the first quarter of 2021
Stockholders’ equity of $440 million, or $50.57 book value per common share
MSR investment of $1.4 billion
Liquidity position of $259 million
Total assets of $10.77 billion
Corporate refinancing in March 2021, with $400 million PMC senior secured notes maturing 2026, $199.5 million OFC senior secured notes maturing 2027 and warrants issued to Oaktree. Prepayment of $185 million SSTL and $313 million senior notes maturing 2021/2022.
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. Our 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.
COVID-19 Pandemic Update
In March 2020, the Coronavirus Disease 2019 (COVID-19) was categorized as a pandemic by the WHO and declared a national emergency in the U.S. The pandemic has adversely affected economic conditions since March 2020, with high levels of unemployment, and prompted unprecedented government measures to contain the pandemic and to support individuals and companies. Our financial performance in 2020 was 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. 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.
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During the first quarter of 2021, our businesses continued to be impacted by the COVID-19 pandemic, with the Servicing business negatively affected by the loans placed under forbearance and the moratorium on foreclosures, and by elevated prepayments of our servicing portfolio. Conversely, our Originations business has continued to benefit from high refinance activities during the first quarter of 2021, despite higher competition and lower margins. As of March 31, 2021, we managed 76,100 loans under forbearance, 21,300 of which related to our owned MSRs (excluding NRZ), or 7.2% of our total portfolio and 4.2% of our owned MSR servicing portfolio (excluding NRZ), respectively. The number of loans under forbearance remained at an elevated level, as illustrated by the below chart of forbearance plans by investor during COVID-19 for our owned MSR portfolio (excluding NRZ).
ocn-20210331_g1.jpg        
We continue to 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 and best practices across all of our locations. We monitor the impact of the pandemic on our workforce and established business contingency plans in regions where the pandemic may surge or re-surge, such as in India and in the Philippines. At March 31, 2021, we had approximately 4,900 employees, of which approximately 3,000 were located in India and approximately 400 were based in the Philippines. Due to the rising incidence of COVID-19 illness in these areas, we could face a reduction in employee availability which could impact our operations generally and loan servicing operations especially. While we have contingency and continuity plans in place, we cannot guarantee that our operations will not be negatively impacted. To date, our operations have not been significantly affected, but we have incurred additional operating expenses to adjust to the COVID-19 environment, including additional compensation, technology equipment and legal consulting fees among others.
Uncertainties related to the duration and severity of the pandemic and related economic downturn remain and make it difficult for us to determine the continued ongoing impact the pandemic may have on us and our business, financial condition, liquidity or results of operations.
Results of Operations and Financial Condition
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.



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Results of Operations SummaryThree Months Ended% ChangeThree Months Ended March 31, 2020% Change
March 31,December 31,
20212020
Revenue
Servicing and subservicing fees$171.7$168.9%$211.5(19)%
Reverse mortgage revenue, net21.89.7126 22.8(4)%
Gain on loans held for sale, net5.744.5(87)13.3(57)
Other revenue, net8.38.06.233 
Total revenue207.6231.0(10)253.8(18)
MSR valuation adjustments, net21.2(20.6)(203)(174.1)(112)
Operating expenses
Compensation and benefits68.369.9(2)60.712 
Servicing and origination27.516.764 20.336 
Professional services17.329.1(40)25.6(32)
Technology and communications13.112.415.2(13)
Occupancy and equipment8.99.8(10)12.0(26)
Other expenses4.66.2(27)3.433 
Total operating expenses139.6144.2(3)137.2
Other income (expense)   
Interest income3.93.222 5.4(27)
Interest expense(28.5)(25.8)10 (30.0)(5)
Pledged MSR liability expense, net(37.9)(46.7)(19)(6.6)474 
Loss on extinguishment of debt(15.5)n/mn/m
Other, net0.32.1(86)1.3(78)
Total other expense, net(77.5)(67.1)16 (29.9)160 
Income (loss) before income taxes11.6(0.8)n/m(87.3)(113)
Income tax (benefit) expense3.16.4(52)(61.9)(105)
Net income (loss)$8.5$(7.2)(218)$(25.5)(134)
Segment income (loss) before income taxes
Servicing$13.5$(1.5)(999)%$(54.4)(125)%
Originations36.533.011 (1.8)n/m
Corporate Items and Other(38.4)(32.3)19 (31.1)23 
$11.6$(0.8)n/m$(87.3)(113)%
n/m: not meaningful
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Total Revenue
The below table presents total revenue by segment and at the consolidated level:
RevenueThree Months Ended% ChangeThree Months Ended March 31, 2020% Change
March 31,December 31,
20212020
Servicing$175.4$165.6%$229.5(24)%
Originations66.354.522 21.7206 %
Corporate1.31.3(4)2.6(51)
Total segment revenue243.0221.510 253.8(4)
Inter-segment elimination (1)(35.4)9.5(471)n/m
Total revenue$207.6231.0(10)$253.8(18)
(1)The fair value change of inter-segment economic hedge derivatives reported within Total revenue (gain on loans held for sale) is eliminated at the consolidated level with an offset in MSR valuation adjustments, net.
