Good morning, ladies and gentlemen, and welcome to the Ocwen Financial Corporation Fourth Quarter Earnings and Business Update Conference Call. [Operator Instructions] This call is being recorded on Tuesday, February 27, 2024. I would now like to turn the conference over to Dico Akseraylian, Senior Vice President, Corporate Communications. Please go ahead.

Good morning, and thank you for joining us for Ocwen's fourth quarter and full year 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, to different degrees, uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements. Forward-looking statements speak only as of the date they are made and involve assumptions, risks and uncertainties, including those 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 references to non-GAAP financial measures, such as adjusted pretax 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 non-GAAP measures used in this presentation to their most directly comparable GAAP measures and management's view on why these measures may be useful to investors may be found in the press release and the appendix to 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 fourth quarter and the full year and take you through our actions to address the market environment and deliver long-term value for our shareholders. Please turn to Slide 3. Ocwen has undergone a significant transformation since 2019. Guided by our strategy, we've transformed the company into a well-balanced mortgage originator and servicer that creates positive outcomes for clients, homeowners, investors and communities. We've built up from our foundation in special residential and small-balance commercial loan servicing with the PHH and RMS acquisitions to include performing agency and reverse mortgage servicing. Today, we're a top 10 nonbank servicer by UPB, with broad capabilities and multiple industry awards for delivering top-tier industry performance for customers and investors. We've added multichannel originations capabilities to replenish and grow our servicing portfolio and provide earnings balance through interest rate cycles. Our originations platform ranks as a top 10 correspondent lender and top five reverse lender by volume and endorsements, respectively, and we've substantially improved our portfolio recapture capabilities over the past four years. We believe our originations platform is positioned to grow volume and earnings should the forecast for lower interest rates in the second half of 2024 materialize. We've invested in technology to enable low costs, high performance and improve the customer experience. We replatformed the entire business, invested in multiple digital interface channels, such as our AI-enabled chat bots and mobile app, and enabling technologies like robotic process automation. Our technology-enabled global operating platform is scalable, with a highly competitive cost structure, and we believe we will deliver further profitability improvement as we increase our total servicing UPB. Servicing is a capital-intensive business. So we focused on driving prudent capital-light growth to reduce capital demands.…

Thank you, Glen. Please turn to Slide 10 for our financial highlights. I'm going to cover both fourth quarter and full year 2023 results. Overall, I'm proud of our positive progress and results for both the quarter and the year and excited about our financial outlook for 2024. For the quarter, the headline is both our servicing and origination businesses continued their profitable trend and collectively demonstrated yet another quarter of improving positive adjusted pretax income. Let's start with the fourth quarter first, the gray column in the middle of the page. The decline in GAAP net income, negative $47 million versus prior quarter's positive $8 million, was driven by interest rate impacts on our MSR, net of hedge, due to about an 80-basis point decline in rates. The adjusted pretax income is up from Q3 to $11 million for the quarter, driven by servicing, with a small contribution from originations. This resulted in an adjusted pretax ROE in line with our prior guidance of 9.4%. Fourth quarter was also up year-over-year, by $7 million, due to both higher revenue and lower costs. For the full year 2023, please go to the far right to the blue column, where we recognized GAAP net income loss of $64 million, primarily driven by MSR fair value changes and hedging performance. Our full year adjusted pretax income of $49 million illustrates the strength of our year, bringing our adjusted ROE back to low double digits, at 10.1%. Finishing off the table to the left, I'd note liquidity ended the fourth quarter higher than normal, due to cash inflows from the MSR hedges and seasonally lower origination volumes. Our portfolio of tax net operating loss carryforwards continued to have a positive effect, as the NOL saved us over $3 million in cash by mitigating…

