Edgar Filing: OCWEN FINANCIAL CORP

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

	For the quarterly period ended September 30, 2010

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 o 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 filer	o	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 Act).

Yes o No x

Number of shares of Common Stock, $0.01 par value, outstanding as of October 31, 2010: 100,496,378 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, 2010 and December 31, 2009	3

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009	4

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2010 and 2009	5

	Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2010 and 2009	6

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009	7

	Notes to Interim Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4.	Controls and Procedures	62

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	62

Item 1A.	Risk Factors	62

Item 5.	Other Information

Item 6.	Exhibits	64

Signatures		66

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;

	·	assumptions about our ability to grow our business;

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

	·	our ability to reduce our cost structure;

	·	our continued ability to successfully and timely modify delinquent loans, foreclose on 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 the actions of loan owners, including mortgage-backed securities investors, regarding loan putbacks and other servicing practices;

	·	uncertainty related to the processes for judicial and non-judicial foreclosure proceedings, including potential additional costs or delays in the future or claims pertaining to past practices;

	·	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, 2009, 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, 2010			December 31, 2009
Assets
Cash	$	163,911		$	90,919
Restricted cash – for securitization investors		942			—
Trading securities, at fair value:
Auction rate		74,712			247,464
Subordinates and residuals		—			3,692
Loans held for resale, at lower of cost or fair value		29,352			33,197
Advances		218,936			145,914
Match funded advances		2,126,991			822,615
Loans, net – restricted for securitization investors		69,736			—
Mortgage servicing rights		203,930			117,802
Receivables, net		42,747			67,095
Deferred tax assets, net		133,782			132,683
Goodwill		19,457			—
Premises and equipment, net		11,893			3,325
Investments in unconsolidated entities		12,284			15,008
Other assets		147,101			89,636
Total assets	$	3,255,774		$	1,769,350

Liabilities and Equity Liabilities
Match funded liabilities	$	1,606,346		$	465,691
Secured borrowings – owed to securitization investors		64,564			—
Lines of credit and other secured borrowings		444,499			55,810
Investment line		—			156,968
Servicer liabilities		2,368			38,672
Debt securities		82,554			95,564
Other liabilities		166,751			90,782
Total liabilities		2,367,082			903,487

Commitments and Contingencies (Note 25)

Equity
Ocwen Financial Corporation stockholders’ equity
Common stock, $.01 par value; 200,000,000 shares authorized; 100,476,378 and 99,956,833 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		1,005			1,000
Additional paid-in capital		465,005			459,542
Retained earnings		435,535			405,198
Accumulated other comprehensive loss, net of income taxes		(13,104	)		(129	)
Total Ocwen Financial Corporation stockholders’ equity		888,441			865,611
Non-controlling interest in subsidiaries		251			252
Total equity		888,692			865,863
Total liabilities and equity	$	3,255,774		$	1,769,350

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
	2010			2009			2010			2009
Revenue
Servicing and subservicing fees	$	86,424		$	57,534		$	218,840		$	201,832
Process management fees		7,911			24,594			24,132			98,372
Other revenues		1,234			2,083			4,136			7,776
Total revenue		95,569			84,211			247,108			307,980

Operating expenses
Compensation and benefits		43,886			18,959			69,752			74,758
Amortization of mortgage servicing rights		7,874			7,159			22,103			25,743
Servicing and origination		1,707			7,804			4,756			36,277
Technology and communications		6,727			5,065			18,582			14,354
Professional services		25,132			6,378			37,521			21,772
Occupancy and equipment		5,201			4,192			13,517			15,056
Other operating expenses		2,847			4,675			6,978			11,188
Total operating expenses		93,374			54,232			173,209			199,148

Income from operations		2,195			29,979			73,899			108,832

Other income (expense)
Interest income		2,962			1,992			8,507			6,411
Interest expense		(24,187	)		(16,145	)		(50,017	)		(50,108	)
Gain (loss) on trading securities		(3,013	)		8,291			(3,958	)		13,346
Loss on loans held for resale, net		(539	)		(1,242	)		(2,626	)		(8,783	)
Equity in earnings (losses) of unconsolidated entities		266			(1,059	)		1,344			(1,608	)
Other, net		1,604			1,642			(3,154	)		4,977
Other expense, net		(22,907	)		(6,521	)		(49,904	)		(35,765	)

Income (loss) from continuing operations before taxes		(20,712	)		23,458			23,995			73,067
Income tax expense (benefit)		(7,487	)		65,294			310			82,803
Income (loss) from continuing operations		(13,225	)		(41,836	)		23,685			(9,736	)
Income (loss) from discontinued operations, net of taxes		4,383			(231	)		4,383			633
Net income (loss)		(8,842	)		(42,067	)		28,068			(9,103	)
Net loss (income) attributable to non-controlling interest in subsidiaries		7			36			(5	)		11
Net income (loss) attributable to Ocwen Financial Corporation (OCN)	$	(8,835	)	$	(42,031	)	$	28,063		$	(9,092	)

Basic earnings per share
Income (loss) from continuing operations attributable to OCN	$	(0.13	)	$	(0.51	)	$	0.24		$	(0.14	)
Income (loss) from discontinued operations attributable to OCN		0.04			—			0.04			0.01
Net income (loss) attributable to OCN	$	(0.09	)	$	(0.51	)	$	0.28		$	(0.13	)

Diluted earnings per share
Income (loss) from continuing operations attributable to OCN	$	(0.13	)	$	(0.51	)	$	0.23		$	(0.14	)
Income from discontinued operations attributable to OCN		0.04			—			0.04			0.01
Net income (loss) attributable to OCN	$	(0.09	)	$	(0.51	)	$	0.27		$	(0.13	)

Weighted average common shares outstanding
Basic		100,329,915			82,614,456			100,159,547			70,966,393
Diluted		100,329,915			82,614,456			107,379,725			70,966,393

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
	2010			2009			2010			2009

Net income (loss)	$	(8,842	)	$	(42,067	)	$	28,068		$	(9,103	)

Other comprehensive income (loss), net of income taxes:

