Onity Group Inc. (ONIT) Q3 2012 Earnings Report, Transcript and Summary

Good morning. And welcome to the Ocwen Third Quarter Earnings Call. [Operator Instructions] This call is being recorded. If you have any objection you may disconnect at this time. Now I would like to introduce John Britti, Chief Financial Officer. Sir, you may begin.

Thank you. Good morning, everyone, and thank you for joining us. My name is John Britti, and I’m the Executive Vice President and Chief Financial Officer of Ocwen Financial Corporation. 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 under Events and Presentations you will see a date and time for Ocwen Financial Third Quarter 2012 Earnings, click on this and register. When done, click on Access Event. Finally, select how you wish to listen to the event either Adobe Flash Player or Windows Media. Each viewer will be able to control the progression of the slides during the presentation. To move the slides ahead, please click the gray button at the bottom of the page pointing to the right. As indicated on Slide 2, our presentation may contain certain forward-looking statements pursuant to the Safe Harbor provisions of the federal security 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 Risks Disclosure statement in today’s earnings release, as well as the company’s filings with the Securities and Exchange Commission, including Ocwen’s 2011 Forms S-3 and 10-K, and first and second quarter 2012 Form 10-Q. If you would like to receive our news releases, SEC filings and other materials via e-mail please contact Linda Ludwig at linda.ludwig@ocwen.com. Our presentation also contains references to normalized results and adjusted cash flow from operations, which are non-GAAP performance measures. We believe these non-GAAP performance measures may provide additional meaningful comparison between current results and results in prior periods. Non-GAAP performance measures should be viewed in addition to and not as an alternative for the company’s reported results under accounting principles generally accepted in the United States. As indicated on Slide 3, joining me for today’s presentation are Bill Erbey, Chairman of Ocwen; and Ron Faris, President and Chief Executive Officer of Ocwen. Now I will turn the call over to Bill Erbey. Bill?

Thank you, John. The past several months has been extraordinarily productive. On today’s call, I will cover 3 topics. First, I will review of strong third quarter results. Second, I’ll discuss our competitive profile, especially with regard to substantial development in our funding efficiency. Finally, I will discuss our recently announced acquisitions and what they mean for the future of the company. Highlights of our third quarter results are shown on Slide 4. Ocwen earned $51.4 million of net income or $0.37 per share on record setting revenues of $232.7 million. Income from operations also reach new high at just under $140 million. All these numbers are substantial increases from prior year results and healthy increases from the second quarter this year as well. These results will continue to improve with the existing portfolios age. Moreover, our consistent ability to drive financial performance our newly acquired portfolios, gives us confidence that we will deliver strong results in recently announced acquisitions. As we have said in the past, our competitive profile is the function of 3 factors, cost to service, the level of delinquencies and advances, and cost of capital and financing. Slide 5 shows Ocwen substantial cost advantage in servicing nonperforming loans versus average industry costs. Larger as a result of proprietary technology and processes that we develop for decade, our cost to servicing nonperforming loan is approximately 70% lower than the industry average. Our existing cost advantage will be further enhanced by the reorganization of our overseas operation under Ocwen mortgage servicing or OMS, which is located in economic development zone in the United States, Virgin Islands. I relocated same core USVI and we’ve moved the substantial portion of Ocwen’s assets under OMS. We also expect to startup call center operations in United States, Virgin Islands within the next 12 to 18 months. We anticipate these changes will streamline global operations and lower overall international tax rate to around 10% on existing assets. We expect to start seeing substantial impact from these changes in the fourth quarter. The future effective tax rate will vary based on a variety of factors, such as the mix of business and a potential retention in Mainland U.S. operations from new acquisitions. Slide 6 shows our consistent performance in driving down delinquencies and advances on acquired business. Note also that these portfolios were previously managed by servicers that were considered among the best servicers in the business. So it’s no mean feat to rapidly improve upon their results. Ron will provide some additional information later in the call in our ability to bring borrowers current. The third component of our competitive profile is diversification and efficiencies in our sources of financing. The recent success by HLSS in tapping both debt and equity markets bodes well for Ocwen’s funding efficiency. In September HLSS raised almost $250 million to purchase rights to MSRs from Ocwen. The success of HLSS’ capital raised proves our ability to execute the capital right strategy we’ve laid out almost 2 years ago. Additionally, in October HLSS booked new ground in advanced funding -- in the advanced funding market by issuing an asset-backed security that was heavily oversubscribed. HLSS reports that it was able to reduce its advanced funding costs by almost 130 basis points, while extending the term. We believe that this improved funding makes Ocwen even more competitive. Further asset sales to HLSS combined with senior secured debt should be sufficient to fund the Homeward and ResCap acquisitions without the need to raise new equity at Ocwen beyond the $162 million in preferred shares paid as part of the Homeward transaction. Ocwen’s low cost structure, ability to bring down advances and efficient funding translates into strong cash flow for the company. As mentioned on our quarterly highlights, Ocwen generated $533.5 million in operating cash flow. Excluding the reduction in match funded advances from operating cash flow, results in $201 million of adjusted cash flow from operations in the quarter. We show this metric over the past 3 quarters on Slide 7 and compared to net income. We believe that this is the most accurate measure of the economics of the business and neutralizes the impact of varying accounting policies. Based on our current market cap is about $5.2 billion, this would -- this would represent a 6.5 multiple on annualized third quarter adjusted cash flow from operations. Now let’s turn to the acquisitions that we announced over the past several quarter -- several weeks. Let me first emphasize that we have extensive experience in successfully managed -- managing large servicing acquisition and we’ve been planning for these opportunities for many months. These acquisitions provide both profitable near-term portfolio growth and perhaps more importantly, a variety of capabilities that substantially improve Ocwen future competitive position. The Homeward and the ResCap acquisitions will add almost $200 billion in MSRs to our portfolio, at least $37 billion in servicing based on UPB at the end of August. We are obviously adding substantially to earnings growth potential, those servicing operations also contributing high quality capacity and added breadth at management workforce, operating facilities and product experience that we can deploy on future business of development. We had indicated in last quarter that we had a pipeline of over $400 billion in addition to ResCap. While Homeward has now moved through our pipeline, so new items have come into it. We are currently tracking opportunities over the next 12 to 18 months in excess of $350 billion in UPB. Moreover, we still believe that the market can see upwards of $1 trillion or more in MSRs in sub-servicing transfers over the next 2 to 3 years. All this suggest that we will be very -- that we will very much need the capacity and capabilities that we are acquiring. Ocwen long-term replenishment and growth strategies will also be transformed with the acquisition of originations business from Homeward and Genworth. The Homeward acquisition accelerates our previous strategy of building correspondent lending and flows servicing acquisition capabilities. Homeward has a very experienced team that has been originating approximately $800 million per month, primarily in the correspondent channel. We expect to fold into the Homeward business our own correspondent one efforts. The Homeward team has also developed the direct-to-consumer capability, recapture capability that will accelerate Ocwen’s ability in an area essential to economics and prime loan servicing. Yesterday we announced the acquisition of Genworth reverse mortgage origination business for $22 million. This acquisition is not as large as the others we announced, but it is strategically significant in that it provides us with the #1 reverse mortgage originator based on our recent monthly industry data. We expect the acquisition to be immediately accretive to earnings. We expect net income contribution of $8 million to $9 million in 2013. More importantly, this acquisition positions Ocwen well in the reverse mortgage business, which has enormous long-term growth potential. As shown on Slide 8, there are sizable untapped potential reverse mortgage market that could sustain rapid growth. In particular, financial planners and academics increasingly appreciate that the product is an excellent tool for managing retirement income risk. Long-term growth potential of the reverse mortgage market complements the near and medium-term growth opportunities we expect in our forward mortgage servicing business. Before turning the call over to our CEO, Ron Faris, I want to congratulate him on receiving this year’s Rooted in ESOP award, presented by Empowering and Strengthening Ohio’s People, a leading community advocacy organization based in Cleveland, Ohio. Ron was recognized for his leadership in foreclosure prevention through Ocwen’s loan modification efforts, particularly principal reductions. Ron is first private sector recipient of the ESOP award, prior recipients included Congressmen Dennis Kucinich and CFPB Director, Richard Cordray. Ron, congratulations again and I will now turn the call over to you.