Thanks, Sean. Please turn to Slide 18 for a few wrap-up comments before we go to Q&A. I'm excited about how we're entering 2024 and believe we are well positioned, to navigate the market environment ahead and deliver long-term value for our shareholders. Our balanced and diversified business creates opportunities, mitigates risks and supports our ability to perform across multiple business cycles. We're executing a focused prudent capital-light growth strategy, leveraging our superior operating capabilities, to grow subservicing across multiple investor and product types. We've expanded our client base, grown our originations volume mix from higher-margin channels and products, and continue to improve recap performance, and believe our originations platform is positioned to take advantage of declining interest rates. We have a strong pipeline of subservicing boarding commitments, and we've expanded our MSR capital partner relationships, to accelerate subservicing growth. Our servicing platform delivers top-tier operational performance levels, resulting in measurable improvements for clients, borrowers and investors. Through our investment in technology, global operating capability and process improvement, we've built a scalable servicing platform with the best practice cost structure and capacity for growth that delivers improved borrower, and client satisfaction. Lastly, 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 risks. 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 the strength of our business. And with that, Joelle, let's open up the call for questions.

Thank you. [Operator Instructions] Your first question comes from Bose George with KBW. Please go ahead.

Hi, everyone. Good morning. I wanted to ask just on the new, the 100% hedge ratio, does that also hedge the escrow income component? So like if the curve - if the Fed cuts and the curve steepens, with long rates remaining still somewhat elevated, how does that look in terms of the hedge effectiveness?

Yes, good morning, Bose, the short answer is, yes, we're hedging all components of MSR fair value change. I think as you may know as well, there's two ways in which the escrow can impact the P&L. There's the initial Day one mark-to-market as interest rates change, and that's covered in our hedge coverage ratio, the 100% hedge coverage ratio target. But on an ongoing basis, obviously, if interest rates, the short end of the curve drops. We'd have less float earnings that, on an ongoing basis, accreted to our P&L. And that's really hedged on an ongoing basis with our floating-rate debt, right? So if the short end of the curve comes down, our floating-rate interest expense would come down with it as well, too. So, we've got both components effectively hedged.

Okay. Great. Thanks. And then actually switching over to the debt repurchases, can you - you've got the PMC and you've got the two senior debts. Which ones are your repurchasing? And when you talk about the refinancing, is that the 2026 that you're focused on, I assume?

Sean?

Bose, it's Sean here. We can actually repurchase either debt. Currently, we've been repurchasing the PHH debt, and that's, because we can buy that at a discount and generate a gain, as well as that it maturing a year earlier than the OFC debt. And yes, when I referred to a debt refinance, I was referring to the earlier maturity, which is $360 million of principal balance, which matures in three of '26.

Okay. Okay, great. Thanks a lot.

Your next question comes from Derek Sommers with Jefferies. Please go ahead.

Hi, good morning. I was wondering if you could walk through the puts and takes, of better industry participation in the reverse market. On one hand, there'd be obviously more competition. But on the other, there might be increased customer awareness of the reverse product, and better secondary market liquidity. Just wanted to get your thoughts on that?

Yeah, good morning, Derek. So look, one of the - our firm view has been the reverse mortgage product has really suffered from a lack of distribution. It has been a small niche-based industry on players who focus principally on reverse products, and we think that's limited the growth potential of the product in our view. So, we were named as one of the Partners of the Year by the National Association of Mortgage Brokers for our efforts to educate the broker community on reverse mortgages. And we're supporting a number of our clients, correspondent clients, in the forward space in their distribution of their reverse mortgage product. Look, because we participate in all segments of the reverse industry from an originations perspective, so direct-to-consumer, wholesale and correspondent, look, we tend to - we would expect to benefit the most in our correspondent channel by growing, or seeing a growth in forward originators moving into the reverse product space. And then obviously, as one of the only originators who services and subservices reverse MSRs as well as originates, that creates additional growth opportunity for us on the servicing and owned MSR portfolios. So look, we're excited about forward players getting into this industry. We think there's a large untapped potential out there that needs distribution.

Got it. Thank you. And then just looking at Slide 17, with your '24 guidance, can you talk about what kind of interest rate environment is embedded into that guidance?

Yes Sean?

Hi Derek, yes we forecast our volumes and, most specifically, origination activity on a flat non-flexing interest rate view. So if interest rates decline from where they finished the year that will help this forecast. If they increase, it could slow it down on the originations side, with inverse effects on servicing.

Got it. Thank you. Very helpful, that's all from me.

Your next question comes from Matthew Howlett with B. Riley. Please go ahead.

