Welcome to the Ocwen Financial Corporation Second Quarter Earnings and Business Update Conference Call. Our host for today's call is Dico Akseraylian, Senior Vice President, Corporate Communications. [Operator Instructions] I would now like to turn the call over to your host. Dico, you may begin.

Good morning, and thank you for joining us on our Second Quarter 2021 Earnings and Business Update Call. Please note that our second quarter earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chief Executive Officer, Glen Messina; and Chief Financial Officer, June Campbell. 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 and address matters that are, to different degrees, uncertain. You should bear this uncertainty in mind when considering such statements and should not place undue reliance on such statements. Forward-looking statements involve assumptions, risks and uncertainties, including the risks and uncertainties described in our SEC filings including our Form 10-K for the year ended December 31, 2020, and our current and quarterly reports since such date. In the past, actual results have differed materially 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 adjusted pretax income and adjusted expenses, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition and 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. A reconciliation of the non-GAAP measures used in this presentation to the most directly comparable GAAP measures may be found in the press release and the appendix to the investor presentation available on our website. Now I will turn the call over to Glen Messina.

Thanks, Dico. Good morning, everyone, and thanks for joining us. If you can please turn to Slide 5, we'll cover some highlights for the second quarter. I'm really proud of what our team accomplished in the second quarter and appreciate all their hard work. Adjusted pretax income was consistent with our expectations and with the past 2 quarters despite continued margin compression in the quarter. And more importantly, adjusted pretax income for the month of June reflects substantially improved earnings performance with annualized adjusted pretax ROE of 34%. And June Campbell, our CFO, will cover that in more detail a little bit later. We accomplished a lot in the quarter: record servicing additions and seller growth; improved scale in servicing and originations; cost reduction; strong operating execution; growth in higher-margin channels, services and products. All of this is giving us really strong momentum. We believe the month of June was a pivot point for us, and our accomplishments and our planned call rights transactions are a catalyst for a step change in second half adjusted pretax income. The previously announced RMS platform acquisition will help us expand our presence in reverse mortgages and we believe uniquely positions us as the only full service provider in this space, creating another new growth opportunity for us. And finally, we continue to navigate a volatile and unpredictable environment. And let's turn to Slide 6 for a bit more about the environment. Industry volume levels continue to be robust versus historical levels, so both forward and reverse. The average of the Fannie Mae, Freddie Mac and MBA forecast for industry volume remains constant or consistent with levels projected at the start of the year. Reverse mortgage endorsement volume increased 21% for the first half of 2021 versus the same period in the prior year,…

Thank you, Glen. Please turn to the next slide. We reported $6 million in adjusted pretax income, positive results for the seventh consecutive quarter. As you can see, our results have been stable over the last 2 quarters through the moratorium environment. Net income in the quarter was a $10 million loss after $28 million of unfavorable notables largely driven by $15 million in net MSR fair value change driven by interest rate volatility and $13 million in transaction-related legal expenses. On the top right bar chart, you can see that we're delivering on our growth objectives and cost leadership. Revenue increase quarter-over-quarter is largely due to higher servicing fees on $55 billion in higher servicing additions primarily from the $51 billion in bulk purchases in June. Because these bulk purchases funded in June, we generated one month of revenue and incremental expenses in the quarter, and I'll show you in the next page June reflected as a full quarter. Operating expense as a percentage of average UPB was favorable quarter-over-quarter after absorbing cost to maintain capacity for both the new bulk volume that boarded in June and, as I mentioned last quarter, excess cost during forbearance and moratorium in expectation of borrower needs. Equity increased to $447 million after $10 million in GAAP net loss and $16 million of additional paid-in capital from issuance of common stock and warrants net. Book value per share is $49. Please turn to Slide 14. June actual results reflected improved earnings performance with annualized adjusted pretax return on equity of 34%. June reflects the first full month of performance, including all servicing additions for the quarter. The $69 billion of servicing additions in the quarter generate meaningful incremental revenue compared to the first quarter, and we are realizing good cost leverage. Going forward,…

Thanks, June. And if we could please now turn to Slide 18. Look, we're executing a set of balanced objectives that are aligned with our strategy of operational excellence, and that's to achieve balance and diversification; scale and low-cost, best-in-class operational performance; and leading client, investor and consumer satisfaction. We believe these elements are critical for our long-term success and value creation for our shareholders. I'm proud of what the team accomplished in the second quarter and appreciate all their hard work. Again, adjusted pretax income was consistent with our expectations and the past 2 quarters despite continued margin compression. And adjusted pretax income for the month of June reflects substantially improved earnings performance with annualized adjusted pretax ROEs of 34%. We accomplished a lot in the quarter, record servicing and additions and seller growth, improved scale in servicing and originations, cost reduction, strong operating execution, growth in higher-margin channel services and products, all of which is giving us strong momentum. The month of June was a pivot point for us, and we believe our accomplishments and our planned call rights transactions are a catalyst for a step change in second half adjusted pretax income performance. The previously announced RMS platform acquisition will help us expand our presence in reverse mortgages and uniquely positions us as the only full service provider in the space, creating another new growth opportunity for us. And finally, we continue to navigate a volatile and unpredictable environment. I'd like to thank and recognize our Board of Directors and our global business team for their hard work and commitment to our success. I'm proud of what our team has accomplished in the second quarter and appreciate all their efforts. And with that, Ross, [ we're ready ] to open up the call for questions.

[Operator Instructions] Our first question comes from Eric Hagen from BTIG.

I got a couple of questions. How much bulk MSR do you guys think will be coming to market now the origination pipelines are showing up again and the faster [ speeds in the foreground ] again? How have your expectations for bulk volume changed? Or what does that backdrop kind of mean for Ocwen? The second question is on the reverse servicing and the kind of scale you guys think is necessary to really just be most effective there, really just to kind of properly manage the liquidity risk and without detracting from the stability that you're really aiming for in other areas of the business.

Sure. So Eric, look, yes, the bulk market, as we said, yes, for the first half of the year was pretty robust, and we expect it's going to continue to be robust for the second half of the year. Again, I think with rates coming down and -- the 10-year treasury rate coming down and mortgage interest rates coming down, probably not as much. Margins have opened up a little bit, and we are seeing increased origination activity across the industry. So I do think bulk is going to be a robust channel for the second half of the year. And that's the beauty of our partnership with MAV. We have the ability -- we will be looking to build the subservicing base in MAV by participating in bulk transactions. In terms of on-balance sheet, we've achieved our full year bulk volume objectives in the first half of the year. But obviously, we'll always look at capital allocation and performance in our other channels to see if it makes sense to put more on the books. As it relates to reverse, the beauty of the transaction that we're doing with RMS is it gives us a reverse platform to, again, create balance in our reverse servicing portfolio. So based on the UPB in RMS, the RMS subservice that we're taking on, we'll, again, have about a 50-50 balance between owned reverse servicing and subservice reverse servicing. And our expectation is we want to continue to grow both sets -- both of those portfolios. It's over an $80 billion subservicing market out there for reverse mortgages with limited competition. So we do think there's an opportunity to continue to grow that piece of our business. And again, I think if our focus has always been balance and diversification, and that's consistent with how we're approaching the reverse servicing space.

Our next question comes from Lee Cooperman from Omega Family.

Two questions. It seems it's always mañana, but you're talking about 34% or something like that pretax return on equity. Let's say it's 20% after-tax return. Book value is $49. That would imply like $10 in earnings or something like that or close to it. We're not reporting anything like that. I realize June was a pivotal month. But are you talking about earnings at a run rate of like $10 a share in the second half of the year, which would imply $2.50 a quarter? Question one.

Okay. So good morning, Lee. Look, we do think June was a pivot point for the company. We do have our road map out there. But again, if you look at the June results page that June Campbell, our CFO, had talked about, you can see that the quarterly adjusted pretax income based on June's results is about $38 million. So obviously, there'd be tax rate effect on that. And we talked about a number of adjustments, pluses and minuses and obviously, the potential for notable transactions. But -- or notable adjustments. But again, that June run rate is, we believe, very strong, very healthy and pivots the company for the second half of the year.

I want to pin you down to specific. You have been saying all along that you expected to earn 20% or 15%, whatever it is, on equity in 2021. That would imply like $10 in earnings, okay? We don't have anything like that for the first and second quarter. Basically -- hold on one second. I'm sorry for the interruption. That's the problem with 2 phones. Anyway, this would imply earnings of well over $2 a share in the second half of the year per quarter. Is that what you're trying to tell people?

Lee, our guidance was for low double-digit to mid-teen after-tax ROEs mid-2021, and we're -- that guidance has been consistent for the entire year and we are reaffirming that guidance.

Okay. But you don't want to mention any numbers. Okay. Fine. Secondly, it seems to me just reading from afar that most of your competition is funding themselves at a 4% rate. You took on some very high-cost debt. How could you be an effective competitor relevant to your peers with such a high cost of debt versus what they have?

So Lee, no question -- no doubt about it, our cost of corporate debt is higher than our peers. But we did include in our earnings supplement, and June covered it a little bit, our -- we fund ourselves largely with asset-based financing, secured financing for our MSR servicer advances and warehouse, and that has proven to be very efficient for us. And as compared to the fourth quarter, we've substantially reduced our cost of -- all-in cost of financing and our all-in cost -- weighted average cost of capital for those assets when you take into consideration how we've improved our secured financing. So I don't think you can look at just the corporate debt. I think you have to look at the entire debt stack to include secured financing.

In terms of your liquidity position, your stock [ stays at about ] half of book value. From my experience, if you can earn the kind of returns on book you're talking about, we should be selling at a premium to book value. Do you have any flexibility in terms of buying back cheap equity?

Lee, look, the Board has always focused on capital allocation. Our priorities right now continue to be driving growth in the business to get the scale and cost advantage and leverage that we've talked about in terms of our key objectives for the year. Given our leverage is relatively high, corporate leverage is relatively high as compared to peers, our near-term focus has really been to drive earnings to help delever the business. So that's really been our focus near term.

Our next question comes from Marco Rodriguez from Stonegate Capital.

I was wondering what kind of synergies you guys expect to achieve in your reverse mortgage business once the RMS acquisition is completed.

Yes, Marco, the reverse platform we're picking up from RMS, again, I just want to reiterate, is a terrific platform, great people, great technology. We're excited about it. Reverse mortgage servicing is a little bit different than forward mortgage servicing, but there are functions that are comparable. And the -- one of the [ key ] places where we saw value in this transaction was the ability to take the best of what RMS has to offer and combine it with the best of what our platform has to offer and leverage our scale in those areas that are common between forward and reverse mortgage servicing. So part of how we get to the 20% return on equity and 14% pretax margins is by harvesting integration savings, so we are looking forward to that.

Our next question comes from Drew Mackintosh from Mackintosh Investor Relations.

Can you give us an update on how the TCB integration is progressing? Last quarter, you guys indicated that there was a potential to gain roughly 200 new correspondent sellers.

Yes, look, I'm really proud of both our team and the TCB employees that we hired. Everyone's done a really good job. We've substantially completed the operational integration. We've stood up and launched our Best Efforts activity. And we've integrated, I think it was over 200 clients, about 216, 218 clients from the TCB acquisition, and those clients are up and running on our platform. So Drew, it's -- the integration is largely behind us. There's always some things -- i's to dot and t's to cross. But we are -- our correspondent platform today is fully functioning with the support of the TCB people. So -- and customer base. We're excited about it.

[Operator Instructions] And at this time, there appears to be no further questions.

Great. Thanks, Ross. And to everyone who joined the call, thank you very much for your continued support of Ocwen. Again, we've accomplished a lot in the quarter. We've got an aggressive agenda in front of us, and we're excited about the opportunities that are in front of the company, and look forward to giving you an update on the next quarter's call. Have a good day.

This concludes today's conference call. Thank you for attending.