Edgar Filing: OCWEN FINANCIAL CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2018



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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 April 30, 2018: 133,914,685 shares

OCWEN FINANCIAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS



		PAGE
PART I - FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Financial Statements	3

	Consolidated Balance Sheets at March 31, 2018 and December 31, 2017	4

	Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017	5

	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2018 and 2017	6

	Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2018 and 2017	7

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017	8

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	71

Item 4.	Controls and Procedures	73

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	75

Item 1A.	Risk Factors	75

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	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. Our business has been undergoing substantial change, which has magnified such uncertainties. Readers should bear these factors in mind when considering forward-looking statements and should not place undue reliance on such statements. 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. 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 or referenced under Item 1A, Risk Factors and the following:

•

uncertainty related to claims, litigation, cease and desist orders and investigations brought by government agencies and private parties regarding our servicing, foreclosure, modification, origination and other practices, including uncertainty related to past, present or future investigations, litigation, cease and desist orders and settlements with state regulators, the Consumer Financial Protection Bureau (CFPB), State Attorneys General, the Securities and Exchange Commission (SEC), the Department of Justice or the Department of Housing and Urban Development (HUD) and actions brought under the False Claims Act by private parties on behalf of the United States of America regarding incentive and other payments made by governmental entities;


•	adverse effects on our business because of regulatory investigations, litigation, cease and desist orders or settlements;


•	reactions to the announcement of such investigations, litigation, cease and desist orders or settlements by key counterparties, including lenders, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Government National Mortgage Association (Ginnie Mae);


•	our ability to reach settlements with regulatory agencies on appropriate terms and to comply with the terms of our settlements with regulatory agencies;


•	increased regulatory scrutiny and media attention;


•	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;


•	our ability to comply with our servicing agreements, including our ability to comply with our agreements with, and the requirements of, Fannie Mae, Freddie Mac and Ginnie Mae and maintain our seller/servicer and other statuses with them;


•	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, including the financial and other covenants contained in them;


•	our ability to invest excess liquidity at adequate risk-adjusted returns;


•	limits on our ability to repurchase our own stock as a result of regulatory settlements and other conditions;


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


•	failure of our information technology and other security measures or breach of our privacy protections, including any failure to protect customers’ data;


•	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;


•	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;


•	our ability to timely transfer mortgage servicing rights under our agreements with NRZ and our ability to maintain our long-term relationship with NRZ under these new arrangements and after the acquisition of PHH Corporation (PHH), our ability to maintain a subservicing relationship with NRZ;


•	our ability to complete the proposed acquisition of PHH, to successfully integrate its business, and to realize the strategic objectives and other benefits of the acquisition at the time anticipated or at all, including our ability to integrate, maintain and enhance PHH’s servicing, subservicing and other business relationships;


•	our ability to transition to a new servicing technology platform within the time and cost parameters anticipated and without significant disruptions to our customers and operations;


•	the loss of the services of our senior managers;


•	our ability to execute an effective chief executive officer leadership transition;


•	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, Ginnie Mae, trustees and government sponsored entities (GSEs), regarding loan put-backs, penalties and legal actions;


•	uncertainty related to the GSEs substantially curtailing or ceasing to purchase our conforming loan originations or the Federal Housing Administration 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 ability to adequately manage and maintain real estate owned (REO) properties and vacant properties collateralizing loans that we service;


•	uncertainty related to our ability to continue to collect certain expedited payment or convenience fees and potential liability for charging such fees;


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


•	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;


•	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;


•	our ability to realize anticipated future gains from future draws on existing loans in our reverse mortgage portfolio;


•	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, including our new business initiatives;


•	our ability to meet capital requirements established by, or agreed with, regulators or counterparties;


•	our ability to protect and maintain our technology systems and our ability to adapt such systems for future operating environments; 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 SEC including our Annual Report on Form 10-K for the year ended December 31, 2017 and our Current Reports on Form 8-K since such date. Forward-looking statements speak only as of the date they were made and we disclaim any obligation to update or revise forward-looking statements whether because 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)



	March 31, 2018			December 31, 2017
Assets
Cash	$	285,653		$	259,655
Mortgage servicing rights ($1,074,247 and $671,962 carried at fair value)	1,074,247			1,008,844
Advances, net	197,120			211,793
Match funded assets (related to variable interest entities (VIEs))	1,084,757			1,177,357
Loans held for sale ($125,848 and $214,262 carried at fair value)	178,078			238,358
Loans held for investment, at fair value	4,988,151			4,715,831
Receivables, net	166,518			199,529
Premises and equipment, net	33,268			37,006
Other assets ($10,366 and $8,900 carried at fair value)(amounts related to VIEs of $23,715 and $27,359)	455,526			554,791
Total assets	$	8,463,318		$	8,403,164

Liabilities and Equity
Liabilities
HMBS-related borrowings, at fair value	$	4,838,193		$	4,601,556
Match funded liabilities (related to VIEs)	800,596			998,618
Other financing liabilities ($715,924 and $508,291 carried at fair value)	793,905			593,518
Other secured borrowings, net	442,356			545,850
Senior notes, net	347,475			347,338
Other liabilities ($2,169 and $635 carried at fair value)	608,451			769,410
Total liabilities	7,830,976			7,856,290

Commitments and Contingencies (Notes 19 and 20)

Equity
Ocwen Financial Corporation (Ocwen) stockholders’ equity
Common stock, $.01 par value; 200,000,000 shares authorized; 133,405,585 and 131,484,058 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively	1,334			1,315
Additional paid-in capital	553,426			547,057
Retained earnings (accumulated deficit)	76,887			(2,083		)
Accumulated other comprehensive loss, net of income taxes	(1,208		)	(1,249		)
Total Ocwen stockholders’ equity	630,439			545,040
Non-controlling interest in subsidiaries	1,903			1,834
Total equity	632,342			546,874
Total liabilities and equity	$	8,463,318		$	8,403,164