Oh, hi, good morning. Thanks. And I loved the guidance, and congratulations. I just want to circle back to '26. I think, Sean, you said the next five quarters you think, you could look at the term market here. And my first question is, one, where are the bonds trading? Where do you think you can buy back the bonds today in terms of what implied yield? I mean, you had a nice write-up from S&P. Where do you think you could enter the market for - are we talking five-year, 10-year debt? We've obviously seen Cooper do deals at 7%. I mean, I don't think you're down there yet. But just talk a little bit about market color, where your bonds are trading, so forth?

Sure. Good morning Matt. So right now our bonds, the high-yield bonds, the $360 million balance I mentioned a minute ago to Bose, is trading somewhere between $91 and $92. So that's a rough yield to maturity of, call it, 12.5%. We think that as the bonds shorten in tenor and get closer to maturity, typically in the high-yield market that drives up the yield to maturity. In addition, if we continue to demonstrate the ability to pay down the existing debt that improves our leverage ratios, which should also improve the coupon at which we can refinance these. So I think we'll be competitive for, say, five to 7-year non-call to type high-yield product, when it comes time to refinance. I think we also need to demonstrate to the debt investors an ability to reduce the existing leverage prior to that transaction.

Is there a ratio you could get to, where you could get possibly upgraded? Oh, I read the S&P report. It said sort of - outlined a few metrics where you could get upgraded?

Yes, so that report specifically referenced debt to EBITDA. We think we'll be inside or lower than their projected target for the end of the year 2024. And then we do show that our - we intend that our debt-to-equity ratio measured just on kind of pure GAAP balance sheet metrics, is going to continue to improve throughout 2024. So it should come in better - the debt to equity should come in better than the 3.9 that we have as kind of a high watermark there.

That would be terrific. And then just moving to - Glen, I missed the comments on selling the owned MSR book. I mean, I see the guidance between $115 billion and $135 billion. I'm assuming the low end of that guidance assumes you'll sell some owned MSRs. But what's the case for against selling today more owned MSRs, to one of your managed funds and deleveraging that way? Would that improve your credit profile? I mean obviously, you would lose some of the earnings from the owned MSR. But just walk me through why wouldn't you start on that immediately, what's holding you back and a little bit why couldn't you even go lower than $115 billion on the owned MSRs?

I mean, I'll start here and then, Sean, you can jump in. So look, one of the things that Sean talked about was maintaining the flexibility to, if market conditions are appropriate, opportunistically sell MSRs with one of our capital partners - to one of our capital partners and convert it to subservicing so, we could - we pay down additional debt. In those type of transactions, because we are bifurcating the MSR into an owned MSR and subservicing. We have to make sure there's no value leakage in the transaction. So that is, it is going to be opportunity-dependent. And look, we are keeping that as, lack of a better term, an arrow in our quiver to accelerate debt reduction, if possible, if opportunities permit. Sean, anything you want to add?

Yes just Matt, I'd just restate that, broadly speaking, as you noted, owned MSRs generate better cash flow and better earnings. And so, we do a lot of analysis to look at our owned book, and ensure that the kind of bottom range that we provide adequately covers not just our debt service coverage ratios, but also ensures we have excess operating cash, to run the company, comfortably hedge and be prepared for kind of extreme swings in interest rates.

Look, I totally understand you have to evaluate all these factors. I guess where I'm going with this is you're growing the subservicing. I mean, you're over half. I mean, it's tremendous. You're keeping margins. You're efficient. You guided to $75 billion, $80 billion. I mean, you think you said over $24 billion in the first quarter alone. I'm assuming you're being conservative for the ads for the '24 guidance. I guess my bigger question is, I mean, do you think Ocwen eventually would just be a subservicing business and it won't own any MSRs, you just be capital-light, completely subservicing? And I guess just give me some clue where the wins coming from. I mean, are these - I know you have these capital partners, but are you also doing it on the back of other people? Just walk me through directionally where subservicing, is going to go long-term for the company, why you're being conservative in the guidance in terms of the ads in '24 and where the wins are coming from?

