Edgar Filing: OCWEN FINANCIAL CORP

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2015



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 No. 1-13219

OCWEN FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



Florida		65-0039856
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1661 Worthington Road, Suite 100 West Palm Beach, Florida		33409
(Address of principal executive office)		(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 (§232.405 of this chapter) 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 Act) Yes o No x

Number of shares of common stock outstanding as of October 26, 2015: 125,390,482 shares

OCWEN FINANCIAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS



		PAGE
PART I - FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Financial Statements	4

	Consolidated Balance Sheets at September 30, 2015 and December 31, 2014	4

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014	5

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014	6

	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2015 and 2014	7

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014	8

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	73

Item 4.	Controls and Procedures	75

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	75

Item 1A.	Risk Factors	75

Item 6.	Exhibits	76

Signatures		77

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,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those suggested by such statements. Our business has been undergoing substantial change, which has magnified such uncertainties. Readers should bear these factors in mind when considering such statements and should not place undue reliance on such statements. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 and the following:


•	adverse effects on our business as a result of regulatory settlements;


•	reactions to the announcement of such settlements by key counterparties;


•	increased regulatory scrutiny and media attention, due to rumors or otherwise;


•	uncertainty related to claims, litigation and investigations brought by government agencies and private parties regarding our servicing, foreclosure, modification and other practices;


•	any adverse developments in existing legal proceedings or the initiation of new legal proceedings;


•	our ability to effectively manage our regulatory and contractual compliance obligations;


•	the adequacy of our financial resources, including our sources of liquidity and ability to sell, fund and recover advances, repay borrowings and comply with our debt agreements;


•	our servicer and credit ratings as well as other actions from various rating agencies, including the impact of recent or future downgrades of our servicer and credit ratings;


•	volatility in our stock price;


•	the characteristics of our servicing portfolio, including prepayment speeds along with delinquency and advance rates;


•	our ability to contain and reduce our operating costs, including our ability to successfully execute on our cost improvement initiative;


•	our ability to successfully modify delinquent loans, manage foreclosures and sell foreclosed properties;


•	uncertainty related to legislation, regulations, regulatory agency actions, regulatory examinations, government programs and policies, industry initiatives and evolving best servicing practices;


•	our dependence on New Residential Investment Corp. (NRZ) for a substantial portion of our advance funding for non-Agency mortgage servicing rights;


•	uncertainties related to our long-term relationship with NRZ;


•	the loss of the services of our senior managers;


•	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 and guarantors, including mortgage-backed securities investors, trustees and government sponsored entities (GSEs), regarding loan put-backs, penalties and legal actions;


•	our ability to comply with our servicing agreements, including our ability to comply with our seller/servicer agreements with GSEs and maintain our status as an approved seller/servicer;


•	uncertainty related to the GSEs substantially curtailing or ceasing to purchase our conforming loan originations or the Federal Housing Authority of the Department of Housing and Urban Development or Department of Veterans Affairs ceasing to provide insurance;


•	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;


•	our reserves, valuations, provisions and anticipated realization on assets;


•	our ability to execute on our strategy to reduce the size of our Agency portfolio;


•	uncertainty related to the ability of third-party obligors and financing sources to fund servicing advances on a timely basis on loans serviced by us;


•	our ability to effectively manage our exposure to interest rate changes and foreign exchange fluctuations;


•	uncertainty related to our ability to adapt and grow our business;


•	our ability to integrate the systems, procedures and personnel of acquired assets and businesses;


•	our ability to maintain our technology systems and our ability to adapt such systems for future operating environments;


•	uncertainty related to our tax positions;


•	our ability to recognize the benefits of our deferred tax assets;


•	uncertainty related to the ability of our technology vendors to adequately maintain and support our systems, including our servicing systems, loan originations and financial reporting systems;


•	failure of our internal security measures or breach of our privacy protections; and


•	uncertainty related to the political or economic stability of foreign countries in which we have operations.

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, 2014, 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 disclaim any obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise.

PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



	September 30, 2015			December 31, 2014
Assets
Cash	$	458,674		$	129,473
Mortgage servicing rights ($787,344 and $93,901 carried at fair value)	1,153,295			1,913,992
Advances	517,378			893,914
Match funded advances	1,955,618			2,409,442
Loans held for sale ($235,909 and $401,120 carried at fair value)	526,972			488,612
Loans held for investment - reverse mortgages, at fair value	2,319,515			1,550,141
Receivables, net	361,572			270,596
Deferred tax assets, net	63,866			76,987
Premises and equipment, net	44,885			43,310
Other assets ($18,551 and $7,335 carried at fair value)	609,279			490,811
Total assets	$	8,011,054		$	8,267,278

Liabilities and Equity
Liabilities
Match funded liabilities	$	1,589,846		$	2,090,247
Financing liabilities ($2,789,663 and $2,058,693 carried at fair value)	2,953,518			2,258,641
Other secured borrowings	1,001,070			1,733,691
Senior unsecured notes	350,000			350,000
Other liabilities	1,036,165			793,534
Total liabilities	6,930,599			7,226,113

Commitments and Contingencies (Notes 19 and 20)

Equity
Ocwen Financial Corporation (Ocwen) stockholders’ equity
Common stock, $.01 par value; 200,000,000 shares authorized; 125,390,482 and 125,215,615 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	1,254			1,252
Additional paid-in capital	527,622			515,194
Retained earnings	550,373			530,361
Accumulated other comprehensive loss, net of income taxes	(1,886		)	(8,413		)
Total Ocwen stockholders’ equity	1,077,363			1,038,394
Non-controlling interest in subsidiaries	3,092			2,771
Total equity	1,080,455			1,041,165
Total liabilities and equity	$	8,011,054		$	8,267,278