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 March 31,
	2018			2017
Revenue
Servicing and subservicing fees	$	222,138		$	272,502
Gain on loans held for sale, net	19,800			22,944
Other	18,319			26,418
Total revenue	260,257			321,864

Expenses
Compensation and benefits	78,075			91,801
Professional services	37,770			41,829
Servicing and origination	31,418			40,171
Technology and communications	22,803			27,347
MSR valuation adjustments, net	17,129			40,451
Occupancy and equipment	12,614			17,749
Other	6,692			17,035
Total expenses	206,501			276,383

Other income (expense)
Interest income	2,700			3,763
Interest expense	(50,810		)	(84,062		)
Gain on sale of mortgage servicing rights, net	958			287
Other, net	(1,639		)	4,033
Total other expense, net	(48,791		)	(75,979		)

Income (loss) before income taxes	4,965			(30,498		)
Income tax expense	2,348			2,125
Net income (loss)	2,617			(32,623		)
Net income attributable to non-controlling interests	(69		)	(101		)
Net income (loss) attributable to Ocwen stockholders	$	2,548		$	(32,724	)

Income (loss) per share attributable to Ocwen stockholders
Basic	$	0.02		$	(0.26	)
Diluted	$	0.02		$	(0.26	)

Weighted average common shares outstanding
Basic	133,121,465			124,014,928
Diluted	134,606,929			124,014,928

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

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)



	For the Three Months Ended March 31,
	2018			2017
Net income (loss)	$	2,617		$	(32,623	)

Other comprehensive income, net of income taxes:
Reclassification adjustment for losses on cash flow hedges included in net income (1)	41			67
Total other comprehensive income, net of income taxes	41			67

Comprehensive income (loss)	2,658			(32,556		)
Comprehensive income attributable to non-controlling interests	(69		)	(101		)
Comprehensive income (loss) attributable to Ocwen stockholders	$	2,589		$	(32,657	)


(1)	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 THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(Dollars in thousands)



	Ocwen Stockholders
	Common Stock			Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss), Net of Taxes			Non-controlling Interest in Subsidiaries		Total
	Shares	Amount		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss), Net of Taxes			Non-controlling Interest in Subsidiaries		Total
Balance at December 31, 2017	131,484,058	$	1,315	$	547,057	$	(2,083	)	$	(1,249	)	$	1,834	$	546,874
Net income	—	—		—		2,548			—			69		2,617
Issuance of common stock	1,875,000	19		5,700		—			—			—		5,719
Cumulative effect of fair value election - Mortgage servicing rights	—	—		—		82,043			—			—		82,043
Cumulative effect of adoption of FASB Accounting Standards Update No. 2016-16	—	—		—		(5,621		)	—			—		(5,621		)
Equity-based compensation and other	46,527	—		669		—			—			—		669
Other comprehensive income, net of income taxes	—	—		—		—			41			—		41
Balance at March 31, 2018	133,405,585	$	1,334	$	553,426	$	76,887		$	(1,208	)	$	1,903	$	632,342

Balance at December 31, 2016	123,988,160	$	1,240	$	527,001	$	126,167		$	(1,450	)	$	2,325	$	655,283
Net income (loss)	—	—		—		(32,724		)	—			101		(32,623		)
Cumulative effect of adoption of FASB Accounting Standards Update No. 2016-09	—	—		284		(284		)	—			—		—
Equity-based compensation and other	589,009	6		701		—			—			—		707
Other comprehensive income, net of income taxes	—	—		—		—			67			—		67
Balance at March 31, 2017	124,577,169	$	1,246	$	527,986	$	93,159		$	(1,383	)	$	2,426	$	623,434

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 Three Months Ended March 31,
	2018			2017
Cash flows from operating activities
Net income (loss)	$	2,617		$	(32,623	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
MSR valuation adjustments, net	17,129			40,451
Gain on sale of mortgage servicing rights, net	(958		)	(287		)
Provision for bad debts	15,336			22,410
Depreciation	6,527			7,081
Amortization of debt issuance costs	656			673
Equity-based compensation expense	575			2,132
Gain on valuation of financing liability	(16,712		)	—
Net gain on valuation of mortgage loans held for investment and HMBS-related borrowings	(8,975		)	(5,360		)
Gain on loans held for sale, net	(8,832		)	(15,306		)
Origination and purchase of loans held for sale	(358,078		)	(1,237,535		)
Proceeds from sale and collections of loans held for sale	383,734			1,173,912
Changes in assets and liabilities:
Decrease in advances and match funded assets	71,096			105,958
Decrease in receivables and other assets, net	57,949			88,449
Decrease in other liabilities	(68,128		)	(62,423		)
Other, net	5,475			1,730
Net cash provided by operating activities	99,411			89,262

Cash flows from investing activities
Origination of loans held for investment	(251,086		)	(347,080		)
Principal payments received on loans held for investment	82,719			80,290
Purchase of mortgage servicing rights	—			(1,229		)
Proceeds from sale of mortgage servicing rights	123			729
Proceeds from sale of advances	4,286			1,115
Issuance of automotive dealer financing notes	(19,642		)	(39,100		)
Collections of automotive dealer financing notes	49,756			37,129
Additions to premises and equipment	(2,983		)	(5,258		)
Other, net	916			(1,644		)
Net cash used in investing activities	(135,911		)	(275,048		)

Cash flows from financing activities
Repayment of match funded liabilities, net	(198,022		)	(65,785		)
Proceeds from mortgage loan warehouse facilities and other secured borrowings	801,155			2,224,774
Repayments of mortgage loan warehouse facilities and other secured borrowings	(968,292		)	(2,188,586		)
Proceeds from sale of mortgage servicing rights accounted for as a financing	279,586			—
Proceeds from sale of reverse mortgages (HECM loans) accounted for as a financing (HMBS-related borrowings)	222,825			306,749
Repayment of HMBS-related borrowings	(80,811		)	(75,099		)
Other, net	(74		)	(904		)
Net cash provided by financing activities	56,367			201,149

Net increase in cash and restricted cash	19,867			15,363
Cash and restricted cash at beginning of year	302,560			302,398
Cash and restricted cash at end of period	$	322,427		$	317,761

Supplemental non-cash investing and financing activities
Issuance of common stock in connection with litigation settlement	$	5,719		$	—

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sums to the total of the same such amounts reported in the unaudited consolidated statements of cash flows:



	March 31, 2018		March 31, 2017
Cash	$	285,653	$	268,320
Restricted cash and equivalents included in Other assets:
Debt service accounts	27,496		43,268
Other restricted cash	9,278		6,173
Total cash and restricted cash reported in the statements of cash flows	$	322,427	$	317,761

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

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

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

Note 1 – Organization, Business Environment 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, originates and services loans. We are headquartered in West Palm Beach, Florida with offices located throughout the United States (U.S.) and in the United States Virgin Islands (USVI) and with operations located 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 (OFSPL), Homeward Residential, Inc. (Homeward) and Liberty Home Equity Solutions, Inc. (Liberty).

We perform servicing activities on behalf of other servicers (subservicing), the largest being New Residential Investment Corp. (NRZ), and investors (primary and master servicing), 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 a subservicer or primary servicer, we may be required to make certain property tax and insurance premium payments, default and property maintenance payments, as well as advances of principal and interest payments to mortgage loan investors before collecting them from borrowers. Most, but not all, of our subservicing agreements provide for us to be reimbursed for any such advances by the owner of the servicing rights. Advances made by us as primary servicer are recovered from the borrower or the mortgage loan investor. 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, 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 Administration (FHA) or Department of Veterans Affairs (VA)) forward mortgages. The GSEs or Ginnie Mae guarantee these mortgage securitizations. We originate Home Equity Conversion Mortgages (HECM, or reverse mortgages) that are insured by the FHA and are an approved issuer of Home Equity Conversion Mortgage-Backed Securities (HMBS) that are guaranteed by Ginnie Mae.

We had a total of approximately 7,200 employees at March 31, 2018 of which approximately 4,700 were located in India and approximately 600 were based in the Philippines. Our operations in India and the Philippines primarily provide internal support services, principally to our loan servicing business and our corporate functions. Of our foreign-based employees, more than 80% were engaged in supporting our loan servicing operations as of March 31, 2018.

Business Environment

We are facing certain challenges and uncertainties that could have significant adverse effects on our business, financial condition, liquidity and results of operations. The ability of management to appropriately address these challenges and uncertainties in a timely manner is critical to our ability to operate our business successfully.

Losses in prior years have significantly eroded stockholders’ equity and weakened our financial condition. In order to drive stronger financial performance, we are focusing our operations on mortgage servicing, on retail forward lending, primarily servicing portfolio recapture, and on our reverse mortgage business. In addition, we have significantly strengthened our cash position through the receipt of a lump-sum fee payment of $279.6 million from NRZ in January 2018 in connection with our rights to mortgage servicing rights agreements. See Note 8 — Rights to MSRs for further information.

On February 27, 2018, we entered into a Merger Agreement pursuant to which PHH Corporation (PHH) will become a wholly owned subsidiary of Ocwen. We believe our acquisition of PHH will enable us to obtain the following key strategic and financial benefits:


•	Accelerate our transition to the Black Knight Financial Services, Inc. LoanSphere MSP® servicing platform;


•	Improve servicing and origination margin through improved economies of scale;


•	Reduce fixed costs (on a combined basis) through reductions of redundant corporate overhead and other costs; and,


•	Provide a foundation to enable the combined servicing platform to resume new business and growth activities to offset portfolio runoff.

Our business, operating results and financial condition have been significantly impacted in recent periods by regulatory actions against us and by significant litigation matters. Should the number or scope of regulatory or legal actions against us increase or expand or should we be unable to reach reasonable resolutions in existing regulatory and legal matters, our business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected, even if we are successful in our ongoing efforts to drive stronger financial performance. See Note 18 – Regulatory Requirements and Note 20 – Contingencies for further information.

Regarding the current maturities of our borrowings, as of March 31, 2018 we have approximately $738.0 million of debt outstanding under facilities coming due in the next 12 months. Portions of our match funded facilities and all of our mortgage loan warehouse facilities have 364-day terms consistent with market practice. We have historically renewed these facilities on or before their expiration in the ordinary course of financing our business. We expect to renew, replace or extend all such borrowings to the extent necessary to finance our business on or prior to their respective maturities consistent with our historical experience.

Our debt agreements contain various qualitative and quantitative events of default provisions that include, among other things, noncompliance with covenants, breach of representations, or the occurrence of a material adverse change. If a lender were to allege an event of default and we are unable to avoid, remedy or secure a waiver, we could be subject to adverse actions by our lenders that could have a material adverse impact on us. In addition, OLS, Homeward and Liberty are parties to seller/servicer agreements and/or subject to guidelines and regulations (collectively, seller/servicer obligations) with one or more of the GSEs, the Department of Housing and Urban Development (HUD), FHA, VA and Ginnie Mae. To the extent these requirements are not met or waived, the applicable agency may, at its option, utilize a variety of remedies including requirements to provide certain information or take actions at the direction of the applicable agency, requirements to deposit funds as security for our obligations, sanctions, suspension or even termination of approved seller/servicer status, which would prohibit future originations or securitizations of forward or reverse mortgage loans or servicing for the applicable agency. Any of these actions could have a material adverse impact on us. See Note 11 – Borrowings, Note 18 – Regulatory Requirements and Note 20 – Contingencies for further information.

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 months ended March 31, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2018. 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, 2017.

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 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. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, income taxes, the provision for potential losses that may arise from litigation proceedings, and our going concern evaluation. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.

