Servicing
Our Servicing business is primarily comprised of our core residential mortgage
servicing business and currently accounts for the majority of our total revenues.
Our servicing clients include some of the largest financial institutions in
the U.S., including the Federal National Mortgage Association (Fannie Mae) and
the Federal Home Loan Mortgage Corporation (Freddie Mac) (each, an Agency or,
collectively, the GSEs), the Government National Mortgage Association (Ginnie
Mae) and non-Agency residential mortgage-backed securities (RMBS) trusts.
We are a leader in the servicing industry in foreclosure prevention and loss
mitigation that helps families stay in their homes and improves financial outcomes
for investors. Our leadership in the industry is evidenced by our high cure
rate for delinquent loans and above average rate of continuing performance by
homeowners whose loans we have modified. Ocwen has provided more loan modifications
under the Federal Government’s Home Affordable Modification Program (HAMP)
than any other mortgage servicer and 50% more than the next highest servicer,
according to data published in the U.S. Treasury’s Making Home Affordable
Third Quarter 2015 Program Performance Report. Overall, Ocwen has completed
nearly 644,000 loan modifications from January 1, 2008 through December 31,
2015, including over 54,000 modifications under Ocwen’s own Shared Appreciation
Modification (SAM) program that incorporates the ability for our servicing clients
to recoup a portion of the principal reductions granted if property values increase
over time.
Servicing involves the collection and remittance of principal and interest payments
received from borrowers, the administration of mortgage escrow accounts, the
collection of insurance claims, the management of loans that are delinquent
or in foreclosure or bankruptcy, including making servicing advances, evaluating
loans for modification and other loss mitigation activities and, if necessary,
foreclosure referrals and the sale of the underlying mortgaged property following
foreclosure (real estate owned or REO) on behalf of investors or other servicers.
Master servicing involves the collection of payments from servicers and the
distribution of funds to investors in mortgage and asset-backed securities and
whole loan packages. We earn contractual monthly servicing fees (which are typically
payable as a percentage of UPB) pursuant to servicing agreements as well as
other ancillary fees in connection with our servicing activities.
We also earn fees under both subservicing and special servicing arrangements
with banks and other institutions that own the mortgage servicing rights (MSRs).
The owners of MSRs may choose to hire Ocwen as a subservicer or special servicer
instead of servicing the MSRs themselves for a variety of reasons, including
not having a servicing platform or not having the necessary capacity or expertise
to service some or all of their MSRs. In a subservicing context, where Ocwen
does not own the MSRs, we may be engaged to perform all of the servicing functions
previously described or it could be a limited engagement (e.g., subservicing
only non-defaulted mortgage loans). As a subservicer, we may be obligated to
make servicing advances, though most subservicing agreements provide for more
rapid reimbursement of any advances from the owner of the servicing rights than
if we were the servicer. Ocwen is also engaged as a special servicer. These
engagements typically involve portfolios of defaulted mortgage loans, which
require more work than performing mortgage loans and involve working out modifications
or short sales with borrowers or taking properties through the foreclosure process.
We typically earn subservicing and special servicing fees either as a percentage
of UPB or on a per loan basis.
Servicing advances are amounts that we, as servicer, are required to advance
to or on behalf of our servicing clients if we do not receive such amounts from
borrowers. These amounts include principal and interest payments, property taxes
and insurance premiums and amounts to maintain, repair and market real estate
properties on behalf of our servicing clients. Most of our advances have the
highest reimbursement priority and are “top of the waterfall” so
that we are entitled to repayment from respective loan or REO liquidations proceeds
before most other claims on these proceeds, and in the majority of cases, advances
in excess of respective loan or REO liquidation proceeds may be recovered from
pool level proceeds. The costs incurred in meeting these obligations consist
principally of the interest expense incurred in financing the servicing advances
and the costs of arranging such financing.
Reducing delinquencies is important to our business because it enables us to
recover advances and recognize additional ancillary income, such as late fees,
which we do not recognize on delinquent loans until they are brought current.
Performing loans also require less work and are thus generally less costly to
service. While increasing borrower participation in loan modification programs
is a critical component of our ability to reduce delinquencies, the persistence
of those modifications to remain current is also an important factor.
While our Servicing business grew rapidly via portfolio and business acquisitions
from 2010 to 2013, we made no significant acquisitions during 2014 or 2015.
Our growth ceased primarily as a result of significant regulatory scrutiny,
which resulted in our settlements with the New York Department of Financial
Services (NY DFS) in December 2014 and the California Department of Business
Oversight (CA DBO) in January 2015, which are discussed in greater detail in
the Regulation section below. These settlements have significantly impacted
our ability to grow our servicing portfolio, which naturally decreases over
time through portfolio runoff, because we have agreed to restrictions in our
consent orders with the NY DFS and CA DBO that effectively prohibit future acquisitions
of servicing until we have satisfied the respective conditions in those consent
orders. If we are unable to satisfy these conditions, we will be unable to grow
our servicing portfolio through acquisitions.
Given the intense regulatory scrutiny and the subsequent investments Ocwen
has made in its risk and compliance infrastructure, we believe the underlying
economics of our Servicing business have likely been changed for the foreseeable
future. We believe it is unlikely Ocwen will achieve meaningful profitability
in its Servicing business in the near term unless there is a significant, structural
change in the business model. While we believe such structural change is probably
unlikely in the current regulatory environment, we are nonetheless intensely
focused on improving our operations to enhance borrower experiences and improve
efficiencies both of which we believe will drive stronger financial performance
through lower overall costs. An additional way to improve our financial performance
would be to significantly grow or re-scale our Servicing portfolio. Although
we are currently constrained under our regulatory settlements, if we can successfully
navigate the regulatory hurdles and demonstrate the progress we have achieved
in the areas of risk management and compliance, we believe that any potential
future sellers of non-Agency servicing rights would view Ocwen’s infrastructure
in a favorable light and place significant consideration on our ability to provide
not only strong servicing performance for both RMBS investors and borrowers,
but also on our ability to service loans in a highly compliant manner. Despite
this belief, we do not believe there is a large market for future bulk servicing
transfers at this time, and therefore our ability to add additional servicing
rights through purchase transactions may be limited in the near term.
As a result of uncertainty regarding our ability to achieve meaningful profitability
in our Servicing business in its current state and our ability to grow our Servicing
portfolio, for both regulatory and market-based reasons, we are seeking to become
a much larger asset generator to provide Ocwen with not only future servicing
rights but also other future income streams. We intend to transform Ocwen over
time by reinvesting cash flows generated by the Servicing business to grow not
only our residential mortgage lending business but also to grow other new business
lines, which we believe can diversify our income profile and assist us in returning
Ocwen to profitability. We believe asset generation, through our residential
mortgage lending business and our new business lines, will be Ocwen’s
primary driver of growth for the future. There can be no assurances that our
efforts to transform Ocwen in this manner will be successful.
Lending
In our Lending business, we originate and purchase conventional (conforming
to the underwriting standards of the GSEs, collectively Agency loans) and government-insured
(insured by the Federal Housing Authority (FHA) or Department of Veterans Affairs
(VA)) forward mortgage loans through the correspondent, wholesale and retail
lending channels of our Homeward Residential, Inc. (Homeward) operations. Per-loan
margins vary by channel, with correspondent typically being the lowest margin
and retail the highest margin. After origination, we generally package and sell
the loans in the secondary mortgage market, through GSE and Ginnie Mae guaranteed
securitizations and whole loan transactions. In 2016, we will securitize and
sell forward loans through our Ocwen Loan Servicing, LLC (OLS) operations. We
typically retain the associated MSRs, providing the Servicing business with
a source of new MSRs to replenish our servicing portfolio and partially offset
the impact of amortization and prepayments. The only jurisdiction where we currently
do not retain servicing rights on new originations, other than recapture (which
is our ability to convert borrowers in our current servicing portfolio into
newly originated loans), is California, where we sell the forward mortgage loans
servicing-released to meet a requirement of our January 2015 settlement with
the CA DBO. Lending revenues include interest income earned for the period the
loans are held by us, gain on sale revenue, which represents the difference
between the origination value and the sale value of the loan, and fee income
earned at origination.
We are working to increase the scale and breadth of our Lending business. Although
the slowing of the Home Affordable Refinance Program (HARP) and the sale of
Agency MSRs (which decreases loans available to re-finance) present challenges,
we are focused on increasing conversion rates (i.e., recapture) on our existing
servicing portfolio and expanding our correspondent channel through growing
our third party origination businesses. Additionally we are exploring offering
different products we believe we can originate profitably and with acceptable
levels of risk. We believe our experience in servicing difficult loans will
allow us to also help borrowers obtain loans that are more challenging to originate.
Building the sales and operations capacity to meet this need is a goal for the
business, as well as investment in the development of our LOS (Loan Operating
System) and the continued use of process improvements to drive productivity.
We historically have originated and purchased Home Equity Conversion Mortgages
(HECM or reverse mortgage loans) insured by FHA through our Liberty Home Equity
Solutions, Inc. (Liberty) operations. Effective in January 2016, we will continue
to originate and purchase reverse mortgage loans through Liberty but will securitize
the reverse mortgage loans through our OLS operations. Loans originated under
this program are guaranteed by the FHA, which provides investors with protection
against risk of borrower default. The reverse channel provides both current
period and future period gain on sale revenue from new originations as a result
of subsequent tail draws taken by the borrower. While we are focused on current
period reported earnings, we also utilize our market experience to invest in
future asset value when returns are at an attractive level. These future cash
flows are not guaranteed but viewed as probable given our historic asset quality
and slow prepayment speeds.
Correspondent Lending. Our forward and reverse correspondent lending channels
purchase mortgage loans that have been originated by a network of approved third
party lenders.
All of the lenders participating in our correspondent lending program are approved
by senior lending and credit management executives. We also employ an ongoing
monitoring and renewal process for participating lenders that includes an evaluation
of the performance of the loans they have sold to us. We perform a variety of
pre- and post-funding review procedures to ensure that the loans we purchase
conform to our requirements and to the requirements of the investors to whom
we sell loans.
Wholesale Lending. We originate loans through a network of approved brokers.
Brokers are subject to a formal approval and monitoring process. We underwrite
all loans originated through this channel consistent with the underwriting standards
required by the ultimate investor prior to funding.
Retail Lending. We originate forward and reverse mortgage loans directly with
borrowers through our retail lending business. Our retail lending business utilizes
our significant portfolio of borrowers being serviced to originate refinanced
loans. Depending on borrower eligibility, we will refinance into conventional,
government or non-Agency products. We also are increasing our ability to originate
in the external retail market. Through lead campaigns and direct marketing,
the Retail channel seeks to convert leads into higher margin loans in a cost
efficient manner.
We provide customary origination representations and warranties to investors
in connection with our loan sales and securitization activities. We receive
customary origination representations and warranties from our network of approved
originators in connection with loans we purchase through our correspondent lending
channel. We recognize the fair value of the liability for our representations
and warranties at the time of sale. In the event we cannot remedy a breach of
a representation or warranty, we may be required to repurchase the loan or provide
an indemnification payment to the investor. To the extent that we have recourse
against a third-party originator, we may recover part or all of any loss we
incur.
We originated or purchased forward and reverse mortgage loans with a UPB of
$3.9 billion and $809.7 million, respectively. Our Lending business provides
us the opportunity to expand into new markets and offer new products, for example
prime loans that exceed the GSE limits (jumbo loans) or non-Agency loans, as
market and investor demand develops in that product segment. We do not currently
expect to originate loans not considered qualified mortgages (Qualified Mortgages)
by the Consumer Financial Protection Bureau (CFPB).
Automotive Capital Services (ACS)
We launched our ACS business on a pilot basis in two markets in Florida. ACS
makes short-term inventory-secured loans to independent used car dealers to
finance their inventory. Loans are typically outstanding for 30 to 60 days and
structured as lines of credit on which the dealerships can draw to finance inventory
purchases. We anticipate that ACS could provide meaningful growth and income
diversification in future periods. After a successful four-month pilot period,
we began expanding across select markets in the U.S. In 2015, ACS approved twenty-one
credit applications. We issued outstanding credit lines for $10.9 million and
had drawn $2.8 million as of the end of the year. For the time being, ACS will
fund new originations with available corporate cash. When the business grows
to sufficient size, we anticipate obtaining warehouse line financing to fund
new volumes, and eventually anticipate launching securitizations when loan volume
and market conditions permit.
Liberty Rental Finance
Through Homeward, Liberty Rental Finance has entered the rental property finance
market. The business will provide mortgage loans to investors interested in
purchasing foreclosed properties or refinancing existing rental properties for
the purpose of improving financing terms. We expect to sell the mortgage loans
to aggregators including both private investors and the GSEs. Liberty Rental
Finance is currently licensed to lend in 38 states and plans to expand to all
states in the future. We believe that our substantial experience in small balance
commercial servicing and single- and multi-family REO management along with
our large customer base of REO buyers provide competitive opportunities.
Given the early launch status of the ACS and Liberty Rental Finance businesses
and their present contribution to Ocwen, each is currently reported as a component
of the Corporate Items and Other segment.