Unrealized foreign currency translation income (loss ) arising during the period (1)		54			(80	)		(31	)		(307	)

Change in deferred loss on cash flow hedges arising during the period (2)		(5,835	)		—			(13,239	)		—
Reclassification adjustment for losses on cash flow hedges included in net income (3)		268			—			289			—
Net change in deferred loss on cash flow hedges		(5,567	)		—			(12,950	)		—

		(5,513	)		(80	)		(12,981	)		(307	)

Comprehensive income (loss)		(14,355	)		(42,147	)		15,087			(9,410	)

Comprehensive (income) loss attributable to non-controlling interests		(11	)		47			1			144

Comprehensive income (loss) attributable to OCN	$	(14,366	)	$	(42,100	)	$	15,088		$	(9,266	)

(1)	Net of income tax benefit (expense) of $(8) and $47 for the three months ended September 30, 2010 and 2009, respectively, and $27 and $180 for the nine months ended September 30, 2010 and 2009, respectively.

(2)	Net of tax benefit of $3,428 and $7,775, respectively for the three and nine months ended September 30, 2010.

(3)	Net of tax expense of $158 and $169, respectively for the three and nine months ended September 30, 2010.

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, 2010 AND 2009

(Dollars in thousands, except share data)

	OCN Shareholders
	Common Stock			Additional Paid-in		Retained		Accumulated Other Comprehensive Loss,			Non-controlling Interest in
	Shares	Amount		Capital		Earnings		Net of Taxes			Subsidiaries			Total

Balance at December 31, 2009	99,956,833	$	1,000	$	459,542	$	405,198	$	(129	)	$	252		$	865,863
Adoption of ASC 810 (FASB Statement No. 167), net of tax	—		—		—		2,274		—			—			2,274
Net income	—		—		—		28,063		—			5			28,068
Exercise of common stock options	502,026		5		2,495		—		—			—			2,500
Issuance of common stock awards to employees	9,865		—		—		—		—			—			—
Equity-based compensation	7,654		—		2,968		—		—			—			2,968
Other comprehensive loss, net of income taxes	—		—		—		—		(12,975	)		(6	)		(12,981	)
Balance at September 30, 2010	100,476,378	$	1,005	$	465,005	$	435,535	$	(13,104	)	$	251		$	888,692

Balance at December 31, 2008	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)	—			—			(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	)
Exercise of common stock options	405,013			4			2,964			—			—			—			2,968
Issuance of common stock awards to employees	29,907			—			(138	)		—			—			—			(138	)
Equity-based compensation	12,147			—			1,817			—			—			—			1,817
Repurchase of 3.25% Convertible Notes	—			—			(4	)		—			—			—			(4	)
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,
	2010			2009
Cash flows from operating activities
Net income (loss)	$	28,068		$	(9,103	)
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of mortgage servicing rights		22,103			25,743
Premium amortization and discount accretion		—			1,735
Depreciation and other amortization		4,824			7,935
Write-off of investment in commercial real estate partnership		3,000			—
Reversal of valuation allowance on mortgage servicing assets		(185	)		(374	)
Reversal of valuation allowance on discontinued operations		—			(1,227	)
Loss (gain) on trading securities		3,958			(13,346	)
Loss on loans held for resale, net		2,626			8,783
Equity in (earnings) losses of unconsolidated entities		(1,344	)		1,608
Decrease (increase) in deferred tax assets		(421	)		44,325
Net cash provided by trading activities		168,853			2,500
Net cash provided by loans held for resale activities		1,163			3,605
Changes in assets and liabilities:
Decrease in advances and match funded advances		204,343			187,669
Decrease (increase) in receivables and other assets, net		(19,885	)		27,222
Decrease in servicer liabilities		(36,304	)		(76,294	)
Increase in other liabilities		44,912			21,102
Other, net		8,871			(2,354	)
Net cash provided by operating activities		434,582			229,529

Cash flows from investing activities
Purchase of mortgage servicing rights		(23,425	)		(10,241	)
Acquisition of advances and other assets in connection with the purchase of mortgage servicing rights		(528,882	)		—
Distributions of capital from unconsolidated entities		3,542			4,496
Cash paid to acquire HomEq Servicing (a business within Barclays Bank PLC)		(1,167,122	)		—
Additions to premises and equipment		(3,261	)		(3,429	)
Proceeds from sales of real estate		3,001			1,689
Increase in restricted cash – for securitization investors		813			—
Principal payments received on loans – restricted for securitization investors		3,558			—
Other		—			334
Net cash used by investing activities		(1,711,776	)		(7,151	)

Cash flows from financing activities
Distribution of cash in connection with the Spin-off of Altisource Portfolio Solutions		—			(20,028	)
Proceeds from (repayment of) match funded liabilities		1,140,655			(427,328	)
Repayment of secured borrowings – owed to securitization investors		(7,487	)		—
Proceeds from lines of credit and other secured borrowings		448,316			102,106
Repayment of lines of credit and other secured borrowings		(63,018	)		(151,976	)
Repayment of investment line		(156,968	)		(33,551	)
Repurchase of debt securities		(11,659	)		(24,612	)
Repurchase of common stock		—			(11,000	)
Issuance of common stock		—			335,167
Exercise of common stock options		2,381			2,587
Other		(2,034	)		1,086
Net cash provided (used) by financing activities		1,350,186			(227,549	)

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,
	2010			2009
Net increase (decrease) in cash		72,992			(5,171	)
Cash at beginning of period		90,919			201,025
Cash at end of period	$	163,911		$	195,854

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		—		$	51,420

Supplemental business acquisition information
Fair value of assets acquired
Advances	$	(1,062,873	)	$	—
Mortgage servicing rights		(84,683	)		—
Premises and equipment		(8,008	)		—
Goodwill		(19,457	)		—
Receivables		(1,423	)		—
		(1,176,444	)		—
Fair value of liabilities assumed
Other liabilities		9,322			—
Cash paid		(1,167,122	)		—
Less cash acquired		—			—
Net cash paid	$	(1,167,122	)	$	—

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, 2010

(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 global operations in India and Uruguay. Ocwen is a Florida corporation organized in February 1988. Ocwen Loan Servicing, LLC (OLS), a wholly-owned subsidiary of Ocwen, is a licensed mortgage servicer in all 50 states, the District of Columbia and two U.S. territories.

