EDGAR 10-K Filing

Company CIK: 873860
Filing Year: 2022
Filename: 873860_10-K_2022_0001628280-22-003998.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
When we use the terms “Ocwen,” “OCN,” “we,” “us” and “our,” we are referring to Ocwen Financial Corporation and its consolidated subsidiaries.
OVERVIEW
We are a financial services company that services and originates both forward and reverse mortgage loans, through our primary brands, PHH Mortgage and Liberty Reverse Mortgage. We have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors. This long-standing core competency will continue to be a guiding principle as we seek to grow our business and improve our financial performance. We are a leader in the reverse mortgage business with a strong brand and have expanded our reverse mortgage servicing competitive advantage with our acquisition of the Reverse Mortgage Servicing platform in the fourth quarter of 2021.
We are headquartered in West Palm Beach, Florida with offices and operations in the U.S., in the United States Virgin Islands (USVI), in India and the Philippines. At December 31, 2021, approximately 64% of our workforce is located outside the U.S. Ocwen Financial Corporation is a Florida corporation organized in February 1988. With our predecessors, we have been servicing residential mortgage loans since 1988. We have been originating forward mortgage loans since 2012 and reverse mortgage loans since 2013. We currently provide solutions through our primary operating, wholly-owned subsidiary, PHH Mortgage Corporation (PMC).
BUSINESS MODEL AND SEGMENTS
Ocwen’s business model is designed to create value and maximize returns for our shareholders, and effectively allocate our resources. Following the acquisition and integration of PHH Corporation (PHH) in late 2018 and 2019, we have transformed into a balanced and diversified business. We seek to create value for shareholders through profitable growth, service excellence and high quality operational execution. Our core competencies revolve around our Servicing business and we have developed a profitable Originations platform to replenish and pursue growth of our servicing portfolio.
Our Servicing business is comprised of two components, our owned MSRs and our subservicing portfolio that complement each other’s when managing scale. We invest our capital to fund purchases and originations of our owned MSRs and servicing advances, for which we establish a targeted return on investment. Our net return includes servicing revenue net of servicing costs, less MSR portfolio runoff, and less our MSR and advance funding cost. Our net return also includes fair value changes of our owned MSR that vary based on market conditions. Our subservicing portfolio generates a relatively stable source of revenue. While subservicing fees are relatively lower, we do not incur any significant capital utilization or funding of advances and are not exposed to fair value volatility. In 2021, we expanded our servicing portfolio with the launch of our MSR joint venture with Oaktree, MAV. At December 31, 2021, PMC serviced residential mortgage loans on behalf of MAV with an unpaid principal balance (UPB) of $33.0 billion or 12% of our total servicing portfolio - see the “Oaktree Relationship” section below for further details. Our MAV and NRZ servicing portfolios are effectively subservicing relationships. We target a balanced mix of our portfolio between servicing and subservicing based on capital allocation and returns. Our servicing operations and customer interactions do not differentiate whether loans are serviced or subserviced. 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, and loan modification or other solutions to exit forbearance in a relatively seamless manner. In 2021, we expanded our capability in reverse servicing by acquiring the Mortgage Assets Management, LLC (formerly known as Reverse Mortgage Solutions, Inc.) (MAM (RMS)) servicing platform - see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview for further details.
Our Originations business’ strategy is to provide self-sustained replenishment opportunities to our servicing portfolio and profitable growth. Our Originations success is built on our relationships with borrowers, lenders and other market participants. We purchase MSRs through bulk portfolio purchases, through flow purchase agreements with our network of mortgage companies and financial institutions, and through participation in the Agency Cash Window (or Co-Issue) programs. In order to diversify our sources of servicing and reduce our reliance on others, we have been developing our origination of MSRs through different channels, including our portfolio recapture channel, retail, wholesale and correspondent lending. In 2021, we expanded our correspondent lending channel by acquiring TCB’s network of approximately 220 correspondent lenders.
The chart below summarizes our current business model:
We report our activities in three segments, Servicing, Originations and Corporate Items and Other, which reflect other business activities that are currently individually insignificant. Our business segments reflect the internal reporting that we use to evaluate operating performance of services and to assess the allocation of our resources. The financial information of our segments is presented in our financial statements in Note 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, MAV and MAM (RMS).
As of December 31, 2021, our servicing portfolio consisted of approximately 1.4 million loans with a UPB of $268.0 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 MSR owner, are required to advance to, or on behalf of, investors if we do not receive such amounts from borrowers. These amounts include principal and interest payments, property taxes and insurance premiums and amounts to maintain, repair and market real estate properties on behalf of our servicing clients. Most of our advances have the highest reimbursement priority such that we are entitled to repayment of the advances from the loan or property liquidation proceeds before most other claims on these proceeds. Advances are contractually non-interest bearing. The costs incurred by servicers in meeting advancing obligations consist principally of the interest expense incurred in financing the advance receivables and the costs of arranging such financing. Under subservicing agreements, Ocwen is promptly reimbursed by the owners of the MSRs who generally finance the advances and incur the associated financing cost.
Reducing delinquencies is important to our business because it enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Performing loans also require less work and thus are generally less costly to service. While increasing borrower participation in loan modification programs is a critical component of our ability to reduce delinquencies, borrower compliance with those modifications is also an important factor.
Our servicing portfolio naturally decreases over time as homeowners make regularly scheduled mortgage payments, prepay loans prior to maturity, refinance with a mortgage loan not serviced by us or involuntarily liquidate through foreclosure or other liquidation process. In addition, existing clients may determine to terminate their servicing and subservicing arrangements with us and transfer the servicing to others. Therefore, our ability to maintain or grow our servicing revenue or the size of our servicing portfolio depends on our ability to acquire the right to service or subservice additional mortgage loans at a rate that exceeds portfolio runoff and any client terminations. Our Originations segment is focused on profitably replenishing and growing our servicing and subservicing portfolios.
Originations
The primary source of revenue of our Originations segment is our gain on sale of loans. We originate and purchase residential mortgage loans that we sell to Agencies or securitize on a servicing retained basis, thereby generating mortgage servicing rights. Our mortgage loans are conventional (conforming to the underwriting standards of the GSEs, 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 (consumer direct channel, previously recapture) 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. Per-loan margins vary by channel, with correspondent typically being the lowest margin and retail the highest, commensurate with fulfillment costs.
In addition to our originated MSRs, we acquire MSRs through multiple channels, including flow purchase agreements, the Agency Cash Window programs and bulk MSR purchases. Our Originations business also includes the sourcing and acquisition of new subservicing clients.
In 2021, our Originations business generated a total volume of $152.0 billion in UPB (refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview for further details).
Retail Lending. We originate forward and reverse mortgage loans directly with borrowers through our retail lending business. Our forward lending business benefits from our servicing portfolio by offering refinance options to qualified borrowers seeking to lower their mortgage payments. Depending on borrower eligibility, we refinance eligible customers into conforming or government-insured products. We are focused on increasing recapture rates on our existing servicing portfolio to grow this business. We also are increasing our ability to originate retail loans to non-Ocwen servicing customers through various marketing channels. Through lead campaigns and direct marketing, the retail channel seeks to convert leads into loans in a cost-efficient manner.
Correspondent Lending. Our correspondent lending operation purchases forward and reverse mortgage loans that have been originated by a network of approved third-party lenders. All the lenders participating in our correspondent lending program are approved 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 Agency Cash Window programs and bulk MSR purchases. The Agency Cash Window programs we participate in, and purchase MSRs from, allow mortgage companies and financial institutions to sell whole loans to the respective Agency and sell the MSR to the winning bidder servicing released. In addition, we partner with other originators to replenish our MSR through flow purchase agreements. We do not
provide any origination representations and warranties in connection with our MSR purchases through MSR flow purchase agreements or Agency Cash Window programs.
New Servicing and Subservicing Acquisitions. Our enterprise sales department strives to expand our network of servicing and subservicing clients and source new flow and co-issue or subservicing agreements. We compete as a low cost provider with our demonstrated expertise to service mortgage assets across borrowers of every credit level and with our recapture ability.
REGULATION
Our business is subject to extensive regulation and supervision by federal, state, local and foreign governmental authorities, including the CFPB, HUD, the SEC and various state agencies that license and conduct examinations of our loan servicing, origination and collection activities. From time to time, we also receive information requests and other inquiries, both formal and informal in nature, (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. 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, the Federal Housing Finance Authority (FHFA), HUD, FHA, VA, 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. In the normal course of business, we incur significant costs to address regulatory requirements in each of our three lines of defense. We devote substantial resources to regulatory compliance, while, at the same time, striving to meet the needs and expectations of our customers, clients and other stakeholders. See Item 1A. Risk Factors - Legal and Regulatory Risks for further information.
We must comply with a large number of federal, state and local consumer protection and other laws and regulations, including, among others, the CARES Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Telephone Consumer Protection Act (TCPA), the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act (FDCPA), the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, as well as individual state laws pertaining to licensing, general mortgage origination and servicing practices and foreclosure, and federal and local bankruptcy rules. These laws and regulations apply to all facets of our business, including, but not limited to, licensing, loan originations, consumer disclosures, default servicing and collections, foreclosure, filing of claims, registration of vacant or foreclosed properties, handling of escrow accounts, payment application, interest rate adjustments, assessment of fees, loss mitigation, use of credit reports, handling of unclaimed property, safeguarding of non-public personally identifiable information about our customers, and the ability of our employees to work remotely. These complex requirements can and do change as laws and regulations are enacted, promulgated, amended, interpreted and enforced, and the requirements applicable to our business have been changing especially rapidly in response to the COVID-19 pandemic, as discussed below.
In recent years, the general trend among federal, state and local legislative bodies and regulatory agencies as well as state attorneys general has been toward increasing laws, regulations, investigative proceedings and enforcement actions with regard to residential mortgage lenders and servicers. The CFPB continues to take a very active role in the mortgage industry, and its rule-making and regulatory agenda relating to loan servicing and origination continues to evolve. Individual states have also been active, as have other regulatory organizations such as the Multistate Mortgage Committee (MMC), a multistate coalition of various mortgage banking regulators. In addition to their traditional focus on licensing and examination matters, certain regulators make observations, recommendations or demands with respect to areas such as corporate governance, safety and soundness and risk and compliance management.
The CFPB and state regulators have also focused on the use and adequacy of technology in the mortgage servicing industry, privacy concerns and other topical issues, such as likely discontinuation of the London Interbank Offered Rate (LIBOR), communications from debt collectors, and the ability of borrowers to repay mortgage loans. 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. Further, the CFPB promulgated certain amendments to RESPA (Regulation X) that became effective on August 31, 2021 and that impose certain additional COVID-19-related requirements with respect to loss mitigation, early intervention call requirements, and initiating new
foreclosures. The CFPB moratorium on new foreclosures sunset on January 1, 2022, although some states continue to impose certain foreclosure moratoria, including in connection with their respective Homeowner Assistance Fund programs.
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. The minimum net worth requirements to which our licensed entities are subject are unique to each state and type of license. See Item 1A. Risk Factors - Legal and Regulatory Risks for further information.
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 April 2021, following the filing of motions by the parties and a number of procedural developments, the court entered final judgment in our favor and closed the case. The CFPB thereafter filed a notice of appeal. Appellate briefing concluded August 26, 2021, and oral argument before the Eleventh Circuit occurred on February 10, 2022. We expect the CFPB to resume its supervision activities of Ocwen upon conclusion of this matter.
•In recent years we have settled state regulatory actions against us by 29 states and the District of Columbia and a lawsuit brought by the Florida Attorney General and the State of Florida Office of Financial Regulation 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 also entered into regulatory settlements with the NY DFS and the California Department of Financial Protection and Innovation (CA DFPI) 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 significant costs to comply with the terms of the settlements into which we have entered. In addition, the restrictions imposed under these settlements have impacted how we run our business.
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, privacy, employment, safety, payroll and other taxes and insurance and laws and regulations that govern the creation, continuation and the winding up of companies as well as the relationships between shareholders, our corporate entities, the public and the government in these countries.
COMPETITION
The financial services markets in which we operate are highly competitive and fragmented, and we expect them to remain so. We compete with large and small financial services companies, including bank and non-bank entities, in the servicing, lending and MSR transaction markets. Our competitors include large and regional banks, large non-bank servicers and mortgage originators, and real estate investment trusts. In both our servicing and originations business, new competitors continue to emerge, including companies that developed new technology around customer interactions and process automation.
In our Servicing business, we compete based on price, operating performance, service quality and customer and client satisfaction. Potential counterparties also (1) assess our regulatory compliance track record and examine our systems and processes for maintaining and demonstrating regulatory compliance, (2) consider our customer satisfaction rankings, and (3) consider our third-party servicer ratings. Certain of our competitors, especially large banks, may have substantially lower costs of capital and greater financial resources, which 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 superior operating performance, our lower cost to service non-performing loans and our deep know-how as a long-time operator of servicing loans. During 2021, PMC was recognized by the GSEs for the quality of its servicing performance. Freddie Mac awarded PMC the Gold Sharp Award for Top Tier Servicing Group. PMC was one of only two mortgage servicers to be recognized by Fannie Mae in 2021 in all three categories of the Servicer Total Achievement Rewards (STAR) Program. Notwithstanding these strengths, we have suffered reputational damage as a result of previous 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 our Originations business, we face intense competition in most areas, including rates, margin, fees, customer service and name recognition. Some of our competitors, including the larger banks, have substantially lower costs of capital and strong
retail presence, which makes it challenging to compete. We believe that we will continue to face increased competitive pressures in the future as the refinance opportunities contract with rising interest rates. We also believe our competitive strengths flow from our existing customer relationships and from our focus on providing strong customer service.
The forward and reverse lending markets face many of the same competitive pressures. However, 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 the competitive advantage of our Liberty Reverse Mortgage business flows from our focus on customer experience and service levels, our significant experience and 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 (PMC)
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+ Above Average RMS3
Ratings Outlook N/A Stable Stable
Date of last action September 28, 2021 June 29, 2021 April 28, 2021
In addition to servicer ratings, each of the agencies will from time to time assign an outlook (or a ratings watch such as Moody’s review status) to the rating status of a mortgage servicer. A negative outlook is generally used to indicate that a rating “may be lowered,” while a positive outlook is generally used to indicate a rating “may be raised.” On September 28, 2021, Moody’s upgraded the servicer quality (SQ) assessment for PMC as a master servicer of residential mortgage loans from SQ3 to SQ3+, reflecting solid reporting and remitting processes and proactive servicer oversight. On June 29, 2021, S&P affirmed PMC’s servicer rating as Average, raising management and organization ranking to Above Average. In addition, S&P raised PMC’s master servicer rating from Average to Above Average reflecting the industry experience of PMC’s management, multiple levels of internal controls to monitor operations, and resolution of regulatory actions, among other factors mentioned by S&P. On 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.
On April 28, 2021, Fitch affirmed PMC’s servicer ratings and revised its outlook from Negative to Stable as PMC’s performance in this evolving environment has not raised any elevated concerns. According to Fitch, the affirmation and stable outlook reflected PMC’s diligent response to the coronavirus pandemic and its impact on servicing operations, effective enterprise-wide risk environment and compliance management framework, satisfactory loan servicing performance metrics, special servicing expertise, and efficient servicing technology. The ratings also consider the financial condition of PMC’s parent, Ocwen Financial Corporation.
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.
In addition to the above servicer ratings, PMC was recognized by the GSEs for the quality of its servicing performance in 2021. Freddie Mac awarded PMC the Gold Sharp Award for Top Tier Servicing Group. PMC was one of only two mortgage servicers to be recognized by Fannie Mae in 2021 in all three categories of the STAR Program.
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 8 - MSR Transfers Not Qualifying for Sale Accounting.
NRZ is our largest servicing client, accounting for $55.8 billion of UPB or 21% of the UPB of our total servicing portfolio as of December 31, 2021, approximately 66% of all delinquent loans that Ocwen serviced, and approximately 19% of our total servicing and subservicing fees in 2021, net of servicing fees remitted to NRZ (excluding ancillary income). On February 20, 2020, we received a notice of termination from NRZ with respect to the legacy PMC subservicing agreement. We continued to service these loans until deboarding on October 1, 2020. A total of 270,218 loans were deboarded representing $34.2 billion of UPB.
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.
The legacy Ocwen agreements with NRZ 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. As of the date this Annual Report on Form 10-K is filed with the SEC, we have not received any such notice of termination. After the initial term, these agreements can be renewed for three-month terms at NRZ’s option by providing proper notice.
In the ordinary course and as we approach the end of the initial term in July 2022, we 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. The agreements may not be renewed by NRZ in July 2022 or at the end of any three-month renewal term after 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 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, title services and real estate sales related services, among other things. Certain services provided by Altisource under the Services 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.
In May 2021, Ocwen and Altisource signed a Binding Term Sheet under which the parties agreed to extend the term of the Services Agreement through August 2030. In addition, the parties agreed to fully release each other from liability with respect to any and all claims related to Ocwen’s transfer of service referrals and services to providers other than Altisource.
Based on public filings, we believe one of our shareholders holding more than 5% of our common stock has a direct or indirect material interest in Altisource.
OAKTREE RELATIONSHIP
We established a strategic alliance with Oaktree in 2020 to support refinancing our corporate debt and help advance our growth initiatives. The Oaktree relationship 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.
On December 21, 2020, we entered into the Transaction Agreement with Oaktree to form a joint venture for the purpose of investing in GSE MSRs subserviced by PMC. Effective with the closing of the transaction on May 3, 2021, Oaktree and Ocwen hold 85% and 15% interests in MAV Canopy, and agreed to invest equity up to $250.0 million over three years. As of December 31, 2021, the total members’ capital contributions to MAV Canopy amounted to $131.2 million, net of distributions,
or approximately 52% of capacity. We are currently discussing with Oaktree a potential upsize of the capital commitment to MAV.
Pursuant to an agreement with Oaktree executed on February 2021, we issued to Oaktree in a private placement $285.0 million of Ocwen senior secured notes in two separate tranches. The initial tranche of $199.5 million senior secured notes was completed on March 4, 2021 and the additional $85.5 million tranche was completed following the launch of the MSR joint venture on May 3, 2021. In addition:
•On March 4, 2021, we issued 1,184,768 warrants to Oaktree to purchase shares of our common stock equal to 12% of our then outstanding common stock at an exercise price of $26.82 per share, subject to anti-dilution adjustments.
•On May 3, 2021, we issued 261,248 warrants to Oaktree to purchase additional common stock equal to 3% of our then outstanding common stock at an exercise price of $24.31 per share, subject to anti-dilution adjustments.
•On May 3, 2021, we issued to Oaktree 426,705 shares, or 4.9% of our fully diluted outstanding common stock, or at a purchase price of $23.15 per share.
The net proceeds before expenses from the issuance to Oaktree of the initial tranche of senior secured notes and the warrants was $175.0 million (after $24.5 million of original issue discount) and was used, together with the proceeds from the additional debt financing, to repay in full an aggregate of $498 million of existing indebtedness, including Ocwen’s $185.0 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 was approximately $75.0 million (after $10.5 million of original issue discount) and was used to fund our investment in the MSR joint venture and for general corporate purposes, including to accelerate the growth of our Originations and Servicing businesses.
In 2021 as part of the launch of the MSR joint venture, PMC entered into a number of definitive agreements with MAV, the licensed mortgage subsidiary of MAV Canopy which govern the terms of their business relationship, including a Subservicing Agreement, Joint Marketing Agreement and Recapture Agreement, and Administrative Services Agreement.
PMC has exclusive rights to subservice the MSR owned by MAV and is compensated with subservicing fees in accordance with the Subservicing Agreement. The Subservicing Agreement will continue until terminated by mutual agreement of the parties or for cause, as defined. We are currently discussing with MAV certain amendments to the terms and conditions of the Subservicing Agreement and related agreements.
PMC entered into the following MSR sale transactions with MAV pursuant to certain MSR purchase and sale agreements in 2021:
•Sales of MSR portfolios to MAV in bulk transactions;
•Flow sales to MAV of certain MSRs PMC purchased from a GSE Cash Window program; and
•Flow sales to MAV of MSRs PMC recaptured from borrowers that were previously serviced on behalf of MAV. Under the Recapture Agreement, PMC sells the originated MSR for nil proceeds but retains the realized gain on loan sales.
These transactions accelerated the launch of MAV. At December 31, 2021, MAV’s servicing portfolio comprised $8.9 billion of MSRs acquired from unrelated third parties and $24.0 billion MSRs acquired from PMC.
These MSR sale transactions between PMC and MAV did not achieve sale accounting criteria due to the Subservicing Agreement termination restrictions. Although the servicer compensation is the same under the Subservicing Agreement, our financial statements reflect two distinct portfolios, depending on whether the MSRs were previously sold by PMC to MAV. PMC recognizes subservicing revenue from those MSRs MAV acquired from third parties. PMC recognizes servicing revenue together with MSR pledged liability expense for servicing fees PMC collects and remits to MAV as it relates to those MSRs sold by PMC to MAV.
See Note 11 - Investment in Equity Method Investee, Note 14 - Borrowings, and Note 16 - Stockholders’ Equity 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 mostly supports our Servicing segment, including a servicing call center for customer service 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 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: Consistently Delivering on Our Commitments
•People: Develop, Grow and Value All Employees
•Teamwork: Succeed Together as a Global Team
•Embracing Change: Value Innovation and New Thinking
We had a total of approximately 5,700 employees at December 31, 2021. Approximately 2,000 of our employees were employed in the U.S. and USVI, and approximately 3,700 of our employees were employed in our operations in India and the Philippines. Of our foreign-based employees, approximately 66% were engaged in our Servicing operations. Ocwen currently operates through a secure remote workforce model for approximately 95% 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 through fostering and measuring employee engagement, committing to comprehensive Diversity, Equity, and Inclusion initiatives, and engaging with both internal and external groups and organizations to ensure that our culture enables employees to consistently demonstrate our company values. Important attributes of our human capital strategy include:
Diversity, Equity and Inclusion (DE&I). We are committed to be a globally diverse and inclusive workplace where every voice is heard. Diversity, inclusiveness and respect are integral parts of our culture and work environment. DE&I training for all employees and unconscious bias training for leaders are 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 Ocwen and be held accountable for achieving diversity and inclusion goals and objectives.
•Workforce: Attract, develop, retain and advance the best and brightest from all walks of life and backgrounds at all levels of the organization.
•Vendor Diversity: Achieve a range of suppliers, vendors and service providers who align with our diversity and inclusion strategies.
•Community Engagement: Ensure that Ocwen has a significant presence in and supports a core group of diverse, community-based organizations and philanthropies.
As of December 31, 2021, 48% of our employees globally are women, and 33% of our U.S. leadership roles (Director and above) are filled by women. 62% of our U.S. employees are women and 45% are people of color. Our affinity groups like the Ocwen Global Women’s Network (OGWN), LEAP Black professionals network, FREE affinity group for LGBTQ+ employees and mentoring programs, when coupled with a culture of appreciation, help provide a comprehensive ecosystem for diversity to flourish.
Ocwen sponsors several organizations focused on under-represented groups, including the American Mortgage Diversity Council and the National Association of Minority Mortgage Bankers of America. We are also committed to hiring graduates from historically Black colleges and universities through the HomeFree-USA Center for Financial Advancement program.
Talent Development. We continue to foster an environment in which every team member has the opportunity to grow and achieve his or her professional goals, with support and encouragement. We regularly measure employee engagement - our employees’ pride, energy and optimism that fuels their effort - and implement action plans that respond to employee feedback. Our most recent employee survey indicated 84% favorable engagement levels. Our training platform focuses not only on the technical domain skills essential to role success, but includes competency-based programs to develop leadership capabilities
and skills needed for the future. In 2021, our voluntary turnover was 16.8%. Succession planning occurs annually and is reviewed by the CEO and the Compensation and Human Capital Committee. Strategic talent reviews to identify, develop and promote top talent are part of our performance management processes. The Aspire mentoring program provides aspiring women leaders at mid-level with a platform to build skill, knowledge and expertise while achieving professional development goals through focused guidance and insight from a network of mentors.
Rewards. Our total rewards (compensation and benefits) programs are developed to attract, motivate and retain employees. They demonstrate the value the employee provides to the organization, are designed to be competitive to the marketplace, and connect directly to key business strategies. Our compensation programs, including salaries and short- and long-term incentives, are centered on our pay-for-performance philosophy, aligning the interests of employees and stakeholders by rewarding both individual and overall company performance. Ocwen’s health and welfare benefit programs strive to keep employees productive and engaged at work by serving the total well-being of employees and their families. We are committed to and regularly evaluate our practices to ensure pay is fair and equitable, and competitive to the marketplace.
Environmental, Social and Corporate Governance (ESG) Practices and Corporate Sustainability
Our Board of Directors and our management are committed to ensuring Ocwen has responsible practices to address the needs of its customers, employees and the communities it serves. Our comprehensive approach to ESG and corporate sustainability is detailed in our report “Environmental, Social and Corporate Governance (ESG) and Corporate Sustainability” on our website at www.ocwen.com in the “Shareholders” section under “Corporate Governance.” Our approach is represented by the following policies and programs:
Policy on non-discrimination. Ocwen’s non-discrimination policy provides equal employment opportunities for all qualified individuals without discrimination based upon the following legally protected characteristics: race, religious creed, color, national origin, ancestry, physical or mental disability, medical condition, genetic information, marital status (including registered domestic partnership status), sex (including pregnancy, childbirth, lactation and related medical conditions), gender (including gender identity and expression), age (40 and over), sexual orientation, Civil Air Patrol status, military and veteran status and any other consideration protected by federal, state or local law (collectively referred to as “protected characteristics”). Underlying this policy is Ocwen’s culture and values, including employees’ rights to be free from unlawful discrimination, and its commitment to providing a safe, secure and productive work environment.
Ocwen’s hiring, salary administration, promotion and transfer policies are based solely on job requirements, job performance and job-related criteria. In addition, every effort is made to ensure that Ocwen’s personnel policies and practices (including those relating to compensation, benefits, transfer, retention, termination, training and self-development opportunities, as well as social and recreational programs) are administered without discrimination on the basis of any legally protected characteristic.
Promoting equal opportunity and diversity. Ocwen is committed to providing equal opportunity in all areas of employment, compensation, training and promotion. Company policies prohibit discrimination of any form in all of the locations in which Ocwen operates. Ocwen strives to foster an environment in which all stakeholders can participate and contribute to the success of the organization’s enterprise, taking full advantage of the collective sum of individual differences, life experiences, inventiveness, self-expression and unique capabilities, knowledge and talent. Our Diversity, Equity and Inclusion Council meets quarterly to review progress related to the Ocwen’s Diversity, Equity and Inclusion Roadmap. Diversity, Equity and Inclusion updates are provided to the Executive Leadership Team on a monthly basis and to the Board of Directors as necessary. Ocwen’s Global Diversity, Equity and Inclusion Policy is reviewed on an annual basis and diversity training is mandatory for all employees globally. Additionally, all leaders are required to complete a training course on Unconscious Bias, and Diversity and Inclusion goals are incorporated into annual performance evaluations for all managers.
In 2017, Ocwen formed the Ocwen Global Women’s Network (OGWN), an affinity group whose mission is to support recruitment, development and retention initiatives for women across the organization. This affinity group serves as a sounding board for business insights, and supports the attainment of company goals in diversity, inclusion and talent development. Integrating Diversity, Equity and Inclusion into Ocwen’s culture is critical for our success and allows us to make the most of the full range of our talent. More than 2,300 employees are OGWN members. In 2021, Ocwen launched two new affinity groups, LEAP and FREE, that respectively foster a safe place, promote belonging and drive inclusion for Black and LGBTQ+ employees. LEAP stands for Leading with Education Action and Purpose and its mission is to educate Ocwen employees globally about Black culture and the Black experience to increase inclusion across the organization. LEAP also enhances the professional development of Black employees through formal and informal mentoring, networking, learning opportunities and leadership development. The mission of FREE, which stands for Freedom, Respect, Expression and Equality, is to create a safe, inclusive and affirming office climate that fosters professional and personal growth for employees of all genders and sexualities through education, advocacy, outreach and support. FREE promotes a fully equitable environment that is free of judgment and strives for knowledge, challenges barriers, and seeks to help and empower LGBTQ+ employees.
Ocwen tracks and monitors representation of women and people of color across the organization. As of December 31, 2021, 48% of our global workforce is made up of women. In the U.S., women make up 62% of our workforce and 33% of our leadership team at the Director level and above. Additionally, in the U.S., people of color make up 45% of our workforce and 18% of our leadership team at the Director level and above. We also take action to support the recruitment, development and retention of our diverse talent. These programs include requiring diverse candidates as part of our hiring process, tracking minority hiring, promotion, retention and representation at all levels, and assessing diverse talent as part of our succession planning.
Ocwen sponsors several organizations focused on under-represented groups, including the American Mortgage Diversity Council, Florida Association of Women Lawyers and the National Association of Minority Mortgage Bankers of America. We are also committed to hiring graduates from historically black colleges and universities through the HomeFree-USA Center for Financial Advancement program.
Pay equity is an important component of Ocwen’s employment value proposition, commitment to DE&I and legal and regulatory compliance. We regularly evaluate our performance management, merit increase incentive award and promotion processes for race and gender equality, and remediate any identified compensation gaps.
Commitment to Ethics. We have adopted a robust Code of Business Conduct and Ethics that applies to all employees and our Board of Directors, as well as an additional Code of Ethics for Senior Financial Officers that applies to our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. We provide multiple anonymous methods for any employee or other person to report a suspected ethical violation, including whistleblower complaints relating to accounting, internal controls, audit matters or securities law, and our policies prohibit retaliation against any person for making a good faith complaint. We also provide methods for interested individuals to contact the members of our Board of Directors and communicate directly with the Chair of our Audit Committee. Our General Counsel serves as our Chief Ethics Officer and works with members of our Internal Audit function to ensure every ethics complaint and communication to our Board is addressed in accordance with our company policies.