Thank you, Bill. The ESOP award really speaks to the hard work and dedication of our entire Ocwen team in helping homeowners in distress wherever possible. We are grateful to ESOP and all of our non-profit community partners around the country such as HomeFree-USA, National Community Reinvestment Coalition, National Council of La Raza and so many others for their relentless work and homeowner outreach and counseling. They are truly indispensable in our success in keeping struggling families in their homes. I will cover a few areas today, including our operating results, our strong loss mitigation capabilities and our integration plans for Homeward and ResCap. A Slide 9 shows the revenue ramp on the newly boarded Saxon and Chase deals are meeting or exceeding our pro forma expectations. The Chase and Saxon portfolio is boarded in April at delinquency reductions of 1.5 and 1.0 percentage points respectively. While delinquencies on the Litton portfolio fell 1.7 points. Overall delinquencies fell from 24.5% to 23.6% from the end of June to the end of September. The total decline in delinquencies over the past 12 months has been more than 5 points, despite the boarding of highly delinquent loan portfolios during the period. These improvements occurred despite a slowdown in modification that we had anticipated in our last earnings call. With the expansion of the federal government HAMP2 program Ocwen evaluated all non-HAMP modifications in progress for eligibility under HAMP, which deferred some modifications into the fourth quarter. Total modifications for the quarter were 18,135. HAMP modifications accounted for 29.3%, up from 20.5% last quarter. The higher level of HAMP mod bolsters our expectations that the impact of HAMP2 will be positive overall as it increases the number of borrowers qualifying for the program. About 3/4 of modifications in the quarter included some principal reduction with about 1/3 of those mods being our shared appreciation modification. Completed modifications began to rebound in early October and offers for Q3 came in at a solid 22,869, suggesting that modification should be back on track in Q4. For the fourth quarter, we expect modifications to be between 19,000 and 22,000. As shown on Slide 10, the pace of advance reduction remains strong. In the third quarter of 2012 net advances declined by $347 million, excluding the sale of assets to HLSS. More detail on third quarter results are available in today earning release and our third quarter 10-Q, which we expect to release tomorrow. I want to talk a little bit about our integration plans for Homeward and ResCap as they differ somewhat from our past acquisitions. First, with respect to Homeward, it is important to recognize that unlike previous platform acquisitions, Homeward is currently generating positive income on a standalone basis. We expect to improve both performance and costs by transitioning to Ocwen’s world class platform, but we intend to maintain substantial portion of their servicing personnel and the origination business in its entirety. With respect to ResCap, we will take full advantage of their solid Ginnie Mae and prime loan platform. As such, we anticipate retaining much of the ResCap U.S.-based servicing personnel for the foreseeable future. I especially look forward to working together with the strong management teams at Homeward, ResCap and Liberty as we continue our positive transformation and evolution. For both Homeward and ResCap, we are confident that our pricing and opportunities to reduce operating expenses while improving cash flow will provide attractive returns to our shareholders. At the margin, both transactions are extremely accretive as they can be funded almost exclusively with debt. However, even with our long-term mix of debt and equity, pre-tax returns on equity are targeted on these deals in the world 20% range. As an indication that how Ocwen achieved the superior performance Bill spoke of earlier, I also want to share with you an analysis based on sub-prime private label securities data sometimes referred to as PLS. On Slide 11, we broke PLS data into Ocwen and non-Ocwen portfolios. We then look at the percentage of totals loans in the portfolios that have been modified and the percentage of those modified loans that are 60 days or more days delinquent. As you can see, Ocwen has modified 52.8% of its portfolio, compared to only 46.6% for other sub-prime servicers. Getting more borrowers into modifications is a critical component of our ability to drive down delinquencies. What is just as important as our ability to modify loans is the persistency of these modifications to remain current. Ocwen modifications that are 60 or more days delinquent are only 27%, compare to non-Ocwen servicers re-defaulted rate of 38%. These results are the opposite of what one might expect as it will seem that we might be modifying less qualified borrowers to attain higher numbers of modifications. Our better performance is a direct function of our industry leading technology platform and the use of psychological principals that enable Ocwen to deliver modification programs that increase both borrower acceptance rate and adherence. By the way, this analysis is consistent with several third-party studies that show Ocwen modifies more loans and has lower re-default rates. Our results are equally impressive when evaluating our success in getting loans to cash flow. Slide 12 portraits the percentage of sub-prime borrowers in PLS that have made 10 or more payments in the past 12 months. As chart shows over 72% of Ocwen borrowers made 10 or more payments compared to only 64.7% for other servicers. This means more cash flow to investors and lower advanced rates for Ocwen. In the third quarter, we began boarding sub-servicing from a large bank adding about 13,200 loan in August and September. We’re also targeting sub-servicing business from a second large bank early next year. The last thing I’d like to mention is the impact of an improving economy upon our results, especially over the long-term, an improving economy provides substantial potential upside in Ocwen’s results. First of all, reduced unemployment will likely reduce delinquencies and re-default, and potentially to a more rapid reduction in operating expenses and interest costs as advances decline faster than anticipated. An improving economy will also likely lead to longer duration of assets as many of our borrowers have low rate modifications with little incentive to refinance. Moreover, many of our borrowers do not qualify for current mortgage offering, so they are not well-positioned to refinance or buy new home. This should keep voluntary prepayments low. In the third quarter, voluntary prepayments are very low, running 2.8% out of a total CPR of 14.3%. As foreclosures and modifications abate, total prepayment should slow considerably as involuntary prepay typically account for 2/3 of Ocwen CPR. Now, I’d like to turn the call over to over to John Britti. John?

