Thank you for standing by. This is the conference operator. Welcome to Ocwen Financial Corporation’s Fourth Quarter 2019 Earnings Conference Call. As a reminder, all participants are in 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 Hugo Arias, Senior Vice President, Treasurer and Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for Ocwen’s fourth quarter 2019 earnings call. Please note that our fourth quarter 2019 earnings release and slide presentation have been provided and are available on our website. Speaking on the call would be Ocwen’s Chief Executive Officer, Glen Messina; and Chief Financial Officer, June Campbell. As a reminder, the presentation and our comments today may contain forward-looking statements 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. 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 uncertainties. You should bear these facts in mind when considering such statements and should not place undue reliance on such statements. Forward-looking statements involve several 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 statement, 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 expenses, excluding MSR valuation adjustments net, and expense notables; and pre-tax loss, excluding income statement notables and amortization of NRZ, lump sum cash payments, among others. We believe these non-GAAP financial measures provide a 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 Securities and Exchange Commission, including once filed Ocwen's 2019 Form 10-K. Now, I will turn the call over to Glen Messina.

Thanks, Hugo. Good morning, everyone. Thanks for joining us. Let’s start on Slide 4. In 2019, we delivered strong performance on our value creation strategy of our improving financial performance, building a sustainable business model, and reducing enterprise risks unique to Ocwen. With respect to improving financial performance, in the fourth quarter, we achieved net income of $35 million and we ended 2019 with a book value per share of slightly over $3. We also achieved pretax income before notable items of $12 million, which exceeds our prior guidance. We’ve improved our annualized pretax income before notable items and amortization of NRZ, lump sum payments by over $265 million since the second quarter 2018. This was enabled by completing the PHH integration on time, growing owned MSR UPB originations from all sources, and realizing significant cost reengineering savings. With respect to creating sustainable business model, we established multiple origination sources that are generating volume at a runrate to deliver between $15 billion to $20 billion this year excluding both purchases. To support our growth objectives, we established secured MSR financing for agency, Ginnie Mae and PLS servicing, improved our servicing advance facilities terms and funding cost, and restructured our mortgage warehouse funding facilities to support our lending growth. To reduce risk, unique to Ocwen, we extended the SSTL maturity to May 2022, resolved multiple litigation matters favorably and we believe we’ve met all requirements to-date of the NYDFS’ conditional approval to the PHH acquisition. We’ve also completed the second of three data integrity audits for Massachusetts, thereby lifting our MSR acquisition constraints in that state. With respect to the CFPB and Florida AG matters, we received favorable court rulings in September last year. We continue to believe we have meritorious factual and legal defenses to the CFPB and Florida AG…

Thank you, Glen. My comments today will focus on our fourth quarter results as compared to the prior quarter. As previously noted, our fourth quarter investor presentation includes more details on our results and is available on our website. Please turn to slide 12. Our fourth quarter 2019 reported net income of $35 million includes by $28 million of interest rate and assumption-driven favorable net valuation impacts, $15 million of recoveries from a mortgage insurance service provider of expenses recognized in the prior period, and $14 million of upfront reengineering costs, among other items. The positive pretax earnings impact from the amortization of the lump sum cash payments received from NRZ in 2017 and 2018 was $26 million in the fourth quarter and $24 million in the prior quarter. The amortization of these lump sum cash payments will have a $35 million positive impact to our pretax income over Q2 periods through April 30 of 2020. Revenue of $262 million decreased by $22 million in the prior quarter, primarily driven by servicing runoff, lower gross float earnings, and $6 million of unfavorable interest rate assumption-driven net fair value changes in the reverse portfolio. Operating expenses of $139 million were $40 million lower than the prior quarter due to continued progress in our cost reengineering actions which remain ahead of our expectations and the previously mentioned expense recovery. The favorable MSR valuation adjustment of $1 million in the fourth quarter is primarily due to $64 million of favorable adjustment in our agency portfolio to do a 33 basis point increase and the ten year swap rate, offset by $63 million reduction in MSR values due to portfolio runoff. The favorable MSR valuation adjustment in the quarter were offset by $30 million of unfavorable NRZ financing and other related liability valuation changes,…

