Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from: ____________________ to ____________________
Commission File 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 every Interactive Data File required to be submitted 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 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
 
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 October 31, 2018: 133,912,425 shares





OCWEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this report, including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.
These statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could”, “intend,” “consider,” “expect,” “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 or others, including lenders, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac, and together with Fannie Mae, the GSEs) and the Government National Mortgage Association (Ginnie Mae);
•
our ability to reach settlements with regulatory agencies and state attorneys general on reasonable terms and to comply with the terms of our settlements;
•
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;
•
the dependence of our business on New Residential Investment Corp. (NRZ), our largest client and the source 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;
•
our ability to successfully integrate PHH Corporation (PHH) and 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, including its relationship with NRZ;

2


•
our ability to transition to the PHH 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 and our ability to execute effective chief executive and chief financial officer leadership transitions;
•
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, GSEs, Ginnie Mae and trustees 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 (FHA) of the HUD or Department of Veterans Affairs (VA) 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;
•
uncertainty related to our reserves, valuations, provisions and anticipated realization of 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 Quarterly Reports on Form 10-Q and 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.



3
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, 2018
 
December 31, 2017
Assets
 

 
 

Cash
$
254,843

 
$
259,655

Mortgage servicing rights ($999,282 and $671,962 carried at fair value)
999,282

 
1,008,844

Advances, net
166,024

 
211,793

Match funded assets (related to variable interest entities (VIEs))
935,080

 
1,177,357

Loans held for sale ($145,417 and $214,262 carried at fair value)
217,436

 
238,358

Loans held for investment, at fair value (amounts related to VIEs of $28,373 and $0)
5,307,560

 
4,715,831

Receivables, net
155,937

 
199,529

Premises and equipment, net
25,873

 
37,006

Other assets ($7,826 and $8,900 carried at fair value)(amounts related to VIEs of $19,954 and $27,359)
399,002

 
554,791

Total assets
$
8,461,037

 
$
8,403,164


 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

HMBS-related borrowings, at fair value
$
5,184,227

 
$
4,601,556

Match funded liabilities (related to VIEs)
714,246

 
998,618

Other financing liabilities ($646,842 and $508,291 carried at fair value)(amounts related to VIEs of $26,643 and $0)
719,319

 
593,518

Other secured borrowings, net
345,425

 
545,850

Senior notes, net
347,749

 
347,338

Other liabilities ($2,567 and $635 carried at fair value)
589,327

 
769,410

Total liabilities
7,900,293

 
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; 133,912,425 and 131,484,058 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
1,339

 
1,315

Additional paid-in capital
553,443

 
547,057

Retained earnings (accumulated deficit)
5,909

 
(2,083
)
Accumulated other comprehensive loss, net of income taxes
(1,135
)
 
(1,249
)
Total Ocwen stockholders’ equity
559,556

 
545,040

Non-controlling interest in subsidiaries
1,188

 
1,834

Total equity
560,744

 
546,874

Total liabilities and equity
$
8,461,037

 
$
8,403,164



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

4

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,
 
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Servicing and subservicing fees
$
213,730

 
$
233,220

 
$
658,095

 
$
761,523

Gain on loans held for sale, net
16,942

 
25,777

 
61,135

 
76,976

Other
7,606

 
25,645

 
32,886

 
79,307

Total revenue
238,278

 
284,642

 
752,116

 
917,806


 
 
 
 
 
 
 
Expenses
 
 
 
 
 

 
 

Compensation and benefits
63,307

 
90,538

 
211,220

 
272,750

Professional services
40,662

 
38,417

 
110,821

 
145,651

MSR valuation adjustments, net
41,448

 
33,426

 
91,695

 
115,446

Servicing and origination
31,758

 
52,246

 
91,452

 
128,061

Technology and communications
20,597

 
27,929

 
67,306

 
79,530

Occupancy and equipment
11,896

 
15,340

 
37,369

 
49,569

Other
7,858

 
15,583

 
19,814

 
39,335

Total expenses
217,526

 
273,479

 
629,677

 
830,342


 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest income
3,963

 
4,099

 
10,018

 
12,101

Interest expense
(61,288
)
 
