Greetings, and welcome to Ocwen Financial Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Hugo Arias, Managing Director of Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us for Ocwen’s fourth quarter 2018 earnings call. Please note that our fourth quarter 2018 earnings release and slide presentation have been released and are available on our Web site for your review. Speaking on the call will be Ocwen’s Chief Executive Officer, Glen Messina; and Chief Accounting Officer, Cathy Dondzila. As a reminder, the presentation and our comments today may contain forward-looking statements made pursuant to the Safe Harbor Provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking 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 uncertainties. You should bear these factors in mind when considering such statements and should not place undue reliance on such statements. Forward-looking statements involve several assumptions, risks and uncertainties that could cause actual results to differ materially. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. Our forward-looking statements speak only as of the date they are made and we disclaim any obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. In addition, the presentation and our comments contain references to non-GAAP financial measures such as available liquidity and an alternative view of the impact of our NRZ transactions, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. We also believe these non-GAAP financial measures provide an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to, and not as, an alternative for the company's reported results under accounting principles generally accepted in the United States. For an elaboration of the factors I just discussed, please refer to our presentation and today's earnings release as well as the company's filings with the Securities and Exchange Commission, including Ocwen's 2018 Form 10-Q and once filed its 2018 Form 10-K. Now, I will turn the call over to Glen Messina.

Thank you, Hugo. Good morning and thank you for joining us. Today, I’ll provide an update regarding the key business initiatives we are pursuing to transform Ocwen into a stronger company and the opportunities and challenges ahead of us. Cathy Dondzila will then follow with a review of the fourth quarter financial results. I will close the call with some brief remarks before opening it up for questions. Please turn to Slide 4. We’ve made solid progress in the quarter as we work to realize the scale and cost reduction benefits of combining Ocwen and PHH and position the company for future profitability. Last quarter, we discussed our primary focus is to return to profitability in the shortest timeframe possible taking into consideration the robust prudent integration process we’re undertaking to integrate PHH. To this end, we established a set of key initiatives to address our most critical near-term challenges and establish a foundation for the future. The initiatives are; execute the integration to create value, reengineer our cost structure, replenish portfolio one-off and restore our growth focus, establish funding for growth and fulfill our regulatory commitments and resolve remaining legacy matters. We have been building our team and executing on our key initiatives. In parallel, we’ve offset the company’s operations, financial performance, market conditions and industry dynamics to better position us to address the opportunities and challenges ahead. We’ve added Tim Yanoti as our growth leader, June Campbell will be joining us on March 4 as CFO, and Joe Samarias is assuming the role of General Counsel on April 1 as part of an orderly succession process. We’ve added Jenne Britell and Kevin Stein to the Ocwen Board. Their respective skills and experiences are well suited to support our efforts to maximize value for our shareholders. Loan boarding has…

Thank you, Glen. My comments today will focus on our fourth quarter results as compared to the prior quarter. Because we closed the PHH acquisition on October 4, the fourth quarter comparisons to the third quarter will all be impacted. As previously noted, our fourth quarter investor presentation includes more details on our results and is available on our Web site. You will also find additional information in regards to the fourth quarter PHH results in our Form 10-K which we expect to be filed later today. Please turn to Slide 12. While our fourth quarter 2018 net loss of $2 million compares favorably to the net loss of $41 million in the third quarter, our fourth quarter loss includes the bargain purchase gain of $64 million recognized in connection with the acquisition. While the acquisition was accretive to book value and cash on the acquisition date, the purchase price contemplated that PHH would incur losses after the acquisition date. To the extent those losses are realized, they are and will be included in our results from operations. Revenue of $311 million increased by $73 million from the prior quarter, principally due to $72 million of PHH post-acquisition revenue. Excluding PHH revenue, the $7 million decline in servicing revenue due to continued portfolio runoff was offset by the $9 million favorable valuation impact from our reverse mortgage portfolio due to lower interest rates in the fourth quarter. Non-MSR expenses of $241 million were $65 million higher than the prior quarter, driven by $59 million of PHH post-acquisition non-MSR-related expenses. Our cost improvements in the quarter were largely offset by higher acquisition, integration and restructuring-related costs. With respect to the higher unfavorable MSR valuation adjustment in the fourth quarter, lower interest rate resulted in a reduction of the value of our…

