Operator (Operator) Good morning, and welcome to the Ocwen Financial Corporation Second Quarter Earnings and Business Update Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dico Akseraylian, Senior Vice President, Corporate Communications.

Good morning, and thank you for joining us for Ocwen's second quarter earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chief Executive Officer, Glen Messina; and Chief Financial Officer, Sean O'Neil. As a reminder, the presentation or 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 and address matters that are to different degrees, uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements. Forward-looking statements involve assumptions, risks and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2021, and our current and quarterly reports since such date. In the past, actual results have differed materially 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 adjusted pre-tax income and adjusted expenses, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the financial performance of our operations and allocate resources. 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. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures as well as additional information regarding why management believes these measures may be useful to investors may be found in the press release in the appendix to the investor presentation. Now I will turn the call over to Glen Messina.

Thanks, Dico. Good morning, everyone, and thanks for joining us. We're looking forward to sharing our progress with you today. I'd like to start by reviewing a few highlights for the second quarter and take you through our actions to address the challenging and dynamic mortgage market. Please turn to Slide 3. We believe our balanced business model is working as intended, as expected for the first half of this year, servicing appreciation and profit improvement is offsetting originations decline. Our second quarter results reflect the impact of continued rising rates, widening spreads and previously disclosed strategic asset sales as well as the benefits from our actions to address the market environment. MSR values increased and we improved profitability and forward originations versus the first quarter. This was partially offset by losses and transaction costs of the EBO and MSR sales we discussed last quarter as well as the market value decline of servicing assets other than MSRs. Our origination team drove meaningful profit improvement in forward originations, while reverse origination profitability was impacted by a steep increase in interest rates and severe spread widening. We improved our mix of higher-margin products and services. We had strong subservicing additions and a growing potential opportunity pipeline. We're reducing our cost structure enterprise-wide and targeting roughly $60 million in annualized run rate expense reduction by the fourth quarter of this year versus the second quarter. We've executed our identified actions to achieve at least 90% of that target, and we expect to complete all actions in the third quarter and realize the full run rate benefit of cost reduction actions in the fourth quarter. We closed the second quarter with $266 million in total liquidity. This is a result of dynamically managing our owned MSR portfolio, driving growth in subservicing over owned…

Thank you, Glen. Please turn to Slide 10 for our financial highlights. In the second quarter, we realized GAAP net income of $10 million for $1.12 earnings per share outcome and a 22% year-over-year increase in book value per share to $59. We saw higher rates positively impact MSR appreciation in our own servicing book as well as strong performance in our correspondent origination business which offset the 2 negative drivers that I will now describe in the walk on the right side of the page. This graph shows a quarter 1 to quarter 2 walk for adjusted pretax income, which is a non-GAAP measure. The second quarter result was a $26 million loss and the change from the $11 million loss in the first quarter was due to 3 primary items. First, a strong income improvement in forward origination of $11 million over the first quarter due primarily to higher volume and margins in correspondent lending. Second, spread widening and reverse origination drove the bulk of a $9 million quarter-over-quarter reduction as well as lower volume due to rising rates. So while still a positive income contributor, it was down from the first quarter, more on these items in the segment portion after this slide. The final driver were impacts from strategic asset sales and mark-to-market items. Collectively, these factors caused a $17 million income drop quarter-over-quarter primarily due to a previously disclosed sale of the delinquent EBOs bought out of Ginnie Mae securitizations. The second quarter sale posted a $9 million loss, but derisked the portfolio by avoiding claim losses and servicing advances going forward. The other items of the net impact of transaction costs and foregone pretax income from the MSR sale discussed in the first quarter, which reduces servicing revenues in the second quarter plus some…

