Edgar Filing: OCWEN FINANCIAL CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2009

	or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from: _____________________to _____________________

Commission File Number: 1-13219

Ocwen Financial Corporation

(Exact name of registrant as specified in its charter)


	Florida	65-0039856

	(State or other jurisdiction	(I.R.S. Employer
	of incorporation or organization)	Identification No.)

1661 Worthington Road, Suite 100, West Palm Beach, Florida 33409

(Address of principal executive offices) (Zip Code)

(561) 682-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


	Large accelerated filero		Accelerated filer x
	Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

Number of shares of Common Stock, $0.01 par value, outstanding as of October 30, 2009: 99,835,097 shares.

OCWEN FINANCIAL CORPORATION
FORM 10-Q

INDEX




		Page
PART I – FINANCIAL INFORMATION

Item 1.	Interim Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at September 30, 2009 and December 31, 2008	3

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2009 and 2008	5

	Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2009	6

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008	7

	Notes to Interim Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

Item 4.	Controls and Procedures	61

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 4.	Submission of Matters to a Vote of Security Holders	61

Item 6.	Exhibits	62

Signatures		63

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to the following:


•	assumptions related to the sources of liquidity, our ability to fund advances and the adequacy of financial resources;

•	estimates regarding prepayment speeds, float balances, delinquency rates, advances and other servicing portfolio characteristics;

•	projections as to the performance of our fee-based loan processing business and our asset management vehicles;

•	assumptions about our ability to grow our business;

•	our plans to continue to sell our non-core assets;

•	our ability to establish additional asset management vehicles;

•	our ability to reduce our cost structure;

•	our analysis in support of the decision to spin Ocwen Solutions as a separate company;

•	our continued ability to successfully modify delinquent loans and sell foreclosed properties;

•	estimates regarding our reserves, valuations and anticipated realization on assets; and

•	expectations as to the effect of resolution of pending legal proceedings on our financial condition.

Forward-looking statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed in “Risk Factors” below and the following:


•	availability of adequate and timely sources of liquidity;

•	delinquencies, advances and availability of servicing;

•	general economic and market conditions;

•	uncertainty related to government programs, regulations and policies; and

•	uncertainty related to dispute resolution and litigation.

Further information on the risks specific to our business are detailed within this report and our other reports and filings with the Securities and Exchange Commission, including our Annual report on Form 10-K for the year ended December 31, 2008, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Forward-looking statements speak only as of the date they are made and should not be relied upon. Ocwen Financial Corporation undertakes no obligation to update or revise forward-looking statements.

PART I – FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)


	September 30, 2009		December 31, 2008

			(As Adjusted)
Assets
Cash	$	195,854	$	201,025
Trading securities, at fair value
Auction rate		250,099		239,301
Subordinates and residuals		4,417		4,369
Loans held for resale, at lower of cost or fair value		36,618		49,918
Advances		131,360		102,085
Match funded advances		879,444		1,100,555
Mortgage servicing rights		124,989		139,500
Receivables, net		33,135		42,798
Deferred tax assets, net		129,116		175,145
Intangibles, including goodwill		—		46,227
Premises and equipment, net		3,954		12,926
Investments in unconsolidated entities		18,764		25,663
Other assets		67,303		97,588

Total assets	$	1,875,053	$	2,237,100


Liabilities and Equity
Liabilities
Match funded liabilities	$	529,779	$	961,939
Lines of credit and other secured borrowings		54,665		116,870
Investment line		167,168		200,719
Servicer liabilities		59,457		135,751
Debt securities		109,814		133,367
Income taxes payable, net		18,940		—
Other liabilities		77,770		78,813

Total liabilities		1,017,593		1,627,459


Commitments and Contingencies (Note 24)

Equity
Ocwen Financial Corporation stockholders’ equity
Common stock, $.01 par value; 200,000,000 shares authorized; 99,835,097 and 62,716,530 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively		998		627
Additional paid-in capital		458,822		201,831
Retained earnings		395,809		404,901
Accumulated other comprehensive income, net of income taxes		1,569		1,876

Total Ocwen Financial Corporation stockholders’ equity		857,198		609,235
Non-controlling interest in subsidiaries		262		406

Total equity		857,460		609,641

Total liabilities and equity	$	1,875,053	$	2,237,100

The accompanying notes are an integral part of these consolidated financial statements.

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)


For the periods ended September 30,	Three months						Nine months

	2009			2008			2009			2008

				(As Adjusted)						(As Adjusted)

Revenue
Servicing and subservicing fees	$	57,534		$	91,298		$	201,832		$	290,200
Process management fees		23,735			27,453			97,513			81,794
Other revenues		2,083			2,510			7,776			8,743

Total revenue		83,352			121,261			307,121			380,737


Operating expenses
Compensation and benefits		18,959			33,727			74,758			96,567
Amortization of servicing rights		7,159			12,106			25,743			40,712
Servicing and origination		7,804			11,540			36,277			37,589
Technology and communications		4,206			6,022			13,495			17,713
Professional services		6,378			5,973			21,772			27,058
Occupancy and equipment		4,192			5,131			15,056			17,471
Other operating expenses		4,675			2,959			11,188			9,689

Total operating expenses		53,373			77,458			198,289			246,799


Income from operations		29,979			43,803			108,832			133,938


Other income (expense)
Interest income		1,992			3,448			6,411			11,492
Interest expense		(16,145	)		(19,334	)		(50,108	)		(66,513	)
Gain (loss) on trading securities		8,291			(621	)		13,346			(22,366	)
Gain (loss) on debt redemption		1,600			—			2,134			(86	)
Loss on loans held for resale, net		(1,242	)		(674	)		(8,783	)		(11,112	)
Equity in losses of unconsolidated entities		(1,059	)		(2,928	)		(1,608	)		(10,628	)
Other, net		42			(284	)		2,843			214

Other expense, net		(6,521	)		(20,393	)		(35,765	)		(98,999	)


Income from continuing operations before income taxes		23,458			23,410			73,067			34,939
Income tax expense		65,294			8,330			82,803			11,693

Income (loss) from continuing operations		(41,836	)		15,080			(9,736	)		23,246
Income (loss) from discontinued operations, net of income taxes		(231	)		(186	)		633			(5,572	)

Net income (loss)		(42,067	)		14,894			(9,103	)		17,674
Net loss (income) attributable to non-controlling interest in subsidiaries		36			82			11			(143	)

Net income (loss) attributable to Ocwen Financial Corporation (OCN)	$	(42,031	)	$	14,976		$	(9,092	)	$	17,531


Basic earnings per share
Income from continuing operations attributable to OCN common shareholders	$	(0.51	)	$	0.24		$	(0.14	)	$	0.37
Income (loss) from discontinued operations attributable to OCN common shareholders		—			—			0.01			(0.09	)

Net income (loss) attributable to OCN common shareholders	$	(0.51	)	$	0.24		$	(0.13	)	$	0.28


Diluted earnings per share
Income from continuing operations attributable to OCN common shareholders	$	(0.51	)	$	0.23		$	(0.14	)	$	0.37
Income (loss) from discontinued operations attributable to OCN common shareholders		—			—			0.01			(0.09	)

Net income (loss) attributable to OCN common shareholders	$	(0.51	)	$	0.23		$	(0.13	)	$	0.28


Weighted average common shares outstanding
Basic		82,614,456			62,715,551			70,966,393			62,655,655
Diluted		82,614,456			69,750,889			70,966,393			62,897,271

The accompanying notes are an integral part of these consolidated financial statements.

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)


For the periods ended September 30,	Three months						Nine months

	2009			2008			2009			2008

				(As Adjusted)						(As Adjusted)

Net income (loss)	$	(42,067	)	$	14,894		$	(9,103	)	$	17,674

Other comprehensive income, net of income taxes:

Change in unrealized foreign currency translation adjustment (1)		(80	)		(88	)		(307	)		456


Change in deferred loss on cash flow hedge arising during the period (2)		—			—			—			(194	)
Reclassification adjustment for loss on cash flow hedge included in net income (3)		—			—			—			345

Net change in deferred loss on cash flow hedge		—			—			—			151

		(80	)		(88	)		(307	)		607


Comprehensive income (loss)		(42,147	)		14,806			(9,410	)		18,281

Comprehensive loss (income) attributable to non-controlling interest in subsidiaries		47			148			144			(145	)

Comprehensive income (loss) attributable to OCN	$	(42,100	)	$	14,954		$	(9,266	)	$	18,136


(1)	Net of income tax benefit (expense) of $47 and $63 for the three months ended September 30, 2009 and 2008, respectively, and $180 and $(268) for the nine months ended September 30, 2009 and 2008, respectively.

(2)	Net of income tax expense of $114 for the nine months ended September 30, 2008.

(3)	Net of income tax expense of $202 for the nine months ended September 30, 2008.

The accompanying notes are an integral part of these consolidated financial statements.

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Dollars in thousands, except share data)


	OCN Shareholders

													Accumulated Other Comprehensive Income, Net of Taxes

																Non- controlling interest in subsidiaries
	Common Stock						Additional Paid-in Capital			Retained Earnings

	Shares			Amount															Total

Balance at December 31, 2008 (As Adjusted – See Note 3)		62,716,530		$	627		$	201,831		$	404,901		$	1,876		$	406		$	609,641
Net loss		—			—			—			(9,092	)		—			(11	)		(9,103	)
Net assets distributed in connection with the spin-off of Altisource Portfolio Solutions S.A. (formerly Ocwen Solutions) (Note 2)		—			—			(71,448	)		—			—			—			(71,448	)
Issuance of common stock		37,671,500			377			334,790			—			—			—			335,167
Repurchase of common stock		(1,000,000	)		(10	)		(10,990	)		—			—			—			(11,000	)
Repurchase of 3.25% Convertible Notes		—			—			(4	)		—			—			—			(4	)
Issuance of common stock awards to employees		29,907			—			(138	)		—			—			—			(138	)
Exercise of common stock options		405,013			4			2,964			—			—			—			2,968
Excess tax benefits related to share-based awards		—			—			362			—			—			—			362
Employee compensation – Share-based awards		—			—			1,373			—			—			—			1,373
Directors’ compensation – Common stock		12,147			—			82			—			—			—			82
Other comprehensive loss, net of income taxes		—			—			—			—			(307	)		(133	)		(440	)

Balance at September 30, 2009		99,835,097		$	998		$	458,822		$	395,809		$	1,569		$	262		$	857,460

The accompanying notes are an integral part of these consolidated financial statements.