Total segment revenue was $243.0 million for the first quarter of 2021, $21.5 million or 10% higher than the fourth quarter of 2020, driven by a $9.8 million revenue increase from Servicing and a $11.8 million revenue increase from Originations. The Servicing revenue increase is mostly due to the net growth of our owned MSR portfolio, including the large MSR bulk acquisitions in December 2020. The increase in Originations revenue is mostly due to higher gains on sale from our Recapture channel with increased production volumes.
Total revenue (after elimination of inter-segment derivative fair value changes) was $207.6 million for the first quarter of 2021, $23.4 million or 10% lower than the fourth quarter of 2020, mostly due to the presentation of macro-hedging derivative gains and losses reported within MSR valuation adjustments, net at the consolidated level, as disclosed in Note 4 – Loans Held for Sale, Note 14 – Derivative Financial Instruments and Hedging Activities and Note 18 – Business Segment Reporting. The below table presents the individual financial statement line item impacted by the inter-segment derivative allocation:
ServicingOriginationsInter-segment EliminationBusiness Segments Consolidated
Three Months Ended March 31, 2021
Gain on loans held for sale, net$3.537.6(35.4)$5.7
MSR valuation adjustments, net(22.7)8.535.421.2
Three Months Ended December 31, 2020
Gain on loans held for sale, net3.931.09.544.5
MSR valuation adjustments, net$(26.4)15.4(9.5)$(20.6)
As compared to the first quarter of 2020, total revenue for the first quarter of 2021 was $46.2 million or 18% lower, mostly due to $54.1 million, or 24% decline in Servicing revenue. We collected $39.3 million lower servicing fees on behalf of NRZ, as a result of portfolio run-off and the derecognition of the MSRs in connection with the termination of the PMC agreement by NRZ in February 2020 with the transfer of $34.2 billion UPB of loans completed in October 2020. The decline in servicing fees collected on behalf of NRZ is partially offset by a $33.9 million decline in servicing fees remitted to NRZ that are separately reported as Pledged MSR liability expense (Other expense), with a $5.3 million net decline in the NRZ servicing fee retained. Originations revenue in the first quarter of 2021 were $44.6 million or 206% higher than the fourth quarter of 2020, due to the significant volume increases in our Originations channels including Recapture, fueled by borrower refinance activities. The $7.6 million, or 57%, decrease in gain on loans held for sale is mostly due to the presentation of $35.4 million derivative gains reported in the first quarter of 2021 within MSR valuation adjustments, net, that were economically hedging the gains on loans held for sale.
See the respective Segment Results of Operations for additional information.
MSR Valuation Adjustments, Net
We reported a $21.2 million gain in MSR valuation adjustments, net for the first quarter of 2021, resulting in a $41.8 million favorable change in fair value as compared to the fourth quarter of 2020. The $21.2 million gain recognized in the first quarter of 2021 comprised a $22.7 million loss in Servicing, a $8.5 million gain on MSR purchases and a $35.4 million inter-segment derivative gain reported in gain on loans held for sale. The $22.7 million net loss in Servicing is due to the $49.1 million MSR portfolio runoff, and the effect of the rise of interest rates, increasing the fair value of the MSR portfolio by $75.5
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million, partially offset by $49.1 million MSR hedging losses. MSR portfolio runoff represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled amortization of the loan UPB together with prepayments.