Reclassifications

Within the expenses section of the unaudited statement of operations for the three months ended March 31, 2017, we reclassified impairment charges and fair value gains and losses on mortgage servicing rights (MSRs), both previously included in the Servicing and origination line item, and Amortization of MSRs to a new line item titled MSR valuation adjustments, net.

As a result of our adoption on January 1, 2018 of FASB Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, debt service accounts and other restricted cash which are included in Other assets on the consolidated balance sheets have been classified as Cash and restricted cash in our consolidated statements of cash flows. Our revision of the unaudited consolidated statement of cash flows for the three months ended March 31, 2017 to conform to the new standard resulted in an increase in net cash provided by operating activities of $3.6 million (Decrease in receivables and other assets, net).

Certain amounts in the unaudited consolidated statement of cash flows for the three months ended March 31, 2017 have been reclassified to conform to the current year presentation as follows:


•	Within the operating activities section, we reclassified Amortization of MSRs, Loss on valuation of MSRs, at fair value, and Impairment of MSRs to a new line item. In addition, we reclassified Realized and unrealized gains on derivative financial instruments to Other, net.


•	Within the financing activities section, we reclassified Repayments of HMBS-related borrowings from Repayments of mortgage loan warehouse facilities and other secured borrowings to a separate line item. We also reclassified Payment of debt issuance costs to Other, net.

These reclassifications had no impact on our consolidated cash flows from operating, investing or financing activities.

Recently Adopted Accounting Standards

Revenue from Contracts with Customers (Accounting Standards Update (ASU) 2014-09)

This ASU clarifies the principles for recognizing revenue and creates a common revenue standard. Under this ASU, an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity will recognize revenue through a five-step process. The guidance in this standard does not apply to financial instruments and other contractual rights or obligations within the scope of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing, among other ASC topics. As a result, our adoption of this standard on a modified retrospective basis on January 1, 2018 did not have a material impact on our consolidated financial statements.

Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01)

This ASU provides users with more useful information regarding the recognition, measurement, presentation, and disclosure of financial instruments and also improves the accounting model to better meet the requirements of today’s complex economic environment. Most changes in this ASU require the same information, but some changes will revise the geography of that information on the financial statements. Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements.

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15)

This ASU clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows under FASB ASC Topic 230, Statement of Cash Flows (ASC 230). Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements.

Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16)

This ASU requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. Previously, recognition of current and deferred income taxes for an intra-entity transfer was prohibited until the asset had been sold to an outside party. We adopted this standard on a modified retrospective basis on January 1, 2018 by recording a cumulative-effect reduction of $5.6 million to retained earnings.

Statement of Cash Flows: Restricted Cash (ASU 2016-18)

This ASU clarifies how changes in restricted cash are classified and presented in the statement of cash flows under ASC 230. This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements. The amendments in this update have been applied using a retrospective transition method to each period presented. We have revised the unaudited consolidated statement of cash flows for the three months ended March 31, 2017 to conform to the new standard.

Business Combinations: Clarifying the Definition of a Business (ASU 2017-01)

This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements.

Compensation: Stock Compensation (ASU 2017-09)

This ASU reduces both diversity in practice as well as cost and complexity when applying the modification accounting guidance in FASB ASC Topic 718, Compensation -- Stock Compensation, to a change to the terms or conditions of a share-based payment award. Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements.

Income Taxes: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (ASU 2018-05)

This ASU adds various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act (Tax Act) in the period of enactment. We adopted the now codified guidance in SAB 118 as of December 31, 2017 and continue to rely on the guidance in these interim financial statements.

Accounting Standards Issued but Not Yet Adopted

Leases (ASU 2016-02)

This ASU will require a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months, regardless of whether the lease is classified as a finance or operating lease. Additional disclosures of the amount, timing and uncertainty of cash flows arising from leases will be required. This standard will be effective for us on January 1, 2019, with early application permitted. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.

Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13)

This ASU will require timelier recording of credit losses on loans and other financial instruments. This standard aligns the accounting with the economics of lending by requiring banks and other lending institutions to immediately record the full amount of credit losses that are expected in their loan portfolios. The new guidance requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This standard requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. Additionally, the new guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. This standard will be effective for us on January 1, 2020, with early application permitted. We are currently evaluating the effect of adopting this standard.

Receivables: Nonrefundable Fees and Other Costs (ASU 2017-08)

This ASU amends the amortization period for certain purchased callable debt securities held at a premium. This standard shortens the amortization period for the premium to the earliest call date, rather than generally amortizing the premium as an adjustment of yield over the contractual life of the instrument. This standard will be effective for us on January 1, 2019. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.

Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02)

This ASU provides entities with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. This standard will be effective for us on January 1, 2019. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.

Financial Instruments: Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10) (ASU 2018-03)

This ASU provides clarification of areas in ASU 2016-01 by improving the measurement and reporting of certain financial assets and liabilities. The effective date of this ASU is July 1, 2018. We do not expect this to have a material impact on our consolidated financial statements.

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 three groups: (1) securitizations of residential mortgage loans, (2) financings of advances and (3) financings of automotive dealer financing notes.

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

We securitize forward and reverse residential mortgage loans involving the GSEs and loans insured by the FHA or VA through Ginnie Mae. To the extent we retain the right to service these loans, we 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 purchased from third parties, generally in the form of mortgage-backed securities guaranteed by the GSEs or Ginnie Mae. Securitization typically occurs within 30 days of loan closing or purchase. 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.

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:



	Three Months Ended March 31,
	2018			2017
Proceeds received from securitizations	$	377,499		$	1,001,997
Servicing fees collected	10,348			10,108
Purchases of previously transferred assets, net of claims reimbursed	(2,170		)	(987		)
	$	385,677		$	1,011,118

In connection with these transfers, we retained MSRs of $2.4 million and $8.1 million, during the three months ended March 31, 2018 and 2017, respectively, which are reported in Gain on loans held for sale, net in the unaudited consolidated statements of operations. See Note 4 – Loans Held for Sale for additional information regarding gains or losses on the transfer of loans held for sale.