Thank you, Cathy. Please turn to Slide 17. We’ve made solid progress in the quarter as we work to realize the scale and cost reduction benefits of combining Ocwen and PHH and position the company for future profitability. During the past quarter, we completed a thorough business assessment which included a forward-looking view of multiple factors that could impact profitability in 2019 and beyond. As a result of this effort, we have identified a number of items that are being addressed through our key business initiatives, including subservicing UPB is likely to shrink going forward as additions will not replenish runoff. Therefore, the amount of capital required to maintain our targets servicing portfolio size is greater than previous estimates. MSR acquisition market is highly competitive and returns are the lower end of our 9% to 13% target range. And the runoff of NRZ lump-sum payment amortization in the second quarter 2020 needs to be addressed now. To address these items to make Ocwen a stronger company, we’re taking decisive action through our key initiatives including we’re attracting quality talent to help us execute on our key initiatives. We’re executing the integration and we’re on track to complete this effort earlier than previously expected. We’ve identified over $340 million in cost reengineering opportunities against our annualized second quarter 2018 baseline resulting in the competitive cost structure. The magnitude and timing of cost reengineering offsets the NRZ lump-sum payment amortization runoff and we’ve already commenced execution. The MSR market continues to be robust and we’ve been a successful bidder for $5.4 billion in MSRs that are aligned with our capabilities. We are on track to restart forward correspondent lending and fully introduce non-agency lending products by the end of the second quarter. Multiple funding structures are potentially available to support our MSR acquisition objectives and we expect to have initial funding in place by the end of the second quarter 2019. And potentially attractive consolidation opportunities are emerging. We remain focused on our goal to restore profitability in the shortest timeframe possible taking into consideration the robust prudent integration process we are undertaking to integrate PHH. Our actions and key initiatives address the items identified through our business assessment effort. We believe we can return to profitability in 12 to 15 months assuming we achieve our cost reengineering and growth objectives and there are no adverse development in market condition and legal and regulatory matters. These are dynamic times for the non-bank mortgage industry, but we believe our key initiatives will position us to continue to play a leadership role in the industry and to make a difference in the life of the customers we serve. And with that, we’re ready to take questions. Operator?

Thank you. [Operator Instructions]. Our first question is from Bose George with KBW. Please proceed with your questions.

Hi. Good morning. Actually the first question, could you just go over what you said about the expectations for MSR acquisitions? You noted that the subservicing will be running up I guess faster than expected. So then the number that you gave for acquisitions, does that assume you can buy enough MSR to offset that as well? So do you think you can keep the portfolio roughly flat this year?

Good morning, Bose. So yes, we do expect that subservicing additions will not replenish subservicing – schedule of subservicing portfolio runoff. That said, we’re looking to achieve a target servicing UPB of $260 billion. And based on the current market conditions, we believe that it would take approximately $35 billion of UPB and MSR additions to replenish portfolio runoff. As you probably know, MSRs generate more dollars of income per loan than subservicing does. So you don’t necessarily have to replace subservicing runoff dollar for dollar from a UPB perspective with MSR investments.

Okay. So that 35 billion you’re contemplating is primarily MSR.

Yes, sir. That’s correct.

Okay, great. And then actually later in the year after the transfer of MSRs to MSP is complete, do you contemplate going back to regulators and getting that 2% limit on New York potentially removed?

Bose, we do have – as you mentioned, in New York we do have the restriction for the 2% growth. And part of the conditional approval is once we complete the boarding of loans on MSP, we’ll do data integrity audits and we would be approaching New York for permission to lift those restrictions. So that is correct.