Dependent care and special leave. Ocwen’s benefits programs strive to keep employees productive and engaged at work by serving the total well-being of employees’ and their families’ physical, mental and financial health. Our comprehensive benefits plan includes company-sponsored medical, dental and vision; company-paid basic life, accident and disability coverage; 401(k) with company match; and supplemental group coverage for critical illness, accident, auto, home, pet, legal, identity protection, childcare/eldercare and tutoring. The medical plans include 100% coverage for all preventive care services and all generic preventive medications.
Our wellness programs offer incentives for completing preventive health screenings, participating in online and telephonic health coaching, improving or reaching targeted health scores, and increasing physical activity. Additionally, we provide employees with a comprehensive employee assistance program that includes virtual counseling, personalized health coaching for chronic conditions, diabetes and ergonomics, stress management and financial planning workshops, online guided meditation and yoga, and more. Ocwen also provides a generous paid time off (PTO) program to support employees’ need to rest and recharge. Our medical and family leave programs offer paid disability absences and paid parental/adoption leave, in addition to FMLA-required schedule flexibility and job security.
Training and development. Ocwen is committed to providing our employees with high quality training and learning experiences targeted to increase industry knowledge levels, improve process efficiency and promote personal growth, which in turn helps improve customer experience, reduce foreclosures and contribute to our success as an organization. Ocwen facilitates professional development through the lifecycle of employees through functional business training, regulatory and compliance training, and skill and competency development programs. We also provide individualized one-on-one coaching to help customer-facing staff guide customers to positive experiences. In addition to learning programs designed to build functional and leadership competency for all levels of leadership throughout the organization, Ocwen offers a Leadership Development Training curriculum specifically designed to prepare employees at the Supervisor level and above with the competencies to make them successful in their roles as leaders. Training courses are housed in our continuously reviewed and updated learning management system.
Community development. At Ocwen, we believe homeownership is an important part of achieving financial independence, and our philosophy in this regard is “helping homeowners is what we do.” This philosophy is what guides us in our commitment to the communities we serve. We organize a variety of community outreach programs and events with local and national organizations around the country to assist homeowners, particularly in communities of color. Our outreach events began during the 2008 mortgage crisis and have continued since then. At the onset of the pandemic in 2020, Ocwen shifted to a virtual borrower outreach model to assist struggling homeowners. We continued this model throughout 2021 and, in partnership with the NAACP, we hosted 52 virtual borrower outreach events across the country. In recognition of our efforts, Ocwen was named the 2021 External Partner of the Year by Neighborhood Housing Services of New York City for our focus on helping New York homeowners stay in their homes.
To better serve our communities, Ocwen created a Community Advisory Council in 2014, consisting of 15 leaders from a diverse group of national non-profit organizations, consumer advocacy groups and civil rights organizations, as a platform to collaborate and share ideas on how to help homeowners. Ocwen provides grants and sponsorship funding to a number of local and national nonprofit organizations each year, in support of the work they do to help distressed communities and homeowners. Since 2012, Ocwen has contributed over $25 million to these organizations.
Charitable activity. Ocwen continues to find meaningful ways to give back to the communities where we live and work. The charitable events at our office locations around the globe included distributing meals and supporting local food banks, helping economically disadvantaged children and at-risk youth, helping schools for hearing-impaired children, holding toy drives and back-to-school supply drives, helping the homeless, supporting victims of crimes, providing financial assistance to families impacted by cancer, making donations to first responders, helping communities impacted by the pandemic with donations and medical equipment, hosting blood drives through the American Red Cross and making donations to the Mortgage Bankers Association’s (MBA) Opens Doors Foundation to help families with a critically ill or injured child.
Responsible information security management. We believe Ocwen has a robust information security program in place to ensure the confidentiality, integrity and availability of data and information systems. Ocwen’s Board of Directors is briefed regularly on information security risks, which are managed by a combination of strong policies, appropriate tools and technologies and continuous people awareness. Ocwen’s cyber security controls utilize a layered defense-in-depth approach to thwart any attempts to compromise the integrity of the network. Our employees are provided regular training to identify, prevent and report cyber security risks and incidents. Our third-party risk management program evaluates and monitors our vendors’ information security practices, and all third-party vendors that process data on our behalf are required to maintain a documented information security program that meets our stringent security requirements. Ocwen’s cyber security preparedness is tested on a regular basis through a variety of assessments, including internal and external vulnerability assessments, penetration tests, incident response table top tests, breach readiness and response tests, among others.
Environmental Impact. Ocwen is committed to operating through a primarily remote working model for a significant majority of our workforce that requires only a small percentage of employees to commute to work on a daily basis. We expect this remote model will allow Ocwen to use significantly fewer natural resources in our facilities and generate fewer employee commute-related carbon emissions than a comparatively-sized business that does not operate remotely. We recycle office supplies at all U.S. facilities, and are in the process of converting our facilities to LED lighting. We have also implemented a digital mailroom process reducing the need for envelopes and shipping of documents between locations. In 2021, working with customers, we replaced over 3 million paper mailings through electronic notice delivery and process automations, reducing our carbon footprint by an average of 20-29 g of CO2 per mailing.
AVAILABLE INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available free of charge through our website (www.ocwen.com) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, including Ocwen, that file electronically with the SEC. The address of that site is www.sec.gov. We have also posted on our website, and have available in print upon request (1) the charters for our Audit Committee, Compensation and Human Capital Committee, Nomination/Governance Committee and Risk and Compliance Committee, (2) our Corporate Governance Guidelines, (3) our Code of Business Conduct and Ethics and (4) our Code of Ethics for Senior Financial Officers.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
An investment in our common stock involves significant risk. We describe below material risks that management believes affect or could affect us. Understanding these risks is important to understanding any statement in this Annual Report and to evaluating an investment in our common stock. You should carefully read and consider the risks and uncertainties described below together with all the other information included or incorporated by reference in this Annual Report before you make any decision regarding an investment in our common stock. If any of the following risks actually occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose some or all of your investment. While the following discussion provides a description of material risks that could cause our results to vary materially from those expressed in public statements or documents, other factors besides those discussed within this Annual Report or elsewhere in other of our reports filed with or furnished to the SEC could also affect our business, financial condition, liquidity and results of operations.
Summary of Risk Factors
As a non-bank mortgage company, we are exposed in the normal course of business to multiple risks shared by other participants in our industry. In addition, some of the risks we face are unique to Ocwen or such risks could have a different or
greater impact on Ocwen than on other companies. These risks could adversely impact our business, regulatory or agency approval, financial condition, liquidity, results of operations, ability to grow and reputation, and are summarized below. This summary is intended to supplement, and should not be considered a substitute for, the complete Risk Factors that follow.
Legal and Regulatory Risks
•Failure to operate our business in compliance with complex legal or regulatory requirements or contractual obligations, 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 execute our strategic plan to return to sustainable profitability or pursue business or asset acquisitions
•Inability to access capital to meet the financing requirements of our business, or noncompliance with our debt agreements or covenants
•Inability to obtain sufficient servicer advance financing necessary to meet the financing requirements due to increased delinquencies or forbearance plans
•Failure to satisfy current or future minimum net worth and liquidity requirements established by regulators, GSEs, Ginnie Mae, lenders, or other counterparties
•Policies or regulations adopted by the GSEs or Ginnie Mae that may be more advantageous to our competitors’ business models than our own
•Inability to appropriately manage liquidity, interest rate and foreign currency exchange risks, including ineffective hedging strategies
•Inability to control decisions made by the management of MSR Asset Vehicle LLC which potentially impact the growth of our subservicing portfolio, funding for growth in our originations business and the profitability of our investment
•Economic slowdown or downturn, a capital market disruption, or a deterioration of the housing market, including but not limited to, in the states where we have some concentration of our business
•Inability to acquire additional profitable client relationships
•Inability to meet future advance financing obligations if 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 Financial Services, Inc. (Black Knight)
•Failure by us or our vendors to adequately update technology systems and processes, interruption or delay in our or our vendors’ operations due to cybersecurity breaches or system failures, and resulting economic loss or regulatory penalties
•Adverse changes in political or economic stability or government policies in the U.S., India, the Philippines or the USVI
•Disruption in our operations and reduced profitability in our servicing operations as a result of severe weather or natural disaster events
•Material increase in loan put-backs and related liabilities for breaches of representations and warranties regarding sold loans or MSRs
•Heightened reputational risk due to media and regulatory scrutiny of companies that originate and securitize reverse mortgages
•Incurrence of losses by our captive reinsurance entity from catastrophic events, particularly in areas where a significant portion of the insured properties are located
•Incurrence of litigation costs and related losses if the validity of a foreclosure action is challenged by a borrower or if a court overturns a foreclosure
•Failure to maintain minimum servicer ratings and impairment of our ability to sell or fund servicing advances, access financing, consummate future servicing transactions, and maintain our status as an approved servicer by the GSEs
•Volatility of our earnings due to MSR valuation changes, financial instrument valuation changes and other factors
•Loss of the confidence of investors and counterparties if we fail to reasonably estimate the fair value of our assets and liabilities or our internal controls over financial reporting are found to be inadequate
•Uncertainty or adverse impacts resulting from the replacement of LIBOR with an alternative reference rate
Tax Risks
•Changes in tax law and interpretations and tax challenges
•Failure to retain or collect the tax benefits provided by the USVI, or certain past income becoming subject to increased 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
Risks Relating to Ownership of Our Common Stock
•Substantial volatility in our common stock price
•The vote by large shareholders of their shares to influence matters requiring shareholder approval in a way that management does not believe represents the best interests of all shareholders
•The issuance of additional securities authorized by the board of directors that causes dilution and depresses the price of our securities
•Future offerings of debt securities that are senior to our common stock in liquidation, or equity securities that are senior to our common stock in respect of liquidation and distributions
•Certain provisions in our organizational documents and regulatory restrictions may make takeovers more difficult, and significant investments in our common stock may be restricted
Legal and Regulatory Risks
The business in which we engage is complex and heavily regulated. If we fail to operate our business in compliance with both existing and future regulations, our business, reputation, financial condition or results of operations could be materially and adversely affected.
Our business is subject to extensive regulation by federal, state, local and foreign governmental authorities, including the CFPB, HUD, the SEC and various state agencies that license and conduct examinations of our servicing and lending activities. In addition, we operate under a number of regulatory settlements that subject us to ongoing reporting and other obligations. See the next risk factor below for additional detail concerning these regulatory settlements. From time to time, we also receive requests (including requests in the form of subpoenas and civil investigative demands) from federal, state and local agencies for records, documents and information relating to our servicing and lending activities. The GSEs (and their conservator, the FHFA), Ginnie Mae, the United States Treasury Department, various investors, non-Agency securitization trustees and others also subject us to periodic reviews and audits.
In the current regulatory environment, we have faced and expect to continue to face heightened regulatory and public scrutiny as an organization as well as stricter and more comprehensive regulation of the entire mortgage sector. We must devote substantial resources to regulatory compliance, and we incurred, and expect to continue to incur, significant ongoing costs to comply with new and existing laws and governmental regulation of our business. If we fail to effectively manage our regulatory and contractual compliance, the resources we are required to devote and our compliance expenses would likely increase. Any significant delay or complication in fulfilling our regulatory commitments and resolving remaining legacy matters may jeopardize our ability to return to sustainable profitability.
We must comply with a large number of federal, state and local consumer protection and other laws and regulations including, among others, the CARES Act, the Dodd-Frank Act, the TCPA, the Gramm-Leach-Bliley Act, the FDCPA, RESPA, TILA, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, as well as individual state laws pertaining to licensing, general mortgage origination and servicing practices and foreclosure and federal and local bankruptcy rules. These laws and regulations apply to all facets of our business, including, but not limited to, licensing, loan originations, consumer disclosures, default servicing and collections, foreclosure, filing of claims, registration of vacant or foreclosed properties, handling of escrow accounts, payment application, interest rate adjustments, assessment of fees, loss mitigation, use of credit reports, handling of unclaimed property, safeguarding of non-public personally identifiable information about our customers, and the ability of our employees to work remotely. These complex requirements can and do change as laws and regulations are enacted, promulgated, amended, interpreted and enforced. In addition, we must maintain an effective corporate governance and compliance management system. See “Business - Regulation” for additional information regarding our regulators and the laws that apply to us.
We must structure and operate our business to comply with applicable laws and regulations and the terms of our regulatory settlements. This can require judgment with respect to the requirements of such laws and regulations and such settlements. While we endeavor to engage proactively with our regulators in an effort to ensure we do so correctly, if we fail to interpret correctly the requirements of such laws and regulations or the terms of our regulatory settlements, we could be found to be in breach of such laws, regulations or settlements.
Failure or alleged failure to comply with the terms of our regulatory settlements or applicable federal, state and local consumer protection laws, regulations and licensing requirements could lead to any of the following:
•administrative fines and penalties and litigation;
•loss of our licenses and approvals to engage in our servicing and lending businesses;
•governmental investigations and enforcement actions;
•civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities;
•breaches of covenants and representations under our servicing, debt or other agreements;
•damage to our reputation;
•inability to raise capital or otherwise secure the necessary financing to operate the business and refinance maturing liabilities;
•changes to our operations that may otherwise not occur in the normal course, and that could cause us to incur significant costs; or
•inability to execute on our business strategy.
Any of these outcomes could materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
In recent years, the general trend among federal, state and local legislative bodies and regulatory agencies as well as state attorneys general has been toward increasing laws, regulations, investigative proceedings and enforcement actions with regard to residential mortgage lenders and servicers. The CFPB continues to take a very active role in the mortgage industry, and its rule-making and regulatory agenda relating to loan servicing and origination continues to evolve. Individual states have also been active, as have other regulatory organizations such as the MMC, a multistate coalition of various mortgage banking regulators. In addition to their traditional focus on licensing and examination matters, certain regulators make observations, recommendations or demands with respect to areas such as corporate governance, safety and soundness, and risk and compliance management. We must endeavor to work cooperatively with our regulators to understand all their concerns if we are to be successful in our business.
The CFPB and state regulators have also increasingly focused on the use, and adequacy, of technology in the mortgage servicing industry, privacy concerns and other topical issues, such as the discontinuation of LIBOR, communications from debt collectors and the ability of borrowers to repay mortgage loans, including in relation to COVID-19. See below as well as Business - Regulation for additional information regarding the rules, regulations and legislative developments most pertinent to our operations.
Presently, a level of heightened uncertainty exists with respect to the future of regulation of mortgage lending and servicing. We cannot predict the specific legislative or executive actions that may result or what actions federal or state regulators might take in response to potential changes to the federal regulatory environment generally. Such actions could impact the industry generally or us specifically, could impact our relationships with other regulators, and could adversely impact our business and limit our ability to reach an appropriate resolution with the CFPB, as described in the next risk factor.
New regulatory and legislative measures, or changes in enforcement practices, including those related to the technology we use, could, either individually or in the aggregate, require significant changes to our business practices, impose additional costs on us, limit our product offerings, limit our ability to efficiently pursue business opportunities, negatively impact asset values or reduce our revenues. Accordingly, they could materially and adversely affect our business and our financial condition, liquidity and results of operations.
Finally, the regulations and requirements to which we are subject have been changing rapidly as the GSEs, Ginnie Mae, the United States Treasury Department and state regulators have responded to the COVID-19 pandemic. In March 2020, the CARES Act was signed into law, allowing borrowers affected by COVID-19 to request temporary loan forbearance for federally backed mortgage loans. Multiple forbearance programs, moratoria of foreclosure and eviction and other requirements to assist borrowers enduring financial hardship due to COVID-19 have been issued by states, agencies and regulators. In addition, the CFPB promulgated certain amendments to RESPA (Regulation X) that became effective on August 31, 2021 and that impose additional COVID-19-related requirements with respect to loss mitigation, early intervention call requirements, and initiating new foreclosures before January 1, 2022. The requirements described above vary across jurisdiction, may conflict in some circumstances, can be complex to interpret and implement, and could cause us to incur additional expense. If we are
unable to comply with, or face allegations that we are in breach of, applicable laws, regulations or other requirements, we may face regulatory action, including fines, penalties, and restrictions on our business. In addition, we could face litigation and reputational damage. Any of these risks could have a material adverse impact on our business, financial condition, liquidity and results of operations. As the COVID-19 pandemic continues and new variants of the virus emerge, there may be a further increase in regulations, which could exacerbate these risks and their adverse impacts.
Governmental bodies have taken regulatory and legal actions against us in the past and may in the future impose regulatory fines or penalties or impose additional requirements or restrictions on our activities that could increase our operating expenses, reduce our revenues or otherwise adversely affect our business, financial condition, liquidity, results of operations, ability to grow and reputation.
We are subject to a number of ongoing federal and state regulatory examinations, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions that could result in further adverse regulatory action against us, including certain matters summarized below. See Note 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. In April 2021, following the filing of motions by the parties and a number of procedural developments, the court entered final judgment in our favor and closed the case. The CFPB thereafter filed a notice of appeal. Oral argument before the Eleventh Circuit occurred on February 10, 2022. Appellate briefing concluded August 26, 2021, and oral argument before the Eleventh Circuit occurred on February 10, 2022. While we believe we have factual and legal defenses to the CFPB’s allegations and are vigorously defending ourselves, the outcome of the matters raised by the CFPB, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our business and could have a material adverse impact on our business, reputation, financial condition, liquidity and results of operations. We expect the CFPB to resume its supervision activities of Ocwen upon conclusion of this matter.
State Licensing and State Attorneys General
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. The minimum net worth requirements to which our licensed entities are subject are unique to each state and type of license. We believe our licensed entities were in compliance with all of their minimum net worth requirements at December 31, 2021. However, it is possible that regulators could disagree with our calculations, and one state regulator has disagreed with our calculation for a prior year period; we have discussed the matter with the regulator, including why we believe we were in compliance with the applicable net worth requirements. Failure to satisfy any of the requirements to which our licensed entities are subject could result in a variety of regulatory actions ranging from a fine, a directive requiring a certain step to be taken, a suspension or, ultimately, a revocation of a license, any of which could have a material adverse impact on our results of operations and financial condition.
In April 2017 and shortly thereafter, mortgage and banking regulatory agencies from 29 states and the District of Columbia took regulatory actions against OLS and certain other Ocwen companies that alleged deficiencies in our compliance with laws and regulations relating to our servicing and lending activities. These regulatory actions generally took the form of orders styled as “cease and desist orders” and prohibited a range of actions relating to our lending and servicing activities. In addition, the Florida Attorney General and the Florida Office of Financial Regulation brought a lawsuit on similar grounds, as did the Massachusetts Attorney General. In resolving these matters, we entered into agreements containing restrictions and commitments with respect to the operation of our business and our regulatory compliance activities, including restrictions and conditions relating to acquisitions of MSRs, a transition to an alternate loan servicing system from the REALServicing system, engagement of third-party auditors, escrow and data testing, loss mitigation solicitations, error remediation, and financial condition reporting. We also provided certain borrower financial remediation and made payments to state regulators and attorneys general.
We have incurred significant costs complying with the terms of these settlements. To the extent that legal or other actions are taken against us by regulators or others with respect to matters, they could result in additional costs or other adverse impacts and could have a materially adverse impact on our business, reputation, financial condition, liquidity and results of operations.
In January 2018, prior to our acquisition of PHH, PMC entered into a settlement agreement with the MMC and consent orders with certain state attorneys general to resolve and close out findings of an MMC examination of PMC’s legacy mortgage servicing practices. Under the terms of these settlements, PMC agreed to comply with certain servicing standards, to conduct testing of compliance with such servicing standards for a period of three years, and to report to the MMC regarding the same. We believe we complied with these obligations, and the three-year period has ended.
We continue to work with the NY DFS to address matters they raise with us as well as to fulfill our commitments under the 2017 NY Consent Order and PHH acquisition conditional approval. To the extent that we fail to address adequately any concerns raised by the NY DFS or fail to fulfill our commitments to the NY DFS, the NY DFS could take regulatory action against us, including imposing fines or penalties or otherwise restricting our business activities. Any such actions could have a material adverse impact on our business, financial condition liquidity and results of operations.
Other Matters
On occasion, we engage with agencies of the federal government on various matters, including the Department of Justice, the Office of Inspector General of HUD, Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and the VA Office of the Inspector General. In addition to the expense of responding to subpoenas and other requests for information from such agencies, in the event that any of these engagements result in allegations of wrongdoing by us, we may incur fines or penalties or significant legal expenses defending ourselves against such allegations.
In the past, we have entered into significant settlements with the NY DFS, the CA DFPI, and the 2013 Ocwen National Mortgage Settlement which involved payments of significant monetary amounts, monitoring by third-party firms for which we were financially responsible and other restrictions on our business. While we are not currently subject to active monitorships under these settlements, we remain obligated to comply with the commitments made to our regulators and if we violate those commitments one or more of these entities could take regulatory action against us. Any future settlements or other regulatory actions against us could have a material adverse impact on our business, reputation, operating results, liquidity and financial condition will be adversely affected.
To the extent that an examination or other regulatory engagement results in an alleged failure by us to comply with applicable laws, regulations or licensing requirements, or if allegations are made that we have failed to comply with applicable laws, regulations or licensing requirements or the commitments we have made in connection with our regulatory settlements (whether such allegations are made through administrative actions such as cease and desist orders, through legal proceedings or otherwise) or if other regulatory actions of a similar or different nature are taken in the future against us, this could lead to (i) administrative fines, penalties and litigation, (ii) loss of our licenses and approvals to engage in our servicing and lending businesses, (iii) governmental investigations and enforcement actions, (iv) civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) damage to our reputation, (vii) inability to raise capital or otherwise secure the necessary funding to operate the business, (viii) changes to our operations that may otherwise not occur in the normal course, and that could cause us to incur significant costs, and (ix) inability to execute on our business strategy. Any of these outcomes could increase our operating expenses and reduce our revenues, hamper our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
Our regulatory settlements and public allegations regarding our business practices by regulators and other third parties may affect other regulators’, rating agencies’, and creditors’ perceptions, which could adversely impact our financial results and ongoing operations.
Our regulatory settlements and public allegations regarding our business practices by regulators and other third parties may affect other regulators’, rating agencies’ and creditors’ perceptions of us. As a result, our ordinary course interactions with regulators may be adversely affected. We may incur additional compliance costs and management time may be diverted from other aspects of our business to address regulatory issues. It is possible that we may incur additional fines or penalties or even that we could lose the licenses and approvals necessary to engage in our servicing and lending businesses. In addition, certain regulators make observations, recommendations or demands with respect to areas such as corporate governance, safety and soundness and risk and compliance management, which could require us to incur additional expense or which could result in the imposition of additional requirements such as liquidity and capital requirements or restrictions on business conduct such as engaging in stock repurchases. To the extent that rating agencies or creditors perceive us negatively, our servicer or credit ratings could be adversely impacted and our access to funding could be limited.
If regulators allege that we do not comply with the terms of our regulatory settlements, or if we enter into future regulatory settlements, it could significantly impact our ability to maintain and grow our servicing portfolio.
Our servicing portfolio naturally decreases over time as homeowners make regularly scheduled mortgage payments, prepay loans prior to maturity, refinance with a mortgage loan not serviced by us or involuntarily liquidate through foreclosure or other liquidation process. Our ability to maintain or grow the size of our servicing portfolio depends on our ability to acquire the right to service or subservice additional pools of mortgage loans or to originate additional loans for which we retain the MSRs.
Historically, our regulatory settlements significantly impacted our ability to maintain or grow our servicing portfolio because we agreed to certain restrictions that effectively prohibited future bulk acquisitions of residential servicing. While certain of these restrictions have been eased in connection with our resolution of state regulatory matters and acquisition of PHH, we are still restricted in our ability to grow our portfolio under the terms of our agreements with the NY DFS. If we are unable to satisfy the conditions of the regulatory commitments we made to these and other regulators, or if a future regulatory settlement restricts our ability to acquire MSRs, we will be unable to grow or even maintain the size of our servicing portfolio through acquisitions and our business could be materially and adversely affected. Moreover, even when regulatory restrictions are lifted, the reputational damage done by these actions may inhibit our ability to acquire new business.
If we are unable to respond timely and effectively to routine or other regulatory examinations and borrower complaints, our business and financial conditions may be adversely affected.
Regulatory examinations by state and federal regulators are part of our ordinary course business activities. If we are unable to respond effectively to regulatory examinations, our business and financial conditions may be adversely affected. In addition, we receive various escalated borrower complaints and inquiries from our state and federal regulators and state Attorneys General and are required to respond within the time periods prescribed by such entities. If we fail to respond effectively and timely to regulatory examinations and escalations, legal action could be taken against us by such regulators and, as a result, we may incur fines or penalties or we could lose the licenses and approvals necessary to engage in our servicing and lending businesses. We could also suffer from reputational harm and become subject to private litigation.
Private legal proceedings and related costs alleging failures to comply with applicable laws or regulatory requirements could adversely affect our financial condition and results of operations.
We are subject to various pending private legal proceedings, including purported class actions, challenging whether certain of our loan servicing practices and other aspects of our business comply with applicable laws and regulatory requirements. For example, we are currently a defendant in various matters alleging that (1) certain fees imposed on borrowers relating to payment processing, payment facilitation, or payment convenience violate state laws similar to the Fair Debt Collection Practices Act, (2) certain fees we assess on borrowers are marked up improperly in violation of applicable state and federal law, (3) we breached fiduciary duties we purportedly owe to benefit plans due to the discretion we exercise in servicing certain securitized mortgage loans 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 continue to devote, significant resources to establishing and maintaining systems and processes for complying with HMDA on an ongoing basis. If we are not successful in capturing and reporting the new HMDA data, and analyzing and correcting any adverse patterns, we could be exposed to regulatory actions and private litigation against us, we could suffer reputational damage and we could incur losses, any of which could materially and adversely impact our business, financial condition and results of operations.
There may be material changes to the laws, regulations, rules or practices applicable to reverse mortgage programs sponsored by HUD and FHA, and securitized by Ginnie Mae, which could materially and adversely affect us and the reverse mortgage industry as a whole.
The reverse mortgage industry is largely dependent upon rules and regulations implemented by HUD, FHA and Ginnie Mae. There can be no guarantee that HUD/FHA will retain Congressional authorization to continue the HECM program, which provides FHA government insurance for qualifying HECM loans, or that they will not make material changes to the laws, regulations, rules or practices applicable to reverse mortgage programs. For example, HUD previously implemented certain lending limits for the HECM program, and added credit-based underwriting criteria designed to assess a borrower’s ability and willingness to satisfy future tax and insurance obligations. In addition, Ginnie Mae’s participation in the reverse mortgage industry may be subject to economic and political changes that cannot be predicted. Any of the aforementioned circumstances could materially and adversely affect the performance of our reverse mortgage business and the value of our common stock.
Regulators continue to be active in the reverse mortgage space, including due to the perceived susceptibility of older borrowers to be influenced by deceptive or misleading marketing activities. Regulators have also focused on appraisal practices because reverse mortgages are largely dependent on collateral valuation. If we fail to comply with applicable laws and regulations relating to the origination of reverse mortgages, we could be subject to adverse regulatory actions, including potential fines, penalties or sanctions, and our business, reputation, financial condition and results of operations could be materially and adversely affected.
Violations of fair lending and/or servicing laws could negatively affect our business.
Various federal, state and local laws have been enacted that are designed to discourage predatory lending and servicing practices. The federal Home Ownership and Equity Protection Act of 1994 (HOEPA) prohibits inclusion of certain provisions in residential loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain additional disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than are those in HOEPA. In addition, under the anti-predatory lending laws of some states, the origination of certain residential loans, including loans that are not classified as “high cost” loans under HOEPA or other applicable law, must satisfy a net tangible benefits test with respect to the related borrower. A failure by us to comply with these laws, to the extent we originate, service or acquire residential loans that are non-compliant with HOEPA or other predatory lending or servicing laws, could subject us, as an originator or a servicer, or as an assignee, in the case of acquired loans, to monetary penalties and could result in the borrowers rescinding the affected loans. Lawsuits have been brought in various states making claims against originators, servicers and assignees of high cost loans for violations of state law. Named defendants in these cases have included numerous participants within the secondary mortgage market. If we are found to have violated predatory or abusive lending laws, defaults could be declared under our debt or servicing agreements, we could suffer reputational damage, and we could incur losses, any of which could materially and adversely impact our business, financial condition and results of operations.
Failure to comply with FHA underwriting guidelines could adversely impact our business.
We must comply with FHA underwriting guidelines in order to successfully originate FHA loans. If we fail to do so, we may not be able collect on FHA insurance. In addition, we could be subject to allegations of violations of the False Claims Act asserting that we submitted claims for FHA insurance on loans that had not been underwritten in accordance with FHA underwriting guidelines. If we are found to have violated FHA underwriting guidelines, we could face regulatory penalties and damages in litigation, suffer reputational damage, and we could incur losses due to an inability to collect on such insurance, any of which could materially and adversely impact our business, financial condition and results of operations.
Failure to comply with 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. Our failure to comply with applicable laws and regulations could, among other things, result in restrictions on our operations, loss of licenses, fines, penalties or reputational damage and have an adverse effect on our business.
Failure to comply with the S.A.F.E. Act could adversely impact our business.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the S.A.F.E. Act) requires the individual licensing and registration of those engaged in the business of loan origination. The S.A.F.E. Act is designed to improve accountability on the part of loan originators, combat fraud and enhance consumer protections by encouraging states to establish a national licensing system and minimum qualification requirements for applicants. Thus, Ocwen must ensure proper licensing for all employees who participate in certain specified loan origination activities. Failure to comply with the S.A.F.E. Act licensing requirements could adversely impact Ocwen’s origination business.
Risks Related to Our Financial Performance, Financing Our Business, Liquidity and Net Worth and the Economy
Our strategic plan to return to sustainable profitability may not be successful.
We are facing certain challenges and uncertainties that could have significant adverse effects on our business, financial condition, liquidity and results of operations. The ability of management to appropriately address these challenges and uncertainties in a timely manner is critical to our ability to operate our business successfully.
Historical losses significantly eroded stockholders’ equity and weakened our financial condition. We established a set of key initiatives to achieve our objective of returning to sustainable profitability in the shortest timeframe possible within an appropriate risk and compliance environment, and generated net income in 2021. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview-Business Initiatives.
There can be no assurance that we will continue to successfully execute on these initiatives, or that even if we do execute on these initiatives we will be able to return to sustained profitability. In addition to successful operational execution of our key initiatives, our success will also depend on market conditions and other factors outside of our control, including continued access to capital. If we continue to experience losses, our share price, business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
If we are unable to obtain sufficient capital to meet the financing requirements of our business, or if we fail to comply with our debt agreements, our business, financing activities, financial condition and results of operations will be adversely affected.
Our business requires substantial amounts of capital and our financing strategy includes the use of leverage. Accordingly, our ability to finance our operations and repay maturing obligations rests in large part on our ability to continue to borrow money at reasonable rates. If we are unable to maintain adequate financing, or other sources of capital are not available, we could be forced to suspend, curtail or reduce our revenue generating objectives, which could harm our results of operations, liquidity, financial condition and business prospects. Our ability to borrow money is affected by a variety of factors including:
•limitations imposed on us by existing debt agreements that contain restrictive covenants that may limit our ability to raise additional debt;
•credit market conditions;
•the strength of the lenders from whom we borrow;
•lenders’ perceptions of us or our sector;
•changes in interest rates or other drivers that affect the value of pledged collateral;
•corporate credit and servicer ratings from rating agencies;
•limitations on borrowing under our MSR and advance facilities and mortgage loan warehouse facilities due to structural features in these facilities and the amount of eligible collateral that is pledged; and
•revenue opportunities including products not currently supported in the financing market.
In addition, our advance facilities are revolving facilities, and in a typical monthly cycle, we repay a portion of the borrowings under these facilities from collections. During the remittance cycle, which starts in the middle of each month, we depend on our lenders to provide the cash necessary to make the advances that we are required to make as servicer. If one or more of these lenders were to restrict our ability to access these revolving facilities or were to fail, we may not have sufficient funds to meet our obligations. We typically require significantly more liquidity to meet our advance funding obligations than our available cash on hand.
Our advance financing facilities are comprised of (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 two-year revolving periods. At December 31, 2021, we had $512.3 million outstanding under these facilities. The revolving periods for our advance financing facilities end in June and August 2022.
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, HECM tails, buyouts and a number of other assets on a short-term basis until they are sold to secondary market investors, including GSEs or other third-party investors. Currently, our master repurchase and participation agreements for financing new loan originations generally have maximum terms of 364 days, and similar to the revolving notes in the advance financing facilities, they are typically renewed, replaced or extended annually. At December 31, 2021, we had $1.09 billion outstanding under these warehouse financing arrangements, all under agreements maturing in 2022.
In 2019, we entered into three separate MSR financing arrangements related to loans we service for (i) Fannie Mae and Freddie Mac, (ii) Ginnie Mae, and (iii) private investors (PLS MSRs). The Fannie Mae/Freddie Mac and Ginnie Mae facilities were provided through bank financing and had total capacity of $350.0 million and $150.0 million and borrowed amounts of $317.5 million and $131.7 million, respectively at December 31, 2021. The PLS MSR financing was issued to capital markets investors as an amortizing note structure with an initial principal amount of $100.0 million. The Fannie Mae/Freddie Mac and Ginnie Mae facilities terminate in June 2022 and February, 2022, respectively, and the PLS MSR facility matures in November 2024. In 2021, we entered into a facility which includes a $135.0 million term loan and a $285.0 million revolving loan secured by a lien on our Agency MSRs. The term loan and revolving loan terminate in June 2023 and June 2026, respectively. MSR financing is dependent on investor appetite and conditions in the capital markets, among other factors. As a result, MSR financing may not be readily available to finance the growth of our portfolio, or at rates and terms that may not be favorable to our business.
Our MSR financing facilities provide funding based on an advance rate of MSR value that is subject to periodic mark-to-market valuation adjustments. 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 attributable to interest rates or other factors may require us to allocate a substantial amount of our available liquidity or future cash flows to meet these requirements. To the extent we are unable to generate sufficient cash flows from operations to meet these requirements, we may
be more constrained to invest in our business and fund other obligations, and our business, financing activities, liquidity, financial condition and results of operations will be adversely affected.
We currently plan to renew, replace or extend all of the above debt agreements consistent with our historical experience. There can be no assurance that we will be able to renew, replace or extend all our debt agreements on appropriate terms or at all and, if we fail to do so, we may not have adequate sources of funding for our business.
Our debt agreements contain various qualitative and quantitative covenants, including financial covenants, covenants to operate in material compliance with applicable laws and regulations, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates. As a result of the covenants to which we are subject, we may be limited in the manner in which we conduct our business and may be limited in our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, noncompliance with our covenants, nonpayment of principal or interest, material misrepresentations, the occurrence of a material adverse effect or material adverse change, insolvency, bankruptcy, certain material judgments and changes of control. Covenants and defaults of this type are commonly found in debt agreements such as ours. Certain of these covenants and defaults are open to subjective interpretation and, if our interpretation were contested by a lender, a court may ultimately be required to determine compliance or lack thereof. In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations and other legal remedies.
An actual or alleged default under any of our debt agreements, negative ratings action by a rating agency (including as a result of our increased leverage or erosion of net worth), the perception of financial weakness, an adverse action by a regulatory authority or GSE, a lengthening of foreclosure timelines or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and make it difficult for us to renew existing credit facilities or obtain new lines of credit. Any or all the above could have an adverse effect on our business, financing activities, financial condition and results of operations.
We may be unable to obtain sufficient servicer advance financing necessary to meet the financing requirements of our business, which could adversely affect our liquidity position and result in a loss of servicing rights.
We currently fund a substantial portion of our servicing advance obligations through our servicing advance facilities. Under normal market conditions, mortgage servicers typically have been able to renew or refinance these facilities. However, market conditions or lenders’ perceptions of us at the time of any renewal or refinancing may mean that we are unable to renew or refinance our advance financing facilities or obtain additional facilities on favorable terms or at all.
If we fail to satisfy minimum net worth and liquidity requirements established by regulators, GSEs, Ginnie Mae, lenders, or other counterparties, our business, financing activities, financial condition or results of operations could be materially and adversely affected.
As a result of our servicing and loan origination activities, we are subject to minimum net worth and liquidity requirements established by state regulators, GSEs, Ginnie Mae, lenders, and other counterparties. Losses incurred in prior years have eroded our net worth. In addition, we must structure our business so each licensed entity satisfies the net worth and liquidity requirements applicable to it, which can be challenging.
The minimum net worth and liquidity requirements to which our licensed entities are subject vary by state and type of license. We must also satisfy the minimum net worth and liquidity requirements of the GSEs and Ginnie Mae in order to maintain our approved status with such agencies and the minimum net worth and liquidity requirements set forth in our agreements with our lenders.
Minimum net worth requirements and liquidity are generally calculated using specific adjustments that may require interpretation or judgment. Changes to these adjustments have the potential to significantly affect net worth and liquidity calculations and imperil our ability to satisfy future minimum net worth and liquidity requirements. We believe our licensed entities were in compliance with all of their minimum net worth requirements at December 31, 2021. 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.
In recent years, certain regulators and other entities have proposed increasing the financial requirements for non-bank mortgage servicers. For instance, in 2021, Ginnie Mae proposed an update to its eligibility requirements, and the Conference of State Bank Supervisors has released proposed state regulatory standards for non-bank mortgage servicers, both of which contained increased capital requirements. If Ginnie Mae increases its capital requirements, or if the proposed standards are adopted by state regulators, we may not be able to meet the minimum capital and liquidity or other requirements in these standards and could be forced to sell mortgage assets, alter our operations, or have regulatory action taken against us, any of which 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, 2021, 86% and 66% of our consolidated total assets and liabilities are measured at fair value, respectively, on a recurring and nonrecurring basis, 93% 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 derivative instruments that we have entered into in order to limit MSR fair value change exposure may require margin calls should the hedge instrument lose
value. In general, we finance our operations through operating cash flows and various other sources of funding, including 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, 2021, we had total advances of $772.4 million. We are also exposed to interest rate risk because a portion of our advance financing and other outstanding debt at December 31, 2021 is at variable rates. Rising interest rates may increase our interest expense. Earnings on float balances partially offset these higher funding costs.
Our MSRs, which we carry at fair value, are subject to substantial interest rate risk, primarily because the mortgage loans underlying the servicing rights permit the borrowers to prepay the loans. A decrease in interest rates generally increases prepayment speeds and vice versa. An interest rate decrease could result in an array of fair value changes, the severity of which would depend on several factors, including the magnitude of the change, whether the decrease is across specific rate tenors or a parallel change across the entire yield curve, and impact from market-side adjustments, among others. Effective May 2021, management adopted a strategy of separately hedging our MSR portfolio and pipeline. The objective of our MSR policy is to provide partial hedge coverage of interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. However, as discussed below, there can be no assurance that our hedging strategy will be effective in partially mitigating our exposure to changes in fair value of our MSRs due to interest rate changes.
In our Originations business, we are exposed to interest rate risk and related price risk on our pipeline (i.e., interest rate loan commitments (IRLCs) and mortgage loans held for sale) from the commitment date up until the date the commitment is cancelled or expires, or the loan is sold into the secondary market. Generally, the fair value of the pipeline will decline in value when interest rates increase and will rise in value when interest rates decrease. Effective May 2021, we separately hedge our pipeline interest rate risk with traditional freestanding derivatives such as TBAs and forward sale contracts.
We are exposed to foreign currency exchange rate risk in connection with our investment in non-U.S. dollar currency operations to the extent that our foreign exchange positions remain unhedged. Our operations in the Philippines and India expose us to foreign currency exchange rate risk.
While we have established policies and procedures intended to identify, monitor and manage the risks described above, our risk management policies and procedures may not be effective. Further, such policies and procedures are not designed to mitigate or eliminate all of the risks we face. As a result, these risks could materially and adversely affect our business, financial condition and results of operations.
Our hedging strategy may not be successful in partially mitigating our exposure to interest rate risk.
Our hedging strategy may not be as effective as desired due to the actual performance of an MSR differing from the expected performance. While we actively track the actual performance of our MSRs across rate change environments, there is potential for our economic hedges to underperform. The underperformance may be a result of various factors, including the following: available hedge instruments have a different profile than the underlying asset, the duration of the hedge is different from the MSR, the convexity of the hedge is not proportional to the valuation change of the MSR asset, the counterparty with which we have traded has failed to deliver under the terms of the contract, or we fail to renew or adjust the hedge position in a timely or efficient manner.
Unexpected changes in market rates or secondary liquidity may have a materially adverse impact on the cash flow or operating performance of Ocwen. 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.
Rising inflation may result in increased compensation and benefit expense and exacerbate pressures created by current labor market trends, increase the rates charged by vendors, and generally increase our operating costs, which could negatively impact our operations and financial results.
If recent trends in rising U.S. inflation rates continue, it may increase Ocwen’s costs of providing health insurance and other employee benefits, and increases in the cost of living may create upward pressure on wages. This pressure, combined with tightening labor markets resulting from elevated resignation rates among U.S. workers could increase the cost and difficulty of recruiting and retaining employees. In addition, inflation may increase the rates charged by our vendors and our operating expenses generally. Any of these risks could negatively impact our operations and financial results.
Growth of our subservicing portfolio and originations business, and the profitability of our investment in MAV, are partially dependent on decisions made by a third party which we do not control.
MAV is owned and managed by an intermediate holding company, MAV Canopy, which is controlled by a board of directors on which Ocwen has minority representation. As part of our agreements with MAV, Ocwen has agreed not to compete with MAV with respect to the purchase of certain GSE MSRs through specific channels. As a result of these arrangements, the growth of Ocwen’s GSE subservicing portfolio and originations business depends in part on MAV’s ability to successfully bid on MSRs and in turn on the pricing and valuation considerations underlying MAV’s bidding strategy. If, and to the extent, MAV were to have limited success acquiring MSRs, the growth of Ocwen’s subservicing portfolio and originations business could be negatively impacted. More broadly, MAV’s profitability depends on business, operating and financial strategies determined by the management of MAV Canopy, which Ocwen does not control. If MAV Canopy’s business, operating or financial strategies are not successful, Ocwen’s 15% investment or returns on its investment, which as of December 31, 2021 amounted to $23.3 million, could be reduced or we may be required to contribute additional capital.
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. Further, to the extent a GSE or Ginnie Mae proposal or requirement impacts our business model differently than our competitors’, we may face a competitive disadvantage.
In addition, our ability to generate revenues through mortgage loan sales to institutional investors depends to a significant degree on programs administered by the GSEs, Ginnie Mae, and others that facilitate the issuance of MBS in the secondary market. These entities play a critical role in the residential mortgage industry and we have significant business relationships with many of them. If it is not possible for us to complete the sale or securitization of certain of our mortgage loans due to changes in GSE and Ginnie Mae programs, we may lack liquidity to continue to fund mortgage loans and our revenues and margins on new loan originations would be materially and negatively impacted.
Our plans to acquire MSRs will require approvals and cooperation by the GSEs and Ginnie Mae. Should approval or cooperation be withheld, we would have difficulty meeting our MSR acquisition objectives.
There are various proposals that deal with the future of the GSEs, including with respect to their ownership and role in the mortgage market, as well as proposals to implement GSE reforms relating to borrowers, lenders and investors in the mortgage market. Thus, the long-term future of the GSEs remains uncertain. Any change in the ownership of the GSEs, or in their programs or role within the mortgage market, could materially and adversely affect our business, liquidity, financial position and results of operations.
An economic slowdown or a deterioration of the housing market could increase both interest expense on servicing advances and operating expenses and could cause a reduction in income from, and the value of, our servicing portfolio.
During any period in which a borrower is not making payments, we are required under most of our servicing 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 21% of the UPB and 31% of the loan count in our servicing portfolio as of December 31, 2021. 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 or opt not to renew 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, if NRZ exercised all or a significant portion of its rights to decline to continue doing business with us 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, assuming we were unable to replenish the portfolio at a pace commensurate to the schedule of the transfer of the servicing.
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, 2021, such servicing advances made by NRZ were approximately $484.2 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, results of operations 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 send over 2 million communications, a process problem such as erroneous letter dating has the potential to negatively affect many parts of our business and have widespread negative implications.
We are similarly dependent on our employees. We could be materially adversely affected if an employee or employees, acting alone or in concert with non-affiliated third parties, causes a significant operational break-down or failure, either because of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems, including by means of cyberattack or denial-of-service attack. In addition to direct losses from such actions, we could be subject to regulatory sanctions or suffer harm to our reputation, financial condition, customer relationships, and ability to attract future customers or employees. Employee misconduct could prompt regulators to allege or to determine based upon such misconduct that we have not established adequate supervisory systems and procedures to inform employees of applicable rules or to detect and deter violations of such rules. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent misconduct may not be effective in all cases. Misconduct by our employees, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our reputation and our business.
Third parties with which we do business could also be sources of operational risk to us, including risks relating to break-downs or failures of such parties’ own systems or employees. Any of these occurrences could diminish our ability to operate one or more of our businesses or lead to potential liability to clients, reputational damage or regulatory intervention. We could also be required to take legal action against or replace third-party vendors, which could be costly, involve a diversion of management time and energy and lead to operational disruptions. Any of these occurrences could materially adversely affect us.
We are dependent on Black Knight and other vendors, service provider and other contractual counterparties for much of our technology, business process outsourcing and other services.
Our vendor relationships subject us to a variety of risks. We have significant exposure to third-party risks, as we are dependent on vendors, including Black Knight, Altisource and other vendors for a number of key services to operate our business effectively and in compliance with applicable regulatory and contractual obligations, and on banks, NRZ and other financing sources to finance our business.
We use the Black Knight MSP servicing system pursuant to a seven-year agreement with Black Knight expiring in 2026, and we are highly dependent on the successful functioning of it to operate our loan servicing business effectively and in compliance with our regulatory and contractual obligations. It would be difficult, costly and complex to transfer all of our loans to another servicing system in the event Black Knight failed to perform under its agreements with us and any such transfer would take considerable time. Any such transfer would also likely be subject us to considerable scrutiny from regulators, GSEs, Ginnie Mae and other counterparties.
If Black Knight were to fail to properly fulfill its contractual obligations to us, including through a failure to provide services at the required level to maintain and support our systems, our business and operations would suffer. In addition, if Black Knight fails to develop and maintain its technology so as to provide us with an effective and competitive servicing system, our business could suffer. Similarly, we are reliant on other vendors for the proper maintenance and support of our technological systems and our business and operations would suffer if these vendors do not perform as required. If our vendors do not adequately maintain and support our systems, including our servicing systems, loan originations and financial reporting systems, our business and operations could be materially and adversely affected.
Altisource and other vendors supply us with other services in connection with our business activities such as property preservation and inspection services and valuation services. In the event that a vendor’s activities do not comply with the applicable servicing criteria, we could be exposed to liability as the servicer and it could negatively impact our relationships with our servicing clients, borrowers or regulators, among others. In addition, if our current vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations.
In addition to our reliance on the vendors discussed above, our business is reliant on a number of technological vendors that provide services such as integrated cloud applications and financial institutions that provide essential banking services on a
daily basis. Even short-terms interruptions in the services provided by these vendors and financial institutions could be disruptive to our business and cause us financial loss. Significant or prolonged disruptions in the ability of these companies to provide services to us could have a material adverse impact on our operations.
Certain provisions of the agreements underlying our relationships with our vendors, service providers, financing sources and other contractual counterparties could be open to subjective interpretation. Disagreements with these counterparties, including disagreements over contract interpretation, could lead to business disruptions or could result in litigation or arbitration or mediation proceedings, any of which could be expensive and divert senior management’s attention from other matters. While we have been able to resolve disagreements with these counterparties in the past, if we were unable to resolve a disagreement, a court, arbitrator or mediator might be required to resolve the matter and there can be no assurance that the outcome of a material disagreement with a contractual counterparty would not materially and adversely affect our business, financing activities, financial condition or results of operations.
We have undergone and continue to undergo significant change to our technology infrastructure and business processes. Failure to adequately update our systems and processes could harm our ability to run our business and adversely affect our results of operations.
We are currently making, and will continue to make, technology investments and process improvements to improve or replace the information processes and systems that are key to managing our business, to improve our compliance management system, and to reduce costs. Additionally, as part of the transition to Black Knight MSP and the integration of our information processes and systems with PHH, we have undergone and continue to undergo significant changes to our technology infrastructure and business processes. Failure to select the appropriate technology investments, or to implement them correctly and efficiently, could have a significant negative impact on our operations.
Cybersecurity breaches or system failures may interrupt or delay our ability to provide services to our customers, expose our business and our customers to harm and otherwise adversely affect our operations.
Disruptions and failures of our systems or those of our vendors may interrupt or delay our ability to provide services to our customers, expose us to remedial costs and reputational damage, and otherwise adversely affect our operations. The secure transmission of confidential information over the Internet and other electronic distribution and communication systems is essential to our maintaining consumer confidence in certain of our services. We have programs in place to detect and respond to security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. While none of the cybersecurity incidents that we have experienced to date have had a material adverse impact on our business, financial condition or operations, a recent cybersecurity incident involving one of our vendors briefly impacted our operations, and we cannot assure that future incidents will not materially and adversely impact us.
Security breaches, computer viruses, phishing attacks, worms, cyberattacks, ransomware, hacking and other acts of vandalism are increasing in frequency and sophistication, and could result in a compromise or breach of the technology that we or our vendors use to protect our borrowers’ personal information and transaction data and other information that we must keep secure. Our financial, accounting, data processing or other operating systems and facilities (or those of our vendors) may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a cyberattack, a spike in transaction volume or unforeseen catastrophic events, potentially resulting in data loss and adversely affecting our ability to process transactions or otherwise operate our business. If one or more of these events occurs, this could potentially jeopardize data integrity or confidentiality of information processed and stored in, or transmitted through, our computer systems and networks. Any failure, interruption or breach in our cyber security could result in reputational harm, disruption of our customer relationships, or an inability to originate and service loans and otherwise operate our business. Further, any of these cyber security and operational risks could expose us to lawsuits by customers for identity theft or other damages resulting from the misuse of their personal information and possible financial liability, any of which could have a material adverse effect on our results of operations, financial condition and liquidity.
Regulators may impose penalties or require remedial action if they identify weaknesses in our systems, and we may be required to incur significant costs to address any identified deficiencies or to remediate any harm caused. A number of states have specific reporting and other requirements with respect to cybersecurity in addition to applicable federal laws. For instance, the NY DFS Cybersecurity Regulation requires New York insurance companies, banks, and other regulated financial services institutions - including certain Ocwen entities licensed in the state of New York - to assess their cybersecurity risk profile. Regulated entities are required, among other things, to adopt the core requirements of a cybersecurity program, including a cybersecurity policy, effective access privileges, cybersecurity risk assessments, training and monitoring for all authorized users, and appropriate governance processes. This regulation also requires regulated entities to submit notices to the NY DFS of any security breaches or other cybersecurity events, and to certify their compliance with the regulation on an annual basis. In addition, consumers generally are concerned with security breaches and privacy on the Internet, and Congress or
individual states could enact new laws regulating the use of technology in our business that could adversely affect us or result in significant compliance costs.
As part of our business, we may share confidential customer information and proprietary information with customers, vendors, service providers, and business partners. The information systems of these third parties may be vulnerable to security breaches as these third parties may not have appropriate security controls in place to protect the information we share with them. If our confidential information is intercepted, stolen, misused, or mishandled while in possession of a third party, it could result in reputational harm to us, loss of customer business, and additional regulatory scrutiny, and it could expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of operations, financial condition and liquidity.
Damage to our reputation could adversely impact our financial results and ongoing operations.
Our ability to serve and retain customers and conduct business transactions with our counterparties could be adversely affected to the extent our reputation is damaged. Our failure to address, or to appear to fail to address, the various regulatory, operational and other challenges facing Ocwen could give rise to reputational risk that could cause harm to us and our business prospects. Reputational issues may arise from the following, among other factors:
•negative news about Ocwen or the mortgage industry generally;
•allegations of non-compliance with legal and regulatory requirements;
•ethical issues, including alleged deceptive or unfair servicing or lending practices;
•our practices relating to collections, foreclosures, property preservation, modifications, interest rate adjustments, loans impacted by natural disasters, escrow and insurance;
•consumer privacy concerns;
•consumer financial fraud;
•data security issues related to our customers or employees;
•cybersecurity issues and cyber incidents, whether actual, threatened, or perceived;
•customer service or consumer complaints;
•legal, reputational, credit, liquidity and market risks inherent in our businesses;
•a downgrade of or negative watch warning on any of our servicer or credit ratings; and
•alleged or perceived conflicts of interest.
The proliferation of social media websites as well as the personal use of social media by our employees and others, including personal blogs and social network profiles, also may increase the risk that negative, inappropriate or unauthorized information may be posted or released publicly that could harm our reputation or have other negative consequences, including as a result of our employees interacting with our customers in an unauthorized manner in various social media outlets. The failure to address, or the perception that we have failed to address, any of these issues appropriately could give rise to increased regulatory action, which could adversely affect our results of operations.
The industry in which we operate is highly competitive, and, to the extent we fail to meet these competitive challenges, it would have a material adverse effect on our business, financial position, results of operations or cash flows.
We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory or technological changes. Competition to service mortgage loans and for mortgage loan originations comes primarily from commercial banks and savings institutions and non-bank lenders and mortgage servicers. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources, and lower funding costs. Further, our competitors that are national banks may also benefit from a federal exemption from certain state regulatory requirements that is applicable to depository institutions. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of revenue generating options (e.g., originating types of loans that we choose not to originate) and establish more favorable relationships than we can. With the proliferation of smartphones and technological changes enabling improved payment systems and cheaper data storage, newer market participants, often called “disruptors,” are reinventing aspects of the financial industry and capturing profit pools previously enjoyed by existing market participants. As a result, the lending industry could become even more competitive if new market participants are successful in capturing market share from existing market participants such as ourselves. Competition to service mortgage loans may result in lower margins. Because of the relatively limited number of servicing clients, our failure to meet the expectations of any significant client could materially impact our business. Ocwen has suffered reputational damage as a result of our regulatory settlements and the associated scrutiny of our business. We believe this may have weakened our competitive position against both our bank and non-bank mortgage servicing competitors. These competitive pressures could have a material adverse effect on our business, financial condition or results of operations.
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 3,200, or 56%, of our employees as of December 31, 2021 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 3,200, or 56%, of our employees as of December 31, 2021 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. In addition, employees located in Pennsylvania, New Jersey and Texas have been impacted by severe weather events in recent years, including as a result of power failures due to such events which temporarily prevented some remote employees from working. While we have implemented and maintain business continuity plans to reduce the disruption such events cause to our critical operations, we cannot guarantee that such plans will eliminate any negative impact on our business, including the cost of evacuation and repairs. As the frequency of severe weather events continues to increase in connection with rising global temperatures and other climatic changes, interruptions to our business operations may become more frequent and costly, and future weather events could have a significant adverse effect on our business and results of operations.
If a rise in severe weather events increases the proportion of borrowers facing financial hardship, our servicing operations and financial condition could be negatively impacted.
Certain regions of the United States have experienced an increase in the frequency and severity of significant weather events during the last decade, resulting in costly property repairs and rising homeowner’s insurance costs. To the extent borrowers living in impacted areas experience a financial hardship and become unable to meet their mortgage obligations or choose to abandon severely damaged property, our servicing operations will become more costly due to the increased expense of servicing delinquent mortgages and managing REO property. While we have programs in place to assist homeowners negatively impacted by weather events and other emergencies, we cannot guarantee that these programs would mitigate impacts to all borrowers. Consequently, if the frequency and severity of weather events continues to increase and the regions subject to extreme weather continue to expand, the results of our servicing operations and financial condition could be significantly impacted.
A significant portion of our business is in the states of California, Texas, Florida, New York and New Jersey, and our business may be significantly harmed by a slowdown in the economy or the occurrence of a natural disaster in those states.
A significant portion of the mortgage loans that we service and originate are secured by properties in California, Texas, Florida, New York and New Jersey. Any adverse economic conditions in these markets, including a downturn in real estate values, could increase loan delinquencies. Delinquent loans are more costly to service and require us to advance delinquent principal and interest and to make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent that we determine that such amounts are recoverable. We could also be adversely affected by business disruptions triggered by natural disasters or acts or war or terrorism in these geographic areas.
Reinsuring risk through our captive reinsurance entity could adversely impact our results of operation and financial condition.
If our captive reinsurance entity incurs losses from a severe catastrophe or series of catastrophes, particularly in areas where a significant portion of the insured properties are located, claims that result could substantially exceed our expectations, which could adversely impact our results of operation and financial condition. An increase in the frequency with which severe weather events occur in the United States would increase the risk of adverse impacts on our captive reinsurance business.
Pursuit of business or asset acquisitions exposes us to financial, execution and operational risks that could adversely affect us.
We are actively looking for opportunities to grow our business through acquisitions of businesses and assets. The performance of the businesses and assets we acquire through acquisitions may not match the historical performance of our other assets. Nor can we assure you that the businesses and assets we may acquire will perform at levels meeting our expectations. We may find that we overpaid for the acquired businesses or assets or that the economic conditions underlying our acquisition decision have changed. It may also take several quarters or longer for us to fully integrate newly acquired business and assets into our business, during which period our results of operations and financial condition may be negatively affected. Further, certain one-time expenses associated with such acquisitions may have a negative impact on our results of operations and financial condition. We cannot assure you that acquisitions will not adversely affect our liquidity, results of operations and financial condition.
The risks associated with acquisitions include, among others:
•unanticipated issues in integrating servicing, information, communications and other systems;
•unanticipated incompatibility in servicing, lending, purchasing, logistics, marketing and administration methods;
•unanticipated liabilities assumed from the acquired business;
•not retaining key employees; and
•the diversion of management’s attention from ongoing business concerns.
The acquisition integration process can be complicated and time consuming and could potentially be disruptive to borrowers of loans serviced by the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its borrowers, we may not realize the anticipated economic benefits of particular acquisitions within our expected timeframe, or we could lose subservicing business or employees of the acquired business. In addition, integrating operations may involve significant reductions in headcount or the closure of facilities, which may be disruptive to operations and impair employee morale. Through acquisitions, we may enter into business lines in which we have not previously operated. Such acquisitions could require additional integration costs and efforts, including significant time from senior management. We may not be able to achieve the synergies we anticipate from acquired businesses, and we may not be able to grow acquired businesses in the manner we anticipate. In fact, the businesses we acquire could decrease in size, even if the integration process is successful.
Further, prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices that we considered to be acceptable, and we expect that we will experience this condition in the future. In addition, to finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or we could raise additional equity capital, which could dilute the interests of our existing shareholders.
The timing of closing of our acquisitions is often uncertain. We have in the past and may in the future experience delays in closing our acquisitions, or certain aspects of them. For example, we and the applicable seller are often required to obtain certain regulatory and contractual consents as a prerequisite to closing, such as the consents of GSEs, the FHFA, RMBS trustees or regulators. Accordingly, even if we and the applicable seller are efficient and proactive, the actions of third parties can impact the timing under which such consents are obtained. We and the applicable seller may not be able to obtain all the required consents, which may mean that we are unable to acquire all the assets that we wish to acquire. Regulators may have questions relating to aspects of our acquisitions and we may be required to devote time and resources responding to those questions. It is also possible that we will expend considerable resources in the pursuit of an acquisition that, ultimately, either does not close or is terminated.