Matt, there's two primary sources for our subservicing. So one is with our capital partners. And obviously, that could be either - that could be newly originated MSRs that we fund with them at the time of origination. That's historically what we've called MSRX [ph]. There are portfolio sales transactions that we've executed in the past where we've sold existing MSRs, or seasoned MSRs to them. And then our capital partners go out and buy bulk transactions, and we get that as well, too. Matt, is in the bulk market all the time and they win deals, as are some of our other capital partners, and we get the benefit of adding that to our subservicing portfolio. The second group of clients is traditional independent and small regional community bank mortgage clients. So that is Guerrilla Warfare. That's hand-to-hand combat with all the competitors in the subservicing marketplace. And as their subservicing contracts come up for bid, or they're dissatisfied with their current provider, we participate in RFPs. We solicit them, some of these potential subservicing clients or even our correspondent clients, in some cases, and we win business from them as well, too. In terms of guidance being conservative, aggressive, look, we're focused on - we've got $29 billion of commitments from clients to board subservicing with us in the first half of the year. Last year, we did see a number of clients, because of the difficult originations market, really tap the brakes on converting - switching subservicing providers largely, because they had bigger buyers to deal with it on the originations side of their business. And in some cases, they actually sold MSRs, right? And while they had an opportunity, they needed to raise cash and they sold MSRs completely. So, I think as we look forward into 2024, we're excited that, we've got a robust pipeline of committed boardings with us. It's 1.5 times the IMB boardings we had in 2023. But we have to see how the environment unfolds and whether, or not there's going to be more IMBs selling MSRs. But make no mistake about it, it's a priority for the business, and we want to grow it and grow it aggressively. And we certainly believe on an apples-to-apples comparison, we, as a service provider in the subservicing space, compare very, very well to any of our competitors.

Yes, I would absolutely agree. I appreciate it, Glen and Sean.

Thank you.

[Operator Instructions] Your next question comes from Eric Hagen with BTIG. Please go ahead.

Hi, thanks. Good morning. Hi, you guys talked about the MSR advances dragging on earnings. Can you say how dilutive to earnings it was, last quarter and last year? And it feels like the credit environment, is kind of priced to perfection, to a degree. I mean, where do you feel like we could see improvements in that portfolio from this point forward?

Yes. So for servicing advances, the math is actually pretty simple. We've got $458 million of advances. Sean, I don't know if we disclose publicly what the average advance rate is for servicing advances; that's probably going to be in the K, right? If you look at one of the tables in the K, you can calculate the advance rate. And actually, the weighted-average cost is going to be in there as well, too. So we can go through the extended math and calculate that. If you assume an 8% borrowing cost and some advance rate times the balance, that's just what the carrying cost is, right? So at $458 million, it's a pretty meaningful number. So everything we do to leverage our special servicing skills to drop that balance, and we're proud of the progress we've made, we've got to continue that momentum and build that flywheel effect and continue, to drive that balance down.

Okay. Thanks. How do you feel like shorter-term volatility in the MSR portfolio, could change the way you think about buying back the debt? I mean, would a big swing going the other way, would that trigger you guys being in the market more frequently buying back your own debt?

So Eric, are you saying if MSR - if interest rates drop precipitously and we lose value, will that alter our thought process on buying back the debt? I'm not sure I'm tracking the question.

Yes, that is the question. And then also going the other way. Like, if the mark were to improve, would that also change?

I wouldn't say - broadly speaking, no, which is why we like to hedge the MSR and/or even moving up from a 70% to closer to a 100% hedge coverage ratio. And the objective there is, to make us less concerned on a day-to-day basis with the interest rate, and ensure that you have an offset with the hedge to cover swings to the pro or the con. Obviously, with a very high hedge coverage ratio, if rates go up. You don't realize as much of the gains you would if you had an unhedged MSR; and same math, conversely, in the other direction. But I would say our efforts, to repurchase the debt are contingent on liquidity, but we also hold excess liquidity for larger interest rate moves.

Okay. All right. Thank you, guys.

Thank you.

Thanks, Eric.

There are no further questions at this time. I will now turn the conference over to Glen Messina. Please go ahead.

Thanks, Joelle. For everyone who joined, look, I want to thank our shareholders and key business partners for supporting our business. I'd also like to thank and recognize the Board of Directors and global business team for their hard work and commitment, to our success. And I look forward to updating all of you, on our progress at our next quarter earnings call. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.