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

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
Revenue
Servicing and subservicing fees	$	360,017		$	465,964		$	1,203,541		$	1,448,096
Gain on loans held for sale, net	27,298			27,218			116,934			110,041
Other revenues	17,631			20,516			58,166			59,896
Total revenue	404,946			513,698			1,378,641			1,618,033

Expenses
Compensation and benefits	102,612			99,879			313,599			316,118
Amortization of mortgage servicing rights	18,108			60,783			88,188			186,075
Servicing and origination	101,545			49,739			255,905			129,473
Technology and communications	37,182			44,261			117,793			121,234
Professional services	62,428			160,704			191,728			212,745
Occupancy and equipment	31,043			24,697			85,530			82,504
Other	34,808			14,976			65,593			101,547
Total expenses	387,726			455,039			1,118,336			1,149,696

Other income (expense)
Interest income	5,693			6,593			16,306			17,472
Interest expense	(118,313		)	(133,049		)	(362,606		)	(409,129		)
Gain on sale of mortgage servicing rights	41,246			—			97,958			—
Gain on extinguishment of debt	—			—			—			2,609
Other, net	(1,764		)	(4,469		)	(12,552		)	(2,675		)
Total other expense, net	(73,138		)	(130,925		)	(260,894		)	(391,723		)

Income (loss) before income taxes	(55,918		)	(72,266		)	(589		)	76,614
Income tax expense	10,832			2,992			21,866			24,374
Net income (loss)	(66,750		)	(75,258		)	(22,455		)	52,240
Net income attributable to non-controlling interests	(119		)	(123		)	(321		)	(165		)
Net income (loss) attributable to Ocwen stockholders	(66,869		)	(75,381		)	(22,776		)	52,075
Preferred stock dividends	—			—			—			(1,163		)
Deemed dividends related to beneficial conversion feature of preferred stock	—			(808		)	—			(1,639		)
Net income (loss) attributable to Ocwen common stockholders	$	(66,869	)	$	(76,189	)	$	(22,776	)	$	49,273

Earnings (loss) per share attributable to Ocwen common stockholders
Basic	$	(0.53	)	$	(0.58	)	$	(0.18	)	$	0.37
Diluted	$	(0.53	)	$	(0.58	)	$	(0.18	)	$	0.36

Weighted average common shares outstanding
Basic	125,383,639			130,551,197			125,322,742			133,318,381
Diluted	125,383,639			130,551,197			125,322,742			136,881,326

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

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
Net income (loss)	$	(66,750	)	$	(75,258	)	$	(22,455	)	$	52,240

Other comprehensive income, net of income taxes:
Reclassification adjustment for losses on cash flow hedges included in net income (1)	494			384			6,527			1,362
Other	—			2			—			5
Total other comprehensive income, net of income taxes	494			386			6,527			1,367

Comprehensive income (loss)	(66,256		)	(74,872		)	(15,928		)	53,607
Comprehensive income attributable to non-controlling interests	(119		)	(123		)	(321		)	(165		)
Comprehensive income (loss) attributable to Ocwen stockholders	$	(66,375	)	$	(74,995	)	$	(16,249	)	$	53,442


(1)	Net of tax expense of $0.4 million and $0.2 million for the nine months ended September 30, 2015 and 2014, respectively. These losses are reclassified to Other, net in the Unaudited Consolidated Statements of Operations.

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

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Dollars in thousands)



	Ocwen Stockholders
	Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Taxes			Non-controlling Interest in Subsidiaries		Total
	Shares		Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Taxes			Non-controlling Interest in Subsidiaries		Total
Balance at December 31, 2014	125,215,615		$	1,252		$	515,194		$	530,361		$	(8,413	)	$	2,771	$	1,041,165
Net income (loss)	—		—			—			(22,776		)	—			321		(22,455		)
Cumulative effect of fair value election - Mortgage servicing rights, net of income taxes	—		—			—			42,788			—			—		42,788
Exercise of common stock options	85,173		1			508			—			—			—		509
Equity-based compensation and other	89,694		1			11,920			—			—			—		11,921
Other comprehensive income, net of income taxes	—		—			—			—			6,527			—		6,527
Balance at September 30, 2015	125,390,482		$	1,254		$	527,622		$	550,373		$	(1,886	)	$	3,092	$	1,080,455


Balance at December 31, 2013	135,176,271		$	1,352		$	818,427		$	1,002,963		$	(10,151	)	$	—	$	1,812,591
Net income	—		—			—			52,075			—			165		52,240
Preferred stock dividends ($18.75 per share)	—		—			—			(1,163		)	—			—		(1,163		)
Deemed dividend related to beneficial conversion feature of preferred stock	—		—			—			(1,639		)	—			—		(1,639		)
Conversion of preferred stock	1,950,296		20			61,980			—			—			—		62,000
Repurchase of common stock	(9,920,649	)	(99		)	(325,510		)	—			—			—		(325,609		)
Exercise of common stock options	244,000		2			1,036			—			—			—		1,038
Equity-based compensation and other	17,887		—			11,092			—			—			—		11,092
Non-controlling interest in connection with acquisition of controlling interest in Ocwen Structured Investments, LLC	—		—			—			—			—			2,526		2,526
Other comprehensive income, net of income taxes	—		—			—			—			1,367			—		1,367
Balance at September 30, 2014	127,467,805		$	1,275		$	567,025		$	1,052,236		$	(8,784	)	$	2,691	$	1,614,443

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

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)



