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 June 30, 2013
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.) |
2002 Summit Boulevard, 6th Floor, Atlanta, Georgia 30319
(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 filer | x | Accelerated filer | o |
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 August 1, 2013: 135,754,992 shares.
OCWEN FINANCIAL CORPORATION
FORM 10-Q
INDEX
1 |
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. All statements, other than statements of historical fact included in this report, including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.
These statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could”, “intend,” “consider,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Such statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from expected results. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed in “Risk Factors” and the following:
● | the adequacy of our financial resources, including our sources of liquidity and ability to fund and recover advances, repay borrowings and comply with debt covenants; |
● | the characteristics of our servicing portfolio, including prepayment speeds along with delinquency and advance rates; |
● | our ability to grow and adapt our business, including the availability of new loan servicing and other accretive business opportunities; |
● | our ability to contain and reduce our operating costs; |
● | our ability to successfully modify delinquent loans, manage foreclosures and sell foreclosed properties; |
● | our reserves, valuations, provisions and anticipated realization on assets; |
● | our ability to effectively manage our exposure to interest rate changes and foreign exchange fluctuations; |
● | our credit and servicer ratings and other actions from various rating agencies; |
● | uncertainty related to general economic and market conditions, delinquency rates, home prices and disposition timelines on foreclosed properties; |
● | uncertainty related to the actions of loan owners, including mortgage-backed securities investors and government sponsored entities (GSEs), regarding loan put-backs, penalties and legal actions; |
● | uncertainty related to the processes for judicial and non-judicial foreclosure proceedings, including potential additional costs or delays or moratoria in the future or claims pertaining to past practices; |
● | uncertainty related to claims, litigation and investigations brought by private parties and government agencies regarding our servicing, foreclosure, modification and other practices; |
● | uncertainty related to legislation, regulations, regulatory agency actions, government programs and policies, industry initiatives and evolving best servicing practices; |
● | uncertainty related to acquisitions, including our ability to integrate the systems, procedures and personnel of acquired companies; |
● | our ability to maintain our technology systems and our ability to adapt such systems for future operating environments; |
● | failure of our internal security measures or breach of our privacy protections; |
● | uncertainty related to the political or economic stability of foreign countries in which we have operations; |
● | conflicts of interest with our officers and directors; and |
● | the loss of the services of our senior managers. |
Further information on the risks specific to our business is detailed within this report and our other reports and filings with the Securities and Exchange Commission (SEC) including our Annual Report on Form 10-K for the year ended December 31, 2012, 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 were made and except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise.
2 |
PART
I – FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(unaudited)
(Dollars in thousands, except share data)
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
Assets | ||||||||
Cash | $ | 439,747 | $ | 220,130 | ||||
Loans held for sale, at fair value | 361,144 | 426,480 | ||||||
Advances | 445,471 | 184,463 | ||||||
Match funded advances | 2,960,324 | 3,049,244 | ||||||
Mortgage servicing rights, at amortized cost | 1,688,038 | 678,937 | ||||||
Mortgage servicing rights, at fair value | 97,163 | 85,213 | ||||||
Receivables, net | 225,011 | 167,459 | ||||||
Deferred tax assets, net | 96,353 | 92,136 | ||||||
Goodwill | 390,640 | 381,560 | ||||||
Premises and equipment, net | 62,917 | 37,536 | ||||||
Debt service accounts | 84,248 | 88,748 | ||||||
Other assets | 231,224 | 273,578 | ||||||
Total assets | $ | 7,082,280 | $ | 5,685,484 | ||||
Liabilities, Mezzanine Equity and Stockholders’ Equity | ||||||||
Liabilities | ||||||||
Match funded liabilities | $ | 2,391,832 | $ | 2,532,745 | ||||
Other borrowings | 2,172,078 | 1,096,679 | ||||||
Other liabilities | 636,628 | 291,266 | ||||||
Total liabilities | 5,200,538 | 3,920,690 | ||||||
Commitments and Contingencies (Note 24) | ||||||||
Mezzanine Equity | ||||||||
Series A Perpetual Convertible Preferred stock, $.01 par value; 200,000 shares authorized; 162,000 shares issued and outstanding at June 30, 2013 and December 31, 2012; redemption value $162,000 plus accrued and unpaid dividends | 155,544 | 153,372 | ||||||
Stockholders’ Equity | ||||||||
Common stock, $.01 par value; 200,000,000 shares authorized; 135,754,992 and 135,637,932 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively | 1,358 | 1,356 | ||||||
Additional paid-in capital | 915,397 | 911,942 | ||||||
Retained earnings | 821,257 | 704,565 | ||||||
Accumulated other comprehensive loss, net of income taxes | (11,814 | ) | (6,441 | ) | ||||
Total stockholders’ equity | 1,726,198 | 1,611,422 | ||||||
Total liabilities, mezzanine equity and stockholders’ equity | $ | 7,082,280 | $ | 5,685,484 |
The accompanying notes are an integral part of these consolidated financial statements.
3 |
OCWEN
FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollars in thousands, except per share data)
Three Months | Six Months | |||||||||||||||
For the Periods Ended June 30, | 2013 | 2012 | 2013 | 2012 | ||||||||||||
Revenue | ||||||||||||||||
Servicing and subservicing fees | $ | 482,632 | $ | 200,335 | $ | 850,125 | $ | 355,424 | ||||||||
Gain on loans held for sale, net | 21,631 | — | 28,380 | — | ||||||||||||
Other revenues | 25,702 | 11,046 | 56,303 | 20,489 | ||||||||||||
Total revenue | 529,965 | 211,381 | 934,808 | 375,913 | ||||||||||||
Operating expenses | ||||||||||||||||
Compensation and benefits | 117,999 | 30,004 | 212,625 | 60,787 | ||||||||||||
Amortization of servicing rights | 70,369 | 19,097 | 118,252 | 33,411 | ||||||||||||
Servicing and origination | 11,747 | 5,877 | 34,423 | 9,150 | ||||||||||||
Technology and communications | 33,877 | 11,042 | 63,889 | 20,391 | ||||||||||||
Professional services | 66,652 | 5,943 | 80,138 | 14,502 | ||||||||||||
Occupancy and equipment | 25,596 | 10,280 | 43,845 | 25,585 | ||||||||||||
Other operating expenses | 48,556 | 3,661 | 65,258 | 8,191 | ||||||||||||
Total operating expenses | 374,796 | 85,904 | 618,430 | 172,017 | ||||||||||||
Income from operations | 155,169 | 125,477 | 316,378 | 203,896 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest income | 9,114 | 2,038 | 16,223 | 4,350 | ||||||||||||
Interest expense | (99,868 | ) | (58,319 | ) | (193,284 | ) | (105,243 | ) | ||||||||
Gain (loss) on debt redemption | 3,192 | — | (13,838 | ) | — | |||||||||||
Other, net | 19,903 | 968 | 13,366 | (2,720 | ) | |||||||||||
Other expense, net | (67,659 | ) | (55,313 | ) | (177,533 | ) | (103,613 | ) | ||||||||
Income before income taxes | 87,510 | 70,164 | 138,845 | 100,283 | ||||||||||||
Income tax expense | 10,789 | 25,331 | 16,977 | 36,101 | ||||||||||||
Net income | 76,721 | 44,833 | 121,868 | 64,182 | ||||||||||||
Preferred stock dividends | (1,519 | ) | — | (3,004 | ) | — | ||||||||||
Deemed dividend related to beneficial conversion feature of preferred stock | (1,086 | ) | — | (2,172 | ) | — | ||||||||||
Net income attributable to Ocwen common stockholders | $ | 74,116 | $ | 44,833 | $ | 116,692 | $ | 64,182 | ||||||||
Earnings per share attributable to Ocwen common stockholders | ||||||||||||||||
Basic | $ | 0.55 | $ | 0.33 | $ | 0.86 | $ | 0.48 | ||||||||
Diluted | $ | 0.53 | $ | 0.32 | $ | 0.84 | $ | 0.47 | ||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 135,690,264 | 134,856,101 | 135,664,242 | 132,752,848 | ||||||||||||
Diluted | 144,721,047 | 138,155,373 | 139,591,958 | 138,100,822 |
The accompanying notes are an integral part of these consolidated financial statements.
4 |
OCWEN FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(Dollars in thousands unless otherwise indicated)
Three Months | Six Months | |||||||||||||||
For the Periods Ended June 30, | 2013 | 2012 | 2013 | 2012 | ||||||||||||
Net income | $ | 76,721 | $ | 44,833 | $ | 121,868 | $ | 64,182 | ||||||||
Other comprehensive income (loss), net of income taxes: | ||||||||||||||||
Unrealized foreign currency translation income (loss) arising during the period | 640 | (1 | ) | 677 | — | |||||||||||
Change in deferred loss on cash flow hedges arising during the period (1) | (3,351 | ) | (2,538 | ) | (7,473 | ) | (3,734 | ) | ||||||||
Reclassification adjustment for losses on cash flow hedges included in net income (2) | 1,016 | 535 | 1,420 | 4,803 | ||||||||||||
Net change in deferred loss on cash flow hedges | (2,335 | ) | (2,003 | ) | (6,053 | ) | 1,069 | |||||||||
Other | 1 | 2 | 3 | 3 | ||||||||||||
Total other comprehensive income, net of income taxes | (1,694 | ) | (2,002 | ) | (5,373 | ) | 1,072 | |||||||||
Comprehensive income | $ | 75,027 | $ | 42,831 | $ | 116,495 | $ | 65,254 |
(1) | Net of income tax benefit of $2.1 million and $1.5 million for the three months ended June 30, 2013 and 2012, respectively, and $4.9million and $2.2 million for the six months ended June 30, 2013 and 2012, respectively. |
(2) | Net of income tax expense of $0.6 million and $0.3 million for the three months ended June 30, 2013 and 2012, respectively, and $0.9 million and $2.7 million for the six months ended June 30, 2013 and 2012, respectively. |
The accompanying notes are an integral part of these consolidated financial statements.
5 |
OCWEN
FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012
(Dollars in thousands)
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Additional | Comprehensive | |||||||||||||||||||||||
Common Stock | Paid-in | Retained | Loss, | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Net of Taxes | Total | |||||||||||||||||||
Balance at December 31, 2012 | 135,637,932 | $ | 1,356 | $ | 911,942 | $ | 704,565 | $ | (6,441 | ) | $ | 1,611,422 | ||||||||||||
Net income | — | — | — | 121,868 | — | 121,868 | ||||||||||||||||||
Preferred stock dividends ($18.54 per share) | — | — | — | (3,004 | ) | — | (3,004 | ) | ||||||||||||||||
Deemed dividend related to beneficial conversion feature of preferred stock | — | — | — | (2,172 | ) | — | (2,172 | ) | ||||||||||||||||
Exercise of common stock options | 105,029 | 2 | 569 | — | — | 571 | ||||||||||||||||||
Equity-based compensation | 12,031 | — | 2,886 | — | — | 2,886 | ||||||||||||||||||
Other comprehensive loss, net of income taxes | — | — | — | — | (5,373 | ) | (5,373 | ) | ||||||||||||||||
Balance at June 30, 2013 | 135,754,992 | $ | 1,358 | $ | 915,397 | $ | 821,257 | $ | (11,814 | ) | $ | 1,726,198 | ||||||||||||
Balance at December 31, 2011 | 129,899,288 | $ | 1,299 | $ | 826,121 | $ | 523,787 | $ | (7,896 | ) | $ | 1,343,311 | ||||||||||||
Net income | — | — | — | 64,182 | — | 64,182 | ||||||||||||||||||
Conversion of 3.25% Convertible Notes | 4,635,159 | 46 | 56,364 | — | — | 56,410 | ||||||||||||||||||
Exercise of common stock options | 342,371 | 4 | 1,220 | — | — | 1,224 | ||||||||||||||||||
Equity-based compensation | 8,877 | — | 3,374 | — | — | 3,374 | ||||||||||||||||||
Other comprehensive income, net of income taxes | — | — | — | — | 1,072 | 1,072 | ||||||||||||||||||
Balance at June 30, 2012 | 134,885,695 | $ | 1,349 | $ | 887,079 | $ | 587,969 | $ | (6,824 | ) | $ | 1,469,573 |
The accompanying notes are an integral part of these consolidated financial statements.
6 |
OCWEN
FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
For the Six Months Ended June 30, | 2013 | 2012 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 121,868 | $ | 64,182 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Amortization of mortgage servicing rights | 118,252 | 33,411 | ||||||
Amortization of debt discount | 752 | 1,480 | ||||||
Amortization of debt issuance costs – senior secured term loans | 2,086 | 1,843 | ||||||
Depreciation | 10,455 | 1,937 | ||||||
Gain on sales of loans | (25,267 | ) | — | |||||
Realized and unrealized (gains) losses on derivative financial instruments, net | (22,286 | ) | 2,255 | |||||
Loss on extinguishment of debt | 13,838 | — | ||||||
Origination and purchase of loans held for sale | (5,019,833 | ) | — | |||||
Proceeds from sale and collection of loans held for sale | 5,095,388 | 949 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease in advances and match funded advances | 429,151 | 774,643 | ||||||
Decrease in receivables and other assets, net | 112,113 | 23,812 | ||||||
Increase in servicer liabilities | 3,259 | 7,250 | ||||||
Increase (decrease) in other liabilities | 42,754 | (19,068 | ) | |||||
Other, net | (5,503 | ) | 7,928 | |||||
Net cash provided by operating activities | 877,027 | 900,622 | ||||||
Cash flows from investing activities | ||||||||
Cash paid to acquire ResCap Servicing Operations (a component of Residential Capital, LLC) | (2,097,821 | ) | — | |||||
Cash paid to acquire Liberty Home Equity Solutions, Inc. | (26,568 | ) | — | |||||
Purchase of mortgage servicing rights, net | (543,621 | ) | (169,411 | ) | ||||
Acquisition of advances in connection with the purchase of mortgage servicing rights | (73,523 | ) | (1,833,485 | ) | ||||
Origination of loans held for investment | (63,029 | ) | — | |||||
Principal payments received on loans held for investment | 871 | — | ||||||
Proceeds from sale of advance financing subsidiary and special purpose entity | — | 76,334 | ||||||
Proceeds from sale of match funded advances | 1,079,777 | 92,593 | ||||||
Proceeds from sale of diversified fee businesses to Altisource Portfolio Solution, S.A. | 215,700 | — | ||||||
Net cash acquired in step acquisition of Correspondent One S.A. | 22,108 | — | ||||||
Distributions of capital from unconsolidated entities | 1,300 | 2,839 | ||||||
Additions to premises and equipment | (19,413 | ) | (16,720 | ) | ||||
Other | 478 | 2,348 | ||||||
Net cash used in investing activities | (1,503,741 | ) | (1,845,502 | ) | ||||
Cash flows from financing activities | ||||||||
Net proceeds from (repayment of) match funded liabilities | (140,913 | ) | 904,348 | |||||
Net proceeds from other borrowings | 6,342,432 | 29,784 | ||||||
Repayment of other borrowings | (5,555,805 | ) | (74,270 | ) | ||||
Payment of debt issuance costs – senior secured term loan | (24,931 | ) | — | |||||
Proceeds from sale of mortgage servicing rights accounted for as a financing | 162,434 | 73,691 | ||||||
Proceeds from sale of loans accounted for as a financing | 65,938 | — | ||||||
Redemption of 10.875% Capital Securities | — | (25 | ) | |||||
Exercise of common stock options | 567 | 1,200 | ||||||
Payment of preferred stock dividends | (3,088 | ) | — | |||||
Other | (303 | ) | (5,974 | ) | ||||
Net cash provided by financing activities | 846,331 | 928,754 | ||||||
Net increase (decrease) in cash | 219,617 | (16,126 | ) | |||||
Cash at beginning of period | 220,130 | 144,234 | ||||||
Cash at end of period | $ | 439,747 | $ | 128,108 |
The accompanying notes are an integral part of these consolidated financial statements.
