Q2 2019 Earnings Call
Thank you for standing by this is the conference operator, welcome to the Ocwen Financial Corporation second quarter earnings call.
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I would now like to turn the conference over to Hugo area, Managing Director Investor Relations and Treasury. Please go ahead Sir.
Good morning, and thank you for joining us for Ocwens second quarter 2019 earnings call.
Please note that our second quarter 2019 earnings release, and slide presentation have been released and are available on our website.
Speaking on the call will be AUC wins, 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 factors 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 differ 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.
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 notables and pretax loss, excluding notables and amortization of NRC 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 any elaboration of these factors I just discussed please refer to our presentation and todays earnings release as well as the Companys filings with the Securities and Exchange Commission, including Ocwens 2018 Form 10-K , and once filed its second quarter 2019 Form 10-Q .
Now I will turn the call over to Glen Messina.
Thank you Greg good morning, and thank you for joining us.
Today I'll provide an update regarding our progress next commuting our key business initiatives and plans to achieve profitability.
I will also discuss the actions we are taking to address evolving market conditions and to reposition auckland to deliver value creation for shareholders.
Our CFO June Campbell will follow with a review of our second quarter 2019 financial results.
I will then close the call with some brief remarks before opening it up for questions.
Please turn to slide four.
Since our last earnings call. We have continued to make substantial progress with respect to our key business initiatives to position the company for profitability.
Our team is executing well committed to delivering on the objective of our key initiatives and we're energized by our accomplishments to date and the opportunities ahead.
We completed the boarding of approximately 1 million legacy Auckland loans to the Black Knight MSP platform.
As well as the merger of awkward loan servicing and PHH mortgage.
We are tracking ahead of expectations for cost reengineering initiative that ive realized annualized run rate expense savings, excluding net MSR valuation adjustments and notable items of $246 million in the second quarter of 2019 as compared to the second quarter of 2018 for the combined Auckland and PHH.
We closed on MSR acquisitions with approximately $11 billion in U P. B for the second quarter.
In a rebuilding our MSR acquisition pipeline after a lower market activity.
We commenced originations through our correspondent forward lending channel.
And launched equity I Q.
Our proprietary reverse mortgage product.
We closed the committed $300 million MSR financing facility in July .
And Bert and initial amount of $144 million.
The facility provides us with the initial borrowing capacity to support our near term MSR acquisition objectives.
Since July 1st we have repurchased approximately $29.4 million of our second lien notes, which we expect to result in a $3.7 million pre tax gain in the third quarter.
At approximately $2.5 million in annualized interest expense savings.
And lastly.
We believe we are meeting all requirements of the conditional approvals for the P.H. acquisition and continue working to improve our regulatory relationships.
As detailed on slide 21.
Our actions to date have reduced the annualized pre tax loss, excluding notable and amortization the NRC lump sum cash payments by approximately $92 million from the combined Auckland and PHH level of $322 million in the second quarter of 2018.
Now please turn to slide five.
Since the start of the year, we have seen significant changes in market conditions, including.
The 10 year Treasury yield has dropped by approximately 75 basis points driving faster run off in our interest rate sensitive MSR portfolio and.
Along with other valuation assumptions, an unfavorable net fair value change of approximately $54 million.
We experienced subservicing terminations of approximately $23 billion in U.P.B. by legacy PHH clients due to the change in relationship resulting from our merger.
[noise] Unlevered investment returns for larger MSR bulk acquisitions have drifted below our minimum target of 9%.
And we are seeing returns for smaller to mid sized portfolios at the low end of our target returns.
We chose not to close a sizable bulk MSR acquisition, we have been awarded as the reduction in interest rates resulted in investment returns that no longer met our minimum requirements.
We are seeing increased forward lending refinancing opportunity higher forward lending margins increased reverse lending opportunity lower funding costs and increased opportunities to exercise call rights.
We are taking decisive action to address evolving market conditions, including.
Continuously aligning our cost structure to enable us to operate profitably, but the MSR investment returns available in the market.
Making changes to people processes and technology to improve our recapture performance.
Building, a balanced approach to MSR sourcing to limit our dependency on the large bulk market and provide a macro hedge to help offset the effective interest rate on our servicing portfolio.
[noise], maintaining strict collateral quality standards on new MSR investments to limit the potential for future loss events.