At September 30, 2010, Ocwen owned all of the outstanding stock of its primary subsidiaries: OLS; Ocwen Financial Solutions, Private Limited (OFSPL); and Investors Mortgage Insurance Holding Company. OCN also holds a 25% interest in Ocwen Structured Investments, LLC (OSI) and an approximate 25% interest in Ocwen Nonperforming Loans, LLC (ONL) and Ocwen REO, LLC (OREO). While OCN continues to own 70% of Global Servicing Solutions, LLC (GSS) with the remaining 30% interest held by ML IBK Positions, Inc., GSS had no material operations during the first nine months of 2010 and 2009 and no material assets as of September 30, 2010. Ocwen holds a 45% interest in BMS Holdings, Inc. (BMS Holdings) which had as its principal asset the equity ownership of Bankruptcy Management Solutions, Inc. (BMS). Effective October 1, 2010, BMS Holdings no longer owns any interest in BMS (See Note 26).

On August 10, 2009, we completed the 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. (Altisource). Altisource common stock is listed on the NASDAQ market under the ticker symbol “ASPS.” We distributed all of the shares of Altisource common stock to OCN’s shareholders of record as of August 4, 2009 (the Separation). 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 Ocwen under the long-term services agreements described in Note 24. Accordingly, for periods prior to August 10, 2009, the historical operating results of Altisource are presented in continuing operations.

On September 1, 2010, Ocwen, through OLS, completed its acquisition (the “HomEq Acquisition”) of the U.S. non-prime mortgage servicing business known as “HomEq Servicing” including, but not limited to, the mortgage servicing rights and associated servicer advances of the business as well as the servicing platforms based in Sacramento, California and Raleigh, North Carolina. See Note 3 for additional information regarding the HomEq Acquisition.

Basis of Presentation

Certain amounts included in our 2009 consolidated financial statements have been reclassified to conform to the 2010 presentation, including retrospective application of new accounting pronouncements adopted January 1, 2010. See Note 2 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, 2010 are not necessarily indicative of the results that may be expected for any other interim period or for the entire year ending December 31, 2010. 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, 2009.

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), deferred tax assets and goodwill and other components of the HomEq purchase price allocation.

Principles of Consolidation

Our financial statements include the accounts of Ocwen and its majority-owned subsidiaries. We apply the equity method of accounting to investments when the entity is not a variable interest entity (VIE) and we are able to exercise significant influence, but not control, over the policies and procedures of the entity but own less than 50% of the voting securities. We have eliminated intercompany accounts and transactions in consolidation.

Variable Interest Entities

We evaluate each special purpose entity (SPE) for classification as a VIE. When an SPE meets the definition of a VIE and we determine that Ocwen is the primary beneficiary, we include the SPE in our consolidated financial statements.

We have determined that the SPEs created in connection with the match funded financing facilities discussed below are VIEs of which we are the primary beneficiary. We have also determined that we are the primary beneficiary for certain residential mortgage loan securitization trusts. The accounts of these SPEs are included in our consolidated financial statements.

Securitizations or Asset Backed Financing Arrangements

Ocwen or its subsidiaries have been a transferor in connection with a number of securitizations or asset-backed financing arrangements. As of January 1, 2010, we had continuing involvement with the financial assets of eight of these securitizations or asset-backed financing arrangements. We also hold residual interests in and are the servicer for three securitizations where we were not a transferor.

We have aggregated these securitizations and asset-backed financing arrangements into two groups: (1) securitizations of residential mortgage loans and (2) financings of advances on loans serviced for others.

Securitizations of Residential Mortgage Loans. In prior years, we securitized residential mortgage loans using certain trusts. These transactions were accounted for as sales even though we continued to be involved with the trusts, typically by acting as the servicer or sub-servicer for the loans held by the trust and by retaining a beneficial ownership interest in the trust. The beneficial interests we held consisted of both subordinate and residual securities that were either retained at the time of the securitization or acquired subsequently.

As a result of our adoption of Accounting Standards Update (ASU) No. 2009-16 (ASC 860, Transfers and Servicing) and ASU 2009-17 (ASC 810, Consolidation), we have included four of these trusts in our consolidated financial statements. The remaining trusts are currently excluded from our consolidated financial statements because we have determined that Ocwen is not the primary beneficiary.

We have determined that Ocwen is the primary beneficiary of the consolidated securitization trusts because:

	1.	as the servicer we have the right to direct the activities that most significantly impact the economic performance of the trusts through our ability to manage the delinquent assets of the trusts and

	2.	as holder of all or a portion of the residual tranches of the securities issued by the trust, we have the obligation to absorb losses of the trusts, to the extent of the value of our investment, and the right to receive benefits from the trust both of which could potentially be significant to the trusts.

Upon adoption of ASU 2009-17 (ASC 810, Consolidation) on January 1, 2010 we began consolidating the four trusts and recorded a $75,506 increase in total assets, a $73,232 increase in liabilities and a $2,274 increase in the opening balance of retained earnings. Included in these amounts were the following transition adjustments:

	·	Consolidation of $1,755 of cash held by the trusts (Restricted cash – for securitization investors);

	·	Consolidation of loans held by the trust with an unpaid principal balance (UPB) of $77,939 (Loans, net – restricted for securitization investors), including $14,780 of non-performing collateral;

	·	Recording of an allowance for loan losses of $4,461, not previously required, for the newly consolidated loans;

	·	Consolidation of $2,346 of real estate owned from the trusts (included in Other assets);

	·	Consolidation of $72,918 of certificates issued by the trusts (Secured borrowings – owed to securitization investors);

	·	Elimination of our $3,634 investment in trading securities that were issued by the newly consolidated trusts against $867 of the face amount of the related certificates and retained earnings;

	·	Recording of net deferred tax assets of $1,561, principally related to establishing an allowance for loan losses for the newly consolidated loans; and

	·	Recording of $1,181 of other liabilities representing accrued interest payable and the fair value of interest rate swap instruments entered into by one of the consolidated trusts.