7 |
OCWEN
FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Dollars in thousands)
For the Six Months Ended June 30, | 2013 | 2012 | ||||||
Supplemental non-cash investing and financing activities | ||||||||
Conversion of 3.25% Convertible Notes to common stock | $ | — | $ | 56,410 | ||||
Supplemental business acquisition information – ResCap Servicing Operations | ||||||||
Fair value of assets acquired | ||||||||
Advances | $ | (1,618,856 | ) | $ | — | |||
Mortgage servicing rights | (393,891 | ) | — | |||||
Premises and equipment | (16,423 | ) | — | |||||
Goodwill | (210,038 | ) | — | |||||
Receivables and other assets | (2,989 | ) | — | |||||
(2,242,197 | ) | — | ||||||
Fair value of liabilities assumed | ||||||||
Accrued expenses and other liabilities | 74,680 | — | ||||||
Total consideration | (2,167,517 | ) | — | |||||
Amount due to seller for purchase price adjustments | 69,696 | — | ||||||
Cash paid | (2,097,821 | ) | — | |||||
Less cash acquired | — | — | ||||||
Net cash paid | $ | (2,097,821 | ) | $ |
(1) | See Note 4 – Business Acquisitions for additional information regarding the acquisitions of Liberty Home Equity Solutions, Inc. and Correspondent One S.A. and Note 9 – Mortgage Servicing for additional information regarding the acquisition of mortgage servicing rights from Ally Bank. |
The accompanying notes are an integral part of these consolidated financial statements.
8 |
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Dollars in thousands, except per share data or if otherwise indicated)
Note 1 | DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Organization
Ocwen Financial Corporation (NYSE: OCN) (Ocwen, OCN, “we”, or “us”) is a financial services holding company which, through its subsidiaries, is engaged in the servicing and origination of mortgage loans. Ocwen is headquartered in Atlanta, Georgia with offices throughout the United States and in the United States Virgin Islands (USVI) with support operations in India and Uruguay. Ocwen is a Florida corporation organized in February 1988. Ocwen owned all of the common stock of one of its primary operating subsidiaries, Ocwen Mortgage Servicing, Inc. (OMS), and directly or indirectly owned all of the outstanding stock of its other primary operating subsidiaries: Ocwen Loan Servicing, LLC (OLS), Ocwen Financial Solutions Private Limited, Homeward Residential, Inc. (Homeward) and Liberty Home Equity Solutions, Inc. (Liberty) (formerly known as Genworth Financial Home Equity Access, Inc.),
We are licensed to service mortgage loans and to originate mortgage loans in all jurisdictions in which we operate.
We purchase existing mortgage servicing rights (MSRs) from market participants and generate new servicing rights through our origination activities. We perform primary and master servicer activities on behalf of investors and other servicers, including the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae) (collectively, the GSEs). We service prime and non-prime mortgages including mortgages included in private label mortgage-backed securities. As primary servicer, we may make certain payments of property taxes and insurance premiums, default and property maintenance payments, as well as advances of principal and interest payments before collecting them from borrowers. As master servicer, we collect mortgage payments from primary servicers and distribute the funds to investors in the mortgage-backed securities. To the extent that the primary servicer does not advance the scheduled principal and interest, as master servicer we are responsible for advancing the shortfall subject to certain limitations.
We originate, purchase, sell and securitize prime first-lien and reverse mortgages. These loans are insured or guaranteed by the Federal Housing Authority (FHA) or the Department of Veterans Affairs (VA) or conform to the underwriting standards of Fannie Mae or Freddie Mac. The GSEs guarantee these securitizations.
We are actively engaged in identifying and completing asset and other acquisitions in connection with our growth strategy. This could involve the acquisition of domestic and international servicing and/or origination platforms or related assets. See Note 4 – Business Acquisitions for additional information.
On various dates beginning on April 1, 2013 and continuing through June 30, 2013, we completed the acquisition of Fannie Mae and Freddie Mac MSRs and related advances from Ally Bank (Ally MSR Transaction), a wholly-owned subsidiary of Ally Financial Inc. (Ally), the indirect parent of Residential Capital, LLC (ResCap). Prior to the closing, we subserviced the related MSRs on behalf of Ally Bank. We assumed certain origination representation and warranty obligations in connection with the Ally MSR Transaction. This transaction did not involve the transfer of ownership of any legal entities.
On April 1, 2013, we completed the acquisition of Liberty Home Equity Solutions, Inc. (the Liberty Acquisition) through a stock purchase agreement. Liberty is engaged in the origination, purchase, sale and securitization of reverse mortgage loans, both retail and wholesale.
On February 15, 2013, we completed the acquisition of certain assets and operations of ResCap in connection with the asset sale by ResCap and certain of its subsidiaries pursuant to a plan under Chapter 11 of the Bankruptcy Code (the ResCap Acquisition). We purchased MSRs related to “private label,” Freddie Mac and Ginnie Mae residential mortgage loans and certain master and subservicing agreements. The ResCap Acquisition included advances and elements of the servicing platform related to the acquired MSRs.
On December 27, 2012, we completed the merger by and among Ocwen, O&H Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Ocwen, Homeward Residential Holdings, Inc. (Homeward Holding) and WL Ross & Co. LLC, a Delaware limited liability company as shareholder representative. Pursuant to the merger, O&H Acquisition Corp. merged with and into Homeward Holding with Homeward Holding continuing as the surviving corporation and becoming a wholly-owned subsidiary of Ocwen (the Homeward Acquisition). Homeward primarily engages in the origination, purchase, sale and securitization of prime loans and the servicing of residential mortgage loans.
9 |
Basis of Presentation
The accompanying unaudited 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 consolidated 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 six months ended June 30, 2013, are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2013. The unaudited 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, 2012.
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 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 materially from those estimates. Material estimates that are particularly significant in the near or medium term relate to fair value measurements, the provision for potential losses that may arise from litigation proceedings, representation and warranty and other indemnification obligations, the amortization of MSRs and the valuation of goodwill and deferred tax assets.
Principles of Consolidation
Our financial statements include the accounts of Ocwen, its majority-owned subsidiaries and any variable interest entity (VIE) where we have determined that we are the primary beneficiary. We apply the equity method of accounting to investments when the entity is not a VIE, and we are able to exercise significant influence, but not control, over the policies and procedures of the entity but own 50% or less of the voting securities. We have eliminated intercompany accounts and transactions in consolidation.
Reclassification
Within the revenue section of the Consolidated Statement of Operations for the three and six months ended June 30, 2012, we reclassified Process management fees of $9.9 million and $18.7 million to Other revenues. In addition, certain other insignificant amounts in the Consolidated Statements of Operations and Cash Flows for prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on our consolidated financial position, cash flows or results of operations.
Significant Accounting Policies
Transfers of Financial Assets
We securitize, sell and service forward and reverse residential mortgage loans. Securitization transactions typically involve the use of VIEs and are accounted for as either sales or secured financings. We typically retain economic interests in the securitized assets in the form of servicing rights and obligations. In order to efficiently finance our assets and operations, we may sell servicing advances and Rights to MSRs. In order to determine whether or not a VIE is required to be consolidated, we consider our ongoing involvement with the VIE. In circumstances where we have both the power to direct the activities that most significantly impact the VIEs performance and the obligation to absorb losses or the right to receive benefits that could be significant, we would conclude that we would consolidate the entity, which precludes us from recording an accounting sale in connection with the transfer of the financial assets. In the case of a consolidated VIE, we continue to record the underlying residential mortgage loans or servicing advances and we record the securitized debt on our consolidated balance sheet.
In the case of transfers where either one or both of the power or economic criteria above are not met, we evaluate whether we achieve a sale for accounting purposes. In order to achieve a sale, the transferred assets must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond our control. If we fail any of these three criteria, the accounting is consistent with a secured financing as described in the preceding paragraph. Subsequent to the determination that a transaction does not meet the accounting sale criteria, we may determine that we meet the criteria. In the event we subsequently meet the accounting sale criteria, we derecognize the transferred assets and related liabilities.
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Gains or losses on off-balance sheet securitizations take into consideration any retained interests, including servicing rights and representation and warranty obligations, both of which are initially recorded at fair value at the date of sale in gain on loans held for sale, net, in our Consolidated Statements of Operations.
Recent Accounting Pronouncements
Accounting Standards Update (ASU) 2011-11, (Accounting Standards Codification (ASC) 210, Balance Sheet): Disclosures about Offsetting Assets and Liabilities and ASU 2013-01: Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU contains new disclosure requirements regarding the nature of an entity’s rights of offset and related arrangements associated with financial and derivative instruments. ASU 2013-01 clarified the scope of transactions that are subject to ASU 2011-11. The new disclosures also provide information about gross and net exposures. Retrospective application is required for all comparative periods presented. Our adoption of these standards on January 1, 2013 did not have a material impact on our unaudited consolidated financial statements, as the requirements relate to disclosures only.
ASU 2013-02 (ASC 220, Comprehensive Income): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (which amends ASC 220, Comprehensive Income). ASC 2013-02 contains new requirements related to the presentation and disclosure of items that are reclassified out of accumulated other comprehensive income. The ASU is required to be applied prospectively. Adoption of this standard on January 1, 2013 did not have a material impact on our unaudited consolidated financial statements, as the requirements relate to disclosures only.
ASU 2013-04 (ASC 405, Liabilities): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date, a consensus of the FASB Emerging Issues Task Force (EITF). On February 28, 2013, the FASB issued ASU 2013-04. The ASU requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following:
a. | The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and |
b. | Any additional amount the reporting entity expects to pay on behalf of its co-obligors.” |
Required disclosures include a description of the joint-and-several arrangement and the total outstanding amount of the obligation for all joint parties. The ASU permits entities to aggregate disclosures (as opposed to providing separate disclosures for each joint-and-several obligation). The ASU is effective for all prior periods in fiscal years beginning on or after December 15, 2013 (and interim reporting periods within those years). The ASU should be applied retrospectively to obligations with joint-and-several liabilities existing at the beginning of an entity’s fiscal year of adoption. Entities that elect to use hindsight in measuring their obligations during the comparative periods must disclose that fact. Early adoption is permitted. We are currently evaluating the effect of adopting this standard effective January 1, 2014, but we do not anticipate that our adoption will have a material impact on our consolidated financial condition or results of operations.
ASU 2013-05 (ASC 830, Foreign Currency Matters): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, a consensus of the FASB Emerging Issues Task Force. On March 4, 2013, the FASB issued ASU 2013-05, which requires that the entire amount of a cumulative translation adjustment (CTA) related to an entity’s investment in a foreign entity should be released when there has been a:
● | sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity, |
● | loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated), or |
● | step acquisition for a foreign entity (i.e., when an entity has changed from applying the equity method for an investment in a foreign entity to consolidating the foreign entity). |
The ASU does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. The ASU is effective for fiscal years (and interim periods within those fiscal years) beginning on or after December 15, 2013. The ASU should be applied prospectively from the beginning of the fiscal year of adoption. We are currently evaluating the effect of adopting this standard effective January 1, 2014, but we do not anticipate that our adoption will have a material impact on our consolidated financial condition or results of operations.
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Note 2 | Securitizations and Variable Interest Entities |
We securitize, sell and service forward and reverse residential mortgage loans and regularly transfer financial assets in connection with asset-backed financing arrangements. 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.
We have determined that the SPEs created in connection with our match funded financing facilities are VIEs of which we are the primary beneficiary. We also determined that we were the primary beneficiary for certain residential mortgage loan securitization trusts which were de-recognized at December 31, 2012, upon sale of our retained interest to a third party.
Securitizations of Residential Mortgage Loans
Currently, we securitize forward and reverse residential mortgage loans involving the GSEs. We retain the right to service these loans and receive servicing fees based upon the securitized loan balances and certain ancillary fees, all of which are reported in servicing and subservicing fees on the Consolidated Statements of Operations. In prior years, we securitized residential mortgage loans through “private label” securitization trusts. We continued to be involved with the securitization 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 securitization trust. The beneficial interests that we held consisted of both subordinate and residual securities that were either retained at the time of the securitization or subsequently acquired. We also acquired residual and subordinated interests in trusts where we were not the transferor but were the servicer.
In December 2012, we sold the beneficial interests that we held in the four consolidated securitization trusts and deconsolidated these securitization trusts. All assets and liabilities associated with the trusts were derecognized. We have no obligation to provide financial support to unconsolidated securitization trusts and have provided no such support. The beneficial owners of the trusts can look only to the assets of the securitization trusts for satisfaction of the debt issued by the securitization trusts and have no recourse against the assets of Ocwen. The general creditors of Ocwen have no claim on the assets of the trusts.
Transfers of Forward Loans
As part of our origination activities, we sell or securitize forward loans that we originate or that we purchase from third parties, generally in the form of mortgage-backed securities guaranteed by the GSEs. Securitization usually occurs within 30 days of loan closing or purchase. We retain servicing rights associated with the transferred loans and receive a servicing fee for services provided. We act only as a fiduciary and do not have a variable interest in the securitization trusts. As a result, we account for these transactions as sales upon transfer.