In the first quarter of 2020, we reported a $174.1 million loss in MSR valuation adjustments, net, mostly due to the COVID-19 distressed conditions as of March 31, 2020. The total loss included a $161.3 million fair value loss on the MSR portfolio due to the decline in interest rates, partially offset by $35.3 million favorable fair value gain from our MSR hedging strategy, and a $48.1 million portfolio runoff. The loss on the NRZ pledged MSRs was offset by a $56.9 million gain recorded as MSR pledged liability expense.
See Segment Results of Operations - Servicing and Originations for additional information.
Compensation and Benefits
Compensation and benefits expense for the first quarter of 2021 decreased $1.6 million, or 2%, as compared to the fourth quarter of 2020. Incentive compensation declined $3.5 million, mostly due to the annual adjustment of incentives recorded in the fourth quarter of 2020. Originations segment compensation and benefits increased by $1.5 million, mostly due to additional headcount to support higher loan production levels. The total Ocwen headcount declined by 3% from the fourth quarter of 2020 to the first quarter of 2021, driven by the reduction in Servicing headcount, that reflects the scaling down of our platform to the loans being serviced. Overall, our offshore-to-total headcount ratio decreased from 71% in the fourth quarter of 2020 to 69% in the first quarter of 2021.
As compared to the first quarter of 2020, compensation and benefits expense for the first quarter of 2021 increased $7.6 million, or 12%, Originations segment compensation and benefits expense increased by $9.0 million, mostly due to additional commissions and salaries driven by additional headcount to support higher loan production levels. Servicing segment compensation and benefits expense decreased by $2.3 million, mostly driven by a decrease in average headcount, that was largely due to the scaling down of our workforce to our volumes and our cost re-engineering initiatives. Our average headcount declined by 8%, and overall, our offshore-to-total headcount ratio decreased from 72% in the first quarter of 2020 to 69% in the first quarter of 2021.
Servicing and Origination Expense
Servicing and origination expense for the first quarter of 2021 increased $10.8 million, or 64%, as compared to the fourth quarter of 2020 as Servicing expenses increased $10.6 million. The increase was largely due to favorable servicing reserve provisions of $10.2 million recorded during the fourth quarter of 2020 associated with recoveries in excess of the allowance, and recoveries of previously recognized expenses in connection with a settlement from a mortgage insurer. In addition, while servicing expense increased by $1.0 million due to higher satisfaction and interest of payoff expenses attributable to higher payoffs, other loan related expenses (e.g., credit report expenses) decreased in line with the lower serviced volume in the first quarter of 2021.
Servicing and origination expense for the first quarter of 2021 increased $7.2 million, or 36%, as compared to the first quarter of 2020, primarily due to a $6.1 million increase in Servicing expenses largely as a result of a $2.2 million increase in satisfaction and interest payoff expenses attributable to higher payoffs, a $2.1 million increase in provisions for non-recoverable servicing advances and receivables, and a $2.0 million increase in other servicer-related expenses driven by the favorable release of a legal accrual in the first quarter of 2020.
See Segment Results of Operations - Servicing for additional information.
Other Operating Expenses
Professional services expense for the first quarter of 2021 decreased $11.7 million, or 40%, as compared to the fourth quarter of 2020, primarily due to a $7.0 million decline in legal expenses and $4.1 million decline in other professional services. During the fourth quarter of 2020, we recorded a $13.1 million increase in our accrual related to the CFPB matter and recognized the recovery of $8.5 million prior expenses in connection with a settlement from a mortgage insurer. Nonrecurring costs recorded in the fourth quarter of 2020, including costs related to 2020 reengineering activities, resulted in lower other professional services expenses in the first quarter of 2021.
Professional services expense for the first quarter of 2021 decreased $8.3 million, or 32%, as compared to the first quarter of 2020, primarily due to a $7.7 million decline in legal expenses largely due to $6.6 million recorded in the first quarter of 2020 related to the CFPB matter.
Occupancy and equipment expense for the first quarter of 2021 decreased $1.0 million, or 10%, as compared to the fourth quarter of 2020 primarily due to a $0.8 million decline in depreciation expense, in part due to accelerated amortization in the fourth quarter of 2020 resulting from our early exit from one of our leased facilities.