(47,281
)
 
(189,601
)
 
(212,471
)
Gain (loss) on sale of mortgage servicing rights, net
(733
)
 
6,543

 
303

 
7,863

Other, net
(2,967
)
 
(1,077
)
 
(6,872
)
 
6,384

Total other expense, net
(61,025
)
 
(37,716
)
 
(186,152
)
 
(186,123
)

 
 
 
 
 
 
 
Loss before income taxes
(40,273
)
 
(26,553
)
 
(63,713
)
 
(98,659
)
Income tax expense (benefit)
845

 
(20,418
)
 
4,541

 
(15,465
)
Net loss
(41,118
)
 
(6,135
)
 
(68,254
)
 
(83,194
)
Net income attributable to non-controlling interests
(29
)
 
(117
)
 
(176
)
 
(289
)
Net loss attributable to Ocwen stockholders
$
(41,147
)
 
$
(6,252
)
 
$
(68,430
)
 
$
(83,483
)

 
 
 
 
 
 
 
Loss per share attributable to Ocwen stockholders
 
 
 
 
 
 
 
Basic
$
(0.31
)
 
$
(0.05
)
 
$
(0.51
)
 
$
(0.66
)
Diluted
$
(0.31
)
 
$
(0.05
)
 
$
(0.51
)
 
$
(0.66
)

 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
133,912,425

 
128,744,152

 
133,632,905

 
125,797,777

Diluted
133,912,425

 
128,744,152

 
133,632,905

 
125,797,777


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

5

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

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(41,118
)
 
$
(6,135
)
 
$
(68,254
)
 
$
(83,194
)
 
 
 
 
 
 
 
 
Other comprehensive income, net of income taxes:
 

 
 

 
 
 
 

Reclassification adjustment for losses on cash flow hedges included in net income (1)
36

 
45

 
114

 
157

Total other comprehensive income, net of income taxes
36

 
45

 
114

 
157

 
 
 
 
 
 
 
 
Comprehensive loss
(41,082
)
 
(6,090
)
 
(68,140
)
 
(83,037
)
Comprehensive income attributable to non-controlling interests
(29
)
 
(117
)
 
(176
)
 
(289
)
Comprehensive loss attributable to Ocwen stockholders
$
(41,111
)
 
$
(6,207
)
 
$
(68,316
)
 
$
(83,326
)
(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

6


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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
 
 
 
 
 
Balance at December 31, 2017
131,484,058

 
$
1,315

 
$
547,057

 
$
(2,083
)
 
$
(1,249
)
 
$
1,834

 
$
546,874

Net income (loss)
—

 
—

 
—

 
(68,430
)
 
—

 
176

 
(68,254
)
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
)
Capital distribution to non-controlling interest
—

 
—

 
—

 
—

 
—

 
(822
)
 
(822
)
Equity-based compensation and other
553,367

 
5

 
686

 
—

 
—

 
—

 
691

Other comprehensive income, net of income taxes
—

 
—

 
—

 
—

 
114

 
—

 
114

Balance at September 30, 2018
133,912,425

 
$
1,339

 
$
553,443

 
$
5,909

 
$
(1,135
)
 
$
1,188

 
$
560,744

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
123,988,160

 
$
1,240

 
$
527,001

 
$
126,167

 
$
(1,450
)
 
$
2,325

 
$
655,283

Net income (loss)
—

 
—

 
—

 
(83,483
)
 
—

 
289

 
(83,194
)
Cumulative effect of adoption of FASB Accounting Standards Update No. 2016-09
—

 
—

 
284

 
(284
)
 