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)


	For the nine months ended September 30,

	2009			2008

				(As Adjusted)
Cash flows from operating activities
Net income (loss)	$	(9,103	)	$	17,674
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Amortization of mortgage servicing rights		25,743			40,712
Premium amortization and discount accretion		1,735			2,924
Depreciation and other amortization		6,025			9,599
Provision for bad debts		1,138			872
Provision for (reversal of) impairment of mortgage servicing assets		(374	)		1,401
Provision for (reversal of) impairment of discontinued operations		(1,227	)		4,980
Loss (gain) on trading securities		(13,346	)		22,366
Loss on loans held for resale, net		8,783			11,112
Equity in losses of unconsolidated entities		1,608			10,628
Loss (gain) on debt redemption		(2,134	)		86
Excess tax benefits related to share-based awards		(362	)		(3	)
Net cash provided (used) by trading activities		2,500			(238,303	)
Net cash provided by loans held for resale activities		3,605			5,641
Decrease in advances and match funded advances		187,669			207,405
Decrease in deferred tax assets		44,325			4,974
Decrease in receivables and other assets, net		27,222			19,780
Decrease in servicer liabilities		(76,294	)		(94,187	)
Increase (decrease) in other liabilities		23,012			(10,241	)
Other, net		(996	)		3,808

Net cash provided by operating activities		229,529			21,228


Cash flows from investing activities
Purchase of mortgage servicing rights		(10,241	)		(3,638	)
Proceeds from the sale of mortgage servicing rights		—			5,985
Distributions of capital from unconsolidated entities		4,496			32,748
Investment in unconsolidated entities		(62	)		(1,250	)
Additions to premises and equipment		(3,429	)		(4,566	)
Proceeds from sales of real estate		1,689			6,003
Other		396			154

Net cash provided (used) by investing activities		(7,151	)		35,436


Cash flows from financing activities
Distribution of cash in connection with the spin-off of Altisource Portfolio Solutions S.A. (formerly Ocwen Solutions) (Note 2)		(20,028	)		—
Repayment of match funded liabilities, net		(427,328	)		(17,313	)
Repayment of lines of credit and other secured borrowings, net		(49,870	)		(195,717	)
Proceeds from investment line		—			299,964
Repayment of investment line		(33,551	)		(84,744	)
Repurchase of debt securities		(24,612	)		(10,797	)
Exercise of common stock options		2,587			3
Repurchase of common stock		(11,000	)		—
Issuance of common stock		335,167			—
Excess tax benefits related to share-based awards		362			3
Proceeds from sale of mortgage servicing rights accounted for as a financing		724			—

Net cash used by financing activities		(227,549	)		(8,601	)

The accompanying notes are an integral part of these consolidated financial statements.

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Dollars in thousands)


	For the nine months ended September 30,

	2009			2008


Net increase (decrease) in cash		(5,171	)		48,063
Cash at beginning of period		201,025			114,243

Cash at end of period	$	195,854		$	162,306


Supplemental disclosure of non-cash investing and financing activities:
Net assets distributed in connection with the spin-off of Altisource Portfolio Solutions S.A. (formerly Ocwen Solutions), excluding cash (Note 2)	$	51,420			—

The accompanying notes are an integral part of these consolidated financial statements.

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Dollars in thousands, except share data)


Note 1	Summary of Significant Accounting Policies

Organization

Ocwen Financial Corporation (NYSE: OCN) (Ocwen or OCN), through its subsidiaries, is a leading provider of residential and commercial mortgage loan servicing, special servicing and asset management services. Ocwen is headquartered in West Palm Beach, Florida with offices in California, the District of Columbia, Florida, Georgia and New York and global operations in India and Uruguay.

At September 30, 2009, OCN owned all of the outstanding stock of its primary subsidiaries: Ocwen Loan Servicing, LLC (OLS); Ocwen Financial Solutions, Private Limited (OFSPL); and Investors Mortgage Insurance Holding Company. OCN owns 70% of Global Servicing Solutions, LLC (GSS) with the remaining 30% minority interest held by ML IBK Positions, Inc.

OCN also holds a 45% interest in BMS Holdings, Inc. (BMS Holdings), a 25% interest in Ocwen Structured Investments, LLC (OSI) and approximately a 25% interest in Ocwen Nonperforming Loans, LLC (ONL) and Ocwen REO, LLC (OREO).

On August 10, 2009, we completed the previously announced distribution of our Ocwen Solutions line of business, except for BMS Holdings and GSS, via the spin-off of a separate publicly-traded company, Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) (Altisource). See Note 2.

Basis of Presentation

Certain amounts included in our 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation, including retrospective application of new accounting pronouncements adopted January 1, 2009. See Note 3 for information regarding our adoption of recent accounting pronouncements.

The accompanying unaudited interim consolidated financial statements have been prepared in conformity with the instructions of the Securities and Exchange Commission (SEC) to Form 10-Q and SEC Regulation S-X, Article 10, Rule 10-01 for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. In our opinion, the accompanying unaudited financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The results of operations and other data for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the entire year ending December 31, 2009. The unaudited interim consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly significant in the near or medium term relate to our determination of the valuation of securities, loans held for resale, mortgage servicing rights (MSRs) and deferred tax assets.

Principles of Consolidation

Securitizations or Asset Backed Financing Arrangements

OCN or its subsidiaries have been the transferor in connection with a number of securitizations or asset-backed financing arrangements. As of September 30, 2009, we have continuing involvement with the financial assets of eleven of these securitizations or asset-backed financing arrangements. We have aggregated these securitizations or asset-backed financing arrangements into two groups: (1) securitizations of residential mortgage loans that were accounted for as sales and (2) financings of advances on loans serviced for others that were accounted for as secured borrowings.

Securitizations of Residential Mortgage Loans

The following table provides information regarding seven securitization trusts where we have continuing involvement with the transferred assets. Our continuing involvement typically includes acting as servicer or sub-servicer for the mortgage loans held by the trust and holding beneficial interests in the trust. The beneficial interests held consist of both subordinate and residual securities that either were retained at the time of the securitization transaction or were acquired subsequent to the securitization. Because each of the securitization trusts is a “qualifying special purpose entity” (QSPE), we exclude the trusts from our consolidated financial statements. Summary information for these trusts is provided below.


For the periods ended September 30	Three months				Nine months

	2009		2008		2009		2008

Total cash received on beneficial interests held	$	407	$	583	$	1,840	$	2,546
Total servicing and subservicing fee revenues		1,000		1,328		3,415		4,326


	As of

	September 30, 2009		December 31, 2008

Total collateral balance	$	629,194	$	740,477
Non-performing collateral (1)		214,481		219,613
Total certificate balance		628,454		740,121
Total servicing advances		23,929		30,683
Total beneficial interests held at fair value (2)		2,095		2,216
Total mortgage servicing rights at amortized cost		1,773		2,066


(1)	Non-performing collateral includes loans past due 90 days or more, loans in foreclosure, loans in bankruptcy and foreclosed real estate.

(2)	Includes investments in subordinate and residual securities that we retained in connection with the loan securitization transactions completed in prior years (primarily 2006). These retained interests had a fair value of $90 and $167 at September 30, 2009 and December 31, 2008, respectively.

We have no obligation to provide financial support to the trusts and have provided no such support. Our exposure to loss as a result of our continuing involvement in the trusts is limited to the carrying values of our investments in the residual and subordinate securities of the trusts, our mortgage servicing rights that are related to the trusts and our advances to the trusts. We consider the probability of loss arising from our advances to be remote because of their position ahead of most of the other liabilities of the trusts. See Notes 6, 7, 8 and 9 for additional information regarding trading securities, advances, match funded advances and mortgage servicing rights.

Match Funded Advances on Loans Serviced for Others

Match funded advances on loans serviced for others result from our transfers of residential loan servicing advances to special purpose entities (SPEs) in exchange for cash. These four SPEs issue debt supported by collections on the transferred advances. We made these transfers under the terms of four advance facility agreements. These transfers do not qualify for sales accounting because we retain control over the transferred assets. As a result, we account for these transfers as financings and classify the transferred advances on our balance sheet as match funded advances and the related liabilities as match funded liabilities. Collections on the advances pledged to the special purpose entities are used to repay principal and interest and to pay the expenses of the entity. Holders of the debt issued by these entities can look only to the assets of the entities themselves for satisfaction of the debt and have no recourse against OCN. However, OLS has guaranteed the payment by one of the entities, Ocwen Servicer Advance Funding (Wachovia), LLC (OSAFW), of its obligations under the securitization documents. The maximum amount payable under the guarantee is limited to 10% of the notes outstanding at the end of the facility’s revolving period in May 2010. As of September 30, 2009, OSAFW had notes outstanding of $109,668. The following table summarizes the assets and liabilities of the four special purpose entities formed in connection with our match funded advance facilities:


	September 30, 2009		December 31, 2008

Total assets	$	922,281	$	1,122,404
Match funded advances		879,444		1,100,555
Total liabilities		596,238		994,244
Match funded liabilities		529,779		961,939

Variable Interest Entities

We evaluate each SPE for classification as a QSPE. We do not consolidate QSPEs in our financial statements. Where we determine that an SPE is not classified as a QSPE, we further evaluate it for classification as a variable interest entity (VIE). When an SPE meets the definition of a VIE, and we determine that OCN is the primary beneficiary, we include the SPE in our consolidated financial statements.