We elected to measure loans held for sale at fair value. We report interest income on loans held for sale in other income (expense). We report the gain or loss on the transfer of the loans held for sale in Gain on loans held for sale, net in the Consolidated Statements of Operations. We also include in Gain on loans held for sale, net changes in fair value of loans and the gain or loss on the related derivatives. See Note 18 – Derivative Financial Instruments and Hedging Activities for information on these derivative financial instruments. We include all changes in loans held for sale and related derivative balances in operating activities in the Consolidated Statements of Cash Flows.
The following table presents a summary of cash flows received from and paid to securitization trusts related to transfers accounted for as sales that were outstanding during the periods ended June 30, 2013:
Three Months | Six Months | |||||||
Proceeds received from securitizations | $ | 1,887,359 | $ | 4,464,151 | ||||
Servicing fees collected | 5,290 | 6,807 | ||||||
Purchases of previously transferred assets | (4,854 | ) | (11,790 | ) | ||||
$ | 1,887,795 | $ | 4,459,168 |
In connection with these transfers, we recorded MSRs of $18.2 million and $46.9 million for the three and six months ended June 30, 2013. We initially record the MSRs at fair value and subsequently account for them at amortized cost. See Note 9 – Mortgage Servicing for information relating to MSRs.
Certain guarantees arise from agreements associated with the transfers of loans. Under these agreements, we may be obligated to repurchase the loans, or otherwise indemnify or reimburse the investor or insurer, for losses incurred due to material breach of contractual representations and warranties. See Note 16 – Other Liabilities for further information.
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The following table presents the carrying amounts of our assets that relate to our continuing involvement with forward loans that we have transferred with servicing rights retained since the Homeward Acquisition as well as our maximum exposure to loss including the unpaid principal balance of the transferred loans:
June 30, 2013 | December 31, 2012 | |||||||
Carrying value of assets: | ||||||||
Mortgage servicing rights, at amortized cost | $ | 44,375 | $ | — | ||||
Mortgage servicing rights, at fair value | 2,580 | 2,908 | ||||||
Advances and match funded advances | 764 | — | ||||||
Unpaid principal balance of loans transferred (1) | 4,458,218 | 238,010 | ||||||
Maximum exposure to loss | $ | 4,505,937 | $ | 240,918 |
(1) | The UPB of the loans transferred is the maximum exposure to loss under our standard representations and warranties obligations. |
At June 30, 2013, only 0.05% of the transferred residential loans that we serviced were 60 days or more past due. During the three and six months ended June 30, 2013, there were no charge-offs, net of recoveries associated with these transferred loans.
Transfers of Reverse Mortgages
We are an approved issuer of Ginnie Mae Home Equity Conversion Mortgage-Backed Securities (HMBS) that are guaranteed by Ginnie Mae. With the acquisition of Liberty, we have begun to originate Home Equity Conversion Mortgages (HECMs or reverse mortgages) that are insured by the FHA. We then pool the loans into HMBS that we sell into the secondary market with servicing rights retained. Based upon the structure of the Ginnie Mae securitization program, we have determined that loan transfers in the HMBS program do not meet the definition of a participating interest because of the servicing requirements in the product that require the Issuer/Servicer to absorb some level of interest rate risk, cash flow timing risk and incidental credit risk. As a result, HECMs do not qualify for sale accounting, and we, therefore, account for these transfers as secured borrowings. Under this accounting treatment, the HECMs remain on our Consolidated Balance Sheet as loans held for investment (Loans – Restricted for Securitization Investors) in Other assets. We record the proceeds from the transfer of assets as secured borrowings (Secured borrowing – owed to securitization investors) in Other borrowings and recognize no gain or loss on the transfer. Holders of participating interests in the HMBS have no recourse against Ocwen, except for standard representations and warranties and our contractual obligation to service the HECMs and the HMBS, and have no recourse against the assets of Ocwen.
We have elected to measure the HECMS and HMBS-related borrowings at fair value. The changes in fair value of the HECMs and HMBS-related borrowings are included in other revenues in our Consolidated Statement of Operations. Included in net fair value gains on the HECMs and related HMBS borrowings are the interest income that we expect to be collected on the HECMs and the interest expense that we expect to be paid on the HMBS-related borrowings. We report net fair value gains on HECMs and the related HMBS borrowings as an adjustment to the net cash provided by or used in operating activities in the Consolidated Statements of Cash Flows. Originations of and payments on the HECMs are included in investing activities in the Consolidated Statements of Cash Flows. Proceeds from securitizations of HECMs and payments on HMBS-related borrowings are included in financing activities in the Consolidated Statements of Cash Flows.
We had HMBS-related borrowings of $73.6 million and $76.6 million of HECMs pledged as collateral to the pools at June 30, 2013.
Financings of 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. We consolidate these SPEs because the transfers do not qualify for sales accounting treatment or because Ocwen is the primary beneficiary of the SPE.
These SPEs issue debt supported by collections on the transferred advances. We made these transfers under the terms of our advance facility agreements. We classify the transferred advances on our Consolidated Balance Sheet as Match funded advances and the related liabilities as Match funded liabilities. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the SPE. Holders of the debt issued by these entities can look only to the assets of the SPE for satisfaction of the debt and have no recourse against Ocwen. However, Ocwen and OLS have guaranteed the payment of the obligations under the securitization documents of two of the entities. The maximum amounts payable under the guarantees are limited to 10% of the notes outstanding at the end of each facility’s revolving period in April 2014 and December 2014, respectively. The balance of notes outstanding at these two entities as of June 30, 2013 was $131.4 million and $39.2 million, respectively. The assets and liabilities of the advance financing SPEs are comprised solely of Match funded advances, Debt service accounts, Match funded liabilities and amounts due to affiliates. Amounts due to affiliates are eliminated in consolidation.
See Note 8 – Match Funded Advances, Note 12 – Debt Service Accounts and Note 14 – Match Funded Liabilities for additional information.
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Note 3 | Transfers of Financial Assets |
In order to efficiently finance our assets and operations, we periodically sell the right to receive servicing fees, excluding ancillary income, relating to certain of our mortgage servicing rights (Rights to MSRs) and related advances (collectively, HLSS Transactions) to Home Loan Servicing Solutions, Ltd. and its wholly owned subsidiary, HLSS Holdings, LLC (collectively HLSS). To the extent applicable, HLSS may also acquire certain advance SPEs and the related match funded liabilities. During the six months ended June 30, 2013 and 2012, we completed HLSS Transactions relating to the Rights to MSRs for $26.5 billion and $18.2 billion of UPB, respectively.
As part of the HLSS Transactions, we retain legal ownership of the MSRs and continue to service the related mortgage loans. However, we service the loans for a reduced fee because HLSS has assumed the match funded liabilities as well as the obligation for future servicing advances related to the MSRs. We are obligated to transfer legal ownership of the MSRs to HLSS upon obtaining all required third party consents. At that time, we would subservice the MSRs pursuant to our subservicing agreement with HLSS which was executed on February 10, 2012 and subsequently amended on October 1, 2012. See Note 22 – Related Party Transactions for additional information.
The following table provides a summary of the assets and liabilities sold to HLSS in connection with the HLSS Transactions during the six months ended June 30:
2013 | 2012 | |||||||
Sale of MSRs accounted for as a financing | $ | 148,622 | $ | 73,691 | ||||
Sale of match funded advances | 1,079,777 | 92,225 | ||||||
Sale of advance SPEs: | ||||||||
Match funded advances | — | 413,374 | ||||||
Debt service account | — | 14,786 | ||||||
Prepaid lender fees and debt issuance costs | — | 5,422 | ||||||
Other prepaid expenses | — | 1,928 | ||||||
Match funded liabilities | — | (358,335 | ) | |||||
Accrued interest payable and other accrued expenses | — | (841 | ) | |||||
Net assets of advance SPEs | — | 76,334 | ||||||
Sales price, as adjusted | 1,228,399 | 242,250 | ||||||
Amount due to HLSS for post-closing adjustments at June 30 | — | 368 | ||||||
Cash received | $ | 1,228,399 | $ | 242,618 |
We completed an additional transaction with HLSS on July 1, 2013 that resulted in the sale of Rights to MSRs with approximately $83.6 billion in UPB of mortgage loans as of June 30, 2013. The purchase price was approximately $2.7 billion, including $2.4 billion for servicing advances and $241 million for the associated Rights to MSRs. See Note 25 – Subsequent Events for additional information regarding this transaction.
Because we retained legal title to the MSRs, the sales of Rights to MSRs are accounted for as financings. The related advance sales meet the requirements for sale accounting under GAAP. When HLSS acquired advance SPEs from Ocwen, we derecognized the consolidated assets and liabilities of the Advance SPEs at the time of the sale. To the extent that we obtain all third party consents, legal title will transfer to HLSS, at which point we will derecognize the related MSRs. Upon derecognition, any resulting gain or loss will be deferred and amortized over the expected life of the related subservicing agreement. Until such time, we continue to recognize the full amount of servicing revenue and amortization of the MSRs.
Note 4 | Business Acquisitions |
We completed the Liberty, ResCap and Homeward acquisitions, respectively, as part of our ongoing strategy to expand our residential origination and servicing businesses. We accounted for these transactions using the acquisition method which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. In a business combination, the initial allocation of the purchase price is considered preliminary and, therefore, subject to change until the end of the measurement period (up to one year from the acquisition date). 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 pro forma consolidated results presented below for each business acquisition are not indicative of what our consolidated net earnings would have been had we completed the acquisitions on the dates indicated because of differences in servicing practices and cost structure between Ocwen and each acquiree. In addition, the pro forma consolidated results do not purport to project our combined future results nor do they reflect the expected realization of any cost savings associated with the acquisitions.
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The ResCap acquisition was 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 as shown in the purchase price allocation tables below. We expect MSRs 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 U.S. tax purposes. The acquisitions of Liberty and Homeward were treated as stock purchases for U.S. tax purposes.
Purchase Price Allocation
The following table summarizes the fair values of assets acquired and liabilities assumed as part of the ResCap and Homeward Acquisitions:
ResCap | Homeward | |||||||||||||||||||||||
Purchase Price Allocation | March 31, 2013 | Adjustments | Revised | December 31, 2012 | Adjustments | Revised | ||||||||||||||||||
Cash | $ | — | $ | — | $ | — | $ | 79,511 | $ | — | $ | 79,511 | ||||||||||||
Loans held for sale | — | — | — | 558,721 | — | 558,721 | ||||||||||||||||||
Mortgage servicing rights | 393,891 | — | 393,891 | 358,119 | 2,225 | 360,344 | ||||||||||||||||||
Advances and match funded advances | 1,622,348 | (3,492 | ) | 1,618,856 | (1) | 2,266,882 | — | 2,266,882 | (1) | |||||||||||||||
Deferred tax assets | — | — | — | 47,346 | — | 47,346 | (1) | |||||||||||||||||
Premises and equipment | 22,398 | (5,975 | ) | 16,423 | (1) | 16,803 | — | 16,803 | (1) | |||||||||||||||
Debt service accounts | — | — | — | 69,287 | — | 69,287 | ||||||||||||||||||
Investment in unconsolidated entities | — | — | — | 5,485 | — | 5,485 | (1) | |||||||||||||||||
Receivables and other assets | 2,989 | 2,989 | 56,886 | — | 56,886 | |||||||||||||||||||
Match funded liabilities | — | — | — | (1,997,459 | ) | — | (1,997,459 | ) | ||||||||||||||||
Other borrowings | — | — | — | (864,969 | ) | — | (864,969 | ) | ||||||||||||||||
Other liabilities | ||||||||||||||||||||||||
Liability for indemnification obligations | (49,500 | ) | — | (49,500 | ) | (32,498 | ) | — | (32,498 | ) (1) | ||||||||||||||
Liability for certain foreclosure matters | — | — | — | — | (13,602 | ) | (13,602 | ) (1) | ||||||||||||||||
Accrued bonuses | — | — | — | (35,201 | ) | — | (35,201 | ) | ||||||||||||||||
Checks held for escheat | — | — | — | (16,418 | ) | — | (16,418 | ) (1) | ||||||||||||||||
Other | (24,840 | ) | (340 | ) | (25,180 | ) | (47,614 | ) | — | (47,614 | ) (1) | |||||||||||||
Total identifiable net assets | 1,967,286 | (9,807 | ) | 1,957,479 | 464,881 | (11,377 | ) | 453,504 | ||||||||||||||||
Goodwill | 204,743 | 5,295 | 210,038 | (1) | 300,843 | 10,477 | 311,320 | (1) | ||||||||||||||||
Total consideration | $ | 2,172,029 | $ | (4,512 | ) | $ | 2,167,517 | $ | 765,724 | $ | (900 | ) | $ | 764,824 |
(1) | Initial fair value estimate |
The estimated fair values of the assets acquired and liabilities assumed at the acquisition date, as set forth in the table above, includes some amounts based on preliminary fair value estimates. The following factors led to certain balances having preliminary fair value estimates:
● | The complex nature of certain acquired assets and assumed liabilities prevents us from completing our valuations and reconciliations; |
● | We engaged a third party specialist to assist in valuing certain assets and liabilities and this work is not yet complete; and |
● | Underlying information such as unpaid principal balance (UPB) and other loan level details have not yet been boarded and reconciled onto our servicing platform, and therefore, we have not been able to fully validate and reconcile certain asset and liability balances correlated with UPB data. |
Because the measurement period is still open, we expect that certain fair value estimates will change once we receive all information necessary to make a final fair value assessment. Any measurement period adjustments that we identify and determine to be material will be applied retrospectively to the period of acquisition, and depending on the nature of the adjustments, other periods subsequent to the period of acquisition could also be affected.
In June 2013, we adjusted the initial purchase price and purchase price allocations related to the Homeward and ResCap Acquisitions as indicated in the table above. These measurement period adjustments were applied retrospectively to the period of acquisition. The December 31, 2012 Consolidated Balance Sheet has been revised to reflect the adjustments attributable to the Homeward Acquisition. None of the adjustments had a material effect on earnings.
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ResCap Acquisition
We completed the ResCap Acquisition on February 15, 2013. We acquired MSRs to “private label,” Freddie Mac and Ginnie Mae loans with a UPB of $107.3 billion and master servicing agreements with a UPB of $42.1 billion. We also assumed subservicing contracts with a UPB of $25.9 billion. In addition, until we obtain certain consents and court approvals we will subservice MSRs with a UPB of $9.0 billion on behalf of ResCap. When we obtain such consents and approvals, we will purchase these MSRs and assume the subservicing contracts from ResCap. We also acquired certain diversified fee-based business operations that include recovery, title and closing services.
To finance the ResCap Acquisition, we deployed $840.0 million from the proceeds of a new $1.3 billion senior secured term loan (SSTL) facility and borrowed an additional $1.2 billion pursuant to two new servicing advance facilities and one existing facility.
Ocwen assumed certain limited liabilities as part of the transaction, including certain employee liabilities and certain business payables outstanding at the closing date. Under the agreement with ResCap, Ocwen generally did not assume any contingent obligations, including pending or threatened litigation, financial obligations in connection with any settlements, orders or similar agreements entered into by ResCap or obligations in connection with any representations or warranties associated with loans previously sold by ResCap except for litigation that may arise in the ordinary course of servicing mortgage loans relating to servicing agreements assumed by Ocwen. Ocwen assumed all liabilities related to servicing loans that are guaranteed by Ginnie Mae, whether arising prior to or after the closing date.
On April 12, 2013 in connection with the sale to Altisource of the diversified fee-based business acquired in connection with the ResCap Acquisition, Ocwen agreed to establish additional terms related to existing servicing arrangements between Altisource and Ocwen for mortgage servicing assets acquired from ResCap. The cash consideration paid by Altisource to Ocwen under the Agreement totaled $128.8 million. At the time of the closing, we derecognized goodwill of $128.8 million associated with the diversified fee-based business sold to Altisource. There were no other significant assets or liabilities associated with this business. See Note 21 – Business Segment Reporting for a discussion of the additional terms of the servicing arrangements.
Post-Acquisition Results of Operations
The following table presents the revenue and earnings of the ResCap Business operations that are included in our unaudited Consolidated Statements of Operations from the acquisition date of February 15, 2013 through June 30, 2013:
For the Periods Ended June 30, 2013: | Three Months | Six Months | ||||||
Revenues | $ | 193,596 | $ | 266,636 | ||||
Net income | $ | 43,646 | $ | 58,525 |
Pro Forma Results of Operations
The following table presents supplemental pro forma information for Ocwen as if the ResCap Acquisition occurred on January 1, 2012. Pro forma adjustments include:
● | conforming servicing revenues to the revenue recognition policies followed by Ocwen; |
● | conforming the accounting for MSRs to the valuation and amortization policies of Ocwen; |
● | adjusting interest expense to eliminate the pre-acquisition interest expense of ResCap and to recognize interest expense as if the acquisition-related debt of Ocwen had been outstanding at January 1, 2012; and |
● | reporting acquisition-related charges for professional services as if they had been incurred in 2012 rather than 2013. |
For the Periods Ended June 30: | Three Months | Six Months | ||||||||||
2012 | 2013 | 2012 | ||||||||||
Revenues | $ | 348,430 | $ | 987,623 | $ | 652,151 | ||||||
Net income (loss) | $ | 20,335 | $ | 106,649 | $ | 14,138 |
Homeward Acquisition
We completed the Homeward Acquisition on December 27, 2012. We acquired the MSRs and subservicing for approximately 421,000 residential mortgage loans with a UPB of $77.0 billion. We also acquired Homeward’s loan origination platform and its diversified fee-based businesses, including property valuation, REO management, title, closing and advisory services.
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On March 29, 2013, Ocwen sold the Homeward diversified fee-based businesses to Altisource Solutions S.à r.l. and Altisource Portfolio Solutions, Inc., wholly-owned subsidiaries of Altisource, for an aggregate purchase price of $87.0 million in cash. Ocwen sold its investment in two subsidiaries of Homeward, Beltline Road Insurance Agency, Inc. and Power Default Services, Inc. As part of this transaction, Ocwen also agreed to sell certain designated assets used or usable in the business conducted by another Homeward subsidiary, Power Valuation Services, Inc., as well as certain designated intellectual property and information technology assets that are used or usable in the business conducted by the acquired subsidiaries or by Powerline Valuation Services, Inc. Altisource also assumed certain liabilities of the diversified fee-based business. The carrying value of the net assets sold, including allocated goodwill, approximated the sales price. The assets sold consisted of receivables and other assets of $18.7 million. The liabilities assumed by Altisource of $4.0 million consisted principally of deferred revenue. At the time of the sale, we derecognized goodwill of $72.3 million associated with the sold business. In connection with this transaction, Ocwen entered into amendments to certain of its services and intellectual property agreements with Altisource. See Note 22 – Related Party Transactions for a discussion of these amendments.
Pro Forma Results of Operations
The following table presents supplemental pro forma information for Ocwen as if the acquisition of Homeward occurred on January 1, 2011. Pro forma adjustments include:
● | conforming servicing revenues to the revenue recognition policy followed by Ocwen; |
● | conforming the accounting for MSRs to the valuation and amortization policies of Ocwen; |
● | reversing depreciation recognized by Homeward and reporting depreciation based on the estimated fair values and remaining lives of the acquired premises and equipment at the date of acquisition; |
● | adjusting interest expense to eliminate the pre-acquisition interest expense of Homeward and to recognize interest expense as if the acquisition-related debt of Ocwen had been outstanding at January 1, 2011 and |
● | reporting acquisition-related charges for professional services as if they had been incurred in 2011 rather than 2012. |
For the Periods Ended June 30, 2012: | Three Months | Six Months | ||||||
Revenues | $ | 325,915 | $ | 603,550 | ||||
Net income | $ | 53,880 | $ | 76,808 |
Other Acquisitions
Correspondent One
On March 31, 2013, we increased our ownership in Correspondent One S.A. (Correspondent One), an entity formed with Altisource in March 2011, from 49% to 100%. We acquired the shares of Correspondent One held by Altisource (49% interest) for $12.6 million and acquired the remaining shares held by an unrelated entity for $0.9 million. We accounted for this transaction as a step acquisition and recognized the assets acquired and liabilities assumed at their fair values as of the acquisition date. The acquired net assets were $26.3 million and consisted primarily of cash ($23.0 million) and residential mortgage loans ($1.1 million). We remeasured our previously held investment, which we accounted for using the equity method, at fair value and recognized a loss of $0.4 million. We also recognized goodwill of $0.1 million. We began including the accounts of Correspondent One in our consolidated financial statements effective on the date of acquisition and have eliminated our investment in consolidation. Correspondent One facilitates the purchase of conforming and government-guaranteed residential mortgages from approved mortgage originators and resells the mortgages to secondary market investors. Correspondent One is not material to our financial condition, results of operations or cash flows.
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Liberty
On April 1, 2013, we completed the Liberty Acquisition for $22.0 million in cash. In addition, and as part of the closing, Ocwen repaid Liberty’s $9.1 million existing outstanding debt to the sellers. We acquired approximately 420 reverse mortgage loans with a UPB of $55.2 million. We also acquired Liberty’s reverse mortgage origination platform. The acquired net assets were $31.1 million and consisted primarily of residential reverse mortgage loans ($60.0 million), receivables ($11.2 million), loans held for investment ($10.3 million) and cash ($4.6 million) less amounts due under warehouse facilities ($46.3 million) and HMBS-related borrowings ($10.2 million). We did not recognize any goodwill in connection with this acquisition. The acquisition of Liberty did not have a material effect on our financial condition, results of operations or cash flows.
Note 5 | Fair Value of Financial Instruments |
We estimate fair value based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Unobservable inputs for the asset or liability.
We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts and the estimated fair values of our financial instruments and our nonfinancial assets measured at fair value are as follows:
June 30, 2013 | December 31, 2012 | |||||||||||||||||
Level | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||
Financial assets: | ||||||||||||||||||
Loans held for sale, at fair value (1) | 2 | $ | 361,144 | $ | 361,144 | $ | 426,480 | $ | 426,480 | |||||||||
Loans held for sale, at lower of cost or fair value (2) | 3 | 33,987 | 33,987 | 82,866 | 82,866 | |||||||||||||
Loans – restricted for securitization investors, at fair value (1) | 3 | 76,649 | 76,649 | — | — | |||||||||||||
Advances and match funded advances (3) | 3 | 3,405,795 | 3,405,795 | 3,233,707 | 3,233,707 | |||||||||||||
Receivables, net (3) | 3 | 225,011 | 225,011 | 167,459 | 167,459 | |||||||||||||
Financial liabilities: | ||||||||||||||||||
Match funded liabilities (3) | 3 | $ | 2,391,832 | $ | 2,391,832 | $ | 2,532,745 | $ | 2,533,278 | |||||||||
Other borrowings: | ||||||||||||||||||
Secured borrowings – owed to securitization investors, at fair value (1) | 3 | 73,641 | 73,641 | — | — | |||||||||||||
Other (3) | 3 | 2,098,437 | 2,082,458 | 1,096,679 | 1,101,504 | |||||||||||||
Total Other borrowings | 2,172,078 | 2,156,099 | 1,096,679 | 1,101,504 | ||||||||||||||
Derivative financial instruments (1): | ||||||||||||||||||
Interest rate lock commitments (IRLCs) | 2 | $ | (7,064 | ) | $ | (7,064 | ) | $ | 5,781 | $ | 5,781 | |||||||
Interest rate swaps | 3 | — | — | (10,836 | ) | (10,836 | ) | |||||||||||
Forward MBS trades | 1 | 18,681 | 18,681 | (1,719 | ) | (1,719 | ) | |||||||||||
U.S. Treasury futures | 1 | — | — | (1,258 | ) | (1,258 | ) | |||||||||||
Interest rate caps | 3 | 176 | 176 | 168 | 168 | |||||||||||||
MSRs, at fair value (1) | 3 | $ | 97,163 | $ | 97,163 | $ | 85,213 | $ | 85,213 |
(1) | Measured at fair value on a recurring basis. |
(2) | Measured at fair value on a non-recurring basis. |
(3) | Financial instruments disclosed, but not carried, at fair value. |
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The following tables present a reconciliation of the changes in fair value of Level 3 assets that we measure at fair value on a recurring basis:
Loans – restricted for securitization investors | Secured borrowings – owed to securitization investors | Derivative Financial Instruments | MSRs at Fair Value | Total | ||||||||||||||||
Three Months Ended June 30, 2013: | ||||||||||||||||||||
Beginning balance | $ | — | $ | — | $ | (18,635 | ) | $ | 84,534 | $ | 65,899 | |||||||||
Purchases, issuances, sales and settlements: | ||||||||||||||||||||
Purchases | 10,251 | (10,179 | ) | — | — | 72 | ||||||||||||||
Issuances | 63,029 | (65,938 | ) | — | — | (2,909 | ) | |||||||||||||
Sales | — | — | 24,156 | — | 24,156 | |||||||||||||||
Settlements | (871 | ) | 867 | (1,375 | ) | — | (1,379 | ) | ||||||||||||
72,409 | (75,250 | ) | 22,781 | — | 19,940 | |||||||||||||||
Total realized and unrealized gains and (losses) (1): | ||||||||||||||||||||
Included in Other, net | 4,240 | 1,609 | 1,469 | 12,629 | 19,947 | |||||||||||||||
Included in Other comprehensive income (loss) | — | — | (5,439 | ) | — | (5,439 | ) | |||||||||||||
4,240 | 1,609 | (3,970 | ) | 12,629 | 14,508 | |||||||||||||||
Transfers in and / or out of Level 3 | — | — | — | — | — | |||||||||||||||
Ending balance | $ | 76,649 | $ | (73,641 | ) | $ | 176 | $ | 97,163 | $ | 100,347 | |||||||||
Three Months Ended June 30, 2012: | ||||||||||||||||||||
Beginning balance | $ | — | $ | — | $ | (12,806 | ) | $ | — | $ | (12,806 | ) | ||||||||
Purchases, issuances, sales and settlements: | ||||||||||||||||||||
Settlements | — | — | 65 | — | 65 | |||||||||||||||
— | — | 65 | — | 65 | ||||||||||||||||
Total realized and unrealized gains and (losses) (1): | ||||||||||||||||||||
Included in Other, net | — | — | 1,843 | — | 1,843 | |||||||||||||||
Included in Other comprehensive income (loss) | — | — | (4,007 | ) | — | (4,007 | ) | |||||||||||||
— | — | (2,164 | ) | — | (2,164 | ) | ||||||||||||||
Transfers in and / or out of Level 3 | — | — | — | — | — | |||||||||||||||
Ending balance | $ | — | $ | — | $ | (14,905 | ) | $ | — | $ | (14,905 | ) |
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Loans – restricted for securitization investors | Secured borrowings – owed to securitization investors | Derivative Financial Instruments | MSRs at Fair Value | Total | ||||||||||||||||
Six Months Ended June 30, 2013: | ||||||||||||||||||||
Beginning balance | $ | — | $ | — | $ | (10,668 | ) | $ | 85,213 | $ | 74,545 | |||||||||
Purchases, issuances, sales and settlements: | ||||||||||||||||||||
Purchases | 10,251 | (10,179 | ) | — | — | 72 | ||||||||||||||
Issuances | 63,029 | (65,938 | ) | — | — | (2,909 | ) | |||||||||||||
Sales | — | — | 24,156 | — | 24,156 | |||||||||||||||
Settlements | (871 | ) | 867 | (1,066 | ) | — | (1,070 | ) | ||||||||||||
72,409 | (75,250 | ) | 23,090 | — | 20,249 | |||||||||||||||
Total realized and unrealized gains and (losses) (1): | ||||||||||||||||||||
Included in Other, net | 4,240 | 1,609 | 117 | 11,950 | 17,916 | |||||||||||||||
Included in Other comprehensive income (loss) | — | — | (12,363 | ) | — | (12,363 | ) | |||||||||||||
4,240 | 1,609 | (12,246 | ) | 11,950 | 5,553 | |||||||||||||||
Transfers in and / or out of Level 3 | — | — | — | — | — | |||||||||||||||
Ending balance | $ | 76,649 | $ | (73,641 | ) | $ | 176 | $ | 97,163 | $ | 100,347 | |||||||||
Six Months Ended June 30, 2012: | ||||||||||||||||||||
Beginning balance | $ | — | $ | — | $ | (16,676 | ) | $ | — | $ | (16,676 | ) | ||||||||
Purchases, issuances, sales and settlements: | ||||||||||||||||||||
Settlements | — | — | 2,422 | — | 2,422 | |||||||||||||||
— | — | 2,422 | — | 2,422 | ||||||||||||||||
Total realized and unrealized gains and (losses) (1): | ||||||||||||||||||||
Included in Other, net | — | — | 5,248 | — | 5,248 | |||||||||||||||
Included in Other comprehensive income (loss) | — | — | (5,899 | ) | — | (5,899 | ) | |||||||||||||
— | — | (651 | ) | — | (651 | ) | ||||||||||||||
Transfers in and / or out of Level 3 | — | — | — | — | — | |||||||||||||||
Ending balance | $ | — | $ | — | $ | (14,905 | ) | $ | — | $ | (14,905 | ) |
(1) | Total net gains (losses) attributable to derivative financial instruments held at June 30, 2013 were $0.1 million for the three months ended June 30, 2013. For derivative financial instruments held at June 30, 2012, total net gains (losses) were $(2.2) million and $(6.4) million for the three and six months ended June 30, 2012, respectively. |
The methodologies that we use and key assumptions that we make to estimate the fair value of financial instruments and other assets and liabilities measured at fair value on a recurring or non-recurring basis are described below:
Loans Held for Sale
We originate and purchase residential mortgage loans that we intend to sell to the GSEs. We also own residential mortgage loans that are not eligible to be sold to the GSEs due to delinquency or other factors. Residential forward and reverse mortgage loans that we intend to sell to the GSEs are carried at fair value as a result of a fair value election. Such loans are subject to changes in fair value due to fluctuations in interest rates from the closing date through the date of the sale of the loan into the secondary market. These loans are classified within Level 2 of the valuation hierarchy as the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. We have the ability to access this market, and it is the market into which conforming mortgage loans are typically sold.
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We report all other loans held for sale at the lower of cost or fair value. Current market illiquidity has reduced the availability of observable pricing data for certain of these loans. When we enter into an agreement to sell a loan or pool of loans to an investor at a set price, we value the loan or loans at the commitment price. We base the fair value of uncommitted loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows. Assumptions used in the valuation of performing loans include historical default rates, re-performance rates on defaulted loans, loss severity on defaulted loans, average resolution timeline, average coupon rate and a discount rate. Significant assumptions used in the valuation of nonperforming loans include the current market value of the underlying collateral based on third party sources such as appraisals or broker price opinions, resolution timeline, estimated foreclosure and disposition costs that are based on historical experience and a discount rate. The assumptions we used in the valuation of these performing and non-performing loans at June 30, 2013 have not changed significantly from those we used in the December 31, 2012 valuations.
We repurchase certain loans from Ginnie Mae guaranteed securitizations in connection with loan modifications and loan resolution activity as part of our servicing obligations. These are classified as loans held for sale at the lower of cost or fair value, as we expect to redeliver (sell) the loans to new Ginnie Mae guaranteed securitizations in the case of modified loans. The fair value of these loans is estimated using published forward Ginnie Mae prices. Loans repurchased in connection with loan resolution activities are modified or otherwise remediated through loss mitigation activities or are reclassified to receivables. Because these loans are insured or guaranteed by the FHA or VA, the fair value of these loans represents the net recovery value taking into consideration the insured or guaranteed claim.
Loans – Restricted for Securitization Investors
These loans are not traded in an active, open market with readily observable prices. We base the fair value of transferred reverse mortgage loans that do not qualify as sales for accounting purposes on the expected future cash flows discounted over the expected life of the loans at a rate commensurate with the risk of the estimated cash flows. Significant assumptions included expected prepayment and delinquency rates and cumulative loss curves. The discount rate assumption for these assets is primarily based on an assessment of current market yields on newly originated reverse mortgage loans, expected duration of the asset, and current market interest rates.
The more significant assumptions used in the June 30, 2013 valuation of our Loans – Restricted for Securitization Investors include:
● | Weighted average life in years ranging from 3.19 to 23.58 (weighted average of 6.86), | |
● | Conditional repayment rate ranging from 5.04% to 64.59% (weighted average of 12.82%), and |
● | Discount rate of 2.14%. |
Mortgage Servicing Rights
Amortized Cost MSRs
We estimate the fair value of MSRs carried at amortized cost using a combination of internal models and data provided by third-party valuation experts. The most significant assumptions used in the valuation of MSRs are the speed at which mortgages prepay and delinquency experience. Other assumptions typically used in the valuation of MSRs 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 |
● | Collection rate of other ancillary fees |
The significant components of the estimated future cash inflows for MSRs include servicing fees, late fees, 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 perform an impairment analysis based on the difference between the carrying amount and fair value after grouping our loans into the applicable strata. As a result of the Homeward and ResCap Acquisitions, management has re-evaluated the portfolio and determined the appropriate strata are Agency and Non-Agency. The Agency stratum includes all GSE MSRs. The Non-Agency stratum includes all private label primary and master MSRs.
We estimate fair value using internal models and with the assistance of third-party valuation experts. Our internal models calculate the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. We derived prepayment speeds and delinquency assumptions from historical experience adjusted for prevailing market conditions. We utilize discount rate provided by third-party valuation experts, 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.
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Third-party valuation experts generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, including risk premiums and liquidity adjustments. The models and related assumptions used by the valuation experts are owned and managed by them and, in many cases, the significant inputs used in the valuation techniques are not reasonably available to us. However, we have an understanding of the processes and assumptions used to develop the prices based on our ongoing due diligence, which includes regular discussions with the valuation experts. We believe that the procedures executed by the valuation experts, combined with our internal verification and analytical procedures, provide assurance that the prices used in our consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
The more significant assumptions used in the June 30, 2013 valuation of our MSRs carried at amortized cost include:
● | Prepayment speeds ranging from 7.22% to 25.92% (weighted average of 14.42%) depending on loan type; |
● | Delinquency rates ranging from 3.83% to 25.02% (weighted average of 14.61%) depending on loan type; |
● | Interest rate of 1-month LIBOR plus 4% for computing the cost of financing advances; |
● | Interest rate of 1-month LIBOR for computing float earnings; and |
● | Discount rates ranging from 10.9% to 20.0% (weighted average of 14.65%). |
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. As a result of the Homeward and ResCap Acquisitions, management has re-evaluated the portfolio and determined the appropriate strata are Agency and Non-Agency. The Agency stratum includes all GSE MSRs. The Non-Agency stratum includes all “private label” primary and master MSRs.
Fair Value MSRs
MSRs carried at fair value are classified within Level 3 of the valuation hierarchy due to the use of third party valuation expert pricing without adjustment. The fair value of these MSRs is within the range of prices provided by the valuation experts, however, a change in the valuation inputs utilized by the valuation expert or a change in the best point price in the range might result in a significantly higher or lower fair value measurement.
The key assumptions (generally unobservable inputs) used in the valuation of these MSRs include:
● | Mortgage prepayment speeds; |
● | Delinquency rates, and |
● | Discount rates. |
The primary assumptions used in the June 30, 2013 valuation include a 9.51% weighted average constant prepayment rate and a discount rate equal to 1-Month LIBOR plus a range of 10.5%.
Advances
We value advances that we make on loans that we service for others at their net realizable value which generally approximates fair value because advances 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.
Secured Borrowings – Owed to Securitization Investors
We recognize the proceeds from the transfer of reverse mortgages as a secured borrowing that we account for at fair value. These borrowings are not actively traded and therefore quoted market prices are not available. We determine fair value by discounting the future principal and interest repayments over the estimated life of the borrowing at a market rate commensurate with the risk of the estimated cash flows. Significant assumptions include prepayments, discount rate and borrower mortality rates for reverse mortgages. The discount rate assumption for these liabilities is based on an assessment of current market yields for newly issued HMBS, expected duration, and current market interest rates.
The more significant assumptions used in the June 30, 2013 valuation of our Secured Borrowings – Owed to Securitization Investors include:
● | Weighted average life in years ranging from 3.15 to 22.84 (weighted average of 6.44), | |
● | Conditional repayment rate ranging from 5.01% to 61.69% (weighted average of 10.74%), and |
● | Discount rate of 1.27%. |
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Match Funded Liabilities and Other Borrowings
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 future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. We estimate principal repayments of match funded liabilities during the amortization period based on our historical advance collection rates and taking into consideration any plans to refinance the notes. At June 30, 2013, the interest on all borrowings under match funded facilities was based on a variable rate adjusted regularly using a market index and therefore the carrying value approximates fair value. For the SSTL, we used a discount rate of 5.63% and the repayment schedule specified in the loan agreement to determine fair value.
Derivative Financial Instruments
We may execute interest rate swaps to hedge against the effects of changes in interest rates on our borrowings under advance funding facilities. These derivatives are not exchange-traded and, therefore, quoted market prices or other observable inputs are not available. Fair value is based on information provided by third-party pricing sources. Third-party valuations are derived from proprietary models based on inputs that include yield curves and contractual terms such as fixed interest rates and payment dates. Although we have not adjusted the information obtained from the third-party pricing sources, we review this information to ensure that it provides a reasonable basis for estimating fair value. Our review is designed to identify information that appears stale, information that has changed significantly from the prior period and other indicators that the information may not be accurate. For interest rate contracts, significant increases or decreases in the unobservable portion of the yield curves in isolation will result in substantial changes in the fair value measurement. We terminated our outstanding interest rates swaps on May 31, 2013.
In addition, we may use interest rate caps to minimize future interest rate exposures on variable rate debt issued on servicing advance facilities from increases in one-month LIBOR interest rates. The fair value for interest rate caps is based on counterparty market prices and adjusted for counterparty credit risk.
We enter into forward trades to provide an economic hedge against changes in the value of residential forward and reverse mortgage loans held for sale that we carry at fair value. Forward trades are primarily used to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Forward contracts are actively traded in the market and we obtained unadjusted market quotes for these derivatives, thus they are classified within Level 1 of the valuation hierarchy.
IRLCs represent an agreement to purchase loans from a third-party originator, or an agreement to extend credit to a mortgage applicant (locked pipeline), or an agreement to sell a loan to investors, whereby the interest rate is set prior to funding. IRLCs are classified within Level 2 of the valuation hierarchy as the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. Fair value amounts of IRLCs are adjusted for expected “fallout” (locked pipeline loans not expected to close), using models that consider cumulative historical fallout rates and other factors.
We previously entered into derivative contracts that included interest rate swaps, U.S. Treasury futures and forward contracts to hedge against the effects of changes in the value of the MSRs that we carry at fair value. Effective April 1, 2013, we modified our strategy for managing the risks of the underlying loan portfolios and no longer use derivative contracts to hedge against the effects of changes in the value of MSRs which we carry at fair value. The fair value of interest rate swaps were based upon projected short-term interest rates and volatility based on published market based sources, a Level 3 valuation. Because futures and forward contracts are actively traded in the market, they are classified within Level 1 of the valuation hierarchy.
See Note 18 – Derivative Financial Instruments and Hedging Activities for additional information regarding derivative financial instruments.
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Note 6 | Loans Held for Sale, at Fair Value |
Loans held for sale, at fair value, represent residential forward and reverse mortgage loans originated or purchased and held until sold to secondary market investors, such as GSEs or other third party investors. The following table summarizes the activity in the balance of loans held for sale during the six months ended June 30, 2013:
Balance at December 31, 2012 | $ | 426,480 | ||
Originations and purchases (1) | 4,511,255 | |||
Proceeds from sale | (4,526,875 | ) | ||
Loss on sale of loans | (37,794 | ) | ||
Decrease in fair value | (11,821 | ) | ||
Other | (101 | ) | ||
Balance at June 30, 2013 | $ | 361,144 |
(1) | Purchases include $60.0 million of reverse mortgages acquired in the Liberty Acquisition. |
The following table summarizes the activity in Gain on loans held for sale, net, during the periods ended June 30:
Three Months | Six Months | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Gain on sales of loans (1) | $ | 10,179 | $ | — | $ | 9,098 | $ | — | ||||||||
Changes in fair value of IRLCs | (11,757 | ) | — | (12,994 | ) | — | ||||||||||
Change in fair value of loans held for sale (2) | (5,216 | ) | — | (5,656 | ) | — | ||||||||||
Gain on hedge instruments | 28,814 | — | 39,003 | — | ||||||||||||
Provision for representations and warranties | (370 | ) | — | (883 | ) | — | ||||||||||
Other | (19 | ) | — | (188 | ) | — | ||||||||||
$ | 21,631 | $ | — | $ | 28,380 | $ | — |
(1) | Includes gains of $18.2 million and $46.9 million for the three and six months ended June 30, 2013, respectively, representing the value assigned to MSRs retained on sales of loans. |
(2) | Includes a gain of $6.2 million recorded during the three months ended June 30, 2013 to adjust Loans – Restricted for Securitization Investors to fair value. |
Note 7 | Advances |
Advances, representing payments made on behalf of borrowers or on foreclosed properties, consisted of the following at the dates indicated:
June 30, 2013 | December 31, 2012 | |||||||
Servicing: | ||||||||
Principal and interest | $ | 109,012 | $ | 83,617 | ||||
Taxes and insurance | 215,981 | 51,447 | ||||||
Foreclosures, bankruptcy and other | 108,115 | 41,296 | ||||||
433,108 | 176,360 | |||||||
Lending | 353 | — | ||||||
Corporate Items and Other | 12,010 | 8,103 | ||||||
$ | 445,471 | $ | 184,463 |
Note 8 | Match Funded Advances |
Match funded advances on residential mortgage loans that we service for others are comprised of the following at the dates indicated:
June 30, 2013 | December 31, 2012 | |||||||
Principal and interest | $ | 1,931,073 | $ | 1,577,808 | ||||
Taxes and insurance | 765,241 | 1,148,486 | ||||||
Foreclosures, bankruptcy, real estate and other | 264,010 | 322,950 | ||||||
$ | 2,960,324 | $ | 3,049,244 |
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Note 9 | Mortgage Servicing |
Mortgage Servicing Rights – Amortization Method
The following table summarizes our activity related to MSRs for the six months ended June 30:
2013 | 2012 | |||||||
Balance at December 31 | $ | 678,937 | $ | 293,152 | ||||
Additions recognized in connection with business and asset acquisitions (1) (2) | 1,078,819 | 175,852 | ||||||
Additions recognized on the sale of residential mortgage loans | 46,892 | — | ||||||
Servicing transfers, adjustments and other | 1,970 | (88 | ) | |||||
Amortization (3) | (118,580 | ) | (34,348 | ) | ||||
Balance at June 30 | $ | 1,688,038 | $ | 434,568 | ||||
Estimated fair value at June 30 | $ | 2,269,985 | $ | 470,974 |
(1) | MSRs purchased during 2013 include $393.9 million acquired in the ResCap Acquisition. See Note 4 – Business Acquisitions for additional information. |
(2) | MSRs purchased during 2013 also include $680.0 million of MSRs acquired in the Ally MSR Transaction. The acquired MSRs relate to mortgage loans with a UPB of approximately $87.0 billion owned by Freddie Mac and Fannie Mae. We also acquired servicing advance receivables of $73.5 million. We assumed the origination representation and warranty obligations of approximately $136.4 million in connection with a majority of the acquired MSRs. We had been subservicing these MSRs on behalf of Ally under a subservicing contract assumed by us in connection with the ResCap Acquisition. |
(3) | Amortization of mortgage servicing rights is reported net of the amortization of servicing liabilities and includes the amount of charges we recognized to increase servicing liability obligations. |
As disclosed in Note 3 – Transfers of Financial Assets, we sold certain Rights to MSRs during 2012 and 2013 as part of the HLSS Transactions. The carrying value of the related MSRs which have not been derecognized at June 30, 2013 was $360.6 million.
