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Text: Speaking on the call will be Ocwen's chief executive officer, Glen Messina; and chief financial officer, June Campbell.
We believe these non-GAAP financial measures provide a useful supplement to 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.
These statements are based on currently available information and reflect our current estimates and assessments.
The company has not finished its fourth-quarter financial closing procedures.
There can be no assurance that actual results will not differ from our current estimates and assessments, including as a result of fourth-quarter financial closing procedures and any such differences could be material.
Let's get started today on Slide 3.
We're really energized by the great progress we've made across the company.
We've executed an incredible business transformation.
We're a better balanced and more diversified mortgage originator and servicer.
We're stronger, more efficient, and better aligned with future market opportunities.
We've concluded our strategic review and are excited to announce an expansion of our strategic alliance with Oaktree Capital with their investment in OFC Holdco notes.
We believe our alliance with Oaktree can enable a level of growth and earnings per share accretion, and potential value creation that we cannot achieve on a stand-alone basis, as well as, support the refinancing of our corporate debt.
In the fourth quarter, we continued to improve profitability.
We delivered record growth in originations and we continued to reshape and diversify our servicing portfolio.
As we look ahead, we believe we are well-positioned to capitalize on potential future growth opportunities in multiple market segments and we're focused on executing five straightforward operating objectives to drive improved value for shareholders.
Let's jump to Slide 6 to discuss the outcome of our strategic review process.
Our expanded strategic alliance with Oaktree marks the conclusion to our strategic review process that we announced in May 2020.
The objective of our strategic review was to maximize long-term value for Ocwen's shareholders.
Our review of alternatives which was overseen by our board and with the support of Barclays and Credit Suisse was fulsome and robust.
Our outreach was aided by our public announcement of the strategic review process which also resulted in inbound increase by parties not included in our initial outreach.
Now we had discussions with numerous parties and all options were considered.
And at the end of the day, there were really no actionable change of control or merger opportunities that emerged from these discussions.
In the absence of a change of control transaction, we believe we need to accelerate our originations and servicing growth, and address the upcoming corporate debt maturities to maximize our value as a stand-alone company.
We concluded through our strategic review that our ability to increase the leverage of the total company using the assets of the operating company was limited by a number of factors, including proposed regulatory requirements that may increase capital and liquidity requirements for nonbank mortgage companies.
So to address our growth and refinancing objectives with these constraints, we focused our structured financing solutions that would provide incremental capital to accelerate our growth and position the company to successfully refinance our upcoming corporate debt maturities without encumbering the assets necessarily of PHH, our operating company.
We're excited to announce that we've executed definitive agreements with Oaktree for $250 million in incremental capital through Holdco notes issued by Ocwen Financial Corporation.
This is our holding company and this incremental capital is in addition to our joint venture with Oaktree MAV.
When combined with MAV, we expect the over $460 million in capital provided by Oaktree can enable us to potentially increase our earnings per share by 65% or more once the proceeds are fully invested.
We believe the Holdco notes also support our corporate debt refinancing on more favorable terms while increasing capacity for secured financing and share repurchases.
Now for these reasons, the board found the Oaktree offer to be the most compelling opportunity to enable a level of growth, earnings per share accretion, and potential long-term value creation that we could not achieve on a stand-alone basis.
We believe the Oaktree investment enhances our ability to compete and prosper, as well as, demonstrates their confidence in and commitment to Ocwen's long-term success.
Yes, starting with the Holdco notes.
These are structured with the collateral package limited to a second lien on the assets of OFC, the holding company.
There is no lien on the PHH assets or guarantees from PHH.
This is a substantially reduced collateral coverage and more deeply subordinated position in our capital structure versus our existing high-yield notes.
The limited collateral package and deep subordination enables us to treat the proceeds from the Holdco notes that gets contributed to PHH, our operating company, as equity.
And we expect this will increase our ability to leverage the assets of PHH with first lien debt and secured financing.
You know this deeply subordinated position in our capital structure relating to the Holdco notes does translate into pricing that's close to equity.
The Oaktree notes have a face value of $285 million with a $35 million original issue discount for net proceeds of $250 million.
The coupon is 12%, plus about 2% for the effective annual cost of the OID.
In addition, Oaktree will receive warrants for 12% of the fully diluted shares of Ocwen.
In terms of use of proceeds, we intend to use $100 million of the proceeds to pay down and support the refinancing of our existing corporate debt in a concurrent refinancing transaction.
We expect less restrictive covenants, eliminating amortization, and relative to existing corporate debt, extending the maturity with an expected tenure of six years on the Holdco notes.
Concurrent with the refinancing, we'll pay off our existing corporate debt per their respective terms.
The remaining $150 million in proceeds from the Holdco notes will be used to support our on book growth objectives through MSR purchases and funding a portion of the MAV investment.
We do expect the incremental capital in the operating company will allow us to improve the terms of our existing MSR financing which can create up to about $75 million in additional capital from our existing MSRs.
The proceeds from Oaktree will come in two tranches.
The first tranche is $175 million and that will come in concurrently with the closing of the corporate debt refinancing.
The remaining $75 million will come in concurrent with the closing of MAV.
Moving on to MAV.
As we announced in December, we formed a partnership joint venture with Oaktree Capital to launch an MSR asset vehicle.
This vehicle will purchase MSRs.
Oaktree will own 85% and Ocwen will own 15%.
You know, MAV expects to leverage up to $250 million in capital that will be contributed by Oaktree and Ocwen, respectively, based on our relative shares to purchase MSRs and this will be leveraged up roughly one for one with secured MSR financing.
So that gives us the capacity for up to about $60 billion in MSR UPB.
Now PHH will be the sole provider of originations, subservicing, and recaptured administrative services to MAV.
And Ocwen will also earn MSR investment returns on its capital contribution and from profit sharing on returns in MAV above 12%.
Now MAV is expected to close in the first half of 2021, subject to GSE and regulatory approvals.
In terms of benefits, MAV supports our servicing and subservicing growth objectives on a capital-efficient basis and will help generate increased cost efficiency through increased origination and servicing scale.
Moving on to Slide 8.
In terms of the financial impact of the Oaktree investment in Ocwen, we estimate that a -- on a combined basis, the Holdco notes and MAV can contribute up to $78 million in annualized pre-tax income from full deployment of the capital provided by these two structures.
We estimate full deployment of the proceeds can generate roughly $5 per share in incremental earnings on a fully diluted basis.
This translates to over a 65% increase above our potential baseline earnings per share range which assumes an after-tax ROE range of roughly 10% to 15% on about $414 million of equity.
Using a PE multiple range of some of our peers of roughly 4 times to 6 times forward earnings, the potential incremental value creation is roughly $20 to $30 per share.
This is a 7 times to 10 times multiple of the potential book value per share dilution, assuming the warrants are fully issued and the corresponding increase to our equity from the proceeds related to issuing the warrants.
The incremental investment capital will allow us to further expand our originations activities and expand our participation in the bulk purchase market.
We expect to source roughly up to $200 billion in incremental total volume over the next couple of years.
And again, it's estimated to source up to $200 billion in incremental volume over the next two years.
The total growth in volume will allow us to grow our total subservicing portfolio to roughly $300 billion by the end of 2022, assuming the NRZ subservicing contract does not renew.
So again, strong growth in the servicing portfolio resulting from the originations.
We believe it's a great time to invest in MSRs.
Pretax cash IRRs in our MSRs generated in December were about 12% before MSR financing, that translates to roughly 18% after MSR secured financing.
Now in addition, we'll continue to opportunistically evaluate M&A transactions to expand our originations and servicing capabilities which might provide enhanced returns versus MSR investments.
These estimates are based on the judgment of management and based on our current assumptions which may be subject to change based on market and industry conditions, among other things.
Look, the bottom line here is, we're really excited about our alliance with Oaktree and the opportunity it provides to enable a level of growth and earnings per share accretion and potential value creation that we could not achieve on a stand-alone basis.
Moving on to Slide 9, maybe a little bit about the fourth quarter.
So look, during 2020, we demonstrated exponential total volume growth, total cost improvement and built a scalable and efficient platform to support our future growth.
Adjusted pre-tax profitability was up roughly 15% in the fourth quarter over the third quarter despite declining origination margins.
Annualized adjusted pre-tax profitability has improved over $380 million over the second-quarter 2018 baseline for Ocwen and PHH combined.
Our multichannel origination platform continued to deliver really strong results.
Flow origination volume in the fourth quarter was up 49% over the third quarter and up over 7 times as compared to 2019.
So again, just really great performance by the originations team.
And as we talked about earlier, we're focused on accelerating our growth trajectory in 2021.
Yeah, we are focused on driving efficiency in our operating expenses.
And as a result of that efficiency and our continuous cost improvement, operating expenses are down 44% over the second-quarter 2018 baseline for Ocwen and PHH combined.
That's over a $400 million cost reduction.
So again, just great performance by the team in really rethinking and reimagining our business infrastructure.
You know, we're disappointed that settlement discussions with the CFPB did not resolve this matter and especially since we've resolved all state regulatory actions filed against Ocwen in 2017.
We engaged with the bureau in good faith throughout the course of mediation and numerous related discussions and took all actions in an attempt to reach a fair and reasonable resolution.
We increased our legal and regulatory accrual related to the CFPB matter by $13 million in the fourth quarter, resulting from our efforts to resolve the matter in mediation.
We remain steadfast in our belief that the CFPB's claims regarding Ocwen's past servicing practice are unsubstantiated and the bureau settlement demands do not reflect the merits of this case.
While we remain committed to attempting to resolve the matter prior to trial, our pending motion for summary judgment which was filed on June 5th, 2020, supports our position on this matter, and we expect to continually -- continue to vigorously defend ourselves going forward.
Look, it was a great quarter, the fourth quarter, a great year in 2020, and I could not be proud of the team of what they accomplished.
Yeah, moving to Slide 10.
Maybe a little bit about the originations platform.
We delivered a record total volume of $30 billion in the fourth quarter.
It translates to roughly an annualized run rate of about $60 billion from our flow channels and about $60 billion annualized from bulk.
Total volume for 2020 was $59 billion versus $26 billion last year, so we've doubled total volume.
Full-year flow and co-issue originations were up 8 times over last year.
Full-year bulk and subservicing adds were up over 48% as compared to last year.
Our correspondent and flow seller base increased about threefold since the fourth quarter of 2019.
You know, all of our channels delivered strong double-digit growth quarter over quarter.
As I mentioned before, cash yields and MSRs continued to be very strong, and our portfolio replenishment was exceptional.
In addition, in the fourth quarter, we were awarded multiple subservicing contracts with projected volume of $16 billion to $24 billion that we expect will board in the first and second quarter.
Now margins as well continued to contract in the fourth quarter.
We had expected that.
The average margins fell to about 56 basis points versus our expectation of 77 basis points for Q4.
This is really solely due to higher-than-expected third party volume.
Margin compression by each channel was actually slightly less than expected.
Again, here, great performance by our originations and capital markets teams and I believe we've got more room to grow.
We'll talk about that in a minute.
Turning to Slide 11.
Our servicing platform continued to deliver very strong performance in the fourth quarter.
Our servicing leadership team is doing a great job of driving continued improvement in efficiency and effectiveness and helping customers navigate through the crisis.
Our call center continued to outperform the MBA reported industry averages.
Our key claims metrics also continued to perform with nearly 100% effectiveness.
We continued to invest in technology to lower unit costs, improve performance for investors and enhance the customer experience.
Despite almost all of our people working remotely, we've continued our unparalleled track record of helping homeowners in need.
In 2020, we provided forbearance relief for over 180,000 consumers and we completed about 40 virtual borrower outreach events to reach consumers potentially impacted by the pandemic.
The strength of our originations have allowed us to grow our servicing portfolio slightly in the fourth quarter.
And we achieved roughly a 50-50 mix of owned servicing and subservicing.
Again, here, I'm really proud of how our servicing team has transformed their operation.
All our hard work over the last two years really positions us well for profitable growth, leveraging a scale -- a scalable and efficient platform for 2021.
Turning to Slide 12.
In 2021, looking ahead, the market, we expect the total originations will be down roughly about 17%, with much decline in the second half of the year.
You know Black Knight is reporting that there's still about 16 million to 17 million borrowers who are eligible for refinancing which should continue to drive the refi market in the near-term.
As well, the millennial generation is driving significant growth in the number of first-time potential homebuyers which should, long-term, also bode well for the purchase market.
Our reverse origination platform is positioned to support the financial needs of our growing senior population by tapping into an estimated $7.8 trillion of untapped home equity.
Our special servicing expertise and track record of creating non-foreclosure outcomes for consumers, you know, positions us to support the roughly 1.8 million homeowners who are still on forbearance who may need loss mitigation assistance.
We estimate that roughly 85% of these borrowers are delinquent and we further estimate that about 25% will need loss mitigation assistance.
We expect the increase in Ginnie Mae workouts as foreclosure alternatives will drive increased EBO, early buyout gain opportunities, in Ginnie Mae servicing, and the current low interest rate environment can create opportunities to drive increased realization of gains for executing call rights.
As most of you know, as rates rise, total industry volume will decline.
We also expect margins will contract and we've seen some of that this year.
However, rising rates can increase the value of our owned MSRs by extending duration and MSR amortization will slow as prepayments decrease.
The increase in MSR values, this rate rise will positively impact book value per share.
Turning to Slide 13.
You know, our focus for 2021 will be on executing five key business initiatives that we believe will help us capitalize on the opportunities that are available in the market ahead.
Those are accelerated growth, strengthen our recapture performance, improve our cost leadership position, maintain high-quality operational execution, and expand servicing revenue opportunities.
Yeah, from a regulatory perspective, we are monitoring and we'll continue to evaluate the impact that the Biden administration's key agenda items may have on our industry.
We'll also closely monitor -- be monitoring statements from the CFPB regarding any planned priorities or areas of focus.
And the President has already signed an Executive Order calling for various federal agencies to extend foreclosure and eviction moratoria, and the administration's enhanced stimulus plans could include additional protections with respect to forbearance and foreclosure, and eviction moratoria.
Any changes at the federal level will, obviously, be uniform across all competitors in the industry, and thus far, Ocwen alone, as well as, the industry has proven to be adaptable in a dynamic regulatory environment.
We expect the successful execution of our key initiatives will allow us to deliver positive GAAP earnings in 2021, with low double-digit to mid-teen after tax ROEs again by mid-2021, assuming no adverse changes in the market, industry or business conditions or legal and regulatory matters.
And June will take us through our road map for 2021 later.
And maybe I'd like to share a little bit more about each of these initiatives for 2021 on the next few pages.
Turning to Slide 14.
In 2021, our goal is to achieve over $100 billion in volume with the 40-60 mix of owned servicing and subservicing, respectively.
Our fourth-quarter run rate kind of puts us on track for those levels.
We focused on several actions to accelerate our growth trajectory by leveraging our multichannel platform.
Now we're targeting to grow our seller base again, over 450 sellers in 2021 to support our growth in correspondent and flow volume, as well as, performing and special subservicing opportunities.
We believe our broad portfolio of services, including subservicing, specialty servicing, MSR purchase through multiple delivery methods, provides a compelling value proposition.
We're also focused on expanding our product reach, so expanding our share in the Ginnie Mae market through correspondent, in the Ginnie Mae co-issue market and correspondent.
We're also working to introduce Jumbo and non-QM products, as well as, expanding our service to include best efforts and non-delegated delivery methods.
In subservicing, we're expanding our small balance commercial loan business.
That's begin to grow nicely for us.
And finally, MAV will allow us to expand our participation in the bulk market significantly which will help us create synthetic subservicing.
And finally, as I mentioned earlier, we continue to evaluate opportunities to enter higher-margin channels based on market conditions.
Now turning to Slide 15.
We continue to target achieving at least a 30% recapture rate for our recapture platform and we believe our recapture performance is only limited by our operating capacity to address available opportunities.
And our recapture team has consistently, over the last four or five quarters, grown our closings quarter over quarter and has marched up the recapture rate quite nicely, but we've still got more room to grow.
So we expect to increase staffing levels by over 40% through the course of 2021.
We're continuing to hire and train new team players in every position and intend to do so throughout the year.
We are focused on process and technology as well.
We're focused on helping new team players improve their productivity as they mature in their roles.
We're also driving continuous process improvement with our process improvement teams, leveraging our global workforce, and we're focused on implementing new technology to support expanding our capacity across the entire loan origination life cycle.
Yeah, moving to Slide 16.
We remain focused on driving productivity to improve our cost leadership position while maintaining high-quality operational execution.
We're targeting to reduce our servicing operating cost by roughly 2 basis points of UPB in this year and reducing corporate overhead expenses by roughly 1 basis points of UPB.
We're executing over 60 technology-enabled projects across the business to drive productivity, cost reduction, improved customer experience, and support growth.
We'll continue to focus on high-quality execution at our operations relative to comparative industry benchmarks to further improve our customer experience and create value for investors and clients.
And as we did in 2020, we stand ready to support consumers in need of forbearance relief and loss mitigation assistance as they come off forbearance.
On Slide 17, finally, we're focused here on several actions aimed to expand our servicing revenue opportunities.
We're preparing for a surge in loss mitigation related to expiring Ginnie Mae forbearance plans.
We expect this will also create a potential surge in early buyouts and modification related redelivery gains.
We're tracking roughly $300 million in RMBS call right opportunities.
We expect roughly $125 million will be eligible to call in 2021 and we'll continue to evaluate the variables that impact eligibility and economics of executing these calls throughout the year.
And finally, we continue to evaluate opportunities to expand our capabilities in both forward and reverse servicing.
This is our fifth consecutive quarter of positive adjusted pre-tax income.
Revenue decreased quarter over quarter, driven primarily by lower NRZ subservicing fees, resulting from UPB transfer and runoff.
We've been awarded multiple subservicing contracts with projected volume $16 billion to $24 billion and closed approximately $15 billion of MSR bulk purchases which should largely offset the lost revenue.
MSR adjustment decrease is driven by fair value calibration for higher one-off which reduced the fair value of MSRs in the third quarter.
We also recorded $3 million of higher gain during the quarter, largely driven by higher MSR purchase volumes.
Operating expense improvement is from leveraging technology and productivity actions as we continued to invest in our originations platform.
Adjusted pre-tax income is $15 million, $2 million higher than prior quarter, as favorable MSR valuation and lower expenses offset lower revenue.
Notables in the fourth quarter include a $13 million additional CFPB accrual and $4 million in other legal accruals.
We had higher income tax expense during the quarter which excludes tax benefit on fourth-quarter legal accruals which we expect to recognize when paid in 2021 and fourth-quarter period adjustment to the CARES Act benefit for higher pre-tax income than previously estimated for the year.
We reported a GAAP net loss of $7 million, $2 million improvement over prior quarter and after the $13 million of additional CFPB accrual I previously mentioned.
Our balanced business model is operating well.
Originations growth and profitability is replenishing the servicing portfolio and offsetting one-offs.
On the left side of the slide, you can see that our multichannel platform is fueling strong originations volume with growth up 164% quarter over quarter.
Servicing originated volume is up almost 4 times quarter over quarter, driving strong replenishment of 267%.
Adjusted pre-tax income was $35 million, $2 million lower than the prior quarter as higher volume was offset by expected margin normalization and $5 million of investment in our platform.
On the right side of the slide, our servicing segment is demonstrating strong performance through the refinance cycle, delivering improved results quarter over quarter.
UPB runoff is being replenished through newly originated servicing and subservicing despite a $16 billion transfer of the NRZ portfolio previously terminated in 2020.
We have a strong subservicing pipeline with our top 15 prospects at approximately $85 billion, with additional opportunities from MAV.
We continue to optimize our cost structure through rigorous process redesign and increased automation, driving improved efficiency.
Our total exposure to loans on forbearance continues to diminish and tracks favorable to our forecast.
You can see on the left that both the total number of forbearance plans and the forbearance plans where we have ultimate responsibility to advance continue to decline.
As the chart reflects, there's a significant difference between total forbearance plans and the amount where we have ultimate responsibility to advance.
This is a function and a benefit from our strategy to maintain a mix of owned servicing and subservicing.
On the upper right chart, you can see that our owned servicing portfolio is performing favorable to other nonbank servicers in terms of percent of loans on forbearance.
We are seeing roughly 53% of our borrowers on maturing forbearance plans reinstate and 40% extend.
Roughly 4% have progressed to loss mitigation and we are awaiting decision for direction from the borrower on about 3% of plans that have matured.
Our expectation is roughly 75% of borrowers on forbearance will reinstate and less than 25% will need some form of loss assistance.
We ended the quarter with $285 million in liquidity.
We have made significant investments in bulk MSR market opportunities and originations during the quarter.
We invested $190 million in cash before financing to fund $25 billion of MSR originations, $18 billion higher than the prior quarter, largely driven by opportunistic bulk MSR acquisitions.
Our originations generated strong cash-on-cash unlevered yields of approximately 12% across all channels.
Servicing advances continue to track favorably and actual advances were 29% lower than forecast.
Lower advance originations were largely driven by higher prepayments and more forbearance plans performing.
We're focused on our five operating objectives, as highlighted by Glen earlier to achieve our profitability goals.
We expect to generate positive GAAP earnings in 2021 with low- to mid-teen after-tax ROE by mid-2021.
This page is a road map to achieving these results broken down by operating objectives in originations, servicing, and corporate segments.
I won't go through the details on the call here today, but please let me know if you'd like to review at another time as we have to go through the details.
You know, wrap up, let's turn to Page 24.
As I said at the onset, I'm just energized about the opportunities and our potential for 2021 and beyond.
We've radically transformed Ocwen.
It's a better balanced, diversified mortgage originator and servicer.
Our strategic alliance with Oaktree can provide almost $0.5 billion of incremental capital to enable a level of growth, earnings per share accretion, and potential value creation that we could just not achieve on a stand-alone basis.
We're stronger, more efficient, and better aligned to future market opportunities as a result of all the hard work of the Ocwen global team.
We're delivering record growth in originations and we continue to reshape and diversify our servicing portfolio.
As we look to the opportunities ahead, we believe we're fairly well-positioned to capitalize on the potential future growth opportunities in multiple market segments.
You know in 2021, we're focused on executing five straightforward objectives to drive improved value for shareholders and achieve our goal of low double-digit to mid-teen after-tax return on equities by mid-2021.
And you know, none of this would be possible without all the hard work of our global Ocwen team.

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ocwen financial - executed agreement with special purpose entities owned by funds and accounts managed by oaktree capital management, l.p.
ocwen financial - executed agreement with special purpose entities owned by funds and accounts managed by oaktree capital management, l.p..
ocwen financial - agreement with oaktree for a debt investment in co that would generate $250 million in proceeds.
ocwen financial - intends to utilize $100 million of proceeds from agreement with oaktree to pay down & support refinancing of existing corporate debt.

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