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Article by DailyStocks_admin    (03-18-08 07:07 AM)

Filed with the SEC from Mar 06 to Mar 12:

Ocwen Financial (OCN) The investor group that wants to buy Ocwen Financial said that it's been unable to reach mutually agreeable terms on the deal and is terminating discussions with a special committee of Ocwen's board. The group, including Ocwen CEO William C. Erbey, Oaktree Capital Management and Angelo Gordon & Co., in January proposed acquiring all the common shares it doesn't already own for $7 each in cash. The investor group has 19,629,533 shares (31%).

BUSINESS OVERVIEW

GENERAL

Ocwen Financial Corporation (“OCN”), through its subsidiaries, is a business process outsourcing provider to the financial services industry specializing in loan servicing, mortgage fulfillment and receivables management services. OCN is headquartered in West Palm Beach, Florida with additional offices in Arizona, California, Florida, Georgia, Illinois and New York and global operations in Canada, Germany and India. OCN is a Florida corporation that was organized in February 1988 in connection with the acquisition of Ocwen Federal Bank FSB (the “Bank”).

Effective June 30, 2005, the Bank voluntarily terminated its status as a federal savings bank. This process, which we have referred to as “debanking,” was approved by the Office of Thrift Supervision (“OTS”) and resulted in the divestiture to Marathon National Bank of New York (“Marathon”) of the Bank’s deposit liabilities and assignment of the Bank’s remaining assets and liabilities to Ocwen Loan Servicing, LLC (“OLS”). We are continuing the Bank’s non-depository businesses, including its residential mortgage servicing business, under OLS, which is a licensed servicer in all 50 states, the District of Columbia and Puerto Rico.

As disclosed in a filing with the Securities and Exchange Commission (the “SEC”) on January 14, 2008, our Chief Executive Officer, together with members of OCN management and funds managed by Oaktree Capital Management, L.P. and Angelo, Gordon & Co., L.P. (collectively, the “Sponsors”), proposed to acquire by merger, for a purchase price of $7.00 per share in cash, all of the outstanding shares of OCN Common Stock. The Board of Directors of OCN formed a Special Committee of independent directors to consider the proposal. On March 11, 2008, OCN announced that the Special Committee and the Sponsors had been unable to reach an agreement as to the terms of a definitive agreement. As a result, the parties have mutually agreed to terminate discussions regarding the proposal. The Special Committee will continue to consider possible strategic opportunities for OCN, but has not made a decision with regard thereto. There can be no assurance that any transaction involving OCN will occur.

SEGMENTS AND STRATEGY

Our current business segments are as follows:















Residential Servicing















Ocwen Recovery Group















Residential Origination Services

In addition to these business segments, we report business activities that are individually insignificant in Corporate Items and Other as discussed later in this section.

Key elements of our business strategy are:















to grow our residential servicing business;















to grow and develop asset management vehicles that allow us to leverage our servicing and loss mitigation capabilities;















to grow our residential fee-based loan processing services, including property valuation, mortgage due diligence and title services; and















to grow our unsecured debt collection business.

A more detailed description of each of our business segments follows.

Residential Servicing

Revenue from the Residential Servicing segment comprised 74%, 80% and 74% of our consolidated revenues in 2007, 2006 and 2005, respectively. Through this segment, we earn fees by providing services to owners of residential mortgage loans. We are one of the largest servicers of subprime mortgage loans. These loans have typically been securitized in Real Estate Mortgage Investment Conduits (“REMICs”). As of December 31, 2007, we serviced 435,616 loans with an aggregate unpaid principal balance (“UPB”) of $53,545,985 under 509 servicing agreements for over 45 clients. These clients include Wall Street firms such as Deutsche Bank, Lehman Brothers and Credit Suisse, mortgage originators and the United States Department of Veterans Affairs (“VA”). This segment includes our investments in joint ventures that are operated as asset management vehicles and primarily invest in mortgage-related assets that benefit from our asset management capabilities. This segment also includes revenues from the licensing to others of REALServicing TM , our comprehensive enterprise-level residential mortgage loan servicing platform that we have used since January 2001.

We are entitled to service loans either because we purchased the mortgage servicing rights (“MSRs”) from the owners of the mortgages or because we entered into subservicing agreements with the entities that own the MSRs. A Pooling and Servicing Agreement between the various parties to a mortgage securitization transaction typically specifies the rights and obligations of servicing rights. Our largest source of revenue with respect to servicing rights is the servicing fees that we earn pursuant to servicing and subservicing agreements. In the majority of cases, we purchase the MSRs, which generally entitle us to receive 50 basis points annually on the average UPB of the loans serviced. We typically purchase the MSRs for between 25 and 95 basis points of the UPB. Under subservicing arrangements, where we do not pay for the MSRs, we generally receive between 5 and 35 basis points annually on the UPB. The servicing and subservicing fees are supplemented by related income, including late fees from borrowers who are delinquent in remitting their monthly mortgage payments, Speedpay ® fees from borrowers who pay by telephone or through the Internet and interest earned on loan payments that we have collected but have not yet remitted to the owner of the mortgage (“float earnings”). In 2007, we collected approximately $16,223,124 in monthly mortgage payments and one-time payoffs on behalf of the owners of these loans.

Subprime mortgage loan servicing involves special loss mitigation challenges not usually present in prime loan servicing. Over a period of years, we have applied scientific management to developing proprietary best practices for reducing loan losses. We have embedded those best practices in our technology in order to ensure that they are consistently and efficiently applied. Our eight global operating centers allow us to recruit in broad, deep talent pools. Rigorous screening and training of our workforce allows us to implement specialized loss mitigation techniques that minimize losses. Our proactive measures to keep borrowers current on their payments are effective in forestalling foreclosures in the overwhelming majority of the cases. The best outcome for the loan investor is to keep the loan performing. When a delinquency occurs and the home is the primary residence of the borrower, we are successful in approximately 80% of the cases in working out a resolution that avoids a foreclosure. We pride ourselves on keeping borrowers in their homes and avoiding foreclosure. This is a “win-win” situation for both the investors and borrowers that we serve.

