Good morning, ladies and gentlemen, and welcome to the Ocwen Financial Corporation Third Quarter Earnings and Business Update Conference Call. [Operator Instructions] This call is being recorded on Tuesday, November 7, 2023. I would now like to turn the conference over to Mr. Dico Akseraylian, Senior Vice President, Corporate Communications.

Good morning, and thank you for joining us for Ocwen's third 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 GAAP 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.

Thanks, Dico. Good morning, and thanks for joining our call. Today, we'll review a few highlights for the third quarter and take you through our actions to address the market environment and deliver long-term value for our shareholders. Now please turn to Slide 3. I'm excited to report our third quarter results, which reflect continued progress against our key initiatives and the benefits of our balanced and diversified business. Adjusted pre-tax income for the third quarter of $10 million was primarily driven by our servicing segment. Both originations and servicing were profitable in the quarter. Adjusted pre-tax income for the quarter has improved materially versus the same quarter last year and slightly better than the second quarter, excluding the reverse whole loan transaction gain realized during that quarter. Our third quarter results achieved a 9% annualized adjusted pre-tax return on equity. Net income of $8 million or $1.10 per share is above consensus, but lower than the second quarter, again, largely driven by the reverse whole loan transaction gain reported in 2Q. Notable items for the quarter were roughly zero, largely resulting from our increased hedge coverage ratio and our market-based MSR valuation and benchmarking process. In the third quarter, total servicing UPB was up 2% versus the second quarter and up 5% versus the prior year, driven by growth in subservicing UPB. Subservicing UPB with MSR capital partners and mortgage banking clients increased 6% versus the second quarter and 10% versus prior year. We're pleased to report that we and Oaktree have mutually agreed to extend the commitment period for MAV through May of 2025. In addition, we and Rithm have mutually agreed to extend our subservicing agreement through December of 2024. We greatly appreciate our relationships with Oaktree and Rithm and the confidence they've placed in us. We…

Thanks, Sean. Please turn to Slide 17 for a few wrap-up comments before we go to Q&A. I'm proud of how our team is executing. In the third quarter, we delivered results and achieved our annualized adjusted pre-tax ROE target. Our balance and diversified business creates opportunities, mitigate risks and supports our ability to perform across multiple business cycles. We're executing a focused, prudent growth strategy, leveraging our superior operating capabilities to grow subservicing across multiple investor and product types. 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 measurable improvements for clients, bars and investors. We remain steadfast in our pursuit of industry servicing cost leadership by driving continuous cost and process improvement. Our investment in people, process improvements and technology are driving improved borrower and client satisfaction and remain committed to delivering a superior experience to borrowers and clients. We continue to expand our capital partner relationships to enable subservicing growth and capitalize on unique investment opportunities. With the support of these relationships, we are prudently managing capital and liquidity for economic and interest rate volatility and deleveraging our balance sheet as excess liquidity permits to further improve financial performance and mitigate capital structure-related risks. Overall, we're excited about the potential for our business and do not believe our recent share price is reflective of our strong financial position, growth opportunities and the strength of our business. As we continue to execute our business strategy, we believe we are well positioned to navigate the market environment ahead and deliver long-term value for our shareholders. And with that, Laura, let's open up the call for questions.

[Operator Instructions] We have our first question coming from the line of Bose George from KBW.

First wanted to just ask about the cost of service. With your servicing UPB now growing by, I guess, you said about 20% or a little more over the next couple of quarters, how do you see your cost of service trend over the course of the next year?

Bose, thanks for your question. As I said, we've got about 30% of our servicing costs that are fixed and semi variable. And obviously, those costs don't scale directly as we grow our business. So you can think about we're going to continue to drive, call it, 3% to 5% variable cost productivity in our servicing platform. We expect to deliver that on a go-forward basis. And to the extent that we are successful in delivering our growth objectives, that 30% of our servicing cost base gets leveraged quite nicely. So we think we'll continue to compare quite favorably against our peers and believe that puts us in a strong competitive position.

Okay, great. That's helpful. And then actually switching to the HECM, the mark on that. Is that on wider spreads? Like, what are the drivers that move the valuation of the HECM servicing? And also, I assume there's no hedging on that piece?

Yes. So our HECM servicing just generally acts as a hedge against our forward servicing. So HECM MSR, so to speak, react in an inverse way to interest rates than forward MSRs. So if rates go up, HECM MSRs actually lose value. And then obviously, that value can change as well by spreads widening or contracting. If spreads widen, all other things being equal, the HECM MSR value would be lower. And if they tighten, the HECM MSR value would be wider. So we look at it as a -- the reverse MSRs as a yielding hedge against our forward MSRs and as part of our overall hedging strategy.

