OCWEN FINANCIAL CORPORATION The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this Form 10-Q, may contain certain statements that constitute forward-looking statements within the meaning of the federal securities laws. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "intend," "consider," "expect," "plan," "anticipate," "believe," "estimate," "predict" or "continue" or the negative of such terms or other comparable terminology. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Our business has been undergoing substantial change, which has magnified such risks and uncertainties. You should bear these factors in mind when considering forward-looking statements and should not place undue reliance on such statements. Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those suggested by such statements. In the past, actual results have differed from those suggested by forward-looking statements, and this may happen again. You should consider all uncertainties and risks discussed or referenced in this report, including those under "Forward-Looking Statements" and Part II, Item 1A. Risk Factors, as well as those discussed in our other reports and filings with theSEC , including those in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and any subsequentSEC filings. OVERVIEW
General
We are a financial services company that services and originates mortgage loans. The majority of our revenues are generated from our residential mortgage servicing business. AtMarch 31, 2020 , our residential mortgage servicing portfolio consisted of 1,396,316 loans with a total UPB of$208.8 billion . We service all mortgage loan classes, including conventional, government-insured and non-Agency loans. Our originations business supports the growth of our servicing volume. We originate and purchase conventional and government-insured forward and reverse mortgage loans that we sell or securitize on a servicing retained basis. 61 -------------------------------------------------------------------------------- We selectively sourced our MSR originations and acquisitions and our subservicing through diversified channels, as detailed below: Amounts in billions UPB Quarter Ended Quarter Ended March 31, 2020 December 31, 2019 Mortgage servicing originations Recapture MSR (1) $ 0.20 $ 0.17 Correspondent MSR (1) 0.51 0.40 Flow purchases MSR 0.82 0.24 GSE Cash Window MSR 0.52 0.55 Reverse mortgage servicing (2) 0.23 0.26 Total servicing originations 2.28 1.62 Bulk MSR purchases 1.54 2.74 Total servicing additions 3.82 4.36 Subservicing additions (3) 3.14 3.79 Total servicing and subservicing UPB additions (2) $ 6.96 $ 8.15
(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) Reverse mortgage loans are securitized on a servicing retained basis. The
loans are recognized on our consolidated balance sheets under GAAP without
any separate recognition of MSRs.
(3) Excludes the volume UPB associated with short-term interim subservicing for
some clients as a support to their originate-to-sell business, where loans
are boarded and de-boarded within the same quarter.
In our Originations business, we originate or purchase, and sell or securitize forward and reverse mortgage loans that are mostly conventional and government-insured. During the three months endedMarch 31, 2020 , we originated or purchased forward and reverse mortgage loans with a UPB of$710.2 million and$226.0 million , respectively. COVID-19 Pandemic Update InMarch 2020 , the WHO categorized COVID-19 as a pandemic and the COVID-19 outbreak was declared a national emergency in theU.S. The efforts to contain the spread of the COVID-19 pandemic are adversely affecting economic conditions, including an increase in unemployment, and are creating significant uncertainties about the duration and magnitude of the economic downturn. Ocwen took decisive actions to address the COVID-19 global pandemic. These actions include a prohibition on international travel, non-essential domestic travel, and in-person meetings, as well as increased sanitary protocols in its facilities. Ocwen is following CDC, WHO and local guidelines and its business continuity and crisis management teams and executive leadership are meeting virtually on a daily basis. Ocwen is currently operating through a remote workforce model for approximately 92% of its global workforce. Approximately 2% of itsU.S. workforce is working out of its facilities to support activities that cannot be performed remotely. For those jobs that cannot be performed remotely, social distancing and facilities hygiene recommendations are being followed, as well as added disinfection cleaning of facilities that continue to be occupied by its workforce. We believe our ability to maximize deployment of a remote work model offers the best protection for employees and the communities in which they live and provides the best assurance of our continued ability to serve borrowers and investors. We did not incur any significant costs associated with the transition to our remote work model during the three months endedMarch 31, 2020 , except for the investment in laptops and related equipment for our workforce that we capitalized as equipment. We have not changed our operations, financial reporting process, systems, and controls. The disruption created by the measures being taken to drive social distancing may give rise to industry-wide elevated delinquency levels. Ocwen is an experienced special servicer with proven capability to assist borrowers who are facing financial difficulties and generate positive outcomes for mortgage loan investors. We believe we have the necessary operating processes, practices and systems to track large servicer advance balances at a detailed level and drive strong advance recoveries within elevated delinquency portfolios. We believe the current environment may create opportunities to assist borrowers who are facing financial difficulties in retaining their homes while improving cash flow for mortgage loan investors. 62 -------------------------------------------------------------------------------- COVID-19 Pandemic Update - Servicing OnMarch 27, 2020 , the CARES Act was signed into law. The CARES Act allows borrowers with federally backed mortgage loans who are affected by COVID-19 to request temporary loan forbearance. Servicers must provide such forbearance for up to 180 days if requested by the borrower. Borrowers may request additional forbearance period of up to 180 days for FHA andVA guaranteed loans. During any period of forbearance granted pursuant to the CARES Act, servicers must also provide related protection, including, but not limited to, suspension of late fees, as well as foreclosure and eviction activity. The CARES Act further restricts servicers from pursuing certain foreclosure and eviction activity on all occupied, federally backed mortgage loans until at leastMay 17, 2020 , regardless of whether the borrower has requested assistance. Although PLS loans are not explicitly covered under the CARES Act, these loans are subject to various requirements and expectations from state Governors, regulators, and Attorneys General to assist borrowers enduring financial hardship due to COVID-19 with forbearance, moratoria on foreclosure sales and evictions and other requirements, some of which apply regardless of whether the borrower has requested assistance. Ocwen provides payment relief to such borrowers in accordance with these requirements and expectations, as well as our servicing agreements. For example, we intend to grant eligible borrowers an initial three months of forbearance and related protection, including suspension of late fees, as well as suspension of foreclosure and eviction activity. Generally, borrowers will be required to repay their suspended or reduced mortgage payments after the forbearance period ends unless an alternate loss mitigation solution is reached, which we anticipate will include extensions of forbearance, repayment plans, payment deferrals, and loan modifications, depending on the borrower's situation, account status, and applicable investor guidelines. Before the completion of each period of forbearance, Ocwen will attempt to contact the borrowers to assess their ability to resume making payments and discuss other options which may be available if their hardship persists. We expect loan forbearance to rise significantly in the near term, in response to the increase in unemployment claims. The unemployment rate increased from 5.1%, for the week endingMarch 28th , to 15.5% for the week endingApril 25th , an increase of 10.4 percentage points in four weeks, according to theU.S. Department of Labor . We also expect that the recession that is expected by most economic forecasts will result in many of those in forbearance not returning to their jobs and so becoming delinquent at the end of the forbearance period. Given the unprecedented nature of this event, it is difficult to predict the severity and timing of this likely increase in delinquencies and forbearance. An