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 unpaid principal balance (UPB) of the transferred loans:



	March 31, 2018		December 31, 2017
Carrying value of assets
MSRs, at fair value	$	113,713	$	227
MSRs, at amortized cost	—		97,832
Advances and match funded advances	61,371		57,636
UPB of loans transferred	11,292,792		12,077,635
Maximum exposure to loss	$	11,467,876	$	12,233,330

At March 31, 2018 and December 31, 2017, 7.8% and 8.9%, respectively, of the transferred residential loans that we service were 60 days or more past due.

Transfers of Reverse Mortgages

We pool HECM loans into HMBS that we sell into the secondary market with servicing rights retained or we sell the loans to third parties with servicing rights released. 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 HECM loans do not qualify for sale accounting, and therefore, we account for these transfers as financings. Under this accounting treatment, the HECM loans are classified as Loans held for investment, at fair value, on our unaudited consolidated balance sheets. Holders of participating interests in the HMBS have no recourse against the assets of Ocwen, except with respect to standard representations and warranties and our contractual obligation to service the HECM loans and the HMBS.

At March 31, 2018 and December 31, 2017, Loans held for investment included $121.6 million and $83.8 million, respectively, of originated loans which had not yet been pledged as collateral. See Note 3 – Fair Value and Note 11 – Borrowings for additional information on HMBS-related borrowings and Loans held for investment.

Financings of Advances

Match funded advances 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 transfers to these SPEs in accordance with the terms of our advance financing facility agreements. Debt service accounts require us to remit collections on pledged advances to the trustee within two days of receipt. Collected funds that are not applied to reduce the related match funded debt until the payment dates specified in the indenture are classified as debt service accounts within Other assets in our consolidated balance sheets. 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, as well as amounts set aside as required by our warehouse facilities as security for our obligations under the related agreements. The funds are held in interest earning accounts and those amounts related to match funded facilities are held in the name of the SPE created in connection with the facility.

We classify the transferred advances on our unaudited consolidated balance sheets as a component of Match funded assets 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 have recourse only to the assets of the SPE for satisfaction of the debt. 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.

Financings of Automotive Dealer Financing Notes

Match funded automotive dealer financing notes resulted from our transfers of short-term, inventory-secured loans to car dealers to an SPE in exchange for cash. We consolidated this SPE because we determined that Ocwen is the primary beneficiary of the SPE. In January 2018, we decided to exit the independent used car dealer floor plan lending business conducted through Automotive Capital Services, Inc. (ACS). We made transfers to the SPE in accordance with the terms of the automotive capital asset receivables financing facility agreement, which we terminated in January 2018 in connection with our exit from the business. We classified the transferred loans on our consolidated balance sheets as a component of Match funded assets and the related liabilities as Match funded liabilities. Holders of the debt issued by the SPE had recourse only to the assets of the SPE for satisfaction of the debt.

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:



		March 31, 2018				December 31, 2017
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets
Loans held for sale
Loans held for sale, at fair value (a)	2	$	125,848	$	125,848	$	214,262	$	214,262
Loans held for sale, at lower of cost or fair value (b)	3	52,230		52,230		24,096		24,096



		March 31, 2018						December 31, 2017
	Level	Carrying Value			Fair Value			Carrying Value			Fair Value
Total Loans held for sale		$	178,078		$	178,078		$	238,358		$	238,358

Loans held for investment (a)	3	$	4,988,151		$	4,988,151		$	4,715,831		$	4,715,831
Advances (including match funded) (c)	3	1,281,877			1,281,877			1,356,393			1,356,393
Automotive dealer financing notes (including match funded) (c)	3	2,399			2,399			32,757			32,590
Receivables, net (c)	3	166,518			166,518			199,529			199,529
Mortgage-backed securities, at fair value (a)	3	1,679			1,679			1,592			1,592
U.S. Treasury notes (a)	1	1,560			1,560			1,567			1,567

Financial liabilities:
Match funded liabilities (c)	3	$	800,596		$	793,547		$	998,618		$	992,698
Financing liabilities:
HMBS-related borrowings, at fair value (a)	3	$	4,838,193		$	4,838,193		$	4,601,556		$	4,601,556
Financing liability - MSRs pledged, at fair value (a)	3	715,924			715,924			508,291			508,291
Other (c)	3	77,981			62,780			85,227			65,202
Total Financing liabilities		$	5,632,098		$	5,616,897		$	5,195,074		$	5,175,049
Other secured borrowings:
Senior secured term loan (c) (d)	2	$	286,665		$	297,371		$	290,068		$	299,741
Other (c)	3	155,691			155,691			255,782			255,782
Total Other secured borrowings		$	442,356		$	453,062		$	545,850		$	555,523

Senior notes:
Senior unsecured notes (c) (d)	2	$	3,122		$	2,768		$	3,122		$	2,872
Senior secured notes (c) (d)	2	344,353			357,718			$	344,216		355,550
Total Senior notes		$	347,475		$	360,486		$	347,338		$	358,422

Derivative financial instrument assets (liabilities), at fair value (a)
Interest rate lock commitments	2	$	4,952		$	4,952		$	3,283		$	3,283
Forward mortgage-backed securities	1	(2,169		)	(2,169		)	(545		)	(545		)
Interest rate caps	3	1,866			1,866			2,056			2,056

Mortgage servicing rights
Mortgage servicing rights, at fair value (a)	3	$	1,074,247		$	1,074,247		$	671,962		$	671,962
Mortgage servicing rights, at amortized cost (c) (e)	3	—			—			336,882			418,745
Total Mortgage servicing rights		$	1,074,247		$	1,074,247		$	1,008,844		$	1,090,707


(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 carrying values are net of unamortized debt issuance costs and discount. See Note 11 – Borrowings for additional information.