As a servicer or subservicer, we have a variety of contractual obligations including the obligation to service the mortgages according to certain standards and to advance funds to securitization trusts in the event that borrowers are delinquent on their monthly mortgage payments. When a borrower becomes delinquent, we “advance” cash to the REMIC Trustees on the scheduled remittance date thus creating a receivable due us from the REMIC Trust. We advance principal and interest (“P&I Advances”), taxes and insurance (“T&I Advances”) and legal fees, maintenance and preservation costs on properties heading into the foreclosure process and on properties that have already been foreclosed (“Corporate Advances”). If we determine that we cannot recover our advances by working with the borrower or from the value of the property, we generally have the right to halt advances, declare the advances to be non-recoverable and, in most cases, recover our advances from the respective general collections accounts owned by the REMIC Trustees. Most of our advances have the highest standing and are “top of the waterfall” so that we are entitled to repayment before any interest or principal is paid on the bonds. The costs incurred in meeting these obligations include, but are not limited to, the interest expense incurred to finance the servicing advances.

The U.S. Department of Housing and Urban Development, Freddie Mac and Fannie Mae have approved OLS as a loan servicer. Standard & Poor’s Rating Services (“Standard & Poor’s”) has rated OLS “Strong” as a Residential Subprime Servicer and Residential Special Servicer. “Strong” represents Standard & Poor’s highest ratings category. Moody’s Investors Services, Inc. (“Moody’s”) has rated OLS “SQ2–” as a Residential Subprime Servicer and “SQ2” as a Residential Special Servicer. “SQ2” represents Moody’s second highest rating category. Fitch Ratings (“Fitch”) has rated OLS “RPS2” for Residential Subprime Servicing and “RSS2” for Residential Special Servicing. These represent Fitch’s second highest categories.

Ocwen Recovery Group

This segment primarily provides collection services to owners of delinquent and charged-off receivables. We generally earn a fee based upon a percentage of the dollars collected on behalf of the owners of the receivables. The percentage fee generally ranges from 6% to 35%. Revenue from this segment comprised 9%, 2% and 3% of our consolidated revenues in 2007, 2006 and 2005, respectively.

On June 6, 2007, we acquired NCI Holdings, Inc. (“NCI”) for $57,000 in cash, including $2,000 of closing adjustments. NCI, through its operating subsidiary, Nationwide Credit, Inc., is ranked as one of the top 10 U.S. companies in the accounts receivable management industry. NCI’s primary business is contingency collections for credit card issuers and other consumer credit providers. The majority of NCI’s annual revenue comes from credit card related collections, with the remainder coming from other consumer credit collections, first-party customer service solutions and student loan collections. NCI primarily serves large credit issuers and has a blue chip customer list. Ocwen Recovery Group includes the operations of NCI since the date of the acquisition.

Residential Origination Services

Revenue from the Residential Origination Services segment comprised 15%, 16% and 18% of our consolidated revenues in 2007, 2006 and 2005, respectively. Our strategic focus in this segment is on fee-based loan processing businesses that include residential property valuation services, mortgage due diligence and title services; and business process outsourcing services to third parties, including mortgage underwriting, data entry, call center services and mortgage research. We also sell due diligence services on closed whole loans to Wall Street firms. These fee-based businesses have limited capital requirements and provide a balance between resolution, servicing and origination of loans. Success in this area is dependent on our ability to provide our customers with quality and timely services at competitive prices.

The segment also includes trading and investing activities and our former subprime loan origination operation. Our trading and investing activities include our investments in subprime residual mortgage-backed trading securities, as well as the results of our loan purchase and securitization activities and the loans remaining from our subprime origination business. In January 2007, we decided to close our start-up subprime loan origination operation, and during 2007, we de-emphasized our trading and investing activities. Our loan origination operation included the results of Funding America, LLC, (“Funding America”), which we began to include in our consolidated financial statements as of December 31, 2005. Our discontinuance of the subprime loan origination business included closing Funding America.

Residential Origination Services also includes REALTrans SM , our web-based vendor management platform that facilitates the electronic fulfillment of real estate products and services necessary to process, approve and close residential mortgage loans, as well as to service them.

Corporate Items and Other

In Corporate Items and Other, we report business activities that are individually insignificant, items of revenue and expense that are not directly related to a business unit, interest income on short-term investments of cash and the related costs of financing these investments and certain other corporate expenses. Insignificant business activities include, among others, our former Commercial Servicing segment, our 46% equity interest in BMS Holdings, Inc. (“BMS Holdings”) and our wholly-owned German banking subsidiary, Bankhaus Oswald Kruber GmbH & Co. KG (“BOK”). In the fourth quarter of 2007, management approved and committed to a plan to sell its investment in BOK. The results of operations of BOK have been reclassified in the consolidated financial statements as discontinued operations.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Segments” for additional financial information and related discussion regarding each of our segments.

SOURCES OF FUNDS

We meet our current need for funds through financings, such as match funded liabilities, lines of credit and other secured borrowings, through funds generated by operations, such as servicing fees (including float earnings and ancillary fees), and through payments received on or from the sale of trading securities and loans held for resale. Our primary uses of funds are the funding of servicing advances, purchases of MSRs, payment of interest and operating expenses and repayments of borrowings. Our funding needs related to loan originations have declined significantly in 2007 as the result of our decision to close our subprime loan origination business. We closely monitor our liquidity position and ongoing funding requirements, and we invest available funds in short-term investment grade securities.

Our ability to sustain and grow our Residential Servicing business depends in part on our ability to maintain and expand sources of financing to fund servicing advances and to purchase new servicing rights. We finance most of our advances using match funded securitization facilities through Barclays Capital, Inc., Deutsche Bank AG, Greenwich Capital Financial Products, Inc. and JPMorgan Chase Bank, N.A. We also finance advances through our banking syndication, which is led by JPMorgan Chase Bank, N.A. This syndication is currently our sole source of financing for MSRs.

An increase in delinquency rates has increased the amount of funds that we, as servicer, must advance to meet contractual principal and interest payments to certain investors, to pay taxes, insurance and other costs necessary to preserve the assets that secure the loans and to pay the costs of foreclosure when past due loans cannot be returned to performing status. A continued increase in delinquency rates could further increase the need to fund advances beyond the current level. Meeting the need to advance these funds requires readily available unused borrowing capacity. We work with multiple financing sources to ensure that we have sufficient capacity to finance servicing advances at all times. However, as noted earlier, we are generally obligated to advance funds only to the extent that we believe that the advances are recoverable, and the risk of loss on advances is low because, when the trust disburses funds that it has collected, advances generally have priority over the securities that the securitization trust has issued.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional financial information regarding our sources of funds.

COMPETITION

A discussion of competition as it relates to our primary businesses appears in Item 1A, “Risk Factors.”

SUBSIDIARIES

A list of our significant subsidiaries is set forth in Exhibit 21.0.

EMPLOYEES

As of December 31, 2007, we had 4,614 employees, of which 1,668 were resident in our U.S. facilities, 2,833 were resident in our India operations centers and 113 were based in other countries. We have developed our India operations centers over the past six years in order to benefit from the cost savings opportunities and the quality workforce.

In the U.S., our principal locations as of December 31, 2007 included our headquarters in West Palm Beach, Florida, which had 246 employees, our operations center in Orlando, Florida, which had 275 employees, and NCI locations in Vestal, New York with 476 employees, Kennesaw, Georgia with 240 employees and Phoenix, Arizona with 211 employees. In total, NCI operations included 1,096 employees at five locations in the U.S. plus 66 employees in Canada. We also had 51 employees at various other locations in the U.S.

Of our employees in India as of December 31, 2007, 1,702 were in the city of Bangalore, 963 were in the city of Mumbai and 168 were in our offices in the state of Goa. Our India workforce is deployed as follows:















40% are in Residential Servicing,















10% are in Ocwen Recovery Group,















9% are in Residential Origination Services,















15% work in various other business units,















18% provide technology support to the business groups and















8% support other functions, including Human Resources and Corporate Services, Accounting, Legal and Risk Management.

REGULATION

Our business is subject to extensive regulation by federal, state and local governmental authorities, including the Federal Trade Commission and the state agencies that license our servicing and collection entities. We also must comply with a number of federal, state and local consumer protection laws, including, among others, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Fair Credit Reporting Act and the Homeowners Protection Act. These statutes apply to debt collection, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and they mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes and regulations are enacted, promulgated or amended.

We are subject to certain federal, state and local consumer protection provisions. We are also subject to licensing and regulation as a mortgage service provider and/or debt collector in a number of states. We are subject to audits and examinations that are conducted by the states. From time to time, we receive requests from state and other agencies for records, documents and information regarding our policies, procedures and practices regarding our loan servicing and debt collection business activities. We incur significant ongoing costs to comply with governmental regulations.

In addition, in connection with debanking, we entered into various agreements to meet the conditions to the OTS’ approval. We also entered into an Assignment and Assumption Agreement, dated June 28, 2005, with our subsidiaries Investors Mortgage Insurance Holding Company, Rocaille Acquisition Subsidiary, Inc., the Bank and OLS whereby the Bank assigned to OLS, directly or indirectly, all of its assets, liabilities and business remaining after the consummation of the debanking transactions (the “Assignment”). Also on June 28, 2005, we entered into an agreement (the “Guaranty”) in favor of the OTS and any holders of claims with respect to liabilities assumed by OLS from the Bank in connection with the Assignment. The Guaranty contains affirmative covenants relating to the maintenance of a cash collateral account, reporting requirements, transactions with affiliates, preservation of the existence of our subsidiaries and maintenance of not less than $35,000 of unencumbered assets. The Guaranty also contains negative covenants that restrict our ability to (i) incur indebtedness if certain financial ratios are not achieved or if we fail to maintain a specified minimum net worth, (ii) enter into merger transactions or a sale of substantially all of our assets, (iii) sell, lease, transfer or otherwise dispose of our assets, or (iv) pay dividends or acquire our capital stock. While we do not expect that compliance with the Guaranty will have a material adverse impact on our financial condition, results of operations or cash flows, if an event of default were to occur we would be obligated to increase the cash collateral amount. Furthermore, the OTS and other beneficiaries of the Guaranty are entitled to initiate enforcement proceedings against us, which, in the case of the OTS, could result in monetary civil penalties.

CEO BACKGROUND

William C. Erbey . Mr. Erbey has served as the Chairman of the Board of Directors of Ocwen since September 1996, as the Chief Executive Officer of Ocwen since January 1988 and as the President of Ocwen from January 1988 to May 1998. From 1983 to 1995, Mr. Erbey served as a Managing General Partner of The Oxford Financial Group, a private investment partnership that was the predecessor of Ocwen. From 1975 to 1983, Mr. Erbey served at General Electric Capital Corporation in various capacities, most recently as the President and Chief Operating Officer of General Electric Mortgage Insurance Corporation. Mr. Erbey also served as the Program General Manager of GECC’s Commercial Financial Services Department and as the President of Acquisition Funding Corporation. He holds a Bachelor of Arts in Economics from Allegheny College and a Masters of Business Administration from Harvard University.

Ronald M. Faris . Mr. Faris has served as a Director of Ocwen since May 2003 and as the President of Ocwen since March 2001. Mr. Faris served as Executive Vice President of Ocwen from May 1998 to March 2001 and as Vice President and Chief Accounting Officer of Ocwen from June 1995 to May 1997. From March 1991 to July 1994, he served as Controller for a subsidiary of Ocwen. From 1986 to 1991, Mr. Faris was a Vice President with Kidder, Peabody & Co., Inc. and from 1984 to 1986 worked in the General Audit Department of PricewaterhouseCoopers LLP. He holds a Bachelor of Science in Accounting from The Pennsylvania State University.

Martha Clark Goss. Ms. Goss has served as a Director of Ocwen since July 2005. Ms. Goss has served as Chief Operating and Financial Officer of Amwell Holdings, LLC and Hopewell Holdings LLC since 2003. She previously served as Chief Financial Officer for The Capital Markets Company, a provider of e-based solutions to the global financial services and capital markets industry, and for Booz Allen & Hamilton Inc., a management consulting firm. Ms. Goss has held various senior executive positions with Prudential Insurance Company of America and Chase Manhattan Bank, N.A. Ms. Goss has served on the boards of Claire’s Stores, Inc., American Water, Channel Reinsurance Holding, Ltd., Foster Wheeler Ltd., Dexter Corporation, IBJ Whitehall Business Credit Corporation, Bank Leumi, USA, Allianz Life Insurance Company of New York, the Metropolitan Regional Advisory Board of Chase Manhattan Bank, and the Advisory Boards of Attensity and the McLean Group as well as the boards of various subsidiaries of The Prudential Insurance Company of America. Ms. Goss holds a Bachelor of Arts from Brown University and a Masters of Business Administration from Harvard University.

Ronald J. Korn. Mr. Korn has served as a Director of Ocwen since May 2003. Mr. Korn is currently the President of Ronald Korn Consulting, which provides business and marketing services to a limited number of clients. Mr. Korn has been Director and Chairman of the Audit Committee of PetMed Express, Inc. since 2002. He has also served as a Director and Chairman of the Audit Committee of Comscore Networks, Inc. since October, 2005. He was a partner and employee of KPMG, LLP from 1961 to 1991, where his client responsibilities included a number of large financial institutions and various public corporations. He was admitted as a Certified Public Accountant in New York, Michigan and Florida, with licenses currently inactive. He was also admitted to the New York Bar in 1966, but has never practiced law. Mr. Korn holds a Bachelor of Science in Economics from the University of Pennsylvania, Wharton School and a Juris Doctorate from New York University Law School.

William H. Lacy. Mr. Lacy has served as a Director of Ocwen since May 2002. Mr. Lacy was formerly Chairman of Mortgage Guaranty Insurance Corporation and Chairman and Chief Executive Officer of MGIC Investment Corporation, Milwaukee, Wisconsin. Both corporations are providers of private mortgage guaranty insurance and other mortgage-related services. Mr. Lacy is also a Director of ACA Capital Holdings, Inc. and of Johnson Controls, Inc. Mr. Lacy is Chairman of Johnson Controls’ Finance Committee and serves on Johnson Controls’ Compensation Committee. He is also a member of ACA Capital’s Risk Management and Audit Committees. Mr. Lacy holds a Bachelor of Arts from the School of Business at the University of Wisconsin.

W. Michael Linn. Mr. Linn has served as a Director of Ocwen since August 2002 and became employed by the Company as Executive Vice President of Sales and Marketing on February 17, 2004. He currently heads the Business Process Outsourcing business segment. Prior to joining Ocwen, Mr. Linn was the Chairman and Chief Executive Officer of Max Q Technologies, Inc., Findlay, Ohio. Prior to joining Max Q Technologies, he served as the Executive Vice President of Sales and Marketing of Solomon Software, Inc., a corporation now owned by Microsoft Corporation. Mr. Linn currently serves on the Board of Directors of National Lime & Stone. He holds a Bachelor of Arts and a Masters of Business Administration from Harvard University.

W. C. Martin. Mr. Martin has served as a Director of Ocwen since July 1996. Since 1982, Mr. Martin has been associated with Holding Capital Group and has been engaged in the acquisition and turnaround of businesses in a broad variety of industries. Since March 1993, Mr. Martin also has served as President and Chief Executive Officer of SV Microwave, a company he formed along with other HCG investors to acquire the assets of the former Microwave Division of Solitron Devices, Inc. In 1998, Mr. Martin became Chief Executive Officer of HCG Technologies, Inc., a holding company formed by him and HCG to acquire, fund or start technology companies. In 1999, he became Chief Executive Officer of SV Microwave Components Group, Inc., a newly formed subsidiary of HCG Technologies, Inc. engaged in the design, production and sale of passive microwave devices. On May 31, 2005, HCG Technologies, Inc. and its subsidiaries were sold to Amphenol Corp., and Mr. Martin continues as General Manager of the former HCG Technologies, Inc. businesses. Prior to 1982, Mr. Martin was a Manager in Touche Ross & Company’s Management Consulting Division, and prior to that, he held positions in financial management with Chrysler Corporation. Mr. Martin holds a Bachelor of Science in Industrial Management from LaSalle University and a Masters of Business Administration from the University of Notre Dame.

Barry N. Wish. Mr. Wish has served as Chairman Emeritus of the Board of Directors of Ocwen since September 1996. He previously served as Chairman of the Board of Ocwen from January 1988 to September 1996. From 1983 to 1995, he served as a Managing General Partner of The Oxford Financial Group, which he founded. From 1979 to 1983, he was a Managing General Partner of Walsh, Greenwood, Wish & Co., a member firm of the New York Stock Exchange. Prior to founding that firm, Mr. Wish was a Vice President and shareholder of Kidder, Peabody & Co., Inc. He holds a Bachelor of Science in Political Science from Bowdoin College.

COMPENSATION

(1)


The number of shares issued pursuant to the Directors’ Stock Plan is based on the “fair market value” of our common stock on the date of election (or re-election) of such Director to our Board of Directors. The term “fair market value” is defined in the Directors’ Stock Plan to mean the average of the high and low prices of the common stock as reported on the New York Stock Exchange on the relevant date. Shares issued pursuant to the Directors’ Stock Plan are subject to forfeiture during the 12 full calendar months following election or appointment to the Board of Directors or a committee thereof, if the Director does not attend an aggregate of at least 75% of all meetings of the Board of Directors and committees thereof of which the Director is a member during such period.






(2)


In March 2005, the Board of Directors adopted a Deferred Compensation Plan for Directors, pursuant to which Directors are permitted to defer receipt of their compensation granted under the Directors’ Stock Plan. During 2006, Ms. Goss and Mr. Wish did not elect to defer their $20,000 in equity compensation and were each issued 1,794 shares of common stock as a result. Our remaining three non-management Directors elected to defer their $20,000 in equity compensation pursuant to the terms of the Deferred Compensation Plan.

Cash Compensation

We provide the following cash compensation to our non-management Directors:







an annual retainer of $35,000 paid in quarterly installments;







an additional $10,000 to the Audit Committee chairperson;







an additional $5,000 to all committee chairpersons (other than the Audit Committee chairperson); and







an additional $2,500 to all Audit Committee members.

Equity Compensation

We provide our non-management Directors an annual award of restricted shares of common stock with a fair market value of $20,000 pursuant to a Directors’ Stock Plan adopted by our Board of Directors and our shareholders in July 1996. Equity compensation is paid after the annual organizational meeting of the Board of Directors, which immediately follows the annual meeting of our shareholders.

Directors’ Deferral Plan

The purpose of Deferral Plan for Directors is to provide Directors with the opportunity to defer the receipt of all or a portion of their equity compensation earned for their service as Directors. The plan is administered by the Compensation Committee, and all Directors are eligible to participate. Before the end of each calendar year, the Directors make an election to either receive the equity portion of their annual compensation in restricted stock or to obtain a credit to their deferral account for the number of share units equal to the number of shares of restricted stock granted to such Director. A Director will become vested in the share units and will receive dividend equivalents to the same extent as such Director would if the original award of restricted stock was held.

Each Director electing deferral must specify the payment date at the time of election as (i) the six-month anniversary of the Director’s termination date or (ii) any other date elected by the Director which is at least two years after the last day of the year of service for which the compensation was awarded. At least 30 days prior to payment of deferred compensation, a Director shall elect to receive such payment in the form of either (i) cash in an amount equal to the fair market value of the number of whole and fractional share units credited to the deferral account, or (ii) whole shares of common stock equal to the number of whole share units credited to the deferral account with fractional share units to be paid in cash.

Other Compensation Issues

Any Director compensation may be prorated for a Director serving less than a full one-year term, as in the case of a Director joining the Board of Directors after an annual meeting of shareholders. Directors are reimbursed for reasonable travel and other expenses incurred in connection with attending meetings of the Board of Directors and its committees. Directors’ compensation is subject to review and adjustment by the Board of Directors from time to time. On March 8, 2007, the Compensation Committee approved the following adjustments to Director compensation:







$30,000 in restricted shares of common stock pursuant to the Directors’ Stock Plan;







$12,500 to the Audit Committee chairperson; and







$5,000 to all Audit Committee members.

These adjustments to Director compensation will become effective as of the date of the Annual Meeting of Shareholders.

SHARE OWNERSHIP

(1)


For purposes of this table, an individual is considered the beneficial owner of shares of common stock if he or she directly or indirectly has or shares voting power or investment power, as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended. Unless otherwise indicated, an individual has sole voting power and sole investment power with respect to the indicated shares. No shares have been pledged as security by the named executive officers, directors or director nominees.

(2)


Based on information contained in a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2007, by Altus Capital, LLC. Includes 297,207 shares as to which sole voting power and sole dispositive power is claimed. Includes 2,982,200 shares as to which shared voting power and shared dispositive power is claimed.






(3)


Based on information contained in a Schedule 13G/A filed with the Securities and Exchange Commission on February 9, 2007, by Dimensional Fund Advisors LP, an investment advisor registered under Section 203 of the Investment Advisors Act of 1940. Includes 3,603,389 shares as to which sole voting power and sole dispositive power is claimed.






(4)


Based on information contained in a Schedule 13G/A filed with the Securities and Exchange Commission on February 12, 2007, by Perry Corp., an investment advisor registered under Section 203 of the Investment Advisors Act of 1940. Includes 3,613,888 shares as to which sole voting power and sole dispositive power is claimed.






(5)


Includes 13,264,356 shares held by FF Plaza Partners, a Delaware partnership of which the partners are William C. Erbey, his spouse, E. Elaine Erbey and Delaware Permanent Corporation, a corporation wholly-owned by William C. Erbey. Mr. and Mrs. William C. Erbey share voting and dispositive power with respect to the shares owned by FF Plaza Partners. Also includes 5,409,704 shares held by Erbey Holding Corporation, a corporation wholly-owned by William C. Erbey, and 7,035 unissued shares representing the vested portion of a total award of 21,104 shares that has been approved by the Compensation Committee pursuant to the 1998 Annual Incentive Plan, as amended. Prior to issuance, a portion of this grant may be forfeited to cover tax withholdings. Also includes options to acquire 815,737 shares, which are exercisable on or within 60 days after March 31, 2007. In addition, the Compensation Committee has approved an award of 102,821 options pursuant to the 2007 Equity Incentive Plan subject to shareholder approval, which are not included in this table.






(6)


Includes 16,260 shares held jointly with Mr. Faris’ spouse and 5,806 unissued shares representing the vested portion of a total award of 17,418 shares that has been approved by the Compensation Committee pursuant to the 1998 Annual Incentive Plan, as amended. Prior to issuance, a portion of this grant may be forfeited to cover tax withholdings. Also includes options to acquire 732,987 shares, which are exercisable on or within 60 days after March 31, 2007. In addition, the Compensation Committee has approved an award of 84,861 options pursuant to the 2007 Equity Incentive Plan subject to shareholder approval, , which are not included in this table.