Okay. That makes sense. And actually, just one small one. The share count -- the diluted share count looks like it went up quarter-over-quarter. What drove that?

Yes. Typically, we certainly didn’t issue any shares. So typically, the only thing that would drive the diluted share count would be the maturation of share-based compensation plans for our employees.

Our next question comes from the line of Kyle Joseph from Jefferies.

On the correspondent channel, obviously, you guys saw good volumes, a little bit of margin compression. But if you could just give us an update on the competitive dynamics there. Obviously, you had some banks pulling out rising mortgage rates in the quarter, but just give us an update on where things are competitively in that channel?

Sure. Look, the correspondent channel continues to be fiercely competitive, I would say. We are not the market price leader. We don't aim or strive to be the market price leader. There are other players who I think we all know well, PennyMac, AmeriHome and others who have a very strong correspondent presence and are fiercely competitive in that channel, even though some other people have either de-emphasized or exited the channel. So with industry volume contracting as it has in 2023, and frankly, the MBA and Fannie Mae forecast for 2024, wouldn't suggest there's going to be a material rebound in volume levels. We expect it's going to continue to be a competitive -- highly competitive channel. And again, we expect to remain disciplined and continue to focus on originating MSRs as opportunity permits consistent with our cost of capital.

Got it. Helpful. And then staying on the banks more on the servicing side, or what are we, 7 months out since Silly Valley. And obviously, there's -- we've seen a lot of headlines on capital requirements. But just in terms of behavior you're seeing in terms of net selling from that industry and potential opportunities for Ocwen on a go-forward basis?

Yes. Look, I think Wells Fargo was the most prominent in announcing they’re downsizing their MSR portfolio. We are seeing other smaller banks as well really think long and hard about do they want to own MSRs on a go-forward basis. And we are seeing some MSR packages enter the bulk market from the banking community. We expect, unfortunately, the Basel III Endgame rules are likely to put further pressure on banks who own MSRs and don’t have the capacity within the Basel III Endgame rules to hold MSRs. So we do think the bulk market is going to continue to be fairly robust for the coming several quarters as a result of just a really tough originations market affecting largely IMBs and the constraints – increasing constraints that banks are facing holding MSRs and mortgage assets.

Next question comes from the line of Eric Hagen from BTIG.

So the outlook for a 9% pre-tax ROE next year, how do you feel like that would maybe change in response to interest rates being both higher or lower? And how much of that return do you feel like is coming from the forward versus reverse origination and servicing side of the business?

Yes. Right now, I'd say, it's pretty obvious looking at our results, the majority of the returns are coming from our servicing platform. We expect on a go-forward basis that we'll continue to see, if interest rates stay steady, strong performance out of our servicing platform. That said, if rates do change in a material way, again, I think that profit dynamic, we expect would shift. We'd see more profitability coming from originations, less coming from servicing as MSR run-off would go up. And increasing originations volume typically would mean more opportunity for originations as well as -- historically, margins have typically widened as interest rates have go down and refinancing volume picks up. In terms of relative performance of reverse versus forward, Sean, you laid out that. Look, our reverse servicing and subservicing platform continues to be profitable and generates good returns. But reverse originations is struggling just like forward is. So look, it's the benefits of our balanced business model. Having both forward and reverse servicing and originations allows us to balance and balance out the impact of the interest rate environment. And we expect that will continue to serve us well on a go-forward basis.

Yes. A follow-up on that. I mean, if marks -- mark-to-market and other one-time items contribute to the ROE exceeding 9% or something thereabout or do you think that would change your approach to buying back either stock or debt?

So this quarter, I think as you saw, there was really zero neutral impact from any notable items. There wasn't any opportunistic transaction gains and distressed assets and MSR values, we're essentially fully hedged throughout the quarter. Our priority continues to be focused on deleveraging the balance sheet as we think about it. Look, our higher financial leverage relative to peers does contribute to higher earnings volatility. And we do think our stock -- the trading price of our stock reflects the fact that we have a higher leverage against the company, which creates more capital structure risk and increased potential earnings volatility. So our preference here in the near-term is really to allocate excess liquidity when it's available to repurchase debt. And as our debt ratios become more consistent with our peer group average, then we can think about a variety of different applications for our capital.

Yes. No, that makes sense. Just a couple of questions around subservicing. I mean, how should someone think about the gross margin on like incremental subservicing? Like, is there a rule of thumb for every $1 billion of subservicing you add from here? What's the kind of pre-tax profit margin? And I think I heard you guys talk about commercial subservicing. Can you talk about the nature of what you're subservicing there? And kind of how the cost may be compared to forward resi servicing?

