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. We are a leading mortgage special servicer, servicing 1.4 million loans with a total UPB of$206.0 billion on behalf of more than 4,000 investors and 179 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 servicing flow agreements, GSE Cash Window and Co-issue programs, opportunistic bulk purchase transactions, and new subservicing agreements. 63 -------------------------------------------------------------------------------- Over the past year, we have built a multi-channel, scalable originations platform that creates sustainable sources of replenishment and growth of our servicing portfolio, as detailed below. We determine our target returns for each channel, however, the channel and delivery selection is generally our clients' decision. Amounts in billions UPB Quarter Ended Quarter Ended Quarter Ended Quarter Ended June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 Mortgage servicing originations Recapture MSR (1) $ 0.32 $ 0.20 $ 0.17 $ 0.13 Correspondent MSR (1) 0.66 0.51 0.40 0.09 Flow purchases MSR (3) 0.51 0.82 0.24 - GSE Cash Window MSR (3) 2.33 0.52 0.55 0.12 Reverse mortgage servicing (2) 0.21 0.23 0.26 0.19 Total servicing originations 4.03 2.28 1.62 0.53 Bulk MSR purchases (3) - 1.54 2.74 1.03 Total servicing additions 4.03 3.82 4.36 1.56 Subservicing additions (4) 4.59 3.14 3.79 3.75 Total servicing and subservicing UPB additions (2) $ 8.62 $ 6.96 $ 8.15 $ 5.31
(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 acquired.
(4) 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.
COVID-19 Pandemic Update InMarch 2020 , theWorld Health Organization (WHO ) categorized COVID-19 as a pandemic and the COVID-19 outbreak was declared a national emergency. The efforts to contain the spread of the COVID-19 pandemic have adversely affected economic conditions, including high levels of unemployment, and are creating uncertainties about the duration and magnitude of the economic downturn. Ocwen has rapidly adapted to the COVID-19 global pandemic and is currently operating through a secure remote workforce model for approximately 98% of its global workforce. We adhere to COVID-19 health and safety-related requirements and best practices across all of our locations. Ocwen is an experienced special servicer with proven capability to assist borrowerswho are facing financial difficulties and generate positive outcomes for mortgage loan investors. During the second quarter of 2020, we have demonstrated we had 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 and forbearance portfolios. The CARES Act signed inMarch 2020 allows borrowers with federally backed mortgage loanswho 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 an additional forbearance period of up to 180 days for FHA andVA guaranteed loans. During any period of forbearance, servicers must also provide related protection, including, but not limited to, suspension of late fees, as well as foreclosure and eviction activity. Servicers are restricted from pursuing certain foreclosure and eviction activity on all occupied, federally backed mortgage loans until at leastAugust 31, 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 generally grant eligible borrowers an initial three months of forbearance and related protection, including suspension of late fees, as well as suspension of foreclosure and eviction activity. 64 -------------------------------------------------------------------------------- Generally, borrowers are required to repay their suspended or reduced mortgage payments after the forbearance period ends unless an alternate loss mitigation solution is reached, which we anticipate will include extensions of forbearance, payment deferrals, repayment plans, and loan modifications, depending on the borrower's situation, account status, and applicable investor guidelines. Before the completion of each period of forbearance, Ocwen attempts to contact the borrowers to assess their ability to resume making payments and discuss other options which may be available if their hardship persists. Ocwen conducts different outreach events, in partnership with non-profit housing advocacy groups to further assist borrowers. OnJune 10, 2020 , Fannie Mae and Freddie Mac announced the servicer incentive for their previously announced COVID-19 payment deferral, and temporary updates to other servicer incentives, which became effective onJuly 1, 2020 . Subject to certain eligibility criteria, servicers will receive incentive fees of$500 for repayment plans with a first payment due date on or afterJuly 1, 2020 and for payment deferrals completed on or afterJuly 1, 2020 , and will receive an incentive fee of$1,000 for completed Flex Modifications with a trial plan period effective date on or afterJuly 1, 2020 . Total servicer incentives per mortgage loan will be cumulatively capped at$1,000 . Loans under forbearance rose significantly inApril 2020 , in response to the increase in unemployment claims and to a lesser impact, inMay 2020 . Consistent with the industry trend, the volume of forbearance plans stabilized inJune 2020 and started decreasing inJuly 2020 . In addition, 35% of borrowers under forbearance plans continued to make payments as ofJune 30, 2020 . As ofJune 30, 2020 , we managed 131,400 loans under forbearance, 39,900 of which related to our owned MSRs excluding NRZ, or 9.6% and 8.5% of the total portfolios, respectively. See below chart of new and closed forbearance plans during COVID-19 for our total serviced and subserviced portfolios: [[Image Removed: chart-3b7e2a0ee012ff81375.jpg]] (*): throughJuly 29, 2020 Determining the COVID-19 impact on our financial performance in the second quarter of 2020 requires management to use judgment, including the estimation of those variances that are directly attributable to COVID-19 factors. The below discussion includes some comparisons with the financial performance of the first quarter of 2020 to isolate the impact of certain COVID-19 factors. We estimate that the overall impact of COVID-19 on our financial performance during the second quarter of 2020 has not been as significant as previously anticipated, due to multiple offsetting factors, mainly due to the natural hedge between our growing Originations business and our Servicing business, i.e., the increased profitability of our Originations business largely offset the adverse COVID-19 conditions on our Servicing business in the second quarter of 2020. The COVID-19 environment has resulted in reduced servicing revenue during the second quarter of 2020. Our ancillary income decreased in the second quarter of 2020 by approximately$5.4 million as a result of the significant drop in interest rates (specifically, 1-month LIBOR). In addition, we did not collect any servicing fees and certain ancillary income, including late and collection fees, on non-paying forbearance loans and on loan foreclosures and liquidations due to the foreclosure moratorium. We estimate our servicing fees declined by$3.1 million in the second quarter of 2020 due to COVID-19 (excluding NRZ). Our subservicing fees were not significantly impacted by the COVID-19 environment because the borrower's delinquency or forbearance does not affect the collection of our compensation. As such, subservicing fees and net servicing fees related to NRZ (collection on behalf of NRZ), net of remittances to NRZ (recorded as MSR pledged liability expense) relating to the$20.0 billion and$109.0 billion UPB respectively, were not significantly impacted by the COVID-19 environment as per the terms of the subservicing agreements, whereby borrower's delinquency or forbearance does not affect the collection of our subservicing fee. The decrease or delay in servicing fee collection where we operate as servicer, i.e., relating to the$70.5 billion UPB, was partially offset by the lower runoff of loans in forbearance in our MSR portfolio in the second quarter of 2020, as the deferred servicing fees or GSE incentive fees generally remain projected as future cash flows. The MSR runoff of forbearance loans was partially offset by higher prepayments in our GSE portfolios, with historically high voluntary CPRs due to lower mortgage interest rates. 65 -------------------------------------------------------------------------------- The overall fair value changes of our MSR portfolio during the second quarter of 2020 attributable to rates and assumptions were also not significantly impacted by the COVID-19 environment, due to certain offsetting factors. Rates declined modestly during the second quarter of 2020 (8 basis point decline in the 10-year swap rate) and we previously increased the coverage ratio of our macro-hedging strategy to mitigate our exposure to rates. In addition, the fair value changes of the NRZ MSR are offset in our income statement by the fair value changes of the pledged MSR liability. We also recorded a$13.2 million MSR valuation gain in the second quarter of 2020 relating to certain MSRs that we opportunistically purchased in a disorderly market due to the COVID-19 environment. Our cost to service and operating expenses were not significantly impacted by COVID-19 during the second quarter of 2020 due to two main offsetting factors. Loans in forbearance required more intensive effort and, 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. During the second quarter of 2020, we incurred$6.1 million additional expense related to COVID-19, including$2.8 million stipend and overtime,$1.6 million staff augmentation to manage our call center increased activity, and$1.2 million technology costs to adapt to our remote working model. The temporary moratorium on evictions and foreclosure sales reduced our expenses, for example due to lower conveyance volumes withGinnie Mae loans. Furthermore, we did not incur any significant change to our interest expense. The increase in our servicing advances for loans in forbearance was more than offset by our collection and recovery efforts and by the surge in prepayments. In addition, the moratorium on evictions and foreclosures delayed certain corporate advances. The recent declines in interest rates and the continued execution of our originations strategy have led to an increase in our originations volume and improved margins. We continue to replenish and grow our owned MSR portfolio despite the significant runoff and voluntary prepayments (excluding NRZ's MSR portfolio). Refer to the discussion below of our Originations segment. Looking ahead, the spread of the COVID-19 pandemic may continue, with the risk of resurgence in certain areas. The different responses from the government and other authorities to keep social distancing and to support individuals experiencing financial hardship have continued to evolve. The disruption created by the pandemic and the measures being taken have given rise to elevated unemployment levels. As of today, uncertainties related to the duration and severity of the economic downturn remain, without any indications of a rapid recovery. The business disruption triggered by COVID-19 could ultimately have a material and adverse effect our business, financial condition, liquidity or results of operations. 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. We are executing on each of these initiatives and believe we will continue to drive stronger financial performance. These initiatives include: • Expanding our originations business to replenish and grow our servicing
portfolio;
• Re-engineering our cost structure to maintain an industry cost competitive
position;
• Effectively managing our balance sheet to ensure adequate liquidity,
finance our ongoing business needs and provide a solid platform for
executing on our growth initiatives; and,
• Fulfilling our regulatory commitments and resolving remaining legacy and
regulatory matters.
First, we must continue to expand our Originations business to replenish and grow our servicing portfolio and mitigate our client concentration risk with NRZ. We expect to continue to focus on selectively acquiring Agency and government-insured MSR portfolios that meet or exceed our minimum targeted investment returns. We executed on our plans to re-enter the forward lending correspondent channel in the second quarter of 2019 and we have built a multi-channel, scalable originations platform, with the launch of the FNMA SMP program inJune 2020 . Second, we must continue to re-engineer our cost structure. Our continuous cost improvement efforts are focused on reducing operating and overhead costs through facility rationalization, strategic sourcing and actions, off-shore utilization, lean process design, simplification, automation and other technology-enabled productivity enhancements. Our initiatives are targeted at delivering superior accuracy, cost, speed and customer satisfaction. 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 growth initiatives. To this end, we have engaged bankers to assist us in exploring all strategic options to leverage our proven operating capability in this environment as we seek to fully realize the value of our platform. Finally, we must fulfill our regulatory commitments and resolve our remaining legal and regulatory matters on satisfactory terms, including the legacyCFPB andFlorida matters. 66 -------------------------------------------------------------------------------- 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 endedDecember 31, 2019 . 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. Results of Operations Three Months Ended June 30, Six Months Ended June 30, Summary 2020 2019 % Change 2020 2019 % Change Revenue Servicing and subservicing fees$ 175,240 $ 239,960 (27 )%$ 386,723 $ 496,576 (22 )% Reverse mortgage revenue, net 13,759 20,493 (33 ) 36,556 52,616 (31 )% Gain on loans held for sale, net 33,547 8,318 303 46,878 17,300 171 Other revenue, net 4,478 5,567 (20 ) 10,709 11,734 (9 ) Total revenue 227,024 274,338 (17 )
480,866 578,226 (17 )
MSR valuation adjustments, net (23,434 ) (147,268 ) (84 )
(197,554 ) (256,266 ) (23 )
Operating expenses Compensation and benefits 65,017 82,283 (21 ) 125,745 176,979 (29 ) Servicing and origination 17,361 21,510 (19 ) 37,617 50,208 (25 ) Professional services 23,818 37,136 (36 ) 49,455 40,577 22 Technology and communications 16,111 20,001 (19 ) 31,304 44,436 (30 ) Occupancy and equipment 16,136 18,699 (14 ) 28,105 35,288 (20 ) Other expenses 6,366 4,597 38 9,797 7,845 25 Total operating expenses 144,809 184,226 (21 ) 282,023 355,333 (21 ) Other income (expense) Interest income 3,566 3,837 (7 ) 8,961 8,395 7 Interest expense (26,760 ) (28,641 ) (7 ) (56,742 ) (55,130 ) 3 Pledged MSR liability expense, net (41,686 ) (2,930 ) n/m (48,280 ) (46,886 ) 3 Other, net (57 ) 557 (110 ) 1,271 1,577 (19 ) Total other expense, net (64,937 ) (27,177 ) 139
(94,790 ) (92,044 ) 3
Loss before income taxes (6,156 ) (84,333 ) (93 ) (93,501 ) (125,417 ) (25 ) Income tax (benefit) expense (8,110 ) 5,404 (250 ) (69,966 ) 8,814 (894 ) Net income (loss)$ 1,954 $ (89,737 ) (102 )
(23,535 ) (134,231 ) (82 )
Segment income (loss) before income taxes Servicing$ 10,385 $ (59,006 ) (118 )%$ (45,711 ) $ (116,508 ) (61 )% Originations 29,439 8,359 252 39,820 28,219 41 Corporate Items and Other (45,980 ) (33,686 ) 36
(87,610 ) (37,128 ) 136
$ (6,156 ) $ (84,333 ) (93 )%$ (93,501 ) $ (125,417 ) (25 )% n/m: not meaningful 67
-------------------------------------------------------------------------------- Three Months EndedJune 30, 2020 versus 2019 We reported net income of$2.0 million in the second quarter of 2020 versus a net loss of$89.7 million in the second quarter of 2019. Total revenue was$227.0 million in the second quarter of 2020,$47.3 million or 17% lower than the second quarter of 2019, mostly due to declines in servicing fee revenue and reverse mortgage revenue, offset in part by an increase in gains on loans held for sale. Servicing and subservicing fee revenue decreased$64.7 million , or 27%, as compared to the second quarter of 2019, with a$52.7 million decline in NRZ servicing fees, primarily due to a lower serviced UPB and an increase in non-paying forbearance and delinquent loans as a result of the COVID-19 pandemic. Reverse mortgage revenue, net decreased$6.7 million , or 33%, as compared to the second quarter of 2019 largely due to the decline in fair value of our reverse mortgage portfolio due to rates and assumptions and the impact of the fair value election onJanuary 1, 2020 of tail draws. The$25.2 million , or 303%, increase in gains on loans held for sale is due to the increase in forward loan production, from both our recapture channel, fueled by industry-wide refinance activity, and our correspondent channel that we re-started in the second quarter of 2019. See Segment Results of Operations for additional information. We reported a$23.4 million loss in MSR valuation adjustments, net in the second quarter of 2020, mostly driven by$31.2 million portfolio runoff partially offset by a$7.5 million favorable fair value gain from our MSR hedging strategy and$13.2 million valuation gain on certain MSRs opportunistically purchased in a disorderly market. The$123.8 million reduction in loss as compared to the second quarter of 2019 is primarily due to a lower decline in market interest rates, derecognition of MSRs in connection with the termination of the PMC agreement by NRZ onFebruary 20, 2020 and the effects of the MSR hedging program implemented onSeptember 1, 2019 . See Segment Results of Operations - Servicing for additional information. Total operating expenses decreased$39.4 million , or 21%, as compared to the second quarter of 2019 and the decrease is the result of multiple variances, as discussed below. Compensation and benefits expense declined$17.3 million , or 21%, as compared to the second quarter of 2019, primarily due to our cost re-engineering initiatives that resulted in a 19% decline in average headcount and the recognition in the second quarter of 2019 of$3.5 million of severance and retention costs. Offshore headcount, whose average compensation cost is relatively lower, increased from 65% to 72% of average total headcount, compared to the second quarter of 2019. Servicing and origination expense decreased$4.1 million , or 19%, as compared to the second quarter of 2019, primarily due to a$4.3 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 decreased$13.3 million , or 36%, as compared to the second quarter of 2019, primarily due to a$13.0 million decline in legal fees relating to the PHH integration, legal entity reorganization and litigation. Technology and communication expense declined$3.9 million , or 19%, as compared to the second quarter of 2019 primarily because we no longer license the REALServicing servicing system fromAltisource following our transition to Black Knight MSP inJune 2019 , a$1.8 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 a decline in total average headcount and our other cost reduction efforts, which include bringing technology services in-house and re-engineering initiatives. Occupancy and equipment expense decreased$2.6 million , or 14%, as compared to the second 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. Depreciation expense declined$2.2 million as compared to the second quarter of 2019. Pledged MSR liability expense increased$38.8 million , as compared to the second quarter of 2019, largely due to fair value gains and runoff related to the PMC MSR Agreements in the second quarter of 2019 and a lower 2017/18 lump sum amortization gain, offset in part by lower net servicing fee remittance to NRZ. These changes were mostly due to termination of the PMC servicing agreement by NRZ onFebruary 20, 2020 , final amortization of the 2017/2018 upfront cash payments inApril 2020 and a lower UPB serviced. See Segment Results of Operations - Servicing for additional information. Six Months EndedJune 30, 2020 versus 2019 We reported a net loss of$23.5 million in the six months endedJune 30, 2020 , as compared to a net loss of$134.2 million in the six months endedJune 30, 2019 . The net loss reported in the six months endedJune 30, 2020 is 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$123.9 million due to the decline in market interest rates, offset in part by$42.8 million gains of our hedging derivatives. Second, we recognized a$70.0 million income tax benefit for the six months endedJune 30, 2020 as the CARES Act 68 -------------------------------------------------------------------------------- allows the carryback of tax net operating losses (NOL) and the associated refund of taxes that we paid in prior years. Total revenue was$480.9 million for the six months endedJune 30, 2020 ,$97.4 million or 17% lower than the six months endedJune 30, 2019 , primarily due to declines in servicing fee revenue and reverse mortgage revenue, offset in part by an increase in gains on loans held for sale. Servicing and subservicing fee revenue decreased$109.9 million , or 22%, as compared to the six months endedJune 30, 2019 , with an$88.9 million decline in NRZ servicing fees, primarily due to a lower serviced UPB and an increase in non-paying forbearance and delinquent loans as a result of the COVID-19 pandemic. Reverse mortgage revenue, net decreased$16.1 million , or 31%, as compared to the six months endedJune 30, 2019 largely due to the decline in fair value of our reverse mortgage portfolio. The$29.6 million , or 171%, increase in gains on loans held for sale is mostly due to the increase in forward loan production, from both our recapture channel, fueled by industry-wide refinance activity, and from our correspondent channel that we re-started in the second quarter of 2019. See Segment Results of Operations for additional information. We reported a$197.6 million loss in MSR valuation adjustments, net in the six months endedJune 30, 2020 , mostly driven by a$156.5 million loss due to the decline in interest rates and$83.9 million portfolio runoff, partially offset by$42.8 million favorable fair value gain from our MSR hedging strategy. The$58.7 million reduction in loss as compared to the six months endedJune 30, 2019 is primarily due to derecognition of MSRs in connection with the termination of the PMC agreement by NRZ onFebruary 20, 2020 and the effects of the MSR hedging program, offset in part by the impact of the additional decline in interest rates (126 basis-point decline in the 10-year swap rate). See Segment Results of Operations - Servicing for additional information. Total operating expenses declined$73.3 million , or 21%, as compared to the six months endedJune 30, 2019 and the decrease is the result of multiple, offsetting variances, as discussed below. Compensation and benefits expense declined$51.2 million , or 29%, as compared to the six months endedJune 30, 2019 , primarily due to a 21% decline in average headcount and the recognition during the six months endedJune 30, 2019 of$24.2 million of severance and retention costs incurred in connection with our 2019 cost re-engineering plan. Offshore headcount increased from 65% to 72% of average total headcount, compared to the six months endedJune 30, 2019 . Servicing and origination expense decreased$12.6 million , or 25%, as compared to the six months endedJune 30, 2019 , primarily due to a$14.3 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$8.9 million , or 22%, as compared to the six months endedJune 30, 2019 , primarily due to the$30.7 million recovery in the first quarter of 2019 of amounts previously recognized as expense from a service provider and a$4.4 million increase to our accrual related to theCFPB andFlorida matters in the first quarter of 2020, offset in part by a$24.0 million decline in legal fees largely due to a decline in legal expenses relating to the PHH integration, legal entity reorganization and litigation. Technology and communication expense decreased$13.1 million , or 30%, as compared to the six months endedJune 30, 2019 primarily because we no longer license the REALServicing servicing system fromAltisource following our transition to Black Knight MSP inJune 2019 , a$4.6 million reduction in depreciation expense that is largely the result of a decline in capitalized technology investments, our closure ofU.S. facilities in 2019, the effects of a decline in total average headcount and our other cost reduction efforts and re-engineering actions. Occupancy and equipment expense decreased$7.2 million , or 20%, as compared to the six months endedJune 30, 2019 primarily due to the results of our cost reduction efforts and the effect of the decline in the size of the servicing portfolio on various expenses, particularly mailing services. Depreciation expense declined$3.8 million as compared to the six months endedJune 30, 2019 . Pledged MSR liability expense increased$1.4 million , or 3%, as compared to the six months endedJune 30, 2019 , largely due to a decline in fair value gains and runoff related to the PMC MSR Agreements and lower 2017/18 lump sum amortization gain, offset by a lower net servicing fee remittance to NRZ. These changes were primarily attributed to termination of the PMC servicing agreement by NRZ onFebruary 20, 2020 , final amortization of the 2017/2018 upfront cash payments inApril 2020 and a lower UPB serviced. See Segment Results of Operations - Servicing for additional information. Although we incurred a pre-tax loss for the six months endedJune 30, 2020 of$93.5 million , we recorded an income tax benefit of$70.0 million primarily due to$65.0 million of estimated income tax benefit to be recognized under the CARES Act related to tax years 2018 and 2019 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 an income tax benefit, exclusive of the impact of the CARES Act to tax years 2018 and 2019, of$5.0 million primarily due to the favorable resolution of an uncertain tax position during the six months endedJune 30, 2020 . 69 -------------------------------------------------------------------------------- Our overall effective tax rates for the six months endedJune 30, 2020 and 2019 were 74.8% and (7.0)%, 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$78.8 million change in income tax expense for the six months endedJune 30, 2020 , compared with the same period in 2019, was primarily due to recognition of the estimated impact of the CARES Act as well as the favorable resolution of an uncertain tax position during the six months endedJune 30, 2020 . See Note 16 - Income Taxes for additional information. December
31,
Financial Condition Summary June 30, 2020 2019 $ Change % Change Cash$ 313,736 $ 428,339 $ (114,603 ) (27 )% Restricted cash 63,813 64,001 (188 ) - MSRs, at fair value 1,044,914 1,486,395 (441,481 ) (30 ) Advances, net 901,009 1,056,523 (155,514 ) (15 ) Loans held for sale 278,517 275,269 3,248 1 Loans held for investment, at fair value 6,730,656 6,292,938 437,718 7 Receivables 247,616 201,220 46,396 23 Other assets 730,177 601,514 128,663 21 Total assets$ 10,310,438 $
10,406,199
Total Assets by Segment Servicing$ 2,835,486 $ 3,378,515 $ (543,029 ) (16 )% Originations 6,965,683 6,459,367 506,316 8 Corporate Items and Other 509,269
568,317 (59,048 ) (10 )
$ 10,310,438 $
10,406,199
HMBS-related borrowings, at fair value
612,650 679,109 (66,459 ) (10 )
Other financing liabilities, at fair value 594,222 972,595 (378,373 ) (39 )
SSTL and other secured borrowings, net 847,331 1,025,791 (178,460 ) (17 )
Senior notes, net 311,484 311,085 399 -
Other liabilities 1,034,366 942,173 92,193 10
Total liabilities 9,877,669 9,994,188 (116,519 ) (1 )%
Total stockholders' equity 432,769 412,011 20,758 5
Total liabilities and equity $ 10,310,438 $
10,406,199
Total Liabilities by Segment Servicing$ 2,444,558 $ 2,862,063 $ (417,505 ) (15 )% Originations 6,794,256 6,347,159 447,097 7 Corporate Items and Other 638,855 784,966 (146,111 ) (19 )$ 9,877,669 $ 9,994,188 $ (116,519 ) (1 )% Book value per share $ 3.33 $
3.06
(1) Pro forma book value per share reflects the number of common stock shares
giving consideration for the 1-to-15 reverse stock split approved on
2020 and expected to be effective in August 2020 , assuming it was
retroactively effective as of each of the dates presented. See Note 13 -
Equity and Note 17 - Basic and Diluted Earnings (Loss) per Share to the
Unaudited Consolidated Financial Statements for additional information.
70-------------------------------------------------------------------------------- The$95.8 million decrease in our balance sheet for the six months endedJune 30, 2020 is attributable to multiple offsetting changes. First, the MSR portfolio decreased by$441.5 million or 30%. The decrease is mostly due to the$263.7 million derecognition of NRZ related MSRs effective with theFebruary 20, 2020 notice of termination of the subservicing agreement between NRZ and PMC, and a$197.6 million MSR valuation loss due to the decline in interest rates, mostly recognized in the first quarter of 2020 due to the distressed COVID-19 market conditions. Second, our cash balance decreased by$126.1 million to prepay a portion of the outstanding SSTL balance onJanuary 27, 2020 . Third, our total assets increased with an additional$437.7 million loans held for investment due to the continued growth of our reverse mortgage business. Fourth, the$128.7 million increase in other assets is mostly attributable to the increase in the Ginnie Mae contingent repurchase rights of loans under forbearance. Total liabilities decreased by$116.5 million with similar effects as described above. First, the$378.4 million decline in Other financing liabilities is mostly due to the$263.7 million derecognition of NRZ pledged MSR liability onFebruary 20, 2020 upon termination of the subservicing agreement between NRZ and PMC, and MSR valuation adjustments due to interest rates. Second, the SSTL liability decreased as a result of our$126.1 million prepayment onJanuary 27, 2020 . Third, our HMBS-related borrowings increased by$414.2 million due to the continued growth of our reverse mortgage business and its securitization. Fourth, the$92.2 million increase in other liabilities is mostly attributable to the increase in the Ginnie Mae contingent repurchase rights of loans under forbearance. Total equity increased$20.8 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 the$23.5 million net loss for the six months endedJune 30, 2020 , and our repurchase of 5.7 million shares of our common stock during the first quarter. 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. 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 ofJune 30, 2020 , we serviced 1.4 million loans with an aggregate UPB of$206.0 billion . The average UPB of loans serviced during the second quarter of 2020 decreased by 14% or$34.0 billion compared to the second quarter of 2019, mostly due to portfolio runoff, net of newly originated and acquired MSRs and certain servicing transfers in the second quarter of 2019. NRZ is our largest servicing client, accounting for 53% and 60% of the UPB and loans in our servicing portfolio as ofJune 30, 2020 , respectively. NRZ servicing fees retained by Ocwen represented approximately 23% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ and excluding ancillary income, for both the three and six months endedJune 30, 2020 , and 27% for both the three and six months endedJune 30, 2019 . 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$54.6 million , respectively, from NRZ in connection with the resulting 2017 and New RMSR Agreements. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue Ocwen received under the renegotiated agreements. These upfront payments received from NRZ were deferred and recorded within Other income (expense), Pledged MSR liability expense, as they amortized through the term of the original agreements (April 2020 ). 71 -------------------------------------------------------------------------------- The following table presents subservicing fees retained by Ocwen under the NRZ agreements and the amortization gain (including fair value change) of the lump-sum payments received in connection with the 2017 Agreements and New RMSR Agreements: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Retained subservicing fees on NRZ agreements (1)$ 25,523 $ 35,905 $ 54,855 $ 73,312 Amortization gain of the lump-sum cash payments received (including fair value change) recorded as a reduction of Pledged MSR liability expense 9,979 30,696 34,218 47,036 Total retained subservicing fees and amortization gain of lump-sum payments (including fair value change)$ 35,502 $ 66,601 $ 89,073 $ 120,348 Average NRZ UPB (2)$ 72,878,102 $ 123,856,714 $ 75,886,160 $ 126,114,653 Average annualized retained subservicing fees as a % of NRZ UPB 0.14 % 0.12 % 0.14 % 0.12 %
(1) Excludes the servicing fees of loans under the PMC Servicing Agreement after
fees earned under subservicing agreements.
(2) Excludes the UPB of loans subserviced under the PMC Servicing Agreement after
UPB of loans under subservicing agreements.
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 adjustments, net, respectively. 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$37.1 billion loan UPB, or 285,237 loans atJune 30, 2020 . In connection with the termination, we are entitled to loan deboarding fees from NRZ. Loan deboarding is under discussion with NRZ and is currently planned for September andOctober 2020 , though is subject to various requirements that may delay the process. 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$37.1 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 recognize subservicing fees associated with the subservicing agreement subsequent toFebruary 20, 2020 and do 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 June 30 ,
Six Months Ended
2020 2019 % Change 2020 2019 % Change
Revenue
Servicing and
subservicing fees
Residential $ 174,361 $ 238,536 (27 )% $ 385,188 $ 493,747 (22 )%
Commercial 687 616 12 1,414 1,843 (23 )
175,048 239,152 (27 ) 386,602 495,590 (22 )
Gain on loans held
for sale, net 4,572 1,723 165 5,414 2,939 84
Other revenue, net 816 1,635 (50 ) 1,975 3,255 (39 )
Total revenue 180,436 242,510 (26 ) 393,991 501,784 (21 )
MSR valuation adjustments, net (36,604 ) (147,199 ) (75 )
(211,040 ) (256,113 ) (18 )
Operating expenses Compensation and benefits 28,675 40,834 (30 ) 55,461 81,237 (32 ) Servicing and origination 12,811 17,157 (25 ) 27,745 42,043 (34 ) Occupancy and equipment 8,345 11,868 (30 ) 17,375 24,475 (29 ) Professional services 8,802 11,037 (20 ) 13,873 22,460 (38 ) Technology and communications 6,701 7,649 (12 ) 13,956 17,149 (19 ) Corporate overhead allocations 16,081 53,721 (70 ) 33,874 111,315 (70 ) Other expenses 1,325 622 113 929 1,192 (22 ) Total operating expenses 82,740 142,888 (42 ) 163,213 299,871 (46 ) Other income (expense) Interest income 1,438 1,872 (23 ) 3,324 4,165 (20 ) Interest expense (12,890 ) (11,261 ) 14 (26,557 ) (22,003 ) 21 Pledged MSR liability expense (41,714 ) (2,930 ) n/m (48,337 ) (46,886 ) 3 Other, net 2,459 890 176 6,121 2,416 153 Total other expense, net (50,707 ) (11,429 ) 344
(65,449 ) (62,308 ) 5
Income (loss) before income taxes$ 10,385 $ (59,006 ) (118 )%$ (45,711 ) $ (116,508 ) (61 )% n/m: not meaningful 74
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The following tables provide selected operating statistics:
June 30,
2020 2019 % Change
Residential Assets Serviced
Unpaid principal balance (UPB) in billions:
Performing loans (2) $ 191.9 $ 220.7 (13 )%
Non-performing loans 12.5 6.5 92
Non-performing real estate 1.6 2.1 (24 )
Total (1) 206.0 229.3 (10 )%
Conventional loans (3) $ 90.8 $ 106.4 (15 )%
Government-insured loans 33.4 29.2 14
Non-Agency loans 81.8 93.7 (13 )
Total (1) $ 206.0 $ 229.3 (10 )%
Servicing portfolio $ 77.0 $ 80.2 (4 )%
Subservicing portfolio 20.0 27.4 (27 )
NRZ (4) 109.0 121.7 (10 )
Total (1) $ 206.0 $ 229.3 (10 )
Number:
Performing loans (2) 1,293,817 1,443,253 (10 )%
Non-performing loans 63,819 36,860 73
Non-performing real estate 9,776 10,916 (10 )
Total (1) 1,367,412 1,491,029 (8 )%
Conventional loans (3) 576,361 639,648 (10 )%
Government-insured loans 199,034 187,527 6
Non-Agency loans 592,017 663,854 (11 )
Total (1) 1,367,412 1,491,029 (8 )%
Servicing portfolio 471,811 487,933 (3 )%
Subservicing portfolio 81,210 105,060 (23 )
NRZ (4) 814,391 898,036 (9 )
Total (1) 1,367,412 1,491,029 (8 )
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Three Months Ended June 30 ,
Six Months Ended
2020 2019 % Change 2020 2019 % Change
Residential Assets
Serviced
Average UPB:
Servicing portfolio $ 77.4 $ 78.9 (2 )% $ 75.5 $ 76.3 (1 )%
Subservicing
portfolio 18.6 38.6 (52 ) 17.7 44.6 (60 )
NRZ (4) 111.5 123.9 (10 ) 114.9 126.1 (9 )
Total $ 207.5 $ 241.4 (14 )% $ 208.1 $ 247.0 (16 )%
Prepayment speed
(CPR) (5) 18.9 % 15.2 % 24 % 17.1 % 13.8 % 24 %
% Voluntary CPR (5) 14.5 10.5 38 12.5 9.1 37
% Involuntary CPR (5) 1.3 1.2 8 1.2 1.6 (25 )
Average number:
Servicing portfolio 476,118 484,538 (2 )% 462,415 473,961 (2 )%
Subservicing
portfolio 77,714 122,013 (36 ) 75,084 134,503 (44 )
NRZ (5) 828,116 910,325 (9 ) 852,774 924,069 (8 )
1,381,948 1,516,876 (9 )% 1,390,273 1,532,533 (9 )%
Residential Servicing
and Subservicing Fees
Loan servicing and
subservicing fees:
Servicing $ 51,737 $ 54,942 (6 )% $ 106,817 $ 107,457 (1 )%
Subservicing 10,623 4,203 153 15,812 10,410 52
NRZ 88,405 141,091 (37 ) 208,073 296,938 (30 )
150,765 200,236 (25 ) 330,702 414,805 (20 )
Late charges 12,619 13,182 (4 ) 27,217 28,520 (5 )
Custodial accounts
(float earnings) 1,590 13,288 (88 ) 7,720 25,198 (69 )
Loan collection fees 2,741 3,395 (19 ) 6,993 7,657 (9 )
HAMP fees 20 1,565 (99 ) 428 3,342 (87 )
Other 6,626 6,870 (4 ) 12,128 14,225 (15 )
$ 174,361 $ 238,536 (27 )% $ 385,188 $ 493,747 (22 )%
Number of Completed
Modifications
Non-HAMP 7,263 5,051 44 15,588 13,083 19
HAMP - 250 (100 )% - 503 (100 )%
Total 7,263 5,301 37 % 15,588 13,586 15 %
n/m: not meaningful
(1) Includes 35,214 and 33,521 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 103,611 and 123,747 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) Loans serviced or subserviced pursuant to our agreements with NRZ.
(5) Average CPR includes voluntary and involuntary prepayments and scheduled
principal amortization (not reflected in the above table).
76
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June 30, 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 $ 3 $ 20 $ 10 $ 34 $ 4 $ 20 $ 27 $ 51
Government-insured - 34 27 62 - 47 26 73
Non-Agency 333 301 172 805 410 354 168 932
Total, net $ 336 $ 355 $ 209 $ 901 $ 414 $ 421 $ 221 $ 1,056
June 30, 2020 December 31, 2019
UPB UPB
Advances ($ ($ billions) Advances ($ ($ billions)
Advances by MSR ownership millions) (3) millions) (3)
Servicer $ 848 $ 70.5 $ 976 $ 67.6
Master Servicer (1) 4 1.7 - 1.8
Subservicer 40 20.0 38 17.3
NRZ (2) 9 109.0 42 118.6
Total, net (3) $ 901 $ 201.2 $ 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
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Three Months Ended June 30 ,
Six Months Ended
2020 2019 % Change 2020 2019 % Change
Financing Costs
Average balance of
advances $ 908,111 $ 1,147,164 (21 )% $ 987,683 $ 1,087,925 (9 )%
Average borrowings
Advance match funded
liabilities 625,360 646,369 (3 ) 649,900 681,813 (5 )
Other secured
borrowings 437,069 74,074 490 555,595 83,585 565 %
Interest expense on
borrowings
Advance match funded
liabilities 7,311 7,045 4 12,976 14,697 (12 )
Other secured
borrowings 4,422 1,206 267 10,059 2,921 244
Effective average
interest rate
Advance match funded
liabilities 4.68 % 4.36 % 7 % 3.99 % 4.31 % (7 )%
Other secured
borrowings 4.05 6.51 (38 ) 3.62 6.99 (48 )
Facility costs
included in interest
expense $ 3,548 $ 1,369 159 % $ 5,741 $ 2,652 116 %
Average 1ML 0.36 % 2.44 % (85 )% 0.90 % 2.47 % (64 )%
Average Employment
India and other 3,018 3,497 (14 )% 3,019 3,585 (16 )%
U.S. 747 1,452 (49 )% 751 1,482 (49 )%
Total 3,765 4,949 (24 )% 3,770 5,067 (26 )%
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
Additions (1) 8.5 8.9 28,949 34,123
Sales (0.1 ) (0.2 ) (720 ) (1,288 )
Servicing transfers (2) (0.9 ) (20.7 ) (3,862 ) (29,625 )
Runoff (10.2 ) (9.8 ) (53,271 ) (46,532 )
Portfolio at June 30 $ 206.0 $ 229.3 1,367,412 1,491,029
(1) Additions in the second quarter of 2020 include purchased MSRs on portfolios
consisting of 1,682 loans with a UPB of
transferred to the Black Knight MSP servicing system as of
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 as 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 until 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, 6,186 short-term interim subservicing loans with a UPB
of
the quarter ended June 30, 2019 are not reflected in the table above.
78
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The following table provides information regarding the changes in the fair value
and the UPB of our portfolio of owned MSR, excluding NRZ during the second
quarter of 2020:
Quarter ended June 30, 2020
Fair Value UPB
Non- Non-
Conventional Government- insured Agency Total Conventional Government-insured Agency Total
Beginning
balance $ 216.5 $ 80.2 $ 161.3 $ 458.0 $ 30.0 $ 15.3 $ 24.8 $ 70.1
Additions
New cap. 7.1 2.0 - 9.1 0.8 0.2 - 1.0
Purchases 15.3 - - 15.3 2.8 - 0.2 3.0
Servicing
transfers
and
adjustments - - 1.3 1.3 - - - -
Sales/calls - - (0.1 ) (0.1 ) - - - -
Change in
fair value
Runoff (14.4 ) (2.7 ) (5.6 ) (22.7 ) (2.8 ) (0.8 ) (1.2 ) (4.8 )
Assumptions 7.2 (3.6 ) (2.1 ) 1.5 - - - -
Ending
balance $ 231.7 $ 75.9 $ 154.8 $ 462.4 $ 30.8 $ 14.7 $ 23.8 $ 69.3
Three Months Ended June 30, 2020 versus 2019
Servicing and subservicing fee revenue declined by $64.1 million , or 27%, as
compared to the second quarter of 2019, with a $52.7 million decline in NRZ
servicing fees, mostly due to the decline in the UPB serviced for NRZ,
derecognition of MSRs in connection with the termination of the PMC agreement by
NRZ on February 20, 2020 , and, to a lesser impact, the COVID-19 market
environment. The average UPB of our portfolio declined 14% as compared to the
second quarter of 2019, mostly due to portfolio runoff, net of newly originated
and acquired MSRs and certain servicing transfers in the second quarter of 2019.
While our servicing fees with NRZ decreased due to derecognition of MSRs in
connection with the termination of the PMC servicing agreement by NRZ on
February 20, 2020 , the net servicing fee retained by Ocwen was not materially
impacted during the period by such termination as we continue to subservice the
loans through deboarding. 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
after February 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 currently planned for September and October 2020 , though is
subject to various requirements that may delay the process.
As discussed in the COVID-19 section above, our servicing fees also decreased as
a result of the loans under forbearance that were not paying during the second
quarter of 2020. We did not recognize any servicing fees on GSE loans under
forbearance and have a shortfall of one month of servicing fees for PLS loans
under forbearance.
Ancillary income declined by $14.7 million primarily due to an $11.7 million , or
88%, decline in float income as compared to the second quarter of 2019 that was
mainly due to lower interest rates, with the average 1-month LIBOR rate dropping
more than 200 basis points as compared to the second quarter of 2019. The
combined effect of lower servicing volume, as discussed above, and the COVID-19
environment with no late fees or collection fees on loans under forbearance also
contributed to the decline in ancillary income. Revenue recognized in connection
with loan modifications, including servicing fees, late charges and HAMP fees,
increased 22% to $9.5 million for the second quarter of 2020 as compared to $7.8
million in the second quarter of 2019.
We reported a $36.6 million loss in MSR valuation adjustments, net in the second
quarter of 2020. This decline in MSR fair value is driven by $30.9 million
portfolio runoff and a $13.3 million loss due to the decline in interest rates
and assumptions, partially offset by a $7.5 million favorable fair value gain
from our MSR hedging strategy. The fair value loss reported in MSR valuation
adjustments, net, decreased $110.6 million , or 75%, as compared to the second
quarter of 2019, primarily due to derecognition of MSRs in connection with the
notice of termination of the PMC agreement by NRZ on
79
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February 20, 2020 , the impact of interest rates and the effects of the MSR
hedging program implemented on September 1, 2019 . The value of the MSRs under
the PMC agreement with NRZ declined $63.6 million in the second quarter of 2019.
The 10-year swap rate declined 8 basis points in the second quarter of 2020, as
compared to a 45 basis-point decline in the second quarter of 2019.
The $36.6 million loss reported in MSR valuation adjustments, net is partially
offset by a $9.1 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 second quarter of 2020:
Total Change in Rate and
In millions Fair Value Runoff Assumption Change MSR Hedging
MSR valuation adjustments, net (1) $ (36.6 ) $ (30.9 ) $ (13.3 ) $ 7.5
Pledged MSR liability expense - Fair
value changes (2) 9.1 8.1 1.0 -
Total $ (27.5 ) $ (22.8 ) $ (12.3 ) $ 7.5
(1) Excludes
disorderly market, that is recognized in the Originations segment.
(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.
The notice of termination of the PMC servicing agreement with NRZ inFebruary 2020 resulted in the derecognition of the associated MSR and pledged MSR liability. Accordingly, sinceFebruary 2020 , we have not recorded any fair value changes of the MSR and the pledged MSR liability relating to the NRZ PMC subservicing agreement, which resulted in lower runoff, and lower volatility due to rates and assumptions (due to lower UPB) in the above two individual line items of our statement of operations in the second quarter of 2020. 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 and assumptions of$12.3 million in the second quarter of 2020, that was partially offset by a$7.5 million fair value gain on our MSR hedging strategy. Our macro-hedge strategy includes other financial instruments not presented in this table. Refer to Item 3 - Quantitative and qualitative disclosures about market risk for further detail on our hedge strategy and its effectiveness. Operating expenses decreased$60.1 million , or 42%, as compared to the second 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$12.2 million , or 30%, as compared to the second 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 24% compared to the second 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 second quarter of 2019. Servicing and origination expense declined$4.3 million , or 25%, as compared to the second quarter of 2019, primarily due to a$3.7 million reduction in government-insured claim loss provisions on reinstated or modified loans in line with a decline in the volume of claims due to the COVID-19 moratorium and a general decline in other servicer-related expenses that was primarily driven by a 9% 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. Occupancy and equipment expense decreased$3.5 million , or 30%, as compared to the second quarter of 2019, largely because of the effect of the decline in the size of the servicing portfolio on various direct and allocated expenses, and the decline in our overall occupancy and equipment expenses due to certain facility closures as part of the integration of PHH. Professional services expense declined$2.2 million , or 20%, as compared to the second quarter of 2019, primarily due to a$4.2 million decline in legal fees largely due to declines in legal expenses relating to the PHH integration and litigation and a 80 -------------------------------------------------------------------------------- decline in fees incurred in connection with the conversion of NRZ's Rights to MSRs to fully-owned MSRs, partially offset by a$1.3 million increase in outsourcing expenses to manage the call center increased activity due to COVID-19. Corporate overhead allocations declined$37.6 million , as compared to the second quarter of 2019, primarily due to lower legal fees, technology expenses and compensation and benefits. The relative weight of average headcount to the consolidated organization declined as compared to the second quarter of 2019. Furthermore, the allocation methodology of corporate overhead was updated in the first quarter 2020 and resulted in lower expenses being allocated to the Servicing segment. Refer to the Corporate Items and Other segment discussion. Interest expense increased by$1.6 million , or 14%, as compared to the second quarter of 2019, primarily because of the new MSR financing facilities entered into during the third and fourth quarters of 2019. Pledged MSR liability expense increased$38.8 million , as compared to second quarter of 2019, largely due to termination of the PMC servicing agreement by NRZ onFebruary 20, 2020 , final amortization of the 2017/2018 upfront cash payments inApril 2020 and a lower UPB serviced. Fair value gains and runoff on the PMC MSR Agreements for the second quarter of 2019 were$47.8 million and$15.8 million , respectively, and the 2017/18 lump sum amortization gain was$20.7 million lower in the second quarter of 2020. The notice of termination of the PMC servicing agreement with NRZ inFebruary 2020 resulted in the derecognition of the associated MSR and pledged MSR liability. Accordingly, sinceFebruary 2020 , we have not recorded any fair value changes of the MSR and the pledged MSR liability relating to the NRZ PMC subservicing agreement, which resulted in lower runoff, and lower volatility due to rates and assumptions (due to lower UPB) in the above two individual line items of our statement of operations in the second quarter of 2020. These increases in Pledged MSR liability expense were partially offset by a$42.3 million lower net servicing fee remittance to NRZ as compared to the second quarter of 2019. Pledged MSR liability expense relates to the MSR sale agreements with NRZ that do not achieve sale accounting and are presented on a gross basis in our financial statements. The$41.7 million expense in the second quarter of 2020 primarily includes a$62.9 million net servicing fee remittance to NRZ partially offset by a$10.0 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$9.1 million fair value gain on the pledged MSR liability. See Note 8 - Rights to MSRs to the Unaudited Consolidated Financial Statements. Three Months Ended June 30, Change Amounts in millions 2020 2019 2020 vs 2019 Net servicing fee remittance to NRZ (a)$ 62.9 $ 105.2 $ (42.3 ) 2017/2018 lump sum amortization (gain) (10.0 ) (30.7 ) 20.7 Pledged MSR liability fair value (gain) loss (b) (9.1 ) (73.3 ) 64.2 Other (2.1 ) 1.7 (3.8 ) Pledged MSR liability expense$ 41.7 $ 2.9 $ 38.8
(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 consolidated 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$10.0 million lump sum amortization gain and the$2.1 million in "Other" affect our net earnings. 81
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