Okay. Thanks. And then the pipeline that you gave, the 400 billion, does that include Ditech? Can you comment on that?

The $400 billion was our view of the MSR acquisition market in 2018. What we’re seeing so far in the first quarter of 2019 is, say, an equally robust market. I think the world knows that there is various options that Ditech is considering while they are in bankruptcy. We would consider all options to continue to grow our portfolio and maximize value for our shareholders. But I can’t make any specific comments about any one individual transaction.

Okay, fair enough. And then actually yesterday, you guys put out an 8-K with an update on your relationship with Altisource. Can you just comment, are there any implications for Ocwen in terms of how that plays out? And specifically if NRZ decides to move any services to other vendors, does that make any difference to you?

From our perspective, look, we’re happy that we reached agreement with Altisource to clarify and amend some of the key provisions of our contract. We do by virtue of this amendment have secured and clarified Altisource’s support in getting off the REALServicing platform and termination of the REALServicing statement of work and as well as making sure we’ve got mechanisms to ensure we get good quality of data transferred over to us as part of the loan transfer process. We’ve also clarified the mechanism around certain vendor services on mortgages that are being serviced by Ocwen. We’ve set a future framework for negotiating service level agreements as part of that. And we do anticipate that Ocwen’s got the capability here to hire under certain conditions alternative service providers for up to 10% of certain portfolios where we can control the direction of business and that will help us essentially get a better gauge of third-party performance and help benchmark that performance versus Altisource. Net-net, we do believe the agreements provide increased clarity, greater performance discipline and will ultimately benefit us and probably Altisource as well.

And just in that last part of it, just in terms of what – if NRZ changes anything, I guess you guys are kind of agnostic in terms of what they do?

Look, we are. NRZ under the contract with Ocwen has the right to designate service providers on their portfolio and we obviously would support NRZ’s efforts to do so if they choose to do it.

Okay, great. And actually one last one from me. In terms of other unusual expenses going forward, you guys highlighted that $55 million to $65 million. Is there anything else we should think about in terms of PHH integration expenses or legal regulatory?

From the PHH integration perspective, the $55 million to $65 million is intended to cover all aspects of the integration to include costs associated with loan boarding, costs associated with the legal entity merger and probably most significantly, the costs associated with our reengineering actions. Obviously to the extent that we would choose to enter into any settlements of any legacy legal and regulatory matters that’s not been included in there and to the extent that there were interest rate changes that would drive MSR valuation adjustments, that would be either a plus or a minus to our reported earnings depending upon the nature of the interest rate adjustment.

Okay, great. Thanks a lot.

Our next question is from Henry Coffey with Wedbush Securities. Please proceed with your question.

Good morning and thank you for taking my call. If we look at the servicing business, these are some simplistic numbers, there’s sort of a fixed amount of revenue that you’re going to get and it’s somewhere between 25 and 35 – I’m sorry, 25 and probably 35 basis points for GSE and servicing and maybe 50 basis points or slightly lower for non-agency servicing. Subservicing, I know nobody ever gives us a comment, but it looks like it’s about a 5 or 6 basis point sort of business. And then there’s direct cost. And if you sort through all those numbers, what does that business look like today? And I don’t mean corporate allocations and accounting adjustments and MSR valuations and stuff, but just the direct cost of servicing alone in basis points, where do you think you are today?

Henry, just overall from a cost perspective, look, I think it’s obvious from the amount of cost reengineering that we plan to execute in the business to achieve a competitive cost structure, our cost structure today is excessive particularly in corporate overhead and --

Right. No, if we just look at the direct cost of servicing business.

Yes. Henry, look, I think our direct costs for servicing are consistent with market expectations for direct cost of servicing for both performing and delinquent loans. I think we’ve demonstrated that in our ability to win bulk MSR acquisitions. We’ve not historically provided granular insight into the detailed cost per loan or basis points, but we do believe we are competitive with market on a direct cost basis.

So the servicing business, all the activity aside is – you think is profitable today?