[noise] accessing more cost effective capital for MSR investment through structured financing alternatives and evaluating an MSR capital vehicle.
And deploying capital Opportunistically to enhance returns to early debt retirement and potential service or early call rights transactions.
Based on current market conditions, we believe an up opportunities exist to source MSR volume that meets our return requirements through the combination of smaller MSR acquisitions flow arrangements correspondent lending and portfolio retention to replenish our servicing portfolio, excluding the U.P.B. impact of sub servicing client terminations.
However, given the low volume of large bulk MSR acquisitions with attractive return profiles.
We now expect more gradual ramp up of MSR acquisition activity to achieve our portfolio replenishment objectives.
[noise] to allow for the necessary adjustments to offset the impact of the current market environment.
We have decided to extend the upper end of our time range for return to profitability on a pre tax basis, excluding notable items and the impact of the amortization of enters the lump sum payments by three months.
As a result, we believe we can return to profitability in the next seven to 13 months, assuming there are no adverse changes to current market and industry conditions or legal and regulatory matters.
I will now address our objectives for the company and provide a detailed update on each of the initiatives to transform and strengthen our business.
Please turn to slide six.
During the first up 2019, we acquired MSR with a total youd be able approximately $11 billion.
Following a lower market activity in the second quarter, we are rebuilding our MSR acquisition pipeline.
In the second quarter. We also completed the build out of our forward correspondent lending platform and commenced originations.
We have achieved our initial timeline cost compliance and risk management goals.
We've concentrated on building an efficient scalable platform that will deliver a consistent quality service experience for our clients.
We're excited about the potential of this new channel and expect to wrap up volume in a disciplined manner consistent with our return and customer service objectives.
We expect this platform will provide a significant amount of our portfolio replenishment beginning in 2020.
We also have equity I Q, our proprietary reverse mortgage product.
We believe this product will offer meaningful value to borrowers.
Through higher overall, lpvs compared to existing proprietary offerings.
Eliminating FHLB mortgage insurance to drive lower costs, so borrowers can realize more proceeds for their use.
And what amounts up to $4 billion, which allows borrowers with higher home values and opportunity to access equity above at A.J. limits.
Considering the expectation for persistently low interest rates over the foreseeable future.
We're taking several actions to improve customer experience and recapture rates in our portfolio retention platform.
We have completed the integration of the legacy Auckland and PHH operations.
Hired an entirely new leadership team.
Implemented new operating sales and pricing systems changed our celebrity platform and implemented new portfolio segmentation and targeting strategies.
We are evaluating sales underwriting and operating processes and the performance management framework for front line care management talent.
We are committed to making portfolio recapture a core competency.
We have seen and bid on several modest size Rps for subservicing, mainly from banks and others.
Well I've been self servicing and concluded that servicing agent portfolios is more complicated and expensive than anticipated.
Lead time for these opportunities tend to be longer.
We continue to target Unlevered returns on MSR acquisitions of at least 9%.
And we intend to remain disciplined in our capital allocation decisions to ensure we achieve an appropriate level of risk adjusted returns.
Based on our recent experience in the bulk MSR market, we believe certain market participants are willing to accept lower returns.
Assume substantially higher than market average recapture rates.
And assume collateral and legacy operating risks.
We also believe that the market, Virginia, Amazon ours continues to miss priced the potential credit risk associated with this asset class.
We expect to have greater bidding success and the potential to achieve our target returns with MSR portfolios into one the 3 billion dollar you BB range, which likely means more gradual ramp up of MSR acquisitions.
We expect that the returns for smaller to mid sized servicing portfolios will persist at the lower end of our investment requirements.
We are anticipating a higher rate of ordinary portfolio run off due to the reduction in market interest rates, particularly relating to the 45% of our portfolio that is interest rate sensitive.
The remainder of our portfolio is more credit sensitive in nature and less sensitive to changes in interest rates.
We continued to experience legacy PHH sub servicing client terminations, resulting from clients, taking a view that our merger resulted in a significant change in the historical subservicing relationship.
Although the sub servicing client terminations have a substantial impact on servicing you PV.
They only have a modest impact on future servicing margins.
Well there are material differences in the capital requirements that economics for own servicing versus Subservicing.
We estimate that the contribution margin for own servicing is at least four times that of Subservicing, assuming a stable delinquency environment.