Mortgage Servicing Rights—Fair Value Measurement Method
This portfolio comprises servicing rights for which we elected the fair value option and includes prime forward mortgage loans for which we hedged the related market risks. The following table summarizes the activity related to our fair value MSRs for the six months ended June 30, 2013:
Balance at December 31, 2012 | $ | 85,213 | ||
Changes in fair value: | ||||
Due to changes in market valuation assumptions | 20,680 | |||
Realization of cash flows and other changes | (8,730 | ) | ||
Balance at June 30, 2013 | $ | 97,163 |
Because the mortgages underlying these MSRs permit the borrowers to prepay the loans, the value of the MSRs generally tends to diminish in periods of declining interest rates (as prepayments increase) and increase in periods of rising interest rates (as prepayments decrease). The following table summarizes the estimated change in the value of the MSRs that we carry at fair value as of June 30, 2013 given hypothetical instantaneous parallel shifts in the yield curve:
Adverse change in fair value | ||||||||
10% | 20% | |||||||
Weighted average prepayment speeds | $ | (3,850 | ) | $ | (7,459 | ) | ||
Discount rate (Option-adjusted spread) | $ | (4,143 | ) | $ | (7,962 | ) |
The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.
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Servicing Revenue
The following table presents the components of servicing and subservicing fees for the periods ended June 30:
Three Months | Six Months | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Loan servicing and subservicing fees | $ | 363,739 | $ | 149,384 | $ | 631,767 | $ | 261,973 | ||||||||
Home Affordable Modification Program (HAMP) fees | 46,792 | 21,390 | 86,939 | 34,074 | ||||||||||||
Late charges | 29,589 | 17,676 | 55,485 | 36,521 | ||||||||||||
Loan collection fees | 7,755 | 3,830 | 14,137 | 7,169 | ||||||||||||
Custodial accounts (float earnings) | 2,110 | 663 | 3,790 | 1,450 | ||||||||||||
Other | 32,647 | 7,392 | 58,007 | 14,237 | ||||||||||||
$ | 482,632 | $ | 200,335 | $ | 850,125 | $ | 355,424 |
Portfolio of Assets Serviced
The following table presents the composition of our servicing and subservicing portfolios by type of asset serviced as measured by UPB. The servicing portfolio represents loans for which we own the MSRs while subservicing represents all other loans.
Residential | Commercial | Total | ||||||||||
UPB at June 30, 2013 | ||||||||||||
Servicing (1) | $ | 344,173,439 | $ | — | $ | 344,173,439 | ||||||
Subservicing | 92,081,944 | 452,042 | 92,533,986 | |||||||||
$ | 436,255,383 | $ | 452,042 | $ | 436,707,425 | |||||||
UPB at December 31, 2012 | ||||||||||||
Servicing (1) | $ | 175,762,161 | $ | — | $ | 175,762,161 | ||||||
Subservicing | 27,903,555 | 401,031 | 28,304,586 | |||||||||
$ | 203,665,716 | $ | 401,031 | $ | 204,066,747 |
(1) | Includes UPB of $99.8 billion and $79.4 billion at June 30, 2013 and December 31, 2012, respectively, for which the Rights to MSRs have been sold to HLSS. |
Residential assets serviced consist principally of residential mortgage loans, but also include foreclosed real estate. Residential assets serviced also include small-balance commercial assets with a UPB of $1.9 billion and $2.1 billion at June 30, 2013 and December 31, 2012, respectively, that are managed using the REALServicing™ application. Commercial assets consist of large-balance foreclosed real estate. The UPB of assets serviced for others are not included on our unaudited Consolidated Balance Sheets.
Custodial accounts, which hold funds representing collections of principal and interest that we receive from borrowers, are held in escrow by an unaffiliated bank and are excluded from our unaudited Consolidated Balance Sheets. Custodial accounts amounted to $7.6 billion and $1.3 billion at June 30, 2013 and December 31, 2012, respectively.
Note 10 | Receivables |
Receivables consisted of the following at the dates indicated:
Receivables | Allowance for Losses | Net | ||||||||||
June 30, 2013 | ||||||||||||
Servicing (1) | $ | 157,869 | $ | (14,202 | ) | $ | 143,667 | |||||
Income taxes receivable | 43,851 | — | 43,851 | |||||||||
Due from related parties (2) | 21,828 | — | 21,828 | |||||||||
Other | 17,622 | (1,957 | ) | 15,665 | ||||||||
$ | 241,170 | $ | (16,159 | ) | $ | 225,011 | ||||||
December 31, 2012 | ||||||||||||
Servicing (1) | $ | 84,870 | $ | (1,647 | ) | $ | 83,223 | |||||
Income taxes receivable | 55,292 | — | 55,292 | |||||||||
Due from related parties (2) | 12,361 | — | 12,361 | |||||||||
Other | 18,577 | (1,994 | ) | 16,583 | ||||||||
$ | 171,100 | $ | (3,641 | ) | $ | 167,459 |
(1) | The receivable balances arise from our Servicing business and include reimbursable expenditures due from investors and amounts to be recovered from the custodial accounts of the trustees. |
(2) | See Note 22 – Related Party Transactions for additional information regarding transactions with Altisource and HLSS. |
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Note 11 | Goodwill |
The following table provides a summary of activity in the carrying value of goodwill during the six months ended June 30, 2013:
ResCap Acquisition | Homeward Acquisition | Litton Acquisition | Hom Eq Acquisition | Total | ||||||||||||||||
Balance at December 31, 2012 | $ | — | $ | 311,320 | $ | 57,430 | $ | 12,810 | $ | 381,560 | ||||||||||
Derecognition of goodwill in connection with the sale of a business (1) (2) | (128,750 | ) | (72,309 | ) | — | — | (201,059 | ) | ||||||||||||
ResCap Acquisition (2) | 210,038 | — | — | — | 210,038 | |||||||||||||||
Balance at June 30, 2013 | $ | 81,288 | $ | 239,011 | $ | 57,430 | $ | 12,810 | 390,539 | |||||||||||
Liberty Acquisition (2) | — | |||||||||||||||||||
Step acquisition - Correspondent One (2) | 101 | |||||||||||||||||||
Balance at June 30, 2013 | $ | 390,640 |
(1) | On March 29, 2013, we sold the diversified fee-based business acquired in the Homeward Acquisition to Altisource and derecognized the assigned goodwill. On April 12, 2013, we sold the diversified fee-based business acquired in the ResCap Acquisition to Altisource and derecognized the assigned goodwill. |
(2) | See Note 4 – Business Acquisitions for additional information regarding this transaction. |
For the ResCap Acquisition, the $81.3 million of remaining goodwill is assigned to the Servicing segment. For the Homeward Acquisition, $118.6 million of the remaining goodwill is assigned to the Servicing segment and $120.4 million is assigned to the Lending segment. Subsequent to the initial assignment and prior to the sale to Altisource, $4.7 million of the purchase price allocated to the diversified fee-based business was reallocated to Servicing and Lending. The assignment of goodwill in the ResCap and Homeward Acquisitions is preliminary pending the final purchase price allocation. For the Litton and HomEq Acquisitions, the entire balance of goodwill pertains to the Servicing segment.
Note 12 | Debt Service Accounts |
Under our 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 balances also include amounts that have been set aside from the proceeds of our 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 in the name of the SPE created in connection with the match funded financing facility. The balance of such debt service accounts at June 30, 2013 and December 31, 2012 was $84.2 million and $88.7 million, respectively.
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Note 13 | Other Assets |
Other assets consisted of the following at the dates indicated:
June 30, 2013 | December 31, 2012 | |||||||
Loans – restricted for securitization investors, at fair value (1) | $ | 76,649 | $ | — | ||||
Loans held for sale, at lower of cost or fair value (2) | 33,987 | 82,866 | ||||||
Prepaid lender fees and debt issuance costs, net (3) | 32,912 | 14,389 | ||||||
Prepaid income taxes | 23,112 | 23,112 | ||||||
Derivatives, at fair value (4) | 18,857 | 10,795 | ||||||
Investment in unconsolidated entities (5) | 12,886 | 25,187 | ||||||
Real estate, net | 8,028 | 6,205 | ||||||
Interest earning collateral deposits (6) | 5,668 | 31,710 | ||||||
Acquisition deposits (7) | — | 57,000 | ||||||
Prepaid expenses and other | 19,125 | 22,314 | ||||||
$ | 231,224 | $ | 273,578 |
(1) | Loans sold into Ginnie Mae guaranteed securitizations that we include in our Consolidated Financial Statements because the transfers of reverse mortgage loans to the trusts did not qualify for sales accounting treatment. |
(2) | The carrying values at June 30, 2013 and December 31, 2012 are net of valuation allowances of $19.4 million and $14.7 million, respectively. The balances include non-performing subprime single-family residential loans that we do not intend to hold to maturity. The balance at June 30, 2013 includes $14.0 million of loans that we were required to repurchase from Ginnie Mae guaranteed securitizations following the ResCap Acquisition in connection with loan modifications and loan resolutions. The balance at December 31, 2012 includes non-performing mortgage loans with a carrying value of $65.4 million that we acquired in December 2012 and sold to Altisource Residential, LP in February 2013 for an insignificant gain. |
(3) | These balances relate to match funded liabilities and other secured borrowings. |
(4) | See Note 18 – Derivative Financial Instruments and Hedging Activities for additional information. |
(5) | The balance at December 31, 2012 includes an investment of $13.4 million that represented our 49% equity interest in Correspondent One. As disclosed in Note 4 – Business Acquisitions, we increased our ownership to 100% on March 31, 2013. Effective on that date, we began including the accounts of Correspondent One in our consolidated financial statements and have eliminated our current investment in consolidation. |
(6) | These balances include $1.1 million and $25.8 million of cash collateral held by the counterparties to certain of our derivative agreements at June 30, 2013 and December 31, 2012, respectively. |
(7) | The balance at December 31, 2012 represents an earnest money cash deposit we made in connection with the ResCap Acquisition. This deposit was subsequently applied towards the purchase price upon closing of the transaction on February 15, 2013. See Note 4 – Business Acquisitions for additional information. |
Note 14 | Match Funded Liabilities |
Match funded liabilities are comprised of the following at the dates indicated:
Available | Balance Outstanding | |||||||||||||||||
Borrowing Type | Interest Rate | Maturity (1) | Amortization Date (1) | Borrowing Capacity (2) | June
30, 2013 | December
31, 2012 | ||||||||||||
2011-Servicer Advance Revolving Trust 1 (3) | 2.23% | May 2043 | May 2013 | $ | — | $ | — | $ | 325,000 | |||||||||
2011-Servicer Advance Revolving Trust 1 (3) | 3.37 – 5.92% | May 2043 | May 2013 | — | — | 525,000 | ||||||||||||
2012-Servicing Advance Revolving Trust 2 (3) | 3.27 – 6.90% | Sep. 2043 | Sept. 2013 | — | — | 250,000 | ||||||||||||
2012-Servicing Advance Revolving Trust 3 (3) | 2.98% | Mar. 2043 | Mar. 2013 | — | — | 248,999 | ||||||||||||
2012-Servicing Advance Revolving Trust 3 (3) | 3.72 – 7.04% | Mar. 2044 | Mar. 2014 | — | — | 299,278 | ||||||||||||
Total fixed rate | — | — | 1,648,277 |
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Available | Balance Outstanding | |||||||||||||||||
Borrowing Type | Interest Rate | Maturity (1) | Amortization Date (1) | Borrowing Capacity (2) | June
30, 2013 | December
31, 2012 | ||||||||||||
Advance Receivable Backed Notes (4) | 1-month LIBOR (1ML) + 285 bps | Apr. 2015 | Apr. 2014 | 168,640 | 131,360 | 205,016 | ||||||||||||
Advance Receivable Backed Notes Series 2012-ADV1 | Commercial paper (CP) rate + 225 or 335 bps | Dec. 2043 | Dec. 2013 | 276,618 | 173,382 | 232,712 | ||||||||||||
Advance Receivable Backed Notes Series 2012-ADV1 | 1ML + 250 bps | June 2016 | June 2014 | 25,000 | 200,000 | 94,095 | ||||||||||||
Advance Receivable Backed Note | 1ML + 300 bps | Dec. 2015 | Dec. 2014 | 10,827 | 39,173 | 49,138 | ||||||||||||
2011-Servicing Advance Revolving Trust 1 (3) | 1ML + 300 bps | May 2043 | May 2013 | — | — | 204,633 | ||||||||||||
2012-Servicing Advance Revolving Trust 2 (3) | 1ML + 315 bps | Sep. 2043 | Sept. 2013 | — | — | 22,003 | ||||||||||||
2012-Servicing Advance Revolving Trust 3 (3) | 1ML + 300 bps – 675 bps | Mar. 2044 | Mar. 2014 | — | — | 40,626 | ||||||||||||
2012-Homeward Agency Advance Funding Trust 2012-1 | 1ML + 300 bps | Sept. 2013 | Sept. 2013 | 3,581 | 21,419 | 16,094 | ||||||||||||
2012-Homeward DSF Advance Revolving Trust 2012-1 (3) | 1ML + 450 bps | Feb. 2013 | Feb. 2013 | — | — | 20,151 | ||||||||||||
Homeward Residential Bridge Loan Trust – 2013 Series-Bridge-VF1 and VF2 (3)(5) | 1ML + 150 bps | Aug. 2043 | Aug. 2013 | 133,162 | 766,838 | — | ||||||||||||
Ocwen Servicer Advance Receivables Trust – Series 2013-VF1 Class A, B, C and D Notes (5)(6) | 1ML + 150 – 525 bps | Feb. 2044 | Feb. 2014 | 351,254 | 848,746 | — | ||||||||||||
Ocwen Servicer Advance Receivables Trust II – Series 2013-VF1 Class A, B, C and D Notes (5)(6) | 1ML + 287.5 bps | Feb. 2044 | Feb. 2014 | 14,086 | 210,914 | — | ||||||||||||
Total variable rate | 983,168 | 2,391,832 | 884,468 | |||||||||||||||
$ | 983,168 | $ | 2,391,832 | $ | 2,532,745 |
(1) | The amortization date of our facilities is the date on which the revolving period ends under each advance facility note and repayment of the outstanding balance must begin if the note is not renewed or extended. The maturity date is the date on which all outstanding balances must be repaid. In two advance facilities, there are multiple notes outstanding. For each note, after the amortization date, all collections that represent the repayment of advances pledged to the facility must be applied to reduce the balance of the note outstanding, and any new advances are ineligible to be financed. |
(2) | Borrowing capacity is available to us provided that we have additional eligible collateral to pledge. Collateral may only be pledged to one facility. At June 30, 2013, none of the available borrowing capacity could be used because we had borrowed the maximum amount against the pledged collateral. |
(3) | Facility was repaid in February 2013 from the proceeds of a new $1.4 billion bridge facility (Homeward Residential Bridge Loan Trust – 2013) which has an amortization date of August 14, 2013. On May 24, 2013, the total maximum borrowing capacity for this facility was reduced to $900,000. |