We have determined that the special purpose entities created in connection with the match funded financing facilities that are discussed above are VIEs and that we are the primary beneficiary of those VIEs. The accounts of those special purpose entities are included in our consolidated financial statements.

We apply the equity method of accounting to investments in which we have less than 50% of the voting securities, yet we are able to exercise significant influence over the policies and procedures of the entity. We have eliminated all material intercompany accounts and transactions in consolidation.

Mortgage Servicing Fees and Advances

We earn fees for servicing mortgage loans. We collect servicing fees, generally expressed as a percent of unpaid principal balance, from the borrowers’ payments. We also include late fees, prepayment penalties, float earnings and other ancillary fees in servicing income. We recognize servicing fees when the fees are earned which is generally when the borrowers’ payments are collected.

During any period in which the borrower does not make payments, most of our servicing agreements require that we advance our own funds to meet contractual principal and interest remittance requirements for the investors, pay property taxes and insurance premiums and process foreclosures. We also advance funds to maintain, repair and market foreclosed real estate properties on behalf of investors. These advances are made pursuant to the terms of each servicing contract. Each servicing contract is associated with specific loans, identified as a pool.

When we make an advance on a loan under each servicing contract, we are entitled to recover that advance from either the borrower, for reinstated and performing loans, or from investors, for foreclosed loans. Most of our servicing contracts provide that the advances made under the respective agreement have priority over all other cash payments from the proceeds of the loan, and in the majority of cases, the proceeds of the pool of loans, which are the subject of that servicing contract. As a result, we are entitled to repayment from loan proceeds before any interest or principal is paid on the bonds, and in the majority of cases, advances in excess of loan proceeds may be recovered from pool level proceeds.

We record a charge to earnings to the extent that advances are uncollectible under the provisions of each servicing contract taking into consideration historical loss and delinquency experience, length of delinquency and the amount of the advance. However, we are generally only obligated to advance funds to the extent that we believe the advances are recoverable from expected proceeds from the loan. We assess collectibility using proprietary cash flow projection models which incorporate a number of different factors, depending on the characteristics of the mortgage loan or pool, including, for example, time to a foreclosure sale, estimated costs of foreclosure action, future property tax payments and the value of the underlying property net of carrying costs, commissions and closing costs.


Note 2	Altisource (formerly Ocwen Solutions) Separation Transaction

On August 10, 2009, we completed the separation of Altisource by distributing all of the shares of Altisource common stock to OCN’s shareholders of record as of August 4, 2009 (the Separation). Altisource consists of the operations of our former Ocwen Solutions line of business and related assets comprising the Mortgage Services, Financial Services and Technology Products segments except for BMS Holdings and GSS. OCN shareholders received a tax-free pro rata distribution of one share of Altisource common stock for every three shares of OCN common stock held and received cash in lieu of fractional shares.

As a consequence of the Separation and related transactions, Ocwen will incur income taxes to the extent that the fair market value of Altisource assets exceeded Ocwen’s tax basis in such assets in accordance with Section 367 of the Internal Revenue Code. Ocwen has recognized $50,631 of income tax expense, of which $26,371 is current expense and $24,260 is deferred expense. Additional disclosure of the impact of the Separation on our deferred tax assets is included in Note 19.

For accounting purposes, we eliminated the assets and liabilities of Altisource from our consolidated balance sheet effective at the close of business on August 9, 2009. Beginning August 10, 2009, the operating results of Altisource are no longer included in our operating results. We do not report the historical operating results of Altisource as a discontinued operation because of the significance of the continuing involvement between Altisource and OCN under the long-term services agreements described in Note 23. Accordingly, for periods prior to August 10, 2009, the historical operating results of Altisource continue to be included in continuing operations.

In connection with the Separation, we recognized $520 and $3,501 of advisory expenses for the three and nine months ended September 30, 2009, respectively.

A summary of the carrying values of the net assets that we transferred to Altisource in the Separation is as follows:


Assets:
Cash	$	20,028
Receivables		13,592
Goodwill and intangibles, net		45,794
Premises and equipment, net		8,615
Other assets		2,179

		90,208

Liabilities
Deferred tax liability		2,473
Accrued expenses and other liabilities		16,287

		18,760


Reduction in Additional paid-in capital	$	71,448

OCN stock options outstanding under Ocwen’s various equity compensation plans have been adjusted to reflect the value of Altisource stock distributed to OCN shareholders. At the date of the Separation, all holders of OCN stock awards, including Altisource employees and those who remained with Ocwen after the Separation, received the following:


	•	New Altisource stock options (issued by Altisource) to acquire the number of shares of Altisource common stock equal to the product of (a) the number of OCN stock options held on the date of the Separation and (b) the distribution ratio of one share of Altisource common stock for every three shares of OCN common stock; and

	•	Adjusted OCN stock options for the same number of shares of OCN common stock with a reduced exercise price per stock option.

We determined the exercise price of the new Altisource options and the adjusted OCN options based on the exercise price ratio. We calculated the exercise price ratio for each individual stock option based on the ratio of the grant-date exercise price of the individual stock option to the trading value of the OCN stock immediately prior to the Separation. We then applied this exercise price ratio to the trading value of the OCN stock and the Altisource stock on the date the Altisource stock began regular-way trading on the NASDAQ market to determine the exercise price of the new Altisource stock option and the adjusted OCN stock option.

Similarly, each holder of OCN restricted stock retained his or her unvested shares and received one unvested Altisource restricted stock share for every three OCN unvested shares held.

Consequently, the fair value of the adjusted OCN stock award and the new Altisource stock award immediately following the Separation was equivalent to the fair value of such OCN stock award immediately prior to the Separation.

As of September 30, 2009, the following OCN stock incentive awards were outstanding:


	OCN Stock Options		OCN Restricted Stock

Held by current and former OCN employees		7,092,220		7,484
Held by Altisource employees		2,203,097		2,381

Total		9,295,317		9,865

In addition, as of September 30, 2009, our current and former employees held 2,380,784 options to purchase Altisource common stock.

We are responsible for fulfilling all stock incentive awards related to OCN common stock, and Altisource is responsible for fulfilling all stock incentive awards related to Altisource common stock regardless of whether such stock incentive awards are held by our or Altisource’s employees. Notwithstanding the foregoing, based on the requirements of SFAS 123(R), our stock-based compensation expense, resulting from awards outstanding at the Separation date, is based on the stock incentive awards held by our employees regardless of whether such awards were issued by OCN or Altisource. Accordingly, stock-based compensation that we recognize as expense with respect to Altisource stock incentive awards is included in “Additional paid-in capital” on our Consolidated Balance Sheet.


Note 3	Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. This establishes the FASB Accounting Standards Codification (ASC) as the only source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, with the exception of Statements of Financial Accounting Standards not yet included in the Codification. We adopted the FASB ASC as required for the period ended September 30, 2009.

ASC 820, Fair Value Measures. In April 2009, the FASB issued FASB FSP FAS 157-4 (Codified within ASC 820) which provides additional guidance for estimating fair value when the level of activity for the asset or liability has significantly decreased. The standard is effective for interim and annual reporting periods ending after June 15, 2009. Our initial adoption of this standard during the second quarter of 2009 did not have a material effect on our consolidated financial statements.

ASC 805, Business Combinations. The FASB issued SFAS No. 141R (Codified within ASC 805) which modifies certain elements of the acquisition method of accounting used for all business combinations. The statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at the full amounts of their fair values, with limited exceptions specified in the statement. If the business combination is achieved in stages (a step acquisition), an acquirer is also required to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. The statement requires the acquirer to recognize restructuring and acquisition costs separately from the business combination. The statement also requires the disclosure of information necessary to understand the nature and effect of the business combination. The adoption of this standard on January 1, 2009 did not have an impact on our consolidated balance sheets or statements of operations.

ASC 810, Consolidations. The FASB issued SFAS No. 160 (Codified within ASC 810) on December 4, 2007. The statement establishes new accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements separate from the parent’s equity. The amount of net income attributable to the non-controlling interest is included in consolidated net income on the face of the income statement. The statement clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, when a subsidiary is deconsolidated, this statement requires that a parent recognize a gain or loss in net income based on the fair value of the entire entity, irrespective of any retained ownership, on the deconsolidation date. Such a gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. We adopted this standard on January 1, 2009 by retrospectively applying the provisions of the new guidance to all prior periods. Because the outstanding non-controlling interests in consolidated subsidiaries are not significant, the implementation of this standard did not have a material effect on our consolidated balance sheets or statements of operations.

ASC 320, Investments. The FASB issued FSP No. APB 14-1 (Codified within ASC 320).which clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), and specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Upon adoption of this standard on January 1, 2009, we recognized a discount to reduce the carrying value of the 3.25% Convertible Notes and an offsetting increase to stockholders’ equity. The cumulative effect of adoption resulted in: (1) a reduction of retained earnings of $19,838 due to the retrospective accretion of the resulting debt discount to interest expense over the expected life of the notes; (2) adjustments to debt issue cost amortization and gains or losses recognized on previous redemptions; and (3) an increase in additional paid-in capital of $21,293. The adjustment to additional paid-in capital includes the recognized debt discount, adjusted for note redemptions, and the effect of deferred taxes, as well as net gains or losses attributable to redemptions of the equity component. Interest expense for the three and nine months ended September 30, 2008 has been adjusted to include amortization of debt discount of $948 and $2,918, respectively, and a reduction in the amortization of debt issue costs of $32 and $103, respectively. The gain previously recognized on the redemption of debt securities during the quarter ended June 30, 2008 of $3,595 has been adjusted to reflect a loss of $86 on the debt component of the convertible notes in the statement of operations and a gain of $2,800 in additional paid in capital for the equity component.