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Occupancy and equipment expense for the first quarter of 2021 decreased $3.1 million, or 26%, as compared to the first quarter of 2020. Depreciation expense decreased $0.6 million compared to the first quarter of 2020, largely due to our cost reduction efforts in 2020 which included closing and consolidating certain facilities. Postage and mailing expenses decreased $1.5 million compared to the first quarter of 2020, largely due to a decline in letter volume attributed to COVID-19 during first quarter of 2021.
Technology and communication expense for the first quarter of 2021 decreased $2.1 million, or 13%, as compared to the first quarter of 2020. Maintenance expense decreased $1.1 million compared to first quarter of 2020, largely driven by the effects of implementing cost-saving enhancements in the second quarter of 2020. Telephone expense declined $1.2 million as compared to the first quarter of 2020, largely driven by our transition to a more cost-effective alternative telephone system.
Other Income (Loss)
Pledged MSR liability expense for the first quarter of 2021 decreased $8.8 million, as compared to the fourth quarter of 2020, largely due to a $4.8 million favorable fair value adjustment and a $3.9 million decline in servicing fee remittance due to runoff of the portfolio.
Pledged MSR liability expense for the first quarter of 2021 increased $31.3 million as compared to the first quarter of 2020, primarily due to a $40.8 million unfavorable fair value change. Also, the lump-sum cash payments received from NRZ in 2017 and 2018 were fully amortized as of the end of the second quarter of 2020 ($24.2 million in the first quarter of 2020). These increases were partially offset by a $33.9 million decline in servicing fee remittance. The decline in net servicing fee remittance to NRZ was driven by the runoff of the portfolio and the termination of the PMC agreement by NRZ in February 2020.
See Segment Results of Operations - Servicing for additional information.
Loss on debt extinguishment of $15.5 million recognized in the first quarter of 2021 resulted from our early repayment of the SSTL due May 2022, PHH 6.375% senior unsecured notes due August 2021, and PMC 8.375% senior secured notes due November 2022. The loss includes the write-off of unamortized debt issuance costs and discount, as well as contractual prepayment premiums totaling $9.8 million on the SSTL and PMC 8.375% senior secured notes.
Income Tax Benefit (Expense)
The $3.3 million decrease in income tax expense for the first quarter of 2021, compared with the fourth quarter of 2020, was primarily due to a decrease in the projected income tax benefit related to the CARES Act that we recognized in the fourth quarter of 2020. This expense recognized in the fourth quarter of 2020 was offset in part by the accrual of projected taxes due of $3.1 million on first quarter of 2021 earnings.
Our overall effective tax rates for the first quarter of 2021 and fourth quarter of 2020 were 26.6% and (792.8)%, respectively. As disclosed above, during the fourth quarter of 2020 we recognized $6.4 million of income tax expense related to a reduction in the projected benefits under the CARES Act on a $0.8 million pre-tax loss, resulting in the large negative tax rate of (792.8)%. During the first quarter of 2021, we recognized $3.1 million of tax expense on $11.6 million of pre-tax income resulting in an effective tax rate of 26.6%. Our U.S., as well as our foreign operations that are compensated on a cost-plus basis under our transfer pricing agreements for the services they provide, all recognized pre-tax income in the first quarter of 2021 and are projected to be subject to tax on a full-year basis.
The $65.0 million change in income tax expense for the first quarter of 2021, compared with the first quarter of 2020, is primarily due to $64.8 million of estimated income tax benefit recognized under the CARES Act during the three months ended March 31, 2020 as a result of modification of the tax rules 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). In 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. Internal Revenue Service in January 2021. See Note 16 – Income Taxes for additional information.
Our overall effective tax rates for the first quarter of 2021 and 2020 were 26.6% and 70.8%, respectively. During the first quarter of 2020, the income tax benefit recorded was driven by the $64.8 million of estimated income tax benefit recognized under the CARES Act as noted above. The estimated benefit recorded related solely to prior period losses with no relationship to operating results of that period, which in turn resulted in the high effective tax rate of 70.8% for first quarter of 2020.