And owned MSR returns of at least 9%.
Therefore, we believe the lost margin from our Subservicing client terminations and the run off of our energy portfolios.
Can be largely offset through investing roughly one quarter of the law subservicing you'd be in relatively more profitable owned MSR.
Volume driven expense reductions.
And our other investment actions.
We also believe there are sufficient opportunities for us to replenish the portfolio, excluding the U.P.B. impact of sub servicing client terminations through our flow MSR trials complemented by bulk MSR acquisition.
In a long term, we're targeting approximately 50% of our total servicing portfolio in own servicing excluding any potential impact on mix from the implementation of MSR capital vehicle.
This shift in servicing composition is expected to have a positive impact on our future profitability, while providing the additional benefit of revenue diversification.
We are taking a balanced approach to MSR sourcing, including correspondent lending flow MSR purchase agreements and portfolio recapture to complement bulk acquisitions.
We believe these actions are necessary to enable a more sustainable source of MSR to meet our return and replenishment requirements and to have a natural offset to the run off and earnings impact of interest rate changes our servicing portfolio.
In addition, we intend to evaluate M&A opportunities for origination job growth if they become available.
As a potential way to enhance and complement our organic growth initiatives in the lending chattel.
Lastly, due to the decline in interest rates.
We are seeing attractive.
Alternative investment opportunities, such as exercise and call rights on loans, and our private loan servicing portfolio, which we intend to pursue.
As of June Thirtyth, we control call rights to approximately $21 billion of mortgage collateral.
Oh up which approximately $8 billion is currently callable.
Based on various factors, especially interest rates and delinquency rates in the underlying deals.
We believe that less than 20% of the callable population currently have sufficient economic value to execute.
Please turn to slide seven.
On July Onest, we closed a $300 million committed MSR funding facility that provides borrowing capacity against agency MSR at least 60% advance rate.
At closing, we borrowed an initial amount of $144 million under the facility collateralized by existing Fannie Mae and Freddie Mac MSR ours.
We expect to have the ability to borrow up to an additional $80 million under the facility against Ginnie Mae MSR.
At the same 60% advance rate subject to the receipt of an acknowledgment agreement.
As a result of closing this facility our liquidity position has been strengthened and we've enhanced our near term financial flexibility.
We believe our stronger liquidity position should be a positive factor in our eventual efforts to refinance our senior secured term loan due December 2020.
As previously indicated we view the closing of the MSR facility as an initial step in a more diversified funding strategy for owned Dennis ours.
The facility is expected to provide the primary funding vehicle until we can achieve a sufficiently large owned MSR portfolio.
The transition to term ABS issuance complemented by a bank funded variable funding note.
We believe this approach should provide us with certain benefits including longer tenor.
Higher advance rates lower funding costs and diversification of funding source.
The timing of this next phase of our owned MSR financing strategy will be dependent on the group and our owned MSR portfolio.
As part of our disciplined approach to capital allocation, we repurchased $29.4 million of our eight and three 8% second lien notes due in 2022 during the early part of July .
We believe this was a prudent use of capital due to the level and certainty.
Oh, the available returns as well as the positive impact on our leverage and debt service costs.
We are continuously evaluating opportunities to lower our cost of capital and optimize our capital structure.
We are currently evaluating alternatives for MSR capital vehicles that could provide us with the ability to grow our servicing you PB with significantly lower capital requirements compared to MSR acquisitions.
We're excited about the prospect of having a new source to fund our growth and support our financial objectives.
The next phase of our agency MSR financing strategy and the MSR capital vehicle will be an area of focus over the next six to 12 months.
Please turn to slide eight.
We completed the systems conversion from real servicing to MSP in early June .
In total approximately 1 million loans were transferred to MSP as part of our multi phased process.
We are now in a strong position to realize significant cost and operational benefits during the second half of 2019 and into 2020.
We also completed the merger of our two primary license legal entities on June 1st.
We now have a more simplified legal entity structure that should facilitate the elimination of duplicative licensing and regulatory activities and other legal entity related support costs.
[noise] throughout the integration, we remain focused on operating excellence and compliance as key components of our strategy as well as the foundation for minimizing liquidity needs of the business and preserving long run asset and franchise value.
We have and continue to monitor multiple dimensions of our operating performance to ensure our integration activities and general operations are performing as expected.
