EDGAR 10-K Filing

Company CIK: 873860
Filing Year: 2023
Filename: 873860_10-K_2023_0001628280-23-005598.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
When we use the terms “Ocwen,” “OCN,” “we,” “us” and “our,” we are referring to Ocwen Financial Corporation and its consolidated subsidiaries.
OVERVIEW
We are a financial services company that services and originates both forward and reverse mortgage loans, through our primary brands, PHH Mortgage and Liberty Reverse Mortgage. We have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors. This long-standing core competency continues to be a guiding principle as we seek to grow our business and improve our financial performance. We are a leader in the reverse mortgage business with a strong brand and have expanded our reverse mortgage servicing competitive advantage with our acquisition of a reverse mortgage servicing platform in the fourth quarter of 2021.
We are headquartered in West Palm Beach, Florida with offices and operations in the U.S., in the United States Virgin Islands (USVI), in India and the Philippines. At December 31, 2022, approximately 75% of our workforce is located outside the U.S. Ocwen Financial Corporation is a Florida corporation organized in February 1988. With our predecessors, we have been servicing residential mortgage loans since 1988. We have been originating forward mortgage loans since 2012 and reverse mortgage loans since 2013. We currently provide solutions through our primary operating, wholly-owned subsidiary, PHH Mortgage Corporation (PMC).
BUSINESS MODEL AND SEGMENTS
Ocwen’s business model is designed to create value and maximize returns for our shareholders, and effectively allocate our resources. We have transformed into a balanced and diversified business intended to navigate challenging economic and market conditions. We seek to create value for shareholders through profitable growth, service excellence and high-quality operational execution. Our core competencies revolve around our Servicing business and we have developed a profitable Originations platform to replenish and pursue growth of our servicing portfolio.
Our Servicing business is comprised of two components, our owned MSRs and our subservicing portfolio that complement each other when managing scale. We invest our capital to fund purchases and originations of our owned MSRs and servicing advances, for which we establish a targeted return on investment. Our net return includes servicing revenue net of servicing costs, less MSR portfolio runoff, and less MSR and advance funding cost. Our net return is impacted by fair value changes of our owned MSRs, net of hedging. that vary based on market conditions. Our subservicing portfolio generates a relatively stable source of revenue. While subservicing fees are relatively lower, we do not incur any significant capital utilization or funding of advances and are not exposed to fair value volatility. In 2021, we expanded our servicing portfolio with the launch of our MSR joint venture with Oaktree, MAV. Our MAV and Rithm (formerly NRZ) servicing portfolios are effectively subservicing relationships. We target a balanced mix of our portfolio between servicing and subservicing based on capital allocation and returns. Our servicing operations and customer interactions do not differentiate whether loans are serviced or subserviced. In 2021, we also expanded our capability in reverse subservicing by acquiring the Mortgage Assets Management, LLC (formerly known as Reverse Mortgage Solutions, Inc.) (MAM (RMS)) servicing platform.
Our Originations business’ strategy is to provide self-sustained replenishment opportunities to our servicing portfolio and profitable growth. Our Originations success is built on our relationships with borrowers, lenders and other market participants. We purchase MSRs through bulk portfolio purchases, through flow purchase agreements with our network of mortgage companies and financial institutions, and through participation in the Agency Cash Window (or Co-Issue) programs. In order to diversify our sources of servicing and reduce our reliance on others, we have been developing our origination of MSRs through different channels, including our portfolio recapture channel, retail, wholesale and correspondent lending. In 2021, we expanded our correspondent lending channel by acquiring Texas Capital Bank’s (TCB) network of approximately 220 correspondent lenders.
The chart below summarizes our current business model:
We report our activities in three segments, Servicing, Originations and Corporate Items and Other, which reflect other business activities that are currently individually insignificant. Our business segments reflect the internal reporting that we use to evaluate operating performance of services and to assess the allocation of our resources. The financial information of our segments is presented in our financial statements in Note 22 - Business Segment Reporting and discussed in the individual business operations sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Servicing
Our Servicing business is primarily comprised of our residential forward mortgage servicing business that currently accounts for the majority of our total revenues, our reverse mortgage servicing business, and our small commercial mortgage servicing business. Our servicing clients include some of the largest financial institutions in the U.S., including the GSEs, Ginnie Mae, Rithm and non-Agency residential mortgage-backed securities (RMBS) trusts, MAV and MAM (RMS).
As of December 31, 2022, our servicing portfolio consisted of approximately 1.4 million loans with a UPB of $289.8 billion.
Servicing involves the collection of principal and interest payments from borrowers, the administration of tax and insurance escrow accounts, the collection of insurance claims, the management of loans that are delinquent or in foreclosure or bankruptcy, including making servicing advances, evaluating loans for modification and other loss mitigation activities and, if necessary, foreclosure referrals and the sale of the underlying mortgaged property following foreclosure (REO) on behalf of mortgage loan investors or other servicers. Master servicing involves the collection of payments from servicers and the distribution of funds to investors in mortgage and asset-backed securities and whole loan packages. Reverse servicing includes additional functions such as the funding of borrowers under their approved borrowing capacity, the repurchase of loans and assignment to HUD upon reaching a limit (based on the maximum claim amount) and the securitization of tails under the Ginnie Mae program. We earn contractual monthly servicing fees (which are typically payable as a percentage of UPB) pursuant to servicing agreements as well as other ancillary fees relating to our servicing activities such as late fees and, in certain circumstances, REO referral commissions.
We own MSRs outright, where we typically receive all the servicing economics, and we subservice on behalf of other institutions that own the MSRs, in which case we typically earn a smaller fee for performing the subservicing activities. Special servicing is a form of subservicing where we generally manage only delinquent loans on behalf of a loan owner. We typically earn subservicing and special servicing fees either as a percentage of UPB or on a per loan basis based on delinquency status. Our reverse owned servicing activities are reflected in our financial statements with the portfolio of securitized reverse loans held for investment and the related HMBS borrowings. We manage our reverse owned servicing activities consistent with our outright ownership of the associated HECM MSR (HMSR).
Servicing advances are an important component of our business and are amounts that we, as MSR owner, are required to advance to, or on behalf of, investors if we do not receive such amounts from borrowers. These amounts include principal and interest payments, property taxes and insurance premiums and amounts to maintain, repair and market real estate properties on behalf of our servicing clients. Most of our advances have the highest reimbursement priority such that we are entitled to
repayment of the advances from the loan or property liquidation proceeds before most other claims on these proceeds. Advances are contractually non-interest bearing. The costs incurred by servicers in meeting advancing obligations consist principally of the interest expense incurred in financing the advance receivables and the costs of arranging such financing. Under subservicing agreements, Ocwen is promptly reimbursed by the owners of the MSRs who generally finance the advances and incur the associated financing cost.
Reducing delinquencies is important to our business because it enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Performing loans also require less work and thus are generally less costly to service. While increasing borrower participation in loan modification programs is a critical component of our ability to reduce delinquencies, borrower compliance with those modifications is also an important factor.
Our servicing portfolio naturally decreases over time as homeowners make regularly scheduled mortgage payments, prepay loans prior to maturity, refinance with a mortgage loan not serviced by us or involuntarily liquidate through foreclosure or other liquidation process. In addition, existing clients may determine to terminate their servicing and subservicing arrangements with us and transfer the servicing to others. Therefore, our ability to maintain or grow our servicing revenue or the size of our servicing portfolio depends on our ability to acquire the right to service or subservice additional mortgage loans at a rate that exceeds portfolio runoff and any client terminations. Our Originations segment is focused on profitably replenishing and growing our servicing and subservicing portfolios.
Originations
The primary source of revenue of our Originations segment is our gain on sale of loans. We originate and purchase residential mortgage loans that we sell to Agencies or securitize on a servicing retained basis, thereby generating mortgage servicing rights. Our mortgage loans are conventional (conforming to the underwriting standards of the GSEs) and government-insured loans (insured by the FHA or VA) (collectively Agency loans). We generally package and sell the loans in the secondary mortgage market, through GSE and Ginnie Mae guaranteed securitizations and whole loan transactions. We originate forward mortgage loans directly with customers (consumer direct channel) as well as through correspondent lending arrangements. We originate reverse mortgage loans in all three channels, through our correspondent lending arrangements, broker relationships (wholesale) and retail channels. Per-loan margins vary by channel, with correspondent typically being the lowest margin and retail the highest, commensurate with fulfillment costs. Similarly, origination margins are generally higher for reverse mortgages than forward mortgages.
In addition to our originated MSRs, we acquire MSRs through multiple channels, including flow purchase agreements, the Agency Cash Window programs and bulk MSR purchases. Our Originations business also includes the sourcing and acquisition of new subservicing clients.
In 2022, our Originations business generated total volume additions of $88.8 billion in UPB (refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview for further details).
Retail Lending. We originate forward and reverse mortgage loans directly with borrowers through our retail lending business. Our forward lending business benefits from our servicing portfolio by offering refinance options to qualified borrowers seeking to lower their mortgage payments. Depending on borrower eligibility, we refinance eligible customers into conforming or government-insured products. We are focused on increasing recapture rates on our existing servicing portfolio to grow this business. We also are increasing our ability to originate retail loans to non-Ocwen servicing customers through various marketing channels. Through lead campaigns and direct marketing, the retail channel seeks to convert leads into loans in a cost-efficient manner. In 2022. we rapidly adjusted our scale and resources to stressed market conditions.
Correspondent Lending. Our correspondent lending operation purchases forward and reverse mortgage loans that have been originated by a network of approved third-party lenders. All the lenders participating in our correspondent lending program are approved under our lending and risk management programs. We also employ an ongoing monitoring and renewal process for participating lenders that includes an evaluation of the performance of the loans they have sold to us. We perform a variety of pre- and post-funding review procedures to ensure that the loans we purchase conform to our requirements and to the requirements of the investors to whom we sell loans.
Wholesale Lending. We originate reverse mortgage loans through a network of approved brokers. Brokers are subject to a formal approval and monitoring process. We underwrite all loans originated through this channel consistent with the underwriting standards required by the ultimate investor prior to funding.
We provide customary origination representations and warranties to investors in connection with our loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved originators relating to loans we purchase through our correspondent lending channel. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur.
MSR Purchases. We purchase MSRs through flow purchase agreements, the Agency Cash Window programs and bulk MSR purchases. The Agency Cash Window programs we participate in, and purchase MSRs from, allow mortgage companies and financial institutions to sell whole loans to the respective Agency and sell the MSR to the winning bidder servicing released. In addition, we partner with other originators to replenish our MSR through flow purchase agreements. We do not provide any origination representations and warranties in connection with our MSR purchases through MSR flow purchase agreements or Agency Cash Window programs.
New Servicing and Subservicing Acquisitions. Our enterprise sales department strives to expand our network of servicing and subservicing clients and source new flow and co-issue or subservicing agreements. We compete as a low cost provider with our demonstrated expertise to service mortgage assets across borrowers of every credit level and with our recapture ability.
REGULATION
Our business is subject to extensive regulation and supervision by federal, state, local and foreign governmental authorities, including the CFPB, HUD, the SEC and various state agencies that license our servicing and lending activities. Accordingly, we are regularly subject to examinations, inquiries and requests, including civil investigative demands and subpoenas. The GSEs and their conservator, the Federal Housing Finance Agency (FHFA), Ginnie Mae, the United States Treasury Department, various investors, non-Agency securitization trustees and others also subject us to periodic reviews and audits. See Item 1A. Risk Factors - Legal and Regulatory Risks for further information.
We have faced and expect to continue to face heightened regulatory scrutiny as well as stricter and more comprehensive regulation of the entire mortgage sector. We continue to work diligently to assess and understand the implications of the regulatory environment in which we operate and to meet the requirements of this constantly changing environment. In the normal course of business, we devote substantial resources to regulatory compliance, while, at the same time, striving to meet the needs and expectations of our customers, clients and other stakeholders. See Item 1A. Risk Factors - Legal and Regulatory Risks for further information.
We must comply with a large number of federal, state and local consumer protection and other laws and regulations, including, among others, the CARES Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Telephone Consumer Protection Act (TCPA), the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act (FDCPA), the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, as well as individual state and local laws, and federal and local bankruptcy rules. These laws and regulations apply to all facets of our business, including, but not limited to, licensing, loan originations, consumer disclosures, default servicing and collections, foreclosure, filing of claims, registration of vacant or foreclosed properties, handling of escrow accounts, payment application, interest rate adjustments, assessment of fees, loss mitigation, use of credit reports, handling of unclaimed property, safeguarding of non-public personally identifiable information about our customers, and the ability of our employees to work remotely. These complex requirements can and do change as laws and regulations are enacted, promulgated, amended, interpreted and enforced. See Item 1A. Risk Factors - Legal and Regulatory Risks for further information.
In addition, a number of foreign laws and regulations apply to our operations outside of the U.S., including laws and regulations that govern licensing, privacy, employment, safety, payroll and other taxes and insurance and laws and regulations that govern the creation, continuation and the winding up of companies as well as the relationships between shareholders, our corporate entities, the public and the government in these countries. Our foreign subsidiaries are subject to inquiries and examinations from foreign governmental regulators in the countries in which we operate outside of the U.S. Finally, our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. The minimum net worth requirements to which our licensed entities are subject are unique to each state and type of license. See Item 1A. Risk Factors - Legal and Regulatory Risks for further information.
The general trend among federal, state and local legislative bodies and regulatory agencies as well as state attorneys general has been toward increasing laws, regulations, investigative proceedings and enforcement actions with regard to residential mortgage lenders and servicers, which could increase the possibility of adverse regulatory action against us. The CFPB continues to take a very active role in the mortgage industry, and its rule-making and regulatory agenda relating to loan servicing and origination continues to evolve. Individual states have also been active, as have other regulatory organizations such as the Multistate Mortgage Committee (MMC), a multistate coalition of various mortgage banking regulators. In addition to their traditional focus on licensing and examination matters, certain regulators make observations, recommendations or demands with respect to areas such as corporate governance, safety and soundness and risk and compliance management.
The CFPB and state regulators have also focused on the use and adequacy of technology in the mortgage servicing industry, privacy concerns and other topical issues, such as discontinuation of the London Interbank Offered Rate (LIBOR), communications from debt collectors, the ability of borrowers to repay mortgage loans, or servicer responses to the COVID-19 pandemic. In March 2020, the CARES Act was signed into law, allowing borrowers affected by COVID-19 to request temporary loan forbearance for federally backed mortgage loans. In addition, multiple forbearance programs, moratoria of foreclosure and eviction and other requirements to assist borrowers enduring financial hardship due to COVID-19 were implemented by states, agencies and regulators. Further, the CFPB promulgated certain amendments to RESPA (Regulation X) that became effective on August 31, 2021 and that impose certain additional COVID-19-related requirements with respect to loss mitigation, early intervention call requirements, and initiating new foreclosures. The CFPB moratorium on new foreclosures sunset on January 1, 2022, although some states continue to impose certain foreclosure moratoria, including in connection with their respective Homeowner Assistance Fund programs.
COMPETITION
The financial services markets in which we operate are highly competitive and fragmented, and we expect them to remain so. We compete with large and small financial services companies, including bank and non-bank entities, in the servicing, lending and MSR transaction markets. Our competitors include large and regional banks, large non-bank servicers and mortgage originators, and real estate investment trusts. In both our servicing and originations business, new competitors continue to emerge, including companies that developed new technology around customer interactions and process automation.
In our Servicing business, we compete based on price, operating performance, service quality and customer and client satisfaction. Potential counterparties also (1) assess our regulatory compliance track record and examine our systems and processes for maintaining and demonstrating regulatory compliance, (2) consider our customer satisfaction rankings, and (3) consider our third-party servicer ratings. Certain of our competitors, especially large banks, may have substantially lower costs of capital and greater financial resources, which can create competitive challenges in certain situations. We believe that our competitive strengths flow from our ability to control and drive down delinquencies using proprietary processes, our superior operating performance, our lower cost to service non-performing loans, our deep know-how as a long-time operator of servicing loans and our long-standing and well established offshore operations. For the 2022 program year, Ocwen’s mortgage subsidiary, PMC, has been recognized for servicing excellence through both Freddie Mac’s Servicer Honors and Rewards Program (SHARPSM) award in the top tier servicing group and Fannie Mae’s Servicer Total Achievement and Rewards (STARTM) performer recognition in the General Servicing category for the third and second consecutive year, respectively. In addition, PMC achieved HUD’s Tier 1 servicer ranking for the second consecutive year.
In our Originations business, we face intense competition in most areas, including rates, margin, fees, customer service and name recognition. Some of our competitors, including the larger banks, have substantially lower costs of capital and strong retail presence, which can create competitive challenges in certain situations. We will continue to face increased competitive pressures in the future as the refinance opportunities remain limited with elevated interest rates. We believe our competitive strengths flow from our existing customer relationships and from our focus on providing strong customer service, our brand recognition for our Liberty Reverse Mortgage business, our long-standing and well established offshore operations and our use of technology to produce higher levels of productivity to drive down per-loan costs.
THIRD-PARTY SERVICER RATINGS
Like other servicers, we are the subject of mortgage servicer ratings or rankings (collectively, ratings) issued and revised from time to time by rating agencies including Moody’s Investors Service, Inc. (Moody’s), S&P Global Ratings, Inc. (S&P) and Fitch Ratings, Inc. (Fitch). Favorable ratings from these agencies are important to the conduct of our loan servicing and lending businesses.
The following table summarizes our latest key servicer ratings:
PHH Mortgage Corporation (PMC)
Moody’s S&P Fitch
Forward
Residential Prime Servicer SQ3 Average RPS3+
Residential Subprime Servicer SQ3 Average RPS3+
Residential Special Servicer SQ3 Average RSS3
Residential Second/Subordinate Lien Servicer SQ3 Average RPS3
Residential Home Equity Servicer - - RPS3
Residential Alt-A Servicer - - RPS3
Master Servicer SQ3+ Above Average RMS3
Ratings Outlook N/A Stable Positive / Stable
Date of last action September 28, 2021 June 29, 2021 August 2, 2022
Reverse
Residential Reverse Servicer - Above Average -
Ratings Outlook - Stable -
Date of initial rating - May 27, 2022 -
In addition to servicer ratings, each of the agencies will from time to time assign an outlook (or a ratings watch such as Moody’s review status) to the rating status of a mortgage servicer. A negative outlook is generally used to indicate that a rating “may be lowered,” while a positive outlook is generally used to indicate a rating “may be raised.” On September 28, 2021, Moody’s upgraded the servicer quality (SQ) assessment for PMC as a master servicer of residential mortgage loans from SQ3 to SQ3+, reflecting solid reporting and remitting processes and proactive servicer oversight. On June 29, 2021, S&P affirmed PMC’s servicer rating as Average, raising management and organization ranking to Above Average. In addition, S&P raised PMC’s master servicer rating from Average to Above Average reflecting the industry experience of PMC’s management, multiple levels of internal controls to monitor operations, and resolution of regulatory actions, among other factors mentioned by S&P. On August 2, 2022, Fitch affirmed and upgraded PMC’s servicer ratings and upgraded its outlook from Stable to Positive for prime and subprime products. The ratings for the other products remain the same and the related rating outlook remains Stable. The rating actions reflect PMC’s strong post-pandemic performance, effective enterprise-wide risk environment and compliance management framework, competitive loan servicing performance metrics, and highly automated technology environment. The ratings also consider the financial condition of PMC’s parent, Ocwen Financial Corporation. The upgrades and positive outlook on PMC’s prime and subprime servicer ratings are reflective of the company’s continued portfolio growth, diversified sourcing strategies and improved performance with respect to these loan types, which represent 85% of the total servicing portfolio.
On May 27, 2022, S&P assigned an Above Average ranking to PMC as a residential reverse mortgage loan servicer. The ranking outlook is Stable. This is the initial rating for PMC as a reverse mortgage loan servicer. S&P’s ranking reflects i) PMC’s highly experienced management teams and staff with sound overall levels of turnover, ii) well-designed information technology infrastructure, cybersecurity controls, and business continuity and disaster recovery processes, iii) sound internal control environment, with multiple lines of defense and automated systems to support each function, iv) lack of material internal or external audit findings noted, based on provided reports, v) good focus on systems and workflow automation throughout loan administration processes, vi) robust default management function and claims processes, vii) scale as one of the largest reverse mortgage servicer’s in the country, with highly experienced management and staff and technology largely from prior established legacy reverse servicers; and viii) good overall reverse servicing performance metrics, except for the elevated home retention department management and staff turnover rates and call center metrics in the contact center operations.
RITHM CAPITAL CORP. (formerly known as NEW RESIDENTIAL INVESTMENT CORP. or NRZ) RELATIONSHIP
We service loans on behalf of Rithm under various agreements, including traditional subservicing agreements, where Rithm is the legal owner of the MSRs, and in connection with legacy MSR transfers, including Rights to MSRs, where Ocwen retains legal title to the underlying MSRs but Rithm has generally assumed risks and rewards consistent with an MSR owner. See Note 8 - Other Financing Liabilities, at Fair Value.
Rithm is our largest servicing client, accounting for $49.1 billion of UPB or 17% of the UPB of our total servicing portfolio as of December 31, 2022, approximately 68% of all delinquent loans that Ocwen serviced, and approximately 13% of our total servicing and subservicing fees in 2022, net of servicing fees remitted to Rithm (excluding ancillary income). In addition to a base servicing fee, we also receive some ancillary income and certain incentive fees or pay penalties tied to various contractual performance metrics. Rithm receives all float earnings and deferred servicing fees related to delinquent borrower payments, as well as certain REO-related income, including REO referral commissions. As legal MSR owner, or in compliance with the Rights to MSRs agreements, Rithm is responsible for financing all servicing advance obligations in connection with the loans underlying the MSRs.
On May 2, 2022, Ocwen and Rithm entered into amendments to extend the term of the subservicing agreements to December 31, 2023 (Second Term) and establish automatic one-year renewals, unless Ocwen or Rithm provide advance notice of termination. In addition, the parties agreed to share some ancillary revenues. The underlying loans are almost exclusively non-Agency loans, involving a higher level of operational and regulatory risk, and requiring substantial direct and oversight staffing relative to Agency loans.
Because of the relative size of the servicing agreements with Rithm, if Rithm exercises its right to terminate all or some of the agreements for convenience at the end of the Second Term on December 31, 2023, we may need to right-size certain aspects of our servicing business as well as the related corporate support functions.
OAKTREE RELATIONSHIP
We established a strategic alliance with Oaktree in 2020 to support refinancing our corporate debt and help advance our growth initiatives. The Oaktree relationship included the launch of an MSR investment vehicle (referred as MAV or MAV Canopy) to scale up our servicing business in a capital efficient manner and investments in our debt and equity.
On December 21, 2020, we entered into a Transaction Agreement with Oaktree to form a joint venture for the purpose of investing in GSE MSRs exclusively subserviced by PMC. Effective with the closing of the transaction on May 3, 2021, Oaktree and Ocwen hold 85% and 15% interests in MAV Canopy, and initially agreed to invest equity up to $250.0 million over three years. On November 2, 2022, Ocwen and Oaktree entered into an agreement modifying certain terms relating to the capitalization, management and operations of MAV Canopy. Under the terms of the agreement, Ocwen and Oaktree agreed to increase the aggregate capital contributions to MAV Canopy by up to $250.0 million through May 2, 2024 (in addition to the then contributed capital), subject to extension. Ocwen may elect to contribute its 15% pro rata share of the additional capital commitment. To the extent Ocwen does not contribute its pro rata share of the additional capital commitment, the ownership percentages held by Ocwen and Oaktree will be adjusted based on the parties’ current percentage interests, capital contributions and book value. As of December 31, 2022, our investment in MAV Canopy amounted to $42.2 million.
Pursuant to an agreement with Oaktree executed on February 2021, we issued to Oaktree in a private placement $285.0 million of Ocwen senior secured notes in two separate tranches. The initial tranche of $199.5 million senior secured notes was completed on March 4, 2021 and the additional $85.5 million tranche was completed following the launch of the MSR joint venture on May 3, 2021. In addition:
•On March 4, 2021, we issued 1,184,768 warrants to Oaktree to purchase shares of our common stock at an exercise price of $26.82 per share, subject to anti-dilution adjustments.
•On May 3, 2021, we issued 261,248 warrants to Oaktree to purchase additional common stock at an exercise price of $24.31 per share, subject to anti-dilution adjustments.
•On May 3, 2021, we issued to Oaktree 426,705 shares at a purchase price of $23.15 per share.
The net proceeds before expenses from the issuance to Oaktree of the initial tranche of senior secured notes and the warrants was $175.0 million (after $24.5 million of original issue discount) and was used, together with the proceeds from the additional debt financing, to repay in full an aggregate of $498 million of existing indebtedness, including Ocwen’s $185 million Senior Secured Term Loan, $21.5 million 6.375% senior unsecured notes due 2021 and $291.5 million 8.375% senior secured second lien notes due 2022. The net proceeds before expenses from the issuance to Oaktree of the additional tranche of senior secured notes and the warrants was approximately $75.0 million (after $10.5 million of original issue discount) and was used to fund our investment in the MSR joint venture and for general corporate purposes, including to accelerate the growth of our Originations and Servicing businesses.
In 2021 as part of the launch of the MSR joint venture, PMC entered into a number of definitive agreements with MAV, the licensed mortgage subsidiary of MAV Canopy which govern the terms of their business relationship, including a Subservicing Agreement, Joint Marketing Agreement and Recapture Agreement, and Administrative Services Agreement. This joint venture is structured to provide Oaktree with MSR investment opportunities and returns, while providing PMC scale and incremental income through exclusive subservicing and recapture services. Additionally, PMC earns direct MSR investment income through its 15% ownership stake and would be entitled to carry interest on investment returns if exceeding certain thresholds upon liquidation (referred to as Promote Distribution). Under the arrangement, MAV has a non-compete to purchase certain GSE MSRs through specific channels in cooperation with PMC. In addition, PMC must offer MAV the first opportunity to purchase GSE MSRs sold by PMC or its affiliates that meet certain criteria, which we refer to as the right of first offer. Both the non-compete and the right of first offer are subject to various restrictions and in effect until MAV has been fully funded, or, if earlier, in the case of the right of first offer, until May 3, 2024 (subject to extension by mutual consent). Also, MAV must provide Ocwen with reciprocal first offer rights prior to selling certain GSE MSRs originated by PMC after October 1, 2022 that are acquired by MAV under its own first offer rights.
PMC has exclusive rights to subservice the MSR owned by MAV and is compensated with subservicing fees in accordance with the Subservicing Agreement. The Subservicing Agreement will continue until terminated by mutual agreement of the parties or for cause, as defined.
See Note 11 - Investment in Equity Method Investee and Related Party Transactions, Note 13 - Borrowings, and Note 15 - Stockholders’ Equity to the Consolidated Financial Statements for additional information.
HUMAN CAPITAL RESOURCES
We believe the success of our organization is highly dependent on the quality and engagement of our human capital resources. Our workforce is dedicated to creating positive outcomes for homeowners, communities and investors through caring service and innovative solutions. We strive to develop a working environment and culture that fosters our company values:
•Integrity: Do What’s Right - Always
•Service Excellence: Consistently Delivering on Our Commitments
•People: Develop, Grow and Value All Employees
•Teamwork: Succeed Together as a Global Team
•Embracing Change: Value Innovation and New Thinking
We had a total of approximately 4,900 employees at December 31, 2022. Approximately 1,200 of our employees were employed in the U.S. and USVI, and approximately 3,700 of our employees were employed in our operations in India and the Philippines.
Our Board of Directors and executive leadership team places significant focus on our human capital resources through fostering and measuring employee engagement, committing to comprehensive Diversity, Equity, and Inclusion initiatives, and engaging with both internal and external groups and organizations to ensure that our culture enables employees to consistently demonstrate our company values. Important attributes of our human capital strategy include:
Diversity, Equity and Inclusion (DE&I). We are committed to be a globally diverse and inclusive workplace where every voice is heard and valued. Diversity, inclusiveness and respect are integral parts of our culture and work environment. DE&I training for all employees and unconscious bias training for leaders are parts of our learning programs to increase awareness, and employees at all levels are annually evaluated on sustaining an inclusive work environment. The pillars of our diversity program are:
•Leadership: Embrace and foster a culture of inclusion throughout Ocwen and be held accountable for achieving diversity and inclusion goals and objectives.
•Workforce: Attract, develop, retain and advance the best and brightest from all walks of life and backgrounds at all levels of the organization.
•Vendor Diversity: Achieve a range of suppliers, vendors and service providers who align with our diversity and inclusion strategies.
•Community Engagement: Ensure that Ocwen has a significant presence in and supports a core group of diverse, community-based organizations and philanthropies.
As of December 31, 2022, 48% of our employees globally are women, and 33% of our U.S. leadership roles (Director and above) are filled by women and 21% are people of color. 64% of our U.S. employees are women and 49% are people of color. Our affinity groups like the Ocwen Global Women’s Network (OGWN), LEAP Black professionals network, FREE affinity group for LGBTQ+ employees and mentoring programs, when coupled with a culture of appreciation, help provide a comprehensive ecosystem for diversity to flourish.
We also take action to support the recruitment, development and retention of our diverse talent. These programs include ensuring diverse candidate slates as part of our hiring process, tracking minority hiring, promotion, retention and representation at all levels, and assessing diverse talent as part of our succession planning.
Pay equity is an important component of Ocwen’s employment value proposition, commitment to DE&I and legal and regulatory compliance. We regularly evaluate our performance management, merit increase incentive award and promotion processes for race and gender equality, and remediate any identified compensation gaps.
Ocwen supports several organizations focused on promoting diversity in the mortgage industry, including the American Mortgage Diversity Council. We are also committed to hiring graduates from historically Black colleges and universities through the HomeFree-USA Center for Financial Advancement program.
Talent Development. We continue to foster an environment in which every team member has the opportunity to grow and achieve his or her professional goals, with support and encouragement. We regularly measure employee engagement - our employees’ pride, energy and optimism that fuels their effort - and implement action plans that respond to employee feedback. Our most recent employee survey indicated 84% favorable engagement levels. Our training platform focuses not only on the technical domain skills essential to role success, but includes competency-based programs to develop leadership capabilities and skills needed for the future. Succession planning occurs annually and is reviewed by the CEO and the Compensation and Human Capital Committee. Strategic talent reviews to identify, develop and promote top talent are part of our performance management processes. The Aspire mentoring program provides aspiring women leaders at mid-level with a platform to build skill, knowledge and expertise while achieving professional development goals through focused guidance and insight from a network of mentors.
Rewards. Our total rewards (compensation and benefits) programs are developed to attract, motivate and retain employees. They demonstrate the value the employee provides to the organization, are designed to be competitive to the marketplace, and connect directly to key business strategies. Our compensation programs, including salaries and short- and long-term incentives, are centered on our pay-for-performance philosophy, aligning the interests of employees and stakeholders by rewarding both individual and overall company performance. Ocwen’s health and welfare benefit programs strive to keep employees productive and engaged at work by serving the total well-being of employees and their families. We are committed to and regularly evaluate our practices to ensure pay is fair and equitable, and competitive to the marketplace.
Environmental, Social and Corporate Governance (ESG) Practices and Corporate Sustainability
Our Board of Directors and our management are committed to ensuring Ocwen has responsible practices to address the needs of its customers, employees and the communities it serves. Our comprehensive approach to ESG and corporate sustainability is detailed in our report “Environmental, Social and Corporate Governance (ESG) and Corporate Sustainability” on our website at www.ocwen.com in the “Shareholders” section under “Corporate Governance.” Our approach is represented by the following policies and programs:
Policy on non-discrimination. Ocwen’s non-discrimination policy provides equal employment opportunities for all qualified individuals without discrimination based upon the following legally protected characteristics: race, religious creed, color, national origin, ancestry, physical or mental disability, medical condition, genetic information, marital status (including registered domestic partnership status), sex (including pregnancy, childbirth, lactation and related medical conditions), gender (including gender identity and expression), age (40 and over), sexual orientation, Civil Air Patrol status, military and veteran status and any other consideration protected by federal, state or local law (collectively referred to as “protected characteristics”). Underlying this policy is Ocwen’s culture and values, including employees’ rights to be free from unlawful discrimination, and its commitment to providing a safe, secure and productive work environment.
Ocwen’s hiring, salary administration, promotion and transfer policies are based solely on job requirements, job performance and job-related criteria. In addition, every effort is made to ensure that Ocwen’s personnel policies and practices (including those relating to compensation, benefits, transfer, retention, termination, training and self-development opportunities, as well as social and recreational programs) are administered without discrimination on the basis of any legally protected characteristic.
Promoting equal opportunity and diversity. Ocwen is committed to providing equal opportunity in all areas of employment, compensation, training and promotion. Company policies prohibit discrimination of any form in all of the locations in which Ocwen operates. Ocwen strives to foster an environment in which all stakeholders can participate and contribute to the success of the organization’s enterprise, taking full advantage of the collective sum of individual differences, life experiences, inventiveness, self-expression and unique capabilities, knowledge and talent. Our Diversity, Equity and Inclusion Council meets quarterly to review progress related to the Ocwen’s Diversity, Equity and Inclusion Roadmap. Diversity, Equity and Inclusion updates are provided to the Executive Leadership Team on a monthly basis and to the Board of Directors as necessary. Ocwen’s Global Diversity, Equity and Inclusion Policy is reviewed on an annual basis and diversity, equity and inclusion training is provided to all employees globally. Additionally, all leaders are provided with a training course
on unconscious bias, and diversity, equity and inclusion goals are incorporated into annual performance evaluations for all people managers.
Ocwen utilizes affinity groups to help support employee development and drive inclusion, including:
•The Ocwen Global Women’s Network (OGWN) supports recruitment, development and retention initiatives for women across the organization, and serves as a sounding board for business insights, and supports the attainment of company goals in diversity, inclusion and talent development. Integrating Diversity, Equity and Inclusion into Ocwen’s culture is critical for our success and allows us to make the most of the full range of our talent. More than 2,400 employees are OGWN members.
•LEAP, which stands for Leading with Education Action and Purpose, has the mission to educate Ocwen employees globally about Black culture and the Black experience to increase inclusion across the organization. LEAP also enhances the professional development of Black employees through formal and informal mentoring, networking, learning opportunities and leadership development.
•The mission of FREE, which stands for Freedom, Respect, Expression and Equality, is to create a safe, inclusive and affirming office climate that fosters professional and personal growth for employees of all genders and sexualities through education, advocacy, outreach and support. FREE promotes a fully equitable environment that is free of judgment and strives for knowledge, challenges barriers, and seeks to help and empower LGBTQ+ employees and allies.
Commitment to Ethics. We have adopted a robust Code of Business Conduct and Ethics that applies to all employees and our Board of Directors, as well as an additional Code of Ethics for Senior Financial Officers that applies to our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. We provide multiple anonymous methods for any employee or other person to report a suspected ethical violation, including whistleblower complaints relating to accounting, internal controls, audit matters or securities law, and our policies prohibit retaliation against any person for making a good faith complaint. We also provide methods for interested individuals to contact the members of our Board of Directors and communicate directly with the Chair of our Audit Committee. Our General Counsel serves as our Chief Ethics Officer and works with members of our Internal Audit function to ensure every ethics complaint and communication to our Board is addressed in accordance with our company policies.
Benefits. Ocwen’s benefits programs strive to keep employees productive and engaged at work by serving the total well-being of employees’ and their families’ physical, mental and financial health. In the U.S., our comprehensive benefits plan includes company-sponsored medical, dental and vision; company-paid basic life, accident and disability coverage; 401(k) with company match; and supplemental group coverage for critical illness, accident, auto, home, pet, legal, identity protection, childcare/eldercare and tutoring. The medical plans include 100% coverage for all preventive care services and all generic preventive medications.
Our wellness programs offer incentives for completing preventive health screenings, participating in online and telephonic health coaching, improving or reaching targeted health scores, and increasing physical activity. Additionally, we provide employees with a comprehensive employee assistance program that includes virtual counseling, personalized health coaching for diabetes and other chronic conditions, stress management and financial planning workshops, online guided meditation and yoga, and more. Ocwen also provides a generous paid time off (PTO) program to support employees’ need to rest and recharge. Our medical and family leave programs offer paid disability absences and paid parental/adoption leave, in addition to FMLA-required schedule flexibility and job security. Outside the U.S., our employee benefit programs provide comparable and market appropriate benefits focused on supporting our employees well-being and retirement needs.
Training and development. Ocwen is committed to providing our employees with high-quality training and learning experiences targeted to increase industry knowledge levels, improve process efficiency and promote personal growth, which in turn helps improve customer experience, reduce foreclosures and contribute to our success as an organization. Ocwen facilitates professional development through the lifecycle of employees through functional business training, regulatory and compliance training, and skill and competency development programs. We also provide individualized one-on-one coaching to help customer-facing staff guide customers to positive experiences. In addition to learning programs designed to build functional and leadership competency for all levels of leadership throughout the organization, Ocwen offers a Leadership Development Training curriculum specifically designed to prepare employees at the Supervisor level and above with the competencies to make them successful in their roles as leaders. Training courses are housed in our continuously reviewed and updated learning management system.
Our training and development programs are important contributors to our ability to deliver industry-leading customer service. For the 2022 program year, Ocwen’s mortgage subsidiary, PMC, has been recognized for servicing excellence through both Freddie Mac’s SHARPSM award in the top tier servicing group and Fannie Mae’s STARTM performer recognition in the
General Servicing category for the third and second consecutive year, respectively. In addition, PMC achieved HUD’s Tier 1 servicer ranking for the second consecutive year.
Community development. At Ocwen, we believe homeownership is an important part of achieving financial independence, and our philosophy in this regard is “helping homeowners is what we do.” This philosophy is what guides us in our commitment to the communities we serve. We organize a variety of community outreach programs and events with local and national organizations around the country to assist homeowners, particularly in communities of color. Our outreach events began during the 2008 mortgage crisis and have continued since then. In 2022, we hosted 55 borrower outreach events across the country in partnership with the NAACP. In Western New York, Ocwen increased its outreach efforts to include membership in the Erie County Clerk’s Good Neighbors program, in addition to its existing participation in the Zombie Task Force and the Stay In Your Home campaign.
To better serve our communities, Ocwen created a Community Advisory Council in 2014, consisting of 15 leaders from a diverse group of national non-profit organizations, consumer advocacy groups and civil rights organizations, as a platform to collaborate and share ideas on how to help homeowners. Ocwen provides grants and sponsorship funding to a number of local and national nonprofit organizations each year, in support of the work they do to help distressed communities and homeowners. Over the past three years, Ocwen has contributed approximately $6 million to these organizations, and over $27 million since 2012.
Charitable activity. Ocwen continues to find meaningful ways to give back to the communities where we live and work. The charitable events at our office locations around the globe included distributing meals and supporting local food banks, helping economically disadvantaged children and at-risk youth, helping schools for hearing-impaired children, holding toy drives and back-to-school supply drives, helping the homeless, supporting victims of crimes, providing financial assistance to families impacted by cancer, making donations to first responders, helping communities impacted by the pandemic with donations and medical equipment, hosting blood drives through the American Red Cross and making donations to the Mortgage Bankers Association’s (MBA) Opens Doors Foundation to help families with a critically ill or injured child.
Responsible information security management. We believe Ocwen has a robust information security program in place to ensure the confidentiality, integrity and availability of data and information systems. Ocwen’s Board of Directors is briefed regularly on information security risks, which are managed by a combination of strong policies, appropriate tools and technologies and continuous people awareness. Ocwen’s cyber security controls utilize a layered defense-in-depth approach to thwart any attempts to compromise the integrity of the network. Our employees are provided regular training to identify, prevent and report cyber security risks and incidents. Our third-party risk management program evaluates and monitors our vendors’ information security practices, and all third-party vendors that process data on our behalf are required to maintain a documented information security program that meets our stringent security requirements. Ocwen’s cyber security preparedness is tested on a regular basis through a variety of assessments, including internal and external vulnerability assessments, penetration tests, incident response table top tests, breach readiness and response tests, among others.
Environmental Impact. In 2022, Ocwen continued its commitment to operate through a primarily remote working model, reducing the percentage of employees commuting daily to the office. Fewer associates in the offices afforded the opportunity to reduce our office footprint in several markets. As office space footprints were reduced, improvements were made to retrofit lighting and equipment to lower our use of natural resources. Recycling of office and paper products in all U.S. facilities continues to be a priority, which reduces our imprint on the local landfills. With the implementation and enhancement of our digital mailing service and the continued success of our electronic notice delivery and process automations, we have eliminated approximately 4.9 million paper mailings leading to a reduction of approximately 142 tons of CO2 pollution.
RISK MANAGEMENT
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established policies and procedures intended to identify, assess, monitor and manage the types of risk to which we are subject, including strategic, market, credit, liquidity and operational risks.
Our Chief Risk and Compliance Officer is responsible for the design, implementation and oversight of our global risk management and compliance programs. Risks unique to our businesses are governed through various management processes and governance committees to oversee risk and related control activities across our company and provide a framework for potential issues to be identified, assessed and remediated under the direction of senior executives from our business, finance, risk, compliance, internal audit and law departments, as applicable. Information is aggregated and reports on risk matters are made to the Board of Directors, its Risk and Compliance Committee or its other committees, as applicable, to enable the Board of Directors and its committees to fulfill their governance and oversight responsibilities.
Strategic Risk
We are exposed to risk with respect to the strategic initiatives we have taken to return to sustainable growth and profitability. Strategic risk represents the risk to shareholder or enterprise value, current or future earnings, capital and liquidity from adverse business decisions and/or improper implementation of business strategies. Management is responsible for developing and implementing business strategies that leverage our core competencies and are appropriately structured, resourced and executed. Oversight for our strategic actions is provided by the Board of Directors. Our performance, relative to our business plans and our longer-term strategic plans, is reviewed by management and the Board of Directors.
To achieve our near-term financial objectives, we believe we need to execute on the key business initiatives discussed above under “Overview”. Our ability to achieve our objectives is highly dependent on the success of our business relationships with our critical counterparties like the GSEs, FHFA, Ginnie Mae, our lenders, regulators, significant customers and our ability to attract new customers, all of which are impacted by our capability to adequately address the competitive challenges we face.
Market Risk
See Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Liquidity Risk
We are exposed to liquidity risk through our ongoing needs to: originate, purchase, repurchase and finance mortgage loans; sell mortgage loans into secondary markets; retain, acquire and finance MSRs, make and finance advances; fund and sell additional future draws by borrowers under variable rate HECM loans; meet our HMBS issuer obligations with respect to MCA repurchases; repay maturing debt; meet our contractual obligations; and otherwise fund our operations. Liquidity is an essential component of our ability to operate and grow our business; therefore, it is crucial that we maintain adequate levels of excess liquidity to fund our businesses during normal economic cycles and events of market stress.
We estimate how our liquidity needs may be impacted by a number of factors, including fluctuations in asset and liability levels due to our business strategy, asset valuations, changes in cash flows from operations, levels of interest rates, debt service requirements including contractual amortization, margin calls and maturities, and unanticipated events, including legal and regulatory expenses. We also assess market conditions and capacity for debt issuance in the various markets that we access to fund our business needs. We have established internal processes to anticipate future cash needs and continuously monitor the availability of funds pursuant to our existing debt arrangements. We monitor MSR asset valuations and communicate closely with our lenders for this asset class to ensure adequate liquidity is maintained for mark-to-market valuation changes within MSR financing facilities. We manage this risk in multiple ways, including but not limited to engaging in MSR hedging activities, and maintaining liquidity earmarks at levels to support potential changes in MSR fair values.
We regularly evaluate capital structure options that we believe will most effectively provide the necessary capacity to support our investment objectives, address upcoming debt maturities and contractual amortization, and accommodate our business needs. Our objective is to maximize the total investment capacity through diversification of our funding sources while optimizing cost, advance rates and terms.
In general, we finance our business operations through a variety of activities - cash on hand, operating cash flow, strategic investor relationships and both committed and non-committed asset-based lending facilities for our significant MSR, mortgage warehouse and servicing advance activities. We address liquidity risk by actively managing our sources and uses of funds and maintaining contingency funding capacities, including but not limited to undrawn excess borrowing capacity on credit lines beyond our expected needs and by extending the tenor of our financing arrangements from time to time. Management closely monitors growth, and can adjust originations pricing quickly to manage its liquidity profile as needed. We have typically amended sizing on existing facilities or entered into new secured facilities in anticipation of our changing liquidity needs.
Operational Risk
Operational risk is inherent in each of our business lines and related support activities. This risk can manifest itself in various ways, including process execution errors, clerical or technological failures or errors, business interruptions and frauds, all of which could cause us to incur losses. Operational risk includes the following key risks:
•legal risk, as we can have legal disputes with borrowers or counterparties;
•compliance risk, as we are subject to many federal and state rules and regulations;
•third-party risk, as we have many processes that have been outsourced to third parties;
•information technology risk, as we operate many information systems that depend on proper functioning of hardware and software;
•information security risk, as our information systems and associates handle personal financial data of borrowers, and
•business continuity risk, as natural disasters, pandemics, extreme weather, and other unexpected events can cause disruption to our operations.
The Board of Directors provides direction to senior executives by setting our organization’s risk appetite, and delegates to our Chief Executive Officer and senior executives the primary ownership and responsibility for operational risk management and control. Senior executives in our risk department oversee the establishment of policies and control frameworks that are designed, executed and administered to provide a sound and well-controlled operational environment in accordance with our risk appetite framework. We mandate training for our employees in respect to these policies, require business line change management control oversight, and we conduct targeted control assessment/reviews on a regular basis. Risk issues identified are tracked in our Governance, Risk and Compliance (GRC) system. Remediation and assurance testing are also tracked in our GRC system. We also have several channels for employees to report operational and/or technological issues affecting their operations to management, the operational risk or compliance teams or the Board.
We seek to embed a culture of compliance and business line responsibility for managing operational and compliance risks in our enterprise-wide approach toward risk management. Ocwen has adopted a “Three Lines of Defense” model to enable risks and controls to be properly managed on an on-going basis. The model delineates business line management's accountabilities and responsibilities over risk management and the control environment and includes mechanisms to assess the effectiveness of executing these responsibilities.
The first line of defense consists of business line management, dedicated control directors and quality assurance personnel who are accountable and responsible for their day-to-day activities, processes and controls. The first line of defense is responsible for ensuring that key risks within their activities and operations are identified, assessed, mitigated and monitored by an appropriate control environment that is commensurate with the operations risk profile.
The second line of defense is independent from the business and comprises a Risk Management function (including Third-Party Risk and Information Security) and a Compliance function, which are responsible for:
•providing assurance, oversight, and credible challenge over the effectiveness of the risk and control activities conducted by the first line;
•establishing frameworks to identify and measure the risks being taken by different parts of the business;
•monitoring risk levels, through key indicators and oversight/assurance and testing programs; and
•provide periodic reporting to Senior Management and the Board of Directors for transparency.
The third line of defense, Internal Audit, provides independent assurance as to the effectiveness of the design, implementation and embedding of the risk management frameworks, as well as the management of the risks and controls by the first line and control oversight by the second line. The Internal Audit function provides periodic reporting on its activities to Senior Management and the Board of Directors for transparency.
All business units and overhead functions are subject to unrestricted audits by our internal audit department. Internal audit is granted unrestricted access to our records, physical properties, systems, management and employees in order to perform these audits. The internal audit department reports to the Audit Committee of the Board and assists the Audit Committee in fulfilling its governance and oversight responsibility.
Compliance risk is managed through an enterprise-wide compliance risk management program designed to monitor, detect and deter compliance issues. Our compliance and risk management policies assign primary responsibility and accountability for the management of compliance risk in the lines of business to business line management.
Information Security Risk oversight is performed by our Chief Information Security Officer who reports to the Chief Administrative Officer. Ocwen’s information security plans are developed to meet or exceed Federal Financial Institutions Examination Council standards.
Credit Risk
Consumer Credit Risk
The typical obligor credit-related risks inherent in maintaining a mortgage loan portfolio as an investment tend to impact us less than a typical long-term investor because we generally sell the mortgage loans that we originate in the secondary market shortly after origination through GSE and Ginnie Mae guaranteed securitizations and whole loan transactions. We are exposed to early payment defaults from the time that we originate a loan to the time that the loan is sold in the secondary market or shortly thereafter. Early payment defaults are monitored and loans are audited by our quality assurance teams for origination defects. Our exposure to early payment defaults remains very limited and we do not anticipate material losses from this exposure.
Servicing costs are generally higher on higher credit risk loans. In addition, higher credit risk loans are generally affected to a greater extent by an economic downturn or a deterioration of the housing market. An increase in delinquencies and foreclosure rates generally results in increased advances for delinquent principal and interest, taxes and insurance, foreclosure costs and the upkeep of vacant property in foreclosure. Interest expense on advances and higher operating expenses decrease
the value of our servicing portfolio. We track the credit risk profile of our servicing portfolio, including the recoverability of advances, with a view to ensuring that changes in portfolio credit risk are identified on a timely basis.
We have loan repurchase and indemnification obligations arising from potential breaches of the representation and warranty provisions in connection with loans we sell in the secondary market. In the event of a breach of these representations and warranties, we may be required to repurchase a mortgage loan or indemnify the purchaser, and we may bear any subsequent loss on the mortgage loan.
We endeavor to minimize our losses from loan repurchases and indemnifications by focusing on originating or purchasing fully compliant mortgage loans and closely monitoring investor and agency eligibility requirements for loan sales. Our quality assurance teams perform independent testing related to the processing and underwriting of mortgage loans to investor guidelines prior to closing, as well as after the closing but before the sale of loans, to identify potential repurchase exposures due to breach of representations and warranties. In addition, we perform a comprehensive review of the loan files where we receive investor requests for repurchase and indemnification to establish the validity of the claims and determine our obligation. In limited circumstances, we may retain the full risk of loss on loans sold to the extent that the liquidation value of the asset collateralizing the loan is insufficient to cover the loan itself and associated servicing expenses. In instances where we have purchased loans from third parties, we usually have the ability to recover the loss from the third-party originator.
Counterparty Credit Risk
Counterparty credit risk represents the potential loss that may occur because a party to a transaction fails to perform according to the terms of the contract. We regularly evaluate the financial position and creditworthiness of our counterparties and disperse risk among multiple counterparties to the extent possible. We manage derivative counterparty credit risk by entering into financial instrument transactions through national exchanges, primary dealers or approved counterparties and using mutual margining agreements whenever possible to limit potential exposure.
Rithm is contractually obligated, pursuant to our agreements with them related to the Rights to MSRs, to make all advances required in connection with the loans underlying such MSRs. If Rithm’s advance financing facilities do not perform as envisaged or should Rithm otherwise be unable to meets its advance financing obligations, we would be required to meet our advance financing obligations with respect to the loans underlying these Rights to MSRs, which could materially and adversely affect our liquidity, financial condition and servicing operations. Due to its concentration in our portfolio, we monitor Rithm’s payment performance, liquidity and capital on a regular basis.
Counterparty credit risk exists with our third-party originators, including our correspondent lenders, from whom we purchase originated mortgage loans. The third-party originators make certain representations and warranties to us when we acquire the mortgage loan from them, and they agree to reimburse us for losses incurred due to an origination defect. We become exposed to losses for origination defects if the third-party originator is not able to reimburse us for losses incurred for indemnification or repurchase. We mitigate this risk by monitoring purchase levels from our third-party originators (to reduce concentration risk), by performing regular quality control reviews of the third-party originators’ underwriting standards and by regular reviews of the creditworthiness of third-party originators.
Concentration Risk
Our Servicing segment has exposure to concentration risk and client retention risk. As of December 31, 2022, our servicing portfolio included significant client relationships with Rithm which represented 17% and 28% of our servicing portfolio UPB and loan count, respectively. The Rithm servicing portfolio accounts for approximately 68% of all delinquent loans that Ocwen services. During 2022, Rithm-related servicing fees retained by Ocwen represented approximately 13% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to Rithm (excluding ancillary income). The current terms of our agreements with Rithm extend through December 2023.
Our Subservicing Agreements and Servicing Addendum with Rithm are in their Second Terms that end December 31, 2023, and may be terminated by Ocwen or Rithm without cause (in effect a non-renewal) by providing notice in advance of the end of the Second Term or the end of each one-year extension of the applicable terms after the Second Term. Ocwen must provide a notice of termination by July 1, 2023, with respect to the Second Term or by July 1 of each one-year extended term after the Second Term and Rithm must provide notice by October 1, 2023 with respect to the Second Term or by October 1 of each one-year extended term after the Second Term. At the end of the Second Term, subject to notice by October 1, 2023, Rithm has the right to terminate the Subservicing Agreements and Servicing Addendum for convenience. If Rithm exercised its right to terminate all or some of the agreements for convenience at the end of the Second Term on December 31, 2023, we might need to right-size certain aspects of our servicing business as well as the related corporate support functions.
In addition, as of December 31, 2022, our servicing portfolio also included a significant client relationship with MAV which represented 17% and 12% of our total servicing portfolio UPB and loan count, respectively. While our servicing agreement with MAV is non-cancellable and provides us with exclusivity, MAV is permitted to sell the underlying MSR without Ocwen’s consent after May 3, 2024.
MAV has the right to terminate the Subservicing Agreement entirely in the event of certain events of default, including failure by Ocwen to meet financial or operational requirements, including service levels. MAV may also terminate the Subservicing Agreement in the event of a change of control of Ocwen or PMC. Termination of some or all of our subservicing rights due to sales by MAV or termination of the entire Subservicing Agreement for cause could result in the loss of a significant portion of Ocwen’s total subservicing portfolio and materially and adversely affect Ocwen’s business, liquidity, financial condition and results of operations.
Market conditions, including interest rates and future economic projections, could impact investor demand to hold MSRs, which may result in our loss of additional subservicing relationships, or significantly decrease the number of loans under such relationships.
The mortgaged properties securing the residential loans that we service are geographically dispersed throughout all 50 states, the District of Columbia and two U.S. territories. The five largest concentrations of properties are located in California, Texas, Florida, New York and New Jersey, comprising 42% of the number of loans serviced at December 31, 2022. California has the largest concentration with 16% of the total loans serviced.
AVAILABLE INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available free of charge through our website (www.ocwen.com) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, including Ocwen, that file electronically with the SEC. The address of that site is www.sec.gov. We have also posted on our website, and have available in print upon request (1) the charters for our Audit Committee, Compensation and Human Capital Committee, Nomination/Governance Committee and Risk and Compliance Committee, (2) our Corporate Governance Guidelines, (3) our Code of Business Conduct and Ethics and (4) our Code of Ethics for Senior Financial Officers.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
An investment in our common stock involves significant risk. We describe below material risks that management believes affect or could affect us. Understanding these risks is important to understanding any statement in this Annual Report and to evaluating an investment in our common stock. You should carefully read and consider the risks and uncertainties described below together with all the other information included or incorporated by reference in this Annual Report before you make any decision regarding an investment in our common stock. If any of the following risks actually occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose some or all of your investment. While the following discussion provides a description of material risks that could cause our results to vary materially from those expressed in public statements or documents, other factors besides those discussed within this Annual Report or elsewhere in other of our reports filed with or furnished to the SEC could also affect our business, financial condition, liquidity and results of operations.
Summary of Risk Factors
As a non-bank mortgage company, we are exposed in the normal course of business to multiple risks shared by other participants in our industry. In addition, some of the risks we face are unique to Ocwen or such risks could have a different or greater impact on Ocwen than on other companies. These risks could adversely impact our business, regulatory or agency approval, financial condition, liquidity, results of operations, ability to grow and reputation, and are summarized below. This summary is intended to supplement, and should not be considered a substitute for, the complete Risk Factors that follow.
Legal and Regulatory Risks
•Failure to operate our business in compliance with complex legal or regulatory requirements or contractual obligations
•Adverse litigation outcomes with the CFPB or other legal matters
•Adverse changes to GSE and Ginnie Mae business models, initiatives and other actions
Risks Related to Our Financial Performance, Financing Our Business, Liquidity and Net Worth, and the Economy
•Inability to execute our strategic plan to return to sustainable profitability or pursue business or asset acquisitions
•Inability to access capital to meet the financing requirements of our business, or noncompliance with our debt agreements or covenants
•Inability to obtain sufficient servicer advance financing necessary to meet the financing requirements due to increased delinquencies or forbearance plans
•Inability to obtain sufficient warehouse financing necessary to meet the financing requirements for reverse mortgage loan repurchases or draws
•Failure to satisfy current or future minimum net worth and liquidity requirements established by regulators, GSEs, Ginnie Mae, lenders, or other counterparties
•Policies or regulations adopted by the GSEs or Ginnie Mae that may be more advantageous to our competitors’ business models than our own
•Inability to appropriately manage liquidity, interest rate and foreign currency exchange risks, including ineffective hedging strategies
•Inability to control decisions made by the management of MSR Asset Vehicle LLC which potentially impact our subservicing portfolio, funding for growth in our originations business and the profitability of our investment
•Economic slowdown or downturn, a capital market disruption, or a deterioration of the housing market, including but not limited to, in the states where we have some concentration of our business
•Inability to acquire additional profitable client relationships
•Inability to meet future advance financing obligations if Rithm were to fail to comply with its servicing advance obligations under the subservicing agreement
Operational Risks and Other Risks Related to Our Business
•Disruption in our operations or technology systems due to the failure or disagreements of our service providers to fulfill their obligations under their agreements with us, including but not limited to Black Knight Financial Services, Inc. (Black Knight)
•Failure by us or our vendors to adequately update technology systems and processes, interruption or delay in our or our vendors’ operations due to cybersecurity breaches or system failures, and resulting economic loss or regulatory penalties
•Adverse changes in political or economic stability or government policies in the U.S., India, the Philippines or the USVI
•Disruption in our operations and reduced profitability in our servicing operations as a result of severe weather or natural disaster events
•Material increase in loan put-backs and related liabilities for breaches of representations and warranties regarding sold loans or MSRs
•Heightened reputational risk due to media and regulatory scrutiny of companies that originate and securitize reverse mortgages
•Incurrence of losses by our captive reinsurance entity from catastrophic events, particularly in areas where a significant portion of the insured properties are located
•Incurrence of litigation costs and related losses if the validity of a foreclosure action is challenged by a borrower or if a court overturns a foreclosure
•Failure to maintain minimum servicer ratings and impairment of our ability to sell or fund servicing advances, access financing, consummate future servicing transactions, and maintain our status as an approved servicer by the GSEs
•Volatility of our earnings due to MSR valuation changes, financial instrument valuation changes and other factors
•Loss of the confidence of investors and counterparties if we fail to reasonably estimate the fair value of our assets and liabilities or our internal controls over financial reporting are found to be inadequate
•Uncertainty or adverse impacts resulting from the replacement of LIBOR with an alternative reference rate
Tax Risks
•Changes in tax law and interpretations and tax challenges
•Failure to retain or collect the tax benefits provided by the USVI, or certain past income becoming subject to increased U.S. federal income taxation
•Inability to utilize our net operating losses carryforwards and other deferred tax assets due to “ownership change” as defined in Section 382 of the Internal Revenue Code or other factors
Risks Relating to Ownership of Our Common Stock
•Substantial volatility in our common stock price
•The vote by large shareholders of their shares to influence matters requiring shareholder approval in a way that management does not believe represents the best interests of all shareholders
•The issuance of additional securities authorized by the board of directors that causes dilution and depresses the price of our securities
•Future offerings of debt securities that are senior to our common stock in liquidation, or equity securities that are senior to our common stock in respect of liquidation and distributions
•Certain provisions in our organizational documents and regulatory restrictions may make takeovers more difficult, and significant investments in our common stock may be restricted
Legal and Regulatory Risks
The business in which we engage is complex and heavily regulated. If we fail to operate our business in compliance with both existing and future regulations, our business, reputation, financial condition or results of operations could be materially and adversely affected.
Our business is subject to extensive regulation by federal, state, local and foreign governmental authorities, including the CFPB, HUD, the SEC and various state agencies that license and conduct examinations of our servicing and lending activities. In addition, we operate under a number of regulatory settlements that subject us to ongoing reporting and other obligations. See the next risk factor below for additional detail concerning these regulatory settlements. From time to time, we also receive requests (including requests in the form of subpoenas and civil investigative demands) from federal, state and local agencies for records, documents and information relating to our servicing and lending activities. The GSEs (and their conservator, the FHFA), Ginnie Mae, the United States Treasury Department, various investors, non-Agency securitization trustees and others also subject us to periodic reviews and audits.
In the current regulatory environment, we have faced and expect to continue to face heightened regulatory and public scrutiny as an organization as well as stricter and more comprehensive regulation of the entire mortgage sector. We must devote substantial resources to regulatory compliance, and we incurred, and expect to continue to incur, significant ongoing costs to comply with new and existing laws and governmental regulation of our business. If we fail to effectively manage our regulatory and contractual compliance, the resources we are required to devote and our compliance expenses would likely increase. Any significant delay or complication in fulfilling our regulatory commitments and resolving remaining legacy matters may jeopardize our ability to return to sustainable profitability.
We must comply with a large number of federal, state and local consumer protection and other laws and regulations including, among others, the CARES Act, the Dodd-Frank Act, the TCPA, the Gramm-Leach-Bliley Act, the FDCPA, RESPA, TILA, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, as well as individual state laws pertaining to licensing, general mortgage origination and servicing practices and foreclosure and federal and local bankruptcy rules. These laws and regulations apply to all facets of our business, including, but not limited to, licensing, loan originations, consumer disclosures, default servicing and collections, foreclosure, filing of claims, registration of vacant or foreclosed properties, handling of escrow accounts, payment application, interest rate adjustments, assessment of fees, loss mitigation, use of credit reports, handling of unclaimed property, safeguarding of non-public personally identifiable information about our customers, and the ability of our employees to work remotely. These complex requirements can and do change as laws and regulations are enacted, promulgated, amended, interpreted and enforced. In addition, we must maintain an effective corporate governance and compliance management system. See “Business - Regulation” for additional information regarding our regulators and the laws that apply to us.
We must structure and operate our business to comply with applicable laws and regulations and the terms of our regulatory settlements. This can require judgment with respect to the requirements of such laws and regulations and such settlements. While we endeavor to engage proactively with our regulators in an effort to ensure we do so correctly, if we fail to interpret correctly the requirements of such laws and regulations or the terms of our regulatory settlements, we could be found to be in breach of such laws, regulations or settlements.
Failure or alleged failure to comply with the terms of our regulatory settlements or applicable federal, state and local consumer protection laws, regulations and licensing requirements could lead to any of the following:
•administrative fines and penalties and litigation;
•loss of our licenses and approvals to engage in our servicing and lending businesses;
•governmental investigations and enforcement actions;
•civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities;
•breaches of covenants and representations under our servicing, debt or other agreements;
•damage to our reputation;
•inability to raise capital or otherwise secure the necessary financing to operate the business and refinance maturing liabilities;
•changes to our operations that may otherwise not occur in the normal course, and that could cause us to incur significant costs; or
•inability to execute on our business strategy.
Any of these outcomes could materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
In recent years, the general trend among federal, state and local legislative bodies and regulatory agencies as well as state attorneys general has been toward increasing laws, regulations, investigative proceedings and enforcement actions with regard to residential mortgage lenders and servicers. The CFPB continues to take a very active role in the mortgage industry, and its rule-making and regulatory agenda relating to loan servicing and origination continues to evolve. Individual states have also been active, as have other regulatory organizations such as the MMC, a multistate coalition of various mortgage banking regulators. In addition to their traditional focus on licensing and examination matters, certain regulators make observations, recommendations or demands with respect to areas such as corporate governance, safety and soundness, and risk and compliance management. We must endeavor to work cooperatively with our regulators to understand all their concerns if we are to be successful in our business.
The CFPB and state regulators have also increasingly focused on the use, and adequacy, of technology in the mortgage servicing industry, privacy concerns and other topical issues, such as the discontinuation of LIBOR, communications from debt collectors and the ability of borrowers to repay mortgage loans, including in relation to COVID-19. See below as well as Business - Regulation for additional information regarding the rules, regulations and legislative developments most pertinent to our operations.
Presently, a level of heightened uncertainty exists with respect to the future of regulation of mortgage lending and servicing. We cannot predict the specific legislative or executive actions that may result or what actions federal or state regulators might take in response to potential changes to the federal regulatory environment generally. Such actions could impact the industry generally or us specifically, could impact our relationships with other regulators, and could adversely impact our business and limit our ability to reach an appropriate resolution with the CFPB, as described in the next risk factor.
New regulatory and legislative measures, or changes in enforcement practices, including those related to the technology we use, could, either individually or in the aggregate, require significant changes to our business practices, impose additional costs on us, limit our product offerings, limit our ability to efficiently pursue business opportunities, negatively impact asset values or reduce our revenues. Accordingly, they could materially and adversely affect our business and our financial condition, liquidity and results of operations.
Finally, the regulations and requirements to which we are subject have been changing rapidly as the GSEs, Ginnie Mae, the United States Treasury Department and state regulators have responded to the COVID-19 pandemic. In March 2020, the CARES Act was signed into law, allowing borrowers affected by COVID-19 to request temporary loan forbearance for federally backed mortgage loans. Multiple forbearance programs, moratoria of foreclosure and eviction and other requirements to assist borrowers enduring financial hardship due to COVID-19 have been issued by states, agencies and regulators. In addition, the CFPB promulgated certain amendments to RESPA (Regulation X) that became effective on August 31, 2021 and that impose additional COVID-19-related requirements with respect to loss mitigation, early intervention call requirements, and initiating new foreclosures before January 1, 2022. The requirements described above vary across jurisdiction, may conflict in some circumstances, can be complex to interpret and implement, and could cause us to incur additional expense. If we are unable to comply with, or face allegations that we are in breach of, applicable laws, regulations or other requirements, we may face regulatory action, including fines, penalties, and restrictions on our business. In addition, we could face litigation and reputational damage. Any of these risks could have a material adverse impact on our business, financial condition, liquidity and results of operations. As the COVID-19 pandemic continues and new variants of the virus emerge, there may be a further increase in regulations, which could exacerbate these risks and their adverse impacts.
Governmental bodies have taken regulatory and legal actions against us in the past and may in the future impose regulatory fines or penalties or impose additional requirements or restrictions on our activities that could increase our operating expenses, reduce our revenues or otherwise adversely affect our business, financial condition, liquidity, results of operations, ability to grow and reputation.
We are subject to a number of ongoing federal and state regulatory examinations, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions that could result in further adverse regulatory action against us, including certain matters summarized below. See Note 23 - Regulatory Requirements and Note 25 - Contingencies to the Consolidated Financial Statements.
CFPB
In April 2017, the CFPB filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, OMS and OLS alleging violations of federal consumer financial laws relating to our servicing business dating back to 2014. The CFPB’s claims include allegations regarding (1) the adequacy of Ocwen’s servicing system and integrity of Ocwen’s
mortgage servicing data, (2) Ocwen’s foreclosure practices and (3) various purported servicer errors with respect to borrower escrow accounts, hazard insurance policies, timely cancellation of private mortgage insurance, handling of customer complaints, and marketing of optional products. The CFPB alleges violations of unfair, deceptive acts or abusive practices, as well as violations of specific laws or regulations. The CFPB does not claim specific monetary damages, although it does seek consumer relief, disgorgement of allegedly improper gains, and civil money penalties. In April 2021, following the filing of motions by the parties and a number of procedural developments, the court entered final judgment in our favor and closed the case. The CFPB appealed the judgment. In April 2022, the Eleventh Circuit ruled on the appeal, largely adopting the district court’s decision in our favor, but vacating and remanding the case back to the district court to determine which, if any claims are not covered and may still be brought by the CFPB. Neither party sought rehearing of the Eleventh Circuit’s decision. Supplemental briefing at the district court was completed in September 2022 and we await the court’s determination. While we believe we have factual and legal defenses to the CFPB’s allegations and are vigorously defending ourselves, the outcome of the matters raised by the CFPB, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our business and could have a material adverse impact on our business, reputation, financial condition, liquidity and results of operations. We expect the CFPB to resume its supervision activities of Ocwen upon conclusion of this matter.
State Licensing and State Attorneys General
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. The minimum net worth requirements to which our licensed entities are subject are unique to each state and type of license. We believe our licensed entities were in compliance with all of their minimum net worth requirements at December 31, 2022. However, it is possible that regulators could disagree with our calculations, and one state regulator has disagreed with our calculation for a prior year period; we have discussed the matter with the regulator, including why we believe we were in compliance with the applicable net worth requirements. Failure to satisfy any of the requirements to which our licensed entities are subject could result in a variety of regulatory actions ranging from a fine, a directive requiring a certain step to be taken, a suspension or, ultimately, a revocation of a license, any of which could have a material adverse impact on our results of operations and financial condition.
In April 2017 and shortly thereafter, mortgage and banking regulatory agencies from 29 states and the District of Columbia took regulatory actions against OLS and certain other Ocwen companies that alleged deficiencies in our compliance with laws and regulations relating to our servicing and lending activities. These regulatory actions generally took the form of orders styled as “cease and desist orders” and prohibited a range of actions relating to our lending and servicing activities. In addition, the Florida Attorney General and the Florida Office of Financial Regulation brought a lawsuit on similar grounds, as did the Massachusetts Attorney General. In resolving these matters, we entered into agreements containing restrictions and commitments with respect to the operation of our business and our regulatory compliance activities, including restrictions and conditions relating to acquisitions of MSRs, a transition to an alternate loan servicing system from the REALServicing system, engagement of third-party auditors, escrow and data testing, loss mitigation solicitations, error remediation, and financial condition reporting. We also provided certain borrower financial remediation and made payments to state regulators and attorneys general.
We have incurred significant costs complying with the terms of these settlements. To the extent that legal or other actions are taken against us by regulators or others with respect to matters, they could result in additional costs or other adverse impacts and could have a materially adverse impact on our business, reputation, financial condition, liquidity and results of operations.
In January 2018, prior to our acquisition of PHH, PMC entered into a settlement agreement with the MMC and consent orders with certain state attorneys general to resolve and close out findings of an MMC examination of PMC’s legacy mortgage servicing practices. Under the terms of these settlements, PMC agreed to comply with certain servicing standards, to conduct testing of compliance with such servicing standards for a period of three years, and to report to the MMC regarding the same. We believe we complied with these obligations, and the three-year period has ended.
We continue to work with the NY DFS to address matters they raise with us as well as to fulfill our commitments under the 2017 NY Consent Order and PHH acquisition conditional approval. To the extent that we fail to address adequately any concerns raised by the NY DFS or fail to fulfill our commitments to the NY DFS, the NY DFS could take regulatory action against us, including imposing fines or penalties or otherwise restricting our business activities. Any such actions could have a material adverse impact on our business, financial condition liquidity and results of operations.
Other Matters
On occasion, we engage with agencies of the federal government on various matters, including the Department of Justice, the Office of Inspector General of HUD, Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and the VA Office of the Inspector General. In addition to the expense of responding to subpoenas and other requests for information
from such agencies, in the event that any of these engagements result in allegations of wrongdoing by us, we may incur fines or penalties or significant legal expenses defending ourselves against such allegations.
In the past, we have entered into significant settlements with the NY DFS, the CA DFPI, and the 2013 Ocwen National Mortgage Settlement which involved payments of significant monetary amounts, monitoring by third-party firms for which we were financially responsible and other restrictions on our business. While we are not currently subject to active monitorships under these settlements, we remain obligated to comply with the commitments made to our regulators and if we violate those commitments one or more of these entities could take regulatory action against us. Any future settlements or other regulatory actions against us could have a material adverse impact on our business, reputation, operating results, liquidity and financial condition will be adversely affected.
To the extent that an examination or other regulatory engagement results in an alleged failure by us to comply with applicable laws, regulations or licensing requirements, or if allegations are made that we have failed to comply with applicable laws, regulations or licensing requirements or the commitments we have made in connection with our regulatory settlements (whether such allegations are made through administrative actions such as cease and desist orders, through legal proceedings or otherwise) or if other regulatory actions of a similar or different nature are taken in the future against us, this could lead to (i) administrative fines, penalties and litigation, (ii) loss of our licenses and approvals to engage in our servicing and lending businesses, (iii) governmental investigations and enforcement actions, (iv) civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) damage to our reputation, (vii) inability to raise capital or otherwise secure the necessary funding to operate the business, (viii) changes to our operations that may otherwise not occur in the normal course, and that could cause us to incur significant costs, and (ix) inability to execute on our business strategy. Any of these outcomes could increase our operating expenses and reduce our revenues, hamper our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
Our regulatory settlements and public allegations regarding our business practices by regulators and other third parties may affect other regulators’, rating agencies’, and creditors’ perceptions, which could adversely impact our financial results and ongoing operations.
Our regulatory settlements and public allegations regarding our business practices by regulators and other third parties may affect other regulators’, rating agencies’ and creditors’ perceptions of us. As a result, our ordinary course interactions with regulators may be adversely affected. We may incur additional compliance costs and management time may be diverted from other aspects of our business to address regulatory issues. It is possible that we may incur additional fines or penalties or even that we could lose the licenses and approvals necessary to engage in our servicing and lending businesses. In addition, certain regulators make observations, recommendations or demands with respect to areas such as corporate governance, safety and soundness and risk and compliance management, which could require us to incur additional expense or which could result in the imposition of additional requirements such as liquidity and capital requirements or restrictions on business conduct such as engaging in stock repurchases. To the extent that rating agencies or creditors perceive us negatively, our servicer or credit ratings could be adversely impacted and our access to funding could be limited.
If regulators allege that we do not comply with the terms of our regulatory settlements, or if we enter into future regulatory settlements, it could significantly impact our ability to maintain and grow our servicing portfolio.
Our servicing portfolio naturally decreases over time as homeowners make regularly scheduled mortgage payments, prepay loans prior to maturity, refinance with a mortgage loan not serviced by us or involuntarily liquidate through foreclosure or other liquidation process. Our ability to maintain or grow the size of our servicing portfolio depends on our ability to acquire the right to service or subservice additional pools of mortgage loans or to originate additional loans for which we retain the MSRs.
Historically, our regulatory settlements significantly impacted our ability to maintain or grow our servicing portfolio because we agreed to certain restrictions that effectively prohibited future bulk acquisitions of residential servicing. While certain of these restrictions have been eased in connection with our resolution of state regulatory matters and acquisition of PHH, we are still restricted in our ability to grow our portfolio under the terms of our agreements with the NY DFS. If we are unable to satisfy the conditions of the regulatory commitments we made to these and other regulators, or if a future regulatory settlement restricts our ability to acquire MSRs, we will be unable to grow or even maintain the size of our servicing portfolio through acquisitions and our business could be materially and adversely affected. Moreover, even when regulatory restrictions are lifted, the reputational damage done by these actions may inhibit our ability to acquire new business.
If we are unable to respond timely and effectively to routine or other regulatory examinations and borrower complaints, our business and financial conditions may be adversely affected.
Regulatory examinations by state and federal regulators are part of our ordinary course business activities. If we are unable to respond effectively to regulatory examinations, our business and financial conditions may be adversely affected. In addition, we receive various escalated borrower complaints and inquiries from our state and federal regulators and state Attorneys
General and are required to respond within the time periods prescribed by such entities. If we fail to respond effectively and timely to regulatory examinations and escalations, legal action could be taken against us by such regulators and, as a result, we may incur fines or penalties or we could lose the licenses and approvals necessary to engage in our servicing and lending businesses. We could also suffer from reputational harm and become subject to private litigation.
Private legal proceedings and related costs alleging failures to comply with applicable laws or regulatory requirements could adversely affect our financial condition and results of operations.
We are subject to various pending private legal proceedings, including purported class actions, challenging whether certain of our loan servicing practices and other aspects of our business comply with applicable laws and regulatory requirements. For example, we are currently a defendant in various matters alleging that (1) certain fees imposed on borrowers relating to payment processing, payment facilitation, or payment convenience violate state laws similar to the Fair Debt Collection Practices Act, (2) certain fees we assess on borrowers are marked up improperly in violation of applicable state and federal law, (3) we breached fiduciary duties we purportedly owe to benefit plans due to the discretion we exercise in servicing certain securitized mortgage loans, (4) certain legacy mortgage reinsurance arrangements violated RESPA, and (5) we failed to subservice loans appropriately pursuant to subservicing and other agreements. In the future, we are likely to become subject to other private legal proceedings alleging failures to comply with applicable laws and regulations, including putative class actions, in the ordinary course of our business. While we do not currently believe that the resolution of the vast majority of the legal proceedings we face will have a material adverse effect on our financial condition or results of operations, we cannot express a view with respect to all of these proceedings. The outcome of any pending legal matter is never certain, and it is possible that adverse results in private legal proceedings could materially and adversely affect our financial results and operations. We have paid significant amounts to settle private legal proceedings in recent periods and paid significant amounts in legal and other costs in connection with defending ourselves in such proceedings. To the extent we are unable to avoid such costs in future periods, our business, financial position, results of operations and cash flows could be materially and adversely affected.
Non-compliance with laws and regulations could lead to termination of servicing agreements or defaults under our debt agreements.
Most of our servicing agreements and debt agreements contain provisions requiring compliance with applicable laws and regulations. While the specific language in these agreements takes many forms and materiality qualifiers are often present, if we fail to comply with applicable laws and regulations, we could be terminated as a servicer and defaults could be triggered under our debt agreements, which could materially and adversely affect our revenues, cash flows, liquidity, business and financial condition. We could also suffer reputational damage and trustees, lenders and other counterparties could cease wanting to do business with us.
If new laws and regulations lengthen foreclosure times or introduce new regulatory requirements regarding foreclosure procedures, our operating costs and liquidity requirements could increase and we could be subject to regulatory action.
When a mortgage loan that we service is in foreclosure, we are generally required to continue to advance delinquent principal and interest to the securitization trust and to make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent that we determine that such amounts are recoverable. These servicing advances are generally recovered when the delinquency is resolved or upon liquidation. Regulatory actions that lengthen the foreclosure process will increase the amount of servicing advances that we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred during the foreclosure process.
Increased regulatory scrutiny and new laws and procedures could cause us to adopt additional compliance measures and incur additional compliance costs in connection with our foreclosure processes. We may incur legal and other costs responding to regulatory inquiries or any allegation that we improperly foreclosed on a borrower. We could also suffer reputational damage and could be fined or otherwise penalized if we are found to have breached regulatory requirements.
If we fail to comply with the TILA-RESPA Integrated Disclosure (TRID) rules, our business and operations could be materially and adversely affected and our plans to expand our lending business could be adversely impacted.
The TRID rules include requirements relating to consumer facing disclosure and waiting periods to allow consumers to reconsider committing to loans after receiving required disclosures. If we fail to comply with the TRID rules, we may be unable to sell loans that we originate or purchase, or we may be required to sell such loans at a discount compared to other loans. We also could be subject to repurchase or indemnification claims from purchasers of such loans, including the GSEs. Additionally, loans might stay on our warehouse lines for longer periods before sale, which would increase our liquidity needs, holding costs and interest expense. We could also be subject to regulatory actions or private lawsuits.
In response to the TRID rules, we have implemented significant modifications and enhancements to our loan production processes and systems, and we continue to devote significant resources to TRID compliance. As regulatory guidance and enforcement and the views of the GSEs and other market participants such as warehouse loan lenders evolve, we may need to
modify further our loan production processes and systems in order to adjust to evolution in the regulatory landscape and successfully operate our lending business. In such circumstances, if we are unable to make the necessary adjustments, our business and operations could be adversely affected and we may not be able to execute on our plans to grow our lending business.
Failure to comply with the Home Mortgage Disclosure Act (HMDA) and related CFPB regulations could adversely impact our business.
HMDA requires financial institutions to report certain mortgage data in an effort to provide the regulators and the public with information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The data points include information related to the loan applicant/borrower (e.g., age, ethnicity, race and credit score), the underwriting process, loan terms and fees, lender credits and interest rate, among others. The scope of the information available to the public could increase fair lending regulatory scrutiny and third-party plaintiff litigation, as the changes will expand the ability of regulators and third parties to compare a particular lender to its peers in an effort to determine differences among lenders in certain demographic borrower populations. We have devoted, and continue to devote, significant resources to establishing and maintaining systems and processes for complying with HMDA on an ongoing basis. If we are not successful in capturing and reporting the new HMDA data, and analyzing and correcting any adverse patterns, we could be exposed to regulatory actions and private litigation against us, we could suffer reputational damage and we could incur losses, any of which could materially and adversely impact our business, financial condition and results of operations.
There may be material changes to the laws, regulations, rules or practices applicable to reverse mortgage programs sponsored by HUD and FHA, and securitized by Ginnie Mae, which could materially and adversely affect us and the reverse mortgage industry as a whole.
The reverse mortgage industry is largely dependent upon rules and regulations implemented by HUD, FHA and Ginnie Mae. There can be no guarantee that HUD/FHA will retain Congressional authorization to continue the HECM program, which provides FHA government insurance for qualifying HECM loans, or that they will not make material changes to the laws, regulations, rules or practices applicable to reverse mortgage programs. For example, HUD previously implemented certain lending limits for the HECM program, and added credit-based underwriting criteria designed to assess a borrower’s ability and willingness to satisfy future tax and insurance obligations. In addition, Ginnie Mae’s participation in the reverse mortgage industry may be subject to economic and political changes that cannot be predicted. Any of the aforementioned circumstances could materially and adversely affect the performance of our reverse mortgage business and the value of our common stock.
Regulators continue to be active in the reverse mortgage space, including due to the perceived susceptibility of older borrowers to be influenced by deceptive or misleading marketing activities. Regulators have also focused on appraisal practices because reverse mortgages are largely dependent on collateral valuation. If we fail to comply with applicable laws and regulations relating to the origination of reverse mortgages, we could be subject to adverse regulatory actions, including potential fines, penalties or sanctions, and our business, reputation, financial condition and results of operations could be materially and adversely affected.
Violations of fair lending and/or servicing laws could negatively affect our business.
Various federal, state and local laws have been enacted that are designed to discourage predatory lending and servicing practices. The federal Home Ownership and Equity Protection Act of 1994 (HOEPA) prohibits inclusion of certain provisions in residential loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain additional disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than are those in HOEPA. In addition, under the anti-predatory lending laws of some states, the origination of certain residential loans, including loans that are not classified as “high cost” loans under HOEPA or other applicable law, must satisfy a net tangible benefits test with respect to the related borrower. A failure by us to comply with these laws, to the extent we originate, service or acquire residential loans that are non-compliant with HOEPA or other predatory lending or servicing laws, could subject us, as an originator or a servicer, or as an assignee, in the case of acquired loans, to monetary penalties and could result in the borrowers rescinding the affected loans. Lawsuits have been brought in various states making claims against originators, servicers and assignees of high cost loans for violations of state law. Named defendants in these cases have included numerous participants within the secondary mortgage market. If we are found to have violated predatory or abusive lending laws, defaults could be declared under our debt or servicing agreements, we could suffer reputational damage, and we could incur losses, any of which could materially and adversely impact our business, financial condition and results of operations.
Failure to comply with FHA underwriting guidelines could adversely impact our business.
We must comply with FHA underwriting guidelines in order to successfully originate FHA loans. If we fail to do so, we may not be able collect on FHA insurance. In addition, we could be subject to allegations of violations of the False Claims Act
asserting that we submitted claims for FHA insurance on loans that had not been underwritten in accordance with FHA underwriting guidelines. If we are found to have violated FHA underwriting guidelines, we could face regulatory penalties and damages in litigation, suffer reputational damage, and we could incur losses due to an inability to collect on such insurance, any of which could materially and adversely impact our business, financial condition and results of operations.
Failure to comply with U.S. and foreign laws and regulations applicable to our global operations could have an adverse effect on our business, financial position, results of operations or cash flows.
As a business with a global workforce, we need to ensure that our activities, including those of our foreign operations, comply with applicable U.S. and foreign laws and regulations. Various states have implemented regulations which specifically restrict the ability to perform certain servicing and originations functions offshore and, from time to time, various state regulators have scrutinized the operations of our foreign subsidiaries. Our failure to comply with applicable laws and regulations could, among other things, result in restrictions on our operations, loss of licenses, fines, penalties or reputational damage and have an adverse effect on our business.
Failure to comply with the S.A.F.E. Act could adversely impact our business.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the S.A.F.E. Act) requires the individual licensing and registration of those engaged in the business of loan origination. The S.A.F.E. Act is designed to improve accountability on the part of loan originators, combat fraud and enhance consumer protections by encouraging states to establish a national licensing system and minimum qualification requirements for applicants. Thus, Ocwen must ensure proper licensing for all employees who participate in certain specified loan origination activities. Failure to comply with the S.A.F.E. Act licensing requirements could adversely impact Ocwen’s origination business.
Risks Related to Our Financial Performance, Financing Our Business, Liquidity and Net Worth and the Economy
Our strategic plan to return to sustainable profitability may not be successful.
We are facing certain challenges and uncertainties that could have significant adverse effects on our business, financial condition, liquidity and results of operations. The ability of management to appropriately address these challenges and uncertainties in a timely manner is critical to our ability to operate our business successfully.
Historical losses significantly eroded stockholders’ equity and weakened our financial condition. We established a set of key initiatives to achieve our objective of returning to sustainable profitability in the shortest timeframe possible within an appropriate risk and compliance environment, and generated net income in 2021 and 2022. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview-Business Initiatives.
There can be no assurance that we will continue to successfully execute on these initiatives, or that even if we do execute on these initiatives we will be able to return to sustained profitability. In addition to successful operational execution of our key initiatives, our success will also depend on market conditions and other factors outside of our control, including continued access to capital. If we continue to experience losses, our share price, business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
If we are unable to obtain sufficient capital to meet the financing requirements of our business, or if we fail to comply with our debt agreements, our business, financing activities, financial condition and results of operations will be adversely affected.
Our business requires substantial amounts of capital and our financing strategy includes the use of leverage. Accordingly, our ability to finance our operations and repay maturing obligations rests in large part on our ability to continue to borrow money at reasonable rates. If we are unable to maintain adequate financing, or other sources of capital are not available, we could be forced to suspend, curtail or reduce our revenue generating objectives, which could harm our results of operations, liquidity, financial condition and business prospects. Our ability to borrow money is affected by a variety of factors including:
•limitations imposed on us by existing debt agreements that contain restrictive covenants that may limit our ability to raise additional debt;
•credit market conditions;
•the potential for ongoing disruption in the financial markets and in commercial activity generally related to changes in monetary and fiscal policy, international events including the conflict in Ukraine and other sources of instability;
•the strength of the lenders from whom we borrow;
•lenders’ perceptions of us or our sector;
•changes in interest rates or other drivers that affect the value of pledged collateral;
•corporate credit and servicer ratings from rating agencies;
•limitations on borrowing under our MSR and advance facilities and mortgage loan warehouse facilities due to structural features in these facilities and the amount of eligible collateral that is pledged; and
•revenue opportunities including products not currently supported in the financing market.
In addition, our advance facilities are revolving facilities, and in a typical monthly cycle, we repay a portion of the borrowings under these facilities from collections. During the remittance cycle, which starts in the middle of each month, we depend on our lenders to provide the cash necessary to make the advances that we are required to make as servicer. If one or more of these lenders were to restrict our ability to access these revolving facilities or were to fail, we may not have sufficient funds to meet our obligations. We typically require significantly more liquidity to meet our advance funding obligations than our available cash on hand.
Our advance financing facilities are comprised of revolving notes issued to large financial institutions that generally have a revolving period of 12 months. At December 31, 2022, we had $513.7 million outstanding under these facilities. The revolving periods for our advance financing facilities end in August 2023, except for $1.2 million outstanding under a facility maturing in May 2026.
In the event we are unable to renew, replace or extend the revolving period of one or more of these advance financing facilities, we would no longer have access to available borrowing capacity and repayment of the outstanding balances on the revolving notes must begin at the end of the applicable revolving period. In addition, we use mortgage loan warehouse facilities to fund newly originated loans, HECM tails, buyouts and a number of other assets on a short-term basis until they are sold to secondary market investors, including GSEs or other third-party investors. Currently, our master repurchase and participation agreements for financing new loan originations generally have maximum terms of 364 days, and similar to the revolving notes in the advance financing facilities, they are typically renewed, replaced or extended annually. At December 31, 2022, we had $702.7 million outstanding under these warehouse financing arrangements, all under agreements maturing in 2023.
In 2019, we entered into three separate MSR financing arrangements related to loans we service for (i) Fannie Mae and Freddie Mac, (ii) Ginnie Mae, and (iii) private investors (PLS MSRs). The Fannie Mae/Freddie Mac and Ginnie Mae facilities were provided through bank financing and had total capacity of $450.0 million and $175.0 million and borrowed amounts of $309.8 million and $157.9 million, respectively at December 31, 2022. The PLS MSR financing was issued to capital markets investors as an amortizing note structure with an initial principal amount of $100.0 million, replaced with a new series of notes in 2022 with an initial principal amount of $75.0 million. The Fannie Mae/Freddie Mac and Ginnie Mae facilities terminate in June 2023 and April 2023, respectively, and the PLS MSR facility matures in February 2025. In 2021, we entered into a facility which includes a $135.0 million term loan and a $285.0 million revolving loan secured by a lien on our Agency MSRs. In November, 2022, the term loan was paid off and the revolving loan capacity was upsized to $400.0 million. Any outstanding borrowings on the revolving loan will convert into a term loan upon the two-year anniversary of the closing of the November 2022 amendment. The final maturity date of the term loan is December 2025. MSR financing is dependent on investor appetite and conditions in the capital markets, among other factors. As a result, MSR financing may not be readily available to finance the growth of our portfolio, or at rates and terms that may not be favorable to our business.
Our MSR financing facilities provide funding based on an advance rate of MSR value that is subject to periodic mark-to-market valuation adjustments (MSR valuation is expected to decline if market interest rates decline). In the normal course, and without any additions to our MSR portfolio from production or acquisition activities, MSR value is expected to decline over time due to run off of the loan balances in our servicing portfolio. As a result, we anticipate having to repay a portion of our MSR debt over a given time period. The requirements to repay MSR debt including those due to unfavorable fair value adjustment attributable to interest rates or other factors may require us to allocate a substantial amount of our available liquidity or future cash flows to meet these requirements. To the extent we are unable to generate sufficient cash flows from operations to meet these requirements, we may be more constrained to invest in our business and fund other obligations, and our business, financing activities, liquidity, financial condition and results of operations will be adversely affected.
We currently plan to renew, replace or extend all of the above debt agreements consistent with our historical experience. There can be no assurance that we will be able to renew, replace or extend all our debt agreements on appropriate terms or at all and, if we fail to do so, we may not have adequate sources of funding for our business.
Our debt agreements contain various qualitative and quantitative covenants, including financial covenants, covenants to operate in material compliance with applicable laws and regulations, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates. As a result of the covenants to which we are subject, we may be limited in the manner in which we conduct our business and may be limited in our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, noncompliance with our covenants, nonpayment of principal or interest, material misrepresentations, the occurrence of a material adverse effect or material adverse change, insolvency, bankruptcy, certain material judgments and changes of control. Covenants and defaults of this type are commonly found in debt agreements such as
ours. Certain of these covenants and defaults are open to subjective interpretation and, if our interpretation were contested by a lender, a court may ultimately be required to determine compliance or lack thereof. In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations and other legal remedies. In addition to these covenants, certain agreements also include trigger events which may lead to adverse actions such as acceleration of outstanding obligations, step down in advance rates and termination of further funding.
An actual or alleged default under any of our debt agreements, negative ratings action by a rating agency (including as a result of our increased leverage or erosion of net worth), the perception of financial weakness, an adverse action by a regulatory authority or GSE, a lengthening of foreclosure timelines or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and make it difficult for us to renew existing credit facilities or obtain new lines of credit. Any or all the above could have an adverse effect on our business, financing activities, financial condition and results of operations.
We may be unable to obtain sufficient servicer advance financing necessary to meet the financing requirements of our business, which could adversely affect our liquidity position and result in a loss of servicing rights.
We currently fund a substantial portion of our servicing advance obligations through our servicing advance facilities. Under normal market conditions, mortgage servicers typically have been able to renew or refinance these facilities. However, market conditions or lenders’ perceptions of us at the time of any renewal or refinancing may mean that we are unable to renew or refinance our advance financing facilities or obtain additional facilities on favorable terms or at all.
If we fail to satisfy minimum net worth and liquidity requirements established by regulators, GSEs, Ginnie Mae, lenders, or other counterparties, our business, financing activities, financial condition or results of operations could be materially and adversely affected.
As a result of our servicing and loan origination activities, we are subject to minimum net worth and liquidity requirements established by state regulators, GSEs, Ginnie Mae, lenders, and other counterparties. Losses incurred in prior years have eroded our net worth. In addition, we must structure our business so each licensed entity satisfies the net worth and liquidity requirements applicable to it, which can be challenging.
The minimum net worth and liquidity requirements to which our licensed entities are subject vary by state and type of license. We must also satisfy the minimum net worth and liquidity requirements of the GSEs and Ginnie Mae in order to maintain our approved status with such agencies and the minimum net worth and liquidity requirements set forth in our agreements with our lenders.
Minimum net worth requirements and liquidity are generally calculated using specific adjustments that may require interpretation or judgment. Changes to these adjustments have the potential to significantly affect net worth and liquidity calculations and imperil our ability to satisfy future minimum net worth and liquidity requirements. We believe our licensed entities were in compliance with all of their minimum net worth and liquidity requirements at December 31, 2022. However, it is possible that regulators could disagree with our calculations. If we fail to satisfy minimum net worth or liquidity requirements, absent a waiver or other accommodation, we could lose our licenses or have other regulatory action taken against us, we could lose our ability to sell and service loans to or on behalf of the GSEs or Ginnie Mae, or it could trigger a default under our debt agreements. Any of these occurrences could have a material adverse effect on our business, financing activities, financial condition or results of operations.
On August 17, 2022, the FHFA and Ginnie Mae announced updated minimum financial eligibility requirements for GSE seller/servicers and Ginnie Mae issuers. The updated minimum financial eligibility requirements modify the definitions of tangible net worth and eligible liquidity, modify their minimum standard measurement and include a new risk-based capital ratio, among other changes. The majority of the updated requirements will become effective on September 30, 2023. On October 21, 2022, Ginnie Mae extended the compliance date for its risk-based capital requirements to December 31, 2024. We believe PMC would be in compliance with the updated requirements if the updated requirements were in effect as of December 31, 2022, except for the new risk-based capital requirement. We are currently evaluating the potential impacts of these updated requirements, the costs and benefits of achieving compliance, and possible courses of action involving external investor solutions, structural solutions or exiting Ginnie Mae forward originations and owned servicing activities. If we are unable to identify and execute a cost-effective solution that allows us to continue these businesses and are unable to replace the lost income from these activities, or if we misjudge the magnitude of the costs and benefits and their impacts on our business, our financial results could be negatively impacted. As of December 31, 2022, our forward owned servicing portfolio included 83,282 government-insured loans with a UPB of $12.7 billion, 10% of our total forward owned MSRs or 4% of our total UPB serviced and subserviced. In addition, during 2022, we originated and purchased a total of 6,148 forward government-insured loans with a UPB of $2.0 billion, 11% of our total Originations UPB.
We use estimates in measuring or determining the fair value of the majority of our assets and liabilities. If our estimates prove to be incorrect, we may be required to write down the value of these assets or write up the value of these liabilities, which could adversely affect our earnings.
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events based on information available at the time of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows.
Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.
At December 31, 2022, 87% and 71% of our consolidated total assets and liabilities are measured at fair value, respectively, on a recurring and nonrecurring basis, 95% and 100% of which are considered Level 3 valuations, including our MSR portfolio. Our largest Level 3 asset and liability carried at fair value on a recurring basis is Loans held for investment - reverse mortgages and the related secured financing. We pool home equity conversion mortgages (reverse mortgages) into Ginnie Mae Home Equity Conversion Mortgage-Backed Securities (HMBS). Because the securitization of reverse mortgage loans does not qualify for sale accounting, we account for these transfers as secured financings and classify the transferred reverse mortgages as Loans held for investment - reverse mortgages and recognize the related Financing liabilities. Holders of HMBS have no recourse against our assets, except for standard representations and warranties and our contractual obligations to service the reverse mortgages and HMBS.
We estimate the fair value of our assets and liabilities utilizing assumptions that we believe are appropriate and are used by market participants. We generally engage third-party valuation experts to support our fair value determination for Level 3 assets and liabilities. The methodology used to estimate these values is complex and uses asset- and liability-specific data and market inputs for assumptions including interest and discount rates, collateral status and expected future performance. If these assumptions prove to be inaccurate, if market conditions change or if errors are found in our models, the value of certain of our assets may decrease, which could adversely affect our business, financial condition and results of operations, including through negative impacts on our ability to satisfy minimum net worth and liquidity covenants.
Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of our valuation methodologies. If changes to interest rates or other factors cause prepayment speeds to increase more than estimated, delinquency and default levels are higher than anticipated or financial market illiquidity is greater than anticipated, we may be required to adjust the value of certain assets or liabilities, which could adversely affect our business, financial condition and results of operations.
We are exposed to liquidity, interest rate and foreign currency exchange risks.
We are exposed to liquidity risk primarily because of the highly variable daily cash requirements to support our servicing business, including the requirement to make advances pursuant to our servicing agreements and the process of collecting and applying recoveries of advances. We are also exposed to liquidity risk due to potential accelerated repayment of our debt depending on the performance of the underlying collateral, including the fair value of MSRs, and certain covenants or trigger events, among other factors. We are also exposed to liquidity and interest rate risk by our decision to originate and finance mortgage loans and the timing of their subsequent sales into the secondary market. Further, as discussed below, the derivative instruments that we have entered into in order to limit MSR fair value change exposure may require margin calls should the hedge instrument lose value. In general, we finance our operations through operating cash flows and various other sources of funding, including advance match funded borrowing agreements, secured lines of credit and repurchase agreements.
We are exposed to interest rate risk to the degree that our interest-bearing liabilities mature or reprice at different speeds, or on different bases, than our interest earning assets or when financed assets are not interest-bearing. Our servicing business is characterized by non-interest earning assets financed by interest-bearing liabilities. Servicing advances are among our more significant non-interest earning assets. At December 31, 2022, we had total advances of $718.9 million. We are also exposed to interest rate risk because a portion of our advance financing and other outstanding debt at December 31, 2022 is at variable rates. Rising interest rates may increase our interest expense. Earnings on float balances may partially offset these higher funding costs.
Our MSRs, which we carry at fair value, are subject to substantial interest rate risk, primarily because the mortgage loans underlying the servicing rights permit the borrowers to prepay the loans. A decrease in interest rates generally increases prepayment speeds and vice versa. An interest rate decrease could result in an array of fair value changes, the severity of which would depend on several factors, including the magnitude of the change, whether the decrease is across specific rate tenors or a parallel change across the entire yield curve, and impact from market-side adjustments, among others. Effective May 2021, management adopted a strategy of separately hedging our MSR portfolio and pipeline. The objective of our MSR policy is to provide partial hedge coverage of interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. However, as discussed below, there can be no assurance that our hedging strategy will be effective in partially mitigating our exposure to changes in fair value of our MSRs due to interest rate changes.
In our Originations business, we are exposed to interest rate risk and related price risk on our pipeline (i.e., interest rate loan commitments (IRLCs) and mortgage loans held for sale) from the commitment date up until the date the commitment is cancelled or expires, or the loan is sold into the secondary market. Generally, the fair value of the pipeline will decline in value when interest rates increase and will rise in value when interest rates decrease. Effective May 2021, we separately hedge our pipeline interest rate risk with freestanding derivatives such as TBAs, futures, options and forward sale contracts.
We are exposed to foreign currency exchange rate risk in connection with our investment in non-U.S. dollar currency operations to the extent that our foreign exchange positions remain unhedged. Our operations in the Philippines and India expose us to foreign currency exchange rate risk.
While we have established policies and procedures intended to identify, monitor and manage the risks described above, our risk management policies and procedures may not be effective. Further, such policies and procedures are not designed to mitigate or eliminate all of the risks we face. As a result, these risks could materially and adversely affect our business, financial condition and results of operations.
Our hedging strategy may not be successful in partially mitigating our exposure to interest rate risk.
Our hedging strategy may not be as effective as desired due to the actual performance of an MSR differing from the expected performance. While we actively track the actual performance of our MSRs across rate change environments, there is potential for our economic hedges to underperform. The underperformance may be a result of various factors, including the following: available hedge instruments have a different profile than the underlying asset, the duration of the hedge is different from the MSR, the convexity of the hedge is not proportional to the valuation change of the MSR asset, the counterparty with which we have traded has failed to deliver under the terms of the contract, or we fail to renew or adjust the hedge position in a timely or efficient manner.
Unexpected changes in market rates or secondary liquidity may have a materially adverse impact on the cash flows or operating performance of Ocwen. The expected hedge coverage profile may not correlate to the asset as desired, resulting in poorer performance than had we not hedged at all. In addition, hedging strategies involve transaction and other costs. We cannot be assured that our hedging strategy and the derivatives that we use will adequately offset the risks of interest rate volatility or that our hedging transactions will not result in or magnify losses.
Rising inflation may result in increased compensation and benefit expense and exacerbate pressures created by current labor market trends, increase the rates charged by vendors, and generally increase our operating costs, which could negatively impact our operations and financial results.
If recent trends in rising U.S. inflation rates continue, it may increase Ocwen’s costs of providing health insurance and other employee benefits, and increases in the cost of living may create upward pressure on wages. This pressure, combined with tightening labor markets resulting from elevated resignation rates among U.S. workers could increase the cost and difficulty of recruiting and retaining employees. In addition, inflation may increase the rates charged by our vendors and our operating expenses generally. Any of these risks could negatively impact our operations and financial results.
Growth of our subservicing portfolio and originations business, and the profitability of our investment in MAV, are partially dependent on decisions made by a third party which we do not control.
MAV is owned and managed by an intermediate holding company, MAV Canopy, which is controlled by a board of directors on which Ocwen has minority representation. As part of our agreements with MAV, Ocwen has agreed not to compete with MAV with respect to the purchase of certain GSE MSRs through specific channels. As a result of these arrangements, the growth of Ocwen’s GSE subservicing portfolio and originations business depends in part on MAV’s ability to successfully bid on MSRs and in turn on the pricing and valuation considerations underlying MAV’s bidding strategy. If, and to the extent, MAV were to have limited success acquiring MSRs, the growth of Ocwen’s subservicing portfolio and originations business could be negatively impacted. More broadly, MAV’s profitability depends on business, operating and financial strategies determined by the management of MAV Canopy, which Ocwen does not control. If MAV Canopy’s business, operating or financial strategies are not successful, Ocwen’s 15% investment or returns on its investment, which as of December 31, 2022
amounted to $42.2 million, could be reduced or we may be requested to contribute additional capital. See the next risk factor below.
Because MAV Canopy may make additional capital calls without Ocwen’s consent, to the extent we are unable or unwilling to contribute additional capital to MAV Canopy when requested, our ownership in MAV Canopy will be diluted and our control over investment decisions and other matters may be reduced.
In November 2022, Ocwen and Oaktree agreed to increase the aggregate capital contributions to MAV Canopy by up to an additional $250 million during an investment period ending May 2, 2024, subject to two annual extensions upon mutual agreement. Under the agreement, Ocwen may elect to contribute up to its pro rata share of the additional capital commitment. To the extent Ocwen does not contribute its pro rata share of the additional capital commitment, the ownership percentages held by Ocwen and Oaktree will be adjusted based on the parties’ current percentage interests, capital contributions, and book value. Because Ocwen does not control the MAV Canopy board of directors, it is possible that MAV Canopy may exercise its right to make capital calls to fund additional MSR investments at times that Ocwen is unable to, or prefers for strategic reasons related to its own operations not to, contribute additional capital to MAV Canopy. To the extent we do not contribute additional capital to MAV Canopy, our ownership will be diluted. If our ownership of MAV Canopy falls below 5%, we will lose our voting rights on certain routine management matters at MAV Canopy and our influence over MAV’s management and investment decisions may be reduced.
GSE and Ginnie Mae initiatives and other actions may affect our financial condition and results of operations.
Due to the significant role that the GSEs and Ginnie Mae play in the secondary mortgage market, new initiatives and other actions that they may implement could become prevalent in the mortgage servicing industry generally. To the extent that FHFA, the GSEs, HUD, Ginnie Mae or other authoritative body implement reforms that materially affect the market not only for conventional and/or government-insured loans but also the non-qualifying loan markets, such reforms could have a material adverse effect on the creation of new MSRs, the economics or performance of any MSRs that we acquire, servicing fees that we can charge and costs that we incur to comply with new servicing requirements. Further, to the extent a GSE or Ginnie Mae proposal or requirement impacts our business model differently than our competitors’, we may face a competitive disadvantage.
In addition, our ability to generate revenues through mortgage loan sales to institutional investors depends to a significant degree on programs administered by the GSEs, Ginnie Mae, and others that facilitate the issuance of MBS in the secondary market. These entities play a critical role in the residential mortgage industry and we have significant business relationships with many of them. If it is not possible for us to complete the sale or securitization of certain of our mortgage loans due to changes in GSE and Ginnie Mae programs, we may lack liquidity to continue to fund mortgage loans and our revenues and margins on new loan originations would be materially and negatively impacted.
Our plans to acquire MSRs will require approvals and cooperation by the GSEs and Ginnie Mae. Should approval or cooperation be withheld, we would have difficulty meeting our MSR acquisition objectives.
There are various proposals that deal with the future of the GSEs, including with respect to their ownership and role in the mortgage market, as well as proposals to implement GSE reforms relating to borrowers, lenders and investors in the mortgage market. Thus, the long-term future of the GSEs remains uncertain. Any change in the ownership of the GSEs, or in their programs or role within the mortgage market, could materially and adversely affect our business, liquidity, financial position and results of operations.
An economic slowdown or a deterioration of the housing market could increase both interest expense on servicing advances and operating expenses and could cause a reduction in income from, and the value of, our servicing portfolio.
During any period in which a borrower is not making payments, we are required under most of our servicing contracts to advance our own funds to meet contractual principal and interest remittance requirements for investors, pay property taxes and insurance premiums and process modifications and foreclosures. We also advance funds to maintain, repair and market real estate properties on behalf of investors. Most of our advances have the highest standing and are “top of the waterfall” so that we are entitled to repayment from respective loan or REO liquidations proceeds before most other claims on these proceeds, and in the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool level proceeds. Consequently, the primary impacts of an increase in advances are generally increased interest expense as we finance a large portion of servicing advance obligations and a decline in the fair value of MSRs as the projected funding cost of existing and future expected servicing advances is a component of the fair value of MSRs. Our liquidity is also negatively impacted because we must fund the portion of our advance obligations that is not financed. Our liquidity would be more severely impacted if we were unable to continue to finance a large portion of servicing advance obligations.
Higher delinquencies also decrease the fair value of MSRs and increase our cost to service loans, as loans in default require more intensive effort to bring them current or manage the foreclosure process. An increase in delinquencies may delay the timing of revenue recognition because we recognize servicing fees as earned, which is generally upon collection of payments from borrowers or proceeds from REO liquidations. An increase in delinquencies also generally leads to lower balances in
custodial and escrow accounts (float balances) and lower net earnings on custodial and escrow accounts (float earnings). Additionally, an increase in delinquencies in our servicing portfolio will result in lower revenue because we collect servicing fees only on performing loans.
Foreclosures are involuntary prepayments resulting in a reduction in UPB. This may also result in declines in the value of our MSRs.
Adverse economic conditions could also negatively impact our lending businesses. For example, declining home prices and increasing loan-to-value ratios may preclude many borrowers from refinancing their existing loans or obtaining new loans.
Any of the foregoing could adversely affect our business, liquidity, financial condition and results of operations.
A significant increase in prepayment speeds could adversely affect our financial results.
Prepayment speed is a significant driver of our business. Prepayment speed is the measurement of how quickly borrowers pay down the UPB of their loans or how quickly loans are otherwise modified involving forgiveness of principal, liquidated or charged off. Prepayment speeds have a significant impact on our servicing fee revenues, our expenses and on the valuation of our MSRs as follows:
•Revenue. If prepayment speeds increase, our servicing fees will decline more rapidly than anticipated because of the greater decrease in the UPB on which those fees are based. The reduction in servicing fees would be somewhat offset by increased float earnings because the faster repayment of loans will result in higher float balances that generate the float earnings. Conversely, decreases in prepayment speeds result in increased servicing fees but lead to lower float balances and float earnings.
•Expenses. Faster prepayment speeds result in higher compensating interest expense, which represents the difference between the full month of interest we are required to remit in the month a loan pays off and the amount of interest we collect from the borrower for that month. Slower prepayment speeds also lead to lower compensating interest expense.
•Valuation of MSRs. The fair value of MSRs is based on, among other things, projection of the cash flows from the related pool of mortgage loans. The expectation of prepayment speeds is a significant assumption underlying those cash flow projections from the perspective of market participants. Increases or decreases in interest rates have an impact on prepayment rates. If prepayment speeds were significantly greater than expected, the fair value of our MSRs, which we carry at fair value, could decrease. When the fair value of these MSRs decreases, we record a loss on fair value, which also has a negative impact on our financial results.
Operational Risks and Other Risks Related to Our Business
If we do not comply with our obligations under our servicing agreements or if others allege non-compliance, our business and results of operations may be harmed.
We have contractual obligations under the servicing agreements pursuant to which we service mortgage loans. Our non-Agency servicing agreements generally contain detailed provisions regarding servicing practices, reporting and other matters. In addition, PMC is party to seller/servicer agreements and/or subject to guidelines and regulations (collectively, seller/servicer obligations) with one or more of the GSEs, HUD, FHA, VA and Ginnie Mae. These seller/servicer obligations include financial covenants that include capital requirements related to tangible net worth, as defined by the applicable agency, an obligation to provide audited consolidated financial statements within 90 days of the applicable entity’s fiscal year end as well as extensive requirements regarding servicing, selling and other matters. To the extent that these requirements are not met or waived, the applicable agency may, at its option, utilize a variety of remedies including requirements to provide certain information or take actions at the direction of the applicable agency, requirements to deposit funds as security for our obligations, sanctions, suspension or even termination of approved seller/servicer status, which would prohibit future originations or securitizations of forward or reverse mortgage loans or servicing for the applicable agency.
Many of our servicing agreements require adherence to general servicing standards, and certain contractual provisions delegate judgment over various servicing matters to us. Our servicing practices, and the judgments that we make in our servicing of loans, could be questioned by parties to these agreements, such as GSEs, Ginnie Mae, trustees or master servicers, or by investors in the trusts which own the mortgage loans or other third parties. As a result, we could be required to repurchase mortgage loans, make whole or otherwise indemnify such mortgage loan investors or other parties. Advances that we have made could be unrecoverable. We could also be terminated as servicer or become subject to litigation or other claims seeking damages or other remedies arising from alleged breaches of our servicing agreements. For example, we are currently involved in a dispute with a former subservicing client relating to alleged violations of our contractual agreements. We are unable to predict the outcome of this dispute or the size of any loss we might incur. In addition, several trustees are currently defending themselves against claims by RMBS investors that the trustees failed to properly oversee mortgage servicers - including Ocwen - in the servicing of hundreds of trusts. Trustees subject to those suits have informed Ocwen that they may seek indemnification for losses they suffer as a result of the filings.
Any of the foregoing could have a significant negative impact on our business, financial condition and results of operations. Even if allegations against us lack merit, we may have to spend additional resources and devote additional management time to contesting such allegations, which would reduce the resources available to address, and the time management is able to devote to, other matters.
GSEs or Ginnie Mae may curtail or terminate our ability to sell, service or securitize newly originated loans to them.
As noted in the prior risk factor, if we do not comply with our seller/servicer obligations, the GSEs or Ginnie Mae may utilize a variety of remedies against us. Such remedies include curtailment of our ability to sell newly originated loans or even termination of our ability to sell, service or securitize such loans altogether. Any such curtailment or termination would likely have a material adverse impact on our business, liquidity, financial condition and results of operations.
A significant reduction in, or the total loss of, our remaining Rithm-related servicing would significantly impact our business, liquidity, financial condition and results of operations.
Rithm is our largest servicing client, accounting for 17% of the UPB and 28% of the loan count in our servicing portfolio as of December 31, 2022. On February 20, 2020, we received a notice of termination from Rithm with respect to the legacy PMC subservicing agreement. It is possible that Rithm could exercise its rights to terminate for convenience or opt not to renew some or all of our servicing agreements.
In addition, any failure under a financial covenant could result in Rithm terminating Ocwen as subservicer under the subservicing agreements or in directing the transfer of servicing away from Ocwen under the Rights to MSRs agreements. Similarly, failure by Ocwen to meet operational requirements, including service levels, critical reporting and other obligations, could also result in termination or transfer for cause. In addition, if there is a change of control to which Rithm did not consent, Rithm could terminate for cause and direct the transfer of servicing away from Ocwen. A termination for cause and transfer of servicing could materially and adversely affect Ocwen’s business, liquidity, financial condition and results of operations.
Further, under our Rights to MSRs agreements, in certain circumstances, Rithm has the right to sell its Rights to MSRs to a third-party and require us to transfer title to the related MSRs, subject to an Ocwen option to acquire at a price based on the winning third-party bid rather than selling to the third party. If Rithm sells its Rights to MSRs to a third party, the transaction can only be completed if the third-party buyer can obtain the necessary third-party consents to transfer the MSRs. Rithm also has the obligation to use reasonable efforts to encourage such third-party buyer to enter into a subservicing agreement with Ocwen. Ocwen may lose future compensation for subservicing, however, if no subservicing agreement is ultimately entered into with the third-party buyer.
Because of the large percentage of our servicing business that is represented by the agreements with Rithm, if Rithm exercised all or a significant portion of its rights to decline to continue doing business with us we anticipate that we would need to restructure many aspects of our servicing business as well as the related corporate support functions to address our smaller servicing portfolio.
If Rithm were to fail to comply with its servicing advance obligations under its agreements with us, it could materially and adversely affect us.
Under the Rights to MSRs agreements, Rithm is responsible for financing all servicing advance obligations in connection with the loans underlying the MSRs. At December 31, 2022, such servicing advances made by Rithm were approximately $501.9 million. However, under the Rights to MSRs structure, we are contractually required under our servicing agreements with the RMBS trusts to make the relevant servicing advances even if Rithm does not perform its contractual obligations to fund those advances. Therefore, if Rithm were unable to meet its advance financing obligations, we would remain obligated to meet any future advance financing obligations with respect to the loans underlying these Rights to MSRs, which could materially and adversely affect our liquidity, financial condition, results of operations and servicing operations.
Rithm currently uses advance financing facilities to fund a substantial portion of the servicing advances that Rithm is contractually obligated to make pursuant to the Rights to MSRs agreements. Although we are not an obligor or guarantor under Rithm’s advance financing facilities, we are a party to certain of the facility documents as the entity performing the work of servicing the underlying loans on which advances are being financed. As such, we make certain representations, warranties and covenants, including representations and warranties in connection with our sale of advances to Rithm. If we were to make representations or warranties that were untrue or if we were otherwise to fail to comply with our contractual obligations, we could become subject to claims for damages or events of default under such facilities could be asserted.
If MAV were to sell its MSR portfolio after May 3, 2024, it could result in our loss of subservicing income and could significantly impact our business, liquidity, financial condition and results of operations.
MAV is our second-largest subservicing client, accounting for 17% of the UPB and 12% of the loan count in our subservicing portfolio as of December 31, 2022. The Subservicing Agreement with MAV provides exclusivity rights to PMC as subservicer and will continue until terminated by mutual agreement of the parties or for cause, as defined. However, under the
terms of our Subservicing Agreement, our subservicing rights terminate as to MSRs sold by MAV to any unaffiliated third party.
Prior to May 3, 2024, MAV may sell MSRs, in one or more sales, constituting up to 20% of MAV’s total assets without our consent. As of December 31, 2022, MAV has exercised these rights to sell MSRs with a book value (at the time of sale) of approximately $120 million, or approximately 20% of the portfolio (at the time of sale). After May 3, 2024, MAV may sell the entire servicing portfolio or any portion thereof without our consent (although we have a right of first offer with respect to the full or partial sale of the MAV entity itself). If MAV chooses to exercise these sale rights, and we are unable to reach an agreement with the purchaser(s) of the MSRs to continue as subservicer, we will lose the corresponding subservicing income. Further, if the MSRs sold by MAV include MSRs previously sold by PMC, we may recognize additional losses on the associated MSR and Pledged MSR liability reported at fair value on our consolidated balance sheets (see Note 11 - Investment in Equity Method Investee and Related Party Transactions).
In addition, MAV has the right to terminate the Subservicing Agreement entirely in the event of certain events of default, including failure by Ocwen to meet financial or operational requirements, including service levels. MAV may also terminate the Subservicing Agreement in the event of a change of control of Ocwen or PMC.
Termination of some or all of our subservicing rights due to sales by MAV or termination of the entire Subservicing Agreement for cause could result in the loss of a significant portion of Ocwen’s total subservicing portfolio and materially and adversely affect Ocwen’s business, liquidity, financial condition and results of operations.
Technology or process failures or employee misconduct could damage our business operations or reputation, harm our relationships with key stakeholders and lead to regulatory sanctions or penalties.
We are responsible for developing and maintaining sophisticated operational systems and infrastructure, which is challenging. As a result, operational risk is inherent in virtually all of our activities. In addition, the CFPB and other regulators have emphasized their focus on the importance of servicers’ and lenders’ systems and infrastructure operating effectively. If our systems and infrastructure fail to operate effectively, such failures could damage our business and reputation, harm our relationships with key stakeholders and lead to regulatory sanctions or penalties.
Our business is substantially dependent on our ability to process and monitor a large number of transactions, many of which are complex, across various parts of our business. These transactions often must adhere to the terms of a complex set of legal and regulatory standards, as well as the terms of our servicing and other agreements. In addition, given the volume of transactions that we process and monitor, certain errors may be repeated or compounded before they are discovered and rectified. For example, because we send over 2 million communications in an average month, a process problem such as erroneous letter dating has the potential to negatively affect many parts of our business and have widespread negative implications.
We are similarly dependent on our employees. We could be materially adversely affected if an employee or employees, acting alone or in concert with non-affiliated third parties, causes a significant operational break-down or failure, either because of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems, including by means of cyberattack or denial-of-service attack. In addition to direct losses from such actions, we could be subject to regulatory sanctions or suffer harm to our reputation, financial condition, customer relationships, and ability to attract future customers or employees. Employee misconduct could prompt regulators to allege or to determine based upon such misconduct that we have not established adequate supervisory systems and procedures to inform employees of applicable rules or to detect and deter violations of such rules. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent misconduct may not be effective in all cases. Misconduct by our employees, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our reputation and our business.
Third parties with which we do business could also be sources of operational risk to us, including risks relating to break-downs or failures of such parties’ own systems or employees. Any of these occurrences could diminish our ability to operate one or more of our businesses or lead to potential liability to clients, reputational damage or regulatory intervention. We could also be required to take legal action against or replace third-party vendors, which could be costly, involve a diversion of management time and energy and lead to operational disruptions. Any of these occurrences could materially adversely affect us.
We are dependent on Black Knight and other vendors, service provider and other contractual counterparties for much of our technology, business process outsourcing and other services.
Our vendor relationships subject us to a variety of risks. We have significant exposure to third-party risks, as we are dependent on vendors, including Black Knight, Altisource and other vendors for a number of key services to operate our business effectively and in compliance with applicable regulatory and contractual obligations, and on banks and other financing sources to finance our business.
We use the Black Knight MSP servicing system pursuant to a seven-year agreement with Black Knight expiring in 2026, and we are highly dependent on the successful functioning of it to operate our loan servicing business effectively and in compliance with our regulatory and contractual obligations. It would be difficult, costly and complex to transfer all of our loans to another servicing system in the event Black Knight failed to perform under its agreements with us and any such transfer would take considerable time. Any such transfer would also likely be subject us to considerable scrutiny from regulators, GSEs, Ginnie Mae and other counterparties.
If Black Knight were to fail to properly fulfill its contractual obligations to us, including through a failure to provide services at the required level to maintain and support our systems, our business and operations would suffer. In addition, if Black Knight fails to develop and maintain its technology so as to provide us with an effective and competitive servicing system, our business could suffer. Similarly, we are reliant on other vendors for the proper maintenance and support of our technological systems and our business and operations would suffer if these vendors do not perform as required. If our vendors do not adequately maintain and support our systems, including our servicing systems, loan originations and financial reporting systems, our business and operations could be materially and adversely affected.
Altisource and other vendors supply us with other services in connection with our business activities such as property preservation and inspection services and valuation services. In the event that a vendor’s activities do not comply with the applicable servicing criteria, we could be exposed to liability as the servicer and it could negatively impact our relationships with our servicing clients, borrowers or regulators, among others. In addition, if our current vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations.
In addition to our reliance on the vendors discussed above, our business is reliant on a number of technological vendors that provide services such as integrated cloud applications and financial institutions that provide essential banking services on a daily basis. Even short-terms interruptions in the services provided by these vendors and financial institutions could be disruptive to our business and cause us financial loss. Significant or prolonged disruptions in the ability of these companies to provide services to us could have a material adverse impact on our operations.
Certain provisions of the agreements underlying our relationships with our vendors, service providers, financing sources and other contractual counterparties could be open to subjective interpretation. Disagreements with these counterparties, including disagreements over contract interpretation, could lead to business disruptions or could result in litigation or arbitration or mediation proceedings, any of which could be expensive and divert senior management’s attention from other matters. While we have been able to resolve disagreements with these counterparties in the past, if we were unable to resolve a disagreement, a court, arbitrator or mediator might be required to resolve the matter and there can be no assurance that the outcome of a material disagreement with a contractual counterparty would not materially and adversely affect our business, financing activities, financial condition or results of operations.
We have undergone and continue to undergo significant change to our technology infrastructure and business processes. Failure to adequately update our systems and processes could harm our ability to run our business and adversely affect our results of operations.
We are currently making, and will continue to make, technology investments and process improvements to improve or replace the information processes and systems that are key to managing our business, to improve our compliance management system, and to reduce costs. Additionally, as part of the transition to Black Knight MSP and the integration of our information processes and systems with PHH, we have undergone and continue to undergo significant changes to our technology infrastructure and business processes. Failure to select the appropriate technology investments, or to implement them correctly and efficiently, could have a significant negative impact on our operations.
Cybersecurity breaches or system failures may interrupt or delay our ability to provide services to our customers, expose our business and our customers to harm and otherwise adversely affect our operations.
Disruptions and failures of our systems or those of our vendors may interrupt or delay our ability to provide services to our customers, expose us to remedial costs and reputational damage, and otherwise adversely affect our operations. The secure transmission of confidential information over the Internet and other electronic distribution and communication systems is essential to our maintaining consumer confidence in certain of our services. We have programs in place to detect and respond to security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. While none of the cybersecurity incidents that we have experienced to date have had a material adverse impact on our business, financial condition or operations, a recent cybersecurity incident involving one of our vendors briefly impacted our operations, and we cannot assure that future incidents will not materially and adversely impact us.
Security breaches, computer viruses, phishing attacks, worms, cyberattacks, ransomware, hacking and other acts of vandalism are increasing in frequency and sophistication, and could result in a compromise or breach of the technology that we or our vendors use to protect our borrowers’ personal information and transaction data and other information that we must keep secure. Our financial, accounting, data processing or other operating systems and facilities (or those of our vendors) may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a cyberattack, a spike in transaction volume or unforeseen catastrophic events, potentially resulting in data loss and adversely affecting our ability to process transactions or otherwise operate our business. If one or more of these events occurs, this could potentially jeopardize data integrity or confidentiality of information processed and stored in, or transmitted through, our computer systems and networks. Any failure, interruption or breach in our cyber security could result in reputational harm, disruption of our customer relationships, or an inability to originate and service loans and otherwise operate our business. Further, any of these cyber security and operational risks could expose us to lawsuits by customers for identity theft or other damages resulting from the misuse of their personal information and possible financial liability, any of which could have a material adverse effect on our results of operations, financial condition and liquidity.
Regulators may impose penalties or require remedial action if they identify weaknesses in our systems, and we may be required to incur significant costs to address any identified deficiencies or to remediate any harm caused. A number of states have specific reporting and other requirements with respect to cybersecurity in addition to applicable federal laws. For instance, the NY DFS Cybersecurity Regulation requires New York insurance companies, banks, and other regulated financial services institutions - including certain Ocwen entities licensed in the state of New York - to assess their cybersecurity risk profile. Regulated entities are required, among other things, to adopt the core requirements of a cybersecurity program, including a cybersecurity policy, effective access privileges, cybersecurity risk assessments, training and monitoring for all authorized users, and appropriate governance processes. This regulation also requires regulated entities to submit notices to the NY DFS of any security breaches or other cybersecurity events, and to certify their compliance with the regulation on an annual basis. In addition, consumers generally are concerned with security breaches and privacy on the Internet, and Congress or individual states could enact new laws regulating the use of technology in our business that could adversely affect us or result in significant compliance costs.
As part of our business, we may share confidential customer information and proprietary information with customers, vendors, service providers, and business partners. The information systems of these third parties may be vulnerable to security breaches as these third parties may not have appropriate security controls in place to protect the information we share with them. If our confidential information is intercepted, stolen, misused, or mishandled while in possession of a third party, it could result in reputational harm to us, loss of customer business, and additional regulatory scrutiny, and it could expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of operations, financial condition and liquidity.
Damage to our reputation could adversely impact our financial results and ongoing operations.
Our ability to serve and retain customers and conduct business transactions with our counterparties could be adversely affected to the extent our reputation is damaged. Our failure to address, or to appear to fail to address, the various regulatory, operational and other challenges facing Ocwen could give rise to reputational risk that could cause harm to us and our business prospects. Reputational issues may arise from the following, among other factors:
•negative news about Ocwen or the mortgage industry generally;
•allegations of non-compliance with legal and regulatory requirements;
•ethical issues, including alleged deceptive or unfair servicing or lending practices;
•our practices relating to collections, foreclosures, property preservation, modifications, interest rate adjustments, loans impacted by natural disasters, escrow and insurance;
•consumer privacy concerns;
•consumer financial fraud;
•data security issues related to our customers or employees;
•cybersecurity issues and cyber incidents, whether actual, threatened, or perceived;
•customer service or consumer complaints;
•legal, reputational, credit, liquidity and market risks inherent in our businesses;
•a downgrade of or negative watch warning on any of our servicer or credit ratings; and
•alleged or perceived conflicts of interest.
The proliferation of social media websites as well as the personal use of social media by our employees and others, including personal blogs and social network profiles, also may increase the risk that negative, inappropriate or unauthorized information may be posted or released publicly that could harm our reputation or have other negative consequences, including as a result of our employees interacting with our customers in an unauthorized manner in various social media outlets. The failure to address, or the perception that we have failed to address, any of these issues appropriately could give rise to increased regulatory action, which could adversely affect our results of operations.
The industry in which we operate is highly competitive, and, to the extent we fail to meet these competitive challenges, it would have a material adverse effect on our business, financial position, results of operations or cash flows.
We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory or technological changes. Competition to service mortgage loans and for mortgage loan originations comes primarily from commercial banks and savings institutions and non-bank lenders and mortgage servicers. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources, and lower funding costs. Further, our competitors that are national banks may also benefit from a federal exemption from certain state regulatory requirements that is applicable to depository institutions. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of revenue generating options (e.g., originating types of loans that we choose not to originate) and establish more favorable relationships than we can. With the proliferation of smartphones and technological changes enabling improved payment systems and cheaper data storage, newer market participants, often called “disruptors,” are reinventing aspects of the financial industry and capturing profit pools previously enjoyed by existing market participants. As a result, the lending industry could become even more competitive if new market participants are successful in capturing market share from existing market participants such as ourselves. Competition to service mortgage loans may result in lower margins. Because of the relatively limited number of servicing clients, our failure to meet the expectations of any significant client could materially impact our business. Ocwen has suffered reputational damage as a result of our regulatory settlements and the associated scrutiny of our business. We believe this may have weakened our competitive position against both our bank and non-bank mortgage servicing competitors. These competitive pressures could have a material adverse effect on our business, financial condition or results of operations.
The unexpected departure of key executives or an inability to attract and retain qualified personnel could harm our business, financial condition and results of operations.
We are highly dependent on an experienced leadership team, including our Chair, President and Chief Executive Officer, Glen A. Messina. We do not maintain key man life insurance relating to Mr. Messina or any other executive officer. The unexpected loss of the services of Mr. Messina or any of our other senior officers could have a material adverse effect on us.
More generally, our future success depends, in part, on our ability to identify, attract and retain highly skilled servicing, lending, finance, risk, compliance and technical personnel. We face intense competition for qualified individuals from numerous financial services and other companies, some of which have greater resources, better recent financial performance, fewer regulatory challenges and better reputations than we do.
If we are unable to attract and retain the personnel necessary to conduct our originations business, or other operations, or if the costs of doing so rise significantly, it could negatively impact our financial condition and results of operations.
The human capital components of our ongoing cost-reduction efforts could disrupt operations, impair productivity and reduce morale, which could have a material adverse effect on our operations, business and financial performance.
As part of our ongoing initiatives to reduce operating costs, we have significantly reduced both our U.S.-based and offshore staffing levels compared to December 31, 2021. In addition, in 2022 we experienced elevated management turnover as a result of planned departures, including the departure of several executive officers. While we believe these planned departures are necessary in order to simplify our operations and drive stronger financial performance, internal reorganizations and personnel turnover add uncertainty to our operations in the short-term and divert management and employee attention from our other initiatives. In addition, the reduction in our workforce may negatively impact employee morale. It is possible that critical employees may seek other employment, and if we have misjudged the number or allocation of positions needed to run our operations efficiently, critical functions could be understaffed. Finally, our workforce reductions, management changes and internal reorganization could potentially invite increased regulatory inquiries. Any of the above risks, or a combination of these risks, could impair our ability to realize intended productivity increases and cost savings and result in a material adverse effect on our business and operating results.
We have operations in India and the Philippines that could be adversely affected by changes in the political or economic stability of these countries or by government policies in India, the Philippines or the U.S.
Approximately 3,200, or 65%, of our employees as of December 31, 2022 are located in India. A significant change in India’s economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally and our business in particular. The political or regulatory climate in the U.S. or elsewhere also could change so that it would not be lawful or practical for us to use international operations in the manner in which we currently use them. For example, changes in regulatory requirements could require us to curtail our use of lower-cost operations in India to service our businesses. If we had to curtail or cease our operations in India and transfer some or all of these operations to another geographic area, we could incur significant transition costs as well as higher future overhead costs that could materially and adversely affect our results of operations.
We may need to increase the levels of our employee compensation more rapidly than in the past to retain talent in India. Unless we can continue to enhance the efficiency and productivity of our employees, wage increases in the long-term may negatively impact our financial performance.
Political activity or other changes in political or economic stability in India could affect our ability to operate our business effectively. For example, political protests disrupted our Indian operations in multiple cities for a number of days during 2018. While we have implemented and maintain business continuity plans to reduce the disruption such events cause to our critical operations, we cannot guarantee that such plans will eliminate any negative impact on our business. Depending on the frequency and intensity of future occurrences of instability, our Indian operations could be significantly adversely affected.
Our operations in the Philippines are less substantial than our operations in India. However, they are still at risk of being affected by the same types of risks that affect our Indian operations. If they were to be so affected, our business could be materially and adversely affected.
There are a number of foreign laws and regulations that are applicable to our operations in India and the Philippines, including laws and regulations that govern licensing, employment, safety, taxes and insurance and laws and regulations that govern the creation, continuation and winding up of companies as well as the relationships between shareholders, our corporate entities, the public and the government in these countries. Non-compliance with the laws and regulations of India or the Philippines could result in (i) restrictions on our operations in these countries, (ii) fines, penalties or sanctions or (iii) reputational damage.
Our operations are vulnerable to disruptions resulting from severe weather events.
Our operations are vulnerable to disruptions resulting from severe weather events, including our operations in India, the Philippines, the USVI and Florida. Approximately 3,700, or 76%, of our employees as of December 31, 2022 are located in India or the Philippines. In recent years, severe weather events caused disruptions to our operations in India, the Philippines, and the USVI and we incurred expense resulting from the evacuation of personnel and from property damage. In addition, employees located in Pennsylvania, New Jersey and Texas have been impacted by severe weather events in recent years, including as a result of power failures due to such events which temporarily prevented some remote employees from working. While we have implemented and maintain business continuity plans to reduce the disruption such events cause to our critical operations, we cannot guarantee that such plans will eliminate any negative impact on our business, including the cost of evacuation and repairs. As the frequency of severe weather events continues to increase in connection with rising global temperatures and other climatic changes, interruptions to our business operations may become more frequent and costly, and future weather events could have a significant adverse effect on our business and results of operations.
If a rise in severe weather events increases the proportion of borrowers facing financial hardship, our servicing operations and financial condition could be negatively impacted.
Certain regions of the U.S. have experienced an increase in the frequency and severity of significant weather events during the last decade, resulting in costly property repairs and rising homeowner’s insurance costs. To the extent borrowers living in impacted areas experience a financial hardship and become unable to meet their mortgage obligations or choose to abandon severely damaged property, our servicing operations will become more costly due to the increased expense of servicing delinquent mortgages and managing REO property. While we have programs in place to assist homeowners negatively impacted by weather events and other emergencies, we cannot guarantee that these programs would mitigate impacts to all borrowers. Consequently, if the frequency and severity of weather events continues to increase and the regions subject to extreme weather continue to expand, the results of our servicing operations and financial condition could be significantly impacted.
A significant portion of our business is in the states of California, Texas, Florida, New York and New Jersey, and our business may be significantly harmed by a slowdown in the economy or the occurrence of a natural disaster in those states.
A significant portion of the mortgage loans that we service and originate are secured by properties in California, Texas, Florida, New York and New Jersey. Any adverse economic conditions in these markets, including a downturn in real estate values, could increase loan delinquencies. Delinquent loans are more costly to service and require us to advance delinquent principal and interest and to make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent that we determine that such amounts are recoverable. We could also be adversely affected by business disruptions triggered by natural disasters or acts or war or terrorism in these geographic areas.
Reinsuring risk through our captive reinsurance entity could adversely impact our results of operation and financial condition.
If our captive reinsurance entity incurs losses from a severe catastrophe or series of catastrophes, particularly in areas where a significant portion of the insured properties are located, claims that result could substantially exceed our expectations,
which could adversely impact our results of operation and financial condition. An increase in the frequency with which severe weather events occur in the U.S. would increase the risk of adverse impacts on our captive reinsurance business.
Pursuit of business or asset acquisitions exposes us to financial, execution and operational risks that could adversely affect us.
We are actively looking for opportunities to grow our business through acquisitions of businesses and assets. The performance of the businesses and assets we acquire through acquisitions may not match the historical performance of our other assets. Nor can we assure you that the businesses and assets we may acquire will perform at levels meeting our expectations. We may find that we overpaid for the acquired businesses or assets or that the economic conditions underlying our acquisition decision have changed. It may also take several quarters or longer for us to fully integrate newly acquired business and assets into our business, during which period our results of operations and financial condition may be negatively affected. Further, certain one-time expenses associated with such acquisitions may have a negative impact on our results of operations and financial condition. We cannot assure you that acquisitions will not adversely affect our liquidity, results of operations and financial condition.
The risks associated with acquisitions include, among others:
•unanticipated issues in integrating servicing, information, communications and other systems;
•unanticipated incompatibility in servicing, lending, purchasing, logistics, marketing and administration methods;
•unanticipated liabilities assumed from the acquired business;
•not retaining key employees; and
•the diversion of management’s attention from ongoing business concerns.
The acquisition integration process can be complicated and time consuming and could potentially be disruptive to borrowers of loans serviced by the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its borrowers, we may not realize the anticipated economic benefits of particular acquisitions within our expected timeframe, or we could lose subservicing business or employees of the acquired business. In addition, integrating operations may involve significant reductions in headcount or the closure of facilities, which may be disruptive to operations and impair employee morale. Through acquisitions, we may enter into business lines in which we have not previously operated. Such acquisitions could require additional integration costs and efforts, including significant time from senior management. We may not be able to achieve the synergies we anticipate from acquired businesses, and we may not be able to grow acquired businesses in the manner we anticipate. In fact, the businesses we acquire could decrease in size, even if the integration process is successful.
Further, prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices that we considered to be acceptable, and we expect that we will experience this condition in the future. In addition, to finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or we could raise additional equity capital, which could dilute the interests of our existing shareholders.
The timing of closing of our acquisitions is often uncertain. We have in the past and may in the future experience delays in closing our acquisitions, or certain aspects of them. For example, we and the applicable seller are often required to obtain certain regulatory and contractual consents as a prerequisite to closing, such as the consents of GSEs, the FHFA, RMBS trustees or regulators. Accordingly, even if we and the applicable seller are efficient and proactive, the actions of third parties can impact the timing under which such consents are obtained. We and the applicable seller may not be able to obtain all the required consents, which may mean that we are unable to acquire all the assets that we wish to acquire. Regulators may have questions relating to aspects of our acquisitions and we may be required to devote time and resources responding to those questions. It is also possible that we will expend considerable resources in the pursuit of an acquisition that, ultimately, either does not close or is terminated.
Loan put-backs and related liabilities for breaches of representations and warranties regarding sold loans could adversely affect our business.
We have exposure to representation, warranty and indemnification obligations relating to our Originations business, including lending, loan sales and securitization activities, and in certain instances, we have assumed these obligations on loans we service. Our contracts with purchasers of originated loans generally contain provisions that require indemnification or repurchase of the related loans under certain circumstances. While the language in the purchase contracts varies, such contracts generally contain provisions that require us to indemnify purchasers of loans or repurchase such loans if:
•representations and warranties concerning loan quality, contents of the loan file or loan underwriting circumstances are inaccurate;
•adequate mortgage insurance is not secured within a certain period after closing;
•a mortgage insurance provider denies coverage; or
•there is a failure to comply, at the individual loan level or otherwise, with regulatory requirements.
We believe that many purchasers of residential mortgage loans are particularly aware of the conditions under which originators must indemnify or repurchase loans and under which such purchasers would benefit from enforcing any indemnification rights and repurchase remedies they may have.
At December 31, 2022, we had outstanding representation and warranty repurchase demands related to 354 loans of $66.7 million total UPB.
If home values decrease, our realized loan losses from loan repurchases and indemnifications may increase as well. As a result, our liability for repurchases may increase beyond our current expectations. Depending on the magnitude of any such increase, our business, financial condition and results of operations could be adversely affected.
We originate and securitize FHA-insured HECM reverse mortgages, which subjects us to risks that could have a material adverse effect on our business, reputation, liquidity, financial condition and results of operations.
We originate, securitize and service FHA-insured HECM mortgages. The reverse mortgage business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. Generally, a HECM reverse mortgage is a government-insured loan available to seniors aged 62 or older that allows homeowners to borrow money against the value of their home. No repayment of the mortgage is required until a default event under the terms of the mortgage occurs, the borrower dies, the borrower moves out of the home or the home is sold. A decline in the demand for HECM reverse mortgages may reduce the number of HECM reverse mortgages we originate and adversely affect our ability to sell HECM reverse mortgages in the secondary market. Although foreclosures involving HECM reverse mortgages generally occur less frequently than forward mortgages, loan defaults on HECM reverse mortgages leading to foreclosures may occur if borrowers fail to occupy the home as their primary residence, maintain their property or fail to pay taxes or home insurance premiums. A general increase in foreclosure rates may adversely impact how HECM reverse mortgages are perceived by potential customers and thus reduce demand for HECM reverse mortgages. Additionally, we could become subject to negative headline risk in the event that loan defaults on HECM reverse mortgages lead to foreclosures or evictions of the elderly. The HUD HECM reverse mortgage program has in the past responded to scrutiny around similar issues by implementing rule changes, and may do so in the future. It is not possible to predict whether any such rule changes would negatively impact us. All of the above factors could have a material adverse effect on our business, reputation, liquidity, financial condition and results of operations.
Our HMBS repurchase obligations may reduce our liquidity, and if we are unable to comply with such obligations, it could materially adversely affect our business, financial condition, and results of operations.
As an HMBS issuer, we assume the obligation to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount (MCA repurchases). Active repurchased loans are assigned to HUD and payment is typically received within 75 days of repurchase. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount. We bear the risk of exposure if the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Inactive repurchased loans (the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments) are generally liquidated through foreclosure and subsequent sale of REO, with a claim filed with HUD for recoverable remaining principal and advance balances. The recovery timeline for inactive repurchased loans depends on various factors, including foreclosure status at the time of repurchase, state-level foreclosure timelines, and the post-foreclosure REO liquidation timeline. The timing and amount of our obligations with respect to MCA repurchases are uncertain as repurchase is dependent largely on circumstances outside of our control. MCA repurchases are expected to continue to increase due to the seasoning of our portfolio, and the increased flow of HECMs and REO that are reaching 98% of their maximum claim amount.
If we do not have sufficient liquidity or borrowing capacity to comply with our Ginnie Mae repurchase obligations, Ginnie Mae could take adverse action against us, including terminating us as an approved HMBS issuer. In addition, if we are required to purchase a significant number of loans with respect to which the outstanding principal balances exceed HUD’s maximum claim amount, we could be required to absorb significant losses on such loans following assignment to HUD or, in the case of inactive loans, liquidation and subsequent claim for HUD reimbursement. Further, during the periods in which HUD reimbursement is pending, our available borrowing or liquidity will be reduced by the repurchase amounts and we will have reduced resources with which to further other business objectives. For all of the foregoing reasons, our liquidity, business, financial condition, and results of operations could be materially and adversely impacted by our HMBS repurchase obligations.
Liabilities relating to our past sales of Agency MSRs could adversely affect our business.
We have made representations, warranties and covenants relating to our past sales of Agency MSRs, including sales made by PHH before we acquired it. To the extent that we (including PHH prior to its acquisition by us) made inaccurate representations or warranties or if we fail otherwise to comply with our sale agreements, we could incur liability to the purchasers of these MSRs pursuant to the contractual provisions of these agreements.
We may incur litigation costs and related losses if the validity of a foreclosure action is challenged by a borrower or if a court overturns a foreclosure.
We may incur costs if we are required to, or if we elect to, execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. We may incur litigation costs if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to a title insurer of the property sold in foreclosure. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans. In addition, if certain documents required for a foreclosure action are missing or defective, we could be obligated to cure the defect or repurchase the loan. A significant increase in litigation costs could adversely affect our liquidity, and our inability to be reimbursed for servicing advances could adversely affect our business, financial condition or results of operations.
A failure to maintain minimum servicer ratings could have an adverse effect on our business, financing activities, financial condition or results of operations.
S&P, Moody’s, Fitch and others rate us as a mortgage servicer. Failure to maintain minimum servicer ratings could adversely affect our ability to sell or fund servicing advances going forward, could affect the terms and availability of debt financing facilities that we may seek in the future, and could impair our ability to consummate future servicing transactions or adversely affect our dealings with lenders, other contractual counterparties and regulators, including our ability to maintain our status as an approved servicer by Fannie Mae and Freddie Mac. The servicer rating requirements of Fannie Mae do not necessarily require or imply immediate action, as Fannie Mae has discretion with respect to whether we are in compliance with their requirements and what actions it deems appropriate under the circumstances in the event that we fall below their desired servicer ratings.
Certain of our servicing agreements require that we maintain specified servicer ratings. As a result of our current servicer ratings, termination rights have been triggered in some non-Agency servicing agreements. While the holders of these termination rights have not exercised them to date, they have not waived the right to do so, and we could, in the future, be subject to terminations either as a result of servicer ratings downgrades or future adverse actions by ratings agencies, which could have an adverse effect on our business, financing activities, financial condition and results of operations. Downgrades in our servicer ratings could also affect the terms and availability of advance financing or other debt facilities that we may seek in the future. Our failure to maintain minimum or specified ratings could adversely affect our dealings with contractual counterparties, including GSEs, Ginnie Mae and regulators, any of which could have a material adverse effect on our business, financing activities, financial condition and results of operations. To date, terminations as servicer as a result of a breach of any of these provisions have been minimal.
The replacement of LIBOR with an alternative reference rate or alternative replacement floating rate indexes, may adversely affect interest rates, our business, and financial markets as a whole.
On July 27, 2017, the Financial Conduct Authority in the U.K. announced that it would phase out LIBOR as a benchmark by the end of 2021. However, for U.S. dollar LIBOR, the date has been deferred to June 30, 2023 for certain tenors (including overnight and one, three, six and 12 months), at which time the LIBOR administrator has indicated that it intends to cease publication of U.S. dollar LIBOR. Despite this deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021 and that beginning January 1, 2022, renewals of existing contracts should provide for the replacement of U.S. dollar LIBOR with an alternative reference rate. This change will affect some adjustable (or variable) rate loans and lines of credit, including but not limited to adjustable-rate mortgages (ARMs), reverse mortgages, and home equity lines of credit (HELOCs).
In the U.S., the Federal Reserve has convened a group called the Alternative Reference Rates Committee (ARRC) to help facilitate the transition away from the use of LIBOR as an index. The ARRC has designated the Secured Overnight Financing Rate (SOFR) as the recommended alternative rate for U.S. dollar-based LIBOR. In addition, on March 15, 2022, Federal legislation was signed into law that includes the Adjustable Interest Rate (LIBOR) Act (the LIBOR Act). On December 16, 2022, the Federal Reserve Board adopted a final rule implementing the LIBOR Act. This final rule identified benchmark rates based on SOFR that will replace LIBOR after June 30, 2023 in certain financial contracts that lack adequate “fallback” provisions to replace LIBOR with a practicable replacement benchmark rate. The LIBOR Act also contains a safe harbor protecting any person selecting and/or implementing a benchmark replacement, adjustments and conforming changes recommended by the Federal Reserve Board. In October 2022, the HUD announced a proposed rule (that has not yet been finalized) that would substitute the SOFR for LIBOR as an acceptable index for FHA-insured adjustable-rate mortgages, including HECMs. In December 2022, Fannie Mae and Freddie Mac announced that SOFR will serve as the index for their LIBOR-based adjustable rate loans, to occur the day after June 30, 2023.
Despite these recommendations of SOFR as a replacement, some market participants may continue to explore whether other U.S. dollar reference rates would be more appropriate for certain instruments. Our servicing portfolio includes forward, reverse and commercial ARMs that reference LIBOR, for which PMC will be following GSE and investor guidance concerning the replacement index and providing notices to borrowers. There still remains uncertainty relating to how widely any given alternative will be adopted by parties in the financial markets, and the extent to which alternative benchmarks may be subject to volatility or present risks and challenges that LIBOR does not. It is possible that we will disagree with our contractual counterparties over which alternative benchmark to adopt, which could make renewing or replacing our debt facilities and other agreements more complex. In addition, to the extent the adoption of a benchmark alternative impacts the interest rates payable by borrowers, it could lead to borrower complaints and litigation. Consequently, it remains difficult to predict the effects the phase-out of LIBOR and the use of alternative benchmarks may have on our business or on the overall financial markets. If LIBOR alternatives re-allocate risk among parties in a way that is disadvantageous to market participants such as Ocwen, if there is disagreement among market participants, including borrowers, over which alternative benchmark to adopt, or if uncertainty relating to the LIBOR phase-out disrupts financial markets, it could have a material adverse effect on our financial position, results of operations, and liquidity.
Tax Risks
Changes in tax laws and interpretation and tax challenges may adversely affect our financial condition and results of operations.
The enactment of Federal Tax Reform has had, and is expected to continue to have, far reaching and significant effects. Further, U.S. tax authorities may at any time clarify and/or modify by legislation, administration or judicial changes or interpretation the income tax treatment of corporations. Such changes could adversely affect us.
In the course of our business, we are sometimes subject to challenges from taxing authorities, including the Internal Revenue Service (IRS), individual states, municipalities, and foreign jurisdictions, regarding amounts due. These challenges may result in adjustments to the timing or amount of taxable income or deductions, the allocation of income among tax jurisdictions, or the rate of tax imposed in such jurisdiction, all of which may require a greater provision for taxes or otherwise adversely affect our financial condition and results of operations.
Failure to retain the tax benefits provided by the USVI would adversely affect our financial condition and results of operations.
During 2019, in connection with our acquisition of PHH, overall corporate simplification and cost-reduction efforts, we executed a legal entity reorganization whereby OLS, through which we previously conducted a substantial portion of our servicing business, was merged into PMC. OLS was previously the wholly-owned subsidiary of OMS, which was incorporated and headquartered in the USVI prior to its merger with Ocwen USVI Services, LLC, an entity which is also organized and headquartered in the USVI. The USVI has an Economic Development Commission (EDC) that provides certain tax benefits to qualified businesses. OMS received its certificate to operate as a company qualified for EDC benefits in October 2012 and as a result received significant tax benefits. Following our legal entity reorganization, we are no longer able to avail ourselves of favorable tax treatment for our USVI operations on a going forward basis. However, if the EDC were to determine that we failed to conduct our USVI operations in compliance with EDC qualifications prior to our reorganization, the value of the EDC benefits corresponding to the period prior to the reorganization could be reduced or eliminated, resulting in an increase to our tax expense. In addition, under our agreement with the EDC, we remain obligated to continue to operate Ocwen USVI Services, LLC in compliance with EDC requirements through 2042. If we fail to maintain our EDC qualification, we could be alleged to be in violation of our EDC commitments and the EDC could take adverse action against us, which could include demands for payment and reimbursement of past tax benefits, and it could result in the loss of anticipated income tax refunds. If any of these events were to occur, it could adversely affect our financial condition and results of operations.
We may be subject to increased U.S. federal income taxation.
OMS was incorporated under the laws of the USVI and operated in a manner that caused a substantial amount of its net income to be treated as not related to a trade or business within the U.S., which caused such income to be exempt from U.S. federal income taxation. However, because there are no definitive standards provided by the Internal Revenue Code (the Code), regulations or court decisions as to the specific activities that constitute being engaged in the conduct of a trade or business within the U.S., and as any such determination is essentially factual in nature, we cannot assure you that the IRS will not successfully assert that OMS was engaged in a trade or business within the U.S. with respect to that income.
If the IRS were to successfully assert that OMS had been engaged in a trade or business within the U.S. with respect to that income in any taxable year, it may become subject to U.S. federal income taxation on such income. Our tax returns and positions are subject to review and audit by federal and state taxing authorities. An unfavorable outcome to a tax audit could result in higher tax expense.
Any “ownership change” as defined in Section 382 of the Internal Revenue Code could substantially limit our ability to utilize our net operating losses carryforwards and other deferred tax assets.
As of December 31, 2022, Ocwen had U.S. federal and USVI net operating loss (NOL) carryforwards of approximately $510.4 million, which we estimate to be worth approximately $107.2 million to Ocwen under our present assumptions related to Ocwen’s various relevant jurisdictional tax rates as a result of recently passed tax legislation (which assumptions reflect a significant degree of uncertainty). As of December 31, 2022, Ocwen had state NOL and state tax credit carryforwards which we estimate to be worth approximately $90.3 million, and foreign tax credit carryforwards of $0.1 million in the U.S. jurisdiction. As of December 31, 2022, Ocwen had disallowed interest under Section 163(j) of $296.2 million in the U.S. jurisdiction. NOL carryforwards, Section 163(j) disallowed interest carryforwards and certain built-in losses or deductions may be subject to annual limitations under Internal Revenue Code Section 382 (Section 382) (or comparable provisions of foreign or state law) in the event that certain changes in ownership were to occur as measured under Section 382. In addition, tax credit carryforwards may be subject to annual limitations under Internal Revenue Code Section 383 (Section 383). We periodically evaluate whether certain changes in ownership have occurred as measured under Section 382 that would limit our ability to utilize our NOLs, tax credit carryforwards, deductions and/or certain built-in losses. If it is determined that an ownership change(s) has occurred, there may be annual limitations under Sections 382 and 383 (or comparable provisions of foreign or state law).
Ocwen and PHH have both experienced historical ownership changes that have caused the use of certain tax attributes to be limited and have resulted in the write-off of certain of these attributes based on our inability to use them in the carryforward periods defined under tax law. Ocwen continues to monitor the ownership in its stock to evaluate whether any additional ownership changes have occurred that would further limit our ability to utilize certain tax attributes. As such, our analysis regarding the amount of tax attributes that may be available to offset taxable income in the future without restrictions imposed by Section 382 may continue to evolve. Our inability to utilize our pre-ownership change NOL carryforwards, Section 163(j) disallowed interest carryforwards, any future recognized built-in losses or deductions, and tax credit carryforwards could have an adverse effect on our financial condition, results of operations and cash flows. Finally, any future changes in our ownership or sale of our stock could further limit the use of our NOLs and tax credits in the future.
Risks Relating to Ownership of Our Common Stock
Our common stock price experiences substantial volatility and has dropped significantly on a number of occasions in recent periods, which may affect your ability to sell our common stock at an advantageous price.
The market price of our shares of common stock has been, and may continue to be, volatile. For example, the closing market price of our common stock on the New York Stock Exchange fluctuated during 2022 between $17.99 per share and $41.30 per share, and the closing stock price on February 24, 2023 was $36.13 per share. Therefore, the volatility in our stock price may affect your ability to sell our common stock at an advantageous price. Market price fluctuations in our common stock may be due to factors both within and outside our control, including regulatory or legal actions, acquisitions, dispositions or other material public announcements or speculative trading in our stock (e.g., traders “shorting” our common stock), as well as a variety of other factors including, but not limited to those set forth under this Item 1.A. Risk Factors .
In addition, the stock markets in general, including the New York Stock Exchange, have, at times, experienced extreme price and trading fluctuations. These fluctuations have resulted in volatility in the market prices of securities that often has been unrelated or disproportionate to changes in operating performance. These broad market fluctuations may adversely affect the market prices of our common stock.
When the market price of a company's shares drops significantly, shareholders often institute securities class action lawsuits against the company. A lawsuit against us, even if unsuccessful, could cause us to incur substantial costs and could divert the time and attention of our management and other resources.
We have several large shareholders, and such shareholders may vote their shares to influence matters requiring shareholder approval.
Based on SEC filings, we understand several shareholders each own or control over five percent of our common stock. These large shareholders individually and collectively have the ability to vote a meaningful percentage of our outstanding common stock on all matters put to a vote of our shareholders. As a result, these shareholders could influence matters requiring shareholder approval, including the amendment of our articles of incorporation, the approval of mergers or similar transactions and the election of directors. If situations arise in which management and certain large shareholders have divergent views, we may be unable to take actions management believes to be in the best interests of Ocwen.
Further, certain of our large shareholders also hold significant percentages of stock in companies with which we do business. It is possible these interlocking ownership positions could cause these shareholders to take actions based on factors other than solely what is in the best interests of Ocwen.
Our board of directors may authorize the issuance of additional securities that may cause dilution and may depress the price of our securities.
Our articles of incorporation permit our board of directors, without our stockholders’ approval, to:
•authorize the issuance of additional common stock or preferred stock in connection with future equity offerings or acquisitions of securities or other assets of companies; and
•classify or reclassify any unissued common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares, including the issuance of shares of preferred stock that have preference rights over the common stock and existing preferred stock with respect to dividends, liquidation, voting and other matters or shares of common stock that have preference rights over common stock with respect to voting.
While any such issuance would be subject to compliance with the terms of our debt and other agreements, our issuance of additional securities could be substantially dilutive to our existing stockholders and may depress the price of our common stock.
Future offerings of debt securities, which would be senior to our common stock in liquidation, or equity securities, which would dilute our existing stockholders’ interests and may be senior to our common stock in liquidation or for the purposes of distributions, may harm the market price of our securities.
We will continue to seek to access the capital markets from time to time and, subject to compliance with our other contractual agreements, may make additional offerings of term loans, debt or equity securities, including senior or subordinated notes, preferred stock or common stock. We are not precluded by the terms of our articles of incorporation from issuing additional indebtedness. Accordingly, we could become more highly leveraged, resulting in an increase in debt service obligations and an increased risk of default on our obligations. If we were to liquidate, holders of our debt and lenders with respect to other borrowings would receive a distribution of our available assets before the holders of our common stock. Additional equity offerings by us may dilute our existing stockholders’ interest in us or reduce the market price of our existing securities. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Further, conditions could require that we accept less favorable terms for the issuance of our securities in the future. Thus, our existing stockholders will bear the risk of our future offerings reducing the market price of our securities and diluting their ownership interest in us.
Because of certain provisions in our organizational documents and regulatory restrictions, takeovers may be more difficult, possibly preventing you from obtaining an optimal share price. In addition, significant investments in our common stock may be restricted, which could impact demand for, and the trading price of, our common stock.
Our amended and restated articles of incorporation provide that the total number of shares of all classes of capital stock that we have authority to issue is 33.3 million, of which 13.3 million are common shares and 20.0 million are preferred shares. Our board of directors has the authority, without a vote of the shareholders, to establish the preferences and rights of any preferred or other class or series of shares to be issued and to issue such shares. The issuance of preferred shares could delay or prevent a change in control. Since our board of directors has the power to establish the preferences and rights of the preferred shares without a shareholder vote, our board of directors may give the holders of preferred shares preferences, powers and rights, including voting rights, senior to the rights of holders of our common shares. In addition, our bylaws include provisions that, among other things, require advance notice for raising business or making nominations at meetings, which could impact the ability of a third party to acquire control of us or the timing of acquiring such control.
Third parties seeking to acquire us or make significant investments in us must do so in compliance with state regulatory requirements applicable to licensed mortgage servicers and lenders. Many states require change of control applications for acquisitions of “control” as defined under each state’s laws and regulation, which may apply to an investment without regard to the intent of the investor. For example, New York has a control presumption triggered at 10% ownership of the voting stock of the licensee or of any person that controls the licensee. In addition, we have licensed insurance subsidiaries in New York and Vermont. Accordingly, there can be no effective change in control of Ocwen unless the person seeking to acquire control has made the relevant filings and received the requisite approvals in New York and Vermont. These regulatory requirements may discourage potential acquisition proposals or investments, may delay or prevent a change in control of us and may impact demand for, and the trading price of, our common stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Ocwen Financial Corporation is headquartered in West Palm Beach, Florida, at 1661 Worthington Road, Suite 100. We have offices and facilities in the U.S., the USVI, India and the Philippines, all of which are leased. The following table sets forth information relating to our principal facilities at December 31, 2022:
Location Owned/Leased Square Footage
Principal executive offices
West Palm Beach, Florida (1) Leased 41,858
Document storage and imaging facility
West Palm Beach, Florida (2) Leased 51,931
Business operations and support offices
U.S. facilities:
Houston, Texas - Walters Road (3) Leased 45,579
Rancho Cordova, California (4) Leased 17,157
Mt. Laurel, New Jersey (5) Leased 18,270
St. Croix, USVI Leased 6,096
Offshore facilities
Bangalore, India (6) Leased 68,050
Mumbai, India Leased 25,665
Pune, India Leased 3,826
Manila, Philippines (7) Leased 13,134
Former operations and support offices no longer utilized
Addison, Texas (8) Leased 39,646
Houston, Texas - Richmond Avenue (9) Leased 9,653
(1)We reduced the leased space by 9,688 square feet in March 2022 and extended the lease term through July 2028.
(2)On February 1, 2022, we extended the lease through February 2028.
(3)Primarily supports reverse servicing operations. This lease was assumed in connection with the MAM (RMS) transaction completed in October 2021 and expired in February 2022. On February 1, 2022, we entered into new agreements to lease 45,579 square feet for a term of five years.
(4)Primarily supports reverse lending operations. We downsized the existing facility to 17,157 square feet in 2021 and extended the lease through August 2024.
(5)The original Mt. Laurel facility included two buildings, one with 376,122 square feet of space, of which we ceased using 243,927 square feet as of the end of 2020. The space in the second building was 107,774 square feet, all of which was subleased. Following the expiration of the original lease and exit of the Mt. Laurel facility in December 2022, we leased a smaller facility at a different location in Mt. Laurel with 18,270 square feet space that supports our servicing and lending operations, as well as our corporate functions.
(6)We terminated the lease on 41,508 square feet of space in June 2022, and an additional 45,725 square feet effective January 2023. During October 2022, we relocated to a managed service office with 22,325 square feet and a lease term expiring in October 2027.
(7)During December 2022, we partially terminated the lease for 26,195 square feet. The lease for the remaining 13,134 square feet was extended through October 2027, with a committed lock-in period until October 2024.
(8)This lease expires in 2025 and is currently being marketed for sublease.
(9)The lease of this facility, which expires in July 2023, was abandoned during 2022.
We regularly evaluate current and projected space requirements, considering the constraints of our existing lease agreements and the expected scale of our businesses. We operate through a hybrid workforce model which combines in-office and remote work for substantially all of our global workforce. During 2022, we exited a total of 561,287 of leased square footage.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
See Note 25 - Contingencies to the Consolidated Financial Statements for a description of our material legal proceedings. That information is incorporated into this item by reference.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The common stock of Ocwen Financial Corporation is traded under the symbol “OCN” on the NYSE.
Dividends
We have never declared or paid cash dividends on our common stock. We currently do not intend to pay cash dividends in the foreseeable future but intend to reinvest earnings in our business. The timing and amount of any future dividends will be determined by our Board of Directors and will depend, among other factors, upon our earnings, financial condition, cash requirements, the capital requirements of subsidiaries and investment opportunities at the time any such payment is considered. Our Board of Directors has no obligation to declare dividends on our common stock under Florida law or our amended and restated articles of incorporation.
Stock Return Performance
The following graph compares the cumulative total shareholder return (TSR) on the common stock of Ocwen Financial Corporation since December 31, 2017, with the cumulative TSR on the stocks included in (i) the Russell 2000 Index and (ii) a group of peer companies Ocwen has selected for the purposes of measuring TSR-based comparative performance metrics which form the basis of Ocwen’s performance-based equity compensation awards. In prior years, Ocwen presented comparisons to Standard & Poor’s 500 Market Index and Standard & Poor’s Diversified Financials Market Index in lieu of the Russell 2000 Index and Ocwen peer group, respectively, and the TSR of those indices is also presented below for comparison purposes. We have chosen to present the Russell 2000 and our peer group for comparison purposes because we believe the Russell 2000 is comprised of companies which more closely resemble Ocwen in terms of market capitalization. In addition, since the TSR of the peer group presented below is information Ocwen’s management uses to benchmark its own performance for the purposes of granting equity awards, it provides relevant information to our shareholders.
The Compensation and Human Capital Committee of Ocwen’s Board of Directors selected the following peer group as the comparator for benchmarking, including competitors in the mortgage finance industry and mortgage real estate investment trusts.
Associated Banc-Corp Mr. Cooper Group Inc.
BankUnited, Inc. Navient Corporation
Finance of America Companies, Inc. PennyMac Financial Services, Inc.
Guild Holdings Company Radian Group Inc.
Home Point Capital Inc. South State Corporation
loanDepot, Inc. UWM Holdings Corporation
LendingTree, Inc. Walker & Dunlop, Inc.
MGIC Investment Corporation Webster Financial Corporation
The cumulative TSR performance of current peer group companies Finance of America Companies, Inc., Guild Holdings Company, Home Point Capital Inc., loanDepot Inc. and UWM Holdings is not included in the weighted average cumulative TSR calculation because they were publicly listed after the beginning of the five-year measurement period.
The graph assumes that $100 was invested in our common stock, each index listed below, and each company in the peer group (except as described above) on December 31, 2017, and the reinvestment of all dividends. The returns of each peer group company are weighted according to their respective stock market capitalization at the beginning of the period.
Period Ending
Index / Peer Group 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022
Ocwen Financial Corporation $ 100.00 $ 42.81 $ 43.77 $ 61.58 $ 85.13 $ 65.13
S&P 500 $ 100.00 $ 93.76 $ 120.84 $ 140.49 $ 178.27 $ 143.61
S&P 500 Diversified Financials $ 100.00 $ 88.98 $ 109.30 $ 119.99 $ 161.12 $ 140.86
Russell 2000 $ 100.00 $ 87.82 $ 108.66 $ 128.61 $ 146.23 $ 114.70
Peer Group $ 100.00 $ 78.50 $ 106.03 $ 103.54 $ 129.89 $ 107.94
(1)© 2023 S&P Dow Jones Indices. All rights reserved. S&P, S&P 500, S&P 500 LOW VOLATILITY INDEX, S&P 100, S&P COMPOSITE 1500, S&P 400, S&P MIDCAP 400, S&P 600, S&P SMALLCAP 600, S&P GIVI, GLOBAL TITANS, DIVIDEND ARISTOCRATS, S&P TARGET DATE INDICES, S&P PRISM, S&P STRIDE, GICS, SPIVA, SPDR and INDEXOLOGY are registered trademarks of S&P Global, Inc. (“S&P Global”) or its affiliates. DOW JONES, DJ, DJIA, THE DOW and DOW JONES INDUSTRIAL AVERAGE are registered trademarks of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks together with others have been licensed to S&P Dow Jones Indices LLC. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. This document does not constitute an offer of services in jurisdictions where S&P Dow Jones Indices LLC, S&P Global, Dow Jones or their respective affiliates (collectively “S&P Dow Jones Indices”) do not have the necessary licenses. Except for certain custom index calculation services, all information provided by S&P Dow Jones Indices is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties and providing custom calculation services. Past performance of an index is not an indication or guarantee of future results.
(2)© 2023 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved. FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator. All information is provided for information purposes only and data is provided "as is" without warranty of any kind.
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing by us under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
Number of Holders of Common Stock
On February 24, 2023, 7,527,443 shares of our common stock were outstanding and held by approximately 64 holders of record. Such number of stockholders does not reflect the number of individuals or institutional investors holding our stock in nominee name through banks, brokerage firms and others.
Unregistered Sales of Equity Securities and Use of Proceeds
All unregistered sales of equity securities during the year ended December 31, 2022 have been previously reported.
Purchases of Equity Securities by the Issuer and Affiliates
On May 20, 2022, Ocwen’s Board of Directors authorized a share repurchase program for an aggregate amount of up to $50.0 million of Ocwen’s issued and outstanding shares of common stock. Prior to the expiration of the program on November 20, 2022, Ocwen completed the repurchase of 1,750,557 shares of our common stock in the open market under this program at prevailing market prices for a total purchase price of $50.0 million (including commissions). The repurchased shares were retired in tranches throughout the term of the program.
Information regarding repurchases of our common stock during the fourth quarter of 2022 is as follows:
Period Total number of shares purchased Average price paid per share (1) Total number of shares purchased as part of a publicly announced repurchase program Approximate dollar value of shares that may yet be purchased under the repurchase program
October 1 - October 31 344,246 $ 26.1311 344,246 $ 2.3 million
November 1 - November 30 67,813 $ 32.7866 67,813 $ - million
December 1 - December 31 - $ - - $ - million
Total 412,059 $ 27.2264 412,059
(1)Average price paid per share does not reflect payment of commissions totaling $12,362 (twelve thousand three hundred sixty-two dollars).

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share amounts and unless otherwise indicated)
The Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-K generally discusses 2022 and 2021 items and provides year-to-year comparisons between 2022 and 2021. Discussions of year-to-year comparisons between 2021 and 2020 are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 25, 2022.
OVERVIEW
We are a leading non-bank mortgage servicer and originator providing solutions through our primary brands, PHH Mortgage and Liberty Reverse Mortgage. PHH Mortgage is one of the largest servicers in the country, focused on delivering a variety of servicing and lending programs. Liberty is one of the nation’s largest reverse mortgage lenders dedicated to education and providing loans that help customers meet their personal and financial needs. We serviced 1.4 million loans with a total UPB of $289.8 billion on behalf of more than 3,800 investors and 114 subservicing clients as of December 31, 2022. We service all mortgage loan classes, including conventional, government-insured, non-Agency, small-balance commercial and multi-family loans. Our Originations business is part of our balanced business model to generate gains on loan sales and profitable returns, and to support the replenishment and the growth of our servicing portfolio. Through our retail, correspondent and wholesale channels, we originate and purchase conventional and government-insured forward and reverse mortgage loans that we sell or securitize on a servicing retained basis. In addition, we grow our mortgage servicing volume through MSR flow purchase agreements, Agency Cash Window and co-issue programs, bulk MSR purchase transactions, and subservicing agreements.
The table below summarizes the volume of Originations by channel during 2022, compared with the volume of the prior years. The volume of Originations is a key driver of the profitability of our Originations segment, together with margins, and a
key driver of the replenishment and growth of our Servicing segment. In 2022, we added $88.8 billion of new volume, with $4.3 billion MSR bulk acquisitions, $54.8 billion of new subservicing and $29.5 billion of non-bulk Originations volume, as further detailed in the below table.
$ In billions UPB $ Change
Year Ended December 31st 2022 vs 2021 2021 vs 2020
2022 2021 2020
Mortgage servicing originations
Retail - Consumer Direct MSR (1) $ 1.2 $ 2.4 $ 1.3 $ (1.2) $ 1.1
Correspondent MSR (1) 15.6 16.6 5.7 (1.0) 10.9
Flow and Agency Cash Window MSR purchases (2) 11.3 20.4 15.1 (9.1) 5.3
Reverse mortgage servicing (3) 1.4 1.5 0.9 (0.1) 0.6
Total servicing 29.5 41.0 23.0 (11.5) 17.9
Bulk MSR purchases (2) (5) 4.3 55.1 16.6 (50.8) 38.6
Bulk purchases - reverse (2) 0.2 - - 0.2 -
Total servicing additions 34.0 96.1 39.6 (62.1) 56.5
Interim forward subservicing 12.6 14.7 17.8 (2.1) (3.0)
Other new forward subservicing 29.0 26.9 - 2.1 26.9
Reverse subservicing 13.2 14.3 - (1.1) 14.3
Total subservicing additions (4) 54.8 55.9 17.8 (1.1) 38.1
Total servicing and subservicing UPB additions $ 88.8 $ 152.0 $ 57.4 $ (63.2) $ 94.6
(1)Represents the UPB of loans that have been originated or purchased (funded) during the respective periods and for which we recognize a new MSR on our consolidated balance sheets upon sale or securitization.
(2)Represents the UPB of loans for which the MSR is purchased.
(3)Represents the UPB of reverse mortgage loans that have been securitized on a servicing retained basis. The loans are recognized on our consolidated balance sheets under GAAP without any separate recognition of MSRs.
(4)Includes interim subservicing, including the volume of UPB associated with short-term interim subservicing for certain clients as a support to their originate-to-sell business.
(5)Bulk purchases during 2022 include 12,931 loans with a UPB of $4.1 billion for which PMC was previously performing the subservicing that were purchased from third parties.
Subservicing additions for 2022 and 2021 include reverse mortgage loan subservicing and new subservicing on behalf of MAV:
•On October 1, 2021, in connection with the transaction with MAM (RMS), PMC became the subservicer for approximately 57,000 reverse mortgages, or approximately $14.3 billion in UPB pursuant to subservicing agreements with various clients, including MAM (RMS). Under the five-year subservicing agreement with MAM (RMS), we added subservicing of approximately 59,000 reverse mortgage loans or approximately $13.2 billion in UPB in 2022.
•In the second quarter of 2021, we launched MAV, our joint venture MSR investment with Oaktree for which PMC is the subservicer. MAV purchased approximately $21.0 billion and $9.4 billion GSE MSRs from unrelated third parties that transferred onto the PMC servicing system in 2022 and 2021, respectively.
The following table summarizes the average volume of our Servicing segment in 2022, compared with prior years. The average volume of Servicing is a key driver of the profitability of our Servicing segment. The relative weight of performing and delinquent loans or servicing and subservicing also drive the gross revenue and expenses, and their timing. In 2022, our total average servicing portfolio increased by $4.6 billion, net of runoff, with subservicing growth generated from our MSR investment joint venture with Oaktree through MAV and our reverse subservicing acquisition from MAM (RMS). The year 2021 established the foundation of a transformed servicing portfolio, with the significant addition of a high credit quality GSE MSR portfolio and the continued reduction of our non-Agency servicing through runoff, also reducing our concentration with Rithm servicing agreements.
$ in billions Average UPB $ Change
Year ended December 31, 2022 vs 2021 2021 vs 2020
2022 2021 2020
Owned MSR $ 121.9 $ 117.5 $ 71.3 $ 4.4 $ 46.3
Rithm (formerly NRZ)
52.0 61.4 74.8 (9.4) (13.4)
MAV 42.5 9.1 - 33.4 9.1
Subservicing (including interim subservicing) 57.0 24.7 45.5 32.3 (20.7)
Reverse mortgage loans (owned) 7.4 6.8 6.5 0.6 0.3
Commercial and other servicing 0.8 1.2 0.5 (0.4) 0.6
Total serviced and subserviced UPB (average) $ 281.6 $ 220.7 $ 198.6 $ 60.9 $ 22.1
As of December 31, 2022 and 2021, the total serviced and subserviced UPB amounted to $289.8 billion and $268.0 billion, respectively, a net increase of $21.8 billion or 8%.
Financial Highlights
Results of operations for 2022
•Net income of $26 million, or $2.97 per share basic and $2.85 per share diluted
•Servicing and subservicing fee revenue of $863 million
•Originations gain on sale of $53 million
•$129 million MSR valuation gain in Servicing attributable to rate and assumption changes, net of hedging
Financial condition at the end of the year
•Stockholders’ equity of $457 million, or $60.68 book value per common share
•MSR investment of $2.7 billion, up $415 million, and $60.9 billion increase in the average serviced and subserviced UPB for the year
•Cash position of $208 million
•Total assets of $12.4 billion
Business Initiatives
We established the following key operating objectives to return to sustainable profitability and drive improved value for shareholders in 2022. As our near-term priority remains to return to sustainable profitability, we continue to execute our strategy around these objectives:
•Leveraging the core strengths of our balanced and diversified business model through a continued focus on servicing and maintaining agility to address a potential recession;
•Driving prudent growth adapted for the environment, including emphasis on subservicing to drive servicing portfolio UPB growth and expansion of higher margin originations products and clients;
•Reducing cost structure across the organization to achieve industry cost leadership by maintaining continuous cost improvement discipline and optimizing technology, global operations, and scale;
•Optimizing liquidity, diversifying capital sources, including leveraging our MSR asset vehicle with Oaktree and expanding multi-investor partnership model to fund new MSR originations, repositioning for higher rates and allocating capital to deliver value for shareholders.
In 2022, market interest rates rose faster and higher than the industry consensus at the beginning of the year, reducing production volumes and Originations profitability more than expected. To achieve our profitability goals, we have responded to the market shift by rapidly scaling down our operations in 2022 and continue to reduce our expenses. We have also accelerated our goals relating to business process rationalization and optimization, including further off-shoring of operations, enterprise-wide.
Our growth strategy includes acquiring assets and/or operations of complementary businesses, by means of acquisition, merger or other transaction forms. Our strategy may also include pursuing large transactions, including bulk purchases or sales of MSRs. We have engaged in such transactions in the past, and we continue to explore opportunities that may be accretive to our business and stockholders’ value.
Results of Operations and Financial Condition
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our audited consolidated financial statements and the related notes thereto appearing elsewhere in this Annual Report on Form 10-K.
Condensed Results of Operations Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Revenue $ 953.9 $ 1,050.1 $ 960.9 (9) % 9 %
MSR valuation adjustments, net (10.4) (98.5) (135.2) (89) (27)
Operating expenses 532.4 609.3 575.7 (13) 6
Other income (expense) (386.2) (346.7) (355.7) 11 (3)
Income (loss) before income taxes 24.9 (4.4) (105.7) (670) (96)
Income tax expense (benefit) (0.8) (22.4) (65.5) (96) (66)
Net income (loss) 25.7 18.1 (40.2) 42 (145)
Segment income (loss) before income taxes:
Servicing $ 125.9 $ 48.5 $ (75.7) 160 % (164) %
Originations 2.9 89.8 104.2 (97) (14)
Corporate Items and Other (103.8) (142.6) (134.2) (27) 6
$ 24.9 $ (4.4) $ (105.7) (670) % (96) %
Ocwen reported $25.7 million net income in 2022, up 42%, as compared to $18.1 million net income in 2021, as a result of the following:
•A $77.4 million increase in Servicing income before income taxes, primarily due to the increase in servicing and subservicing volume, cost reductions and fair value gains on the MSR portfolio, net of hedging, driven by increasing interest rates; and
•A $38.8 million decrease in Corporate loss before income taxes, primarily due to cost reductions of the Corporate functions and recoveries of prior year legal expenses due to favorable settlements; partially offset by
•An $86.9 million decrease in Originations income before income taxes, primarily due to lower Originations volume and margins, driven by the higher interest rate environment, partially offset by headcount and cost reductions; and
•A $21.6 million decrease in income tax benefit, primarily due to $12.6 million benefits recognized in 2021 in connection with the CARES Act.
Total Revenue
The below table presents total revenue by segment:
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Servicing $ 821.7 $ 819.4 $ 757.7 -% 8%
Originations 141.1 249.9 179.3 (44) 39
Corporate 6.9 6.2 6.6 11 (6)
Total segment revenue 969.7 1,075.4 943.5 (10) 14
Inter-segment elimination (1) (15.7) (25.3) 17.4 (38) (245)
Total revenue $ 953.9 $ 1,050.1 $ 960.9 (9)% 9%
(1)The fair value change of inter-segment economic hedge derivatives reported within Total revenue (Gain on loans held for sale, net) is eliminated at the consolidated level with an offset in MSR valuation adjustments, net.
Total segment revenue for 2022 was $105.7 million, or 10%, lower as compared to 2021 due to a $108.8 million decrease in Originations revenue partially offset by a $2.3 million net increase in Servicing revenue.
•The decrease in Originations revenue is driven by the challenging origination market environment in 2022 with interest rate hikes at a historic pace that contrasted with favorable market conditions in 2021 due to historically low interest rates. As a result, the high volume of refinance activity dropped precipitously in 2022 and the competition on pricing further distressed margin levels. Similar to the industry trend, our Originations business faced a significant decrease in volumes and margins across all products (reverse and forward). We reported a $77.7 million decrease in Gain on loans held for sale, net in Consumer Direct, a $20.8 million decrease in Gain on reverse loans held for investment and HMBS-related borrowings, net and a decline in fees due to lower origination volume.
•The net increase in Servicing revenue includes an $87.0 million increase in servicing and subservicing fees due to our continued portfolio growth, including the launch of MAV and the acquisition of reverse subservicing from MAM (RMS). The increase in fees was largely offset by a $61.7 million decline in Gain on loans held for sale (forward) and a $22.8 million decline in Gain on reverse loans held for investment and HMBS-related borrowings, net due to higher unrealized fair value losses on the HECM loan portfolio, net attributable to lower margins resulting from the increase in interest rates and the widening of yield spreads. The decline in Gain on loans held for sale (forward) is driven by lower redelivery gains and losses on repurchased loans in connection with Ginnie Mae loan modifications and EBO program and a $27.1 million gain on sale of loans acquired through the exercise of non-Agency call rights recorded in 2021.
MSR Valuation Adjustments, Net
The table below presents the key components of MSR valuation adjustments, net:
Years Ended December 31,
2022 2021 2020
Realization of expected cash flows (runoff) of MSRs, MSR pledged liability and ESS financing liability $ (164.5) $ (160.8) $ (58.4)
Fair value gains (losses) of MSRs, MSR pledged liability and ESS financing liability due to rates and assumptions 261.0 71.9 (104.3)
Total fair value gains (losses) of MSR, MSR pledged liability and ESS financing liability 96.5 (89.0) (162.7)
Derivative fair value gain (loss) (1) (106.9) (9.5) 27.5
MSR valuation adjustments, net (2) $ (10.4) $ (98.5) $ (135.2)
(1)Includes $15.7 million, $25.3 million and $(17.4) million for 2022, 2021 and 2020, respectively of inter-segment derivative fair value gains (losses) reported within Total revenue and eliminated at the consolidated level - also see Revenue table above.
(2)Refer to Change in Presentation - Consolidated Statements of Operations in Note 1 to the consolidated financial statements
MSR valuation adjustments, net includes the loss on the MSR portfolio associated with the realization of its expected cash flows, or runoff, due to the passage of time, and any fair value gains or losses due to inputs, market interest rates or assumptions, net of hedging gains and losses. Included in the valuation adjustments are fair value gains and losses of the related MSR pledged liability and Excess Servicing Spread (ESS) financing liability. We reported a $10.4 million loss in MSR valuation adjustments, net in 2022 as compared to a $98.5 million loss in 2021. The year over year reduction in the fair value
loss is driven by favorable MSR fair value changes in 2022 due to significant interest rate increases, net of (economic) hedging losses. The 10-year swap rate increased by 222 basis points in 2022 as compared to 66 basis points in 2021. Also refer to the MSR Hedging Strategy section of Item 7A. Quantitative and Qualitative Disclosures about Market Risks for further detail.
Operating Expenses
The table below presents the key components of operating expenses:
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Compensation and benefits $ 289.4 $ 297.9 $ 265.3 (3) 12
Servicing and origination 64.9 113.6 77.3 (43) 47
Technology and communications 57.9 56.0 59.6 3 (6)
Professional services 49.3 81.9 106.9 (40) (23)
Occupancy and equipment 41.8 36.5 47.5 15 (23)
Other expenses 29.1 23.3 19.2 25 22
Total operating expenses $ 532.4 $ 609.3 $ 575.7 (13) 6
Compensation and benefits expense for 2022 decreased $8.5 million, or 3%, as compared to 2021 largely due to a $28.9 million reduction in incentive compensation, partially offset by a $14.1 million increase in severance expense predominantly due to enterprise-wide headcount reductions, and a $6.0 million increase in salaries and benefits, mostly attributed to the increase in Servicing headcount to support the development of our reverse subservicing platform and the MAM (RMS) subservicing portfolio acquisition. The $28.9 million reduction in incentive compensation included a $12.9 million decline in expense for cash-settled share-based awards as a result of a decrease in our common stock price and forfeitures, a $10.5 million decline in annual incentive plan (AIP) awards partially due to a reduction in headcount and a $3.3 million decrease in commissions due to lower origination volumes.
Servicing and origination expense for 2022 decreased $48.7 million, or 43%, as compared to 2021, mostly attributed to an $18.3 million decrease in satisfaction and interest on payoff expenses attributable to lower payoff volume, a $13.8 million decrease in reverse subservicing expenses driven by the transfer of our owned reverse portfolio from a subservicer onto our platform beginning in the fourth quarter of 2021, an $8.1 million reduction in interim subservicing costs incurred on MSR bulk acquisitions in 2021, a $4.0 million reduction in Servicing-related provision expense and a $3.9 million decrease in our Originations expenses primarily driven by lower volume.
Professional services expense for 2022 decreased $32.6 million, or 40%, as compared to 2021 primarily due to a $26.6 million decline in legal expenses and a $6.3 million decline in other professional services. The decline in legal expenses is largely due to reimbursements received from mortgage loan investors related to prior year legal expenses, and to payments received following favorable resolution of legacy litigation matters. Professional services for 2021 included $3.2 million of advisory fees related to the launch of our MSR investment joint venture with Oaktree, MAV Canopy. Refer to the respective segment results discussion for other offsetting factors.
Occupancy and equipment expense for 2022 increased $5.3 million, or 15%, as compared to 2021 largely driven by a $2.9 million repair cost in connection with our exit of our New Jersey leased office facility.
Other expenses for 2022 increased $5.8 million as compared to 2021 mainly due to a $3.6 million increase in amortization expense on the reverse subservicing contract intangible assets recognized in October 2021 and April 2022.
Other Income (Expense)
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Net interest expense $ (140.4) $ (117.6) $ (93.4) 19 26
Pledged MSR liability expense (1) (255.0) (221.3) (269.1) 15 (18)
Gain (loss) on extinguishment of debt 0.9 (15.5) - (106) n/m
Earnings of equity method investee 18.5 3.6 - - n/m
Other, net (10.2) 4.1 6.7 (350) (39)
Total other income (expense), net $ (386.2) $ (346.7) $ (355.7) 11 (3)
n/m: not meaningful
(1)Refer to Change in Presentation - Consolidated Statements of Operations in Note 1 to the Consolidated Financial Statements
Net interest expense for 2022 increased $22.8 million, or 19%, as compared to 2021 primarily due to an increase in the cost of funds of our asset-backed financing facilities, driven by increased interest rates, a higher average debt balance to finance our MSR portfolio growth, and higher corporate debt cost due to the OFC senior secured notes issued on March 4, 2021 and May 3, 2021.
Pledged MSR liability expense reflects the servicing fee remittance, net of subservicing fee, associated with the MSR transfers that do not meet sale accounting treatment. Pledged MSR liability expense for 2022 increased $33.7 million, or 15%, as compared to 2021 primarily due to the increase in the MSR portfolio transferred to MAV and partially offset by the Rithm MSR runoff.
Gain on debt extinguishment of $0.9 million for 2022 resulted from our repurchase of $25.0 million PMC 7.875% Senior Secured Notes due March 2026 at a discount. Loss on debt extinguishment of $15.5 million for 2021 was recognized upon the early repayment of the Senior Secured Term Loan (SSTL) due May 2022 and the early redemption of the PHH 6.375% senior unsecured notes due August 2021 and the PMC 8.375% senior secured notes due November 2022.
Earnings of equity method investee represent our 15% share of MAV Canopy, our MSR investment joint venture with Oaktree that we launched in May 2021. The $18.5 million earnings for 2022 are predominantly driven by the fair value gains recorded by MAV Canopy on its MSR portfolio due to higher interest rates. See Note 11 - Investment in Equity Method Investee and Related Party Transactions for further detail.
Income Tax Benefit (Expense)
Years Ended December 31,
2022 2021 2020
Income tax expense (benefit) $ (0.8) $ (22.4) $ (65.5)
Income (loss) before income taxes 24.9 (4.4) (105.7)
Effective tax rate (3.2) % 509.1 % 62.0 %
Our effective tax rate for the periods indicated in the table above differs from the federal statutory income tax rate primarily due to the full valuation allowance recorded on our net U.S. federal and state deferred tax assets. While Ocwen generates positive income before income taxes, the U.S. filing jurisdiction is in a cumulative loss position for the three-year period ended December 31, 2022. We evaluated all positive and negative evidence and determined that a full valuation allowance at December 31, 2022 remains appropriate. The income tax expense (benefit) is primarily comprised of income taxes in foreign jurisdictions and changes in uncertain tax positions. Refer to Note 19 - Income Taxes for further details on deferred tax assets.
For 2022, income tax benefit of $0.8 million was driven primarily by income tax expense related to pre-tax earnings, offset by income tax benefit related to the favorable resolution of uncertain tax positions. The $21.6 million reduction in income tax benefit for 2022, compared with 2021, is primarily due to higher pre-tax earnings, a $12.6 million reduction in the amount of income tax benefit recognized under the CARES Act, a $2.1 million reduction in the amount of income tax benefit recognized for interest from taxing authorities on refund claims, and a $5.3 million reduction in the amount of income tax benefit related to the favorable resolution of uncertain tax positions. The decline in the effective tax rate is primarily due to the $29.3 million increase in pre-tax earnings in 2022 compared to 2021, as well as the reduction in income tax benefit recognized under the CARES Act, the reduction in income tax benefit recognized for interest from taxing authorities on refund claims, and the reduction in income tax benefit related to the favorable resolution of uncertain tax positions.
Under our transfer pricing agreements, our operations in India and Philippines are compensated on a cost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from operations these foreign operations have taxable income, which is subject to statutory tax rates in these jurisdictions that are higher than the U.S. statutory rate of 21%.
Financial Condition
Financial Condition Summary December 31, $ Change % Change
2022 2021
Cash and cash equivalents $ 208.0 $ 192.8 $ 15.2 8 %
Restricted cash
66.2 70.7 (4.5) (6)
MSRs, at fair value 2,665.2 2,250.1 415.1 18
Advances, net 718.9 772.4 (53.5) (7)
Loans held for sale
622.7 928.5 (305.8) (33)
Loans held for investment, at fair value
7,510.8 7,207.6 303.1 4
Receivables, net 180.8 180.7 0.1 -
Investment in equity method investee 42.2 23.3 18.9 81
Premises and equipment, net 20.2 13.7 6.6 48
Other assets
364.2 507.3 (143.0) (28)
Total assets $ 12,399.2 $ 12,147.1 $ 252.1 2 %
Total Assets by Segment
Servicing $ 11,535.0 $ 10,999.2 $ 535.8 5 %
Originations 570.5 823.5 (253.1) (31)
Corporate Items and Other 293.7 324.4 (30.7) (9)
$ 12,399.2 $ 12,147.1 $ 252.1 2 %
HMBS-related borrowings, at fair value $ 7,326.8 $ 6,885.0 $ 441.8 6
Other financing liabilities, at fair value 1,137.4 805.0 332.4 41
Advance match funded liabilities 513.7 512.3 1.4 -
Mortgage loan warehouse facilities 702.7 1,085.1 (382.3) (35)
MSR financing facilities, net 953.8 900.8 53.1 6
Senior notes, net 599.6 614.8 (15.2) (2)
Other liabilities
708.5 867.5 (159.0) (18)
Total liabilities 11,942.5 11,670.4 272.1 2
Total stockholders’ equity 456.7 476.7 (20.0) (4)
Total liabilities and equity $ 12,399.2 $ 12,147.1 $ 252.1 2 %
Total Liabilities by Segment
Servicing $ 11,049.0 $ 10,101.5 $ 947.5 9 %
Originations 544.2 813.3 (269.0) (33)
Corporate Items and Other 349.3 755.7 (406.4) (54)
$ 11,942.5 $ 11,670.4 $ 272.1 2 %
Book value per share $ 60.68 $ 51.77 $ 8.91 17 %
Total assets increased by $252.1 million, or 2%, between December 31, 2021 and December 31, 2022 due to a $415.1 million increase in our MSR portfolio mostly attributed to fair value gains due to rising interest rates and net additions through purchases, sales and retained servicing on loan sales, and a $303.1 million increase in loans held for investment, mostly driven by our reverse mortgage origination and bulk acquisition. These increases were offset by a $305.8 million decrease in our loans
held for sale portfolio driven by lower forward loan production volumes than sales, a $143.0 million decrease in other assets mostly attributable to the decrease in contingent repurchase rights related to delinquent loans that have been repurchased in 2022 under the Ginnie Mae EBO program, and a $53.5 million decline in servicing advances, mainly due to lower new advances, increased recoveries on delinquent and default loans, and loan repurchases under the Ginnie Mae EBO program and sold to third parties.
Total liabilities increased by $272.1 million, or 2%, as compared to December 31, 2021 with similar effects as described above. Our HMBS-related borrowings increased by $441.8 million due to the continued growth of our reverse mortgage originations business and its securitization. The $332.4 million increase in Other financing liabilities is primarily due to the issuance of $199.0 million ESS financing liabilities, and the increase in 2022 in the fair value Pledged MSR liabilities due to rising interest rates. Borrowings under our MSR financing facilities increased $53.1 million to fund the increase in our MSR portfolio. Our borrowings under warehouse lines decreased $382.3 million due to lower loan production volumes. Senior notes, net decreased $15.2 million due to our repurchase in 2022 of $25.0 million PMC 7.875% Senior Secured Notes due March 2026. Other liabilities declined $159.0 million mostly due to a decrease in the Ginnie Mae contingent repurchase rights of loans related to delinquent loans that have been repurchased in 2022.
Total equity decreased $20.0 million during 2022 mostly due to $50.0 million stock repurchased under the $50.0 million repurchase program approved in May 2022, partially offset by $25.7 million net income. See Note 15 - Stockholders’ Equity for additional information.
Key Trends
The following discussion provides information regarding certain key drivers of our financial performance and includes certain forward-looking statements that are based on the current beliefs and expectations of Ocwen’s management and are subject to significant risks and uncertainties. Refer to Forward-Looking Statements beginning on page 2 and the Risk Factors section beginning on page 18, for discussion of certain of those risks and uncertainties and other factors that could cause Ocwen’s actual results to differ materially because of those risks and uncertainties. There is no assurance that actual results in 2023 will be in line with the outlook information set forth below, and Ocwen does not undertake to update any forward-looking statements. Also refer to the Segment results of operations section for further detail, the description of our business environment, initiatives and risks.
Servicing and subservicing fee revenue - Our servicing fee revenue is a function of the volume being serviced - UPB for servicing fees and loan count for subservicing fees. We expect we will continue to modestly grow our servicing portfolio through our multi-channel Originations platform and through MAV and other capital partners. In addition, we continuously evaluate the relative mix between servicing and subservicing volume.
Gain on sale of loans held for sale - Our gain on sale is driven by both volume and margin and is channel-sensitive. The industry outlook for 2023 remains largely similar to the second half of 2022, with origination volume expected by the industry to continue to decline and mortgage interest rates to remain elevated although lower than recent peak levels. We expect recapture volumes in our Consumer Direct channel to remain at depressed levels absent any significant interest rate decrease and expect lower margins across all channels due to heightened competition. We expect to continue to prudently manage our Correspondent volume at margins that are accretive to the business.
Gain on reverse loans held for investment and HMBS-related borrowings, net - The reverse mortgage origination gain is driven by the same factors as gain on sale of loans held for sale, with smaller volumes in the reverse mortgage market and generally larger margins. With our experience and brand in the marketplace, we expect to continue to maintain or prudently grow our portfolio albeit with some channel mix changes. We expect continued uncertain market interest rate and spread conditions. The fair value of the net reverse servicing asset is expected to continue to follow market conditions, with fair value gains or losses generally associated with declining or increasing interest rates, respectively, and is part of our forward MSR hedging strategy.
MSR valuation adjustments, net - Our net MSR fair value changes include multiple components. First, amortization of our investment is a function of the UPB, capitalized value of the MSR relative to the UPB, and the level of scheduled payments and prepayments. We expect the MSR realization of cash flows to increase as we continue to grow our MSR portfolio. Second, MSR fair value changes are driven by changes in interest rates and assumptions, such as forecasted prepayments. Third, the MSR fair value changes are partially offset by derivative fair value changes that economically hedge the MSR portfolio. We are exposed to increased interest rate volatility due to our interest rate sensitive GSE MSR portfolio. Our hedging strategy provides only partial hedge coverage and we would expect net MSR fair value losses if interest rates drop and conversely, net MSR fair value gains if interest rates rise. Refer to the sensitivity analysis in the Market Risk sections of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for further detail.
Operating expenses - Compensation and benefits are a significant component of our cost-to-service and cost-to-originate and is directly correlated to headcount levels. Headcount in Servicing is primarily driven by the number of loans or UPB being serviced and subserviced, and by the relative mix of performing, delinquent and defaulted loans. As servicing volume is
expected to modestly increase (see above), we expect a stable to modest increase in our workforce with some offset from an increased relative share of performing loans. We expect to continue to right-size and prudently manage our Originations headcount and operating expenses to align with funded volume. Other operating expenses are expected to correlate with volumes, with some productivity and efficiencies expected through our technology and continuous improvement initiatives. An elevated inflation may result in higher operating expenses due to increases in salaries and benefits and rates charged by our vendors.
Stockholders’ equity - With the above considerations, we expect our businesses to generate net income and increase our equity in 2023, absent any significant adverse change in interest rates or other factors.
SEGMENT RESULTS OF OPERATIONS
We report our activities in three segments, Servicing, Originations and Corporate Items and Other that reflect other business activities that are currently individually insignificant. Our business segments reflect the internal reporting that we use to evaluate operating and financial performance and to assess the allocation of our resources.
Servicing
We earn contractual monthly servicing fees pursuant to servicing agreements pertaining to MSRs we own, which are typically payable as a percentage of UPB, as well as ancillary fees, including late fees, modification incentive fees, REO referral commissions, float earnings and convenience or other loan collection fees, where permitted. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions, including MAV, that own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Subservicing per-loan fees typically vary based on type of investor and on loan delinquency status.
As of December 31, 2022, we serviced 1.4 million mortgage loans with an aggregate UPB of $289.8 billion, an increase of 2% and 8%, respectively, from December 31, 2021. The average UPB of loans serviced during 2022 increased by 28% or $60.9 billion compared to 2021. The increase in our servicing volume is mostly due to MSR acquisitions, forward and reverse subservicing additions and MSR originations, offset in part by portfolio runoff. We manage the size of our servicing portfolio with our Originations business and by selectively purchasing MSRs based on capital allocation and financial return targets.
In May 2021, PMC entered into a subservicing agreement with MAV for exclusive rights to service the mortgage loans underlying MSRs owned by MAV. MAV provides us with a source of additional subservicing volume, either with the MSRs that MAV purchases outright from third parties or with the MSRs that MAV purchases from PMC. In November 2022, we upsized MAV Canopy capacity with an additional $250 million capital commitment with Oaktree. Refer to Note 11 - Investment in Equity Method Investee and Related Party Transactions.
In October 2021, PMC acquired reverse mortgage subservicing contracts from MAM (RMS) and became its exclusive subservicer under a five-year subservicing agreement. PMC boarded approximately 59,000 additional reverse mortgage loans onto our servicing platform in 2022 under the agreement.
Rithm (formerly NRZ) remains our largest subservicing client, accounting for 17% and 28% of the total serviced UPB and loan count, respectively, in our servicing portfolio as of December 31, 2022. Rithm servicing fees retained by Ocwen represented approximately 13% and 19% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to Rithm, for 2022 and 2021, respectively. Rithm’s portfolio represents approximately 68% of all delinquent loans that Ocwen serviced, for which the cost to service and the associated risks are higher. Consistent with a subservicing relationship, Rithm is responsible for funding the advances we service for Rithm. In May 2022, Ocwen and Rithm agreed to extend the servicing agreements to December 31, 2023 with subsequent automatic one-year renewals and to amend the sharing of certain ancillary revenue.
The financial performance of our servicing segment is impacted by the changes in fair value of the MSR portfolio due to changes in market interest rates, among other factors. Our MSR portfolio is carried at fair value, with changes in fair value recorded in earnings, within MSR valuation adjustments, net. The fair value of our MSRs is typically correlated to changes in market interest rates; as interest rates decrease, the value of the servicing portfolio typically decreases as a result of higher anticipated prepayment speeds, and the reverse is true. The sensitivity of MSR fair value to interest rates is typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of approximately 17 years, exhibiting little response to movements in market interest rates. Our hedging strategy is designed to reduce the volatility of the MSR portfolio to interest rates.
As of December 31, 2022, we managed 14,233 loans under forbearance associated with borrowers impacted by the COVID-19 pandemic (or 1.0% of our total portfolio), 3,069 of which related to our owned MSRs, or 0.5% of our owned MSR servicing portfolio (excluding failed sale transactions), a reduction of 50% and 55%, respectively, compared to December 31, 2021.
Loan Resolutions
We have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors. Reducing delinquencies also enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Loan resolution activities address the pipeline of delinquent loans and generally lead to (i) modification of the loan terms, (ii) repayment plan alternatives, (iii) a discounted payoff of the loan (e.g., a “short sale”), or (iv) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting REO. Loan modifications must be made in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon, or even forbid, loan modifications. To select an appropriate loan modification option for a borrower, we perform a structured analysis, using a proprietary model, of all options using information provided by the borrower as well as external data, including recent broker price opinions to value the mortgaged property. Our proprietary model includes, among other things, an assessment of re-default risk.
Advance Obligation
As a servicer, we are generally obligated to advance funds in the event borrowers are delinquent on their monthly mortgage related payments. We advance principal and interest (P&I Advances), taxes and insurance (T&I Advances) and legal fees, property valuation fees, property inspection fees, maintenance costs and preservation costs on properties that have been foreclosed (Corporate Advances). For certain loans in non-Agency securitization trusts, we have the ability to cease making P&I advances and immediately recover advances previously made from the general collections of the respective trust if we determine that our P&I advances cannot be recovered from the projected future cash flows. With T&I and Corporate advances, we continue to advance if net future cash flows exceed projected future advances without regard to advances already made.
Most of our advances have the highest reimbursement priority (i.e., they are “top of the waterfall”) so that we are entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. The costs incurred in meeting these obligations consist principally of the interest expense incurred in financing the servicing advances. Most subservicing agreements, including our agreements with Rithm, provide for prompt reimbursement of any advances from the owner of the servicing rights. Refer to Note 24 - Commitments to the Consolidated Financial Statements for further description of servicer advance obligations.
Significant Variables
The following factors could significantly impact the results of our Servicing segment from period to period.
Aggregate UPB and Loan Count. Servicing fees are generally earned as a percentage of UPB and subservicing fees are earned on a per-loan basis or as a percentage of UPB. As a result, the change in aggregate UPB and loan count for which we have servicing rights or subservicing rights will directly impact our revenue contributed by our Servicing segment. Aggregate UPB and loan count decline as a result of portfolio run-off and increase to the extent we retain MSRs from new originations or engage in MSR acquisitions.
Cost to Service and Operating Efficiency. Our operating results for our Servicing segment are heavily dependent on our ability to scale our operations to cost-effectively and efficiently perform servicing activities in accordance with our servicing agreements.
Delinquencies. Delinquencies impact our financial results and operating cash flows for our Servicing segment. Non-performing loans are more expensive to service because the loss mitigation activities that we must undertake to keep borrowers in their homes or to foreclose, if necessary, are costlier than the activities required to service a performing loan. These loss mitigation activities include increased contact with the borrower for collection and the development of forbearance plans or loan modifications by highly skilled associates who command higher compensation as well as the higher compliance costs associated with these, and similar activities. While the higher cost is somewhat offset by ancillary fees for severely delinquent loans or loans that enter the foreclosure process, the incremental revenue opportunities are generally not sufficient to cover our increased costs.
In addition, when borrowers are delinquent, the amount of funds that we are required to advance to the investors increases. We utilize servicing advance financing facilities, which are asset-backed (i.e., match funded liabilities) securitization facilities, to finance a portion of our advances. As a result, increased delinquencies result in increased interest expense.
Prepayment Speed. The rate at which portfolio UPB declines can have a significant impact on our Servicing segment. Items reducing UPB include scheduled and unscheduled principal payments (runoff), refinancing, loan modifications involving forgiveness of principal, voluntary property sales and involuntary property sales such as foreclosures. Prepayment speed impacts future servicing fees, runoff and valuation of MSRs, float earnings on float balances and interest expense on advances. Increases in anticipated lifetime prepayment speeds generally cause MSR valuation adjustments to increase because MSRs are
valued based on total expected servicing income over the life of a portfolio. The converse is true when expectations for prepayment speeds decrease.
Reverse Mortgage
The activities and financial performance related to reverse mortgage loans that are securitized and classified as held for investment, at fair value, together with the HMBS-related borrowings, at fair value (internally identified as our Reverse Owned Servicing business) are reflected in the Servicing segment, consistent with how the activities are managed and internally reported. Once a reverse mortgage loan is securitized, our activities are generally consistent with other loan servicing as described above, with the following variations.
Under the terms of ARM-based HECM loan agreements, the borrowers have additional borrowing capacity of $1.8 billion at December 31, 2022. These draws or tails are funded by the servicer and can be subsequently securitized. We do not incur any substantive underwriting, marketing or compensation costs in connection with any future draws, although we must maintain sufficient capital resources and available borrowing capacity to ensure that we are able to fund these future draws prior to securitization with Ginnie Mae (generally less than 30 days).
As an HMBS issuer, we assume certain obligations related to each security issued. In addition to our obligation to fund tails, the most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once they reach 98% of the maximum claim amount (MCA repurchases or active buyouts). Active repurchased loans or buyouts are assigned to HUD and payment is received from HUD through a claims process, generally within 90 days. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount; we bear the risk of exposure if the outstanding balance on a loan exceeds the maximum claim amount. Inactive repurchased loans or buyouts (loans that are in default for one of the following reasons - title conveyances or the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments) are generally liquidated through foreclosure and subsequent sale of REO. State specific foreclosure and REO liquidation timelines have a significant impact on the timing and amount of our recovery. If we are unable to sell the property securing the inactive reverse loan for an acceptable price within the timeframe established by HUD (six months), we are required to make an appraisal-based claim to HUD. In such cases, HUD reimburses us for the loan balance, eligible expenses and interest, less the appraised value of the underlying property. Thereafter, all the risks and costs associated with maintaining and liquidating the property remains with us; we may incur additional losses on REO properties as they progress through the liquidation processes related to delayed timelines due to market conditions, sales commissions, property preservation costs or property tax and insurance advances. The significance of future losses associated with appraisal-based claims is dependent upon the volume of inactive loans, condition of foreclosed properties and the general real estate market.
The Gain on reverse loans held for investment and HMBS-related borrowings, net reported within the Servicing segment includes the net fair value changes of securitized reverse mortgage loans held for investment and HMBS-related borrowings. We elected the fair value accounting election for both our reverse mortgage loans held for investment and the HMBS-related borrowings. The net fair value changes of the reverse mortgage loans and related borrowings reported within the Servicing segment include the following:
•contractual interest income earned on securitized reverse mortgage loans, net of interest expense on HMBS-related borrowings, that is, the servicing fee we are contractually entitled to and collect on a monthly basis under the Ginnie Mae MBS Guide regarding servicing HMBS;
•cash gains on tail securitization. Tails are participations in previously securitized HECMs and are created by additions to principal for borrower draws on lines-of-credit (scheduled and unscheduled), interest, servicing fees, and mortgage insurance premiums;
•fair value changes due to the realization of other expected cash flows of the net asset balance of securitized loans held for investment and HMBS-related borrowings; and
•fair value changes due to the inputs and assumptions of the net balance of securitized loans held for investment and HMBS-related borrowings.
The fair value of our Ginnie Mae securitized HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, with lower interest rates extending the timeline to liquidation. HECM loans have a longer duration than HMBS-related borrowings as a result of the future draw commitments, and our obligations as issuer of HMBS to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM loan is equal to 98% of the maximum claim amount.
The financial performance associated with the subservicing of reverse mortgage loans associated with the MAM (RMS) transaction is primarily reflected within Servicing and subservicing fees, net since Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net strictly reflects the financial performance of owned loans/servicing. We collect
higher subservicing fees for inactive loans relative to the base subservicing fee for performing loans or active repurchased loans, commensurate with the level of servicing efforts, as described above.
The following table presents selected results of operations of our Servicing segment. The amounts presented are before the elimination of balances and transactions with our other segments:
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Revenue
Servicing and subservicing fees $ 860.5 $ 773.5 $ 731.2 11 % 6 %
Gain (loss) on loans held for sale, net (15.1) 46.6 14.7 (132) 217
Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net
(25.1) (2.3) 7.6 975 (131)
Other revenue, net 1.4 1.7 4.2 (16) (60)
Total revenue 821.7 819.4 757.7 - 8
MSR valuation adjustments, net (36.0) (143.4) (159.5) (75) (10)
Operating expenses
Compensation and benefits 126.0 108.1 113.6 17 (5)
Servicing expense 52.3 98.2 68.4 (47) 44
Occupancy and equipment 31.1 26.5 31.0 17 (14)
Professional services 26.1 31.4 28.1 (17) 11
Technology and communications 24.7 23.8 25.2 4 (5)
Corporate overhead allocations 46.2 47.7 61.0 (3) (22)
Other expenses 7.7 6.6 4.5 16 46
Total operating expenses 314.1 342.4 331.9 (8) 3
Other income (expense)
Interest income 12.9 8.2 7.1 57 17
Interest expense (114.8) (80.8) (90.7) 42 (11)
Pledged MSR liability expense (255.0) (221.3) (269.1) 15 (18)
Earnings of equity method investee 18.5 3.6 - 414 n/m
Other, net (7.3) 5.2 10.8 (241) (52)
Total other expense, net (345.7) (285.1) (342.0) 21 (17)
Income (loss) before income taxes $ 125.9 $ 48.5 $ (75.7) 160 % (164) %
The following table provides selected operating statistics for our Servicing segment:
% Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Assets Serviced at December 31
Unpaid principal balance (UPB) in billions:
Performing loans (1) $ 276.2 $ 254.2 $ 177.6 9 % 43 %
Non-performing loans 12.9 13.1 10.3 (2) 27
Non-performing real estate 0.7 0.7 0.9 - (22)
Total $ 289.8 $ 268.0 $ 188.8 8 42
Conventional loans (2) $ 186.2 $ 166.3 $ 77.0 12 % 116 %
Government-insured loans 32.6 28.8 34.8 13 (17)
Non-Agency loans 71.0 72.8 77.0 (2) (5)
Total $ 289.8 $ 268.0 $ 188.8 8 42
Servicing portfolio (3) $ 134.5 $ 135.9 $ 97.4 (1) % 40 %
Subservicing portfolio
Subservicing - forward 34.7 29.4 24.3 18 21
Subservicing - reverse 23.2 13.9 - 67 n/m
Total subservicing 58.0 43.3 24.3 34 78
MAV (4) (5) 48.2 33.0 - 46 n/m
Rithm (formerly NRZ) (5) (6) 49.1 55.8 67.1 (12) (17)
Total $ 289.8 $ 268.0 $ 188.8 8 42
Number (in 000’s):
Performing loans (1) 1,319.8 1,287.0 1,048.7 3 % 23 %
Non-performing loans
Non-performing loans - Rithm 24.1 30.7 33.8 (21) % (9) %
Non-performing loans - Other 31.6 30.7 18.4 3 67
55.7 61.4 52.2 (9) 18
Non-performing real estate 3.3 4.9 6.7 (33) (27)
Total
1,378.8 1,353.3 1,107.6 2 22
Conventional loans (2) 734.2 686.5 349.6 7 % 96 %
Government-insured loans 168.1 168.1 201.9 - (17)
Non-Agency loans 476.5 498.7 556.1 (4) (10)
Total 1,378.8 1,353.3 1,107.6 2 22
% Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Servicing portfolio 605.7 636.1 511.6 (5) % 24 %
Subservicing portfolio
Subservicing - forward 126.0 105.6 96.3 19 10
Subservicing - reverse 93.7 54.7 - 71 n/m
Total subservicing 219.7 160.3 96.3
MAV (5) 170.7 131.6 - 30 n/m
Rithm (5)
382.7 425.4 499.6 (10) (15)
1,378.8 1,353.3 1,107.6 2 22
Prepayment speed (CPR) (7)
12-month % Voluntary CPR 7.6 % 17.6 % 15.2 % (57) % 16 %
12-month % Involuntary CPR 0.4 0.7 1.5 (43) (53)
Total 12-month % CPR 11.2 21.1 20.0 (47) 6
Number of completed modifications (in thousands) 16.8 17.3 28.3 (3) % (39) %
Revenue recognized in connection with loan modifications $ 21.9 $ 27.8 $ 30.2 (21) (8)
n/m: not meaningful
(1)Performing loans include those loans that are less than 90 days past due and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing.
(2)Conventional loans at December 31, 2022 include 66,796 prime loans with a UPB of $13.2 billion which we service or subservice. This compares to 73,340 prime loans with a UPB of $13.7 billion at December 31, 2021. Prime loans are generally good credit quality loans that meet GSE underwriting standards.
(3)Includes $7.6 billion UPB of reverse mortgage loans that are recognized in our consolidated balance sheet at December 31, 2022.
(4)Includes $22.1 billion UPB subserviced and $26.1 billion UPB of MSRs sold to MAV that have not achieved sale accounting treatment. Excludes subserviced loans with a UPB of $2.4 billion that have not yet transferred onto the PMC servicing system as of December 31, 2022.
(5)Loans serviced or subserviced pursuant to our agreements with Rithm or MAV.
(6)Includes $1.9 billion UPB of subserviced loans at December 31, 2022.
(7)Total 12-month % CPR includes voluntary and involuntary prepayments, as shown in the table, plus scheduled principal amortization.
The following table provides selected operating statistics related to our owned reverse mortgage loans held for investment reported within our Servicing segment:
% Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Reverse Mortgage Loans at December 31
Unpaid principal balance (UPB):
Loans held for investment (1) $ 7,199.6 $ 6,546.5 $ 6,299.6 10 % 4 %
Active Buyouts (2) 73.0 36.1 28.4 102 27
Inactive Buyouts (2) 121.4 95.3 60.9 27 56
Total $ 7,394.0 $ 6,677.9 $ 6,388.9 11 5
Inactive buyouts % to total 1.64 % 1.43 % 0.95 % 15 51
Future draw commitments (UPB): 1,756.6 1,507.1 2,044.4 17 (26)
% Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Fair value:
Loans held for investment (1) $ 7,392.6 $ 6,979.1 $ 6,872.2 6 2
HMBS related borrowings 7,326.8 6,885.0 6,772.7 6 2
Net asset value $ 65.8 $ 94.1 $ 99.5 (30) (5)
Net asset value to UPB 0.91 % 1.44 % 1.58 %
(1)Securitized loans only; excludes unsecuritized loans as reported within the Originations segment.
(2)Buyouts are reported as Loans held for sale, Receivables or REO depending on the loan and foreclosure status.
The following table provides a breakdown of our servicer advances:
Advances by investor type
December 31, 2022 Principal and Interest Taxes and Insurance Foreclosures, bankruptcy, REO and other Total
Conventional $ 3.2 $ 97.7 $ 7.5 $ 108.3
Government-insured 3.0 35.9 17.7 56.6
Non-Agency 209.1 233.9 111.0 554.0
Total, net $ 215.3 $ 367.5 $ 136.2 $ 718.9
December 31, 2021 Principal and Interest Taxes and Insurance Foreclosures, bankruptcy, REO and other Total
Conventional $ 2.3 $ 65.7 $ 7.2 $ 75.3
Government-insured 0.7 54.5 23.4 78.6
Non-Agency 224.7 260.7 133.1 618.5
Total, net $ 227.7 $ 380.9 $ 163.8 $ 772.4
The following table provides the rollforward of activity of our portfolio of mortgage loans serviced for the years ended December 31, that includes MSRs, whole loans and subserviced loans, both forward and reverse:
Amount of UPB (in billions)
Count (in 000’s)
2022 2021 2020 2022 2021 2020
Portfolio at January 1 $ 268.0 $ 188.8 $ 212.4 1,353.3 1,107.6 1,420.0
Additions (1) (2) (3) (4) 85.3 152.0 57.4 292.2 567.9 194.5
Sales (2) (11.2) - (0.2) (0.3) (0.2) (1.6)
Servicing transfers (1) (2) (5) (18.0) (23.1) (40.5) (114.3) (102.0) (303.1)
Runoff (34.3) (49.7) (40.3) (152.1) (220.0) (202.2)
Portfolio at December 31 $ 289.8 $ 268.0 $ 188.8 1,378.8 1,353.3 1,107.6
(1)Includes the volume of UPB associated with short-term interim subservicing for some clients as a support to their originate-to-sell business, where loans are boarded and deboarded within the same quarter.
(2)Includes MSRs sold to an unrelated third party in the first quarter of 2022 consisting of 38,850 loans with a UPB of $11.1 billion, with the remaining active loans transferred out of the PMC servicing system in the third quarter of 2022, and for which PMC performed interim subservicing.
(3)Additions include purchased MSRs on portfolios consisting of 79 loans with a UPB of $24.1 million that have not yet transferred to the PMC servicing system as of December 31, 2022. Because we have legal title to the MSRs, the UPB and count of the loans are included in our reported servicing portfolio. The seller continues to subservice the loans on an interim basis between the transaction closing date and the servicing transfer date.
(4)Excludes MSRs acquired from unrelated third parties in the third quarter of 2022 consisting of 12,931 loans with a UPB of $4.1 billion for which PMC was previously performing the subservicing.
(5)2020 includes 270,218 deboarded loans with a UPB of $34.2 billion related to the termination of the subservicing agreement between Rithm and PMC on February 20, 2020. Refer to Note 8 - Other Financing Liabilities, at Fair Value.
Year Ended December 31, 2022 versus 2021
Servicing and Subservicing Fees
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Loan servicing and subservicing fees
Servicing $ 337.8 $ 339.3 $ 216.2 - % 57 %
Subservicing 72.9 21.1 28.9 246 (27)
MAV 72.8 15.7 - 363 n/m
Rithm
255.0 304.2 383.7 (16) (21)
Servicing and subservicing fees 738.5 680.3 628.8 9 8
Ancillary income 122.0 93.2 102.5 31 (9)
Total $ 860.5 $ 773.5 $ 731.2 11 % 6 %
The $87.0 million, or 11% increase in total servicing and subservicing fees in 2022 as compared to 2021 is primarily driven by our successful volume growth strategy, selectively balanced between servicing and subservicing, and the gradual runoff of the Rithm volume and growth of MAV and other new relationships. The increase in ancillary income is driven by float earnings at higher interest rates, as further discussed below.
The following table presents the respective drivers of residential loan servicing (owned MSRs) and subservicing fees.
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Servicing and subservicing fee
Servicing fees (owned MSRs) $ 337.8 $ 339.3 $ 216.2 - % 57 %
Average servicing fee (% of UPB) (1) 0.28 0.29 0.30 (3) % (3) %
Subservicing fees (excl. MAV and Rithm) (2) $ 72.9 $ 21.1 $ 28.9 245 (27) %
Average monthly fee per loan (in dollars) (3) $ 28 $ 18 $ 9 56 100 %
Residential assets serviced
Average UPB ($ in billions):
Servicing portfolio - Owned $ 130.1 $ 125.5 $ 78.3 4 % 60 %
Subservicing portfolio
Subservicing - forward 35.1 21.5 45.5 63 (53) %
Subservicing - reverse 21.9 3.3 - 564 n/m
Total subservicing 57.0 24.7 45.5
MAV 42.5 9.1 - 367 n/m
Rithm
52.0 61.4 74.8 (15) (18) %
Total $ 281.6 $ 220.7 $ 198.6 28 % 11 %
Average number (in 000’s):
Servicing portfolio 602.7 609.1 466.1 (1) % 31 %
Subservicing portfolio
Subservicing - forward 124.9 83.6 268.5 49 (69) %
Subservicing - reverse 89.8 12.9 - 596 n/m
Total subservicing 817.4 705.6 734.6 16 (4) %
MAV 159.9 37.4 - 328 n/m
Rithm
402.4 463.1 561.6 (13) (18) %
Total 1,379.7 1,206.1 1,296.2 14 % (7) %
(1)Excludes owned reverse mortgages effective with the three months ended June 30, 2022. Prior periods of 2021 and 2020 have been recast to conform to the current presentation.
(2)Subservicing fees for 2020 includes $15.9 million of fees earned on the Rithm PMC MSR Agreements upon receiving the notice of cancellation in February 2020.
(3)Excludes MAV portfolio and includes reverse subservicing beginning in the fourth quarter of 2021.
The table above reflects our strategy to grow our subservicing business, including reverse subservicing, and the increased use of MAV to grow our servicing volume. Comparing 2022 with 2021, we achieved a net $58.2 million servicing and subservicing fee increase, or 9%. Our servicing fee from MAV increased by $57.1 million and our subservicing fee grew by $51.8 million. Partially offsetting these increases, we reported a $49.2 million reduction in fees collected on behalf of Rithm due to portfolio runoff, and servicing fees from our owned MSR portfolio declined by $1.5 million. The $51.8 million increase in subservicing fees is driven by the boarding of new reverse mortgage loans under the subservicing agreement with MAM (RMS). The average subservicing fee per loan increased from $18 to $28 dollars, driven by the additions of reverse mortgage loans that yield relatively higher compensation for both active and inactive loans.
The following table presents both servicing fees collected and subservicing fees retained by Ocwen under the Rithm (formerly NRZ) agreements.
Rithm Servicing and Subservicing Fees Years Ended December 31,
2022 2021 2020
Servicing fees collected on behalf of Rithm $ 255.0 $ 304.2 $ 383.7
Servicing fees remitted to Rithm (1) (181.0) (215.8) (278.8)
Retained subservicing fees on Rithm agreements (2) $ 74.0 $ 88.4 $ 104.8
Average Rithm UPB ($ in billions) (3) $ 52.0 $ 61.4 $ 74.8
Average retained subservicing fees as a % of Rithm UPB 0.14 % 0.14 % 0.14 %
(1)Reported within Pledged MSR liability expense. The Rithm servicing fee includes the total servicing fees collected on behalf of Rithm relating to the MSR sold but not derecognized from our balance sheet. Under GAAP, we separately present servicing fees collected and remitted on a gross basis, with the servicing fees remitted to Rithm reported as Pledged MSR liability expense.
(2)Excludes the servicing fees of loans under the PMC Servicing Agreement after February 20, 2020 due to the notice of termination by Rithm, and subservicing fees earned under subservicing agreements. Also excludes ancillary income.
(3)Excludes the UPB of loans subserviced under the PMC Servicing Agreement after February 20, 2020 due to the notice of termination by Rithm, and excludes the UPB of loans under subservicing agreements.
The net retained fee on our Rithm portfolio for 2022 declined by $14.4 million, or 16% as compared to 2021. The decline in the Rithm fee collection and remittance is primarily driven by the decline in the average UPB of 15% due to portfolio runoff and prepayments. As the Rithm relationship is effectively a subservicing agreement, the COVID-19 environment, loans under forbearance and the fee collection do not impact our financial results to the same extent as for serviced loans with our owned MSRs.
The following table presents the detail of our ancillary income:
Years Ended December 31, % Change
Ancillary Income 2022 2021 2020 2022 vs 2021 2021 vs 2020
Late charges $ 41.0 $ 40.9 $ 47.7 - % (14) %
Custodial accounts (float earnings) 26.2 4.7 9.9 453 (53)
Reverse subservicing ancillary fees 20.4 1.4 - n/m n/m
Loan collection fees 11.1 11.7 13.0 (5) (10)
Recording fees 8.5 16.0 14.3 (47) 12
Boarding and deboarding fees 4.0 4.3 5.0 (5) (14)
GSE forbearance fees 0.8 1.5 1.2 (48) 25
HAMP fees - 0.6 0.6 (99) -
Other 10.0 12.0 10.8 (16) 11
Ancillary income $ 122.0 $ 93.2 $ 102.5 31 % (9) %
Ancillary income for 2022 increased by $28.8 million as compared to 2021 largely due to an increase in float earnings of $21.5 million due to higher interest rates in 2022, and a $19.0 million increase in reverse servicing ancillary fees on reverse mortgage loans boarded under the subservicing agreement with MAM (RMS) in 2022 and the fourth quarter of 2021. Partially offsetting these increases, recording fees were $7.5 million lower in 2022 due to the reduction in payoff volume.
Gain (Loss) on Loans Held for Sale, Net
Loss on loans held for sale, net for 2022 was $15.1 million, as compared to the $46.6 million gain recognized in 2021. In addition to the $8.8 million loss recognized in 2022 on certain delinquent and aged loans repurchased in connection with the Ginnie Mae EBO program (net of the associated Ginnie Mae MSR fair value adjustment), losses in 2022 are driven by decreased volume and margins on redelivery of repurchased loans in connection with Ginnie Mae loan modifications and EBO activities as a result of higher market interest rates. The unfavorable change is also explained by a $27.1 million gain recognized in 2021 on the sale of loans acquired in connection with the exercise of our servicer call rights of certain Non-Agency trusts.
Gain (Loss) on Reverse Loans Held for Investment and HMBS-Related Borrowings, Net
Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net reported in the Servicing segment is the net change in fair value of securitized loans held for investment and HMBS-related borrowings. Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net excludes reverse subservicing that is reflected in Servicing and subservicing fees. The following table presents the components of the net fair value change and is comprised of net interest income and other fair value gains or losses. Net interest income is primarily driven by the volume of securitized UPB as it is the interest income earned on the securitized loans offset against interest expense incurred on the HMBS-related borrowings, and represents a component of our compensation for servicing the portfolio, that is a percentage of the outstanding UPB. Other fair value changes are primarily driven by changes in market-based inputs or assumptions. Lower interest rates generally result in favorable net fair value impacts on our HECM reverse mortgage loans and the related HMBS financing liability and higher interest rates generally result in unfavorable net fair value impacts. Note that the fair value changes of the net asset value between securitized HECM loans and HMBS (referred to as our reverse MSR) attributable to interest rate changes are effectively used as a hedge of our forward MSR portfolio. See further description of our hedging strategy in Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Net interest income (servicing fee) $ 21.9 $ 19.9 $ 19.2 10 % 4 %
Realized gain on tail securitization 11.2 21.6 24.4 (48) % (11) %
Other fair value gains (losses) (1) (58.2) (43.8) (36.0) 33 22 %
Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net (Servicing)
$ (25.1) $ (2.3) $ 7.6 975 % (131) %
(1) Includes realization of expected cash flows and fair value gains and losses due to inputs and assumptions.
Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net for 2022 declined $22.8 million, or 975%, as compared to 2021 primarily driven by higher unrealized fair value losses due to increasing interest rates and widening yield spread directly impacting projected asset life and the tail value of the HECM reverse mortgage loans. Realized gains on tail securitization declined by $10.4 million in 2022 as compared to 2021, mostly due to a widening yield spread. Tails represent the future draws of borrowers, scheduled and unscheduled, as well as capitalized interest and are included in the fair value of the underlying loans. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach the 98% maximum claim amount liquidation event more quickly. The increase in rates and widening of yield spread resulted in additional $17.7 million fair value losses. Net interest income, that effectively represents our servicing fee increased $2.0 million in 2022 as compared with 2021 mostly due to the growth of the loan portfolio.
MSR Valuation Adjustments, Net
The following table summarizes the components of MSR valuation adjustments, net reported in our Servicing segment, with additional related measures:
Years Ended December 31,
2022 2021 2020
Total fair value gains (losses)
(1)+(2) Runoff (1) Changes in rates and assumptions (2) Total fair value gains (losses)
(1)+(2) Runoff (1) Changes in rates and assumptions (2) Total fair value gains (losses)
(1)+(2) Runoff (1) Changes in rates and assumptions (2)
MSR $ 166.6 $ (275.2) $ 441.8 $ (120.0) $ (250.2) $ 130.2 $ (321.2) $ (171.4) $ (149.8)
MSR pledged liability (88.0) 104.1 (192.1) 11.5 89.4 (77.9) 116.8 113.0 3.8
ESS financing liability 8.0 6.6 1.4 - - - - - -
Derivatives (122.6) - (122.6) (34.9) - (34.9) 44.9 - 44.9
Total $ (36.0) $ (164.5) $ 128.5 $ (143.4) $ (160.8) $ 17.4 $ (159.5) $ (58.4) $ (101.1)
Change in 10-year swap rate (bps) 222 66 (98)
Average UPB ($ in billions)(3) $ 130.1 $ 125.5 $ 78.3
(1)The terms runoff and realization of expected future cash flows may be used interchangeably within this discussion.
(2)Excludes gains of $9.9 million, $19.6 million and $41.7 million in 2022, 2021, and 2020, respectively, on the revaluation of MSRs purchased at a discount, that is reported in the Originations segment as MSR valuation adjustments, net.
(3)For Owned MSRs, i.e., excludes MSRs subject to sale agreements with Rithm, MAV and others that do not meet sale accounting criteria.
MSR valuation adjustments, net include the fair value gain and losses of the MSR portfolio, the MSR pledged liability associated with the MSR transfers that do not meet sale accounting and the ESS financing liabilities for which we elected the fair value option and that is collateralized by MSRs. The $36.0 million loss in MSR valuation adjustments, net in 2022, comprised of $164.5 million runoff partially offset by a $128.5 million fair value gain due to rates and assumptions. MSR portfolio runoff represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled amortization of the loan UPB together with projected voluntary prepayments. The runoff in 2022 was relatively stable vs. 2021 (increased by $3.7 million or 2%) when compared with the UPB of the owned portfolio. The $128.5 million fair value gain due to rates and assumptions is primarily driven by an increase in market interest rates (the 10-year swap rate increased by 222 basis points in 2022), partially offset by a $122.6 million hedging loss and a loss attributed to 50 basis point yield or discount rate assumption update by our third-party valuation experts across all investors.
MSR valuation adjustments, net increased by $107.4 million (lower loss) in 2022 as compared to 2021, primarily due to a $111.1 million increase in the gain attributed to rates and assumptions, net of an $87.7 million increase in the hedging loss, driven by an increase in market interest rates (the 10-year swap rate increased by 222 basis points in 2022 as compared to 66 basis points in 2021).
Our MSR hedging policy is designed to reduce the volatility of the MSR portfolio fair value due to market interest rates. Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risks for further detail on our hedging strategy and its effectiveness.
The following table provides information regarding the changes in the fair value and the UPB of our portfolio of Owned MSRs (excluding MSRs transferred to MAV, Rithm and others ) during 2022, with the breakdown by investor type.
Owned MSR Fair Value (1) Owned MSR UPB ($ in billions) (1)
GSEs Ginnie Mae Non-
Agency Total GSEs Ginnie Mae Non-
Agency Total
Beginning balance $ 1,198.5 $ 109.4 $ 114.6 $ 1,422.5 $ 98.5 $ 12.0 $ 17.4 $ 127.9
Additions
New cap.
193.0 41.3 0.1 234.4 14.9 1.9 - 16.8
Purchases 164.5 17.1 - 181.6 14.6 1.1 - 15.7
Sales/transfers/calls (2) (251.7) 14.7 (0.3) (237.3) (19.1) (0.3) - (19.4)
Change in fair value:
Inputs and assumptions (3) 225.4 19.3 29.8 274.5 - - - -
Realization of cash flows (134.4) (12.3) (18.4) (165.1) (10.5) (1.8) (2.6) (14.9)
Ending balance $ 1,395.3 $ 189.5 $ 125.8 $ 1,710.6 $ 98.4 $ 12.9 $ 14.8 $ 126.1
Weighted average note rate 3.5 % 4.2 % 4.3 % 3.7 %
Fair value (% of UPB) 1.42 % 1.47 % 0.85 % 1.36 %
Fair value multiple (4) 5.56 x 3.89 x 2.57 x 4.91 x
New cap. fair value (% of UPB) 1.28 % 2.20 %
New cap. fair value multiple (4) 5.09 x 4.86 x
(1)See Note 7 - Mortgage Servicing and Note 8 - Other Financing Liabilities, at Fair Value for further information on the Rithm and MAV portfolios.
(2)Includes $97.8 million fair value and $7.4 billion UPB of MSR sales to MAV in 2022 that did not achieve sale accounting treatment.
(3)Mostly changes in interest rates, except for gains of $9.9 million on the revaluation of purchased MSRs, that are reported in the Originations segment.
(4)Multiple of average servicing fee and UPB.
Compensation and Benefits
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Compensation and benefits $ 126.0 $ 108.1 $ 113.6 17 % (5) %
Average Employment - Servicing
Forward 2,732 3,051 3,598 (10) % (15)
Reverse 913 121 12 655 % 908
Total 3,645 3,172 3,610
India and other 2,660 2,432 2,880 9 % (16)
U.S. 985 740 730 33 1
Total 3,645 3,172 3,610 15 (12)
Compensation and benefits expense for 2022 increased $17.9 million, or 17%, as compared to 2021 primarily due to an $18.2 million increase in salaries and benefit expense driven by a 15% increase in our average servicing headcount, mostly onshore. The increase in Servicing headcount primarily reflects the hiring of employees to support the growth of the reverse mortgage subservicing platform, specifically with the acquisition of reverse mortgage subservicing from MAM (RMS). In addition, severance expense increased $2.6 million due to forward servicing headcount reductions in 2022, and commissions were $1.1 million higher primarily driven by the MAM (RMS) acquisition. Partially offsetting these increases in expense, incentive compensation decreased $4.7 million primarily due to a decrease in cash-settled share-based awards expense
associated with the decrease in our common stock price and forfeitures of unvested awards, and a decline in AIP awards. partially due to a reduction in headcount.
Servicing Expense
Servicing expense primarily includes claim losses and interest curtailments on government-insured loans, provision expense for advances and servicing representation and warranties, and certain loan-volume related expenses.
Servicing expense for 2022 declined $45.9 million, or 47%, as compared to 2021. This decline is primarily due to an $18.3 million decrease in satisfaction and interest on payoff expense attributable to lower payoff volume, a $13.8 million decrease in reverse subservicing expenses driven by the transfer of our owned reverse portfolio from a subservicer onto our platform beginning in the fourth quarter of 2021, an $8.1 million reduction in interim subservicing costs incurred on MSR bulk acquisitions in 2021, a $2.3 million decrease in certain indemnification reserves and a $1.7 million decline in provision expense on government-insured claims receivables primarily due to decreased claim volumes.
Other Operating Expenses
Other operating expenses (total operating expenses less Compensation and benefit expense and Servicing expense) for 2022 decreased by $0.2 million as compared to 2021. Professional services declined $5.3 million due to a $13.3 million decrease in legal expenses, mostly driven by reimbursements received from mortgage loan investors related to prior year legal expenses and to payments received following resolution of legacy litigation matters, partially offset by an increase in other litigation and legal expenses and a $7.5 million increase in other professional fees primarily related to our reverse subservicing business and MSR sales. The $1.5 million decline in Corporate overhead allocations is primarily attributable to the decline in support group operating expenses, mostly legal and compensation and benefits. Offsetting these decreases, Occupancy and equipment expense increased $4.6 million primarily due to an increase in printing and mailing expenses mostly as a result of the increase in the average number of loans serviced and additional mailing driven by our acquisition of reverse mortgage subservicing. Other expense increased by $1.0 million driven primarily by the $3.6 million increase in amortization expense recognized during 2022 on the reverse subservicing contract intangible asset recorded in October 2021 and April 2022 as part of the transactions with MAM (RMS), partially offset by a $3.1 million decrease in bank charges driven by increased earning credits due to interest rate increases.
Other Income (Expense)
Interest income for 2022 increased $4.7 million, or 57%, compared to 2021 primarily due to an increase in interest rates during 2022 and higher delinquent interest payments in 2021 related to Ginnie Mae EBO loan repurchases.
The following table provides information regarding Interest expense:
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Interest Expense
Advance match funded liabilities $ 19.8 $ 14.2 $ 24.1 39 % (41) %
Mortgage loan warehouse facilities 9.5 8.9 5.4 7 65
MSR financing facilities 47.0 26.0 15.9 81 64
Corporate debt interest expense allocation (1) 31.0 25.1 38.2 23 (34)
Escrow 7.5 6.5 7.0 15 (7)
Total interest expense $ 114.8 $ 80.8 $ 90.7 42 % (11) %
Average balances
Advances $ 689.6 $ 754.1 $ 891.3 (9) % (15) %
Advance match funded liabilities 461.1 505.4 603.7 (9) (16)
Mortgage loan warehouse facilities 227.2 265.4 116.0 (14) 129
MSR financing facilities 942.6 701.2 308.4 34 127
Effective average interest rate
Advance match funded liabilities 4.29 % 2.81 % 4.00 % 53 % (30) %
Mortgage loan warehouse facilities 4.18 3.35 4.66 25 (28)
MSR financing facilities 4.99 3.71 5.15 34 (28)
Average 1ML 1.91 % 0.10 % 0.52 % n/m (81) %
Average 1M Term SOFR 1.85 % 0.04 % 0.35 % n/m (89) %
(1)Effective in the first quarter of 2022, interest expense on the OFC Senior Secured Notes issued in March 2021 is no longer allocated to the Servicing segment. Corporate debt interest expense allocation for prior periods has been recast to conform to the current period presentation. The interest expense allocation adjustment for 2021 is $23.7 million (nil in 2020).
Interest expense for 2022 increased by $34.0 million, or 42%, compared to 2021, primarily due to a $21.0 million increase on MSR financing facilities as a result of an overall increase in the average debt balances to finance the growth of the MSR portfolio and a higher funding cost driven by increasing market interest rates. The $5.6 million increase (39%) in interest expense on advance match funded facilities is due to higher funding cost, driven by increasing market interest rates and our repayment of low-cost OMART term notes during 2022, offset in part by lower average balances of advances and borrowings. The $5.9 million increase in corporate debt interest expense allocation is mostly due to a higher corporate debt allocation to finance the growth of the MSR portfolio.
Pledged MSR liability expense includes the servicing fee remittance related to the MSR transfers that do not meet sale accounting criteria and are presented on a gross basis in our consolidated financial statements and the servicing spread remittance associated with our ESS financing liability at fair value. See Note 8 - Other Financing Liabilities, at Fair Value to the Consolidated Financial Statements. The following table provides the components of Pledged MSR liability expense:
Years Ended December 31,
2022 2021 2020
Servicing fees collected on behalf of third party $ 322.5 $ 318.4 $ 383.7
Less: Subservicing fee retained (82.8) (90.4) (104.8)
Ancillary fee/income and other settlement (incl. expense reimbursement) 6.1 (6.7) (9.7)
Net servicing fee remittance (1) 245.9 221.3 269.1
ESS servicing spread remittance 9.1 - -
Pledged MSR liability expense
$ 255.0 $ 221.3 $ 269.1
(1)For MSR transfers that do not meet sale accounting criteria.
Pledged MSR liability expense for 2022 increased $33.7 million as compared to 2021, primarily due to a $24.6 million increase in net servicing fee remittance of MSR transfers that do not meet sale accounting criteria. This increase is primarily due to an increase in the MSR portfolio transferred to MAV, launched in the second half of 2021, offset in part by a decline in runoff on the Rithm MSR portfolio. In addition, we recorded $9.1 million servicing spread remittance on the ESS financing liabilities issued in 2022.
Other, net expense for 2022 increased $12.5 million, as compared to 2021, primarily due to income of $4.6 million recognized in 2021 in connection with our exercise of call rights and $1.3 million of termination fees recognized in 2021 as a result of call rights exercised by Rithm. Additionally, in connection with our MSR sales, we recorded $4.9 million early payout protection expense in 2022.
Originations
We originate and purchase loans and MSRs through multiple channels, including retail, wholesale, correspondent, flow MSR purchase agreements, the Agency Cash Window and Co-issue programs and bulk MSR purchases.
We originate and purchase conventional loans (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government-insured (FHA, VA or USDA) forward mortgage loans. The GSEs and Ginnie Mae guarantee these mortgage securitizations. We originate HECM loans, or reverse mortgages, that are mostly insured by the FHA and we are an approved issuer of HMBS that are guaranteed by Ginnie Mae.
Within retail, our Consumer Direct channel for forward mortgage loans focuses on targeting existing servicing customers by offering them competitive mortgage refinance opportunities, where permitted by the governing servicing and pooling agreement. In doing so, we generate revenues for our forward lending business and protect the servicing portfolio by retaining these customers. A portion of our servicing portfolio is susceptible to refinance activity during periods of declining interest rates. Origination recapture volume and related gains are a natural economic hedge, to a certain degree, to the impact of declining MSR values as interest rates decline. To the extent we refinance a loan underlying the MSRs subject to the MAV subservicing agreement, we are obligated to transfer such recaptured MSR to MAV under the terms of the joint-marketing agreement. In addition to refinance activities, our Consumer Direct channel targets purchase mortgage loans, cash-out, debt consolidation, mortgage insurance premium reduction, and new customer acquisition.
Our forward lending correspondent channel drives higher servicing portfolio replenishment. We purchase closed loans that have been underwritten to investor guidelines from our network of correspondent sellers and sell and securitize them, on a servicing retained basis. We offer correspondent sellers the choice to take out mandatory or best efforts contracts, under which the seller's obligation to deliver the mortgage loan becomes mandatory only when and if the mortgage is closed and funded. Additionally, we offer correspondent sellers the opportunity to leverage a non-delegated underwriting option for best-efforts deliveries. As of December 31, 2022, we have relationships with 600 approved correspondent sellers, or 162 new sellers since December 31, 2021. On June 1, 2021, we expanded our network through the assignment by TCB to us, of all its correspondent loan purchase agreements with its correspondent sellers (approximately 220 sellers).
We originate and purchase reverse mortgage loans through our retail, wholesale and correspondent lending channels, under the guidelines of the HECM reverse mortgage insurance program of the FHA. Loans originated under this program are generally insured by the FHA, which provides protection against risk of borrower default.
After origination, we package and sell the loans in the secondary mortgage market, through GSE and Ginnie Mae securitizations on a servicing retained basis. Origination revenue mostly includes interest income earned for the period the loans are held by us, gain on sale revenue, which represents the difference between the origination or purchase value and the sale value of the loan including its MSR value, and fee income earned at origination. As the securitizations of reverse mortgage loans do not achieve sale accounting treatment and the loans are classified as loans held for investment, at fair value, reverse mortgage revenues include the fair value changes of the loan from lock date to securitization date.
We provide customary origination representations and warranties to investors in connection with our GSE loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved correspondent lenders. We recognize the fair value of the liability for our representations and warranties at the time of sale. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the mortgage loan investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur. We actively monitor our counterparty risk associated with our network of correspondent lenders-sellers.
We purchase MSRs through flow purchase agreements, the Agency Cash Window programs and bulk MSR purchases. The Agency Cash Window programs we participate in, and purchase MSR from, allow mortgage companies and financial institutions to sell whole loans to the respective agency and sell the MSR to the winning bidder servicing released. In addition, we partner with other originators to replenish our MSRs through flow purchase agreements. We do not provide any origination representations and warranties in connection with our MSR purchases through MSR flow purchase agreements or Agency Cash
Window programs. As of December 31, 2022, we have relationships with 238 approved sellers through the Agency Cash Window co-issue programs, or 84 new sellers since December 31, 2021.
We initially recognize our MSR origination with the associated economics in our Originations segment, and transfer the MSR to our Servicing segment once the MSR is initially recognized on our balance sheet with all subsequent performance associated with the MSR, including funding cost, run-off and other fair value changes reflected in our Servicing segment. However, effective in the first quarter of 2022, we report those MSRs purchased through the Fannie Mae Cash Window program that are transferred to MAV and the associated economics in our Servicing segment upon acquisition, as such MSRs are transferred to MAV monthly under an MSR flow sale agreement and subserviced by PMC. Segment results for prior periods have been recast as applicable to conform to the current segment presentation. See the “MSR Valuations Adjustments, net” section below for additional information.
We source additional servicing volume through our subservicing and interim servicing agreements, through our existing relationships and our enterprise sales initiatives. We do not report any revenue or gain associated with subservicing within the Originations segment as the impact is captured in the Servicing segment. However, sales efforts and certain costs - marginal compensation and benefits - are managed and reported within the Originations segment.
For 2022, our Originations business originated or purchased forward and reverse mortgage loans with a UPB of $16.8 billion and $1.4 billion, respectively. In addition, we purchased $11.3 billion UPB MSR through the Agency Cash Window and flow purchase programs during 2022.
Significant Variables
The following factors could significantly impact the results of our Originations segment from period to period.
Economic Conditions. General economic conditions can impact the growth and revenue of our Originations segment by impacting the capacity for consumer credit and the supply of capital. More specifically, employment levels and home prices are variables that can each have a material impact on mortgage volume. Employment levels, the level of wages and the stability of employment are underlying factors that impact credit qualification. The effect of home prices on lending volumes is significant and complex. As home prices go up, home equity increases and this improves the position of existing homeowners either to refinance or to sell their home, which often leads to a new home purchase and a new forward mortgage loan, or in the case of a reverse mortgage, increase the size of the mortgage loan available and the number of potential borrowers. However, if home prices increase rapidly, the effect on affordability for first-time and move-up buyers can dampen the demand for mortgage loans. The more restrictive standards for loan to value (LTV) ratios, debt to income (DTI) ratios and employment that characterize the current market amplify the significance and sensitivity of the housing market and related mortgage lending volumes to employment levels and home prices. If home prices decline due to increased mortgage interest rates or for other reasons, home sales may decline and it may be more difficult for homeowners to refinance existing mortgages, thereby negatively impacting mortgage volume.
Mortgage Rates. Changes in mortgage rates directly impact the demand for both purchase and refinance forward mortgages and therefore can impact the financial results of our Originations segment. Small changes in mortgage rates directly impact housing affordability for both first-time and move-up home buyers and affect their ability to purchase a home. For refinance loans, current market mortgage rates must be considered relative to the rates on the current mortgage debt outstanding. As the time and cost to refinance has decreased, relatively small reductions in mortgage rates can trigger higher refinancing activity. Given the large size of U.S. residential forward mortgage debt outstanding, the impact of mortgage rate changes can drive significant swings in mortgage refinance volume.
Market Size and Composition. The volume of new or refinanced loans is impacted by changes to existing, or development of new, GSE or other government sponsored programs. Changes in GSE or HUD guidelines and costs and the availability of alternative financing sources, such as non-Agency proprietary loans and traditional home equity loans, impact borrower demand for forward and reverse mortgages and therefore can impact the volume of mortgage originations.
Investor Demand. The liquidity of the secondary market for mortgage loans impacts the size of the mortgage loan market by defining loan attributes and credit guidelines for loans that investors are willing to buy and at what price. In recent years, the GSEs have been the dominant providers of secondary market liquidity for forward mortgages, keeping the product and credit spectrum relatively homogeneous and risk averse (higher credit standards).
Margins. Changes in pricing margin for mortgages are closely correlated with changes in market size for mortgage loans. As loan demand and market capacity move out of alignment, pricing adjusts. In a growing market, margins expand and in a contracting market, margins tighten as lenders seek to keep their production at or close to full capacity. Managing capacity and cost is critical as volumes change. Among our channels, our margins per loan are highest in the retail channel and lowest in the correspondent channel. We work directly with the borrower to process, underwrite and close loans in our retail and reverse wholesale channels. In our retail channel, we also identify the customer and take loan applications. As a result, our retail channel is the most people- and cost-intensive and experiences the greatest volume volatility.
The following table presents the results of operations of our Originations segment. The amounts presented are before the elimination of balances and transactions with our other segments:
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Revenue
Gain on loans held for sale, net $ 52.9 $ 124.5 $ 105.2 (58) % 18 %
Gain on reverse loans held for investment and HMBS-related borrowings, net 61.2 82.0 53.1 (25) 54
Other revenue, net (1) 27.0 43.4 21.0 (38) 107
Total revenue 141.1 249.9 179.3 (44) 39
MSR valuation adjustments, net (2)
9.9 19.6 41.7 (50) (53)
Operating expenses
Compensation and benefits 85.1 101.6 62.2 (16) 63
Origination expense 11.1 15.0 7.2 (26) 109
Technology and communications 9.2 9.8 5.5 (5) 76
Professional services 4.8 10.2 9.3 (53) 10
Occupancy and equipment 4.5 6.9 5.4 (35) 27
Corporate overhead allocations 21.6 20.0 18.2 8 10
Other expenses 12.2 9.4 6.5 30 43
Total operating expenses 148.5 172.8 114.4 (14) 51
Other income (expense)
Interest income 31.2 17.7 7.0 76 152
Interest expense (29.0) (22.3) (9.8) 30 126
Other, net (1.8) (2.3) 0.4 (21) (750)
Total other income (expense), net 0.4 (6.9) (2.5) (106) 178
Income before income taxes $ 2.9 $ 89.8 $ 104.2 (97) (14)
(1)Includes $2.1 million, $8.5 million and $6.0 million ancillary fee income related to MSR acquisitions reported as Servicing and subservicing fees at the consolidated level for 2022, 2021 and 2020, respectively.
(2)Effective in the first quarter of 2022, we report those MSRs purchased through the Fannie Mae Cash Window program that are transferred to MAV and the associated economics in our Servicing segment upon acquisition, as such MSRs are transferred to MAV monthly under an MSR flow sale agreement and subserviced by PMC. Segment results for prior periods have been recast as applicable to conform to the current segment presentation. The MSR valuation adjustments, net reclassified to the Servicing segment for 2021 was $5.6 million. No such gains were recognized in 2020.
The following table provides selected operating statistics for our Originations segment:
Years Ended December 31, % Change
UPB in billions 2022 2021 2020 2022 vs 2021 2021 vs 2020
Loan Production by Channel
Forward loans
Correspondent $ 15.6 $ 16.6 $ 5.7 (6) % 192
Consumer Direct 1.2 2.4 1.3 (49) 84
$ 16.8 $ 19.0 $ 7.0 (12) 171
% Purchase production 71 32 20 122 63
% Refinance production 29 68 80 (58) (15)
Reverse loans (1)
Correspondent $ 0.7 $ 0.8 $ 0.5 (14) % 72 %
Wholesale 0.3 0.3 0.3 22 (8)
Retail 0.4 0.4 0.2 (8) 161
$ 1.4 $ 1.5 $ 0.9 (8) 62
MSR Purchases by Channel
Agency Cash Window / Flow MSR 11.3 20.4 15.1 (45) 35
Bulk MSR purchases 4.3 55.1 16.6 (92) 233
Bulk reverse purchases 0.2 - - n/m n/m
$ 15.8 $ 75.6 $ 31.7 (79) 138
Total $ 34.0 $ 96.1 $ 39.6 (65) 143
Short-term loan commitment (at year end)
Forward loans $ 540.1 $ 1,022.0 619.7 (47) % 65 %
Reverse loans 13.8 63.3 11.7 (78) 442
Average Employment
U.S. 523 653 461 (20) % 42 %
India and other 470 400 177 18 126
Total Originations 993 1,053 638 (6) 65
(1)Loan production excludes reverse mortgage loan draws by borrowers disbursed subsequent to origination that are reported within the Servicing segment.
Gain on Loans Held for Sale, Net
The following table provides information regarding Gain on loans held for sale by channel and the related forward loan origination volume and margins (excluding fees that are presented in Other revenue, net):
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Gain on Loans Held for Sale (1)
Correspondent $ 24.6 $ 18.5 $ 20.8 33 % (11) %
Consumer Direct 28.3 106.0 84.4 (73) 26
$ 52.9 $ 124.5 $ 105.2 (58) % 18 %
% Gain on Sale Margin (2)
Correspondent 0.16 % 0.11 % 0.37 % 45 % (69) %
Consumer Direct 2.30 4.39 6.44 % (48) (32)
0.31 % 0.66 % 1.50 % (52) % (56) %
Origination UPB (3) (in billions)
Correspondent $ 15.6 $ 16.6 $ 5.7 (6) % 192 %
Consumer Direct 1.2 2.4 1.3 (50) 84
$ 16.8 $ 19.0 $ 7.0 (12) % 171 %
(1)Includes realized gains on loan sales and related new MSR capitalization, changes in fair value of IRLCs, changes in fair value of loans held for sale and economic hedging gains and losses.
(2)Ratio of gain on Loans held for sale to Origination UPB. Note that the ratio differs from the day-one gain on sale margin upon lock.
(3)Defined as the UPB of loans funded in the period.
Gain on loans held for sale, net, declined $71.6 million, or 58%, as compared to 2021 primarily due to a $77.7 million decrease in our Consumer Direct channel, driven by a decline in margin and a 50% decrease in loan production attributed to this channel, as detailed in the table above. Our Consumer Direct channel benefited from historical low rate conditions during 2021 and was exposed to rapidly changing and unfavorable market conditions for borrower refinancing due to rising interest rates during 2022. In our Correspondent channel, we recognized a $6.1 million higher gain in 2022 despite a $1.0 billion, or 6% decrease in loan production volume. With our efforts to prudently manage volatile market conditions and improve execution, we were able to continue to grow volume at margin levels that met our targets. On June 1, 2021, we expanded our network of correspondent sellers through the assignment by TCB to us, of all its correspondent loan purchase agreements with its correspondent sellers (approximately 220 sellers). Margins of our Correspondent channel increased when comparing 2022 with 2021 due to our prudent pricing and growth of higher margin execution, including best efforts during 2022.
Gain on Reverse Loans Held for Investment and HMBS-Related Borrowings, Net
The following table provides information regarding Gain on reverse loans held for investment and HMBS-related borrowings, net of the Originations segment that comprises fair value changes of the pipeline and unsecuritized reverse mortgage loans held for investment, at fair value, together with related volume and margin:
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Origination UPB (1) (in billions)
$ 1.4 $ 1.5 $ 0.9 (6) % 62 %
Origination margin (2) 4.25 % 5.37 % 5.64 % (21) (5) %
Gain on reverse loans held for investment and HMBS-related borrowings, net (Originations) (3) $ 61.2 $ 82.0 $ 53.1 (25) % 54 %
(1)Defined as the UPB of loans funded in the period.
(2)Ratio of origination gain and fees - see (3) below - to origination UPB. Note that the ratio includes gains or losses on interest rate lock commitments.
(3)Includes gain on new origination, and loan fees and other. Includes $32.4 million, $34.1 million and $26.9 million non-cash gain on securitization of newly originated loans in 2022, 2021 and 2020, respectively.
We reported a $61.2 million Gain on reverse loans held for investment and HMBS-related borrowings, net in 2022, a $20.8 million or 25% decrease as compared to 2021. The decrease is primarily driven by lower margins in our Retail and Wholesale channels and a decrease in originations volume in our Retail and Correspondent channels, partially offset by an increase in volume in our Wholesale channel. The lower margins were mostly due to the increase in market interest rates and yield spread
widening observed in the market. Our higher-margin reverse Retail channel generated a net $14.2 million revenue decrease in 2022 as compared to 2021, due to a decline in margin as well as origination volume.
Other revenue, net
Other revenue, net for 2022 declined $16.4 million as compared to 2021 primarily due to a $6.4 million decrease in ancillary fee income related to MSR acquisitions due to a decline in bulk acquisitions and Agency cash window/flow purchases, a $6.2 million decline in setup fees earned for loans boarded on our servicing platform, mostly related to a decline in flow purchases volume, and a $3.7 million decrease in correspondent and broker fees due to a decline in originations volume.
MSR Valuation Adjustments, Net
MSR valuation adjustments, net includes gains of $9.9 million and $19.6 million in 2022 and 2021, respectively, due to revaluation gains on certain MSRs opportunistically purchased through the Agency Cash Window programs, and flow purchases. As an aggregator of MSRs, we may purchase MSRs from smaller originators with a purchase price at a discount to fair value and we recognize valuation adjustments for differences in exit markets in accordance with the accounting fair value guidance. We record such valuation adjustments as MSR valuation adjustments, net within the Originations segment since the segment’s business objective is the sourcing of new MSRs at targeted returns.
MSR valuation adjustments, net for 2022 decreased $9.7 million as compared to 2021, mostly due to volume decrease.
Operating Expenses
Operating expenses for 2022 decreased $24.3 million, or 14%, as compared to 2021. Compensation and benefits decreased by $16.5 million, or 16%, with a $10.2 million decrease in salary and benefits, $6.3 million decline in incentive compensation and $4.5 million lower commissions, partially offset by a $5.1 million increase in severance expense due to headcount reductions in 2022. The decrease in salaries and benefits expense was mostly attributed to a 6% decrease in Originations average total headcount as compared to 2021. Forward Originations headcount, mostly Consumer Direct, declined 13% in 2022 as part of our efforts to right-size our resources to market opportunities. The offshore-to-total average headcount ratio for Originations increased from 38% for 2021 to 47% for 2022. The decline in incentive compensation is primarily due to a decrease in the fair value of cash-settled share-based awards associated with the decrease in our common stock price at December 31, 2022 as compared to December 31, 2021 and a decline in AIP awards that was largely due to a reduction in headcount.
Other operating expenses (total operating expenses less Compensation and benefit expense) decreased $7.8 million primarily due to a $5.4 million decrease in Professional services, explained by outsourced surge resources utilized during 2021 to support production volumes, a $3.9 million decrease in Originations expense due to lower Originations volume in 2022, and a $2.4 million decrease in Occupancy and equipment expense primarily due to lower mailing and postage expenses in our Consumer Direct channel with decreased marketing campaign activities, partially offset by a $1.8 million increase in advertising expense mostly attributed to Reverse Originations and a $1.6 million increase in Corporate overhead allocations, which is primarily driven by Capital Markets cost allocation to Originations, previously a direct charge, and partially offset by a decline in support group operating expenses.
Certain other operating expenses are variable, and as a result, as origination volume increased or decreased so did the related expenses. Examples include credit reports, appraisals, settlement fees, and tax service fees recorded in Origination expenses or certain outsourced services including surge resources recorded in Professional services.
Other Income (Expense)
Interest income consists primarily of interest earned on newly-originated and purchased loans prior to sale to investors. Interest expense is incurred to finance the mortgage loans prior to sale or securitization, which is generally within 20 days. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, commonly referred to as warehouse lines.
Interest income for 2022 increased $13.5 million as compared to 2021 primarily due to higher interest rates and the increase in the average held for sale loan balances due to higher forward loan production volumes through the first three quarters of the year.
Interest expense for 2022 increased $6.7 million as compared to 2021 due to an increase in effective interest rates driven by base rate increases and a 7% increase in average warehouse facility debt balances, consistent with higher average held for sale loan balances.
Corporate Items and Other
Corporate Items and Other includes revenues and expenses of corporate support services, our reinsurance business CRL, inactive entities, and our other business activities that are currently individually insignificant, revenues and expenses that are
not directly related to other reportable segments, interest income on short-term investments of cash, gain or loss on repurchases of debt, interest expense on unallocated corporate debt and foreign currency exchange gains or losses. Interest expense on corporate debt is allocated to the Servicing segment and the Originations segment (starting in the fourth quarter of 2021) based on relative financing requirements. Effective in the first quarter of 2022, we no longer allocate the OFC Senior Secured Notes (issued in 2021) and related interest expense to the Servicing and Originations segments. Accordingly, the financing cost of the Servicing and Originations segments reflects and is consistent with the financing structure of the licensed entity PMC that carries out these businesses and does not depend on the financing structure strategy of its parent, as a holding company. Interest expense allocated to the Servicing and Originations segments for prior periods has been recast to conform to the current period presentation. The interest expense allocation adjustment for 2021 is $24.4 million.
Corporate support services include finance, facilities, human resources, internal audit, legal, risk and compliance, capital markets and technology functions. Certain expenses incurred by corporate support services are allocated to the Servicing and Originations segments using various methodologies intended to approximate the utilization of such services. Various measurements of utilization of corporate support services are maintained, primarily time studies, personnel volumes and service consumption levels. Support service costs not allocated to the Servicing and Originations segments are retained in the Corporate Items and Other segment along with certain other costs including certain litigation and settlement related expenses or recoveries, and other costs related to operating as a public company. Corporate Items and Other also includes severance, retention, facility-related and other expenses incurred in 2020 related to our re-engineering initiatives and have not been allocated to other segments.
CRL, our wholly-owned captive reinsurance subsidiary, provides re-insurance related to coverage on REO properties owned or serviced by us. CRL assumes a quota share of REO insurance coverage written by a third-party insurer under a blanket policy issued to PMC. The underlying REO policy provides coverage for direct physical loss on commercial and residential properties, subject to certain limitations. Under the terms of the reinsurance agreement, CRL assumes a 60% quota share of premiums and all related losses and loss adjustment expenses incurred by the third-party insurer, effective March 2021, with a 50% and 40% quota share through February 2021 and May 2020, respectively. The reinsurance agreement expires December 31, 2023, but may be terminated by either party at any time with six months advance written notice. The agreement will automatically renew for additional one-year terms unless either party provides 60 days advance written notice prior to renewal.
The following table presents selected results of operations of Corporate Items and Other. The amounts presented are before the elimination of balances and transactions with our other segments:
Years Ended December 31, % Change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Revenue
Premiums (CRL) $ 6.4 $ 5.9 $ 6.2 10 % (5) %
Other revenue 0.5 0.3 0.4 67 (28)
Total revenue 6.9 6.2 6.6 12 (6)
Operating expenses
Compensation and benefits 78.2 88.2 89.6 (11) (1)
Professional services 18.4 40.3 69.4 (54) (42)
Technology and communications 23.9 22.5 28.9 6 (22)
Occupancy and equipment 6.1 3.1 11.1 97 (72)
Servicing and origination 1.5 0.4 1.7 275 (74)
Other expenses 9.5 7.3 8.1 30 (10)
Total operating expenses before corporate overhead allocations
137.6 161.8 208.7 (15) (22)
Corporate overhead allocations
Servicing segment (46.2) (47.7) (61.0) (3) (22)
Originations segment (21.6) (20.0) (18.2) 8 10
Total operating expenses 69.8 94.1 129.5 (26) (27)
Other income (expense), net
Interest income 1.5 0.5 1.9 200 (77)
Interest expense (42.2) (40.9) (8.9) 3 361
Gain (loss) on extinguishment of debt 0.9 (15.5) - (106) n/m
Other, net (1.1) 1.2 (4.4) (192) (127)
Total other expense, net (40.9) (54.7) (11.3) (25) 384
Loss before income taxes $ (103.8) $ (142.6) $ (134.2) (27) 6
n/m: not meaningful
Compensation and Benefits
Compensation and benefits expense for 2022 decreased $10.0 million, or 11%, as compared to 2021 primarily as a result of a $14.7 million decrease in incentive compensation and a $2.0 million decline in salaries and benefit expense, partially offset by a $6.3 million increase in severance expense. The decline in incentive compensation is primarily due to an $8.5 million decrease in cash-settled share-based awards expense associated with the decrease in our common stock price during the year and forfeitures of unvested awards, and a $6.0 million decrease in AIP awards for 2022, partially due to a reduction in headcount. The decline in salaries and benefit expense and the increase in severance expense are due to headcount reduction as part of our cost-reduction efforts. The average Corporate headcount mix between onshore and offshore was unchanged.
Professional Services
Professional services expense for 2022 declined $21.9 million, or 54%, as compared to 2021, primarily due to a $13.4 million decrease in legal expenses and an $8.1 million decline in other professional services expenses. The net decline in legal expenses is largely due to $7.8 million reimbursements received from mortgage loan investors in 2022 related to prior year legal expenses and a $5.6 million decrease in expenses related to other matters. Other professional services for 2021 includes $3.2 million of advisory fees related to our MSR investment joint venture with Oaktree, MAV Canopy, which closed May 3, 2021, and higher utilization of professional services in 2021 including consulting services related to corporate strategy and business initiatives.
Other Operating Expenses
Technology and communications expense for 2022 increased $1.4 million, or 6%, as compared to 2021, primarily due to an increase in cloud usage costs. Occupancy and equipment expense for 2022 increased $3.0 million or 97%, as compared to 2021, primarily due to facility repairs required in connection with our exit of our New Jersey leased office facility. As compared to 2021, Other expenses for 2022 increased $2.2 million primarily driven by certain tax credits in 2021 and increased travel and miscellaneous expenses in 2022.
Other Income (Expense)
Interest expense for 2022 increased $1.3 million, or 3%, as compared to 2021. The debt balance of the Corporate segment is comprised mostly of the OFC Senior Secured Notes issued by Ocwen (parent company) as the PMC Senior Secured Notes are largely allocated to the Servicing and Originations segments. The increase is primarily driven by a higher average corporate debt and higher cost of corporate debt that is mostly attributed to the OFC Senior Secured Notes issued at a discount on March 4, 2021 and May 3, 2021 to Oaktree together with warrants that resulted in an additional discount, the accretion of which is reported as interest expense.
In the second quarter of 2022, we recognized a gain on debt extinguishment of $0.9 million resulting from our repurchase of $25.0 million PMC 7.875% Senior Secured Notes due March 2026 at a discount, net of the proportionate write-off of unamortized discount and debt issuance costs. In March 2021, we recognized a loss on debt extinguishment of $15.5 million resulting from our early repayment of the SSTL due May 2022 and our early redemption of our 6.375% PHH senior unsecured notes due August 2021 and our 8.375% PMC senior secured notes due November 2022. The loss on debt extinguishment in 2021 includes the write-off of unamortized debt issuance costs and discount, as well as contractual prepayment premiums.
We reported $1.1 million Other expense in 2022 as compared to $1.2 million Other income in 2021, primarily driven by a $2.3 million increase in loss adjustment expense related to our CRL business due to a higher claim ratio attributed to higher frequency and severity. In addition, we recorded foreign currency remeasurement losses of $0.1 million in 2022, as compared to gains of $0.3 million in 2021, related to our operations in India and the Philippines.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We have successfully completed multiple financing transactions at market terms during 2022 as summarized below, which included refinancing and rightsizing our existing facilities as well as entering into new transactions with respect to our current and anticipated financing needs in the normal course of business:
•We have entered into multiple ESS financing transactions for aggregated proceeds of $200.9 million to fund our GSE MSR acquisitions and portfolio growth.
•We increased the borrowing capacity of our MSR financing facilities by $240.0 million to fund our MSR acquisitions and portfolio growth, and extended the duration of our debt.
•We voluntarily reduced total borrowing capacity on our advance facilities by $40.6 million as we continue to experience improvements in our servicing portfolio performance.
•We have kept the total borrowing capacity on our mortgage loan warehouse facilities materially unchanged, and extended the maturity of our debt.
In addition, after evaluating our liquidity, capital allocation and profitability outlook, we completed the following repurchases during 2022. We funded the repurchases with available cash.
•We repurchased $50.0 million of our common stock under a share repurchase program authorized by Ocwen’s Board of Directors.
•We opportunistically repurchased $25.0 million of our PMC Senior Secured Notes in the open market for a price of $23.6 million, and recognized a $0.9 million net gain on debt extinguishment.
We actively monitor and, during 2022, we have adjusted our borrowing capacity on our various collateralized debt agreements to align with our financing needs and to optimize our financing costs. A summary of borrowing capacity under our advance facilities, mortgage warehouse facilities and MSR financing facilities is as follows (see Note 13 - Borrowings to the Consolidated Financial Statements for additional information):
December 31, 2022 December 31, 2021
Total Borrowing Capacity (1) Available Borrowing Capacity - Committed (1) Available Borrowing Capacity - Uncommitted (1) Total Borrowing Capacity (1) Available Borrowing Capacity - Committed (1) Available Borrowing Capacity - Uncommitted (1)
Advance facilities $ 554.4 $ 27.5 $ 13.2 $ 595.0 $ 82.7 $ -
Mortgage loan warehouse facilities 2,133.0 332.6 1,097.6 2,119.3 240.3 794.0
MSR financing facilities 1,025.0 143.4 17.1 785.0 40.4 18.3
Total $ 3,712.4 $ 503.5 $ 1,128.0 $ 3,499.3 $ 363.4 $ 812.3
(1)Total Borrowing Capacity represents the maximum amount which can be borrowed, subject to eligible collateral. Available Borrowing Capacity represents Total Borrowing Capacity less outstanding borrowings.
At December 31, 2022, none of the available borrowing capacity under our advance financing facilities could be funded based on the amount of eligible collateral that had been pledged to such facilities. Also, none of our uncommitted borrowing capacity was available to fund advances at December 31, 2022 under our Ginnie Mae MSR financing facility based on the amount of eligible collateral. We may utilize committed borrowing capacity under our mortgage loan warehouse facilities and MSR financing facilities to the extent we have sufficient eligible collateral to borrow against and otherwise satisfy the applicable conditions to funding. At December 31, 2022, we had $11.1 million committed borrowing capacity under our mortgage loan warehouse facilities and nil committed borrowing capacity under our MSR financing facilities, based on the amount of eligible collateral. Uncommitted amounts can be advanced at the discretion of the lender, and there can be no assurance that any uncommitted amounts will be available to us at any particular time.
At December 31, 2022, our unrestricted cash position was $208.0 million compared to $192.8 million at December 31, 2021. We typically invest cash in excess of our immediate operating needs in deposit accounts and other liquid assets.
We optimize our daily cash position to reduce financing costs while closely monitoring our liquidity needs and ongoing funding requirements. We regularly monitor and project cash flows over various time horizons as a way to anticipate and mitigate liquidity risk. We maintain liquidity buffers to be responsive to the level of risks, including stressed market interest rate conditions and operational risk.
In assessing our liquidity outlook, our primary focus is on available cash on hand, unused available funding and the following forecast measures:
•Financial projections for ongoing net income, excluding the impact of non-cash items, and working capital needs including loan and MSR origination and repurchases;
•Requirements for amortizing and maturing liabilities;
•The projected change in advances compared to the projected borrowing capacity to fund such advances under our facilities, including capacity for monthly peak needs;
•Projected funding requirements for acquisitions of MSRs and other investment opportunities, including our equity contributions to MAV Canopy;
•Funding capacity for whole loans and tail draws under our reverse mortgage commitments subject to warehouse eligibility requirements;
•Potential payments or recoveries related to legal and regulatory matters, insurance, taxes and others; and
•Margining requirements associated with our borrowing facilities and hedging program.
Use of Funds
Our primary near-term uses of funds in the normal course include:
•Payment of operating costs and corporate expenses;
•Payments for advances in excess of collections;
•Investing in our servicing and originations businesses, including MSRs, other asset acquisitions and MAV Canopy equity contributions;
•Originated and repurchased loans, including scheduled and unscheduled equity draws on reverse mortgage loans;
•Payment of margin calls under our MSR financing facilities and derivative instruments;
•Repayments of borrowings, including under our MSR financing, advance financing and warehouse facilities, and payment of interest expense; and
•Net negative working capital and other general corporate cash outflows.
We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $1.8 billion at December 31, 2022. This additional borrowing capacity is available on a scheduled or unscheduled payment basis. During 2022, we funded $246.1 million out of the $1.5 billion borrowing capacity available as of December 31, 2021. We also had short-term commitments to lend $540.1 million and $13.8 million in connection with our forward and reverse mortgage loan IRLCs, respectively, outstanding at December 31, 2022. As an HMBS issuer, we assume certain obligations related to each security issued. The most significant obligation is the requirement to repurchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount (MCA repurchases), or when they become inactive (the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments).We carry these repurchases until reimbursement by HUD and/or property liquidation if inactive. Our subservicing clients bear the financial obligation and risks associated with purchasing loans out of securitization pools within the portfolio we subservice. See Note 24 - Commitments to the Consolidated Financial Statements for additional information. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, referred to as warehouse lines.
Regarding the current maturities of our borrowings, as of December 31, 2022, we have approximately $1.7 billion of debt outstanding that would either come due, begin amortizing or require partial repayment in the next 12 months. This amount is comprised of $702.7 million of borrowings under forward and reverse mortgage warehouse facilities, $512.5 million of notes under advance financing facilities that will enter their respective amortization periods, $467.7 million outstanding under Agency and Ginnie Mae MSR financing facilities maturing in 2022, and $17.5 million of scheduled principal amortization on the PLS Notes secured by PLS MSRs.
With respect to liquidity management, we consider our servicing advance requirements during each investor remittance period and the uncertainties of daily margin calls on our collateralized debt facilities and derivative instruments due to interest rate fluctuations.
As servicer, we are required to advance to investors the loan P&I installments not collected from borrowers for those delinquent loans, including those on forbearance plans. Loan payoffs and prepayments are a source of additional liquidity and are dependent on the interest rate environment. We also advance T&I and Corporate advances primarily on properties that are in default or have been foreclosed. Our obligations to make these advances are governed by servicing agreements or guides, depending on investors or guarantor. Refer to Note 24 - Commitments to the Consolidated Financial Statements for further description of our servicer advance obligations. As subservicer, we are also required to make P&I, T&I and Corporate advances on behalf of servicers following the servicing agreements or guides. However, servicers are generally required to reimburse us within 30 days of our advancing under the terms of the subservicing agreements, and we are generally reimbursed by Rithm the same day we fund P&I advances, or within no more than three days for servicing advances and certain P&I advances under the Ocwen agreements.
We are generally subject to daily margining requirements under the terms of our MSR financing facilities and daily cash calls for our TBAs, interest rate swap futures or other derivatives. Declines in fair value of our MSRs due to declines in market interest rates, assumption updates or other factors require that we provide additional collateral to our lenders under MSR financing facilities. Similarly, declines in fair value of our derivative instruments require that we provide additional collateral to the clearing counterparties. While the objective our hedging strategy is to reduce volatility due to interest rates, it is also designed to address cash and liquidity considerations. Refer to the sensitivity analysis in the Market Risk section of Risk Management for our quantitative and qualitative disclosures about market risk.
Our medium- and long-term requirements for cash include:
•Payment of interest and principal repayment of our corporate debt that matures in 2026 and 2027;
•Any payments associated with the confirmation of loss contingencies; and
•Any other payments required under contractual obligations discussed above that extend beyond one year.
We are focused on ensuring that we have sufficient liquidity sources to continue to operate and support our business initiatives. We continuously evaluate alternative financings to diversify our sources of funds, optimize maturities and reduce our funding cost. See “Sources of Funds” below.
Sources of Funds
Our primary sources of funds for near-term liquidity in normal course include:
•Collections of servicing and subservicing fees and ancillary revenues;
•Collections of advances in excess of new advances;
•Proceeds from match funded advance financing facilities;
•Proceeds from other borrowings, including warehouse facilities and MSR financing facilities;
•Proceeds from sales and securitizations of originated loans and repurchased loans; and
•Net positive working capital from changes in other assets and liabilities.
Servicing advances are an important component of our business and represent amounts that we, as servicer, are required to advance to, or on behalf of, our servicing clients if we do not receive such amounts from borrowers. Our use of advance financing facilities is integral to our cash and liquidity management strategy. Revolving variable funding notes issued under our advance financing facilities to financial institutions typically have a revolving period of 12 months. Additionally, certain of our financing and subservicing agreements permit us to retain advance collections for a period ranging from one to two business days before remittance, thus providing a source of short-term liquidity.
We use mortgage loan repurchase and participation facilities (commonly called warehouse lines) to fund newly-originated loans on a short-term basis until they are sold or securitized to secondary market investors, including GSEs or other third-party investors, and to fund repurchases of certain Ginnie Mae forward loans, HECM loans, second-lien loans and other types of loans. Warehouse facilities are structured as repurchase or participation agreements under which ownership of the loans is temporarily transferred to the lender. These facilities contain eligibility criteria that include aging and concentration limits by loan type among other provisions. Currently, our master repurchase and participation agreements generally have maximum terms of 364-days. The funds are typically repaid using the proceeds from the sale of the loans to the secondary market investors, usually within 30 days.
We also rely on the secondary mortgage market as a source of consistent liquidity to support our lending operations. Substantially all of the mortgage loans that we originate or purchase are sold or securitized in the secondary mortgage market in the form of residential mortgage-backed securities guaranteed by Fannie Mae or Freddie Mac and, in the case of mortgage-backed securities guaranteed by Ginnie Mae, are mortgage loans insured or guaranteed by the FHA, VA or United States Department of Agriculture (USDA).
We regularly evaluate financing structure options that we believe will most effectively provide the necessary capacity to support our investment plans, address upcoming debt maturities and accommodate our business needs. We continuously evaluate the allocation of our capital to MSR investments, the related returns, funding and liquidity requirements. The relationship with MAV may continue to provide PMC with an additional means to finance MSRs and maintain liquidity while maintaining servicing volume - See Item 1. Business, Oaktree Relationship for further details. With the development of MAV and our relationships with other clients, additional opportunities to rebalance our servicing and subservicing portfolio mix are available to us and may result in the sale of MSRs while we would perform subservicing for the sold portfolio. In 2022, we issued excess servicing spread financing liabilities that allowed us to continue to perform servicing while enhancing our liquidity.
Covenants
Our debt agreements contain various qualitative and quantitative covenants including financial covenants, covenants to operate in material compliance with applicable laws and regulations, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates. These covenants may limit the manner in which we conduct our business and may limit our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, nonpayment of principal or interest, noncompliance with our covenants, breach of representations, the occurrence of a material adverse change, insolvency, bankruptcy, certain material judgments and litigation and changes of control. See Note 13 - Borrowings to the Consolidated Financial Statements for additional information regarding our covenants. The most restrictive liquidity requirement under our debt agreements is for a minimum of $75.0 million in consolidated liquidity, as defined, under certain of our advance match funded debt and MSR financing facilities agreements. At December 31, 2022, we held unrestricted cash in excess of this minimum amount.
In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations, and other legal remedies, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We believe that we are in compliance with the covenants in our debt agreements as of December 31, 2022.
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a company’s debt obligations. Lower ratings generally result in higher borrowing costs and reduced access to capital markets. The following table summarizes our current
ratings and outlook by the respective nationally recognized rating agencies. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time.
Rating Agency Long-term Corporate Rating Review Status / Outlook Date of last action
Moody’s Caa1 Positive August 15, 2022
S&P B- Stable January 24, 2023
On August 15, 2022, Moody’s reaffirmed their ratings of Caa1 and revised their outlook to Positive from Stable. In its affirmation of PMC’s ratings, Moody’s referenced currently weak but improving profitability and modest capital levels. In its change in PMC’s outlook to Positive from Stable, Moody’s cited the progress the company is making in transitioning its strategy to focus on originations and servicing of non-delinquent forward and reverse mortgages from the servicing of seriously delinquent loans, which should lead to a more resilient business model and more stable earnings profile. The Positive outlook also reflects Moody's expectation that PMC will maintain stable financial metrics in the next 12-18 months with respect to capitalization and liquidity, continue to strengthen its servicing and origination franchises and make progress with respect to its strategic plan to improve profitability.
On February 24, 2021, concurrent with the launch of the PMC Senior Secured Notes offering, both Moody’s and S&P reaffirmed the long-term corporate ratings at Caa1 and B-, respectively. In addition, both agencies revised the outlook of the issuer corporate ratings to Stable from Negative. This change in outlook was driven by the elimination of the short debt maturity runway and refinancing risk, which was listed as an area of concern by both Moody’s and S&P. S&P affirmed the long-term corporate rating at B- on January 24, 2022, and again on January 24, 2023.
On January 24, 2022, S&P raised the assigned rating to the PMC Senior Secured Notes from ‘B-’ to ‘B’ and maintained a stable outlook citing improved profitability and increase in assets. On January 24, 2023, S&P affirmed the ’B’ rating.
It is possible that additional actions by credit rating agencies could have a material adverse impact on our liquidity and funding position, including materially changing the terms on which we may be able to borrow money.
Cash Flows
Our operating cash flow is primarily impacted by operating results, including Originations gains on loan sales, changes in our servicing advance balances, the level of mortgage loan production, the timing of sales and securitizations of mortgage loans, and the margin calls required under our MSR financing facilities or derivative instruments. We classify purchases of MSRs through flow purchase agreements, Agency Cash Window and bulk acquisitions as investing activity. MSR investments represent a key indicator of our ability to generate future income in our Servicing business, together with originated MSRs. We classify changes in HECM loans held for investment as investing activity and changes in the related HMBS borrowings as financing activity.
Our Rithm and MAV agreements represent an important component of our liquidity and our liquidity management, and have a significant impact on our consolidated statements of cash flows. Because the payments we received in connection with our agreements with Rithm and MAV were recorded as secured financings, additions to, and reductions in, the balance of those secured financings were recognized as financing activity in our consolidated statements of cash flows. Excluding the impact of changes to the secured financings attributed to changes in fair value, changes in the balance of these secured financings are reflected in cash flows from operating activities despite having no impact on our consolidated cash balance.
Our cash flows are summarized as follows:
$ in millions For the Year Ended December 31,
2022 2021
Net cash provided by (used in) operating activities 173 $ (468)
Net cash provided by (used in) investing activities (149) (1,005)
Net cash provided by (used in) financing activities (13) 1,380
Net increase (decrease) in cash, cash equivalents and restricted cash $ 11 $ (93)
Cash, cash equivalents and restricted cash at end of period $ 274 $ 264
Cash flows for the year ended December 31, 2022
Our operating activities provided $173.2 million of cash, including net collections of servicing advances of $28.3 million, and net cash received on loans held for sale of $8.1 million, due to lower forward loan production volumes. In addition, we received earnings distributions of $18.5 million from our equity method investee MAV Canopy.
Our investing activities used $149.1 million of cash. The primary uses of cash in our investing activities include $199.4 million to purchase MSRs, $77.0 million net cash outflows in connection with our HECM reverse mortgages, $6.9 million acquisition of reverse mortgage subservicing intangible assets and $19.0 million of capital contributions, net of distributions, to our equity method investee MAV Canopy. Offsetting cash inflows include $155.7 million proceeds from the sale of MSRs to unrelated third-parties.
Our financing activities used $13.4 million of cash. Cash outflows include a $327.1 million net repayments of borrowings under our mortgage warehouse and MSR financing facilities due to the decline in loans held for sale and $111.9 million of net payments on the financing liabilities related to MSRs transferred due to runoff. We also paid $23.6 million to repurchase $25.0 million of our 7.875% PMC Senior Secured Notes and $50.0 million to repurchase 1,750,557 shares of our common stock. Cash inflows include $1.8 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, largely offset by repayments on the related financing liability of $1.6 billion, $86.2 million of proceeds from sale of MSRs accounted for as a financing in connection with sales of MSRs to MAV, $200.9 million of proceeds from the new ESS financings and $1.4 million of net proceeds on advance match funded liabilities.
Cash flows for the year ended December 31, 2021
Our operating activities used $468.4 million of cash largely due to the growth of our new Originations production with net cash paid on loans held for sale of $623.0 million, partially offset by the $28.9 million of net collections of servicing advances, mostly P&I advances.
Our investing activities used $1.0 billion of cash. The primary uses of cash in our investing activities include $831.2 million to purchase MSRs, mostly through bulk acquisitions, net cash outflows in connection with our HECM reverse mortgages of $135.1 million and $23.3 million of capital contributions, net of distributions, to our equity method investee MAV Canopy.
Our financing activities provided $1.4 billion of cash. Cash inflows include $647.9 million of proceeds from the issuance of the PMC Senior Secured Notes and the OFC Senior Secured Notes, warrants and common stock to Oaktree and $1.7 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, largely offset by repayments on the related financing liability of $1.6 billion, $247.0 million of proceeds from sale of MSRs accounted for as a financing in connection with sales of MSRs to MAV, and a $1.1 billion net increase in borrowings under our mortgage loan warehouse and MSR financing facilities. Cash outflows include $319.2 million to repay our 6.375% senior unsecured notes and 8.375% senior secured notes, $188.7 million repayment of the SSTL, $69.0 million of net repayments on advance match funded liabilities, and $91.2 million of net payments on the financing liabilities related to MSRs transferred.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events based on information available at the date of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. We have processes in place to monitor these judgments and assumptions, and management is required to review critical accounting policies and estimates with the Audit Committee of the Board of Directors. The following is a summary of certain accounting policies and estimates involving significant judgments. Our significant accounting policies and critical accounting estimates are described in Note 1 - Organization, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain instruments in our statement of operations and to determine fair value disclosures. Refer to Note 3 - Fair Value to the Consolidated Financial Statements for the fair value hierarchy, descriptions of valuation methodologies used to measure significant assets and liabilities at fair value and details of the valuation models, key inputs to those models, significant assumptions utilized, and sensitivity analyses. We follow the fair value hierarchy to prioritize the inputs utilized to measure fair value and classify instruments as Level 3 when the valuation technique requires significant unobservable inputs or assumptions. We review and modify, as necessary, our fair value hierarchy classifications on a quarterly basis. The determination of the fair value of these Level 3 financial assets and liabilities and MSRs requires significant management judgment and estimation. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for a sensitivity analysis reflecting the estimated change in the fair value of our MSRs, HECM loans held for investment and loans held for sale carried at fair value as well as any related derivatives at December 31, 2022, given hypothetical instantaneous parallel shifts in the yield curve.
The following table summarizes assets and liabilities measured at fair value on a recurring and nonrecurring basis and the amounts measured using Level 3 inputs:
December 31,
2022 2021
Loans held for sale $ 622.7 $ 928.5
Loans held for investment - Reverse mortgages 7,504.1 7,199.8
MSRs 2,665.2 2,250.1
Derivatives and other 13.7 29.8
Assets at fair value $ 10,805.7 $ 10,408.2
As a percentage of total assets 87 % 86 %
Assets at fair value using Level 3 inputs $ 10,212.2 $ 9,707.8
As a percentage of assets at fair value 95 % 93 %
HMBS-related borrowings 7,326.8 6,885.0
Other financing liabilities 1,137.4 805.0
Derivatives 15.0 3.1
Liabilities at fair value $ 8,479.2 $ 7,693.1
As a percentage of total liabilities 71 % 66 %
Liabilities at fair value using Level 3 inputs $ 8,464.1 $ 7,688.9
As a percentage of liabilities at fair value 100 % 100 %
We have various internal controls in place to ensure the appropriateness of fair value measurements. Significant fair value measures are subject to analysis and management review and approval. Additionally, we utilize a number of controls to ensure the results are reasonable, including comparison, or “back testing,” of model results against actual performance and monitoring the market for recent trades, including our own price discovery in connection with potential and completed sales, and other market information that can be used to benchmark inputs or outputs. Considerable judgment is used in forming conclusions about Level 3 inputs such as prepayment speeds and discount rates. Changes to these inputs could have a significant effect on fair value measurements.
Valuation of Reverse Mortgage Loans Held for Investment
Reverse mortgage loans are insured by the FHA and transferred into Ginnie Mae guaranteed securities (or HMBS). Loan transfers in these Ginnie Mae securitizations do not qualify for sale accounting and are recorded as secured borrowings. We record both loans held for investment and the corresponding HMBS borrowings at fair value. Our net exposure to reverse mortgages and the HMBS-related borrowings is limited to the residual value we retain, including future draw commitments. Changes in the fair value of the loans held for investment are largely offset by changes in the value of the related secured financing. As of December 31, 2022, we reported $7.4 billion securitized loans held for investment at fair value and $7.3 billion HMBS-related borrowings at fair value, with a residual, net asset value of $65.8 million. In 2022, we recorded a net $25.1 million loss on change in fair value of securitized loans held for investment and HMBS-related borrowings reported in Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net in our Servicing segment.
The fair value of both reverse mortgage loans held for investment and corresponding HMBS-related borrowings is based primarily on discounted cash flow methodologies. Inputs to the discounted cash flows of these assets include future draws and tail spread gains, conditional prepayment rate (including voluntary and involuntary prepayments) and discount rate. The determination of fair value requires management judgment due to the significant unobservable assumptions, including conditional prepayment rate and discount rate.
We engage third-party valuation experts to support our valuation and provide observations and assumptions related to market activities. We evaluate the reasonableness of our fair value estimate and assumptions using historical experience, or cash flow backtesting, adjusted for prevailing market conditions and benchmarks with third-party expert valuations. We believe that our back-testing and benchmarking procedures provide reasonable assurance that the fair value used in our consolidated financial statements complies with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
The following table provides the range and weighted average of significant unobservable assumptions used (expressed as a percentage of UPB) by class projected for the five-year period beginning December 31, 2022:
December 31,
Significant unobservable assumptions 2022 2021
Life in years
Range 1.0 to 7.6 1.0 to 8.2
Weighted average 5.0 5.7
Conditional prepayment rate (1)
Range 13.2% to 45.0% 11.2 % to 36.6%
Weighted average 18.0 % 16.0 %
Discount rate 5.1 % 2.6 %
(1)Includes voluntary and involuntary prepayments.
Valuation of MSRs and Other Financing Liabilities
We originate MSRs from our lending activities and acquire MSRs through flow purchase agreements, Agency Cash Window programs, bulk purchases, asset acquisitions or business combinations. We account for MSRs and pledged MSR liabilities at fair value (reported within Other financing liabilities, at fair value). As of December 31, 2022, we reported a $2.7 billion fair value of MSRs. In 2022, we recorded a $176.5 million fair value gain on the revaluation of our MSRs and an $88.0 million fair value loss on the revaluation of our pledged MSR liabilities.
We determine the fair value of MSRs and pledged MSR liabilities primarily using discounted cash flow methodologies. The significant estimated future cash inflows for MSRs include servicing fees, late fees, float earnings and other ancillary fees and cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments. The determination of the fair value of MSRs and pledged MSR liabilities requires management judgment relating to the significant unobservable assumptions that underlie the valuation, including prepayment speed, delinquency rates, cost to service and discount rate. Our judgement is informed by the transactions we observe in the market, by our actual portfolio performance and by the advice and information we obtain from our valuation experts, amongst other factors.
To assist in the determination of fair value, we engage third-party valuation experts who generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model and a prepayment model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, incorporating available industry survey results, and including risk premiums and liquidity adjustments. While the models and related assumptions used by the valuation experts are proprietary to them, we understand the methodologies and assumptions used to develop the prices based on our ongoing due diligence, which includes regular discussions with the valuation experts, and we perform additional verification and analytical procedures. We evaluate the reasonableness of our third-party experts’ assumptions using historical experience adjusted for prevailing market conditions and benchmarks with third-party expert valuation and market participant surveys. We believe that our procedures provide reasonable assurance that the fair value used in our consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
The following table provides the range and weighted average of significant unobservable assumptions used (expressed as a percentage of UPB) by class projected for the five-year period beginning December 31, 2022:
Conventional Government-Insured Non-Agency
Prepayment speed
Range 2.9% to 10.0% 5.2% to 10.4% 7.0% to 7.9%
Weighted average 7.3% 7.8% 7.3%
Delinquency
Range 0.6% to 1.0% 7.3% to 11.9% 8.5% to 18.0%
Weighted average 0.7% 8.5% 12.2%
Cost to service (in dollars)
Range $68 to $69 $105 to $120 $185 to $244
Weighted average $68 $112 $206
Discount rate 9.5% 10.5% 10.6%
Changes in these assumptions are generally expected to affect our results of operations as follows:
•Increases in prepayment speeds generally reduce the value of our MSRs as the underlying loans prepay faster which causes accelerated MSR portfolio runoff, higher compensating interest payments and lower overall servicing fees, partially offset by a lower overall cost of servicing, increased float earnings on higher float balances and lower interest expense on lower servicing advance balances.
•Increases in delinquencies generally reduce the value of our MSRs as the cost of servicing increases during the delinquency period, and the amounts of servicing advances and related interest expense also increase.
•Increases in the discount rate reduce the value of our MSRs due to the lower overall net present value of the net cash flows.
•Increases in interest rate assumptions will increase interest expense for financing servicing advances although this effect is partially offset by an increase in the amount of float earnings.
Allowance for Losses on Servicing Advances and Receivables
Advances are generally fully reimbursed under the terms of servicing agreements. However, servicing advances may include claimable (with investors) but non-recoverable expenses, for example due to servicer error, such as lack of reasonable documentation as to the type and amount of advances. We record an allowance for losses on servicing advances to the extent we believe that a portion of advances are uncollectible under the provisions of each servicing contract taking into consideration, among other factors, our historical collection rates, probability of default, cure or modification, length of delinquency and the amount of the advance. We continually assess collectability using proprietary cash flow projection models that incorporate a number of different factors, depending on the characteristics of the mortgage loan or pool, including, for example, the probable loan liquidation path, estimated time to a foreclosure sale, estimated costs of foreclosure action, estimated future property tax payments and the estimated value of the underlying property net of estimated carrying costs, commissions and closing costs. At December 31, 2022, the allowance for losses on servicing advances was $6.2 million, which represented 1% of total servicing advances. In 2022, we recorded a $7.2 million provision expense for losses on servicing advances.
We record an allowance for losses on receivables in our Servicing business, including related to defaulted FHA-, VA- or USDA-insured loans repurchased from Ginnie Mae guaranteed securitizations (government-insured claims). This allowance for expected credit losses is estimated based on relevant qualitative and quantitative information about past events, including historical collection and loss experience, current conditions and reasonable and supportable forecasts that affect collectability. The government-insured claims that do not exceed HUD, VA, FHA or USDA insurance limits are not subject to any allowance for losses as guaranteed by the U.S. government. At December 31, 2022, the allowance for losses on receivables related to government-insured claims was $33.8 million, which represented 24% of total government-insured claims receivables. In 2022, we recorded a $12.5 million provision expense on receivables related to government-insured claims.
Determining an allowance for losses involves management judgment and assumptions that, given similar information at any given point, may result in a different but reasonable estimate.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and
liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates in each jurisdiction that applies to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. In these evaluations, we gave more significant weight to objective evidence, such as our actual financial condition and historical results of operations, as compared to subjective evidence, such as projections of future taxable income or losses.
For the three-year periods ended December 31, 2022 and 2021, the U.S. filing jurisdiction was in a material cumulative loss position. We recognize that cumulative losses in recent years is an objective form of negative evidence in assessing the need for a valuation allowance and that such negative evidence is difficult to overcome. Other factors considered in these evaluations are estimates of future taxable income, future reversals of temporary differences, tax character and the impact of tax planning strategies that may be implemented, if warranted.
As a result of these evaluations, we recognized a full valuation allowance of $177.5 million and $171.1 million on our U.S. deferred tax assets at December 31, 2022 and 2021, respectively. The U.S. jurisdictional deferred tax assets are not considered to be more likely than not realizable based on all available positive and negative evidence. We intend to continue maintaining a full valuation allowance on our deferred tax assets in the U.S. until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period in which the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the profitability that we achieve.
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
NOL carryforwards may be subject to annual limitations under Internal Revenue Code Section 382 (Section 382) (or comparable provisions of foreign or state law) in the event that certain changes in ownership were to occur. In addition, tax credit carryforwards may be subject to annual limitations under Internal Revenue Code Section 383 (Section 383). We periodically evaluate our NOL and tax credit carryforwards and whether certain changes in ownership have occurred as measured under Section 382 that would limit our ability to utilize a portion of our NOL and tax credit carryforwards. If it is determined that an ownership change(s) has occurred, there may be annual limitations on the use of these NOL and tax credit carryforwards under Sections 382 and 383 (or comparable provisions of foreign or state law).
Ocwen and PHH have both experienced historical ownership changes that have caused the use of certain tax attributes to be limited and have resulted in the write-off of certain of these attributes based on our inability to use them in the carryforward periods defined under the tax laws. Ocwen continues to monitor the ownership in its stock to evaluate whether any additional ownership changes have occurred that would further limit its ability to utilize certain tax attributes. As such, our analysis regarding the amount of tax attributes that may be available to offset taxable income in the future without restrictions imposed by Section 382 may continue to evolve.
Indemnification Obligations
We have exposure to representation, warranty and indemnification obligations because of our lending, sales and securitization activities, our acquisitions to the extent we assume one or more of these obligations, and in connection with our servicing practices. We initially recognize these obligations at fair value. Thereafter, the estimation of the liability considers probable future obligations based on industry data of loans of similar type segregated by year of origination, to the extent applicable, and estimated loss severity based on current loss rates for similar loans, our historical rescission rates and the current pipeline of unresolved demands. Loss severity assumptions consider historical loss experience related to repurchasing loans or paying settlements, as well as current market conditions. We monitor the adequacy of the overall liability and make adjustments, as necessary, after consideration of other qualitative factors including ongoing dialogue and experience with our counterparties. As of December 31, 2022, we have recorded a liability for representation and warranty obligations and similar indemnification obligations of $41.5 million. In 2022, we recorded a $0.3 million provision expense for indemnification. See Note 25 - Contingencies for additional information.
Litigation
In the ordinary course of business, we are a defendant in, or a party or potential party to, many threatened and pending litigation matters. We monitor our litigation matters, including advice from external legal counsel, and regularly perform assessments of these matters for potential loss accrual and disclosure. We establish liabilities for settlements, judgments on appeal and filed and/or threatened claims for which we believe it is probable that a loss has been or will be incurred and the
amount can be reasonably estimated based on current information regarding these matters. Where we determine that a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. Management’s assessment involves the use of estimates, assumptions, and judgments, including progress of the matter, prior experience, available defenses, and the advice of legal counsel and other experts. Accruals are adjusted as more information becomes available or when an event occurs requiring a change. In 2022, we recorded a $6.6 million provision expense for loss contingencies. Our total accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was $42.2 million at December 31, 2022. It is possible that we will incur losses relating to threatened and pending litigation that materially exceed the amount accrued. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded at December 31, 2022.
RECENT ACCOUNTING DEVELOPMENTS
Recent Accounting Pronouncements
For additional information, see Note 1 - Organization, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements for additional information.
Our adoption of the standards listed below in 2022 did not have a material impact on our consolidated financial statements:
•Reference Rate Reform (ASC 848): Deferral of the Sunset Date of ASC 848 (ASU 2022-06)
•Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force) (ASU 2021-04)

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in millions unless otherwise indicated)
Interest Rates
Our principal market risk exposure is the impact of interest rate changes on our mortgage-related assets and commitments, including MSRs, loans held for sale, loans held for investment, interest rate lock commitments (IRLCs) and other derivative instruments. In addition, changes in interest rates could materially and adversely affect the amount of escrow and float income, the volume of mortgage loan originations or result in MSR fair value changes. We also have exposure to the effects of changes in interest rates on our floating-rate borrowings, including MSR and advance financing facilities.
Our management-level Market Risk Committee establishes and maintains policies that govern our risk appetite and associated hedging programs, including such factors as market volatility, duration and interest rate sensitivity measures, limits, targeted hedge ratios, the hedge instruments that we are permitted to use in our hedging activities and the counterparties with whom we are permitted to enter into hedging transactions and our liquidity risk profile.
MSR Hedging Strategy
MSRs are carried at fair value with changes in fair value being recorded in earnings in the period in which the changes occur. The fair value of MSRs is subject to changes in market interest rates, among other inputs and assumptions.
The objective of our risk management MSR policy is to provide partial hedge coverage of interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. The interest-rate sensitive MSR portfolio exposure is defined as follows:
•Agency MSR portfolio,
•expected Agency MSR bulk transactions subject to letters of intent (LOI),
•less the Agency MSRs subject to our sale agreements with Rithm (formerly NRZ), MAV and others (See Note 8 - Other Financing Liabilities, at Fair Value),
•less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings (Reverse).
The hedge coverage ratio, defined as the ratio of hedge and asset rate sensitivity (referred to as DV01) at the time of measurement, is subject to lower and upper thresholds, as modeled. A minimum 25% and 30% hedge coverage ratios were required for interest rate declines less than, and more than 50 basis points, respectively. Prior to September 30, 2022, the hedge coverage ratio was required to remain within a minimum of 40% and maximum of 60%. MSRs subject to LOI may be covered under a separate hedge coverage ratio requirement sufficient to preserve the economics of the intended transactions. Accordingly, the changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate changes. We periodically evaluate the hedge coverage ratio at the intended shock
interval to determine if it is relevant or warrants adjustment based on market conditions, symmetry of interest rate risk exposure, and liquidity impacts of both the hedge and asset profile under shock scenarios. As the market dictates, management may choose to maintain hedge coverage ratio levels at or beyond the above thresholds, with approval of the Market Risk Committee, in order to preserve liquidity and/or optimize asset returns. In addition, while DV01 measures may remain within the range of our hedging strategy’s objective, actual changes in fair value of the derivatives and MSR portfolio may not offset to the same extent, due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and hedging instruments, among other factors. We continuously evaluate the use of hedging instruments to strive to enhance the effectiveness and efficiency of our interest rate hedging strategy.
The following table illustrates the interest rate sensitivity of our MSR portfolio exposure and associated hedges at December 31, 2022. Hypothetical change in values of the MSR and hedges are presented under a set instantaneous +/- 25 basis point parallel move in rates. Refer to the description below under Sensitivity Analysis for more details. Changes in fair value cannot be extrapolated because the relationship to the change in fair value may not be linear. The amounts based on market risk sensitive measures are hypothetical and presented for illustrative purposes only.
Fair value at December 31, 2022
Hypothetical change in fair value due to 25 bps rate decrease (1) Hypothetical change in fair value due to 25 bps rate increase (1)
Agency MSRs - interest rate sensitive (excluding Rithm and MAV)
$ 1,584.8 $ (38.4) $ 36.3
Asset value of securitized HECM loans, net of HMBS-related borrowing 65.8 4.0 (4.0)
MSR hedging derivative instruments (14.3) 9.9 (9.8)
Total hedge position 13.9 (13.8)
Hypothetical hedge coverage ratio (2) 36 % 38 %
Hypothetical residual exposure to changes in interest rates $ (24.5) $ 22.5
(1)The baseline for the hypothetical change in fair value is based on a 10-year Treasury Rate of 3.80% at December 31, 2022.
(2)The hypothetical hedge coverage ratio above is calculated as the change in fair value of the total hedge position divided by the change in value of the Agency MSR position.
Our derivative instruments include forward trades of MBS or Agency TBAs with different banking counterparties, exchange-traded interest rate swap futures and interest rate options. TBAs, or To-Be-Announced securities are actively traded, forward contracts to purchase or sell Agency MBS on a specific future date. From time-to-time, we enter into exchange-traded options contracts with purchased put options financed by written call options. These derivative instruments are not designated as accounting hedges. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations, within the Servicing segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to minimize the use of third-party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements.
The derivative instruments are subject to margin requirements, posted as either initial or variation margin. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties through margin calls, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating may require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.
Loans Held for Investment and HMBS-related Borrowings
The fair value of our HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, while lower interest rates extend the timeline to reach maximum claim amount liquidation. Additionally, portfolio value is heavily influenced by market spreads for fixed and discount margin for ARMs.
The fair value of our HECM loan portfolio net of the fair value of the HMBS-related borrowings comprises the fair value of reverse mortgage loans, tails that are unsecuritized as of the balance sheet date and the fair value of securitized HECM loans net of the corresponding HMBS-related borrowings that represent the reverse mortgage economic MSR (HMSR) for risk management purposes. The HMSR acts as a partial hedge for our forward MSR value sensitivity. This HMSR exposure is used as a partial offset to our forward MSR exposure and managed as part of our MSR hedging strategy described above.
Pipeline Hedging Strategy - Loans Held for Sale and IRLCs
In our Originations business, we are exposed to interest rate risk and related price risk during the period from the date of the interest rate lock commitment through (i) the lock commitment cancellation or expiration date or (ii) through the date of sale of the resulting loan into the secondary mortgage market. Loan commitments for forward loans generally range from 5 to 90 days, with the majority of our commitments to borrowers for 55 to 75 days and our commitments to correspondent sellers for 7 days. Loans held for sale are generally funded and sold within 3 to 20 days. The interest rate exposure of loans held for sale and IRLCs is economically hedged with derivative instruments, including forward sales of Agency TBAs. The objective of our pipeline hedging strategy is to provide hedge coverage of locks and loans within certain tolerance levels. The net daily market risk position of net pull-though adjusted locks and loans held for sale, less the offsetting hedges of the forward and reverse pipelines, is monitored daily and its daily limit is the greater of +/- 5% or +/- $15 million. We report changes in fair value of these derivative instruments in gain on loans held for sale in our consolidated statements of operations, within the Originations segment. We establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to minimize the use of third-party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements. Reverse origination pipeline is hedged under the same principles as described above, for unsecuritized loans held for investment.
EBO and Loan Modification Hedging - Loans Held for Sale, at fair value
In our Servicing business, effective February 2022, management started hedging certain Ginnie Mae EBO loans repurchased out of securitization pools for modification and reperformance with TBAs to manage the interest rate risk while these loans await redelivery.
Advance Match Funded Liabilities
We monitor the effect of increases in interest rates on the interest paid on our variable-rate advance financing debt. Earnings on cash and float balances are a partial offset to our exposure to changes in interest expense. We purchase interest rate caps as economic hedges (not designated as a hedge for accounting purposes) when required by our advance financing arrangements.
Sensitivity Analysis
Fair Value MSRs, Loans Held for Sale, Loans Held for Investment and Related Derivatives
The following table summarizes the estimated change in the fair value of our MSRs, HECM loans held for investment and loans held for sale that we have elected to carry at fair value as well as any related derivatives at December 31, 2022, given hypothetical instantaneous parallel shifts in the yield curve. We used December 31, 2022 market rates to perform the sensitivity analysis. The estimates are based on the interest rate risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship to the change in fair value may not be linear.
Change in Fair Value
Down 25 bps Up 25 bps
Asset value of securitized HECM loans, net of HMBS-related borrowing $ 4.0 $ (4.0)
Loans held for investment - Unsecuritized HECM loans and tails 0.04 (0.04)
Loans held for sale 7.5 (8.5)
Derivative instruments 2.6 (1.8)
Total MSRs - Agency and non-Agency (1) (39.5) 37.3
IRLCs (0.7) 0.5
Total, net $ (26.1) $ 23.5
(1)Primarily reflects the impact of market interest rate changes on projected prepayments on the Agency MSR portfolio, Rithm and MAV pledged MSR financing liabilities and ESS financing liabilities.
The decrease in our net sensitivity from December 31, 2021 to December 31, 2022 (from approximately $35.0 - $38.6 million to $23.5 - $26.1 million for a 25 basis point parallel shift in the yield curve) is primarily driven by the effect of the increase in interest rates on our MSR portfolio (due to convexity), the sale of MSRs and the change in our hedging instruments in 2022.
Borrowings
The majority of the debt used to finance much of our operations is exposed to interest rate fluctuations. We may purchase interest rate swaps and interest rate caps to minimize future interest rate exposure from increases in interest rates, or when required by the financing agreements.
Based on December 31, 2022 balances, if interest rates were to increase by 100 bps on our variable rate debt and cash and float balances, we estimate a net negative impact of approximately $3.2 million resulting from an increase of $20.6 million in annual interest expense and an increase of $17.4 million in annual interest income and other credits on deposits.
Foreign Currency Exchange Rate Risk
Our operations in India and the Philippines expose us to foreign currency exchange rate risk to the extent that our foreign exchange positions remain unhedged. Depending on the magnitude and risk of our positions we may enter into forward exchange contracts to hedge against the effect of changes in the value of the India Rupee or Philippine Peso. We did not enter into any foreign currency hedging derivative instruments during 2022.
Home Prices
Inactive reverse mortgage loans for which the maximum claim amount has not been met are generally foreclosed upon on behalf of Ginnie Mae with the REO remaining in the related HMBS until liquidation. Inactive MCA repurchased loans are generally foreclosed upon and liquidated by the HMBS issuer. Although active and inactive reverse mortgage loans are insured by FHA, we may incur expenses and losses in the process of repurchasing and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines. In addition, in certain circumstances, we may be subject to real estate price risk to the extent we are unable to liquidate REO within the FHA program guidelines. As our reverse mortgage portfolio seasons, and the volume of MCA repurchases increases, our exposure to this risk will increase.
Interest Rate Sensitive Financial Instruments
The tables below present the notional amounts of our financial instruments that are sensitive to changes in interest rates categorized by expected maturity and the related fair value of these instruments at December 31, 2022 and 2021. We use certain assumptions to estimate the expected maturity and fair value of these instruments. We base expected maturities upon contractual maturity and projected repayments and prepayments of principal based on our historical experience. The actual maturities of these instruments could vary substantially if future prepayments differ from our historical experience. Average interest rates are based on the contractual terms of the instrument and, in the case of variable rate instruments, reflect estimates of applicable forward rates. The averages presented represent weighted averages.
Expected Maturity Date at December 31, 2022
2023 2024 2025 2026 2027 Thereafter Total Balance Fair Value (1)
Rate-Sensitive Assets:
Interest-earning cash $ 186.1 $ - $ - $ - $ - $ - $ 186.1 $ 186.1
Average interest rate 3.58 % - % - % - % - % - % 3.58 %
Loans held for sale, at fair value 617.8 - - - - - 617.8 617.8
Average interest rate 6.19 % - % - % - % - % - % 6.19 %
Loans held for sale, at lower of cost or fair value (2)
1.0 0.3 - - 3.5 4.9 4.9
Average interest rate 3.92 % 5.50 % - % - % - % 2.94 % 3.31 %
Loans held for investment 662.9 799.4 860.7 657.0 969.4 3,554.8 7,504.1 7,504.1
Average interest rate 5.58 % 5.30 % 5.20 % 5.25 % 5.04 % 6.65 % 2.23 %
Debt service accounts and interest-earning time deposits
22.3 - - 0.12 - 0.4 22.8 22.8
Average interest rate 0.32 % - % - % 3.96 % - % 5.40 % 0.33 %
Total rate-sensitive assets $ 1,490.1 $ 799.7 $ 860.7 $ 657.1 $ 969.4 $ 3,558.8 $ 8,335.7 $ 8,335.7
Percent of total 17.88 % 9.59 % 10.33 % 7.88 % 11.63 % 42.69 % 100.00 %
Rate-Sensitive Liabilities (3):
Match funded liabilities $ 512.5 $ - $ - $ 1.2 $ - $ - $ 513.7 $ 513.7
Average interest rate 7.09 % - % - % 7.30 % - % - % 7.09 %
Senior notes (4) - - - 375.0 285.0 - 660.0 555.2
Average interest rate - % - % - % 7.88 % 12.00 % - % 9.66 %
Mortgage loan warehouse facilities 702.7 - - - - - 702.7 702.7
Average interest rate 5.74 % - % - % - % - % - % 5.74 %
MSR financing facilities (4) 485.2 13.8 422.2 - - 33.4 954.6 932.1
Average interest rate 7.74 % 5.11 % 6.89 % - % - % - % 7.31 %
Total rate-sensitive liabilities $ 1,700.4 $ 13.8 $ 422.2 $ 376.2 $ 285.0 $ 33.4 $ 2,831.0 $ 2,703.7
Percent of total 60.06 % 0.49 % 14.91 % 13.29 % 10.07 % 1.18 % 100.00 %
Expected Maturity Date at December 31, 2022 (Notional Amounts)
2023 2024 2025 2026 2027 There- after Total
Balance Fair
Value (1)
Rate-Sensitive Derivative Financial Instruments:
Derivative assets (liabilities)
Forward sales of loans 140.0 - - - - - $ 140.0 $ 0.5
Average coupon 4.87 % - % - % - % - % - % 4.87 %
TBA / Forward MBS trades - MSRs 75.0 - - - - - 75.0 (0.7)
Average coupon 5.27 % - % - % - % - % - % 5.27 %
Interest rate swap futures 670.0 - - - - - 670.0 (13.6)
Average coupon 4.00 % - % - % - % - % - % 4.00 %
IRLCs 553.9 - - - - - 553.9 (0.7)
Average coupon 5.52 % - % - % - % - % - % 5.52 %
TBA / forward MBS trades - Pipeline 814.0 - - - - - 814.0 6.6
Average coupon 5.38 % - % - % - % - % - % 5.38 %
Others 56.4 - - - - - 56.4 (0.1)
Average coupon 5.11 % - % - % - % - % - % 5.11 %
Total derivatives, net $ 2,309.3 $ - $ - $ - $ - $ - $ 2,309.3 $ (8.0)
Expected Maturity Date at December 31, 2021
2022 2023 2024 2025 2026 There- after Total Balance Fair Value (1)
Rate-Sensitive Assets:
Interest-earning cash $ 136.7 $ - $ - $ - $ - $ - $ 136.7 $ 136.7
Average interest rate 0.27 % - % - % - % - % - % 0.27 %
Loans held for sale, at fair value 917.5 - - - - - 917.5 917.5
Average interest rate 3.59 % - % - % - % - % - % 3.59 %
Loans held for sale, at lower of cost or fair value (2)
6.1 0.4 - - - 4.5 11.0 11.0
Average interest rate 4.19 % 5.51 % - % - % - % 3.59 % 3.98 %
Loans held for investment 414.3 628.4 899.7 1,152.8 761.6 3,342.9 7,199.8 7,199.8
Average interest rate 3.13 % 3.23 % 3.23 % 2.96 % 2.93 % 2.74 % 2.78 %
Debt service accounts and interest-earning time deposits
10.0 0.1 - - 0.1 0.5 10.6 10.6
Average interest rate 0.03 % 4.00 % - % - % 4.00 % 5.40 % 0.30 %
Total rate-sensitive assets $ 1,484.5 $ 628.9 $ 899.7 $ 1,152.8 $ 761.7 $ 3,347.9 $ 8,275.5 $ 8,275.5
Percent of total 17.94 % 7.60 % 10.87 % 13.93 % 9.20 % 40.46 % 100.00 %
Rate-Sensitive Liabilities (3):
Match funded liabilities $ 512.3 $ - $ - $ - $ - $ - $ 512.3 $ 512.0
Average interest rate 1.54 % - % - % - % - % - % 1.54 %
Senior notes (4) - - - - 400.0 285.0 685.0 674.9
Average interest rate - % - % - % - % 7.88 % 12.00 % 9.59 %
Mortgage loan warehouse facilities 1,085.1 - - - - - $ 1,085.1 1,085.1
Average interest rate 2.61 % - % - % - % - % - % 2.61 %
MSR financing facilities (4) 490.9 94.2 - - 277.1 39.5 901.7 873.8
Average interest rate 3.94 % 2.69 % - % - % 2.69 % - % 3.71 %
Total rate-sensitive liabilities $ 2,088.3 $ 94.2 $ - $ - $ 677.1 $ 324.5 $ 3,184.1 $ 3,145.8
Percent of total 65.59 % 2.96 % - % - % 21.27 % 10.19 % 100.00 %
Expected Maturity Date at December 31, 2021 (Notional Amounts)
2022 2023 2024 2025 2026 There- after Total
Balance Fair
Value (1)
Rate-Sensitive Derivative Financial Instruments:
Forward sales of Reverse loans 175.0 - - - - - $ 175.0 $ 0.4
Average coupon 2.07 % - % - % - % - % - % 2.07 %
TBA / Forward MBS trades - MSRs 550.0 - - - - - 550.0 (0.3)
Average coupon 2.00 % - % - % - % - % - % 2.00 %
Interest rate swap futures 792.5 - - - - - 792.5 1.7
Average coupon 1.53 % - % - % - % - % - % 1.53 %
IRLCs 1,085.3 - - - - - 1,085.3 18.1
Average coupon 2.40 % - % - % - % - % - % 2.40 %
TBA / forward MBS trades - Pipeline 1,232.0 - - - - - 1,232.0 -
Average coupon 2.44 % - % - % - % - % - % 2.44 %
Interest rate option contracts 575.0 - - - - - 575.0 (0.3)
Average coupon - % - % - % - % - % - % - %
Total derivatives, net $ 4,409.8 $ - $ - $ - $ - $ - $ 4,409.8 $ 19.7
(1)See Note 3 - Fair Value to the Consolidated Financial Statements for additional fair value information on financial instruments.
(2)Net of valuation allowances and including non-performing loans.
(3)Excludes financing liabilities that result from sales of assets that do not qualify as sales for accounting purposes and, therefore, are accounted for as secured financings, which have no contractual maturity and are amortized over the life of the related assets.
(4)Amounts are exclusive of any related discount or unamortized debt issuance costs.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this section is contained in the Consolidated Financial Statements of Ocwen Financial Corporation and Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, beginning on Page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision of and with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the end of the period covered by this Annual Report. Based on such evaluation, management concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial reporting as of December 31, 2022, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on that evaluation, our management concluded that, as of December 31, 2022, internal control over financial reporting is effective based on criteria established in Internal Control-Integrated Framework issued by the COSO.
The effectiveness of Ocwen’s internal control over financial reporting as of December 31, 2022 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report that appears herein.
Limitations on the Effectiveness of Controls
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting during our fiscal quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees as required by the New York Stock Exchange rules. We have also adopted a Code of Ethics for Senior Financial Officers that applies to our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. Any waivers from either the Code of Business Conduct and Ethics or the Code of Ethics for Senior Financial Officers must be approved by our Board of Directors or a Board Committee and must be promptly disclosed. The Code of Business Conduct and Ethics and the Code of Ethics for Senior Financial Officers are available on our web site at www.ocwen.com in the “Shareholders” section under “Corporate Governance.” Any amendments to the Code of Business Conduct and Ethics or the Code of Ethics for Senior Financial Officers, as well as any waivers that are required to be disclosed under the rules of the SEC or the New York Stock Exchange, will be posted on our website.
The additional information required by this item is incorporated by reference to the information contained in our definitive Proxy Statement with respect to our 2023 Annual Meeting, which we intend to file with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2022.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information contained in our definitive Proxy Statement with respect to our 2023 Annual Meeting, which we intend to file with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2022.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the information contained in our definitive Proxy Statement with respect to our 2023 Annual Meeting, which we intend to file with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2022.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the information contained in our definitive Proxy Statement with respect to our 2023 Annual Meeting, which we intend to file with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2022.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information contained in our definitive Proxy Statement with respect to our 2023 Annual Meeting, which we intend to file with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended December 31, 2022.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(1) and (2) Financial Statements and Schedules. The information required by this section is contained in the Consolidated Financial Statements of Ocwen Financial Corporation and Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, beginning on Page.
(3) Exhibits.
3.1
Amended and Restated Articles of Incorporation, as amended (15)
3.2
Amended and Restated Bylaws of Ocwen Financial Corporation (16)
4.1
Form of Certificate of Common Stock (1)
4.2 The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument with respect to the issuance of long-term debt of the Company and its subsidiaries, the authorized principal amount of which does not exceed 10% of the consolidated assets of the Company and its subsidiaries.
4.3
Description of Common Stock (20)
10.1*
Ocwen Financial Corporation 1998 Annual Incentive Plan, as amended (12)
10.2*
Ocwen Financial Corporation Deferral Plan for Directors, dated March 7, 2005 (5)
10.3*
Ocwen Financial Corporation 2007 Equity Incentive Plan, dated May 10, 2007 (6)
10.4*
Ocwen Financial Corporation 2017 Performance Incentive Plan, as amended (21)
10.5†††
Binding Term Sheet dated as of February 22, 2019 between Altisource S.à r.l., Ocwen Financial Corporation and Ocwen Mortgage Servicing, Inc. (15)
10.6
Services Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l.,as amended (22)
10.7
Services Agreement, dated as of October 1, 2012, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l.,as amended (22)
10.8
Agreement dated as of April 12, 2013 by and among Altisource Solutions S.à r.l., Ocwen Financial Corporation and Ocwen Mortgage Servicing, Inc. (7)
10.9†††††
Binding Term Sheet among Ocwen Financial Corporation, Ocwen USVI Services, LLC and Altisource S.à r.l. dated as of May 5, 2021 (18)
10.10*
Form of Indemnification Agreement (8)
10.11*
Form of Undertaking to Repay Advancement of Indemnification Expenses (8)
10.12††
Transfer Agreement dated as of July 23, 2017 by and between Ocwen Loan Servicing, LLC, New Residential Mortgage LLC, Ocwen Financial Corporation, and New Residential Investment Corp. (10)
10.13††
Subservicing Agreement dated as of July 23, 2017 by and between New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (10)
10.14 †††††
Amendment No. 3, dated as of May 2, 2022, to Subservicing Agreement dated as of July 23, 2017 between New Residential Mortgage LLC and PHH Mortgage Corporation (9)
10.15††
New RMSR Agreement, dated as of January 18, 2018 by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC, and New Residential Mortgage LLC (2)
10.16 †††††
Amendment No. 3, dated as of May 2, 2022, to New RMSR Agreement dated as of January 18, 2018 by and among PHH Mortgage Corporation, HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC, and New Residential Mortgage LLC (9)
10.17††
Amendment No. 1 to Transfer Agreement, dated as of January 18, 2018 by and among Ocwen Loan Servicing, LLC, New Residential Mortgage LLC, Ocwen Financial Corporation and New Residential Investment Corp. (2)
10.18*
Offer Letter, dated April 17, 2018, between Ocwen Financial Corporation and Glen Messina, as amended (22)
10.19*
Offer Letter dated January 17, 2019 between Ocwen Financial Corporation and June Campbell (3)
10.20*
Offer Letter dated May 11, 2022 between Ocwen Financial Corporation and Sean O’Neil (9)
10.21††
Amendment No. 1 to Subservicing Agreement dated as of August 17, 2018 between New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (11)
10.22††
Amendment No. 1, dated as of August 17, 2018 to New RMSR Agreement dated as of January 18, 2018 by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS MSR-EBO Acquisition LLC, and New Residential Mortgage LLC (11)
10.23††
Subservicing Agreement dated as of August 17, 2018 between New Penn Financial, LLC and Ocwen Loan Servicing, LLC (11)
10.24 †††††
Amendment No. 2, dated as of May 2, 2022, to Subservicing Agreement dated as of August 17, 2018 between NewRez LLC DBA Shellpoint Mortgage Servicing and PHH Mortgage Corporation (9)
10.25*
Form of Director Restricted Stock Unit Agreement (1)
10.26*
Amended and Restated Ocwen Financial Corporation United States Basic Severance Plan (14)
10.27*
Amended and Restated Ocwen Financial Corporation United States Change in Control Severance Plan (14)
10.28*
Ocwen Financial Corporation Executive Nonqualified Deferred Compensation Plan (filed herewith)
10.29*
Form of 2019 Annual Performance-Based Cash Award Agreement (4)
10.30*
Form of 2019 Annual Performance-Based Stock Award Agreement (4)
10.31*
Form of 2019 Annual Time-Based Cash Award Agreement (4)
10.32*
Form of 2019 Annual Time-Based Stock Award Agreement (4)
10.33*
Form of 2019 Transitional Cash Award Agreement (4)
10.34*
Form of Cash Award granted September 10, 2020 (15)
10.35*
Form of Restricted Stock Unit Award granted September 10, 2020 (15)
10.36††††
Amendment No. 2, dated as of October 5, 2020, to New RMSR Agreement dated as of January 18, 2018 by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC, and New Residential Mortgage LLC (15)
10.37††††
Amendment No. 2, dated as of October 5, 2020, to Subservicing Agreement dated as of July 23, 2017 between New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (15)
10.38††††
Amendment No. 1, dated as of October 5, 2020, Subservicing Agreement dated as of August 17, 2018 between New Penn Financial, LLC and PHH Mortgage Corporation (15)
10.39
Agreement Amending Notice Due Date among PHH Mortgage Corporation, New Residential Mortgage LLC and the other parties thereto, dated December 10, 2021 (22)
10.40††††
Transaction Agreement between Ocwen Financial Corporation and Oaktree Capital Management L.P. and affiliates, dated as of December 21, 2020 (20)
10.41††††
Form of Securities Purchase Agreement between Ocwen Financial Corporation, Opps OCW Holdings, LLC, and ROF8 OCW MAV PT, LLC (20)
10.42
Form of Registration Rights Agreement between Ocwen Financial Corporation, Opps OCW Holdings, LLC, and ROF8 OCW MAV PT, LLC (20)
10.43
Form of Warrant issuable to Opps OCW Holdings, LLC and ROF8 OCW MAV PT, LLC (20)
10.44*
Form of 2020 Annual Time-Based Cash Award Agreement (13)
10.45*
Form of 2020 Annual Performance-Based Cash Award Agreement (13)
10.46*
Ocwen Financial Corporation 2021 Equity Incentive Plan, as amended (17)
10.47
Bulk Servicing Rights Purchase and Sale Agreement between PHH Mortgage Corporation and AmeriHome Mortgage Company, LLC dated as of May 21, 2021 (18)
10.48††††
Note and Warrant Purchase Agreement, dated as of February 9, 2021, by and among Ocwen Financial Corporation, the purchasers signatory thereto, and Oaktree Fund Administration, LLC, as collateral agent (19)
10.49††††
Second Lien Notes Pledge and Security Agreement, dated as of March 4, 2021, among Ocwen Financial Corporation and Oaktree Fund Administration, LLC (19)
10.50
Form of $199,500,000 aggregate principal amount Senior Secured Notes due 2027 (19)
10.51
Form of Warrant issued March 4, 2021 (19)
10.52
Registration Rights Agreement dated as of March 4, 2021 (19)
10.53††††
First Lien Notes Pledge and Security Agreement dated as of March 4, 2021 among PHH Mortgage Corporation, PHH Corporation, other guarantors thereto, and Wilmington Trust, National Association (19)
10.54††††
Indenture, dated as of March 4, 2021, among PHH Mortgage Corporation, as the issuer, Ocwen Financial Corporation, as the parent, and the other guarantors thereto, and Wilmington Trust, National Association, as the trustee and collateral trustee (19)
10.55
Form of $400,000,000 aggregate principal amount 7.875% Senior Secured Notes due 2026 (19)
10.56††††
First Amendment to Transaction Agreement, dated as of March 4, 2021, by and among OCW MAV Holdings, LLC, Ocwen Financial Corporation, and affiliates of Oaktree Capital Management L.P. (19)
10.57*
Form of Stock-Settled Performance-Based Restricted Stock Unit Agreement dated March 2, 2021 (19)
10.58*
Form of Hybrid (Cash and Stock Settled) Performance-Based Restricted Stock Unit Agreement dated March 2, 2021 (19)
10.59*
Form of Stock-Settled Time-Based Restricted Stock Unit Agreement dated March 2, 2021 (19)
10.60*
Form of Hybrid (Cash and Stock Settled) Time-Based Restricted Stock Unit Agreement dated March 2, 2021 (19)
21.1
Subsidiaries (filed herewith)
23.1
Consent of Independent Registered Public Accounting Firm (filed herewith)
31.1
Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2
Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1
Certification of the principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2
Certification of the principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101 The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 were formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in iXBRL (included as Exhibit 101).
* Management contract or compensatory plan or agreement.
† Certain exhibits have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any referenced exhibits will be furnished supplementally to the SEC upon request.
†† Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
††† Certain confidential information contained in this agreement has been omitted because it is not material and would be competitively harmful if publicly disclosed.
†††† Certain schedules to the exhibits have been omitted in accordance with Item 601(a)(5) of Regulation S-K. A copy of any referenced schedules will be furnished supplementally to the SEC upon request.
††††† Certain information has been omitted in accordance with Item 601(b)(10) of Regulation S-K because it is both not material and is the type of information that the Registrant treats as private or confidential. An unredacted copy will be furnished supplementally to the SEC upon request.
(1)Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K filed for the year ended December 31, 2018 filed on February 27, 2019.
(2) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form
10-Q for the period ended March 31, 2018 filed on May 2, 2018.
(3) Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2019 filed on May 7, 2019.
(4) Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2019 filed on August 6, 2019.
(5) Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 16, 2005.
(6) Incorporated by reference from the similarly described exhibit to the Registrant’s definitive Proxy Statement with respect to its 2007 Annual Meeting of Shareholders as filed on March 30, 2007.
(7) Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on April 18, 2013.
(8) Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on March 26, 2015.
(9) Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2022 filed on August 4, 2022.
(10) Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2017 filed on November 2, 2017.
(11) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2018 filed on November 6, 2018.
(12) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2016 filed on April 28, 2016.
(13) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 filed on May 8, 2020.
(14) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 filed on August 4, 2020.
(15) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2020 filed on November 3, 2020.
(16) Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on February 25, 2019.
(17) Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on May 27, 2022.
(18) Incorporated by reference to the similarly described exhibit to the Registrant’s Quarterly Report on Form10-Q for the period ended June 30, 2021 filed on August 5, 2021.
(19) Incorporated by reference to the similarly described exhibit to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2021 filed on May 4, 2021.
(20) Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 19, 2021.
(21) Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on May 24, 2017.
(22) Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 25, 2022.