On a direct cost basis, that’s correct. Yes.

Exactly. And then the interplay between Ocwen and Altisource and NRZ, so you are locked-in to use Altisource as a vendor on all but 10% of the related services. Is there a point where that contract – you’ve completed the transition and then that contract is completely open and goes to zero?

Henry, as you may recall, the contract between Altisource and Ocwen was put in place at the time Altisource was spun off out of the Ocwen family of companies. That agreement runs until 2025 and Altisource is our service provider for portfolios where Ocwen controls the direction of services with the exception of we can direct up to 10% of the business off to a third party. For areas where we do not control – portfolios where we do not control the provision of services, third-party services, the party we’re subservicing for, they have the discretion to designate to whoever they want to. So obviously for the NRZ portfolio, they can designate who their service provider is. For portfolios where we can control, we could designate up to 10% to an alternative service provider.

And that would include newly acquired MSRs?

That’s correct. Now obviously that’s all subject to Altisource maintaining the performance standards they agreed to in the agreement to the extent that there is a failure, their secure period. But they have to perform to earn that business as you might expect. That’s traditional in any service contract.

And then when you’ve completed the transition to Black Knight, the only remaining relationship with Altisource will be around sort of asset preservation and resolution services, or would there be other relationships?

Well, it’s the breadth of services that they do for their provision – for our servicing operations, the vast majority of which are around the backend processes, the property preservation, OREO, that type of stuff.

And then finally with the regulators, it always seems kind of murky to us but is there an active dialog? Is there a point of resolution where everybody is happy? I hate to use that word. I’m sure that’s not a legal term. And how close are we to that point where people sit back and say, we have a good – the state and other regulators you deal with sit back and say, hey, I think we have a constructive relationship and the penalties are over and the legal wrangling is over and everybody is on good terms with each other?

Henry, we are maintaining very active, I would say proactive dialog with all of our regulators through the PHH integration process. We actually have regular integration update calls with all of our regulators. Certain regulators we go see personally and do follow-up presentations. But we are maintaining a very active and engaged dialog for the express purpose of making sure we manage those relationships proactively and address any issues or concerns that our regulators may have during the integration process. And so far it’s been a very productive exchange and a productive dialog. We’re addressing issues to the extent they have any and I feel good about the progress we’re making.

Is there a point where the costs related to all that become just sort of a rounding error or --?

Well, our cost to manage the regulatory relationships is just going to be an ongoing part of the business that --

No, I meant any legal fines and the like.

As we expect – as we continue to work towards resolution of the remaining legacy, legal and regulatory matters, we do expect our non-routine litigation expenses would decline. And as I said during the earnings call – formal portion of the earnings call, we’ve made significant investments in our compliance and risk management infrastructure and our compliance management system. We’ve improved operational performance and we expect that over time, that should help result in lower non-routine litigation expenses.

Great. Thank you. A tremendous amount of work going on here and it’s obviously you’re well positioned to keep moving forward. So thank you for your comments.

Yes, sir. Thank you.

Our next question is from Giuliano Bologna with BTIG. Please proceed with your questions.

Good morning and thank you for taking my questions.

Good morning.

So just trying to true up a couple of the additional disclosure around the cost savings, obviously you’ve made great progress getting from the $200 million range to $340 million. But thinking about that, there’s a little mismatch between the timeframe of achieving profitability and those cost saves. The cost saves are supposed to come over 12 to 15 months – sorry, the profitability is 12 to 15 months and the cost saves will go in over the next 12 to 18 months. How should we think about the amount needed to get to profitability?

Yes, Giuliano, the cost savings are actually going to be – if you look at that 12 to 18 months timeframe, the real bulk of the cost savings occur after the loan boarding event and the legal entity merger. So that would be effectively the back half of 2019. We’re expecting by the fourth quarter of 2019 that we will have taken actions to realize in $300 million of annual run rate savings. So almost all of the $340 million gets realized within the 2019 calendar year just after we complete the loan boarding. There’s another at least $40 million that we expect to realize during the course of 2019 that’s largely coming from operational process improvements – I’m sorry, 2020, $40 million in 2020 that’s coming from continued operational process improvements and facilities closure costs that will be coming in I guess fairly ratably during the course of 2020.

