EDGAR 10-K Filing

Company CIK: 873860
Filing Year: 2021
Filename: 873860_10-K_2021_0001628280-21-002577.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 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 will continue to be a guiding principle as we seek to grow our business and improve our financial performance.
We are headquartered in West Palm Beach, Florida with offices and operations in the U.S., in the United States Virgin Islands, in India and the Philippines. At December 31, 2020, approximately 70% 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).
As of December 31, 2020, our public shareholders collectively held 8,536,869 shares or 98.3% of our common stock.
BUSINESS MODEL AND SEGMENTS
Ocwen’s business model is designed to create value and maximize returns for our shareholders, and effectively allocate our resources. Following the acquisition and integration of PHH Corporation (PHH) in late 2018 and 2019, we have transformed into a better balanced and more diversified business. We seek to create value for shareholders through growth, operational efficiency and high quality operational execution. Our core competencies revolve around our Servicing business and we aggressively pursue growth of our servicing portfolio through origination and purchase of servicing volume from multiple sources.
Our servicing portfolio is comprised of three components with different economics - our owned MSRs, our subservicing portfolio, and the NRZ servicing portfolio. 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 our MSR and advance funding cost. Our subservicing portfolio generates a relatively more stable source of revenue. While subservicing fees are relatively lower, we do not incur any significant capital utilization or funding of advances. Our NRZ servicing portfolio is effectively a subservicing relationship - See New Residential Investment Corp. Relationship. 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. Our leadership and experience in dealing with distressed economic conditions and non-performing loans allowed us to quickly adapt to the COVID-19 pandemic and provide payment relief and assistance to borrowers enduring financial hardship, in a relatively seamless manner to subservicing clients and investors.
Our growth strategy is built on our relationships with borrowers, lenders and other market participants. We develop these relationships to grow our existing owned MSR portfolio, or develop new subservicing arrangements. 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.
The chart below summarizes our current business model:
We report our activities in three segments, Servicing, Originations (previously Lending) 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 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 23 - 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, NRZ and non-Agency residential mortgage-backed securities (RMBS) trusts. As of December 31, 2020, our residential servicing portfolio consisted of 1,107,582 loans with an unpaid principal balance (UPB) of $188.8 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. 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.
Servicing advances are an important component of our business and are 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. 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. The costs incurred 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 (previously Lending) 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 a mortgage servicing rights. Our mortgage loans are conventional (conforming to the underwriting standards of the GSEs, collectively Agency loans) and government-insured loans (insured by the FHA or VA). 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 (recapture channel) as well as through correspondent lending arrangements since the second quarter of 2019. We originate reverse mortgage loans in all three channels, through our correspondent lending arrangements, broker relationships (wholesale) and retail channels. In addition to our originated MSRs, we acquire MSRs through multiple channels, including flow purchase agreements, the GSE Cash Window programs and bulk MSR purchases.
In 2020, our Originations business originated or purchased forward and reverse mortgage loans with a UPB of $7.0 billion and $941.6 million, respectively. Per-loan margins vary by channel, with correspondent typically being the lowest margin and retail the highest. As part of our internal management reporting we renamed the Lending segment as Originations effective in the first quarter 2020, without any other changes to our operating and reporting segments. In addition, effective with the fourth quarter of 2020, we report the results of Reverse Servicing within the Servicing segment (previously within Originations), to align with the change in the management of the business and change in the internal management reporting. Historical segment information has been recast to conform to the current segment structure.
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.
Correspondent Lending. Our correspondent lending operation purchases 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 by senior management members of our lending and risk management teams. 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 GSE Cash Window programs and bulk MSR purchases. The GSE 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 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 GSE Cash Window programs.
REGULATION
Our business is subject to extensive oversight and regulation by federal, state and local governmental authorities, including the CFPB, HUD and various state agencies that license and conduct examinations of our loan servicing, origination and collection activities. In addition, we operate under a number of regulatory settlements that subject us to ongoing reporting and other obligations. 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 the policies, procedures and practices of our loan servicing, origination and collection activities. The GSEs and their conservator, the Federal Housing Finance Authority (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 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. 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 laws including, among others, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Telephone Consumer Protection 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 statutes apply to many facets of our business, including loan origination, default servicing and collections, use of credit reports, safeguarding of non-public personally identifiable information about our customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes and regulations are enacted, promulgated, amended, interpreted and enforced.
In recent years, the general trend among federal, state and local lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings 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 Multistate Mortgage Committee (MMC), a multistate coalition of various mortgage banking regulators. We also believe there has been a shift among certain regulators towards a broader view of the scope of regulatory oversight responsibilities with respect to mortgage lenders and servicers. In addition to their traditional focus on licensing and examination matters, certain regulators have begun to 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 likely discontinuation of the London Interbank Offered Rate (LIBOR), communications from debt collectors, and the ability of borrowers to repay mortgage loans. In 2016, the CFPB issued a special edition supervision report that stressed the need for mortgage servicers to assess and make necessary improvements to their information technology systems to ensure compliance with the CFPB’s mortgage servicing requirements. In October 2020 and December 2020, respectively, the CFPB issued final rules revising Regulation F, which implements the Fair Debt Collection Practices Act and which will take effect on November 30, 2021. In December 2020, the CFPB issued two final rules which will become effective on March 1, 2021, one of which amended the definition of a general qualified mortgage loan under Regulation Z and the other of which created a new category of “seasoned” qualified mortgages. The New York Department of Financial Services (NY DFS) also issued Cybersecurity Requirements for Financial Services Companies, which took effect in 2017, and which required banks, insurance companies, and other financial services institutions regulated by the NY DFS to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry. Likewise, the NY DFS has directed New York-regulated depository and non-depository institutions, insurers and pension funds to submit their plans for managing the risks relating to the likely discontinuation of LIBOR. Similarly, the California Consumer Privacy Act, which was enacted in 2018 and became effective on January 1, 2020, created new consumer rights relating to the access to, deletion of, and sharing of personal information. In November 2020, California voters approved Proposition 24, thereby enacting the California Privacy Rights Act, which creates additional privacy protections above and beyond the California Consumer Privacy Act, most of which will take effect on January 1, 2023. Further, in 2020 we became subject to additional regulations and requirements as the GSEs, Ginnie Mae, the United States Treasury Department and state regulators 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. 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.
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. In addition, we receive information requests and other inquiries, both formal and informal in nature, from our state regulators as part of their general regulatory oversight of our servicing and lending businesses. We also engage with state attorneys general and the CFPB and, on occasion, we engage with other federal agencies, including the Department of Justice and various inspectors general on various matters, including responding to information requests and other inquiries. Many of our regulatory engagements arise from a complaint that the entity is investigating, although some are formal investigations or proceedings. The GSEs and their conservator, FHFA, HUD, FHA, VA, Ginnie Mae, the United States Treasury Department, and others also subject us to periodic reviews and audits. See Item 1A. Risk Factors - Legal and Regulatory Risks for further information.
In recent years, we have been subject to significant state and federal regulatory actions against us, including the following:
•We are currently in litigation with the CFPB after the CFPB filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, Ocwen Mortgage Servicing, Inc. (OMS) and Ocwen Loan Servicing, LLC (OLS) alleging violations of federal consumer financial laws relating to our servicing business.
•In October 2020, we announced that we had reached an agreement to resolve a lawsuit filed in April 2017 by the Florida Attorney General and the State of Florida Office of Financial Regulation regarding certain legacy servicing activities. Pursuant to that agreement, Ocwen was required to pay the State of Florida $5.16 million within 60 days of the Court entering the final consent judgment between the parties. Ocwen then has an additional two years to provide debt forgiveness totaling at least $1.0 million to certain Florida borrowers. If Ocwen is unable to do so by the completion of the two-year period, it will owe the State of Florida an additional $1.0 million. We anticipate that we will be able to satisfy the debt forgiveness obligation and therefore do not presently anticipate that the additional $1.0 million payment will be required. In addition, Ocwen agreed to certain late fee waivers, a targeted loan modification program for certain eligible Florida borrowers, and certain non-monetary reporting and handling obligations. Ocwen did not admit any fault or liability as part of the settlement. Ocwen satisfied the monetary portions of the settlement in December 2020. Although we believe we had strong defenses to all of Florida’s claims, this was an opportunity to resolve one of Ocwen’s remaining significant legacy matters, and to do so without incurring further expense in preparing for trial.
•In addition, we have previously settled state regulatory actions against us by 29 states and the District of Columbia after these states and the District of Columbia alleged deficiencies in our compliance with laws and regulations relating to our servicing and lending activities, we have entered into regulatory settlements with the NY DFS and the California Department of Business Oversight (CA DBO) relating to our servicing practices and other aspects of our business, and we have 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.
We have incurred, and will continue to incur significant costs to comply with the terms of the settlements into which we have entered. In addition, the restrictions imposed under these settlements have significantly impacted how we run our business and will continue to do so.
We continue to be subject to a number of ongoing federal and state regulatory examinations, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions, which could result in adverse regulatory action against us. See Item 1A. Risk Factors - Legal and Regulatory Risks for further information.
Finally, there are a number of foreign laws and regulations that are applicable to our operations outside of the U.S., including laws and regulations that govern licensing, employment, safety, 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.
COMPETITION
The financial services markets in which we operate are highly competitive and fragmented. 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 banks, such as Wells Fargo, JPMorgan Chase, Bank of America and Citibank, large non-bank servicers such as Mr. Cooper and PennyMac Loan Services, market disruptors such as Quicken Loans and Loan Depot who are aggressively investing in the digital transformation of their business platforms, and real estate investment trusts, including New Residential Investment Corp.
In the servicing industry, we compete based on price, quality and risk appetite. 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 makes it challenging to compete. We believe that our competitive strengths flow from our ability to control and drive down delinquencies using proprietary processes, our lower cost to service non-performing loans and our deep know-how as a long-time operator of servicing loans. Notwithstanding these strengths, we have suffered reputational damage as a result of our regulatory settlements and the associated scrutiny of our business. We believe this has weakened our competitive position against both our bank and non-bank servicing competitors.
In the lending industry, 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 makes it challenging to compete. In addition, 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. We believe our competitive strengths flow from our existing customer relationships and from our focus on providing strong customer service.
The reverse lending market faces many of the same competitive pressures as the forward market. In addition, the reverse market is significantly smaller than the forward market with a higher market share concentration among the top five Ginnie Mae HMBS issuers. These higher concentration levels can, at times, lead to significant price competition. We believe our competitive advantage flows from the long tenure of Liberty Home Equity Solutions, Inc. (Liberty) in the industry (Liberty began operations in 2004 and we currently operate under the brand name Liberty Reverse Mortgage), which provides us with significant experience and contributes to our name recognition, our strategic partnerships 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 key servicer ratings:
PHH Mortgage Corporation
Moody’s S&P Fitch
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 Average RMS3
Ratings Outlook N/A Stable Negative
Date of last action August 29, 2019 December 27, 2019 March 24, 2020
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 March 24, 2020, Fitch placed all U.S RMBS servicer ratings on Negative outlook resulting from a rapidly evolving economic and operating environment due to the sudden impact of the COVID-19 virus.
Downgrades in servicer ratings could adversely affect our ability to service loans, sell or finance servicing advances 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 if we fall below their desired servicer ratings.
See Item 1A. Risk Factors - Risks Relating to Our Business for further discussion of the adverse effects that a failure to maintain minimum servicer ratings could have on our business, financing activities, financial condition or results of operations.
NEW RESIDENTIAL INVESTMENT CORP. RELATIONSHIP
Ocwen has a legacy relationship with NRZ and we acquired PMC’s legacy relationship with NRZ when we acquired PHH in October 2018. As a result, we service loans on behalf of NRZ under various agreements, including traditional subservicing agreements, where NRZ is the legal owner of the MSRs, and in connection with Rights to MSRs, where Ocwen retains legal title to the underlying MSRs but NRZ has generally assumed risks and rewards consistent with an MSR owner. See Note 10 - Rights to MSRs.
NRZ is our largest servicing client, accounting for $67.1 billion of UPB or 36% of the UPB of our total servicing portfolio as of December 31, 2020, approximately 62% of all delinquent loans that Ocwen serviced, and approximately 30% of our total servicing and subservicing fees in 2020, net of servicing fees remitted to NRZ (excluding ancillary income). Through April 2020, we have benefited from the amortization of $334.2 million deferred upfront lump-sum cash payments that we received from NRZ in 2017 and 2018 when we renegotiated certain aspects of the legacy Ocwen agreements. We recognized other income of $34.2 million and $95.1 million due to the amortization of these lump sum payments in 2020 and 2019, respectively.
On February 20, 2020, we received a notice of termination from NRZ with respect to the legacy PMC subservicing agreement. This termination was for convenience and not for cause, and provided for loan deboarding fees to be paid by NRZ. We continued to service these loans until deboarding on October 1, 2020. A total of 270,218 loans were deboarded representing $34.3 billion of UPB.
The legacy Ocwen agreements have an initial term ending in July 2022. 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. NRZ may terminate the agreements for convenience, subject to Ocwen’s right to receive a termination fee and 180 days’ notice at any time during the initial term. The termination fee is calculated as specified in the Ocwen agreements, and is a discounted percentage of the expected revenues that would be owed to Ocwen over the remaining contract term based on certain portfolio run off assumptions. After the initial term, these agreements can be renewed for three-month terms at NRZ’s option. In addition to a base servicing fee, we receive ancillary income, which primarily includes late fees, loan modification fees and Speedpay® fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. NRZ 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, NRZ is responsible for financing all servicing advance obligations in connection with the loans underlying the MSRs.
In the ordinary course, we regularly share information with NRZ and discuss various aspects of our relationship. With respect to the Rights to MSRs, our existing agreements provide that the Rights to MSRs could (i) remain in the existing Rights to MSR structure, (ii) be acquired by Ocwen or (iii) be sold or transferred to a third party together with Ocwen’s title to the related MSRs. In addition, the Rights to MSRs could be transferred to NRZ under the Transfer Agreement and become subserviced by PMC. It is possible that NRZ could exercise its rights to early terminate for convenience some or all of the legacy Ocwen servicing agreements. In addition, the agreements may not be renewed in July 2022. In our business planning efforts, we have assessed the potential impact of such actions by NRZ in light of the current and predicted future economics of the NRZ relationship generally. Because of the large percentage of our servicing business that is represented by agreements with NRZ, if NRZ exercised all or a significant portion of these early termination rights, we would need to rapidly scale our servicing business.
ALTISOURCE VENDOR RELATIONSHIP
Ocwen is a party to a number of long-term agreements with Altisource S.à r.l., and certain of other subsidiaries of Altisource Portfolio Solutions, S.A. (Altisource), including a Services Agreement, under which Altisource provides various services, such as property valuation services, property preservation and inspection services and title services, among other things. This agreement expires August 31, 2025 and includes renewal provisions. Ocwen and Altisource have also entered into a Master Services Agreement pursuant to which Altisource currently provides title services to Ocwen for reverse mortgage loans. Ocwen also has a General Referral Fee Agreement with Altisource pursuant to which Ocwen receives referral fees which are paid out of the commission that would otherwise be paid to Altisource as the selling broker in connection with real estate sales services provided by Altisource. However, for MSRs that transferred to NRZ, as well as those subject to our Rights to MSRs agreements with NRZ, we are not entitled to REO referral commissions.
In February 2019, Ocwen and Altisource signed a Binding Term Sheet, which among other things, confirmed Altisource’s cooperation with the deboarding of loans from Altisource’s REALServicing servicing system to Black Knight MSP. The
Binding Term Sheet also amended certain provisions in the Services Agreement. After certain conditions have been met and where Ocwen has the right to select the services provider, Ocwen agreed to use Altisource to provide the types of services that Altisource currently provides under the Services Agreement for at least 90% of services for all portfolios for which Ocwen is the servicer or subservicer, except that Altisource will be the provider for all such services for the portfolios: (i) acquired by Ocwen pursuant to loan servicing under agreements from Homeward (acquired in 2012) or assigned and assumed by Ocwen from Residential Capital, LLC, et al (assets acquired in 2013); and (ii) acquired from Ocwen, excluding certain portfolios in which PHH has an interest, by NRZ or its affiliates prior to the date of the Binding Term Sheet. The Binding Term Sheet also sets forth a framework for negotiating additional service level changes under the Services Agreement in the future. As specified in the Binding Term Sheet, if Altisource fails certain performance standards for specified periods of time, then Ocwen may terminate Altisource as a provider for the applicable service(s), subject to Altisource’s right to cure. For certain claims arising from service referrals received by Altisource after the effective date of the Binding Term Sheet, the provisions include reciprocal indemnification obligations in the event of negligence by either party, and Altisource’s indemnification of Ocwen in the event of breach by Altisource of its obligations under the Services Agreement. The limitations of liability provisions include an exception for losses either party suffers as a result of third-party claims.
Certain services provided by Altisource under these agreements are charged to the borrower and/or mortgage loan investor. Accordingly, such services, while derived from our loan servicing portfolio, are not reported as expenses by Ocwen. These services include residential property valuation, residential property preservation and inspection services, title services and real estate sales-related services.
OAKTREE RELATIONSHIP
We have recently established a strategic alliance with Oaktree Capital Management L.P. and certain of its affiliates and managed investment vehicles (collectively Oaktree) that we expect will support refinancing our corporate debt and help advance our growth initiatives. The Oaktree relationship includes the launch of an MSR investment vehicle to scale up our servicing business in a capital efficient manner and investments in our debt and equity to support a comprehensive refinancing at the corporate level and our growth.
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 that PMC will subservice. Oaktree and Ocwen will hold 85% and 15% of the venture, respectively, and have agreed to invest equity up to $250 million over three years. The closing of the transaction is expected to occur in the first half of 2021. Upon closing, Ocwen also agreed to issue to Oaktree up to 4.9% of Ocwen’s then outstanding common stock at a price of $23.15 per share, and to issue to Oaktree warrants to purchase additional common stock equal to 3% of Ocwen’s then outstanding common stock at a purchase price of $24.31 per share, subject to anti-dilution adjustments.
On February 9, 2021, we executed an agreement with Oaktree to issue to Oaktree in a private placement $285 million of Ocwen senior secured notes in two separate tranches. The initial tranche of $199.5 million senior secured notes is subject to certain conditions, including, but not limited to, the contemporaneous consummation by Ocwen or one of its subsidiaries of an additional debt financing not to exceed $450 million. The additional $85.5 million tranche is also subject to certain conditions, including, but not limited to, the closing of the MSR joint venture with Oaktree. Upon issuance of the initial tranche of senior secured notes, Ocwen agreed to issue to Oaktree warrants to purchase common stock equal to 12.0% of Ocwen’s then outstanding common stock at an exercise price of $26.82 per share, subject to anti-dilution adjustments.
The net proceeds before expenses from the issuance to Oaktree of the initial tranche of senior secured notes and the warrants will be $175.0 million (after $24.5 million of original issue discount) and are expected to be 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 $185.0 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 will be approximately $75.0 million (after $10.5 million of original issue discount) and are expected to be 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.
There can be no assurance that the conditions to the issuance to Oaktree of the senior secured notes will be met, or that any additional debt financing will be consummated. See the Liquidity and Capital Resources section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Note 25 - Commitments, and Note 28 - Subsequent Events to the Consolidated Financial Statements for additional information.
USVI OPERATIONS
The majority of our USVI operations and assets were transferred to the U.S. during 2019 as a result of our legal entity simplification. Our current USVI operations support our three segments, including a Servicing call center for customer call and home retention.
In 2012, Ocwen formed OMS under the laws of the USVI in a federally recognized economic development zone where qualified entities are eligible for certain tax benefits granted by the USVI Economic Development Commission (“EDC Benefits”). We were approved as a Category IIA service business, and are therefore entitled to receive significant benefits that may have a favorable impact on our effective tax rate. We conducted a substantial portion of our servicing business through OLS, a wholly-owned subsidiary of OMS. Although we are eligible for a reduced tax rate in the USVI, the reduced tax rate has not provided Ocwen with a foreign tax benefit in recent tax years as we have been incurring taxable losses in the USVI.
During 2019, OLS merged into PMC. As a result of this reorganization, the majority of our USVI operations and assets were transferred to the U.S. We plan to continue to maintain some operations in the USVI. However, it is possible that we may not be able to retain our qualifications for the EDC Benefits, or that our past and future EDC Benefits could be adversely impacted by our reorganization, or that changes in U.S. federal, state, local, territorial or USVI taxation statutes or applicable regulations may cause a reduction in or an elimination of the value of the EDC Benefits, all of which could result in an increase to our tax expense, including a loss of anticipated income tax refunds, and, therefore, adversely affect our financial condition and results of operations.
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: Delight Our Customers with Exceptional Service
•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 5,000 employees at December 31, 2020. At December 31, 2020, approximately 1,500 of our employees were employed in the U.S. and USVI, and approximately 3,500 of our employees were employed in our operations in India and the Philippines. Of our foreign-based employees, more than 70% were engaged in our Servicing operations as of December 31, 2020. Ocwen currently operates through a secure remote workforce model for approximately 98% of its global workforce due to the COVID-19 pandemic.
Our Board of Directors and executive leadership team places significant focus on our human capital resources, ensuring our culture enables employees to consistently demonstrate our company values. Important attributes of our human capital strategy include:
Diversity and Inclusion (D&I). We are committed to be a globally diverse and inclusive workplace where every voice is heard. Diversity, inclusiveness and respect are integral parts of our culture and work environment. D&I training for all employees and unconscious bias training for leaders are mandatory 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 the Company 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 Company.
•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, 2020, 44% of our employees globally are women, and 36% of our U.S. leadership roles (Director and above) are filled by women. 59% of our U.S. employees are women and 45% are people of color. Our affinity groups like the Ocwen Global Women’s Network (OGWN) and mentoring programs, when coupled with a culture of appreciation, help provide a comprehensive ecosystem for diversity to flourish.
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 81% 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. In 2020, our voluntary turnover was 15.4%. 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.
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 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 Governance (ESG) Practices
We are committed to conducting our business in a way that is mindful of our environmental impact, our impacts on homeowners, our employees and the communities in which we operate, and the highest standards of corporate governance.
Environmental Impact. In December 2020, we announced we remain committed to a primarily remote post-COVID-19 working model that will result in less than one-third of employees commuting to work on a daily basis, significantly reducing the use of natural resources in our facilities and reducing carbon emissions by eliminating a daily commute for thousands of our employees. We recycle office supplies at all U.S. facilities, are converting to LED lighting, and are in the process of transforming to digital mailrooms to reduce paper usage.
Social Responsibility. Ocwen participates in a variety of community outreach and homeowner assistance programs and events with local and national organizations around the country. We remain focused on areas still suffering the effects of the 2008 housing crisis as well those impacted by COVID-19. Since the onset of the pandemic, we implemented a virtual borrower outreach program in partnership with the NAACP and our Community Advisory Council to support borrowers impacted by COVID-19, with 40 borrower outreach events completed in 2020. In addition to giving back to our communities through corporate-level donations, our employee Corporate Social Responsibility group volunteers plan events focused on giving back to our local communities.
Corporate Governance. We ensure all employees, including members of management, are fully trained in and continuously comply with our robust governance policies, including our code of business conduct and ethics, insider trading prevention policy, anti-money laundering program, “Suspicious Activity Report” filing requirements, fraud risk management policy, whistleblower protections, and vendor audit procedures. With the exception of our Chief Executive Officer, our Board of Directors is fully independent of management, and all directors are re-elected annually. In addition to a committee structure that fully meets the governance requirements of the New York Stock Exchange (NYSE), our Board of Directors includes a Risk and Compliance Committee to oversee Ocwen’s risk management, compliance management, information security and privacy programs.
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. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to or waiver of the Code of Ethics for Senior Financial Officers, as well as any amendment to the Code of Business Conduct and Ethics or waiver thereto applicable to any executive officer or director. We may post information that is important to investors on our website. The information provided on our website is not part of this report and is, therefore, not incorporated herein by reference.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
An investment in our common stock involves significant risk. We describe below the most significant 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. You should also consider the information set forth above under “Forward Looking Statements.” 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 some of the important 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 or results.
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, including those in response to the COVID-19 pandemic
•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 consummate the transactions we have entered into with Oaktree, including the private placement of senior secured notes and the MSR asset vehicle transaction
•Inability to consummate the additional debt funding that is a condition of the Oaktree debt investment on favorable terms or at all
•Inability to execute our strategic plan to return to 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 fund our tail commitments, securitize our Home Equity Conversion Mortgages (HECM or reverse mortgage loans) or fund our Home Equity Conversion Mortgage-Backed Securities (HMBS) repurchase obligations
•Failure to satisfy minimum net worth and liquidity requirements established by regulators, GSEs, Ginnie Mae, lenders, or other counterparties
•Inability to appropriately manage liquidity, interest rate and foreign currency exchange risks, including ineffective hedging strategies
•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 NRZ 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
•Failure to adequately update our technology systems and processes, and interruption or delay in our operations due to cybersecurity breaches or system failures
•Adverse changes in political or economic stability or government policies in India, the Philippines or the U.S. Virgin Islands (USVI)
•Disruption in our operations, including in India, the Philippines, the USVI and Florida, resulting from 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
•Changes in the method of determining LIBOR, or its replacement with an alternative reference rate
Tax Risks
•Failure to retain or collect the tax benefits provided by the USVI, or certain past income becoming subject to increased United States 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
General Risks - 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 and local 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 profitability.