	For the Nine Months Ended September 30,
	2015			2014

Cash flows from operating activities
Net income (loss)	$	(22,455	)	$	52,240
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of mortgage servicing rights	88,188			186,075
Loss on valuation of mortgage servicing rights, at fair value	73,257			13,147
Impairment of mortgage servicing rights	25,052			—
Gain on sale of mortgage servicing rights	(97,958		)	—
Realized and unrealized losses on derivative financial instruments	8,529			1,955
Provision for bad debts	25,272			49,583
Depreciation	13,467			16,601
Amortization of debt issuance costs	10,385			3,754
Gain on extinguishment of debt	—			(2,609		)
(Gain) loss on sale of fixed assets	(1,095		)	2,093
Decrease in deferred tax assets, net	5,700			35,884
Equity-based compensation expense	5,130			9,372
Gain on loans held for sale, net	(116,934		)	(110,041		)
Origination and purchase of loans held for sale	(3,713,311		)	(6,007,152		)
Proceeds from sale and collections of loans held for sale	3,935,420			6,013,059
Changes in assets and liabilities:
Decrease in advances and match funded advances	491,654			236,688
Increase in receivables and other assets, net	(1,899		)	(11,806		)
Increase in other liabilities	30,726			46,243
Other, net	14,866			23,929
Net cash provided by operating activities	773,994			559,015

Cash flows from investing activities
Origination of loans held for investment – reverse mortgages	(781,002		)	(565,670		)
Principal payments received on loans held for investment - reverse mortgages	105,520			56,193
Purchase of mortgage servicing rights, net	(10,055		)	(19,395		)
Proceeds from sale of mortgage servicing rights	598,059			287
Acquisition of advances in connection with the purchase of mortgage servicing rights	—			(84,373		)
Acquisition of advances in connection with the purchase of loans	—			(60,482		)
Proceeds from sale of advances and match funded advances	285,938			—
Additions to premises and equipment	(18,335		)	(7,716		)
Proceeds from sale of premises and equipment	4,758			22
Cash paid to acquire ResCap Servicing Operations (a component of Residential Capital, LLC)	—			(54,220		)
Net cash paid to acquire controlling interest in Ocwen Structured Investments, LLC	—			(7,834		)
Distributions of capital from unconsolidated entities	—			6,572
Other	4,082			4,248
Net provided by (used in) investing activities	188,965			(732,368		)

Cash flows from financing activities
Repayment of match funded liabilities	(500,401		)	(329,175		)
Proceeds from other secured borrowings	5,647,016			4,352,495
Repayments of other secured borrowings	(6,572,601		)	(4,532,029		)
Proceeds from issuance of senior unsecured notes	—			350,000
Payment of debt issuance costs	(18,610		)	(6,835		)
Proceeds from sale of mortgage servicing rights accounted for as a financing	—			123,551
Proceeds from sale of loans accounted for as a financing	803,924			572,031
Proceeds from sale of advances accounted for as a financing	—			88,095
Repurchase of common stock	—			(325,609		)
Payment of preferred stock dividends	—			(1,163		)
Proceeds from exercise of common stock options	413			1,176
Other	6,501			1,467
Net cash (used in) provided by financing activities	(633,758		)	294,004

Net increase in cash	329,201			120,651
Cash at beginning of year	129,473			178,512
Cash at end of period	$	458,674		$	299,163

Supplemental non-cash investing and financing activities
Transfer of loans held for sale to loans held for investment	$	—		$	110,874

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

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Dollars in thousands, except per share data and unless otherwise indicated)

Note 1 – Description of Business and Basis of Presentation

Organization

Ocwen Financial Corporation (NYSE: OCN) (Ocwen, we, us and our) is a financial services holding company which, through its subsidiaries, is engaged in the servicing and origination of mortgage loans. Effective October 1, 2015, Ocwen designated its office in West Palm Beach, Florida as corporate headquarters. Previously our office in Atlanta, Georgia was designated as headquarters. We have offices located throughout the United States (U.S.) and in the United States Virgin Islands (USVI) with support operations in India and the Philippines. Ocwen is a Florida corporation organized in February 1988.

Ocwen owns all of the common stock of its primary operating subsidiary, Ocwen Mortgage Servicing, Inc. (OMS), and directly or indirectly owns 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).

We perform primary and master servicer activities on behalf of investors and other servicers, including the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs), the Government National Mortgage Association (Ginnie Mae) and private-label securitizations (non-Agency). As primary servicer, we may be required to 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 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 conventional (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government insured (Federal Housing Authority (FHA) or Department of Veterans Affairs (VA)) forward and reverse mortgages. The GSEs or Ginnie Mae guarantee these mortgage securitizations.

Note 1A — Business Environment

Our business has been facing certain challenges and uncertainties, including with respect to the potential impact on us of any regulatory actions against us, downgrades in our third-party servicer ratings or any failure to maintain sufficient liquidity or comply with the covenants in our debt agreements.

We believe that we have made significant progress over the course of 2015 addressing the challenges and uncertainties that our business has been facing. We have largely completed executing on our strategic plan to sell a significant portion of our Agency MSRs, completing sales of approximately $89 billion unpaid principal balance (UPB) of Agency MSRs from which we expect to receive proceeds of approximately $642 million, subject in each case to necessary approvals and the satisfaction of closing conditions. The majority of proceeds received to date have been used to make $561.6 million of prepayments under our Senior Secured Term Loan (SSTL), which has significantly reduced our leverage.

During 2015, we have successfully renewed, refinanced, replaced or extended all of our servicing advance facilities and mortgage loan warehouse facilities prior to their scheduled maturity dates to the extent we have deemed necessary to maintain adequate liquidity. On September 18, 2015, we refinanced an existing $1.8 billion servicing advance facility. The amortization date was extended to September 2016 and the maximum borrowing capacity was reduced to $1.7 billion.

On October 16, 2015, we entered into an amendment to the SSTL facility agreement. Effective as of October 20, 2015, the amendment, among other things (1) removed, until the quarter ending June 30, 2017, the interest coverage and corporate leverage ratio financial covenants; (2) expanded our ability to exclude certain assets from the collateral securing the SSTL to the extent necessary to meet regulatory minimum net worth requirements; (3) increased our ability to make certain permitted investments; and (4) established a requirement that we use 100.0% of the net cash proceeds from future asset sales permitted under the general asset sale basket to prepay the SSTL.