That makes sense. And then just thinking about the – on the cost side, how should we think about the allocation of those costs and kind of the timing for the 55 million to 65 million?

Yes, the $55 million to $65 million in upfront costs would almost follow the recognition of the cost takeouts or the cost reduction. One of the biggest categories that we do have in the cost reduction is related to severance and retention for people and there are significant people actions that are happening during the course of this. So, it again will be timed as absent any accounting accrual requirements to record things early. The actual cash expenditure is going to be timed as staffing – as positions are eliminated and staffing rolls off out of the business.

That makes sense. And then just on the bulk acquisitions that the company closed in the fourth quarter and year-to-date, have you disclosed the amount that happened in 2019 versus the 4Q?

Well, so far in 2019 in the bulk MSR acquisitions, yes, $5.4 billion is what we’ve been either awarded or have closed on. That’s a combination of both agency and Ginnie Mae MSRs. We’re excited that we’ve come out of the gate strong. There is a strong market, albeit pricing is probably at the lower end of the range of what we thought. But we are cautiously optimistic that there is going to continue to be a robust MSR acquisition market which can help us achieve our growth objectives.

That makes sense. And while I’m sort of annualizing that is not necessarily the right way to look at it, but that gets you – if you were to do that throughout the year, that would get you into the low $30 billion range plus originations and I’m assuming that’s probably another basis for thinking about your ability to get to $35 billion with MSRs on the balance sheet to replenish?

The annualization math would suggest that. Look, we are subject to market timing of deals coming into the marketplace. We did mention that our restart-up – our restart or reentry of the correspondent forward lending business is going to recur late second quarter. So that will be – that volume will be essentially backend loaded. So, look, we’re cautiously optimistic that we can achieve our objectives, but obviously we are subject to market volumes for sure.

That’s great. I appreciate the time. Thank you very much.

Thank you.

We now have a follow-up question from Bose George. Please proceed with your questions.

Great. Thanks. I just wanted to go back to Slide 13. Can you just go over what happens exactly after April 2020?

Sure. This is Cathy, Bose. What we have is the remaining amortization. If you think about sort of how the original upfront lump sum cash is going to be rolling out, we’re going to be amortizing that into income, the remaining balance, which I think we disclosed was around $139 million. That will be amortizing similar to – if you look on Slide 13, you see for the fiscal year 2018, that was around $151 million down there was – the prior year impact in '18. So we’ll be taking that $139 million over the remaining, I’m going to say, 15 months or so of that transaction starting here in January.

And Bose, this is Glen. So I think you were looking for what happens after, right, what happens after. Effectively, the income statement will reflect more traditional subservicing economics, right. So there is – there would be these entries that are reflected on Slide 13 effectively get downscaled and you would see more traditional subservicing economics flowing through our P&L.

And the 139 million, is that kind of a declining number? So by the end of that period, it’s not kind of a straight line, right?

No. It sort of goes down like a mortgage amortizes. So it will amortize off over the next 15 months to zero by the end of April of 2020.

And your profitability guidance incorporates that runoff of that amortization. Is that right?

Yes, it does. As a matter of fact, the $340 million in cost reengineering savings that we’re expecting to realize is more than enough to offset that amortization.

Okay, great. Thank you.

You’re welcome.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Great. Thank you, operator. We’ve made a tremendous amount of progress in a short period of time and we’ve got a roadmap where we believe we can get the company back to profitability in 12 to 15 months, assuming execution of our cost reengineering and growth objectives and assuming no other changes in market conditions or legal and regulatory matters. We thank you for your continued interest in Ocwen, and look forward to speaking to you next quarter.

Thank you. This concludes today’s conference. You may disconnect your lines at this time, and have a great day.