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Financial Condition Summary March 31, 2021December 31, 2020        $ Change% Change
Cash$259.1$284.8$(25.7)(9)%
Restricted cash77.372.54.8
MSRs, at fair value1,400.21,294.8105.4
Advances, net786.7828.2(41.5)(5)
Loans held for sale517.8387.8130.034 
Loans held for investment, at fair value7,053.27,006.946.3
Receivables178.2187.7(9.5)(5)
Other assets499.2588.4(89.2)(15)
Total assets$10,771.8$10,651.1$120.7%
Total Assets by Segment
Servicing$9,869.7$9,847.6$22.1— %
Originations525.6379.2146.439 
Corporate Items and Other376.5424.3(47.8)(11)
$10,771.8$10,651.1$120.7%
HMBS-related borrowings, at fair value$6,778.2$6,772.7$5.5— %
Advance match funded liabilities550.4581.3(30.9)(5)
Other financing liabilities, at fair value559.2576.7(17.5)(3)
Other secured borrowings, net1,066.01,069.2(3.2)— 
Senior notes, net542.9311.9231.074 
Other liabilities835.0924.0(89.0)(10)
Total liabilities10,331.810,235.896.0%
Total stockholders’ equity440.0415.424.6
Total liabilities and equity$10,771.8$10,651.2$120.6%
Total Liabilities by Segment
Servicing$9,161.1$9,163.5$(2.4)— %
Originations480.0428.551.512 
Corporate Items and Other690.7643.747.0
$10,331.8$10,235.8$96.0%
Book value per share$50.57 $47.81 $2.76 %
Total assets increased $120.7 million between December 31, 2020 and March 31, 2021, mostly due to the $130.0 million increase in our loans held for sale portfolio - driven by higher production volumes - and a $105.4 million or 8% increase in the MSR portfolio - driven by MSR valuation gain and new capitalized MSR. Loans held for investment increased by $46.3 million mostly due to the continued growth of our reverse mortgage business. Servicing advances declined $41.5 million mostly due to heightened payoff activity. The $89.2 million decrease in other assets is mostly attributable to the decrease in the Ginnie Mae contingent repurchase rights of loans under forbearance.
Total liabilities decreased by $96.0 million as compared to December 31, 2020, with similar effects as described above. Our senior notes increased $231.0 million due to the refinancing transactions completed on March 4, 2021. On that date, we issued $556.4 million of new senior notes, net of discount, and repaid in full $313.1 million of existing notes. The decrease in other secured borrowings due to the $185.0 million repayment of the SSTL on March 4, 2021 was largely offset by an increase in borrowings under our warehouse lines. Advance match funded liabilities decreased $30.9 million consistent with the decline in servicing advances. Further, the $89.0 million decrease in other liabilities is mostly attributable to the decrease in the Ginnie Mae contingent repurchase rights of loans under forbearance.
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Total equity increased $24.6 million due to net income of $8.5 million for the first quarter of 2021 and the issuance of common stock warrants on March 4, 2021.
Outlook
The following discussion provides outlook information for certain key drivers of our financial performance. Also refer to the Segment results of operations section for further detail and the description of our business initiatives.
Servicing fee revenue - Our servicing fee revenue is a function of the volume being serviced - UPB for servicing fees and loan count for subservicing fees. We expect we will continue to replenish and grow our servicing portfolio through our multi-channel Originations platform, with additional bulk acquisitions and the expected launch of MAV in the second quarter of 2021. We recently signed letters of intent (non-binding) and entered into an agreement to purchase bulk MSRs representing a total $68 billion of UPB. The expected volume increase is also intended to exceed the portfolio serviced on behalf of NRZ that may end in July 2022. Ancillary income has been adversely impacted by COVID-19 and the low rate environment, which may persist throughout 2021.
Gain on sale of loans held for sale - Our gain on sale is driven by both volume and margin and is channel-sensitive, with recapture generating relatively higher margins than correspondent. While we intend to increase our recapture rate by expanding our channel operating capacity, the volume of refinance activity by borrowers is expected to decline with relatively higher interest rates. Intense competition is expected in the correspondent channel or through GSE Cash Window and co-issue programs for the remainder of 2021 imposing a trade-off between volumes and margins.
Reverse mortgage revenue, net - The reverse mortgage origination gain is driven by the same factors as gain on sale of loans held for sale, with smaller volumes in the reverse mortgage market and generally larger margins. With our experience and brand in the marketplace, we expect to continue to grow our volumes at similar margins in each channel, however the channel mix may vary. With a relatively stable UPB, reverse mortgage servicing revenue is expected to generate a stable return on the portfolio, absent any significant change in interest rates.
Operating expenses - Compensation and benefits is a significant component of our cost-to-service and cost-per-loan, and is directly correlated to headcount levels. We have recently scaled down our Servicing workforce to adjust for portfolio termination and attempt to maintain the relative income contribution of our Servicing business. The COVID-19 environment required us to maintain additional resources to support borrowers, for example through the offering and management of forbearance plans, or as the eviction and foreclosure moratorium was postponed several times, As servicing volume is expected to increase (see above), we expect an increase in our workforce, some of which may be in anticipation of the expected loan transfers. We expect we will continue to increase our Originations workforce for the remainder of 2021 to accompany the growth of the channels. Other operating expenses are expected to favorably correlate with volumes, as productivity and efficiencies are expected with our technology and continuous improvement initiatives.
Stockholders’ equity - With the above considerations, we expect our businesses to generate net income and increase our equity for the remainder of 2021. We expect additional capital from Oaktree with the issuance of shares and warrants upon closing of the MAV transaction.
SEGMENT RESULTS OF OPERATIONS
Our activities are organized into two reportable business segments that reflect our primary lines of business - Servicing and Originations - as well as a Corporate Items and Other segment.

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 Speedpay/collection fees. In addition, we earn performance or incentive fees depending on operational and other metrics exceeding certain service level agreement targets. 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 March 31, 2021, we serviced approximately 1.1 million mortgage loans with an aggregate UPB of $179.4 billion. The average UPB of loans serviced during the first quarter of 2021 increased by 4% or $6.9 billion compared to the fourth quarter of 2020, mostly due to our replenishment and growth strategy that resulted in newly originated and purchased MSRs exceeding high levels of portfolio runoff. Compared to the first quarter of 2020, the average UPB of loans serviced during the first quarter of
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2021 decreased by 11% or $22.6 billion mostly due to the heightened portfolio runoff due to low rate environment and the termination of the PMC MSR Agreements by NRZ with the transfer of $34.2 billion UPB of loans completed in October 2020.
NRZ is our largest subservicing client, accounting for 36% and 45%, respectively, of the UPB and loan count in our servicing portfolio as of March 31, 2021. NRZ servicing fees retained by Ocwen represented approximately 21% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ and excluding ancillary income, for the first quarter of 2021, and 22% for the fourth quarter of 2020. This compares to 24% for the first quarter of 2020. NRZ’s portfolio represents approximately 64% of all delinquent loans that Ocwen serviced, for which the cost to service and the associated risks are higher. However, consistent with a subservicing relationship, NRZ is responsible for funding the advances we service for NRZ.
Our MSR portfolio is carried at fair value, with changes in fair value recorded in MSR valuation adjustments, net. The value of our MSRs is typically correlated to changes in interest rates; as interest rates decrease, the value of the servicing portfolio typically decreases as a result of higher anticipated prepayment speeds. The sensitivity of MSR fair value to interest rates is 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 interest rates. Valuation is also impacted by loan delinquency rates whereby as delinquency rates rise, the value of the servicing portfolio declines. The MSR portfolio is an investment that decreases in value over time, through portfolio runoff, as we realize its cash flows and yield. MSR portfolio runoff is an expense to our Servicing segment as a fair value loss, and represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled amortization of the loan UPB together with prepayments.
For those MSR sale transactions with NRZ that do not achieve sale accounting treatment, we present on a gross basis the pledged MSR as an asset at fair value and the corresponding liability amount pledged MSR liability on our balance sheet. The changes in fair value of the pledged MSR are reflected as MSR valuation adjustments, net and the corresponding changes in fair value of the pledged MSR liability are reported within Pledged MSR liability expense, without any net earnings impact. In addition, the total servicing fees collected on behalf of NRZ are reported within Servicing and subservicing fees, and the servicing fees remitted to NRZ are presented within Pledged MSR liability expense.
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 $162.8 million at March 31, 2021, of which $128.5 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 advances cannot be recovered from the projected future cash flows. 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 subservicing agreements, including our agreements with NRZ, provide for prompt reimbursement of any advances from the owner of the servicing rights.
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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, S&P and 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 (PMC)
 Moody’sS&PFitch
Residential Prime ServicerSQ3AverageRPS3
Residential Subprime ServicerSQ3AverageRPS3
Residential Special ServicerSQ3AverageRSS3
Residential Second/Subordinate Lien ServicerSQ3AverageRPS3
Residential Home Equity ServicerRPS3
Residential Alt-A ServicerRPS3
Master ServicerSQ3AverageRMS3
Ratings OutlookN/AStableStable
Date of last actionAugust 29, 2019December 27, 2019April 28, 2021
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. On April 28, 2021, Fitch affirmed PMC’s servicer ratings and revised its outlook from Negative to Stable as PMC’s performance in this evolving environment has not raised any elevated concerns. According to Fitch, the affirmation and stable outlook reflected PMC’s diligent response to the coronavirus pandemic and its impact on servicing operations, effective enterprise-wide risk environment and compliance management framework, satisfactory loan servicing performance metrics, special servicing expertise, and efficient servicing technology. The ratings also consider the financial condition of PMC’s parent, OFC.
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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:
Three Months Ended% ChangeThree Months Ended March 31, 2020% Change
March 31,December 31,
20212020
Revenue
Servicing and subservicing fees
Residential$168.7$165.0$210.7(20)
Commercial0.71.0(30)0.7— 
169.4166.0211.5(20)
Gain on loans held for sale, net3.53.9(10)0.2n/m
Reverse mortgage revenue, net2.0(5.3)(138)16.7(88)
Other revenue, net0.50.9(44)1.2(58)
Total revenue175.4165.6229.5(24)
 
MSR valuation adjustments, net(22.7)(26.4)(14)(174.4)(87)
Operating expenses
Compensation and benefits25.127.9(10)27.2(8)
Servicing and origination24.513.878 18.433 
Occupancy and equipment6.56.8(4)9.1(29)
Professional services7.18.3(14)5.139 
Technology and communications5.75.210 7.3(22)
Corporate overhead allocations12.212.7(4)17.8(31)
Other expenses1.61.6— (0.4)(500)
Total operating expenses82.876.484.5(2)
Other income (expense) 
Interest income1.30.786 2.5(48)
Interest expense (1)(20.3)(20.9)(3)(24.6)(17)
Pledged MSR liability expense(37.9)(46.7)(19)(6.6)474 
Other, net0.52.5(80)3.7(86)
Total other expense, net(56.5)(64.4)(12)(25.0)126 
Income (loss) before income taxes$13.5$(1.5)n/m$(54.4)(125)%
n/m: not meaningful
(1) Beginning in the third quarter of 2020, we began allocating interest expense on the 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 from Corporate Items and Other to the Servicing segment for prior periods to conform to the current period presentation. See Note 18 – Business Segment Reporting.
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The following tables provide selected operating statistics:
March 31,December 31,% ChangeMarch 31,% Change
 202120202020
Residential Assets Serviced
Unpaid principal balance (UPB) in billions:
Performing loans (1)$169.7 $177.6 (4)%$196.1 (13)%
Non-performing loans8.8 10.3 (15)10.6 (17)
Non-performing real estate0.9 0.9 — 2.1 (57)
Total179.4 188.8 (5)208.8 (14)%
Conventional loans (2)$75.6 $77.0 (2)%$92.8 (19)%
Government-insured loans29.4 34.8 (16)31.6 (7)
Non-Agency loans74.3 77.0 (4)84.3 (12)
Total$179.4 $188.8 (5)%$208.8 (14)%
Servicing portfolio (5)$98.7 $97.4 %$77.2 28 %
Subservicing portfolio16.3 24.3 (33)17.7 (8)
NRZ (3) (6)64.3 67.1 (4)113.9 (44)
Total$179.4 $188.8 (5)%$208.8 (14)
Prepayment speed (CPR) (4):
3-month % Voluntary CPR21.7 %18.30 %19 %10.5 %107 %
3-month % Involuntary CPR0.8 %1.50 %(47)1.2 (33)
Total 3-month % CPR25.2 %22.80 %11 15.3 %65 
Number (in 000’s):
Performing loans (2)1,011.1 1,048.7 (4)%1,326.6 (24)%
Non-performing loans45.5 52.2 (13)55.9 (19)
Non-performing real estate6.7 6.7 — 13.8 (51)
Total1,063.2 1,107.6 (4)%1,396.3 (24)%
Conventional loans (1)344.3 349.6 (2)%593.2 (42)%
Government-insured loans180.2 201.9 (11)193.7 (7)
Non-Agency loans538.6 556.1 (3)609.4 (12)
Total1,063.2 1,107.6 (4)%1,396.3 (24)%
Servicing portfolio513.0 511.6 — %474.9 %
Subservicing portfolio67.5 96.3 (30)79.3 (15)
NRZ (4)482.7 499.6 (3)842.2 (43)
Total1,063.2 1,107.6 (4)%1,396.3 (24)
Number of completed modifications (in 000’s)
4.8 5.8 (17)%8.3 (42)%
(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 include 85,479 and 89,458 prime loans with a UPB of $15.3 billion and $16.1 billion at March 31, 2021 and December 31, 2020, respectively, that we service or subservice. This compares to 107,352 prime loans with a UPB of $19.6 billion at March 31, 2020. Prime loans are generally good credit quality loans that meet GSE underwriting standards.
(3)Loans serviced or subserviced pursuant to our agreements with NRZ.
(4)Average CPR includes voluntary and involuntary prepayments and scheduled principal amortization (not reflected in the above table).
(5)Includes $6.7 billion UPB of reverse mortgage loans that are recognized in our consolidated balance sheet at March 31, 2021.
(6)Includes $2.5 billion UPB of subserviced loans at March 31, 2021.
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The following table provides selected operating statistics related to our reverse mortgage loans reported within our Servicing segment:

March 31,December 31,% ChangeMarch 31,% Change
202120202020
Reverse Mortgage Loans at December 31
Unpaid principal balance (UPB) in millions:
Loans held for investment (1)$6,326.1 $6,299.6 — %$5,864.2 %
Active Buyouts (2)27.0 28.4 (5)15.0 89 
Inactive Buyouts (2)75.9 64.2 18 35.6 80 
Total$6,429.0 $6,392.3 $5,914.7 
Inactive buyouts % to total1.18 %1.00 %18 0.60 %67 
Future draw commitments (UPB) in millions:2,052.6 2,044.4 — 1,574.6 30 
Fair value in millions:
Loans held for investment (1)$6,874.9 $6,872.3 — $6,438.8 
HMBS related borrowings6,778.2 6,772.7 — 6,323.1 
Net asset value$96.7 $99.5 (3)$115.7 (14)
(1)Securitized loans only; excludes unsecuritized loans as reported within the Originations segment.
(2)Buyouts are reported as Loans held for sale, Accounts Receivable or REO depending on the loan and foreclosure status.
The following table provides selected operating statistics related to advances for our Servicing segment:
March 31, 2021December 31, 2020
Advances by investor typePrincipal and InterestTaxes and InsuranceForeclosures, bankruptcy, REO and otherTotalPrincipal and InterestTaxes and InsuranceForeclosures, bankruptcy, REO and otherTotal
Conventional$2$27$5$35$4$30$5$38
Government-insured14927761552884
Non-Agency255272149676272279155705
Total, net$258$349$180$787$277$365$187$828

The following table provides information regarding the changes in our portfolio of residential assets serviced or subserviced:
Amount of UPB ($ in billions)
Count (000’s)
2021202020212020
Portfolio at January 1$188.8 $212.4 1,107.6 1,419.9 
Additions (1)13.5 6.9 49.4 28.8 
Sales— (0.1)(0.1)(0.7)
Servicing transfers (2)(10.9)(2.2)(42.5)(8.5)
Runoff(12.1)(8.2)(51.2)(43.2)
Portfolio at March 31$179.4 $208.8 1,063.2 1,396.3 
(1)Additions include purchased MSRs on portfolios consisting of 5,971 loans with a UPB of $1.6 billion that have not yet transferred to the Black Knight MSP servicing system as of March 31, 2021. Because we have legal title to the MSRs, the UPB and count of the loans are included in our reported servicing portfolio. The seller continues to subservice the loans on an interim basis until the servicing transfer date.
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