ASC 320, Investments. The FASB issued FSP No. FAS 115-2 and FAS 124-2 (Codified within ASC 320) which amends the other-than-temporary impairment guidance for debt securities and improves the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This standard does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. Because our current investments in debt securities are classified as trading securities and therefore measured at fair value on a recurring basis, this standard did not have a material effect on our consolidated financial statements upon adoption during the second quarter of 2009.

ASC 855, Subsequent Events. This statement, which we adopted during the quarter ended June 30, 2009, introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. A public entity is required to evaluate subsequent events through the date that the financial statements are issued. This statement did not result in changes in the subsequent events that we report, either through recognition or disclosure, in our financial statements upon adoption. We have evaluated subsequent events through November 9, 2009 as disclosed in Note 25.

SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. This statement clarifies that the objective of the standard is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. That determination must consider the transferor’s continuing involvements in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. This statement modifies the financial-components approach currently used and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset.

This statement defines the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. If the transfer does not meet those conditions, a transferor should account for the transfer as a sale only if it transfers an entire financial asset or a group of entire financial assets and surrenders control over the entire transferred asset(s). This statement requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets.

The provisions in for guaranteed mortgage securitizations are removed to require those securitizations to be treated the same as any other transfer of financial assets within the scope of the standard. If such a transfer does not meet the requirements for sale accounting, the securitized mortgage loans should continue to be classified as loans in the transferor’s statement of financial position.

We must adopt this statement as of January 1, 2010 and all reporting periods thereafter. Earlier application is prohibited. This statement must be applied to transfers occurring on or after the effective date. Additionally, the disclosure provisions of this statement should be applied to transfers that occurred both before and after the effective date of this standard. We are evaluating the potential impact of this standard.

SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This standard will require an enterprise to perform ongoing periodic assessments to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics:


	a.	The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance

	b.	The obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

In addition to reintroducing the concept of control into the determination of the primary beneficiary of a VIE, this statement makes numerous other amendments to the current standards to primarily reflect the elimination of the concept of a QSPE. This statement also amends the current standards to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a VIE. The additional disclosures required by this statement are included in Note 1—Principles of Consolidation.

This standard will become effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited.

As disclosed in Note 1—Securitizations of Residential Mortgage Loans, we currently exclude certain loan securitization trusts from our consolidated financial statements because each is a QSPE. Once this statement becomes effective, we will be required to reevaluate these QSPEs as well as all other potentially significant interests in other unconsolidated entities, such as our asset management vehicles and the securitization trusts underlying our servicing portfolio, to determine if we should include them in our consolidated financial statements. We are evaluating the potential impact of this statement.


Note 4	Fair Value of Financial Instruments

The carrying amounts and the estimated fair values of our financial instruments are as follows at the dates indicated:


	September 30, 2009				December 31, 2008
	Carrying Value		Fair Value		Carrying Value			Fair Value
Financial assets:
Trading securities:
Auction rate	$	250,099	$	250,099	$	239,301		$	239,301
Subordinates and residuals		4,417		4,417		4,369			4,369
Loans held for resale		36,618		36,618		49,918			49,918
Advances		1,010,804		1,010,804		1,202,640			1,202,640
Receivables		33,135		33,135		42,798			42,798
Financial liabilities:
Match funded liabilities	$	529,779	$	529,779	$	961,939		$	965,233
Lines of credit and other secured borrowings		54,665		54,665		116,870			116,870
Investment line		167,168		167,168		200,719			200,719
Servicer liabilities		59,457		59,457		135,751			135,751
Debt securities		109,814		101,258		133,367			112,764
Derivative financial instruments, net	$	631	$	631	$	(533	)	$	(533	)

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 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. The three broad categories are:


	Level 1:	Quoted prices in active markets for identical assets or liabilities.

	Level 2:	Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly for substantially the full term of the financial instrument.

	Level 3:	Unobservable inputs for the asset or liability.

Where available, we utilize quoted market prices or observable inputs rather than unobservable inputs to determine fair value. We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth assets and liabilities measured at fair value categorized by input level within the fair value hierarchy:


	Carrying value			Level 1			Level 2		Level 3
At September 30, 2009:
Measured at fair value on a recurring basis:
Trading securities (1):
Auction rate	$	250,099		$	—		$	—	$	250,099
Subordinates and residuals		4,417			—			—		4,417
Derivative financial instruments, net (2)		631			(252	)		—		883
Measured at fair value on a non-recurring basis:
Loans held for resale (3)		36,618			—			—		36,618
Mortgage servicing rights (4)		361			—			—		361

At December 31, 2008:
Measured at fair value on a recurring basis:
Trading securities (1):
Auction rate	$	239,301		$	—		$	—	$	239,301
Subordinates and residuals		4,369			—			—		4,369
Derivative financial instruments, net (2)		(533	)		(726	)		—		193
Measured at fair value on a non-recurring basis:
Loans held for resale (3)		49,918			—			—		49,918
Mortgage servicing rights (4)		—			—			—		—


(1)	Because our internal valuation model requires significant use of unobservable inputs, we classified these securities within Level 3 of the fair value hierarchy.

(2)	Derivative financial instruments consist of interest rate caps that we use to protect against our exposure to rising interest rates on two of our match funded variable funding notes and foreign currency futures contracts that we use to hedge our net investment in Bankhaus Oswald Kruber GmbH & Co. KG (BOK), our wholly-owned German banking subsidiary, against adverse changes in the value of the Euro versus the U.S. Dollar. We classified the interest rate caps within Level 3 of the fair value hierarchy and the futures contracts within Level 1. See Note 21 for additional information on our derivative financial instruments.

(3)	Loans held for resale are measured at fair value on a non-recurring basis. At September 30, 2009 and December 31, 2008, the carrying value of loans held for resale is net of a valuation allowance of $16,468 and $17,491, respectively. Current market illiquidity has reduced the availability of observable pricing data. Consequently, we classify these loans within level 3 of the fair value hierarchy.

(4)	The carrying value of MSRs at September 30, 2009 and December 31, 2008 is net of a valuation allowance for impairment of $3,250. The valuation allowance, which relates exclusively to the high-loan-to-value stratum of our residential MSRs, reduced the carrying value of the stratum to $361 at September 30, 2009. The estimated fair value exceeded amortized cost for all other strata. See Note 9 for additional information on MSRs.

The following table sets forth a reconciliation of the changes in fair value of our Level 3 assets that we measure at fair value on a recurring basis:


	Fair value at beginning of period		Purchases, collections and settlements, net (1)			Total realized and unrealized gains and (losses) (2)			Transfers in and/or out of Level 3		Fair value at September 30
For the three months ended September 30, 2009:
Trading securities:
Auction rate	$	243,285	$	(500	)	$	7,314		$	—	$	250,099
Subordinates and residuals		3,440		—			977			—		4,417

Derivative financial instruments		957		—			(74	)		—		883

For the three months ended September 30, 2008:
Trading securities:
Auction rate	$	254,745	$	(801	)	$	—		$	—	$	253,944
Subordinates and residuals		4,860		—			(621	)		—		4,239

Derivative financial instruments		1,326		—			(163	)		—		1,163

For the nine months ended September 30, 2009:
Trading securities:
Auction rate	$	239,301	$	(2,500	)	$	13,298		$	—	$	250,099
Subordinates and residuals		4,369		—			48			—		4,417

Derivative financial instruments		193		—			690			—		883

For the nine months ended September 30, 2008:
Trading securities:
Auction rate	$	—	$	270,313		$	(16,369	)	$	—	$	253,944
Subordinates and residuals		7,362		22			(3,145	)		—		4,239

Derivative financial instruments		4,867		(7,063	)		3,359			—		1,163


(1)	Purchases, collections and settlements, net, related to trading securities exclude interest received.

(2)	Total gains on auction rate securities for the third quarter include unrealized gains of $7,314 on auction rate securities held at September 30, 2009. We did not record any unrealized gains or losses on auction rate securities during the three months ended September 30, 2008. For the year to date periods, unrealized gains (losses) on auction rate securities held at September 30, 2009 and 2008 were $13,298 and $(15,707), respectively. The total losses attributable to subordinates and residuals and derivative financial instruments were comprised exclusively of unrealized losses on assets held at September 30, 2009 and 2008.

The methodologies that we use and key assumptions that we make to estimate the fair value of instruments are described in more detail by instrument below:

Trading Securities

Auction Rate Securities. We estimated the fair value of the auction rate securities based on a combination of observable market inputs provided by actual orderly sales of similar auction rate securities and a discounted cash flow analysis. This discounted cash flow analysis incorporates expected future cash flows based on our best estimate of market participant assumptions. In periods of market illiquidity, the fair value of auction rate securities is determined after consideration of the credit quality of the securities held and the underlying collateral, market activity and general market conditions affecting auction rate securities.

The discounted cash flow analysis included the following range of assumptions at September 30, 2009:


•	Expected term	27 months
•	Illiquidity premium	1.0% –1.5%
•	Discount rate	3.1% – 14.3%

The expected term was based upon our best estimate of market participants’ expectations of future successful auctions. The discount rate and illiquidity premium are consistent with prevailing rates for similar securities. Other significant assumptions that we considered in our analysis included the credit risk profiles of the issuers, the impact on the issuers of the increased debt service costs associated with the payment of penalty interest rates and the collateralization of the securitization trusts. We do not assume defaults in our valuation due to the high credit quality of both the securities we hold and the underlying collateral.