Note 1B - 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 adjustments, necessary for a fair presentation. The results of operations and other data for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2015. 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, 2014.

Reclassifications

Within the Other income (expense) section of the Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2014, we reclassified Interest income from Other, net to a separate line item to conform to the current year presentation.

Certain insignificant amounts in the Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 have been reclassified to conform to the current year presentation. These reclassifications had no impact on our consolidated cash flows from operating, investing or financing activities.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the related disclosures in the accompanying notes. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, the provision for potential losses that may arise from litigation proceedings, and representation and warranty and other indemnification obligations. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.

Income Taxes

In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 270, Interim Financial Reporting, and ASC 740-270, Income Taxes — Interim Reporting, at the end of each interim period, we are required to determine the best estimate of our annual effective tax rate and then apply that rate to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) in providing for income taxes on an interim period. However, in certain circumstances where we are unable to make a reliable estimate of the annual effective tax rate, ASC 740-270 allows the actual effective tax rate for the interim period to be used in the interim period. For the three months ended September 30, 2015, we calculated an estimate of our annual effective rate for the year and applied that rate to our pre-tax “ordinary” income or loss for the nine months ended September 30, 2015.

Recently Issued Accounting Standards

Business Combinations: Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (ASU 2015-08)

In May 2015, the FASB issued Accounting Standards Update (ASU) 2015-08, which removes references to the SEC’s Staff Accounting Bulletin (SAB) Topic 5.J on pushdown accounting from ASC 805-50, thereby conforming the FASB’s guidance on pushdown accounting with the SEC’s guidance on this topic. The SEC’s issuance of SAB No. 115 had superseded the guidance in SAB Topic 5.J in connection with the FASB’s November 2014 release of ASU 2014-17. ASU 2015-08 became effective for us upon issuance.

Our adoption of ASU 2015-08 on May 11, 2015 did not have a material impact on our consolidated financial condition or results of operations.

Revenue from Contracts with Customers: Deferral of the Effective Date (ASU 2015-14)

In August 2015, the FASB issued Accounting Standards Update (ASU) 2015-14, which defers the effective date of ASU 2014-09, “Revenue from Contracts with Customers”, by one year. In May 2014, the FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard.

As a result of the issuance of ASU 2015-14, ASU 2014-09 will now be effective for us on January 1, 2018, with early application permitted as of the annual reporting period beginning on January 1, 2017, including interim reporting periods within that reporting period. We are currently evaluating the effect of adopting this standard.

Interest -- Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements -- Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (ASU 2015-15)

In August 2015, the FASB issued Accounting Standards Update (ASU) 2015-15, which clarifies ASU 2015-03, “Interest -- Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs”, by providing guidance regarding the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance on this matter, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on that line-of-credit arrangement.

The issuance of ASU 2015-15 does not change the effective date of ASU 2015-03. ASU 2015-03 will be effective for us on January 1, 2016, with early adoption permitted for financial statements that have not been previously issued. We are currently evaluating the effect of adopting this standard.

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 special purpose entities (SPEs) created in connection with our match funded advance financing facilities are variable interest entities (VIEs) for which we are the primary beneficiary.

Securitizations of Residential Mortgage Loans

Currently, we securitize forward and reverse residential mortgage loans involving the GSEs and Ginnie Mae and loans insured by the FHA or VA. 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 in the Unaudited Consolidated Statements of Operations.

Transfers of Forward Loans

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 or Ginnie Mae. Securitization usually occurs within 30 days of loan closing or purchase. We retain the 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 report the gain or loss on the transfer of the loans held for sale in Gain on loans held for sale, net in the Unaudited Consolidated Statements of Operations along with the changes in fair value of the loans and the gain or loss on any related derivatives. We include all changes in loans held for sale and related derivative balances in operating activities in the Unaudited 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 three and nine months ended September 30:



	Three Months				Nine Months
	2015		2014		2015		2014
Proceeds received from securitizations	$	1,478,142	$	1,369,468	$	3,964,866	$	4,346,991
Servicing fees collected	5,973		10,840		25,066		25,174
Purchases of previously transferred assets, net of claims reimbursed	1,512		2,237		2,408		2,237
	$	1,485,627	$	1,382,545	$	3,992,340	$	4,374,402

In connection with these transfers, we retained MSRs of $9.5 million and $27.8 million during the three and nine months ended September 30, 2015, respectively, and $10.7 million and $32.1 million during the three and nine months ended September 30, 2014, respectively. We initially record the MSRs at fair value and subsequently account for them at amortized cost.

Certain obligations arise from the agreements associated with our 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.

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 as well as our maximum exposure to loss including the UPB of the transferred loans at the dates indicated:



	September 30, 2015		December 31, 2014
Carrying value of assets:
Mortgage servicing rights, at amortized cost	$	45,064	$	82,542
Mortgage servicing rights, at fair value	226		2,840
Advances and match funded advances	21,686		1,236
UPB of loans transferred (1)	6,811,864		9,353,187
Maximum exposure to loss	$	6,878,840	$	9,439,805


(1)	The UPB of the loans transferred is the maximum exposure to loss under our standard representations and warranties obligations.

At September 30, 2015 and December 31, 2014, 8.1% and 5.1%, respectively, of the transferred residential loans that we service were 60 days or more past due. During the three and nine months ended September 30, 2015, 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. We 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. 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, the transfers of the HECMs do not qualify for sale accounting, and therefore, we account for these transfers as financings. Under this accounting treatment, the HECMs are classified as Loans held for investment - reverse mortgages, at fair value, on our Unaudited Consolidated Balance Sheets. We record the proceeds from the transfer of assets as secured borrowings (HMBS-related borrowings) in Financing liabilities and recognize no gain or loss on the transfer. Holders of participating interests in the HMBS have no recourse against the assets of Ocwen, except for standard representations and warranties and our contractual obligation to service the HECMs and the HMBS.