(e)

Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. The balance at December 31, 2017 includes the impaired government-insured stratum of amortization method MSRs, which was measured at fair value on a non-recurring basis and reported net of the valuation allowance. At December 31, 2017, the carrying value of this stratum was $158.0 million before applying the valuation allowance of $24.8 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:



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-Backed Securities		Financing Liability - MSRs Pledged			Derivatives			MSRs			Total
Three months ended March 31, 2018
Beginning balance	$	4,715,831		$	(4,601,556	)	$	1,592	$	(508,291	)	$	2,056		$	671,962		$	281,594
Purchases, issuances, sales and settlements
Purchases	—			—			—		—			—			2,378			2,378
Issuances	251,086			(222,825		)	—		(279,586		)	—			(1,758		)	(253,083		)
Transfer from MSRs carried at amortized cost, net of valuation allowance	—			—			—		—			—			336,882			336,882
Cumulative effect of MSR fair value election	—			—			—		—			—			82,043			82,043
Transfer to Loans held for sale, at fair value	(184		)	—			—		—			—			—			(184		)
Sales	—			—			—		—			—			(131		)	(131		)
Transfers to Other assets	(104		)	—			—		—			—			—			(104		)
Transfers to Receivables, net	(50		)	—			—		—			—			—			(50		)
Settlements	(82,719		)	80,811			—		54,547			(371		)	—			52,268
	168,029			(142,014		)	—		(225,039		)	(371		)	419,414			220,019
Total realized and unrealized gains (losses) included in earnings
Change in fair value	104,291			(94,623		)	87		16,712			181			(17,129		)	9,519
Calls and other	—			—			—		694			—			—			694
	104,291			(94,623		)	87		17,406			181			(17,129		)	10,213
Transfers in and / or out of Level 3	—			—			—		—			—			—			—
Ending balance	$	4,988,151		$	(4,838,193	)	$	1,679	$	(715,924	)	$	1,866		$	1,074,247		$	511,826



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-Backed Securities		Financing Liability - MSRs Pledged			Derivatives		MSRs			Total
Three months ended March 31, 2017
Beginning balance	$	3,565,716		$	(3,433,781	)	$	8,342	$	(477,707	)	$	1,836	$	679,256		$	343,662
Purchases, issuances, sales and settlements
Purchases	—			—			—		—			—		—			—
Issuances	347,080			(306,749		)	—		—			—		(706		)	39,625
Sales	—			—			—		—			—		(228		)	(228		)
Settlements	(80,290		)	75,099			—		16,999			—		—			11,808
	266,790			(231,650		)	—		16,999			—		(934		)	51,205
Total realized and unrealized gains (losses) included in earnings
Change in fair value	83,881			(73,834		)	316		1,521			426		(26,335		)	(14,025		)
Calls and other	—			—			—		—			—		—			—
	83,881			(73,834		)	316		1,521			426		(26,335		)	(14,025		)
Transfers in and / or out of Level 3	—			—			—		—			—		—			—
Ending balance	$	3,916,387		$	(3,739,265	)	$	8,658	$	(459,187	)	$	2,262	$	651,987		$	380,842

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

Residential forward and reverse mortgage loans that we intend to sell 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 loans for which we have no agreement to sell on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows.

Loans Held for Investment

We measure these loans at fair value based 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.



Significant valuation assumptions	March 31, 2018		December 31, 2017
Life in years
Range	3.7 to 8.3		4.4 to 8.1
Weighted average	6.1		6.4
Conditional repayment rate
Range	6.0% to 51.2%		5.4% to 51.9%
Weighted average	14.0	%	13.1	%
Discount rate	2.8	%	3.2	%

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

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 sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is disclosed 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 the 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.



Significant valuation assumptions	March 31, 2018						December 31, 2017
Significant valuation assumptions	Agency (1)			Non-Agency			Agency			Non-Agency
Weighted average prepayment speed	7.6		%	16.1		%	8.1		%	16.6		%
Weighted average delinquency rate	11.1		%	28.5		%	1.0		%	28.5		%
Advance financing cost	5-year swap			5-yr swap plus 2.75%			5-year swap			5-yr swap plus 2.75%
Interest rate for computing float earnings	5-year swap			5-yr swap minus .50%			5-year swap			5-yr swap minus 0.50%
Weighted average discount rate	9.2		%	12.9		%	9.0		%	13.0		%
Weighted average cost to service (in dollars)	$	108		$	305		$	64		$	305


(1)	The change in valuation assumptions for Agency MSRs at March 31, 2018, as compared to December 31, 2017, reflects the effects of our fair value election on January 1, 2018 for our remaining MSRs carried at amortized cost.

Amortized Cost MSRs

Prior to our fair value election on January 1, 2018 for our remaining portfolio of MSRs carried at amortized cost, we estimated the fair value using a process that involved either actual sale prices obtained or the use of independent 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 disclosed actual Ocwen sale prices for orderly transactions where available in lieu of third-party valuations.



Significant valuation assumptions	December 31, 2017
Weighted average prepayment speed	8.8		%
Weighted average delinquency rate	10.9		%
Advance financing cost	5-year swap
Interest rate for computing float earnings	5-year swap
Weighted average discount rate	9.2		%
Weighted average cost to service (in dollars)	$	108

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

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.

Automotive Dealer Financing Notes

At March 31, 2018, the limited number of balances remaining following our decision to exit the ACS business represent negotiated recoveries from suspended dealers or trailing potential recoveries on liquidated performing accounts, the net carrying value of which approximates fair value. Previously, we estimated the fair value of our automotive dealer financing notes using unobservable inputs within an internally developed cash flow model. Key inputs included projected repayments, interest and fee receipts, deferrals, delinquencies, recoveries and charge-offs of the notes within the portfolio. The projected cash flows were then discounted at a rate commensurate with the risk of the estimated cash flows to derive the fair value of the portfolio.