Subordinates and Residuals. Our subordinate and residual securities are not actively traded, and, therefore, we estimate the fair value of these securities based on the present value of expected future cash flows from the underlying mortgage pools. We use our best estimate of the key assumptions we believe are used by market participants. We calibrate our internally developed discounted cash flow models for trading activity when appropriate to do so in light of market liquidity levels. Key inputs include expected prepayment rates, delinquency and cumulative loss curves and discount rates commensurate with the risks. Where possible, we use observable inputs in the valuation of our securities. However, the subordinate and residual securities in which we invest typically trade infrequently and therefore have few or no observable inputs and little price transparency. Additionally, during periods of market dislocation the observability of inputs is further reduced.

Discount rates for the subordinate and residual securities range from 21% to 22% and are determined based upon an assessment of prevailing market conditions and prices for similar assets. We project the delinquency, loss and prepayment assumptions based on a comparison to actual historical performance curves adjusted for prevailing market conditions. Peak delinquency assumptions range from 20% to 30%, and loss assumptions on current balances range from 19% to 28%. Average prepayment assumptions range from 5% to 6%.

At September 30, 2009, securities amounting to $254,516 were carried at their fair value as determined by using valuations based on internally developed discounted cash flow models. These models are calibrated for observable liquid market trading activity.

Derivative Financial Instruments

Exchange-traded derivative financial instruments are valued based on quoted market prices. If quoted market prices or other observable inputs are not available, fair value is based on estimates provided by third-party pricing sources.

Loans Held for Resale

Loans held for resale are reported at the lower of cost or fair value. We account for the excess of cost over fair value as a valuation allowance with changes in the valuation allowance included in gain (loss) on loans held for resale, net, in the period in which the change occurs. All loans held for resale were measured at fair value because the cost of $53,086 exceeded the estimated fair value of $36,618 at September 30, 2009.

When we enter into an agreement to sell a loan to an investor at a set price, the loan is valued at the commitment price. The fair value of loans for which we do not have a firm commitment to sell is based upon a discounted cash flow analysis. We stratify our fair value estimate of uncommitted loans held for resale based upon the delinquency status of the loans. We base the fair value of our performing loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows. Significant assumptions include collateral and loan characteristics, prevailing market conditions and the creditworthiness of the borrower. The fair value of our non-performing loans is determined based upon the underlying collateral of the loan and the estimated period and cost of disposition.

Mortgage Servicing Rights

We estimate the fair value of our MSRs by calculating the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. The most significant assumptions used in our internal valuation are the speed at which mortgages prepay and delinquency experience, both of which we derive from our historical experience and available market data. Other assumptions used in our internal valuation are:


	•	Cost of servicing

	•	Discount rate

	•	Interest rate used for computing the cost of servicing advances

	•	Interest rate used for computing float earnings

	•	Compensating interest expense

The significant components of the estimated future cash inflows for MSRs include servicing fees, late fees, prepayment penalties, float earnings and other ancillary fees. Significant cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments. We derive prepayment speeds and delinquency assumptions from historical experience adjusted for prevailing market conditions. We develop the discount rate internally, and we consider external market-based assumptions in determining the interest rate for the cost of financing advances, the interest rate for float earnings and the cost of servicing. The more significant assumptions used in the September 30, 2009 valuation include prepayment speeds ranging from 19.3% to 25.7% (depending on loan type) and delinquency rates ranging from 18.0% to 26.1% (depending on loan type). Other assumptions include an interest rate of 1-month LIBOR plus 5% for computing the cost of financing advances, an interest rate of 1-month LIBOR for computing float earnings and a discount rate of 20%.

We perform an impairment analysis based on the difference between the carrying amount and fair value after grouping our loans into the applicable strata based on one or more of the predominant risk characteristics of the underlying loans. The risk factors used to assign loans to strata include the credit score (FICO) of the borrower, the loan to value ratio and the default risk. Our strata include:


	•	Subprime

	•	ALT A

	•	High-loan-to-value

	•	Re-performing

	•	Special servicing

	•	Other

Advances

We value advances that we make on loans that we service for others at their carrying amounts because they have no stated maturity, generally are realized within a relatively short period of time and do not bear interest.

Receivables

The carrying value of receivables generally approximates fair value because of the relatively short period of time between their origination and realization. We carry long-term receivables with an implicit fixed rate or floating rate at a discounted value or approximate face value, respectively, which we believe approximates fair value.

Servicer Liabilities

The carrying value of servicer liabilities approximates fair value due to the short period of time the funds are held until they are deposited in collection accounts, paid directly to an investment trust or refunded to borrowers.


Note 5	Discontinued Operations

In the fourth quarter of 2007, management of OCN approved and committed to a plan to sell its investment in BOK. Management has concluded that BOK met and continues to meet the definition of a discontinued operation. Accordingly, the results of BOK are classified as discontinued in the accompanying consolidated financial statements. For segment reporting purposes, the operations of BOK are included in Corporate Items and Other.

In the second quarter of 2008, we recorded a charge of $4,980 that included the impairment of the remaining $3,423 carrying value of goodwill and intangibles, a $1,377 write-down of receivables and a $180 write-down of premises and equipment.

On June 15, 2009, we entered into an agreement to sell our investment in BOK, subject to regulatory approvals. Based on the terms of this new agreement, we recognized a gain of $1,227 in the second quarter of 2009 to partially reflect the increased sales price for our investment. This gain relates to a previously recorded valuation adjustment.

Results of BOK’s operations for the periods ended September 30 are as follows:


	Three Months						Nine Months

	2009			2008			2009		2008

Revenue	$	25		$	68		$	64	$	339
Operating expenses		414			593			18		6,891

Income (loss) from operations		(389	)		(525	)		46		(6,552	)
Other income, net		158			339			587		980

Income (loss) before income taxes		(231	)		(186	)		633		(5,572	)
Income tax expense (benefit)		—			—			—		—

Net income (loss)	$	(231	)	$	(186	)	$	633	$	(5,572	)

The following table presents BOK’s assets and liabilities at the dates indicated:


	September 30, 2009		December 31, 2008

Cash	$	9,482	$	4,613
Receivables		7,224		10,250
Other		56		33

Total assets	$	16,762	$	14,896


Total liabilities (including customer deposits of $6,784 and $5,820)	$	7,087	$	6,280


Note 6	Trading Securities

Trading securities consisted of the following at the dates indicated:


	September 30, 2009		December 31, 2008

Auction rate (Corporate Items and Other)	$	250,099	$	239,301


Subordinates and residuals:
Loans and Residuals	$	4,327	$	4,204
Corporate Items and Other		90		165

	$	4,417	$	4,369

Gain (loss) on trading securities for the periods ended September 30 was comprised of the following:


	Three months					Nine months

	2009		2008			2009		2008

Unrealized gains (losses) (1)	$	8,291	$	(621	)	$	13,346	$	(20,670	)
Realized losses (2)		—		—			—		(1,696	)

	$	8,291	$	(621	)	$	13,346	$	(22,366	)


(1)	Unrealized gains on auction rate securities were $7,314 for the three months ended September 30, 2009. We did not record any unrealized gains or losses on auction rate securities during the three months ended September 30, 2008. Year to date, the unrealized gains (losses) on auction rate securities were $13,298 and $(15,707) for 2009 and 2008, respectively.

(2)	Realized losses for 2008 include a loss of $662 on the sale of auction rate securities in the second quarter.

Auction Rate Securities

During the first quarter of 2008, we invested investment line borrowings (see Note 15) in AAA-rated auction rate securities backed by student loans originated under the U. S. Department of Education’s Federal Family Education Loan Program (FFELP). Auction rate securities are long-term variable rate bonds tied to short-term interest rates that reset through an auction process that historically occurred every 7 to 35 days. The student loans underlying the auction rate securities carry a U.S Government guarantee of at least 97% of the unpaid principal balance in the event of default. The auction rate securities that we hold are in the senior-most position and are smaller in amount than the federally guaranteed portion of the underlying loans. Historically, the par value of auction rate securities approximated fair value due to the frequent auctions of these securities at par. In the first quarter of 2008, the auction rate security market began experiencing illiquidity, and auctions began to fail because there were not enough orders to purchase all of the securities being offered at the auction. Within the context of a failed auction, the issuer pays the investor a “fail rate” penalty interest until the auction returns to clearing status, the notes mature at par or the notes are called or redeemed.

On January 21, 2009, Fitch Ratings announced that it had downgraded several tranches of auction rate securities from ‘AAA’ to ‘BBB’. Auction rate securities we hold, with a par value of $70,350 at September 30, 2009, were affected by this ratings action. On January 28, 2009 and February 19, 2009, respectively, Moody’s Investors Services, Inc. announced that it had downgraded several tranches of auction rate securities from ‘BBB’ to ‘B’ and from ‘AAA’ to ‘A’. Auction rate securities we hold, with a par value of $70,350 and $6,400 at September 30, 2009, were affected by the ratings actions from ‘BBB’ to ‘B’ and from ‘AAA’ to ‘A’, respectively. The AAA rating from Standard and Poor’s Ratings Services has not been revised. To date we have received all interest payments when due.

We did not sell any of our auction rate securities during the first nine months of 2009. During this same period, issuers redeemed, at par, auction rate securities we held with a face value of $2,500, including $500 during the third quarter. We recognized an $8,291 unrealized gain in the third quarter of 2009. This gain was due to the increased probability of a near term liquidity solution for approximately $70,350 principal amount of the auction rate securities and continued improvement in the underlying FFELP student loan market since December 31, 2008. See Note 25 for a subsequent event related to auction rate securities.

Subordinates and Residuals

Through our investment in subordinate and residual securities, we support senior classes of securities. Principal from the underlying mortgage loans generally is allocated first to the senior classes with the most senior class having a priority right to the cash flow from the mortgage loans until its payment requirements are satisfied. To the extent that there are defaults and unrecoverable losses on the underlying mortgage loans, resulting in reduced cash flows, the most subordinate security will be the first to bear this loss.


Note 7	Advances

Advances, representing payments made on behalf of borrowers or on foreclosed properties, as more fully described in Note 1—Mortgage Servicing Fees and Advances, consisted of the following at the dates indicated:


	September 30, 2009		December 31, 2008

Servicing:
Principal and interest	$	51,368	$	36,183
Taxes and insurance		42,377		32,812
Foreclosure and bankruptcy costs		25,860		23,122
Real estate servicing costs		287		225
Other		6,894		4,756

		126,786		97,098
Loans and Residuals		4,432		4,867
Corporate Items and Other		142		120

	$	131,360	$	102,085


Note 8	Match Funded Advances

Match funded advances on residential loans we service for others, as more fully described in Note 1—Mortgage Servicing Fees and Advances, are comprised of the following at the dates indicated:


	September 30, 2009		December 31, 2008

Principal and interest	$	410,641	$	615,344
Taxes and insurance		319,855		324,605
Foreclosure and bankruptcy costs		75,525		70,142
Real estate servicing costs		51,091		70,658
Other		22,332		19,806

	$	879,444	$	1,100,555

See also Note 1—Principles of Consolidation—Match Funded Advances on Loans Serviced for Others.


Note 9	Mortgage Servicing Rights


	Residential			Commercial		Total

Carrying value of MSRs:
Balance at December 31, 2008	$	139,500		$	—	$	139,500
Purchases		10,241			—		10,241
Servicing transfers and adjustments		(8	)		—		(8	)
Reduction in impairment valuation allowance		374			—		374
Amortization		(25,118	)		—		(25,118	)

Balance at September 30, 2009	$	124,989		$	—	$	124,989


Estimated fair value of MSRs:
September 30, 2009	$	131,327		$	—	$	131,327
December 31, 2008	$	148,135		$	—	$	148,135

Unpaid principal balance of assets serviced:
September 30, 2009:
Servicing	$	27,039,067		$	—	$	27,039,067
Subservicing (1)		13,254,631			154,031		13,408,662

	$	40,293,698		$	154,031	$	40,447,729

December 31, 2008:
Servicing	$	29,830,654		$	—	$	29,830,654
Subservicing		10,340,878			1,319,175		11,660,053

	$	40,171,532		$	1,319,175	$	41,490,707


(1)	Includes non-performing loans serviced for Freddie Mac.

We service residential mortgage loans and real estate that we do not own under contractual servicing agreements. We generally obtain MSRs by purchasing them from the owners of the mortgages. We also enter into subservicing agreements with entities that own the servicing rights. Residential assets serviced consist almost entirely of mortgage loans, primarily subprime, but also include real estate. An agreement between the various parties to a mortgage securitization transaction typically specifies the rights and obligations of the holder of the servicing rights which include guidelines and procedures for servicing the loans including remittance and reporting requirements, among other provisions. Assets serviced for others are excluded from our balance sheet. Custodial accounts, which hold funds representing collections of principal and interest that we have received from borrowers, are escrowed with an unaffiliated bank and excluded from our balance sheet. Custodial accounts amounted to approximately $283,600 and $370,200 at September 30, 2009 and December 31, 2008, respectively.

During 2008, we established a valuation allowance for impairment of $3,624 on the high-loan-to-value stratum of our mortgage servicing rights as the external valuation that we consider in our impairment analysis fell below the carrying value due primarily to the declining fair value for rights to service second liens. The external valuation reflects industry averages for delinquencies on loans in the second lien position that are higher than those currently experienced by our servicing portfolio. During the third quarter of 2009, the valuation increased, and we reduced the valuation allowance by $374. Net of the valuation allowance of $3,250, the carrying value of this stratum was $361 at September 30, 2009. For all other strata, the fair value was above the carrying value at September 30, 2009.

We have recognized a servicing liability for those agreements that are not expected to adequately compensate us for performing the servicing. Servicing liabilities were $3,864 and $3,239 at September 30, 2009 and December 31, 2008, respectively, and are included in other liabilities on the balance sheet. During the nine months ended September 30, 2009, the amount of charges we recognized to increase our servicing liability obligations exceeded amortization by $625, and we have reported this net expense as amortization of servicing rights in the statement of operations.


Note 10	Receivables

Receivables consisted of the following at the dates indicated:


	September 30, 2009		December 31, 2008

Accounts receivable by segment:
Servicing, net (1)	$	8,140	$	6,495
Loans and Residuals		1,145		1,169
Asset Management Vehicles		464		1,171
Mortgage Services		71		2,668
Financial Services		—		5,747
Technology Products		—		975
Corporate Items and Other, net (2)		9,715		13,593

		19,535		31,818
Other receivables:
Term note (3)		7,000		—
Security deposits		4,144		4,645
Income taxes		—		5,386
Other		2,456		949

	$	33,135	$	42,798


(1)	The balances primarily include reimbursable expenses due from investors. The total balance of receivables for this segment is net of reserves of $2,398 and $1,604 at September 30, 2009 and December 31, 2008, respectively.

(2)	The balances at September 30, 2009 and December 31, 2008 include $5,384 and $8,286, respectively, of mortgage loans originated by BOK. These loans were net of allowances of $197 and $1,392, respectively. The balances at September 30, 2009 and December 31, 2008 also include receivables totaling $1,698 and $3,324, respectively, that primarily represent payments to be received in future years (through June 2014) of proceeds from the sales of investments in affordable housing properties. These affordable housing receivables are net of reserves for doubtful accounts of $6,517 and $6,400, respectively.

(3)	In March 2009, we issued a note receivable, maturing on April 1, 2014, in connection with advances funded by the Ocwen Servicer Advance Funding, LLC (OSAF) term note pledged as collateral, as described in Note 14. We receive 1-Month LIBOR plus 300 basis points under the terms of this note receivable. We are obligated to pay 1-Month LIBOR plus 350 basis points under the terms of a five-year note payable to the same counterparty. We do not have a contractual right to offset these payments.


Note 11	Investment in Unconsolidated Entities


	September 30, 2009		December 31, 2008

Asset Management Vehicles:
Investment in OSI (1)	$	10,140	$	15,410
Investment in ONL and affiliates (2)		8,545		10,174

		18,685		25,584
Corporate Items and Other		79		79

	$	18,764	$	25,663

Equity in earnings (losses) of unconsolidated entities was as follows for the periods ended September 30:


	Three months						Nine months

	2009			2008			2009			2008

OSI (1) (3)	$	(956	)	$	(1,864	)	$	(599	)	$	(3,411	)
ONL and affiliates (2) (3)		(103	)		(1,064	)		(1,009	)		(1,551	)
BMS Holdings (4)		—			—			—			(5,666	)

	$	(1,059	)	$	(2,928	)	$	(1,608	)	$	(10,628	)


(1)	Our investment in OSI represents a 25% equity interest. OSI invests in the lower tranches and residuals of residential mortgage-backed securities, the related mortgage servicing rights and other similar assets. During the first nine months of 2009, we received distributions from OSI totaling $4,000. We have no remaining commitment to invest in OSI.

(2)	Our investment in ONL and affiliates represent equity interests of approximately 25%. ONL resolves non-performing loans purchased at a discount. An affiliate purchases real estate for sale, including real estate that ONL may obtain through foreclosure. During the first nine months of 2009, we received distributions totaling $496 from ONL and affiliates and invested an additional $62 in these entities. We have a remaining commitment that expires in September 2010, to invest up to an additional $33,840 in ONL and affiliates, collectively.

(3)	We earn loan servicing and management fees from OSI and from ONL and affiliates. In determining the amount of consolidated equity in earnings to recognize, we add back our share of the loan servicing and management fee expense recognized by OSI, ONL and affiliates. For the first nine months of 2009 and 2008, OLS earned fees of $3,401 and $5,539, respectively, from OSI and from ONL and affiliates. On a consolidated basis, we have recognized approximately 75% of the loan servicing and management fee revenue.

(4)	During the second quarter of 2008, our share of the losses of BMS Holdings reduced our investment to zero. Our investment in BMS Holdings represents an equity interest of approximately 45%. Because we are not required to advance funds to BMS Holdings to finance operations and we are not a guarantor of any obligations of BMS Holdings, we suspended the recognition of losses from our investment in BMS Holdings. We will not resume recording income or losses until our share of BMS Holdings’ earnings exceeds our share of their losses that we did not recognize during the period when the equity method was suspended.


Note 12	Other Assets

Other assets consisted of the following at the dates indicated:


	September 30, 2009		December 31, 2008

Debt service accounts (1)	$	39,738	$	58,468
Deferred debt related costs, net		9,122		14,758
Real estate		8,556		7,771
Interest earning collateral deposits		7,612		9,684
Prepaid expenses and other		2,275		6,907

	$	67,303	$	97,588

(1)

Under our four advance funding facilities, we are contractually required to remit collections on pledged advances to the trustee within two days of receipt. The collected funds are not applied to reduce the related match funded debt until the payment dates specified in the indenture. The balance also includes amounts that have been set aside from the proceeds of our four match funded advance facilities to provide for possible shortfalls in the funds available to pay certain expenses and interest. These funds are held in interest earning accounts.


