Thank you for standby, this is the conference operator. Welcome to the Ocwen Financial Third Quarter 2018 Earnings Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Mr. Steve Swett, moderator. Please go ahead, Mr. Swett.

Good morning, and thank you for joining us for Ocwen’s third quarter 2018 earnings call. Please note that our third quarter 2018 earnings release and slide presentation have been released and are available on our website for your review. Speaking on the call, we have Ocwen’s Chief Executive Officer, Glen Messina; and Chief Accounting Officer, Cathy Dondzila. John Britti, Chief Investment Officer will also be available to answer questions. As a reminder, the presentation and our comments today may contain forward-looking statements made pursuant to the Safe Harbor Provisions of federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology. Forward-looking statements by their nature address matters that are to different degrees, uncertain. Our business has been undergoing substantial change, which has magnified such uncertainty. You should bear these factors in mind in considering such statements and should not place undue reliance on such statements. Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. In addition, the presentation and our comments contain references to non-GAAP financial measures such as available liquidity, adjusted operating expense, adjusted pre-tax income, and cash flow from operations after adjustments among others. We believe these non-GAAP financial measures provide useful supplement to discussions and analysis of our financial condition. We also believe these non-GAAP financial measures provide an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial 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. For an elaboration of the factors I just discussed, please refer to our presentation and today's earnings release as well as the company's filings with the SEC, including Ocwen's 2017 Form 10-K and 2018 Form 10-Q, which are available on our website. Now, I will turn the call over to Glen Messina.

Thanks, Steve. Good morning and thank you for joining us today. I'm excited to join Ocwen as it's important time for the company. I would like to thank John Britti for his services as Interim CEO, and both John and Rob Brown, President and CEO, PHH and their respective teams for executing the necessary action to close Ocwen’s acquisition with PHH. I look forward to working with the board, management and employees to help Ocwen continue as a leading mortgage servicer that delivers value to all of our stakeholders. Today, I will provide an overview of the PHH transaction and our strategic priorities. Cathy Dondzila will then follow with the review of the third quarter financial results. I will close the call with some brief remarks before opening it up for questions. Please turn to slide four. We believe Ocwen's acquisition of PHH provides us with the opportunity to transform to a stronger, more efficient company that are able to serve our customers and clients and positions us for a return to growth and profitability. In the near-term, our goal to return to profitability in the shortest timeframe possible, taking into consideration the robust prudent integration process we are undertaking. To achieve this goal, we have established a set of initiatives that will be executed in two phases. Our Phase 1 initiatives address our most critical near-term challenges and establish a foundation for the future. These include, execute the integration to create value, re-engineer our cost structure, established funding for growth, replenish portfolio runoff and restore growth focus and fulfill our regulatory commitments and resolve remaining legacy matters. Our Phase 2 initiatives focused on ensuring sustainability. These initiatives include, digitize our business model, diversify our business model, leveraging our core competencies and rebuild our reputation and demonstrate that we have…

Thank you, Glen. My comments today will focus on our third quarter results as compared to the prior quarter. As previously noted our third quarter investor presentation includes more details on our results and is available on our website. Please turn to slide 13, we recorded a net loss of $41 million in the third quarter of 2018. Our pre-tax loss was $40 million in the quarter as compared to a pre-tax loss of $28 million in the second quarter. Revenue of $238 million declined $15 million from the prior quarter, primarily due to portfolio runoff. Due to MSR acquisition restrictions we have not been able to replenish our portfolio through MSR acquisitions and have instead been limited to portfolio recaption. As discussed on our last call we’ve reported a $4 million gain from executing R&D as call rights, on seasoned second lien residential mortgage loans in the second quarter, with no similar activity in the third quarter. Lending revenue also declined, driven by unfavorable valuation changes on our reverse mortgage portfolio and lower margins in the business due to unfavorable market conditions. Non-MSR related expenses at $176 million were only marginally higher than the prior quarter, with higher professional fees only partly offset by lower compensation and benefits expenses, resulting from our cost improvement initiatives. While we have made progress in our cost improvement initiatives as, Glen, noted earlier, we believe there are significant opportunities to make further improvements. Addressing the higher unfavorable MSR valuation adjustments in the third quarter. Rising interest rates are resulting in higher funding cost assumption, which reduced the value of our MSRs. We have provided additional information in regards to MSR valuation impact for you on page 27 in our slide deck. Please note the majority of our unfavorable MSR valuation was offset by…

Thanks, Cathy. Please turn to slide 17. We believe that Ocwen's acquisition of PHH provides us with the opportunity to transform to a stronger, more efficient company. They're able to serve our customers and clients and positions us for return to growth and profitability. In the near-term, our goal is to return to profitability in the shortest timeframe possible, taking into consideration the robust prudent integration process we are undertaking. To achieve this goal, we have established a set of initiatives that will be executed in two phases. Our Phase 1 initiatives addressing most critical near-term challenges and establish a foundation for the future. These include execute the integration to create value, re-engineer our cost structure, establish funding for growth, replenish portfolio runoff and restore growth focus and fulfill our regulatory commitments and resolve remaining legacy matters. Our Phase 2 initiatives focused on ensuring sustainability. These initiatives include digitize our business model, diversify our business model, leveraging our core competencies and rebuild our reputation and demonstrate that we have transformed our company. Ocwen continues to be an industry leader in helping homeowners remain in their home. This is a long standing core competency for Ocwen and it will continue to be a guiding principle as we move the company forward. We're excited about the opportunities that exist as we move forward after prolonged growth restrictions and we're focusing on executing initiatives largely within our control. And with that, we're ready to take questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Bose George of KBW. Please go ahead.