The consolidation of the four trusts on January 1, 2010 did not affect Cash and, therefore, the transition adjustments are not reported in the Consolidated Statement of Cash Flows.

Our Consolidated Statement of Operations for the three and nine months ended September 30, 2009 and our Consolidated Balance Sheet at December 31, 2009 have not been retroactively adjusted to reflect the effect of our adoption of ASU 2009-16 and ASU 2009-17. Therefore, current period results and balances will not be comparable to prior period amounts particularly with regard to the following:

	·	Trading securities (Subordinates and residuals)

	·	Loans, net – restricted for securitization investors

	·	Deferred tax assets, net

	·	Secured borrowings – owed to securitization investors

	·	Interest income

	·	Interest expense

	·	Gain (loss) on trading securities

Beginning January 1, 2010, interest income on the securities that we hold that were issued by the securitization trusts is eliminated in consolidation against the interest expense of the trusts.

Ocwen has no obligation to provide financial support to the trusts and has provided no such support. The creditors of the trusts can look only to the assets of the trusts themselves for satisfaction of the debt and have no recourse against the assets of Ocwen. Similarly, the general creditors of Ocwen have no claim on the assets of the trusts. Our exposure to loss as a result of our continuing involvement 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.

The following table presents a summary of the involvement of Ocwen with seven unconsolidated securitization trusts and summary financial information for the trusts. Although we are the servicer for these trusts, the residual interests that we hold in these entities have little to no value. As a result, we are exposed to no loss from these holdings. Further, since our valuation of the residual interest is based on anticipated cash flows, we are unlikely to receive any future benefits from our residual interests in these trusts.

For the periods ended September 30,	Three months				Nine months
	2010		2009		2010		2009
Total cash received on beneficial interests held	$	—	$	1	$	—	$	63
Total servicing and subservicing fee revenues		947		899		2,820		3,102

	As of
	September 30, 2010		December 31, 2009
Total servicing advances	$	17,110	$	19,027
Total beneficial interests held at fair value (1)		—		58
Total mortgage servicing rights at amortized cost		1,395		1,659

(1)	Includes investments in subordinate and residual securities that we retained in connection with the loan securitization transactions completed in prior years.

With regard to these unconsolidated securitization trusts, 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 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 Note 5, Note 6, Note 7 and Note 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 SPEs in exchange for cash. These SPEs issue debt supported by collections on the transferred advances. We made these transfers under the terms of five 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 Consolidated Balance Sheet as Match funded advances and the related liabilities as Match funded liabilities. Collections on the advances pledged to the SPEs 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 of the obligations under the securitization documents of one of the entities, Ocwen Servicer Advance Funding (Wachovia), LLC (OSAFW). The maximum amount payable under the guarantee is limited to 10% of the notes outstanding at the end of the facility’s revolving period on May 5, 2011. As of September 30, 2010, OSAFW had $258,386 of notes outstanding.

The following table summarizes the assets and liabilities of the SPEs formed in connection with our match funded advance facilities, at the dates indicated:

	September 30, 2010		December 31, 2009
Match funded advances	$	2,126,991	$	822,615
Other assets		82,211		19,343
Total assets	$	2,209,202	$	841,958

Match funded liabilities	$	1,606,346	$	465,691
Due to affiliates (1)		106,727		136,860
Other liabilities		3,172		1,350
Total liabilities	$	1,716,245	$	603,901

(1)	Amounts are payable to Ocwen and its consolidated affiliates and eliminated in consolidation.

Reclassification

Certain immaterial amounts in our 2009 consolidated financial statements have been reclassified to conform to the 2010 presentation. In the fourth quarter of 2009, we reclassified gains and losses on debt redemptions to Other, net on the Consolidated Statements of Operations. On the Consolidated Statements of Changes in Equity, we condensed share-based compensation amounts and associated excess tax benefits into one line item, Equity-based compensation. Within the operating activities section of the Consolidated Statements of Cash Flows we condensed several immaterial items to Other, net. Similarly, in the financing section of the Consolidated Statements of Cash Flows we condensed several immaterial items to Other.

NOTE 2

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (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.

ASU 2009-16 (ASC 860, Transfers and Servicing). This statement eliminates the exceptions for qualifying special purpose entities (QSPE) from the consolidation guidance (ASC 810) and 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 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 adopted this standard effective January 1, 2010 as a result of which, we reevaluated certain QSPEs with which we had ongoing relationships as further described under ASU 2009-17, below, and reassessed the adequacy of our disclosures with regard to our servicing assets and servicing liabilities.

ASU 2009-17 (ASC 810, Consolidation). This standard requires 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. We adopted this standard effective January 1, 2010. 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 primarily to reflect the elimination of the concept of a QSPE under ASC 860 (above). 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—Summary of Significant Accounting Policies.

As also disclosed in Note 1—Securitizations of Residential Mortgage Loans, we previously excluded certain loan securitization trusts from our consolidated financial statements because each was a QSPE. Effective January 1, 2010, we reevaluated these QSPEs as well as all other potentially significant interests in other unconsolidated entities to determine if we should include them in our consolidated financial statements.

ASU No. 2010-06 (ASC 820, Fair Value Measurements and Disclosures). ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. These new disclosure requirements became effective for our financial statements for the period ended June 30, 2010, except for the requirement concerning gross presentation of Level 3 activity, which will become effective for fiscal years beginning after December 15, 2010. See Note 4 for our fair value disclosures related to financial instruments.

ASU No. 2010-20 (ASC 310, Receivables). On July 21, 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This standard outlines specific disclosures required for the allowance for credit losses and all finance receivables, as defined. A finance receivable is defined as a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the entity’s statement of financial position. This definition includes instruments such as certain trade receivables, notes receivable and lease receivables as well as the instruments more traditionally associated with an allowance for credit loss, such as mortgage loans, auto loans, credit card loans and other consumer or commercial lending agreements.