Thanks, Sean. Now if you could please turn to Slide 15. We believe our balanced and diversified business, exemplary servicing performance, proven cost management and track record of execution position us well to navigate the market environment ahead. Consistent with our expectations, first half 2022 earnings were driven by MSR fair value adjustments offsetting origination headwinds and the build-out of our reverse servicing platform. We delivered positive net income, book value per share appreciation and improved liquidity despite the impact of continued rising rates and spread widening and the adverse impact of our planned strategic asset sales. Given the current market conditions, we're focused on a deliberate strategy comprised of 5 initiatives that permeate everything we do to drive business performance and shareholder value. First, we're leveraging our balanced and diversified business. As we said, servicing profitability improved with higher rates, and we have a strong value proposition as demonstrated by our subservicing boardings and robust subservicing opportunity pipeline. Our recognized special servicing skills position us to deliver value to clients, investors and consumers in an economic downturn, and we have derisked our portfolio. We believe we are uniquely positioned in the reverse mortgage market with end-to-end capabilities and the opportunity for favorable demographics and home price appreciation to drive future growth within the market. Second, we're focused on delivering prudent growth through capital efficient servicing additions and expansion in higher-margin products, channels and services. Third, we're reducing our cost structure to match market demand and improve profitability. Fourth, we're optimizing liquidity, diversifying financing sources and positioning for higher rates. And finally, we're allocating capital to maximize value for shareholders. Despite the recent headwinds in reverse originations, we believe with the benefits of successful execution of our business initiatives, we can deliver after-tax ROEs before notable items in the fourth quarter at or above our minimum target of 9%. I'm proud of how our team is executing in unprecedented market conditions. We have an established track record of successfully navigating multiple mortgage cycles with a focus on prudent growth, cost management, operational excellence and customer experience. We will be unrelenting in this focus. And with that, Danielle, let's open up the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Eric Hagen of BTIG. Please go ahead.

Maybe a couple on liquidity here. You mentioned harvesting gains in MSR as a driver of earnings. Can you give more detail around, kind of, what you mean by that and how to think about that relative to the amount of liquidity that you do carry? And maybe more specifically, how you're thinking about repurchasing more stock and debt in light of being able to monetize MSRs at their current value?

Eric, thanks for joining us today. So Eric, the -- yes, we've been -- look, I'd call it dynamically managing our MSR book. So last year, if you look at -- we focused a lot of our growth on MSR acquisitions last year through correspondent or bulk transactions. Last year, I think it's generally known that MSR multiples were probably in the mid-4s lower than where they are today. In the first quarter of the year, as we discussed in our last quarter earnings call with MSR values appreciating and multiples getting up into the 5s. We did take the opportunity to harvest value appreciation in our MSR portfolio. So we got a very strong bid, strong price for MSRs in the first quarter. It helped us validate where the market bid was for MSRs -- and again, that's proven to be, I think, a good trade since MSR multiples quite frankly, have come down a bit since then. So I think we timed that one pretty well. You know what -- our strategy has evolved. We now have -- we have MAV as one of our key MSR funding partners, which allows us to grow on a capital-light basis. Additionally, we're working on developing new MSR funding partnerships. We've talked about 2 new providers we're in discussions with. And I think that gives us the flexibility to dynamically manage our portfolio to optimize profitability as well as optimize our liquidity position for other investments could be M&A, it could be share repurchase, debt repurchases, it gives us flexibility.

Got it. That's helpful. Maybe just one follow-up. I mean is there a minimum level of liquidity that you aim to run the portfolio with over the, kind of, near term versus maybe the medium to longer term?

Yes. So look, here in the near term, look, we want to make sure we have sufficient liquidity to support all the initiatives that we have in the business. We want to grow our servicing portfolio and then complete our share repurchase program as well. I think as I've mentioned before, our liquidity varies greatly -- or I should say, cash balances vary greatly throughout the month as service as our custodial balances change, payments come in, payments go out. Look, we -- as you look at the fourth quarter of last year, we closed with roughly $196 million in cash on the balance sheet and a little bit more with unused lines. Our focus really right now is we think at the -- our current cash levels, we have enough of cash and liquidity to support the initiatives of the business. Longer term, I think as you know, all of us in the industry will have to meet increased FHFA capital and liquidity guidelines. We are expecting them to be put in place towards the end of this year. And based on our initial work, we think we're in compliance with those capital guidelines. We believe we can meet them. So that is one of the things we take into consideration, too.