(7)


Includes 6,000 shares held by William M. Linn, II Et Al Trust, of which Mr. Linn is the custodian for his minor children, 18,000 shares held by Brown’s Valley Development, a company owned by Mr. Linn, and 2,210 unissued shares representing the vested portion of a total award of 6,629 shares that has been approved by the Compensation Committee pursuant to the 1998 Annual Incentive Plan, as amended. Prior to issuance, a portion of this grant may be forfeited to cover tax withholdings. Also includes options to acquire 149,180 shares, which are exercisable on or within 60 days after March 31, 2007. In addition, the Compensation Committee has approved an award of 32,296 options pursuant to the 2007 Equity Incentive Plan subject to shareholder approval, which are not included in this table.






(8)


Includes 5,110 shares held by Martin & Associates Defined Contribution Pension Plan & Trust.






(9)


Includes 6,460,178 shares held by Wishco, Inc., a corporation controlled by Barry N. Wish pursuant to his ownership of 93% of the common stock thereof; 351,940 shares held by B.N.W. Partners, a Delaware partnership of which the partners are Mr. Wish and B.N.W., Inc., a corporation wholly-owned by Mr. Wish; and 37,000 shares held by the Barry Wish Family Foundation, Inc., a charitable foundation of which Mr. Wish is a director.






(10)


Includes 1,154 unissued shares representing the vested portion of a total award of 3,461 shares that has been approved by the Compensation Committee pursuant to the 1998 Annual Incentive Plan, as amended. Prior to issuance, a portion of this grant may be forfeited to cover tax withholdings. In addition, the Compensation Committee has approved an award of 16,861 options pursuant to the 2007 Equity Incentive Plan subject to shareholder approval, which are not included in this table.


(11)


Includes 1,941 unissued shares representing the vested portion of a total award of 5,824 shares that has been approved by the Compensation Committee pursuant to the 1998 Annual Incentive Plan, as amended. Prior to issuance, a portion of this grant may be forfeited to cover tax withholdings. Also includes options to acquire 195,654 shares, which are exercisable on or within 60 days after March 31, 2007. In addition, the Compensation Committee has approved an award of 28,376 options pursuant to the 2007 Equity Incentive Plan subject to shareholder approval, which are not included in this table.

MANAGEMENT DISCUSSION FROM LATEST 10K

EXECUTIVE SUMMARY

Strategic Goals

Ocwen Financial Corporation is a business process outsourcing provider to the financial services industry, specializing in loan servicing, mortgage fulfillment and receivables management services. Our primary goal is to make our client’s loans worth more by leveraging our superior processes, innovative technology and high quality, cost effective global human resources. Our business is comprised of three segments – Residential Servicing, Ocwen Recovery Group and Residential Origination Services.

Results of Operations

The following table summarizes our consolidated operating results for the periods indicated. Refer to the Segments section for a more complete discussion of operating results by line of business.

2007 Compared to 2006

Our results for 2007 were characterized by higher income from operations, increased interest expense related to funding requirements for servicing advances and losses on residual securities and loans held for resale. Unrealized losses on residual securities were significantly offset by the gain we realized from our sale of the UK residuals. Interest income decreased due to reduced investments in loans held for resale, and we recognized a loss on our early redemption of CDs.

Although Residential Servicing continues to be our most profitable segment, rising delinquencies and declining prepayments on residential mortgages have had a negative impact on 2007 results. The significant rise in delinquencies and decline in prepayment speeds have resulted in revenue growth that has lagged portfolio growth and increased interest expense related to the financing of higher servicing advance balances. This was offset somewhat by lower amortization of MSRs due to the decline in prepayment speeds. The results for Ocwen Recovery Group in 2007 reflect the June 6, 2007 acquisition of NCI, which incurred a loss for the period. The 2007 results for Residential Origination Services are characterized by lower interest income attributed to reduced balances of loans held for resale and our sale of the UK residuals and higher charges to reduce loans and residual securities to estimated market values, largely offset by improved earnings from fee-based businesses, a realized gain from the sale of the UK residuals and the closing of our subprime loan origination operation, which generated a loss in 2006.

Total revenues increased by $49,083 or 11% in 2007 principally because of the acquisition of NCI, which added $35,978 of revenues to the Ocwen Recovery Group segment. Residential Servicing revenue increased by 3% in 2007. Rising delinquencies constrained revenue growth because we do not recognize servicing fees until payments are collected. We estimate that we had $49,550 of uncollected delinquent servicing fees at December 31, 2007 that we had not recognized as revenue, an increase of $24,946 as compared to December 31, 2006. Declining prepayment speeds resulted in lower custodial account balances and related float income. Revenues of the Residential Origination Services segment were 2% greater than 2006 as increases in fees from residential property valuations and title services offset declines in mortgage due diligence and loan refinancing fees.

Total operating expenses were $15,535, or 5%, higher in 2007. Ocwen Recovery Group operating expenses increased by $38,804 largely because of the acquisition of NCI, which added $38,400 of operating expenses in 2007. Residential Servicing operating expenses declined by $3,231, or 1%, as an $11,400 decline in the amortization of MSRs and a $4,288 decline in professional services, primarily legal fees, offset a $4,587 increase in compensation and benefits due to increased staffing levels in India as a result of portfolio growth and an increase in non-performing loans. Slower prepayment speeds have reduced the rate of MSR amortization as we expect to earn the servicing income over a longer period of time. Residential Origination Services operating expenses were $13,636 or 16% less in 2007 as compensation and benefits declined by $11,010 largely due to our closing of the subprime loan origination operation, and professional services declined by $5,828 because of lower fees paid in connection with securitizations of loans held for resale.

As a result, income from operations for Residential Servicing and Residential Origination Services improved by $14,673 (13%) and $15,244 (111%), respectively. These increases were partly offset by a decrease of $5,178 (573%) in the income from operations of Ocwen Recovery Group that resulted from the acquisition of NCI.

Other expense, net increased in 2007 as a result of several significant factors. The costs of financing servicing advances and servicing rights increased in 2007 because of the growth in these assets and higher interest rates on average, resulting in a $27,593, or 91%, increase in interest expense for the Residential Servicing segment. Our Residential Origination Services segment suffered a decline in interest income in 2007 due to a lower investment in loans held for resale and our sale of the UK residuals. In addition, Residential Origination Services incurred unrealized losses of $29,031 in 2007 due principally to the write-down during the fourth quarter of subprime subordinate and residual securities to their estimated market values reflecting significantly higher projected loss assumptions, largely offset by a gain of $25,587 realized from our sale of the UK residuals in the second quarter. These changes resulted in a $16,320 decrease in other income (expense), net for Residential Origination Services. In Corporate Items and Other, other income (expense), net decreased by $10,291 largely because of a loss of $8,673 realized when an unanticipated liquidity need that arose in the third quarter caused us to redeem our zero coupon certificates of deposit prior to their maturity.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Third Quarter Results

Consolidated Results

Consolidated net income for the third quarter of 2007 was $5,951 or $0.09 per diluted share. This compares to net income of $16,970 or $0.25 per diluted share for the third quarter of 2006. Income before taxes was $9,833 for the third quarter of 2007 as compared to $26,373 for the third quarter of 2006. The $6,293 improvement in operating income in the third quarter of 2007 was more than offset by a $22,833 decline in other income that was primarily due to the disruption that occurred in the credit and capital markets. Results for the third quarter of 2007 are summarized as follows:












Total revenue of $125,542 represents an increase of $15,303 or 14% over the third quarter of 2006. Servicing and subservicing fees increased by $13,513 or 16%. NCI earned revenues of $15,749 in the third quarter of 2007.




Total operating expenses of $94,138 represents an increase of $9,010 or 11% over the third quarter of 2006. NCI incurred $16,859 of expenses in the third quarter of 2007. Amortization of servicing rights of $22,022 declined by $5,060 as compared to the third quarter of 2006.




Income from operations of $31,314 represents a 25% increase over operating income of $25,021 for the third quarter of 2006.




Other expense, net, of $21,481 as compared to other income, net, of $1,352 for the third quarter of 2006:

o


Interest income of $5,316 as compared to $12,466 for the third quarter of 2006, reflecting lower balances of loans held for resale and subordinates and residuals as a result of our efforts to reduce our investments in non-core subprime assets.

o


Interest expense of $17,533 as compared to $11,558 for the third quarter of 2006, reflecting increased funding requirements on residential servicing advances partially offset by decreased funding requirements on loans held for resale.

o


Losses on trading securities were $1,406 compared to gains of $2,156 for the third quarter of 2006. The third quarter of 2006 includes a gain of $3,716 realized on the receipt of overcollateralization funds related to acquired residual securities.

o


Charges to reduce loans held for resale to estimated market value were $2,474 compared to $667 for the third quarter of 2006, reflecting declines in the value of subprime mortgages as a result of the liquidity crisis that occurred in global capital markets.

o


Equity in earnings of unconsolidated entities were $3,537 as compared to $374 for the third quarter of 2006 as a result of improved net earnings of BMS Holdings and earnings from our investment in OSI, which began operations in the second quarter of 2007.




o


A loss of $8,673 on the early termination of long-term discounted CDs during the third quarter of 2007.

Segment Results

We have three primary business segments: Residential Servicing, Ocwen Recovery Group and Residential Origination Services. Operating income of our Residential Servicing and Residential Origination Services segments improved in the third quarter of 2007. This improvement in operating income was more than offset by declines in other income due to higher interest expense associated with servicing advances, lower interest income on reduced investments in subprime loans and securities and higher charges to reduce subprime loans to market value. The pre-tax loss of our Ocwen Recovery Group segment increased in the third quarter of 2007, largely reflecting the pre-integration cost structure of NCI.

Our Residential Servicing segment continues to post strong operating results. Operating income of $34,949 for the third quarter of 2007 represents an increase of $3,656 or 12% over the third quarter of 2006. Total revenue was down slightly for the quarter while operating expenses declined by $4,192 or 7% due to a $5,202 decline in amortization. The growth in operating income was offset by a $5,692 increase in other expense, net, due to a $6,185 increase in interest expense for the quarter. As a result, despite improved operating income, pre-tax income declined from $23,931 for the third quarter of 2006 to $21,895 for the third quarter of 2007. Third quarter 2007 results were impacted by portfolio growth, rising delinquencies and declining prepayment speeds. Rising delinquencies and declining prepayment speeds have resulted in: revenue growth lagging portfolio growth; decreased amortization of servicing rights; and increased interest expense related to advance financing.

Although the average balance of loans serviced has grown, revenue has not grown at the same rate for two reasons. First, declining prepayment speeds have led to lower float balances and float income. Second, we recognize major components of revenue, including servicing fees and late fees, upon collection. Increasing delinquencies have resulted in lower collections relative to the size of our portfolio. Delinquencies affect the timing of servicing fee recognition, but not the ultimate collection because servicing fees have priority over any principal or interest payments made by the securitization trust on the bonds. Despite an increase in the average balance of mortgage servicing rights, slower prepayment speeds have also resulted in a decline in amortization of servicing rights as the period over which we earn servicing fees is extended resulting in greater total revenue over the life of a given pool of loans. Declining prepayment speeds, rising delinquencies and a growing servicing portfolio have also combined to increase the average balance of servicing advances, which has led to higher interest expense on the financing of the advances.

(1)


Excluding real estate serviced pursuant to our contract with the U.S. Department of Veterans Affairs (“VA”).

The significant decline in subprime originations in 2007 has had and may continue to have an adverse impact on our ability to further expand our servicing portfolio.

Ocwen Recovery Group is our unsecured collections business. We incurred a $2,999 pre-tax loss in the third quarter of 2007 as compared to $384 for the third quarter of 2006. Results for the third quarter of 2007 were impacted by our acquisition of NCI on June 6, 2007, which generated a pre-tax loss of $1,824 for the quarter. NCI generated revenues of $15,749 for the third quarter of 2007. Our focus is on the continued integration of NCI and Ocwen Recovery Group operations to take advantage of NCI’s strong customer relationships and Ocwen Recovery Group’s global infrastructure. We have developed an integration action plan to improve NCI’s performance, including the migration, primarily through attrition, of collector and administrative positions to our facilities in India and the elimination of redundant expenses.

Residential Origination Services generated pre-tax income of $834 in the third quarter of 2007 as compared to $5,634 in the third quarter of 2006. Although operating income improved by $2,200 in the third quarter of 2007 as compared to 2006, other income declined by $7,000. Our efforts to reduce our investments in subprime loans and residual securities have resulted in lower interest income, which declined by $6,547 in the third quarter of 2007. We are winding down our subprime loan origination operation and have de-emphasized trading and investing activities. Pre-tax income for the third quarter of 2007 and 2006 includes $1,149 and $3,052, respectively, of losses related to the subprime loan origination operation. The current liquidity environment has had a significant negative impact on asset valuations, resulting in higher charges in 2007 to reduce subprime loans to estimated market values.

Our focus in this segment is on fee-based loan processing businesses, which generated $5,014 and $5,761 of pre-tax contribution in the third quarter of 2007 and 2006, respectively. These fee-based businesses have limited capital requirements and represent a balance between resolution, servicing and origination of loans, thereby producing relatively stable earnings in spite of the decline in loan origination activity in 2007. Success in this area is dependent on our ability to provide quality and timely services at competitive prices.

Strategic Initiatives

Acquisition of NCI. On June 6, 2007, we acquired NCI for $55,000 in cash plus $2,000 of closing adjustments. NCI, through its operating subsidiary, Nationwide Credit, Inc., is engaged principally in receivables management for its clients. The operations of NCI are included in our Ocwen Recovery Group segment since the date of the acquisition.

Investments in Asset Management Entities. We are developing asset management vehicles that benefit from our servicing and loss mitigation capabilities. These entities afford us a controlled source of servicing and generate higher returns for superior loss mitigation performance than does traditional servicing.

Investment in OSI. To date, we have invested $37,500 in OSI, which began operations during the second quarter of 2007. Our ownership interest in OSI is 25%. OSI invests in the lower tranches and residuals of residential mortgage-backed securities, the related mortgage servicing rights and other, similar assets. We are responsible for managing OSI’s portfolio under a management agreement and for subservicing any of its mortgage servicing rights. Under our agreement with the other investors in OSI, our total commitment is $75,000. We, along with the other principal investors, receive a preferential return in excess of our ownership interest in the event that OSI achieves

certain performance objectives. These preferential distributions are, however, subject to a repayment provision should the future performance of OSI not support the preference payments made to the principal investors.

New Investment Venture. We have invested $18,083 for a 25% interest in NPL, an asset management company that invests in non-performing loans. We act as the servicer of the loans. We have committed to invest up to $75,000 in NPL and its affiliated companies.

Liquidity

Our balance sheet reflects the impact of rising mortgage delinquencies and declining prepayment speeds. Cash and investment grade securities totaled $180,245 at September 30, 2007, a $131,322 decline as compared to December 31, 2006 due to lower collections and increased advance funding requirements. Servicer liabilities, which represent cash collected from borrowers but not yet remitted to securitization trusts, have declined by $213,736 from December 31, 2006 to September 30, 2007, while total residential servicing advances have increased by $241,785 during the same period. Our borrowings have increased by $279,683 since December 31, 2006, including $276,995 related to our Residential Servicing Segment.

On August 17, 2007 we redeemed CDs prior to their maturity and received cash in the amount of $66,260. During our peak advance period in August, we learned that the sub-servicer for certain residential pooling and servicing agreements for which we are the servicer had declared bankruptcy. As servicer, we were required to fund servicing advances that would normally have been funded by the sub-servicer. Although we were negotiating increases in our borrowing capacity, this unanticipated liquidity need caused us to terminate the CDs prior to their maturity to ensure that we were able to meet our obligations under those pooling and servicing agreements. There are no other pooling and servicing agreements for which we are the servicer and a third party is the sub-servicer. We have since increased our borrowing capacity on advances.

Our increased advance funding requirements have caused us to increase our borrowing capacity and to take actions toward obtaining additional increases in the future. Our total maximum borrowing capacity was $1,346,085 as of September 30, 2007 as compared to $1,175,000 at December 31, 2006. This represents an increase of $171,085 primarily due to a $320,000 increase in borrowing capacity of the Residential Servicing segment offset by a $160,000 decline in borrowing capacity of the Residential Origination Services segment. At September 30, 2007, $277,890 of our total maximum borrowing capacity remained unused, including $181,144 available to the Residential Servicing business. In September, we executed a servicing advance securitization under which we issued a $200,000 variable funding note. In October, we increased the borrowing capacity under one of our other advance financing facilities by $50,000. As of October 31, 2007, the total maximum borrowing capacity of our Residential Servicing business through match funded facilities and lines of credit was $1,235,000, of which approximately $234,000 was unused. On November 5, 2007, we negotiated an increase in the maximum borrowing through the variable funding note under the largest of our match funded agreements by $100,000 and extended the stated maturity of the note to November 2013. We are also in the final stages of negotiating a new $250,000 match funded financing facility. We expect this new agreement to close during the fourth quarter of 2007. Borrowing capacity under a secured advance facility may only be utilized to the extent that underlying collateral is pledged to that financing facility.

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