Yes. So let me go in reverse order. So commercial and reverse subservicing has a much higher cost structure than resi forward. The requirements are more complex, particularly at the, I'll call it, end of life for reverse assets. So more complex loss mitigation and conveyance process or conveying loans back to HUD. And there's more things you have to do; occupancy certs, property inspections to make sure that they're -- the properties are kept in good stead and the like. So the servicing costs are a lot higher for small balance commercial and multifamily as well as for the reverse portfolio. If you look at our last quarter's presentation, we did show that for our typical subservicing contract on a marginal basis, so we continue to grow, we would expect that profitability would average between 2 to 3 basis points on subservicing growth as we go forward. Obviously, depending upon the size of the relationship, scale of the relationship, if it’s a plain vanilla portfolio that’s largely current, that can have a pretty broad range of 1 to 3 basis points. But generally, call it, 2, 2.5 to 3 basis points of profitability on a marginal basis for a typical servicing portfolio – subservicing relationship.

[Operator Instructions] We have our next question coming from the line of Matthew Howlett from B. Riley.

Congrats on all around good quarter. I want to focus on the debt repurchases, obviously, $15 million. I think you said it included in October. Glen, you mentioned taking down leverage to the peer group. My question is sort of how much can you knock down that senior debt? Is that the area you want to focus on in terms of deleveraging? And then in terms of liquidity, you did some of those synthetic transactions last quarter. Clearly, there's going to be some seasonality with the origination business. What could you do? What steps could you do to generate more cash for deleveraging?

So Matt, look, as we said, our growth is primarily going to be -- or we would expect our growth to primarily be in subservicing and leveraging our MSR capital partners. We do need to maintain a target level of owned MSR UPB. Our target level is between $115 billion and $135 billion to maintain what we believe are appropriate debt service coverage ratio. So while we do have our corporate debt balances, we focus on debt service coverage as well. So look, as excess liquidity permits on a go-forward basis, we would expect to continue to allocate that excess liquidity to pay down our debt. So far in the last 18 months or so, it's about $40 million of corporate debt reduction. The easiest debt to reduce is the PHH senior secured notes in the marketplace. Obviously, we'll continue to focus on various stratifications of our debt as opportunities permit to further reduce. At this stage of the game, we've not set a specific target of how much debt we want to reduce by quarter. We do think we need to maintain a prudent and flexible approach to allocating our capital against the priority of maintaining our own servicing UPB and as well allocating excess liquidity when available to reduce debt. Sean O’Neil: Yes. Matt, it's Sean. The other thing you mentioned was engaging in more synthetic subservicing transactions to promote liquidity to do something else, whether it be delever, et cetera, the constant tension we have to measure is we make significantly more -- we and any other servicer make significantly more on an owned MSR than a subservice MSR. You can see all that in the Q. And so it's kind of a -- it's a relevant target to watch where the market is. And so when the market rewards us to sell into subservicing, then it could be a useful transaction. But it frees up cash today, it's with the commensurate lower cash flows in the future. So that's something you have to take a 2 to 4-year kind of NPV on and understand what you're doing to your total cash production capability if you move in that direction.

Look, I appreciate all the actions you're taking and I certainly understand the ROEs you're getting on the owned portfolio, maybe I'll ask it a different way. Do you feel confident you can take the leverage profile, I think you said down in line with peers, those being what PennyMac and Cooper and Rithm? Do you feel like, Glen, over time -- Glen or Sean, that you can bring it down to peer levels over a certain amount of time? Is that sort of the goal here?

Yes. Look, the goal is to try to have a more normative capital structure and leverage ratio as compared to our peers. And look, we believe that's the right priority for the business. We believe it's the right way to allocate our capital on a go-forward basis to eliminate risk, potentially eliminate risk and volatility in our earnings. But look, as of now, look, it's capital allocated -- we review capital allocation all the time with the board. So as the market environment changes, we'll continuously evaluate our capital allocation priorities and make the decisions that we think are most accretive to shareholders on a go-forward basis.

No, look, you certainly deserve a multiple in line with those folks. So congrats on the progress you're making. But on the subservicing, I mean, most of that is going to be through your third-party capital partners. I mean, do you have discussions -- you've entered with subservicing with some banks in the past, sort of some negotiated transactions. Do you still have that in the pipeline where you could do -- you could win business without your third-party capital partners, you kind of just go in and subservice a portfolio for a bank, call it?

Yes. So we've got a variety of different client profile, so to speak, in our subservicing portfolio. So it would include banks, credit unions, independent mortgage banks and financial investors. Those are kind of the 4 towers essentially client profiles that we tend to look at. So yes, we've -- we do subservicing today for banks. It's good business, especially if it's a smaller regional and community bank who's got a couple of billion dollars in mortgages outstanding, really tough for them to service anywhere near a cost competitive profile to make MSR returns. That would be commensurate with their return objectives. So leveraging our subservicing capabilities with a larger scale platform with a more competitive cost structure is a good way for them to participate in offering a product to their consumers and not have the burden of the operating responsibilities.

And that's part of the guidance, right? I mean, you have some of those in the guidance or is that -- is it also the third-party capital? Just curious whether that mix is going to include?

It's all in. So look, we don't necessarily have established growth targets, so to speak, by each client profile that we discussed publicly. Our guidance on our expected growth in subservicing and what we believe we can achieve includes subservicing transactions from all client profile types.

Got you. Great. And then last question, Sean, for you. It looks like you're going to end the year profitable. And again, I always focus on that deferred tax asset. Did you release any reserve on that deferred tax asset this quarter? It doesn't look like you did. And could you give us sort of the estimated size of it? And whether or not the outlook on releasing some of that reserve partially or fully because I know it is substantial? Sean O’Neil: Yes. So we -- to your -- I'll go backwards. To your last question, we don't update our valuation allowance and total deferred tax asset, which is offset by the valuation allowance, except for annually. So you won't see that except in the K. As of the last K, it was a little north of $107 million was the deferred tax asset. You're going to see -- you'll have to see several more quarters of continued profitability before we can release that either partially or fully. So there have been no transactions that involve that other than just offsetting any existing profit with the net operating losses, but the valuation allowance has not been lifted to free up the deferred tax asset at this point.

Got you. I'm sorry. And then you said it was 100 -- remind me, you said it was $170 million or $107 million? Sean O’Neil: I believe -- I have to go back and look at our K. It was -- the actual valuation allowance includes the deferred tax asset plus some other drivers. I can give you the exact number out of the K. I don't have it handy on me right now.

Got you. Just -- if I'm looking at it right, it could be -- what you're saying, it could be as much as $20 per share. I mean, that could come on theoretically the book value if that reserve was fully released at some point in time? Sean O’Neil: At some point in time, with input from our external tax council, yes, that could have a significant impact now. The reason it also declines over time because as you produce MSRs, owned MSRs create a deferred tax liability that can offset that, but that's usually partially. We believe the [Indiscernible] releases it should be a significant improvement to our network.

Yes, exactly, your ratios are going to look completely different and you’re obviously not going to be a taxpayer for a significant period of time. Look, I appreciate that. I look forward to the update. Congrats on really solid results and good guidance.

[Operator Instructions] We have a follow-up question coming from the line of Eric Hagen from BTIG.

I think you mentioned the MSR portfolio that is owned by you is around $1.5 billion. Can you say what the advanced funding is that's associated with that $1.5 billion? And is the $642 million of net advances, is that -- like how is that allocated? Sean O’Neil : Yes. So if you look near the end of the earnings deck, there’s a page on MSR valuation. I think it is, hang on a second, Page 29 this quarter. And from there, if you look at the third quarter, you can see the GSEs or the Fannie-Freddie column, is fairly normal for delinquencies, it’s pretty low. The 30, 60, 90 buckets, 1.8. And then you can see the PLS or the non-agency column is the other extreme at 15% and the Ginnies are somewhere in the middle. And the Ginnies, as Glen pointed out earlier, actually a mix of newer Ginnies which have low, what I’d call, normal delinquencies and very old pre-2008 crisis Ginnies, which are very delinquent. The delinquent Ginnies and the delinquent PLS drive the bulk of our advances. So the vast majority of our advances are coming out of that non-agency book. Hence, Glen’s comment that we’ve had a renewed focus for several quarters now to kind of improve resolution on our non-agency book because that will bring our advances down. In terms of our kind of newer book, which would be the newer Ginnies and all the GSEs, that has relatively normative advances aligned with a fairly low delinquencies on that. And we have excess advanced capacity right now to finance in the event that advances do pick up.

There are no further questions at this time. I'd now like to turn the call back over to Mr. Glen Messina for final closing comments.

Thanks, Laura. I’d like to thank our shareholders and key business partners for their support of our business. I’d also like to thank and recognize our Board of Directors and our global business team for their hard work and commitment to our success. I look forward to updating everyone on our progress on our next quarter earnings call. Thank you.

Thank you so much. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.