Thanks, June. Now let’s turn to Slide 16. For 2020, we are focused on originations growth and diversifying our servicing portfolio mix, executing our continuous cost reengineering framework, optimizing sources of capital and continuing to reduce enterprise risks. We believe we have built a multi-channel mortgage platform that positions us to take advantage of growth opportunities, supported by our internal capital initiatives and external capital partners. We continue to make progress on our cost reengineering initiatives to enable a competitive industry cost structure and support our long-term profitability objectives. We are reducing funding cost by expanding our structured finance funding platforms, optimizing our existing funding sources, and paying down high cost corporate debt. We believe our actions will drive greater balance and scale across our core servicing and originations channels and we expect to reduce client concentration risk over time and we are continuing to proactively engage our regulators and track our progress as it relates to our regulatory commitments. We are excited about the opportunities available to us. We believe successful execution of our strategy will result in a more attractive business with improved flexibility to consider a variety of alternatives to maximize value for shareholders. I want to thank our management team, Board of Directors, and employees for their commitment during last year’s integration efforts and as we take the next steps forward towards further improving our long-term competitiveness and financial performance. And with that, we are ready to take questions. Operator?

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

Hey. Good morning. Actually, first I just wanted to ask on your comments about NRZ and the incentive, how are the benefits essentially that you would get but did that contract was terminated? Can you just talk about the likelihood that it does get terminated?

Yes, if there is a termination of the PLS related assets, the legacy Ocwen subservicing, there is a termination penalty that is a discounted percentage of the future servicing fees at a material percentage. As we talked about in the script we have an ongoing and active dialogue with NRZ over the course of our relationship to try to understand ways in which we can take our relationship forward in a way that it solves both of our business needs and maximizes value for both of us. I can’t speculate on what NRZ is thinking or what they are intending to do. They issued their own press release today. They said they are not taking action on the remaining portfolio.

And actually – and just to clarify, the numbers that you gave – the – whatever, roughly 20 odd million cost for the savings of whatever $25 million, $30 million. Does the penalties is sort of – is separate from that?

The $20 million, $30 million of upfront cost of affecting a transition and restructuring of the business was net of any expected termination fees that we would receive. But again, because of the confidentiality provisions in the agreement we are not in liberty to disclose exactly what that number is at this point in time.

Okay, great. Thanks. And then, you said that, you think that you can get low to mid-teens ROEs I think in 2021. And I don’t recall the guidance of that nature before, just curious what’s changed to give you more comfort now that you can get there on ROEs next year?

In terms of our discussions of targeting low to mid-teen ROEs for the business, I think that’s been a fairly constant theme in our profitability roadmap and how we are directing the business. We’ve made terrific progress in building a sustainable business model for the business at least, we believe we’ve made terrific progress in building a sustainable business model. We’ve got multiple sources of portfolio replenishments to feed our servicing portfolio. We are building growing list of potential capital partners to support our growth in subservicing. We’ve got objectives to grow our own servicing. And as we discussed, we are going to continue to reengineer our business to adapt our cost structure to the evolving nature of our portfolio. We think it’s appropriate and prudent for us to provide an appropriate return on capital for our shareholders and that’s the objectives of our plan.

Okay. Thanks. And then, the – on the NRZ payment, the amortization of that $35 million, does that flow through – just through the first four months of April of this year through April? And then, after that, how should we think about the runrate earnings? I mean, essentially should we sort of think about that $35 million of earnings being sort of lower than that runrate going forward?

The amortization of the NRZ lump sum payment will continue to our P&L through April as we provided in our guidance, subject to any adjustments that that maybe necessary due to changes in interest rates or changes in business conditions. We are expecting that the company will be profitable excluding the amortization of the NRZ lump sum payments and notable items in the third quarter of 2020. So our objective is to – our objective all along since we started this profitability roadmap was to recognize that amortization is going away and we’ve got to build a business enterprise that’s profitable without that amortization and I think as we discussed on the all, as you could see that the legacy subservicing we have with NRZ, the PLS portfolio is unprofitable without that amortization of the NRZ lump sum payment. So, our objective is all along have been to build a growing and sustainable business enterprise, a profitable business enterprise that doesn’t include the benefit of that lump sum amortization.

Okay. Thanks. And then, actually on the adjustment, the CECL, whatever impact and the mood change that had to detailed, sort of going forward, does that mean the sort of actually the earnings on those tails have a – like an offsetting amortization that flows through the P&L?

So, yes. I think that those tails are recorded on the balance sheet, be it there, in theory if you were to think about it as an MSR value there would be an ongoing amortization of that amount through the P&L. We have obviously taken that into consideration as we put forth our affirmation of returning to profitability right in the third quarter of 2020 excluding NRZ amortization and sort of items.

Okay. Thanks. And then just one last one for me. You noted in terms of the earnings this year with the – sort of excluding some notable items or, I forget, did you call out any of them yet or just could you give us a sort of an update on what we could expect there?

In terms of notable items they are hard to predict. We did indicate on Slide 9 that we are expecting $40 million of incremental upfront cost associated with our continued reengineering in 2020. You are targeting reengineering savings of $35 million to $45 million for the year. So that’s about a one year payback.

Okay. Great. Thanks.

Thank you.

Our next question comes from Giuliano Bologna of BTIG.

Hi, good morning and congrats on the continued progress of turning the business around. It's interesting to get a little bit of your perspective around capital allocation as you ramp up to $20 billion or up to $20 billion in originations volumes and as you kind of look at the numbers that you quoted around being able to purchase about $20 billion of the MSR UPB. Are those both possible at the same time? And then the question is, if you don’t – if you didn’t scale one or the other all the way would you kind of sort of using the excess for capital returns?

Good morning, Giuliano and thanks for the congratulations. We’ve – our capital allocation methodology, first and foremost I want to make sure we’ve gotten appropriate working capital and reserve for potential risk and liquidity earmarks that we have in the business. Second, it goes into investment in the business and our goal here is to build a profitable sustainable enterprise that is growing and delivering appropriate return on capital. Obviously, investing in MSRs to continue to grow our servicing portfolio is a priority in that regard. We typically have, based on the December 31, 2019 half balance after adjusting for the pay down on the term loan, the SSTL, we have the ability to invest up to $20 billion in MSR UPB and then we are looking to execute a number of balance sheet efficiency initiatives to clean up our balance sheet fundamentally and have more effective use of capital on our balance sheet to fund the additional MSR growth. So, right now, our expectation is that with the exception of the previously authorized Board share repurchase program for up to $5 million in shares, they will be purchased in the open market that the balance of our capital will be going to fund growth in our owned MSR portfolio. And then we’ll be using some capital initiatives to continue to grow our subservicing portfolio. As you may be aware, we’ve got a $10 million total limitation under the senior secured term loan for – what are called restricted payments, which include share repurchases or a second-lien on repurchases.

Okay. That makes sense and that’s helpful. I guess, one other question I have going forward. As you think about the mix of the portfolio, obviously, as you pull the originations you are probably going to be building out more GSE and Ginnie products? Do you have any sense of where you want the product mix to go? Or do you have any preference in terms of where that goes?

So, look, we ultimately, we would expect assuming our risk appetite equal to market risk appetite, right, that over time, our portfolio composition would approach that of what’s the general market is, right. So, we are not - other than return requirements and our specific view of risk in certain Ginnie Mae products, we’ve talked before about or just not – based on our own portfolio experience, we are not comfortable where certain industry players are pricing risk in those products. So, we are looking to win both GSE business and Ginnie Mae business. I think we’ve been reasonably successful as of late in being competitive in both arenas, again, subject to our risk appetite. So - and eventually, quite frankly, as we think about GSE reform going forward, and the potential for there to be limitations on GSE products, we would have to – I think, expand, our product set to include non-agency product or non-QM product.

Okay. That makes a lot of sense. And then you made a comment about your servicing costs being in the lowest quartile. Do you have a sense of where that was before and is there additional opportunity to continue to drive that cost to service the loans even lower?

Giuliano, look, if I go back to the chart reflected on Page 9 of our investor supplement, you could see 2Q 2018, we had a $916 million annualized adjust cost structure. That cost structure was uncompetitive and just about any products you could mention. We have done a lot of work. We’ve taken out over 40% of our cost structure through the integration process. We are now down to $531 million on an annualized basis. Different aspects of our portfolio, how the different cost structures, I think that’s best shown on Slide 25 of the investor supplement, where we show the market cost of services for a variety of different assets that we service in the portfolio. I believe right now, we are very competitive in our cost to serve for GSE and Ginnie Mae product. And we are continuing to execute on cost reengineering initiatives going forward to make ourselves more competitive. I think, look, in this business generally you are a price taker not a price maker. So, having always driving for the most effective cost structure you could possibly is the competitive advantage. And we think but now that we are on MSP and with our global operations capability and the advancements, we are making in application of lien, automation, and optimizing our global offshore platform, I think we can maintain a highly competitive cost structure going forward.