Significant valuation assumptions	December 31, 2017
Weighted average life in months	2.2
Average note rate	8.5	%
Discount rate	10.0	%
Loan loss rate	21.5	%

Mortgage-Backed Securities (MBS)

Our subordinate and residual securities are not actively traded, and therefore, we estimate the fair value of these securities using a process based upon the use of an independent third-party valuation expert. Where possible, we consider observable trading activity in the valuation of our securities. 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.

U.S. Treasury Notes

We classify U.S. Treasury notes as trading securities and account for them at fair value on a recurring basis. We base the fair value on quoted prices in active markets to which we have access. Changes in the fair value of our investment in U.S. Treasury notes are recognized in Other, net in the consolidated statements of operations.

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 advance 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. 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. 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.



Significant valuation assumptions	March 31, 2018		December 31, 2017
Life in years
Range	3.7 to 8.3		4.4 to 8.1
Weighted average	6.1		6.4
Conditional repayment rate
Range	6.0% to 51.2%		5.4% to 51.9%
Weighted average	14.0	%	13.1	%
Discount rate	2.7	%	3.1	%

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

MSRs Pledged (Rights to MSRs)

We have elected to measure these borrowings at fair value. We recognize the proceeds received in connection with Rights to MSRs transactions as a secured borrowing that we account for at fair value. Fair value for the portion of the borrowing attributable to the MSRs underlying the Rights to MSRs is determined using the mid-point of the range of prices provided by third-party valuation experts. Fair value for the portion of the borrowing attributable to any lump sum payments received in connection with the transfer of MSRs underlying such Rights to MSRs to the extent such transfer is accounted for as a

financing is determined by discounting the relevant future cash flows that were altered through such transfer using assumptions consistent with the mid-point of the range of prices provided by third-party valuation experts for the related MSR. Because we have elected fair value for our portfolio of non-Agency MSRs, fair value changes in the Financing Liability - MSRs Pledged are partially offset by changes in the fair value of the related MSRs. See Note 8 — Rights to MSRs for additional information.



Significant valuation assumptions	March 31, 2018			December 31, 2017
Weighted average prepayment speed	16.5		%	17.0		%
Weighted average delinquency rate	28.9		%	28.9		%
Advance financing cost	5-yr swap plus 2.75%			5-year swap plus 2.75%
Interest rate for computing float earnings	5-yr swap minus .50%			5-year swap minus 0.50%
Weighted average discount rate	13.7		%	13.7		%
Weighted average cost to service (in dollars)	$	311		$	311

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 Senior Secured Term Loan (SSTL), we based the fair value on quoted prices in a market with limited trading activity.

Senior Notes

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

Derivative Financial Instruments

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 (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 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 obtain 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 exposure on variable rate debt issued on servicing advance financing facilities from increases in one-month Eurodollar rate (1ML) interest rates. The fair value for interest rate caps is based on counterparty market prices and adjusted for counterparty credit risk.

Note 4 – Loans Held for Sale



Loans Held for Sale - Fair Value	Three Months Ended March 31,
Loans Held for Sale - Fair Value	2018			2017
Beginning balance	$	214,262		$	284,632
Originations and purchases	205,994			840,999
Proceeds from sales	(293,063		)	(817,033		)
Principal collections	(804		)	(744		)
Transfers from Loans held for investment, at fair value	184			—
Gain on sale of loans	4,652			(396		)
Increase (decrease) in fair value of loans	(3,871		)	5,628
Other	(1,506		)	472
Ending balance (1)	$	125,848		$	313,558


(1)	At March 31, 2018 and 2017, the balances include $3.8 million and $10.5 million, respectively, of fair value adjustments.

At March 31, 2018, loans held for sale, at fair value with a UPB of $108.7 million were pledged as collateral to warehouse lines of credit in our Lending segment.



Loans Held for Sale - Lower of Cost or Fair Value	Three Months Ended March 31,
Loans Held for Sale - Lower of Cost or Fair Value	2018			2017
Beginning balance	$	24,096		$	29,374
Purchases	152,084			396,536
Proceeds from sales	(86,421		)	(354,285		)
Principal collections	(3,446		)	(1,850		)
Transfers to Receivables, net	(35,666		)	(48,752		)
Transfers to Other assets	(1,195		)	(55		)
Gain on sale of loans	692			(998		)
(Increase) decrease in valuation allowance	(1,185		)	4,429
Other	3,271			1,196
Ending balance (1)	$	52,230		$	25,595

(1)

At March 31, 2018 and 2017, the balances include $46.1 million and $20.0 million, respectively, of loans that we repurchased from Ginnie Mae guaranteed securitizations pursuant to Ginnie Mae servicing guidelines. We may repurchase loans that have been modified, to facilitate loss reduction strategies, or as otherwise obligated as a Ginnie Mae servicer. Repurchased loans may be modified or otherwise remediated through loss mitigation activities, may be sold to a third party, or are reclassified to receivables.



Valuation Allowance - Loans Held for Sale at Lower of Cost or Fair Value	Three Months Ended March 31,
	2018			2017
Beginning balance	$	7,318		$	10,064
Provision	853			364
Transfer from Liability for indemnification obligations (Other liabilities)	719			255
Sales of loans	(409		)	(5,045		)
Other	22			(3		)
Ending balance	$	8,503		$	5,635



Gain on Loans Held for Sale, Net	Three Months Ended March 31,
Gain on Loans Held for Sale, Net	2018			2017
Gain on sales of loans, net
MSRs retained on transfers of forward loans	$	2,378		$	8,126
Fair value gains related to transfers of reverse mortgage loans, net	10,968			7,638
Gain (loss) on sale of repurchased Ginnie Mae loans	692			(998		)
Other, net	6,015			2,146
	20,053			16,912
Change in fair value of IRLCs	1,377			1,060
Change in fair value of loans held for sale	(3,924		)	7,666
Gain (loss) on economic hedge instruments	2,398			(2,514		)
Other	(104		)	(180		)
	$	19,800		$	22,944

Note 5 – Advances



	March 31, 2018			December 31, 2017
Principal and interest	$	21,344		$	20,207
Taxes and insurance	128,441			144,454
Foreclosures, bankruptcy and other	64,315			63,597
	214,100			228,258
Allowance for losses	(16,980		)	(16,465		)
	$	197,120		$	211,793

Advances at March 31, 2018 and December 31, 2017 include $12.3 million and $18.1 million, respectively, of advances relating to sales of loans that did not qualify for sale accounting.

The following table summarizes the activity in net advances:



	Three Months Ended March 31,
	2018			2017
Beginning balance	$	211,793		$	257,882
Sales of advances	(439		)	(3		)
Collections of advances, charge-offs and other, net	(13,719		)	(25,814		)
(Increase) decrease in allowance for losses	(515		)	2,108
Ending balance	$	197,120		$	234,173



Allowance for Losses	Three Months Ended March 31,
Allowance for Losses	2018			2017
Beginning balance	$	16,465		$	37,952
Provision	2,524			3,421
Net charge-offs and other	(2,009		)	(5,529		)
Ending balance	$	16,980		$	35,844

Note 6 – Match Funded Assets



	March 31, 2018		December 31, 2017
Advances
Principal and interest	$	491,659	$	523,248
Taxes and insurance	418,775		439,857
Foreclosures, bankruptcy, real estate and other	174,323		181,495
	1,084,757		1,144,600

Automotive dealer financing notes (1)	—		35,392
Allowance for losses	—		(2,635		)
	—		$	32,757

	$	1,084,757	$	1,177,357


(1)	In January 2018, we terminated our remaining automotive dealer loan financing facility.



	Three Months Ended March 31,
	2018						2017
	Advances			Automotive Dealer Financing Notes			Advances			Automotive Dealer Financing Notes
Beginning balance	$	1,144,600		$	32,757		$	1,451,964		$	—
Transfer (to) from other assets	—			(36,896		)	—			25,180
Sales	—			—			(245		)
New advances (collections), net	(59,843		)	1,504			(86,294		)	1,816
Decrease in allowance for losses	—			2,635			—			—
Ending balance	$	1,084,757		$	—		$	1,365,425		$	26,996

Note 7 – Mortgage Servicing



Mortgage Servicing Rights – Amortization Method	Three Months Ended March 31,
Mortgage Servicing Rights – Amortization Method	2018			2017
Beginning balance	$	336,882		$	363,722
Fair value election - transfer of MSRs carried at fair value (1)	(361,670		)	—
Additions recognized in connection with asset acquisitions	—			1,229
Additions recognized on the sale of mortgage loans	—			8,126
Sales and other transfers	—			(430		)
	(24,788		)	372,647
Amortization (1)	—			(12,715		)
(Increase) decrease in impairment valuation allowance (1) (2)	24,788			(1,401		)
Ending balance	$	—		$	358,531

Estimated fair value at end of period	$	—		$	462,289

(1)

Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. This irrevocable election applies to all subsequently acquired or originated servicing assets and liabilities that have characteristics consistent with each of these classes. We recorded a cumulative-effect adjustment of $82.0 million to retained earnings as of January 1, 2018 to reflect the excess of the fair value of the Agency MSRs over their carrying amount. We also recognized the tax effect of this adjustment through an increase in retained earnings of $6.8 million and a deferred tax asset for the same amount. However, we established a full valuation allowance on the resulting

deferred tax asset through a reduction in retained earnings. The government-insured MSRs were impaired by $24.8 million at December 31, 2017; therefore, these MSRs were already effectively carried at fair value.

(2)

Impairment of MSRs is recognized in MSR valuation adjustments, net in the unaudited consolidated statements of operations for the three months ended March 31, 2017. Impairment valuation allowance balance of $24.8 million was reclassified to reduce the carrying value of the related MSRs on January 1, 2018 in connection with our fair value election. See Note 3 – Fair Value for additional information regarding impairment and the valuation allowance.



Mortgage Servicing Rights – Fair Value Measurement Method	Three Months Ended March 31,
Mortgage Servicing Rights – Fair Value Measurement Method	2018									2017
	Agency			Non-Agency			Total			Agency			Non-Agency			Total
Beginning balance	$	11,960		$	660,002		$	671,962		$	13,357		$	665,899		$	679,256
Fair value election - transfer of MSRs carried at amortized cost, net of valuation allowance	336,882			—			336,882			—			—			—
Cumulative effect of fair value election	82,043			—			82,043			—			—			—
Sales and other transfers	—			(131		)	(131		)	—			(228		)	(228		)
Additions recognized on the sale of residential mortgage loans	2,378			—			2,378			—			—			—
Servicing transfers and adjustments	(1		)	(1,757		)	(1,758		)	—			(706		)	(706		)
Changes in fair value (1):
Changes in valuation inputs or other assumptions	20,460			—			20,460			494			—			494
Realization of expected future cash flows and other changes	(15,501		)	(22,088		)	(37,589		)	(445		)	(26,384		)	(26,829		)
Ending balance	$	438,221		$	636,026		$	1,074,247		$	13,406		$	638,581		$	651,987


(1)	Changes in fair value are recognized in MSR valuation adjustments, net in the unaudited consolidated statements of operations.

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, an improving housing market or expanded product availability (as prepayments increase) and increase in periods of rising interest rates, a deteriorating housing market or reduced product availability (as prepayments decrease). The following table summarizes the estimated change in the value of the MSRs that we carry at fair value as of March 31, 2018 given hypothetical shifts in lifetime prepayments and yield assumptions:



	Adverse change in fair value
	10%	20%
Weighted average prepayment speeds