We must comply with a large number of federal, state and local consumer protection laws including, among others, the Dodd-Frank Act, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, RESPA, TILA, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Equal Credit Opportunity Act, as well as individual state licensing and foreclosure laws and federal and local bankruptcy rules. These statutes apply to many facets of our business, including loan origination, default servicing and collections, use of credit reports, safeguarding of non-public personally identifiable information about our customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes 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.
Our actual 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 lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings 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 originations continues to evolve. Individual states, including New York and California, have also been active, as have other regulatory organizations such as the MMC. We also believe there has been a shift among certain regulators towards a broader view of the scope of regulatory oversight responsibilities with respect to mortgage originators and servicers. In addition to their traditional focus on licensing and examination matters, certain regulators have begun to make observations, recommendations or demands with respect to such areas 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 likely discontinuation of LIBOR and communications from debt collectors and the ability of borrowers to repay mortgage loans. In 2016, the CFPB issued a special edition supervision report that stressed the need for mortgage servicers to assess and make necessary improvements to their information technology systems in order to ensure compliance with the CFPB’s mortgage servicing requirements. See Business - Regulation for a description of recent rules issued by the CFPB and NY DFS and recent legislation adopted in California.
Presently, a level of heightened uncertainty exists with respect to the future of regulation of mortgage lending and servicing, including the future of the Dodd Frank Act and CFPB. 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 Dodd Frank Act or 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, with which we are engaged to attempt to resolve certain concerns relating to our mortgage servicing practices, 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. On March 27, 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 are being issued by states, agencies and regulators. These requirements vary across jurisdiction, may conflict in some circumstances, and 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. If the COVID-19 pandemic is prolonged or intensifies due to the emergence of additional viral strains or otherwise, it may lead to 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 24 - Regulatory Requirements and Note 26 - 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, and handling of customer complaints. 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. 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.
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, 2020. 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. We entered into agreements with all 29 states plus the District of Columbia to resolve these regulatory actions. These agreements generally contained the Multi-State Common Settlement Terms.
In addition, Ocwen entered into settlements with certain states, including on October 15, 2020, with the Florida Attorney General and the Florida Office of Financial Regulation, on different or additional terms, which include making additional communications with and for borrowers, certain restrictions, certain review, reporting and remediation obligations, and requirements to make certain monetary payments.
We have incurred and will continue to incur, 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.
Certain of the state regulators’ cease and desist orders referenced a confidential supervisory memorandum of understanding (MOU) that we entered into with the MMC and six states relating to a servicing examination from 2013 to 2015. Among other things, the MOU prohibited us from repurchasing stock during the development of a going forward plan and, thereafter, except as permitted by the plan. We submitted a plan in 2016 that contained no stock repurchase restrictions and, therefore, we do not believe we are currently restricted from repurchasing stock. We requested confirmation from the signatories of the MOU that they agree with this interpretation, and received affirmative responses from the MMC and five states, and a response declining to take a legal position from the remaining state.
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. To the extent PMC does not comply with the terms of the servicing standards, the MMC or state attorneys general could take regulatory action against us, including imposing fines or penalties or otherwise restricting our business activities.
We continue to work with the NY DFS to address matters they continue to 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, 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 recent years, we have also entered into significant settlements with the NY DFS, the CA DBO, and the 2013 Ocwen National Mortgage Settlement. These settlements involved payments of significant monetary amounts, monitoring by third-party firms for which we were financially responsible and other restrictions on our business. For example, we recognized $177.5 million in third-party monitoring costs alone relating to these settlements between 2014 and 2017. 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 have begun to 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. For example, our January 2015 consent order with the CA DBO arose out of an alleged failure to respond adequately to requests from the CA DBO as part of a routine regulatory examination. 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 and (4) certain legacy mortgage reinsurance arrangements violated RESPA. 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 will need to devote, significant resources to establishing 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.
As a participant in the now ended HAMP program, we are subject to review by SIGTARP, which could adversely affect our business, reputation, and financial condition.
A significant portion of Ocwen’s loan modifications in recent years have been in connection with the now ended HAMP program. SIGTARP has indicated that it is assessing potential unlawful conduct by servicers in the HAMP program. In May 2017, we received a subpoena from SIGTARP requesting various documents and information relating to Ocwen’s participation in the HAMP program, and we have been providing documents and information in response to that subpoena. If SIGTARP were to allege breaches of the HAMP program, such allegations could be referred to the enforcement authorities within the Department of the Treasury or the Department of Justice and if such enforcement authorities elected to take action against Ocwen, it could adversely affect our business, reputation and financial condition, regardless of the outcome of any such enforcement action.
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 predatory 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 United States 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 United States 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. For example, as previously disclosed, in 2016, two of our foreign subsidiaries entered into a Consent Order with the Washington State Department of Financial Institutions relating to the activities of those entities in Washington State under the Washington Consumer Loan Act. 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
We may be unable to consummate our previously announced transactions with Oaktree.
On February 10, 2021, we announced that we entered an agreement with Oaktree to issue $285 million principal amount of Senior Secured Notes, in two separate tranches. See Note 28 - Subsequent Events. Closing of the first tranche is subject to conditions including, but not limited to, the contemporaneous consummation by us or one of our subsidiaries of an additional debt financing of up to $450 million. Conditions to the closing of the second tranche include, among others, the closing of the MSR joint venture with affiliates of Oaktree, which joint venture transaction is also subject to closing conditions, including regulatory approvals. See Note 25 - Commitments, Oaktree MAV Transaction. Our ability to consummate the additional debt financing, whether on favorable terms or at all, depends on factors outside our control, including market and interest rate conditions, the financial condition of our potential lenders, and perceptions by third parties of Ocwen or our industry, and cannot be guaranteed. Similarly, our receipt of regulatory approvals relating to the MSR joint venture cannot be guaranteed. If we cannot meet the conditions to the issuance and sale of one or both tranches of the Oaktree notes, it could adversely impact our financial condition, liquidity and results of operations. These adverse impacts could be compounded by reputational damage and negative publicity which could result from a failure to close, which could impair our ability to access sources of liquidity on acceptable terms, worsen the perception of Ocwen by counterparties, and materially adversely affect our ability to execute on our business plan.
Our strategic plan to return to 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 have significantly eroded stockholders’ equity and weakened our financial condition. We have 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. See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview-Business Initiatives.
There can be no assurance that we will successfully execute on these initiatives, or that even if we do execute on these initiatives we will be able to return to 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 strength of the lenders from whom we borrow;
•lenders’ perceptions of us or our sector;
•corporate credit and servicer ratings from rating agencies; and
•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.
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 (i) revolving notes issued to large financial institutions that generally have a revolving period of 12 months, and (ii) term notes issued to institutional investors with one-, two- and three-year revolving periods. At December 31, 2020, we had $581.3 million outstanding under these facilities. The revolving periods for variable funding notes with a total maximum borrowing capacity of $320.0 million end in June 2021.
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 and term notes must begin at the end of the applicable revolving period and end of the term, respectively. In addition, we use mortgage loan warehouse facilities to fund newly originated loans 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, 2020, we had $451.7 million outstanding under these warehouse financing arrangements, all under agreements maturing in 2021.
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 commitments and had total capacity of $250.0 million and $125.0 million and borrowed amounts of $210.8 million and $112.0 million, respectively at December 31, 2020. The PLS MSR financing was issued as an amortizing note structure to capital markets investors with an initial principal amount of $100.0 million. The Fannie Mae/Freddie Mac and Ginnie Mae facilities terminate in June 2021 and December 2021, respectively and the PLS MSR facility matures in November 2024. MSR financing structures have become more common in recent years and investor appetite has evolved in both the bank and capital markets. As a result, MSR financing has become a lower cost funding alternative to corporate loans and bonds. Despite these positive developments, MSR financing is not as readily available as secured match funded facilities for servicing advances and whole loans via warehouse facilities. In addition, MSR financing may require a higher level of issuer scrutiny despite being principally an asset-based financing structure.
Our MSR financing facilities provide funding based on an advance rate of MSR value that is subject to periodic mark-to-market valuation adjustments. In the normal course, 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 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, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring additional debt, paying dividends, repurchasing or redeeming capital stock, transferring assets or making loans, investments or acquisitions. 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 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.
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. We have been incurring losses for the last five years, which has eroded our net worth. In addition, we must structure our business so each subsidiary 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 requirements at December 31, 2020. 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 are in compliance with the applicable net worth requirements. If we fail to satisfy minimum net worth 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.
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, 2020, 82% and 72% of our consolidated total assets and liabilities are measured at fair value, respectively, on a recurring and nonrecurring basis, 96% 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 do 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, 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 economic hedges that we have entered into in order to limit MSR fair value change exposure may include instruments that require margin, thereby leading to liquidity distributions should the hedge instrument lose value. In general, we finance our operations through operating cash flows and various other sources of funding, including 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, 2020, we had total advances of $828.2 million. We are also exposed to interest rate risk because a portion of our advance financing and other outstanding debt at December 31, 2020 is at variable rates. Rising interest rates may increase our interest expense. Earnings on float balances partially offset these higher funding costs. At December 31, 2020, we had no interest rate swaps in place to hedge our exposure to rising interest rates in our servicing activities.
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. As a result, the valuation assumptions for MSRs are highly correlated to changes across the yield curve. 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. Beginning in September 2019, we implemented a hedging strategy using economic hedges (derivatives that do not qualify as hedges for accounting purposes) to partially offset the changes in fair value of our MSRs due to interest rate changes. 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 lending business, we are subject to interest rate and 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 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. Our interest rate exposure on our pipeline had previously been economically hedged with freestanding derivatives such as forward contracts. Beginning in September 2019, this exposure is no longer
individually hedged, but rather used as an offset to our MSR fair value exposure and managed as part of our MSR hedging strategy described above.
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, we cannot assure you that our risk management policies and procedures will 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 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 flow or operating performance of the Company. The expected hedge coverage profiled 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.
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 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 and/or the GSEs 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.
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 agreements to advance our own funds to meet contractual principal and interest remittance requirements for investors, pay property taxes and insurance premiums and process 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 GSE servicing portfolio will result in lower revenue because we collect servicing fees from GSEs 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 brought current, modified, 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, including that we did not properly submit mortgage insurance and other claims for reimbursement. We are presently engaged in a dispute resolution process relating to these claims. 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 NRZ-related servicing would significantly impact our business, liquidity, financial condition and results of operations.
NRZ is our largest servicing client, accounting for 36% of the UPB in our servicing portfolio as of December 31, 2020. On February 20, 2020, we received a notice of termination from NRZ with respect to the legacy PMC subservicing agreement and completed the deboarding of those loans on October 1, 2020. It is possible that NRZ could exercise its rights to terminate for convenience some or all of the legacy Ocwen servicing agreements.
In addition, under the legacy Ocwen agreements, any failure under a financial covenant could result in NRZ 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 NRZ did not consent, NRZ 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, NRZ 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 NRZ 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. NRZ 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 legacy Ocwen agreements with NRZ that provide NRZ with the termination or transfer rights described above, our business, financial condition, results of operations would be significantly impacted if NRZ exercised all or a significant portion of these rights. If this were to occur, we anticipate that we would need to substantially restructure many aspects of our servicing business as well as the related corporate support functions to address our smaller servicing portfolio, which would likely be a complex and expensive undertaking. Such a restructuring of our operations could divert management attention and financial resources required to execute on other strategic objectives, which could delay or prevent our growth or otherwise negatively impact the execution of our plans to return to profitability. In addition, it is possible that the unwinding of all or a significant portion of our relationship may not occur in an orderly or timely manner, which could be disruptive and could result in us incurring additional costs or even in disagreements with NRZ relating to our respective rights and obligations.
More generally, if NRZ were to decline to continue doing business with us and we were unable to develop relationships with new servicing clients on a similar scale or otherwise acquire sufficient replacement servicing, our business, liquidity, results of operations and financial condition could be materially and adversely affected. In addition, if NRZ were to take actions to limit or terminate our relationship, that could impact perceptions of other servicing clients, lenders, GSEs, regulators or others, which could cause them to take actions that materially and adversely impact our business, liquidity, results of operations and financial condition.
If NRZ 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, NRZ is responsible for financing all servicing advance obligations in connection with the loans underlying the MSRs. At December 31, 2020, such servicing advances made by NRZ were approximately $575.9 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 NRZ does not perform its contractual obligations to fund those advances. Therefore, if NRZ 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 and servicing operations.
NRZ currently uses advance financing facilities to fund a substantial portion of the servicing advances that NRZ is contractually obligated to make pursuant to the Rights to MSRs agreements. Although we are not an obligor or guarantor under NRZ’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 NRZ. 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.
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, in the area of borrower correspondence, in 2014, problems were identified with our letter dating processes such that erroneously dated letters were sent to borrowers, which damaged our reputation and relationships with borrowers, regulators, important counterparties and other stakeholders. Because in an average month we mail over 2 million letters, 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 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, for a number of key services.
We use the Black Knight MSP servicing system pursuant to a seven-year agreement with Black Knight, 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.
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.
Disagreements with vendors, service providers or other contractual counterparties could materially and adversely affect our business, financing activities, financial condition or results of operations.
We rely on services provided by Black Knight, Altisource and other vendors to operate our business effectively and in compliance with applicable regulatory and contractual obligations and on banks, NRZ and other financing sources to finance our business. 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.
In February 2019, Ocwen and Altisource signed a Binding Term Sheet, which among other things, confirmed Altisource’s cooperation with the de-boarding of loans from Altisource’s REALServicing servicing system to Black Knight’s MSP servicing system. In addition, Ocwen and Altisource entered into a letter agreement confirming that, except in relation to Ocwen’s transfer off of the REALServicing technology beginning in February 2019 or termination of the REALServicing statement of work, each party reserves its rights and remedies in the event of any disputes between them. While the Binding Term Sheet does not restrict Ocwen’s rights to sell MSRs in any way, the letter agreement specifically includes a reservation of each party’s rights to assert damage claims against the other party regarding such transactions including any transfer by Ocwen to NRZ (or its affiliates) or any third party of the rights to designate a vendor. Ocwen does not believe its agreements with Altisource restrict Ocwen’s rights to sell MSRs or restrict Ocwen from allowing an owner of MSRs, or owner of the economics thereto, the right to designate vendors. As such, Ocwen believes any asserted claims by Altisource against Ocwen arising from Ocwen’s sale of MSRs or related to the rights to designate a vendor to a third party, would be without merit and we have so informed Altisource. However, if Altisource were to assert such claims against us, such disputes could cause us to incur costs, divert the
attention of management, and potentially disrupt our operations which rely on Altisource-provided services, regardless of whether such claims were ultimately resolved in our favor.
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, we cannot assure that future incidents will not so impact us.
Security breaches, computer viruses, cyberattacks, 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 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.
An inability to attract and retain qualified personnel could harm our business, financial condition and results of operations.
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.
In addition, the current low interest rate environment has created an increase in refinancing and home purchase activities, creating high demand for originations underwriters and processing staff that has resulted in increased competition for qualified personnel and upward pressure on compensation levels.
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.
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 3,100, or 62%, of our employees as of December 31, 2020 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 3,100, or 62%, of our employees as of December 31, 2020 are located in India. 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. 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. Consequently, the occurrence of severe weather events in the future could have a significant adverse effect on our business and results of operations.
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 lending, 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, 2020, we had outstanding representation and warranty repurchase demands of $41.2 million UPB (250 loans).
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 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 reverse mortgages and we have retained third parties to subservice the reverse mortgages. The reverse mortgage business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. Generally, a reverse mortgage is a 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 reverse mortgages may reduce the number of reverse mortgages we originate and adversely affect our ability to sell reverse mortgages in the secondary market. Although foreclosures involving reverse mortgages generally occur less frequently than forward mortgages, loan defaults on 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 reverse mortgages are perceived by potential customers and thus reduce demand for reverse mortgages. Additionally, we could become subject to negative headline risk in the event that loan defaults on 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.
If we are unable to fund our tail commitments or securitize our HECM loans (including tails), this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We have originated and continue to service HECM loans under which the borrower has additional undrawn borrowing capacity in the form of undrawn lines of credit. We are obligated to fund future borrowings drawn on that capacity. As of December 31, 2020, our commitment to fund additional borrowing capacity was $2.0 billion. In addition, we are required to pay mortgage insurance premiums on behalf of HECM borrowers. We normally fund these obligations on a short-term basis using our cash resources, and regularly securitize these amounts (along with our servicing fees) through the issuance of tails. In January 2021, we renewed our $50.0 million revolving credit facility to fund HECM tail advances. However, to the extent our funding commitments exceed our borrowing capacity under this facility, or if we are unable to renew this 364-day facility on acceptable terms, we will be dependent on our cash resources to meet these commitments. If our cash resources are insufficient to fund these amounts and we are unable to fund them through the securitization of such tails, this could have a material adverse effect on our business, financial condition, liquidity 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 60 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 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 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.
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.
A significant portion of our business is in the states of California, Florida, Texas, New York and Illinois, 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, Florida, Texas, New York and Illinois. 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.
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.
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, 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, it now appears that the relevant date may be 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 potential deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. Our debt agreements that presently reference LIBOR provide that upon LIBOR’s phase out, the applicable lender may select the replacement rate at its sole discretion. While under some agreements, the lender’s choice of replacement rate must be reasonable and/or market-based, under other agreements, our only option if we disagree with the lender’s benchmark rate will be to terminate the agreement, which could be difficult due to our reliance on the source of funding or for other reasons.
There are indications that some market participants may adopt the Secured Overnight Financing Rate (SOFR) as a replacement for LIBOR. However, it is uncertain at this time the extent to which SOFR may be widely accepted. In general, there remains substantial uncertainty relating to the process and timeline for developing LIBOR alternatives, 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 of 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.
Increased reporting on corporate responsibility, specifically related to environmental, social and governance (ESG) matters, may impose additional costs and expose us to new risks if we are perceived to lag behind our peers.
Public ESG and sustainability reporting is becoming more broadly expected by investors, shareholders and other third parties. Certain organizations that provide corporate governance and other corporate risk information to investors and shareholders have developed, and others may in the future develop, scores and ratings to evaluate companies and investment funds based upon ESG or “sustainability” metrics. Many investment funds focus on positive ESG business practices and sustainability scores when making investments and may consider a company’s ESG or sustainability scores as a reputational or other factor in making an investment decision. In addition, investors, particularly institutional investors, use these scores to benchmark companies against their peers and if a company is perceived as lagging, these investors may engage with such company to improve ESG disclosure or performance and may also make voting decisions, or take other actions, to hold these companies and their boards of directors accountable. Board diversity is an ESG topic that is, in particular, receiving heightened attention by investors, shareholders, lawmakers and listing exchanges. Certain states have passed laws requiring companies to meet certain gender and ethnic diversity requirements on their boards of directors. We may face reputational damage in the event our corporate responsibility initiatives or objectives do not meet the standards set by our investors, shareholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating from third party rating services. A low ESG or sustainability rating by a third-party rating service could also result in the exclusion of our common stock from consideration by certain investors who may elect to invest with our competition instead. Ongoing focus on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose us to new risks.
Tax Risks
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 United States 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 United States, which caused such income to be exempt from United States 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 United States, 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 United States with respect to that income.
If the IRS were to successfully assert that OMS had been engaged in a trade or business within the United States with respect to that income in any taxable year, it may become subject to United States 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, 2020, Ocwen had U.S. federal and USVI net operating loss (NOL) carryforwards of approximately $191.2 million, which we estimate to be worth approximately $40.0 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, 2020, Ocwen had state NOL and state tax credit carryforwards which we estimate to be worth approximately $67.3 million, and foreign tax credit carryforwards of $0.1 million in the U.S. jurisdiction. As of December 31, 2020, Ocwen had disallowed interest under Section 163(j) of $92.8 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 2020 between $4.65 per share and $31.03 per share, retroactively adjusted for the effect of the 1-for-15 reverse stock split completed in August 2020, and the closing stock price on February 16, 2021 was $28.98 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 “Risk Factors” and “Forward-Looking Statements.”
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. Further, if the average closing price of our stock over thirty consecutive trading days were to fall below $1.00, as it did during the second quarter of 2020, we would need to take immediate steps to avoid de-listing by the New York Stock Exchange. Such measures could cause us to incur substantial costs and divert management attention, and could include implementing a reverse stock split such as we implemented in August 2020, which would entail additional risk, and success in preventing de-listing would not be assured.
We have several large shareholders, and such shareholders may vote their shares to influence matters requiring shareholder approval.
Based on SEC filings, certain shareholders, such as investors Deer Park Road Management Company, LP and Leon G. Cooperman, own or control significant amounts of our common stock. These and our other large shareholders each 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. For instance, we held a special meeting of shareholders in November 2018 in order to implement an amendment to our articles of incorporation that management believed was necessary to help us preserve certain tax assets, but in part due to the fact that we did not receive the vote of several large shareholders, the proposal was not adopted by our shareholders. If, in the future, 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 charter permits 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 charter 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 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 United States, the U.S. Virgin Islands, India and the Philippines, all of which are leased. The following table sets forth information relating to our principal facilities at December 31, 2020:
Location Owned/Leased Square Footage
Principal executive offices
West Palm Beach, Florida Leased 51,546
Document storage and imaging facility
West Palm Beach, Florida Leased 51,931
Business operations and support offices
U.S. facilities:
Mt. Laurel, New Jersey (1) Leased 483,896
Rancho Cordova, California (2) Leased 53,107
Houston, Texas (3) Leased 9,653
St. Croix, USVI (4) Leased 6,096
Offshore facilities (4)
Bangalore, India (5) Leased 128,606
Mumbai, India (6) Leased 96,696
Pune, India (7) Leased 44,328
Manila, Philippines Leased 39,329
Former operations and support offices no longer utilized
Westampton, New Jersey (8) Leased 71,164
Addison, Texas (9) Leased 39,646
(1)The Mt. Laurel facility includes two buildings, one with 376,122 square feet of space supporting our servicing and lending operations, as well as our corporate functions. We ceased using 124,795 square feet as a result of the reduction in headcount in 2019, and ceased using an additional 119,132 square feet in 2020. The second building has 107,774 square feet of space, all of which is subleased.
(2)Primarily supports reverse lending operations. We have provided a termination notice to surrender this facility by June 2021. We are in the process of identifying a smaller facility in California.
(3)Primarily supports commercial and reverse servicing operations.
(4)Primarily supports servicing operations.
(5)We have provided a termination notice to surrender 41,373 square feet of the space by May 2021.
(6)We have provided a termination notice to surrender this facility by June 2021. We will be relocating to a managed service office with less capacity effective June 2021.
(7)We have provided a termination notice to surrender this facility by March 2021. We will be relocating to a managed service office with less capacity effective February 2021.
(8)Former PHH facility is currently subleased until the lease expires in December 2021.
(9)The lease expires in 2025 and is currently being marketed for sublease.
We regularly evaluate current and projected space requirements, considering the constraints of our existing lease agreements and the expected scale of our businesses. As part of our reengineering initiatives, we abandoned 153,844 and 398,057 square feet in 2020 and 2019, respectively - refer to Note 3 - Severance and Restructuring Charges to our consolidated financial statements.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
See Note 24 - Regulatory Requirements and Note 26 - Contingencies to the Consolidated Financial Statements. 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
Price Range of Our Common Stock
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 return on the common stock of Ocwen Financial Corporation since December 31, 2015, with the cumulative total return on the stocks included in Standard & Poor’s 500 Market Index and Standard & Poor’s Diversified Financials Market Index. The graph assumes that $100 was invested in our common stock and in each index on December 31, 2015 and the reinvestment of all dividends.
Period Ending
Index 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
Ocwen Financial Corporation $ 100.00 $ 77.67 $ 45.10 $ 19.31 $ 19.74 $ 27.77
S&P 500 $ 100.00 $ 109.54 $ 130.81 $ 122.65 $ 158.07 $ 183.77
S&P 500 Diversified Financials $ 100.00 $ 118.83 $ 146.55 $ 130.39 $ 160.18 $ 175.84
(1)Copyright © 2017 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. S&P 500® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC, a division of S&P Global (S&P); DOW JONES is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC. S&P Dow Jones Indices LLC, Dow Jones, S&P and their respective affiliates (S&P Dow Jones Indices) makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and S&P Dow Jones Indices and its third-party licensors shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. All data and information is provided by S&P DJI "as is". Past performance is not an indication or guarantee of future results.
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 16, 2021, 8,687,750 shares of our common stock were outstanding and held by approximately 59 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 have been previously reported.
Purchases of Equity Securities by the Issuer and Affiliates
On February 3, 2020, Ocwen’s Board of Directors authorized an open market share repurchase program for an aggregate amount of up to $5.0 million of Ocwen’s issued and outstanding shares of common stock. Ocwen purchased $4.5 million of shares prior to the program’s termination on February 3, 2021.
Information regarding repurchases of our common stock during 2020 is as follows:
Period Total number of shares purchased (1) Average price paid per share (1) (2) Total number of shares purchased as part of a publicly announced repurchase program (1) Approximate dollar value of shares that may yet be purchased under the repurchase program
January 1 - January 31 - $ - - $ 5.0 million
February 1 - February 29 - $ - - $ 5.0 million
March 1 - March 31 377,484 $ 11.8995 377,484 $ 0.5 million
(1)Adjusted retroactively to give effect to the 1-for-15 reverse stock split which became effective on August 13, 2020.
(2)Price paid per share does not reflect payment of commissions totaling $0.1 million.
We did not repurchase any shares of our common stock under this program subsequent to the first quarter of 2020 through the termination date.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA (Dollars in millions, except per share data and unless otherwise indicated)
The selected historical consolidated financial information set forth below should be read in conjunction with Business, Management’s Discussion and Analysis of Financial Condition and Results of Operations, our Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. The historical financial information presented may not be indicative of our future performance.
December 31,
2020 2019 2018 2017 2016
Selected Balance Sheet Data
Total Assets $ 10,651.1 $ 10,406.2 $ 9,394.2 $ 8,403.2 $ 7,655.7
Loans held for sale $ 387.8 $ 275.3 $ 242.6 $ 238.4 $ 314.0
Loans held for investment
7,006.9 6,292.9 5,498.7 4,715.8 3,565.7
Advances, net 828.2 1,056.5 1,186.7 1,356.4 1,709.8
Mortgage servicing rights 1,294.8 1,486.4 1,457.1 1,008.8 1,043.0
Total Liabilities $ 10,235.8 $ 9,994.2 $ 8,839.5 $ 7,856.3 $ 7,000.4
HMBS-related borrowings $ 6,772.7 $ 6,063.4 $ 5,380.4 $ 4,601.6 $ 3,433.8
Other financing liabilities 576.7 972.6 1,062.1 520.9 497.9
Advance match funded liabilities 581.3 679.1 778.3 998.6 1,281.0
Long-term other secured borrowings 545.6 511.3 632.7 704.1 799.5
Total equity $ 415.4 $ 412.0 $ 554.7 $ 546.9 $ 655.3
Residential Loans and Real Estate
Serviced or Subserviced for Others
Count 1,107,582 1,419,943 1,562,238 1,221,695 1,393,766
UPB (in billions) $ 188.8 $ 212.4 $ 256.0 $ 179.4 $ 209.1
For the Years Ended December 31,
2020 2019 2018 2017 2016
Selected Results of Operations Data
Revenue
Servicing and subservicing fees $ 737.3 $ 975.5 $ 937.1 $ 991.6 $ 1,188.2
Gain on loans held for sale, net
137.2 38.3 37.3 57.2 51.0
Reverse mortgage revenue, net 60.7 86.3 60.2 75.5 71.7
Other revenue, net 25.6 23.3 28.4 70.3 76.2
Total revenue 960.9 1,123.4 1,063.0 1,194.6 1,387.2
MSR valuation adjustments, net (251.9) (120.9) (153.5) (53.0) (124.0)
Operating expenses 575.7 673.9 779.0 945.7 1,099.2
Other income (expense)
Interest expense (109.4) (114.1) (103.4) (126.9) (178.2)
Pledged MSR liability expense
(152.3) (372.1) (171.7) (236.3) (234.4)
Bargain purchase gain (1) - (0.4) 64.0 - -
Other, net 22.7 31.5 9.0 23.3 42.3
Other expense, net (239.0) (455.1) (202.0) (339.9) (370.3)
Loss from continuing operations before income taxes
(105.7) (126.5) (71.5) (144.0) (206.4)
Income tax expense (benefit) (65.5) 15.6 0.5 (15.5) (7.0)
Loss from continuing operations (40.2) (142.1) (72.0) (128.5) (199.4)
Income from discontinued operations, net of tax
- - 1.4 - -
Net loss
(40.2) (142.1) (70.6) (128.5) (199.4)
Net loss (income) attributable to non-controlling interests
- - (0.2) 0.5 (0.4)
Net loss attributable to Ocwen stockholders
$ (40.2) $ (142.1) $ (70.8) $ (128.0) $ (199.8)
Earnings (loss) per share - Basic and Diluted (2)
Continuing operations
$ (4.59) $ (15.86) $ (8.10) $ (15.10) $ (24.17)
Discontinued operations
$ - $ - $ 0.16 $ - $ -
Total attributable to Ocwen stockholders
$ (4.59) $ (15.86) $ (7.94) $ (15.10) $ (24.17)
Weighted average common shares outstanding (2)
Basic 8,748,725 8,962,961 8,913,558 8,472,138 8,266,047
Diluted (3) 8,748,725 8,962,961 8,913,558 8,472,138 8,266,047
(1)Recognized in connection with the acquisition of PHH on October 4, 2018. See Note 2 - Business Acquisition to the Consolidated Financial Statements for additional information.
(2)In August 2020, Ocwen implemented a reverse stock split of its shares of common stock in a ratio of one-for-15. The number of shares and earnings/loss per share amounts have been retroactively adjusted for all years presented to give effect to the reverse stock split as if it occurred at the beginning of the first period presented. See Note 16 - Stockholders’ Equity for additional information.
(3)For 2016 - 2020, we have excluded the effect of all dilutive or potentially dilutive shares from the computation of diluted earnings per share because of the anti-dilutive effect of our reported net loss.

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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 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K 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, 2019.
OVERVIEW
We are a financial services company that services and originates mortgage loans. We are a leading mortgage special servicer, servicing 1,107,582 loans with a total UPB of $188.81 billion on behalf of more than 4,179 investors and 127 subservicing clients as of December 31, 2020 . We service all mortgage loan classes, including conventional, government-insured and non-Agency 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 recapture, 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, GSE Cash Window programs, bulk MSR purchase transactions, and subservicing agreements.
We have built a multi-channel, scalable origination platform that creates sustainable sources of replenishment and growth of our servicing portfolio, as detailed in the table below. We determine our target returns for each channel, however, the channel and delivery selection is generally our clients’ decision.
We selectively sourced our MSR originations and purchases and subservicing in 2020 through diversified channels, as detailed below:
2020 2019 2020 vs 2019
$ Change
$ In billions Quarter Ended March 31st Quarter Ended June 30th Quarter Ended September 30th Quarter Ended December 31st Year Ended December 31st Year Ended December 31st
Recapture (1) $ 0.20 $ 0.32 $ 0.37 $ 0.43 $ 1.31 $ 0.66 $ 0.65
Correspondent (1) 0.51 0.66 1.93 2.59 5.69 0.49 5.20
Flow and GSE Cash Window MSR purchases (3) 1.34 2.84 4.20 6.73 15.11 0.91 14.20
Reverse originations (2) 0.23 0.21 0.23 0.27 0.94 0.73 0.21
Total 2.28 4.03 6.72 10.01 23.05 2.79 20.26
Bulk MSR purchases (3) 1.54 - - 15.02 16.57 14.62 1.95
Total MSR additions 3.82 4.03 6.72 25.04 39.62 17.41 22.21
Subservicing additions (4) 3.14 4.59 4.43 5.08 17.24 8.68 8.56
Total servicing additions $ 6.96 $ 8.62 $ 11.15 $ 30.11 $ 56.86 $ 26.09 $ 30.77
(1)Represents the UPB of loans that have been originated or purchased 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 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.
(3)Represents the UPB of loans for which the MSR is purchased.
(4)Interim subservicing, excluding the volume UPB associated with short-term interim subservicing for some clients as a support to their originate-to-sell business, where loans are boarded and de-boarded within the same quarter.
COVID-19 Pandemic Impact on our 2020 Financial Performance
In March 2020, the WHO categorized the Coronavirus Disease 2019 (COVID-19) as a pandemic and the COVID-19 outbreak was declared a national emergency in the U.S. The pandemic has adversely affected economic conditions since March 2020, with high levels of unemployment, and has created uncertainties about the duration and magnitude of the economic downturn. Our financial performance in 2020 has been affected by the pandemic, mostly due to large losses on MSRs and lower revenue in our Servicing business, partially offset by the growth and profitability of our Originations business, as discussed further below. Furthermore, the CARES Act allowed us to recognize income tax benefits in 2020 mostly due to the carryback of a portion of our prior net operating losses.
Determining the COVID-19 impact on our financial performance requires management to use judgment, including the estimation of those impacts that are directly attributable to COVID-19 factors. The below discussion includes some comparisons with the financial performance of 2019 and selected noteworthy items to isolate the impact of certain COVID-19 factors and may not be complete.
First, we recorded a $129.1 million fair value loss on our MSR portfolio in our Servicing segment due to rate and assumption updates in 2020 driven by record low interest rates fostering refinancing and voluntary prepayments, partially offset by $44.9 million gains on our MSR macro-hedge strategy.
Second, the financial performance of our Servicing business was negatively affected by the loans placed under forbearance, the moratorium on foreclosures and other market conditions. We recognized $51.7 million lower ancillary income in our Servicing segment in 2020 as compared to 2019, with $37.6 million lower float earnings, lower late and collection fees, and lower deferred servicing fee collections. The CARES Act signed in March 2020 allows borrowers with federally backed mortgage loans who are affected by COVID-19 to request temporary loan forbearance, for up to 180 days if requested by the borrower. Borrowers may request an additional forbearance period of up to 180 days for FHA and VA guaranteed loans. During any period of forbearance, servicers must also provide related protection, including, but not limited to, suspension of late fees. In addition, servicers are restricted from pursuing certain foreclosure and eviction activity on all occupied, federally backed mortgage loans until at least March 31, 2021.
Although PLS loans are not explicitly covered under the CARES Act, these loans are subject to various requirements and expectations from state Governors, regulators, and Attorneys General to assist borrowers enduring financial hardship due to COVID-19 with forbearance, moratoria on foreclosure sales and evictions and other requirements, some of which apply regardless of whether the borrower has requested assistance. Ocwen provides payment relief to such borrowers in accordance with these requirements and expectations, as well as our servicing agreements. For example, we generally grant eligible borrowers an initial three months of forbearance and related protection, including suspension of late fees, as well as suspension of foreclosure and eviction activity.
Generally, borrowers are required to repay their suspended or reduced mortgage payments after the forbearance period ends unless an alternate loss mitigation solution is reached, which we anticipate will include extensions of forbearance, payment deferrals, repayment plans, and loan modifications, depending on the borrower’s situation, account status, and applicable investor guidelines. Before the completion of each period of forbearance, Ocwen attempts to contact the borrowers to assess their ability to resume making payments and discuss other options which may be available if their hardship persists.
As of December 31, 2020, we managed 81,900 loans under forbearance, 23,100 of which related to our owned MSRs (excluding NRZ), or 7.39% of our total portfolio and 4.52% of our owned MSR servicing portfolio (excluding NRZ), respectively. The number of loans under forbearance peaked at the end of the second quarter of 2020 and decreased progressively since, while remaining at an elevated level at year end as illustrated by the below chart of forbearance plans during COVID-19 for our owned MSR portfolio (excluding NRZ) by investor.
Third, offsetting the above negative impact of COVID-19 on our financial performance, our Originations business generated $117.6 million incremental revenues, including $53.8 million incremental gain on loan sale from our Recapture channel. The low interest rate environment discussed above and the continued execution of our originations strategy have led to significantly increased volume in 2020. We continue to recapture, replenish and grow our owned MSR portfolio (excluding NRZ’s MSR portfolio), net of runoff and voluntary prepayments. In addition, we opportunistically purchased MSRs at a discount to fair value in the COVID-19 market conditions and recorded gains on revaluation.
We operate through a secure remote workforce model for approximately 98% of our global workforce and continue to adhere to COVID-19 health and safety-related requirements and best practices across all of our locations. While our operations have not been significantly affected, we incurred an estimated $16.4 million of additional operating expenses in 2020 due to our adjustment to the COVID-19 environment, including additional compensation, technology equipment and legal consulting fees among others, $6.3 million of which is recorded in our Servicing segment.
Looking ahead, the spread of the COVID-19 pandemic may continue. The disruption created by the pandemic and the measures being taken have given rise to elevated unemployment levels. As of today, uncertainties related to the duration and severity of the economic downturn remain, without any indications of a rapid recovery. The business disruption triggered by COVID-19 could ultimately have a material and adverse effect on our business, financial condition, liquidity or results of operations.
Business Initiatives
In 2021, we have established five key operating objectives to drive improved value for shareholders, as our near-term priority remains to return to sustainable profitability. The five objectives are focused on:
•Accelerating growth, by expanding our client base, our product offering and by leveraging our MSR asset vehicle with Oaktree;
•Strengthening recapture performance, by expanding our operating capacity;
•Improving our cost leadership position, by driving productivity and efficiencies, with our technology and continuous improvement initiatives;
•Maintaining high quality operational execution, through our technology and continuous improvement initiatives, and our commitment to employee engagement and customer satisfaction; and
•Expanding servicing and other revenue opportunities.
Historical losses have significantly eroded stockholders’ equity and weakened our financial condition. With the acquisition and integration of PHH in late 2018 and 2019, we established a set of key business initiatives intended to achieve our objective of returning to sustainable profitability within an appropriate risk and compliance environment. We have successfully executed on these initiatives and achievements throughout 2020, and we believe they were the foundation for driving stronger financial performance.
These initiatives and accomplishments included the following:
2018/2019 Initiatives Accomplishments
Expanding our Originations business to replenish and grow our servicing portfolio We have built a multi-channel, scalable originations platform and have replenished and grown our owned servicing portfolio in 2020. We selectively acquired MSRs that meet or exceed our minimum targeted investment returns, with $16.6 billion UPB in bulk transactions and $15.1 billion UPB through our now well established participation to the GSE Cash Window programs. We successfully re-entered the forward lending correspondent channel in the second quarter of 2019 with $5.7 billion UPB in 2020. We have reduced our client concentration risk with NRZ.
Driving continuous cost improvement to maintain an industry cost competitive position With the acquisition and integration of PHH in late 2018 and 2019, we successfully implemented cost reduction and continuous improvement initiatives, resulting in approximately $100 million lower operating expenses in 2020 as compared to 2019, and approximately $200 million as compared to 2018. Our continuous cost improvement efforts were focused on reducing operating and overhead costs through facility rationalization, optimizing strategic sourcing and actions and off-shore utilization, lean process design, simplification, automation and other technology-enabled productivity enhancements.
Effectively managing our balance sheet to ensure adequate liquidity, finance our ongoing business needs and provide a solid platform for executing on our growth initiatives We have managed our liquidity and financing obligations through the most challenging time of the COVID-19 and have enhanced our existing balance sheet and cost of funds. For example, we have extended to May 2022 and prepaid $126.1 million on our senior secured term loan (SSTL) and reduced our OMART cost of funds. We have concluded our strategic review process and announced an expansion of our strategic alliance with Oaktree Capital to support the refinancing of our corporate debt maturing in 2021 and 2022 and to provide capital to accelerate our growth trajectory. In addition, we have established the MSR Asset Vehicle (MAV) to support the future growth of our servicing volume with the most efficient capital allocation for us.
Fulfilling our regulatory commitments and resolving remaining legacy and regulatory matters On October 15, 2020, we resolved our legacy regulatory matter with the State of Florida Office of the Attorney General and Office of Financial Regulation. Ocwen has now resolved all state regulatory actions from April 2017. The legacy CFPB litigation matter remains pending. We have participated in mediation and settlement discussions with the CFPB, however, the parties were unable to reach a resolution of the litigation on satisfactory terms.
Operations Summary
Years Ended December 31, % Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Revenue
Servicing and subservicing fees $ 737.3 $ 975.5 $ 937.1 (24) % 4 %
Gain on loans held for sale, net 137.2 38.3 37.3 258 3
Reverse mortgage revenue, net 60.7 86.3 60.2 (30) 43
Other revenue, net 25.6 23.3 28.4 10 (18)
Total revenue 960.9 1,123.4 1,063.0 (14) 6
MSR valuation adjustments, net (251.9) (120.9) (153.5) 108 (21)
Operating expenses
Compensation and benefits 265.3 313.5 298.0 (15) 5
Professional services 106.9 102.6 165.6 4 (38)
Servicing and origination 77.3 109.0 131.3 (29) (17)
Technology and communications 59.6 79.2 98.2 (25) (19)
Occupancy and equipment 47.5 68.1 59.6 (30) 14
Other expenses 19.2 1.5 26.3 n/m (94)
Total operating expenses 575.7 673.9 779.0 (15) (13)
Other income (expense)
Interest income 16.0 17.1 14.0 (6) 22
Interest expense (109.4) (114.1) (103.4) (4) 10
Pledged MSR liability expense (152.3) (372.1) (171.7) (59) 117
Gain on repurchase of senior secured notes - 5.1 - (100) n/m
Bargain purchase gain - (0.4) 64.0 (100) (101)
Other, net 6.7 9.3 (5.0) (28) (286)
Total other expense, net (239.0) (455.1) (202.0) (47) 125
Loss from continuing operations before income taxes
(105.7) (126.5) (71.5) (16) 77
Income tax expense (benefit) (65.5) 15.6 0.5 (520) n/m
Loss from continuing operations, net of tax (40.2) (142.1) (72.0) (72) 97
Income from discontinued operations, net of tax
- - 1.4 n/m (100)
Net loss
(40.2) (142.1) (70.6) (72) 101
Net income attributable to non-controlling interests - - (0.2) n/m (100)
Net loss attributable to Ocwen stockholders
$ (40.2) $ (142.1) $ (70.8) (72) 101
Segment income (loss) from continuing operations before taxes:
Servicing $ (75.8) $ (72.7) $ (47.1) 4 % 54 %
Lending 104.2 (12.2) (22.7) (954) (46)
Corporate Items and Other (134.1) (41.6) (1.7) 222 n/m
$ (105.7) $ (126.5) $ (71.5) (16) 77
n/m: not meaningful
Year Ended December 31, 2020 versus 2019
Revenue
Total revenue was $960.9 million in 2020, $162.5 million or 14% lower than 2019, mostly due to declines in servicing fee revenue and reverse mortgage revenue, offset in part by an increase in gain on loans held for sale. Servicing and subservicing fee revenue decreased $238.2 million or 24%, as compared to 2019, including a $193.3 million decline in servicing fees collected on behalf of NRZ, primarily due to a lower serviced UPB as a result of run-off and an increase in non-paying forbearance loans as a result of the COVID-19 pandemic. The decline in servicing fees collected on behalf of NRZ is partially offset by a decline in servicing fees remitted to NRZ that are separately reported as Pledged MSR liability expense (Other expense), with a $34.5 million net decline in the NRZ servicing fee retained in 2020 as compared to 2019. The $98.9 million increase in gain on loans held for sale is mostly due to the increase in forward loan production, from both our correspondent channel that we re-started in the second quarter of 2019 and our recapture channel, fueled by industry-wide refinance activity. Reverse mortgage revenue, net decreased $25.6 million, or 30%, as compared to 2019, largely due to the change in our accounting policy related to tails. Tails include accrued interest and insurance premiums on loans together with the commitments to fund borrower draws that we regularly securitize. We recorded a $31.2 million gain on tails upon their funding and securitization in 2019 and nil in 2020 due to our fair value election. We recorded $24.7 million lower fair value gains on our securitized reverse mortgage portfolio and HMBS related borrowings and $28.5 million higher origination gain in 2020.
MSR Valuation Adjustments, Net
We reported a $251.9 million loss in MSR valuation adjustments, net in 2020, driven by a $173.3 million portfolio runoff and a $106.2 million loss due to the decline in interest rates, partially offset by $27.5 million favorable fair value gain from our MSR hedging strategy. The $131.0 million additional loss in 2020 as compared to 2019 is primarily due to a $116.3 million additional loss on the NRZ pledged MSR and $14.7 million additional loss on our owned MSRs. The $116.3 million additional loss on the NRZ pledged MSR is offset by an additional gain recorded as MSR pledged liability expense, and was mostly due to a $147.1 million favorable assumption update recorded in 2019, partially offset by a lower runoff on the NRZ MSR. The lower runoff is driven by the derecognition of MSRs in February 2020 with the termination of the PMC agreement by NRZ. The $14.7 million additional loss on our owned MSR is driven by lower interest rates in 2020 with increased runoff and fair value losses due to rates, partially offset by the effects of our MSR hedging strategy implemented in September 2019, and the revaluation gains of MSR opportunistically purchased at a discount to fair value due to the COVID-19 distressed environment.
Compensation and Benefits
Compensation and benefits expense decreased $48.2 million, or 15%, as compared to 2019, largely due to cost re-engineering initiatives and the scaling of our workforce to our volumes. Servicing compensation and benefits decreased by $30.4 million, mostly due to a 16% decline in average total Ocwen headcount and an increase in our offshore-to-total headcount ratio from 67% to 72%, driving down our average compensation cost. Originations compensation and benefits increased by $18.4 million, mostly due to additional commissions and incentive compensation and additional headcount to accompany our record production levels in 2020. We reduced our average Corporate headcount by 19% globally, driving down base compensation by $14.3 million in 2020 as compared to 2019. We also recognized $35.7 million of compensation and benefits costs during 2019 in connection with our 2019 cost re-engineering plan, as compared to $9.7 million in 2020 related to our 2020 re-engineering initiatives. We recorded $6.7 million additional compensation expenses related to COVID-19 in 2020.
Servicing and Origination Expense
Servicing and origination expense decreased $31.7 million, or 29%, as compared to 2019 primarily due to a $32.8 million decrease in servicing expenses. This decline was largely the result of a reduction in government-insured claim loss provisions and a general decline in servicer-related expenses that was primarily driven by a reduction in our servicing portfolio. The reduction in government-insured claim loss provisions is due to the combined effect of a decline in claim volumes, partially due to COVID-19, and lower loss severity, mostly driven by a reduction in the foreclosure and liquidation timeline of loans. The government-insured claim loss provisions recorded in 2019 included claims of a legacy portfolio with higher severity loans. Government-insured claim loss provisions are generally offset by changes in the fair value of the corresponding MSRs, which are recorded in MSR valuation adjustments, net. The decrease is also attributable to $9.1 million improved advance recoveries, which decreased loss severity rates used in the computation of advance reserves, and the recovery of $3.1 million of expenses in connection with a settlement from a mortgage insurer as well as a $6.8 million release of indemnification reserves related to such settlement.
Other Operating Expenses
Professional services expense increased $4.2 million, or 4%, as compared to 2019 primarily due to the $34.7 million recovery in 2019 of prior expenses from service providers and a mortgage insurer, offset by a $21.4 million decline in legal fees for settlements and defense, and a $6.4 million decline in other professional fees. The decline in legal fees was largely the result of the recovery of $8.0 million prior expenses in connection with a settlement from a mortgage insurer, and a general decline in accruals for expenses related to litigation matters in 2020. Other professional services expense decreased in 2020 as a
result of the expenses incurred in 2019 relating to the PHH integration and legal entity reorganization, partially offset by $5.1 million of COVID-19 related expenses in 2020.
Technology and communication expense decreased $19.6 million, or 25%, as compared to 2019 primarily because we no longer license the REALServicing servicing system from Altisource following our transition to Black Knight MSP in June 2019. Our expenses decreased as a result of other factors, including a decline in capitalized technology investments, our closure of U.S. facilities in 2019 and the effects of our other cost reduction efforts, which include bringing technology services in-house and re-engineering initiatives. Depreciation expense decreased $5.0 million as compared to 2019. Technology and communication expenses in 2020 included $3.1 million of COVID-19 related expenses.
Occupancy and equipment expense decreased $20.6 million, or 30%, as compared to 2019, primarily due to the results of our cost reduction efforts, which include consolidating vendors and closing and consolidating certain facilities, and the effect of the decline in the size of the servicing portfolio on various expenses such as postage and mailing services. We partially abandoned two of our leased properties and decided to vacate other leased properties prior to the contractual maturity date of the lease agreements resulting in the recognition of facility-related costs totaling $6.0 million, as compared to $6.6 million of similar costs recognized in 2019 in connection with our decision to vacate other leased properties. Depreciation expense, postage and mailing costs, rent expense and interest on lease liabilities declined $7.8 million, $3.9 million, $3.8 million and $1.9 million, respectively, as compared to 2019. Occupancy and equipment expense in 2020 included $1.4 million of COVID-19 related expenses.
Other expenses increased $17.7 million as compared to 2019 primarily due to a $14.4 million provision release in 2019 for indemnification obligations that was largely the result of favorable updates to default, defect and severity assumptions relative to historical performance, and a $7.2 million expense recovery recorded in 2019 in connection with a settlement with a mortgage insurer, partially offset by $2.8 million lower travel expenses in 2020 due to COVID-19.
In February 2020, we announced our intention to implement certain cost re-engineering initiatives in 2020 to generate further cost savings. Our continuous cost improvement efforts were focused on reducing operating and overhead costs through facility rationalization, strategic sourcing and actions, off-shore utilization, lean process design, simplification, automation and other technology-enabled productivity enhancement. We have incurred a total of $27.6 million re-engineering costs in 2020, including $6.2 million facility-related expenses reported as Occupancy and equipment, $9.7 million Compensation and benefits costs and $6.7 million Professional services costs. In 2019, we incurred a total of $65.0 million PHH integration and re-engineering costs, including $10.1 million facility-related expenses, $35.7 million severance, retention and other employee-related costs and $19.1 million Professional services costs.
Other Income (Loss)
Pledged MSR liability expense decreased $219.8 million as compared to 2019, mostly due to a $116.3 million favorable fair value change and a $158.8 million decline in servicing fee remittance. The decline in net servicing fee remittance to NRZ was driven by the runoff of the portfolio and the termination of the PMC agreement by NRZ in February 2020, which also reduced the servicing fees collected on behalf of NRZ. Partially offsetting the decrease in Pledged MSR liability expense was $60.9 million lower amortization gain of the lump sum payment received from NRZ in 2017 and 2018, as the amortization ended in April 2020.
Income Tax Benefit (Expense)
Although we incurred a pre-tax loss for 2020 of $105.7 million, we recorded an income tax benefit of $65.5 million primarily due to $64.0 million of estimated income tax benefit to be recognized under the CARES Act as a result of modification of the tax rules to allow the carryback of NOLs arising in 2018, 2019 and 2020 tax years to the five prior tax years and the increase to the business interest expense limitation under IRC Section 163(j). We collected $51.4 million in 2020, which represents the tax refund associated with the NOLs generated in 2018 carried back to prior tax years.
Our overall effective tax rates for 2020 and 2019 were 62.0% and (12.4)%, respectively. 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 significantly higher than the U.S. statutory rate of 21%.
Financial Condition Summary
December 31,
2020 2019 $ Change % Change
Cash and cash equivalents $ 284.8 $ 428.3 $ (143.5) (34) %
Restricted cash
72.5 64.0 8.5 13
MSRs, at fair value 1,294.8 1,486.4 (191.6) (13)
Advances, net 828.2 1,056.5 (228.3) (22)
Loans held for sale
387.8 275.3 112.5 41
Loans held for investment, at fair value
7,006.9 6,292.9 714.0 11
Receivables 187.7 201.2 (13.5) (7)
Other assets
588.4 601.5 (13.1) (2)
Total assets $ 10,651.1 $ 10,406.2 $ 244.9 2 %
Total Assets by Segment
Servicing $ 9,847.6 $ 9,580.5 $ 267.1 3 %
Originations 379.2 257.4 121.8 47
Corporate Items and Other 424.3 568.3 (144.0) (25)
$ 10,651.1 $ 10,406.2 $ 244.9 2 %
HMBS-related borrowings, at fair value $ 6,772.7 $ 6,063.4 $ 709.3 12
Advance match funded liabilities 581.3 679.1 (97.8) (14)
Other financing liabilities, at fair value 576.7 972.6 (395.9) (41)
SSTL and other secured borrowings, net
1,069.2 1,025.8 43.4 4
Senior notes, net 311.9 311.1 0.8 -
Other liabilities
924.0 942.2 (18.2) (2)
Total liabilities 10,235.8 9,994.2 241.6 2
Total stockholders’ equity 415.4 412.0 3.4 1
Total liabilities and equity $ 10,651.1 $ 10,406.2 $ 245.0 2 %
Total Liabilities by Segment
Servicing $ 9,163.5 $ 8,945.1 $ 218.4 2 %
Originations 428.5 264.1 164.4 62
Corporate Items and Other 643.7 785.0 (141.3) (18)
$ 10,235.8 9,994.2 $ 241.5 2 %
Book value per share (1) $ 47.81 $ 45.83 $ 1.98 4 %
(1)The Common shares outstanding were retroactively adjusted for the effect of the 1-for-15 reverse stock split completed in August 2020.
Total assets increased by $244.9 million, or 2%, between December 31, 2019 and December 31, 2020 with multiple offsetting changes within our asset categories. First, our total assets increased with an additional $714.0 million loans held for investment, or 11%, mostly due to the continued growth of our reverse mortgage business. Second, the $112.5 million increase in our loans held for sale portfolio is mostly due to higher production volumes. Third, our cash balance decreased by $126.1 million to prepay a portion of the outstanding SSTL balance on January 27, 2020. Fourth, the MSR portfolio decreased by $191.6 million or 13%, due to the $263.7 million derecognition of MSRs in February 2020 upon termination by NRZ of the PMC subservicing agreement, a $251.9 million MSR valuation loss due to the decline in interest rates, mostly recognized in the first quarter of 2020 due to the distressed COVID-19 market conditions, partially offset by our MSR replenishment. Fifth, servicing advances declined $228.3 million due to significant payoff activity and a decline in the non-performing loans in our servicing portfolio by $2.2 billion in UPB, replaced by newer-production performing loans for which our advances are lower.
Total liabilities increased $241.6 million, or 2%, with similar effects as described above. First, our HMBS-related borrowings increased by $709.3 million due to the continued growth of our reverse mortgage business and its securitization. Second, borrowings under our mortgage warehouse facilities and MSR financing facilities increased $186.0 million, offset in part by our $126.1 million prepayment of the SSTL on January 27, 2020. Third, the $395.9 million decline in Other financing liabilities is mostly due to the $263.7 million derecognition of NRZ pledged MSR liability in February 2020 upon termination of the PMC subservicing agreement, and MSR valuation adjustments due to interest rates. Fourth, advance match funded liabilities decreased $97.8 million consistent with the decline in servicing advances.
Total equity increased $3.4 million during 2020 mostly due to a $47.0 million adjustment to stockholders’ equity on January 1, 2020 as a result of our election to measure future reverse mortgage draw commitments at fair value in conjunction with the application of the new credit loss accounting standard, offset by the $40.2 million net loss for 2020, and our repurchase of shares of our common stock during the first quarter.
SEGMENT RESULTS OF OPERATIONS
We report our activities in three segments, Servicing, Originations (previously Lending) 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 performance and to assess the allocation of our resources.
Effective with the fourth quarter of 2020, we report the results of Reverse Servicing in the Servicing segment. Historically, the Reverse Servicing business was included in the reported results of the Originations segment. This realignment of our business segments is consistent with a change in our internal management reporting to the chief operating decision maker and the management of the business and risks. Segment results for 2019 and 2018 have been recast to conform to the current segment structure. Reverse Servicing generated Revenue and Income before income taxes of $63.4 million and $53.0 million, respectively, in 2019. For 2018, Revenue and Income before income taxes were $41.7 million and $33.8 million, respectively. Reverse Servicing assets consist primarily of securitized Loans held for investment - Reverse Mortgages, at fair value.
Servicing
We earn contractual monthly servicing fees pursuant to servicing agreements, 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 Speedpay/collection fees. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions that own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Per-loan fees typically vary based on type of investor and on delinquency status. As of December 31, 2020, we serviced 1.1 million mortgage loans with an aggregate UPB of $188.8 billion. The average UPB of loans serviced during 2020 declined by 15% or $33.8 billion compared to 2019, mostly due to termination of the PMC agreement by NRZ and deboarding of the loans by October 1, 2020, and portfolio runoff, net of newly originated and purchased MSRs.
We are actively pursuing actions to manage the size of our servicing portfolio through expanding our originations business and selectively purchasing MSRs based on our capital availability that are prudent and well-executed with appropriate financial return targets. We closed MSR purchases with $31.7 billion UPB during 2020. We expect to continue to focus on acquiring Agency and government-insured MSR portfolios that meet or exceed our minimum targeted investment returns. We re-entered the forward lending correspondent channel in the second quarter of 2019 to support the growth of our MSR portfolio and we continue to pursue a number of other MSR purchase options, including driving improved recapture rates within our existing servicing portfolio. We acquired new subservicing in the fourth quarter of 2020 through our enterprise sales. We entered into a subservicing agreement with a new subservicing client that we expect to amount to $13 billion of UPB. In addition, we entered into an agreement with Oaktree to launch an MSR joint-venture, or MAV, where PMC would subservice the loans. Both agreements are expected to generate new subservicing volume in 2021.
NRZ is our largest subservicing client, accounting for 36% and 45% of the UPB and loan count in our servicing portfolio as of December 31, 2020, respectively, and approximately 62% of all delinquent loans that Ocwen serviced. NRZ servicing fees retained by Ocwen represented approximately 30% and 36% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ, for 2020 and 2019, respectively (excluding ancillary income). Consistent with a subservicing relationship, NRZ is responsible for funding the advances we service for NRZ. On February 20, 2020, we received a notice of termination from NRZ with respect to the PMC MSR Agreements, and all loans were deboarded by October 1, 2020. This termination was for convenience and not for cause.
In 2017 and early 2018, we renegotiated the Ocwen agreements with NRZ to more closely align with a typical subservicing arrangement whereby we receive a base servicing fee and certain ancillary fees, primarily late fees, loan modification fees and Speedpay fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. We received upfront cash payments in 2018 and 2017 of $279.6 million and $54.6 million, respectively, from NRZ in connection with the resulting 2017 and New RMSR Agreements. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue
Ocwen would receive under the renegotiated agreements. These upfront payments received from NRZ were deferred and recorded within Other income (expense) as they amortized through the remaining term of the original agreements (April 30, 2020).
Our MSR portfolio is carried at fair value, with changes in fair value recorded in MSR valuation adjustments, net. The value of our MSRs is typically correlated to changes in interest rates; as interest rates decrease, the value of the servicing portfolio typically decreases as a result of higher anticipated prepayment speeds. 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 15 years, exhibiting little response to movements in market interest rates. Valuation is also impacted by loan delinquency rates whereby as delinquency rates rise, the value of the servicing portfolio declines.
For those MSR sale transactions with NRZ that do not achieve sale accounting treatment, we present on a gross basis the pledged MSR as an asset and the corresponding liability amount pledged MSR liability on our balance sheet. Similarly, we present the total servicing fees and the fair value changes related to the MSR sale transactions with NRZ within Servicing and subservicing fees, net and MSR valuation adjustment, net. Net servicing fee remittance to NRZ and the fair value changes of the pledged MSR liability are separately presented within Pledged MSR liability expense and are offset by the two corresponding amounts presented in other statement of operations line items. We record both our pledged MSRs and the associated MSR liability at fair value, the changes in fair value of the pledged MSR liability were offset by the changes in fair value of the associated MSRs pledged, presented in MSR valuation adjustments, net.
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.
Our future financial performance will be less impacted by loan resolutions because, under our NRZ agreements, NRZ receives all deferred servicing fees. Deferred servicing fees related to delinquent borrower payments were $169.2 million at December 31, 2020, of which $131.8 million were attributable to NRZ agreements.
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 NRZ, provide for prompt reimbursement of any advances from the owner of the servicing rights. Refer to Note 25 - Commitments to the Consolidated Financial Statements for further description of servicer advance obligations.
Significant Variables
Aggregate UPB and Loan Count. Servicing fees are generally expressed as a percentage of UPB and subservicing fees are earned on a per-loan basis or expressed as a percentage of UPB. 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, to the extent permitted.
Operating Efficiency. Our operating results are heavily dependent on our ability to scale our operations to cost-effectively and efficiently perform servicing activities in accordance with our servicing agreements. To the extent we are unable to process a high volume of transactions consistently and systematically, the cost of our servicing activities increases and has a negative impact on our operating results. To the extent we are unable to complete servicing activities in accordance with the requirements of our servicing agreements, we may incur additional costs or fail to recover otherwise reimbursable costs and advances.
Delinquencies. Delinquencies impact our results of operations and operating cash flows. 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 incur significant costs to finance those advances. 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 business. Items reducing UPB include normal 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, amortization 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 Revenue
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 Servicing business) are reflected in the Servicing segment, consistent with how the activities are managed and internally reported beginning in 2020. Segment results for 2019 and 2018 have been recast to conform to the current segment presentation. 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 $2.0 billion at December 31, 2020. 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.
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 are assigned to HUD and payment is received from HUD through a claims process. 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 reverse mortgage revenue 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 fair value changes include the contractual interest income earned on securitized reverse mortgage loans, net of interest expense on HMBS-related borrowings, and the change in fair value of these assets and liabilities. The fair value of reverse mortgage loans held for investment includes
gains on future tails as a result of our fair value elections. 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.
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, 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 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
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Revenue
Servicing and subservicing fees:
Residential $ 727.7 $ 970.3 $ 930.0 (25) % 4 %
Commercial 3.5 3.8 5.5 (8) (31)
731.2 974.2 935.5 (25) 4
Gain on loans held for sale, net 14.7 5.4 6.0 172 (10)
Reverse mortgage revenue, net 7.6 63.5 44.1 (88) 44
Other revenue, net 4.2 5.4 7.3 (22) (25)
Total revenue 757.7 1,048.5 992.9 (28) 6
MSR valuation adjustments, net (276.3) (120.9) (153.5) 129 (21)
Operating expenses
Compensation and benefits 113.6 144.0 154.5 (21) (7)
Servicing and origination 68.4 101.3 114.6 (32) (12)
Professional services 28.1 42.2 53.6 (33) (21)
Occupancy and equipment 31.0 44.3 42.6 (30) 4
Technology and communications 25.2 32.6 45.6 (23) (28)
Corporate overhead allocations 61.0 197.9 211.7 (69) (7)
Other expenses 4.5 (14.3) 5.9 (131) (342)
Total operating expenses 331.9 548.0 628.6 (39) (13)
Other income (expense)
Interest income 7.1 10.1 7.1 (30) 42
Interest expense (90.7) (102.5) (90.8) (12) 13
Pledged MSR liability expense (152.5) (372.2) (172.3) (59) 116
Gain on sale of MSRs, net - 0.5 1.3 (100) (66)
Other, net 10.8 11.8 (3.2) (8) (469)
Total other expense, net (225.3) (452.3) (257.9) (50) 75
Loss from continuing operations before income taxes $ (75.8) $ (72.7) $ (47.1) 4 % 54 %
The following table provides selected operating statistics for our Servicing segment:
% Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Residential Assets Serviced at December 31
Unpaid principal balance (UPB) in billions:
Performing loans (1) $ 177.6 $ 198.9 $ 243.4 (11) % (18) %
Non-performing loans 10.3 11.2 10.4 (8) 8
Non-performing real estate 0.9 2.2 2.2 (59) -
Total $ 188.8 $ 212.4 $ 256.0 (11) (17)
Conventional loans (2) $ 77.0 $ 95.3 $ 127.1 (19) % (25) %
Government-insured loans 34.8 30.1 27.7 16 9
Non-Agency loans 77.0 87.0 101.3 (11) (14)
Total $ 188.8 $ 212.4 $ 256.0 (11) (17)
Servicing portfolio (5) $ 97.4 $ 76.7 $ 72.4 27 % 6 %
Subservicing portfolio 24.3 17.1 53.1 42 (68)
NRZ (3) (6) 67.1 118.6 130.5 (43) (9)
$ 188.8 $ 212.4 $ 256.0 (11) (17)
Prepayment speed (CPR) (4 )
12-month % Voluntary CPR 15 % 11 % 11 % 36 % - %
12-month % Involuntary CPR 2 2 2 - -
Total 12-month % CPR 20 16 13 25 23
Number (in 000’s):
Performing loans (1) 1,048.7 1,344.9 1,499.0 (22) % (10) %
Non-performing loans 52.2 60.7 52.3 (14) 16
Non-performing real estate 6.7 14.3 11.0 (53) 30
Total
1,107.6 1,419.9 1,562.2 (22) (9)
Conventional loans (2) 349.6 607.9 677.9 (42) % (10) %
Government-insured loans 201.9 185.1 182.6 9 1
Non-Agency loans 556.1 627.0 701.7 (11) (11)
Total 1,107.6 1,419.9 1,562.2 (22) (9)
Servicing portfolio 511.6 472.8 455.7 8 % 4 %
Subservicing portfolio 96.3 77.3 155.6 25 (50)
NRZ (3) 499.6 869.9 951.0 (43) (9)
1,107.6 1,419.9 1,562.2 (22) (9)
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, 2020 include 89,458 prime loans with a UPB of $16.1 billion which we service or subservice. This compares to 111,246 prime loans with a UPB of $20.4 billion at December 31, 2019. Prime loans are generally good credit quality loans that meet GSE underwriting standards.
(3)Loans serviced or subserviced pursuant to our agreements with NRZ.
(4)Average CPR includes voluntary and involuntary prepayments and scheduled principal amortization (not reflected in the above table).
(5)Includes $6.7 billion UPB of reverse mortgage loans that are recognized in our consolidated balance sheet at December 31, 2020.
(6)Includes $3.1 billion UPB of subserviced loans at December 31, 2020.
The following table provides selected operating statistics related to our reverse mortgage loans reported within our Servicing segment:
% Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Reverse Mortgage Loans at December 31
Unpaid principal balance (UPB) in millions:
Loans held for investment (1) $ 6,299.6 $ 5,658.3 $ 4,985.0 11 % 14 %
Active Buyouts (2) 28.4 10.2 2.4 178 325
Inactive Buyouts (2) 60.9 26.4 15.7 131 68
Total $ 6,389.0 $ 5,694.9 $ 5,003.1 12 14
Inactive buyouts % to total 0.95 % 0.46 % 0.31 % 107 48
Future draw commitments (UBP) in millions: 2,044.4 1,937.4 1,426.8 6 36
Fair value in millions:
Loans held for investment (1) $ 6,872.3 $ 6,120.9 $ 5,446.8 12 12
HMBS related borrowings 6,772.7 6,063.4 5,380.4 12 13
Net asset value $ 99.6 $ 57.5 $ 66.4 73 (13)
Future Value (3) $ - $ 47.0 $ 68.1 (100) (31)
(1)Securitized loans only; excludes unsecuritized loans as reported within the Originations segment.
(2)Buyouts are reported as Loans held for sale, Accounts Receivable or REO depending on the loan and foreclosure status.
(3)Future Value represented the unrecognized net present value of estimated future cash flows from customer draws of the reverse mortgage loans (tails) and projected performance assumptions based on historical experience and industry benchmarks discounted at 12% related to HECM loans originated prior to January 1, 2019. On January 1, 2020, we made an irrevocable election to account for tails at fair value and recognized the $47.0 million Future Value through stockholders’ equity. Excludes the fair value of future draw commitments related to HECM loans purchased or originated after December 31, 2018 that we elected to carry at fair value.
The following table provides selected operating statistics related to advances for our Servicing segment:
December 31, 2020 December 31, 2019
Advances by investor type Principal and Interest Taxes and Insurance Foreclosures, bankruptcy, REO and other Total Principal and Interest Taxes and Insurance Foreclosures, bankruptcy, REO and other Total
Conventional $ 4 $ 30 $ 5 $ 38 $ 4 $ 20 $ 27 $ 51
Government-insured 1 55 28 84 - 47 26 73
Non-Agency 272 279 155 705 410 354 168 932
Total, net $ 277 $ 365 $ 187 $ 828 $ 415 $ 420 $ 221 $ 1,056
The following table provides the rollforward of activity of our portfolio of residential assets serviced for the years ended December 31, that includes MSR and subserviced loans:
Amount of UPB (in billions)
Count (in 000’s)
2020 2019 2018 2020 2019 2018
Portfolio at beginning of year
$ 212.4 $ 256.0 $ 179.4 1,419.9 1,562.2 1,221.7
Acquisition of PHH - - 119.3 - - 537.2
Other portfolio additions(1)(2) 57.2 26.1 9.4 194.5 100.6 41.0
Total additions 57.2 26.1 128.7 194.5 100.6 578.2
Sales (0.2) (1.2) (0.6) (1.6) (8.3) (3.3)
Servicing transfers (2) (3) (40.2) (30.3) (23.0) (303.1) (48.5) (73.9)
Runoff (40.3) (38.3) (28.5) (202.1) (186.0) (160.4)
Portfolio at end of year $ 188.8 $ 212.3 $ 256.0 1,107.6 1,420.0 1,562.3
(1)Additions include purchased MSRs on portfolios consisting of 46,794 loans with a UPB of $15.8 billion that have not yet transferred to the Black Knight MSP servicing system as of December 31, 2020. These loans are scheduled to transfer onto Black Knight MSP by April 1, 2021. 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.
(2)Excludes the volume 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.
(3)Includes 270,218 deboarded loans with a UPB of $34.3 billion related to the termination of the subservicing agreement between NRZ and PMC on February 20, 2020. Refer to Note 10 - Rights to MSRs.
Year Ended December 31, 2020 versus 2019
Servicing and Subservicing Fees
Years Ended December 31, % Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Loan servicing and subservicing fees
Servicing $ 216.2 $ 227.5 $ 227.7 (5) % - %
Subservicing 28.9 15.4 8.9 88 73
NRZ 383.7 577.0 539.0 (34) 7
Servicing and subservicing fees 628.8 820.0 775.6 (23) 6
Ancillary income 102.5 154.2 159.9 (34) (4)
Total $ 731.2 $ 974.2 $ 935.5 (25) 4
The 25% decline in total servicing and subservicing fees in 2020 as compared to 2019 is driven by two main factors: the reduction in fees collected on behalf of NRZ, as further discussed below, and the reduction in ancillary and float income which was mostly due to the COVID-19 environment and lower interest rates.
Servicing fees declined $11.3 million or 5% as compared to 2019. As our average volume serviced (MSRs owned) increased by 3% year-over-year, the decline in revenue is mostly due to the shortfall of servicing fee collections on loans under forbearance, and lower collection of deferred servicing fees. We do not recognize any servicing fees on GSE loans under forbearance that were not paying during the period, and have a shortfall of one month of servicing fees for PLS loans under forbearance. We typically collect deferred servicing fees upon loan liquidation and the moratorium and restrictions on foreclosures reduced our collection in 2020 as compared to 2019. The deferral of servicing fee collections due to forbearance is not expected to significantly impact our total cumulative revenue over the life of the loan but will reduce near-term revenue and cash flow. The delay in servicing fee collection is expected to be partially offset by lower runoff in our MSR portfolio, as the deferred servicing fees generally remain projected as future cash flows in the MSR valuation model.
Subservicing fees increased by $13.4 million as compared to 2019, mostly explained by the PMC subservicing agreement with NRZ. Upon notice of termination by NRZ on February 20, 2020, the servicing fees collected on behalf of NRZ net of the remittance to NRZ has been reported as subservicing fees instead of NRZ MSR servicing fees in prior periods, with $15.9 million recognized in 2020. Ocwen performed subservicing of these loans subject to termination and earned subservicing fee until loan deboarding, which occurred on September 1 and October 1, 2020.
The following table below presents the respective drivers of residential and commercial loan servicing and subservicing fees.
Years Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Servicing and subservicing fee
Servicing fee $ 216.2 $ 227.5 $ 227.7 (5) % - %
Average servicing fee (% of UPB) 0.28 0.30 0.32 (7) % (6) %
Subservicing fee (1) $ 28.9 $ 15.4 $ 8.9 88 73 %
Average monthly fee per loan (in dollars) $ 9 $ 12 $ 14 (25) (14) %
Residential assets serviced
Average UPB ($ in billions):
Servicing portfolio
$ 78.30 $ 76.14 $ 72.28 3 % 5 %
Subservicing portfolio 19.84 31.23 15.93 (36) 96 %
NRZ 100.46 125.07 104.77 (20) 19 %
Total $ 198.60 $ 232.44 $ 192.98 (15) % 20 %
Average number (in 000’s):
Servicing portfolio 466.1 471.8 463.5 (1) % 2 %
Subservicing portfolio 268.5 106.2 53.0 153 100 %
NRZ 561.6 913.2 748.4 (39) 22 %
1,296.2 1,491.2 1,264.9 (13) % 18 %
(1)Subservicing fees for the year ended December 31, 2020 includes $15.9 million of fees earned on the NRZ PMC MSR Agreements upon receiving the notice of cancellation in February 2020.
The NRZ servicing fee includes the servicing fee collected on behalf of NRZ relating to the MSRs sold but not derecognized from our balance sheet. Under GAAP, we present servicing fees collected and remitted on a gross basis, with the servicing fees remitted to NRZ reported as Pledged MSR liability expense. The NRZ collected fees declined by $193.3 million as compared to 2019.
The decline in the NRZ fee collection is driven by the decline in the average UPB of 20% as compared to 2019. The volume decline is mostly explained by the NRZ portfolio runoff and the derecognition of the MSRs in connection with the termination of the PMC agreement by NRZ on February 20, 2020. As the NRZ 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 both servicing fees collected and subservicing fees retained by Ocwen under the NRZ agreements, together with the previously recognized amortization gain of the lump-sum payments received in connection with the 2017 Agreements and New RMSR Agreements. See Note 10 - Rights to MSRs for further information.
NRZ Servicing and Subservicing Fees Years Ended December 31,
2020 2019 2018
Servicing fees collected on behalf of NRZ $ 383.7 $ 577.0 $ 539.0
Servicing fees remitted to NRZ (1) (278.8) (437.7) (396.7)
Retained subservicing fees on NRZ agreements (2) $ 104.8 $ 139.3 $ 142.3
Amortization gain of the lump-sum cash payments received (including fair value change) (1) (3) 34.2 95.1 148.9
Total retained subservicing fees and amortization gain of lump-sum payments (including fair value change)
$ 139.0 $ 234.4 $ 291.2
Average NRZ UPB (in billions) (4) $ 100.5 $ 125.1 $ 104.8
Average retained subservicing fees as a % of NRZ UPB (excluding amortization gain of lump-sum cash payments) 0.10 % 0.11 % 0.14 %
(1)Reported within 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 NRZ, and subservicing fees earned under subservicing agreements.
(3)In 2017 and early 2018, we renegotiated the Ocwen agreements with NRZ to more closely align with a typical subservicing arrangement whereby we receive a base servicing fee and certain ancillary fees, primarily late fees, loan modification fees and Speedpay fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. We received upfront cash payments in 2018 and 2017 of $279.6 million and $54.6 million, respectively, from NRZ in connection with the resulting 2017 and New RMSR Agreements. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue Ocwen received under the renegotiated agreements. These upfront payments received from NRZ were deferred and recorded within Other income (expense), Pledged MSR liability expense, as they amortized through the term of the original agreements (April 2020). See Note 10 - Rights to MSRs for further information.
(4)Excludes the UPB of loans subserviced under the PMC Servicing Agreement after February 20, 2020 due to the notice of termination by NRZ, and excludes the UPB of loans under subservicing agreements.
The following table presents the detail of our ancillary income:
Years Ended December 31, % Change
Ancillary Income 2020 2019 2018 2020 vs 2019 2019 vs 2018
Late charges $ 47.7 $ 57.2 $ 61.5 (17) % (7) %
Custodial accounts (float earnings) 9.9 47.5 40.4 (79) 18
Loan collection fees 13.0 15.5 18.4 (16) (16)
HAMP fees 0.6 5.5 14.3 (90) (62)
Other 31.3 28.5 25.4 10 12
Ancillary income $ 102.5 $ 154.2 $ 159.9 (34) % (4) %
Number of completed modifications 28,322 25,754 39,545 10 % (35) %
Revenue recognized in connection with loan modifications $ 30.2 38.5 59.4 (22) (35)
Ancillary income declined by $51.7 million, as compared to 2019 primarily due to a $37.6 million, or 79% decline in float income that was mainly due to lower interest rates. The average 1-month LIBOR rate dropped over 120 basis points as compared to 2019. The combined effect of lower servicing volume, the COVID-19 environment restricting late fees or collection fees on loans under forbearance, and lower modification fees also contributed to the decline in ancillary income. Revenue recognized in connection with loan modifications, including HAMP fees and other fees, decreased $8.3 million due to the expiration of the program.
Reverse Mortgage Revenue, Net
Reverse mortgage revenue, net is comprised of the net change in fair value of securitized loans held for investment and HMBS-related borrowings. The decline of $55.9 million, or 88%, as compared to 2019 is primarily attributable to the fair value election for future draw commitments and the unfavorable assumption updates due to the COVID-19 environment and increased prepayments.
We recorded a $31.2 million gain on tail draws upon their funding and securitization in 2019 and nil in 2020 due to our fair value election. On January 1, 2020, we elected fair value accounting for future draw commitments on HECM reverse mortgage loans purchased or originated before December 31, 2018. The fair value election resulted in the one-time recognition of $47.0 million gain through stockholders’ equity on January 1, 2020. Under this accounting treatment, the fair value of tail draws is recorded together with the loan at the time of lock within the Originations segment, while any subsequent change in fair value is recorded within the Servicing segment. As such, during 2020 we did not recognize any gain on tail draws in the Servicing segment.
We recorded an additional $21.1 million fair value loss in 2020 as compared to 2019 due to unfavorable assumption updates and higher actual prepayments. The unfavorable assumption updates in 2020 were primarily related to elevated levels of projected prepayments in the market, lower tail gains and other COVID-specific updates, including higher mortality and inactive status or delinquency. We did not record any significant change in fair value of securitized loans held for investment net of HMBS-related borrowings relating to interest rates and spreads between 2019 and 2020.
MSR Valuation Adjustments, Net
The following table summarizes the MSR valuation adjustments, net reported in our Servicing segment, with the breakdown of the total MSRs recorded on our balance sheet between our owned MSR and the pledged MSRs transferred to NRZ that did not achieve sale accounting treatment:
Years Ended December 31,
2020 2019 2018
Total (1) Owned MSR (1) Pledged MSR (2) (NRZ) Total (1) Owned MSR (1) Pledged MSR (2) (NRZ) Total (1) Owned MSR (1) Pledged MSR (2) (NRZ)
Runoff $ (173.3) $ (109.5) $ (63.8) $ (215.4) $ (102.0) $ (113.4) $ (159.3) $ (82.0) $ (77.3)
Rate and assumption change (1) (147.9) (129.1) (18.8) 94.0 (53.1) 147.1 5.9 10.8 (4.9)
Hedging gain 44.9 44.9 - 0.5 0.5 - - - -
Total $ (276.3) $ (193.7) $ (82.6) $ (120.9) $ (154.6) $ 33.8 $ (153.5) $ (71.2) $ (82.2)
(1)Excludes gains of $41.7 million for the year ended December 31, 2020 (nil in 2019) on the revaluation of MSRs purchased in disorderly markets, that is reported in the Originations segment.
(2)For those MSR sale transactions with NRZ that do not achieve sale accounting treatment, we present gross the pledged MSR as an asset and the corresponding liability amount pledged MSR liability on our balance sheet. Because we record both our pledged MSRs with NRZ and the associated MSR liability at fair value, the changes in fair value of the pledged MSR liability are offset by the changes in fair value of the associated pledged MSR asset, presented in MSR valuation adjustments, net. Although fair value changes are separately presented in our statement of operations, we are not exposed to any fair value changes of the MSR pledged to NRZ. See Note 10 - Rights to MSRs for further information.
We reported a $276.3 million loss in MSR valuation adjustments, net in 2020, with a $193.7 million loss on our owned MSRs and an $82.6 million loss on the MSRs transferred and pledged to NRZ.
The $193.7 million loss on our owned MSRs in 2020 is comprised of $109.5 million portfolio runoff and a $129.1 million loss due to changes in interest rates and assumptions, partially offset by a $44.9 million hedging gain. The elevated portfolio runoff is driven by high prepayments of our GSE portfolio due to historically low interest rates, with a 98 basis point decline in the 10-year swap rate during 2020, and an 81 basis-point decline in 2019. We implemented a MSR macro-hedge strategy in the fourth quarter of 2019 to partially protect us against interest rate volatility. Refer to the Market Risk sections for further detail on our hedging strategy and its effectiveness.
Ocwen replenished and grew its GSE portfolio in 2020 with total originations and purchases of $36.2 billion UPB of MSR or 66% of the GSE owned portfolio at December 31, 2020, resulting in a weighted average coupon of 3.40% as compared to 4.26% as of December 31, 2019. MSR runoff due to prepayment is generally lower with lower mortgage loan portfolio coupons. Comparatively, most of the non-Agency MSR portfolio relates to loans originated pre-2008 financial crisis and are
less sensitive to interest rates. The following table provides information regarding the changes in the fair value and the UPB of our portfolio of owned MSRs during 2020, with the breakdown by investor type.
Fair Value UPB ($ in billions)
GSEs Ginnie Mae Non-
Agency Total GSEs Ginnie Mae Non-
Agency Total
Beginning balance $ 307.2 $ 99.0 $ 165.1 $ 571.3 $ 30.0 $ 14.4 $ 26.6 $ 71.0
Additions
New cap.
62.0 6.7 - 68.7 6.3 0.6 - 6.9
Purchases (1) 267.0 18.8 3.1 288.9 30.0 1.6 0.4 32.0
Sales/servicing transfers (1.3) (0.2) (0.1) (1.6) (0.2) - - (0.2)
Sales/calls - - - - (0.1) - - (0.1)
Change in fair value:
Runoff (70.7) (11.6) (29.0) (111.3) (10.9) (3.5) (4.9) (19.3)
Assumptions (2) (56.3) (37.3) 5.4 (88.2) - - - -
Ending balance $ 507.9 $ 75.4 $ 144.5 $ 727.8 $ 55.1 $ 13.1 $ 22.1 $ 90.3
Fair value
(% of UPB) 0.92 % 0.58 % 0.65 % 0.81 %
(1)Includes $15.0 billion UPB of GSE MSRs purchased in bulk transactions in December 2020.
(2)Includes gains of $41.7 million on the revaluation of MSRs purchased in COVID-19 market conditions, that is reported in the Originations segment.
The $82.6 million loss on the MSRs transferred to NRZ does not affect our net income as it is offset by a corresponding $82.6 million gain on the pledged MSR liability, reported as Pledged MSR liability expense. The factors underlying the fair value loss of the NRZ Pledged MSR and its variance between 2019 and 2020 are similar to our owned MSR, discussed above, with the exception of the fair value gain due to assumptions on non-Agency MSR (NRZ pledged) reported in 2019, and the lower UPB due to the termination of the PMC servicing agreement by NRZ in February 2020.
Compensation and Benefits
Years Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Compensation and benefits $ 113.6 $ 144.0 $ 154.5 (21) % (7) %
Average Employment - Servicing
India and other 2,880 3,360 4,097 (14) % (18)
U.S. 730 1,158 1,128 (37) 3
Total 3,610 4,518 5,225 (20) (14)
Compensation and benefits expense declined $30.4 million, or 21% as compared to 2019 due to our efforts to re-engineer our cost structure and align headcount in our servicing operations with the size of our servicing portfolio. Salaries and benefit expenses declined $28.6 million and $6.1 million, respectively, due to a 20% lower average servicing headcount, as compared to 2019, and the change in the composition of our headcount with relatively more offshore, and less U.S. resources. Offshore headcount, whose average compensation cost is relatively lower, increased from 74% to 80% of total headcount, compared to 2019. A $3.6 million decline in commissions also contributed to the decline in expense. Partially offsetting these declines are $1.5 million of costs related to our 2020 re-engineering initiatives, $3.0 million incremental incentive compensation and $4.2 million of compensation expenses related to COVID-19.
Servicing Expense
Servicing expense primarily includes claim losses and interest curtailments on government-insured loans and provision expense for advances and servicing representation and warranties. Servicing expense declined $32.8 million, or 32%, as compared to 2019 primarily due to a $13.0 million decrease in government-insured claim loss provisions on reinstated or modified loans and a general decline in other servicer-related expenses that was primarily driven by a 13% reduction in the average number of loans in our servicing portfolio. The reduction in government-insured claim loss provisions is due to the combined effect of a decline in claims, mostly due to the COVID-19 moratorium, and lower loss severity, mostly driven by a reduction in the foreclosure and liquidation timeline of loans. The government-insured claim loss provisions recorded in 2019
included claims of a legacy portfolio with higher severity loans. Government-insured claim loss provisions are generally offset by changes in the fair value of the corresponding MSRs, which are recorded in MSR valuation adjustments, net. The decrease is also attributable to $9.1 million improved advance recoveries, which decreased loss severity rates used in the computation of advance reserves, and the recovery of $3.1 million previously recognized as Servicing and origination expense in connection with a settlement from a mortgage insurer as well as a $6.8 million release of indemnification reserves related to such settlement.
Other Operating Expenses
Occupancy and equipment expense decreased $13.3 million, or 30% in 2020, as compared to 2019. The decrease is largely due to the effect of the decline in the size of the servicing portfolio on various direct and allocated expenses, including postage and mailing services, which declined by $4.6 million, and the decline in our overall occupancy and equipment expenses due to certain facility closures as part of the integration of PHH.
Professional services expense declined $14.0 million, or 33%, as compared to 2019 due to a $14.5 million decline in legal fees largely due to declines in legal expenses relating to the PHH integration and litigation and a decline in fees incurred in connection with the conversion of NRZ’s Rights to MSRs to fully-owned MSRs. Professional services expenses in 2020 included $1.6 million of COVID-19 related expenses
Technology and communication expense declined $7.4 million, or 23%, as compared to 2019. The costs savings were driven by our servicing platform integration as we no longer license the REALServicing servicing system from Altisource following our transition to Black Knight MSP beginning in June 2019.
Corporate overhead allocations declined $136.9 million, as compared to 2019, primarily due to lower compensation and benefits, technology expenses, legal fees, and occupancy and equipment costs. The relative weight of average headcount to the consolidated organization declined as compared to 2019. Furthermore, the allocation methodology of corporate overhead was updated in the first quarter 2020 and resulted in lower expenses being allocated to the Servicing segment. Refer to the Corporate Items and Other segment discussion.
Other expenses increased $18.8 million as compared to 2019 primarily due to a lower provision for indemnification obligations in 2019 that was largely a result of the reversal of a portion of the liability for representation and warranty obligations related to favorable updates to default, defect and severity assumptions relative to historical performance. In addition, Other expenses for 2019 also includes a $7.2 million expense recovery in connection with a settlement with a mortgage insurer.
Other Income (Expense)
Other income (expense) includes primarily net interest expense and the pledged MSR liability expense.
Years Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Interest Expense
Advance match funded liabilities $ 24.1 $ 26.9 $ 30.7 (10) % (12) %
Other secured borrowings 21.3 11.6 6.3 84 84 %
Corporate debt interest expense allocation 38.2 54.9 49.0 (30) 12 %
Escrow and other 7.0 9.1 4.8 (23) 90 %
Total interest expense $ 90.7 $ 102.5 $ 90.8 (12) % 13 %
Average balances
Average balance of advances $ 891.3 $ 1,006.3 $ 1,214.4 (11) % (17) %
Advance match funded liabilities 603.7 671.8 737.0 (10) (9) %
Other secured borrowings 376.2 191.5 74.6 96 157 %
Effective average interest rate n/m
Advance match funded liabilities 4.00 % 4.00 % 4.17 % - % (4) %
Other secured borrowings 5.66 6.08 8.48 (7) (28) %
Average one-month LIBOR 0.52 % 1.75 % 2.45 % (70) % (29) %
Interest expense declined by $11.9 million, or 12%, compared to 2019. The decline in interest expense is primarily due to the decline in the amount of debt used to fund servicing advances and other servicing assets, as reflected in the decline in the interest expense allocation from the Corporate segment. This decline was offset in part by an increase in interest expense on new MSR financing facilities entered into during the third and fourth quarters of 2019.
Pledged MSR liability expense relates to the MSR sale agreements with NRZ that do not achieve sale accounting and are presented on a gross basis in our financial statements. See Note 10 - Rights to MSRs to the Consolidated Financial Statements. Pledged MSR liability expense includes the servicing fee remittance to NRZ and the fair value changes of the pledged MSR liability.
The following table provides information regarding the Pledged MSR liability expense:
Years Ended December 31,
2020 2019 2018
Net servicing fee remitted to NRZ (1) $ 278.8 $ 437.7 $ 396.7
Pledged MSR liability fair value (gain) loss (2) (82.6) 33.8 (82.2)
2017/18 lump sum amortization gain (34.2) (95.1) (148.9)
Other (9.6) (4.2) 6.7
Pledged MSR liability expense $ 152.4 $ 372.2 $ 172.3
(1)Offset by corresponding amount recorded in Servicing and subservicing fee. See table below.
(2)Offset by corresponding amount recorded in MSR valuation adjustments, net. See table below.
Pledged MSR liability expense decreased $219.7 million as compared to 2019, largely due to a $116.3 million favorable fair value change and a $158.8 million decline in servicing fee remittance. Pledged MSR liability expense for 2019 included an unfavorable fair value adjustment resulting from, among other factors, an update to our MSR fair value assumptions associated with improved collateral performance and market trade activity. The decline in net servicing fee remittance to NRZ was driven by the runoff of the portfolio and the termination of the PMC agreement by NRZ in February 2020, which also reduced the servicing fees collected on behalf of NRZ. Refer to the above discussions of MSR valuation adjustments, net (Pledged MSR to NRZ) and Servicing and subservicing fee (NRZ).
Partially offsetting the decrease in Pledged MSR liability expense was $60.9 million lower amortization gain related to the lump-sum cash payments received from NRZ in 2017 and 2018. This decrease is due to the lump-sum payments being fully amortized at the end of the second quarter of 2020. Refer to the above discussion of NRZ servicing fees.
The table below reflects the condensed consolidated statement of operations together with the amounts related to the NRZ pledged MSRs that offset each other (nil impact on net income/loss). The table provides information related to the impact of the accounting for the NRZ relationship that did not achieve sale accounting treatment, and is not intended to reflect the profitability of the NRZ relationship. Net servicing fee remittance and pledged MSR fair value changes are presented on a gross basis and are offset by corresponding amounts presented in other statement of operations line items. In addition, because we record both our pledged MSRs and the associated pledged MSR liability at fair value, the changes in fair value of the pledged MSR liability were offset by the changes in fair value of the MSRs pledged, presented in MSR valuation adjustments, net. Accordingly, only the lump sum amortization gain and the amount reported in “Other” in the table above affect our net earnings.
Years Ended December 31,
2020 2019 2018
Statement of Operations NRZ Pledged MSR-related Amounts Statement of Operations NRZ Pledged MSR-related Amounts Statement of Operations NRZ Pledged MSR-related Amounts
Total revenue $ 960.9 $ 278.8 $ 1,123.4 $ 437.7 $ 1,063.0 $ 396.7
MSR valuation adjustments, net (251.9) (82.6) (120.9) 33.8 (153.5) (82.2)
Total operating expenses 575.7 - 673.9 - 779.0 -
Total other expense, net (239.0) (196.3) (455.1) (471.4) (202.0) (314.5)
Loss before income taxes $ (105.7) $ - $ (126.5) $ - $ (71.5) $ -
Originations
We originate and purchase loans and MSRs through multiple channels, including recapture, retail, wholesale, correspondent, flow MSR purchase agreements, the GSE Cash Window programs and bulk MSR purchases.
We originate or purchase conventional loans (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency) and government-insured (FHA or VA) forward mortgage loans. We generally sell and securitize loans on a servicing-retained basis. 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 HECM mortgage-backed securities (HMBS) that are guaranteed by Ginnie Mae.
Our recapture channel focuses on targeting existing Ocwen customers by offering them competitive mortgage refinance opportunities (i.e., portfolio recapture), 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. Our recapture lending activity partially mitigates this risk. Origination volume and related gains are a natural economic hedge, to a certain degree, to the impact of declining MSR values as interest rates decline. Effective June 1, 2019, we no longer perform any portfolio recapture on behalf of NRZ. Previously under the terms of our agreements with NRZ, to the extent we refinanced a loan underlying the MSRs subject to these agreements, we were obligated to transfer such recaptured MSR to NRZ under the terms of a separate subservicing agreement.
We re-entered the forward lending correspondent channel in the second quarter of 2019 to drive higher servicing portfolio replenishment. We purchase closed loans from our network of correspondent sellers and sell and securitize them. As of December 31, 2020, we have client relationships with 131 approved correspondent sellers, or 85 new sellers since December 31, 2019.
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 HUD. Loans originated under this program are generally insured by the FHA, which provides investors with protection against risk of borrower default. In the second half of 2019, we started originating proprietary reverse mortgage loans that are not FHA-insured and are sold servicing-released to third parties. The financial statement impact of these non-HECM loans was negligible in 2019 and 2020. We retain the servicing rights to reverse HECM loans securitized through the Ginnie Mae HMBS program; however, the securitization program fails sale accounting such that the underlying HECM loans are not de-recognized upon securitization. The activities and financial performance related to reverse mortgage loans that are securitized (internally referred to as Reverse Servicing business) are reflected in the Servicing segment, consistent with how the activities are managed and internally reported beginning in 2020. Segment results for 2019 and 2018 have been recast to conform to the current segment presentation. See Note 23 - Business Segment Reporting for further information.
After origination, we package and sell the loans in the secondary mortgage market, through GSE and Ginnie Mae securitizations on a servicing retained basis and through whole loan transactions on a servicing released basis. Lending revenues mostly include interest income earned for the period the loans are held by us, gain on sale revenue, which represents the difference between the origination 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 reverse mortgage 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. No gain or loss is recognized upon securitization. Securitized loans are reflected within the Servicing segment.
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 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 GSE Cash Window programs and bulk MSR purchases. The GSE 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 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 GSE Cash Window programs. As of December 31, 2020, we have client relationships with 322 sellers, including 191 MSR co-issue and flow sellers and 131 correspondent sellers.
We initially recognize our MSR origination with the associated economics in our Originations business, and subsequently transfer the MSR to our Servicing segment at fair value. Our Servicing segment reflects all subsequent performance associated with the MSR, including funding cost, run-off and other fair value changes.
We source additional servicing volume through our subservicing and interim servicing agreements and we intend to grow our subservicing business through our enterprise sales. We do not report any revenue or gain associated with subservicing, as it is reported within the Servicing segment. However, sales efforts and certain costs - marginal compensation and benefits - are managed and reported within the Originations segment.
Significant Variables
Economic Conditions. General economic conditions impact the capacity for consumer credit and the supply of capital. More specifically, employment 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.
Market Size and Composition. Changes in mortgage rates directly impact the demand for both purchase and refinance forward mortgages. 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 is likewise 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.
Investor Demand. The liquidity of the secondary market impacts the size of the 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 are closely correlated with changes in market size. 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
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Revenue
Gain on loans held for sale, net $ 105.2 $ 32.9 $ 31.3 220 % 5 %
Reverse mortgage revenue, net 53.1 22.9 16.1 132 42
Other revenue, net 21.0 6.0 4.5 251 33
Total revenue 179.3 61.7 52.0 191 19
MSR valuation adjustments, net 41.7 - - n/m n/m
Operating expenses
Compensation and benefits 62.2 43.8 37.4 42 17
Servicing and origination 7.2 7.0 16.4 3 (57)
Occupancy and equipment 5.4 6.4 6.0 (16) 7
Technology and communications 5.5 3.2 1.9 72 68
Professional services 9.3 1.3 1.2 615 8
Corporate overhead allocations 18.2 6.0 3.7 203 63
Other expenses 6.5 4.8 6.7 35 (28)
Total operating expenses 114.4 72.5 73.3 58 (1)
Other income (expense)
Interest income 7.0 5.2 4.4 35 20
Interest expense (9.8) (7.6) (7.3) 29 4
Other, net 0.4 0.9 1.6 (56) (44)
Total other income (expense), net (2.5) (1.5) (1.4) 67 7
Income (loss) from continuing operations before income taxes
$ 104.2 $ (12.2) $ (22.7) (954) (46)
The following table provides selected operating statistics for our Origination segment:
Years Ended December 31, % Change
UPB in millions 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Loan Production by Channel
Forward loans
Correspondent $ 5,685.5 $ 494.0 $ 0.4 n/m n/m
Recapture 1,309.8 656.6 868.1 99 (24)
Wholesale - - 1.8 n/m (100)
$ 6,995.3 $ 1,150.6 $ 870.3 508 32
% Purchase production 20 18 4 11 350
% Refinance production 80 82 96 (2) (15)
Reverse loans (1)
Correspondent $ 470.3 $ 411.6 $ 360.4 14 % 14 %
Wholesale 300.5 238.2 170.9 26 39
Retail 170.8 79.6 62.4 115 28
$ 941.6 $ 729.4 $ 593.7 29 23
MSR Purchases by Channel (Forward only)
GSE Cash Window / Flow MSR purchases 15,111.6 908.3 - n/m n/m
Bulk MSR purchases 16,566.2 14,616.7 144.3 13 n/m
$ 31,677.8 $ 15,525.0 $ 144.3 104 n/m
Total (2) $ 39,614.7 $ 17,405.0 $ 1,608.3 128 982
Short-term loan commitment (at year end)
Forward loans $ 619.7 $ 204.0 132.1 204 % 54 %
Reverse loans 11.7 28.5 18.1 (59) 57
Average Employment - Originations
U.S. 461 387 425 19 % (9) %
India and other 177 97 131 82 (26)
Total 638 484 556 32 (13)
(1)Loan production excludes reverse mortgage loan draws by borrowers disbursed subsequent to origination.
(2)Excludes interim subservicing.
Gain on Loans Held for Sale
The following table provides information regarding Gain on loans held for sale by channel and the related origination volume and margin:
Years Ended December 31, % Change
2020 2019 2020 vs 2019
Gain on Loans Held for Sale (1)
Correspondent $ 18.6 $ 0.1 n/m
Recapture 86.6 32.8 164
$ 105.2 $ 32.9 220 %
% Gain on Sale Margin (2)
Correspondent 0.32 % 0.02 % n/m
Recapture 5.55 5.00 11
1.42 % 2.65 % (46) %
Origination UPB (3)
Correspondent $ 5,851.1 $ 584.6 901 %
Recapture 1,560.4 655.5 138
$ 7,411.5 $ 1,240.1 498 %
(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 volume UPB -see (3) below. 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 plus the change in the period in the pull-through adjusted UPB of IRLCs.
Gain on loans held for sale, net, increased $72.3 million, or 220%, as compared to 2019, mostly due to the significant increase (approximately 500%) in our loan production volume. The $5.8 billion new production volume increase in 2020 is driven by both our correspondent channel that we re-started in the second quarter of 2019 and our recapture channel. Our pipeline, or lock commitments, significantly increased in 2020 benefit from the refinance opportunities in the market driven by mortgage rate decrease to historical low levels. Both margins in the correspondent and recapture channels were higher in 2020, as compared to 2019, due to significant volatility attributed to the rate rally and COVID-19 related market disruption. The lower average gain on sale margin is mainly due to our channel mix, with an increased relative weight of our lower-margin correspondent production.
Reverse Mortgage Revenue, Net
The following table provides information regarding the Reverse mortgage revenue, 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 volume and margin:
Years Ended December 31, % Change
2020 2019 2020 vs 2019
Origination UPB (1) $ 915.4 $ 731.4 25 %
Origination margin (2) 5.81 % 3.12 % 86
Reverse mortgage revenue, net (Originations) (3) $ 53.1 $ 22.9 132 %
(1)Defined as the UPB of loans funded in the period plus the change in the period in the pull-through adjusted UPB of IRLCs.
(2)Ratio of Originations gain to origination UPB - see (1) above.
(3)Includes gain on new origination, and loan fees and other.
We reported $53.1 million Reverse mortgage revenue, net in 2020, a $30.3 million or 132% increase as compared to 2019. As detailed in the above table, the increase is driven by both a volume increase and a higher average margin. The higher average margin increase is mostly driven by a change to the channel mix, in addition to market related dynamics driving
margins upward in 2020 that we anticipate to abate in 2020 as margins normalize and originations mix wherein the lower margin, higher volume channels weigh down the average margin.
Other revenue, net
Other revenue, net increased $15.0 million as compared to 2019 primarily due to higher fees earned on increased loan origination volume and setup fees earned for loans boarded on our servicing platform, mostly driven by the increased volume of our correspondent channel and flow MSR purchases.
MSR Valuation Adjustments, Net
MSR valuation adjustments, net includes a gain of $41.7 million in 2020 (nil in 2019) due to the revaluation gains on certain MSRs opportunistically purchased through bulk MSR purchases, the GSE Cash Window programs, and flow purchases. Due to the market dislocation created by the COVID-19 environment, we seized the opportunity to purchase certain MSRs with a purchase price at a discount to fair value. Opportunities for fair value discount or margins were larger in the early period of the pandemic and have reduced as markets start to normalize. In addition, as an aggregator of MSRs, we recognized valuation adjustments for differences in the exit markets in accordance with the accounting fair value guidance. We report such initial margin gains, including due to the revaluation to mid-point of the bid-ask spread, within the Originations segment since the segment’s business objective is the sourcing of new MSRs at targeted returns. We transfer the MSR from the Originations segment to the Servicing segment at fair value upon closing.
Operating Expenses
Operating expenses increased $41.9 million, or 58%, as compared to 2019, primarily due to increases in our direct expenses, including an $18.4 million increase in Compensation and benefits, a $12.2 million increase in corporate overhead allocations and an $8.0 million increase in Professional services. Certain expenses are variable, and as a result, as origination volume increased so did the related expenses. Examples include commissions, recorded in Compensation and benefits expense, certain outsourced services to support the surge in our Originations business recorded in Professional services, and advertising expense recorded in Other expenses. Total average headcount increased 32% as compared to 2019, reflecting increases in staffing levels as part of our initiative to increase volume, including our re-entry into the forward lending correspondent channel in the second quarter of 2019, offset in part by our PHH integration and cost re-engineering initiatives. The $18.4 million, or 42% increase in Compensation and benefits expense as compared to 2019 is largely due to increased headcount and higher origination volume. Salaries and benefits expenses increased by $6.2 million, and commissions were $6.1 million higher. In addition, Compensation and benefit expense for 2020 includes $2.4 million related to our 2020 re-engineering initiatives and $1.6 million incremental incentive compensation. The $12.2 million increase in corporate overhead allocations is mostly attributed to the increase in our origination volume and the increase in the relative weight of average headcount to the consolidated organization, as compared to 2019. The increase in corporate overhead allocations due to the allocation drivers is partially offset by the effects of our cost re-engineering initiatives.
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. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, commonly referred to as warehouse lines. The increases in interest income and interest expense as compared to 2019 is primarily the result of the increase in the average held-for-sale loan and warehouse debt balances, due to increased loan production volumes.
Corporate Items and Other
Corporate Items and Other includes revenues and expenses of corporate support services, our reinsurance business CRL, discontinued operations and 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 on repurchases of debt, interest expense on corporate debt and foreign currency exchange gains or losses. Interest expense on direct asset-backed financings are recorded in the respective Servicing and Originations segments, while interest expense on the SSTL and the Senior Notes is recorded in Corporate Items and Other and was not allocated. Beginning in the third quarter of 2020, we began allocating interest expense, excluding amortization of debt issuance costs and discount, on such corporate debt used to fund servicing advances and other servicing assets from Corporate Items and Other to Servicing. The interest expense related to the corporate debt has been allocated to the Servicing segment for prior periods to conform to the current period presentation. Our cash balances are included in Corporate Items and Other.
Corporate support services include finance, facilities, human resources, internal audit, legal, risk and compliance and technology functions. Corporate support services costs, specifically compensation and benefits and professional services expense, have been, and continue to be, significantly impacted by regulatory actions against us and by significant litigation matters. We anticipate that our ability to return to sustainable profitability will be significantly impacted by the degree to which
we can reduce these costs going forward. Corporate Items and Other also includes severance, retention, facility-related and other expenses incurred 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 50% quote share of premiums and all related losses incurred by the third-party insurer, effective June 2020, and 40% through May 2020. The initial term of the reinsurance agreement expired December 31, 2020 and was automatically renewed for an additional one-year term.
Certain expenses incurred by corporate support services that are not directly attributable to a segment are allocated to the Servicing and Originations segments. Beginning in the first quarter of 2020, we updated our methodology to allocate overhead costs incurred by corporate support services to the Servicing and Originations segments which now incorporates the utilization of various measurements primarily based on time studies, personnel volumes and service consumption levels. In 2019, corporate support services costs were primarily allocated based on relative segment size. 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, costs related to our re-engineering initiatives, and other costs related to operating as a public company.
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
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Revenue
Premiums (CRL) $ 6.2 $ 12.9 $ 16.6 (52) % (22) %
Other revenue 0.4 0.3 1.6 54 (83)
Total revenue 6.6 13.2 18.1 (50) (27)
Operating expenses
Compensation and benefits 89.6 125.7 106.1 (29) 19
Professional services 69.4 59.2 110.7 17 (47)
Technology and communications 28.9 43.4 50.8 (34) (15)
Occupancy and equipment 11.1 17.4 11.1 (36) 57
Servicing and origination 1.7 0.7 0.3 124 (94)
Other expenses 8.2 11.0 13.7 (25) (20)
Total operating expenses before corporate overhead allocations
208.8 257.4 292.5 (19) (12)
Corporate overhead allocations
Servicing segment (61.0) (197.9) (211.7) (69) (7)
Lending segment (18.2) (6.0) (3.7) 202 63
Total operating expenses 129.5 53.5 77.1 142 (31)
Other income (expense), net
Interest income 1.9 1.8 2.6 9 (31)
Interest expense (8.9) (4.0) (5.3) 121 (24)
Bargain purchase gain - (0.4) 64.0 (100) (101)
Gain on repurchase of senior secured notes - 5.1 - (100) n/m
Other, net (4.3) (3.8) (4.1) 13 (8)
Total other (expense) income, net (11.2) (1.3) 57.2 775 (102)
Loss from continuing operations before income taxes
$ (134.1) $ (41.6) $ (1.7) 222 n/m
n/m: not meaningful
Revenue
CRL premium revenue decreased $6.7 million, or 52%, as compared to 2019 primarily due to the 54% decline in the number of covered REO properties in our servicing portfolio, consistent with the 53% decline in the total number of REO properties in our Servicing portfolio. Factors contributing to the decline in covered properties include the current moratoria and restrictions on foreclosure procedures due to COVID-19, and the GSE removal of REO coverage requirements.
Compensation and Benefits
Compensation and benefits expense decreased $36.2 million, or 29%, as compared to 2019 mostly due to $35.7 million of severance and retention costs recognized in 2019 in connection with the PHH integration and cost re-engineering plan. The effects of other factors impacting Compensation and benefits expense were largely offsetting. Salaries and benefit expenses declined $14.3 million and $4.3 million, respectively, due to the effects of a 19% decrease in average corporate headcount, including a 40% decrease in average onshore headcount from 511 to 308. These cost savings were largely offset by $5.9 million compensation and benefit costs related to our 2020 re-engineering initiatives, $8.7 million incremental incentive compensation and $1.6 million additional compensation expenses related to COVID-19.
Professional Services
Professional services expense increased $10.3 million, or 17%, as compared to 2019, primarily due to the $34.7 million recovery in 2019 of prior expenses from a service provider and mortgage insurer, offset in part by $19.5 million other professional services expenses incurred in 2019 related to our cost reengineering plan, and a $6.9 million decrease in legal expenses. The net decline in legal expenses is largely due to an $8.0 million recovery in 2020 of prior expenses from a mortgage insurer and a reduction in litigation expenses, partially offset by an additional accrual for the CFPB and Florida matters in 2020. Professional services expense for 2020 includes $3.5 million of COVID-19 related expenses.
Other Operating Expenses
Technology and communications expense decreased $14.5 million, or 34%, as compared to 2019, primarily due to $4.4 million termination fees recorded in 2019 relating to PHH integration, a $4.0 million decline in depreciation expense, and a $3.4 million decline in telephone expense. Technology and communications expense for 2020 includes $3.1 million of COVID-19 related expenses. The expense reductions are primarily due to a decline in capitalized technology investments, the closure of U.S. facilities and our other cost reduction efforts which included bringing technology services in-house and re-engineering initiatives.
Occupancy and equipment expense decreased $6.3 million or 36%, as compared to 2019. The expense reduction is primarily due to the results of our cost reduction efforts, which include consolidating vendors and closing and consolidating certain facilities. The expense reduction is mostly related to depreciation expense, rent expense and interest on lease liabilities, net of the allocation of occupancy costs to other segments. In 2019, occupancy and equipment expense included PHH expenses and accelerated amortization of ROU assets in connection with our decision to vacate leased properties prior to the contractual maturity date of the lease agreements. In 2020, we partially abandoned two of our leased properties and decided to vacate other leased properties prior to contractual maturity, resulting in the recognition of facility-related costs totaling $6.0 million, versus $6.6 million of similar costs recognized in 2019. Occupancy and equipment expense for 2020 includes $0.9 million of COVID-19 related expenses.
Total operating expenses, after corporate overhead allocation, increased by $76.0 million, or 142%, as compared to 2019, primarily due to the $34.7 million recovery in 2019 of amounts previously recognized as expense from a service provider, which was not allocated, $19.2 million costs related to our 2020 re-engineering initiatives, and the effect of our updated methodology to allocate overhead costs which we implemented in 2020. Operating expenses for 2020 include $9.3 million of COVID-19 related expenses. These increases in expenses were partially offset by the effects of a decline in average headcount and our other cost reduction efforts, as well as $65.0 million of costs recognized in 2019 in connection with the PHH integration and cost re-engineering plan.
Other Income (Expense)
Interest expense increased $4.8 million, or 121%, as compared to 2019. A $16.6 million decrease in interest expense allocated to the Servicing segment and an $11.8 million decline in interest expense before allocation resulted in a $4.8 million increase in interest expense retained in the Corporate Items and Other segment. Interest expense allocated to the Servicing segment amounted to $38.2 million and $54.9 million in 2020 and 2019, respectively. The interest allocation represents a charge for the financing of MSRs and servicing advances which are funded by corporate debt. The $11.8 million decline in interest expense before allocation was primarily due to the $126.1 million prepayment of the outstanding SSTL balance in January 2020, the maturity of $97.5 million of our 7.375% senior unsecured notes in September 2019, and the repurchase of $39.4 million of our 8.375% senior secured notes in July and August 2019.
We recognized a bargain purchase gain of $64.0 million in 2018 in connection with the acquisition of PHH representing the excess of the net assets acquired over the consideration paid. The purchase price we negotiated contemplated that PHH would incur losses after the acquisition date. See Note 2 - Business Acquisition to the Consolidated Financial Statements for additional information.
In 2019, we repurchased a total of $39.4 million of our 8.375% Senior secured notes in the open market for a price of $34.3 million and recognized a gain of $5.1 million.
FOURTH QUARTER RESULTS
(Unaudited consolidated statements of operations)
Quarters Ended December 31, % Change
2020 2019 2020 vs. 2019
Revenue
Servicing and subservicing fees $ 168.9 $ 230.4 (27) %
Gain on loans held for sale, net 44.5 12.0 271
Reverse mortgage revenue, net 9.7 13.4 (28)
Other revenue, net 8.0 5.8 38
Total revenue 231.0 261.6 (12)
MSR valuation adjustments, net (20.6) 0.8 n/m
Operating expenses
Compensation and benefits 69.9 63.1 11
Professional services 29.1 25.4 15
Servicing and origination 16.7 22.2 (25)
Technology and communications 12.4 18.1 (31)
Occupancy and equipment 9.8 15.6 (37)
Other expenses 6.2 (5.1) (222)
Total operating expenses 144.2 139.3 4
Other income (expense)
Interest income 3.2 4.6 (30)
Interest expense (25.8) (29.5) (13)
Pledged MSR liability expense (46.7) (68.8) (32)
Other, net 2.1 7.8 (73)
Other expense, net (67.1) (85.9) (22)
Income (loss) before income taxes (0.8) 37.2 (102)
Income tax expense 6.4 2.4 167
Net income (loss) $ (7.2) $ 34.8 (121)
Segment income (loss) before taxes:
Servicing $ (1.5) $ 53.5 (103) %
Originations 33.0 (0.2) n/m
Corporate Items and Other (32.3) (16.0) 102
$ (0.8) $ 37.2 (102)
n/m: not meaningful
We reported a net loss of $7.2 million for the fourth quarter of 2020 as compared to $34.8 million net income for the fourth quarter of 2019. On a pre-tax basis, our results were near breakeven for the fourth quarter of 2020 ($0.8 million loss).
Total revenue was $30.6 million, or 12% lower in the fourth quarter of 2020 as compared to the fourth quarter of 2019 primarily due to a decline in servicing fee revenue, offset in part by an increase in gain on loans held for sale. The decline in Servicing and subservicing fees was mostly driven by a decline in servicing fees collected on behalf of NRZ, primarily due to a lower serviced UPB as a result of the NRZ portfolio runoff and the derecognition of the MSRs in connection with the termination of the PMC agreement by NRZ on February 20, 2020. Also, ancillary income declined largely due to lower interest rates. While the average UPB of our total servicing portfolio increased 11% as compared to the fourth quarter of 2019, a significant amount of portfolio additions occurred at or near the end of the quarter and generated minimal or no servicing fee revenue. Gain on loans held for sale, net, increased $32.5 million largely due to the $2.4 billion increase in total forward loan production, primarily the correspondent channel.
We reported a net $20.6 million loss on MSR valuation adjustments, net in the fourth quarter of 2020 compared to a $0.8 million net gain for the fourth quarter of 2019. The net loss reported in the fourth quarter of 2020 includes a $41.3 million loss due to runoff, a favorable $32.5 million gain mostly due to rates, partially offset by a $11.7 million hedging loss. The $21.4 million decline is primarily due to $43.6 million lower gains in the fourth quarter of 2020 related to interest rates and assumptions, net of hedging loss, and a $22.2 million favorable impact from lower portfolio runoff. The 10-year swap rate increased 21 basis points in the fourth quarter of 2020 as compared to a 33 basis-point increase in the fourth quarter of 2019. Fair value adjustments to our MSRs are offset, in part, by fair value adjustments related to the NRZ financing liabilities, which are recorded in Pledged MSR liability expense. The lower runoff in the fourth quarter of 2020 is mostly driven by the termination of the NRZ PHH servicing agreement in February 2020 and elevated voluntary prepayments.
Operating expenses increased $4.8 million, or 4%,as compared with the fourth quarter of 2019. Operating expenses for the fourth quarter of 2020 includes $13.1 million of accruals for losses recorded in Professional services expense related to the CFPB matter, and $3.3 million of COVID-19 related expenses. Severance, retention, facility-related and other expenses related to our cost re-engineering plans of $5.9 million and $14.4 million were recognized in the fourth quarter of 2020 and 2019, respectively. Our cost reduction efforts include eliminating redundant costs through the integration process including headcount reductions, facility closures and legal entity reorganization as well as bringing technology services in-house. The effects of a 5% reduction in total average headcount on Compensation and benefits expense was more than offset by higher commissions on higher loan origination volume, as well as higher retention and incentive compensation costs. Operating expenses for the fourth quarter of 2020 and 2019 are net of recoveries of $11.9 million and $15.0 million, respectively of amounts recognized as expenses in prior periods.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We are actively engaged with our lenders and as a result, have successfully completed at market terms the following with respect to our current and anticipated financing needs:
•On January 22, 2020, we did not renew and let terminate a $50.0 million uncommitted warehouse facility used to fund reverse mortgage loan draws.
•On January 27, 2020, we executed an amendment to the SSTL agreement which provided for a net prepayment of $126.1 million to reduce the maximum borrowing capacity to $200.0 million, extended the maturity date to May 15, 2022, reduced the contractual quarterly principal payment from $6.4 million to $5.0 million and modified the interest rate.
•On March 12, 2020, we entered into a mortgage loan warehouse agreement to fund reverse mortgage loan draws by borrowers subsequent to origination. Under this agreement, the lender provides financing for up to $100.0 million to PMC on an uncommitted basis. In October 2020, the maturity date was extended to October 29, 2021 and the capacity was temporarily increased to $150.0 million until November 15, 2020 when it was reduced to $100.0 million. Concurrently, we reduced the maximum borrowing capacity of another reverse mortgage loan warehouse agreement from $100.0 million to $1.0 million in connection with Liberty’s transfer of substantially all of its assets, liabilities, contracts and employees to PMC effective March 15, 2020. On August 10, 2020, the maturity date of this agreement was extended to August 13, 2021.
•On May 7, 2020, we renewed the OMART variable funding advance financing facility through June 30, 2021 and increased the borrowing capacity from $200.0 million to $500.0 million. On August 17, 2020, we reduced the total borrowing capacity of the OMART variable-rate notes from $500.0 million to $250.0 million in conjunction with the issuance of new fixed-rate term notes disclosed above.
•On May 7, 2020, we renewed the OFAF advance financing facility through June 30, 2021 and increased the borrowing capacity from $60.0 million to $70.0 million.
•On May 7, 2020, we renewed a mortgage loan warehouse agreement with a maximum borrowing capacity of $175.0 million ($110.0 million of which is committed) through June 30, 2021. On November 25, 2020, we upsized this facility by $100.0 million, which increased the total committed borrowing capacity to $160.0 million.
•On May 7, 2020 we renewed the Agency MSR financing facility through June 30, 2021 and reduced the borrowing capacity from $300.0 million to $250.0 million.
•On June 25, 2020, we renewed and amended a mortgage loan warehouse agreement with an original maximum borrowing capacity of $300.0 million through June 24, 2021 and reduced the borrowing capacity to $210.0 million (a $90 million committed repurchase agreement and a $120.0 million uncommitted participation agreement).
•On June 30, 2020, we amended the Ginnie Mae MSR facility to include servicing advances as eligible collateral, upsized the borrowing capacity to $127.5 million from $100 million, and accelerated the maturity to December 20, 2020. On December 23, 2020, the maturity date was extended to December 27, 2021 and the borrowing capacity was reduced to $125.0 million.
•On August 12, 2020, we issued new OMART fixed-rate term notes with a total borrowing capacity of $475.0 million and an amortization date of August 15, 2022. The existing fixed-rate term notes with a total borrowing capacity of $470.0 million were redeemed on August 17, 2020.
•On September 30, 2020, we entered into a $100.0 million uncommitted repurchase agreement to finance the purchase of EBO loans from Ginnie Mae. This agreement does not have any stated maturity date, however, each transaction has a maximum duration of four years. The cost of this line is set at each transaction date and is based on the interest rate on the collateral.
•On November 19, 2020, we renewed a mortgage loan warehouse agreement with a total borrowing capacity of $250.0 million to November 18, 2021. The interest rate for this facility was increased to one-month LIBOR plus 3.25% for borrowings secured by forward mortgage loans and one-month LIBOR plus 350% for reverse mortgage loan borrowings.
•On December 24, 2020, we extended the maturity date of the $50.0 million warehouse facility used to fund reverse tails to January 15, 2021, when it was extended for an additional year.
•On February 1, 2021, the borrowing capacity was temporarily increased on our $100.0 million reverse mortgage loan facility to $150.0 million until February 28, 2021 when it will be reduced to $100.0 million.
See Note 14 - Borrowings to the Consolidated Financial Statements for additional information.
A summary of borrowing capacity under our advance facilities, mortgage warehouse facilities and MSR financing facilities is as follows at the dates indicated:
December 31, 2020 December 31, 2019
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 $ 795.0 $ 213.7 $ - $ 730.0 $ 50.9 $ -
Mortgage loan warehouse facilities 1,037.0 186.9 398.4 1,125.0 108.4 684.4
MSR financing facilities 375.0 39.2 13.0 400.0 180.0 -
Total $ 2,207.0 $ 439.8 $ 411.4 $ 2,255.0 $ 339.3 $ 684.4
(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.
The available borrowing capacity under our advance financing facilities increased by $162.8 million as compared to December 31, 2019 due to the $65.0 million net increase in total borrowing capacity and the $97.8 million decline in outstanding borrowings. At December 31, 2020, none could be funded under the available borrowing capacity based on the amount of eligible collateral that had been pledged to our advance financing facilities.
We may utilize committed borrowing capacity under our mortgage 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, 2020, we had no committed borrowing capacity, based on the amount of eligible collateral, and no uncommitted borrowing capacity. 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, 2020, our unrestricted cash position was $284.8 million compared to $428.3 million at December 31, 2019. Throughout 2020, we voluntarily paid down or foregone borrowings on our facilities to reduce interest costs. We typically invest cash in excess of our immediate operating needs in deposit accounts and other liquid assets.
We closely monitor our liquidity position and ongoing funding requirements, and we regularly monitor and project cash flows over various time horizons as a way to anticipate and mitigate liquidity risk. As uncertainties in market conditions decline, we will continue to seek to optimize our cash management and may reduce our unrestricted cash position to further fund our growth.
In assessing our liquidity outlook, our primary focus is on available cash on hand, unused available funding and the following six forecast measures:
•Financial projections for ongoing net income, excluding the impact of non-cash items, and working capital needs including loan repurchases;
•Requirements for amortizing and maturing liabilities compared to sources of cash;
•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;
•Potential payments or recoveries related to legal and regulatory matters, insurance, taxes and MSR transactions; and
•Funding capacity for whole loans and tail draws under our reverse mortgage commitments subject to warehouse eligibility requirements.
COVID-19 Update
The COVID-19 environment created unprecedented changes in the economy, volatility in the capital markets, and uncertainties in the mortgage industry. As of today, while market conditions have stabilized and our prior scenario planning has proven somewhat conservative, uncertainties related to the duration, severity and impact of the economic downturn remain. Two critical factors affect our liquidity management in the current COVID-19 environment: our increased advancing requirements as servicer during each investor remittance period, and the uncertainties of daily margin calls on our collateralized debt facilities and derivative instruments.
First, 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. We also advance T&I and Corporate advances 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. 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 NRZ 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. Refer to Note 25 - Commitments to the Consolidated Financial Statements for further description of servicer advance obligations.
Second, we are generally subject to daily margining requirements under the terms of our MSR financing facilities and daily cash calls for our TBAs and interest rate swap futures. 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.
We are focused on ensuring that we have sufficient liquidity sources to continue to operate through the pandemic as well as after. As such, in 2020 we increased the total borrowing capacity of our OMART and OFAF advance financing facilities from $730.0 million to $795.0 million and extended the amortization dates to June 2021 and August 2022. We also amended our Ginnie Mae MSR facility to include servicing advances as eligible collateral and increased the total borrowing capacity from $100.0 million to $125.0 million. We continuously evaluate alternative financings to diversify our sources of funds, optimize maturities and reduce our funding cost.
Regarding the current maturities of our borrowings, as of December 31, 2020, we have approximately $949.0 million of debt outstanding that would either come due, begin amortizing or require partial repayment in the next 12 months. This amount is comprised of $21.5 million 6.375% senior unsecured notes, $20.0 million in contractual repayments of our SSTL, $451.7 million of borrowings under forward and reverse mortgage warehouse facilities, $106.3 million of variable funding and term notes under advance financing facilities that will enter their respective amortization periods, $322.8 million outstanding under our Agency and Ginnie Mae MSR financing facilities and $26.7 million of scheduled principal amortization on the PLS Notes secured by PLS MSRs.
We have considered the impact of financial projections on our liquidity analysis and have evaluated the appropriateness of the key assumptions in our financial forecasts. As part of this analysis, we have also assessed the cash requirements to operate our business and service our financial obligations coming due. We have assessed the range of potential impacts of the COVID-19 pandemic on our financial projections and projected liquidity under base case, adverse and severely adverse scenarios. We believe the recent issuances, renewals and amendments we have executed will provide sufficient liquidity in all
of these scenarios. We expect to renew, replace or extend our borrowings to the extent necessary to finance our business on or prior to their respective maturities consistent with our historical experience.
Use of Funds
Our primary uses of funds in 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 MSR and other asset acquisitions;
•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.
Under the terms of our SSTL facility agreement, subject to certain exceptions, we are required to prepay the SSTL with certain percentage amounts of excess cash flow as defined and 100% of the net cash proceeds from certain permitted asset sales, subject to our ability to reinvest such proceeds in our business within 270 days of receipt.
Sources of Funds
Our primary sources of funds for near-term liquidity in normal course include:
•Collections of servicing 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 by our advance financing facilities to financial institutions typically have a revolving period of 12 months. Term notes are generally issued to institutional investors with one-, two- or three-year revolving periods. 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 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 have entered into an agreement with Oaktree Capital Management L.P. (Oaktree) to launch an MSR funding vehicle, MAV, in the first half of 2021 to accelerate the growth of our servicing volume. We also recently entered into an agreement with Oaktree in connection with an additional investment in Ocwen. See Capital Resources Outlook below, Note 25 - Commitments and Note 28 - Subsequent Events for additional information regarding this agreement. Our financing structure actions are targeted at optimizing access to capital and debt financing, improving our cost of funds, enhancing financial flexibility, bolstering liquidity and reducing funding risk while maintaining leverage within our risk tolerances. Historical losses have significantly eroded our stockholders’ equity and weakened our financial condition. To the extent we are not successful in achieving our objective of returning to profitability, funding continuing losses will limit our opportunities to grow our business through capital investment.
Capital Resources Outlook
On February 9, 2021 we announced the conclusion of the strategic process we began in May 2020. As a result of this process, we have reached an agreement with Oaktree for a $250.0 million cash investment into Ocwen. This investment is in addition to the previously announced strategic alliance to launch MSR Asset Vehicle, LLC (MAV). These combined investments from Oaktree are expected to contribute approximately $460.0 million into Ocwen and the MSR joint venture to fund growth and strengthen the corporate capital structure.
The debt investment by Oaktree will be structured as senior secured notes. The investment with be an aggregate of $285.0 million principal, with $250.0 million proceeds and $35.0 million of original issue discount (OID) and is subject to certain conditions, including, but not limited to, the contemporaneous consummation by Ocwen or one of its subsidiaries of an additional debt financing not to exceed $450.0 million. The Oaktree notes will bear interest at 12% cash or 13.25% payment-in-kind (PIK), with some limitations on PIK. The investment will be made in two tranches with the first investment of $199.5 million on a date mutually agreed and subject to certain conditions, including the refinancing of our corporate debt. In preparation for this refinancing and investment by Oaktree, on February 2, 2021, we submitted notices of redemption to the trustees of the 6.375% PHH notes and the 8.375% senior secured second lien notes, according to the indentures governing the notes, subject to a “financing condition”. We intend to use $100.0 million of the proceeds from the first tranche of the Oaktree notes to repay a portion of our corporate debt. The second investment of $85.5 million is subject to the launching of MAV and a minimum total net worth of $360.0 million at Ocwen Financial Corporation. We expect to use proceeds from the second tranche of the Oaktree notes to fund our investment in the MAV joint venture and for general corporate purposes, including to accelerate growth of our Originations and Servicing businesses.
If we are successful in the corporate debt refinancing, we expect we will reduce corporate indebtedness at the PHH and PMC level by approximately $100 million, extend overall corporate debt maturities by over three years, and provide greater financial flexibility than we currently have. As part of the MAV transaction and Oaktree financing, we have agreed to issue warrants to Oaktree to purchase shares of our common stock equal to 12.0% of our then outstanding common stock at an exercise price of $26.82 per share, subject to anti-dilution adjustments. In addition, Oaktree will have the option to purchase up to 4.9% of our fully diluted outstanding common stock at the closing of the MAV transaction at a purchase price of $23.15 per share and Oaktree will be issued warrants to purchase additional common stock equal to 3% of our then outstanding common stock at a purchase price of $24.31 per share, subject to anti-dilution adjustments.
There can be no assurance that the issuance and sale of the senior secured notes to Oaktree, or the additional debt refinancing, will be consummated. Similarly, there can be no assurance regarding the timing of the execution of such transactions, or that the anticipated benefits of such transactions will be realized. See Note 28 - Subsequent Events.
Collateral
Our assets held as collateral related to secured borrowings, committed under sale or other contractual obligations and which may be subject to a secured lien under the SSTL are as follows at December 31, 2020:
Collateral for Secured Borrowings
Assets Total Match Funded Liabilities Financing Liabilities Mortgage Loan Warehouse/MSR Facilities Sales and Other Commitments Other
Cash $ 284.8 $ - $ - $ - $ - $ 284.8
Restricted cash 72.5 14.2 - 5.9 52.3 -
MSRs (1) 1,294.8 - 567.0 728.4 - -
Advances, net 828.2 651.6 - 82.1 - 94.5
Loans held for sale 387.8 - - 359.1 - 28.7
Loans held for investment 7,006.9 - 6,882.0 96.3 - 28.6
Receivables, net 187.7 - - 47.2 - 140.5
Premises and equipment, net
16.9 - - - - 16.9
Other assets 571.5 - - 6.3 497.6 67.5
Total assets $ 10,651.1 $ 665.8 $ 7,449.0 $ 1,325.5 $ 549.9 $ 661.5
Liabilities
HMBS - related borrowings
$ 6,772.7 $ - $ 6,772.7 $ - $ - $ -
Other financing liabilities 576.7 - 576.7 - - -
Match funded liabilities 581.3 581.3 - - - -
Other secured borrowings, net
1,069.2 - - 890.3 - 178.9
Senior notes, net 311.9 - - - - 311.9
Other liabilities 924.0 - - - 497.6 426.4
Total Liabilities $ 10,235.8 $ 581.3 $ 7,349.4 $ 890.3 $ 497.6 $ 917.2
Total Equity $ 415.3
(1)Certain MSR cohorts with a net negative fair value of $0.6 million that would be presented as Other are excluded from the eligible collateral of the facilities and are comprised of $16.3 million of positive fair value related to RMBS and $16.9 million of negative fair value related to private EBO and PLS MSRs.
See Note 14 - Borrowings for information on assets held as collateral related to secured borrowings, committed under sale or other contractual obligations and which may be subject to a secured lien under the SSTL.
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 additional debt, paying dividends, repurchasing or redeeming capital stock, transferring assets or making loans, investments or acquisitions. Because 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, 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 14 - Borrowings to the Consolidated Financial Statements for additional information regarding our covenants.
Covenants and default provisions of this type are commonly found in debt agreements such as ours. Certain of these covenants and default provisions 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, 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 qualitative and quantitative covenants in our debt agreements as of the date this Annual Report on Form 10-K is filed with the SEC. Given the current market conditions created by the COVID-19 pandemic, there are no assurances we will be able to maintain compliance with our covenants.
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 Negative September 11, 2019
S&P B- Negative July 23, 2020
On July 23, 2020, S&P removed the CreditWatch with negative implications that was placed on our ratings on April 3, 2020 as a result of uncertainty around the financial impacts resulting from COVID-19. S&P revised the rating to a Negative Outlook based on our reported preliminary results for the second quarter that showed sufficient liquidity to manage servicing advance requirements from COVID-19-related forbearances, including nearly $314 million of cash and over $750 million of credit availability on our servicing advance, MSR, and mortgage warehouse lines. On August 21, 2020, Moody’s reaffirmed their ratings. In addition, Ocwen has been able to maintain cushion on its tangible net worth debt covenants. 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, 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 proceeds from the sale of servicing advances, including advances sold in connection with the sale of MSRs, purchase of MSRs through flow purchase agreements, GSE Cash Window and bulk acquisitions as investing activity. We classify changes in HECM loans held for investment as investing activity and changes in the related HMBS borrowings as financing activity.
Our NRZ agreements have a significant impact on our consolidated statements of cash flows. Because the lump-sum payments we received in connection with our 2017 Agreements and New RMSR Agreements 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 through April 2020. 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. Net cash provided by operating activities for the years ended December 31, 2020, 2019 and 2018 includes $35.1 million, $101.0 million and $134.5 million, respectively, of such cash flows and they were offset by corresponding amounts in net cash used in financing activities in the same periods.
Cash flows for the year ended December 31, 2020
Our operating activities provided $261.0 million of cash largely due to $213.3 million of net collections of servicing advances, mostly P&I advances, partially offset by net cash paid on loans held for sale of $121.5 million.
Our investing activities used $527.9 million of cash. The primary uses of cash in our investing activities include net cash outflows in connection with our HECM reverse mortgages of $258.9 million, and $273.2 million to purchase MSRs.
Our financing activities provided $131.8 million of cash. Cash inflows include $1.2 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, less repayments on the related financing liability of $935.8 million. In addition, we increased borrowings under our mortgage loan warehouse facilities and MSR financing facilities by $119.5 million and $68.5 million, respectively. Cash outflows include repayments of $141.1 million on the SSTL, $97.8 million of net repayments on advance match funded liabilities, and $101.8 million of net payments on the financing liabilities related to MSRs pledged. In addition, we also paid $7.7 million of debt issuance costs related to our SSTL facility amendment and repurchased shares of our common stock for $4.6 million.
Cash flows for the year ended December 31, 2019
Our operating activities provided $151.9 million of cash largely due to $105.1 million of net collections of servicing advances. Net cash paid on loans held for sale during the year was $108.8 million.
Our investing activities used $587.4 million of cash. The primary uses of cash in our investing activities include net cash outflows in connection with our HECM reverse mortgages of $467.4 million. Cash outflows also include $145.7 million to purchase MSRs.
Our financing activities provided $530.8 million of cash. Cash inflows include $962.1 million received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, less repayments on the related financing liability of $549.6 million. We increased borrowings under the SSTL through the issuance of an additional term loan of $120.0 million (before a discount of $0.9 million), less repayments of $25.4 million. In addition, we increased borrowings under our mortgage loan warehouse facilities by $176.5 million and borrowed $314.4 million under new MSR financing facilities. Cash outflows include $99.2 million of net repayments on advance match funded liabilities as a result of advance recoveries, $214.4 million of net payments on the financing liabilities related to MSRs pledged, and $131.8 million to redeem and repurchase Senior notes.
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 the 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 need to undertake in order to return to 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. There can be no assurance that we will be successful in executing on these initiatives. Further, there can be no assurance that even if we execute on these initiatives we will be able to return to 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. If we continue to experience losses, our share price, business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
Market Risk
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 and interest rate lock commitments (IRLCs). In addition, changes in interest rates could materially and adversely affect our 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 advance financing facilities.
Interest rate risk is a function of (i) the timing of re-pricing and (ii) the dollar amount of assets and liabilities that re-price at various times. We are exposed to interest rate risk to the extent that our interest rate-sensitive liabilities mature or re-price at different speeds, or on different bases, than interest-earning assets.
Our management-level Market Risk Committee establishes and maintains policies that govern our hedging program, including such factors as market volatility, duration and interest rate sensitivity measures, 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. See Note 17 - Derivative Financial Instruments and Hedging Activities to the Consolidated Financial Statements for additional information regarding our use of derivatives.
Our market risk exposure may also be affected by the phase-out of LIBOR, expected to occur by the end of 2021. However, for U.S dollar LIBOR, it now appears that the relevant date may be 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 potential deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. Many of our debt facilities incorporate LIBOR. These facilities either mature prior to the end of 2021 (or June 30, 2023) or have terms in place that provide for an alternative to LIBOR upon its phase-out. As we renew or replace these debt facilities, we will need to work with our counterparties to incorporate alternative benchmarks. There is presently substantial uncertainty relating to the process and timeline for developing LIBOR alternatives, 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. Consequently, it is difficult to predict what effect, if any, 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, 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.
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 and prepayment speeds. Beginning in September 2019, management implemented a hedging strategy to partially offset the changes in fair value of our net MSR portfolio attributable to interest rate changes. As a general matter, the impact of interest rates on the fair value of our MSR portfolio is naturally offset by other exposures, including our loan pipeline and our economic MSR value embedded in our reverse mortgage loan portfolio. Our hedging strategy is targeted at mitigating the residual exposure, which we refer to as our net MSR portfolio exposure. We define our net MSR portfolio exposure as follows:
•our more interest rate-sensitive Agency MSR portfolio,
•less the Agency MSRs subject to our agreements with NRZ (See Note 10 - Rights to MSRs),
•less the unsecuritized reverse mortgage loans and tails classified as held-for-investment,
•less the asset value for securitized HECM loans net of the corresponding HMBS-related liability, and
•less the net value of our held for sale loan portfolio and lock commitments (pipeline).
We determine and monitor daily the hedge coverage based on the duration and interest rate sensitivity measures of our net MSR portfolio exposure, considering market and liquidity conditions. During 2020, our hedging strategy was targeted to provide partial coverage of our net MSR portfolio exposure of approximately 50%. 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 due to the partial hedge coverage and other factors.
The following table illustrates the composition of our net MSR portfolio exposure at December 31, 2020 with the associated interest rate sensitivity for a hypothetical, instantaneous decrease in interest rate of 25 basis points assuming a parallel shift in interest rate yield curves (refer to the description below under Sensitivity Analysis). The amounts based on market risk sensitive measures are hypothetical and presented for illustrative purposes only. Changes in fair value cannot be extrapolated because the relationship to the change in fair value may not be linear.
Fair value at December 31, 2020 Hypothetical change in fair value due to 25 bps rate decrease
Agency MSR - interest rate sensitive $ 579.0 $ (30.9)
Asset value of securitized HECM loans, net of HMBS-related liability 99.5 3.5
Loans held for investment - Unsecuritized HECM loans and tails 124.9 -
Loans held for sale 366.4 3.8
Pipeline IRLCs 22.7 (0.4)
Natural hedges (sum of the above) 6.9
Hypothetical 30% offset by hedging instruments (1) 7.2
Total hedge position (2) (3) $ 14.1
Hypothetical residual exposure to changes in interest rates $ (16.8)
(1)Hypothetical 30% offset is calculated in the above table as a percentage of the net MSR exposure, that is, the Agency MSR less natural hedges, i.e., pipeline and economic MSR of reverse mortgage loans.
(2)Total hedge position is defined as the sum of the fair value changes of hedging derivatives and the fair value changes of natural hedges due to interest rate risks, i.e., pipeline and economic MSR of reverse mortgage loans.
(3)We define our hedge coverage ratio as the total hedge position (derivatives and natural hedges) as a percentage of the Agency MSR exposure, or 45% in the above table.
We use forward trades of MBS or Agency TBAs with different banking counterparties and exchange-traded interest rate swap futures as hedging instruments. These derivative instruments are not designated as accounting hedges. TBAs, or To-Be-Announced securities are actively traded, forward contracts to purchase or sell Agency MBS on a specific future date. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations.
The TBAs and interest rate swap futures are subject to margin requirements. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating could require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.
MSRs and MSR Financing Liabilities
Our entire portfolio of MSRs is accounted for using the fair value measurement method. MSRs are subject to interest rate risk as the mortgage loans underlying the MSRs permit borrowers to prepay their loans. The fair value of MSRs generally decreases in periods where interest rates are declining, as prepayments increase, and generally increases in periods where interest rates are increasing, as prepayments decrease.
While the majority of our non-Agency MSRs have been sold to NRZ, these transactions did not initially qualify as sales and are accounted for as secured financings until such time as the transactions meet the requirements for sale accounting treatment and are derecognized from our consolidated balance sheet. We have elected fair value accounting for these MSR financing liabilities. Through these transactions, the majority of the risks and rewards of ownership of the MSRs transferred to NRZ, including interest rate risk. Changes in the fair value of the MSRs sold to NRZ are offset by a corresponding change in the fair value of the MSR financing liabilities, which are recognized as a component of interest expense in our consolidated statements of operations.
Loans Held for Sale, Loans Held for Investment and IRLCs
In our Originations business, newly-originated forward mortgage loans held for sale and newly originated reverse mortgage loans held for investment that we have elected to carry at fair value and IRLCs are subject to the effects of changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. IRLCs represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage loan applicant, whereby the interest rate on the loan is set prior to funding. We are exposed to interest rate risk and related price risk
during the period from the date of the 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, but the majority of our commitments are for 60 days. Our holding period for forward mortgage loans from funding to sale is typically less than 30 days. Loan commitments for reverse mortgage loans range from 10 to 30 days. The majority of our reverse loans are variable rate loan commitments. This interest rate exposure had historically been economically hedged with freestanding derivatives, including forward sales of agency “to be announced” securities (TBAs) and forward mortgage-backed securities (Forward MBS). Beginning in September 2019, this exposure is not individually hedged, but rather used as an offset to our MSR exposure and managed as part of our MSR hedging strategy described above.
We elected fair value accounting for newly repurchased loans from securitization trusts or investors after January 1, 2020. We may repurchase loans that have been modified, to facilitate loss reduction strategies, or as otherwise obligated as a Ginnie Mae servicer.
Loans Held for Investment and HMBS-related Borrowings
We elected fair value accounting for the entire reverse mortgage HECM loans, which are held for investment, together with the HMBS-related borrowings. We also elected fair value accounting for non-cancellable draw commitments (tails) of our HECM loans. The fair value of our HECM loan portfolio 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.
The fair value of our HECM loan portfolio net of the fair value of the HMBS-related borrowings comprise the fair value of reverse mortgage loans and tails that are unsecuritized at the balance sheet date (reverse pipeline) 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. Both reverse assets (reverse pipeline and HMSR) act as a partial hedge for our forward MSR value sensitivity. Due to this characteristic, beginning in September 2019, this exposure is used as an offset to our MSR exposure and managed as part of our MSR hedging strategy described above.
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, 2020, given hypothetical instantaneous parallel shifts in the yield curve. We used December 31, 2020 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 $ 3.5 $ (3.0)
Loans held for investment - Unsecuritized HECM loans and tails 0.05 (0.04)
Loans held for sale 3.8 (5.8)
TBA / Forward MBS trades / Interest rate swap futures (2.8) 4.0
Total 4.6 (4.8)
MSRs (1) (30.6) 31.4
MSRs, embedded in pipeline (0.4) 0.2
Total MSRs (2) (31.0) 31.6
Derivatives related to MSRs 11.2 (11.0)
Total MSRs and related derivatives (19.8) 20.6
Total, net $ (15.3) $ 15.8
(1)Primarily reflects the impact of market interest rate changes on projected prepayments on the Agency MSR portfolio and on advance funding costs on the non-Agency MSR portfolio carried at fair value. Fair value adjustments to our MSRs are offset, in part, by fair value adjustments related to the NRZ financing liabilities, which are recorded in Pledged MSR liability expense.
(2)Forward mortgage loans only.
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, 2020 balances, if interest rates were to increase by 1% on our variable rate debt and interest earning cash and float balances, we estimate a net positive impact of approximately $12.3 million resulting from an increase of $22.4 million in annual interest income and an increase of $10.1 million in annual interest expense.
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.
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, 2020 and 2019. 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, 2020
2021 2022 2023 2024 2025 There- after Total Balance Fair Value (1)
Rate-Sensitive Assets:
Interest-earning cash $ 261,515 $ - $ - $ - $ - $ - $ 261,515 $ 261,515
Average interest rate 0.30 % - % - % - % - % - % 0.30 %
Loans held for sale, at fair value 366,364 - - - - - 366,364 366,364
Average interest rate 3.33 % - % - % - % - % - % 3.33 %
Loans held for sale, at lower of cost or fair value (2)
153 - 473 6 17 20,823 21,472 21,472
Average interest rate 5.00 % - % 5.51 % 4.61 % 3.50 % 4.21 % 4.23 %
Loans held for investment 396,408 385,882 729,032 1,550,187 1,392,130 2,543,488 6,997,127 6,997,127
Average interest rate 3.26 % 3.46 % 3.64 % 3.52 % 3.53 % 3.44 % 3.39 %
Debt service accounts and interest-earning time deposits
20,451 283 - - - - 20,734 20,734
Average interest rate 0.09 % 5.55 % - % - % - % - % 0.17 %
Total rate-sensitive assets $ 1,044,891 $ 386,165 $ 729,505 $ 1,550,193 $ 1,392,147 $ 2,564,311 $ 7,667,212 $ 7,667,212
Percent of total 13.63 % 5.04 % 9.51 % 20.22 % 18.16 % 33.45 % 100.00 %
Rate-Sensitive Liabilities:
Match funded liabilities $ 106,288 $ 475,000 $ - $ - $ - $ - $ 581,288 $ 581,997
Average interest rate 4.10 % 1.49 % - % - % - % - % 1.96 %
Senior notes 21,543 291,509 - - - - 313,052 320,879
Average interest rate 6.38 % 8.38 % - % - % - % - % 8.24 %
SSTL and other borrowings (3) (4) 821,141 206,662 - - - 47,476 1,075,279 1,043,212
Average interest rate 3.91 % 6.48 % - % - % - % - % 4.55 %
Total rate-sensitive liabilities $ 948,972 $ 973,171 $ - $ - $ - $ 47,476 $ 1,969,619 $ 1,946,088
Percent of total 48.18 % 49.41 % - % - % - % 2.41 % 100.00 %
Expected Maturity Date at December 31, 2020 (Notional Amounts)
2021 2022 2023 2024 2025 There- after Total
Balance Fair
Value (1)
Rate-Sensitive Derivative Financial Instruments:
Derivative assets (liabilities)
Forward MBS trades 50,000 - - - - - $ 50,000 $ (50)
Average coupon 2.40 % - % - % - % - % - % 2.40 %
TBA / Forward MBS Trades 400,000 - - - - - 400,000 (4,554)
Average coupon 2.22 % - % - % - % - % - % 2.22 %
Derivatives futures 593,500 - - - - - 593,500 504
Average coupon 0.75 % - % - % - % - % - % 0.75 %
IRLCs 631,405 - - - - - 631,405 22,706
Average coupon 2.89 % - % - % - % - % - % 2.89 %
Total derivatives, net $ 1,674,905 $ - $ - $ - $ - $ - $ 1,674,905 $ 18,606
Forward LIBOR curve (5) 0.14 % 0.13 % 0.20 % 0.36 % 0.60 % 0.86 %
Expected Maturity Date at December 31, 2019
2020 2021 2022 2023 2024 There- after Total Balance Fair Value (1)
Rate-Sensitive Assets:
Interest-earning cash $ 433,224 $ - $ - $ - $ - $ - $ 433,224 $ 433,224
Average interest rate 1.74 % - % - % - % - % - % 1.74 %
Loans held for sale, at fair value 208,752 - - - - - 208,752 208,752
Average interest rate 5.41 % - % - % - % - % - % 5.41 %
Loans held for sale, at lower of cost or fair value (2)
5,009 6 - 559 203 60,740 66,517 66,517
Average interest rate 4.67 % 5.29 % - % - % 5.52 % 7.06 % 4.42 %
Loans held for investment 258,058 275,651 608,912 1,231,545 1,566,200 2,329,230 6,269,596 6,269,596
Average interest rate 4.77 % 4.57 % 4.71 % 4.92 % 4.91 % 4.95 % 4.82 %
Debt service accounts and interest-earning time deposits
23,463 203 - - - - 23,666 23,666
Average interest rate 0.11 % 9.90 % - % - % - % - % 0.17 %
Total rate-sensitive assets $ 928,506 $ 275,860 $ 608,912 $ 1,232,104 $ 1,566,403 $ 2,389,970 $ 7,001,755 $ 7,001,755
Percent of total 13.26 % 3.94 % 8.70 % 17.60 % 22.37 % 34.13 % 100.00 %
Rate-Sensitive Liabilities:
Match funded liabilities $ 394,109 $ 285,000 $ - $ - $ - $ - $ 679,109 $ 679,507
Average interest rate 3.02 % 2.53 % - % - % - % - % 2.81 %
Senior notes - 21,543 291,509 - - - 313,052 270,022
Average interest rate - % 6.38 % 8.38 % - % - % - % 8.24 %
SSTL and other borrowings (3) (4) 832,078 98,971 41,663 - - 57,594 1,030,306 1,010,789
Average interest rate 4.96 % 3.71 % - % - % 5.07 % - % 4.74 %
Total rate-sensitive liabilities $ 1,226,187 $ 405,514 $ 333,172 $ - $ - $ 57,594 $ 2,022,467 $ 1,960,318
Percent of total 60.63 % 20.05 % 16.47 % - % - % 2.85 % 100.00 %
Expected Maturity Date at December 31, 2019 (Notional Amounts)
2020 2021 2022 2023 2024 There- after Total
Balance Fair
Value (1)
Rate-Sensitive Derivative Financial Instruments:
Derivative assets (liabilities)
Interest rate caps $ 27,083 $ - $ - $ - $ - $ - $ 27,083 $ -
Average strike rate 3.00 % - % - % - % - % - % 3.00 %
Forward MBS trades 60,000 - - - - - 60,000 (92)
Average coupon - % - % - % - % - % - % - %
TBA / Forward MBS Trades 1,200,000 - - - - - 1,200,000 1,121
Average coupon 3.00 % - % - % - % - % - % 3.00 %
IRLCs 232,566 - - - - - 232,566 4,878
Average coupon 3.97 % - % - % - % - % - % 3.97 %
Total derivatives, net $ 1,519,649 $ - $ - $ - $ - $ - $ 1,519,649 $ 5,907
Forward LIBOR curve (5) 1.76 % 1.51 % 1.48 % 1.58 % 1.68 % 1.78 %
(1)See Note 5 - 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.
(5)Average 1-Month LIBOR for the periods indicated.
Liquidity Risk
We are exposed to liquidity risk through our ongoing needs to originate and finance mortgage loans, sell mortgage loans into secondary markets, retain 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 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 monthly 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. Historical losses have significantly eroded our stockholders’ equity and weakened our financial condition. To the extent we are not successful in achieving our near-term objective of returning to profitability, funding continuing losses will limit opportunities to grow our business.
We address liquidity risk by maintaining borrowing capacity in excess of our expected needs and by extending the tenor of our financing arrangements from time to time. For example, to fund additional advance obligations, we have typically “upsized” existing advance facilities or entered into new advance facilities in anticipation of the funding obligation and then pledged additional advances to support the borrowing. In general, we finance our assets and operating requirements through cash on hand, operating cash flow, advance financing facilities and other secured borrowings.
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.
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, Process Unity. 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. 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 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.
NRZ 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 NRZ’s advance financing facilities do not perform as envisaged or should NRZ 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.
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, 2020, our servicing portfolio included significant client relationships with NRZ which represented 36% and 45% of our servicing portfolio UPB and loan count, respectively. The NRZ servicing portfolio accounts for approximately 62% of all delinquent loans that Ocwen services. During 2020, NRZ-related servicing fees retained by Ocwen represented approximately 30% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ (excluding ancillary income). The current terms of our agreements with NRZ extend through July 2022 (legacy Ocwen agreements).
On February 20, 2020, we received a notice of termination from NRZ with respect to the PMC subservicing agreement. This termination was for convenience and not for cause, and provided for loan deboarding fees to be paid by NRZ. As the sale accounting criteria were met upon the notice of termination, the MSRs and the Rights to MSRs were derecognized from our balance sheet on February 20, 2020 without any gain or loss on derecognition. We continued to service these loans until deboarding, accounting for them as a subservicing relationship. Accordingly, we recognized subservicing fees associated with the subservicing agreement subsequent to February 20, 2020 and have not reported any servicing fees collected on behalf of, and remitted to NRZ, any change in fair value, runoff and settlement in financing liability thereafter. On September 1, 2020, 133,718 loans representing $18.2 billion were deboarded and the remaining 136,500 loans representing $16.0 billion of UPB were deboarded on October 1, 2020.
Currently, subject to proper notice (generally180 days) and the payment of termination fees, NRZ has rights to terminate the legacy Ocwen agreements for convenience.
In the ordinary course, we regularly share information with NRZ and discuss various aspects of our relationship. At times, we discuss modifications to our relationship that we believe could be to our mutual benefit as our respective businesses evolve over time. We also discuss alternatives to the outcomes contemplated under our agreements when they were originally executed as facts and circumstances change over time. Examples of these discussions include our discussions with respect to the Rights to MSRs. As part of these discussions, we discussed several potential changes to existing contracts. It is possible that NRZ could exercise its rights to terminate for convenience some or all of the legacy Ocwen servicing agreements. As of December 31, 2020, these agreements accounted for approximately 36% of our servicing portfolio.
Given the NRZ concentration in our servicing segment, senior management has been monitoring two main risks associated with our NRZ relationship, in addition to its strategic component. First, management has been monitoring the profitability of the NRZ servicing agreements. As performing loans in the NRZ servicing portfolio have run-off, delinquencies have remained high, resulting in a relatively elevated average cost per loan. Because the NRZ portfolio contains a high percentage of delinquent accounts, it has an inherently high level of potential operational and compliance risk and requires a disproportionately high level of operating staff, oversight support infrastructure and overhead which drives the elevated average cost per loan. We actively pursue cost re-engineering initiatives to continue to reduce our cost-to-service and our corporate overhead, as well as pursue actions to grow our non-NRZ servicing portfolio.
Second, because NRZ has rights to terminate for convenience subject to certain conditions, senior management has been monitoring our risks associated with a potential early termination or non-renewal of some or all of the Ocwen legacy agreements with NRZ. Management developed stress scenarios to assess the operational and financial impact of such termination scenarios, and the necessary mitigating actions. Management’s responses to the different scenarios are all based on the appropriate right-sizing or restructuring of our operations and include, but are not limited to the adequate reduction of direct servicing resources, the closure of certain facilities in different locations to rationalize property utilization, the appropriate planning of loan deboarding, and the potential reduction in corporate support functions without impairing our ability to effectively operate in a controlled environment.
It is possible that the unwinding of all or a significant portion of our relationship with NRZ may not occur in an orderly or timely manner, which could be disruptive and could result in us incurring additional costs or even in disagreements with NRZ relating to our respective rights and obligations. Furthermore, if NRZ were to take actions to limit or terminate our relationship,
that could impact perceptions of other servicing clients, lenders, GSEs or others, which could cause them to take actions that materially and adversely impact our business, liquidity, results of operations and financial condition.
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, Florida, Texas, New York and Illinois, comprising 42% of the number of loans serviced at December 31, 2020. California has the largest concentration with 15% of the total loans serviced.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations
We have certain contractual obligations which require us to make cash payments. At December 31, 2020, such contractual obligations were primarily comprised of:
Less Than
One Year After One Year
Through Three
Years After Three
Years
Through
Five Years After Five
Years Total
Senior secured term loan (1)
$ 20,000 $ 165,000 $ - $ - $ 185,000
Senior notes (1) 21,543 291,509 - - 313,052
Other secured borrowings (1) 801,141 41,662 - 47,476 890,279
Contractual interest payments (2) 61,819 28,116 659 - 90,594
Originate/purchase mortgages or securities 631,405 - - - 631,405
Reverse mortgage equity draws (3) 2,044,421 - - - 2,044,421
Operating leases 14,618 12,929 1,351 - 28,898
$ 3,594,947 $ 539,216 $ 2,010 $ 47,476 $ 4,183,649
(1)Amounts are exclusive of any related discount, unamortized debt issuance costs or fair value adjustment. Excludes match funded liabilities as these represent debt where the holders only have recourse to the assets that collateralize the debt and such assets are not available to satisfy general claims against Ocwen. Also 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. See Note 14 - Borrowings to the Consolidated Financial Statements for additional information related to these excluded borrowings.
(2)Represents estimated future interest payments on MSR financing facilities, warehouse lines, senior notes and the SSTL, based on applicable interest rates as of December 31, 2020.
(3)Represents additional equity draw obligations in connection with reverse mortgage loans originated or purchased. Because these draws can be made in their entirety, we have classified them as due in less than one year at December 31, 2020.
As of December 31, 2020, we had recorded gross unrecognized tax benefits of $20.6 million and an additional $3.4 million for gross interest and penalties. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities, including whether or not these tax liabilities will be paid; therefore, such amounts are not included in the above contractual obligation table.
Our forecasting with respect to our ability to satisfy our contractual obligations, including but not limited to our servicing advance obligations, requires management to use judgment and estimates and includes factors that may be beyond our control, such as the conditions created by the COVID-19 pandemic. Our actual results could differ materially from our estimates, and if this were to occur, it could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Off-Balance Sheet Arrangements
In the normal course of business, we engage in transactions with a variety of financial institutions and other companies that are not reflected on our balance sheet. We are subject to potential financial loss if the counterparties to our off-balance sheet transactions are unable to complete an agreed upon transaction. We manage counterparty credit risk by entering into financial instrument transactions through national exchanges, primary dealers or approved counterparties and through the use of mutual margining agreements whenever possible to limit potential exposure. We regularly evaluate the financial position and creditworthiness of our counterparties. Our off-balance sheet arrangements include mortgage loan repurchase and
indemnification obligations, unconsolidated special purpose entities (SPEs) (a type of variable interest entity or VIE) and notional amounts of our derivatives.
Mortgage Loan Repurchase and Indemnification Liabilities. We have exposure to representation, warranty and indemnification obligations in our capacity as a loan originator and servicer. We recognize the fair value of representation and warranty obligations in connection with originations upon sale of the loan or upon completion of an acquisition. Thereafter, the estimation of the liability considers probable future obligations based on industry data of loans of similar type segregated by year of origination and estimated loss severity based on current loss rates for similar loans. Our historical loss severity considers the historical loss experience that we incur upon sale or liquidation of a repurchased loan as well as current market conditions. See Note 4 - Securitizations and Variable Interest Entities, Note 15 - Other Liabilities and Note 26 - Contingencies to the Consolidated Financial Statements for additional information.
Unfunded Lending Commitments. We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $2.0 billion at December 31, 2020. This additional borrowing capacity is available on a scheduled or unscheduled payment basis. See Note 25 - Commitments to the Consolidated Financial Statements for additional information.
HMBS Issuer Obligations. As an HMBS issuer, we assume certain obligations related to each security issued. The most significant obligation is the requirement 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 received from HUD, typically within 60 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. See Note 25 - Commitments to the Consolidated Financial Statements for additional information.
Involvement with VIEs. We use SPEs and VIEs for a variety of purposes but principally in the financing of our servicing advances, in the securitization of mortgage loans and in the financing of our MSRs. We include VIEs in our consolidated financial statements if we determine we are the primary beneficiary. See Note 4 - Securitizations and Variable Interest Entities to the Consolidated Financial Statements for additional information. We generally use match funded securitization facilities to finance our servicing advances. The SPEs to which the receivables for servicing advances are transferred in the securitization transaction are included in our consolidated financial statements either because we have the majority equity interest in the SPE or because we are the primary beneficiary where the SPE is a VIE. Holders of the debt issued by the SPEs have recourse only to the assets of the SPEs for satisfaction of the debt.
Derivatives. We record all derivatives at fair value on our consolidated balance sheets. We use these derivatives primarily to manage our interest rate risk. The notional amounts of our derivative contracts do not reflect our exposure to credit loss. Generally, our derivative instruments require daily margin calls. See Note 17 - Derivative Financial Instruments and Hedging Activities to the Consolidated Financial Statements for additional information.
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. 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 5 - 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. 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,
2020 2019
Loans held for sale $ 387.8 $ 275.3
Loans held for investment - Reverse mortgages 6,997.1 6,269.6
Mortgage Servicing Rights 1,294.8 1,486.4
Other 35.2 31.9
Assets at fair value $ 8,715.0 $ 8,063.1
As a percentage of total assets 82 % 77 %
Assets at fair value using Level 3 inputs $ 8,376.8 $ 7,847.9
As a percentage of assets at fair value 96 % 97 %
HMBS-related borrowings 6,772.7 6,063.4
Financing liability - MSRs pledged 567.0 950.6
Other 14.4 22.0
Liabilities at fair value $ 7,354.1 $ 7,036.1
As a percentage of total liabilities 72 % 70 %
Liabilities at fair value using Level 3 inputs $ 7,349.5 $ 7,036.0
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 operational 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) that we sell into the secondary market. Loan transfers in these Ginnie Mae securitizations do not qualify for sale accounting and are recorded as secured borrowings. We have elected to 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, 2020, we reported $6.87 billion securitized loans held for investment at fair value and $6.77 billion HMBS-related borrowings at fair value, with a residual, net asset value of $99.5 million. In 2020, we recognized a $7.6 million gain as the net change in fair value of securitized loans held for investment and HMBS-related borrowings, and a $46.3 million gain on new originations of reverse mortgage loans (pre-securitization).
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, voluntary prepayments, defaults and discount rate. The determination of fair value requires management judgment due to the significant unobservable assumptions, including voluntary prepayment speeds, defaults 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 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, 2020:
December 31,
Significant unobservable assumptions 2020 2019
Life in years
Range 0.9 to 8.0 2.4 to 7.8
Weighted average 5.9 6.0
Conditional prepayment rate (1)
Range 10.6% to 28.8% 7.8% to 28.3%
Weighted average 15.4 % 14.6 %
Discount rate 1.9 % 2.8 %
(1)Includes voluntary and involuntary prepayments.
Valuation of MSRs
MSRs are assets that represent the right to service a portfolio of mortgage loans. We originate MSRs from our lending activities and acquire MSRs through flow purchase agreements, GSE Cash Window programs, bulk purchases, asset acquisitions or business combinations. We elected to account for MSRs using the fair value measurement method. As of December 31, 2020, we reported a $1,294.8 million fair value of MSRs. In 2020, we recognized a $106.2 million fair value loss due to changes in valuation inputs and assumptions.
We determine the fair value of MSRs 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 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 obtained from our valuation experts, amongst other factors.
To assist us 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, 2020:
Conventional Government-Insured Non-Agency
Prepayment speed
Range 8.8% to 21.1% 9.0% to 24.2% 8.6% to 15.0%
Weighted average 13.1% 15.5% 11.3%
Delinquency
Range 1.6% to 3.5% 6.8% to 17.9% 27.7% to 29.4%
Weighted average 1.9% 8.8% 28.1%
Cost to service (in dollars)
Range $72 to $73 $102 to $122 $226 to $272
Weighted average $72 $109 $261
Discount rate 9.0% 10.1% 11.4%
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 because rate increases will also increase the amount of float earnings that we recognize.
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 as a charge to earnings 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, 2020, the allowance for losses on servicing advances was $6.3 million, which represents 1% of total servicing advances.
We record an allowance for losses on receivables in our Servicing business, including related to defaulted FHA or VA insured loans repurchased from Ginnie Mae guaranteed securitizations (government-insured loan claims). This allowance represents management’s estimate of expected lifetime credit losses and is maintained at a level that management considers adequate based upon continuing assessments of collectability, current trends, historical loss experience, and reasonable and supportable forecasts. At December 31, 2020, the allowance for losses on receivables related to government-insured claims was $38.3 million, which represents 28% of total government-insured claims receivables.
We adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as amended, on January 1, 2020. The ASU requires the measurement and recording of expected lifetime credit losses on loans and other financial instruments measured at amortized cost and replaces the existing incurred loss model for credit losses. The new guidance requires an organization to measure all current expected credit losses (CECL) for financial assets held and certain off-balance sheet credit exposures at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
The transition adjustment related to the allowance for losses on servicing advances and receivables did not result in any significant adjustment to our financial statements.
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, 2020 and 2019, the USVI filing jurisdiction was in a material cumulative loss position. The U.S. jurisdiction was also in a three-year cumulative loss position as of December 31, 2020 and 2019. 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 $182.7 million and $199.5 million on our U.S. deferred tax assets at December 31, 2020 and 2019, respectively, and a full valuation allowance of $0.4 million and $0.4 million on our USVI deferred tax assets at December 31, 2020 and 2019, respectively. The U.S. and USVI 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 both the U.S. and USVI 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. Our historical loss severity considers the historical loss experience that we incur upon sale or liquidation of a repurchased loan 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, 2020, we have recorded a liability for representation and warranty obligations and similar indemnification obligations of $40.4 million. See Note 26 - 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. It is possible that we will incur losses relating to threatened and pending litigation that materially exceed the amount accrued. Our accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was $38.9 million at December 31, 2020. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded at December 31, 2020.
Going Concern
In accordance with ASC 205-40, Presentation of Financial Statements - Going Concern, we evaluate whether there are conditions that are known or reasonably knowable that raise substantial doubt about our ability to continue as a going concern within one year after the date that our financial statements are issued. We perform a detailed review and analysis of relevant quantitative and qualitative information from across our organization in connection with this evaluation. To support this effort, senior management from key business units reviews and assesses the following information:
•our current financial condition, including liquidity sources at the date that the financial statements are issued (e.g., available liquid funds and available access to credit, including covenant compliance);
•our conditional and unconditional obligations due or anticipated within one year after the date that the financial statements are issued (regardless of whether those obligations are recognized in our financial statements);
•funds necessary to maintain operations considering our current financial condition, obligations and other expected cash flows within one year after the date that the financial statements are issued (i.e., financial forecasting); and
•other conditions and events, when considered in conjunction with the above items, that may adversely affect our ability to meet obligations within one year after the date that the financial statements are issued (e.g., negative financial trends, indications of possible financial difficulties, internal matters such as a need to significantly revise operations and external matters such as adverse regulatory or legal proceedings, adverse counterparty actions or rating agency decisions, and our client concentration).
Our evaluation of whether it is probable that we will be unable to meet our obligations as they become due within one year after the date that our financial statements are issued involves a degree of judgment, including about matters that are, to different degrees, uncertain.
If such conditions exist, management evaluates its plans that when implemented would mitigate the condition(s) and alleviate the substantial doubt about our ability to continue as a going concern. Such plans are considered only if information available as of the date that the financial statements are issued indicates both of the following are true:
•it is probable management’s plans will be implemented within the evaluation period; and
•it is probable management’s plans, when implemented individually or in the aggregate, will mitigate the condition(s) that raise substantial doubt about our ability to continue as a going concern in the evaluation period.
Our evaluation of whether it is probable that management’s plans will be effectively implemented within the evaluation period is based on the feasibility of implementation of management’s plans in light of our specific facts and circumstances.
Our evaluation of whether it is probable that our plans, individually or in the aggregate, will be implemented in the evaluation period involves a degree of judgment, including about matters that are, to different degrees, uncertain.
Based on our evaluation, we have determined that there are no conditions that are known or reasonably knowable that raise substantial doubt about our ability to continue as a going concern within one year after the date that our Consolidated Financial Statements for the year ended December 31, 2020 are issued.
RECENT ACCOUNTING DEVELOPMENTS
Recent Accounting Pronouncements
We adopted new credit loss guidance (ASU 2016-13, as amended) on January 1, 2020 by applying the guidance at the adoption date with a cumulative-effect adjustment to the opening balance of Retained earnings in the period of adoption. The transition adjustment resulted in an adjustment to the opening balance of retained earnings of $47.0 million and we increased our loans held for investment by $47.0 million, representing the recognition of certain non-cancellable draw commitments (tails) associated with our reverse mortgage loans. 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 on January 1, 2020 did not have a material impact on our consolidated financial statements:
•Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15)
•Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the Market Risk sections of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for our quantitative and qualitative disclosures about market risk.

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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, 2020, 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, 2020, 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, 2020 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, 2020 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
There was no information required to be reported on Form 8-K during the fourth quarter of the year covered by this Form 10-K that was not so reported.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the information contained in our definitive Proxy Statement with respect to our 2021 Annual Meeting, which we intend to file with the SEC no later than April, 30 2021.

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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 2021 Annual Meeting, which we intend to file with the SEC no later than April, 30 2021.

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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 2021 Annual Meeting, which we intend to file with the SEC no later than April, 30 2021.

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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 2021 Annual Meeting, which we intend to file with the SEC no later than April, 30 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING 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 2021 Annual Meeting, which we intend to file with the Securities and Exchange Commission no later than April, 30 2021.
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.
2.1†
Agreement and Plan of Merger, dated as of February 27, 2018, by and among Ocwen Financial Corporation, POMS Corp and PHH Corporation (3)
3.1
Amended and Restated Articles of Incorporation, as amended (30)
3.2
Amended and Restated Bylaws of Ocwen Financial Corporation (31)
4.1
Form of Certificate of Common Stock (2)
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
Indenture, dated as of December 5, 2016, among Ocwen Loan Servicing, LLC, Ocwen Financial Corporation, the other guarantors named therein and Wilmington Trust, National Association (16)
4.4
First Supplemental Indenture, dated as of October 4, 2018, among PHH Corporation, PHH Mortgage Corporation and Wilmington Trust, National Association (21)
4.5
Third Supplemental Indenture, dated August 20, 2013, between PHH Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (22)
4.6
Fifth Supplemental Indenture, dated as of July 3, 2017, among PHH Corporation, as issuer and The Bank of New York Mellon Trust Company, N.A., as trustee (23)
4.7
Form of 6.375% Senior Note due 2021 (22)
4.8
Indenture, dated as of January 17, 2012, between PHH Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (20)
4.9
Description of Common Stock (filed herewith)
10.1*
Ocwen Financial Corporation 1998 Annual Incentive Plan, as amended (25)
10.2*
Ocwen Financial Corporation Deferral Plan for Directors, dated March 7, 2005 (10)
10.3*
Ocwen Financial Corporation 2007 Equity Incentive Plan, dated May 10, 2007 (11)
10.4*
Ocwen Financial Corporation 2017 Performance Incentive Plan (17)
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. (30)
10.6
Services Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (9)
10.7
Services Agreement, dated as of October 1, 2012, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (1)
10.8
First Amendment to Services Agreement, dated as of October 1, 2012, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (1)
10.9
Second Amendment to Services Agreement, dated as of March 29, 2013, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (4)
10.10
First Amendment to Services Agreement, dated as of March 29, 2013, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (4)
10.11
Third Amendment to Services Agreement, dated as of July 24, 2013, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (5)
10.12
Second Amendment to Services Agreement dated July 24, 2013 by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (5)
10.13
Agreement dated as of April 12, 2013 by and among Altisource Solutions S.à r.l., Ocwen Financial Corporation and Ocwen Mortgage Servicing, Inc. (12)
10.14
Amended and Restated Senior Secured Term Loan Facility Agreement, dated as of December 5, 2016, by and among Ocwen Loan Servicing, LLC, as Borrower, Ocwen Financial Corporation, as Parent, Certain Subsidiaries of Ocwen Financial Corporation, as Subsidiary Guarantors, the Lender Parties thereto, and Barclays Bank PLC, as Administrative Agent and Collateral Agent (16)
10.15
Pledge and Security Agreement dated as of February 15, 2013 between each of the Grantor Parties thereto, and Barclays Bank PLC, as Collateral Agent (13)
10.16
Second Lien Notes Pledge and Security Agreement, dated as of December 5, 2016, among each of the grantors named therein and Wilmington Trust, National Association (16)
10.17
Junior Priority Intercreditor Agreement, dated as of December 5, 2016, among Ocwen Loan Servicing, LLC, Ocwen Financial Corporation, the other grantors named therein, Barclays Bank PLC and Wilmington Trust, National Association (16)
10.18
Description of USVI Relocation Package of Ocwen Mortgage Servicing, Inc. (14)
10.19*
Form of Indemnification Agreement (15)
10.20*
Form of Undertaking to Repay Advancement of Indemnification Expenses (15)
10.21†
Agreement for the Purchase and Sale of Servicing Rights, dated December 28, 2016, by and between New Residential Mortgage LLC, PHH Mortgage Corporation and, for limited purposes, PHH Corporation (32)
10.22††
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. (18)
10.23††
Subservicing Agreement dated as of July 23, 2017 by and between New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (18)
10.24††
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 (3)
10.25††
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. (3)
10.26*
Offer Letter, dated April 17, 2018, between Ocwen Financial Corporation and Glen Messina (19)
10.27
Counterpart Agreement, dated as of October 4, 2018, executed by PHH Corporation and PHH Mortgage Corporation and acknowledged and agreed to by Barclays Bank PLC, as administrative agent and collateral agent (21)
10.28††
Amendment No. 1 to Subservicing Agreement dated as of August 17, 2018 between New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (24)
10.29††
Amendment No. 1 to New RMSR Agreement dated as of August 17, 2018 among New Residential Mortgage LLC, Ocwen Loan Servicing, LLC and the other parties thereto (24)
10.30††
Subservicing Agreement dated as of August 17, 2018 between New Penn Financial, LLC and Ocwen Loan Servicing, LLC (24)
10.31*
Form of Director Restricted Stock Unit Agreement (2)
10.32*
Amended and Restated Ocwen Financial Corporation United States Basic Severance Plan (29)
10.33*
Amended and Restated Ocwen Financial Corporation United States Change in Control Severance Plan (29)
10.34*
Amendment to April 17, 2018 Offer Letter between Ocwen Financial Corporation and Glen Messina, dated February 27, 2019 (6)
10.35*
Amendment to April 17, 2018 Offer Letter between Ocwen Financial Corporation and Glen Messina, effective September 15, 2020 (30)
10.36*
Offer Letter between Ocwen Financial Corporation and June Campbell, dated January 17, 2019 (6)
10.37
Joinder and Amendment Agreement among Ocwen Financial Corporation, Ocwen Loan Servicing, LLC, as borrower, Barclays Bank PLC as administrative agent, and the other parties thereto, dated as of March 18, 2019 (8)
10.38*
Form of Annual Performance-Based Cash Award Agreement (7)
10.39*
Form of Annual Performance-Based Stock Award Agreement (7)
10.40*
Form of Annual Time-Based Cash Award Agreement (7)
10.41*
Form of Annual Time-Based Stock Award Agreement (7)
10.42*
Form of Transitional Cash Award Agreement (7)
10.45*
Amendment to April 17, 2018 Offer Letter between Ocwen Financial Corporation and Glen Messina, effective April 11, 2019 (7)
10.46††††
Joinder and Second Amendment Agreement, dated as of January 27, 2020, to the Amended and Restated Senior Secured Term Loan Facility Agreement (26)
10.47†††
Amended and Restated Flow Mortgage Loan Subservicing Agreement between New Residential Mortgage LLC and PHH Mortgage Corporation dated March 29, 2019 (7)
10.48
Amendment No. 2, dated as of March 11, 2020, to Agreement for the Purchase and Sale of Servicing Rights, dated as of December 28, 2016, between New Residential Mortgage LLC and PHH Mortgage Corporation (28)
10.49*
Form of Cash Award granted September 10, 2020 (30)
10.50*
Form of Restricted Stock Unit Award granted September 10, 2020 (30)
10.51††††
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 (30)
10.52††††
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 (30)
10.53††††
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 (30)
10.54††††
Transaction Agreement between Ocwen Financial Corporation and Oaktree Capital Management L.P. and affiliates, dated as of December 21, 2020 (filed herewith)
10.55††††
Form of Securities Purchase Agreement between Ocwen Financial Corporation, Opps OCW Holdings, LLC, and ROF8 OCW MAV PT, LLC (filed herewith)
10.56
Form of Registration Rights Agreement between Ocwen Financial Corporation, Opps OCW Holdings, LLC, and ROF8 OCW MAV PT, LLC (filed herewith)
10.57
Form of Warrant issuable to Opps OCW Holdings, LLC and ROF8 OCW MAV PT, LLC (filed herewith)
10.58*
Form of 2020 Annual Time-Based Cash Award Agreement (28)
10.59*
Form of 2020 Annual Performance-Based Cash Award Agreement (28)
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, 2020 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, 2020, formatted in iXBRL (included as Exhibit 101).
* Management contract or compensatory plan or agreement.
† Certain schedules and exhibits have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any referenced schedules 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 and 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.
(1)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on October 5, 2012.
(2)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.
(3)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.
(4)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on April 4, 2013.
(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, 2013 filed on March 3, 2014.
(6)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.
(7)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.
(8)Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on March 18, 2019.
(9)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on August 12, 2009.
(10)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.
(11)Incorporated by reference from the similarly described exhibit to our definitive Proxy Statement with respect to our 2007 Annual Meeting of Shareholders as filed on March 30, 2007.
(12)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on April 18, 2013.
(13)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on February 19, 2013.
(14)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, 2014 filed on May 2, 2014.
(15)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on March 26, 2015.
(16)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on December 6, 2016.
(17)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on May 24, 2017.
(18)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.
(19)Incorporated by reference to the similarly described exhibit included with the Registrant’s Form 8-K filed on April 19, 2018.
(20)Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on January 17, 2012.
(21)Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on October 4, 2018.
(22)Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on August 20, 2013.
(23)Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on July 5, 2017.
(24)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.
(25)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.
(26)Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on January 27, 2020.
(27)Incorporated by reference from the Description of Capital Stock included in the Registrant’s Registration Statement on Form S-3 filed on May 9, 2013.
(28)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.
(29)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.
(30)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.
(31)Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on February 25, 2019.
(32)Incorporated by reference to the similarly described exhibit to PHH Corporation’s Form 8-K filed on December 28, 2016.