Earnings Labs

Onity Group Inc. (ONIT)

Q4 2008 Earnings Call· Thu, Mar 12, 2009

$45.75

-4.19%

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Transcript

Operator

Operator

Welcome to the Ocwen Fourth Quarter and Year End 2008 Earnings Conference Call. All participants will be in a listen-only mode. (Operators Instructions). Today's conference is being recorded, if you have any objections, you may disconnect at this time. Now I'll turn the meeting over to Mr. David Gunter, Executive Vice President and CFO. Sir you may begin.

David Gunter

Management

Thank you. Good morning, everyone, and thank you for joining us today. Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slides, log on to our website, at www.ocwen.com, select "Shareholder Relations," then "Calendar of Events," then "Click here to listen to Conference Call," then under Conference Calls, "Fourth Quarter 2008 Earnings," select "Click here to listen and view slides." Each viewer will be able to control the progression of the slides during the presentation. To move the slides ahead, please click on the gray button pointing to the right. As indicated on slide two, our presentation may contain certain forward-looking statements that are made pursuant to the Safe Harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in the forward-looking statements. For an elaboration of the factors that may cause such a difference, please refer to the risk disclosure statement in today's earnings release as well as the company's filings with the Securities and Exchange Commission, including Ocwen's 2008 Form 10-K. If you would like to receive our news releases, SEC filings and other materials via email, please contact Linda Ludwig at linda.ludwig@ocwen.com. As indicated on slide three, joining me for today's presentation are Bill Erbey, Chairman and CEO of Ocwen; Ron Faris, President of Ocwen Asset Management and Bill Shepro, President of Ocwen Solutions. And now, I'll turn the call over to Bill Erbey. Bill?

William Erbey

Management

Good morning, everyone and thank you for joining us today. Our management team and our Board of Directors have spent considerable time framing for the time when the economy would be difficult for businesses and consumers alike. Early on, we saw the potential for a downturn in the economy and planned for the time when home price appreciation would halt, when credit would become scarce and consumers would come under pressure. We've executed on our plans to expand our liquidity resources, to right size our business to available financing, control delinquencies and advances, lower our cost of servicing and further develop our fee for service business model. Our focus on liquidity has resulted in cash balances that have increased in each of the last four quarters. With great pride, I can now tell you that our cash balances were $201 million and our unused borrowing capacity was $267 million at December 31, 2008. Our advance financing renewals in December and January of $300 million and $200 million demonstrates our continued ability to attract and retain financing relationships. Our ability to control advances has given the banks confidence that Ocwen will be a survivor. Furthermore, we're currently developing other liquidity sources, including advance financing facilities with new private sector providers, and participation in an industry coalition which seeks government guarantees of advances as well as inclusion of AAA rated securities backed by servicing advances within the TALF program. On March 3rd, 2009, the treasury announced that it's considering extending TALF to include securities backed by servicing advances. We applaud the strong government actions recently taken, such as the Making Home Affordable Plan announced in detail on March 4th of 2009. As the leader in loan modifications, we intend to be an active participant in this plan. By providing the financial incentive…

David Gunter

Management

Thank you, Bill. I would like to discuss three key items with you: one, our current liquidity position; two, minimizing balance sheet exposure, and three, the strength of our core operations. Our liquidity position remains strong. At year-end cash balances were $201 million or 24% greater than the September 30 balance and 76% greater than one year ago. The increase in cash is due to retaining profits earned in 2008, limited acquisitions of mortgaged servicing rights, selling or financing non-core assets, including our investments in CMOs issued by Fannie Mae and Freddie Mac, loans held for resale, real estate and commercial MSRs held by GSS Canada, and collecting long-term receivables from the sale of affordable housing partnerships. Our unused advance financing borrowing capacity was $267 million at December 31, 2008 on total lines of $1.2 billion. Our consolidated balance sheet with assets of $2.2 billion has continued to contract as we reduce advances and work to eliminate non-core assets. During 2008, we raised $84.7 million in cash by selling or financing non-core assets, including investments in Fannie and Freddie securities, loans, real estate owned or investment in GSS Canada, residuals and affordable housing partnerships. We will continue to dispose of non-core holdings during 2009. Our primary areas of focus in 2009 will be our holdings in auction rate securities and whole loans. We continue to hold auction rate securities or ARS with face value of $267 million. During the fourth quarter, we booked further unrealized losses of $13.6 million. As a result, our ARS portfolio is marked at 89.4%, versus 94.5% at September the 30th. Our loans held for resale are booked at the lower cost of the market. Given the decrease in property values, we booked $6 million in losses against this portfolio during the fourth quarter. Our loan…