Please turn to slide nine.
We are highly focused on executing actions to achieve a competitive cost structure that allows us to operate profitably at market MSR return levels and our portfolio composition profile.
Our cost reduction initiatives consist of three categories of actions.
Integration related cost reengineering, including merger synergies.
With annual expense saving target of at least $340 million.
Relative to our second quarter 2018 baseline that we previously outlined based on certain lending volumes.
And assuming that MSR, you PB of at least $260 billion.
Ongoing expense reductions based on expectations for lending volumes and the size of our MSR portfolio.
[noise] continuous cost reengineering based on innovation.
Digitization and other technology enabled productivity enhancements.
Our team is demonstrating strong execution and we're now running ahead of our expectations for cost reductions at this stage of our efforts.
At this time, we continue to target at least $300 million of annualized run rate cost reengineering savings by the fourth quarter and at least an additional $40 million by the second quarter of 2020.
These cost savings exclude net MSR valuation adjustments and notable items and are measured against our baseline second quarter 2018 annualized total adjusted expenses for the combined dockland in PHH.
We are in the process of carefully evaluating our progress to make any upward adjustments to our cost reduction target.
Our targeted cost reengineering expense savings are based on certain assumptions of lending volume and MSR portfolio size. Therefore, we would expect.
Our cost reengineering efforts to be complemented by volume driven cost adjustments, if actual volumes differ materially from our original expectations.
We estimate incurring approximately $65 million of upfront costs.
To execute our reengineering actions in 2019.
Through the end of the second quarter, we have incurred $32 million of this amount.
With $24 million, resulting from employee related expense.
Based on what we are learning as we execute our cost reengineering actions. We believe we have meaningful opportunities for additional benefits from reengineering and process innovation.
We're commencing our second phase of business reengineering focused on continuous improvement in speed cost compliance and customer experience.
Every function is engaged in this initiative with committed resources, who are supported by centers of excellence and lean process design strategic sourcing.
Global operations optimization and automation.
Our global team has experienced engaged energized and committed to our long term success.
We believe our global operations, our distinct competitive advantage in achieving our cost operating and technology objectives.
We believe further automation opportunities exist by optimizing the capabilities.
Our new core operating system and through the application of robotics.
Optical character recognition machine learning and digital workforce.
Now that we have completed loan boarding and are fully operating in the MSP environment. We can apply lean process designed to simplify business processes and strategically refiner vendor usage.
Please turn to slide 10.
Our fifth initiative is to fulfill regulatory commitment and resolve remaining legacy matters.
We continue to proactively engage our regulators on a consistent and frequent basis and track our progress as it relates to regulatory commitments.
The completion of the servicing systems conversion to MSP was another positive step in meeting our regulatory commitments.
This was one of the requirements under my divorce settlements of the April 2017, regulatory matters and a requirement from the state of New York and Massachusetts for the removal of the remaining restrictions on servicing portfolio growth for loans in their respective states.
The next step and final step with respect to New York is to demonstrate to the satisfaction of the New York Department of financial services that all loans serviced on the real servicing system.
Have been successfully migrated to the MSP system.
And that we have developed a satisfactory compliance risk management and internal control infrastructure to onboard sizable portfolios of emmis ours.
With respect to Massachusetts.
The MSR growth restrictions will be lifted when we complete the second phase of a three phase data integrity audit, which will be conducted by an independent third party.
Although the restrictions in New York, and Massachusetts have not been a constraint to date on our ability to acquire MSR is that our minimum investment return targets. We are working with the respective state regulators to satisfy the requirements.
We continue to believe we have meritorious defenses in the sea of PB and Florida matters.
And we are vigorously defending ourselves we have no updates currently with respect to these matters.
I will now turn it over to June who will discuss the results for the quarter.
Thank you Glenn My comments today will focus on our second quarter results as compared to the prior quarter. As previously noted our second quarter Investor presentation includes more details on our results is available on our web site.
Please turn to slide 12.
Our second quarter 2019 reported net loss of $90 million compares unfavorably to the net loss of $44 million in the first quarter of 2019.
Our second quarter was impacted by $41 million of pre tax unfavorable net fair value changes driven by changes in interest rates and valuation assumptions.
And $10 million of pre tax severance retention and other reengineering costs.
As a reminder, our first quarter results included the $31 million pre tax recoveries of amounts previously expense through service provider.
The positive pretax earnings impact from the amortization of the lump sum cash payments received from <unk> and R&D in 2017, 2018 was $31 million in the second quarter and $60 million in the prior quarter.
The amortization of these lump sum cash payments will have an 88 million dollar positive impact to our pre tax income over future quarters through April 2020.
Revenue of $274 million decrease by $30 million from the prior quarter.
[noise] servicing revenue of $243 million decreased $17 million, primarily due to continued portfolio run off.
Offsetting this servicing fees related to energy were down $13 million compared to the prior quarter and were recorded in interest expense.
Revenues net of fees remitted to NRG, we're down $4 million, partially due to timing of loan modification processing associated with the final NSP loan boarding in June .
To the extent, we are unable to replenish our volume due to unfavorable market conditions, we intend to offset negative revenue trends through higher cost reductions.
[noise] lending revenue of $29 million declined $12 million from the prior quarter due to the $12 million favorable financing cost assumption update to our reverse mortgage portfolio in the first quarter.
The second quarter included $8 million, a favorable valuation on the reverse mortgage portfolio due to a decrease in interest rates compared to $5 million of favorable valuation in the first quarter.
Non NSR expenses of $184 million was $13 million higher than the prior quarter, primarily due to the 31 million dollar recoveries of amounts previously expensed from a service provider in the first quarter.
This was offset by progress in our savings initiatives and lower severance retention and other real engineering expenses.
With respect to the $147 million on favorable MSR valuation adjustments in the second quarter of 45 basis point decline in the 10 year swap rate and valuation assumption updates drove a $95 million reduction in the value of our forward Amazon ours.
You may recall the P.H. each portfolio is primarily comprised of agency MBS ours, which are more sensitive to changes in interest rates.
The remaining $52 million resulted from portfolio run off.
A portion of the $95 million unfavorable MSR valuation adjustment, resulting from interest rate changes and valuation assumption updates was offset by $46 million a favorable NRG financing liability valuation change, which was recorded in interest expense and the previously noted $8 million a favorable fair value change on the reverse mortgage portfolio.
We've provided additional information related to the MSR valuation impacts on slide 26.
I would now like to provide comments on our servicing and lending segment results.
As outlined on slide 13, our servicing segment recorded a $59 million pretax loss compared to a $58 million a pre tax loss in the prior quarter.
The business was impacted by continued portfolio run off and favorable MSR fair value changes in timing of loan modification processing associated with the final NSP loan boarding.
The servicing business remains focused on providing sustainable loan modification solutions to qualifying borrowers in need.
We completed approximately 5300 modifications in the quarter, 16% of which resulted in some type of debt forgiveness totaling $24 million.
As of June Thirtyth, the total U P. B of our servicing portfolio stood at $229 billion, which is down from $251 billion at March 30 Onest.
This reduction was driven by a termination of a legacy PHH subservicing client relationships, representing approximately $21 billion of you PV in certain smaller terminations all of which totaled approximately $5 million in annual revenue.
We currently expect an additional sub servicing client termination in the third quarter, representing $6 billion, if you PB, but having no anticipated material adverse impact on our financial results.
These legacy PHH Subservicing terminations are the result of clients, taking the view that our merger resulted in a significant change to their historical subservicing relationship.
Excluding the impact of the second quarter sub servicing client terminations. Our total portfolio you Pee Dee would have been close to flat quarter over quarter.
While our owned MSR portfolio, you Pee Dee increased by almost $5 billion over the prior quarter.
[noise] sustained profitability in the business will largely be driven by our ability to successfully execute the integration.
We engineer our operating costs.
And pursue opportunities to replenish portfolio runoff, excluding the impact of sub servicing terminations.
Please turn to slide 14.
Our forward lending business recorded a pre tax loss of $4 million, which was slightly favorable to the prior quarter due to cost reductions.
Revenue was $1 million unfavorable to prior quarter driven by lower volumes.
We re entered the forward correspondent channel in the second quarter and expect to ramp up in a disciplined manner.
We are focused on improving portfolio retention and pull through rates.
Our reverse lending business recorded pre tax income of $12 million, which included $8 million a favorable net fair value changes related to interest rate changes.