increase in loans in forbearance or an increase in delinquencies may temporarily reduce our servicing revenue or may delay the timing of revenue recognition. We receive and record servicing fees as income each period. Per the servicing guides, we do not collect any servicing fees on delinquent loans for the GSE and Ginnie Mae MSR loan population. In addition, we may not recognize any servicing fee during the forbearance periods. Conditions will also affect ancillary income timing and may reduce such income. While higher delinquencies tend to increase the assessment of some ancillary income, such as late fees, we will not be assessing late fees on loans in forbearance. The deferral of servicing fee collections due to forbearance is not expected to significantly impact our total cumulative revenue over the life of the loan but will reduce near term revenue and cash flow. The delay in servicing fee collection is expected to be partially offset by lower runoff in our MSR portfolio, as the deferred servicing fees generally remain projected as future cash flows. An increase in loans in forbearance, an increase in delinquencies, further declines in market or mortgage rates and other assumptions changes would further decrease the fair value of our MSR portfolio. We reported a$174.1 million loss in MSR valuation adjustments, net in the first quarter of 2020, mostly driven by$52.7 million portfolio runoff and a$156.7 million loss due to the decline in interest rates due to the COVID-19 pandemic (117 basis-point decline in the 10-year treasury swap rate), partially offset by$35.3 million favorable fair value gain from our MSR hedging strategy. The$65.5 million additional loss as compared to the first quarter of 2019 is primarily due to the impact of the additional decline in market interest rates. An increase in loans in forbearance or an increase in delinquencies would increase our cost to service and operating expenses. Loans in default typically require more intensive effort to bring them current or manage the foreclosure process. As forbearance periods end, additional efforts may be required to establish repayment plans, loan modifications, extensions of forbearance, payment deferrals, or other loss mitigation solutions. We follow regulatory and investor requirements, including the temporary moratoria on evictions and foreclosure sales and monitor daily our inventory and its trend due to the COVID-19 environment. An increase in loans in forbearance or an increase in delinquencies would increase our servicing advances and may increase the related interest expense. Additional fair value losses may be recorded on our MSRs as the projected funding cost of existing and future expected servicing advances is a component of the fair value of MSRs. We do not expect any significant changes to our advances' allowance for losses, including under the new FASB's current expected credit loss model (CECL), as advances are generally expected to be fully reimbursed. 63 -------------------------------------------------------------------------------- For the quarter endedMarch 31, 2020 , Ocwen provided approximately 27,500 COVID-19 related forbearance plans to its customers. NRZ has the responsibility to advance on approximately 16,800, or 61%, Ocwen has the responsibility to advance on approximately 9,400, or 34%, and no advances are required on approximately 1,300, or 5%, of the loans subject to these forbearance plans. Of the loans subject to these plans for which we are responsible for making advances, our subservicing clients are obligated to reimburse Ocwen within 30 days of Ocwen making an advance on approximately 3,900 of these loans. Ocwen has sole responsibility to advance on approximately 5,500 of these loans. Of this amount, 67% are PLS and 20% are Freddie Mac, where in both cases Ocwen has its own servicing advance financing lines. For eligible PLS loans that were not significantly delinquent at the time forbearance was applied to the account, Ocwen intends to administer each three-month forbearance period through a series of one-month forbearance plans each of which advances the due date upon completion and move the resulting missed payment to or near the loan's maturity as a non-interest bearing balance. As such, Ocwen does not expect to be out of pocket cash for P&I and T&I advances for any more than one month for each of these eligible loans with forbearance protection. We have a PLS servicing advance financing line that provides financing at weighted average advance rates of 92% of eligible principal and interest advances. As ofMarch 31, 2020 , Ocwen had$59.0 million in remaining committed financing capacity under our PLS servicing advance financing line. ForGinnie Mae loans, advance requirements are mitigated by the ability to use excess funds in custodial accounts to cover principal and interest advances, though the remaining advances are covered by corporate cash.Ginnie Mae has announced it intends to provide financing to servicers to fund servicer advances through itsPass-Through Assistance Program (PTAP). We are not acting at this time to establish a privateGinnie Mae advance funding facility or planning to access the Ginnie Mae PTAP. We will continue to assess ourGinnie Mae requirements and options going forward and may establish financing later this year. For Freddie Mac loans, Ocwen has a servicing advance financing line that provides financing at a 98% advance rate of eligible P&I advances, and an overall weighted average advance rate of 80.5% of all eligible advances. As ofMarch 31, 2020 , the Company had$45.0 million in remaining committed financing capacity under this servicing advance financing line. For Fannie Mae loans, advances are currently funded through corporate cash. OnApril 21, 2020 , theFederal Housing Finance Agency (FHFA) announced that the 120-day P&I servicer advance obligation limit for delinquent loans will apply to loans in forbearance. Accordingly, once a servicer has advanced four months of missed payments on a loan, it will have no further obligation to advance scheduled payments, as the loan will be moved into an "Actual/Actual" remittance status. Reimbursement of such P&I advance is expected after the forbearance period ends, through loan resolution, cure or liquidation. Mortgage loans with COVID-19 payment forbearance will be treated as they would in the event of a natural disaster event and will remain in the MBS pools. GSE servicers are required to make T&I and Corporate advances until the property is sold but can submit reimbursement claims for certain T&I and Corporate advances after incurring the expense. To the extent necessary, Ocwen intends to apply for financing through the Federal Reserve Emergency Funding Programs when such programs are made available to the industry. Ocwen's ability to utilize these programs will be subject to eligibility requirements applicable to Ocwen and the collateral being financed. The eligibility criteria and the timing of financing availability is not yet known. As ofApril 30, 2020 , we provided approximately 114,600 COVID-19 related forbearance plans to our customers, or an additional 87,100 forbearance plans sinceMarch 31, 2020 . The loans under forbearance represented 8.5% and 2.0% of our servicing volume as ofApril 30, 2020 andMarch 31, 2020 , respectively. Due to the adverse economic conditions created by the COVID-19 pandemic, we expect the number of forbearance plans to continue to increase in the near term, consistent with the industry trend, and to continue to correlate with unemployment claims. An increase in loans in forbearance would increase our servicing advance obligations. The below table shows the requests for forbearance plans and the estimated obligation to advance monthly P&I as ofMarch 31, 2020 andApril 30, 2020 : 64 -------------------------------------------------------------------------------- COVID-19 impacted borrowers and As of March 31, 2020 As of April 30, 2020 monthly P&I advance estimate Estimated Monthly P&I Estimated Monthly Number of Advance Number of P&I Advance Forbearance Obligation Forbearance Obligation Plans (3) ($ million) Plans (3) ($ million) GSE loans 1,400$ 1.8 6,200 $ 7.9 Ginnie Mae loans 400 0.5 8,400 7.9 PLS loans 3,700 5.8 16,000 24.4 Servicer 5,500$ 8.1 30,600 $ 40.2 GSE loans 2,300$ 2.6 9,400 $ 10.5 PLS loans 14,500 14.0 63,200 62.4 NRZ's responsibility (1) 16,800$ 16.6 72,600 $ 72.9 Subservicer (2) 3,900$ 4.5 6,500 $ 8.9 No advance requirements 1,300 - 4,900 - Total 27,500$ 29.2 114,600 $ 122.0
(1) Ocwen is obligated to advance under the terms of the 2017 Agreements and New
RMSR Agreements, and NRZ is obligated to reimburse Ocwen daily for PLS and
weekly for Freddie Mac and Fannie Mae servicing advances. See Note 8 - Rights
to MSRs and Note 11 - Borrowings for additional information.
(2) Ocwen is obligated to advance under the terms of subservicing agreements, and
subservicing clients (servicers) are generally obligated to reimburse Ocwen
within one day to 30 days for P&I advances.