—

 
—

 
—

Issuance of common stock
6,075,510

 
61

 
13,852

 
—

 
—

 
—

 
13,913

Equity-based compensation and other
795,388

 
8

 
3,255

 
—

 
—

 
—

 
3,263

Other comprehensive income, net of income taxes
—

 
—

 
—

 
—

 
157

 
—

 
157

Balance at September 30, 2017
130,859,058

 
$
1,309

 
$
544,392

 
$
42,400

 
$
(1,293
)
 
$
2,614

 
$
589,422




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

7

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

 
For the Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities
 

 
 

Net loss
$
(68,254
)
 
$
(83,194
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

MSR valuation adjustments, net
91,695

 
115,446

Gain on sale of mortgage servicing rights, net
(303
)
 
(7,863
)
Provision for bad debts
40,269

 
57,274

Depreciation
18,199

 
20,430

Loss on write-off of fixed assets
—

 
6,834

Amortization of debt issuance costs
2,261

 
1,979

Equity-based compensation expense
1,244

 
4,489

Gain on valuation of financing liability
(11,323
)
 
(27,024
)
Net gain on valuation of mortgage loans held for investment and HMBS-related borrowings
(8,057
)
 
(18,637
)
Gain on loans held for sale, net
(24,265
)
 
(39,542
)
Origination and purchase of loans held for sale
(1,234,830
)
 
(3,074,725
)
Proceeds from sale and collections of loans held for sale
1,154,526

 
3,067,522

Changes in assets and liabilities:
 

 
 

Decrease in advances and match funded assets
243,831

 
285,066

Decrease in receivables and other assets, net
126,829

 
160,169

Decrease in other liabilities
(46,767
)
 
(66,321
)
Other, net
6,478

 
3,466

Net cash provided by operating activities
291,533

 
405,369


 
 
 
Cash flows from investing activities
 

 
 

Origination of loans held for investment
(711,035
)
 
(961,642
)
Principal payments received on loans held for investment
296,800

 
311,560

Purchase of mortgage servicing rights
(2,729
)
 
(1,658
)
Proceeds from sale of mortgage servicing rights
6,138

 
2,263

Proceeds from sale of advances
7,882

 
6,119

Issuance of automotive dealer financing notes
(19,642
)
 
(129,471
)
Collections of automotive dealer financing notes
52,598

 
119,389

Additions to premises and equipment
(7,326
)
 
(7,365
)
Other, net
5,446

 
1,480

Net cash used in investing activities
(371,868
)
 
(659,325
)

 
 
 
Cash flows from financing activities
 

 
 

Repayment of match funded liabilities, net
(284,372
)
 
(252,981
)
Proceeds from mortgage loan warehouse facilities and other secured borrowings
2,211,606

 
5,810,591

Repayments of mortgage loan warehouse facilities and other secured borrowings
(2,585,286
)
 
(6,016,169
)
Proceeds from sale of mortgage servicing rights accounted for as a financing
279,586

 
54,601

Proceeds from sale of reverse mortgages (HECM loans) accounted for as a financing (HMBS-related borrowings)
728,745

 
981,730

Repayment of HMBS-related borrowings
(290,338
)
 
(287,908
)
Issuance of common stock
—

 
13,913

Capital distribution to non-controlling interest
(822
)
 
—

Other, net
(991
)
 
(2,321
)
Net cash provided by financing activities
58,128

 
301,456


 
 
 
Net increase (decrease) in cash and restricted cash
(22,207
)
 
47,500

Cash and restricted cash at beginning of year
302,560

 
302,398

Cash and restricted cash at end of period
$
280,353

 
$
349,898

 
 
 
 
Supplemental non-cash investing and financing activities
 

 
 

Initial consolidation of mortgage-backed securitization trusts (VIEs):
 
 
 
Loans held for investment
$
28,373

 
$
—

Other financing liabilities
26,643

 
—

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 unaudited consolidated balance sheets that sums to the total of the same such amounts reported in the unaudited consolidated statements of cash flows:
 
September 30, 2018
 
September 30, 2017
Cash
$
254,843

 
$
299,888

Restricted cash and equivalents included in Other assets:
 
 
 
Debt service accounts
22,454

 
38,753

Other restricted cash
3,056

 
11,257

Total cash and restricted cash reported in the statements of cash flows
$
280,353

 
$
349,898




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

8


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 advances for certain property tax and insurance premium payments, default and property maintenance payments and principal and interest payments on behalf of delinquent borrowers to mortgage loan investors before recovering 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 6,400 employees at September 30, 2018 of which approximately 4,300 were located in India and approximately 500 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 September 30, 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 forward lending, primarily servicing portfolio recapture, and on our reverse mortgage business. We have significantly strengthened our cash position during 2018 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 October 4, 2018, we acquired PHH Corporation (PHH). We believe this acquisition will enable the following key strategic and financial benefits:
•
Accelerate our transition to the Black Knight Financial Services, Inc. (Black Knight) LoanSphere MSP® servicing platform (Black Knight MSP);
•
Reduce fixed costs, on a combined basis, through reductions in corporate overhead and other costs;
•
Improve economies of scale; and,
•
Provide a foundation to enable the combined servicing platform to resume new business and growth activities to offset portfolio runoff.

9


The approval of the New York Department of Financial Services (NY DFS) for the acquisition imposed certain post-closing requirements on Ocwen, including certain reporting obligations and certain record retention and other requirements relating to the planned transfer of New York loans onto the Black Knight MSP servicing platform as well as certain requirements with respect to the management of PHH Mortgage Corporation, a licensed subsidiary of PHH. In addition, the NY DFS modified its restriction on Ocwen’s ability to acquire MSRs to allow certain acquisitions of MSRs that are boarded onto the Black Knight MSP servicing platform subject to annual portfolio growth limitations until such time as the NY DFS determines that all loans have been successfully migrated to the Black Knight MSP servicing platform and that Ocwen has developed a satisfactory infrastructure to board sizeable portfolios of MSRs. See Note 18 – Regulatory Requirements and Note 21 – Subsequent Events for additional information regarding the acquisition of PHH.
Now that we have consummated our acquisition of PHH, if we can execute on five key initiatives, we believe we will drive stronger financial performance. First, we must successfully execute on the integration of PHH’s business with ours, including a smooth transition onto the Black Knight MSP servicing platform. Second, we must re-engineer our cost structure to go beyond eliminating redundant costs through the integration process. Third, we must fulfill our regulatory commitments and resolve our remaining legal and regulatory matters on satisfactory terms. Fourth, we must replenish our servicing portfolio through expanding our lending business and permissible MSR acquisitions that are prudent and well-executed with appropriate financial return targets. Finally, we must ensure that we continue to manage our balance sheet to provide a solid platform for executing on our growth and other initiatives.
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 September 30, 2018 we have approximately $520.4 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 of such alleged default, 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 and nine months ended September 30, 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

10


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 and nine months ended September 30, 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 Financial Accounting Standards Board (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 nine months ended September 30, 2017 to conform to the new standard resulted in an increase in net cash provided by operating activities of $4.2 million (Decrease in receivables and other assets, net line item is higher as revised).
Certain amounts in the unaudited consolidated statement of cash flows for the nine months ended September 30, 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 (MSR valuation adjustments, net). In addition, we reclassified Realized and unrealized gains on derivative financial instruments to Other, net.
•
Within the financing activities section, we 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 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

11


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 nine months ended September 30, 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.

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. Our adoption of this standard on July 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. In July 2018, the FASB amended this guidance by issuing ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements which provides clarification and further guidance on areas identified as potential implementation issues, as well as providing for an additional optional transition method to allow initial application of the new leasing guidance at the adoption date and recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
These standards will be effective for us on January 1, 2019, with early application permitted. At adoption, we expect to apply the new transition method provided for in ASU 2018-11. While we are continuing to evaluate the effects that this guidance will have on our financial statements, we have determined it will result in the recognition of certain operating leases as right-of-use assets and lease liabilities in the consolidated balance sheet, but we do not anticipate that the impact will be material.
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

12


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.
Codification Improvements (ASU 2018-09)
This ASU amends multiple codification Topics. The transition and effective date guidance is based on the facts and circumstances of each amendment. While some of the amendments in this ASU do not require transition guidance and were effective upon issuance of this ASU, many of the amendments in this ASU have transition guidance with an effective date of January 1, 2019. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.
Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
This ASU modifies the disclosure requirements on fair value measurements in FASB ASC Topic 820, Fair Value Measurement. The main provisions in this update include removal of the following disclosure requirements from this ASC: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels and 3) the valuation processes for Level 3 fair value measurements. This standard adds disclosure requirements to report the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and for certain unobservable inputs an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
This standard will be effective for us on January 1, 2020, with early application permitted on any removed or modified disclosures and to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption, and to allow a delayed adoption of the additional disclosures until the effective date. We are currently evaluating the effect of adopting this standard.
Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15)
This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments in this ASU require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments in this ASU require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of operations as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element.
This standard will be effective for us on January 1, 2020, with early adoption permitted, including adoption in any interim period. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the effect of adopting this standard.
SEC Simplifies and Updates Disclosure Requirements (US 2018-21)
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, to eliminate, modify, or integrate into other SEC requirements certain disclosure rules. The amendments eliminate the following:
•
Redundant and duplicative requirements, which require substantially similar disclosures as GAAP, IFRS, or other SEC disclosure requirements;

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•
Overlapping requirements, which are related to, but not the same as GAAP, IFRS, or other SEC disclosure requirements - including the elimination of the ratio of earnings to fixed charges;
•
Outdated requirements, which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment; and
•
Superseded requirements, which are inconsistent with recent legislation, more recently updated SEC disclosure requirements, or more recently updated GAAP.
In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule will become effective on November 5, 2018. We are currently evaluating the 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.
From time to time, we may acquire beneficial interests issued in connection with mortgage-backed securitizations where we may also be the master and or primary servicer. These beneficial interests consist of subordinate and residual interests acquired from third-parties in market transactions. We consolidate the VIE when we conclude 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 September 30,
 
Nine Months Ended September 30,
2018
 
2017
 
2018
 
2017
Proceeds received from securitizations
$
282,507

 
$
687,502

 
$
998,204

 
$
2,711,651

Servicing fees collected
9,808

 
10,300

 
30,233

 
30,250

Purchases of previously transferred assets, net of claims reimbursed
(1,507
)
 
(1,234
)
 
(4,336
)
 
(3,958
)
 
$
290,808

 
$
696,568

 
$
1,024,101

 
$
2,737,943

In connection with these transfers, we retained MSRs of $1.4 million and $5.9 million, and $3.6 million and $18.6 million, during the three and nine months ended September 30, 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.

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The following table presents the carrying amounts of our assets that relate to our continuing involvement with forward loans that we have transferred with servicing rights retained as well as our maximum exposure to loss including the unpaid principal balance (UPB) of the transferred loans:
 
September 30, 2018
 
December 31, 2017
Carrying value of assets
 
 
 
MSRs, at fair value
$
111,586

 
$
227

MSRs, at amortized cost
—

 
97,832

Advances and match funded advances
61,500

 
57,636

UPB of loans transferred
11,118,533

 
12,077,635

Maximum exposure to loss
$
11,291,619

 
$
12,233,330

At September 30, 2018 and December 31, 2017, 7.4% 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 September 30, 2018 and December 31, 2017, Loans held for investment included $78.1 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.
Mortgage-Backed Securitizations
We have concluded we are the primary beneficiary of certain residential mortgage-backed securitizations as a result of beneficial interests consisting of residual securities, which expose us to the expected losses and residual returns of the trust, and our role as master servicer, where we have the ability to direct the activities that most significantly impact the performance of the trust.
The table below presents the carrying value and classification of the assets and liabilities of two consolidated mortgage-backed securitization trusts included in our unaudited consolidated balance sheet at September 30, 2018 as a result of residual securities issued by the trust that we acquired during the third quarter of 2018.

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Loans held for investment, at fair value - Restricted for securitization investors
$
28,373

Financing liability - Owed to securitization investors, at fair value
26,643

Upon consolidation of the securitization trusts, we elected to apply the measurement alternative to ASC Topic 820, Fair Value Measurement for collateralized financing entities. The measurement alternative requires a reporting entity to use the more observable of the fair value of the financial assets or the financial liabilities to measure both the financial assets and the financial liabilities of the entity. We determined that the fair value of the loans held by the trusts is more observable than the fair value of the debt certificates issued by the trusts. Through the application of the measurement alternative, the fair value of the financial liabilities of the trusts are measured as the difference between the fair value of the financial assets and the fair value of our investment in the residual securities of the trusts.
Holders of the debt issued by these entities have recourse only to the assets of the SPE for satisfaction of the debt and have no recourse against the assets of Ocwen. Similarly, the general creditors of Ocwen have no claim on the assets of the trusts. Our exposure to loss as a result of our continuing involvement is limited to the carrying values of our investments in the residual securities of the trusts, our MSRs and related advances. At September 30, 2018, MSRs of $0.2 million and our $1.7 million investment in the residual securities of the trusts were eliminated in consolidation. Advances outstanding at September 30, 2018 were $1.2 million.
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 decision to exit 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:
 
 
 
September 30, 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
 
$
145,417

 
$
145,417

 
$
214,262

 
$
214,262

Loans held for sale, at lower of cost or fair value (b)
3
 
72,019

 
72,019

 
24,096

 
24,096

Total Loans held for sale
 
 
217,436

 
217,436

 
238,358

 
238,358

 
 
 
 
 
 
 
 
 
 

16


 
 
 
September 30, 2018
 
December 31, 2017
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Loans held for investment, at fair value
 
 
 
 
 
 
 
 
 
Loans held for investment - Reverse mortgages (a)
3
 
5,279,187

 
5,279,187

 
4,715,831

 
4,715,831

Loans held for investment - Restricted for securitization investors (a)
3
 
28,373

 
28,373

 
—

 
—

Total loans held for investment
 
 
5,307,560

 
5,307,560

 
4,715,831

 
4,715,831

 
 
 
 
 
 
 
 
 
 
Advances (including match funded) (c)
3
 
1,101,104

 
1,101,104

 
1,356,393

 
1,356,393

Automotive dealer financing notes (including match funded) (c)
3
 
—

 
—

 
32,757

 
32,590

Receivables, net (c)
3
 
155,937

 
155,937

 
199,529

 
199,529

Mortgage-backed securities, at fair value (a)
3
 
1,670

 
1,670

 
1,592

 
1,592

U.S. Treasury notes (a)
1
 
1,059

 
1,059

 
1,567

 
1,567

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

 
 

Match funded liabilities (c)
3
 
$
714,246

 
$
710,303

 
$
998,618

 
$
992,698

Financing liabilities:
 
 
 
 
 
 
 
 
 
HMBS-related borrowings, at fair value (a)
3
 
5,184,227

 
5,184,227

 
4,601,556

 
4,601,556

Financing liability - MSRs pledged, at fair value (a)
3
 
620,199

 
620,199

 
508,291

 
508,291

Financing liability - Owed to securitization investors, at fair value (a)
3
 
26,643

 
26,643

 
—

 
—

Other (c)
3
 
72,477

 
57,984

 
85,227

 
65,202

Total Financing liabilities
 
 
$
5,903,546

 
$
5,889,053

 
$
5,195,074

 
$
5,175,049

Other secured borrowings:
 
 
 
 
 
 
 
 
 
Senior secured term loan (c) (d)
2
 
230,295

 
236,866

 
290,068

 
299,741

Other (c)
3
 
115,130

 
115,130

 
255,782

 
255,782

Total Other secured borrowings
 
 
345,425

 
351,996

 
545,850

 
555,523

 
 
 
 
 
 
 
 
 
 
Senior notes:
 
 
 
 
 
 
 
 
 
Senior unsecured notes (c) (d)
2
 
3,122

 
3,090

 
3,122

 
2,872

Senior secured notes (c) (d)
2
 
344,627

 
352,071

 
344,216

 
355,550

Total Senior notes
 
 
347,749

 
355,161

 
347,338

 
358,422

 
 
 
 
 
 
 
 
 
 
Derivative financial instrument assets (liabilities), at fair value (a)
 
 
 

 
 

 
 

 
 

Interest rate lock commitments
2
 
2,816

 
2,816

 
3,283

 
3,283

Forward mortgage-backed securities
1
 
(1,873
)
 
(1,873
)
 
(545
)
 
(545
)
Interest rate caps
3
 
1,211

 
1,211

 
2,056

 
2,056

 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
 
 
 
 
 
 
 
 
Mortgage servicing rights, at fair value (a)
3
 
$
999,282

 
$
999,282

 
$
671,962

 
$
671,962

Mortgage servicing rights, at amortized cost (c) (e)
3
 
—

 
—

 
336,882

 
418,745

Total Mortgage servicing rights
 
 
$
999,282

 
$
999,282

 
$
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-

17


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
 
Loans Held for Inv. - Restricted for Securitiza-
tion Investors
 
Financing Liability - Owed to Securit -
ization Investors
 
Mortgage-Backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
Three months ended September 30, 2018
Beginning balance
$
5,143,758

 
$
(5,040,983
)
 
$
—

 
$
—

 
$
1,732

 
$
(672,619
)
 
$
1,657

 
$
1,043,995

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

Purchases
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,924

Issuances
223,563

 
(229,169
)
 
—

 
—

 
—

 
—

 
—

 
1,930

Consolidation of mortgage-backed securitization trusts
—

 
—

 
28,373

 
(26,643
)
 
—

 
—

 
—

 
—

Sales
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(8,119
)
Settlements
(110,584
)
 
108,790

 
—

 
—

 
—

 
49,620

 
—

 
—

Transfers (to) from:
 
 
 
 


 


 
 
 
 
 
 
 
 
Loans held for sale, at fair value
(253
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other assets
(170
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Receivables, net
(20
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
112,536

 
(120,379
)
 
28,373

 
(26,643
)
 
—

 
49,620

 
—

 
(3,265
)
Total realized and unrealized gains (losses) included in earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
22,893

 
(22,865
)
 
—

 
—

 
(62
)
 
2,681

 
(446
)
 
(41,448
)
Calls and other
—

 
—

 
—

 
—

 
—

 
119

 
—

 
—

 
22,893

 
(22,865
)
 
—

 
—

 
(62
)
 
2,800

 
(446
)
 
(41,448
)
Transfers in and / or out of Level 3
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Ending balance
$
5,279,187

 
$
(5,184,227
)
 
$
28,373

 
$
(26,643
)
 
$
1,670

 
$
(620,199
)
 
$
1,211

 
$
999,282


18


 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-Backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
Three months ended September 30, 2017
Beginning balance
$
4,223,776

 
$
(4,061,626
)
 
$
8,986

 
$
(441,007
)
 
$
1,937

 
$
625,650

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 
 
 
Purchases
—

 
—

 
—

 
—

 
655

 
—

Issuances
263,169

 
(317,277
)
 
—

 
(54,601
)
 
—

 
(715
)
Sales
—

 
—

 
—

 
—

 
—

 
(311
)
Settlements
(118,991
)
 
111,677

 
—

 
19,770

 
(403
)
 
—

Transfers (to) from:
 
 
 
 
 
 
 
 
 
 
 
Other assets
88

 
—

 
—

 
—

 
—

 
—

 
144,266

 
(205,600
)
 
—

 
(34,831
)
 
252

 
(1,026
)
Total realized and unrealized gains (losses) included in earnings
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
91,718

 
(91,051
)
 
341

 
27,024

 
(350
)
 
(26,477
)
Calls and other
—

 
—

 
—

 
971

 
—

 
—

 
91,718

 
(91,051
)
 
341

 
27,995

 
(350
)
 
(26,477
)
Transfers in and / or out of Level 3
—

 
—

 
—

 
—

 
—

 
—

Ending balance
$
4,459,760

 
$
(4,358,277
)
 
$
9,327

 
$
(447,843
)
 
$
1,839

 
$
598,147


19


 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Loans Held for Inv. - Restricted for Securitiza-
tion Investors
 
Financing Liability - Owed to Securiti-
zation Investors
 
Mortgage-backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
Nine months ended September 30, 2018
Beginning balance
$
4,715,831

 
$
(4,601,556
)
 
$
—

 
$
—

 
$
1,592

 
$
(508,291
)
 
$
2,056

 
$
671,962

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

Purchases
—

 
—

 
—

 
—

 
—

 
—

 
95

 
8,809

Issuances
711,035

 
(728,745
)
 
—

 
—

 
—

 
(279,586
)
 
—

 
(445
)
Consolidation of mortgage-backed securitization trusts
—

 
—

 
28,373

 
(26,643
)
 
—

 
—

 
—

 
—

Sales
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(8,274
)
Settlements
(296,800
)
 
290,338

 
—

 
—

 
—

 
154,129

 
(371
)
 
—

Transfers (to) from:
 
 
 
 

 

 
 
 
 
 
 
 
 
MSRs carried at amortized cost, net of valuation allowance
—

 
—

 
—

 
—

 
—

 
—

 
—

 
418,925

Loans held for sale, at fair value
(694
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other assets
(307
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Receivables, net
(92
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
413,142

 
(438,407
)
 
28,373

 
(26,643
)
 
—

 
(125,457
)
 
(276
)
 
419,015

Total realized and unrealized gains (losses) included in earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
150,214

 
(144,264
)
 
—

 
—

 
78

 
11,323

 
(569
)
 
(91,695
)
Calls and other
—

 
—

 
—

 
—

 
—

 
2,226

 
—

 
—

 
150,214

 
(144,264
)
 
—

 
—

 
78

 
13,549

 
(569
)
 
(91,695
)
Transfers in and / or out of Level 3
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Ending Balance
$
5,279,187

 
$
(5,184,227
)
 
$
28,373

 
$
(26,643
)
 
$
1,670

 
$
(620,199
)
 
$
1,211

 
$
999,282


20


 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
Nine months ended September 30, 2017
Beginning balance
$
3,565,716

 
$
(3,433,781
)
 
$
8,342

 
$
(477,707
)
 
$
1,836

 
$
679,256

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 

 
 

Purchases
—

 
—

 
—

 
—

 
655

 
—

Issuances
961,642

 
(981,730
)
 
—

 
(54,601
)
 
—

 
(2,131
)
Sales
—

 
—

 
—

 
—

 
—

 
(541
)
Settlements
(311,560
)
 
287,908

 
—

 
52,963

 
(445
)
 
—

Transfers (to) from:
 
 
 
 
 
 
 
 
 
 
 
Other assets
(1,335
)
 
—

 
—

 
—

 
—

 
—

 
648,747

 
(693,822
)
 
—

 
(1,638
)
 
210

 
(2,672
)
Total realized and unrealized gains (losses) included in earnings
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
245,297

 
(230,674
)
 
985

 
27,024

 
(207
)
 
(78,437
)
Calls and other
—

 
—

 
—

 
4,478

 
—

 
—

 
245,297

 
(230,674
)
 
985

 
31,502

 
(207
)
 
(78,437
)
Transfers in and / or out of Level 3
—

 
—

 
—

 
—

 
—

 
—

Ending balance
$
4,459,760

 
$
(4,358,277
)
 
$
9,327

 
$
(447,843
)
 
$
1,839

 
$
598,147

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 t