A significant change from the current disclosure requirements will be to provide information for both the finance receivables and the related allowance for credit losses at disaggregated levels. The standard introduces two new defined terms that will govern the level of disaggregation. These include a “portfolio segment” and a “class” of financing receivable. A portfolio segment is defined as the level at which an entity determines its allowance for credit losses. For example, this may be by type of receivable, industry or risk. A class of financing receivable is defined as a group of finance receivables determined on the basis of their initial measurement attribute (i.e., amortized cost or purchased credit impaired), risk characteristics, and an entity’s method for monitoring and assessing credit risk.

The new guidance requires an entity to provide the extensive disclosures or information for the reporting periods presented including, but not limited to:

Presented by portfolio segment: A rollforward schedule of the allowance for credit losses (with the ending allowance balance further disaggregated based on impairment methodology) together with the related ending balance of the finance receivables; and significant purchases and sales of financing receivables.

Presented by class: The credit quality of the financing receivables portfolio at the end of the reporting period; the aging of past due financing receivables at the end of the period; the nature and extent of troubled debt restructurings that occurred during the period and their impact on the allowance for credit losses; the nature and extent of troubled debt restructurings, that occurred within the last year, that have defaulted in the current reporting period, and their impact on allowance for credit losses; the nonaccrual status of financing receivables; and impaired financing receivables.

Disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending after December 15, 2010. Specific items regarding activity that occurred prior to the issuance of the ASU, such as the allowance rollforward and modification disclosures will be required for periods beginning after December 15, 2010.

NOTE 3

ACQUISITION

On September 1, 2010, Ocwen completed the HomEq Acquisition. The sellers were Barclays Bank PLC, a corporation organized under the laws of England and Wales (Barclays), and Barclays Capital Real Estate Inc., a corporation organized under the laws of the State of Delaware (BCRE). The HomeEq Acquisition was completed in accordance with the provisions of the Asset Purchase Agreement dated May 28, 2010 among Barclays, BCRE, OLS and Ocwen. This transaction did not result in the transfer of ownership of any legal entities.

Ocwen acquired HomEq Servicing in order to grow its Servicing segment. With the close of the HomEq Acquisition, Ocwen boarded 134,000 residential mortgage loans with an aggregate unpaid principal balance of $22,400,000 onto its servicing platform.

OLS paid an initial aggregate purchase price of $1,196,747 in cash upon completion of the HomEq Acquisition. Of this amount, $852,617 was funded by notes issued by a new $1,011,000 structured servicing advance financing facility, $150,000 was paid from funds held in escrow in accordance with the terms of the new $350,000 senior secured term loan facility and $194,130 consisted of cash and funds borrowed pursuant to the senior secured term loan facility. See Note 12 and 14 for additional details regarding the terms of the notes supporting these facilities. The initial purchase price was reduced by $29,625 pursuant to an initial true-up of advances as reflected in the table below and is subject to further true-up under adjustment mechanisms and repurchase rights in limited circumstances.

The transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the preliminary estimate of the fair values of assets acquired and liabilities assumed as part of the HomEq Acquisition:

Mortgage servicing rights	$	84,683
Advances		1,062,873
Receivables		1,423
Premises and equipment, net		8,008
Checks held for escheat (1)		(4,616	)
Accrued bonus (1)		(3,042	)
Servicing liabilities (1)		(700	)
Other liabilities (1)		(964	)
Total identifiable net assets		1,147,665
Goodwill		19,457
Total consideration	$	1,167,122

(1)	Amounts are included in Other liabilities on our Consolidated Balance Sheet.

Consistent with our fair value policy for mortgage servicing rights disclosed in Note 4, we estimated the fair value of the mortgage servicing rights by calculating the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. The valuation of premises and equipment was based on the in-use valuation premise, where the highest and best use of the assets would provide maximum value to market participants principally through its use with other assets as a group. This valuation presumes the continued operation of the HomEq platform as installed or otherwise configured for use. Advances are non-interest bearing receivables that are expected to have a short average collections period and were, therefore, valued at their face amount, consistent with Ocwen’s fair value policy for servicing advances. Other assets and liabilities that are expected to have a short life that were valued at the face value of the specific assets and liabilities purchased, including checks held for escheat, accrued bonuses and other liabilities. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined business. The goodwill portion of the purchase price allocation shown in the table above pertains to the Servicing segment and is subject to adjustment as the fair value of certain other components of the purchase price are adjusted. All components of the purchase price allocation are considered preliminary. We anticipate finalizing the purchase price allocations by December 31, 2010. Potential changes in advances, premises and equipment and goodwill could be significant. If certain premises and equipment acquired from HomEq are not used in the future, they may be written down to the estimated liquidation value. Ocwen is considering subleasing office space acquired as part of the HomEq Acquisition. Further changes to the opening balance of advances will result in a cash exchange between Ocwen and Barclays and, as such, should not result in any change to goodwill.

The acquisition of HomEq is treated as an asset acquisition for U.S. tax purposes. We expect the opening tax basis for the acquired assets and liabilities to be the fair value, which is shown in the table above. We expect the mortgage servicing rights and goodwill to be treated as intangible assets acquired in connection with the purchase of a trade or business and as such, amortized over 15 years for tax purposes.

The asset purchase agreement provides for a 90-day true-up process for Advances and Mortgage servicing rights under limited circumstances. Payment for advances in the amount of $3,500 was held back in an escrow account under a four-year agreement during which Ocwen can seek reimbursement for existing and future uncollectible advances on certain pooling and servicing agreements under limited circumstances. Notwithstanding this holdback amount, the agreement provides for the reimbursement of uncollectible advances under all pooling and servicing agreements under limited circumstances.

Additionally, the agreement provides that any severance paid by Ocwen to HomEq employees accepting employment with Ocwen in accordance with the Barclays severance plan with payments in excess of $20,440 being reimbursed by Barclays, and conversely, that Ocwen shall pay Barclays the difference if severance paid is less than $20,440. Severance payments for all HomEq Servicing employees who entered an employment agreement with Ocwen were recorded in the third quarter as steps were taken that obligated Ocwen to pay severance for all such employees. Severance expense of $20,889 is included in Compensation and benefits in our Consolidated Statements of Operations. The projected excess of $449 is included in Receivables in our Consolidated Balance Sheet and is considered part of the HomEq Acquisition purchase price.

In connection with the establishment of the match funded advance facility Ocwen paid Barclays a $10,110 securitization fee and funded a reserve in the initial amount of $14,342 held by the facility Indenture Trustee for the benefit of the note holders. The securitization fee along with and certain other professional fees paid in connection with the establishment of the facility will be amortized over the expected three-year life of the notes.

Ocwen has agreed to assist Barclays in defending against certain litigation regarding the HomEq Servicing business that Ocwen did not assume under the terms of the Asset Purchase Agreement. Ocwen has no material financial obligation for litigation related to the operations of HomEq prior to the closing.

Actual and Pro forma impact of the HomEq Acquisition

The following table presents the revenue and earnings of HomEq Servicing that is included in our Consolidated Statement of Operations from the acquisition date of September 1, 2010 through September 30, 2010:

Revenues		$	10,402
Net loss (1)		$	(20,443	)

(1)

Net loss includes one-time transaction related expenses of $33,684, including severance and other compensation of $30,345 related to HomEq employees who accepted employment with Ocwen and $2,323 of fees for professional services related to the acquisition. Income taxes were computed using a statutory rate of 37% for federal and state income taxes.

The following table presents supplemental pro forma information as if the HomEq Acquisition had occurred on January 1, 2010 for the three and nine months ended September 30, 2010. The comparative 2009 columns were prepared as if the HomEq Acquisition had occurred on January 1, 2009 for the three and nine months ended September 30, 2009. As a result, the nine month periods for both years include acquisition related charges, including severance paid to HomEq employees and fees for professional services related to the acquisition. The pro forma consolidated results are not indicative of what Ocwen’s consolidated net earnings would have been had Ocwen completed the HomEq Acquisition on January 1, 2010 or 2009 because of differences in servicing practices and cost structure between Ocwen and HomEq. In addition, the pro forma consolidated results do not purport to project the future results of Ocwen combined nor do they reflect the expected realization of any cost savings associated with the HomEq Acquisition.

Periods ended September 30, 2010	Three months					Nine months
	2010		2009			2010		2009
Revenues	$	125,324	$	141,558		$	366,893	$	489,430
Net income (loss)	$	5,781	$	(39,633	)	$	17,730	$	(15,783	)

Through September 30, 2010, we have incurred approximately $3,744 of fees for professional services related to the HomEq Acquisition which are included in Operating expenses.

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, 2010						December 31, 2009
	Carrying Value			Fair Value			Carrying Value		Fair Value
Financial assets:
Trading securities:
Auction rate	$	74,712		$	74,712		$	247,464	$	247,464
Subordinates and residuals		—			—			3,692		3,692
Loans held for resale		29,352			29,352			33,197		33,197
Loans, net – restricted for securitization investors		69,736			66,926			—		—
Advances		2,345,927			2,345,927			968,529		968,529
Receivables, net		42,747			42,747			67,095		67,095
Financial liabilities:
Match funded liabilities	$	1,606,346		$	1,611,397		$	465,691	$	463,716
Lines of credit and other secured borrowings		444,499			452,550			55,810		56,220
Secured borrowings – owed to securitization investors		64,564			63,963			—		—
Investment line		—			—			156,968		156,968
Servicer liabilities		2,368			2,368			38,672		38,672
Debt securities		82,554			76,334			95,564		84,551
Derivative financial instruments, net	$	(21,419	)	$	(21,419	)	$	781	$	781

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, 2010:
Measured at fair value on a recurring basis:
Trading securities (1):
Auction rate	$	74,712		$	—	$	—	$	74,712
Subordinates and residuals (2)		—			—		—		—
Derivative financial instruments, net (3)		(21,419	)		—		—		(21,419	)
Measured at fair value on a non-recurring basis:
Loans held for resale (4)		29,352			—		—		29,352
Mortgage servicing rights (5)		523			—		—		523

At December 31, 2009:
Measured at fair value on a recurring basis:
Trading securities (1):
Auction rate	$	247,464		$	—	$	—	$	247,464
Subordinates and residuals (2)		3,692			—		—		3,692
Derivative financial instruments, net (3)		781			—		—		781
Measured at fair value on a non-recurring basis:
Loans held for resale (4)		33,197			—		—		33,197
Mortgage servicing rights (5)		613			—		—		613

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

(2)	Effective January 1, 2010, we eliminated our investment in trading securities that were issued by newly consolidated securitization trusts as more fully described in Note 1—Securitizations of Residential Mortgage Loans.

(3)	The fair values of derivative financial instruments as of January 1, 2010 were adjusted to include $(826) related to an interest rate swap that is held by one of the newly consolidated securitization trusts. 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; interest rate swaps to protect against our exposure to rising interest rates on a third match funded facility and a match funded facility entered into in connection with the HomEq Acquisition; the interest rate swap that is held by one of the newly consolidated loan securitization trusts; and foreign exchange forward contracts to protect against changes in the value of the Indian Rupee. See Note 18 for additional information on our derivative financial instruments.

(4)	Loans held for resale are measured at fair value on a non-recurring basis. At September 30, 2010 and December 31, 2009, the carrying value of loans held for resale is net of a valuation allowance of $12,551 and $15,963, respectively. Current market illiquidity has reduced the availability of observable pricing data. Consequently, we classify loans within Level 3 of the fair value hierarchy.

