Welcome to the Ocwen Financial Corporation Second Quarter Earnings and Business Update Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to your host, Dico Akseraylian, Senior Vice President, Corporate Communications. Mr. Akseraylian, you may begin.

Good morning and thank you for joining us for Ocwen’s second quarter 2023 earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen’s Chair and Chief Executive Officer, Glen Messina; and Chief Financial Officer, Sean O’Neil. 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 at different degrees uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements. Forward-looking statements, which speak only as of the date they are made, involve assumptions, risks, and uncertainties, including the risks and uncertainties described in our SEC filings. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. In addition, the presentation and our comments contain reference to non-GAAP financial measures, such as adjusted pre-tax income, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the financial performance of our operations and allocate resources. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company’s reported results. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures as well as management's view on why these measures may be useful to investors may be found in the press release and the appendix of the investor presentation. Now, I will turn the call over to Glen Messina.

Thank you, Dico. Good morning everyone and thanks for joining our call. Today, we'll review a few highlights for the second quarter, take you through our actions to address the market environment, and discuss why we believe our balance and diversified business can deliver long term value. Please turn to slide three. I'm pleased to report our second quarter results, which reflect the strength of our balance and diversified business and continued progress against our key initiatives. Adjusted pre-tax income of $23 million for the second quarter has materially improved versus the first quarter, largely driven by reverse servicing. Profitability and originations and forward servicing improved slightly versus the first quarter as well. We reported net income of $15 million or $2.02 per share, which includes $6 million of pre-tax loss relating to notable items. Notable items primarily include an unfavorable MSR fair value change due to interest rate assumptions offset in part by a favorable adjustment to our legal and regulatory reserves for various matters, including the CFPB litigation. I am also pleased to report the CFPB did not appeal the district court's May 2023 ruling in our favor. As a result, that ruling is now final and the case will remain closed. We look forward to normalizing our relationship with the CFPB. We're excited to put this legacy matter behind us. The last of the matters filed against the company in 2017. We believe this removes what may be a perceived uncertainty in the eyes of potential counterparties. Total servicing UPB was down slightly at the end of the second quarter versus the first quarter, reflecting our continued discipline in purchasing MSRs, a sale by MAV of $5 billion of MSR UPB to optimize portfolio returns, and consistent with expectations we had nominal subservicing boardings in the second…

Thanks Sean. I'd ask you to please turn to slide 16 for a few wrap-up comments before we go to Q&A. I'm proud of how our team is executing and the strong results we've delivered in the second quarter. We've made solid progress towards achieving our financial objectives. I'd like to thank and recognize our global business team for the hard work and commitment to our success. As we continue to execute our business strategy, we believe we're well positioned to navigate the market environment ahead and deliver long-term value for our shareholders. Our balanced and diversified business supports our ability to perform across multiple cycles. We're executing a focused growth strategy, leveraging our superior operating capabilities to grow subservicing across multiple investor and product types. Our subservicing opportunity pipeline is robust and we are positioned to deliver value to clients, investors and consumers in any economic environment, pipeline is robust and we are positioned to deliver value to clients, investors, and consumers in any economic environment. We remain steadfast in our pursuit of industry servicing cost leadership by driving continuous cost and process improvement and will continue to optimize expenses further during 2023. We remain equally determined to maintain our industry-leading operational performance. We have delivered measurable performance improvements for our clients, borrowers, and investors and provide an unmatched breadth of capabilities. Through our investment in technology and global operating capability, we've built an efficient and mature platform with capacity for growth that delivers industry-leading performance and improved financial outcomes for clients. We continue to expand our capital partner relationships. We are prudently managing capital and liquidity for economic and interest rate volatility as well as the market risks and opportunities. Lastly, we're excited to put the legacy CFPB matter behind us, the last of the matters filed against the company in 2017. We believe this removes what may be a perceived uncertainty in the eyes of potential counterparties. Overall, we're excited about the potential for our business and do not believe our recent share price is reflective of our financial position, growth opportunities, or strength of our business. With that, Jen, let's open up the call for questions.

Hey, good morning. Hope you guys are well. A couple of questions here. I mean, at this point, do you think you'd support a stronger ROE if mortgage rates were higher or lower than where they are today? Like how much upside do you feel like there is in MSRs if rates go higher? How are you thinking about the impacts of hedging and what you could potentially recapture, and maybe just the overall growth rate for the market if rates were to come down? And then as a follow-up to that, when you sort of guide to get into $300 plus billion of servicing into early next year like you do on I think it's slide 6, do you have an estimate for how much incremental capital you are using to get there, or even how much you might even free up with the portfolio that size?

Sure. Good morning, Eric. Look, I think in the industry, if you look overall, it's fair to say that a rich nations in a stable environment or certainly in a downward rate environment generates a substantially higher return on equity than servicing does. I think that's just the dynamics of our industry. So, look, I think with an embedded base of very low coupon MSRs, I think further upside value appreciation in MSRs as interest rates rise is going to be limited and not consistent with historical MSR value increases we've seen, the S curve effect of prepayment speed, so to speak. So from a return on equity perspective, and I'll call it an adjusted pre-tax ROE, I think the adjusted pre-tax ROEs would be probably better with rates trending down because it creates refi opportunity, which again creates, and originations uses less capital. So the refi margins typically expand in a downward rate environment. As I think about the growth in our portfolio, Eric, look, our strategy is capital like growth. So as we're growing our portfolio forward, we don't expect to deploy incremental capital to do that with the exception of the opportunistic transactions like we executed in the second quarter for special servicing opportunities. Those always require a little bit of capital, but have very high returns as we demonstrated in the second quarter. So the growth that we're expecting in the portfolio is really going to come from, growth in our subservicing book, both with, new third-party subservicing relationships and growth in our capital partner book.

Okay. Okay, that's a helpful direction. On slide 10, you show the same liquidity quarter over quarter. Even though the book value went up, normally, maybe wouldn't you have more liquidity if your capital position is improving? And would you say that there's a threshold for liquidity if it even strengthened enough where you might look to repurchase some stock? Sean O’Neil: Hey, Eric, it's Sean. Good morning. So what we do is we sometimes de-lever assets as needed because we don't want to have excess cash since it's a pretty low returning asset. With respect to having excess liquidity in our options, that pretty much remains the same as recent quarters, where we would consider debt repurchase and stock buyback. Currently, we're probably leaning more into a debt repurchase mode, given our high degree of leverage on the company. And then, having cash for either opportunistic asset purchases or for M&A transactions is also the other variable that we're considering.

Okay. Thank you guys very much. Sean O’Neil: Thank you.

Thanks, Eric.

And our next question will come from Matt Howlett with B. Riley Securities.

Good morning, everyone. This is Mike Schaefer on for Matt. So, I was wondering if you could give some commentary on the overall reverse space in the context of interest rate volatility that we're seeing and kind of how you'd expect that outlook to adapt as the Fed roadmap develops.

Hey, Mike. Thanks for your question. Look, in a reverse space, look, it's no surprise reverse originations, the reverse originations market opportunity has declined substantially, probably more than 50% with the rise in interest rates. Heck of mortgages are a variable rate; short end of the curve is very high. So, again, the amount of, even though there's been home price appreciation, because interest rates have gone up quite a bit, the amount of equity that people could tap in their house with the reverse mortgage is limited by the level of interest rates. So we have seen a rich nations volume come down. That said, I think it's fair to say that, we are, if you look at the league tables on HECM issuance, we're still either number three or number four in the league tables. And, year over year, our share is going up. What we've seen during the course of 2023 has been a fair amount of volatility in what's called the discount margin or spread. Essentially that reverse mortgage backed securities get priced off of, or HECM securities get priced off of. So that spread volatility has impacted our originations business, and frankly has impacted the valuation of our MSR portfolio. As market conditions continue to normalize, we would expect to see those spreads stabilize and approach longer term averages. And I would say over right now, HECM spreads are probably a good 20, 30 basis points at a minimum above the long-term average, maybe even more. In the servicing space, the servicing side of the business continues to perform very well for us. The platform we acquired from, RMS, reverse mortgage servicing, the, , MAM waterfall had previously owned, performing well, we've driven a lot of cost productivity. And, as we discussed, the special servicing side of that business performs extremely well, and has given us the opportunity to take advantage of opportunistic assets purchases and generate decent returns for the company. So I think the reverse space is still one we like. I still think the demographics of the US population support long-term, stable, consistent growth and reverse mortgage originations, but it's been a choppy market and that's been, it's affected the industry and I think it's us and others. But again, we think there's a long-term opportunity in both the origination and the servicing side.

Sure, thank you. So as far as the opportunistic side of the reverse segment, I see on the deck that you're not expecting any whole loan purchases in Q3, but I was curious if you could quantify what you might think that would look like for the next year?

So because these are opportunistic asset purchases, it's really hard to quantify. And I think I said on the call that, look, it's right now trying, while we are working on a couple of things, both on the forward and reverse side, it's really hard to dimension it. Yes, they could be small opportunities, could be large opportunities. So unfortunately right now, I just can't, I really can't dimension it, other than to say that, we are seeing an increased number of opportunities pop up in the market. But here, obviously, you've got to buy the assets right, you've got to price them right, but I'm convinced that the assets come to market and we can acquire them at a fair price. That makes sense for us. We certainly have the servicing skills to address it and generate nice returns.

All right. Sounds good. I appreciate it, thank you.

Thank you, Mike.

[Operator Instructions] And our next question will come from Derek Sommers with Jefferies.

Hey, good morning, everyone. Just given the increased capital requirements for mortgage activities at banks and the correspondent volume trend at Wells Fargo, I was wondering if you all could provide kind of an update on how things are shaking out among the correspondent sellers. Has that market share been reallocated? Is the wallet share still shifting or things stabilized? Thanks.

Good morning, Derek. Thanks for your question. So, we are seeing, look, we saw the correspondent market conditions improve in the second quarter. We still, like I said on the call, we still believe there are certain market leaders whose view of MSR values is not necessarily reflective of what we're seeing in the bulk market. That aside, our volume went up and our margins went up as well too. So I think the market's beginning to improve. I'd say the capacity that existed or that shifted from Wells Fargo is kind of balanced around. I think there's always an opportunity for performance relationship, an opportunity to expand our customer base. As Sean talked about, our correspondent customer base continued to grow in the second quarter, and the team is continuing to look to add new sellers for the balance of the year. I still think there's an opportunity to grow in the correspondence base for the balance of the year. Correspondent, we're getting very attractive. We call it cash on cash yields, which includes the quote origination margin. So we're essentially buying the MSR at a price lower than its fair value. So we feel good about our position in Correspondent. I think our team there is executing really well. I think the returns we're seeing are attractive and we're approaching the market with a very disciplined and thoughtful approach, making sure we price consistent with our cost of capital and where our MSR investors are looking to, the returns they're looking to get. So, I think with the new bank capital standards, it's going to create more opportunity for those who aren't affected by those capital standards. Our focus on growing our portfolio on a capital-like basis with MSR investor partners, we've got four now, we're looking to expand that. And I think the more capital partners we have in the portfolio within reason, gives us multiple investors with different buy box appetites, so to speak, which will allow us to take advantage of the growth opportunity should volume shift into the correspondent sector and the bulk markets as a result of banks perhaps exiting or not being as aggressive in the MSR space as they have been historically. So, I think it's an exciting time for us and others in this industry.

Got it. Thank you. That's a helpful commentary. And then just one more, just on the guidance, it seems consistent quarter to quarter and previously the 9% free tax ROE was contingent upon the origination segment normalizing. With this quarter's improvement in gain on sale margin, do you view the normalization as primarily missing volume or further increases in margins? Or what's the missing piece for that segment to normalize?

Yes, I mean, for us, I think it'd be a little bit more volume. As you think is fairly widely known, look, the home sales transactions are just not robust, right, for all the reasons that people talk about. People have golden handcuffs with low mortgage rates and all kinds of good stuff, right? So I would love to see a little bit more volume activity in the marketplace. I think that would be good and healthy for the industry and certainly good and healthy for the home buyer, home builder segment as well too. So I think it is a volume issue at this stage of the game. Again, I think conditions are improving. We did see volume go up in the second quarter, and right now, I'd say the early read on the third quarter from, what we saw in the press is, home sales were up for June, which, and there were home purchase applications were up in June, so that would bode well for, July and August, in the summer buying season. But it's just not as robust as we'd like to see it.

Got it. Thank you. That's all for me.

Great. Thanks, Derek.

Our next question today will come from Howard Amster with Ramat Securities.

Hi, Glen. Just wondered why the employee costs went up like $28 million for the quarter and also from the previous year?

And Howard, good morning, by the way. Thank you for your question. It's great to hear from you. Sean O’Neil : Good morning, Howard. So our staffing was flat quarter-over-quarter. We did pay higher incentive comp in some of the businesses like correspondent and CD, given the much higher volumes we experienced in some of those channels. So that was the primary driver of that, as well as merit raises came through, which during a period of high inflation, that's one of the things we have to do to make sure we're taking care of our employees to grant merit. So confident Fannie went up, staffing stayed low.

I see. Was any of that due to severance? I mean, $28 million on a $56 million base seemed really high, just maybe above like merit increases.

I'm looking at the three months ended page 21 of our appendix. three months ended June 22, comp and [indiscernible] was $84 million. Three months ended June 30th, 2023 was $58 million. So I'm seeing a reduction and, it looks like it's relatively flat to the first quarter as well. Sean, am I reading it right? I maybe I misunderstood. Sean O’Neil : Yes, Howard you may be looking at the June 30, it starts June 30, 2022, and then it jumps end of Q1 to end of Q2 and Q1 to Q2 on page 21 is flat at 58.

Got you. Okay, I must have read it wrong. Thank you very much. Thank you.

No worries, sir. All good. Yes. Sean O’Neil : Okay, good.

And this concludes our question-and-answer session. I'd like to turn the call back to Glenn Messina for any additional or closing remarks.

Thank you, Jen. Look, I'd like to thank our shareholders and key business partners for their unyielding support of our business. And I'd also like to thank and recognize our Board of Directors and global business team for their continued hard work and commitment to our business. I'm excited about the results we delivered for the quarter and I look forward to updating you on our progress at our next earnings call. Thank you.

And this concludes today's conference. Thank you all for attending. Have a pleasant day.