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 Unaudited Consolidated Statements 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 originations and collections of HECMs in investing activities in the Unaudited Consolidated Statements of Cash Flows. 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 Unaudited Consolidated Statements of Cash Flows. Proceeds from securitizations of HECMs and payments on HMBS-related borrowings are included in financing activities in the Unaudited Consolidated Statements of Cash Flows.

At September 30, 2015 and December 31, 2014, we had HMBS-related borrowings of $2.2 billion and $1.4 billion and HECMs pledged as collateral to the pools of $2.3 billion and $1.6 billion, respectively.

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 we have determined that Ocwen is the primary beneficiary of the SPE. These SPEs issue debt supported by collections on the transferred advances, and we refer to this debt as Match funded liabilities.

We make the transfers to these SPEs under the terms of our advance financing facility agreements. We classify the transferred advances on our Unaudited Consolidated Balance Sheets 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 the debt is not recourse to Ocwen. 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 in our Unaudited Consolidated Balance Sheets.

Note 3 – Fair Value

Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.


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 certain of our nonfinancial assets measured at fair value on a recurring or non-recurring basis or disclosed, but not carried, at fair value are as follows at the dates indicated:



		September 30, 2015						December 31, 2014
	Level	Carrying Value			Fair Value			Carrying Value			Fair Value
Financial assets:
Loans held for sale:
Loans held for sale, at fair value (a)	2	$	235,909		$	235,909		$	401,120		$	401,120
Loans held for sale, at lower of cost or fair value (b)	3	291,063			291,063			87,492			87,492
Total Loans held for sale		$	526,972		$	526,972		$	488,612		$	488,612
Loans held for investment - Reverse mortgages, at fair value (a)	3	$	2,319,515		$	2,319,515		$	1,550,141		$	1,550,141
Advances and match funded advances (c)	3	2,472,996			2,472,996			3,303,356			3,303,356
Receivables, net (c)	3	361,572			361,572			270,596			270,596
Mortgage-backed securities, at fair value (a)	3	8,541			8,541			7,335			7,335

Financial liabilities:
Match funded liabilities (c)	3	$	1,589,846		$	1,589,901		$	2,090,247		$	2,090,247
Financing liabilities:
HMBS-related borrowings, at fair value (a)	3	$	2,229,604		$	2,229,604		$	1,444,252		$	1,444,252
Financing liability - MSRs pledged (a)	3	560,059			560,059			614,441			614,441
Other (c)	3	163,855			144,725			199,948			189,648
Total Financing liabilities		$	2,953,518		$	2,934,388		$	2,258,641		$	2,248,341
Other secured borrowings:
Senior secured term loan (c)	2	$	702,918		$	702,397		$	1,273,219		$	1,198,227
Other (c)	3	298,152			298,152			460,472			460,472
Total Other secured borrowings		$	1,001,070		$	1,000,549		$	1,733,691		$	1,658,699

Senior unsecured notes (c)	2	$	350,000		$	321,563		$	350,000		$	321,563

Derivative financial instruments assets (liabilities) (a):
Interest Rate Lock Commitments (IRLCs)	2	$	10,010		$	10,010		$	6,065		$	6,065
Forward MBS trades	1	(3,438		)	(3,438		)	(2,854		)	(2,854		)
Interest rate caps	3	1,501			1,501			567			567

MSRs:
MSRs, at fair value (a)	3	$	787,344		$	787,344		$	93,901		$	93,901
MSRs, at amortized cost (c) (d)	3	365,951			404,533			1,820,091			2,237,703
Total MSRs		$	1,153,295		$	1,191,877		$	1,913,992		$	2,331,604


(a)	Measured at fair value on a recurring basis.


(b)	Measured at fair value on a non-recurring basis.


(c)	Disclosed, but not carried, at fair value.


(d)	The balance at September 30, 2015 includes our impaired government-insured stratum of amortization method MSRs, which is measured at fair value on a non-recurring basis. The carrying value of this stratum at September 30, 2015 was $144.2 million, net of a valuation allowance of $25.1 million.

The following tables present a reconciliation of the changes in fair value of Level 3 assets and liabilities that we measure at fair value on a recurring basis for the three and nine months ended September 30, 2015 and 2014.



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-Backed Securities		Financing Liability - MSRs Pledged			Derivatives			MSRs			Total
Three months ended September 30, 2015
Beginning balance	$	2,097,192		$	(1,987,998	)	$	8,157	$	(581,219	)	$	155		$	814,450		$	350,737
Purchases, issuances, sales and settlements:
Purchases	—			—			—		—			2,084			—			2,084
Issuances	250,600			(271,068		)	—		—			—			—			(20,468		)
Sales	—			—			—		—			—			(2,329		)	(2,329		)
Settlements	(41,582		)	43,725			—		21,160			—			—			23,303
	209,018			(227,343		)	—		21,160			2,084			(2,329		)	2,590
Total realized and unrealized gains and (losses):
Included in earnings	13,305			(14,263		)	384		—			(738		)	(24,777		)	(26,089		)
Included in Other comprehensive income	—			—			—		—			—			—			—
	13,305			(14,263		)	384		—			(738		)	(24,777		)	(26,089		)
Transfers in and / or out of Level 3	—			—			—		—			—			—			—
Ending balance	$	2,319,515		$	(2,229,604	)	$	8,541	$	(560,059	)	$	1,501		$	787,344		$	327,238



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-Backed Securities			Financing Liability - MSRs Pledged			Derivatives			MSRs			Total
Three months ended September 30, 2014
Beginning balance	$	1,107,626		$	(1,033,712	)	$	7,502		$	(629,579	)	$	97		$	104,220		$	(443,846	)
Purchases, issuances, sales and settlements:
Purchases	—			—			—			—			—			—			—
Issuances	208,566			(190,452		)	—			—			—			—			18,114
Sales	—			—			—			—						—			—
Settlements	(27,592		)	12,690			—			10,724			—			(934		)	(5,112		)
	180,974			(177,762		)	—			10,724			—			(934		)	13,002
Total realized and unrealized gains and (losses):
Included in earnings	26,724			(24,620		)	(124		)	—			(6		)	(1,338		)	636
Included in Other comprehensive income	—			—			—			—			—			—			—
	26,724			(24,620		)	(124		)	—			(6		)	(1,338		)	636
Transfers in and / or out of Level 3	—			—			—			—			—			—			—
Ending balance	$	1,315,324		$	(1,236,094	)	$	7,378		$	(618,855	)	$	91		$	101,948		$	(430,208	)



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-backed Securities		Financing Liability - MSRs Pledged			Derivatives			MSRs			Total
Nine months ended September 30, 2015
Beginning balance	$	1,550,141		$	(1,444,252	)	$	7,335	$	(614,441	)	$	567		$	93,901		$	(406,749	)
Purchases, issuances, sales and settlements:
Purchases	—			—			—		—			2,201			—			2,201
Issuances	781,002			(803,924		)	—		—			—			(1,139		)	(24,061		)
Transfer from MSRs carried at amortized cost	—			—			—		—			—			839,157			839,157
Sales	—			—			—		—			—			(71,318		)	(71,318		)
Settlements (1)	(105,505		)	107,522			—		54,382			346			—			56,745
	675,497			(696,402		)	—		54,382			2,547			766,700			802,724
Total realized and unrealized gains and (losses): (2)
Included in earnings	93,877			(88,950		)	1,206		—			(1,613		)	(73,257		)	(68,737		)
Included in Other comprehensive income (loss)	—			—			—		—			—			—			—
	93,877			(88,950		)	1,206		—			(1,613		)	(73,257		)	(68,737		)
Transfers in and / or out of Level 3	—			—			—		—			—			—			—
Ending Balance	$	2,319,515		$	(2,229,604	)	$	8,541	$	(560,059	)	$	1,501		$	787,344		$	327,238



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-backed Securities			Financing Liability - MSRs Pledged			Derivatives			MSRs			Total
Nine months ended September 30, 2014
Beginning balance	$	618,018		$	(615,576	)	$	—		$	(633,804	)	$	442		$	116,029		$	(514,891	)
Purchases, issuances, sales and settlements:
Purchases	—			—			7,677			—			23			—			7,700
Issuances	565,670			(572,031		)	—			—			—			—			(6,361		)
Transfer from loans held for sale, at fair value	110,874			—			—			—			—			—			110,874
Sales	—			—			—			—			—			—			—
Settlements	(56,193		)	25,725			—			14,949			—			(934		)	(16,453		)
	620,351			(546,306		)	7,677			14,949			23			(934		)	95,760
Total realized and unrealized gains and (losses):
Included in earnings	76,955			(74,212		)	(299		)	—			(374		)	(13,147		)	(11,077		)
Included in Other comprehensive income (loss)	—			—			—			—			—			—			—
	76,955			(74,212		)	(299		)	—			(374		)	(13,147		)	(11,077		)
Transfers in and / or out of Level 3	—			—			—			—			—			—			—
Ending balance	$	1,315,324		$	(1,236,094	)	$	7,378		$	(618,855	)	$	91		$	101,948		$	(430,208	)


(1)	In the event of a transfer to another party of servicing related to Rights to MSRs, we are required to reimburse New Residential Investment Corp. (NRZ) at predetermined contractual rates for the loss of servicing revenues. Settlements

for Financing liability - MSRs pledged for the nine months ended September 30, 2015 includes $2.2 million of such reimbursements.


(2)	Total losses attributable to derivative financial instruments still held at September 30, 2015 were $1.3 million for the nine months ended September 30, 2015.

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 and those disclosed, but not carried, at fair value 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 because 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 conventional and government-insured mortgage loans are typically sold.

We repurchase certain loans from Ginnie Mae guaranteed securitizations in connection with loan modifications and loan resolution activity as part of our contractual obligations as the servicer of the loans. These loans are classified as loans held for sale at the lower of cost or fair value, in the case of modified loans, as we expect to redeliver (sell) the loans to new Ginnie Mae guaranteed securitizations. 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.

For all other loans held for sale, which we report at the lower of cost or fair value, market illiquidity has reduced the availability of observable pricing data. 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.

Loans Held for Investment – Reverse Mortgages

We have elected to measure these loans at fair value. For transferred reverse mortgage loans that do not qualify as sales for accounting purposes, we base the fair value 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 include 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 September 30, 2015 valuation include:


•	Life in years ranging from 6.33 to 10.22 (weighted average of 6.70);


•	Conditional repayment rate ranging from 4.85% to 53.75% (weighted average of 19.39%); and


•	Discount rate of 2.95%.

Significant increases or decreases in any of these assumptions in isolation could result in a significantly lower or higher fair value, respectively. The effects of changes in the assumptions used to value the loans held for investment are largely offset by the effects of changes in the assumptions used to value the HMBS-Related Borrowings that are associated with these loans.

Mortgage Servicing Rights

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.

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 internal 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, supported by our internal verification and analytical procedures, provide reasonable assurance that the prices used in our Unaudited Consolidated Financial Statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.

We evaluate the reasonableness of our third party experts’ assumptions using historical experience adjusted for prevailing market conditions. Assumptions used in the valuation of MSRs include:



•	Mortgage prepayment speeds	•	Interest rate used for computing the cost of financing servicing advances
•	Cost of servicing	•	Interest rate used for computing float earnings
•	Discount rate	•	Compensating interest expense
•	Delinquency rates	•	Collection rate of other ancillary fees

Amortized Cost MSRs

We estimate the fair value of MSRs carried at amortized cost using a process that involves either actual sale prices obtained or the use of third-party valuation experts, supported by commercially available discounted cash flow models and analysis of current market data. To provide greater price transparency to investors, we disclose actual Ocwen sale prices for orderly transactions where available in lieu of third-party valuations.

The more significant assumptions used in the September 30, 2015 valuation include:



Weighted average prepayment speed	12.67		%
Weighted average delinquency rate	14.39		%
Advance financing cost	5-year swap
Interest rate for computing float earnings	5-year swap
Weighted average discount rate	9.30		%
Weighted average cost to service (in dollars)	$	98

We perform an impairment analysis based on the difference between the carrying amount and fair value after grouping the underlying loans into the applicable strata. Our strata are defined as conventional and government-insured.

Fair Value MSRs

MSRs carried at fair value are classified within Level 3 of the valuation hierarchy. The fair value is equal to the mid-point of the range of prices provided by third-party valuation experts, without adjustment, except in the event we have a potential or completed Ocwen sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is carried at the estimated sale price. Fair value reflects actual Ocwen sale prices for orderly transactions where available in lieu of independent third-party valuations. Our valuation process includes discussions of bid pricing with the third-party valuation experts and presumably are contemplated along with other market-based transactions in their model validation.

A change in the valuation inputs utilized by the valuation experts might result in a significantly higher or lower fair value measurement. Changes in market interest rates tend to impact the fair value for Agency MSRs via prepayment speeds by altering the borrower refinance incentive, and for Non-Agency MSRs via a market rate indexed cost of advance funding. Other key assumptions used in the valuation of these MSRs include delinquency rates and discount rates.

The primary assumptions used in the September 30, 2015 valuation include:



	Agency			Non Agency
Weighted average prepayment speed	10.80		%	16.48		%
Weighted average delinquency rate	1.10		%	29.80		%
Advance financing cost	5-year swap			1ML plus 3.5%
Interest rate for computing float earnings	5-year swap			1ML
Weighted average discount rate	9.00		%	14.94		%
Weighted average cost to service (in dollars)	$	70		$	336

Advances

We value advances at their net realizable value, which generally approximates fair value, because advances have no stated maturity, are generally 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.

Mortgage-Backed Securities

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

Discount rates for the subordinate and residual securities are determined based upon an assessment of prevailing market conditions and prices for similar assets. We project the delinquency, loss and prepayment assumptions based on a comparison to actual historical performance curves adjusted for prevailing market conditions.

Match Funded Liabilities

For match funded liabilities that bear interest at a rate that is adjusted regularly based on a market index, the carrying value approximates fair value. For match funded liabilities 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.

Financing Liabilities

HMBS-Related Borrowings

We have elected to measure these borrowings at fair value. 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 September 30, 2015 valuation include:


•	Life in years ranging from 4.85 to 10.22 (weighted average of 5.54);


•	Conditional repayment rate ranging from 4.85% to 53.75% (weighted average of 19.39%); and


•	Discount rate of 2.27%.

Significant increases or decreases in any of these assumptions in isolation would result in a significantly higher or lower fair value.

MSRs Pledged

We periodically sell the rights to receive servicing fees, excluding ancillary income, with respect to certain non-Agency MSRs (Rights to MSRs). Because we have retained legal title to the MSRs, the sales of Rights to MSRs are accounted for as financings. We initially establish the value of the Financing Liability - MSRs Pledged based on the price at which the Rights to MSRs are sold. Thereafter, the carrying value of the Financing Liability - MSRs pledged is adjusted to fair value at each reporting date. We determine fair value by applying the price of the underlying MSRs to the remaining principal balance related to the underlying MSRs. Since we have elected fair value for our portfolio of private-label MSRs, future fair value changes in the Financing Liability - MSRs Pledged will be largely offset by changes in the fair value of the related MSRs.

The more significant assumptions used in determination of the price of the underlying MSRs at September 30, 2015 include:



Weighted average prepayment speed	16.98		%
Weighted average delinquency rate	30.75		%
Advance financing cost	1 ML plus 3.5%
Interest rate for computing float earnings	1ML
Weighted average discount rate	14.77		%
Weighted average cost to service (in dollars)	$	341

Significant increases or decreases in these assumptions in isolation would result in a significantly higher or lower fair value

Secured Notes

We issued Ocwen Asset Servicing Income Series (OASIS), Series 2014-1 Notes secured by Ocwen-owned MSRs relating to Freddie Mac mortgages. We accounted for this transaction as a financing. We determine the fair value based on bid prices provided by third parties involved in the issuance and placement of the notes.

Other Secured Borrowings

The carrying value of secured borrowings that bear interest at a rate that is adjusted regularly based on a market index approximates fair value. For other 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. For the SSTL, we based the fair values at September 30, 2015 and December 31, 2014 on quoted prices in a market with limited trading activity.

Senior Unsecured Notes

We base the fair value on quoted prices in a market with limited trading activity.

Derivative Financial Instruments

IRLCs represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage applicant (locked pipeline), 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 enter into forward mortgage-backed securities (MBS) trades to provide an economic hedge against changes in the fair value of residential forward and reverse mortgage loans held for sale that we carry at fair value. Forward MBS 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.

In addition, we may use interest rate caps to minimize future interest rate exposures on variable rate debt issued on servicing advance financing 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.

Note 4 — Sales of Advances and MSRs

In order to efficiently finance our assets, streamline our operations and generate liquidity, we sell MSRs, Rights to MSRs and servicing advances to market participants. We may retain the right to subservice loans when we sell MSRs. In connection with sales of Rights to MSRs, we retain legal ownership of the MSRs and continue to service the related mortgage loans until such time as all necessary consents to a transfer of the MSRs are received.

The following table provides a summary of MSRs and advances sold during the nine months ended September 30, 2015:



	MSRs		Advances and Match Funded Advances
Carrying value of assets sold	$	662,923	$	321,164
Gain (loss) on sale	97,958		—
Plus: Accrued expenses and reserves	19,529		—
Sales price	780,410		321,164
Less:
Amount due from purchaser at September 30	98,545		35,226
Amount paid to purchasers for estimated representation and warranty obligations, compensatory fees for foreclosures that may ultimately exceed investor timelines and related indemnification obligations	83,806		—
Total net cash received	$	598,059	$	285,938

During nine months ended September 30, 2015, we sold Agency MSRs relating to loans with a UPB of $87.6 billion. There were no significant MSR sales during the nine months ended September 30, 2014. In 2012 and 2013, we sold to Home Loan Servicing Solutions, Ltd. (HLSS) Rights to MSRs and the related servicing advances (together with the sale of the related servicing advances, the NRZ/HLSS Transactions). On April 6, 2015, HLSS closed on the sale of substantially all of its assets to NRZ. References to NRZ in these unaudited consolidated financial statements include HLSS for periods prior to April 6, 2015 because, following HLSS’ sale of substantially all of its assets on April 6, 2015, NRZ, through its subsidiaries, is the owner of the Rights to MSRs and has assumed all rights and obligations under the associated agreements.

Pursuant to our agreements, NRZ has assumed the obligation to fund new servicing advances with respect to the Rights to MSRs. However, because we remain the servicer on the loans for which the Rights to MSRs have been sold, in the event NRZ were to fail to fulfill its advance funding obligations, as the servicer under our servicing agreements, we would be contractually obligated to fund such advances. At September 30, 2015, NRZ had outstanding advances of approximately $5.1 billion in connection with the Rights to MSRs.

The servicing fees payable under the servicing agreements underlying the Rights to MSRs are apportioned between NRZ and us as provided in our agreements with NRZ. NRZ retains a fee based on the UPB of the loans serviced, and OLS receives certain fees, including a performance fee based on servicing fees actually paid less an amount calculated based on the amount of servicing advances and cost of financing those advances. After the earlier of April 30, 2020 or eight years after the closing date of the sale of each tranche of Rights to MSRs to NRZ, the apportionment of these fees with respect to such tranche is subject to re-negotiation.

As it relates to the NRZ/HLSS Transactions, if and when a transfer of legal ownership occurs, OLS will subservice the loans pursuant to a subservicing agreement, as amended, with NRZ.

Beginning April 2017, NRZ has a general right to direct us to transfer servicing of the servicing agreements underlying the Rights to MSRs that we have previously sold to NRZ provided that the transfer is subject to our continued right to be paid the servicing fees and other amounts payable under our agreements. An exception to the requirement that the transfer is subject to our continued right to payment under the transferred servicing agreement exists in circumstances where a termination event (as defined in our agreements with NRZ) occurs. In these circumstances, NRZ may direct us to use commercially reasonable efforts to transfer servicing under the affected servicing agreement and, following the transfer, we would no longer be entitled to receive future servicing fee revenue with respect to the transferred servicing agreement. Regarding NRZ’s rights upon a termination event resulting from an uncured servicer rating downgrade, NRZ has agreed to a standstill until April 2017 unless they determine in good faith that a trustee intends to terminate servicing under an affected servicing agreement. In these circumstances, NRZ may direct us to use commercially reasonable efforts to transfer servicing under the affected servicing agreement and, following the transfer, we would no longer be entitled to receive future servicing fee revenue. All required third-party consents would need to be obtained in connection with any servicing transfer.

To the extent servicing agreements underlying Rights to MSRs are terminated as a result of a termination event, NRZ is entitled to payment of an amount equal to a percentage of NRZ’s purchase price for the related Rights to MSRs. We paid NRZ $2.2 million through September 30, 2015 in connection with the termination of four servicing agreements underlying the Rights to MSRs.

The NRZ/HLSS Transactions are accounted for as financings. If and when transfer of legal ownership of the underlying MSRs occurs upon receipt of third-party consents, we would derecognize the related MSRs. Upon derecognition, any resulting

gain or loss is deferred and amortized over the expected life of the related subservicing agreement. Until derecognition, we continue to recognize the full amount of servicing revenue and amortization of the MSRs.

The sales of the advances in connection with MSR sales, including the NRZ/HLSS Transactions, meet the requirements for sale accounting, and the advances are derecognized from our consolidated financial statements at the servicing transfer date, or, in the case of advances sold in connection with the sale of Rights to MSRs at time of the sale.

In 2014, Ocwen sold advances related to certain FHA-insured mortgage loans to subsidiaries of NRZ. These advance sales did not qualify for sales treatment and were accounted for as financings.

Note 5 – Loans Held for Sale

Loans Held for Sale - Fair Value

Loans held for sale, at fair value, represent residential mortgage loans originated or purchased and held until sold to secondary market investors, such as the GSEs or other third parties. The following table summarizes the activity in the balance during the nine months ended September 30:



	2015			2014
Beginning balance	$	401,120		$	503,753
Originations and purchases	3,119,457			3,923,870
Proceeds from sales	(3,306,180		)	(4,010,644		)
Principal collections	(6,512		)	(9,156		)
Transfers to loans held for investment - reverse mortgages	—			(110,874		)
Gain on sale of loans	37,580			39,486
Other (1)	(9,556		)	(485		)
Ending balance	$	235,909		$	335,950


(1)	Other includes the change in fair value of $9.9 million and $1.2 million for the nine months ended September 30, 2015 and 2014, respectively.

At September 30, 2015, loans held for sale, at fair value with a UPB of $220.2 million were pledged to secure warehouse lines of credit in our Lending segment.

Loans Held for Sale - Lower of Cost or Fair Value

Loans held for sale, at lower of cost or fair value, include residential loans that we do not intend to hold to maturity. The following table summarizes the activity in the balance during the nine months ended September 30: