OCWEN FINANCIAL CORP - Annual Report: 2010 (Form 10-K)

 

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2010
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from: _____________________to _____________________

 

 

 

Common Stock, $.01 par value		New York Stock Exchange (NYSE)
(Title of each class)		(Name of each exchange on which registered)

 

 

 

 

 

 

 

Large Accelerated filer  x	Accelerated filer                                o
Non-accelerated filer      o (Do not check if a smaller reporting company)	Smaller reporting company               o

 

 

 

 

 

			PAGE
PART I
Item 1.	Business		3
Item 1A.	Risk Factors		15
Item 1B.	Unresolved Staff Comments		22
Item 2.	Properties		23
Item 3.	Legal Proceedings		23
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		24
Item 6.	Selected Financial Data		25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		50
Item 8.	Financial Statements and Supplementary Data		53
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		53
Item 9A.	Controls and Procedures		53
Item 9B.	Other Information		54
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		54
Item 11.	Executive Compensation		54
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		54
Item 13.	Certain Relationships and Related Transactions, and Director Independence		54
Item 14.	Principal Accounting Fees and Services		54
PART IV
Item 15.	Exhibits, Financial Statement Schedules		54
Signatures			57

 

 

 

	●	assumptions related to the sources of liquidity, our ability to fund advances and the adequacy of financial resources;
	●	estimates regarding prepayment speeds, float balances, delinquency rates, advances and other servicing portfolio characteristics;
	●	projections as to the performance of our asset management vehicles;
	●	assumptions about our ability to grow or otherwise adapt our business;
	●	our plans to continue to sell our non-core assets;
	●	our ability to reduce our cost structure;
	●	our continued ability to successfully modify delinquent loans and sell foreclosed properties;
	●	estimates regarding our reserves, valuations and anticipated realization on assets; and
	●	expectations as to the effect of resolution of pending legal proceedings on our financial condition.

 

	●	availability of adequate, affordable and timely sources of liquidity;
	●	delinquencies, advances and availability of servicing;
	●	general economic and market conditions;
	●	uncertainty related to the actions of loan owners, including mortgage-backed securities investors, regarding loan putbacks and other servicing practices;
	●	uncertainty related to the processes for judicial and non-judicial foreclosure proceedings, including potential additional costs, delays or moratoria in the future or claims pertaining to past practices;
	●	uncertainty related to inquiries from government agencies into past servicing and foreclosure practices;
	●	uncertainty related to legislation, regulations, government programs and policies, and industry initiatives; and
	●	uncertainty related to dispute resolution and litigation.

 

 

 

ITEM 1.

BUSINESS (Dollars in thousands, unless otherwise indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

	●	Lowest Cost Provider. We believe that OLS has the lowest operating cost in the sub-prime mortgage servicing industry and special servicing industry. Based on average industry cost information provided by a third party valuation consultant on November 30, 2010, OLS’ net cost to service a non-performing loan was 63% lower than the average net cost for the subprime industry.
	●	Scalable Servicing Platform. We believe that OLS has the most scalable platform in the subprime and special servicing industries primarily as a result of our superior technology. Recent examples of our ability to scale our platform include:

 

		●	Transfer in, via a special servicing agreement, of approximately $4 billion of delinquent Freddie Mac loans in August of 2009
		●	Transfer in, via a subservicing agreement, of approximately $9.7 billion of subprime loans in November and December of 2009,
		●	Transfer in, via a mortgage servicing rights (MSRs) acquisition, of approximately $6.9 billion of subprime loans in April and May of 2010; and
		●	The HomEq Acquisition of approximately $22.4 billion of subprime loans on September 1, 2010.