Got it. If I could sneak in one more. If we were to think about the net equity in the company and how it's allocated, how much equity do you think you have behind the MSR, the forward origination business and the reverse origination business? And how easily would you say you can move capital back and forth between those segments of the business?

Yes. We don't publicly disclose a specific capital allocation framework, but as a rough rule of thumb, look, our -- the capital behind our -- where our originations businesses is basically the equity haircut on our warehouse lines, right? So that is the fundamental equity invested in our businesses. And when our -- when our Q comes out, Eric, we can work with you to sort through that and see if there's a way we can navigate there through the Q. And then for the MSR portfolio, it's our -- the book value of our MSR is minus our MSR liability and then our secured borrowings against the MSR. And then I'd say our corporate debt stock is allocated just ratably across. Look, by definition, our servicing business carries, I would say, carries the majority of our equity versus our origination businesses, especially now as origination volumes are coming down and warehouse balances are declining.

The next question comes from Matthew Howlett of B. Riley. Please go ahead.

Glen, you first -- I got to commend you for the repurchases. I think it's driving -- it's going to drive significant shareholder value and both the debt and the equity. And when you talk about -- so I just want to go over capital allocation going forward. How much -- I mean for the MAV upsizing and these other possible deals, I mean, how much capital are we talking about potentially going into these sidecars?

Yes. So for MAV, we are targeting to increase the equity capacity in total by $250 million assuming our current ownership structure of 85% owned by Oaktree and 15% owned by Ocwen. That would be $37.5 million of equity if it was fully funded. And obviously, if we chose to put the equity in. And then in the other vehicles, Matt, I'm not -- we're not far enough along in the discussions to really talk about exact sizing on those facilities, but I would say stay tuned. There is, I think, a robust appetite for MSRs out there in the market. And I think we, again, offer a compelling value proposition to MSR investors and our ability to service. So yes, more to come on that. So right now, you can assume for the MAV side card vehicle, 250, if assuming we get it closed and signed and all that good stuff, $250 million of incremental -- of equity investment capacity, of which our share would be $37.5 million.

Got you. Okay. That makes sense that sort of what it looked like the first round. But when you look at the -- you're going through the share repurchase, very quickly, you could be done here in a couple of months. And then, of course, you're sort of doing one-for-one on that debt reduction. One, how inclined are you in the Board to re-up this when it's through, the $50 million? And then the guidance, I look at the walk here and does it include -- I mean, this path to 9-plus percent, 11%. I mean how much does that include the interest cost reduction? How much does it include ROE in terms of if you do retire another 1 million shares. And then -- and then how -- sort of surprised you didn't see sort of like an improvement in servicing margin from lower -- in lower prepays and higher escrow balance, I mean is that all in there?

Yes. So let me unpack that, Matt. You got quite a bit there. So yes, yes, yes. So in terms of the share repurchase program, look, as I said on the call, we think our share price doesn't reflect the potential of our business, our earnings capability or the value we can deliver to clients. And given where our current book value per share is, we think it's a prudent buying back our stock it is a prudent investment. The Board and management continuously review our allocation of capital. Obviously, we stand behind the equity of the company. Management has bought. The Board has bought, shares the company is buying back shares. -- we'll -- once we get close to the expiration of the program as part of our capital allocation framework, we'll take a look at what our investment opportunities are and decide then. As you know, it's always subject to market conditions at that time, right? So -- but look, we've demonstrated our willingness to step behind the stock of the company and demonstrate our confidence in our plan. As it relates to the forward look, as I said before, we're not assuming any recovery in margins in reverse at all. We're assuming that origination volumes remain depressed in the near term. We're also not really assuming any further prepayment reduction on the forward side of the business. You might say that that's conservative, given what some other people out there are saying. But look, we think prepayments have gone down to historical lows and we'll have to wait and see if they get any better than this. So I think the business is -- and if you look at what we have to do to deliver on the forward -- our forward projection for the fourth quarter,…

Yes. Certainly looks conservative to the -- some of the other guidance we've heard from the servicers. Last question, Glen, how much is left on that reserve litigation? You noted that you released something? And then how much is the DTA? How much is the reserve against the DTA? I'm assuming it's still forward reserve. Could you give me those 2 numbers?

Yes. The legal reserves will be in our Q when we release it this afternoon. So we can share that right after the Q is release. In terms of DTAs, again at the -- I'll talk -- because our Q is not out, at the end of the first quarter, 100% of our DTAs were reserved, and we can chat what that position looks like at the end of the -- second quarter. Yes. I think as -- I'm sorry, long-term guidance?

Well, just in terms of the company has guided to be profitable going forward, we should investors, you encourage investors to start to look at that DTA as having value.

Yes. Look, it's -- again, when the Q comes out, we can talk about the DTA. I think, as you know, the accounting rules around that is, as the company returns to profitability. We've got to demonstrate, Sean, what is it?

Three years.

Yes, 3 years of profitability before you can start releasing the DTA reserve. So we've not included any of that in any of our thinking around returns for the business going forward, quite frankly.

The next question comes from Tommy McJoynt of KBW. Please go ahead.

So just given the move down in rates, kind of, in July. Can you talk about the magnitude of any downward pressure on the MSR mark? Or how most of that population is still out of the money through finance you wouldn't expect much remark.

Yes. So Tommy, look, it's -- the 10-year treasury has been massively volatile. As you know, it's been up or down, probably over 80 basis points in the last 60 days. Our Q when it comes out, will have a -- the typical rate shock table in the back of the Q, it's plus or minus 25 basis points. Just generally speaking, our portfolio has a -- has a lot of low coupon product in it. There's not a lot of high coupon product in it. And as we talked about at the end of -- during our earnings call last quarter, the DV01 or the dollar value change for 1 basis point change in interest rates has been compressing as rates have gone up because of prepayment speed burn out. So again, when the Q comes out, we can give you some further guidance on what the DV01 is as model, and we can share that with you later on this afternoon. But again, as you can see, first quarter big MSR value improvement, second quarter smaller MSR value improvement as you walk back down the curve, that general pattern tends to follow. So based on the S-curve of prepayments in our portfolio.

Okay. Yes, we'll keep our eye out for that. There was some discussion on, kind of, the capital allocation, I am just thinking about. Is there anything on the M&A side that might make sense? Are there any areas that you feel like having more scale would be very beneficial?

Yes, Tommy. Look, scale in this business is good, right? So it's servicing originations -- servicing and originations have relatively high fixed cost structure, particularly servicing. So we constantly have our eye out for potential acquisitions that would give us scale or enhance our capabilities. We demonstrated our willingness to do that. Certainly, last year as we were big buyers of MSRs last year. And we also did the TCB transaction last year. We did the reverse subservicing business last year to expand capabilities. So look, we have our eyes open and ear to the ground -- we obviously can't talk about anything specifically. But as we think through our capital allocation model, looking at acquisitions is something we always want to have some optionality to retain dry powder for.

That makes sense -- excellent.

[Operator Instructions] The next question comes from Preston Graham of Stonegate Capital. Please go ahead.

The FHFA guidelines you mentioned during Eric's question. I guess any additional detail there on, sort of, how you're positioned, how that's affected you would be great.