Ronald Faris

Management

Thank you, Dave. My remarks today will focus on four key aspects of Ocwen Asset Management. One, servicing operations key drivers, two President Obama's Making Home Affordable program, new business and finally other investments. As Bill and Dave already discussed, the Ocwen Asset Management business performed extremely well in 2008, including the fourth quarter results. For the year, pre-tax income increased by $19.4 million or 34% over 2007. I'm very proud of what we have been able to accomplish. Three key drivers of the loan servicing business that I would like to address are prepayment speeds, delinquencies and advances. As is noted on slide six, in the fourth quarter of 2008, prepayment speeds decreased to 24% as compared to 26% in both the second and third quarters of 2008. Voluntary prepayments continued to decline, dropping from 10% in the first quarter to under 5% in the fourth quarter. The increase in the involuntary rate is a positive sign, because it has a favorable effect on our advance balances. The involuntary prepayment rate should eventually decline as the portfolio continues to age and the level of delinquent loans continues to decrease. Moving on to slide seven, delinquencies have stabilized due to our loss mitigation efforts. Contractually delinquent loans and REO service decreased by approximately 30,000 units from December 31, 2007 to December 31, 2008. This decrease in delinquent assets is a result of our effective loss mitigation processes which involve prudent loan modifications combined with the efficient foreclosure and REO resolution practices. We continue to refine and improve our approach to repayment plans, loan modifications and REO sales and marketing by systematically analyzing historical performance data, and instituting appropriate enhancements to our models and systems. As shown on slide eight, during the fourth quarter of 2008, the loan servicing advance balances…

William Shepro

Management

Thank you, Ron. Currently, Ocwen Solutions faces two primary challenges. First, the Mortgage Services segment needs to expand its product offerings to support loans in defaults in order to address the decline in loan origination. Second, the Financial Services segment must address declining collection rates on the receivables we manage primarily for credit card issuers. We're very pleased with the progress that we've made in the fourth quarter. Turning to slide 23, Ocwen Solutions fourth quarter 2008 revenue was $39.3 million, a 2% increase over the third quarter. In addition, our pre-tax income increased $3.8 million over the third quarter to $4.8 million. This is noteworthy in light of the fact that from a seasonality perspective, you would expect fourth quarter revenue and earnings to be lower than the third quarter. For the full year, revenues increased 14% from $144 million to $164.1 million and pre-tax income increased 47% from $10 million to $14.7 million, exclusive of the impact of BMS in both years. Our Mortgage Services segment is addressing its challenges by pursuing a plan to diversify our revenue base by rolling out new products and services primarily related to delinquent loans and real estate, so that we are less dependent on origination cycles. New services recently launched include default processing services, property inspections, property preservation, real estate sales, title services and homeowner outreach. As shown on slide 24, our Mortgage Services revenue increased $2.9 million from the third quarter, driven in part by these initiatives. We expect this trend to continue throughout 2009. In our Financial Services segment, we're addressing the decreasing collection rates by remaining focused on the execution of key initiatives in the areas of technology and customers. On the technology front, we're encouraged by the roll-out of our scripting technology to a limited number of…

David Gunter

Operator

Thank you. And operator, we are now ready to take questions.

Operator

Operator

Thank you. (Operator Instructions). Our first question comes from Douglas Kass with Seabreeze Partners.

Douglas Kass - Seabreeze Partners

Analyst · Seabreeze Partners

Thank you. Good morning, Bill, how are you?

William Erbey

Management

Good morning.

Douglas Kass - Seabreeze Partners

Analyst · Seabreeze Partners

In 2008 -- you answered actually three of the questions I have. But one last question, in 2008, you modified approximately 60,000 loans, I believe?

William Erbey

Management

Correct.

Douglas Kass - Seabreeze Partners

Analyst · Seabreeze Partners

Of those 60,000 loans, what percentage are going to be eligible for re-modification from the new program?

William Erbey

Management

Ron, correct me if I am wrong but we believe almost all of them are eligible for re-modification.

Douglas Kass - Seabreeze Partners

Analyst · Seabreeze Partners

Thank you, Bill.

William Erbey

Management

You're welcome.

Operator

Operator

Our next question comes from Bob Napoli with Piper Jaffray. Your line is open.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Hi, thank you, good morning. When will you be operating under that plan? When willactually there would be the revenue generation from the Obama plan begin?

William Erbey

Management

Ron, would you like to answer that?

Ronald Faris

Management

Sure. Basically from March 4th forward, the efforts that we are taking will qualify. However, there's a process obviously of going through and gathering the correct information and qualifying the borrower and completing that process. The plan also requires that there is a three month trial period in which the borrower must make their first three payments before the servicer incentive payments would be paid. So, it will still be a few months out before we start seeing direct revenue. However, the efforts have already begun to qualify borrowers under the plan.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay. And of the modifications that you made last year, what percentage of them made the first three payments? What would you expect, what do you expect at it --

Ronald Faris

Management

Well, I think the numbers that we gave you, the 60,000 - 61,000, that for the most part, most all of those did complete three payments.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay.

William Erbey

Management

The President's plan, Bob, is quite, shall we say inclusive in terms of people being able to make their payments, a 31% DTI, debt income ratio, and even usability in certain cases were necessary to go below that is what we qualify for an agency or prime mortgage. So someone there would only have to spend 31% of their gross income for housing which is generally considered to be quite affordable across the most of the demographics.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay. On the test with Freddie Mac and theI guess other government agencies, I would imagine you're talking to Fannie Mae and others, what is the potential for that relationship and then reasonably well, I think you're working on Alt-A for Freddie Mac, they must have $200 billion or so, $250 billion of Alt-A securities. I'm just not sure what is the target of the Freddie Mac portfolio? And how is the test going? And when would you expect to hear whether it was going to be expanded? Hello?

Ronald Faris

Management

Yeah, I think unfortunately we're somewhat constrained in the details that we can provide about that relationship. I think that in Freddie Mac's press release, they sort of hinted to the fact that they wanted the pilot program to go a couple of months at least so that they can evaluate it and then decide on expanding it. So I think we are a couple of months away from their evaluation. I mean, we have every reason to believe that our performance will live up to or even exceed their expectations. It is difficult though to project after the end of the couple of months pilot period what exactly that will mean from that point going forward.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay. And do you expect to have any announcements of other pilots or other tests? Are there other tests going on that haven't been announced?

William Erbey

Management

We're little reluctant discussing any of our relationships with, that are other than in the press releases, because of people's concerns about confidentiality. So, we'd like to answer those questions, but we really can't, Bob, I'm sorry.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay the --

William Erbey

Management

The answer would be an answer that none of us want to have because they will be upset with us.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay. The TALF program, where do you stand, I'd imagine you're having conversations with people and what are -- what is the likelihood that advances will be included under TALF? And what -- I mean is there something that could take six months to a year? I mean, we started talking about TALF, the government did last year and maybe we're getting close to doing some deals.

William Erbey

Management

Well, obviously I can't talk about everything. But this I think was meaningful that they were significant that they chose to have an announcement that would include that as an asset class. They certainly did not do that, I do not believe randomly.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

No -- yes, so --

William Erbey

Management

In terms of announcing that, so --

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Well, so, it should be okay to talk about where you are and what your discussions have been with them, I think that's --

William Erbey

Management

I really can't discuss the discussions with them, but the press release is, if we'd like to, we can send it to you. I believe the inference from the press release was that it would be available under TALF 2.0, which I believe is a May rollout.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay.

William Erbey

Management

That is not -- I can't give --

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

But it's not part of the loan where you're actually preparing to do a, several of the credit card companies months ahead of time were working, they were open about discussing with people on what they were working on putting the other transactions under TALF?

William Erbey

Management

I think two things, one of which is the initial ramp-up for TALF, the original asset classes that were announced a long time ago --

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Right.

William Erbey

Management

And when they got the mechanics in place, this was the first time that there was in fact a public announcement as to their considering doing servicing advances. Now with respect to that, we have been internally in discussions with the bankers on what we would like to do there. But there are still issues to be worked out. But if it comes to pass, it will be quite beneficial really to our business.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Yes, now it seems like it would be. Theyou said about option ARMs in the quarter, $2.6 billion of servicing for option ARMs, is that right?

Ronald Faris

Management

Yes, that's correct.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Are you feeling good enough about your liquidity even without TALF that you are going to start acquiring additional servicing in a meaningful way or not?

Ronald Faris

Management

I mean I would say that we're going to be -- we're going to continue to be cautious about how we spend our capital. If the opportunities make sense, then we will definitely consider them. So I wouldn't want you to read into it that we're back into the -- going to be acquiring at the same levels we were historically, but we will evaluate opportunities that make sense.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

And I know you have the convert that is due in I think in August about $80 million. What other -- and I know you did the $500 million of advance fundings, what other fundings are there to do this year?

William Erbey

Management

You mean -- you mean renewals?

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Yes or other commitments?

William Erbey

Management

We have one renewal that comes up in April. We are discussing as I said with another -- we are in the final throes of closing another line with a new investor, or rather lender. So it's pretty much -- once -- if we are successful in April, you really don't have another meaningful set of renewals occurring until December of '09. We -- and at that time we expect our advances to be materially below where they are today. So that we would be in a position at that time to actually move one or two lines and still basically have advance lines in excess of our advances.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay. The question on the auction rates, I mean what -- I mean you are suing the Citi, I guess, it was publicly announced yesterday or the day before. And I mean -- what -- can you tell me what -- has anybody begun any liquidity? These are student loan auction rates, right?

William Erbey

Management

Yes. These are government guaranteed -- Department of Education guaranteed student loans of the underlying collateral to these securities.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

So, what are the steps from -- I mean is there any liquidity in that market at all? I mean if you've written it down to a value where there have actually been trades and what is the remaining risk in that?

David Gunter

Operator

Hi Bob, it's Dave.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Hi Dave.

David Gunter

Operator

It is not written down to trades, there really are no trades that we can use as marks. So this is simply FAS 157. We are looking out to see what other market participants are using. And it's taken a lot of spade work to find out what they have because we are quite transparent in our Form 10-K which will be released today and previous Form 10-Q. But no, it's simply moving the mark to a place that makes sense compared to all market participants. But you're right, these are the self backed paper, the government guaranteed. So its high quality, the underlying assets are quite good. As to liquidity, obviously we have one line through the first half of the year and are working on alternatives to that line and expect to have liquidity on a go-forward basis. But we can't say in the future just when we would have liquidity coming back from any of the parties that you mentioned.

William Erbey

Management

What's going on right now in the market, particularly as it relates to -- there are several initiatives with respect to auction rates student loans or SLARS that are occurring. And I think as a result, you're not seeing people execute on trades because I think their expectation is that liquidity will resume in the market fairly shortly due to two actions the government has taken. One is the -- is obviously TALF. There is a very good article by Barclays out there that chose the yields and spreads required on auction rates on all the different asset classes. And certainly student loans are the most attractive because the haircut's only 5%, for the equity piece. The other is the creation of Straight-A Funding, which is -- the liquidity provides conduit -- the liquidity provider for that entity is the Federal Financing Bank. So there are two fairly strong liquidity initiatives by the government, both of which are now just commencing in the month -- in the next 30 days to kick into the market. Our expectation is -- no guarantee is that what will happen is the existing securities will effect the buyback in, broken up out of their existing structure and put back into asset backed securities, either financed through the conduit or through the TALF program. So there has been a lot of work being done by the government behind the curve if you will in terms of providing liquidly to student loans. Also, the BoE has said that if you break the deal -- if you break these up, you can deliver certain student loans that are from 2007 forward back to the BoE for their guarantee fee which would provide additional liquidity in the market.

Robert Napoli - Piper Jaffray

Analyst · the parties that you mentioned

Okay. Last question, on the servicing revenues in the quarter, while the portfolio didn't decline as much as we thought, and I guess because of the option ARM. Servicing revenue did come down faster than I thought. Is there anything unusual in the servicing revenue number? Or is that kind of the trend, is that -- is that late fees, late fees collected or what's in that?

David Gunter

Operator

I would like to just clarify one thing, the option ARM portfolio was a 2009 event.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay.

David Gunter

Operator

Okay. So that was not a -- that was not a 2008 event.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay.

William Erbey

Management

The revenue is more a function, Bob of less the decline of UPB and more of the level of modifications or reduction in delinquency. Your fourth quarter is your most difficult quarter both for servicing as well as for Bill Shepro's operation in NCI, because your poorest collections occur about the holiday season. That starts to ramp up dramatically in the first quarter. So our revenue and our earnings are very dependent on the level of modifications that are actually conducted or rather the reduction in delinquencies, because when you reduce the delinquency, you have the potential historically to correct normally late fees but you also reverse if you will or bring in the income deferred servicing fees, which are quite meaningful as you see the delta in delinquencies quarter-over-quarter.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Yeah.

William Erbey

Management

So, it's more than seasonality if you will of the business.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

And you are saying through -- I mean we're in March now, you are seeing a traditional first quarter seasonal trends, first quarter is usually one of the better quarters, isn't it?

William Erbey

Management

First quarter is generally a very good quarter, and you just saw the modifications Ron has told you about.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Yeah, right.

William Erbey

Management

They are materially from last year's run rate. Certainly in NCI collections are, on a seasonal basis are doing very well in the business.

Robert Napoli - Piper Jaffray

Analyst · Piper Jaffray. Your line is open

Okay, great. Thank you very much.

Operator

Operator

Our next question comes from Jordan Hymowitz with Piper Jaffray.

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

It's actually Philadelphia Financial. Hello?

William Erbey

Management

Hello Jordan, how are you?

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

Good, and yourself?

William Erbey

Management

Fine, thank you.

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

I have several questions. First of all, how much of fee income, loan fees was in the numbers in the both either quarter or the year? You said delinquent fee income which would not get if you modified the loan?

David Gunter

Operator

We'll show you -- we're going to release the From 10-K today and at the end of business day -- in the very back of the footnotes, we provide for you a breakout. And you'll be able to see the late fees compared to servicing fees, slot interest income. So I might just ask you to check that today.

Jordan Hymowitz - Philadelphia Financial

Analyst · the end of business day -- in the very back of the footnotes, we provide for you a breakout. And you'll be able to see the late fees compared to servicing fees, slot interest income. So I might just ask you to check that today

Okay. Okay, second question is you modified 60,000 – 61,000 almost loans in '08, but what do you hypothetically only get paid in the loans that didn't default or about 73% of those loans?

David Gunter

Operator

Sorry, say that again please?

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

Well, if the program is in effect last year, you're not getting paid on loans you modify, you're getting paid on loans you modify that don't re-default in three months. So instead of the 60,000, wouldn't it be closer to 45,000 loans, you got paid on, it's about 25% default within three months.

William Erbey

Management

The number we gave you was six months default rate, as Ron was saying, for most of those that are under that program in fact did pay in three months.

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

I am sorry, say that again, please.

William Erbey

Management

The re-default rate that we quoted to you was a six month re-default rate. What Ron was saying before is that the majority, the preponderance shall we say, not the majority, the preponderance of those loans that we modified did in fact pay their three month period.

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

Okay. But the default process is the same, you have to multiply the number of loans modified by the re-default rate to figure out what you get paid on, correct?

Ronald Faris

Management

Well, there is two different types of fees. You get paid an additional fee of $1000 which as Bill is pointing out, most of those would have been ineligible under that because they would have made this repayment. And then you receive a fee kind of equivalent to $1000 a year for each loan that continues to perform. So, yes, as loans that don't perform long term, you'll eventually stop receiving the success fee but a high percentage will perform. And if you try to point out, if you go, as you continue to kind of do the program and build on it, you kind of get a compounding benefit effect of the loans that you've modified, you're going to be able to get that success fee going out three years for the loans that continue to pay.

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

And what is the three months rate as opposed to the six months rate, instead of preponderance, could I get a figure?

Ronald Faris

Management

To some degree, the 60,000 loans and many of those are already -- we don't even count them until after the three months period. So in a way, when we said that six months re-default rate, in some way it's actually a nine month rate. So the 60,000 loans, many of those had already completed three months of payments before we even counted them in the 60,000. So there were others that we may have attempted to modify but they only made one or two payments. We never even counted those in the 60,000.

William Erbey

Management

Yeah, Jordan, the industry standard is, it isn't a loan technically totally until it pays for three months.

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

Got it.

William Erbey

Management

So the re-default rate is, as Ron said, is later on. And the re-default -- sorry.

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

Sorry, I apologize.

William Erbey

Management

The re-default rate we believe, ramps up obviously, to about the six months level in that -- sort of if you look at the industry data, it ramps up on the front-end of that and flattens out fairly quickly. So it doesn't continue to rise as you get out further out. Once people start paying for a while they tend to keep paying.

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

Okay. And last question is the loan servicing slide on slide number 15, can you explain this to me please?

David Gunter

Operator

Yeah. I mean basically what we are looking at there is the number of 30 plus day delinquent loans. So anything that's more than 30 days delinquent including REO that we currently manage. And if you go but look back in December of 2007 that the number actually was increasing but now it's been decreasing.

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

And would be -- the way to say that your portfolio is getting smaller too, is the actual underlying credit quality improving or is that the number of loans you're servicing is declining and as the cumulative change in delinquent loan is slowing down?

William Erbey

Management

Well your portfolio is, the following characteristics, the portfolio has the following characteristics. It had a very high proportion of seconds, those tended -- those tend to default earlier. And Ron was saying in his presentation that he would expect that the portfolio will get improved over time as a result of that. Secondly, all of your investor owned properties tend to default much earlier on within the process. So you would tend to scrape those out of the bucket. The President's plan on top of that basically permits servicers or require servicers in another sense to go back and re-underwrite all of those loans as if they were prime loans. Now many of these loans were originated just to give you some sense, with debt to income ratios that conceivably were well north of 50%, i.e. people were expecting to pay north of -- well north of half of their gross income for their mortgage payment. The new plan will reduce it down to at a minimum -- at a maximum 31% of today's income. So those are two fairly meaningful adjustments in terms of the underwriting standards and the required payments that the borrower would have. So if someone wishes to maintain their home, they've significantly -- they've had an opportunity to significantly reset, if you will, their obligation which by very its very nature would increase the quality of the portfolio.

Jordan Hymowitz - Philadelphia Financial

Analyst · Piper Jaffray

Got it. Thank you.

Operator

Operator

(Operator Instructions) Our next question comes from Steven Tannenbaum with Greenwood Investors.

Steven Tannenbaum - Greenwood Investors

Analyst · Greenwood Investors

Hi, my question is -- I understand the 60,000 loans and that they all qualify for the program. But what do you have -- what's your expectation on the timing for the receipt of the initial payment and the ongoing payment?

William Erbey

Management

Ron, correct me if I'm wrong. You're not going to see any -- I think the government has done a very good job of rolling out which when you actually get down to details, it's a very complex set of operations that need to occur. They're going to go and start basically signing contracts up. Once the contract has been signed, you're eligible for the payment assuming that the borrowers have in fact paid for 90 days. So you're probably not going to see much in a way of payments occurring until basically the start of fourth quarter of this year.

Steven Tannenbaum - Greenwood Investors

Analyst · Greenwood Investors

Okay. And everything that -- all the 60,000, if anything that's modified until that point, all qualified for both initial and the regular monthly payments?

William Erbey

Management

That is our -- we've been verbally told that multiple times by various people through the administration, as have -- almost every other servicer -- major servicer there.

Steven Tannenbaum - Greenwood Investors

Analyst · Greenwood Investors

Great, thank you.

William Erbey

Management

Welcome.

Operator

Operator

(Operators instructions). At this time, there are no other questions.

David Gunter

Operator

Thank you, operator. We're ready to conclude the call. And thanks to all for participating.