Note 13	Match Funded Liabilities

Match funded liabilities, representing obligations secured by related match funded advances and repaid through the cash proceeds arising from those assets, as more fully described in Note 1—Mortgage Servicing Fees and Advances, consisted of the following at the dates indicated:


				Unused Borrowing Capacity (2)		Balance Outstanding

Borrowing Type	Interest Rate (1)	Maturity	Amortization Date			September 30, 2009		December 31, 2008

Variable Funding Note Series 2007-1	Commercial paper rate + 200 basis points (3)	December 2014	December 2009	$	75,514	$	224,486	$	219,722
Term Note Series 2006 -1	5.335%	November 2015 (4)	December 2009		—		—		165,000
Variable Funding Note (5)	Commercial paper rate + 150 basis points (5)	December 2013	December 2010		133,595		116,405		192,520
Advance Receivable Backed Notes	1-Month LIBOR + 400 basis points (6)	January 2019 (6)	January 2010 (6)		120,780		79,220		142,361
Advance Receivable Backed Notes	1-Month LIBOR + 275 basis points (7)	May 2011 (7)	May 2010 (7)		390,332		109,668		237,504

					720,221		529,779		957,107
Basis adjustment (4)					—		—		4,832

				$	720,221	$	529,779	$	961,939


(1)	1-Month LIBOR was 0.25% and 0.44% at September 30, 2009 and December 31, 2008, respectively.

(2)	At September 30, 2009, all eligible advances are pledged as collateral to a facility. Our unused borrowing capacity is available to us provided that we have additional eligible collateral to pledge. Collateral may only be pledged to one facility.

(3)	The interest rate for this note is determined using a commercial paper rate that reflects the borrowing costs of the lender plus a margin of 200 basis points that has generally approximated 1-Month LIBOR plus 200 basis points.

(4)	On August 11, 2009, we repaid this note and transferred the majority of the borrowing to the Variable Funding Note Series 2007-1. We previously carried this note on the balance sheet at fair value as the result of a designated fair value hedging relationship that we established in December 2006 using an interest rate swap. We terminated the swap agreement in February 2008 and began amortizing the basis adjustment to earnings over the expected remaining term of the note. In connection with the repayment of this note, we recognized a gain on debt redemption of $1,600, representing the reversal of the fair value hedging basis adjustment less early termination fees and the write-off of unamortized debt issue costs.

(5)	The interest rate for this note is determined using a commercial paper rate that reflects the borrowing costs of the lender plus a margin of 150 basis points that has generally approximated 1-Month LIBOR plus 150 basis points.

(6)	In January 2009, the lender agreed to renew this facility and to extend the amortization date from February 2009 to January 2010. The interest rate was increased from 1-Month LIBOR plus 200 basis points to 1-Month LIBOR plus 400 basis points.

(7)	In May 2009, we negotiated an increase in the maximum borrowing capacity from $300,000 to $500,000 and extended the amortization date from April 2009 to May 2010. Under the terms of the new facility, we pay interest on drawn balances at 1-Month LIBOR plus 275 basis points. The previous interest rate was 1-Month LIBOR plus 250 basis points. In addition, we pay, in twelve monthly installments, a facility fee of 2.25% of the maximum borrowing capacity of $500,000.


Note 14	Lines of Credit and Other Secured Borrowings

Secured lines of credit from various unaffiliated financial institutions are as follows:


				Unused Borrowing Capacity		Balance Outstanding

						September 30, 2009			December 31, 2008
Borrowings	Collateral	Interest Rate (1)	Maturity			September 30, 2009			December 31, 2008


Servicing:
Fee reimbursement advance	Term note (2)	See (2) below	March 2014	$	—	$	60,000		$	—
Term note (3)	Advances	1-Month LIBOR + 350 basis points	March 2014		—		7,000			—
Senior secured credit agreement - Term note	MSRs	1-Month LIBOR +187.5 basis points (4)	February 2010		—		—			97,987

					—		67,000			97,987

Loans and Residuals:
Class A-1 notes (5)	Loans held for resale and real estate	1-Month LIBOR + 600 basis points	April 2037		—		—			17,760

Financial Services:
Revolving note (6)	Receivables	1, 3, 6 or 12-Month LIBOR + 200 basis points or Prime plus 125 basis points	(6)		—		—			1,123

					—		67,000			116,870
Discount (2)					—		(12,335	)		—

				$	—	$	54,665		$	116,870


(1)	1-Month LIBOR was 0.25% and 0.44% at September 30, 2009 and December 31, 2008, respectively.

(2)	This advance is secured by the pledge to the lender of our interest in a $60,000 term note issued by OSAF on March 31, 2009. The OSAF note, in turn, is secured by advances on loans serviced for others, similar to match funded advances and liabilities. The fee reimbursement advance is payable annually in five installments of $12,000. The advance does not carry a stated rate of interest. However, we are compensating the lender for the advance of funds by forgoing the receipt of fees due from the lender over the five-year term of the advance. Accordingly, we recorded the advance as a zero-coupon bond issued at an initial implied discount of $14,627. We used an implicit market rate to compute the discount that we are amortizing to interest expense over the five-year term of the advance.

(3)	This note was issued by OSAF and is secured by advances on loans serviced for others, similar to match funded advances and liabilities. The lender has pledged its interest in this note to us as collateral against the $7,000 term note receivable due on April 1, 2014.

(4)	The interest incurred on this facility is based on 1-Month LIBOR plus 187.5 basis points but could be reduced to as low as 0.10% to the extent that we have available balances on deposit with the lender. We repaid this note in full on August 21, 2009.

(5)	In 2007, we issued A-rated securities in connection with the transfer of loan and real estate collateral to OREALT, a bankruptcy remote VIE that we consolidate. In August 2008, we sold a portion of these A-rated securities with a face value of $23,200 to a third party. The notes were sold net of an original discount of $928 that was amortized to interest expense over the estimated life of the notes. On September 23, 2009, we repaid the remaining principal balance of the notes held by a third party and retired the notes.

(6)	We terminated this agreement in June 2009. There were no borrowings outstanding at the time that we terminated the agreement.


Note 15	Investment Line

Under this agreement, we borrowed funds each month under a revolving demand note equal to the projected average float balance and invested those funds in certain permitted investments, including auction rate securities. The custodial funds comprising most of the float balance remained on deposit in bank accounts that meet the requirements of each trust. The terms of the investment line required that we sell the investments and repay the associated borrowings prior to the end of each quarter.

As a result of failed auctions in the first quarter of 2008, we were unable to liquidate our investment in auction rate securities. On March 28, 2008, we executed an amendment to the investment line that eliminated the requirement that borrowings be repaid at quarter end, increased the annual interest rate from 0.1% to 0.35% and limited borrowings to $350,000. We recognized these securities and a corresponding liability on our balance sheet in the first quarter of 2008. On June 30, 2008, we executed an extension of this agreement through July 13, 2008.

On July 10, 2008, in addition to further reducing the borrowing limit under the revolving demand note to $120,000, we executed another amendment to the investment line that created a new term note maturing on June 30, 2009 that was secured by our investment in the auction rate securities. Interest on the term note was 0.35% to the extent that we had available balances on deposit with the lender. For any portion of the outstanding balance of the term note that was in excess of the available balances, the interest rate was 1-month LIBOR plus 35 basis points. In the event that the 0.35% rate did not fairly reflect the cost to the lender in providing the funds, the lender could, with notice, adjust the rate upward to a rate not exceeding 3.35%.

The revolving demand note expired on September 30, 2008. At that time, we repaid the borrowings in full using proceeds received from the liquidation of the investments.

Under the term note, we receive the interest on the auction rate securities while the proceeds from the redemption or sale of auction rate securities are applied to the outstanding balance. If the proceeds are below the then-effective maximum borrowing percentage, we are required to make up the shortfall. On April 30, 2009, we negotiated a one-year extension of the term note maturity to June 30, 2010. This agreement was renewed under terms substantially similar to the previous agreement. However, in lieu of quarterly advance rate reductions, we now make monthly amortization payments of $3,000 per month. During the first nine months of 2009, we made payments totaling $33,551 that reduced the investment line obligation to $167,168.


Note 16	Servicer Liabilities

Servicer liabilities represent amounts we have collected, primarily from residential borrowers, whose loans we service, that will be deposited in custodial accounts and paid directly to an investment trust or refunded to borrowers. The following table sets forth the components of servicer liabilities at the dates indicated:


	September 30, 2009		December 31, 2008
Borrower payments due to custodial accounts	$	32,944	$	67,227
Escrow payments due to custodial accounts		2,540		5,488
Partial payments and other unapplied balances		23,973		63,036
	$	59,457	$	135,751


Note 17	Debt Securities

Our debt securities consisted of the following at the dates indicated:


	September 30, 2009		December 31, 2008
3.25% Contingent Convertible Unsecured Senior Notes due August 1, 2024	$	56,435	$	79,988
10.875% Capital Trust Securities due August 1, 2027		53,379		53,379
	$	109,814	$	133,367

Each of our debt securities contain qualitative and quantitative covenants that establish, among other things, the maintenance of specified net worth and restrictions on future indebtedness as well as the monitoring and reporting of various specified transactions or events. We believe that we are currently in compliance with these covenants.

Convertible Notes. In July 2004, OCN issued $175,000 aggregate principal amount of 3.25% Contingent Convertible Unsecured Senior Notes due 2024 (the Convertible Notes). The Convertible Notes are senior general unsecured obligations not guaranteed by any of our subsidiaries and bear interest at the rate of 3.25% per year. Interest is payable on February 1 and August 1 of each year. The Convertible Notes mature on August 1, 2024. We recognized a discount on the Convertible Notes. We amortized the debt discount over the period from the date of issuance to August 1, 2009, the first date at which holders could require us to repurchase their notes.

The principal outstanding on December 31, 2008 of $82,355 is reported net of the unamortized debt discount of $2,367. Interest expense on the Convertible Notes for the first nine months of 2009 and 2008, respectively, includes amortization of debt discount of $1,735 and $2,918 and cash interest expense at the contractual rate of $1,489 and $2,155. We recognized interest on the debt at an effective annual rate of 8.25% over the period from the date of issuance to August 1, 2009.