Yes. So look, we've run through our modeling based on the FHFA capital guidelines. Sean, I don't know if our footnotes in the financial statements talk specifically about how much capacity we have vis-a-vis the new potential guidelines. But what I could say, Preston is, look, we've looked at that. We think we've got adequate capital and liquidity to navigate those new guidelines. I could tell you from a day-to-day operating perspective in the business, when we look at our business operating reviews, our key risk metric dashboard, we're tracking to both the old and new capital guidelines to make sure that when implemented, we'll be in a position to be in compliance. As you know, those capital guidelines are probably more punitive on Ginnie Mae assets than they are on GSE assets. Compared to others in the industry, we have a smaller Ginnie Mae book. It doesn't quite match the overall industry composition of Ginnie Mae originations. So we are somewhat benefited by that. But we are looking to grow our Ginnie Mae business. But right now, I'd say we're only modestly growing in that space. But look, I feel good right now based on what we know the capital guidelines and how we're positioned to address them upon implementation at the balance of this year. And again, that's always subject to any changes or amendments that may be made by when they were finally implemented.

Got it. Okay. That's helpful. And then you touched on it in the prepared remarks, but sort of maybe just some general commentary on how you think the business would perform in a recession, would be helpful.

Yes. So Preston look, in a recession, there are obviously pluses and deltas -- minuses that happen in the business. So during a recession, obviously, from a servicing perspective, for owned servicing. And again, that's less than -- slightly less than 50% of our portfolio today, you would expect in a recession that delinquencies would rise and with rising delinquencies, our cost to service loans would go up, servicing delinquent loans is more expensive than servicing performing loans. Also, you don't recognize revenue when loans go delinquent, and you have to make servicer advances. In the case of GSE loans, there's a stop advance after a couple of months, a couple of 4 months. In the case of Ginnie Mae loans, you've got advanced P&I and T&I forever until they get through foreclosure. So there is a profitability compression that happens in owned servicing as delinquencies rise, that would also adversely impact the MSR fair value. On the subservicing side of our business, which again is slightly more than 50% of our business, we're fairly insulated from what happens with rising delinquencies, most of our contracts do include provisions, I'll call it, revenue enhancement provisions, revenue escalation provisions. As our cost to serve goes up, we get incentives for servicing delinquent loans. And there's also in some of our contracts performance incentives as well as we mitigate delinquencies, compress total delinquency cycle time and those types of things. And then we don't have in subservicing, there is no MSR, so there's no adverse impact to our balance sheet and for no advancing requirements, either we don't advance. We're not providing service advances when we -- subservice. So again, downside in owned servicing, I would say, neutral to upside and subservicing. Given our legacy as a special servicer, and again, we're a top-ranked special servicer with near-perfect performance on Ginnie Mae delinquency milestone time lines as well as being a top-rated servicer by Fannie, Freddie and HUD. Look, we think there'd be additional opportunity for us to add value to clients, investors and homeowners through delinquent servicing, and we think it would give rise to either opportunities to purchase delinquent servicing or to engage in delinquent subservicing. So we think that's a net benefit to the business. And then on the origination side, again, if you believe in a recession authorizing delinquencies, the Fed would be accommodative in lower interest rates, well, then you'll see what happened in the pandemic right, so rates come down, refinancing incentive goes up, margins widen, volume goes up. So it would be potentially a boost for the origination side of the business. And frankly, that's what happened in the -- great Recession as well, too, back in post 2008 financial environment. So big refi wave in 2011, '12, '13.

Seeing that there are no further questions. I would like to turn the conference back over to Glen Messina for closing remarks.

Thanks, Danielle. Everyone, look, we are operating in a volatile and uncertain environment, certainly as it relates to mortgage banking. We've active -- we're actively monitoring the financial markets, the economic environment and industry conditions closely. We're dynamically managing our operations, our plans and targets and will adjust as necessary to address emerging opportunities and risks. We have a deliberate strategy to address the choppy waters and tough environment that we're operating in, and I'm very pleased with the performance of the business. I'd like to thank and recognize our Board of Directors and our global business team for their hard work and commitment to our success. And I look forward to updating you on our progress on our next earnings call. Thank you all very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.