(4) | We repaid this facility in full in July 2013. |
(5) | On July 1, 2013, we repaid these facilities in full from the proceeds received on the sale of servicing advances to HLSS. See Note 25 Subsequent Events for additional information regarding this transaction. |
(6) | We entered into these facilities in connection with the ResCap Acquisition (See Note 4 Business Acquisitions). |
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Note 15 | Other Borrowings |
Lines of credit and other secured and unsecured borrowings are comprised of the following at the dates indicated:
Available | Balance Outstanding | |||||||||||||||||
Borrowings | Collateral | Interest Rate | Maturity | Borrowing | June 30, | December 31, | ||||||||||||
Servicing: | ||||||||||||||||||
SSTL (1) | (1) | 1ML + 550 bps; LIBOR floor of 150 bps (1) | Sept. 2016 | $ | — | $ | — | $ | 314,229 | |||||||||
SSTL (2) | (2) | (2) | Feb. 2018 | — | 1,296,750 | — | ||||||||||||
Senior unsecured term loan (3) | 1-Month Euro-dollar rate + 675 bps with a Eurodollar floor of 150 bps | Mar. 2017 | — | — | 75,000 | |||||||||||||
Financing liability – MSRs pledged (4) | MSRs (4) | (4) | (4) | — | 428,339 | 303,705 | ||||||||||||
Financing liability – MSRs pledged (5) | MSRs (5) | (5) | (5) | — | — | 2,603 | ||||||||||||
Promissory note (6) | MSRs | 1ML + 350 bps | May 2017 | — | 17,844 | 18,466 | ||||||||||||
Repurchase agreement | Loans held for sale (LHFS) | 1 ML + 250 – 345 bps | Apr. 2014 | 92,579 | 7,421 | — | ||||||||||||
92,579 | 1,750,354 | 714,003 | ||||||||||||||||
Lending: | ||||||||||||||||||
Master repurchase agreement (7) | LHFS | 1ML + 175 bps | Mar. 2014 | 231,875 | 68,125 | 88,122 | ||||||||||||
Participation agreement (8) | LHFS | N/A | May 2014 | — | 21,742 | 58,938 | ||||||||||||
Master repurchase agreement (9) | LHFS | 1ML + 200 bps | Aug. 2013 | 143,392 | 106,608 | 133,995 | ||||||||||||
Master repurchase agreement | LHFS | 1ML + 200 bps | Jul. 2013 | 216,806 | 83,194 | 107,020 | ||||||||||||
Master repurchase agreement | LHFS | 1ML + 275 bps | Aug. 2013 | 39,690 | 60,310 | — | ||||||||||||
Financing liability – MSRs pledged (5) | MSRs (5) | (5) | (5) | — | 10,068 | — | ||||||||||||
Secured borrowings - owed to securitization investors (10) | Loans held for investment | 1ML + 220 bps | (10) | — | 73,641 | — | ||||||||||||
631,763 | 423,688 | 388,075 | ||||||||||||||||
Corporate Items and Other | ||||||||||||||||||
Securities sold under an agreement to repurchase (11) | Ocwen Real Estate Asset Liquidating Trust 2007-1 Notes | Class A-2 notes: 1ML + 200 bps; Class A-3 notes: 1ML + 300 bps | Monthly | — | 4,045 | 2,833 | ||||||||||||
724,342 | 2,178,087 | 1,104,911 | ||||||||||||||||
Discount (1) (2) | — | (6,009 | ) | (8,232 | ) | |||||||||||||
$ | 724,342 | $ | 2,172,078 | $ | 1,096,679 |
30 |
(1) | In February 2013, we repaid this loan in full and wrote off the remaining discount as part of the loss on extinguishment. |
(2) | On February 15, 2013, we entered into a new SSTL facility agreement and borrowed $1.3 billion that was used principally to fund the ResCap Acquisition and repay the balance of the previous SSTL. The loan was issued with an original issue discount of $6.5 million that we are amortizing over the term of the loan. We are required to repay the principal amount of the borrowings in consecutive quarterly installments of $3.3 million. In addition, we are required to use the net cash proceeds (as defined) from any asset sale (as defined) to repay loan principal. Generally, this provision applies to non-operating sales of assets, such as the HLSS Transactions, and generally, net cash proceeds represent the proceeds from the sale of the assets, net of the repayment of any debt secured by a lien on the assets sold. The borrowings are secured by a first priority security interest in substantially all of the assets of Ocwen. Borrowings bear interest, at the election of Ocwen, at a rate per annum equal to either (a) the base rate [the greatest of (i) the prime rate in effect on such day, (ii) the federal funds rate in effect on such day plus 0.50% and (iii) the one-month Eurodollar rate (1-Month LIBOR)], plus a margin of 2.75% and a base rate floor of 2.25% or (b) the one month Eurodollar rate, plus a margin of 3.75% with a 1-Month LIBOR floor of 1.25%. To date we have elected option (b) to determine the interest rate. |
(3) | We repaid this loan in full in February 2013. |
(4) | As part of the HLSS Transactions, we transfer certain Rights to MSRs to HLSS. Because we have not yet transferred legal title to the MSRs, we account for these transfers as financings with the proceeds from the sale of the Rights to MSRs recorded as a financing liability. The financing liability is amortized using the interest method with the servicing income that is remitted to HLSS representing payments of principal and interest. The liability has no contractual maturity but is amortized over the estimated life of the transferred Rights to MSRs. The balance of the liability is reduced each month based on the change in the estimated fair value of the transferred rights to MSRs. See Note 3 Transfers of Financial Assets for additional information. |
(5) | We sold MSRs for certain loans to an unrelated third party in December 2012 and June 2013; however, we are required to repurchase the MSRs for any loans that cannot be refinanced by the purchaser under the federal government’s Home Affordable Refinance Program (HARP). As a result, the sale is being accounted for as a financing. The financing liability is being amortized using the interest method with the servicing income that is remitted to the purchaser representing payments of principal and interest. In June 2013, we derecognized a portion of the liability from the December 2012 sale related to loans that had been refinanced under HARP and recognized a $3.2 million gain on the retirement of the financing liability. |
(6) | Prepayments of the balance on this note may be required if the borrowing base, as defined, falls below the amount of the note outstanding. |
(7) | On March 19, 2013, the maturity date of the Master Repurchase Agreement was extended to March 18, 2014 and the maximum borrowing capacity was increased to $120.0 million to $300.0 million. |
(8) | Under this participation agreement, the lender provides financing on an uncommitted basis for up to $100.0 million at the discretion of the lender. The participation agreement allows the lender to acquire a 100% beneficial interest in the underlying mortgage loans. However, the transaction does not qualify for sales accounting treatment and is, therefore, accounted for as a financing. The lender earns the stated interest rate of the underlying mortgage loans while the loans are financed under the participation agreement. In April 2013, we extended the participation agreement maturity date to May 31, 2014. |
(9) | On June 12, 2013, the maturity date of the Master Repurchase Agreement was extended to August 2, 2013. |
(10) | This represents amounts due to the holders of beneficial interests in Ginnie Mae guaranteed securitization that we include in our consolidated financial statements because the transfers of reverse mortgage loans to the trusts did not qualify for sales accounting treatment. There are no maturity dates; the borrowings mature as the related loans are repaid. |
(11) | This agreement has no stated credit limit and lending is determined for each transaction based on the acceptability of the securities presented as collateral. |
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Note 16 | Other Liabilities |
Other liabilities are comprised of the following at the dates indicated:
June 30, 2013 | December 31, 2012 | |||||||
Liability for indemnification obligations (1) | $ | 220,041 | $ | 38,140 | ||||
Accrued expenses | 103,742 | 70,831 | ||||||
Amount due seller for purchase price adjustments – ResCap Acquisition | 69,696 | — | ||||||
Liability for certain foreclosure matters (2) | 66,431 | 13,602 | ||||||
Checks held for escheat | 25,448 | 33,225 | ||||||
Payable to servicing and subservicing investors (3) | 23,545 | 9,973 | ||||||
Liability for selected tax items | 22,338 | 22,702 | ||||||
Due to related parties (4) | 19,132 | 45,034 | ||||||
Servicing liabilities (5) | 11,704 | 9,830 | ||||||
Accrued interest payable | 8,874 | 5,410 | ||||||
Derivatives, at fair value (6) | 7,064 | 18,658 | ||||||
Other | 58,613 | 23,861 | ||||||
$ | 636,628 | $ | 291,266 |
(1) | The balance includes origination representation and warranty obligations and compensatory fees for foreclosures that may ultimately exceed investor timelines. These obligations were primarily assumed in connection with the Ally MSR Transaction, the ResCap Acquisition and the Homeward Acquisition. See Note 4 – Business Acquisitions and Note 9 – Mortgage Servicing for additional information. |
(2) | The balance represents a liability established in connection with our ongoing discussions with the Multi-State Mortgage Committee of the Conferences of State Bank Supervisors (MMC), Consumer Finance Protection Bureau (CFPB) and state Attorneys General in connection with certain foreclosure related matters. We recognized $52.8 million of expense in Professional services in the second quarter of 2013 in establishing the liability. We recognized the remaining $13.6 million of the liability as an adjustment to the initial purchase price allocation related to the Homeward Acquisition. We applied this measurement period adjustment retrospectively to our Consolidated Balance Sheet at December 31, 2012 with an offsetting increase in goodwill. See Note 24 – Commitments and Contingencies for additional information. |
(3) | The balance represents amounts due to investors in connection with loans we service under servicing and subservicing agreements. |
(4) | See Note 22 – Related Party Transactions for additional information. |
(5) | During the six months ended June 30, 2013 and 2012, amortization of servicing liabilities exceeded the amount of charges we recognized to increase our servicing liability obligations by $0.3 million and $0.9 million, respectively. Amortization of mortgage servicing rights is reported net of this amount in the unaudited Consolidated Statement of Operations. |
(6) | See Note 18 – Derivative Financial Instruments and Hedging Activities for additional information. |
Note 17 | Mezzanine Equity |
Preferred Stock
On December 27, 2012, we issued 162,000 shares of Series A Perpetual Convertible Preferred Stock (the Preferred Shares) having a par value of $0.01 per share and paying dividends at a rate of 3.75% on the liquidation preference of $1,000 per share as part of the consideration for the Homeward Acquisition. The dividends are payable quarterly at the end of each calendar quarter.
The Preferred Shares are accounted for as equity and are classified as “mezzanine” equity in the unaudited Consolidated Balance Sheets. The conversion option of the Preferred Shares represents a Beneficial Conversion Feature (BCF) with an intrinsic value of $8.7 million which we accounted for as a discount on the Preferred Shares with an offsetting increase in additional paid in capital upon issuance. The BCF will be amortizing through the second anniversary of the issue date, the first date at which we can redeem the Preferred Shares.
We amortize the BCF discount on the Preferred Shares as a deemed dividend with an offsetting reduction in retained earnings.
32 |
The carrying value of our Preferred Shares reflects the following:
Initial issuance price on December 27, 2012 | $ | 162,000 | ||
Discount for beneficial conversion feature | (8,688 | ) | ||
Accretion of BCF discount (Deemed dividend) | 60 | |||
Carrying value at December 31, 2012 | 153,372 | |||
Accretion of discount (Deemed dividend) | 2,172 | |||
Carrying value at June 30, 2013 | $ | 155,544 |
Note 18 | Derivative Financial Instruments and Hedging Activities |
Because many of our current derivative agreements are not exchange-traded, we are exposed to credit loss in the event of nonperformance by the counterparty to the agreements. We control this risk through credit monitoring procedures including financial analysis, dollar limits and other monitoring procedures. The notional amount of our contracts does not represent our exposure to credit loss.
The following table summarizes the changes in the notional balance of our holdings of derivatives during the six months ended June 30, 2013:
IRLCs | U.S. Treasury Futures | Forward MBS Trades | Interest Rate Caps | Interest Rate Swaps | ||||||||||||||||
Balance at December 31, 2012 | $ | 1,112,519 | $ | 109,000 | $ | 1,638,979 | $ | 1,025,000 | $ | 1,495,955 | ||||||||||
Additions | 2,803,364 | 85,000 | 6,443,459 | — | 1,280,000 | |||||||||||||||
Amortization | (228,319 | ) | — | (33,372 | ) | (24,000 | ) | — | ||||||||||||
Maturities | (2,826,503 | ) | — | (3,094,020 | ) | — | (295,604 | ) | ||||||||||||
Terminations | (207,842 | ) | (194,000 | ) | (4,100,120 | ) | (126,000 | ) | (2,480,351 | ) | ||||||||||
Balance at June 30, 2013 | $ | 653,219 | $ | — | $ | 854,926 | $ | 875,000 | $ | — | ||||||||||
Fair value of net derivative assets (liabilities) at: | ||||||||||||||||||||
June 30, 2013 | $ | (7,064 | ) | $ | — | $ | 18,681 | $ | 176 | $ | — | |||||||||
December 31, 2012 | $ | 5,781 | $ | (1,258 | ) | $ | (1,719 | ) | $ | 168 | $ | (10,836 | ) | |||||||
Maturity | Jul. 2013 – Oct. 2013 | — | Jul. 2013 – Sep. 2013 | Aug. 2015 – May 2016 | — |
Interest Rate Management
Match Funded Liabilities
We previously entered into interest rate swaps in order to hedge against the effects of changes in interest rates on our borrowings under our advance funding facilities. These interest rate swap agreements required us to pay a fixed rate and receive a variable interest rate based on one-month LIBOR. At the time that we entered into the agreements, these swaps were designated as hedges for accounting purposes. As disclosed in Note 5 – Fair Value of Financial Instruments, we terminated these interest rate swaps on May 31, 2013 primarily because the custodial account float balances, which earn a variable rate of interest, are well in excess of variable rate borrowings under advance facilities and therefore reduce our exposure to changes in interest rates. We also purchased interest rate caps to minimize future interest rate exposure from increases in one-month LIBOR interest rates, as required by the certain of our advance financing arrangements.
Loans Held for Sale, at Fair Value
The mortgage loans held for sale that we carry at fair value are subject to interest rate and price risk from the loan funding date until the date the loan is sold into the secondary market. Generally, the fair value of a loan will decline in value when interest rates increase and will rise in value when interest rates decrease. To mitigate this risk, we enter into forward trades to provide an economic hedge against those changes in fair value on mortgage loans held for sale. Forward trades are primarily used to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market.
33 |
Interest Rate Lock Commitments
IRLCs represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage applicant, whereby the interest rate is set prior to funding. The loan commitment binds us (subject to the loan approval process) to fund the loan at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. The borrower is not obligated to obtain the loan, thus we are subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Our interest rate exposure on these derivative loan commitments is hedged with derivatives, including forward contracts. We enter into forward contracts with respect to fixed rate loan commitments.
MSRs at Fair Value
The MSRs which we measure at fair value are subject to interest rate risk as the mortgage loans underlying the MSRs permit the borrowers to prepay the loans. Therefore, the fair value of these MSRs generally tends to diminish in periods of declining interest rates (as prepayments increase) and increase in periods of rising interest rates (as prepayments decrease). Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards and product characteristics. Effective April 1, 2013, we terminated our hedging program for fair value MSRs. Prior to their termination, we used economic hedges including interest rate swaps, U.S. Treasury futures and forward contracts to minimize the effects of loss in value of these MSRs associated with increased prepayment activity that generally results from declining interest rates.
Asset Acquisitions
In March 2013, we entered into an interest rate swap to hedge the impact on cash flows of changes in the purchase price to be paid for MSRs acquired in the Ally MSR Transaction. This purchase was forecasted to occur in stages with the purchase price subject to adjustment based on changes in the 10-year swap rate between the date of the MSR purchase agreement and the date of each closing. We entered into an interest rate swap with a notional amount sufficient to yield changes in the fair value of the interest rate swap in response to changes in the swap rate that were essentially equal to and offsetting to changes in the purchase price of the MSRs. We designated the swap as a hedge for accounting purposes. We completed the transaction in April 2013 and terminated the swap agreement at the same time. See Note 9 – Mortgage Servicing for additional information regarding the Ally MSR Transaction.
The following summarizes our use of derivatives at June 30, 2013 and the gains (losses) on those derivatives for the six months then ended. None of these derivatives was designated as a hedge for accounting purposes at June 30, 2013:
Purpose | Expiration Date | Notional Amount | Fair Value (1) | Gains / (Losses) | Consolidated Statement of Operations Caption | |||||||||||
Interest rate risk of borrowings | ||||||||||||||||
Interest rate caps | ||||||||||||||||
Hedge the effects of changes in 1ML on advance funding facilities | 2015-2016 | $ | 875,000 | $ | 176 | $ | 9 | Other, net | ||||||||
Interest rate risk of mortgage loans held for sale and IRLCs | ||||||||||||||||
Forward MBS trades | 2013 | 854,926 | 18,681 | 40,293 | Loss on loans held for sale, net and Other, net | |||||||||||
IRLCs | 2013 | 653,219 | (7,064 | ) | (12,994 | ) | Loss on loans held for sale, net | |||||||||
Total derivatives | $ | 11,793 | $ | 27,308 |
(1) | Derivatives are reported at fair value in Receivables, Other assets or in Other liabilities on our unaudited Consolidated Balance Sheets. |
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Included in AOCL at June 30, 2013 and December 31, 2012, respectively, were $19.9 million and $9.9 million of deferred unrealized losses, before taxes of $7.6 million and $3.6 million, respectively, on interest rate swaps that we designated as cash flow hedges. Changes in the losses on cash flow hedges included in AOCL during the six months ended June 30, 2013 were as follows:
Accumulated losses on cash flow hedges at December 31, 2012 | $ | 9,878 | ||
Additional net losses on cash flow hedges | 12,363 | |||
Ineffectiveness of cash flow hedges reclassified to earnings | (657 | ) | ||
Losses on terminated hedging relationships amortized to earnings (1) | (1,654 | ) | ||
Accumulated losses on cash flow hedges at June 30, 2013 | $ | 19,930 |
(1) | Where the hedging relationship has been terminated but the hedged transaction is still forecast to occur, losses on the hedging relationship that are included in AOCL are amortized to earnings in the periods in which earnings are affected by the hedged transaction. |
The statements of operations include the following related to derivative financial instruments for the periods ended June 30:
Three Months | Six Months | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Servicing and origination expense | ||||||||||||||||
Gains on economic hedges | $ | 17 | $ | — | $ | 1,017 | $ | — | ||||||||
Loss on loans held for resale, net | ||||||||||||||||
Gains (losses) on economic hedges | 17,056 | — | 26,009 | — | ||||||||||||
Other, net | ||||||||||||||||
Gains (losses) on economic hedges (1) | 2,742 | 1,843 | (2,429 | ) | 5,248 | |||||||||||
Ineffectiveness of cash flow hedges | — | (64 | ) | (657 | ) | (1) | ||||||||||
Write-off of losses in AOCL for a discontinued hedge relationship | (1,654 | ) | (772 | ) | (1,654 | ) | (1,544 | ) | ||||||||
Write-off of losses in AOCL for hedge of a financing facility assumed by HLSS (See Note 3 – Transfers of Financial Assets) | — | — | — | (5,958 | ) | |||||||||||
$ | 18,161 | $ | 1,007 | $ | 22,286 | $ | (2,255 | ) |
(1) | Includes a gain of $3.4 million recognized during the three months ended March 31, 2012 from the termination of foreign exchange forward contracts. |
Note 19 | Interest Expense |
The following table presents the components of interest expense for the periods ended June 30:
Three Months | Six Months | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Match funded liabilities | $ | 25,078 | $ | 35,920 | $ | 55,429 | $ | 67,035 | ||||||||
Other borrowings (1) | 72,180 | 21,060 | 132,703 | 35,283 | ||||||||||||
Debt securities: | ||||||||||||||||
3.25% Convertible Notes | — | — | — | 153 | ||||||||||||
10.875% Capital Trust Securities | — | 710 | — | 1,420 | ||||||||||||
Other | 2,610 | 629 | 5,152 | 1,352 | ||||||||||||
$ | 99,868 | $ | 58,319 | $ | 193,284 | $ | 105,243 |
(1) | Includes interest expense of $49.9 million and $10.6 million for the three months ended June 30, 2013 and 2012, respectively, and $94.4 million and $13.5 million for the six months ended June 30, 2013 and 2012, respectively, related to financing liabilities recorded in connection with the HLSS Transactions. See Note 3 – Transfers of Financial Assets and Note 15 – Other Borrowings for additional information. |
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Note 20 | Basic and Diluted Earnings Per Share (EPS) |
Basic EPS excludes common stock equivalents and is calculated by dividing net income attributable to Ocwen common stockholders by the weighted average number of common shares outstanding during the year. We calculate diluted EPS by dividing net income attributable to Ocwen, as adjusted to add back preferred stock dividends and 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, the Preferred Shares and the Convertible Notes. The following is a reconciliation of the calculation of basic EPS to diluted EPS for the periods ended June 30:
Three Months | Six Months | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Basic EPS: | ||||||||||||||||
Net income attributable to Ocwen common stockholders | $ | 74,116 | $ | 44,833 | $ | 116,692 | $ | 64,182 | ||||||||
Weighted average shares of common stock | 135,690,264 | 134,856,101 | 135,664,242 | 132,752,848 | ||||||||||||
Basic EPS | $ | 0.55 | $ | 0.33 | $ | 0.86 | $ | 0.48 | ||||||||
Diluted EPS: | ||||||||||||||||
Net income attributable to Ocwen common stockholders | $ | 74,116 | $ | 44,833 | $ | 116,692 | $ | 64,182 | ||||||||
Preferred stock dividends (1) | 2,605 | — | — | — | ||||||||||||
Interest expense on Convertible Notes, net of income tax (2) | — | — | — | 98 | ||||||||||||
Adjusted net income attributable to Ocwen | $ | 76,721 | $ | 44,833 | $ | 116,692 | $ | 64,280 | ||||||||
Weighted average shares of common stock | 135,690,264 | 134,856,101 | 135,664,242 | 132,752,848 | ||||||||||||
Effect of dilutive elements: | ||||||||||||||||
Preferred Shares (1) | 5,095,942 | — | — | — | ||||||||||||
Convertible Notes (2) | — | — | — | 2,028,868 | ||||||||||||
Stock options | 3,924,536 | 3,297,798 | 3,913,463 | 3,317,685 | ||||||||||||
Common stock awards | 10,305 | 1,474 | 14,253 | 1,421 | ||||||||||||
Dilutive weighted average shares of common stock | 144,721,047 | 138,155,373 | 139,591,958 | 138,100,822 | ||||||||||||
Diluted EPS | $ | 0.53 | $ | 0.32 | $ | 0.84 | $ | 0.47 | ||||||||
Stock options excluded from the computation of diluted EPS: | ||||||||||||||||
Anti-dilutive (3) | — | 166,250 | — | 158,750 | ||||||||||||
Market-based (4) | 1,530,000 | 558,750 | 1,530,000 | 558,750 |
(1) | The effect of our Preferred Shares on diluted EPS is computed using the if-converted method. In the three months ended June 30, 2013, the effect of the Preferred Shares was dilutive, and we added back preferred stock dividends, including the deemed dividend related to the BCF of the Preferred Shares, to net income. We assumed no conversion to common shares for the six months ended June 30, 2013 because the effect was anti-dilutive. |
(2) | Prior to the redemption of the 3.25% Convertible Notes in March 2012, we also computed their effect on diluted EPS using the if-converted method. Interest expense and related amortization costs applicable to the Convertible Notes, net of income tax, were added back to net income. We assumed the conversion of the Convertible Notes into shares of common stock for purposes of computing diluted EPS unless the effect was anti-dilutive. We issued 4,635,159 shares of common stock upon conversion of $56.4 million of the Convertible Notes. |
(3) | These stock options were anti-dilutive because their exercise price was greater than the average market price of our stock. |
(4) | 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. |
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Note 21 | Business Segment Reporting |
Our business segments reflect the internal reporting that we use to evaluate operating performance of services and to assess the allocation of our resources. A brief description of our current business segments is as follows:
Servicing. This segment is primarily comprised of our core residential servicing business. We provide residential and commercial mortgage loan servicing, special servicing and asset management services. We earn fees for providing these services to owners of the mortgage loans and foreclosed real estate. In most cases, we provide these services either because we purchased the MSRs from the owner of the mortgage, retained the MSRs on the sale of residential mortgage loans or because we entered into a subservicing or special servicing agreement with the entity that owns the MSR. Our residential servicing portfolio includes both agency and non-agency loans. Non-agency loans include prime and subprime loans which represent residential loans that generally did not qualify under GSE guidelines or have subsequently become delinquent.
Lending. The Lending segment is focused on originating and purchasing agency-conforming residential forward and reverse mortgage loans mainly through correspondent lending arrangements. We also commenced a direct lending business to pursue refinancing opportunities from our existing portfolio, where permitted. The loans are typically sold shortly after origination into a liquid market on a servicing retained basis.
Corporate Items and Other. Corporate Items and Other includes items of revenue and expense that are not directly related to a business, business activities that are individually insignificant, interest income on short-term investments of cash, corporate debt and certain corporate expenses. Business activities that are not considered to be of continuing significance include subprime loans held for sale (at lower of cost or fair value), investments in unconsolidated entities and affordable housing investment activities. Corporate Items and Other also included the diversified fee-based businesses that we acquired as part of the Homeward and ResCap Acquisitions and subsequently sold to Altisource.
We allocate interest income and expense to each business segment for funds raised or for funding of investments made, including interest earned on cash balances and short-term investments and interest incurred on corporate debt. We also allocate expenses generated by corporate support services to each business segment.
Financial information for our segments is as follows:
Servicing | Lending | Corporate Items and Other | Corporate Eliminations | Business Segments Consolidated | ||||||||||||||||
Results of Operations | ||||||||||||||||||||
Three Months Ended June 30, 2013: | ||||||||||||||||||||
Revenue | $ | 495,033 | $ | 33,735 | $ | 1,241 | $ | (44 | ) | $ | 529,965 | |||||||||
Operating expenses (1) | 282,651 | 28,941 | 63,248 | (44 | ) | 374,796 | ||||||||||||||
Income (loss) from operations | 212,382 | 4,794 | (62,007 | ) | — | 155,169 | ||||||||||||||
Other income (expense), net: | ||||||||||||||||||||
Interest income | 3,485 | 4,587 | 1,042 | — | 9,114 | |||||||||||||||
Interest expense (1) | (96,073 | ) | (4,001 | ) | 206 | — | (99,868 | ) | ||||||||||||
Other | 17,923 | 4,741 | 431 | — | 23,095 | |||||||||||||||
Other income (expense), net | (74,665 | ) | 5,327 | 1,679 | — | (67,659 | ) | |||||||||||||
Income (loss) before income taxes | $ | 137,717 | $ | 10,121 | $ | (60,328 | ) | $ | — | $ | 87,510 | |||||||||
Three Months Ended June 30, 2012: | ||||||||||||||||||||
Revenue | $ | 210,407 | $ | — | $ | 1,204 | $ | (230 | ) | $ | 211,381 | |||||||||
Operating expenses (1) | 80,936 | — | 5,099 | (131 | ) | 85,904 | ||||||||||||||
Income (loss) from operations | 129,471 | — | (3,895 | ) | (99 | ) | 125,477 | |||||||||||||
Other income (expense), net: | ||||||||||||||||||||
Interest income | — | — | 2,038 | — | 2,038 |