Loan put-backs and related liabilities for breaches of representations and warranties regarding sold loans could adversely affect our business.
We have exposure to representation, warranty and indemnification obligations relating to our Originations business, including lending, 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, 2021, we had outstanding representation and warranty repurchase demands related to 288 loans of $52.5 million total UPB.
If home values decrease, our realized loan losses from loan repurchases and indemnifications may increase as well. As a result, our liability for repurchases may increase beyond our current expectations. Depending on the magnitude of any such increase, our business, financial condition and results of operations could be adversely affected.
We originate and securitize 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.
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.
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, the date has been deferred to June 30, 2023 for certain tenors (including overnight and one, three, six and 12 months), at which time the LIBOR administrator has indicated that it intends to cease publication of U.S. dollar LIBOR. Despite this deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021 and that beginning January 1, 2022, renewals of existing contracts should provide for the replacement of U.S. dollar LIBOR with an alternative reference rate. 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.
Tax Risks
Changes in tax laws and interpretation and tax challenges may adversely affect our financial condition and results of operations.
The enactment of Federal Tax Reform has had, and is expected to continue to have, far reaching and significant effects. Further, U.S. tax authorities may at any time clarify and/or modify by legislation, administration or judicial changes or interpretation the income tax treatment of corporations. Such changes could adversely affect us.
In the course of our business, we are sometimes subject to challenges from taxing authorities, including the IRS, individual states, municipalities, and foreign jurisdictions, regarding amounts due. These challenges may result in adjustments to the timing or amount of taxable income or deductions, the allocation of income among tax jurisdictions, or the rate of tax imposed in such jurisdiction, all of which may require a greater provision for taxes or otherwise adversely affect our financial condition and results of operations.
Failure to retain the tax benefits provided by the USVI would adversely affect our financial condition and results of operations.
During 2019, in connection with our acquisition of PHH, overall corporate simplification and cost reduction efforts, we executed a legal entity reorganization whereby OLS, through which we previously conducted a substantial portion of our servicing business, was merged into PMC. OLS was previously the wholly-owned subsidiary of OMS, which was incorporated and headquartered in the USVI prior to its merger with Ocwen USVI Services, LLC, an entity which is also organized and headquartered in the USVI. The USVI has an Economic Development Commission (EDC) that provides certain tax benefits to qualified businesses. OMS received its certificate to operate as a company qualified for EDC benefits in October 2012 and as a result received significant tax benefits. Following our legal entity reorganization, we are no longer able to avail ourselves of favorable tax treatment for our USVI operations on a going forward basis. However, if the EDC were to determine that we failed to conduct our USVI operations in compliance with EDC qualifications prior to our reorganization, the value of the EDC benefits corresponding to the period prior to the reorganization could be reduced or eliminated, resulting in an increase to our tax expense. In addition, under our agreement with the EDC, we remain obligated to continue to operate Ocwen USVI Services, LLC in compliance with EDC requirements through 2042. If we fail to maintain our EDC qualification, we could be alleged to be in violation of our EDC commitments and the EDC could take adverse action against us, which could include demands for
payment and reimbursement of past tax benefits, and it could result in the loss of anticipated income tax refunds. If any of these events were to occur, it could adversely affect our financial condition and results of operations.
We may be subject to increased 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, 2021, Ocwen had U.S. federal and USVI net operating loss (NOL) carryforwards of approximately $256.9 million, which we estimate to be worth approximately $53.9 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, 2021, Ocwen had state NOL and state tax credit carryforwards which we estimate to be worth approximately $70.7 million, and foreign tax credit carryforwards of $0.2 million in the U.S. jurisdiction. As of December 31, 2021, Ocwen had disallowed interest under Section 163(j) of $162.0 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 2021 between $22.70 per share and $40.59 per share, and the closing stock price on February 22, 2022 was $34.27 per share. Therefore, the volatility in our stock price may affect your ability to sell our common stock at an advantageous price. Market price fluctuations in our common stock may be due to factors both within and outside our control, including regulatory or legal actions, acquisitions, dispositions or other material public announcements or speculative trading in our stock (e.g., traders “shorting” our common stock), as well as a variety of other factors including, but not limited to those set forth under this Item 1.A. Risk Factors .
In addition, the stock markets in general, including the New York Stock Exchange, have, at times, experienced extreme price and trading fluctuations. These fluctuations have resulted in volatility in the market prices of securities that often has been unrelated or disproportionate to changes in operating performance. These broad market fluctuations may adversely affect the market prices of our common stock.
When the market price of a company's shares drops significantly, shareholders often institute securities class action lawsuits against the company. A lawsuit against us, even if unsuccessful, could cause us to incur substantial costs and could divert the time and attention of our management and other resources.
We have several large shareholders, and such shareholders may vote their shares to influence matters requiring shareholder approval.
In connection with the issuance of our senior secured notes in March 2021 and the creation of MAV in May 2021, we issued Oaktree 4.9% of our then outstanding common shares, as well as warrants to purchase an additional 15% of our then outstanding shares. Based on SEC filings, we believe Oaktree has purchased additional shares on the open market and now holds approximately 8% of our outstanding shares. In addition, based on SEC filings, Deer Park Road Management Company, LP and certain other shareholders also own or control significant amounts of our common stock. These 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 20.0 million are preferred shares. Our board of directors has the authority, without a vote of the shareholders, to establish the preferences and rights of any preferred or other class or series of shares to be issued and to issue such shares. The issuance of preferred shares could delay or prevent a
change in control. Since our board of directors has the power to establish the preferences and rights of the preferred shares without a shareholder vote, our board of directors may give the holders of preferred shares preferences, powers and rights, including voting rights, senior to the rights of holders of our common shares. In addition, our bylaws include provisions that, among other things, require advance notice for raising business or making nominations at meetings, which could impact the ability of a third party to acquire control of us or the timing of acquiring such control.
Third parties seeking to acquire us or make significant investments in us must do so in compliance with state regulatory requirements applicable to licensed mortgage servicers and lenders. Many states require change of control applications for acquisitions of “control” as defined under each state’s laws and regulation, which may apply to an investment without regard to the intent of the investor. For example, New York has a control presumption triggered at 10% ownership of the voting stock of the licensee or of any person that controls the licensee. In addition, we have licensed insurance subsidiaries in New York and Vermont. Accordingly, there can be no effective change in control of Ocwen unless the person seeking to acquire control has made the relevant filings and received the requisite approvals in New York and Vermont. These regulatory requirements may discourage potential acquisition proposals or investments, may delay or prevent a change in control of us and may impact demand for, and the trading price of, our common stock.

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

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Ocwen Financial Corporation is headquartered in West Palm Beach, Florida, at 1661 Worthington Road, Suite 100. We have offices and facilities in the United States, the USVI, India and the Philippines, all of which are leased. The following table sets forth information relating to our principal facilities at December 31, 2021:
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
Houston, Texas - Walters Road (2) Leased 46,425
Rancho Cordova, California (3) Leased 17,157
Houston, Texas - Richmond Avenue (4) Leased 9,653
St. Croix, USVI (5) Leased 6,096
Offshore facilities (5)
Bangalore, India (6) Leased 87,233
Mumbai, India (7) Leased 25,665
Pune, India (8) Leased 3,826
Manila, Philippines Leased 39,329
Former operations and support offices no longer utilized
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 243,927 square feet as of the end of 2020. The second building has 107,774 square feet of space, all of which is subleased. The lease expires in December 2022.
(2)Primarily supports reverse servicing operations. This lease was assumed in connection with the MAM (RMS) transaction completed in October 2021 and expired in February 2022. On February 1, 2022, we entered into new agreements to lease 45,479 square feet for a term of five years.
(3)Primarily supports reverse lending operations. We downsized the existing facility to 17,157 square feet and extended the lease through August 2024.
(4)Primarily supports commercial and reverse servicing operations.
(5)Primarily supports servicing operations.
(6)We terminated our lease with respect to 41,373 square feet of the space in June 2021.
(7)We terminated the lease on our previous facility with 96,696 square feet and relocated to a managed service office in June 2021.
(8)We terminated our lease on the previous facility with 44,328 square feet and relocated to a managed service office in February 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. We continue to operate through a secure remote workforce model for approximately 95% of our global workforce due to the COVID 19 pandemic. During 2021, we exited a total of 298,138 of leased square footage.

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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 for a description of our material legal proceedings. That information is incorporated into this item by reference.

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

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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, 2016, 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, 2016 and the reinvestment of all dividends.
Period Ending
Index 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021
Ocwen Financial Corporation $ 100.00 $ 58.07 $ 24.86 $ 25.42 $ 35.76 $ 49.44
S&P 500 $ 100.00 $ 119.42 $ 111.97 $ 144.31 $ 167.77 $ 212.89
S&P 500 Diversified Financials $ 100.00 $ 123.33 $ 109.73 $ 134.80 $ 147.98 $ 198.70
(1)Copyright © 2021 S&P Dow Jones Indices. All rights reserved. S&P, S&P 500, S&P 500 LOW VOLATILITY INDEX, S&P 100, S&P COMPOSITE 1500, S&P 400, S&P MIDCAP 400, S&P 600, S&P SMALLCAP 600, S&P GIVI, GLOBAL TITANS, DIVIDEND ARISTOCRATS, S&P TARGET DATE INDICES, S&P PRISM, S&P STRIDE, GICS, SPIVA, SPDR and INDEXOLOGY are registered trademarks of S&P Global, Inc. (“S&P Global”) or its affiliates. DOW JONES, DJ, DJIA, THE DOW and DOW JONES INDUSTRIAL AVERAGE are registered trademarks of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks together with others have been licensed to S&P Dow Jones Indices LLC. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. This document does not constitute an offer of services in jurisdictions where S&P Dow Jones Indices LLC, S&P Global, Dow Jones or their respective affiliates (collectively “S&P Dow Jones Indices”) do not have the necessary licenses. Except for certain custom index calculation services, all information provided by S&P Dow Jones Indices is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties and providing custom calculation services. Past performance of an index is not an indication or guarantee of future results.
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 22, 2022, 9,208,312 shares of our common stock were outstanding and held by approximately 62 holders of record. Such number of stockholders does not reflect the number of individuals or institutional investors holding our stock in nominee name through banks, brokerage firms and others.
Unregistered Sales of Equity Securities and Use of Proceeds
All unregistered sales of equity securities during the year ended December 31, 2021 have been previously reported.
Purchases of Equity Securities by the Issuer and Affiliates
We did not repurchase any shares of our common stock during 2021 or through February 22, 2022.

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

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share amounts and unless otherwise indicated)
The Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-K generally discusses 2021 and 2020 items and provides year-to-year comparisons between 2021 and 2020. Discussions of year-to-year comparisons between 2020 and 2019 are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 19, 2021.
OVERVIEW
We are a financial services company that services and originates mortgage loans. We are a leading mortgage special servicer, servicing 1.4 million loans with a total UPB of $268.0 billion on behalf of more than 3,900 investors and 125 subservicing clients as of December 31, 2021. 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 retail, correspondent and wholesale channels, we originate and purchase conventional and government-insured forward and reverse mortgage loans that we sell or securitize on a servicing retained basis. In addition, we grow our mortgage servicing volume through MSR flow purchase agreements, Agency Cash Window programs, bulk MSR purchase transactions, and subservicing agreements.
The table below summarizes the volume of Originations by channel during 2021, compared with the volume of the prior years. The volume of Originations is a key driver of the profitability of our Originations segment, together with margins, and a key driver of the replenishment and growth of our Servicing segment. In 2021, we added $152.0 billion of new volume, with $55.1 billion MSR bulk acquisitions, $55.9 billion of new subservicing and $41.0 billion of non-bulk Originations volume, as further detailed in the below table.
$ In billions UPB $ Change
Year Ended December 31st 2021 vs 2020 2020 vs 2019
2021 2020 2019
Mortgage servicing originations
Retail - Consumer Direct MSR (1) $ 2.4 $ 1.3 $ 0.7 $ 1.1 $ 0.7
Correspondent MSR (1) 16.6 5.7 0.5 10.9 5.2
Flow and Agency Cash Window MSR purchases (2) 20.4 15.1 0.9 5.3 14.2
Reverse mortgage servicing (3) 1.5 0.9 0.7 0.6 0.2
Total servicing 41.0 23.0 2.8 17.9 20.3
Bulk MSR purchases (2) 55.1 16.6 14.6 38.6 1.9
Total servicing additions 96.1 39.6 17.4 56.5 22.2
Subservicing additions (4) 55.9 17.8 12.7 38.2 5.1
Total servicing and subservicing UPB additions $ 152.0 $ 57.4 $ 30.1 $ 94.7 $ 27.3
(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 loans for which the MSR is purchased.
(3)Represents the UPB of reverse mortgage loans that have been securitized on a servicing retained basis. The loans are recognized on our consolidated balance sheets under GAAP without separate recognition of MSRs.
(4)Includes interim subservicing, including the volume of UPB associated with short-term interim subservicing for certain clients as a support to their originate-to-sell business, with $14.7 billion, $17.8 billion and $12.2 billion in the years 2021, 2020 and 2019, respectively.
In addition to interim subservicing, subservicing additions for 2021 in the table above include $14.3 billion in UPB of reverse mortgage loan subservicing and $9.4 billion of new subservicing on behalf of MAV. On October 1, 2021, in connection with the transaction with MAM (RMS) and its then parent, PMC became the subservicer for approximately 57,000 reverse mortgages, or approximately $14.3 billion in UPB pursuant to subservicing agreements with various clients, including MAM (RMS). Under the five-year subservicing agreement with MAM (RMS), we expect to add subservicing of approximately 60,000 reverse mortgage loans or approximately $13.1 billion in UPB upon boarding to our servicing platform in the first half of 2022, subject to investor approval. Furthermore, in the second quarter 2021, we launched our joint venture MSR investment with Oaktree with MAV purchasing approximately $9.4 billion GSE MSRs from unrelated third parties that PMC began subservicing in the third quarter of 2021.
The following table summarizes the average volume of our Servicing segment in 2021, compared with prior years. The average volume of Servicing is a key driver of the profitability of our Servicing segment. The relative weight of performing and delinquent loans drives the gross revenue and expenses, and their timing. In 2021, we have increased our total average servicing portfolio by $47.2 billion, net of runoff, with large GSE MSR bulk acquisitions driving the growth of our owned MSR portfolio, and the new subservicing volume generated from our MSR investment joint venture with Oaktree through MAV and our reverse subservicing acquisition from MAM (RMS). In addition to runoff, the NRZ portfolio declined as a result of the termination by NRZ of the PMC servicing agreement resulting in the deboarding of loans with $34.2 billion of UPB in September and October 2020. The year 2021 established the foundation of a transformed servicing portfolio, with the significant addition of a high credit quality GSE MSR portfolio and the continued reduction of our non-Agency servicing through runoff, also reducing our concentration with NRZ servicing agreements.
$ in billions Average UPB $ Change
Year ended December 31, 2021 vs 2020 2020 vs 2019
2021 2020 2019
Owned MSR $ 117.5 $ 71.3 $ 70.0 $ 46.3 $ 1.3
NRZ 61.4 74.8 125.1 (13.4) (50.2)
MAV 9.1 - - 9.1 -
Subservicing 24.7 45.5 31.2 (20.7) 14.2
Reverse mortgage loans (owned) 6.8 6.5 5.8 0.3 0.7
Commercial and other servicing 1.2 0.5 0.3 0.6 0.2
Total serviced and subserviced UPB (average) $ 220.7 $ 198.6 $ 232.4 $ 22.1 $ (33.8)
As of December 31, 2021 and 2020, the total serviced and subserviced UPB amounted to $268.0 billion and $188.8 billion, respectively, a net increase of $79.2 billion or 42%.
Business Initiatives
We had established five key operating objectives to drive improved value for shareholders in 2021. As our near-term priority remains to return to sustainable profitability, we continue to execute our strategy around these objectives:
•Accelerating growth, by expanding our client base and our product offerings, 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.
MAV and Oaktree Relationship
On May 3, 2021, we formally launched MAV, our MSR asset vehicle and entered into a number of definitive agreements with Oaktree. Oaktree and Ocwen committed 85% and 15%, respectively, to fund GSE MSR investments on a pro rata basis up to a total aggregate commitment of $250.0 million over a term of three years following closing (subject to extension). This joint venture is structured to provide Oaktree with MSR investment opportunities and returns, while providing PMC scale and incremental income through subservicing and recapture services. Additionally, PMC earns direct MSR investment income through its 15% ownership stake and carry interest on investment returns exceeding certain thresholds. Under the arrangement, MAV has a non-compete to purchase certain GSE MSRs through specific channels in cooperation with PMC. In addition, PMC must offer MAV the first opportunity to purchase GSE MSRs sold by PMC or its affiliates that meet certain criteria, which we refer to as the right of first offer. Both the non-compete and the right of first offer are subject to various restrictions and in effect
until MAV has been fully funded, or, if earlier, in the case of the right of first offer, until May 3, 2024 (subject to extension by mutual consent). In exchange, PMC receives exclusive subservicing and recapture rights, subject generally to ongoing performance and financial standards.
During 2021, PMC recognized $17.1 million of total servicing and subservicing fees, including ancillary income, and remitted $12.2 million servicing fees (as Pledged MSR liability expense) under its agreements with MAV (refer to Note 8 - MSR Transfers Not Qualifying for Sale Accounting to the Consolidated Financial Statements for further description of the accounting for the MAV agreements). In addition, PMC recognized $3.6 million earnings in 2021 from its equity method investment in MAV Canopy.
COVID-19 Pandemic Update
Our financial performance in 2020 was affected by the Coronavirus Disease 2019 (COVID-19) pandemic and the associated historical decline in interest rates, 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. 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.
In 2021, our Servicing business continued to be impacted by the COVID-19 pandemic, with a large number of loans placed under forbearance and the moratorium on foreclosures and evictions. The collection and recognition of servicing fees and ancillary income related to forbearance loans continued to be delayed or reduced. In addition, our outreach activities with impacted borrowers have intensified to address extensions and exits of plans or to offer loan modifications. The foreclosure moratorium ended on July 31, 2021, and the eviction moratorium was extended through January 1, 2022 for foreclosed borrowers.
As of December 31, 2021, we managed 28,500 loans under forbearance (or 2.1% of our total portfolio), 6,800 of which related to our owned MSRs, or 1.1% of our owned MSR servicing portfolio (excluding NRZ and MAV), a reduction of 65% and 71%, respectively, compared to the prior year end. As of December 31, 2020, we managed 81,900 loans under forbearance, 23,100 of which related to our owned MSRs (excluding NRZ). During 2021, the number of loans under forbearance continued to trend down, as illustrated by the below chart of forbearance plans by investor for our owned MSR portfolio (excluding NRZ).
The decline in open plans of our owned MSR portfolio during 2021 is mostly driven by performing loans and pay-offs (excluding servicing transfers), as further illustrated below:
We outperformed the industry average as reported by the MBA relating to the percentage of borrowers with an Agency loan who exited forbearance with a reinstatement or loss mitigation solution in place. In addition, we consistently exceeded the industry benchmark for borrowers with a GSE loan who remained current while on forbearance. We undertook significant efforts to contact and educate borrowers in understanding their forbearance plans and resolution options, and believe our high-touch communication strategy resulted in these favorable outcomes. We continue to reach out to all borrowers who have not resumed making payments after exiting their plans with the goal of coming to an appropriate resolution.
We continue to operate through a secure remote workforce model for approximately 95% of our global workforce and continue to adhere to COVID-19 health and safety-related requirements and best practices across all of our locations. We monitor the impact of the pandemic on our workforce and have established business resiliency plans for all our locations. At December 31, 2021, we had approximately 5,700 employees, of which approximately 3,200 were located in India and approximately 500 were based in the Philippines. While we have contingency and continuity plans in place, we cannot guarantee that our operations will not be negatively impacted. To date, our operations have not been significantly affected.
Uncertainties related to the duration and severity of the pandemic and related economic impact remain and make it difficult for us to determine the continued ongoing effect the pandemic may have on us and our business, financial condition, liquidity or results of operations.
Operations Summary
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenue
Servicing and subservicing fees $ 781.9 $ 737.3 $ 975.5 6 % (24) %
Reverse mortgage revenue, net 79.7 60.7 86.3 31 (30)
Gain on loans held for sale, net 145.8 137.2 38.3 6 258
Other revenue, net 42.7 25.6 23.3 67 10
Total revenue 1,050.1 960.9 1,123.4 9 (14)
MSR valuation adjustments, net (109.9) (251.9) (120.9) (56) 108
Operating expenses
Compensation and benefits 297.9 265.3 313.5 12 (15)
Professional services 81.9 106.9 102.6 (23) 4
Servicing and origination 113.6 77.3 109.0 47 (29)
Technology and communications 56.0 59.6 79.2 (6) (25)
Occupancy and equipment 36.5 47.5 68.1 (23) (30)
Other expenses 23.3 19.2 1.5 22 n/m
Total operating expenses 609.3 575.7 673.9 6 (15)
Other income (expense)
Interest income 26.4 16.0 17.1 65 (6)
Interest expense (144.0) (109.4) (114.1) 32 (4)
Pledged MSR liability expense (209.9) (152.3) (372.1) 38 (59)
Gain (loss) on extinguishment of debt (15.5) - 5.1 n/m (100)
Earnings of equity method investee 3.6 - - n/m n/m
Other, net 4.1 6.7 9.0 (39) (25)
Total other income (expense), net (335.2) (239.0) (455.1) 40 (47)
Income (loss) before income taxes (4.4) (105.7) (126.5) (96) (16)
Income tax expense (benefit) (22.4) (65.5) 15.6 (66) (519)
Net income (loss) 18.1 (40.2) (142.1) (145) (72)
Segment income (loss) before taxes:
Servicing $ 19.9 $ (75.8) $ (72.7) (126) % 4 %
Originations 93.9 104.2 (12.2) (10) (952)
Corporate Items and Other (118.1) (134.1) (41.6) (12) 222
$ (4.4) $ (105.7) $ (126.5) (96) % (16) %
n/m: not meaningful
Total Revenue
The below table presents total revenue by segment and at the consolidated level:
Revenue Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Servicing $ 819.4 $ 757.7 $ 1,048.5 8% (28)%
Originations 249.9 179.3 61.7 39 191
Corporate 6.2 6.6 13.2 (6) (50)
Total segment revenue 1,075.4 943.5 1,123.4 14 (16)
Inter-segment elimination (1) (25.3) 17.4 - (245) n/m
Total revenue $ 1,050.1 $ 960.9 $ 1,123.4 9% (14)%
(1)The fair value change of inter-segment economic hedge derivatives reported within Total revenue (Gain on loans held for sale, net) is eliminated at the consolidated level with an offset in MSR valuation adjustments, net.
As compared to 2020, total segment revenue for 2021 was $131.9 million or 14% higher, due to a $70.6 million increase in Originations revenue and a $61.7 million increase in Servicing revenue. The 39% increase in Originations revenue is primarily due to a 159% increase in total forward and reverse production volume combined, partially offset by lower margins. The increase in Servicing revenue is primarily due to a $42.2 million increase in servicing fees and $27.1 million gain on sale of loans acquired through the exercise of call rights in 2021. The $42.2 million increase in servicing fees is mostly driven by a $123.1 million or 57% increase in servicing fee income on our owned MSRs and $15.7 million new servicing fees collected on behalf of MAV in 2021, partially offset by $79.4 million reduction in fees collected on behalf of NRZ and a $9.3 million reduction in ancillary income. The growth in our owned MSR portfolio is mostly due to bulk MSR acquisitions, MSR acquisitions through the Agency Cash Window programs and the growth in our correspondent lending volumes. The decline in the collection of NRZ servicing fees is mostly due to portfolio runoff and the termination of the PMC servicing agreement in February 2020. The decline in ancillary fees is mostly due to the COVID-19 environment and related decrease in late fees, collection and convenience fees as well as a decrease in float earnings due to lower interest rates, partially offset by the growth in our owned MSR portfolio.
Total revenue (after elimination of inter-segment derivative fair value changes) was $1.05 billion for 2021, $89.2 million or 9% higher than 2020, driven by the segment revenue factors described above and the presentation of macro-hedging derivative gains and losses reported within MSR valuation adjustments, net at the consolidated level, as disclosed in Note 4 - Loans Held for Sale, Note 17 - Derivative Financial Instruments and Hedging Activities and Note 23 - Business Segment Reporting. Effective May 2021, we replaced our macro-hedging strategies with two distinct strategies to separately hedge the pipeline and our MSR exposure with third party derivatives. However, we have and may continue to use inter-segment derivatives between the two strategies. Refer to the MSR Hedging Strategy section of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for further detail.
See the respective Segment Results of Operations for additional information.
MSR Valuation Adjustments, Net
The table below presents the key components of MSR valuation adjustments, net:
Segment Results Years Ended December 31,
2021 2020 2019
MSR realization of expected cash flows (1) $ (250.2) $ (171.4) $ (197.3)
MSR fair value changes due to interest rate and assumption updates 124.7 (149.8) 75.9
Derivative fair value gain (loss) (34.9) 44.9 0.5
Total Servicing (160.4) (276.3) (120.9)
Originations - MSR fair value changes 25.2 41.7 -
Inter-segment elimination - derivative fair value gain (loss) (2) 25.3 (17.4) -
MSR valuation adjustments, net $ (109.9) $ (252.0) $ (120.9)
(1)The terms “realization of expected cash flows” and “runoff” may be used interchangeably within this discussion.
(2)The fair value change of inter-segment economic hedge derivatives reported within MSR valuation adjustments, net is eliminated at the consolidated level with an offset in Gain on loans held for sale, net (Total Revenue). Also refer to the description of the inter-segment derivative elimination in Note 23 - Business Segment Reporting.
We reported a $109.9 million loss in MSR valuation adjustments, net in 2021. As detailed in the above table and further discussed below, the loss is due to $250.2 million portfolio runoff and a $124.7 million fair value gain due to interest rate and assumption updates, $34.9 million loss on MSR hedging derivative instruments, $25.2 million revaluation gain on MSR purchases reported in Originations and a $25.3 million gain on derivatives hedging the pipeline within the Originations segment.
•MSR portfolio runoff represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled and unscheduled amortization of the loan UPB. MSR portfolio runoff increased by $78.8 million mostly due to a higher MSR portfolio driven by MSR acquisitions and continued elevated levels of prepayments in a relatively low interest rate environment.
•The $124.7 million fair value gain due to interest rate and assumption updates is comprised of a $88.5 million gain on the MSRs transferred to NRZ and MAV (that did not achieve sale accounting) and a $36.2 million gain on our owned MSRs. This NRZ and MAV MSR gain is mostly driven by assumption updates implemented in the third quarter of 2021 relating to a PLS model calibration by our third-party valuation expert, and is largely offset by a corresponding loss separately reported with Pledged MSR liability expense.
•Our MSR hedging policy is designed to reduce the volatility of the MSR portfolio fair value due to market interest rates. In 2021, we reported a $36.2 million fair value gain on our owned MSR portfolio attributable to interest rate and assumption updates and a $34.9 million hedging derivative loss. The year-over-year fair value changes are mostly explained by interest rate changes, with a 66 basis point increase in the 10-year swap rate during 2021. The changes in fair value of the MSR and economically hedging derivatives were not offset to the same extent as per their expected hedging sensitivity measures, mainly due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and the available hedging instruments. Refer to the MSR Hedging Strategy section of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for additional information regarding our hedging programs.
•The $16.5 million decline in 2021 in MSR fair value changes reported in Originations, from $41.7 million to $25.2 million, is due to a decrease in our cash window MSR originations volume and declining margins.
•In connection with our macro-hedge strategy through the second quarter of 2021, we have used our derivative instruments to economically hedge both the fair value changes of the MSR and Originations pipeline exposures. While allocated to the pipeline for risk management purposes and segment reporting, inter-segment derivatives are eliminated in our consolidated financial statements and we reported a $25.3 million gain on inter-segment derivatives in 2021 economically hedging the Originations pipeline. The change from $17.4 million loss in 2020 to $25.3 million gain on Originations inter-segment derivatives in 2021 is mostly due to the change in interest rates and related changes in our Originations pipeline.
Compensation and Benefits
Compensation and benefits expense increased $32.7 million, or 12%, as compared to 2020. Salaries and benefits, commissions, and incentive compensation increased $13.6 million, $9.9 million, and $9.7 million, respectively. Originations segment compensation and benefits increased by $39.4 million, mostly due to additional commissions and salaries driven by additional headcount to support higher loan production levels in 2021. Servicing segment compensation and benefits expense decreased by $5.4 million, mostly driven by a decline in average headcount that was largely due to the scaling down of our platform to the number of loans serviced and the efficiencies resulting from our cost re-engineering initiatives, partially offset by the hiring of employees to support the acquisition of reverse mortgage subservicing from MAM (RMS) on October 1, 2021. Corporate segment compensation and benefits expense decreased $1.3 million primarily as a result of a decrease in average corporate headcount and a decrease in annual incentive compensation, significantly offset by a $7.9 million increase in share-based compensation. Our total average headcount declined by 2%, and overall our offshore-to-total average headcount ratio decreased from 72% to 68%.
Servicing and Origination Expense
Servicing and origination expense increased $36.4 million, or 47%, as compared to 2020, with $29.8 million from Servicing (see below) and $7.8 million from Originations, due to the increase in loan production volume. Servicing expenses increased $29.8 million, or 44%, largely driven by the following:
•$19.0 million provision release recorded in 2020, comprised of $9.9 million recoveries from a settlement in 2020 with a mortgage insurer, and $9.1 million improved advance recoveries in 2020, which decreased loss severity rates used in the computation of advance reserves;
•Additional subservicing expenses primarily due to a $4.5 million increase in interim subservicing expense on MSR bulk acquisitions and a $5.2 million increase largely attributable to the termination and deboarding fees associated with moving our owned reverse portfolio from a subservicer onto our platform;
•$8.4 million additional satisfaction and other loan expenses attributed to a larger portfolio; and
•$6.6 million reduction in government-insured claim loss provisions in 2021 on reinstated or modified loans that was primarily due to a decline in the volume of government-insured claim receivables due to the foreclosure moratorium in effect for much of 2021.
Other Operating Expenses
Professional services expense decreased $25.0 million, or 23%, as compared to 2020 primarily due to a $17.2 million decline in legal expenses and an $8.5 million decline in other professional services. The decline in legal fees is primarily due to expenses recorded in 2020 related to the CFPB and Florida matters. Cost reduction initiatives and higher utilization of professional services in 2020, including strategic vendor sourcing, cloud migration and consulting, resulted in lower other professional fees in 2021. In addition, professional services for 2021 include $3.2 million of advisory fees related to the launch of our MSR investment joint venture with Oaktree, MAV Canopy. Legal expenses and professional services for 2020 included an $8.0 million recovery of prior expenses from a mortgage insurer and $5.1 million of COVID-19 related expenses, respectively.
Technology and communication expense decreased $3.6 million, or 6%, as compared to 2020. Telephone and telecommunication expense declined $4.4 million as compared to 2020, largely driven by facility closures, our transition to a more cost-effective alternative telephone system, consolidation of telecommunication vendors and other cost savings initiatives. Depreciation expense decreased $2.6 million as compared to 2020. These decreases were partially offset by a $4.0 million increase in software usage and maintenance expenses, mostly in our Originations segment to support its growth.
Occupancy and equipment expense decreased $11.0 million, or 23%, as compared to 2020. Depreciation expense, facility maintenance and utility expenses, and interest on lease liabilities decreased $6.3 million, $2.7 million and $1.6 million, respectively, compared to 2020 largely due to our cost reduction efforts in 2020, which included closing and consolidating certain facilities.
Other expenses increased $4.1 million as compared to 2020 primarily due to a $3.8 million increase in advertising expenses, mostly in our Originations segment as part of our initiative to expand our origination platform and increase volumes.
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 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.
Other Income (Expense)
The $10.4 million increase in interest income during as compared to 2020 is primarily attributable to the Originations segment and as a result of the increase in loan production volumes.
Interest expense increased $34.6 million, or 32%, as compared to 2020, due to an increased average debt balance to finance our increased loan production volumes and MSR portfolio, partially offset by a lower cost of funds. The $1.2 billion or 59% higher debt balance is driven by a higher MSR portfolio - largely due to bulk acquisitions - and additional warehouse loans, partially offset by lower advance match funded liabilities. The lower cost of funds on asset backed financing facilities (102 basis point lower effective interest rate) is partially offset by the issuance of higher-rate senior secured notes as part of our corporate debt refinancing on March 4, 2021.
Pledged MSR liability expense increased $57.6 million as compared to 2020, primarily due to a $71.1 million unfavorable fair value change, mostly driven by a fair value increase in NRZ PLS MSRs due to model recalibrations performed by our third-party valuation expert to more accurately reflect the favorable delinquency and default performance of PLS collateral across its client base. Fair value adjustments to our NRZ MSR pledged liability are offset by fair value adjustments to the related MSR asset, which are recorded in MSR valuation adjustments, net. In addition, the lump-sum cash payments received from NRZ in 2017 and 2018 were fully amortized as of the end of the second quarter of 2020 ($34.2 million income in 2020). These increases in expense were partially offset by a $50.8 million decline in servicing fee remittance driven by lower volume serviced, with the runoff of the portfolio and the termination of the PMC agreement by NRZ in February 2020.
Loss on debt extinguishment of $15.5 million for 2021 was recognized in the first quarter of 2021 and resulted from our early repayment of the Senior Secured Term Loan (SSTL) due May 2022 and our early redemption of the PHH 6.375% senior unsecured notes due August 2021 and the PMC 8.375% senior secured notes due November 2022.
Earnings of equity method investee represent our 15% share of MAV Canopy from May 3, 2021. See Note 11 - Investment in Equity Method Investee for further detail.
Income Tax Benefit (Expense)
For 2021 and 2020, we recognized an income tax benefit of $22.4 million and $65.5 million on pre-tax losses of $4.4 million and $105.7 million, respectively. For 2021, the income tax benefit was driven primarily by $12.6 million of additional income tax benefit recognized under the CARES Act and $9.0 million of income tax benefit recognized related to the favorable resolution of various uncertain tax positions during the year. For 2020, the income tax benefit was driven by the $79.0 million of estimated income tax benefit recognized under the CARES Act offset by $15.0 million of income tax expense for related uncertain tax positions. Income tax benefits recognized during 2021 and 2020 related primarily to resolution of prior period uncertain tax positions and utilization of prior period losses that bear no relationship to current operating results. This in turn resulted in the high effective tax rates of 513.6% and 62.0% for 2021 and 2020, respectively.
The $43.1 million reduction in income tax benefit for 2021, compared with 2020, is primarily due to a $45.0 million reduction in estimated income tax benefit recognized under the CARES Act, net of related uncertain tax positions, during 2021 versus 2020 based on 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). In 2021 and 2020, we collected $24.6 million and $51.4 million, respectively, which represents the tax refund associated with the NOLs generated in 2019 and 2018, respectively, carried back to prior tax years.
Under our transfer pricing agreements, our operations in India and Philippines are compensated on a cost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from operations these foreign operations have taxable income, which is subject to statutory tax rates in these jurisdictions that are higher than the U.S. statutory rate of 21%.
Financial Condition Summary
December 31,
2021 2020 $ Change % Change
Cash and cash equivalents $ 192.8 $ 284.8 $ (92.0) (32) %
Restricted cash
70.7 72.5 (1.8) (2)
MSRs, at fair value 2,250.1 1,294.8 955.3 74
Advances, net 772.4 828.2 (55.8) (7)
Loans held for sale
928.5 387.8 540.7 139
Loans held for investment, at fair value
7,207.6 7,006.9 200.7 3
Receivables 180.7 187.7 (7.0) (4)
Investment in equity method investee 23.3 - 23.3 n/m
Other assets
520.9 588.4 (67.5) (11)
Total assets $ 12,147.1 $ 10,651.1 $ 1,496.0 14 %
Total Assets by Segment
Servicing $ 10,999.2 $ 9,847.6 $ 1,151.6 12 %
Originations 823.5 379.2 444.3 117
Corporate Items and Other 324.4 424.3 (99.9) (24)
$ 12,147.1 $ 10,651.1 $ 1,496.0 14 %
HMBS-related borrowings, at fair value $ 6,885.0 $ 6,772.7 $ 112.3 2
Other financing liabilities, at fair value 805.0 576.7 228.2 40
Advance match funded liabilities 512.3 581.3 (69.0) (12)
Mortgage loan warehouse facilities 1,085.1 451.7 633.4 140
MSR financing facilities, net 900.8 437.7 463.1 106
Senior secured term loan - 179.8 (179.8) (100)
Senior notes, net 614.8 311.9 302.9 97
Other liabilities
867.5 924.0 (56.5) (6)
Total liabilities 11,670.4 10,235.8 1,434.7 14
Total stockholders’ equity 476.7 415.4 61.3 15
Total liabilities and equity $ 12,147.1 $ 10,651.1 $ 1,496.0 14 %
Total Liabilities by Segment
Servicing $ 10,101.5 $ 9,163.5 $ 937.9 10 %
Originations 813.3 428.5 384.8 90
Corporate Items and Other 755.7 643.7 112.0 17
$ 11,670.4 $ 10,235.8 $ 1,434.7 14 %
Book value per share $ 51.77 $ 47.81 $ 3.96 8 %
Total assets increased by $1.5 billion, or 14%, between December 31, 2020 and December 31, 2021 mostly due to a $955.3 million, or 74%, increase in our MSR portfolio - mostly driven by MSR bulk acquisitions and new capitalized MSRs - and a $540.7 million, or 139%, increase in our loans held for sale portfolio - driven by higher production volumes. In addition, loans held for investment increased $200.7 million mostly due to the continued growth of our reverse mortgage business. Servicing advances declined $55.8 million mostly due to heightened payoff activity and lower delinquencies, partially offset by increased escrow advances on acquired MSRs. The $67.5 million decrease in other assets is mostly attributable to the decrease in contingent repurchase rights related to loans that have been repurchased from Ginnie Mae.
Total liabilities increased $1.4 billion, or 14%, as compared to December 31, 2020 with similar effects as described above. Borrowings under our mortgage warehouse lines and MSR financing facilities increased $633.4 million and $463.1 million, respectively, due to higher loan production volumes and MSR bulk acquisitions, respectively. Our HMBS-related borrowings increased by $112.3 million due to the continued growth of our reverse mortgage business and its securitization. Our senior notes increased $302.9 million due to the refinancing transactions completed on March 4, 2021 and May 3, 2021. We issued $627.1 million of new senior notes, net of discount, redeemed in full $313.1 million of existing senior notes and repaid the $185.0 million SSTL. The $228.2 million increase in Other financing liabilities is due to the transfers of MSRs to MAV in 2021 which did not qualify for sale accounting. Advance match funded liabilities decreased $69.0 million consistent with the decline in servicing advances. Other liabilities declined $56.5 million mostly due to a decrease in the Ginnie Mae contingent repurchase rights of loans under forbearance.
Total equity increased $61.3 million during 2021 mostly due to $32.1 million issuance of common stock and warrants to Oaktree in March and May 2021, $18.1 million net income, a $6.5 million reduction in the unfunded pension plan obligation recognized in accumulated other comprehensive income and $4.4 million of equity-classified awards.
Key Trends
The following discussion provides information regarding certain key drivers of our financial performance. Also refer to the Segment results of operations section for further detail, the description of our business environment, initiatives and risks.
Servicing fee revenue - Our servicing fee revenue is a function of the volume being serviced - UPB for servicing fees and loan count for subservicing fees. We expect we will continue to replenish and grow our servicing portfolio through our multi-channel Originations platform in 2022. In addition, we continuously evaluate the relative mix between servicing and subservicing volume. The expected volume increase is also intended to exceed the portfolio serviced on behalf of NRZ that may end in July 2022. Servicing revenue and ancillary income have been adversely impacted by COVID-19, which may persist throughout 2022, until forbearance plan exits and the end of foreclosure and eviction moratoria or related restrictions.
Gain on sale of loans held for sale - Our gain on sale is driven by both volume and margin and is channel-sensitive, with consumer direct generating relatively higher margins than correspondent. The volume mix is expected to shift to purchase as the volume of refinance activity by borrowers is expected to continue to decline, consistent with expected industry trends. While we continue to increase our recapture rate by expanding our channel operating capacity, we focus on cash-out, debt consolidation and other borrower solutions, in addition to new customer acquisitions. Based on industry origination volume projections for 2022, we expect competition to intensify and origination margins will be under pressure until industry excess capacity can be eliminated. This will impose trade-offs between volumes and margins, and potential shifts among channels.
Reverse mortgage revenue, net - The reverse mortgage origination gain is driven by the same factors as gain on sale of loans held for sale, with smaller volumes in the reverse mortgage market and generally larger margins. With our experience and brand in the marketplace, we expect to continue to grow our volumes and maintain similar margins in each channel, however the channel mix may vary. With the assignment of MAM (RMS) subservicing agreements to PMC on October 1, 2021 and the expected additional loans to transfer on our subservicing platform in the first half of 2022, reverse mortgage servicing revenue is expected to grow.
MSR valuation adjustments, net - Our net MSR fair value changes include multiple components. First, amortization of our investment is function of both UPB, capitalized value of the MSR relative to the UPB, and the level of scheduled payments and prepayments. We expect the MSR realization of cash flows to increase in 2022 as we have recently grown our MSR portfolio. Second, MSR fair value changes are driven by changes in interest rates and assumptions, such as forecasted prepayments, Third, the MSR fair value changes are partially offset by derivative fair value changes that economically hedge the MSR portfolio. We are exposed to increased interest rate volatility due to our now larger MSR portfolio. Refer to the sensitivity analysis in the Market Risk sections of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for further detail.
Operating expenses - Compensation and benefits is a significant component of our cost-to-service and cost-per-loan and is directly correlated to headcount levels. Headcount in Servicing is primarily driven by the number of loans or UPB being serviced and subserviced, and by the relative mix of performing, delinquent and defaulted loans. As servicing volume is expected to increase (see above), we expect an increase in our workforce with partial offset from an increased relative share of performing loans through our MSR acquisitions. We expect to swiftly scale our headcount and operating expenses to servicing volume in 2022, including due to the potential non-renewal or termination of the NRZ agreement. We expect our Originations workforce to remain largely stable or moderately increase in the near term to accompany the growth of the channels. Other operating expenses are expected to favorably correlate with volumes, as productivity and efficiencies are expected with our technology and continuous improvement initiatives.
Stockholders’ equity - With the above considerations, we expect our businesses to generate net income and increase our equity in 2022, absent any significant adverse change in interest rates.
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.
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 loan delinquency status.
As of December 31, 2021, we serviced 1.4 million mortgage loans with an aggregate UPB of $268.0 billion, an increase of 22% and 42%, respectively, from December 31, 2020. The average UPB of loans serviced during 2021 increased by 11% or $22.1 billion compared to 2020. The increase in our servicing volume is mostly due to MSR acquisitions, subservicing additions and increased MSR originations. We manage the size of our servicing portfolio with our Originations business and by selectively purchasing MSRs based on our capital availability and financial return targets.
In May 2021, PMC entered into a subservicing agreement with MAV for exclusive rights to service the mortgage loans underlying MSRs owned by MAV. In addition, in October 2021, PMC acquired reverse mortgage subservicing contracts from MAM (RMS) and became its exclusive subservicer under a five-year subservicing agreement.
NRZ remains our largest subservicing client, accounting for 21% and 31% of the UPB and loan count, respectively, in our servicing portfolio as of December 31, 2021. NRZ servicing fees retained by Ocwen represented approximately 19% and 30% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ and excluding ancillary income, for 2021 and 2020, respectively. NRZ’s portfolio represents approximately 66% of all delinquent loans that Ocwen serviced, for which the cost to service and the associated risks are higher. Consistent with a subservicing relationship, NRZ is responsible for funding the advances we service for NRZ.
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).
The financial performance of our servicing segment is impacted by the changes in fair value of the MSR portfolio due to changes in market interest rates. Our MSR portfolio is carried at fair value, with changes in fair value recorded in earnings, within MSR valuation adjustments, net. The value of our MSRs is typically correlated to changes in market interest rates; as interest rates decrease, the value of the servicing portfolio typically decreases as a result of higher anticipated prepayment speeds, and the reverse is true. The sensitivity of MSR fair value to interest rates is typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of approximately 16 years, exhibiting little response to movements in market interest rates. Our hedging strategy is designed to reduce the volatility of the MSR portfolio.
For those MSR sale transactions with NRZ and MAV that do not achieve sale accounting treatment, we present on a gross basis the transferred MSR as an asset at fair value and the corresponding liability amount as a pledged MSR liability at fair value on our balance sheet. The changes in fair value of the MSR are reflected as MSR valuation adjustments, net and the corresponding changes in fair value of the pledged MSR liability are reported within Pledged MSR liability expense. Similarly, we present on a gross basis the total servicing fees collected on behalf of NRZ within Servicing and subservicing fees, net and the total servicing fee remittance to NRZ within Pledged MSR liability expense.
Our Servicing business continues to be adversely affected by the COVID-19 pandemic, with the loans placed under forbearance, the moratorium on foreclosures and elevated prepayments of our MSR portfolio due to interest rates. See further discussion within Overview, COVID-19 Pandemic Update.
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 $148.4 million at December 31, 2021, of which $117.7 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.
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 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 scheduled and unscheduled principal payments (runoff), refinancing, loan modifications involving forgiveness of principal, voluntary property sales and involuntary property sales such as foreclosures. Prepayment speed impacts future servicing fees, 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. Once a reverse mortgage loan is securitized, our activities are generally consistent with other loan servicing as described above, with the following variations.
Under the terms of ARM-based HECM loan agreements, the borrowers have additional borrowing capacity of $1.5 billion at December 31, 2021. 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 net fair value changes of the reverse mortgage loans and related borrowings reported within the Servicing segment include the following:
•contractual interest income earned on securitized reverse mortgage loans, net of interest expense on HMBS-related borrowings, that is, the servicing fee we are contractually entitled to and collect on a monthly basis under the Ginnie Mae MBS Guide regarding servicing HMBS;
•cash gains on tail securitization. Tails are participations in previously securitized HECMs and are created by additions to principal for borrower draws on lines-of-credit (scheduled and unscheduled), interest, servicing fees, and mortgage insurance premiums;
•fair value changes due to the realization of expected cash flows of the net asset balance of securitized loans held for investment and HMBS-related borrowings; and
•fair value changes due to the inputs and assumptions of the net balance of securitized loans held for investment and HMBS-related borrowings.
The fair value of our HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, with lower interest rates extending the timeline to liquidation. HECM loans have a longer duration than HMBS-related borrowings as a result of the future draw commitments, and our obligations as issuer of HMBS to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM loan is equal to 98% of the maximum claim amount.
The financial performance associated with the subservicing of reverse mortgage loans associated with the MAM (RMS) transaction is primarily reflected within Servicing and subservicing fees, net since Reverse mortgage revenue, net strictly reflects the financial performance of owned loans/servicing. We collect higher subservicing fees for inactive loans relative to the base subservicing fee for performing loans or active repurchased loans, commensurate with the level of servicing efforts, as described above.
The following table presents selected results of operations of our Servicing segment. The amounts presented are before the elimination of balances and transactions with our other segments:
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenue
Servicing and subservicing fees $ 773.5 $ 731.2 $ 974.2 6 % (25) %
Gain on loans held for sale, net 46.6 14.7 5.4 217 171
Reverse mortgage revenue, net (2.3) 7.6 63.5 (131) (88)
Other revenue, net 1.7 4.2 5.4 (60) (24)
Total revenue 819.4 757.7 1,048.5 8 (28)
MSR valuation adjustments, net (160.4) (276.3) (120.9) (42) 129
Operating expenses
Compensation and benefits 108.1 113.6 144.0 (5) (21)
Servicing expense 98.2 68.4 101.3 44 (32)
Professional services 31.4 28.1 42.2 11 (33)
Occupancy and equipment 26.5 31.0 44.3 (14) (30)
Technology and communications 23.8 25.2 32.6 (5) (23)
Corporate overhead allocations 47.7 61.0 197.9 (22) (69)
Other expenses 6.6 4.5 (14.3) 46 (132)
Total operating expenses 342.4 331.9 548.0 3 (39)
Other income (expense)
Interest income 8.2 7.1 10.1 17 (30)
Interest expense (104.6) (90.7) (102.5) 15 (12)
Pledged MSR liability expense (209.1) (152.5) (372.2) 37 (59)
Earnings of equity method investee 3.6 - - n/m n/m
Other, net 5.2 10.8 12.3 (52) (13)
Total other income (expense), net (296.6) (225.3) (452.3) 32 (50)
Income (loss) before income taxes $ 19.9 $ (75.8) $ (72.7) (126) % 4 %
The following table provides selected operating statistics for our Servicing segment:
% Change
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Assets Serviced at December 31
Unpaid principal balance (UPB) in billions:
Performing loans (1) $ 254.2 $ 177.6 $ 198.9 43 % (11) %
Non-performing loans 13.1 10.3 11.2 27 (8)
Non-performing real estate 0.7 0.9 2.2 (22) (59)
Total $ 268.0 $ 188.8 $ 212.4 42 (11)
Conventional loans (2) $ 166.3 $ 77.0 $ 95.3 116 % (19) %
Government-insured loans 28.8 34.8 30.1 (17) 16
Non-Agency loans 72.8 77.0 87.0 (5) (11)
Total $ 268.0 $ 188.8 $ 212.4 42 (11)
Servicing portfolio (3) $ 135.9 $ 97.4 $ 76.7 40 % 27 %
Subservicing portfolio
Subservicing - forward 29.4 24.3 17.1 21 42
Subservicing - reverse 13.9 - - n/m n/m
Total subservicing 43.3 24.3 17.1 78 42
MAV (4) 33.0 - - n/m n/m
NRZ (5) (6) 55.8 67.1 118.6 (17) (43)
$ 268.0 $ 188.8 $ 212.4 42 (11)
Number (in 000’s):
Performing loans (1) 1,287.0 1,048.7 1,344.9 23 % (22) %
Non-performing loans
Non-performing loans - NRZ 30.7 33.8 54.2 (9) % (38) %
Non-performing loans - Other 30.7 18.4 6.6 67 179
61.4 52.2 60.8 18 (14)
Non-performing real estate 4.9 6.7 14.3 (27) (53)
Total
1,353.3 1,107.6 1,420.0 22 (22)
Conventional loans (2) 686.5 349.6 607.9 96 % (42) %
Government-insured loans 168.1 201.9 185.1 (17) 9
Non-Agency loans 498.7 556.1 627.0 (10) (11)
Total 1,353.3 1,107.6 1,420.0 22 (22)
% Change
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Servicing portfolio 636.1 511.6 472.8 24 % 8 %
Subservicing portfolio
Subservicing - forward 105.6 96.3 77.3 10 25
Subservicing - reverse 54.7 - - n/m n/m
Total subservicing
MAV 131.6 - - n/m n/m
NRZ (5) 425.4 499.6 869.9 (15) (43)
1,353.3 1,107.6 1,420.0 22 (22)
Prepayment speed (CPR) (7)
12-month % Voluntary CPR 18 % 15 % 11 % 20 % 36 %
12-month % Involuntary CPR 1 2 2 (50) -
Total 12-month % CPR 21 20 16 5 25
Number of completed modifications 17,294 28,322 25,754 (39) % 10 %
Revenue recognized in connection with loan modifications $ 27.8 $ 30.2 $ 38.5 (8) (22)
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, 2021 include 73,340 prime loans with a UPB of $13.7 billion which we service or subservice. This compares to 89,458 prime loans with a UPB of $16.1 billion at December 31, 2020. Prime loans are generally good credit quality loans that meet GSE underwriting standards.
(3)Includes $7.0 billion UPB of reverse mortgage loans that are recognized in our consolidated balance sheet at December 31, 2021.
(4)Includes $8.9 billion UPB subserviced and $24.0 billion UPB of MSRs sold to MAV that does not achieve sale accounting treatment.
(5)Loans serviced or subserviced pursuant to our agreements with NRZ.
(6)Includes $2.1 billion UPB of subserviced loans at December 31, 2021.
(7)Total 12-month % CPR includes voluntary and involuntary prepayments, as shown in the table, plus scheduled principal amortization.
The following table provides selected operating statistics related to our owned reverse mortgage loans held for investment reported within our Servicing segment:
% Change
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Reverse Mortgage Loans at December 31
Unpaid principal balance (UPB) in millions:
Loans held for investment (1) $ 6,546.5 $ 6,299.6 $ 5,658.3 4 % 11 %
Active Buyouts (2) 36.1 28.4 10.2 27 178
Inactive Buyouts (2) 95.3 60.9 26.4 56 131
Total $ 6,677.9 $ 6,388.9 $ 5,694.9 5 12
Inactive buyouts % to total 1.43 % 0.95 % 0.46 % 51 107
Future draw commitments (UPB) in millions: 1,507.1 2,044.4 1,937.4 (26) 6
% Change
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Fair value in millions:
Loans held for investment (1) $ 6,979.1 $ 6,872.3 $ 6,120.9 2 12
HMBS related borrowings 6,885.0 6,772.7 6,063.4 2 12
Net asset value $ 94.1 $ 99.6 $ 57.5 (6) 73
Net asset value to UPB 1.44 % 1.58 % 1.02 %
(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.
The following table provides selected operating statistics related to advances for our Servicing segment:
Advances by investor type (Carrying value in millions)
December 31, 2021 Principal and Interest Taxes and Insurance Foreclosures, bankruptcy, REO and other Total
Conventional $ 2 $ 66 $ 7 $ 75
Government-insured 1 55 23 79
Non-Agency 225 261 133 618
Total, net $ 228 $ 381 $ 164 $ 772
December 31, 2020 Principal and Interest Taxes and Insurance Foreclosures, bankruptcy, REO and other Total
Conventional $ 4 $ 30 $ 5 $ 38
Government-insured 1 55 28 84
Non-Agency 272 279 155 705
Total, net $ 277 $ 365 $ 187 $ 828
The following table provides the rollforward of activity of our portfolio of mortgage loans serviced for the years ended December 31, that includes MSR, whole loans and subserviced loans, both forward and reverse:
Amount of UPB (in billions)
Count (in 000’s)
2021 2020 2019 2021 2020 2019
Portfolio at beginning of year
$ 188.8 $ 212.4 $ 256.0 1,107.6 1,420.0 1,562.2
Additions (1) (2) 152.0 57.4 30.1 567.9 194.5 100.6
Sales - (0.2) (1.2) (0.2) (1.6) (8.3)
Servicing transfers (2) (3) (23.1) (40.5) (34.3) (102.0) (303.1) (48.5)
Runoff (49.7) (40.3) (38.3) (220.0) (202.2) (186.0)
Portfolio at end of year $ 268.0 $ 188.8 $ 212.3 1,353.3 1,107.6 1,420.0
(1)2021 additions include purchased MSRs on portfolios consisting of 287 loans with a UPB of $0.1 billion that have not yet transferred to the Black Knight MSP servicing system as of December 31, 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)Includes 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)2020 includes 270,218 deboarded loans with a UPB of $34.2 billion related to the termination of the subservicing agreement between NRZ and PMC on February 20, 2020. Refer to Note 8 - MSR Transfers Not Qualifying for Sale Accounting.
Year Ended December 31, 2021 versus 2020
Servicing and Subservicing Fees
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Loan servicing and subservicing fees
Servicing $ 339.3 $ 216.2 $ 227.5 57 % (5) %
Subservicing 21.1 28.9 15.4 (27) 87
MAV 15.7 - - n/m n/m
NRZ 304.2 383.7 577.0 (21) (34)
Servicing and subservicing fees 680.3 628.8 820.0 8 (23)
Ancillary income 93.2 102.5 154.2 (9) (34)
Total $ 773.5 $ 731.2 $ 974.2 6 % (25) %
The $42.2 million, or 6% increase in total servicing and subservicing fees in 2021 as compared to 2020 is primarily driven by servicing volume, with a $123.1 million or 57% increase in servicing fee income on our owned MSR, partially offset by $79.4 million reduction in fees collected on behalf of NRZ. The increase in servicing fee income on our owned MSR as compared to 2020 is due to a 60% increase in our average volume serviced, primarily driven by bulk acquisitions, MSR acquisitions through the Agency Cash Window programs and the growth in our correspondent lending volumes. The decline in the collection of NRZ servicing fees is mostly due to portfolio runoff and the PMC servicing termination in February 2020.
Additional changes between 2020 and 2021 include $15.7 million of servicing fees collected on behalf of MAV, launched in 2021 and $9.2 million subservicing fees related to the MAM (RMS) reverse subservicing portfolio acquired in the fourth quarter of 2021. The average subservicing fee per loan increased, driven by the inclusion of reverse mortgage loans, with relatively higher compensation for inactive loans. These fee increases were offset by a $9.3 million decline in ancillary income and a $15.8 million decrease in NRZ subservicing fees. The $7.8 million decrease in subservicing fees is mostly due to NRZ fees being reported as subservicing fees during 2020 from PMC servicing termination through loan deboarding, partially offset by MAM (RMS) reverse subservicing fees.
The following table presents the respective drivers of loan servicing and subservicing fees.
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Servicing and subservicing fee
Servicing fee $ 339.3 $ 216.2 $ 227.5 57 % (5) %
Average servicing fee (% of UPB) 0.27 0.28 0.30 (4) % (7) %
Subservicing fee (1) (2) $ 21.1 $ 28.9 $ 15.4 (27) 88 %
Average monthly fee per loan (in dollars) (2) $ 18 $ 9 $ 12 100 (25) %
Assets serviced
Average UPB ($ in billions):
Servicing portfolio
$ 125.48 $ 78.30 $ 76.14 60 % 3 %
Subservicing portfolio
Subservicing - forward 21.46 45.46 31.23 (53) 46 %
Subservicing - reverse 3.26 - - n/m n/m
MAV 9.08 - - n/m n/m
NRZ 61.43 74.84 125.07 (18) (40) %
Total $ 220.71 $ 198.60 $ 232.44 11 % (15) %
Average number (in 000’s):
Servicing portfolio 609.1 466.1 471.8 31 % (1) %
Subservicing portfolio
Subservicing - forward 83.6 268.5 106.2 (69) 153 %
Subservicing - reverse 12.9 - - n/m n/m
MAV 37.4 - - n/m n/m
NRZ 463.1 561.6 913.2 (18) (39) %
1,206.1 1,296.2 1,491.2 (7) % (13) %
(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.
(2)Excludes MAV portfolio and includes reverse subservicing in the fourth quarter of 2021.
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 (through the second quarter of 2020 only). See Note 8 - MSR Transfers Not Qualifying for Sale Accounting for further information.
NRZ Servicing and Subservicing Fees Years Ended December 31,
2021 2020 2019
Servicing fees collected on behalf of NRZ $ 304.2 $ 383.7 $ 577.0
Servicing fees remitted to NRZ (1) (215.8) (278.8) (437.7)
Retained subservicing fees on NRZ agreements (2) $ 88.4 $ 104.8 $ 139.3
Amortization gain of the lump-sum cash payments received (including fair value change) (1) (3) - 34.2 95.1
Total retained subservicing fees and amortization gain of lump-sum payments (including fair value change)
$ 88.4 $ 139.0 $ 234.4
Average NRZ UPB (in billions) (4) $ 61.4 $ 74.8 $ 125.1
Average retained subservicing fees as a % of NRZ UPB (excluding amortization gain of lump-sum cash payments) 0.14 % 0.14 % 0.11 %
(1)Reported within Pledged MSR liability expense. The NRZ servicing fee includes the total servicing fees collected on behalf of NRZ relating to the MSR sold but not derecognized from our balance sheet. Under GAAP, we separately present servicing fees collected and remitted on a gross basis, with the servicing fees remitted to NRZ reported as Pledged MSR liability expense.
(2)Excludes the servicing fees of loans under the PMC Servicing Agreement after February 20, 2020 due to the notice of termination by NRZ, and subservicing fees earned under subservicing agreements. Excludes ancillary income.
(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 8 - MSR Transfers Not Qualifying for Sale Accounting 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 net retained fee on our NRZ portfolio declined by $16.4 million, or 16% as compared to 2020. The decline in the NRZ fee collection and remittance is primarily driven by the decline in the average UPB of 18%, partially offset by an increased fee margin due to the nature of remaining collateral, which was non-Agency with higher delinquencies, as compared to the performing Agency portfolio that deboarded in connection with the termination of the PMC agreement by NRZ on February 20, 2020. The decline in serviced volume is explained by the NRZ portfolio runoff and the derecognition of the MSRs in connection with the termination of the PMC agreement. 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 the detail of our ancillary income:
Years Ended December 31, % Change
Ancillary Income 2021 2020 2019 2021 vs 2020 2020 vs 2019
Late charges $ 40.9 $ 47.7 $ 57.2 (14) % (17) %
Custodial accounts (float earnings) 4.7 9.9 47.5 (52) (79)
Loan collection fees 11.7 13.0 15.5 (10) (16)
Recording fees 16.0 14.3 13.0 12 10
Boarding and deboarding fees 4.3 5.0 3.3 (15) 52
GSE forbearance fees 1.5 1.2 - 28 n/m
Reverse subservicing 1.4 - - n/m n/m
HAMP fees 0.6 0.6 5.5 13 (89)
Other 12.0 10.8 12.2 11 (11)
Ancillary income $ 93.2 $ 102.5 $ 154.2 (9) % (34) %
Ancillary income declined by $9.3 million as compared to 2020 primarily due to $6.8 million lower late fees, driven by the combined effect of lower servicing volume of delinquent loans, through acquisitions of primarily performing portfolios and sales of delinquent portfolios in 2021, and the COVID-19 environment restricting late fees. Float earnings were $5.2 million lower driven by the decline in interest rates, with average one-month LIBOR declining by approximately 40 basis points in 2021 as compared to 2020, partially offset by larger account balances due to the MSR portfolio growth.
Gain on Loans Held for Sale, Net
Gain on loans held for sale, net of $46.6 million increased $31.9 million as compared to 2020 primarily due to a $27.1 million gain recognized in 2021 on the sale of loans acquired in connection with the exercise of call rights relating to certain Non-Agency trusts, and additional gains on repurchased loans in connection with Ginnie Mae loan modifications and early buyout (EBO) activities.
Reverse Mortgage Revenue, Net
Reverse mortgage revenue, net is the net change in fair value of securitized loans held for investment and HMBS-related borrowings. The following table presents the components of the net fair value change and is comprised of net interest income and other fair value gains or losses. Net interest income is primarily driven by the volume of securitized UPB as it is the interest
income earned on the securitized loans offset against interest expense incurred on the HMBS-related borrowings, and represents our compensation for servicing the portfolio, that is typically a percentage of the outstanding UPB. Other fair value changes are primarily driven by changes in market-based inputs or assumptions. Lower interest rates generally result in favorable net fair value impacts on our HECM reverse mortgage loans and the related HMBS financing liability and higher interest rates generally result in unfavorable net fair value impacts.
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Net interest income (servicing fee) $ 19.9 $ 19.2 $ 16.9 4 % 13 %
Other fair value changes (1) (22.3) (11.6) 46.6 91 (125) %
Reverse mortgage revenue, net (Servicing) $ (2.3) $ 7.6 $ 63.5 (131) % (88) %
(1) Includes $21.6 million and $24.4 million of realized gains on tail securitization in 2021 and 2020, respectively. On January 1, 2020, we made an irrevocable election to account for tails at fair value.
The decline in Reverse mortgage revenue, net of $9.9 million, or 131%, as compared to 2020 is primarily due to unrealized losses on the HECM loan portfolio attributable to market rate conditions. Specifically, fair value losses are driven by increasing interest rates and widening yield spread directly impacting the tail value of the HECM reverse mortgage loans. Tails represent the future draws of borrowers, scheduled and unscheduled, as well as capitalized interest and are included in the fair value of the underlying loans. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach the 98% maximum claim amount liquidation event more quickly. Tails are securitized on a monthly basis and a widening yield spread results in lower cash gain on securitization. Net interest income, that effectively represents our servicing fee increased in 2021 as compared with 2020 mostly due to the growth of the loan portfolio.
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 MSRs transferred to NRZ and MAV that did not achieve sale accounting treatment:
Years Ended December 31,
2021 2020 2019
Total (1) Owned MSR (1) Pledged MSR (NRZ and MAV) (2) Total (1) Owned MSR (1) Pledged MSR (NRZ) (2) Total Owned MSR (1) Pledged MSR (NRZ) (2)
Runoff (3) (4) $ (250.2) (159.9) (90.3) (171.4) (93.5) (77.9) (197.3) (90.4) $ (106.9)
Rate and assumption change (1) 124.7 36.2 88.5 (149.8) (145.1) (4.7) 75.9 (64.7) 140.6
Hedging gain (loss) (34.9) (34.9) - 44.9 44.9 - 0.5 0.5 -
Total $ (160.4) (158.6) (1.8) (276.3) (193.7) (82.6) (120.9) (154.6) $ 33.8
(1)Excludes gains of $25.2 million and $41.7 million in 2021 and 2020, respectively (nil in 2019), on the revaluation of MSRs purchased at a discount, that is reported in the Originations segment as MSR valuation adjustments, net.
(2)MSR sale transactions with NRZ and MAV that do not achieve sale accounting treatment. See Note 8 - MSR Transfers Not Qualifying for Sale Accounting for further information.
(3)Effective January 1, 2021, changes in fair value due to actual versus model variances are presented as Changes in valuation inputs or assumptions. Activity for 2020 and 2019 in the table above has been recast to conform to current year disclosure, resulting in a $1.8 million and $18.1 million gain, respectively, reclassified from Runoff to Rate and assumption change.
(4)The terms runoff and realization of expected future cash flows may be used interchangeably within this discussion.
We reported a $160.4 million loss in MSR valuation adjustments, net in 2021, comprised of $158.6 million loss on our owned MSRs and $1.8 million loss on the MSRs transferred to NRZ and MAV. The $158.6 million loss on our owned MSRs is comprised of $159.9 million MSR portfolio runoff, $36.2 million gain on the MSR portfolio attributed to rate and assumption change and a $34.9 million hedging loss. MSR portfolio runoff represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled amortization of the loan UPB together with projected voluntary prepayments. The gain on rate and assumption change is primarily due to an increase in market interest rates (the 10 year swap rate increased by 66 basis points in 2021), partially offset by a loss on assumption updates driven by unfavorable prepayment model variance and related calibrations.
Our MSR hedging policy is designed to reduce the volatility of the MSR portfolio fair value due to market interest rates. The changes in fair value of the MSR and hedging derivatives were not offset to the same extent as per their expected hedging
sensitivity measures, mainly due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and the available hedging instruments. Refer to the Market Risk sections for further detail on our hedging strategy and its effectiveness.
The following table provides information regarding the changes in the fair value and the UPB of our portfolio of Owned MSRs (excluding NRZ and MAV related MSRs) during 2021, with the breakdown by investor type.
Owned MSR Fair Value (4) Owned MSR UPB ($ in billions) (4)
GSEs Ginnie Mae Non-
Agency Total GSEs Ginnie Mae Non-
Agency Total
Beginning balance $ 507.9 $ 75.4 $ 144.5 $ 727.8 $ 55.1 $ 13.1 $ 22.1 $ 90.3
Additions
New cap.
199.2 23.5 1.9 224.6 16.9 1.7 - 18.6
Purchases (1) 833.2 11.3 - 844.5 74.6 0.9 - 75.6
Sales/servicing transfers - - - - - - - -
Sales/calls (3) (271.0) - (4.5) (275.5) (25.1) - - (25.1)
Change in fair value:
Inputs and assumptions (1) 47.7 9.9 3.5 61.0 - - - -
Realization of cash flows (118.5) (10.7) (30.8) (159.9) (23.1) (3.7) (4.6) (31.5)
Ending balance $ 1,198.5 $ 109.4 $ 114.6 $ 1,422.5 $ 98.4 $ 12.0 $ 17.5 $ 127.9
Fair value (% of UPB) 1.22 % 0.91 % 0.65 % 1.11 %
Fair value multiple (2) 4.8 2.6 2.0 4.0
(1)Mostly changes in interest rates, except for gains of $25.2 million on the revaluation of purchased MSRs, that are reported in the Originations segment.
(2)Multiple of average servicing fee and UPB.
(3)Includes $274.8 million fair value and $24.9 billion UPB of MSR sales to MAV in 2021 that did not achieve sale accounting treatment.
(4)See Note 7 - Mortgage Servicing and Note 8 - MSR Transfers Not Qualifying for Sale Accounting for further information on the NRZ and MAV portfolios.
The $1.8 million loss on the transferred MSRs not qualifying for sale accounting (transferred to NRZ and MAV) includes $90.3 million runoff and $88.5 million fair value gain attributable to rates and assumptions. The runoff is explained by the same factors underlying our owned MSR, discussed above, and the transfers of MSRs to MAV in 2021 and the decline in the NRZ MSR portfolio, due to runoff and the termination of the PMC servicing agreement by NRZ in February 2020. The $88.5 million fair value gain attributable to rates and assumptions in 2021 is mostly driven by PLS model calibrations by our third-party valuation expert. The model calibrations more accurately reflect the favorable delinquency and default performance of the PLS collateral across the valuation expert’s client base and was supported by our fair value benchmarking and back-testing analysis. This MSR fair value gain is offset by a fair value loss recorded on the associated NRZ MSR pledged liability.
Compensation and Benefits
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Compensation and benefits $ 108.1 $ 113.6 $ 144.0 (5) % (21) %
Average Employment - Servicing
India and other 2,432 2,880 3,360 (16) % (14)
U.S. 740 730 1,158 1 (37)
Total 3,172 3,610 4,518 (12) (20)
Compensation and benefits expense declined $5.4 million, or 5%, as compared to 2020 primarily due to a $5.3 million decrease in salaries and benefit expense as a result of the 12% decline in our average servicing headcount, mostly offshore. A $0.8 million decline in commissions also contributed to the decline in Compensation and benefits expense. During 2021, we serviced 7% fewer loans, on average, as compared to 2020. The decline in servicing headcount reflects the scaling down of our
platform to the number of loans being serviced and the efficiencies resulting from our cost re-engineering initiatives, partially offset by the hiring of employees to support the acquisition of reverse mortgage subservicing from MAM (RMS) on October 1, 2021.
Servicing Expense
Servicing expense primarily includes claim losses and interest curtailments on government-insured loans, provision expense for advances and servicing representation and warranties, and certain loan volume related expenses.
Servicing expense increased $29.8 million, or 44%, as compared to 2020 largely driven by a $4.5 million increase in interim subservicing expense on MSR bulk acquisitions, a $5.2 million increase in our subservicer expenses largely attributable to the termination and deboarding fees associated with moving our owned reverse portfolio from a subservicer onto our platform, and an $8.4 million increase in satisfaction and other loan expenses attributed to a larger portfolio. In addition, Servicing expense for 2020 included a $19.0 million provision release comprised of $9.9 million recoveries from a settlement in 2020 with a mortgage insurer, and $9.1 million improved advance recoveries in 2020, which decreased loss severity rates used in the computation of advance reserves.
The effects of the above factors were partially offset by a $6.6 million reduction in government-insured claim loss provisions in 2021 on reinstated or modified loans and receivables primarily due to a decline in the volume of government-insured claim receivables and claim losses due to the foreclosure moratorium in effect for much of 2021.
Other Operating Expenses
Other operating expenses (total operating expenses less compensation and benefit expense and servicer expense) decreased by $13.8 million in 2021 as compared to 2020, in large part due to a $13.3 million decline in Corporate overhead allocations and other cost savings attributed to our re-engineering initiatives.
Professional services increased by $3.2 million primarily due to $1.6 million increase in other professional services fee expense driven by additional expense related to reverse sub-servicing business. Professional services expenses in 2020 included $1.1 million reimbursement credits for the NRM consent deal-related shared expenses.
Occupancy and equipment expense decreased $4.5 million primarily due to a $3.8 million decrease in office space occupancy allocations resulting from a reduction in Servicing headcount and the cost savings of prior year office space rationalization initiatives.
Technology and communications expense declined $1.4 million primarily due to cost savings associated with the implementation of data solutions as well as consolidation of telecommunication vendors in the second quarter of 2020.
The $13.3 million decline in Corporate overhead allocations is attributable to the decline in support group operating expenses, including technology savings, and the lower relative weight of Servicing headcount to the consolidated organization.
Other Income (Expense)
Other income (expense) primarily includes net interest expense and the Pledged MSR liability expense.
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Interest Expense
Advance match funded liabilities $ 14.2 $ 24.1 $ 26.9 (41) % (10) %
Mortgage loan warehouse facilities 8.9 5.4 3.5 65 53
MSR financing facilities 26.0 15.9 8.1 64 96
Corporate debt interest expense allocation 48.8 38.2 54.9 28 (30)
Escrow and other 6.5 7.0 9.1 (7) (23)
Total interest expense $ 104.6 $ 90.7 $ 102.5 15 % (12) %
Average balances
Average balance of advances $ 754.1 $ 891.3 $ 1,006.3 (15) % (11) %
Advance match funded liabilities 505.4 603.7 671.8 (16) (10)
Mortgage loan warehouse facilities 265.4 116.0 49.4 129 135
MSR financing facilities 701.2 308.4 148.5 127 108
Effective average interest rate
Advance match funded liabilities 2.82 % 4.00 % 4.00 % (29) % - %
Mortgage loan warehouse facilities 3.36 4.66 7.14 (28) (35)
MSR financing facilities 3.71 5.15 5.46 (28) (6)
Facility costs included in interest expense $ 9.8 $ 13.1 $ 6.2 (25) 112
Average one-month LIBOR 0.10 % 0.52 % 1.75 % (81) % (70) %
Interest expense increased by $13.9 million, or 15%, compared to 2020, due to an overall increase in the average debt balances to finance the growth of the business, partially offset by a lower funding cost. The $10.2 million increase in interest expense on MSR financing facilities, $10.6 million increase in the corporate debt interest expense allocation and $3.5 million increase in interest expense on mortgage loan warehouse facilities, are mostly the result of larger MSR and Loans held for sale portfolios, partially offset by lower funding costs. The $9.9 million decline in interest expense on advance match funded facilities is due to lower average balances of advances and borrowings and a lower cost of funds.
Pledged MSR liability expense relates to the MSR transfers that do not qualify for sale accounting and are presented on a gross basis in our financial statements. See Note 8 - MSR Transfers Not Qualifying for Sale Accounting to the Consolidated Financial Statements. Pledged MSR liability expense includes the servicing fee remittance for these transfers 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,
2021 2020 2019
Net servicing fee remittance (1) $ 228.0 $ 278.8 $ 437.7
Pledged MSR liability fair value (gain) loss (1)
(11.4) (82.6) 33.8
NRZ 2017/18 lump sum amortization gain - (34.2) (95.1)
Other (7.6) (9.6) (4.2)
Pledged MSR liability expense
$ 209.1 $ 152.4 $ 372.2
(1)See Note 8 - MSR Transfers Not Qualifying for Sale Accounting
Pledged MSR liability expense increased $56.7 million as compared to 2020, primarily due to a $71.1 million unfavorable fair value change on the Pledged MSR liability, mostly driven by a fair value increase in NRZ PLS MSRs due to model recalibrations performed by our third-party valuation expert to more accurately reflect the favorable delinquency and default performance of PLS collateral across its client base. Fair value adjustments to our NRZ MSR pledged liability are offset by fair value adjustments to the related MSR asset, which are recorded in MSR valuation adjustments, net. In addition, we recognized a $34.2 million amortization gain recorded in 2020 (through the end of the second quarter of 2020, nil in 2021), related to the lump-sum cash payments received from NRZ in 2017 and 2018. These increases in the expense were partially offset by a $50.8 million decline in servicing fee remittance, driven by lower volume serviced, with the runoff of the portfolio and the termination of the PMC agreement by NRZ in February 2020. Refer to the above discussions of MSR valuation adjustments, net (Pledged MSR to NRZ and MAV) and Servicing and subservicing fees (NRZ).
Originations
We originate and purchase loans and MSRs through multiple channels, including retail, wholesale, correspondent, flow MSR purchase agreements, the Agency Cash Window and Co-issue programs and bulk MSR purchases.
We originate and purchase conventional loans (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government-insured (FHA or VA) forward mortgage loans. The GSEs and Ginnie Mae guarantee these mortgage securitizations. We originate HECM loans, or reverse mortgages, that are mostly insured by the FHA and we are an approved issuer of HECM mortgage-backed securities (HMBS) that are guaranteed by Ginnie Mae.
Within retail, our Consumer Direct channel for forward mortgage loans (previously called Recapture) focuses on targeting existing servicing customers by offering them competitive mortgage refinance opportunities, where permitted by the governing servicing and pooling agreement. In doing so, we generate revenues for our forward lending business and protect the servicing portfolio by retaining these customers. A portion of our servicing portfolio is susceptible to refinance activity during periods of declining interest rates. Origination recapture volume and related gains are a natural economic hedge, to a certain degree, to the impact of declining MSR values as interest rates decline. To the extent we refinance a loan underlying the MSRs subject to the MAV subservicing agreement, we are obligated to transfer such recaptured MSR to MAV under the terms of the joint-marketing agreement. In addition to refinance activities, our Consumer Direct channel targets cash-out, debt consolidation, mortgage insurance premium reduction, and new customer acquisition.
Our forward lending correspondent channel drives higher servicing portfolio replenishment. We purchase closed loans that have been underwritten to investor guidelines from our network of correspondent sellers and sell and securitize them. As of December 31, 2021, we have relationships with 438 approved correspondent sellers, or 307 new sellers since December 31, 2020. On June 1, 2021, we expanded our network through the assignment by Texas Capital Bank (TCB) to us, of all its correspondent loan purchase agreements with its correspondent sellers (approximately 220 sellers).
We originate and purchase reverse mortgage loans through our retail, wholesale and correspondent lending channels, under the guidelines of the HECM reverse mortgage insurance program of the FHA. Loans originated under this program are generally insured by the FHA, which provides protection against risk of borrower default.
After origination, we package and sell the loans in the secondary mortgage market, through GSE and Ginnie Mae securitizations on a servicing retained basis. Origination 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 or purchase value and the sale value of the loan including its MSR value, and fee income earned at origination. As the securitizations of reverse mortgage loans do not achieve sale accounting treatment and the loans are classified as loans held for investment, at fair value, reverse mortgage revenues include the fair value changes of the loan from lock date to securitization date.
We provide customary origination representations and warranties to investors in connection with our GSE loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved correspondent lenders. We recognize the fair value of the liability for our representations and warranties at the time of sale. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the mortgage loan investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur. We actively monitor our counterparty risk associated with our network of correspondent lenders-sellers.
We purchase MSRs through flow purchase agreements, the Agency Cash Window programs and bulk MSR purchases. The Agency Cash Window programs we participate in, and purchase MSR from, allow mortgage companies and financial institutions to sell whole loans to the respective agency and sell the MSR to the winning bidder servicing released. In addition, we partner with other originators to replenish our MSRs through flow purchase agreements. We do not provide any origination representations and warranties in connection with our MSR purchases through MSR flow purchase agreements or Agency Cash Window programs. As of December 31, 2021, we have relationships with 154 approved sellers through the Agency Cash Window co-issue programs, or 121 new sellers since December 31, 2020.
We recognize our MSR origination with the associated economics in our Originations business, and transfer the MSR to our Servicing segment at fair value once the MSR is recognized on our balance sheet. 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, through our existing relationships and our enterprise sales initiatives. We do not report any revenue or gain associated with subservicing within the Originations segment as the impact is captured in the Servicing segment. However, sales efforts and certain costs - marginal compensation and benefits - are managed and reported within the Originations segment.
For 2021, our Originations business originated or purchased forward and reverse mortgage loans with a UPB of $19.0 billion and $1.5 billion, respectively. In addition, we purchased $20.4 billion UPB MSR through the Agency Cash Window / Flow MSR during 2021.
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
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenue
Gain on loans held for sale, net $ 124.5 $ 105.2 $ 32.9 18 % 220 %
Reverse mortgage revenue, net 82.0 53.1 22.9 54 133
Other revenue, net (1) 43.4 21.0 6.0 107 251
Total revenue 249.9 179.3 61.7 39 191
MSR valuation adjustments, net 25.2 41.7 - (40) n/m
Operating expenses
Compensation and benefits 101.6 62.2 43.8 63 42
Origination expense 15.0 7.2 7.0 109 3
Occupancy and equipment 6.9 5.4 6.4 27 (15)
Technology and communications 9.8 5.5 3.2 76 76
Professional services 10.2 9.3 1.3 10 620
Corporate overhead allocations 20.0 18.2 6.0 10 202
Other expenses 9.4 6.5 4.8 43 36
Total operating expenses 172.8 114.4 72.5 51 58
Other income (expense)
Interest income 17.7 7.0 5.2 152 34
Interest expense (23.0) (9.8) (7.6) 134 30
Other, net (3.1) 0.4 0.9 (988) (61)
Total other income (expense), net (8.4) (2.5) (1.5) 239 70
Income (loss) before income taxes $ 93.9 $ 104.2 $ (12.2) (10) (952)
(1)Includes $8.5 million, $6.0 million, and $1.3 million ancillary fee income related to MSR acquisitions reported as Servicing and subservicing fees at the consolidated level for 2021, 2020 and 2019, respectively.
The following table provides selected operating statistics for our Origination segment:
Years Ended December 31, % Change
UPB in millions 2021 2020 2019 2021 vs 2020 2020 vs 2019
Loan Production by Channel
Forward loans
Correspondent $ 16,577.8 $ 5,685.5 $ 494.0 192 % n/m
Consumer Direct 2,411.7 1,309.8 656.6 84 99
$ 18,989.5 $ 6,995.3 $ 1,150.5 171 508
% Purchase production 32 20 18 63 10
% Refinance production 68 80 82 (15) (2)
Reverse loans (1)
Correspondent $ 807.1 $ 470.3 $ 411.6 72 % 14 %
Wholesale 275.4 300.5 238.2 (8) 26
Retail 445.5 170.8 79.6 161 115
$ 1,527.9 $ 941.6 $ 729.4 62 29
MSR Purchases by Channel (Forward only)
Agency Cash Window / Flow MSR 20,443.4 15,111.6 908.3 35 n/m
Bulk MSR purchases 55,133.5 16,566.2 14,616.7 233 13
$ 75,576.9 $ 31,677.7 $ 15,525.0 139 104
Total $ 96,094.3 $ 39,614.7 $ 17,405.0 143 128
Short-term loan commitment (at year end)
Forward loans $ 1,022.0 $ 619.7 204.0 65 % 204 %
Reverse loans 63.3 11.7 28.5 442 (59)
Average Employment
U.S. 653 461 387 42 % 19 %
India and other 400 177 97 126 82
Total 1,053 638 484 65 32
(1)Loan production excludes reverse mortgage loan draws by borrowers disbursed subsequent to origination that are reported within the Servicing segment.
Gain on Loans Held for Sale
The following table provides information regarding Gain on loans held for sale by channel and the related forward loan origination volume and margins (excluding fees that are presented in Other revenue, net):
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Gain on Loans Held for Sale (1)
Correspondent $ 18.5 $ 20.8 $ 0.1 (11) % n/m
Consumer Direct 106.0 84.4 32.8 26 158
$ 124.5 $ 105.2 $ 32.9 18 % 220 %
% Gain on Sale Margin (2)
Correspondent 0.11 % 0.35 % 0.02 % (69) % n/m
Consumer Direct 4.36 5.41 5.00 % (19) 8
0.64 % 1.42 % 2.65 % (55) % (46) %
Origination UPB (3)
Correspondent $ 16,957.0 $ 5,851.1 $ 584.6 190 % 901 %
Consumer Direct 2,432.0 1,560.4 655.5 56 138
$ 19,389.0 $ 7,411.5 $ 1,240.1 162 % 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 Origination 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 $19.3 million, or 18%, as compared to 2020, all attributed to our consumer direct channel, with a 56% increase in our loan production volume, partially offset by a lower margin. The effect of nearly three times higher production volume in our correspondent channel was more than offset by lower margin and resulted in a 11% lower gain on sale as compared to 2020. The combined $12.0 billion, or 162% new production volume increase in our correspondent and consumer direct channels is due to favorable market conditions for borrower refinancing, the successful integration of the TCB correspondent lending resources and network of correspondent sellers, and the demonstrated capability of our Originations platform. We have expanded our correspondent seller network from 131 to 438, a 234% increase in twelve months. In addition, the increase in the new production volume of our consumer direct channel is the result of investments in staffing we made to develop the production capabilities of our platform. Overall, the average gain on sale margin for forward loans declined from 142 basis points in 2020 to 64 basis points in 2021, mostly due to the continued shift in the channel mix, with higher volume in correspondent, a lower-margin channel.
Reverse Mortgage Revenue, Net
The following table provides information regarding 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
2021 2020 2019 2021 vs 2020 2020 vs 2019
Origination UPB (1) $ 1,547.0 $ 915.4 $ 731.4 69 % 25 %
Origination margin (2) 5.30 % 5.81 % 3.12 % (9) 86 %
Reverse mortgage revenue, net (Originations) (3) $ 82.0 $ 53.1 $ 22.9 54 % 133 %
(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 origination gain and fees - see (3) below - to origination UPB - see (1) above.
(3)Includes gain on new origination, and loan fees and other. Includes $34.1 million, $26.9 million and $16.6 million non-cash gain on securitization of newly originated loans in 2021, 2020 and 2019, respectively.
We reported $82.0 million Reverse mortgage revenue, net in 2021, a $28.9 million or 54% increase as compared to 2020. The increase is primarily driven by an increase in volume of our higher-margin retail channel that generated an additional $26.8
million revenue. The historical record increase in the volume of our reverse correspondent and retail channels were partially offset by a lower average margin in those channels mostly due to unfavorable yield spread widening observed in the market.
Other revenue, net
Other revenue, net increased $22.4 million as compared to 2020 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 our forward correspondent and consumer direct channels.
MSR Valuation Adjustments, Net
MSR valuation adjustments, net includes gains of $25.2 million and $41.7 million in 2021 and 2020, respectively, due to the revaluation gains on certain MSRs purchased through the Agency Cash Window programs, and flow purchases. As an aggregator of MSRs, we may purchase MSRs from smaller originators with a purchase price at a discount to fair value and we recognize valuation adjustments for differences in exit markets in accordance with the accounting fair value guidance. We record such valuation adjustments as MSR valuation adjustments, net, within the Originations segment because 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.
MSR valuation adjustments, net decreased $16.5 million as compared to 2020. Opportunities for fair value discount or margins were larger in the early period of the pandemic and have reduced as markets normalized.
Operating Expenses
Operating expenses increased $58.4 million, or 51%, as compared to 2020, due to our increased production volumes. Compensation and benefits increased by $39.4 million, or 63%, with a $23.1 million increase in salary and benefits and $10.9 million higher commissions. Originations average headcount increased 65% as compared to 2020, reflecting an increase in loan production levels, and reflecting the integration of the TCB correspondent lending resources in the second half of 2021. The offshore-to-total average headcount ratio for Originations increased from 28% for 2020 to 38% for 2021.
Other operating expenses increased primarily due to a $7.8 million increase in Origination expense driven by increased origination volumes, a $4.2 million increase in Technology and communications mostly due to higher software usage and maintenance expenses to support the growth in originations volumes, a $3.5 million increase in advertising expense as part of Origination business expansion, and a $2.0 million increase in postage and mailing expenses in support of increased volumes. Certain other operating expenses are variable, and as a result, as origination volume increased so did the related expenses. Examples include credit reports, appraisals, settlement fees, and tax service fees recorded in origination expenses or certain outsourced services including surge resources recorded in Professional services.
Other Income (Expense)
Interest income consists primarily of interest earned on newly-originated and purchased loans prior to sale to investors. Interest expense is incurred to finance the mortgage loans. 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 2020 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, inactive entities, and our other business activities that are currently individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash, gain or loss on repurchases of debt, interest expense on unallocated corporate debt and foreign currency exchange gains or losses. Interest expense on direct asset-backed financings are recorded in the respective Servicing and Originations segments. Interest expense on corporate debt is allocated to the Servicing segment and the Originations segment (starting in the fourth quarter of 2021) based on relative financing requirements.
Corporate support services include finance, facilities, human resources, internal audit, legal, risk and compliance and technology functions. Certain expenses incurred by corporate support services are allocated to the Servicing and Originations segments using various methodologies intended to approximate the utilization of such services. Various measurements of utilization of corporate support services are maintained, primarily time studies, personnel volumes and service consumption levels. 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, and other costs related to operating as a public company. Corporate Items and Other also includes severance, retention, facility-related and other expenses incurred in 2020 and 2019 related to our re-engineering initiatives and have not been allocated to other segments.
CRL, our wholly-owned captive reinsurance subsidiary, provides re-insurance related to coverage on REO properties owned or serviced by us. CRL assumes a quota share of REO insurance coverage written by a third-party insurer under a blanket policy issued to PMC. The underlying REO policy provides coverage for direct physical loss on commercial and residential properties, subject to certain limitations. Under the terms of the reinsurance agreement, CRL assumes a 60% quota share of premiums and all related losses incurred by the third-party insurer, effective March 2021, with a 50% and 40% quota share through February 2021 and May 2020, respectively. The reinsurance agreement expires December 31, 2023, but may be terminated by either party at any time with six months advance written notice. The agreement will automatically renew for additional one-year terms unless either party provides 60 days advance written notice prior to renewal.
The following table presents selected results of operations of Corporate Items and Other. The amounts presented are before the elimination of balances and transactions with our other segments:
Years Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs. 2019
Revenue
Premiums (CRL) $ 5.9 $ 6.2 $ 12.9 (5) % (52) %
Other revenue 0.3 0.4 0.3 (28) 55
Total revenue 6.2 6.6 13.2 (6) (50)
Operating expenses
Compensation and benefits 88.2 89.6 125.7 (1) (29)
Professional services 40.3 69.4 59.2 (42) 17
Technology and communications 22.5 28.9 43.4 (22) (34)
Occupancy and equipment 3.1 11.1 17.4 (72) (36)
Servicing and origination 0.4 1.7 0.7 (74) (94)
Other expenses 7.3 8.1 11.0 (10) (26)
Total operating expenses before corporate overhead allocations
161.8 208.7 257.4 (22) (19)
Corporate overhead allocations
Servicing segment (47.7) (61.0) (197.9) (22) (69)
Originations segment (20.0) (18.2) (6.0) 10 202
Total operating expenses 94.1 129.5 53.5 (27) 142
Other income (expense), net
Interest income 0.5 1.9 1.8 (77) 9
Interest expense (16.4) (8.9) (4.0) 85 121
Gain (loss) on extinguishment of debt (15.5) - 5.1 n/m (100)
Other, net 1.2 (4.3) (4.1) (129) 3
Total other (expense) income, net (30.2) (11.2) (1.3) 170 775
Income (loss) before income taxes $ (118.1) $ (134.1) $ (41.6) (12) 222
n/m: not meaningful
Compensation and Benefits
Compensation and benefits expense decreased $1.3 million, or 1%, as compared to 2020 primarily as a result of a $4.2 million decline in salaries and benefit expense driven by a 7% decrease in average corporate headcount, including a 13% decrease in average onshore headcount from 308 to 267. In addition, the decline in compensation and benefits expense is driven by a $2.2 million decrease in annual incentive compensation and a $1.8 million decline in severance expense. These lower expenses were largely offset by a $7.9 million increase in share-based compensation mostly due to an increase in the fair value of cash-settled share-based awards associated with the increase in our common stock price during the year.
Professional Services
Professional services expense declined $29.1 million, or 42%, as compared to 2020, primarily due to a $16.9 million decrease in legal expenses and an $11.1 million decline in other professional services expenses. The net decline in legal expenses is largely due to expenses and provision for litigation settlement recorded in 2020 related to the CFPB and Florida
matters. Legal expenses and professional services for 2020 included an $8.0 million recovery of prior expenses from a mortgage insurer and $3.5 million of COVID-19 related expenses, respectively. Cost reduction initiatives and higher utilization of professional services in 2020, including strategic vendor sourcing, cloud migration and consulting, resulted in lower other professional fees in 2021. Other professional services for 2021 includes $3.2 million of advisory fees related to the setup of our MSR investment joint venture with Oaktree, MAV Canopy.
Other Operating Expenses
Technology and communications expense decreased $6.4 million, or 22%, as compared to 2020, primarily due to a $3.5 million decline in telephone and telecommunication expense, and a $2.5 million decline in hardware and software depreciation expense. Cost re-engineering initiatives in 2020 resulted in lower expenses in 2021 through facility closure and the transition to a more cost-effective alternative telephone system. In addition, during 2020, we recognized accelerated depreciation for certain of our hardware and software assets and incurred additional expenses related to COVID-19.
Occupancy and equipment expense decreased $8.0 million or 72%, as compared to 2020, primarily due to the rationalization of our facilities. In 2020, we partially abandoned certain leased properties and recognized accelerated depreciation and exit costs. Depreciation and lease interest expense for 2021 declined $7.9 million as compared to 2020. Occupancy allocations to Servicing and Originations segments were lower by $4.3 million due to the above mentioned facility rationalization, partially offset by a $2.7 million decrease in repair, maintenance and utilities related expenses and a $1.1 million decline in postage and mailing expenses attributed to COVID-19.
Corporate overhead allocations decreased $11.5 million for 2021 as compared to 2020 largely due to the benefits of cost savings achieved at the corporate level, most significantly technology expenses, achieved through our cost re-engineering initiatives in 2020.
Other Income (Expense)
Interest expense of the Corporate segment relates to the remaining corporate debt unallocated to other segments. Interest expense increased $7.6 million, or 85%, as compared to 2020. The increase is primarily driven by a higher cost of corporate debt that is mostly due to the senior secured notes issued at a discount on March 4, 2021 and May 3, 2021.
On March 4, 2021, we recognized a loss on debt extinguishment of $15.5 million resulting from our early repayment of the SSTL due May 2022 and our early redemption of our 6.375% PHH senior unsecured notes due August 2021 and our 8.375% PMC senior secured notes due November 2022.
We reported $1.2 million Other income in 2021, as compared to $4.3 million Other expense in 2020. Loss adjustment expense, related to our CRL business decreased by $1.8 million due to a decline in the number of covered REO properties and claims filed during 2021 compared to 2020. In 2020, we recognized a $2.2 million net loss on the sale of a vacant office facility. In addition, we recorded foreign currency remeasurement gains of $0.3 million in 2021, as compared to losses of $1.0 million in 2020, related to our operations in India and the Philippines.
LIQUIDITY AND CAPITAL RESOURCES
Overview
On March 4, 2021, we successfully completed a comprehensive refinancing of our corporate debt and a capital contribution to our licensed entity PMC, through the following transactions:
•We redeemed all of PHH’s outstanding 6.375% Senior Notes due August 2021 at a price of 100% of the $21.5 million principal amount, plus accrued and unpaid interest, and all of PMC’s 8.375% Senior Secured Notes due November 2022 at a price of 102.094% of the $291.5 million principal amount, plus accrued and unpaid interest.
•We repaid in full the $185.0 million outstanding principal balance of the SSTL due May 2022, with a 2% prepayment premium of the outstanding principal balance, or $3.7 million.
•PMC completed the issuance and sale of $400.0 million aggregate principal amount of 7.875% senior secured notes due March 15, 2026 (the PMC Senior Secured Notes).
•Ocwen Financial Corporation, completed the private placement of $199.5 million aggregate principal amount of senior secured notes due March 4, 2027 (the OFC Senior Secured Notes) together with the issuance of warrants to certain entities owned by funds and accounts managed by Oaktree Capital Management, L.P. (the Oaktree Investors).
•Ocwen Financial Corporation contributed the $175.0 million net proceeds from the issuance of the OFC Senior Secured Notes to its wholly owned subsidiary, PHH, and PHH contributed $153.4 million to its wholly owned subsidiary PMC, as permanent equity, after redeeming PHH’s 6.375% Senior Notes disclosed above.
With the completion of the corporate debt refinancing, we have reduced corporate indebtedness at the PHH and PMC level by approximately $100 million and extended overall corporate debt maturities by over three years resulting in a better
alignment of the debt profile with our investments. We now have greater financial flexibility than with the prior capital structure, and we believe, an opportunity to negotiate better terms for our future financing needs.
On May 3, 2021, concurrent with the closing of the MAV transaction, we issued to Oaktree the second tranche of the OFC Senior Secured Notes due March 4, 2027 in an aggregate principal amount of $85.5 million, together with the issuance of common shares and additional warrants.
In addition, we have successfully completed at market terms the following during 2021 with respect to our current and anticipated financing needs:
•We increased the total borrowing capacity on our mortgage loan warehouse facilities by $1.1 billion to support growth in our Originations business. We reduced our weighted average interest rate on these facilities by 0.72% during the year.
•We increased the borrowing capacity of our MSR financing facilities by $410.0 million to fund our MSR bulk acquisitions and portfolio growth, and extended the duration of our debt. We reduced our weighted average interest rate on these facilities by 1.11% during the year.
•We voluntarily reduced total borrowing capacity on our advance facilities by $200.0 million as we continue to experience better than expected forbearance performance. We reduced our weighted average interest rate on these facilities by 0.42% during the year.
In the normal course of business, we are actively engaged with our lenders and as a result, have renewed, replaced or extended our debt agreements to the extent necessary to finance our operations. 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, 2021 December 31, 2020
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 $ 595.0 $ 82.7 $ - $ 795.0 $ 213.7 $ -
Mortgage loan warehouse facilities 2,119.3 240.3 794.0 1,037.0 186.9 398.4
MSR financing facilities 785.0 40.4 18.3 375.0 39.2 13.0
Total $ 3,499.3 $ 363.4 $ 812.3 $ 2,207.0 $ 439.9 $ 411.3
Total Capacity increase (decrease) $ 1,292.3 $ (76.5) 59% (17)%
Advance facilities $ (200.0) $ (131.0) (25)% (61)%
Mortgage loan warehouse facilities $ 1,082.3 $ 53.4 104% 29%
MSR financing facilities $ 410.0 $ 1.2 109% 3%
(1)Total Borrowing Capacity represents the maximum amount which can be borrowed, subject to eligible collateral. Available Borrowing Capacity represents Total Borrowing Capacity less outstanding borrowings.
Our total borrowing capacity increased by approximately $1.3 billion (or 59%) in 2021, mostly driven by a $1.1 billion (104%) increase in our mortgage loan warehouse capacity to fund the growth in our Originations business. In addition, we increased the capacity of our MSR financing facilities by $410.0 million to fund our MSR bulk acquisitions and portfolio growth. The available borrowing capacity under our advance financing facilities decreased by $131.0 million as compared to December 31, 2020 due to a $170.0 million voluntary reduction in total borrowing capacity of the OMART variable funding notes and a $30.0 million reduction in total borrowing capacity of the OFAF facility, offset in part by a $69.0 million decrease in outstanding borrowings, consistent with a decrease in our servicer advances. At December 31, 2021, none of the available borrowing capacity under our advance financing facilities could be funded based on the amount of eligible collateral that had been pledged to such facilities. Also, none of our uncommitted borrowing capacity was available to fund advances at December 31, 2021 under our Ginnie Mae MSR financing facility based on the amount of eligible collateral.
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, 2021, we had no committed borrowing capacity under our mortgage loan warehouse facilities, based on the
amount of eligible collateral. Uncommitted amounts can be advanced at the discretion of the lender, and there can be no assurance that any uncommitted amounts will be available to us at any particular time.
At December 31, 2021, our unrestricted cash position was $192.8 million compared to $284.8 million at December 31, 2020. We typically invest cash in excess of our immediate operating needs in deposit accounts and other liquid assets.
We strive to optimize our daily cash position to reduce financing costs while closely monitoring our liquidity needs and ongoing funding requirements. We regularly monitor and project cash flows over various time horizons as a way to anticipate and mitigate liquidity risk.
In assessing our liquidity outlook, our primary focus is on available cash on hand, unused available funding and the following forecast measures:
•Financial projections for ongoing net income, excluding the impact of non-cash items, and working capital needs including loan repurchases;
•Requirements for amortizing and maturing liabilities;
•The projected change in advances compared to the projected borrowing capacity to fund such advances under our facilities, including capacity for monthly peak needs;
•Projected funding requirements for acquisitions of MSRs and other investment opportunities;
•Funding capacity for whole loans and tail draws under our reverse mortgage commitments subject to warehouse eligibility requirements;
•Potential payments or recoveries related to legal and regulatory matters, insurance, taxes and others; and
•Margining requirements associated with our borrowing facilities and hedging program.
Use of Funds
Our primary near-term uses of funds in the normal course include:
•Payment of operating costs and corporate expenses;
•Payments for advances in excess of collections;
•Investing in our servicing and originations businesses, including MSR, other asset acquisitions and MAV Canopy equity contribution;
•Originated and repurchased loans, including scheduled and unscheduled equity draws on reverse mortgage loans;
•Payment of margin calls under our MSR financing facilities and derivative instruments;
•Repayments of borrowings, including under our MSR financing, advance financing and warehouse facilities, and payment of interest expense; and
•Net negative working capital and other general corporate cash outflows.
We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $1.5 billion at December 31, 2021. This additional borrowing capacity is available on a scheduled or unscheduled payment basis. During 2021, we funded $226.6 million out of the $2.0 billion borrowing capacity available as of December 31, 2020. We also had short-term commitments to lend $1.0 billion and $63.3 million in connection with our forward and reverse mortgage loan IRLCs, respectively, outstanding at December 31, 2021. 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). See Note 25 - Commitments to the Consolidated Financial Statements for additional information. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, referred to as warehouse lines.
Regarding the current maturities of our borrowings, as of December 31, 2021, we have approximately $2.09 billion of debt outstanding that would either come due, begin amortizing or require partial repayment in the next 12 months. This amount is comprised of $1.09 billion of borrowings under forward and reverse mortgage warehouse facilities, $512.3 million of notes under advance financing facilities that will enter their respective amortization periods, $449.2 million outstanding under Agency and Ginnie Mae MSR financing facilities maturing in 2022, and $41.7 million of scheduled principal amortization on the PLS Notes secured by PLS MSRs.
In our liquidity management, we consider two factors more specifically as a result of the COVID-19 environment and the volatile interest rate 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 due to interest rate fluctuations. 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 plans. Loan payoffs and prepayments are a source of additional liquidity and are dependent on the interest rate environment. We also advance T&I and Corporate advances primarily on properties that are in default or have been foreclosed. Our obligations to make these advances are governed by servicing agreements or guides, depending on investors or guarantor. Refer to Note 25 - Commitments to the Consolidated Financial Statements for further description of our servicer advance obligations. As subservicer, we are also required to make P&I, T&I and Corporate advances on behalf of servicers following the servicing agreements or guides. However, servicers are generally required to reimburse us within 30 days of our advancing under the terms of the subservicing agreements, and we are generally reimbursed by 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.
Second, we are generally subject to daily margining requirements under the terms of our MSR financing facilities and daily cash calls for our TBAs, interest rate swap futures or other derivatives. Declines in fair value of our MSRs due to declines in market interest rates, assumption updates or other factors require that we provide additional collateral to our lenders under MSR financing facilities. Similarly, declines in fair value of our derivative instruments require that we provide additional collateral to the clearing counterparties. Our exposure to changes in fair value of our MSRs and the associated liquidity risk have increased as a result of the GSE MSR bulk acquisitions in June 2021. Refer to the sensitivity analysis in the Market Risk section of Risk Management for our quantitative and qualitative disclosures about market risk.
Our medium- and long-term requirements for cash include:
•Payment of interest and principal repayment of our corporate debt that matures in 2026 and 2027;
•Any payments associated with the confirmation of loss contingencies; and
•Any other payments required under contractual obligations discussed above that extend beyond one year, e.g., lease payments.
We are focused on ensuring that we have sufficient liquidity sources to continue to operate through the pandemic as well as after. We continuously evaluate alternative financings to diversify our sources of funds, optimize maturities and reduce our funding cost. See “Sources of Funds” below.
Sources of Funds
Our primary sources of funds for near-term liquidity in normal course include:
•Collections of servicing and subservicing fees and ancillary revenues;
•Collections of advances in excess of new advances;
•Proceeds from match funded advance financing facilities;
•Proceeds from other borrowings, including warehouse facilities and MSR financing facilities;
•Proceeds from sales and securitizations of originated loans and repurchased loans; and
•Net positive working capital from changes in other assets and liabilities.
Servicing advances are an important component of our business and represent amounts that we, as servicer, are required to advance to, or on behalf of, our servicing clients if we do not receive such amounts from borrowers. Our use of advance financing facilities is integral to our cash and liquidity management strategy. Revolving variable funding notes issued 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 continuously evaluate the allocation of our capital to MSR investments, the related returns, funding and liquidity requirements. While our investment in MAV Canopy exposes us to additional capital contributions, the relationship provides PMC an additional means to finance MSRs and maintain liquidity while maintaining servicing volume - See Item 1. Business, Oaktree Relationship for further details. With the launch of MAV and our relationships with other clients, additional opportunities to rebalance our servicing and subservicing portfolio mix are available to us and may result in additional sales of MSRs while we would perform subservicing for the sold portfolio.
Covenants
Our debt agreements contain various qualitative and quantitative covenants including financial covenants, covenants to operate in material compliance with applicable laws and regulations, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates. These covenants may limit the manner in which we conduct our business and may limit our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, nonpayment of principal or interest, noncompliance with our covenants, breach of representations, the occurrence of a material adverse change, insolvency, bankruptcy, certain material judgments and litigation and changes of control. See Note 14 - Borrowings to the Consolidated Financial Statements for additional information regarding our covenants. The most restrictive liquidity requirement under our debt agreements is for a minimum of $125.0 million in consolidated liquidity, as defined, under certain of our advance match funded debt and MSR financing facilities agreements. At December 31, 2021, we held unrestricted cash in excess of this minimum amount.
In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations, and other legal remedies, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We believe that we are in compliance with the covenants in our debt agreements as of December 31, 2021.
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 Stable February 24, 2021
S&P B- Stable February 24, 2021
On February 24, 2021, concurrent with the launch of the $400.0 million PMC Senior Secured Notes offering, both Moody’s and S&P reaffirmed the corporate ratings at Caa1 and B-, respectively. In addition, both agencies revised the outlook of the corporate ratings to Stable from Negative. This change in outlook was driven by the elimination of the short debt maturity runway and refinancing risk, which was listed as an area of concern by both Moody’s and S&P. On January 24, 2022, S&P affirmed the corporate rating at B-.
On January 24, 2022, S&P raised the assigned rating to the PMC Senior Secured Notes from ‘B-’ to ‘B’ and maintained a stable outlook citing improved profitability and increase in assets. It is possible that additional actions by credit rating agencies could have a material adverse impact on our liquidity and funding position, including materially changing the terms on which we may be able to borrow money.
Cash Flows
Our operating cash flow is primarily impacted by operating results, including Originations gains on loan sales, changes in our servicing advance balances, the level of mortgage loan production, the timing of sales and securitizations of mortgage loans, and the margin calls required under our MSR financing facilities or derivative instruments. We classify purchases of MSRs through flow purchase agreements, Agency Cash Window and bulk acquisitions as investing activity. MSR investments represent a key indicator of our ability to generate future income in our Servicing business, together with originated MSRs. We classify changes in HECM loans held for investment as investing activity and changes in the related HMBS borrowings as financing activity.
Our NRZ agreements represent an important component of our liquidity and our liquidity management, and have a significant impact on our consolidated statements of cash flows. Because the 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, 2021 and 2020 includes $- million and $35.1 million, respectively, of such cash flows and they were offset by corresponding amounts in net cash used in financing activities in the same periods.
Our cash flows are summarized as follows:
$ in millions For the Year Ended December 31,
2021 2020
Net cash provided by (used in) operating activities $ (472) $ 261
Net cash provided by (used in) investing activities (1,001) (528)
Net cash provided by (used in) financing activities 1,380 132
Net increase (decrease) in cash, cash equivalents and restricted cash $ (93) $ (135)
Cash, cash equivalents and restricted cash at end of period $ 263 $ 357
Cash flows for the year ended December 31, 2021
Our operating activities used $472.2 million of cash largely due to the growth of our new Originations production with net cash paid on loans held for sale of $623.0 million, partially offset by the $28.9 million of net collections of servicing advances, mostly P&I advances.
Our investing activities used $1.0 billion of cash. The primary uses of cash in our investing activities include $831.2 million to purchase MSRs, mostly through bulk acquisitions, net cash outflows in connection with our HECM reverse mortgages of $135.1 million, and $27.9 million of capital contributions to our equity method investee MAV Canopy.
Our financing activities provided $1.4 billion of cash. Cash inflows include $647.9 million of proceeds from the issuance of the PMC Senior Secured Notes and the OFC Senior Secured Notes, warrants and common stock to Oaktree and $1.7 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, largely offset by repayments on the related financing liability of $1.6 billion, $247.0 million of proceeds from sale of MSRs accounted for as a financing in connection with sales of MSRs to MAV, and a $1.1 billion net increase in borrowings under our mortgage warehouse and MSR financing facilities. Cash outflows include $319.2 million to repay our 6.375% senior unsecured notes and 8.375% senior secured notes, $188.7 million repayment of the SSTL, $69.0 million of net repayments on advance match funded liabilities, and $91.2 million of net payments on the financing liabilities related to MSRs transferred.
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 during the year 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 $66.9 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 transferred. 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.
RISK MANAGEMENT
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established policies and procedures intended to identify, assess, monitor and manage the types of risk to which we are subject, including strategic, market, credit, liquidity and operational risks.
Our Chief Risk and Compliance Officer is responsible for the design, implementation and oversight of our global risk management and compliance programs. Risks unique to our businesses are governed through various management processes and governance committees to oversee risk and related control activities across our company and provide a framework for potential issues to be identified, assessed and remediated under the direction of senior executives from our business, finance, risk, compliance, internal audit and law departments, as applicable. Information is aggregated and reports on risk matters are made to the Board of Directors, its Risk and Compliance Committee or its other committees, as applicable, to enable the Board of Directors and its committees to fulfill their governance and oversight responsibilities.
Strategic Risk
We are exposed to risk with respect to the strategic initiatives we need to undertake in order to return to sustainable growth and profitability. Strategic risk represents the risk to shareholder or enterprise value, current or future earnings, capital and liquidity from adverse business decisions and/or improper implementation of business strategies. Management is responsible for developing and implementing business strategies that leverage our core competencies and are appropriately structured, resourced and executed. Oversight for our strategic actions is provided by the Board of Directors. Our performance, relative to our business plans and our longer-term strategic plans, is reviewed by management and the Board of Directors.
To achieve our near-term financial objectives, we believe we need to execute on the key business initiatives discussed above under “Overview”. Our ability to achieve our objectives is highly dependent on the success of our business relationships with our critical counterparties like the GSEs, FHFA, Ginnie Mae, our lenders, regulators, significant customers and our ability to attract new customers, all of which are impacted by our capability to adequately address the competitive challenges we face. 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
See Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Liquidity Risk
We are exposed to liquidity risk through our ongoing needs to: originate, purchase, repurchase and finance mortgage loans; sell mortgage loans into secondary markets; retain, acquire and finance MSRs, make and finance advances; fund and sell additional future draws by borrowers under variable rate HECM loans; meet our HMBS issuer obligations with respect to MCA repurchases; repay maturing debt; meet our contractual obligations; and otherwise fund our operations. Liquidity is an essential component of our ability to operate and grow our business; therefore, it is crucial that we maintain adequate levels of excess liquidity to fund our businesses during normal economic cycles and events of market stress.
We estimate how our liquidity needs may be impacted by a number of factors, including fluctuations in asset and liability levels due to our business strategy, asset valuations, changes in cash flows from operations, levels of interest rates, debt service requirements including contractual amortization and maturities, and unanticipated events, including legal and regulatory expenses. We also assess market conditions and capacity for debt issuance in the various markets that we access to fund our business needs. We have established internal processes to anticipate future cash needs and continuously monitor the availability of funds pursuant to our existing debt arrangements. We monitor MSR asset valuations and communicate closely with our lenders for this asset class to ensure adequate liquidity is maintained for mark-to-market valuation changes within MSR financing facilities. We manage this risk in multiple ways, including but not limited to engaging in MSR hedging activities, and maintaining liquidity earmarks at levels to support potential changes in MSR fair values.
We regularly evaluate capital structure options that we believe will most effectively provide the necessary capacity to support our investment objectives, address upcoming debt maturities and contractual amortization, and accommodate our business needs. Our objective is to maximize the total investment capacity through diversification of our funding sources while optimizing cost, advance rates and terms. 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 sustainable profitability, funding continuing losses will limit opportunities to grow our business.
In general, we finance our business operations through a variety of activities - cash on hand, operating cash flow, term borrowings and both committed and non-committed asset-based lending facilities for our significant MSR, mortgage warehouse and servicing advance activities. We address liquidity risk by actively managing our sources and uses of funds and maintaining contingency funding capacities, including but not limited to undrawn excess borrowing capacity on credit lines beyond our expected needs and by extending the tenor of our financing arrangements from time to time. Management closely monitors growth, and can adjust originations pricing quickly to manage its liquidity profile as needed. We have typically “upsized” existing warehouse or advance facilities or entered into new secured facilities in anticipation of our liquidity needs.
Operational Risk
Operational risk is inherent in each of our business lines and related support activities. This risk can manifest itself in various ways, including process execution errors, clerical or technological failures or errors, business interruptions and frauds, all of which could cause us to incur losses. Operational risk includes the following key risks:
•legal risk, as we can have legal disputes with borrowers or counterparties;
•compliance risk, as we are subject to many federal and state rules and regulations;
•third-party risk, as we have many processes that have been outsourced to third parties;
•information technology risk, as we operate many information systems that depend on proper functioning of hardware and software;
•information security risk, as our information systems and associates handle personal financial data of borrowers.
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. Due to its concentration in our portfolio, we monitor NRZ’s payment performance, liquidity and capital on a regular basis.
Counterparty credit risk exists with our third-party originators, including our correspondent lenders, from whom we purchase originated mortgage loans. The third-party originators make certain representations and warranties to us when we acquire the mortgage loan from them, and they agree to reimburse us for losses incurred due to an origination defect. We become exposed to losses for origination defects if the third-party originator is not able to reimburse us for losses incurred for indemnification or repurchase. We mitigate this risk by monitoring purchase levels from our third-party originators (to reduce concentration risk), by performing regular quality control reviews of the third-party originators’ underwriting standards and by regular reviews of the creditworthiness of third-party originators.
Concentration Risk
Our Servicing segment has exposure to concentration risk and client retention risk. As of December 31, 2021, our servicing portfolio included significant client relationships with NRZ which represented 21% and 31% of our servicing portfolio UPB and loan count, respectively. The NRZ servicing portfolio accounts for approximately 66% of all delinquent loans that Ocwen services. During 2021, NRZ-related servicing fees retained by Ocwen represented approximately 19% 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 servicing 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 serviced these loans until deboarding in October 2020 representing $34.2 billion of UPB, and accounted 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 of UPB 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. Following the initial term ending July 2022, NRZ may extend the term of the Subservicing Agreements and Servicing Addendum for additional three-month periods by providing proper notice.
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 or not renew some or all of the legacy Ocwen servicing agreements.
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, Texas, Florida, New York and New Jersey, comprising 42% of the number of loans serviced at December 31, 2021. California has the largest concentration with 16% of the total loans serviced.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events based on information available at the date of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. We have processes in place to monitor these judgments and assumptions, and management is required to review critical accounting policies and estimates with the Audit Committee of the Board of Directors. The following is a summary of certain accounting policies and estimates involving significant judgments. Our significant accounting policies and critical accounting estimates are described in Note 1 - Organization, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain instruments in our statement of operations and to determine fair value disclosures. Refer to Note 3 - Fair Value to the Consolidated Financial Statements for the fair value hierarchy, descriptions of valuation methodologies used to measure significant assets and liabilities at fair value and details of the valuation models, key inputs to those models, significant assumptions utilized, and sensitivity analyses. We follow the fair value hierarchy to prioritize the inputs utilized to measure fair value and classify instruments as Level 3 when the valuation technique requires significant unobservable inputs or assumptions. We review and modify, as necessary, our fair value hierarchy classifications on a quarterly basis. The determination of the fair value of these Level 3 financial assets and liabilities and MSRs requires significant management judgment and estimation. See the Market Risk sections of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for a sensitivity analysis reflecting the estimated change in the fair value of our MSRs, HECM loans held for investment and loans held for sale carried at fair value as well as any related derivatives at December 31, 2021, given hypothetical instantaneous parallel shifts in the yield curve. The following table summarizes assets and liabilities measured at fair value on a recurring and nonrecurring basis and the amounts measured using Level 3 inputs:
December 31,
2021 2020
Loans held for sale $ 928.5 $ 387.8
Loans held for investment - Reverse mortgages 7,199.8 6,997.1
MSRs 2,250.1 1,294.8
Other 29.8 35.2
Assets at fair value $ 10,408.2 $ 8,715.0
As a percentage of total assets 86 % 82 %
Assets at fair value using Level 3 inputs $ 9,707.8 $ 8,376.8
As a percentage of assets at fair value 93 % 96 %
HMBS-related borrowings 6,885.0 6,772.7
Pledged MSR liabilities 797.1 567.0
Other 11.0 14.4
Liabilities at fair value $ 7,693.1 $ 7,354.1
As a percentage of total liabilities 66 % 72 %
Liabilities at fair value using Level 3 inputs $ 7,688.9 $ 7,349.4
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 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, 2021, we reported $6.98 billion securitized loans held for investment at fair value and $6.89 billion HMBS-related borrowings at fair value, with a residual, net asset value of $94.1 million. In 2021, we recorded a net $2.3 million loss on change in fair value of securitized loans held for investment and HMBS-related borrowings reported in Reverse mortgage revenue, net in our Servicing segment.
The fair value of both reverse mortgage loans held for investment and corresponding HMBS-related borrowings is based primarily on discounted cash flow methodologies. Inputs to the discounted cash flows of these assets include future draws and tail spread gains, conditional prepayment rate (including voluntary and involuntary prepayments) and discount rate. The determination of fair value requires management judgment due to the significant unobservable assumptions, including conditional prepayment rate and discount rate.
We engage third-party valuation experts to support our valuation and provide observations and assumptions related to market activities. We evaluate the reasonableness of our fair value estimate and assumptions using historical experience, or cash flow backtesting, adjusted for prevailing market conditions and benchmarks with third-party expert valuations. We believe that our back-testing and benchmarking procedures provide reasonable assurance that the fair value used in our consolidated financial statements 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, 2021:
December 31,
Significant unobservable assumptions 2021 2020
Life in years
Range 1.0 to 8.2 0.9 to 8.0
Weighted average 5.7 5.9
Conditional prepayment rate (1)
Range 11.2 % to 36.6% 10.6% to 28.8%
Weighted average 16.0 % 15.4 %
Discount rate 2.6 % 1.9 %
(1)Includes voluntary and involuntary prepayments.
Valuation of MSRs and Pledged MSR Liabilities
We originate MSRs from our lending activities and acquire MSRs through flow purchase agreements, Agency Cash Window programs, bulk purchases, asset acquisitions or business combinations. We account for MSRs and pledged MSR liabilities at fair value. As of December 31, 2021, we reported a $2.3 billion fair value of MSRs. In 2021, we recognized a $149.5 million fair value gain on the revaluation of our MSRs.
We determine the fair value of MSRs and pledged MSR liabilities primarily using discounted cash flow methodologies. The significant estimated future cash inflows for MSRs include servicing fees, late fees, float earnings and other ancillary fees and cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments. The determination of the fair value of MSRs and pledged MSR liabilities requires management judgment relating to the significant unobservable assumptions that underlie the valuation, including prepayment speed, delinquency rates, cost to service and discount rate. Our judgement is informed by the transactions we observe in the market, by our actual portfolio performance and by the advice and information we obtain from our valuation experts, amongst other factors.
To assist in the determination of fair value, we engage third-party valuation experts who generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model and a prepayment model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, incorporating available industry survey results, and including risk premiums and liquidity adjustments. While the models and related assumptions used by the valuation experts are proprietary to them, we
understand the methodologies and assumptions used to develop the prices based on our ongoing due diligence, which includes regular discussions with the valuation experts, and we perform additional verification and analytical procedures. We evaluate the reasonableness of our third-party experts’ assumptions using historical experience adjusted for prevailing market conditions and benchmarks with third-party expert valuation and market participant surveys. We believe that our procedures provide reasonable assurance that the fair value used in our consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
The following table provides the range and weighted average of significant unobservable assumptions used (expressed as a percentage of UPB) by class projected for the five-year period beginning December 31, 2021:
Conventional Government-Insured Non-Agency
Prepayment speed
Range 6.0% to 12.5% 7.2% to 16.5% 11.7% to 14.5%
Weighted average 9.0% 11.5% 12.5%
Delinquency
Range 0.6% to 1.3% 6.0% to 13.7% 9.9% to 20.0%
Weighted average 0.8% 7.7% 14.1%
Cost to service (in dollars)
Range $68 to $69 $96 to $125 $193 to $235
Weighted average $68 $106 $214
Discount rate 8.3% 10.1% 11.2%
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 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, 2021, the allowance for losses on servicing advances was $7.0 million, which represented 1% of total servicing advances. In 2021, we recorded an $8.1 million provision expense for losses on servicing advances.
We record an allowance for losses on receivables in our Servicing business, including related to defaulted FHA or VA insured loans repurchased from Ginnie Mae guaranteed securitizations. This allowance is based upon continuing assessments of collectability, historical loss experience, current conditions and reasonable and supportable forecasts. At December 31, 2021, the allowance for losses on receivables related to government-insured claims was $41.5 million, which represented 32% of total government-insured claims receivables. In 2021, we recorded a $14.4 million provision expense on receivables related to government-insured claims.
Determining an allowance for losses involves management judgment and assumptions that, given similar information at any given point, may result in a different but reasonable estimate.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates in each jurisdiction that applies to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. In these evaluations, we gave more significant weight to objective evidence, such as our actual financial condition and historical results of operations, as compared to subjective evidence, such as projections of future taxable income or losses.
For the three-year periods ended December 31, 2021 and 2020, the U.S. and USVI filing jurisdictions were in material cumulative loss positions. 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 $175.4 million and $182.7 million on our U.S. deferred tax assets at December 31, 2021 and 2020, respectively, and a full valuation allowance of $0.4 million on our USVI deferred tax assets at both December 31, 2021 and 2020. 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, 2021, we have recorded a liability for representation and warranty obligations and
similar indemnification obligations of $49.4 million. In 2021, we recorded a $3.2 million provision expense for indemnification. 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. In 2021, we recorded a $9.4 million provision expense for loss contingencies. Our total accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was $44.0 million at December 31, 2021. It is possible that we will incur losses relating to threatened and pending litigation that materially exceed the amount accrued. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded at December 31, 2021.
RECENT ACCOUNTING DEVELOPMENTS
Recent Accounting Pronouncements
For additional information, see Note 1 - Organization, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements for additional information.
Our adoption of the standards listed below on January 1, 2021 did not have a material impact on our consolidated financial statements:
•Investments-Equity Securities (ASC Topic 321), Investments-Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815) (ASU 2020-01)
•Debt-Debt with Conversion and Other Options and Derivatives and Hedging-Contracts in Entity's Own Equity-Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (ASU 2020-06)
•Income Taxes: Simplifying the Accounting for Income Taxes (ASU 2019-12)

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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, interest rate lock commitments (IRLCs) and other derivative instruments. In addition, changes in interest rates could materially and adversely affect the amount of escrow and float income, the volume of mortgage loan originations or result in MSR fair value changes. We also have exposure to the effects of changes in interest rates on our floating-rate borrowings, including MSR and advance financing facilities.
Our management-level Market Risk Committee establishes and maintains policies that govern our risk appetite and associated hedging programs, including such factors as market volatility, duration and interest rate sensitivity measures, limits, targeted hedge ratios, the hedge instruments that we are permitted to use in our hedging activities and the counterparties with whom we are permitted to enter into hedging transactions and our liquidity risk profile. 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 replacement of LIBOR, which is expected to be fully phased out and completely replaced by June 30, 2023. The LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021 and that beginning January 1, 2022, renewals of existing contracts should provide for the replacement of U.S. dollar LIBOR with an alternative reference rate. Many of our debt facilities incorporate LIBOR. These facilities either matured prior to the end of 2021 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 are working with our counterparties to incorporate alternative benchmarks.
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.
Effective May 2021, management started hedging its MSR portfolio and its pipeline separately (see below for further description of pipeline hedging), effectively ending the macro hedge strategy previously in place. Under the new MSR hedging strategy, the interest-rate sensitive MSR portfolio exposure is now defined as follows:
•Agency MSR portfolio,
•expected Agency MSR bulk transactions subject to letters of intent (LOI),
•less the Agency MSRs subject to our sale agreements with NRZ and MAV (See Note 8 - MSR Transfers Not Qualifying for Sale Accounting),
•less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings (Reverse).
Our MSR policy’s objective is to provide partial hedge coverage of interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. The hedge coverage ratio defined as the ratio of hedge and asset rate sensitivity (referred to as DV01) at the time of measurement is subject to lower and upper thresholds, as modeled, of 40% and 60%, respectively. Accordingly, the changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate changes. We periodically evaluate the 40-60% coverage ratio to determine if it warrants adjustment based on market conditions and the symmetry of interest rate risk exposure and liquidity impacts of the hedge and asset profile under shock scenarios. In addition, while DV01 measures remain within the range of our hedging strategy’s objective, actual changes in fair value of the derivatives and MSR portfolio may not offset to the same extent, due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and hedging instruments. We continuously evaluate the use of hedging instruments to strive to enhance the effectiveness of our interest rate hedging strategy.
Effective October 2021, we refined the scope of the hedge policy to allow for MSRs subject to LOI to be covered under a separate hedge coverage ratio requirement sufficient to preserve the economics of the intended transactions.
The following table illustrates the interest rate sensitivity of our MSR portfolio exposure and associated hedges at December 31, 2021. Hypothetical change in values of the MSR and hedges are presented under a set instantaneous +/- 25 basis point parallel move in rates. Refer to the description below under Sensitivity Analysis for more details. Changes in fair value cannot be extrapolated because the relationship to the change in fair value may not be linear. The amounts based on market risk sensitive measures are hypothetical and presented for illustrative purposes only.
Fair value at December 31, 2021 Hypothetical change in fair value due to 25 bps rate decrease (2) Hypothetical change in fair value due to 25 bps rate increase (2)
Agency MSRs - interest rate sensitive (excluding NRZ and MAV) $ 1,307.90 $ (68.3) $ 66.0
Asset value of securitized HECM loans, net of HMBS-related borrowing 94.1 3.4 (3.5)
MSR hedging derivative instruments 1.2 28.8 (28.4)
Total hedge position 32.2 (31.9)
Hypothetical hedge coverage ratio (1) 47 % 48 %
Hypothetical residual exposure to changes in interest rates $ (36.1) $ 34.1
(1)The hypothetical hedge coverage ratio above is calculated as the change in fair value of the total hedge position divided by the change in value of the Agency MSR position.
(2)The baseline for the hypothetical change in fair value is based on a 10-year Treasury Rate of 1.25% at December 31, 2021.
Our derivative instruments include forward trades of MBS or Agency TBAs with different banking counterparties and exchange-traded interest rate swap futures and interest rate options. 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. From time-to-time, we enter into exchange-traded options contracts with purchased put options financed by written call options. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations, within the Servicing segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to optimize the use of third party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements.
The derivative instruments are subject to margin requirements, posted as either initial or variation margin. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties through margin calls, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating may require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.
Loans Held for Investment and HMBS-related Borrowings
The fair value of our HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, 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. The HMSR acts as a partial hedge for our forward MSR value sensitivity. This HMSR exposure is used as an offset to our forward MSR exposure and managed as part of our MSR hedging strategy described above.
Pipeline Hedging Strategy - Loans Held for Sale and IRLCs
In our Originations business, we are exposed to interest rate risk and related price risk during the period from the date of the interest rate lock commitment through (i) the lock commitment cancellation or expiration date or (ii) through the date of sale of the resulting loan into the secondary mortgage market. Loan commitments for forward loans generally range from 5 to 90 days, with the majority of our commitments to borrowers for 60 days and our commitments to correspondent sellers for 7 days. Loans held for sale are generally funded and sold within 5 to 20 days. This interest rate exposure was not individually hedged until May 2021, but rather used as an offset to our MSR exposure and managed as part of our MSR macro-hedging strategy described above. Effective May 2021, we implemented a new pipeline hedging strategy, whereby the interest rate exposure of loans held for sale and IRLCs is economically hedged with derivative instruments, including forward sales of Agency TBAs. The pipeline hedging strategy’s objective is to provide hedge coverage of locks and loans within certain tolerance levels. The net daily market risk position of net pull-though adjusted locks and loans held for sale, less the offsetting hedges of the forward and reverse pipelines, is monitored daily and its daily limit is the greater of +/- 15% or +/- $15 million. During the fourth quarter 2021, the daily limit was revised to +/-7.5% or +/- $7.5 million. We report changes in fair value of these derivative instruments in gain on loans held for sale in our consolidated statements of operations, within the Originations segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to optimize the use of third party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements. Reverse pipeline is hedged under the same principles as described below, for unsecuritized loans held for investment.
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, 2021, given hypothetical instantaneous parallel shifts in the yield curve. We used December 31, 2021 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 $ 3.4 $ (3.5)
Loans held for investment - Unsecuritized HECM loans and tails 0.04 (0.04)
Loans held for sale 15.8 (19.1)
Derivative instruments 12.1 (9.7)
Total MSRs - Agency and non-Agency (1) (68.4) 66.1
Interest rate lock commitments (2) (1.6) 1.3
Total, net $ (38.7) $ 35.1
(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 and MAV financing liabilities, which are recorded in Pledged MSR liability expense.
(2)Forward mortgage loans only.
The increase in our net sensitivity as of December 31, 2021 as compared to December 31, 2020 (from approximately $15 million to $35 - $39 million for a 25 basis point parallel shift in the yield curve) is primarily due to the growth of our Servicing and Originations businesses, with the significant increase in the size of our Agency MSR portfolio through bulk acquisitions and the increase in our pipeline, as our hedging strategy objectives and coverage ratio remained broadly similar.
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, 2021 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 $9.8 million resulting from an increase of $22.6 million in annual interest income and an increase of $12.8 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, 2021 and 2020. 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, 2021
2022 2023 2024 2025 2026 Thereafter Total Balance Fair Value (1)
Rate-Sensitive Assets:
Interest-earning cash $ 136.7 $ - $ - $ - $ - $ - $ 136.7 $ 136.7
Average interest rate 0.27 % - % - % - % - % - % 0.27 %
Loans held for sale, at fair value 917.5 - - - - - 917.5 917.5
Average interest rate 3.59 % - % - % - % - % - % 3.59 %
Loans held for sale, at lower of cost or fair value (2)
6.1 0.4 - - 4.5 11.0 11.0
Average interest rate 4.19 % 5.51 % - % - % - % 3.59 % 3.98 %
Loans held for investment 414.3 628.4 899.7 1,152.8 761.6 3,342.9 7,199.8 7,199.8
Average interest rate 3.13 % 3.23 % 3.23 % 2.96 % 2.93 % 2.74 % 2.78 %
Debt service accounts and interest-earning time deposits
10.0 0.1 - - 0.1 0.5 10.6 10.6
Average interest rate 0.03 % 4.00 % - % - % 4.00 % 5.40 % 0.30 %
Total rate-sensitive assets $ 1,484.5 $ 628.9 $ 899.7 $ 1,152.8 $ 761.7 $ 3,347.9 $ 8,275.5 $ 8,275.5
Percent of total 17.94 % 7.60 % 10.87 % 13.93 % 9.20 % 40.46 % 100.00 %
Rate-Sensitive Liabilities (3):
Match funded liabilities $ 512.3 $ - $ - $ - $ - $ - $ 512.3 $ 512.0
Average interest rate 1.54 % - % - % - % - % - % 1.54 %
Senior notes (4) - - - - 400.0 285.0 685.0 674.9
Average interest rate - % - % - % - % 7.88 % 12.00 % 9.59 %
Mortgage loan warehouse facilities 1,085.1 - - - - - 1,085.1 1,085.1
Average interest rate 2.60 % - % - % - % - % - % 2.60 %
MSR financing facilities (4) 490.9 94.2 - - 277.1 39.5 901.7 873.8
Average interest rate 3.94 % 2.69 % - % - % 2.69 % - % 4.55 %
Total rate-sensitive liabilities $ 2,088.3 $ 94.2 $ - $ - $ 677.1 $ 324.5 $ 3,184.1 $ 3,145.8
Percent of total 65.59 % 2.96 % - % - % 21.27 % 10.19 % 100.00 %
Expected Maturity Date at December 31, 2021 (Notional Amounts)
2022 2023 2024 2025 2026 There- after Total
Balance Fair
Value (1)
Rate-Sensitive Derivative Financial Instruments:
Derivative assets (liabilities)
Forward MBS trades 175.0 - - - - - $ 175.0 $ 0.4
Average coupon 2.07 % - % - % - % - % - % 2.07 %
TBA / Forward MBS Trades 550.0 - - - - - 550.0 (0.3)
Average coupon 2.00 % - % - % - % - % - % 2.00 %
Derivatives futures 792.5 - - - - - 792.5 1.7
Average coupon 1.53 % - % - % - % - % - % 1.53 %
IRLCs 1,085.3 - - - - - 1,085.3 18.1
Average coupon 2.40 % - % - % - % - % - % 2.40 %
TBA forward Pipeline trades 1,232.0 - - - - - 1,232.0 -
Average coupon 2.44 % - % - % - % - % - % 2.44 %
Option contracts 575.0 - - - - - 575.0 (0.3)
Average coupon - % - % - % - % - % - % - %
Total derivatives, net $ 4,409.8 $ - $ - $ - $ - $ - $ 4,409.8 $ 19.7
Forward LIBOR curve (5) 0.45 % 1.22 % 1.46 % 1.52 % 1.52 % 1.64 %
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 $ 261.5 $ - $ - $ - $ - $ - $ 261.5 $ 261.5
Average interest rate 0.30 % - % - % - % - % - % 0.30 %
Loans held for sale, at fair value 366.4 - - - - - 366.4 366.4
Average interest rate 3.33 % - % - % - % - % - % 3.33 %
Loans held for sale, at lower of cost or fair value (2)
0.2 - 0.5 - - 20.8 21.5 21.5
Average interest rate 5.00 % - % 5.51 % - % - % 4.21 % 4.42 %
Loans held for investment 396.4 385.9 729.0 1,550.2 1,392.1 2,543.5 6,997.1 6,997.1
Average interest rate 3.26 % 3.46 % 3.64 % 3.52 % 3.53 % 3.44 % 4.82 %
Debt service accounts and interest-earning time deposits
20.5 0.3 - - - - 20.8 20.8
Average interest rate 0.09 % 5.55 % - % - % - % - % 0.17 %
Total rate-sensitive assets $ 1,045.0 $ 386.2 $ 729.5 $ 1,550.2 $ 1,392.1 $ 2,564.3 $ 7,667.3 $ 7,667.3
Percent of total 13.63 % 5.04 % 9.51 % 20.22 % 18.16 % 33.44 % 100.00 %
Rate-Sensitive Liabilities (3):
Match funded liabilities $ 106.3 $ 475.0 $ - $ - $ - $ - $ 581.3 $ 582.0
Average interest rate 4.10 % 1.49 % - % - % - % - % 1.96 %
Senior notes (4) 21.5 291.5 - - - - 313.1 320.9
Average interest rate 6.38 % 8.38 % - % - % - % - % 8.24 %
Mortgage loan warehouse facilities 451.7 - - - - - $ 451.7 451.7
Average interest rate 3.30 % - % - % - % - % - % 3.30 %
MSR financing facilities (4) 349.4 41.7 - - - 47.5 438.6 406.9
Average interest rate 4.79 % 5.07 % - % - % - % - % 4.82 %
Senior secured term loan (4) 20.0 165.0 - - - - 185.0 184.6
Average interest rate 7.00 % 7.00 % - % - % - % - % 7.00 %
Total rate-sensitive liabilities $ 949.0 $ 973.2 $ - $ - $ - $ 47.5 $ 1,969.6 $ 1,946.1
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 50.0 - - - - - 50.0 $ (0.1)
Average coupon 2.40 % - % - % - % - % - % 2.40 %
TBA / Forward MBS Trades 400.0 - - - - - 400.0 (4.6)
Average coupon 2.22 % - % - % - % - % - % 2.22 %
Derivatives futures 593.5 - - - - - 593.5 0.5
Average coupon 0.75 % - % - % - % - % - % 0.75 %
IRLCs 631.4 - - - - - 631.4 22.7
Average coupon 2.89 % - % - % - % - % - % 2.89 %
Total derivatives, net $ 1,675 $ - $ - $ - $ - $ - $ 1,675 $ 19
Forward LIBOR curve (5) 0.14 % 0.13 % 0.20 % 0.36 % 0.60 % 0.86 %
(1)See Note 3 - Fair Value to the Consolidated Financial Statements for additional fair value information on financial instruments.
(2)Net of valuation allowances and including non-performing loans.
(3)Excludes financing liabilities that result from sales of assets that do not qualify as sales for accounting purposes and, therefore, are accounted for as secured financings, which have no contractual maturity and are amortized over the life of the related assets.
(4)Amounts are exclusive of any related discount or unamortized debt issuance costs.
(5)Average 1-Month LIBOR for the periods indicated.

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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, 2021, 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, 2021, 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, 2021 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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees as required by the New York Stock Exchange rules. We have also adopted a Code of Ethics for Senior Financial Officers that applies to our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. Any waivers from either the Code of Business Conduct and Ethics or the Code of Ethics for Senior Financial Officers must be approved by our Board of Directors or a Board Committee and must be promptly disclosed. The Code of Business Conduct and Ethics and the Code of Ethics for Senior Financial Officers are available on our web site at www.ocwen.com in the “Shareholders” section under “Corporate Governance.” Any amendments to the Code of Business Conduct and Ethics or the Code of Ethics for Senior Financial Officers, as well as any waivers that are required to be disclosed under the rules of the SEC or the New York Stock Exchange, will be posted on our website.
The additional information required by this item is incorporated by reference to the information contained in our definitive Proxy Statement with respect to our 2022 Annual Meeting, which we intend to file with the SEC no later than 120 days after the end of our fiscal year ended December 31, 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 2022 Annual Meeting, which we intend to file with the SEC no later than 120 days after the end of our fiscal year ended December 31, 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 2022 Annual Meeting, which we intend to file with the SEC no later than 120 days after the end of our fiscal year ended December 31, 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 2022 Annual Meeting, which we intend to file with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information contained in our definitive Proxy Statement with respect to our 2022 Annual Meeting, which we intend to file with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended December 31, 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.
3.1
Amended and Restated Articles of Incorporation, as amended (15)
3.2
Amended and Restated Bylaws of Ocwen Financial Corporation (16)
4.1
Form of Certificate of Common Stock (1)
4.2 The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument with respect to the issuance of long-term debt of the Company and its subsidiaries, the authorized principal amount of which does not exceed 10% of the consolidated assets of the Company and its subsidiaries.
4.3
Description of Common Stock (20)
10.1*
Ocwen Financial Corporation 1998 Annual Incentive Plan, as amended (12)
10.2*
Ocwen Financial Corporation Deferral Plan for Directors, dated March 7, 2005 (5)
10.3*
Ocwen Financial Corporation 2007 Equity Incentive Plan, dated May 10, 2007 (6)
10.4*
Ocwen Financial Corporation 2017 Performance Incentive Plan (9)
10.5†††
Binding Term Sheet dated as of February 22, 2019 between Altisource S.à r.l., Ocwen Financial Corporation and Ocwen Mortgage Servicing, Inc. (15)
10.6
Services Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. , as amended (filed herewith)
10.7
Services Agreement, dated as of October 1, 2012, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l., as amended (filed herewith)
10.8
Agreement dated as of April 12, 2013 by and among Altisource Solutions S.à r.l., Ocwen Financial Corporation and Ocwen Mortgage Servicing, Inc. (7)
10.9†††††
Binding Term Sheet among Ocwen Financial Corporation, Ocwen USVI Services, LLC and Altisource S.à r.l. dated as of May 5, 2021 (18)
10.10*
Form of Indemnification Agreement (8)
10.11*
Form of Undertaking to Repay Advancement of Indemnification Expenses (8)
10.12††
Transfer Agreement dated as of July 23, 2017 by and between Ocwen Loan Servicing, LLC, New Residential Mortgage LLC, Ocwen Financial Corporation, and New Residential Investment Corp. (10)
10.13††
Subservicing Agreement dated as of July 23, 2017 by and between New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (10)
10.14††
New RMSR Agreement, dated as of January 18, 2018 by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC, and New Residential Mortgage LLC (2)
10.15††
Amendment No. 1 to Transfer Agreement, dated as of January 18, 2018 by and among Ocwen Loan Servicing, LLC, New Residential Mortgage LLC, Ocwen Financial Corporation and New Residential Investment Corp. (2)
10.16*
Offer Letter, dated April 17, 2018, between Ocwen Financial Corporation and Glen Messina, as amended (filed herewith)
10.17††
Amendment No. 1 to Subservicing Agreement dated as of August 17, 2018 between New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (11)
10.18††
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 (11)
10.19††
Subservicing Agreement dated as of August 17, 2018 between New Penn Financial, LLC and Ocwen Loan Servicing, LLC (11)
10.20*
Form of Director Restricted Stock Unit Agreement (1)
10.21*
Amended and Restated Ocwen Financial Corporation United States Basic Severance Plan (14)
10.22*
Amended and Restated Ocwen Financial Corporation United States Change in Control Severance Plan (14)
10.23*
Offer Letter dated January 17, 2019 between Ocwen Financial Corporation and June Campbell (3)
10.24*
Form of 2019 Annual Performance-Based Cash Award Agreement (4)
10.25*
Form of 2019 Annual Performance-Based Stock Award Agreement (4)
10.26*
Form of 2019 Annual Time-Based Cash Award Agreement (4)
10.27*
Form of 2019 Annual Time-Based Stock Award Agreement (4)
10.28*
Form of 2019 Transitional Cash Award Agreement (4)
10.29*
Form of Cash Award granted September 10, 2020 (15)
10.30*
Form of Restricted Stock Unit Award granted September 10, 2020 (15)
10.31††††
Amendment No. 2, dated as of October 5, 2020, to New RMSR Agreement dated as of January 18, 2018 by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC, and New Residential Mortgage LLC (15)
10.32††††
Amendment No. 2, dated as of October 5, 2020, to Subservicing Agreement dated as of July 23, 2017 between New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (15)
10.33††††
Amendment No. 1, dated as of October 5, 2020, Subservicing Agreement dated as of August 17, 2018 between New Penn Financial, LLC and PHH Mortgage Corporation (15)
10.34
Agreement Amending Notice Due Date among PHH Mortgage Corporation, New Residential Mortgage LLC and the other parties thereto, dated December 10, 2021 (filed herewith)
10.35††††
Transaction Agreement between Ocwen Financial Corporation and Oaktree Capital Management L.P. and affiliates, dated as of December 21, 2020 (20)
10.36††††
Form of Securities Purchase Agreement between Ocwen Financial Corporation, Opps OCW Holdings, LLC, and ROF8 OCW MAV PT, LLC (20)
10.37
Form of Registration Rights Agreement between Ocwen Financial Corporation, Opps OCW Holdings, LLC, and ROF8 OCW MAV PT, LLC (20)
10.38
Form of Warrant issuable to Opps OCW Holdings, LLC and ROF8 OCW MAV PT, LLC (20)
10.39*
Form of 2020 Annual Time-Based Cash Award Agreement (13)
10.40*
Form of 2020 Annual Performance-Based Cash Award Agreement (13)
10.41*
Ocwen Financial Corporation 2021 Equity Incentive Plan (17)
10.42
Bulk Servicing Rights Purchase and Sale Agreement between PHH Mortgage Corporation and AmeriHome Mortgage Company, LLC dated as of May 21, 2021 (18)
10.43††††
Note and Warrant Purchase Agreement, dated as of February 9, 2021, by and among Ocwen Financial Corporation, the purchasers signatory thereto, and Oaktree Fund Administration, LLC, as collateral agent (19)
10.44††††
Second Lien Notes Pledge and Security Agreement, dated as of March 4, 2021, among Ocwen Financial Corporation and Oaktree Fund Administration, LLC (19)
10.45
Form of $199,500,000 aggregate principal amount Senior Secured Notes due 2027 (19)
10.46
Form of Warrant issued March 4, 2021 (19)
10.47
Registration Rights Agreement dated as of March 4, 2021 (19)
10.48††††
First Lien Notes Pledge and Security Agreement dated as of March 4, 2021 among PHH Mortgage Corporation, PHH Corporation, other guarantors thereto, and Wilmington Trust, National Association (19)
10.49††††
Indenture, dated as of March 4, 2021, among PHH Mortgage Corporation, as the issuer, Ocwen Financial Corporation, as the parent, and the other guarantors thereto, and Wilmington Trust, National Association, as the trustee and collateral trustee (19)
10.50
Form of $400,000,000 aggregate principal amount 7.875% Senior Secured Notes due 2026 (19)
10.51††††
First Amendment to Transaction Agreement, dated as of March 4, 2021, by and among OCW MAV Holdings, LLC, Ocwen Financial Corporation, and affiliates of Oaktree Capital Management L.P. (19)
10.52*
Form of Stock-Settled Performance-Based Restricted Stock Unit Agreement dated March 2, 2021 (19)
10.53*
Form of Hybrid (Cash and Stock Settled) Performance-Based Restricted Stock Unit Agreement dated March 2, 2021 (19)
10.54*
Form of Stock-Settled Time-Based Restricted Stock Unit Agreement dated March 2, 2021 (19)
10.55*
Form of Hybrid (Cash and Stock Settled) Time-Based Restricted Stock Unit Agreement dated March 2, 2021 (19)
21.1
Subsidiaries (filed herewith)
23.1
Consent of Independent Registered Public Accounting Firm (filed herewith)
31.1
Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2
Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1
Certification of the principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2
Certification of the principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101 The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 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, 2021, formatted in iXBRL (included as Exhibit 101).
* Management contract or compensatory plan or agreement.
† Certain exhibits have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any referenced exhibits will be furnished supplementally to the SEC upon request.
†† Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
††† Certain confidential information contained in this agreement has been omitted because it is not material and would be competitively harmful if publicly disclosed.
†††† Certain schedules to the exhibits have been omitted in accordance with Item 601(a)(5) of Regulation S-K. A copy of any referenced schedules will be furnished supplementally to the SEC upon request.
††††† Certain information has been omitted in accordance with Item 601(b)(10) of Regulation S-K because it is both not material and is the type of information that the Registrant treats as private or confidential. An unredacted copy will be furnished supplementally to the SEC upon request.
(1)Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K filed for the year ended December 31, 2018 filed on February 27, 2019.
(2) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form
10-Q for the period ended March 31, 2018 filed on May 2, 2018.
(3) Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2019 filed on May 7, 2019.
(4) Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2019 filed on August 6, 2019.
(5) Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 16, 2005.
(6) Incorporated by reference from the similarly described exhibit to the Registrant’s definitive Proxy Statement with respect to its 2007 Annual Meeting of Shareholders as filed on March 30, 2007.
(7) Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on April 18, 2013.
(8) Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on March 26, 2015.
(9) Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed on May 24, 2017.
(10) Incorporated by reference from the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2017 filed on November 2, 2017.
(11) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2018 filed on November 6, 2018.
(12) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2016 filed on April 28, 2016.
(13) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 filed on May 8, 2020.
(14) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 filed on August 4, 2020.
(15) Incorporated by reference to the similarly described exhibit included with the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2020 filed on November 3, 2020.
(16) Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on February 25, 2019.
(17) Incorporated by reference to the similarly described exhibit to the Registrant’s Form 8-K filed on May 25, 2021.
(18) Incorporated by reference to the similarly described exhibit to the Registrant’s Form10-Q for the period ended June 30, 2021 filed on August 5, 2021.
(19) Incorporated by reference to the similarly described exhibit to the Registrant’s Form 10-Q for the period ended March 31, 2021 filed on May 4, 2021.
(20) Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 19, 2021.