In February 2009, we repurchased $25,910 of our 3.25% Convertible Notes in the open market at a price equal to 95% of the principal amount. We recognized a gain of $534 on these repurchases, net of the write-off of unamortized issuance costs and debt discount.

Holders may convert all or a portion of their notes into shares of our common stock under the following circumstances: (1) at any time during any calendar quarter (and only during such calendar quarter) if the closing sale price of our common stock for at least 20 consecutive trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than 125% of the conversion price per share of common stock on such last day; (2) subject to certain exceptions, during the five business day period after any five-consecutive-trading-day period in which the trading price per $1,000 (actual dollars) principal amount of the notes for each day of the five-consecutive-trading-day period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 (actual dollars) principal amount of the notes; (3) if the notes have been called for redemption; or (4) upon the occurrence of specified corporate transactions.

The conversion rate is 82.1693 shares of our common stock per $1,000 (actual dollars) principal amount of the notes, subject to adjustment. Events that may cause the conversion rate to be adjusted primarily relate to cash dividends or other distributions to holders of our common stock. Upon conversion, we may at our option choose to deliver, in lieu of our common stock, cash or a combination of cash and common stock. At September 30, 2009 and December 31, 2008, the if-converted value of the Convertible Notes was $52,493 and $62,106 respectively.

On June 26, 2009, we provided notice to holders of the Convertible Notes of their right to request that we repurchase all or a portion of their notes for cash on August 3, 2009 at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any. There were no material redemptions on August 3, 2009. Holders that did not choose to exercise their repurchase right on August 3, 2009 will receive the same right to request that we repurchase all or a portion of their notes for cash on August 1, 2014 and August 1, 2019. A similar right is also available to holders of the Convertible Notes in the event of a “fundamental change.” A “fundamental change” is a change of control or a termination of trading in our common stock.

Beginning August 1, 2009, we may redeem all or a portion of the notes for cash for a price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any.

On July 23, 2009, we provided notice that all holders of the Convertible Notes as of the close of business on August 4, 2009 would participate in the distribution of Altisource shares based on the conversion ratio of the Convertible Notes, consistent with the pro rata distribution ratio of one share of Altisource common stock for every three shares of OCN common stock, without conversion of the Convertible Notes into common shares of OCN. Accordingly, upon the Separation of Altisource and OCN, there were no adjustments to the conversion ratio of the Convertible Notes.

Capital Trust Securities. In August 1997, Ocwen Capital Trust (OCT) issued $125,000 of 10.875% Capital Securities (the Capital Trust Securities). OCT invested the proceeds from issuance of the Capital Trust Securities in 10.875% Junior Subordinated Debentures issued by OCN. The Junior Subordinated Debentures, which represent the sole assets of OCT, will mature on August 1, 2027. For financial reporting purposes, we treat OCT as a consolidated subsidiary.

Holders of the Capital Trust Securities are entitled to receive cumulative cash distributions accruing from the date of original issuance and payable semiannually in arrears on February 1 and August 1 of each year at an annual rate of 10.875% of the liquidation amount of $1,000 (actual dollars) per Capital Security. OCN guarantees payment of distributions out of moneys held by OCT and payments on liquidation of OCT or the redemption of Capital Trust Securities to the extent OCT has funds available. If OCN does not make principal or interest payments on the Junior Subordinated Debentures, OCT will not have sufficient funds to make distributions on the Capital Trust Securities in which event the guarantee shall not apply to such distributions until OCT has sufficient funds available.

We have the right to defer payment of interest on the Junior Subordinated Debentures at any time or from time to time for a period not exceeding 10 consecutive semiannual periods with respect to each deferral period provided that no extension period may extend beyond the stated maturity of the Junior Subordinated Debentures. Upon the termination of any such extension period and the payment of all amounts then due on any interest payment date, we may elect to begin a new extension period. Accordingly, there could be multiple extension periods of varying lengths throughout the term of the Junior Subordinated Debentures. If we defer interest payments on the Junior Subordinated Debentures, distributions on the Capital Trust Securities will also be deferred, and we may not, nor may any of our subsidiaries, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, their capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. During an extension period, interest on the Junior Subordinated Debentures will continue to accrue at the rate of 10.875% per annum, compounded semiannually.

We may redeem the Junior Subordinated Debentures before maturity at our option subject to the receipt of any necessary prior regulatory approval, in whole or in part at the redemption prices (expressed as a percentage of the principal amount) set forth below, plus accrued interest thereon, if redeemed during the twelve-month period beginning on August 1 of the years indicated below:


	Percentages
2009		104.350	%
2010		103.806
2011		103.263
2012		102.719
2013		102.175
2014		101.631
2015		101.088
2016		100.544

On or after August 1, 2017, the redemption price will be 100%, plus accrued interest to the redemption date.

We may also redeem the Junior Subordinated Debentures at any time upon the occurrence and continuation of a special event (defined as a tax event, regulatory capital event or an investment company event) at 100%. The Capital Trust Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures in an amount equal to the amount of the related Junior Subordinated Debentures maturing or being redeemed and at a redemption price equal to the redemption price of the Junior Subordinated Debentures, plus accumulated and unpaid distributions thereon to the date of redemption.


Note 18	Basic and Diluted Earnings per Share

Basic EPS excludes common stock equivalents and is calculated by dividing net income (loss) attributable to OCN by the weighted average number of common shares outstanding during the period. We calculate diluted EPS by dividing net income (loss) attributable to OCN, as adjusted to add back interest expense net of income tax on the Convertible Notes, by the weighted average number of common shares outstanding including the potential dilutive common shares related to outstanding stock options, restricted stock awards and the Convertible Notes. The following is a reconciliation of the calculation of basic EPS to diluted EPS for the three and nine months ended September 30:


	Three months					Nine months
	2009			2008		2009			2008
Basic EPS:
Net income (loss) attributable to OCN	$	(42,031	)	$	14,976	$	(9,092	)	$	17,531

Weighted average shares of common stock		82,614,456			62,715,551		70,966,393			62,655,655

Basic EPS	$	(0.51	)	$	0.24	$	(0.13	)	$	0.28

Diluted EPS (1):
Net income (loss) attributable to OCN	$	(42,031	)	$	14,976	$	(9,092	)	$	17,531
Interest expense on Convertible Notes, net of income tax (2)		—			1,148		—			—
Adjusted net income (loss) attributable to OCN	$	(42,031	)	$	16,124	$	(9,092	)	$	17,531

Weighted average shares of common stock		82,614,456			62,715,551		70,966,393			62,655,655
Effect of dilutive elements (3):
Convertible Notes (2)		—			6,767,053		—			—
Stock options (4)		—			252,251		—			219,214
Common stock awards		—			16,034		—			22,402
Dilutive weighted average shares of common stock		82,614,456			69,750,889		70,966,393			62,897,271

Diluted EPS	$	(0.51	)	$	0.23	$	(0.13	)	$	0.28


(1)	For the three and nine months ended September 30, 2009, we have excluded the effect of the Convertible Notes, stock options and common stock awards from the computation of diluted EPS because of the anti-dilutive impact on our reported net loss.

(2)	The effect of our Convertible Notes on diluted EPS is computed using the if-converted method. Interest expense and related amortization costs applicable to the Convertible Notes, net of income tax, are added back to net income. Conversion of the Convertible Notes into shares of common stock has not been assumed for purposes of computing diluted EPS for the nine months ended September 30, 2008 because the effect would be anti-dilutive. The effect is anti-dilutive whenever interest expense on the Convertible Notes, net of income tax, per common share obtainable on conversion exceeds basic EPS.

(3)	Because we have reported discontinued operations, we use income from continuing operations as the “control number” in determining whether potential common shares are dilutive or anti-dilutive. That is, the same number of potential common shares used in computing the diluted per-share amount for income from continuing operations is used in computing all other diluted per-share amounts even though those amounts are anti-dilutive to their respective basic per-share amounts.

(4)	An average of 3,412,757 and 3,059,532 options that were anti-dilutive have been excluded from the computation of diluted EPS for the three and nine months ended September 2008, respectively. These options were anti-dilutive because their exercise price was greater than the average market price of our stock. Also excluded from the computation of diluted EPS are 1,710,000 of the 5,130,000 options we granted on July 14, 2008, for shares that are issuable upon the achievement of certain performance criteria related to OCN’s stock price and an annualized rate of return to investors. On August 10, 2009, the performance criteria were met for 3,420,000 of these options. However, we have excluded these options from the computation of diluted EPS for the 2009 periods because we have incurred a loss, and, therefore, their effect would be anti-dilutive.


Note 19	Income Taxes

As described in Note 2, a significant portion of the income tax expense for the three and nine months ended September 30, 2009 pertains to deferred tax expense related to the Separation. The net deferred tax asset was comprised of the following as of:


	September 30, 2009		December 31, 2008
Deferred tax assets:
Tax residuals and deferred income on tax residuals	$	3,606	$	3,725
State taxes		4,804		9,780
Accrued incentive compensation		5,743		4,208
Valuation allowance on real estate owned		3,473		3,502
Bad debt and allowance for loan losses		6,308		8,296
Mortgage servicing rights amortization		53,168		79,658
Foreign currency exchange		1,328		1,328
Net operating loss carryforward		22,098		31,281
Partnership losses and low-income housing tax credits		11,817		23,963
Foreign deferred assets		2,494		1,458
Net unrealized gains and losses on securities		18,727		20,883
Equity interest		—		68
Other		—		1,348
		133,566		189,498
Deferred tax liabilities:
Deferred interest income on loans		75		75
Intangibles amortization		3,161		12,533
Debt discount		204		—
Other deferred income		346