That makes sense. Well, I really appreciate it and congrats.

Thank you.

[Operator Instructions] Our next question comes from Lee Cooperman of Omega Family Office.

Yes. Thank you very much. I apologize if you addressed on these questions, but I was on a TV program this morning and I got on the call a little bit later than usual. But I have about four questions, maybe I could put them out there and you can answer me in the order that you choose. You gave a lot of numbers, which were good. But, the bottom-line is, given the way you intend to run the business, what do you think the sustainable ROE is, if a tax return on equity on that $3 book value number? And how long you think it will take you to achieve that? So, sustainable ROE and the timetable to get there? Second, I’ve been very surprised personally that with the stock’s depressed price versus our underlying asset value and potential earning power that nobody has made a pass to this. And I could assume that the poison pill, so to speak is the Florida Attorney General, the CFPB are kind of poison pills. How long will it take for you to resolve these issues and get them off the table, given the effect of where Florida Corporation will think that Florida AG would be more cooperative. Second or third question I guess is, the publicly traded bonds sell at a high yield they were earning in our business to have an attractive change of controls put feature, why are we more aggressively trying them given the liquidity of our balance sheet. And third, do you think your shareholders will be better served if we sought proactively a private market solution. You are doing a very fine job, working very hard to fix it. But is the shareholders better off maybe being derisked by a transaction with a larger, profitable entity? And those will be my principal questions. I assume the size of the buyback is limited by your bank agreements, because, 5 million really is a nice gesture, but it really means nothing compared to the size of the company. So, any help you could be in these questions would be appreciated. Thank you.

Yes, sir. Good morning, Lee. I’ll take them, Lee, in the order that you put them out there. So, in terms of the ROE target for the business, we are targeting low to mid-teen pretax ROEs by 2021, I think that is based on the market dynamics that we see today that is a sustainable ROE for this business. There are others in this industry who are earning those returns, PennyMac is earning those returns and maybe more. NRZ is earning those returns as well. And I think our business model is more closely related to PennyMac than it is NRZ. So, I think that is a sustainable return level, at least as we see the market today. We do have a sizable amount of NOL. So we don’t expect to be a cash tax payer other than the beaT and GILTI tax, which we paid today. But in terms of an ordinary income tax payer that’s I don’t think we are going to be a tax payer for quite some time. So, I think the foreseeable future, pretax does kind of equal after-tax on a cash basis. In terms of price versus asset values, and the discount, look, I think I said before, we don’t think it’s warranted. That’s where we put the share repurchase program in place. It is limited to your point by the – in terms of the SSTL. And as we talked about our value creation roadmap, our value creation strategy for the company, there are a number or risks that are unique to Ocwen and you mentioned the Florida AG CFPB matter that is a unique risk to Ocwen, that’s still hanging out there. I do think our customer concentration risk with NRZ is a risk that’s unique to us and another risk that’s…

When you talk in terms of like a low to mid-teens pretax ROE, so, let’s say, you are talking 12%, 13%, 14%. What would a normal tax rate be for the company, 20%?

No. Tax rate, about 25%, I think it’s 21%.

So, you are talking about a 9% to 10% after-tax return on equity as a objective of when we – somewhere in the hereafter we get to be a profitable company. So, I would think to justify a value – a book value, today, you probably have to earn 12%, 13% after-tax from book. So, we are not quite there with the pretax is the objective. And I am just talking to myself now, but I appreciate your responses. Thank you.

Yes sir. Thank you, Lee.

This concludes the question and answer session. I would like to turn the conference back over to Mr. Messina for any closing remarks. Thanks everyone. I appreciate it. Again, look, I am really proud of the team here for the job they’ve done to bring Ocwen to a place where we have generated positive net income. We’ve built a sustainable business model and we’ve got a clear and actionable roadmap ahead to deliver – continue to deliver value for our shareholders through building a profitable and sustainable business enterprise. Look forward to updating you on our progress, on our next earnings call and thank you for your continued interest in Ocwen.

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