Hi, everyone. Good morning. Good morning, Glen. Welcome, looking forward to working together with you again.

Good morning, Bose.. Thank you.

The first question I had was just on the cost saves that you guys talked about the $100 million. When we look at that relative to what was reported in 2Q by Ocwen and PHH. Should we use the GAAP numbers as kind of the baseline or should we adjust for unusual items, which way should we kind of look at it when the baseline put $100 million of cost saves?

Yes, Bose, the $100 million of cost saves was based off of the second quarter GAAP results for both -- second quarter 2018 GAAP results for both Ocwen and PHH.

Okay, great. Thank you. And then, actually on the MSR valuation, just wanted to make sure I had the comment you made earlier. Was there a net MSR valuation adjustment this quarter after the NRZ liability? Or was there -- was that kind of flat after adjusted for that?

Yes. Cathy can you answer that?

Yes, there was a small net adjustment, but it was not significant after adjusting for the NRZ.

Okay. So because the MSR mark -- so the valuation was the negative $7 million and then that was kind of largely offset by NRZ, is that what happened?

Correct.

Okay, great. And then just wanted to go back to the point, Glen, you had made earlier just about the tax rate after the merger. Can you just repeat what you said about what happened to the tax after the merger?

Yes, Bose, as part of the integration process. Once we've completed a majority of the loan transfers onto the MSP, Black Knight MSP operating system. We do intend to collapse the two primary legal entities for Ocwen into the primary legal entity for PHH, which is PHH Mortgage Corporation. With that collapse of legal entities we’ll no longer enjoy the lower tax rate that we have for the U.S. Virgin Islands tax structure.

Okay. And what's the expected GAAP tax rate going forward?

Yes, Bose, I think it's -- as we think through it, we don't expect there to be a material adverse adjustment to the business given the overall how much income was actually in the U.S. Virgin Islands tax structure as well as go forward operating performance in the business and the fact that U.S. tax rates overall have come down. But we don't have an estimate or probably wouldn't forecast an estimate for projected future effective tax rate. That's just too hard to do.

Okay. And then actually just one last one for me. With the agreement with New York DFS, I guess, effectively allowing you to keep modestly grow your portfolio. Are you going to be active in buying MSRs again or are you going to wait till the integration is done and kind of do that sort of further down the road?

We do intent to be more active in purchasing MSRs. Here we talked about on the call both participating in bulk and mini-bulk MSR purchases, as well as the agency co-issue programs and our portfolio retention activities. We are going to be prudent and we are going to leg into it. It's been a while since the company has exercised its growth engine so to speak. So we want to make sure that the plumbing in the pipes are all working well. And clearly while we have the acquisition going on we are going to make sure that we don't disturb the long boarding or integration schedule or do anything that would potentially disrupt or impact of our experience. So the integration is the first among sequel so to speak.

Okay, great. Thanks a lot.

The next question is from Lee Cooperman with Omega Advisors. Please go ahead.

I was wondering if you could be a bit more helpful. You talked about returning to profitability in the shortest timeframe possible. What does that mean? Maybe I could wrap it up into few questions. I think from what you said that the book value a year from now will be higher than it is presently because of the accounting adjustments that not yet been made. So do you have an estimate of pro forma book value looking at a year? And what kind of -- the way you want to run the business, what kind of return on book value should we earn as a business. And what is your timetable to get there? Just aspirational not a forecast.

Yes, Leon, let me break that into three pieces. So first, in terms of the time frame to return to profitability. I think there's a couple milestones that we've got to get through. So I think as we said on the call first and foremost getting through the integration, which is roughly 9 to 12 months to get through that integration process. In terms of executing the cost re-engineering actions, that will take another 12 to 18 months. And we also have to develop an annualized run rate of new originations to replenish portfolio runoff of about $35 billion. So that's the framework we're operating within right now in terms of return to profitability.

Are these additive meaning it's two and half, three years before you return to profitability?

They will be executed in parallel.

Parallel. Okay, thank you. Go ahead.

Second, in terms of overall returns for the business. We identified that you know we think there's potentially 30% margins available on the subservicing side and 9% to 13% return on assets for MSR acquisitions. Assuming we can re-engineer our cost structure and generate portfolio runoff, we would hope that the overall investments would continue to earn that rate of return. Our return on equity would be a function of how we choose to leverage those assets. And we were right now looking at a variety of different financing and funding structures for those assets. We're still working through cost advance rates and those type of things to be able to back into an ROE for the business. So, I think we've got some work to do on what we think the ROEs can be for these individual asset acquisitions and the business. We do have to understand the financing structure.

I mean, would you think 12% to 15% would be a reasonable objective.

Lee, just broadly if I look at players within this industry and if I look at industry overall returns through the cycle, people look to average somewhere in the -- I would say high single-digit low double-digit to mid-teen returns from mortgage banking through the cycles. As you know there is lots of -- given that’s an interest rate sensitive business back and vary depending on what market cycle you’re in, but through the cycles I think that’s the range that an industry participant would target for this business.

Did I understand it correctly that the accounting adjustments have not yet been effectuated would lead to an increase in our book value, was that I misunderstand something?

No, that is correct Lee. So we are expecting because we did -- our purchase price was less than the actual fair value of the assets for the business we do expect there will be a bargain purchase gain, those calculations are underway now and Cathy December…

December 21st…

21st.

It is when we’d expect to release the pro forma.

Got you. Okay, thank you for your responses. I appreciate it.

Yes, sir.

This concludes the question and answer session. I will now turn the call back over to management for closing remarks.

I want to thank everyone for joining the call today. And we appreciate your support as a company. We look forward to updating you on our progress and these initiatives next quarter.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.