(5)	The carrying value of MSRs at September 30, 2010 and December 31, 2009 is net of a valuation allowance for impairment of $2,769 and $2,954, respectively. The carrying value of the impaired stratum, net of the valuation allowance, was $523 and $613 at September 30, 2010 and December 31, 2009, respectively. 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)(3)			Transfers in and/or out of Level 3		Fair value at September 30

Three months ended September 30, 2010:
Trading securities:
Auction rate	$	78,073		$	(400	)	$	(2,961	)	$	—	$	74,712
Subordinates and residuals		52			—			(52	)		—		—

Derivative financial instruments		(12,278	)		58			(9,199	)		—		(21,419	)

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

Nine months ended September 30, 2010:
Trading securities:
Auction rate	$	247,464		$	(168,853	)	$	(3,899	)	$	—	$	74,712
Subordinates and residuals		59			—			(59	)				—

Derivative financial instruments		(45	)		134			(21,508	)		—		(21,419	)

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

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

(2)	Total gains and (losses) on auction rate securities for the third quarter include unrealized gains (losses) of $(2,976) and $7,314 on auction rate securities still held at September 30, 2010 and 2009, respectively. For the year to date periods, unrealized gains (losses) on auction rate securities still held at September 30, 2010 and 2009 were $(2,417) and $13,298, respectively. The total gains and (losses) attributable to subordinates and residuals and derivative financial instruments were comprised principally of unrealized gains (losses) on assets held at September 30, 2010 and 2009.

(3)	Total gains (losses) on derivatives for the three and nine months ended September 30, 2010 include unrealized losses of $8,824 and $20,556, respectively, reported in changes in Other comprehensive loss. All other unrealized gains (losses) on derivatives for the 2010 and 2009 periods are reported in Other, net. The total gains and (losses) attributable to derivative financial instruments were comprised principally of unrealized gains (losses) on assets still held at September 30, 2010 and 2009.

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, 2010:

· Expected term		12 - 48 months
· Discount to face value upon liquidation		0.00% - 4.00%
· Illiquidity premium		0.27% - 0.96%
· Discount rate		1.06% - 2.51%

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. The discount to face value upon liquidation is based on observed tender offers 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 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.

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 $41,903 exceeded the estimated fair value of $29,352 at September 30, 2010.

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.

Loans – Restricted for Securitization Investors

Loans – restricted for securitization investors are reported at cost, less an allowance for loan losses and are comprised of loans that are secured by first or second liens on one- to four-family residential properties. We base the fair value of our loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows. Significant assumptions include expected prepayment rates and delinquency and cumulative loss curves.

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	·	Interest rate used for computing float earnings
·	Discount rate	·	Compensating interest expense
·	Interest rate used for computing the cost of servicing advances

The significant components of the estimated future cash inflows for MSRs include servicing fees, late fees, prepayment penalties, float earnings and other ancillary revenues. 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, 2010 valuation include prepayment speeds ranging from 14.25% to 18.09% (depending on loan type) and delinquency rates ranging from 14.4% to 33.2% (depending on loan type). Other assumptions include an interest rate of 1-month LIBOR plus 4% 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	·	Re-performing
·	ALT A	·	Special servicing
·	High-loan-to-value	·	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.

Borrowings

Borrowings not subject to a hedging relationship are carried at amortized cost. We base the fair value of our debt securities on quoted market prices. The carrying value of match funded liabilities and secured borrowings that bear interest at a rate that is adjusted regularly based on a market index approximates fair value. For other match funded or secured borrowings that bear interest at a fixed rate, we determine fair value by discounting the contractual future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. We carry certain zero-coupon long-term secured borrowings with an implicit fixed rate at a discounted value and determine fair value by discounting the contractual future principal repayments at a market rate that is commensurate with the risk of the estimated cash flows.

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

TRADING SECURITIES

Trading securities consisted of the following at the dates indicated:

	September 30, 2010		December 31, 2009

Auction rate (Corporate Items and Other)	$	74,712	$	247,464

Subordinates and residuals:
Loans and Residuals (1)	$	—	$	3,634
Corporate Items and Other		—		58
	$	—	$	3,692

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

	Three months					Nine months
	2010			2009		2010			2009
Unrealized gains (losses):
Auction rate securities	$	(2,976	)	$	7,314	$	(2,007	)	$	13,298
Subordinates and residuals (1)		(52	)		977		(59	)		48
	$	(3,028	)	$	8,291	$	(2,066	)	$	13,346
Realized gains (losses) – Auction rate securities		15			—		(1,892	)		—
	$	(3,013	)	$	8,291	$	(3,958	)	$	13,346

(1)	Effective January 1, 2010, we eliminated our investment in trading securities that were issued by newly consolidated securitization trusts as more fully described in Note 1—Securitizations of Residential Mortgage Loans, as well as the related unrealized gains and losses.

Auction Rate Securities

During the first quarter of 2008, we invested investment line borrowings (see Note 15) in 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.

On January 21, 2010 and March 4, 2010, we negotiated settlements of two of our auction rate securities litigation actions. Under the terms of these settlements, the broker/dealers repurchased $103,625 par value of auction rate securities for cash proceeds of $92,745. On February 10, 2010, we sold auction rate securities with a par value of $33,350 for cash proceeds of $29,848.

Under the terms of the liquidity option agreement we entered into in October 2009, we have the right to sell specific securities for cash. We also have the right to repurchase the same following the initial sale at the same price. On February 11, 2010, we exercised a portion of our option to sell auction rate securities with a par value of $88,150 and received proceeds of $74,953. We recognized the sale as a secured borrowing because of our ability to repurchase the same securities until the maturity of the liquidity option in October 2012. On June 24, 2010, we repurchased $46,800 par value of these securities at the initial sale price of $40,504 and sold them for cash proceeds of $44,460. We continue to report on our Consolidated Balance Sheet the remaining $41,350 par value of these auction rate securities, with a fair value of $39,607 as of September 30, 2010. However, these securities are pledged to collateralize a $34,449 borrowing reflecting the proceeds received upon exercise of the option. We no longer receive cash interest income on the pledged securities nor do we pay cash interest on this secured borrowing. See Note 14 for additional information on this secured borrowing.

We used proceeds from the January 21, 2010 litigation settlement and the February 10, 2010 sale to pay down the investment line. On February 17, 2010, we used the proceeds from the February 11, 2010 exercise of the liquidity option and an additional $3,664 cash to repay the remaining balance of the investment line.

In June 2010, we sold auction rate securities with a par value of $35,000 under an agreement to repurchase and received proceeds of $21,704. We report repurchase agreements as collateralized financings and report the obligations to repurchase the assets sold as a liability on our Consolidated Balance Sheet. See Note 14 for additional details regarding the terms of the financing obligation. We report the auction rate securities underlying the repurchase agreement, which had a fair value of $33,118 at September 30, 2010, in our Consolidated Balance Sheet.

The remaining $2,000 par value of auction rate securities are not financed.

During the nine months ended September 30, 2010, issuers redeemed, at par, auction rate securities we held that had a face value of $1,800.

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 6

ADVANCES

Advances consisted of the following at the dates indicated:

	September 30, 2010		December 31, 2009
Servicing:
Principal and interest	$	104,926	$	51,598
Taxes and insurance		53,183		52,813
Foreclosure and bankruptcy costs		28,275		28,021
Other		28,405		8,998
		214,789		141,430
Loans and Residuals		3,988		4,321
Corporate Items and Other		159		163
	$	218,936	$	145,914

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.

Servicing advances of $79,936 and $72,670 were pledged as collateral under the terms of the term reimbursement advance borrowing as of September 30, 2010 and December 31, 2009, respectively.

NOTE 7

MATCH FUNDED ADVANCES

Match funded advances on residential loans we service for others, as more fully described in Note 1—Principles of Consolidation-Match Funded Advances on Loans Serviced for Others, are comprised of the following at the dates indicated:

	September 30, 2010		December 31, 2009
Principal and interest	$	1,156,699	$	345,924
Taxes and insurance		668,349		332,326
Foreclosure and bankruptcy costs		143,451		72,385
Real estate servicing costs		114,233		49,446
Other		44,259		22,534
	$	2,126,991	$	822,615

NOTE 8

LOANS – RESTRICTED FOR SECURITIZATION INVESTORS

Loans – restricted for securitization investors are held by four securitization trusts that we include in our consolidated financial statements under the provisions of ASC 810, Consolidation, as more fully described in Note 1—Securitizations of Residential Mortgage Loans. Loans – restricted for securitization investors consisted of the following at September 30, 2010:

Single family residential loans (1)	$	72,179
Allowance for loans losses		(2,443	)
	$	69,736

(1)	Includes nonperforming loans of $12,907.

We report loans held by the consolidated securitization trusts at cost, less an allowance for loan losses. We consider loans held by the trusts to be nonperforming if they are delinquent greater than 89 days or if the loan is in foreclosure or in bankruptcy. We do not accrue for interest on nonperforming loans. In situations where the trusts foreclose upon the collateral, we classify the loans as real estate, a component of Other assets. We report as Other, net the losses that are realized by the trusts on loans or real estate resolved through repayment of less than the unpaid principal balance of the loan in full plus any costs incurred by the servicer to resolve the loan or real estate.

We maintain an allowance for loan losses for loans and real estate held by the trusts at a level that, based upon our evaluation of known and inherent risks in the collateral of the trusts, we consider to be adequate to provide for probable losses. We base our ongoing evaluation of the allowance for loan losses upon an analysis of the collateral of the trusts, historical loss experience, economic conditions and trends, collateral values and other relevant factors.

At September 30, 2010, the trusts held 1,252 loans that are secured by first or second liens on one- to four-family residential properties. These loans have a weighted average coupon rate of 9.43% and a weighted average remaining life of 138 months.

NOTE 9

MORTGAGE SERVICING RIGHTS

Servicing Assets. The following table summarizes the activity in the carrying value of residential servicing assets for the nine months ended September 30, 2010:

Carrying value at December 31, 2009	$	117,802
Purchases(1)		108,108
Servicing transfers and adjustments		(29	)
Decrease in impairment valuation allowance		185
Amortization (2)		(22,136	)
Carrying value at September 30, 2010	$	203,930

(1)	Includes $84,683 of MSRs acquired as part of the HomEq Acquisition.

(2)	During the first nine months of 2010, amortization of servicing liabilities exceeded the amount of charges we recognized to increase servicing liability obligations by $33. Amortization of mortgage servicing rights of $22,103 in our Consolidated Statement of Operations is reported net of this amount.

The following table presents the composition of our servicing and subservicing portfolios by type of property serviced as measured by UPB. The servicing portfolio represents purchased mortgage servicing rights while subservicing generally represents all other mortgage servicing rights.

	Residential		Commercial		Total
UPB of Assets Serviced:
September 30, 2010:
Servicing	$	52,973,984	$	—	$	52,973,984
Subservicing (1)		23,166,038		452,296		23,618,334
	$	76,140,022	$	452,296	$	76,592,318
December 31, 2009:
Servicing	$	27,408,436	$	—	$	27,408,436
Subservicing (1)		22,571,641		211,603		22,783,244
	$	49,980,077	$	211,603	$	50,191,680

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

MSRs are an intangible asset representing the right to service a portfolio of mortgage loans. We generally obtain MSRs by purchasing them from the owners of the mortgage loans. Residential assets serviced consist principally of mortgage loans, primarily subprime, but also include real estate. Assets serviced for others are not included on our Consolidated Balance Sheet.

Custodial accounts, which hold funds representing collections of principal and interest we receive from borrowers, are escrowed with an unaffiliated bank and excluded from our Consolidated Balance Sheet. Custodial accounts amounted to approximately $451,300 and $234,100 at September 30, 2010 and December 31, 2009, respectively.

Valuation Allowance for Impairment. 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 estimated fair value was less than the carrying value. Changes in the valuation allowance for impairment are reflected in Servicing and origination expenses in our Consolidated Statement of Operations. Net of the valuation allowance of $2,769, the carrying value of this stratum was $523 at September 30, 2010. For all other strata, the fair value was above the carrying value at September 30, 2010.

Estimated fair value of MSRs:
September 30, 2010	$	233,722
December 31, 2009	$	127,268

Servicing Liabilities. We recognize a servicing liability for those agreements that we do not expect to compensate us adequately for performing the servicing. Servicing liabilities were $3,545 and $2,878 at September 30, 2010 and December 31, 2009, respectively, and are included in Other liabilities. The increase is primarily due to servicing liabilities of $700 assumed as part of the HomEq Acquisition.

NOTE 10

RECEIVABLES

Receivables consisted of the following at the dates indicated:

		September 30, 2010				December 31, 2009
Accounts receivable by segment: