NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(Dollars in millions, except per share data and unless otherwise indicated)
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Note 1 - Organization and Basis of Presentation |
Organization
Ocwen Financial Corporation (NYSE: OCN) (Ocwen, OFC, we, us and our) is a non-bank mortgage servicer and originator providing solutions to homeowners, clients, investors and others through its primary operating subsidiary, PHH Mortgage Corporation (PMC). We are headquartered in West Palm Beach, Florida with offices and operations in the United States (U.S.), the United States Virgin Islands (USVI), India and the Philippines. Ocwen is a Florida corporation organized in February 1988.
Ocwen directly or indirectly owns all of the outstanding common stock of its operating subsidiaries, including PMC since its acquisition on October 4, 2018, Ocwen Financial Solutions Private Limited (OFSPL) and Ocwen USVI Services, LLC (OVIS). Effective May 3, 2021, Ocwen holds a 15% equity interest in MAV Canopy HoldCo I, LLC (MAV Canopy) that invests in mortgage servicing assets through its licensed mortgage subsidiary MSR Asset Vehicle LLC (MAV). See Note 10 - Investment in Equity Method Investee and Related Party Transactions for additional information.
We perform servicing activities related to our own MSR portfolio (primary) and on behalf of other servicers (subservicing), the largest being Rithm Capital Corp. (Rithm), formerly known as 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 referred to as GSEs), the Government National Mortgage Association (Ginnie Mae, and together with the GSEs, the Agencies) and private-label securitizations (PLS, or non-Agency).
We source our servicing portfolio through multiple channels, including retail, wholesale, correspondent, flow MSR purchase agreements, the Agency Cash Window programs and bulk MSR purchases. We originate, sell and securitize conventional (conforming to the GSE underwriting standards) loans and government-insured (Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA)) forward mortgage loans, generally with servicing retained. The GSEs or Ginnie Mae guarantee these mortgage securitizations. We originate and purchase Home Equity Conversion Mortgage (HECM) loans, or reverse mortgages, which are mostly insured by the FHA and we are an approved issuer of Home Equity Conversion Mortgage-Backed Securities (HMBS) that are guaranteed by Ginnie Mae.
We had a total of approximately 4,700 employees at March 31, 2023 of which approximately 3,100 were located in India and approximately 400 were based in the Philippines. Our operations in India and the Philippines provide internal support services to our loan servicing and originations businesses and our corporate functions.
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, 2023 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2023. 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, 2022.
Change in Presentation
Effective in the fourth quarter of 2022, in our consolidated statements of operations we present all fair value gains and losses of Other financing liabilities, at fair value in MSR valuation adjustments, net (previously reported in Pledged MSR liability expense). In addition, effective December 31, 2022, we changed our accounting policy from the nature of the distribution approach to the cumulative earnings approach for classifying distributions from our equity method investee MAV Canopy between operating and investing cash flows. The consolidated statements of operations and the consolidated statements of cash flows for the three months ended March 31, 2022 have been recast to conform to the current presentation policy. For additional information, including the impact on previously reported periods, see the “Change in Presentation” section of Note 1
to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.
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 and the provision for losses that may arise from contingencies including litigation proceedings. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.
Recently Adopted Accounting Standards
Business Combinations (ASC 805) - Accounting for Contract Assets and Contract Liabilities (ASU 2021-08)
The amendments in this Update apply to all entities that enter into a business combination within the scope of Subtopic 805-10, Business Combinations— Overall. The amendments in this ASU are issued to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the following: (1) recognition of an acquired contract liability and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in this ASU require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with ASC 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the acquiree applied ASC 606 to determine what to record for the acquired revenue contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements (if the acquiree prepared financial statements in accordance with GAAP).
Our adoption of this ASU on January 1, 2023 did not have a material impact on our consolidated financial statements.
Financial Instruments—Credit Losses (ASC 326) Troubled Debt Restructurings and Vintage Disclosures (ASU 2022-02)
The amendments in this ASU are related to 1) troubled debt restructurings (TDRs) and 2) vintage disclosures which affect all entities after they have adopted ASU 2016-13. The amendments eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40 Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in ASC 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. The amendments in this ASU also requires an entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases with the scope of ASC 326 – Financial Instruments – Credit Losses – Measured at Amortized Cost.
Our adoption of this ASU on January 1, 2023 did not have a material impact on our consolidated financial statements.
Accounting Standards Issued but Not Yet Adopted
Leases (Topic 842) Common Control Arrangements (ASU 2023-01)
The amendments in this ASU affect 1) all lessees that are a party to a lease between entities under common control in which there are leasehold improvements, and apply to all entities and 2) require leasehold improvements associated with common control leases be a) amortized by the lessee over the useful life of the leasehold improvements to the common group (regardless of lease term) and b) accounted for as a transfer between two entities under common control through an adjustment to equity, if and when the lessee no longer controls the use of the underlying asset.
The amendments in this ASU are effective for us on January 1, 2024. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
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Note 2 – Securitizations and Variable Interest Entities |
We securitize, sell and service forward and reverse residential mortgage loans and regularly transfer financial assets in connection with asset-backed financing arrangements. We have aggregated these transfers of financial assets and asset-backed financing arrangements using special purpose entities (SPEs) or variable interest entities (VIEs) into the following groups: (1) securitizations of residential mortgage loans, (2) financings of advances and (3) MSR financings. Financing transactions that do not use SPEs or VIEs are disclosed in Note 12 – Borrowings.
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
Transfers of Forward Loans
We sell or securitize forward loans that we originate or purchase 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 of loans accounted for as sales that were outstanding:
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| | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Proceeds received from securitizations | $ | 2,316.8 | | | $ | 3,588.3 | | | | | |
| Servicing fees collected (1) | 27.0 | | | 21.7 | | | | | |
Purchases of previously transferred assets, net of claims reimbursed | (3.1) | | | (2.0) | | | | | |
| $ | 2,340.6 | | | $ | 3,607.9 | | | | | |
(1)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.
In connection with these transfers, we retained MSRs of $31.1 million and $45.8 million during the three months ended March 31, 2023 and 2022, respectively.
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. We receive customary origination representations and warranties from our network of approved correspondent lenders. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur. Also refer to the Loan Put-Back and Related Contingencies section of Note 20 – Contingencies.
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 an estimate of our maximum exposure to loss including the UPB of the transferred loans:
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| March 31, 2023 | | December 31, 2022 |
| Carrying value of assets | | | |
| MSRs, at fair value | $ | 515.2 | | | $ | 524.3 | |
| Advances | 62.5 | | | 75.9 | |
| UPB of loans transferred (1) | 39,283.7 | | | 37,571.1 | |
| Maximum exposure to loss (2) | $ | 39,861.4 | | | $ | 38,171.2 | |
(1)Includes $7.5 billion and $6.8 billion of loans delivered to Ginnie Mae as of March 31, 2023 and December 31, 2022, respectively, and includes loan modifications repurchased and delivered through the Ginnie Mae Early Buyout Program (EBO).
(2)The maximum exposure to loss in the table above is primarily based on the remaining UPB of loans serviced and assumes all loans were deemed worthless as of the reporting date. It does not take into consideration the proceeds from the underlying collateral liquidation, recoveries or any other recourse available to us, including from mortgage insurance, guarantees or correspondent sellers. We do not believe the maximum exposure to loss from our involvement with these previously transferred loans is representative of the actual loss we are likely to incur based on our contractual rights and historical loss experience and projections. Also, refer to the Loan Put-Back and Related Contingencies section in Note 20 – Contingencies.
At March 31, 2023 and December 31, 2022, 2.2% and 2.5%, respectively, of the transferred residential loans that we service were 60 days or more past due, including 60 days or more past due loans under forbearance. This includes 7.2% and 8.3%, respectively, of loans delivered to Ginnie Mae that are 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. As the transfers of the HECM loans do not qualify for sale accounting, we account for these transfers as financings, with the HECM loans classified as Loans held for investment, at fair value, on our unaudited consolidated balance sheets.
Financings of Advances using SPEs
Match funded advances, i.e., advances that are pledged as collateral to our advance facilities, result from our transfers of residential loan servicing advances to SPEs - that we include in our consolidate financial statements - in exchange for cash.
The table below presents the carrying value and classification of the assets and liabilities of the advance financing facilities:
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| March 31, 2023 | | December 31, 2022 |
| Match funded advances (Advances, net) | $ | 548.8 | | | $ | 608.4 | |
| Debt service accounts (Restricted cash) | 15.9 | | | 15.8 | |
| Unamortized deferred lender fees (Other assets) | 1.4 | | | 2.3 | |
| Prepaid interest (Other assets) | 0.7 | | | 0.9 | |
| Advance match funded liabilities | 468.9 | | | 512.5 | |
MSR Financings using SPEs
We consolidate two SPEs (PMC ESR Trusts) in connection with a third-party financing facility secured by certain of PMC’s Fannie Mae and Freddie Mac MSRs (Agency MSRs) and one SPE (PMC PLS ESR Issuer LLC) in connection with our PLS MSR financing facility (Ocwen Excess Spread-Collateralized Notes, Series 2022-PLS1 Class A).
The table below presents the carrying value and classification of the assets and liabilities of the Agency MSR financing facility and the PLS Notes facility:
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| March 31, 2023 | | December 31, 2022 |
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| MSRs pledged (MSRs, at fair value) | $ | 599.8 | | | $ | 696.9 | |
| Debt service account (Restricted cash) | 1.9 | | | 1.8 | |
| Unamortized deferred lender fees (Other assets) | 0.6 | | | 1.1 | |
| Outstanding borrowings (MSR financing facilities, net) | 342.3 | | | 366.5 | |
| Unamortized debt issuance costs (MSR financing facilities, net) | 0.6 | | | 0.8 | |
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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.
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 measured, at fair value are as follows:
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| | | | March 31, 2023 | | December 31, 2022 |
| | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Financial assets | | | | | | | | | |
| Loans held for sale | | | | | | | | | |
| Loans held for sale, at fair value (a) (e) | 3, 2 | | $ | 845.2 | | | $ | 845.2 | | | $ | 617.8 | | | $ | 617.8 | |
Loans held for sale, at lower of cost or fair value (b) | 3 | | 4.2 | | | 4.2 | | | 4.9 | | | 4.9 | |
| Total Loans held for sale | | | $ | 849.4 | | | $ | 849.4 | | | $ | 622.7 | | | $ | 622.7 | |
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| | | | March 31, 2023 | | December 31, 2022 |
| | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | | | | | | |
| Loans held for investment, at fair value | | | | | | | | | |
| Loans held for investment - Reverse mortgages (a) | 3 | | $ | 7,662.8 | | | $ | 7,662.8 | | | $ | 7,504.1 | | | $ | 7,504.1 | |
Loans held for investment - Restricted for securitization investors (a) | 3 | | 6.2 | | | 6.2 | | | 6.7 | | | 6.7 | |
| Total Loans held for investment, at fair value | | | $ | 7,669.0 | | | $ | 7,669.0 | | | $ | 7,510.8 | | | $ | 7,510.8 | |
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Advances, net (c) | 3 | | $ | 656.9 | | | $ | 656.9 | | | $ | 718.9 | | | $ | 718.9 | |
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| Receivables, net (c) | 3 | | 200.2 | | | 200.2 | | | 180.8 | | | 180.8 | |
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| Financial liabilities | | | | | | | | | |
| Advance match funded liabilities (c) | 3 | | $ | 469.9 | | | $ | 469.9 | | | $ | 513.7 | | | $ | 513.7 | |
| Financing liabilities, at fair value | | | | | | | | | |
| HMBS-related borrowings (a) | 3 | | $ | 7,470.6 | | | $ | 7,470.6 | | | $ | 7,326.8 | | | $ | 7,326.8 | |
| Other financing liabilities | | | | | | | | | |
| Financing liability - Pledged MSR liability (a) | 3 | | $ | 883.2 | | | $ | 883.2 | | | $ | 931.7 | | | $ | 931.7 | |
| Financing liability - Excess Servicing Spread (ESS) (a) | 3 | | 263.1 | | | 263.1 | | | 199.0 | | | 199.0 | |
| Financing liability - Owed to securitization investors (a) | 3 | | 6.2 | | | 6.2 | | | 6.7 | | | 6.7 | |
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| Total Other financing liabilities | | | $ | 1,152.5 | | | $ | 1,152.5 | | | $ | 1,137.4 | | | $ | 1,137.4 | |
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| Mortgage loan warehouse facilities (c) | 3 | | 948.3 | | | 948.3 | | | 702.7 | | | 702.7 | |
| MSR financing facilities (c) (d) | 3 | | 914.6 | | | 893.8 | | | 953.8 | | | 932.1 | |
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| Senior notes: | | | | | | | | | |
| PMC Senior secured notes due 2026 (c) (d) | 2 | | $ | 369.8 | | | $ | 329.2 | | | $ | 369.4 | | | $ | 331.4 | |
| OFC Senior secured notes due 2027 (c) (d) | 3 | | 232.5 | | | 221.6 | | | 230.2 | | | 223.9 | |
| Total Senior notes | | | $ | 602.3 | | | $ | 550.8 | | | $ | 599.6 | | | $ | 555.2 | |
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| Derivative financial instrument assets (liabilities), net | | | | | | | | | |
| Interest rate lock commitments (IRLCs) (a) | 3 | | $ | 4.8 | | | $ | 4.8 | | | $ | (0.7) | | | $ | (0.7) | |
| Forward sales of loans (a) | 1 | | — | | | — | | | 0.5 | | | 0.5 | |
| TBA / Forward mortgage-backed securities (MBS) trades (a) | 1 | | 1.4 | | | 1.4 | | | (0.7) | | | (0.7) | |
| Interest rate swap futures (a) | 1 | | 22.9 | | | 22.9 | | | (13.6) | | | (13.6) | |
| TBA forward pipeline trades (a) | 1 | | (10.4) | | | (10.4) | | | 6.6 | | | 6.6 | |
| Option contracts (a) | 2 | | 1.3 | | | 1.3 | | | — | | | — | |
| Other (a) | 3 | | 0.2 | | | 0.2 | | | (0.1) | | | (0.1) | |
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| MSRs (a) | 3 | | $ | 2,580.6 | | | $ | 2,580.6 | | | $ | 2,665.2 | | | $ | 2,665.2 | |
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(a)Measured at fair value on a recurring basis.
(b)Measured at fair value on a non-recurring basis.
(c)Disclosed, but not measured, at fair value.
(d)The carrying values are net of unamortized debt issuance costs and discount. See Note 12 – Borrowings for additional information.
(e)Loans repurchased from Ginnie Mae securitizations with a fair value of $23.3 million and $32.1 million at March 31, 2023 and December 31, 2022, respectively, are classified as Level 3. The remaining balance of loans held for sale at fair value is classified as Level 2.
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:
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| | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitization Investors | | Loans Held for Sale - Fair Value | | | | ESS Financing Liability | | IRLCs | | | | |
| Three months ended March 31, 2023 |
| Beginning balance | | | | | $ | 6.7 | | | $ | (6.7) | | | $ | 32.1 | | | | | $ | (199.0) | | | $ | (0.7) | | | | | |
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| Purchases, issuances, sales and settlements | | | | | | | | | | | | | | | | | | | |
| Purchases | | | | | — | | | — | | | 12.4 | | | | | — | | | — | | | | | |
| Issuances (1) | | | | | — | | | — | | | — | | | | | (68.7) | | | 5.8 | | | | | |
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| Sales | | | | | — | | | — | | | (20.2) | | | | | — | | | — | | | | | |
| Settlements | | | | | (0.5) | | | 0.5 | | | — | | | | | 6.8 | | | — | | | | | |
| Transfers: | | | | | | | | | | | | | | | | | | | |
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| Loans held for sale, at fair value (1) | | | | | — | | | — | | | — | | | | | — | | | (20.4) | | | | | |
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| Receivables, net | | | | | — | | | — | | | (0.4) | | | | | — | | | — | | | | | |
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| Net addition (disposition/derecognition) | | | | | (0.5) | | | 0.5 | | | (8.2) | | | | | (62.0) | | | (14.6) | | | | | |
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| Change in fair value included in earnings (1) | | | | | — | | | — | | | (0.5) | | | | | (2.1) | | | 20.1 | | | | | |
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| Ending balance | | | | | $ | 6.2 | | | $ | (6.2) | | | $ | 23.3 | | | | | $ | (263.1) | | | $ | 4.8 | | | | | |
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| | | | | Loans Held for Investment - Restricted for Securitization Investors | | Financing Liability - Owed to Securitization Investors | | Loans Held for Sale - Fair Value | | | | | | IRLCs | | | | |
| Three months ended March 31, 2022 |
| Beginning balance | | | | | $ | 7.9 | | | $ | (7.9) | | | $ | 220.9 | | | | | | | $ | 18.1 | | | | | |
| Purchases, issuances, sales and settlements | | | | | | | | | | | | | | | | | | | |
| Purchases | | | | | — | | | — | | | 60.7 | | | | | | | — | | | | | |
| Issuances (1) | | | | | — | | | — | | | — | | | | | | | 79.6 | | | | | |
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| Sales | | | | | — | | | — | | | (47.8) | | | | | | | — | | | | | |
| Settlements | | | | | (0.2) | | | 0.2 | | | — | | | | | | | — | | | | | |
| Transfers: | | | | | | | | | | | | | | | | | | | |
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| Loans held for sale, at fair value (1) | | | | | — | | | — | | | — | | | | | | | (57.5) | | | | | |
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| Receivables, net | | | | | — | | | — | | | (0.1) | | | | | | | — | | | | | |
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| Net addition (disposition/derecognition) | | | | | (0.2) | | | 0.2 | | | 12.8 | | | | | | | 22.1 | | | | | |
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| Change in fair value included in earnings (1) | | | | | — | | | — | | | (3.3) | | | | | | | (34.5) | | | | | |
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| Ending balance | | | | | $ | 7.7 | | | $ | (7.7) | | | $ | 230.4 | | | | | | | $ | 5.7 | | | | | |
(1)IRLC activity (issuances and transfers) represent changes in fair value included in earnings. This activity is presented on a gross basis in the table for disclosure purposes. Total net change in fair value included in earnings attributed to IRLCs is a gain (loss) of $5.6 million and $(12.5) million for the three months ended March 31, 2023 and 2022, respectively. See Note 14 – Derivative Financial Instruments and Hedging Activities.
A reconciliation from the beginning balances to the ending balances of Loans Held for Investment and HMBS-related borrowings, MSRs and Pledged MSR liabilities that we measure at fair value on a recurring basis is disclosed in Note 5 - Reverse Mortgages, Note 7 – Mortgage Servicing and Note 8 — Other Financing Liabilities, at Fair Value, respectively.
The significant unobservable assumptions that we make to estimate the fair value of certain assets and liabilities classified as Level 3 and measured at fair value on a recurring basis are provided below.
Loans Held for Sale
The fair value of loans we purchased from Ginnie Mae guaranteed securitizations is estimated using both observable and unobservable inputs, including published forward Ginnie Mae prices or existing sale contracts, as well as estimated default, prepayment, and discount rates. The significant unobservable input in estimating fair value is the estimated default rate. Accordingly, these repurchased Ginnie Mae loans are classified as Level 3 within the valuation hierarchy.
Loans Held for Investment - Reverse Mortgages
Reverse mortgage loans held for investment are carried at fair value and classified as Level 3 within the valuation hierarchy. Significant unobservable assumptions include conditional prepayment rate and discount rate. The conditional prepayment rate assumption displayed in the table below is inclusive of voluntary (repayment or payoff) and involuntary (inactive/delinquent status and default) prepayments. The discount rate assumption is primarily based on an assessment of current market yields on reverse mortgage loan and tail securitizations, expected duration of the asset and current market interest rates.
| | | | | | | | | | | |
| Significant unobservable assumptions | March 31,
2023 | | December 31,
2022 |
| Life in years | | | |
| Range | 0.9 to 7.8 | | 1.0 to 7.6 |
| Weighted average | 5.2 | | 5.0 | |
| Conditional prepayment rate, including voluntary and involuntary prepayments | | | |
| Range | 12.3% to 44.0% | | 13.2% to 45.0% |
| Weighted average | 17.5 | % | | 18.0 | % |
| Discount rate | 4.7 | % | | 5.1 | % |
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 securitized loans held for investment, excluding future draw commitments, are partially offset by the effects of changes in the assumptions used to value the HMBS-related borrowings that are associated with these loans.
MSRs
MSRs are carried at fair value and classified within Level 3 of the valuation hierarchy. The fair value is equal to the fair value mark provided by the 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 recorded at the estimated sale price.
We engage third-party valuation experts who 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 and prepayment 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, incorporating available industry survey results and client feedback, and including risk premiums and liquidity adjustments. While the models and related assumptions used by the valuation experts are proprietary to them, we understand the methodologies 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 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 and benchmarks of assumptions and value estimates.
A change in the valuation inputs or assumptions may result in a significantly higher or lower fair value measurement. Changes in market interest rates predominantly impact the fair value of Agency MSRs via prepayment speeds by altering the borrower refinance incentive and the non-Agency MSRs due to the impact on advance funding costs. The significant unobservable assumptions used in the valuation of these MSRs include prepayment speeds, delinquency rates, cost to service and discount rates.
| | | | | | | | | | | | | | | | | | | | | | | |
| Significant unobservable assumptions | March 31, 2023 | | December 31, 2022 |
| Agency | | Non-Agency | | Agency | | Non-Agency |
| Weighted average prepayment speed | 7.2 | % | | 7.9 | % | | 6.9 | % | | 7.9 | % |
| Weighted average lifetime delinquency rate | 1.3 | % | | 10.5 | % | | 1.4 | % | | 10.1 | % |
| | | | | | | |
| | | | | | | |
| Weighted average discount rate | 9.6 | % | | 10.5 | % | | 9.6 | % | | 10.6 | % |
| Weighted average cost to service (in dollars) | $ | 72 | | | $ | 205 | | | $ | 72 | | | $ | 201 | |
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 as of March 31, 2023 given hypothetical increases in lifetime prepayments and yield assumptions:
| | | | | | | | | | | |
| Adverse change in fair value | 10% | | 20% |
| Change in weighted average prepayment speeds (in percentage points) | 0.9 | | | 1.7 | |
| Change in fair value due to change in weighted average prepayment speeds | $ | (63.2) | | | $ | (123.6) | |
| Change in weighted average discount rate (in percentage points) | 1.0 | | | 1.9 | |
| Change in fair value due to change in weighted average discount rate | $ | (73.3) | | | $ | (140.9) | |
Financing Liabilities
HMBS-Related Borrowings
HMBS-related borrowings are carried at fair value and classified as Level 3 within the valuation hierarchy. These borrowings are not actively traded, and therefore, quoted market prices are not available. We determine fair value using a discounted cash flow approach, by discounting the projected recovery of principal and interest over the estimated life of the borrowing at a market rate commensurate with the risk of the estimated cash flows.
We engage third-party valuation experts to support our valuation and provide observations and assumptions related to market activities. The fair value is equal to the fair value mark provided by a third-party valuation expert. We evaluate the reasonableness of our fair value estimate and assumptions using historical experience, or cash flow backtesting, adjusted for prevailing market conditions and benchmarks of assumptions and value estimates.
Significant unobservable assumptions include yield spread and discount rate. The yield spread and discount rate assumption for these liabilities are primarily based on an assessment of current market yields for newly issued HMBS, expected duration and current market interest rates.
| | | | | | | | | | | |
| Significant unobservable assumptions | March 31,
2023 | | December 31,
2022 |
| Life in years | | | |
| Range | 0.9 to 7.8 | | 1.0 to 7.6 |
| Weighted average | 5.2 | | 5.0 | |
| Conditional prepayment rate | | | |
| Range | 12.3% to 44.0% | | 13.2% to 45.0% |
| Weighted average | 17.5 | % | | 18.0 | % |
| Discount rate | 4.6 | % | | 5.0 | % |
Significant increases or decreases in any of these assumptions in isolation could result in a significantly higher or lower fair value, respectively. The effects of changes in the assumptions used to value the HMBS-related borrowings are partially offset by the effects of changes in the assumptions used to value the associated pledged loans held for investment, excluding future draw commitments.
Pledged MSR Liabilities
Pledged MSR liabilities are carried at fair value and classified as Level 3 within the valuation hierarchy. We determine the fair value of the pledged MSR liability consistent with the prices provided by third-party valuation experts for the related MSR, considering retained cash flows.
| | | | | | | | | | | |
| Significant unobservable assumptions | March 31,
2023 | | December 31,
2022 |
| Weighted average prepayment speed | 7.6 | % | | 7.6 | % |
| Weighted average delinquency rate | 7.3 | % | | 7.1 | % |
| | | |
| | | |
| Weighted average discount rate | 10.2 | % | | 10.2 | % |
| Weighted average cost to service (in dollars) | $ | 177 | | | $ | 174 | |
Significant increases or decreases in these assumptions in isolation would result in a significantly higher or lower fair value.
ESS Financing Liability
The Excess Servicing Spread (ESS) financing liability consists of the obligation to remit to a third party a specified percentage of future servicing fee collections on reference pools of mortgage loans, which we are entitled to as owner of the related MSRs. We have elected to carry the ESS financing liability at fair value and have classified it as Level 3 within the valuation hierarchy. The fair value represents the net present value of the expected servicing spread cash flows, consistent with the valuation model and behavioral projections of the underlying MSR, as applicable. The fair value of the ESS financing liability is determined using a third-party valuation expert. The significant unobservable assumptions used in the valuation of the ESS financing liability include prepayment speeds, delinquency rates, and discount rates. The discount rate is initially determined based on the expected cash flows and the proceeds from each issuance, and is subsequently updated, at each issuance level, based on the change in discount rate of the underlying MSR, as provided by third-party valuation expert. At March 31, 2023 and December 31, 2022, the weighted average discount rate of the ESS financing liability was 8.0% and 7.6%, respectively. Refer to MSRs above for a description of other significant unobservable assumptions. Also see Note 8 — Other Financing Liabilities, at Fair Value.
Derivative Financial Instruments
IRLCs are classified as Level 3 assets as fallout rates were determined to be significant unobservable assumptions.
| | |
Note 4 – Loans Held for Sale |
| | | | | | | | | | | | | | | |
Loans Held for Sale - Fair Value | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Beginning balance | $ | 617.8 | | | $ | 917.5 | | | | | |
| Originations and purchases | 2,552.4 | | | 3,472.6 | | | | | |
| Proceeds from sales | (2,296.1) | | | (3,570.9) | | | | | |
| Principal collections | (15.4) | | | (29.5) | | | | | |
| Transfers from (to): | | | | | | | |
| Loans held for investment, at fair value | 1.6 | | | 3.1 | | | | | |
| | | | | | | |
| Receivables, net | 1.1 | | | (0.7) | | | | | |
| REO (Other assets) | (4.2) | | | — | | | | | |
| Capitalization of advances on Ginnie Mae modifications | 2.0 | | | 7.3 | | | | | |
| Realized loss on sale of loans | (22.0) | | | (72.3) | | | | | |
| Fair value gain (loss) on loans held for sale | 6.2 | | | (12.3) | | | | | |
| Other | 1.7 | | | 1.0 | | | | | |
Ending balance (1) | $ | 845.2 | | | $ | 716.0 | | | | | |
| UPB | $ | 845.6 | | | $ | 736.6 | | | | | |
| Premium (discount) | 6.7 | | | (3.9) | | | | | |
| Fair value adjustment | (7.1) | | | (16.7) | | | | | |
| Total | $ | 845.2 | | | $ | 716.0 | | | | | |
(1)At March 31, 2023 and 2022, the balances include $23.3 million and $230.4 million, respectively, of loans that we repurchased from Ginnie Mae guaranteed securitizations pursuant to Ginnie Mae servicing guidelines.
| | | | | | | | | | | | | | | |
Loans Held for Sale - Lower of Cost or Fair Value | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Carrying amount before valuation allowance | $ | 8.1 | | | $ | 13.3 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Valuation allowance | (3.9) | | | (4.3) | | | | | |
| | | | | | | |
| Ending balance, net | $ | 4.2 | | | $ | 9.0 | | | | | |
| | | | | | | | | | | | | | | |
Gain (Loss) on Loans Held for Sale, Net | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Gain (loss) on sales of loans, net | | | | | | | |
MSRs retained on transfers of forward mortgage loans | $ | 31.1 | | | $ | 45.8 | | | | | |
| | | | | | | |
| Gain (loss) on sale of forward mortgage loans (1) | (22.1) | | | (72.3) | | | | | |
| Gain (loss) on sale of repurchased Ginnie Mae loans (1) | 0.2 | | | 0.6 | | | | | |
| | | | | | | |
| | 9.1 | | | (25.9) | | | | | |
| Change in fair value of IRLCs | 5.7 | | | (12.1) | | | | | |
| Change in fair value of loans held for sale | 4.8 | | | (11.7) | | | | | |
| Gain (loss) on economic hedge instruments (2) | (16.4) | | | 47.1 | | | | | |
| | | | | | | |
| Other | (0.3) | | | (0.7) | | | | | |
| $ | 2.8 | | | $ | (3.2) | | | | | |
(1)Realized gain (loss) on sale of loans, excluding retained MSRs.
(2)Excludes gains of $0 and $13.3 million during the three months ended March 31, 2023 and 2022, respectively, on inter-segment economic hedge derivatives presented within MSR valuation adjustments, net. Third-party derivatives are hedging the net exposure of MSR and pipeline, and the change in fair value of derivatives are reported within MSR valuation adjustments, net. Inter-segment derivatives are established to transfer risk and allocate hedging gains/losses to the pipeline separately from the MSR portfolio and are eliminated in the consolidated financial statements. Refer to Note 17 – Business Segment Reporting.
| | | | | | | | | | | | | | |
| Note 5 - Reverse Mortgages |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings | | Loans Held for Investment - Reverse Mortgages | | HMBS - Related Borrowings |
| Beginning balance | $ | 7,504.1 | | | $ | (7,326.8) | | | $ | 7,199.8 | | | $ | (6,885.0) | |
| | | | | | | |
| Originations | 235.3 | | | — | | | 620.2 | | | — | |
| Securitization of HECM loans accounted for as a financing (including realized fair value changes) | — | | | (231.2) | | | — | | | (583.9) | |
| Additional proceeds from securitization of HECM loans and tails | — | | | (6.4) | | | — | | | (12.2) | |
| Acquisition | — | | | — | | | 211.3 | | | (209.1) | |
| Repayments (principal payments received) | (235.6) | | | 235.3 | | | (518.8) | | | 517.4 | |
| Transfers to: | | | | | | | |
| Loans held for sale, at fair value | (1.6) | | | — | | | (3.2) | | | — | |
| Receivables, net | (0.9) | | | — | | | (12.5) | | | — | |
| Other assets | — | | | — | | | (0.1) | | | — | |
| Change in fair value included in earnings (1) | 161.5 | | | (141.5) | | | (45.1) | | | 54.0 | |
| Ending balance | $ | 7,662.8 | | | $ | (7,470.6) | | | $ | 7,451.6 | | | $ | (7,118.8) | |
| Securitized loans (pledged to HMBS-Related Borrowings) | $ | 7,545.2 | | | $ | (7,470.6) | | | $ | 7,202.0 | | | $ | (7,118.8) | |
| Unsecuritized loans | 117.6 | | | | | 249.5 | | | |
| Total | $ | 7,662.8 | | | | | $ | 7,451.6 | | | |
(1)See further breakdown in the table below.
| | | | | | | | | | | | | | | |
Gain on Reverse Loans Held for Investment and HMBS-related Borrowings, Net | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Gain on new originations (1) | $ | 5.9 | | | $ | 20.7 | | | | | |
| Gain on tail securitizations (2) | 3.6 | | | 3.8 | | | | | |
| Net interest income (servicing fee) (3) | 5.9 | | | 5.3 | | | | | |
| Other change in fair value of securitized loans held for investment and HMBS-related borrowings, net | 4.5 | | | (21.0) | | | | | |
| | | | | | | |
| Fair value gains (losses) included in earnings (2) | 20.0 | | | 8.8 | | | | | |
| Loan fees and other | 1.2 | | | 4.3 | | | | | |
| $ | 21.2 | | | $ | 13.1 | | | | | |
(1)Includes the changes in fair value of newly originated loans held for investment in the period from interest rate lock commitment date through securitization date.
(2)Includes the cash realized gains upon securitization of tails (previously reported within Other change in fair value of securitized loans held for investment and HMBS-related borrowings, net in the table above).
(3)Includes the interest income on loans held for investment less the interest expense on HMBS-related borrowings (previously reported within Other change in fair value of securitized loans held for investment and HMBS-related borrowings, net in the table above). The net interest income includes the servicing fee Ocwen is contractually entitled to on securitized loans.
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Principal and interest | $ | 204.5 | | | $ | 215.5 | |
| Taxes and insurance | 320.2 | | | 367.5 | |
| Foreclosures, bankruptcy, REO and other | 138.4 | | | 142.1 | |
| | 663.1 | | | 725.1 | |
| Allowance for losses | (6.2) | | | (6.2) | |
| Advances, net | $ | 656.9 | | | $ | 718.9 | |
The following table summarizes the activity in net advances:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
| Beginning balance - before Allowance for Losses | $ | 725.1 | | | $ | 779.5 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| New advances | 188.9 | | | 197.3 | | | | | |
| Transfer from Receivables | 8.9 | | 1.6 | | — | | | | | |
| Sales of advances | (4.2) | | | (0.6) | | | | | |
| Collections of advances and other | (255.6) | | | (239.2) | | | | | |
| | | | | | | |
| | | | | | | |
| Ending balance - before Allowance for Losses | 663.1 | | | 736.9 | | | | | |
| | | | | | | |
| Beginning balance - Allowance for Losses | $ | (6.2) | | | $ | (7.0) | | | | | |
| Provision expense | (1.7) | | | (1.8) | | | | | |
| Net charge-offs and other | 1.7 | | | 1.9 | | | | | |
| Ending balance - Allowance for Losses | (6.2) | | | (6.9) | | | | | |
| | | | | | | |
| Ending balance, net | $ | 656.9 | | | $ | 730.0 | | | | | |
| | |
Note 7 – Mortgage Servicing |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
MSRs – At Fair Value | Three Months Ended March 31, |
| 2023 | | 2022 |
| Agency | | Non-Agency | | Total | | Agency | | Non-Agency | | Total |
| Beginning balance | $ | 1,931.8 | | | $ | 733.5 | | | $ | 2,665.2 | | | $ | 1,571.8 | | | $ | 678.3 | | | $ | 2,250.1 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Sales | — | | | — | | | — | | | (149.3) | | | — | | | (149.3) | |
| Additions: | | | | | | | | | | | |
| Recognized on the sale of residential mortgage loans | 31.1 | | | — | | | 31.1 | | | 45.8 | | | — | | | 45.8 | |
| Purchases | 25.0 | | | — | | | 25.0 | | | 46.8 | | | — | | | 46.8 | |
| Servicing transfers and adjustments | — | | | — | | | — | | | — | | | (0.8) | | | (0.8) | |
| Net additions (sales) | 56.1 | | | — | | | 56.1 | | | (56.7) | | | (0.8) | | | (57.5) | |
| Changes in fair value recognized in earnings: | | | | | | | | | | | |
| Changes in valuation inputs or assumptions | (42.1) | | | (41.5) | | | (83.6) | | | 194.5 | | | 9.0 | | | 203.5 | |
| Realization of expected cash flows | (49.3) | | | (7.8) | | | (57.1) | | | (47.7) | | | (25.2) | | | (72.8) | |
| Fair value gains (losses) recognized in earnings | (91.4) | | | (49.3) | | | (140.7) | | | 146.8 | | | (16.2) | | | 130.7 | |
| | | | | | | | | | | |
| Ending balance | $ | 1,896.5 | | | $ | 684.2 | | | $ | 2,580.6 | | | $ | 1,661.9 | | | $ | 661.3 | | | $ | 2,323.3 | |
The following table summarizes delinquency status of the loans underlying our MSRs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Delinquent loans | Agency | | Non - Agency | | Total | | Agency | | Non - Agency | | Total |
| 30 days | 1.4 | % | | 7.5 | % | | 4.1 | % | | 1.7 | % | | 8.5 | % | | 4.8 | % |
| 60 days | 0.4 | | | 3.0 | | | 1.6 | | | 0.5 | | | 3.3 | | | 1.8 | |
| 90 days or more | 1.0 | | | 8.4 | | | 4.3 | | | 1.1 | | | 8.6 | | | 4.5 | |
| Total 30-60-90 days or more | 2.8 | % | | 18.9 | % | | 10.0 | % | | 3.3 | % | | 20.4 | % | | 11.1 | % |
MSR UPB and Fair Value
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Fair Value | UPB ($ billions) | | Fair Value | UPB ($ billions) | | Fair Value | UPB ($ billions) |
| Owned MSRs | $ | 1,673.1 | | $ | 127.6 | | | $ | 1,710.6 | | $ | 126.2 | | | $ | 1,435.2 | | $ | 115.7 | |
| Rithm and others transferred MSRs (1) (2) | 565.7 | | $ | 46.7 | | | 601.2 | | $ | 47.3 | | | 545.3 | | $ | 51.5 | |
| MAV transferred MSRs (1) | 341.9 | | $ | 25.7 | | | 353.4 | | $ | 26.1 | | | 342.8 | | $ | 26.8 | |
| Total MSRs | $ | 2,580.6 | | $ | 200.0 | | | $ | 2,665.2 | | $ | 199.6 | | | $ | 2,323.3 | | $ | 194.0 | |
(1)MSRs subject to sale agreements that do not meet sale accounting criteria. See Note 8 — Other Financing Liabilities, at Fair Value.
(2)At March 31, 2023, the UPB of MSRs transferred to Rithm for which title is retained by Ocwen was $10.6 billion.
We purchased MSRs with a UPB of $2.0 billion and $4.1 billion from unrelated third-parties during the three months ended March 31, 2023 and 2022, respectively. We sold MSRs, servicing released, with a UPB of $15.8 million and $11.1 billion during the three months ended March 31, 2023 and 2022, respectively, to unrelated third parties, mostly to Freddie Mac under the Voluntary Partial Cancellation (VPC) program for delinquent loans.
Servicing Revenue
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Loan servicing and subservicing fees | | | | | | | |
| Servicing | $ | 90.0 | | | $ | 88.5 | | | | | |
| Subservicing | 19.7 | | | 14.7 | | | | | |
| MAV (1) | 18.2 | | | 16.6 | | | | | |
| Rithm and others (1) | 59.6 | | | 67.1 | | | | | |
| 187.5 | | | 187.0 | | | | | |
| Ancillary income | | | | | | | |
| Custodial accounts (float earnings) | 20.2 | | | 1.0 | | | | | |
| Late charges | 9.6 | | | 10.0 | | | | | |
| Reverse subservicing ancillary fees | 8.1 | | | 3.1 | | | | | |
| Loan collection fees | 2.6 | | | 2.9 | | | | | |
| Recording fees | 1.2 | | | 3.3 | | | | | |
| | | | | | | |
| Boarding and deboarding fees | 0.9 | | | 1.8 | | | | | |
| GSE forbearance fees | 0.2 | | | 0.2 | | | | | |
| Other, net | 2.0 | | | 3.4 | | | | | |
| 44.7 | | | 25.6 | | | | | |
| Total Servicing and subservicing fees | $ | 232.2 | | | $ | 212.6 | | | | | |
(1)Includes servicing fees related to transferred MSRs and subservicing fees. See Note 8 — Other Financing Liabilities, at Fair Value.
Float balances, on which we earn interest referred to as float earnings, (balances in custodial accounts, which represent collections of principal and interest that we receive from borrowers on behalf of investors) are held in escrow by unaffiliated banks and are excluded from our unaudited consolidated balance sheets. Float balances amounted to $1.9 billion, $1.5 billion and $2.1 billion at March 31, 2023, December 31, 2022 and March 31, 2022, respectively.
The following table presents the components of MSR valuation adjustments, net:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| MSR fair value changes due to rates and assumptions (1) | $ | (83.6) | | | $ | 203.5 | |
| MSR realization of expected cash flows (1) | (57.0) | | | (72.8) | |
| Total MSR fair value gains (losses) | (140.6) | | | 130.7 | |
| | | |
| MSR pledged liability fair value changes due to rates and assumptions | 38.3 | | | (56.8) | |
| MSR pledged liability realization of expected cash flows | 14.5 | | | 28.3 | |
| Total MSR pledged liability fair value gains (losses) (2) | 52.8 | | | (28.5) | |
| | | |
| ESS financing liability fair value changes due to rates and assumptions | (2.1) | | | — | |
| ESS financing liability realization of expected cash flows | 6.8 | | | — | |
| Total ESS financing liability fair value gains (losses) (2) | 4.7 | | | — | |
| | | |
| Derivative fair value gain (loss) (MSR economic hedges) | 14.1 | | | (66.8) | |
| | | |
| MSR valuation adjustments, net | $ | (69.0) | | | $ | 35.4 | |
(1)Includes $0.1 million and $0 in three months ended March 31, 2023 and 2022, respectively, of fair value changes on the reverse MSR liability and other.
(2)Also refer to Note 8 — Other Financing Liabilities, at Fair Value.
| | |
Note 8 — Other Financing Liabilities, at Fair Value |
The following tables presents financing liabilities carried at fair value which include pledged MSR liabilities recorded in connection with MSR transfers that do not qualify for sale accounting, liabilities of consolidated mortgage-backed securitization trusts and MSR excess servicing spread (ESS) financing liability carried at fair value (see Note 12 – Borrowings for ESS financing liability carried at amortized cost).
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Outstanding Balance |
| Borrowing Type | Collateral | | | | Maturity | | March 31, 2023 | | December 31, 2022 |
| MSR transfers not qualifying for sale accounting (1): | | | | | | | | | |
| Original Rights to MSRs Agreements, at fair value - Rithm | MSRs | | | | (1) | | $ | 560.2 | | | $ | 601.2 | |
| Pledged MSR liability, at fair value - MAV | MSRs | | | | (1) | | 318.7 | | | 329.8 | |
| Pledged MSR liability, at fair value - Others | MSRs | | | | (1) | | 4.3 | | | 0.7 | |
| | | | | | | 883.2 | | | 931.7 | |
| Financing liability - Owed to securitization investors, at fair value: Residential Asset Securitization Trust 2003-A11 (RAST 2003-A11) (2) | Loans held for investment | | | | October 2033 | | 6.2 | | | 6.7 | |
| ESS financing liability, at fair value (3) | MSRs (3) | | | | (3) | | 263.1 | | | 199.0 | |
| Total Other financing liabilities, at fair value | | | | | | | $ | 1,152.5 | | | $ | 1,137.4 | |
(1)MSRs transferred or sold in transactions which do not qualify for sale accounting treatment are accounted for as secured financings.
(2)Consists of securitization debt certificates due to third parties that represent beneficial interests in trusts that are consolidated.
(3)Consists of the obligation to remit to a third party a specified percentage of future servicing fee collections (servicing spread) on reference pools of MSRs, which we are entitled to as owner of the related MSRs.
The following tables present the activity of the pledged MSR liability recorded in connection with the MSR transfer agreements with Rithm and MAV that do not qualify for sale accounting.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Pledged MSR Liability | Rithm and Others | | MAV (1) | | Total | | Rithm and Others | | MAV (1) | | Total |
| Beginning Balance | $ | 601.9 | | | $ | 329.8 | | | $ | 931.7 | | | $ | 558.9 | | | $ | 238.1 | | | $ | 797.1 | |
| Additions | — | | | — | | | — | | | — | | | — | | | — | |
| MSR transfers | 4.3 | | | 0.1 | | | 4.4 | | | — | | | 39.3 | | | 39.3 | |
| Changes in fair value due to inputs and assumptions | (35.8) | | | (2.5) | | | (38.3) | | | 6.8 | | | 50.0 | | | 56.8 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Runoff and settlement | (5.9) | | | (8.6) | | | (14.5) | | | (19.9) | | | (8.4) | | | (28.3) | |
| Fair value (gain) loss (2) | (41.7) | | | (11.1) | | | (52.8) | | | (13.1) | | | 41.6 | | | 28.5 | |
| | | | | | | | | | | |
| Calls | — | | | — | | | — | | | (0.6) | | | — | | | (0.6) | |
| Ending Balance | $ | 564.5 | | | $ | 318.7 | | | $ | 883.2 | | | $ | 545.2 | | | $ | 319.0 | | | $ | 864.3 | |
(1)The fair value of the Pledged MSR liability differs from the fair value of the associated transferred MSR asset mostly due to the portion of ancillary income that is retained by PMC (shared between PMC and MAV) and other contractual cash flows under the terms of the subservicing agreement.
(2)The changes in fair value of the MAV Pledged MSR liability includes a $14.1 million loss associated with the amendment to the MAV Subservicing Agreement in March 2022, resulting in lower contractual ancillary income retained by PMC.
The following table presents the Pledged MSR liability expense recorded in connection with the MSR sale agreements with MAV, Rithm and others that do not qualify for sale accounting and the ESS financing liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
| Rithm and Others | | MAV | | Total | | Rithm and Others | | MAV | | Total |
| Servicing fees collected on behalf of Rithm | $ | 59.6 | | | $ | 16.4 | | | $ | 76.0 | | | $ | 67.1 | | | $ | 15.7 | | | $ | 82.9 | |
| Less: Subservicing fee retained by Ocwen | (17.3) | | | (2.2) | | | (19.5) | | | (19.4) | | | (2.1) | | | (21.5) | |
| Ancillary fee/income and other settlement (incl. expense reimbursement) | 3.3 | | | — | | | 3.3 | | | (2.3) | | | 0.6 | | | (1.7) | |
| Transferred MSR net servicing fee remittance | $ | 45.6 | | | $ | 14.2 | | | 59.8 | | | $ | 45.4 | | | $ | 14.3 | | | 59.7 | |
| ESS servicing spread remittance | | | | | 10.5 | | | | | | | — | |
| Pledged MSR liability expense | | | | | $ | 70.3 | | | | | | | $ | 59.7 | |
On May 2, 2022, Ocwen entered into amendments to its servicing agreements with Rithm to extend their terms to December 31, 2023 and provide for subsequent, automatic one-year renewals, unless Ocwen provides six months’ advance notice of termination (by July 1), or Rithm provides three months’ advance notice of termination (by October 1), among other changes.
As of March 31, 2023, the UPB of MSRs subject to the servicing agreements with Rithm subsidiaries is $48.1 billion, including $1.8 billion for which Ocwen or Rithm is subservicer for another entity as servicer of record and $10.6 billion for which title has not transferred to Rithm. We describe Rithm’s rights and obligations with respect to such non-transferred MSRs as “Rights to MSRs”. As the third-party consents required for title to the MSRs to transfer were not obtained, the $10.6 billion Rights to MSRs may (i) be acquired by Ocwen at a price determined in accordance with the terms of the previously disclosed agreements entered into in January 2018 (the New RMSR Agreements), at the option of Ocwen, or (ii) be sold, together with Ocwen’s title to those MSRs, to a third party, subject to an additional Ocwen option to acquire at a price based on the winning third-party bid rather than selling to the third party. If the Rights to MSRs are not transferred pursuant to these alternatives, then the Rights to MSRs will remain subject to the subservicing agreement.
As stated above, Rithm has the right to terminate the $10.6 billion Rights to MSRs for convenience, in whole but not in part, subject to three months’ advance notice of termination. If Rithm exercises this termination right, Rithm has the option of seeking (i) the transfer of the MSRs through a sale to a third party of its Rights to MSRs (together with a transfer of Ocwen’s title to those MSRs) or (ii) a substitute RMSR arrangement that substantially replicates the Rights to MSRs structure under which we would transfer title to the MSRs to a successor servicer and Rithm would continue to own the economic rights and obligations related to the MSRs. In the case of option (i), we have a purchase option, as described above. If Rithm is not able to sell the Rights to MSRs or establish a substitute RMSR arrangement with another servicer, Rithm has the right to revoke its termination notice and re-instate the applicable servicing addendum or to establish a subservicing arrangement whereby the MSRs remaining subject to the New RMSR Agreements would be transferred to up to three subservicers who would subservice under Ocwen’s oversight. If such a subservicing arrangement were established, Ocwen would receive an oversight fee and reimbursement of expenses. We may also agree on alternative arrangements that are not contemplated under our existing agreements or that are variations of those contemplated under our existing agreements.
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Servicing-related receivables: | | | |
| Government-insured loan claims - Forward | $ | 53.4 | | | $ | 65.0 | |
| Government-insured loan claims - Reverse | 96.6 | | | 73.8 | |
| | | |
| Due from custodial accounts | 22.7 | | | 16.3 | |
| Servicing fees | 7.7 | | | 6.4 | |
| Reimbursable expenses | 5.8 | | | 5.3 | |
| Subservicing fees and reimbursable expenses - Due from Rithm | 1.6 | | | 3.0 | |
| Receivable from sale of MSRs (holdback) | 1.5 | | | 1.5 | |
| Subservicing fees, reimbursable expenses and other - Due from MAV | 0.5 | | | 1.0 | |
| Other | 0.8 | | | 3.2 | |
| 190.6 | | | 175.5 | |
| Income taxes receivable | 33.4 | | | 34.4 | |
| Due from MAV | 0.4 | | | 0.6 | |
| Other receivables | 5.3 | | | 4.6 | |
| 229.7 | | | 215.1 | |
| Allowance for losses | (29.5) | | | (34.3) | |
| | $ | 200.2 | | | $ | 180.8 | |
At March 31, 2023 and December 31, 2022, the allowance for losses primarily related to receivables of our Servicing business. The allowance for losses related to FHA-, VA- or USDA insured loans repurchased from Ginnie Mae guaranteed securitizations (government-insured claims) was $29.1 million and $33.8 million at March 31, 2023 and December 31, 2022, respectively.
| | | | | | | | | | | | | | | |
Allowance for Losses - Government-Insured Loan Claims | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Beginning balance | $ | 33.8 | | | $ | 41.5 | | | | | |
| Provision | 4.1 | | | 2.2 | | | | | |
| Charge-offs and other, net | (8.8) | | | (2.9) | | | | | |
| Ending balance | $ | 29.1 | | | $ | 40.8 | | | | | |
| | |
| Note 10 - Investment in Equity Method Investee and Related Party Transactions |
We account for our 15% investment in MAV Canopy under the equity method.
As of March 31, 2023, PMC subserviced a total $51.8 billion UPB on behalf of MAV under the Subservicing Agreement, of which $25.7 billion MSR was previously sold by PMC to MAV and remains reported on the consolidated balance sheet of PMC.
During the three months ended March 31, 2023 and 2022, PMC transferred UPB of $8.0 million and $90.3 million under a flow MSR sale agreement (Recapture Agreement), respectively. During the three months ended March 31, 2023 and 2022, PMC transferred MSRs with UPB of nil and $3.4 billion to MAV under various MSR purchase and sale agreements, respectively. These MSR sale transactions between PMC and MAV do not qualify for sale accounting primarily due to the termination restrictions of the subservicing agreement, and are accounted for as secured borrowings. See Note 8 — Other Financing Liabilities, at Fair Value.
MAV Canopy, MAV and Oaktree are deemed related parties to Ocwen. In addition to the transactions described above, Ocwen issued common stock, warrants and senior secured notes to Oaktree in 2021. See also Note 12 – Borrowings and Note 15 – Interest Expense.
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Contingent loan repurchase asset | $ | 257.6 | | | $ | 289.9 | |
| Derivatives, at fair value | 32.6 | | | 7.7 | |
| Prepaid expenses | 20.8 | | | 19.8 | |
| REO | 12.4 | | | 9.8 | |
Intangible assets, net (net of accumulated amortization of $6.5 million and $5.0 million) | 9.8 | | | 14.7 | |
| Derivative margin deposit | 6.7 | | | 1.5 | |
| Prepaid lender fees, net | 5.7 | | | 7.7 | |
| Prepaid representation, warranty and indemnification claims - Agency MSR sale | 5.0 | | | 5.0 | |
| Deferred tax asset, net | 2.6 | | | 2.6 | |
| | | |
| Security deposits | 0.8 | | | 0.8 | |
| | | |
| | | |
| | | |
| Other | 5.3 | | | 4.7 | |
| | $ | 359.3 | | | $ | 364.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Advance Match Funded Liabilities | | Borrowing Capacity | | Outstanding Balance |
| Borrowing Type | | | | Maturity | | Amort. Date (1) | | Total | | Available (2) | | March 31, 2023 | | Dec. 31, 2022 |
Ocwen Master Advance Receivables Trust (OMART) - Advance Receivables Backed Notes - Series 2015-VF5 | | | | Aug. 2053 | | Aug. 2023 | | $ | 450.0 | | | $ | 45.0 | | | $ | 405.0 | | | $ | 422.5 | |
Ocwen GSE Advance Funding (OGAF) - Advance Receivables Backed Notes, Series 2015-VF1 | | | | Aug. 2053 | | Aug. 2023 | | 90.0 | | | 26.1 | | | 63.9 | | | 90.0 | |
| EBO Advance facility (3) | | | | May 2026 | | NA | | 14.4 | | | 13.4 | | | 1.0 | | | 1.2 | |
| | | | | | | | $ | 554.4 | | | $ | 84.5 | | | $ | 469.9 | | | $ | 513.7 | |
| | | | | | | | | | | | | | |
| Weighted average interest rate (4) | | | | | | | | 7.65 | % | | 7.09 | % |
(1)The amortization date of our facilities is the date on which the revolving period ends under each advance facility note and repayment of the outstanding balance must begin if the note is not renewed or extended. In all of our advance facilities, there are multiple notes outstanding. After the amortization date for each note, all collections that represent the repayment of advances pledged to the facility must be applied ratably to each outstanding amortizing note to reduce the balance and, as such, the collection of advances allocated to the amortizing note may not be used to fund new advances.
(2)The committed borrowing capacity under the OMART and OGAF facilities is available to us provided that we have sufficient eligible collateral to pledge. At March 31, 2023, none of the available borrowing capacity of the OMART and OGAF advance financing notes could be used based on the amount of eligible collateral.
(3)We entered into a loan and security agreement to finance the acquisition of advances in connection with the early buyout of certain fixed-rate, fully-amortizing FHA-insured residential mortgage loans. At March 31, 2023, none of the available borrowing capacity of the facility could be used based on the amount of eligible collateral.
(4)The weighted average interest rate, excluding the effect of the amortization of prepaid lender fees. At March 31, 2023 and December 31, 2022, the balance of unamortized prepaid lender fees was $1.4 million and $2.3 million, respectively, and are included in Other assets in our consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage Loan Warehouse Facilities | | | | | Available Borrowing Capacity | | Outstanding Balance |
| Borrowing Type | | Collateral | | Maturity | | | | Un-committed | | Committed (1) | | March 31, 2023 | | Dec. 31, 2022 |
| $175 million Master repurchase agreement | | Loans held for sale (LHFS), Receivables and REO | | Aug. 2023 | | | | $ | 47.8 | | | $ | — | | | $ | 127.2 | | | $ | 142.2 | |
| Master repurchase agreement (2) | | LHFS and Loans Held for Investment (LHFI) | | N/A | | | | — | | | — | | | — | | | 100.3 | |
| $50 million Mortgage warehouse agreement (3) | | LHFS | | N/A | | | | 50.0 | | | — | | | — | | | — | |
| $350 million Participation agreement | | LHFS | | June 2023 | | | | 162.5 | | | — | | | 187.5 | | | 64.3 | |
| $173 million Master repurchase agreement | | LHFS, LHFI and Receivables | | June 2023 | | | | — | | | 110.1 | | | 62.9 | | | 26.1 | |
| Master repurchase agreement | | LHFS | | June 2023 | | | | — | | | 1.0 | | | — | | | — | |
| $50 million Mortgage warehouse agreement | | Reverse LHFS and LHFI | | June 2023 | | | | — | | | 50.0 | | | — | | | 7.8 | |
| $204 million Mortgage warehouse agreement (4) | | LHFS and LHFI | | May 2023 | | | | 147.3 | | | — | | | 56.7 | | | 44.2 | |
| $230 million Mortgage warehouse agreement (5) | | LHFS and Receivables | | (4) | | | | 213.6 | | | — | | | 16.4 | | | 21.9 | |
| Master repurchase agreement (6) | | LHFS | | (5) | | | | — | | | — | | | — | | | — | |
| $50 million Loan and security agreement (7) | | LHFS and Receivables | | March 2024 | | | | — | | | 38.7 | | | 11.3 | | | 7.2 | |
| $500 million Master repurchase agreement (8) | | LHFS and LHFI | | April 2024 | | | | 13.8 | | | — | | | 486.2 | | | 288.8 | |
| | | | | | | | | | | | | | |
| | | | | $ | 635.0 | | | $ | 199.8 | | | $ | 948.3 | | | $ | 702.7 | |
| | | | | | | | | | | | | | |
| Weighted average interest rate (9) | | 6.27 | % | | 5.74 | % |
(1)Of the borrowing capacity on mortgage loan warehouse facilities extended on a committed basis, $14.9 million of the available borrowing capacity could be used at March 31, 2023 based on the amount of eligible collateral that could be pledged.
(2)On February 9, 2023, we voluntarily allowed the facility to mature.
(3)This agreement has no stated maturity date.
(4)In April 2023, the maturity date of this facility was extended to May 15, 2023.
(5)The agreement has no stated maturity date, however each transaction has a maximum duration of four years.
(6)This repurchase agreement provides borrowing at our discretion up to a certain maximum amount of capacity on a rolling 30-day committed basis. This facility is structured as a gestation repurchase facility whereby dry Agency mortgage loans are transferred to a trust which issues a trust certificate that is pledged as the collateral for the borrowings. Each certificate is renewed monthly and the interest rate for this facility is 1ML plus applicable margin. During 2022, we voluntarily reduced the trust certificates to $0.
(7)This revolving facility agreement provides committed borrowing capacity secured by eligible HECM loans that are active buyouts, as defined in the agreement. In April 2023, the maturity date of this facility was extended to March 31, 2024.
(8)In April 2023, the maturity date of this facility was extended to April 6, 2024.
(9)The weighted average interest rate excludes the effect of the amortization of prepaid lender fees. At March 31, 2023 and December 31, 2022, unamortized prepaid lender fees were $0.2 million and $0.5 million, respectively, and are included in Other assets in our consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MSR Financing Facilities, net | | | | | | Available Borrowing Capacity | | Outstanding Balance |
| Borrowing Type | | Collateral | | | | Maturity | | Un-committed | | Committed (1) | | March 31, 2023 | | Dec. 31, 2022 |
| $450 million Agency MSR financing facility (2) | | MSRs | | | | June 2023 | | $ | — | | | $ | 159.7 | | | $ | 290.3 | | | $ | 309.8 | |
| $200 million Ginnie Mae MSR financing facility (3) | | MSRs, Advances | | | | April 2024 | | 47.2 | | | — | | | 152.8 | | | 157.9 | |
| Ocwen Excess Spread-Collateralized Notes, Series 2022-PLS1 (4) | | MSRs | | | | Feb. 2025 | | — | | | — | | | 51.9 | | | 56.7 | |
| Secured Notes, Ocwen Asset Servicing Income Series Notes, Series 2014-1 (5) | | MSRs | | | | Feb. 2028 | | — | | | — | | | 32.1 | | | 33.4 | |
| $400 million Agency MSR financing facility - revolving loan (6) | | MSRs | | | | Dec. 2026 | | — | | | 11.9 | | | 388.1 | | | 396.8 | |
| | | | | | | | | | | | | | |
| Total MSR financing facilities | | | | | $ | 47.2 | | | $ | 171.6 | | | 915.2 | | | 954.6 | |
| | | | | | | | | | | | | | |
| Unamortized debt issuance costs - PLS Notes (7) | | | | | | (0.6) | | | (0.8) | |
| Total MSR financing facilities, net | | | | | | | | | $ | 914.6 | | | $ | 953.8 | |
| | | | | | | | | | | | | | |
| Weighted average interest rate (8) | | | | | | | | 7.77% | | 7.31% |
(1)Of the borrowing capacity on MSR financing facilities extended on a committed basis, $1.9 million of the available borrowing capacity could be used at March 31, 2023 based on the amount of eligible collateral that could be pledged.
(2)PMC’s obligations under this facility are secured by a lien on the related MSRs. Ocwen guarantees the obligations of PMC under this facility. See Note 2 – Securitizations and Variable Interest Entities for additional information. We are subject to daily margining requirements under the terms of the facility.
(3)In connection with this facility, PMC entered into a repurchase agreement pursuant to which PMC has sold a participation certificate representing certain economic interests in the Ginnie Mae MSRs and servicing advances and has agreed to repurchase such participation certificate at a future date at the repurchase price set forth in the repurchase agreement. PMC’s obligations under this facility are secured by a lien on the related Ginnie Mae MSRs and servicing advances. Ocwen guarantees the obligations of PMC under the facility. See (2) above regarding daily margining requirements. In April 2023, the maturity date of this facility was extended to April 26, 2024.
(4)The single class PLS Notes are an amortizing debt instrument with an original principal amount of $75.0 million and a fixed interest rate of 5.114%. The PLS Notes are issued by a trust (PLS Issuer) that is included in our consolidated financial statements, and PLS Issuer’s obligations under the facility are secured by a lien on the related PLS MSRs. Ocwen guarantees the obligations of PLS Issuer under the facility. The principal balance amortizes in accordance with a predetermined schedule subject to modification under certain events, with a final payment due in February 2025. See Note 2 – Securitizations and Variable Interest Entities for additional information.
(5)OASIS noteholders are entitled to receive a monthly payment equal to the sum of: (a) 21 basis points of the UPB of the reference pool of Freddie Mac mortgages; (b) any termination payment amounts; (c) any excess refinance amounts; and (d) the note redemption amounts, each as defined in the indenture supplement for the notes. Monthly amortization of the liability is estimated using the proportion of monthly projected service fees on the underlying MSRs as a percentage of lifetime projected fees, adjusted for the term of the notes.
(6)This facility includes a revolving loan secured by a lien on certain of PMC’s Agency MSRs and is subject to daily margining requirements. Any outstanding borrowings on the revolving loan will convert into a term loan in November 2024.
(7)At March 31, 2023 and December 31, 2022, unamortized prepaid lender fees related to revolving type MSR financing facilities were $4.1 million and $4.9 million, respectively, and are included in Other assets in our consolidated balance sheets.
(8)Weighted average interest rate excluding the effect of the amortization of debt issuance costs and prepaid lender fees.
| | | | | | | | | | | | | | | | | | | | |
| Senior Notes | Interest Rate (1) | | Maturity | Outstanding Balance |
| March 31, 2023 | | December 31, 2022 |
| | | | | | |
| PMC Senior Secured Notes (2) | 7.875% | | March 2026 | $ | 375.0 | | | $ | 375.0 | |
| OFC Senior Secured Notes (due to related parties) (3) | 12% paid in cash or 13.25% paid-in-kind (see below) | | March 2027 | 285.0 | | | 285.0 | |
| Principal balance | | | | 660.0 | | | 660.0 | |
| Discount | | | | | | |
| PMC Senior Secured Notes | | | | (1.2) | | | (1.3) | |
| OFC Senior Secured Notes | | | | (45.3) | | | (47.3) | |
| | | | (46.5) | | | (48.6) | |
| Unamortized debt issuance costs | | | | | | |
| PMC Senior Secured Notes | | | | (4.0) | | | (4.3) | |
| OFC Senior Secured Notes | | | | (7.2) | | | (7.5) | |
| | | | (11.2) | | | (11.8) | |
| | | | | | |
| | | | $ | 602.3 | | | $ | 599.6 | |
(1)Excluding the effect of the amortization of debt issuance costs and discount.
(2)Redeemable at 103.938% and 101.969% before March 15, 2024 and March 15, 2025, respectively, at par thereafter. The Indenture contains customary covenants that limit the ability of PHH Corporation (PHH) and its restricted subsidiaries (including PMC) to, among other things, (i) incur or guarantee additional indebtedness, (ii) incur liens, (iii) pay dividends on or make distributions in respect of PHH’s capital stock or make other restricted payments, (iv) make investments, (v) consolidate, merge, sell or otherwise dispose of certain assets, and (vi) enter into transactions with Ocwen’s affiliates.
(3)Redeemable at a make-whole premium prior to March 4, 2026, at par thereafter. The make-whole premium represents the present value of all scheduled interest payments due through March 4, 2026. The Notes are solely the obligation of Ocwen and are secured by a pledge of substantially all of the assets of Ocwen, including its directly held subsidiaries.
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a company’s debt obligations. On January 24, 2023, S&P affirmed the issuer credit rating for Ocwen of “B-” and the “B” rating of the PMC Senior Secured Notes. On August 15, 2022, Moody’s affirmed PMC’s long-term corporate family ratings of Caa1 and revised their outlook to Positive from Stable. It is possible that additional actions by credit rating agencies could have a material adverse impact on our liquidity and funding position, including materially changing the terms on which we may be able to borrow money.
Covenants
Under the terms of our debt agreements, we are subject to various affirmative and negative covenants. Collectively, these covenants include:
•Financial covenants, including, but not limited to, specified levels of net worth, liquidity and leverage;
•Covenants to operate in material compliance with applicable laws;
•Restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional forms of debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries or of PHH or PMC and their respective subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates;
•Monitoring and reporting of various specified transactions or events, including specific reporting on defined events affecting collateral underlying certain debt agreements; and
•Requirements to provide audited financial statements within specified timeframes, including requirements that Ocwen’s financial statements and the related audit report be unqualified as to going concern.
The most restrictive consolidated net worth requirement contained in our debt agreements with borrowings outstanding at March 31, 2023 is a minimum of $300.0 million tangible net worth for both Ocwen and PMC, as defined in certain of our mortgage warehouse, MSR financing and advance financing facilities agreements. The most restrictive liquidity requirement under our debt agreements with borrowings outstanding at March 31, 2023 is for a minimum of $75.0 million for both Ocwen
and PMC consolidated liquidity, as defined, under certain of our MSR financing facilities and mortgage warehouse agreements. The minimum tangible net worth and liquidity requirements at PMC are subject to the minimum requirement set forth by the Agencies. See also Note 18 – Regulatory Requirements.
We believe we were in compliance with all of the covenants in our debt agreements as of the date of these unaudited consolidated financial statements.
Collateral
Our assets held as collateral for secured borrowings and other unencumbered assets which may be subject to a lien under various collateralized borrowings are as follows at March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | Pledged
Assets | | Collateralized Borrowings | | | | Unencumbered Assets (1) | | | |
| Cash | $ | 216.6 | | | $ | — | | | $ | — | | | | | $ | 216.6 | | | | |
| Restricted cash | 39.3 | | | 39.3 | | | — | | | | | — | | | | |
| Loans held for sale | 849.4 | | | 825.3 | | | 797.6 | | | | | 24.1 | | | | |
| Loans held for investment - securitized (2) | 7,545.2 | | | 7,545.2 | | | 7,470.6 | | | | | — | | | | |
| Loans held for investment - unsecuritized | 117.6 | | | 65.5 | | | 59.4 | | | | | 52.1 | | | | |
| MSRs (3) | 1,673.1 | | | 1,684.9 | | | 1,144.3 | | | | | 0.5 | | | | |
| Advances, net | 656.9 | | | 600.6 | | | 504.0 | | | | | 56.3 | | | | |
| Receivables, net | 200.2 | | | 87.9 | | | 86.1 | | | | | 112.3 | | | | |
| REO | 12.4 | | | 6.2 | | | 5.2 | | | | | 6.2 | | | | |
| Total (4) | $ | 11,310.7 | | | $ | 10,854.9 | | | $ | 10,067.2 | | | | | $ | 468.1 | | | | |
(1)Certain assets are pledged as collateral to the PMC Senior Secured Notes and OFC Senior Secured (second lien) Notes.
(2)Reverse mortgage loans and real estate owned are pledged as collateral to the HMBS beneficial interest holders, and are not available to satisfy the claims of our creditors. Ginnie Mae, as guarantor of the HMBS, is obligated to the holders of the HMBS in an instance of PMC’s default on its servicing obligations, or if the proceeds realized on HECMs are insufficient to repay all outstanding HMBS related obligations. Ginnie Mae has recourse to PMC in connection with certain claims relating to the performance and obligations of PMC as both issuer of HMBS and servicer of HECMs underlying HMBS.
(3)Excludes MSRs transferred to MAV, Rithm and others, and associated Pledged MSR liability recorded as sale accounting criteria are not met. Pledged assets exceed the MSR asset balance due to the netting of certain PLS MSR portfolios with negative and positive fair values as eligible collateral.
(4)The total of selected assets disclosed in the above table does not represent the total consolidated assets of Ocwen. For example, the total excludes premises and equipment and certain other assets.
The OFC Senior Secured Notes due 2027 have a second lien priority on specified security interests, as defined under the OFC Senior Secured Note Agreement and listed in the table below, and have a priority lien on the following assets: investments by OFC in subsidiaries not guaranteeing the PMC Senior Secured Notes, including PHH and MAV; cash and investment accounts at OFC; and certain other assets, including receivables. | | | | | |
| March 31, 2023 |
| Specified net servicing advances | $ | 203.9 |
| Specified deferred servicing fee | 4.4 |
| Specified MSR value less borrowings | 632.7 |
| Specified unrestricted cash balances | 124.1 |
| Specified advance facility reserves | 15.9 |
| Specified loan value | 108.8 |
| Specified residual value | — |
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| Total | $ | 1,089.8 |
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Note 13 – Other Liabilities |
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| March 31, 2023 | | December 31, 2022 |
| Contingent loan repurchase liability | 257.6 | | | $ | 289.9 | |
| Other accrued expenses | 64.3 | | | 75.9 | |
| Due to Rithm - Advance collections, servicing fees and other | 59.8 | | | 64.4 | |
| Checks held for escheat | 52.8 | | | 48.1 | |
| Liability for indemnification obligations | 44.4 | | | 43.8 | |
| Accrued legal fees and settlements | 40.0 | | | 42.2 | |
| Servicing-related obligations | 39.3 | | | 40.1 | |
| Lease liability | 15.2 | | | 16.6 | |
| Derivatives, at fair value | 12.3 | | | 15.7 | |
| Liability for uncertain tax positions | 11.2 | | | 10.9 | |
| Accrued interest payable | 9.8 | | | 13.7 | |
| Liability for unfunded pension obligation and India gratuity plan | 9.3 | | | 9.3 | |
| MSR purchase price holdback | 8.5 | | | 13.9 | |
Derivative related payables | 7.1 | | | 6.0 | |
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| Income taxes payable | 6.8 | | | 6.2 | |
| Mortgage insurance premium payable | 5.1 | | | 5.0 | |
| Excess servicing fee spread payable | 3.5 | | | 3.4 | |
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| Other | 5.5 | | | 3.4 | |
| 652.5 | | | $ | 708.5 | |
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Note 14 – Derivative Financial Instruments and Hedging Activities |
The table below summarizes the fair value, notional and maturity of our derivative instruments. The notional amount of our contracts does not represent our exposure to credit loss. None of the derivatives were designated as a hedge for accounting purposes as of or during the three months ended March 31, 2023 and 2022.
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| | March 31, 2023 | | December 31, 2022 |
| | Maturities | Notional | Fair value | | Maturities | Notional | Fair value |
| Derivative Assets (Other assets) | | | | | | | | |
| Forward sales of Reverse loans | | April, 2023 | $ | 20.0 | | $ | 0.2 | | | January, 2023 | $ | 20.0 | | $ | 0.1 | |
| Forward loans IRLCs | | April 2023 to July 2023 | 612.1 | | 4.3 | | | N/A | — | | — | |
| Reverse loans IRLCs | | April, 2023 | 21.9 | | 0.5 | | | January, 2023 | 13.8 | | 0.6 | |
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| TBA forward MBS trades | | April 2023 to June 2023 | 160.0 | | 1.6 | | | January - March 2023 | 804.0 | | 6.6 | |
| Forward sales of Forward loans | | N/A | — | | — | | | January, 2023 | 100.0 | | 0.4 | |
| Interest rate swap futures | | June, 2023 | 975.0 | | 22.9 | | | N/A | — | | — | |
| Interest rate option contracts | | April, 2023 | 450.0 | | 2.9 | | | N/A | — | | — | |
| Other | | N/A | 189.1 | | 0.3 | | | N/A | — | | — | |
| Total | | | $ | 2,428.1 | | $ | 32.6 | | | | $ | 937.8 | | $ | 7.7 | |
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| Derivative Liabilities (Other liabilities) | | | | | | | | |
| Forward loans IRLCs | | N/A | $ | — | | $ | — | | | January - April 2023 | $ | 540.1 | | $ | (1.3) | |
| Forward sales of Reverse loans | | April, 2023 | 25.0 | | (0.2) | | | January, 2023 | 20.0 | | (0.1) | |
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| TBA forward MBS trades | | April 2023 to June 2023 | 1,103.0 | | (10.5) | | | January - February 2023 | 85.0 | | (0.7) | |
| Interest rate swap futures | | N/A | — | | — | | | January, 2023 | 670.0 | | (13.6) | |
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| Interest rate option contracts | | May, 2023 | 415.0 | | (1.5) | | | N/A | — | | — | |
| Other | | N/A | 7.7 | | (0.1) | | | N/A | 56.4 | | (0.1) | |
| Total | | | $ | 1,550.7 | | $ | (12.3) | | | | $ | 1,371.4 | | $ | (15.7) | |
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The table below summarizes the net gains and losses of our derivative instruments recognized in our consolidated statement of operations. | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Financial Statement Line |
| Gain (loss) | 2023 | | 2022 | | | | | |
| Derivative Instruments | | | | | | | | | |
| Forward loans IRLCs | $ | 5.7 | | | $ | (12.1) | | | | | | | Gain on loans held for sale, net |
| Reverse loans IRLCs | (0.1) | | | (0.4) | | | | | | | Gain on reverse loans held for investment and HMBS-related borrowings, net |
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| TBA trades (economically hedging forward pipeline trades and EBO pipeline) | (16.4) | | | 47.1 | | | | | | | Gain on loans held for sale, net (Economic hedge) |
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| TBA trades (economically hedging reverse pipeline trades) | — | | | — | | | | | | | Gain on reverse loans held for investment and HMBS-related borrowings, net |
| Interest rate swap futures, TBA trades and interest rate option contracts | 14.1 | | | (66.8) | | | | | | | MSR valuation adjustments, net |
| Forward sales of Reverse loans | — | | | (0.4) | | | | | | | Gain on reverse loans held for investment and HMBS-related borrowings, net |
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| Other | 0.3 | | | 0.4 | | | | | | | Other, net |
| Total | $ | 3.5 | | | $ | (32.0) | | | | | | | |
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Interest Rate Risk
MSR Hedging
Under our MSR hedging strategy, the interest-rate sensitive MSR portfolio exposure to be hedged is defined as follows:
•Agency MSR portfolio,
•expected Agency MSR bulk transactions subject to letters of intent (LOI),
•less the Agency MSRs subject to our sale agreements with MAV, Rithm and others (See Note 8 — Other Financing Liabilities, at Fair Value),
•less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings.
The objective of our MSR policy is to provide partial hedge coverage of interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. The hedge coverage ratio, defined as the ratio of hedge and asset rate sensitivity (referred to as DV01) is subject to lower and upper thresholds, as modeled. Since September 2022, our hedge policy establishes a minimum 25% and 30% hedge coverage ratio required for interest rate declines less than, and more than 50 basis points, respectively. We periodically evaluate the hedge coverage ratio at the intended shock interval to determine if it is relevant or warrants adjustment based on market conditions, symmetry of interest rate risk exposure, and liquidity impacts of both the hedge and asset profile under shock scenarios. As the market dictates, management may choose to maintain hedge coverage ratio levels at or beyond the above thresholds, with approval of the Market Risk Committee, in order to preserve liquidity and/or optimize asset returns. During the first quarter of 2023, management targeted a 38% minimum hedge coverage ratio. Accordingly, the changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate changes. In addition, while DV01 measures may remain within the range of our hedging strategy’s objective, actual changes in fair value of the derivatives and MSR portfolio may not offset to the same extent, due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and hedging instruments, among other factors. We continuously evaluate the use of hedging instruments with the objective of enhancing the effectiveness of our interest rate hedging strategy.
Our derivative instruments include forward trades of MBS or Agency TBAs with different banking counterparties, exchange-traded interest rate swap futures and interest rate options. These derivative instruments are not designated as accounting hedges. TBAs, or To-Be-Announced securities, are actively traded, forward contracts to purchase or sell Agency MBS on a specific future date. From time-to-time, we enter into exchange-traded options contracts with purchased put options financed by written call options. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations, within the Servicing segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to minimize the use of third-party derivatives. The fair value gains and losses of such inter-segment derivatives effectively reclassify certain derivative gains and losses between MSR valuation adjustments, net within the Servicing segment and Gain on loans held for sale, net within the Originations segment to reflect the performance of these economic hedging strategies in the appropriate segments (see Note 17 – Business Segment Reporting for the amount of such reclassification). Such inter-segment derivatives are eliminated in our consolidated financial statements.
The derivative instruments are subject to margin requirements, posted as either initial or variation margin. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties through margin calls, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating may require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.
Pipeline Hedging - Interest Rate Lock Commitments and Loans Held for Sale, at Fair Value
In our Originations business, we are exposed to interest rate risk and related price risk during the period from the date of the interest rate lock commitment through (i) the lock commitment cancellation or expiration date or (ii) through the date of sale or securitization of the resulting loan into the secondary mortgage market. Loan commitments for forward loans generally range from 5 to 90 days, with the majority of our commitments to borrowers for 40 to 60 days and our commitments to correspondent sellers for 5 to 15 days. Loans held for sale are generally funded and sold within 3 to 25 days. This interest rate exposure of loans and IRLCs is economically hedged with derivative instruments, including forward sales of Agency TBAs. The objective of our pipeline hedging strategy is to reduce the volatility of the fair value of IRLCs and loans due to market interest rates, thus to preserve the initial gain on sale margin at lock date. We report changes in fair value of these derivative instruments as gain or loss on economic hedge instruments within either Gain on loans held for sale, net or Gain on reverse loans held for investment and HMBS-related borrowings, net in our consolidated statements of operations, respectively. See above description of inter-segment derivatives.
EBO and Loan Modification Hedging – Loans Held for Sale, at fair value
Effective February 2022, management started hedging certain Ginnie Mae EBO loans as well as loans in process of modification pending redelivery/re-securitization to manage interest rate risk. Such interest rate exposure on these loans held for
sale accounted for at fair value is economically hedged using forward trades of TBAs. Changes in fair value of these derivative instruments are reported as gain or loss on economic hedge instruments within Gain on loans held for sale, net in our consolidated statements of operations. Beginning June 2022, management started hedging the in-process GNMA modification pipeline as well.
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Note 15 – Interest Expense |
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| MSR financing facilities | $ | 17.5 | | | $ | 7.8 | | | | | |
| Mortgage loan warehouse facilities | 13.6 | | | 7.1 | | | | | |
| OFC Senior Secured Notes (1) | 10.8 | | | 10.4 | | | | | |
| Advance match funded liabilities | 10.7 | | | 2.7 | | | | | |
| PMC Senior Secured Notes | 7.8 | | | 8.2 | | | | | |
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| Escrow | 1.9 | | | 1.7 | | | | | |
| | $ | 62.3 | | | $ | 37.9 | | | | | |
(1)Notes issued to Oaktree affiliates, inclusive of amortization of debt issuance costs and discount of $2.3 million and $2.0 million for the three months ended March 31, 2023 and 2022, respectively.
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Note 16 – Basic and Diluted Earnings per Share |
Basic earnings or loss per share excludes common stock equivalents and is calculated by dividing net income or loss attributable to Ocwen common stockholders by the weighted average number of common shares outstanding during the period. We calculate diluted earnings or loss per share by dividing net income or loss attributable to Ocwen by the weighted average number of common shares outstanding including the potential dilutive common shares related to outstanding restricted stock awards, stock options and warrants as determined using the treasury stock method. For the three months ended March 31, 2023, we have excluded the effect of all stock options, common stock awards and warrants from the computation of diluted loss per share because of the anti-dilutive effect of our reported net loss.
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Basic earnings (loss) per share | | | | | | | |
| Net income (loss) | $ | (40.2) | | | $ | 58.1 | | | | | |
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Weighted average shares of common stock | 7,533,561 | | | 9,215,122 | | | | | |
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| Basic earnings (loss) per share | $ | (5.34) | | | $ | 6.30 | | | | | |
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| Diluted earnings (loss) per share | | | | | | | |
| Net income (loss) | $ | (40.2) | | | $ | 58.1 | | | | | |
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| Weighted average shares of common stock | 7,533,561 | | | 9,215,122 | | | | | |
| Effect of dilutive elements | | | | | | | |
| Common stock warrants | — | | | 278,320 | | | | | |
| Stock option awards | — | | | 73 | | | | | |
| Common stock awards | — | | | 168,052 | | | | | |
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Dilutive weighted average shares of common stock | 7,533,561 | | | 9,661,567 | | | | | |
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| Diluted earnings (loss) per share | $ | (5.34) | | | $ | 6.01 | | | | | |
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| Stock options and common stock awards excluded from the computation of diluted earnings per share | | | | | | | |
| Anti-dilutive (1) | 34,657 | | | 98,520 | | | | | |
| Market-based (2) | 56,281 | | | 166,269 | | | | | |
(1)Includes stock options and stock awards that are anti-dilutive based on the application of the treasury stock method.
(2)Shares that are issuable upon the achievement of certain market-based performance criteria related to Ocwen’s stock price.
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Note 17 – Business Segment Reporting |
Our business segments reflect the internal reporting that we use to evaluate our operating and financial performance and to assess the allocation of our resources. Our reportable business segments consist of Servicing, Originations, and Corporate Items and Other. During the three months ended March 31, 2023, there have been no changes to our business segments as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Financial information for our segments is as follows:
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| Three Months Ended March 31, 2023 |
| Results of Operations | Servicing | | Originations | | Corporate Items and Other | | Corporate Eliminations (1) | | Business Segments Consolidated |
| Servicing and subservicing fees | $ | 231.8 | | | $ | 0.4 | | | $ | — | | | $ | — | | | $ | 232.2 | |
| Gain on reverse loans held for investment and HMBS-related borrowings, net | 14.0 | | | 7.2 | | | — | | | — | | | 21.2 | |
| Gain (loss) on loans held for sale, net (1) | (1.3) | | | 4.1 | | | — | | | — | | | 2.8 | |
| Other revenue, net | 0.5 | | | 3.1 | | | 2.0 | | | — | | | 5.6 | |
| Revenue | 245.0 | | | 14.8 | | | 2.0 | | | — | | | 261.8 | |
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| MSR valuation adjustments, net (1) | (70.9) | | | 1.9 | | | — | | | — | | | (69.0) | |
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| Operating expenses | 79.8 | | | 18.7 | | | 15.6 | | | — | | | 114.1 | |
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| Other income (expense): | | | | | | | | | |
| Interest income | 4.1 | | | 9.0 | | | 1.0 | | | — | | | 14.1 | |
| Interest expense | (41.6) | | | (9.9) | | | (10.8) | | | — | | | (62.3) | |
| Pledged MSR liability expense | (70.3) | | | — | | | — | | | — | | | (70.3) | |
| Earnings of equity method investee | 0.3 | | | — | | | — | | | — | | | 0.3 | |
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| Other | 0.2 | | | 0.2 | | | 0.8 | | | — | | | 1.2 | |
| Other expense, net | (107.3) | | | (0.7) | | | (9.0) | | | — | | | (117.0) | |
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| Income (loss) before income taxes | $ | (13.0) | | | $ | (2.7) | | | $ | (22.6) | | | $ | — | | | $ | (38.3) | |
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| Three Months Ended March 31, 2022 |
| Results of Operations | Servicing | | Originations | | Corporate Items and Other | | Corporate Eliminations (1) | | Business Segments Consolidated |
| Servicing and subservicing fees | $ | 212.2 | | | $ | 0.5 | | | $ | — | | | $ | — | | | 212.6 | |
| Gain on reverse loans held for investment and HMBS-related borrowings, net | (11.9) | | | 25.0 | | | — | | | — | | | 13.1 | |
| Gain (loss) on loans held for sale, net (1) | (2.7) | | | 12.8 | | | — | | | (13.3) | | | (3.2) | |
| Other revenue, net | 0.4 | | | 6.8 | | | 1.8 | | | — | | | 9.1 | |
| Revenue | 198.0 | | | 45.1 | | | 1.8 | | | (13.3) | | | 231.6 | |
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| MSR valuation adjustments, net (1) | 21.1 | | | 1.1 | | | — | | | 13.3 | | | 35.4 | |
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| Operating expenses | 74.2 | | | 46.3 | | | 6.5 | | | — | | | 127.0 | |
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| Other income (expense): | | | | | | | | | |
| Interest income | 4.1 | | | 3.0 | | | 0.1 | | | — | | | 7.1 | |
| Interest expense | (23.1) | | | (4.2) | | | (10.5) | | | — | | | (37.9) | |
| Pledged MSR liability expense | (59.7) | | | — | | | — | | | — | | | (59.7) | |
| Earnings of equity method investee | 12.0 | | | — | | | — | | | — | | | 12.0 | |
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| Other | 0.7 | | | (1.4) | | | 0.5 | | | — | | | (0.2) | |
| Other expense, net | (66.1) | | | (2.7) | | | (10.0) | | | — | | | (78.7) | |
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| Income (loss) before income taxes | $ | 78.8 | | | $ | (2.8) | | | $ | (14.7) | | | $ | — | | | $ | 61.3 | |
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(1)Corporate Eliminations includes inter-segment derivatives eliminations of $0 and $13.3 million for the three months ended March 31, 2023 and 2022, respectively, reported as Gain on loans held for sale, net with a corresponding offset in MSR valuation adjustments, net.
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| Total Assets | Servicing | | Originations | | Corporate Items and Other | | | | Business Segments Consolidated |
| March 31, 2023 | $ | 11,553.4 | | | $ | 774.0 | | | $ | 299.6 | | | | | $ | 12,627.0 | |
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| December 31, 2022 | $ | 11,535.0 | | | $ | 570.5 | | | $ | 293.7 | | | | | $ | 12,399.2 | |
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| March 31, 2022 | $ | 11,251.8 | | | $ | 610.9 | | | $ | 435.1 | | | | | $ | 12,297.8 | |
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| Depreciation and Amortization Expense | Servicing | | Originations | | Corporate Items and Other | | Business Segments Consolidated |
| Three months ended March 31, 2023 |
| Depreciation expense | $ | 0.2 | | | $ | 0.1 | | | $ | 1.5 | | | $ | 1.8 | |
| Amortization of debt issuance costs and discount | 0.1 | | | — | | | 2.7 | | | 2.8 | |
| Amortization of intangibles | 1.5 | | | — | | | — | | | 1.5 | |
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| Three months ended March 31, 2022 |
| Depreciation expense | $ | 0.2 | | | $ | 0.1 | | | $ | 2.3 | | | $ | 2.6 | |
| Amortization of debt issuance costs and discount | 0.2 | | | — | | | 2.3 | | | 2.5 | |
| Amortization of intangibles | 0.6 | | | — | | | — | | | 0.6 | |
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Note 18 – Regulatory Requirements |
Our business is subject to extensive regulation and supervision by federal, state, local and foreign governmental authorities, including the Consumer Financial Protection Bureau (CFPB), HUD, the SEC and various state agencies that license our servicing and lending activities. Accordingly, we are regularly subject to examinations, inquiries and requests, including civil investigative demands and subpoenas. The GSEs and their conservator, the Federal Housing Finance Agency (FHFA), Ginnie Mae, the United States Treasury Department, various investors, non-Agency securitization trustees and others also subject us to periodic reviews and audits.
We must comply with a large number of federal, state and local consumer protection and other laws and regulations, including, among others, the CARES Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Telephone Consumer Protection Act (TCPA), the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act (FDCPA), the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, as well as individual state and local laws, and federal and local bankruptcy rules. These laws and regulations apply to all facets of our business, including, but not limited to, licensing, loan originations, consumer disclosures, default servicing and collections, foreclosure, filing of claims, registration of vacant or foreclosed properties, handling of escrow accounts, payment application, interest rate adjustments, assessment of fees, loss mitigation, use of credit reports, handling of unclaimed property, safeguarding of non-public personally identifiable information about our customers, and the ability of our employees to work remotely. These complex requirements can and do change as laws and regulations are enacted, promulgated, amended, interpreted and enforced. The general trend among federal, state and local legislative bodies and regulatory agencies as well as state attorneys general has been toward increasing laws, regulations, investigative proceedings and enforcement actions with regard to residential real estate lenders and servicers, which could increase the possibility of adverse regulatory action against us.
In addition, a number of foreign laws and regulations apply to our operations outside of the U.S., including laws and regulations that govern licensing, privacy, employment, safety, payroll and other taxes and insurance and laws and regulations that govern the creation, continuation and the winding up of companies as well as the relationships between shareholders, our corporate entities, the public and the government in these countries. Our foreign subsidiaries are subject to inquiries and examinations from foreign governmental regulators in the countries in which we operate outside of the U.S.
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements and satisfying minimum net worth requirements and non-financial requirements such as satisfactory completion of examinations relating to the licensee’s compliance with applicable laws and regulations.
We are also subject to seller/servicer obligations under agreements with the GSEs, HUD, FHA, VA and Ginnie Mae, including capital requirements related to tangible net worth, as defined by the applicable agency, an obligation to provide audited financial statements within 90 days of the applicable entity’s fiscal year end as well as extensive requirements regarding servicing, selling and other matters. We believe our licensed entities were in compliance with all of their minimum net worth requirements at March 31, 2023. Our non-Agency servicing agreements also contain requirements regarding servicing practices and other matters, and a failure to comply with these requirements could have a material adverse impact on our business.
The most restrictive of the various net worth requirements for licensing and seller/servicer obligations referenced above is based on the UPB of assets serviced by PMC. Under the applicable formula, the required minimum net worth was $376.8 million at March 31, 2023. PMC’s adjusted net worth was $553.3 million at March 31, 2023. The most restrictive of the various liquidity requirements for licensing and seller/servicer obligations referenced above pertains to PMC and the required minimum liquidity was $42.1 million at March 31, 2023. PMC’s liquid assets were $188.0 million at March 31, 2023.
In 2022, the FHFA, the GSEs and Ginnie Mae announced updated minimum financial eligibility requirements for GSE seller/servicers and Ginnie Mae issuers. The updated minimum financial eligibility requirements modify the definitions of tangible net worth and eligible liquidity, modify their minimum standard measurement and include a new risk-based capital ratio, among other changes. The majority of the updated requirements are effective on September 30, 2023, with Ginnie Mae’s risk-based capital requirements effective on December 31, 2024. We believe PMC would be in compliance with the updated requirements if the updated requirements were in effect as of March 31, 2023, except for the new risk-based capital requirement. We are currently evaluating the potential impacts of these updated requirements, the costs and benefits of achieving compliance, and possible courses of action involving external investor solutions, structural solutions or exiting Ginnie Mae forward originations and owned servicing activities. If we are unable to identify and execute a cost-effective solution that allows us to continue these businesses and are unable to replace the lost income from these activities, or if we misjudge the magnitude of the costs and benefits and their impacts on our business, our financial results could be negatively impacted. As of March 31, 2023, our forward owned servicing portfolio included 85,336 government-insured loans with a UPB of $13.7 billion, 7% of our total forward owned MSRs or 5% of our total UPB serviced and subserviced.
New York Department of Financial Services (NY DFS). We operate pursuant to certain regulatory requirements with the NY DFS, including obligations arising under a consent order entered into in March 2017 (the NY Consent Order) and the terms of the NY DFS’ conditional approval in September 2018 of our acquisition of PHH. The conditional approval includes reporting obligations and record retention and other requirements relating to the transfer of loans collateralized by New York property (New York loans) onto our servicing system, the Black Knight Financial Services, Inc. (Black Knight) LoanSphere MSP® servicing system (Black Knight MSP), and certain requirements with respect to the evaluation and supervision of management of both Ocwen and PMC. In addition, we were prohibited from boarding any additional loans onto the REALServicing system and we were required to transfer all New York loans off the REALServicing system by April 30, 2020. The conditional approval also restricts our ability to acquire MSRs with respect to New York loans, so that Ocwen may not increase its aggregate portfolio of New York loans serviced or subserviced by Ocwen by more than 2% per year. This restriction will remain in place until the NY DFS determines that all loans serviced on the REALServicing system have been successfully migrated to Black Knight MSP and that Ocwen has developed a satisfactory infrastructure to board sizable portfolios of MSRs. We transferred all loans onto Black Knight MSP in 2019 and no longer service any loans on the REALServicing system. We believe we have complied with all terms of the PHH acquisition conditional approval to date. We continue to work with the NY DFS to address matters they raise with us as well as to fulfill our commitments under the NY Consent Order and PHH acquisition conditional approval.
California Department of Financial Protection and Innovation (CA DFPI). In January 2015 and February 2017, Ocwen Loan Servicing, LLC (OLS) entered into consent orders with the CA DFPI (formerly known as the California Department of Business Oversight) relating to our alleged failure to produce certain information and documents during a routine licensing examination and relating to alleged servicing practices. We have completed all of our obligations under each of these consent orders. We also entered into a consent order in February 2023 to resolve a legacy OLS matter with the CA DFPI primarily addressing OLS’s post-boarding process related to loan payment terms. The Consent Order provides for a $2.5 million settlement with the CA DFPI with the waiver of certain late fees, a loss mitigation campaign, and other reliefs. The settlement was fully accrued at December 31, 2022 and paid in March 2023.
Unfunded Lending Commitments
We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $1.8 billion at March 31, 2023. This additional borrowing capacity is available on a scheduled or unscheduled payment basis. During the three months ended March 31, 2023, we funded $67.7 million out of the $1.8 billion borrowing capacity as of December 31, 2022. We also had short-term commitments to lend $612.1 million and $21.9 million in connection with our
forward and reverse mortgage loan IRLCs, respectively, outstanding at March 31, 2023. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, referred to as warehouse lines.
HMBS Issuer Obligations
As an HMBS issuer, we assume certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of a reverse mortgage loan is equal to or greater than 98% of the maximum claim amount (MCA repurchases), or when they become inactive (the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments). Our subservicing clients bear the financial obligation and risks associated with purchasing loans out of securitization pools within the portfolio we subservice.
Activity with regard to HMBS repurchases is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Active | | Inactive | | Total |
| Number | | Amount | | Number | | Amount | | Number | | Amount |
| Beginning balance | 264 | | | $ | 70.7 | | | 457 | | | $ | 107.7 | | | 721 | | | $ | 178.4 | |
| Additions | 264 | | | 71.4 | | | 81 | | | 20.4 | | | 345 | | | 91.9 | |
| Recoveries, net (1) | (220) | | | (58.0) | | | (42) | | | (9.7) | | | (262) | | | (67.6) | |
| Transfers | (13) | | | (3.8) | | | 13 | | | 3.8 | | | — | | | — | |
| Changes in value | — | | | — | | | — | | | (1.1) | | | — | | | (1.2) | |
| Ending balance | 295 | | | $ | 80.3 | | | 509 | | | $ | 121.1 | | | 804 | | | $ | 201.5 | |
(1)Includes amounts received upon assignment of loan to HUD, loan payoff, REO liquidation and claim proceeds less any amounts charged off as unrecoverable.
Client Concentration
Our Servicing segment has exposure to concentration risk and client retention risk.
As of March 31, 2023, our servicing portfolio included a significant client relationship with Rithm which represented 16% and 27% of our total servicing portfolio UPB and loan count, respectively, and approximately 68% of all delinquent loans that Ocwen services. Our Subservicing Agreements and Servicing Addendum with Rithm are in their second terms that end December 31, 2023, but they provide for automatic one-year renewals, unless Ocwen (by July 1, 2023) or Rithm (by October 1, 2023) provide advance notice of termination. At the end of the second term, if notice for termination is given by the appropriate time, Rithm has the right to terminate the Subservicing Agreements and Servicing Addendum for convenience. If Rithm exercises its right to terminate all or some of the agreements for convenience at the end of the Second Term on December 31, 2023, we might need to right-size certain aspects of our servicing business as well as the related corporate support functions. The impacts to our consolidated statements of operations in connection with our Rithm agreements are disclosed in Note 8 — Other Financing Liabilities, at Fair Value. Receivables and Other liabilities recorded on our consolidated balance sheets are disclosed in Note 9 – Receivables and Note 13 – Other Liabilities, respectively.
In addition, as of March 31, 2023, our servicing portfolio also included a significant client relationship with MAV which represented 17% and 13% of our total servicing portfolio UPB and loan count, respectively. While our servicing agreement with MAV is non-cancellable and provides us with exclusivity, MAV is permitted to sell the underlying MSR without Ocwen’s consent after May 3, 2024. See Note 10 - Investment in Equity Method Investee and Related Party Transactions.
When we become aware of a matter involving uncertainty for which we may incur a loss, we assess the likelihood of any loss. If a loss contingency is probable and the amount of the loss can be reasonably estimated, we record an accrual for the loss. In such cases, there may be an exposure to potential loss in excess of the amount accrued. Where a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. If a reasonable estimate of loss cannot be made, we do not accrue for any loss or disclose any estimate of exposure to potential loss even if the potential loss could be material and adverse to our business, reputation, financial condition and results of operations. An assessment regarding the ultimate outcome of any such matter involves judgments about future events, actions and circumstances that are
inherently uncertain. The actual outcome could differ materially. Where we have retained external legal counsel or other professional advisers, such advisers assist us in making such assessments.
Litigation
In the ordinary course of business, we are a defendant in, or a party or potential party to, many threatened and pending legal proceedings, including proceedings brought by borrowers, regulatory agencies (discussed further under “Regulatory” below), current or former employees, those brought on behalf of various classes of claimants, and those brought derivatively on behalf of Ocwen against certain current or former officers and directors or others, and those brought under the False Claims Act by private citizens on behalf of the U.S. In addition, we may be a party or potential party to threatened or pending legal proceedings brought by fair-housing advocates, current and former commercial counterparties and market competitors, including, among others, claims related to the sale or purchase of loans, MSRs or other assets, and breach of contract actions, parties on whose behalf we service or serviced mortgage loans, parties who provide ancillary services including property preservation and other post-foreclosure related services, and parties who provide or provided consulting, subservicing, or other services to Ocwen.
The majority of these proceedings are based on alleged violations of federal, state and local laws and regulations governing our mortgage servicing and lending activities, including, among others, the Dodd-Frank Act, the Gramm-Leach-Bliley Act, the FDCPA, the RESPA, the TILA, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the TCPA, the Equal Credit Opportunity Act, as well as individual state licensing and foreclosure laws, federal and local bankruptcy rules, federal and local tax regulations, and state deceptive trade practices laws. Such proceedings include wrongful foreclosure and eviction actions, bankruptcy violation actions, payment misapplication actions, allegations of wrongdoing in connection with lender-placed insurance and mortgage reinsurance arrangements, claims relating to our property preservation activities, claims related to REO management, claims relating to our written and telephonic communications with our borrowers such as claims under the TCPA and individual state laws, claims related to our payment, escrow and other processing operations, claims relating to fees imposed on borrowers relating to inspection fees, foreclosure attorneys’ fees, reinstatement fees, foreclosure registration fees, payment processing, payment facilitation or payment convenience fees, claims related to ancillary products marketed and sold to borrowers, claims related to loan modifications and loan assumptions, claims related to call recordings, claims regarding certifications of our legal compliance related to our participation in certain government programs, claims related to improper occupancy inspections, and claims related to untimely recording of mortgage satisfactions. In some of these proceedings, claims for substantial monetary damages are asserted against us. For example, we are currently a defendant in various matters alleging that (1) certain fees imposed on borrowers relating to payment processing, payment facilitation or payment convenience violate the FDCPA and similar state laws, (2) certain fees we assess on borrowers are improperly assessed and/or marked up improperly in violation of applicable state and federal law, (3) we breached fiduciary duties we purportedly owe to benefit plans due to the discretion we exercise in servicing certain securitized mortgage loans, (4) certain legacy mortgage reinsurance arrangements violated RESPA, and (5) we failed to subservice loans appropriately pursuant to subservicing and other agreements. In the future, we are likely to become subject to other private legal proceedings alleging failures to comply with applicable laws and regulations, including putative class actions, in the ordinary course of our business.
In view of the inherent difficulty of predicting the outcome of any threatened or pending legal proceedings, particularly where the claimants seek very large or indeterminate damages, including punitive damages, or where the matters present novel legal theories or involve a large number of parties, we generally cannot predict what the eventual outcome of such proceedings will be, what the timing of the ultimate resolution will be, or what the eventual loss, if any, will be. Any material adverse resolution could materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
Where we determine that a loss contingency is probable in connection with a pending or threatened legal proceeding and the amount of our loss can be reasonably estimated, we record an accrual for the loss. We have accrued for losses relating to threatened and pending litigation that we believe are probable and reasonably estimable based on current information regarding these matters. Where we determine that a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. It is possible that we will incur losses relating to threatened and pending litigation that materially exceed the amount accrued. Our accrual for probable and estimable legal and regulatory matters, including accrued legal fees, was $40.0 million at March 31, 2023. We cannot currently estimate the amount, if any, of reasonably possible losses above amounts that have been recorded at March 31, 2023.
As previously disclosed, we are subject to individual lawsuits relating to our FDCPA compliance and putative state law class actions based on the FDCPA and similar state statutes. We are currently defending class actions challenging, under state and federal law, our practice of charging borrowers a fee to use certain optional payment methods, including: Morris v. PHH Mortg. Corp., et al. (S.D. FL), Torliatt v. PHH Mortg. Corp., et al. (N.D. Ca), Thacker v. PHH Mortg. Corp., et al. (N.D. WV), Forest v. PHH Mortg. Corp., et al. (D. RI), Williams v. PHH Mortg. Corp., et al. (S.D. TX) and Jones v. PHH Mortg. Corp., et
al. (D. N.J.). We have reached settlements in five of these class actions. In the Thacker and Torliatt cases, the parties executed settlement agreements which were granted final approval by the Court in November 2022. In the Morris class action, the Court granted preliminary approval of the parties’ settlement, and we are proceeding with class notice before moving for final approval. In the Williams class action, the Court has granted preliminary approval of the settlement. Finally, we have reached a tentative settlement with the class plaintiffs in the Forest class action. In February 2023, the Jones class action was filed in federal court in New Jersey and we have taken initial steps to file a motion to dismiss the complaint.
In addition, we continue to be involved in legacy matters arising prior to Ocwen’s October 2018 acquisition of PHH, including a putative class action filed in 2008 in the United States District Court for the Eastern District of California against PHH and related entities alleging that PHH’s legacy mortgage reinsurance arrangements between its captive reinsurer, Atrium Insurance Corporation, and certain mortgage insurance providers violated RESPA. See Munoz v. PHH Mortgage Corp. et al. (Eastern District of California). In June 2015, the court certified a class of borrowers who obtained loans with private mortgage insurance through PHH’s captive reinsurance arrangement between June 2007 and December 2009. PHH asserted numerous defenses to the merits of the case. Following pre-trial developments in August 2020, the only issues remaining for trial were whether the plaintiffs had standing to bring their claims and whether the reinsurance services provided by PHH’s captive reinsurance subsidiary, Atrium, were actually provided in order for the safe harbor provision of RESPA to apply. In January 2022, the Court denied a motion by the plaintiffs to enter new evidence and a motion by PHH to decertify the class, which motion PHH may renew if the case ultimately goes to trial. Following the entry of this order, at the request of the parties, the Court dismissed all of the plaintiffs’ claims for lack of standing and entered judgment in favor of PHH. The plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit, and on February 24, 2023 that court reversed and remanded for further proceedings. Ocwen will continue to vigorously defend itself. Our current accrual with respect to this matter is included in the $40.0 million legal and regulatory accrual referenced above. At this time, Ocwen is unable to predict the outcome of this lawsuit or the possible loss or range of loss, if any, associated with the resolution of such lawsuit. If our efforts to defend this lawsuit are not successful, our business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected.
Ocwen is a defendant in a certified class action in the U.S. District Court in the Eastern District of California where the plaintiffs claim Ocwen marked up fees for property valuations and title searches in violation of California state law. See Weiner v. Ocwen Financial Corp., et al. In May 2020, the court ruled that plaintiff’s recoverable damages are limited to out-of-pocket costs, i.e., the amount of marked-up fees actually paid, rather than the entire cost of the valuation that plaintiffs sought. Following further pre-trial developments, in August 2022, the Court entered an order granting our motion to decertify each of the three classes. The plaintiffs filed a petition for permission to appeal the decertification decision and a motion asking the trial court to reconsider its decertification decision, and on February 28, 2023, the court granted that motion. At this time, Ocwen is unable to predict the outcome of this lawsuit or any additional lawsuits that may be filed, the possible loss or range of loss, if any, associated with the resolution of such lawsuits or the potential impact such lawsuits may have on us or our operations. Ocwen intends to vigorously defend against this lawsuit. If our efforts to defend this lawsuit are not successful, our business, financial condition liquidity and results of operations could be materially and adversely affected. Ocwen may have affirmative indemnification rights and/or other claims against third parties related to the allegations in the lawsuit. Although we may pursue these claims, we cannot currently estimate the amount, if any, of recoveries from these third parties.
We are currently involved in a dispute with a former subservicing client, HSBC Bank USA, N.A. (HSBC), which filed a complaint in the Supreme Court of the State of New York against PHH. See HSBC Bank USA, N.A. v. PHH Mortgage Corp. (Supreme Court of the State of New York). HSBC’s claims relate to alleged breaches of agreements entered into under a prior subservicing arrangement and origination assistance agreement. In its complaint, HSBC also asserted a claim for fraud, which was dismissed by the Court. PHH has answered the complaint and has asserted counterclaims against HSBC for breach of contract. We believe we have strong factual and legal defenses to the remaining claims and are vigorously defending the action. Ocwen is currently unable to predict the outcome of this dispute or estimate the size of any loss which could result from a potential resolution reached through litigation or otherwise.
Over the past several years, lawsuits have been filed by RMBS trust investors alleging that the trustees and master servicers breached their contractual and statutory duties by (i) failing to require loan servicers to abide by their contractual obligations; (ii) failing to declare that certain alleged servicing events of default under the applicable contracts occurred; and (iii) failing to demand that loan sellers repurchase allegedly defective loans, among other things. Ocwen has received several letters from trustees and master servicers purporting to put Ocwen on notice that the trustees and master servicers may ultimately seek indemnification from Ocwen in connection with the litigations. Ocwen has not yet been impleaded into any of these cases, but it has produced and continues to produce documents to the parties in response to third-party subpoenas.
Ocwen has, however, been impleaded as a third-party defendant into five consolidated loan repurchase cases first filed against Nomura Credit & Capital, Inc. in 2012 and 2013. Ocwen is vigorously defending itself in those cases against allegations by the mortgage loan seller-defendant that Ocwen failed to inform its contractual counterparties that it had discovered defective loans in the course of servicing them and had otherwise failed to service the loans in accordance with accepted standards.
Ocwen is unable at this time to predict the ultimate outcome of these matters, the possible loss or range of loss, if any, associated with the resolution of these matters or any potential impact they may have on us or our operations. If, however, we were required to compensate claimants for losses related to the alleged loan servicing breaches, then our business, reputation, financial condition, liquidity and results of operations could be adversely affected.
In addition, several RMBS trustees have received notices of events of default alleging material failures by servicers to comply with applicable servicing agreements. Although Ocwen has not been sued by an RMBS trustee in response to an event of default notice, there is a risk that Ocwen could be replaced as servicer as a result of said notices, that the trustees could take legal action on behalf of the trust certificate holders, or, under certain circumstances, that the RMBS investors who issue notices of event of default could seek to press their allegations against Ocwen, independent of the trustees. We are unable at this time to predict what, if any, actions any trustee will take in response to an event of default notice, nor can we predict at this time the potential loss or range of loss, if any, associated with the resolution of any event of default notice or the potential impact on our operations. If Ocwen were to be terminated as servicer, or other related legal actions were pursued against Ocwen, it could have an adverse effect on Ocwen’s business, reputation, financial condition, liquidity and results of operations.
Regulatory
We are subject to a number of ongoing federal and state regulatory examinations, orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions. We may also on occasion be subject to foreign regulatory actions in the countries where we operate outside the U.S. Where we determine that a loss contingency is probable in connection with a regulatory matter and the amount of our loss can be reasonably estimated, we record an accrual for the loss. Where we determine that a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible loss is not material to our financial position, results of operations or cash flows. It is possible that we will incur losses relating to regulatory matters that materially exceed any accrued amount. Predicting the outcome of any regulatory matter is inherently difficult and we generally cannot predict the eventual outcome of any regulatory matter or the eventual loss, if any, associated with the outcome.
To the extent that an examination, audit or other regulatory engagement results in an alleged failure by us to comply with applicable laws, regulations or licensing requirements, or if allegations are made that we have failed to comply with applicable laws, regulations or licensing requirements or the commitments we have made in connection with our regulatory settlements (whether such allegations are made through administrative actions such as cease and desist orders, through legal proceedings or otherwise) or if other regulatory actions of a similar or different nature are taken in the future against us, this could lead to (i) administrative fines and penalties and litigation, (ii) loss of our licenses and approvals to engage in our servicing and lending businesses, (iii) governmental investigations and enforcement actions, (iv) civil and criminal liability, including class action lawsuits and actions to recover incentive and other payments made by governmental entities, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) damage to our reputation, (vii) inability to raise capital or otherwise fund our operations and (viii) inability to execute on our business strategy. Any of these occurrences could increase our operating expenses and reduce our revenues, hamper our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition, liquidity and results of operations.
CFPB
In April 2017, the CFPB filed a lawsuit in the federal district court for the Southern District of Florida against Ocwen, Ocwen Mortgage Servicing, Inc. (OMS) and OLS alleging violations of federal consumer financial laws relating to our servicing business dating back to 2014. The CFPB’s claims include allegations regarding (1) the adequacy of Ocwen’s servicing system and integrity of Ocwen’s mortgage servicing data, (2) Ocwen’s foreclosure practices and (3) various purported servicer errors with respect to borrower escrow accounts, hazard insurance policies, timely cancellation of private mortgage insurance, handling of customer complaints, and marketing of optional products. The CFPB alleges violations of laws prohibiting unfair, deceptive or abusive acts or practices, as well as violations of other laws or regulations. The CFPB does not claim specific monetary damages, although it does seek consumer relief, disgorgement of allegedly improper gains, and civil money penalties. The parties participated in mediation in October 2020 and subsequently held additional settlement discussions. However, the parties were unable to reach a resolution of the litigation.
On March 4, 2021, the court issued an order granting in part and reserving ruling in part on Ocwen’s motion for summary judgment. In that order, the court granted Ocwen summary judgment on 9 of 10 counts in the CFPB’s amended complaint, finding that the CFPB’s allegations were barred under the principles of claim preclusion or res judicata to the extent those claims are premised on servicing activity occurring prior to February 26, 2017 and are covered by a 2014 Consent Judgment entered by the United States District Court for the District of Columbia. The CFPB subsequently filed its Second Amended Complaint to remove count 10 as well as allegations in counts 1-9 concerning servicing activity that occurred after February 26, 2017. On April 21, 2021, the court entered final judgment in our favor, denied all pending motions as moot, and closed the case. The CFPB thereafter filed a notice of appeal. On April 6, 2022, the Eleventh Circuit issued its opinion relating to the appeal,
largely adopting the district court’s decision precluding the CFPB from bringing claims covered by the National Mortgage Settlement, but vacating and remanding the case back to the district court to determine which, if any, claims are not covered and may still be brought by the CFPB. Neither party sought rehearing of the Eleventh Circuit’s decision. Following briefing and oral argument, on May 2, 2023, the court issued an order granting in full Ocwen’s motion for summary judgment on the remaining 9 counts. In that order, based on a claim by claim analysis, the court found that all of the CFPB’s claims were barred under the principles of res judicata because they were premised on servicing activity covered by the 2014 Consent Judgment referenced above. Also on May 2, 2023, the court entered final judgment in our favor, denied all pending motions as moot, and closed the case. To the extent the CFPB appeals the court’s order, Ocwen will continue to vigorously defend itself.
Our current accrual with respect to this matter is included in the $40.0 million legal and regulatory accrual referenced above. The outcome of the matters raised by the CFPB, whether through negotiated settlements, court rulings or otherwise, could potentially involve monetary fines or penalties or additional restrictions on our business and could have a material adverse impact on our business, reputation, financial condition, liquidity and results of operations.
State Licensing and Other Matters
Our licensed entities are required to renew their licenses, typically on an annual basis, and to do so they must satisfy the license renewal requirements of each jurisdiction, which generally include financial requirements such as providing audited financial statements or satisfying minimum net worth requirements and non-financial requirements such as satisfactorily completing examinations as to the licensee’s compliance with applicable laws and regulations. Failure to satisfy any of the requirements to which our licensed entities are subject could result in a variety of regulatory actions ranging from a fine, a directive requiring a certain step to be taken, entry into a consent order, a suspension or ultimately a revocation of a license, any of which could have a material adverse impact on our results of operations and financial condition. In addition, we receive information requests and other inquiries, both formal and informal in nature, from our state financial regulators as part of their general regulatory oversight of our servicing and lending businesses, as well as from state attorneys general, the CFPB and other federal agencies, including the Department of Justice and various inspectors general. For example, we have received requests regarding the charging of certain fees to borrowers; the post-boarding process to verify loan and payment terms are properly implemented, calculated, and applied; bankruptcy practices; COVID-19-related forbearance and post-forbearance options; and Homeowner Assistance Fund participation and implementation. Many of our regulatory engagements arise from a complaint that the entity is investigating, although some are formal investigations or proceedings. The GSEs (and their conservator, FHFA), HUD, FHA, VA, Ginnie Mae, the United States Treasury Department, and others also subject us to periodic reviews and audits, and engage with us on various matters. We have in the past resolved, and may in the future resolve, matters via consent orders, payments of monetary amounts and other agreements in order to settle issues identified in connection with examinations or other oversight activities, and such resolutions could have material and adverse effects on our business, reputation, operations, results of operations and financial condition.
Loan Put-Back and Related Contingencies
We have exposure to representation, warranty and indemnification obligations relating to our lending, loan sales and securitization activities, and servicing practices. We receive origination representations and warranties from our network of approved originators in connection with loans we purchased through our correspondent lending channel. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we may incur. We do not provide or assume any origination representations and warranties in connection with our MSR purchases through MSR flow purchase agreements or Agency Cash Window programs.
At March 31, 2023 and March 31, 2022, we had outstanding representation and warranty repurchase demands of $31.0 million UPB (127 loans) and $49.8 million UPB (270 loans), respectively. We review each demand and monitor through resolution, primarily through rescission, loan repurchase or make-whole payment.
The following table presents the changes in our liability for representation and warranty obligations and similar indemnification obligations:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Beginning balance (1) | $ | 41.6 | | | $ | 49.4 | |
| Provision for (reversal of) representation and warranty obligations | 2.7 | | | (3.6) | |
| New production liability | 0.3 | | | 0.7 | |
| | | |
| | | |
| Charge-offs and other (2) | (2.7) | | | (2.1) | |
| Ending balance (1) | $ | 41.9 | | | $ | 44.4 | |
(1)The liability for representation and warranty obligations and compensatory fees for foreclosures is reported in Other liabilities (a component of Liability for indemnification obligations) on our unaudited consolidated balance sheets.
(2)Includes principal and interest losses realized in connection with repurchased loans, make-whole, indemnification and fee payments and settlements net of recoveries, if any.
We believe that it is reasonably possible that losses beyond amounts currently recorded for potential representation and warranty obligations and other claims described above could occur, and such losses could have an adverse impact on our results of operations, financial condition or cash flows. However, based on currently available information, we are unable to estimate a range of reasonably possible losses above amounts that have been recorded at March 31, 2023.
Other
Ocwen, on its own behalf and on behalf of various mortgage loan investors, has engaged in a variety of activities to seek payments from mortgage insurers for unpaid claims, including claims where the mortgage insurers paid less than the full claim amount. Ocwen believes that many of the actions by mortgage insurers were in violation of the applicable insurance policies and insurance law. In some cases, Ocwen entered into tolling agreements, initiated arbitration or litigation, engaged in settlement discussions, or took other similar actions. Ocwen has now settled or otherwise resolved all of its pending mortgage insurance litigation matters.
We may, from time to time, have affirmative indemnification and other claims against service providers, parties from whom we purchased MSRs or other assets, investors or other parties. Although we pursue these claims, we cannot currently estimate the amount, if any, of further recoveries. Similarly, from time to time, indemnification and other claims are made against us by parties to whom we sold MSRs or other assets or by parties on whose behalf we service mortgage loans. We cannot currently estimate the amount, if any, of reasonably possible loss above amounts recorded.
Note 21 – Subsequent Events
On April 4 2023, we purchased active and inactive reverse mortgage loan buyouts for $110.1 million. The transaction was financed through a master repurchase agreement with total uncommitted capacity of $200.0 million. The purchased assets included loans, claim receivables from HUD and REOs.