●

Superior Loss Mitigation and Cash Management. We believe that OLS provides the highest servicing quality in the subprime sector based on the following third-party studies:

		●	Credit Suisse (2008) – Ocwen had the highest payment rate of all servicers on 90+ delinquent loans for 2006 vintage subprime loans. Ocwen’s payment rate was more than double the midpoint of all servicers reported.
		●	Bank of America/Merrill Lynch (July 2009) – Ocwen had the highest roll rate from 90+ delinquent to current on both fixed rate and adjustable rate subprime loans. Ocwen’s results were more than double the midpoint for all servicers reported.
		●	Deutsche Bank (May 2010) – Ocwen was ranked first in a measure called “Recovery Score,” which evaluates the results of short sales and real estate owned sales based on the timeline to liquidate and loss severity.
		●	J.P. Morgan (June 2010) – Ocwen was ranked first in Quality Rank, which considers the re-default rate for loans modified.
		●	Fannie Mae Reports on the federal Home Affordable Modification Program (HAMP) (various dates in 2010) – Ocwen was consistently ranked among the top three servicers in terms of the number of trial modifications and the speed of converting trial modifications to permanent modifications.

●

Generate Substantial Cash Flow. Our servicing business generates substantial cash flow. Healthy margins are augmented by the add-back of non-cash amortization expense. Cash flow is further enhanced by reducing delinquencies and the associated advances which allows Ocwen to recover the advance haircut and reduce asset intensity.

 

 

 

 

	1.	Access to new servicing business
	2.	Cost of servicing
	3.	Ability to manage delinquencies and advances
	4.	Cost of capital

 

 

	1.	Acquisition of existing servicing platforms
	2.	Special servicing opportunities (both residential and commercial)
	3.	Flow servicing
	4.	New servicing segments

 

	●	On March 29, 2010, we entered into a Servicing Rights Purchase and Sale Agreement under which we agreed to purchase from Saxon Mortgage Services, Inc. the rights to service approximately 38,000 mortgage loans with an aggregate UPB of approximately $6.9 billion (the Saxon Acquisition). This acquisition was completed on May 3, 2010.
	●	On May 28, 2010, we entered into an Asset Purchase Agreement pursuant to which OLS agreed to acquire the U.S. non-prime mortgage servicing business known as HomEq Servicing. The HomEq Acquisition closed on September 1, 2010, and we boarded approximately 134,000 residential loans with an aggregate UPB of approximately $22.4 billion onto Ocwen’s platform increasing the size of our Servicing business to $76.7 billion in UPB on the closing date.

 

 

 

Ocwen has been a party to loan sales and securitizations dating back to the 1990s. The majority of securities issued in these transactions has been retired and are not subject to putback risk. There is one remaining securitization with an original UPB of approximately $200,000 where Ocwen provided representations and warranties and the loans were originated in the last decade. Ocwen performed due diligence on each of the loans included in this securitization. The outstanding UPB of this securitization was $58,132 at December 31, 2010 and outstanding notes were $59,007. Ocwen is not aware of any inquiries or claims regarding loan putbacks for any transaction where we made representations and warranties. We do not expect loan putbacks to result in any material change to our financial position, operating results or liquidity.

 

 

 

	·	Servicing
	·	Loans and Residuals
	·	Asset Management Vehicles (AMV)

 

 

 

 

 

		2010								2009								2008
Segment		$					%			$					%			$					%
External Revenue
Servicing		$	358,441				99.5	%		$	271,561				71.3	%		$	339,278				69.0	%
Loans and Residuals			—				—				—				—				—				—
Asset Management Vehicles			523				0.1				1,381				0.4				2,751				0.6
Mortgage Services			—				—				54,052				14.2				58,706				11.9
Financial Services			—				—				40,293				10.6				73,835				15.0
Technology Products			—				—				12,375				3.2				17,402				3.5
Corporate Items and Other			1,417				0.4				1,066				0.3				156				—
Consolidated		$	360,381				100.0	%		$	380,728				100.0	%		$	492,128				100.0	%
Income (Loss) from Continuing Operations before Income Taxes
Servicing		$	78,195				199.7	%		$	87,681				94.0	%		$	100,770				325.2	%
Loans and Residuals			(2,846	)			(7.3	)			(9,121	)			(9.8	)			(14,682	)			(47.4	)
Asset Management Vehicles			(797	)			(2.0	)			(5,317	)			(5.7	)			(9,813	)			(31.7	)
Mortgage Services			—				—				17,815				19.1				13,262				42.8
Financial Services			—				—				(5,969	)			(6.4	)			(7,875	)			(25.4	)
Technology Products			—				—				9,590				10.3				3,580				11.6
Corporate Items and Other			(35,398	)			(90.4	)			(1,418	)			(1.5	)			(54,260	)			(175.1	)
Consolidated		$	39,154				100.0	%		$	93,261				100.0	%		$	30,982				100.0	%

 

 

 

 

 

	●	fees from the federal government for HAMP (from completing new HAMP modifications and from the continued success of prior HAMP modifications on the anniversary date of the HAMP trial modification);
	●	interest earned on loan payments that we have collected but have not yet remitted to the owner of the mortgage (float earnings);
	●	referral commissions from brokers for REO properties sold through our network of brokers;
	●	Speedpay® fees from borrowers who pay by telephone or through the Internet; and
	●	late fees from borrowers who were delinquent in remitting their monthly mortgage payments and have subsequently become current.

 

 

	1.	When a loan becomes current via our non-HAMP modification process, we earn $500 of deferred servicing fees and $300 of late fees. (Note: If any debt is forgiven as part of a non-HAMP modification, no late fees are collected or earned.)
	2.	When a loan becomes current via our HAMP modification process, we earn $500 on deferred servicing fees, and we earn initial HAMP fees of $1,000, or $1,500 if the loan was in imminent risk of default. However, we forfeit $300 of late fees. If the loan is in imminent risk of default but not delinquent, we recognize no deferred servicing fees.
	3.	When a loan is modified under HAMP and remains less than 90 days delinquent, we earn, at the first, second or third anniversary of the start of the trial modification, up to a $1,000 HAMP success fee on each anniversary. We expect HAMP success fees soon to exceed initial HAMP fees.

 

	1.	The loan and borrower are evaluated for HAMP eligibility. If HAMP criteria are met, HAMP documentation and trial offer phases proceed. The three most common reasons for failure to qualify for HAMP are (i) existing loan terms are already below a 31% debt to income (DTI) ratio, (ii) inadequate documentation or (iii) inadequate or inconsistent income.
	2.	If the criteria to qualify for HAMP are not met, the loan and borrower are evaluated utilizing non-HAMP criteria that are more flexible and focus both on the borrower’s ability to pay and on maximizing net present value for investors. If the criteria are met, non-HAMP documentation and trial modification and/or modification phases proceed.
	3.	If the loan and borrower qualify for neither a HAMP nor a non-HAMP modification, liquidation of the loan then proceeds via either a discounted payoff (or “short sale”), deed-in-lieu-of-foreclosure or foreclosure and REO sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

	●	financings, such as match funded liabilities, lines of credit and other secured borrowings;
	●	funds generated by operations, such as servicing fees (including float earnings and other ancillary fees);
	●	collections of advances that were not financed; and
	●	payments received on loans held for resale.

 

 

	●	payments for advances in excess of collections on existing servicing portfolios;
	●	payment of interest and operating costs;
	●	purchases of MSRS and related advances; and
	●	repayments of borrowings.

 

 

 

 

 

 

 

 

 

	●	89% are in Servicing,
	●	10% are in support functions, including Human Resources, Corporate Services, Accounting, Legal and Risk Management and
	●	1% are in other business segments.

 

 

       Our failure to comply with applicable federal, state and local consumer protection laws can lead to:

 

	●	civil and criminal liability;
	●	loss of our licenses and approvals to engage in the servicing of residential mortgage loans;
	●	damage to our reputation in the industry;
	●	inability to raise capital;
	●	administrative fines and penalties and litigation, including class action lawsuits; and
	●	governmental investigations and enforcement actions.

	●	creates an inter-agency body that is responsible for monitoring the activities of the financial system and recommending a framework for substantially increased regulation of large interconnected financial services firms;
	●	creates a liquidation framework for the resolution of certain bank holding companies and other large and interconnected nonbank financial companies;
	●	strengthens the regulatory oversight of securities and capital markets activities by the SEC; and
	●	creates the Bureau of Consumer Financial Protection (“BCFP”), a new federal entity responsible for regulating consumer financial services.

 

	●	force-placing insurance, unless there is a reasonable belief that the borrower has failed to comply with a contract’s requirement to maintain insurance;
	●	charging a fee for responding to a valid qualified written request;
	●	failing to take timely action to respond to the borrower’s request to correct errors related to payment, payoff amounts, or avoiding foreclosure;
	●	failing to respond within ten (10) business days of a request from the borrower to provide contact information about the owner or assignee of loan; and
	●	failing to return an escrow balance or provide a credit within twenty (20) business days of a residential mortgage loan being paid off by the borrower.

	●	acknowledging receipt of a qualified written request under RESPA within five (5) business days and providing a final response within thirty (30) business days;
	●	promptly crediting mortgage payments received from the borrower on the date of receipt except where payment does not conform to previously established requirements; and
	●	sending an accurate payoff statement within a reasonable period of time but in no case more than seven (7) business days after receipt of a written request from the borrower.

 

 

ITEM 1A.

RISK FACTORS (Dollars in thousands, except per share data or unless otherwise indicated)

	●	Revenue. An increase in delinquencies may delay the timing of revenue recognition because we recognize servicing fees as earned which is generally upon collection. An increase in delinquencies also leads to lower float balances and float earnings.
	●	Expenses. An increase in advances outstanding relative to the change in the size of the servicing portfolio can result in substantial strain on our financial resources. This occurs because excess growth of advances increases financing costs with no offsetting increase in revenue, thus reducing profitability. If we are unable to fund additional advances, we could breach the requirements of our servicing contracts. Such developments could result in our losing our servicing rights, which would have a substantial negative impact on our financial condition and results of operations and could trigger cross-defaults under our various credit agreements.
	●	Valuation of MSRs. Apart from the risk of losing our servicing rights, defaults are involuntary prepayments resulting in a reduction in UPB. This may result in higher amortization and an impairment in the value of our MSRs.

	●	limitations imposed on us by existing lending and similar agreements that contain restrictive covenants that may limit our ability to raise additional debt;
	●	liquidity in the credit markets;
	●	the strength of the lenders from whom we borrow; and
	●	limitations on borrowing on advance facilities which is limited by the amount of eligible collateral pledged and may be less than the borrowing capacity of the facility.

 

 

 

 

 

	●	Revenue. If prepayment speeds increase, our servicing fees will decline more rapidly because of the greater than expected decrease in the UPB on which those fees are based. The reduction in servicing fees would be somewhat offset by increased float earnings because the faster repayment of loans will result in higher balances in the custodial accounts that generate the float earnings. Conversely, decreases in prepayment speeds drive increased servicing fees and lead to lower float balances and float earnings.
	●	Expenses. Amortization of MSRs is our largest operating expense. Since we amortize servicing rights in proportion to total expected income over the life of a portfolio, an increase in prepayment speeds will lead to increased amortization expense as we revise downward our estimate of total expected income. Faster prepayment speeds would also result in higher compensating interest expense. Compensating interest expense represents the difference, in the month in which a loan is repaid, between the full month of interest that we are required to remit to the trust and the amount of interest that we actually collect from the borrower. Decreases in prepayment speeds lead to decreased amortization expense as the period over which we amortize MSRs is extended. Slower prepayment speeds also lead to lower compensating interest expense.
	●	Valuation of MSRs. We base the price we pay for MSRs and the rate of amortization of those rights on, among other things, our projection of the cash flows from the related pool of mortgage loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speeds were significantly greater than expected, the carrying value of our MSRs could exceed their estimated fair value. When the carrying value of MSRs exceeds their fair value, we are required to record an impairment charge which has a negative impact on our financial results.

 

 

Loan putbacks could adversely affect our business.  Ocwen has been a party to loan sales and securitizations dating back to the 1990s. The majority of securities issued in these transactions has been retired and are not subject to putback risk. There is one remaining securitization with an original UPB of approximately $200,000 where Ocwen provided representations and warranties and the loans were originated in the last decade. Ocwen performed due diligence on each of the loans included in this securitization. The outstanding UPB of this securitization was $58,132 at December 31, 2010 and outstanding notes were $59,007. Ocwen is not aware of any inquiries or claims regarding loan putbacks for any transaction where we made representations and warranties. We do not expect loan putbacks to result in any material change to our financial position, operating results or liquidity.

 

 

 

 

	●	any competitive actions by Altisource;
	●	the quality and pricing of services that Altisource has agreed to provide to us or that we have agreed to provide to Altisource and
	●	our ongoing and future relationships with Altisource, including related party agreements and other arrangements with respect to the administration of tax matters, employee benefits, indemnification and other matters.

 

 

	●	coordinating market functions;
	●	unanticipated issues in integrating information, communications and other systems;
	●	unanticipated incompatibility of purchasing, logistics, marketing and administration methods;
	●	retaining key employees; and
	●	the diversion of management’s attention from ongoing business concerns.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

 

ITEM 2.

PROPERTIES

 

Location		Owned/Leased		Square Footage
Principal executive office:
Atlanta, Georgia (1)		Leased		2,094
Document storage and imaging facility:
Riviera Beach, Florida		Leased		30,000
Business operations and technology support offices:
West Palm Beach, Florida		Leased		41,860
Sacramento, California (2)		Leased		126,460
Raleigh, North Carolina (2)		Leased		46,528
Bangalore, India		Leased		86,413
Mumbai, India		Leased		23,140
Montevideo, Uruguay		Leased		16,668

 

(1)	In December 2010, we entered into an agreement to sublease this space from Altisource through October 2014.

 

(2)	We assumed these leases in connection with our acquisition of HomEq Servicing. The former HomEq operations have been shut down and these facilities are currently not in use.

 

ITEM 3.

LEGAL PROCEEDINGS (Dollars in thousands)

 

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

		High				Low
2010
First quarter		$	11.36			$	9.07
Second quarter			12.45				10.09
Third quarter			10.74				8.77
Fourth quarter			10.20				8.48
2009
First quarter		$	12.02			$	8.37
Second quarter			13.30				10.80
Third quarter			14.30				9.02
Fourth quarter			11.95				9.05

 

 

 

 

(1)	Excludes the significant value distributed in 2009 to Ocwen investors in the form of Altisource common equity.

 

ITEM 6.

SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)

 

 

 

 

		December 31,
		2010 (7)				2009 (6)				2008				2007				2006
Selected Balance Sheet Data
Cash		$	127,796			$	90,919			$	201,025			$	114,243			$	236,581
Restricted cash – for securitization investors (1)			727				—				—				—				—
Trading securities, at fair value:
Auction rate			—				247,464				239,301				—				—
Other investment grade securities			—				—				—				34,876				74,986
Subordinates and residuals			—				3,692				4,369				7,362				65,242
Investment in certificates of deposit			—				—				—				—				72,733
Loans held for resale, at lower of cost or fair value			25,803				33,197				49,918				75,240				99,064
Advances			184,833				145,914				102,085				292,887				324,137
Match funded advances			1,924,052				822,615				1,100,555				1,126,097				572,708
Loans, net – restricted for securitization investors (1)			67,340				—				—				—				—
Mortgage servicing rights			193,985				117,802				139,500				197,295				183,743
Deferred tax assets, net (2)			138,716				132,683				175,145				175,669				172,202
Intangibles, net, including goodwill (6) (7)			12,810				—				46,227				58,301				7,053
Investment in unconsolidated entities (3)			12,072				15,008				25,663				76,465				46,151
Other			233,275				160,056				153,312				233,489				150,794
Total assets		$	2,921,409			$	1,769,350			$	2,237,100			$	2,391,924			$	2,005,394
Match funded liabilities		$	1,482,529			$	465,691			$	961,939			$	1,001,403			$	510,236
Secured borrowings – owed to securitization investors (1)			62,705				—				—				—				—
Debt securities, lines of credit and other secured borrowings:
Short-term			51,085				7,979				182,860				339,976				310,149
Long-term			277,542				143,395				67,377				143,111				153,462
Investment line			—				156,968				200,719				—				—
Servicer liabilities			2,492				38,672				135,751				204,484				383,549
Other			140,239				90,782				78,813				110,429				81,340
Total liabilities			2,016,592				903,487				1,627,459				1,799,403				1,438,736
Ocwen Financial Corporation stockholders’ equity (1)			904,571				865,611				609,235				590,542				564,868
Non-controlling interest in subsidiaries			246				252				406				1,979				1,790
Total equity			904,817				865,863				609,641				592,521				566,658
Total liabilities and equity		$	2,921,409			$	1,769,350			$	2,237,100			$	2,391,924			$	2,005,394
Residential Loans and Real Estate Serviced for Others
Count			479,165				351,595				322,515				435,616				473,665
Amount		$	73,886,391			$	49,980,077			$	40,171,532			$	53,545,985			$	52,834,028

 

 

		For the Years Ended December 31,
		2010 (7)				2009 (6)				2008				2007				2006
Selected Operations Data
Revenue:
Servicing and subservicing fees		$	321,699			$	264,467			$	368,026			$	379,277			$	340,584
Other			38,682				116,261				124,102				101,384				90,746
Total revenue			360,381				380,728				492,128				480,661				431,330
Operating expenses			236,474				235,654				323,355				351,866				339,655
Income from operations			123,907				145,074				168,773				128,795				91,675
Other income (expense):
Interest income (1)			10,859				8,786				14,696				29,651				47,609
Interest expense			(85,923	)			(62,954	)			(86,574	)			(76,586	)			(56,979	)
Other, net (1)			(9,689	)			2,355				(65,913	)			(27,306	)			(3,717	)
Other expense, net			(84,753	)			(51,813	)			(137,791	)			(74,241	)			(13,087	)
Income from continuing operations before income taxes			39,154				93,261				30,982				54,554				78,588
Income tax expense (benefit) (2)(6)			5,545				96,110				12,006				15,186				(127,720	)
Income (loss) from continuing operations			33,609				(2,849	)			18,976				39,368				206,308
Income (loss) from discontinued operations, net of taxes (4)			4,383				3,121				(5,767	)			(3,172	)			(2,094	)
Net income			37,992				272				13,209				36,196				204,214
Net loss (income) attributable to non-controlling interests			(8	)			25				41				(92	)			(69	)
Net income attributable to OCN		$	37,984			$	297			$	13,250			$	36,104			$	204,145
Basic earnings per share
Income (loss) from continuing operations		$	0.34			$	(0.04	)		$	0.30			$	0.63			$	3.28
Income (loss) from discontinued operations (4)			0.04				0.04				(0.09	)			(0.05	)			(0.03	)
Net income		$	0.38			$	—			$	0.21			$	0.58			$	3.25
Diluted earnings per share
Income (loss) from continuing operations		$	0.32			$	(0.04	)		$	0.30			$	0.62			$	2.95
Income (loss) from discontinued operations (4)			0.04				0.04				(0.09	)			(0.05	)			(0.03	)
Net income		$	0.36			$	—			$	0.21			$	0.57			$	2.92
Weighted average common shares outstanding
Basic			100,273,121				78,252,000				62,670,957				62,712,076				62,871,613
Diluted (5)			107,483,015				78,252,000				62,935,314				63,496,339				71,864,311