Thank you, Ron. On Slide 13 we show that normalized pre-tax income increased from $72 million in Q2 to $80.7 million in Q3. We had no normalizing items in the third quarter. This is a 69% improvement over Q3 2011 and a 12% improvement versus last quarter. These improvements are largely attributable to growth in our servicing portfolio and our ability to reduce delinquencies. At the end of September, Ocwen’s liquidity position as measured by unencumbered cash plus unused collateral financing capacity was $464.2 million. This is made up of $270.5 million in cash and $193.7 million in available credit. This sizable liquidity position is largely the result of asset sales to HLSS in August and September that generated proceeds of $1.1 billion. Approximately $667 million of these proceeds were used to pay down match funded liabilities and another $99 million to pay down our senior secured term debt leaving about $336 million to fund future acquisitions and other corporate purposes. To track the impact of HLSS on our financials, I will walk you through the entries. HLSS is accounted for as a financing of MSRs adding approximately $14 million to interest expense in the third quarter. The advance is assumed by HLSS, on the other hand move off of our balance sheet, so we must net the savings of $6.4 million in advance funding costs we avoided to arrive at a net increase in interest expense of $7.6 million. When we sell the rights to mortgage services -- to MSRs, we also realize deferred tax assets. As a result of this and other savings, we expect this costs to fund from these HLSS transactions, is in the mid-single-digit. Year-to-date, HLSS transactions have netted Ocwen nearly $470 million in capital to fund growth or other corporate purposes. For those modeling Ocwen’s earnings, I’ll provide some direction on our new acquisitions. Homeward servicing portfolio is relatively easy to model as we anticipate economic similar to what we have experienced on leasing sub-prime acquisition such as Litton though with lower transaction expenses. Homeward originations are expected to grow from the current $800 million per month pace to about $1 billion early next year. ResCap is little more complicated. The private label securities or PLS, have an average contractual servicing spread of about 31 basis points versus the 50 basis points, which is more typical of PLS in our portfolio. The average contractual servicing fees on Freddie Mac and Ginnie Mae portfolios are typical such business at about 27.5 basis points and 34 basis points respectively. The non-NOI sub-servicing has averaged fees of approximately 9 basis points. The master servicing contracts generate approximately 6 basis points of revenue. Thank you. We will now open the call up to questions. Operator?

[Operator Instructions] Our first question comes from Bose George with KBW.

Just a couple of questions in terms of modeling the portfolio. On the cost side, especially for ResCap for the other piece, such as the GSE and the Ginnie Mae, should we assume that the cost of service will be quite a bit lower?

Yes. The major driver of costs are delinquencies and so. And those portfolios are much less delinquent, so they will be much lower.

Okay. And then just switching to financing for ResCap. I mean, is HLSS going to be able to do, presumably they can do the non-agencies but can they do the Ginnie Mae and the GSE portion as well?

HLSS will not be taking those assets onto its balance sheet. We want to maintain clarity with respect to the asset class that they have, which were predominantly 90% advances in cash and only 10% of MSRs. And they tend to be -- they are the far more stable MSRs associated with non-prime loan. So HLSS will not be financing those assets. We are in preliminary stages of actually viewing another vehicle that will specifically deal with prime and agency-based products.

Brad Ball with Evercore.

The $350 billion pipeline that you mentioned, does that includes $120 billion related to ally that is mentioned in the press release.

That’s not included in that pipeline.

Would you have an interest in bidding on that, John?

I think we are interested.

So, why wouldn’t you include that in the $350 billion, and maybe could you just talk about what is in the $350 billion and what the timing would be?

We were looking at mostly the kind of transactions that are similar to ones that we’ve done in the past -- in the recent last 2 years, and we look out and say what’s likely to close in the next 12 to 18 months. That’s how we come up with that pipeline.

So does the $350 billion -- is it predominantly sub-prime or can you give us a sense as to the proportions?

It would be -- it would predominantly be non-prime.

Okay. And you said that -- you said that Homeward was part of your $400 billion plus and so that’s the difference in your guidance? What would be the timing for boarding Homeward and ultimately time you have boarding on ResCap next year?

This is Ron. We’re targeting to close Homeward in December of this year. And on ResCap, the transaction will likely close, might be earliest at the end of January. But maybe at the latest by the end of March, so somewhere in that timeframe.

And will they be boarding right away, or would you expect them to board over a couple of quarters, following the closing?

Well, I guess it depends on the definition of board. So with Homeward, we are acquiring the company and so will own Homeward assuming everything goes as planned then we’ll closed in December in December. There will be then a transition period, as we migrate on to our platform as I mentioned in the prepared remarks. So there will be a period of migration. But as we also mentioned, Homeward is a profitable business on a standalone basis and it should add profitability immediately upon closing. On the ResCap side, we are acquiring along with the servicing assets, the servicing platform. We think that the platform is well suited for Ginnie Mae and another agency business. And we will expect to maintain the platform to handle that kind of product for the foreseeable future. We will look to migrate private-label business onto the Ocwen’s technology platform over and orderly period of time. And we are going to have to sort of plan that out in conjunction with the Homeward movements as well.

Okay. And, John, thank you for the contractual fee breakdown that you gave us. What would you expect to do in the way of ancillary fees on each of those component parts?

I think you should expect that -- on the private label securities, we should do about what we’ve done in the past. I don’t have a good number for you on the Ginnie Mae and Freddies in front of me. We will come out with an estimate and try to go public with that.

So the overall revenue margins on Homeward should be similar to those on Litton?

I think that would be good way to model, yes.

Kevin Barker with Compass Point.

John, could you go over the funding, before you said, Homeward and ResCap acquisitions beyond the debt and talk about some of the debt covenants that may be placed on that you have existing right now, and how that would flow through and how you look at that from a funding perspective?

We primarily believe that we can fund as we mentioned. First of all, we have substantial cash available as I mentioned earlier. And we anticipated by closing a substantial portion of our ability to close Homeward with cash on hand, plus the equity that’s part of the transaction of deferred stock. So that transaction should be relatively straight forward. The other component -- 2 components of our funding are proceeds that we’ll receive from likely further sales to HLSS and senior secured debt. And I think that makes up virtually all of our funding and we anticipate -- we’ve already had discussions about the debt covenants that are required with respect to issuing new senior debt and we anticipate no problem with the covenants.

Do you expect -- from an interest coverage standpoint with this, the new senior debt where do you think it falls out and do you expect it to have 2x coverage, 3x coverage, where do you see that coming?

I don’t have that in front of me. But I do think that when we’ve gone through the details of the covenant requirements, we’re confident that we can easily stay within the kind of covenants that will be expected from investors.

Okay. And then from a margin perspective on ResCap, when I look at the base fees, the contractual fees you talked about, come out to about an average 23 basis points on base fees. If we add in some extra fees for ancillary and late fees, et cetera, we’ll probably see that come up to -- it get maybe 30 to 35 basis points. Am I looking at that correctly?

I’m not sure -- I want to give you. Let me -- give me those numbers again?

I was thinking you’ve got an average base fee for the entire portfolio close to about.

I don’t think we’re going to give a direction on margin at the moment. But we can give you more direction on that on future calls.

Okay. And then ResCap portfolio, do you see a lot of opportunity for refinances through HARP and modifications through HAMP, or anything along these government programs in the near-term for 2013?

As you are probably aware, we did the ResCap transaction in conjunction with Walter, and they are taking the Fannie Mae component, which is the larger GSE portion that’s probably be most available for HARP refinance. But, on the Freddie Mac piece that we are retaining, we would expect to capitalize on refinance opportunities there and we would expect to have retention business in place for the Ginnie Mae portfolio as well.

Bob Napoli with William Blair.

Couple of questions. So I guess I would like to understand, Bill and Ron, at the origination strategy that you’re going to be building now at Ocwen, and I guess I think I heard you say that Correspondent One is being voted into Ocwen, so you'll buy out Altisources piece of that or something like that. But what are you looking to do longer-term with the origination strategy or you are buying something that’s right now all correspondent? Are you going to -- when you are going to look to build out a real, build out a retail strategy or and is it going to be all prime or over the medium term? Do you expect to get back, I mean, is this country going to start originating sub-prime loans again, are you going to be part of that?

I think the Homeward acquisition gives us, as we mentioned already a very strong correspondent lending platform. And that’s the reason why we see a combination. You are combining correspondent one into that platform, and we think that there is further growth from where they are today. John mentioned where we expect them to be early next year. In addition, Homeward has started to develop on a small scale basis some retail based capabilities, particularly for re-finance type recapture business. And so we would definitely plan on continuing to build that out, and grow that piece of the business. Obviously with the acquisition of Genworth, we anticipate being a meaningful player in the reverse space. I don’t think we have any current plans to look at non-prime lending. One other things that Homeward is not doing today is FHA and Ginnie Mae business, which Ocwen is qualified to do. So we see that as a nice addition to their product mix that they are not tapping into today. So I think that kind of sums up the strategy as we stand today.

Okay. A question just on your servicing yield in the quarter. Just the revenue yield, the improvement, how much of that was from bringing current I guess some of your past due servicing fees and how much do you have left and is that -- that 81 basis point I understand that you are going to bring on the homeward, but what is the yield? Is that really sustainable I guess? Are there unusual items in there this quarter?

One thing I think in our earnings release, we note that we have $295 million of deferred servicing fees. Which is the component that we use to drive up that servicing fee above the contractual rate?

What that last quarter, John?

At the end of September, it was $295 million and last quarter, it was still a little over $300 million.

Well, if there is anything the actual -- because of HARP or HAMP2, it actually slowed down our modifications and recognition of DSF or deferred servicing fees in the quarter.

Okay. So I mean, but then the servicing yields, though is you’re suggesting for the current portfolio that, that number is not only sustainable but could increase a little more from here?

Yes. As we continue to obviously margin work -- now as the portfolio becomes more and more current that was what Ron was speaking about. You will lose that extra revenue, but your advances and interest expense along with your operating cost will just simply will decrease more. I mean the ideal portfolio for us would be one that doesn’t prepay and has no delinquencies, right. I mean, it would be pure margin. And so, yes, you will have that as, if we don’t buy more product as delinquent you will have that excess your ancillary [ph] fees will start to taper off, but concomitantly with that, excuse me, you have a reduction in both interest expense and operating expense that should outweigh that.

Then just on the tax rate, I think though you’re said in your comments, the 10% on existing assets. Any thoughts on being able to maintain that 10% tax rate as you bring on these additional acquisitions?

Yes. We recently stated that we’ve not yet decided whether those new acquisitions will be placed in the OMS first and then sold to HLSS or Altisource just sold directly to HLSS. In the intervening time, if we leave them at Ocwen, don’t move them down and move them to HLSS. They will be paid the full tax rate for that period of time. Then, obviously when they go to HLSS, we will be paying 1% tax rate. So it’s only for that interim between -- when you actually board than and you move them off to either HLSS’ book or on to OMSs book.

Great. And then last question, just what additions are you making to the management team. Are you getting some key additional members to the management team from these acquisitions, or do you need to bring in somebody to head up? I don’t know the origination business or the agency servicing business, or I know you’re becoming a much larger and somewhat more complicated business that probably needs a maybe a deeper management team?

Absolutely, this is a great opportunity for us. I mean, both of these companies as Ron pointed out, Homeward was a profitable business. That’s fairly unique and they have a very solid sound senior management team that we would like to integrate within our operations. In the same way with ResCap, ResCap is extremely well regarded as a servicer and certainly you can see that in their delinquency rates. They do a very quality job. So there are one of the intangible benefits, which is a very significant one is the ability on these 2 acquisitions to add significant management talent to our ranks.

Mike Grondahl with Piper Jaffray.

Can you help us on the flow deal that you talked about I think you got 13,200 loans in the quarter. What does the profitability look like on that deal, and how do you think about that flow continuing in the fourth quarter in 2013?

John, you want to take that?

Yes, I think as we’ve mentioned in the past, the way to think about sub-servicing profitability is it is very profitable but it has much shorter durations, primarily because a lot of the revenue stream that we get from these flows sub-servicing transactions come in a form of incentive fees that are front loaded. We anticipate that some of this is coming a little more slowly than we had liked, but I think we would expect that we will continue to generate sub-servicing into next year. So we are very hopeful that I think this will be a nice component of our overall business.

Okay. And then you were talking about the base fees on sub-prime and agency paper and Ginnie Mae paper. Generically speaking, how should we think about pre-tax profit in basis points on those different types of paper?

We’re not providing direction on that right now.

But I guess what I’m asking you, is not specifically on what you acquired. But as you look out to the marketplace, what do you think is the profitability on your platform you can get in those different buckets?

We’ll provide direction on that in the future, I don’t have direction to provide right now.

And I think, Mike, it always comes back. We look at it on more on return on capital basis than on -- but that’s how we look at it and how we model it out and we give them some guidance on where we think we are there, so that’s how we look at it.

Yes. I think we are always hesitant to give -- to discuss the business in terms of basis points largely because we think it leads you astray. I think, as we talked about on prior calls when we start talking about basis points, it’s trying to mix sometimes completely different types of portfolios because to the extent that you acquire Ginnie Mae portfolio that’s highly delinquent, it’s going to have different cost structure than one that doesn’t. And fees and portfolio is going to have mixture of both. So I think we got to just be careful. We don’t want to lead you astray by giving you level of profitability, which are going to be very different for newly acquired portfolios, seasoned portfolios and highly delinquent portfolios.

And in some cases it actually become difficult for us to answer real-time, because none of the management team ever looks at the portfolio and says, what are basis points on it. We don’t -- that isn’t a metric that we even in our management lexicon. So it's always a translation process for us to get to that data.

Okay. And then may be I can try to ask this way, when you look at Homeward and ResCap, how would you think about the capital or the equity that you are deploying in each deal? What size of that equity that Ocwen is putting in the each deal that’s going to get that return on?

That is the operative question in terms of what how we look at the business. I don’t have that. I don’t know if John or Ronny have that on top of their head?

Well, I think -- I mean first thing is as we mentioned we are funding this, I mean, in terms of equity, we are not issuing new equity at all. So it’s amount of equity they are putting it into this transaction business is 0 but the amount of capital we are putting it is related to the issuance of senior debt. We will give more direction on that. But I think the other piece of it, when we have a better sense of what we’re going to be selling to HLSS. That’s the other form of capital that we’ve raised. So I think that it would be premature for us to say exactly that mix because we’re still working out some of the components of it.

Got you. And then maybe just lastly, what should we think of it as a tax rate for the fourth quarter. Do we just use that 10% or is it going to be blended for the fourth quarter?

I think that it would be -- I think that’s a fair.

There will be some elements that have yet -- there will be some small elements that have yet to move and 10% is at the upper-end of the range. So we’re hopeful combination of that we’ll be able to comment on those -- in that level.

Ken Bruce of Bank of America Merrill Lynch.

I’ve got couple of questions. First, I guess just reflect back on your prepared remark. I believe you said that the Homeward and ResCap transactions from a return on capital perspective we’re going to be in the low-20s pretax. And I think just given a reasonable tax rate that there is just still going to be very attractive return on equity businesses, maybe a little below the threshold that you had before but still very attractive. Yet they increase your capabilities pretty dramatically. I’m hoping you might be willing to discuss how you think about this business now strategically as you increase your servicing capabilities -- used to be a relatively small sub-price servicing shop. You’re moving something much bigger. Can you discuss how you think about that strategically, please?

Sure. So I think, these transactions do really transform us because we are now a much larger scale player. And when you look at some of the opportunities that are out there in the marketplace, many of them are large-scale opportunities. And so it’s only going to be a handful of players that probably even have the capability to pursue those because they’re such large potential transactions. And you’re going to have to have a seasoned experience management team with a lot of depth and breadth to it. You’re going to have to have the kind of platform that can handle all the different mortgage asset classes and have strong experience in those areas. And that’s where we see the market going and that’s why these acquisitions are very important in taking what we’ve already developed and adding to it and making us -- we think the best positioned player for a lot of the future opportunities that are going to be out there. We’re going to add into it the origination capability so that we have organic growth to go along with the acquisition opportunities that remain out there.

Okay. And just as you think about this in the context of the capital-light strategy, HLSS has been a tremendous success. Bill had mentioned that in early thought process around something like that within the agency MSR arena. I think that maybe the capital-light discussion is maybe evolved a bit from where it initially began at possible stock buyback situation to something or maybe this is going to be more of a basically supporting a lot faster growth. Is that a fair assessment at this stage?

I don’t know. I don’t know that’s a change from what we said in past. I think in the past we’ve always said that we expected in the near-term, our growth would outpace HLSS's ability to purchase assets for a period of time? But that ultimately they would then outpace our growth and long term, we would achieve this capital light objective. But I don’t think that we ever said that we were going to get the capital lights in the direct line. We thought that we always expect that we would get there first by outpacing HLSS’ ability to continue to buy asset. And then once we -- once they start to grow faster than we do than we would buy back stock.

and there is -- I guess, as you transform yourselves into a more normal servicer, -- is this is -- I’m just -- I want to reconcile that statement with the potential for growth because it would seem that you could continue to use capital even in a very different balance sheet configuration from today as you grow if there market opportunity is as we’ve discussed earlier is as big it is.

We will continue to use our capital for our growth. And we will continue to look at vehicles such as HLSS that are -- that provide cash flow stream that meet the specific needs of individual investor groups. So we’re going to work on both sides of that equation as we continue to work at that all the time. So you’ll see this continue to push more and more toward the capital light model but as we get -- as we continue to grow that, we may not be getting there tomorrow.

Understood. And then just lastly, in just the context of the growth that is now coming how should we look at this in the context of the rating agencies. How those discussions gone, should we expect any actions on their part?

I don’t think we can necessarily project what they are going to do. We definitely communicated all the information available on the different transactions that we’re doing and how we plan on funding those transactions. I think some of them have come out already. They are expressing some concerns about our -- what they would term rapid growth. But I think there is some recognition that we were very experienced at doing this. We have a strong track record acquiring large servicing portfolios and businesses and integrating them quickly and effectively. So hopefully we’re starting to get some recognition of that and some credit for that on a go-forward basis. These particular transactions, I think, we’re -- since we are going to for example with ResCap maintain their platform for the foreseeable future handling the Ginnie Mae and the Freddie Mac portfolios. There is -- the integration risk if you want to call it that, I think is much less on those portions of the portfolio on the private label stuff. We’ve got tremendous experience in doing that and don’t expect there to be any hiccups there. But I think that remains their biggest concern. And they will obviously continue to monitor that. But I think overall we don’t expect anything beyond what you’ve seen so far.

Great. Very interesting time in the mortgage business these days and you continue to be at forefront of that.

Ryan Zacharia with JAM.

Bill, you can just kind of bring us back to kind of the original thinking behind Correspondent One was to try and keep it removed from Ocwen and now it seems like while all the logistic aren’t fully ironed out. Correspondent One is now going to be brought in Ocwen by the way of Homeward. I think just going forward a bit kind of that decision making profits and maybe below it more specifically on how that’s going to work?

I mean the process is just -- the decision making process is one being practical about what can get approved and not approved through the agencies. And Ocwen has a more a longer track record in approvals as a seller servicer. So it streamlined that process significantly by readjusting the ownership between Altisource and Ocwen to build that business model. The Homeward acquisition -- we still have Correspondent One. I mean, we still have Altisource ownership within that vehicle because I think it provides support to both Ocwen and Altisource in their business models. So you’ll since continue to see that joint ownership there. I’m not sure whether it's -- is that responsive, Ryan?

It is. It is. That’s helpful. And can you give a little bit more color. I asked this on the Altisource call, maybe with more time just for more clarity, but how the Homeward ancillary businesses are going to be treated, whether we can expect those revenues to stay inside Ocwen or not? How that’s all going to work?

We’re not commenting on that for a specific business reason with regard to that. We can provide you, I think much more clarity on that. And we’ll provide you a lot of clarity on that we believe in our next earnings call.

Okay. And then can you help us reconcile. For the last couple of few quarters, there has been kind of this ramp in core operating expenses that’s suppose that we’re leading growth. And you’ve been over staff, but it sounds like on the latest transactions, you’re going to retain a lot of the overhead. So even though average UPB was basically flat this quarter with last quarter, we saw operating expenses rise. I think since the beginning of this year, operating expenses have risen on the order of magnitude around 60%. UPB is only up around 25%. So when are we going to see kind of normalization in core operating expenses?

Okay. One of the reasons…

I could say it.

Go ahead, go ahead, please

No, Ron, please.

Just to clarify couple of things, one of the reasons that operating expenses, you’ll have been rising relative to UPB is the special servicing or sub-servicing business that we are doing for one of the large banks out there. It's virtually all non-performing loans, which means it's very heavily people intensive. And a large percentage of the people handling those portfolios are being hired on shore based on certain kind of arrangements that’s we have with that particular bank. So there is a sort of disproportionate amount of growth in the U.S. operating work force because of that portfolio. So that probably is one of the things driving that. We’ve been very careful to make sure that we’re staffed to handle any of the acquisitions that come on and hit the ground running and have no hiccups as far as our ability to serve customers. I think we have done it right.

If you are retaining a lot of overhead, I guess, that’s kind of where that’s what I’m trying to reconcile. You’re retaining lot of overhead on what you’re acquiring, but then what were you building out for?

We weren’t really as much building out as Ron was saying as we were bringing on new portfolios through that period of time. Firstly, you see the -- you see the quarter number, you don’t see what’s happening month-by-month within that quarter. But we were making a very concerted effort to drive down delinquencies. But that was somewhat interrupted in the quarter because of all these massive amount of rewriting -- re-underwriting to do on HAMP2. We don’t lose those modifications but they -- in fact, they pushed into the fourth quarter. And we also basically pick up because there are more HAMP module, pick up more revenue with regard to it. So what you don’t see within the quarter is a large ramp-up on prior quarters with regard to 40 new portfolios. And those headcount as you bring delinquency that fall away very quickly. There was a lot of work done in the third quarter that’s was really a one-time effort to try to basically get the entire, if you look, inventory of modifications re-underwritten both through the HAMP2 program as well as for our own private label programs with regard to that. We however -- we were very mindful of -- we’ve going into the acquisitions of not cutting a lot of the excess headcount that we are carrying, which is pretty significant in certain of our operations because even though we are requiring new people, new organizations, there will be transition in their work force as they -- some people decide they want to go work somewhere else before the deal closes, et cetera. So we are trying to make certain that we have more than sufficient staffing going into these acquisitions. And then the steady state, we’re much better able to significantly reduce our headcount and our staffing.

So if we think about Q4 irrespective of Homeward, what would we expect -- what should we expect core operating expenses to look like vis-à-vis Q3?

We exited the September with headcount that we see was meaningfully below where it was in the month of July. We still are significantly overstaffed, and we’re not planning on reducing any headcount from that. But either Ron or John if you like to give different color on that.

Yes. I mean with the upcoming acquisitions, we are not going to look to reduce staff significantly. But as I’ve mentioned before, as we’ve been adding the most recent addition to the portfolio has generally been in the sub-servicing area, which have resulted in the lot more people being hired in the U.S. relative to offshore. So that changes the cost mix. So I mean, I don’t know that we’ll see dramatically different operating expenses in the fourth quarter compared to the third quarter.

Other thing I mentioned is that, I know that and this is one of the reasons why we like to shy way from this basis points model. If you look at our operating margin, it actually remained the same quarter-to-quarter. On a percentage basis, it’s just the -- and I think it’s partly because as Ron mentioned some mix of business change that have had an influence on that. We’ve taken on more expensive business to service. But it also generates decent revenues associated with it. So I think that -- now again, the margins of these businesses will change as the mix changes. But I think if you look quarter-to-quarter, I know that you focus on sort of how much you’re spending per dollar of UPB. And that’s probably not the most appropriate way to do it because much of the sub-servicing business that we are taking out for example, often generates much higher revenues.

But the preponderance of your servicing is still in purchase servicing. That’s kind of relatively, I guess, I would say vanilla flavor to what Ocwen bread and butter is, Litton, Saxon and Chase. And in those portfolios which makeup the preponderance of your recent growth, have resulted in inordinate expense ramp vis-à-vis let’s say, HomeEq, that’s fine, what I’m driving at.

Ryan, I think the one thing, the product we’re bringing on the flow business is almost 100% delinquent and service to 100% in the United States. So it is extraordinarily labor intensive. It is also however produces incentive fees that are really quite attractive to it. In other words, the business from -- if you start from beginning to end and look at it, we believe it will be very, very profitable business for us. Those incentive fees tend to be lag a little bit. In other words, you do a tremendous amount of work upfront to try to put yourself in a position to resolve those portfolios. But those resolution fees are really quite exciting to us. So we’ve been investing heavily. It looks like a small portfolio that’s 100% delinquent and it does require a meaningful amount of labor. Now having said that, we still do have more people on our payroll now than we need to service the portfolio and it read meaningful number. But we’re not going to take those people out other than people who are just simply poor performers that are destroying value. We’re not going to take those people off because we want to go into these acquisitions extremely well staffed and able to handle them. And in our ability -- and the prior question was, how was the ratings -- how the rating teams of the government treats you. Is it our ability that demonstrates to take on portfolios and to immediately reduce delinquent fees is the important part of our business model. So if it costs us a little bit money in the short term, I’m the cheapest guy on the planet. I don’t like that. It is both Ron and John say. They can attest too, but I think it’s the prudent way to continue to build value in the business.

That’s make sense. I appreciate the color. One final question just can you give any color or guidance on Homeward correspondent deal on sale margins?

No, we’ll give probably more guidance on that, next quarter.

Henry Coffey with Sterne, Agee.

And let me just continue on this subject. I’m narrowing in on just looking at the second to third quarter. And between those 2 quarters actually your compensation costs went down a shade of -- amortization was a little bit higher but that’s expected because average servicing was probably a little higher. The 2 items that seem to kind of take a jump in cost were servicing and origination cost and, "operating expenses." Can you give us a sense of what drives those?

I mean, John, the best -- I mean the best way to -- there will be -- there will be a fair amount of details in the 10-Q that maybe most helpful in looking at those kind of things. There are certain as we become bigger in the GSE business. There are certain expenses in the form of compensatory story fees and things like that that larger GSE servicers would have in their numbers, that our numbers have historically been low. But as we’ve taken on more of that business, some of those numbers have started to rise and that is…

Is that like contemplating that weird thing where you have to pay half of…

No. There is certain -- you’re depending on foreclosure timelines and things like that where there is certain fees that you pay back in effect to the GSEs depending on performance. And so, as you get bigger, those numbers are going to go up. And we’ve been pretty small in that area, but started to grow with -- we did a $10 billion acquisition in June with Freddie Mac business. So some of that has to do with kind of the change in mix of product and where some of the expense lines come into play. We build those things into our -- how we price the portfolios but they will change some of the line items. I think may be the Q will be helpful -- somewhat helpful in trying to budget some of that stuff out.

Yes. And there is some volatility, I think another operating expense line that generated by…

I will go through the Q and then call you. On the HAMP issue and I’m going to ask you to repeat some of the numbers. What were your HAMP mods in the quarter?

Well, we did. They were about 29% of total mods and we did.

And what were the total mods here?

18,135 was total mods.

And then what you made a comment about what to -- what was going on in the current month and what do you expect in the fourth quarter?

Well, the fourth quarter we said mods should be between 19,000 and 22,000. So little hard to tell where those HAMP percentage is going to come out, HAMP2 is obviously driven the number up, because as we indicate in the second quarter we were 20% with HAMP and we’re up to 29%. So hopefully, that we’ll stay at that higher end and maybe even improve a little bit more as HAMP2 kicks in even more.

And the delay and tied to the review was a procedural issue or you felt that, that was done?

No, no. This is -- I’d say it call more of a requirement. I mean when HAMP2 went live in June, one of the requirements was you needed to -- since it added new eligibility requirements, if you had loans that say were a non-HAMP kind of process because they didn’t qualify for HAMP I. You needed to kind of pause, pull those back in, reevaluate them for the new HAMP program to see if they qualified or not. And all of that took some rework and time to do it. I don’t think we were any different than anybody else out there. It was not a procedural problem. It was just a procedural requirement based on going live with HAMP2 in June.

And now, it’s sort of back to -- the fourth quarter would be sort of back to a normal flow on that front.

Yes.

If you have a mortgage originator, which you will have, HARP would be part of your equation as well, correct. That’s an opportunity that…

Yes. That remains an opportunity for us, yes.

Two other questions, one very simple, John, you mentioned what your liquidity currently was. And I was actually that, that’s one I was giving my name into the operator, so…

$464 million.

What was it again?

$464 million at the end of the quarter.

And then is it fair to characterize your view on ResCap that the government business and the GSE business will stay with the existing platform and the private label servicing will migrate towards your offshore platform?

Yes. Look, I think yes. I think that’s a fair assessment. I mean long, long-term, we’d like to -- that would be most efficient to operate on a kind of a single technology platform. So out there in the future, that’s where we would want to get to. But we get tremendous amount of management and staff capabilities in the GSE and Ginnie Mae world. With these acquisitions -- and we want to capitalize on that and position ourselves well for some of the other transactions that are out there and that’s going to be coming down the road. So the mix of business is changing. It’s going to change sort of the -- what’s on Mainland, U.S. and what’s not. But it always kind of by design with the long-term plan to position ourselves really to be the best qualified both management wise, technology wise, cost wise, funding wise for future opportunities that are out there.

No. That’s helpful. And then the master servicing businesses, it's 6 basis points. We're kind of watching numbers go back and forth. Is there any -- is the cost 50% of that revenue stream or very, very small?

What I can say is there is not a lot of people decked against that piece of business. So, the cost shouldn’t be too high. I don’t think we’re going to get kind of much more on that now, but we’re happy to have those capabilities -- right now it's kind of been a run off type of business. But to the extent the market does evolve and change and maybe private label securities start to grow again. It could be very, very good capabilities to have kind of as mortgage business continues to evolve. So again, it’s another capability that we’ve now added into our arsenal that we didn’t have before and we’re excited about that.

DeForest Hinman with Walthausen & Company.

I just have one question. Can you walk us through the interest expenses, you had the match funding advances decline by about $1.2 billion sequentially, yet. The interest expense was relatively flat. And I know mentioned, I think it was $7 million net from the HLSS transaction. But I’m wondering if there are some original issue discount expense, so it was accelerated in there or am I missing something?

Yes. It was some related to the retirement of our 10 7/8 securities as well.

Okay. But I mean looking at -- I mean it just maybe a blended interest rate type thing where I think in the past it was more around 6 and change. Now in this quarter, it’s much higher than your estimating balance for the debt.

Well again, I think it -- a chunk it is -- I think the main difference in probably numbers is the HLSS component what shows up is financing. It is actually -- it actually increases our overall interest -- shows up as $14 million and the -- and when I told you it was -- I was netting out the savings on the advance funding that moved off of our balance sheet. But we still end up occurring the equivalent $14 million or the full $14 million.

Hugh Miller with Sidoti & Company.

Just had one quick follow-up question on that point with regards to, I think you guys mentioned and my phone cut away but with the relationship between match funded advances relative to the UPB, which obviously came down in the quarter. Just getting some sense as to how we should we thinking about that relationship in the ensuing quarter?

I’m not sure, I understand the question.

Just the reduction in match funded advances and which we saw come down from the second quarter and how we should be thinking about that on a go forward basis?

So I mean advances -- the things you have to keep an eye on is, we would expect that we will continue to drive down our advance levels just from continuing to bring delinquencies down. But then you are going to have no -- to the extent we are able to sell more assets to HLSS, which we hopeful we will be able to do. That will also bring the advance numbers down. But when that occurs as John was trying to point out, you have that an increase in interest expense related to kind of the financing of the MSR as an effect. So yes, there is a number of dynamics going on there. And you just have to kind of watch for when we do sales to HLSS. And may be we can do little better job and trying to give some guidance on what that will look like going forward.

David Haas with Moore Capital.

Just a quick question. You guys did discuss on the ASPS call as well as briefly on this call, just the -- that there will be businesses from Homeward coming in to Ocwen that are similar to the services provided by Altisource. But what about the ResCap piece, are there similar structures within the ResCap platform that are sort of redundant with what Altisource does for you?

Yes.

Okay. And so it is the same sort of construct where you will have to sort of assess what can be done well within Ocwen from ResCap or what can be done better at Altisource is there. I guess really the question I’m asking is there cost save and transferability opportunities from the ResCap piece over to Ocwen and therefore Altisource?

There are and we can give you better clarity on that in next earnings call.

Kevin Barker with Compass Point.

Maybe I just had follow-up question on the $1 billion of originations you expect from Homeward. And you did about $3.6 billion of flow program that was brought on this quarter -- Correspondent One. It’s also going to be integrated, where we talking about Homeward. Can you just give us an idea of the amount of organic inflows that you expect with combination of originations and flow programs in 2013?

First of all make sure that $3.6 billion of flows sub-servicing is a very different animal from newly originated correspondent loans. So I mean these are quite different. I mean one is coming in as brand new newly minted loan. The other is a 100% delinquent loans coming through sub-servicing. But I think that right now the direction we’ve given, I think this is as much as we’ll give the time being, which is that we do expect that this correspondent learning platform will ramp up to early next year to about $1 billion a month. But we do think that there is more upside over the long-term to continue to grow our organic capabilities.

So essentially a $1 billion all in from Correspondent One and Homeward from origination standpoint is how we should look at it in the beginning of next year?

Yes. That’s a good, that’s a good start.

Let me caution you also that the profitability on prime product is about 10% of what non-prime is. So, it's -- whereas we’re interested in developing that channel and we think we’ll make good money on the origination side. It’s not a -- you have to originate an enormous amount of prime to create an ongoing, meaningful ongoing revenue stream. That’s we always talk about -- we talk why we don’t like to talk about UPB. One analysis we did on the most recent acquisition in ResCap is that if we took its common size, prime and non-prime portfolios there. The non-prime would generate $100 of profit, say, over the next 6 years, heavily in the first 4 years. The prime will generate $10 of profit, $9.5 of that would be in year one, primarily because of HARP2. So there are radically -- you’d have to ask what size of UPB is that in order to really build your models.

And just to put that further in perspective, the sub-prime -- the sub servicing business from a profitability standpoint, is probably about 2.5 times less profitable on a UPB basis as non-prime.

Okay.

Right. And maybe some of other things that touch on John. Just 2 -- we mentioned in our prepared remarks that we’re hoping to add another bank into that sub-servicing, special servicing process. We also -- you’ll note that we announced that we had done some acquisitions of some $2.2 billion of Fannie Mae, MSRs. There is a number of opportunities we’re seeing in the market, so what we call kind of co-issue opportunities. So there is a variety at different channels that we are working on in addition to the big bulk acquisitions that kind of in the end and are similar to correspondent business. But they just come through in different ways. So the $1 billion that John mentioned is what we would expect at least in the early part of next year related to Homeward. But there is a number of other different channels that are little harder to project what they are going to be. But that I think we’ve made good progress on this year and are starting to see some of the fruits of that labor here in the third quarter and into the fourth quarter. So I don’t think the $1 billion is the only amount of flow that we can expect. It’s just a little hard to project what it’s going to be.

But one critical element is that for strategy is the ability to create another HLSS product that will basically take that product with that we trying to return 20 plus return -- 20 plus percent returns on equity that’s very difficult to achieve in the prime space, whereas you can still create a very attractive low to mid-teens yield conservatively within that space. So the extent that we can actually develop and bring into market successfully. Altisource also has the Lenders One network which this year would produce 12.5% of all mortgages originated in United State. So our amount of origination is less related to availability or should be able to attract the business. It’s more related to a pricing cost of capital determination that’s the gating factor.

Okay. And with flow programs you have another bank coming on, you did $3.6 billion in this quarter. Presumably, it could be somewhere near that or close to the $3.6 billion. How long you see that lasting and how long do you see some of these programs playing out given, it’s mostly delinquent and foreclose -- I mean some mostly delinquent loans?

If you look at delinquency today, it's still up around, I guess you are a little wrong, but probably around 29 levels. I mean we’re may be 25% off the peak. But we are still running that levels that are many, many multiples of historical experience. So we were 5 years into this crisis if you will or recession. And we’ve seen nominal reversions to the mean with respect to level of foreclosure. So we are not in the 7 or 8 inning by any stretch of imagination unless there is a radical shift in the underlying income levels of the population.

Okay. And just going back to tax rate real quick. You said, you’re probably running on right now close to high single-digits with the tax credits from the Virgin Islands. Can you give us a little bit of understanding around what percentage of your operations will be U.S. based versus foreign based and how that -- how we should look at that from a tax rate perspective, given that the mix of your business is going to change quite a bit?

It is a blended -- that is a blended tax rate based on all the countries that we’re in today and where our assets are. Now the only reason we said it might be higher is that in fact if you kept more assets on Ocwen’s books as opposed to immediately transferring to OMS. But instead waited so HLSS did another transaction can transfer that directly, that pro rata portion would be bearing an interest rate of closer to the effective rate of 35%, perhaps little higher with some the deferred tax assets. They will only be for that in the right between the time you boarded and the time HLSS is prepared to take it on Board.

So the near-term we probably could see the tax rate a little bit higher and then over time, as it goes under OMS probably get back closer to high single-digits, is that the way we should look at?

Yes. That’s right. You will see periods of times where this more inventory in the U.S. at a higher tax rate and you can just multiply the 36 times that amount and figure what that number might be. We may have a little more domestic content for some of the products and I will see you transfer pricing with respect to that and that’s not an enormous driver of the number. But the effective tax rate into the IS is 3.75%. So we think high single-digits, it’s a good weighted average for all the basic tax jurisdictions that we’re in.

And that something we can rely on longer term 2014 out a high single-digits tax rates, the way we should look at?

Yes. We’re being conservative with saying 10%. If you use 10% in your numbers, I don’t think you'll be disappointed. You'll be slightly lower than that and it’s slightly higher. Well, fairly around upper end of that range in the fourth quarter, because not all issues -- not all elements have been moved at the present time, but the vast majority have been.

Bose George with KBW.

In terms of the funding cost for the stuff that you’re going to fund with this HLSS type vehicle. Is it too early to determine what kind of funding cost you can get for them?

It’s under the prime one with regard to that.

Yes. The prime piece exactly?

We have a -- we’d prefer not at this point in time to comment on that. I think we have some interesting parts of the structure that will make it attractive and make it competitive with comparables within the market. So I think that’s as far as we are prepared to go at this time.

But it is fair to say that it’s probably more expensive to fund prime versus sub-prime?

I would expect it to be because the volatility of prime is, most of it is in MSR. Vast majority -- there's virtually no advances, it's all MSR and prime MSR are far more volatile than the non-prime MSRs.

Okay. Great. And then just one last thing, do you have the average servicing portfolio number for the quarter?

I mean we started the quarter at 127.8 and we ended at right around 127. So I think if use 127, you’d be pretty much spot on. Maybe a little more.

And at this time, I’m showing nothing further.

Thank you everybody for attending today. We appreciate your interest. Have a great day.

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