(3) Numbers have been rounded.
COVID-19 Pandemic Update - Originations Recent declines in interest rates and the continued execution of our originations strategy have led to an increase in mortgage refinancing activity in our portfolio retention channel. We continue to increase staffing levels to maximize our recapture potential. Lock volume for the first quarter of 2020 was approximately$870 million and funded volume was approximately$196 million . Ocwen continues to approach MSR purchases with discipline as it has seen increased volatility in primary and secondary margins as well as the average 30-year mortgage rate. We are bidding conservatively, especially on higher coupon loans, while mortgage spreads are high, and the market is going through price discovery. First quarter 2020 correspondent lock volume was approximately$618 million and funded volume originated through correspondent and all other flow channels was approximately$1.9 billion . In the current environment, there are several factors that could impact Ocwen's volume and industry-wide volume levels in all channels, including COVID-19 related impacts to the lending ecosystem (e.g., appraiser unwillingness to enter homes; borrower unwillingness to allow appraisers into homes; title agent office closings; and delays in obtaining, and uncertainty relating to the validity of, verifications of borrower employment), volatility of market interest rates, primary and secondary spread volatility, industry capacity constraints, and uncertainty regarding the future value of newly originated MSRs in light of the current wide spread between the 10-year treasury rate and the 30-year conventional fixed rate mortgage rate. In this environment, our current capital allocation priorities are maintaining liquidity to support its operations and funding its flow origination channels. We continue to monitor our liquidity and calibrate our originations activity based on our evolving assessment of the business environment and our liquidity and financial condition. See Liquidity and Capital Resources for additional COVID-19 update. Business Initiatives We have established a set of key business initiatives to achieve our objective of returning to profitability in the shortest timeframe possible within an appropriate risk and compliance environment. These include: • Managing the size of our servicing portfolio through expanding our lending
business to grow sustainable channels of MSR replenishment;
• Re-engineering our cost structure;
• Effectively managing our balance sheet to fund our ongoing business needs
and growth; and,
• Fulfilling our regulatory commitments and resolving remaining legacy matters.
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First, we must expand our Originations business and targeted MSR acquisitions
that have appropriate financial return targets to replenish and grow our
servicing portfolio, and within the constraints of our liquidity. We expect to
continue to focus on acquiring Agency and government-insured MSR portfolios that
meet or exceed our minimum targeted investment returns. We also executed on our
plans to re-enter the forward lending correspondent channel in the second
quarter of 2019 and we continue to pursue a number of other MSR acquisition
options, including driving improved recapture rates within our existing
servicing portfolio. In addition to our organic growth initiatives in our
Originations business, we have been actively engaged in evaluating opportunities
to acquire complimentary lending platforms with proven capabilities to generate
significant volume through mortgage lending cycles and provide a sustainable MSR
source. Our efforts to grow and diversify our sources of servicing volumes also
mitigate our client concentration risk. We have exposure to client concentration
and retention risk as a result of our relationship with NRZ, which accounted for
55% of the UPB in our servicing portfolio as of March 31, 2020 .
Second, we must re-engineer our cost structure to go beyond eliminating
redundant costs through the integration process and establish continuous
operational efficiencies and cost improvement as a core strength. Our continuous
cost improvement efforts are focused on leveraging our single servicing platform
and technology, optimizing strategic sourcing and off-shore utilization, lean
process design, automation and other technology-enabled productivity
enhancements. Our initiatives are targeted at delivering superior accuracy,
cost, speed and customer satisfaction. We believe these steps are necessary in
order to simplify our operations and drive stronger financial performance.
Third, we must manage our balance sheet to ensure adequate liquidity, finance
our ongoing business needs and provide a solid platform for executing on our
other key business initiatives. Regarding the current maturities of our
borrowings, as of March 31, 2020 we had approximately $789.0 million of debt
outstanding under facilities coming due in the next 12 months. In January 2020 ,
we extended the maturity of our SSTL from December 2020 to May 2022 and we
reduced the outstanding balance from $326.1 million to $200.0 million . Portions
of our match funded advance facilities and all of our mortgage loan warehouse
facilities have 364-day terms consistent with market practice. We have
historically renewed these facilities on or before their expiration in the
ordinary course of financing our business. We have assessed the potential impact
of the COVID-19 pandemic on our financial projections and projected liquidity.
We have an agreement in place to upsize and extend through June 2021 our OMART
and OFAF advance financing facilities. The OMART VFN capacity will increase from
$200.0 million to $500.0 million to accommodate forecasted advancing
requirements and the amortization of $185.0 million in term notes in August
2020 . The OFAF facility will increase to a total capacity of $70.0 million . In
addition, we have executed an agreement to extend our MSR repurchase agreement
and warehouse facilities with Barclays. We expect to renew, replace or extend
our borrowings to the extent necessary to finance our business on or prior to
their respective maturities consistent with our historical experience.
Finally, we must fulfill our regulatory commitments and resolve our remaining
legal and regulatory matters on satisfactory terms. Our business, operating
results and financial condition have been significantly impacted in recent
periods by regulatory actions against us and by significant litigation matters.
Should the number or scope of regulatory or legal actions against us increase or
expand or should we be unable to reach reasonable resolutions in existing
regulatory and legal matters, our business, reputation, financial condition,
liquidity and results of operations could be materially and adversely affected,
even if we are successful in our ongoing efforts to drive stronger financial
performance. Our ability to execute on these key business initiatives is not
certain and is dependent on the successful execution of several complex actions,
including our ability to grow our lending business and acquire MSRs with
appropriate financial return targets, our ability to acquire, maintain and grow
profitable client relationships, our ability to maintain relationships with the
GSEs, Ginnie Mae , FHFA, lenders and regulators, our ability to implement further
organizational redesign and cost reduction, as well as the absence of
significant unforeseen costs, including regulatory or legal costs, that could
negatively impact our return to sustainable profitability, and our ability to
extend, renew or replace our debt agreements in the ordinary course of business.
Our ability to execute on our key initiatives has been hindered by the recent
COVID-19 environment and the impact on our organization depends on the duration
of the lockdown and the magnitude of the economic downturn. There can be no
assurances that the desired strategic and financial benefits of these actions
will be realized.
In recent periods, Ocwen has incurred significant losses as a result of declines
in the fair value of our MSRs. Further interest rate decreases, prepayment speed
increases or changes to other fair value inputs or assumptions could result in
further fair value declines and hamper our ability to return to profitability.
Starting in September 2019 , we have implemented a hedging strategy to partially
offset the changes in fair value of our net MSR portfolio. See Item 3.
Quantitative and Qualitative Disclosures About Market Risk - MSR Hedging
Strategy for further information.
During 2019, we completed an assessment of the cost-to-service and the
profitability of the NRZ servicing portfolio. Based on this analysis, in the
fourth quarter of 2019, we estimate that operating expenses, including direct
servicing expenses and overhead allocation, exceeded the net revenue retained
for the NRZ servicing portfolio by approximately $10.0 million . As with all
estimates, this estimate required the exercise of judgment, including with
respect to overhead allocations, and it excludes the benefits of the lump-sum
payment amortization. The estimated loss for these subservicing agreements is
partially
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driven by the declining revenue as the loan portfolio amortizes down without a
corresponding reduction to our servicing cost per loan over time. As performing
loans in the NRZ servicing portfolio have run-off, delinquencies have remained
high, resulting in a relatively elevated average cost per loan. Because the NRZ
portfolio contains a high percentage of delinquent accounts, it has an
inherently high level of potential operational and compliance risk and requires
a disproportionately high level of operating staff, oversight support
infrastructure and overhead which drives the elevated average cost per loan. We
actively pursue cost re-engineering initiatives to continue to reduce our
cost-to-service and corporate overhead, as well as pursue actions to grow our
non-NRZ servicing portfolio.
On February 20, 2020 , we received a notice of termination from NRZ with respect
to the legacy PMC subservicing agreement. This termination is for convenience
(and not for cause). The notice states that the effective date of termination is
June 19, 2020 for 25% of the loans under the agreement (not including loans
constituting approximately $6.6 billion in UPB that were added by NRZ under the
agreement in 2019) and August 18, 2020 for the remainder of the loans under the
agreement. The actual servicing transfer date(s) will be determined through
discussions with NRZ and other stakeholders such as GSEs. We currently expect
the deboarding of these loans in the third and fourth quarters of 2020. In
connection with the termination, we estimate that we will receive loan
deboarding fees of approximately $6.0 million from NRZ. The portfolio subject to
termination accounted for $40.0 billion in UPB, or 19% of our total serviced UPB
as of March 31, 2020 . Under this agreement, in the fourth quarter of 2019, we
estimated that operating expenses, including direct expenses and overhead
allocation, exceeded the net revenue retained for this portion of the NRZ
servicing portfolio by approximately $3.0 million . At this stage, we do not
anticipate significant operational impacts on our servicing business as a result
of this termination. The terminated servicing is comprised of Agency loans with
relatively low delinquencies that do not pose a high level of operating and
compliance risk or require substantial direct and oversight staffing relative to
our non-Agency servicing. Nonetheless, we intend to right-size and reduce
expenses in our servicing business and the related corporate support functions
to the extent possible to align with our smaller portfolio. It is possible that
the loan deboarding and other transition activities that we will undertake as a
result of the termination may not occur in an orderly or timely manner, which
could be disruptive and could result in us incurring additional costs or even in
disagreements with NRZ relating to our respective rights and obligations.
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, 2019 .
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--------------------------------------------------------------------------------The following discussion addresses each component of our statement of operations, and further detail related to our servicing, originations and corporate segments is provided in the discussion by segment.
Three Months Ended March 31,
Results of Operations Summary 2020 2019 % Change
Revenue
Servicing and subservicing fees $ 211,483 $ 256,616 (18 )%
Reverse mortgage revenue, net 22,797 32,123 (29 )
Gain on loans held for sale, net 13,331 8,982 48
Other revenue, net 6,231 6,167 1
Total revenue 253,842 303,888 (16 )
MSR valuation adjustments, net (174,120 ) (108,998 ) 60
Operating expenses
Compensation and benefits 60,728 94,696 (36 )
Servicing and origination 20,256 28,698 (29 )
Professional services 25,637 3,441 645
Technology and communications 15,193 24,435 (38 )
Occupancy and equipment 11,969 16,589 (28 )
Other expenses 3,431 3,248 6
Total operating expenses 137,214 171,107 (20 )
Other income (expense)
Interest income 5,395 4,558 18
Interest expense (29,982 ) (26,489 ) 13
Pledged MSR liability expense, net (6,594 ) (43,956 ) (85 )
Other, net 1,328 1,020 30
Total other expense, net (29,853 ) (64,867 ) (54 )
Loss before income taxes (87,345 ) (41,084 ) (46 )
Income tax (benefit) expense (61,856 ) 3,410 n/m
Net loss $ (25,489 ) $ (44,494 ) (189 )
Segment income (loss) before income taxes Servicing$ (56,096 ) $ (57,503 ) (2 )% Originations 10,381 19,860 (48 ) Corporate Items and Other (41,630 ) (3,441 ) n/m$ (87,345 ) $ (41,084 ) 113 % n/m: not meaningful Three Months EndedMarch 31, 2020 versus 2019 We reported a net loss of$25.5 million in the first quarter of 2020 driven in large part by two partially offsetting effects of the COVID-19 pandemic environment. First, the fair value of our MSRs and related MSR financing liability at fair value decreased by$125.1 million in the first quarter of 2020 due to the unprecedented decline in market interest rates, offset in part by$35.3 million gains of our hedging derivatives. Second, we recognized a$61.9 million income tax benefit in the first quarter of 2020 as the CARES Act allows the carryback of tax net operating losses (NOL) and the associated refund of taxes that we paid in prior years. While many factors impacted our results, as discussed below, the$46.3 million increase in our pre-tax net loss for the first quarter of 2020, as compared to the first quarter of 2019 is also largely explained by the$30.7 million recovery in the first quarter of 2019 of prior professional fees from a service provider. 68 -------------------------------------------------------------------------------- Total revenue was$253.8 million in the first quarter of 2020,$50.0 million or 16% lower than the first quarter of 2019, mostly due to declines in servicing fee revenue and reverse mortgage revenue. Servicing and subservicing fee revenue decreased$45.1 million , or 18%, as compared to the first quarter of 2019, primarily due to a lower serviced UPB. Reverse mortgage revenue, net decreased$9.3 million , or 29%, as compared to the first quarter of 2019 largely due to the decline in fair value of our reverse mortgage portfolio due to the COVID-19 unfavorable market conditions. See Segment Results of Operations for additional information. We reported a$174.1 million loss in MSR valuation adjustments, net in the first quarter of 2020, mostly driven by$52.7 million portfolio runoff and a$156.7 million loss due to the decline in interest rates, partially offset by$35.3 million favorable fair value gain from our MSR hedging strategy. The$65.1 million additional loss as compared to the first quarter of 2019 is primarily due to the impact of the decrease in market interest rates due to the COVID-19 pandemic. See Segment Results of Operations - Servicing for additional information. Total operating expenses decreased$33.9 million , or 20%, as compared to the first quarter of 2019 and the decrease is the result of multiple, offsetting variances, as discussed below. Compensation and benefits expense declined$34.0 million , or 36%, as compared to the first quarter of 2019, primarily due to a 24% decline in average headcount and the recognition in the first quarter of 2019 of$19.2 million of severance and retention costs incurred in connection with our 2019 cost re-engineering plan. Servicing and origination expense decreased$8.4 million , or 29%, as compared to the first quarter of 2019, primarily due to a$10.0 million decrease in servicing expenses largely as a result of a reduction in government-insured claim loss provisions and a general decline in servicer-related expenses that was primarily driven by a reduction in our servicing portfolio. See Segment Results of Operations - Servicing for additional information. Professional services expense increased$22.2 million , or 645%, as compared to the first quarter of 2019, primarily due to the$30.7 million recovery in 2019 of amounts previously recognized as expense from a service provider offset in part by a$6.6 million decline in legal fees largely due to a declines in legal expenses relating to the PHH integration, legal entity reorganization and litigation, partially offset by a$4.4 million increase to our accrual related to theCFPB andFlorida matters in the first quarter of 2020. Technology and communication expense declined$9.2 million , or 38%, as compared to the first quarter of 2019 primarily because we no longer license the REALServicing servicing system fromAltisource following our transition to Black Knight MSP inJune 2019 , a$2.9 million reduction in depreciation expense that is largely the result of a decline in capitalized technology investments, our closure ofU.S. facilities in 2019 and the effects of our other cost reduction efforts, which include bringing technology services in-house, and synergy benefits resulting from our PHH integration efforts. Occupancy and equipment expense decreased$4.6 million , or 28%, as compared to the first quarter of 2019 primarily due to the results of our cost reduction efforts, which include consolidating vendors and closing and consolidating certain facilities, and the effect of the decline in the size of the servicing portfolio on various expenses, particularly mailing services. Interest expense increased$3.5 million , or 13%, as compared to the first quarter of 2019, primarily because of$4.7 million interest on the new MSR financing facilities entered into during the third and fourth quarters of 2019, partially offset by a$2.0 million decrease in interest on advance match funded liabilities, consistent with the decline in servicing advances. Pledged MSR liability expense decreased$37.4 million , or 85%, as compared to the first quarter of 2019, largely due to a$7.9 million higher 2017/18 lump sum amortization gain and$28.1 million lower net servicing fee remittance to NRZ. These changes were mostly due to a lower UPB serviced and the termination of the PMC servicing agreement by NRZ onFebruary 20, 2020 . See Segment Results of Operations - Servicing for additional information. Although we incurred a pre-tax loss for the three months endedMarch 31, 2020 of$87.3 million , we recorded an income tax benefit of$61.9 million primarily due to$64.8 million of estimated income tax benefit to be recognized under the CARES Act 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). We recognized income tax expense, exclusive of the impact of the CARES Act, of$2.9 million due to the mix of earnings among different tax jurisdictions with different statutory tax rates. Our overall effective tax rates for the three months endedMarch 31, 2020 and 2019 were 71% and (8)%, respectively. Under our transfer pricing agreements, our operations inIndia andPhilippines are compensated on a cost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from continuing operations these foreign operations have taxable income, which is subject to statutory tax rates in these jurisdictions that are significantly higher than theU.S. statutory rate of 21%. The$65.3 million change in income tax expense for the three months endedMarch 31, 2020 , compared with the same period in 2019, was primarily due to recognition of the estimated impact of the CARES Act. See Note 16 - Income Taxes for additional information. 69 --------------------------------------------------------------------------------
December 31,
Financial Condition Summary March 31, 2020 2019 $ Change % Change
Cash $ 263,555 $ 428,339 $ (164,784 ) (38 )%
Restricted cash 53,177 64,001 (10,824 ) (17 )
MSRs, at fair value 1,050,228 1,486,395 (436,167 ) (29 )
Advances, net 1,024,807 1,056,523 (31,716 ) (3 )
Loans held for sale 246,015 275,269 (29,254 ) (11 )
Loans held for investment, at fair
value 6,591,382 6,292,938 298,444 5
Receivables 235,305 201,220 34,085 17
Other assets 521,555 601,514 (79,959 ) (13 )
Total assets $ 9,986,024 $ 10,406,199 (420,175 ) (4 )%
Total Assets by Segment
Servicing $ 2,787,250 $ 3,378,515 $ (591,265 ) (18 )%
Originations 6,739,576 6,459,367 280,209 4
Corporate Items and Other 459,198 568,317 (109,119 ) (19 )
$ 9,986,024 $ 10,406,199
HMBS-related borrowings, at fair value$ 6,323,091 $ 6,063,435 259,656 4 % Advance match funded liabilities 625,951 679,109 (53,158 ) (8 ) Other financing liabilities, at fair value 623,049 972,595 (349,546 ) (36 ) SSTL and other secured borrowings, net 797,615 1,025,791 (228,176 ) (22 ) Senior notes, net 311,290 311,085 205 - Other liabilities 875,171 942,173 (67,002 ) (7 ) Total liabilities 9,556,167 9,994,188 (438,021 ) (4 )% Total stockholders' equity 429,857 412,011 17,846 4 Total liabilities and equity$ 9,986,024 $ 10,406,199 (420,175 ) (4 )% Total Liabilities by Segment Servicing$ 2,323,103 $ 2,862,063 $ (538,960 ) (19 )% Originations 6,582,507 6,347,159 235,348 4 Corporate Items and Other 650,557 784,966 (134,409 ) (17 )$ 9,556,167 $ 9,994,188 $ (438,021 ) (4 )% The$420.2 million decrease in our balance sheet for the three months endedMarch 31, 2020 is principally attributable to the$263.7 million derecognition of MSRs and the related financing liability effective withFebruary 20, 2020 termination of the subservicing agreement between NRZ and PMC,$126.1 million of cash used to prepay a portion of the outstanding SSTL balance onJanuary 27, 2020 and the$99.5 million decrease in the Ginnie Mae contingent loan repurchase asset and corresponding liability, offset by continued growth of our reverse mortgage business with an additional$298.4 million loans held for investment and$259.7 million HMBS-related borrowings. Total equity increased$17.8 million due to a$47.0 million adjustment to stockholders' equity onJanuary 1, 2020 as a result of our election to measure future reverse mortgage draw commitments at fair value in conjunction with the application of the new credit loss accounting standard, offset by our net loss for the three months endedMarch 31, 2020 and our repurchase of 5.7 million shares of our common stock. 70 --------------------------------------------------------------------------------
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 fees. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions that own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Per loan fees typically vary based on delinquency status. As ofMarch 31, 2020 , we serviced 1.4 million loans with an aggregate UPB of$208.8 billion . The average UPB of loans serviced during the first quarter of 2020 decreased by 18% or$44.8 billion compared to the first quarter of 2019, mostly due to portfolio runoff and servicing transfers. NRZ is our largest servicing client, accounting for 55% and 60% of the UPB and loans in our servicing portfolio as ofMarch 31, 2020 , respectively. NRZ servicing fees retained by Ocwen represented approximately 24% and 27% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ, for the three months endedMarch 31, 2020 and 2019, respectively (excluding ancillary income). Consistent with a subservicing relationship, NRZ is responsible for funding the advances we service for NRZ. In 2017 and early 2018, we renegotiated the Ocwen agreements with NRZ to more closely align with a typical subservicing arrangement whereby we receive a base servicing fee and certain ancillary fees, primarily late fees, loan modification fees and Speedpay fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. We received upfront cash payments in 2018 and 2017 of$279.6 million and$54.6 million , respectively, from NRZ in connection with the resulting 2017 and New RMSR Agreements. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue Ocwen will receive under the renegotiated agreements. These upfront payments received from NRZ were deferred and are recorded within Other income (expense), Pledged MSR liability expense, as they amortize through the remaining term of the original agreements. As ofMarch 31, 2020 , the remaining unamortized payment amounted to$10.0 million . During 2019, we completed an assessment of the cost-to-service and the profitability of the NRZ servicing portfolio. Based on this analysis, in the fourth quarter of 2019, we estimated that operating expenses, including direct servicing expenses and overhead allocation, exceeded the net revenue retained for the NRZ servicing portfolio by approximately$10.0 million . As with all estimates, this estimate required the exercise of judgment, including with respect to overhead allocations, and it excluded the benefits of the lump-sum payment amortization. The estimated loss for these subservicing agreements is partially driven by the declining revenue as the loan portfolio amortizes down without a corresponding reduction to our servicing cost over time. As performing loans in the NRZ servicing portfolio have run-off, delinquencies have remained high, resulting in a relatively elevated average cost per loan. Because the NRZ portfolio contains a high percentage of delinquent accounts, it has an inherently high level of potential operational and compliance risk and requires a disproportionally high level of operating staff, oversight support infrastructure and overhead which drives the elevated average cost per loan. We pursue cost re-engineering initiatives to continue to reduce our cost-to-service and our corporate overhead, as well as pursue actions to grow our non-NRZ servicing portfolio to offset the losses on the NRZ sub servicing. 71 -------------------------------------------------------------------------------- The following table presents subservicing fees retained by Ocwen under the NRZ agreements and the amortization gain (including fair value change) of the lump-sum payments received in connection with the 2017 Agreements and New RMSR Agreements: Three Months Ended March 31, 2020 2019 Retained subservicing fees on NRZ agreements$ 29,331
24,239 16,340
Total retained subservicing fees and amortization gain
of lump-sum payments (including fair value change)
Average NRZ UPB$ 118,092,691
0.10 % 0.12 %
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. Valuation is also impacted by loan delinquency rates whereby as delinquency rates rise, the value of the servicing portfolio declines. For those MSR sale transactions with NRZ that do not achieve sale accounting treatment, we present gross the pledged MSR as an asset and the corresponding liability amount pledged MSR liability on our balance sheet. Similarly, we present the total servicing fees and the fair value changes related to the MSR sale transactions with NRZ within Servicing and subservicing fees, net and MSR valuation adjustment, net. Net servicing fee remittance to NRZ and the fair value changes of the pledged MSR liability are separately presented within Pledged MSR liability expense and are offset by the two corresponding amounts presented in other statement of operations line items. We record both our pledged MSRs with NRZ and the associated MSR liability at fair value, the changes in fair value of the pledged MSR liability were offset by the changes in fair value of the associated MSRs pledged, presented in MSR valuation adjustments, net. Although fair value changes are separately presented in our statement of operations, we are not exposed to any fair value changes of the MSR related to NRZ. OnFebruary 20, 2020 , we received a notice of termination from NRZ with respect to the PMC MSR Agreements, which accounted for$40.0 billion loan UPB. The notice states that the effective date of termination isJune 19, 2020 with respect to 25% of the Initial Mortgage Loans under the agreement andAugust 18, 2020 for the remainder of the loans under the agreement. The loans that were added by NRZ under the PMC subservicing agreement in 2019 and amounted to approximately$6.6 billion in UPB are subject to the termination with the stated effective date ofAugust 18, 2020 . In connection with the termination, we are entitled to loan deboarding fees from NRZ. This termination is for convenience and not for cause. As the sale accounting criteria were met upon the notice of termination, the MSRs and the Rights to MSRs associated with the$40.0 billion loan UPB were derecognized from our balance sheet onFebruary 20, 2020 without any gain or loss on derecognition. We continue to service these loans until deboarding, and account for them as a subservicing relationship. Accordingly, we recognized subservicing fees associated with the subservicing agreement subsequent toFebruary 20, 2020 and did not report any servicing fees collected on behalf of, and remitted to NRZ, any change in fair value, runoff and settlement in financing liability thereafter. 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. 72 --------------------------------------------------------------------------------
The following table summarizes our key servicer ratings:
PHH Mortgage Corporation
Moody's S&P Fitch
Residential Prime Servicer SQ3 Average RPS3
Residential Subprime Servicer SQ3 Average RPS3
Residential Special Servicer SQ3 Average
RSS3
Residential Second/Subordinate Lien Servicer SQ3 Average
RPS3
Residential Home Equity Servicer - - RPS3
Residential Alt-A Servicer - - RPS3
Master Servicer SQ3 Average RMS3
Ratings Outlook N/A Stable Negative
December
Date of last action August 29, 2019 27, 2019 March 24, 2020
In addition to servicer ratings, each of the agencies will from time to time
assign an outlook (or a ratings watch such as Moody's review status) to the
rating status of a mortgage servicer. A negative outlook is generally used to
indicate that a rating "may be lowered," while a positive outlook is generally
used to indicate a rating "may be raised." On March 24, 2020 , Fitch placed all
U.S RMBS servicer ratings on Negative outlook resulting from a rapidly evolving
economic and operating environment due to the sudden impact of the COVID-19
virus.
Downgrades in servicer ratings could adversely affect our ability to service
loans, sell or finance servicing advances and could impair our ability to
consummate future servicing transactions or adversely affect our dealings with
lenders, other contractual counterparties, and regulators, including our ability
to maintain our status as an approved servicer by Fannie Mae and Freddie Mac.
The servicer rating requirements of Fannie Mae do not necessarily require or
imply immediate action, as Fannie Mae has discretion with respect to whether we
are in compliance with their requirements and what actions it deems appropriate
under the circumstances if we fall below their desired servicer ratings.
73
--------------------------------------------------------------------------------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 March 31,
2020 2019 % Change
Revenue
Servicing and subservicing fees Residential$ 210,827 $ 255,211 (17 )% Commercial 727 1,227 (41 ) 211,554 256,438 (18 ) Gain on loans held for sale, net 842 1,216 (31 ) Other revenue, net 1,159 1,620 (28 ) Total revenue 213,555 259,274 (18 ) MSR valuation adjustments, net (174,436 ) (108,914 ) 60 Operating expenses Compensation and benefits 26,786 40,403 (34 ) Servicing and origination 14,934 24,887 (40 ) Occupancy and equipment 9,030 12,607 (28 ) Professional services 5,071 11,423 (56 ) Technology and communications 7,255 9,500 (24 ) Corporate overhead allocations 17,793 57,594 (69 ) Other expenses (396 ) 570 (169 ) Total operating expenses 80,473 156,984 (49 ) Other income (expense) Interest income 1,886 2,294 (18 ) Interest expense (13,667 ) (10,742 ) 27 Pledged MSR liability expense (6,623 ) (43,956 ) (85 ) Other, net 3,662 1,525 140 Total other expense, net (14,742 ) (50,879 ) (71 ) Loss before income taxes$ (56,096 ) $ (57,503 ) (2 )% n/m: not meaningful 74
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The following tables provide selected operating statistics:
At
2020 2019 % Change
Residential Assets Serviced
Unpaid principal balance (UPB) in billions:
Performing loans (2) $ 196.1 $ 239.4 (18 )%
Non-performing loans 10.6 9.8 8
Non-performing real estate 2.1 1.9 11
Total (1) 208.8 251.1 (17 )%
Conventional loans (3) $ 92.8 $ 124.5 (25 )%
Government-insured loans 31.6 28.1 12
Non-Agency loans 84.4 98.5 (14 )
Total $ 208.8 $ 251.1 (17 )%
Percent of total UPB:
Servicing portfolio 37 % 30 % 23 %
Subservicing portfolio (4) 8 20 (60 )
NRZ (5) 55 50 10
Non-performing residential assets serviced 6 5 20
Number:
Performing loans (2) 1,326,642 1,475,824 (10 )%
Non-performing loans 55,905 49,199 14
Non-performing real estate 13,769 9,328 48
Total 1,396,316 1,534,351 (9 )%
Conventional loans (3) 593,213 664,937 (11 )%
Government-insured loans 193,670 183,757 5
Non-Agency loans 609,433 685,657 (11 )
Total 1,396,316 1,534,351 (9 )%
Percent of total number:
Servicing portfolio 34 % 31 % 10 %
Subservicing portfolio (4) 6 9 (33 )
NRZ (5) 60 60 -
Non-performing residential assets serviced 5 4 25
75--------------------------------------------------------------------------------
Three Months Ended March 31,
2020 2019 % Change
Residential Assets Serviced
Average UPB:
Servicing portfolio $ 74.0 $ 73.3 1 %
Subservicing portfolio 16.8 52.0 (68 )
NRZ (5) 118.1 128.3 (8 )
Total $ 208.9 $ 253.6 (18 )%
Prepayment speed (average CPR) 15 % 12 % 25 %
% Voluntary 93 88 6
% Involuntary 7 12 (42 )
% CPR due to principal modification - 1 (100 )
Average number:
Servicing portfolio 451,832 462,438 (2 )%
Subservicing portfolio 73,500 148,794 (51 )
NRZ (5) 874,778 937,414 (7 )
1,400,110 1,548,646 (10 )%
Residential Servicing and Subservicing Fees
Loan servicing and subservicing fees:
Servicing $ 55,080 $ 52,515 5 %
Subservicing 5,190 6,207 (16 )
NRZ 119,669 155,847 (23 )
179,939 214,569 (16 )
Late charges 14,598 15,338 (5 )
Custodial accounts (float earnings) 6,131 11,909 (49 )
Loan collection fees 4,252 4,262 -
HAMP fees 408 1,777 (77 )
Other 5,499 7,356 (25 )
$ 210,827 $ 255,211 (17 )%
Number of Completed Modifications
Non-HAMP 8,325 8,032 4
HAMP - 253 (100 )%
Total 8,325 8,285 - %
n/m: not meaningful
(1) Includes 35,170 and 33,242 reverse mortgage loans, recorded on our balance
sheet and classified as loans held for investment, with a UPB of
and
(2) 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.
(3) Conventional loans include 107,352 and 107,954 prime loans with a UPB of
which we service or subservice. Prime loans are generally good credit quality
loans that meet GSE underwriting standards.
(4) Decline in subservicing is due to the termination of a subservicing client
relationship consisting of 33,626 loans with a UPB of
31, 2019, total servicing fee revenue for this client was
(5) Loans serviced or subserviced pursuant to our agreements with NRZ.
76
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March 31, 2020 December 31, 2019
Foreclosures, Foreclosures,
Dollars in Principal and Taxes and bankruptcy, REO Principal and Taxes and bankruptcy, REO
millions Interest Insurance and other Total Interest Insurance and other Total
Advances by
investor type
Conventional $ 4 $ 16 $ 27 $ 47 $ 4 $ 20 $ 27 $ 51
Government-insured 1 37 29 67 - 47 26 73
Non-Agency 421 329 161 911 410 354 168 932
Total, net $ 426 $ 382 $ 217 $ 1,025 $ 414 $ 421 $ 221 $ 1,056
March 31, 2020 December 31, 2019
UPB UPB
Advances ($ ($ billions) Advances ($ ($ billions)
Advances by MSR ownership millions) (3) millions) (3)
Servicer $ 923 $ 68.0 $ 976 $ 67.6
Master Servicer (1) - 1.8 - 1.8
Subservicer 49 17.8 38 17.3
NRZ (2) 53 113.9 42 118.6
Total, net $ 1,025 $ 201.5 $ 1,056 $ 205.3 (1) Excludes relationships where we are both master servicer and servicer
(included in Servicer).
(2) Pursuant to the 2017 Agreements and New RMSR Agreements, NRZ is obligated to
fund new servicing advances with respect to the MSRs underlying the Rights to
MSRs. We are dependent upon NRZ for funding the servicing advance obligations
for Rights to MSRs where we are the servicer. As the servicer, we are
contractually required under our servicing agreements to make certain
servicing advances even if NRZ does not perform its contractual obligations
to fund those advances. NRZ currently uses advance financing facilities in
order to fund a substantial portion of the servicing advances that they are
contractually obligated to purchase pursuant to our agreements with them.
(3) Excludes reverse mortgage loans reported on our unaudited consolidated
balance sheets and classified as loans held for investment. No separate MSRs
are recognized in our unaudited consolidated balance sheets.
77--------------------------------------------------------------------------------
Three Months Ended March 31,
2020 2019 % Change
Financing Costs
Average balance of advances $ 1,035,669 $ 1,147,164 (10 )%
Average borrowings
Advance match funded liabilities 674,441 717,652 (6 )
Other secured borrowings 427,228 93,201 358
Interest expense on borrowings
Advance match funded liabilities 5,665 7,652 (26 )
Other secured borrowings 5,637 1,715 229
Effective average interest rate
Advance match funded liabilities 3.36 % 4.27 % (21 )
Other secured borrowings 5.28 7.36 (28 )
Facility costs included in interest expense $ 2,193 $ 1,283 71
Average 1ML 0.92 % 2.49 % (63 )
Average Employment
India and other 3,018 3,675 (18 )%
U.S. 752 1,517 (50 )%
Total 3,770 5,192 (27 )%
The following table provides information regarding the changes in our portfolio of residential assets serviced or subserviced:
Amount of UPB (in billions) Count
2020 2019 2020 2019
Portfolio at January 1 $ 212.4 $ 256.0 1,419,943 1,562,238
Additions (1) (2) 6.9 4.7 28,781 16,419
Sales (0.1 ) (0.1 ) (720 ) (723 )
Servicing transfers (2) (2.2 ) (0.4 ) (8,527 ) (3,092 )
Runoff (8.2 ) (9.1 ) (43,161 ) (40,491 )
Portfolio at March 31 $ 208.8 $ 251.1 1,396,316 1,534,351
(1) Additions in the first quarter of 2020 include purchased MSRs on portfolios
consisting of 12,584 loans with a UPB of
transferred to the Black Knight MSP servicing system. These loans are
scheduled to transfer onto Black Knight MSP in the second quarter of 2020.
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 between the transaction closing date
and the servicing transfer date.
(2) Excludes the volume UPB associated with short-term interim subservicing for
some clients as a support to their originate-to-sell business, where loans
are boarded and deboarded within the same quarter. To conform to the current
period presentation, 2,011 short-term interim subservicing loans with a UPB
of
for the quarter ended
The key drivers of our servicing segment operating results for the three months endedMarch 31, 2020 , as compared to the same period of 2019, are portfolio runoff and the effects of cost improvements achieved in aligning our servicing operations more appropriately to the size of our servicing portfolio. Until the Black Knight MSP conversion was completed inJune 2019 , we were maintaining the infrastructure and related costs of two servicing platforms, including certain corporate functions. Three Months EndedMarch 31, 2020 versus 2019 Servicing and subservicing fee revenue declined by$44.9 million , or 18%, as compared to the first quarter of 2019 due to portfolio runoff and the termination of the PMC agreement by NRZ onFebruary 20, 2020 , offset in part by additional fees earned on MSRs acquired sinceMarch 31, 2019 . The average UPB of our portfolio declined 18% as compared to the first 78 -------------------------------------------------------------------------------- quarter of 2019. The total number of loan modifications was essentially unchanged as compared to the first quarter of 2019. Float income declined by$5.8 million , or 49%, as compared to the first quarter of 2019 mainly due to the combined effect of lower custodial account balances and lower interest rates. Revenue recognized in connection with loan modifications, including servicing fees, late charges and HAMP fees, declined 8% to$10.6 million for the first quarter of 2020 as compared to$11.6 million in the first quarter of 2019. The termination of the PMC servicing agreement by NRZ both reduced the amount of servicing fee collected on behalf of NRZ that is reported as Servicing and subservicing fees and the amount of servicing fee remitted to NRZ that is reported as Pledged MSR liability expense, without any impact on the net servicing fee retained, that is reported as subservicing fee afterFebruary 20, 2020 . Ocwen will not perform any subservicing of the loans subject to termination and will not earn any subservicing fee after loan deboarding, which is expected in the third and fourth quarter of 2020. We reported a$174.4 million loss in MSR valuation adjustments, net in the first quarter of 2020. This decline in MSR fair value is driven by$53.0 million portfolio runoff, a$156.7 million loss due to the decline in interest rates and assumptions, partially offset by a$35.3 million favorable fair value gain from our MSR hedging strategy. The fair value loss reported in MSR valuation adjustments, net, increased$65.5 million , or 60%, as compared to the first quarter of 2019, primarily due to the interest rate impact, with a 117 basis-point decline in the 10-year swap rate in the first quarter of 2020, as compared to the 30 basis-point decline in the first quarter of 2019. The$174.4 million loss reported in MSR valuation adjustments, net is partially offset by a$56.9 million gain reported in our statement of operations relating to the pledged MSR liability. MSRs have been sold under different agreements that did not qualify for sale accounting treatment and, therefore are reported as MSR assets together with an associated liability for the MSR failed-sale secured borrowing at fair value. Because both pledged MSRs and the associated MSR liability are measured at fair value, changes in fair value offset each other, although they are separately presented in our statement of operations, as MSR valuation adjustments, net and Pledged MSR liability expense, respectively. The following table summarizes the fair value change impact on our statement of operations of our total MSRs and the MSRs liability associated with the NRZ failed-sale accounting treatment during the first quarter of 2020: Total Change in Rate and In millions Fair Value Runoff Assumption Change MSR Hedging MSR valuation adjustments, net (1)$ (174.1 ) $ (52.7 ) $ (156.7 ) $ 35.3 Pledged MSR liability expense - Fair value changes (2) 56.9 25.3 31.6 - Total$ (117.2 ) $ (27.4 ) $ (125.1 ) $ 35.3
(1) Includes
(2) Includes changes in fair value, including runoff and settlement, of the NRZ
related MSR liability under the Original Rights to MSRs Agreements and PMC
MSR Agreements. See Note 8 - Rights to MSRs for further information.
As described in the table above, Ocwen's MSR portfolio, net of the pledged MSR liability, incurred a fair value loss due to interest rates of$125.1 million in the first quarter of 2020, that was partially offset by a$35.3 million fair value gain due to our MSR hedging strategy. Operating expenses decreased$76.5 million , or 49%, as compared to the first quarter of 2019, mostly due to our integration and cost reduction initiatives that favorably and equally impacted our direct cost to service and our corporate overhead cost allocation, as discussed below. Compensation and benefits expense declined$13.6 million , or 34%, as compared to the first quarter of 2019, due to our efforts to re-engineer our cost structure and align headcount in our servicing operations with the size of our servicing portfolio. Our average total servicing headcount decreased 27% compared to the first quarter of 2019. The decline in compensation and benefits is also due to the change in the composition of our headcount with relatively more offshore, and lessU.S. resources. Offshore headcount, whose average compensation cost is relatively lower, increased from 71% to 80% of total headcount, compared to the first quarter of 2019. Servicing and origination expense declined$10.0 million , or 40%, as compared to the first quarter of 2019, primarily due to a$2.5 million reduction in government-insured claim loss provisions on reinstated or modified loans in line with a decline in the volume of claims, a$2.5 million decrease in provisions for non-recoverable servicing advances and receivables and a general decline in other servicer-related expenses that was primarily driven by a 10% reduction in the average number of loans in our servicing portfolio. Government-insured claim loss provisions are generally offset by changes in the fair value of the corresponding MSRs, which are recorded in MSR valuation adjustments, net. 79 -------------------------------------------------------------------------------- Occupancy and equipment expense decreased$3.6 million , or 28%, as compared to the first quarter of 2019, largely because of the effect of the decline in the size of the servicing portfolio on various expenses, particularly mailing services. Professional services expense declined$6.4 million , or 56%, as compared to the first quarter of 2019, primarily due to a$5.6 million decline in legal fees largely due to declines in legal expenses relating to the PHH integration and litigation and a decline in fees incurred in connection with the conversion of NRZ's Rights to MSRs to fully-owned MSRs. Technology and communication expense declined$2.2 million , or 24%, as compared to the first quarter of 2019, primarily because we no longer license the REALServicing servicing system fromAltisource following our transition to Black Knight MSP inJune 2019 . Corporate overhead allocations declined$39.8 million , as compared to the first quarter of 2019, primarily due to lower legal fees, technology expenses and compensation and benefits. Refer to the Corporate Items and Other segment discussion. Interest expense increased by$2.9 million , or 27%, as compared to the first quarter of 2019, primarily because of the new MSR financing facilities entered into during the third and fourth quarters of 2019, partially offset by a reduction in interest expense relating to servicing advances. Pledged MSR liability expense decreased$37.3 million , as compared to first quarter of 2019, largely due to a$7.9 million higher 2017/18 lump sum amortization gain and$28.1 million lower net servicing fee remittance to NRZ. These changes were mostly due to a lower UPB serviced and the termination of the PMC servicing agreement by NRZ onFebruary 20, 2020 . Pledged MSR liability expense relates to the MSR sale agreements with NRZ that do not achieve sale accounting and are presented on a gross basis in our financial statements. The$6.6 million expense in the first quarter of 2020 primarily includes a$90.3 million net servicing fee remittance to NRZ partially offset by a$24.2 million amortization gain related to the lump-sum cash payments received from NRZ in connection with the 2017 Agreements and New RMSR Agreements in 2017 and 2018, and a$56.9 million fair value gain on the pledged MSR liability. See Note 8 - Rights to MSRs to the Unaudited Consolidated Financial Statements. Three Months Ended March 31, Change Amounts in millions 2020 2019 2020 vs 2019 Net servicing fee remittance to NRZ (a)$ 90.3 $ 118.4 $ (28.1 ) 2017/2018 lump sum amortization (gain) (24.2 ) (16.3 ) (7.9 ) Pledged MSR liability fair value (gain) loss (b) (56.9 ) (60.0 ) 3.1 Other (2.6 ) 1.8 (4.4 ) Pledged MSR liability expense$ 6.6 $ 43.9 $ (37.3 )
(a) Offset by corresponding amount recorded in Servicing and subservicing fee -
See table below.
(b) Offset by corresponding amount recorded in MSR valuation adjustments, net -
See table below.
The table below reflects the condensed statement of operations together with the included amounts related to the NRZ pledged MSRs that offset each other (nil impact on net income/loss). Net servicing fee remittance and pledged MSR fair value changes are presented on a gross basis and are offset by corresponding amounts presented in other statement of operations line items. In addition, because we record both our pledged MSRs and the associated pledged MSR liability at fair value, the changes in fair value of the pledged MSR liability were offset by the changes in fair value of the MSRs pledged, presented in MSR valuation adjustments, net. Accordingly, only the$24.2 million lump sum amortization gain and the$2.6 million in "Other" affect our net earnings. 80
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