[noise] unrecognized value related to future draw commitments on loans purchased or originated prior to January Onest 2019 is estimated to be $60 million on a present value basis and will be recognized over time as future draws a securitized or sold.
We also launched our proprietary reverse lending product in the quarter as part of our initiatives to grow our lending volume and achieve a more balanced revenue mix.
In our reverse business over 85% of our portfolio consists of loans originated after March 2014.
[noise], which conform to the new initial disbursement limits and more stringent underwriting criteria for heck of mortgages.
In addition, 84% of our portfolio is LIBOR based arms with lower initial disbursement levels than a traditional fully drawn fixed rate happens.
We had only $22 million, a pack and buyouts on our balance sheet as of June thirtyth.
And our current projected peak outstanding for how come buyouts is approximately $175 million in August of 2025.
We maintain adequate levels of funding for hacking buyouts and can typically fund up to 360 days with advance rates of 89% to 98% depending on the active or inactive status and whether the property resides in a judicial versus non judicial state.
As you can see on slide 15, we ended the quarter with available liquidity of $311 million. This included $288 million of unrestricted cash and $24 million of available liquidity on our servicing advance facilities.
We view available liquidity as cash on hand, plus available borrowing capacity on advanced facilities and warehouse lines that can be drawn based on eligible collateral.
At quarter end the available liquidity came from our committed servicing advance facilities as we were fully funded on our warehouse lines.
Our liquidity was $107 million lower than prior quarter, driven by $51 million in cash used for MSR acquisitions and $56 million of other cash uses which includes at least 25 million of working capital use that we expect to reverse in the third quarter.
We ended the quarter with corporate debt outstanding was $789 million, excluding the $98 million in PHH unsecured notes maturing in September our corporate debt to book equity ratio would have been 1.6 times.
I'll now turn it back over to Glen.
Thank you Gerry please turn to slide six chain.
Since our last earnings call. We have continued to make substantial progress with respect to our key business initiatives to position the company for profitability.
Our team is executing well committed to delivering on the objectives of our key initiatives and we're energized by our accomplishments today and the opportunities ahead.
We're taking decisive actions to address the evolving market conditions by strengthening our portfolio recapture capability diversifying our MSR sources, taking incremental cost reduction actions, reducing our cost of capital and exercising disciplined and prudent allocation of capital.
We expect continued dynamic industry and business conditions, while operating with a largely predetermined revenue structure in a highly competitive rules based environment.
As a result, we believe sustainability profitability and competitiveness will be driven by advantages and cost structure operational execution.
Reputation with customers and regulators, we've got for performance and ancillary income generation capabilities.
[noise] chasing side for economies of scale to gain a competitive advantage.
Well lead to subpar returns.
And we'll be fraught with challenges is built off another performing operating platform.
Loans to poor collateral quality and to a poor legacy servicing practices.
We believe often is well positioned to lead in each of the capability is critical for long term success.
We've replatformed go operating systems to establish a technology foundation for future automation and technical innovation.
So lets technology pallets are being implemented in the areas of robotics optical character recognition machine learning and digital workforce.
We have global operations that provide us access to highly skilled energized and experienced talent pool, who are committed to creating positive outcomes for consumers investors and communities.
Weve commenced our second phase of business reengineering focused on continuous improvement in speed cost compliance and customer experience.
The strength of our operational execution Hutton optimum servicing a hut tier one servicer rating for Ginnie Mae servicing and we expect to achieve a tier one rating for PHH mortgage in 2020.
Our operational execution has enabled lower recoverable advances.
And allowance for other technical advances was just under 2% of our total servicing advances as of June Thirtyth.
We are highly focused on preserving the collateral value of newly acquired MSR rigorous diligence to validate compliance servicing practices and complete loan files.
We have a profitable high quality reverse mortgage business with a lower credit risk profile compared to other industry participants.
We have incurred limited buyout activity today, and our projected peak outstanding balance the budget is expected to be about as of a levels.
Ultimately our vision for often.
Just to be a leading mortgage servicer with a core competency and loss mitigation.
That creates positive outcomes for homeowners to Moody's and investors.
Our objectives include.
Roughly a 50 50 balance of loan servicing and subservicing, excluding the potential impact of an MSR capital vehicle.
Diversified origination channels and product capability to replenish and grow our portfolio anchored by strong portfolio retention performance.
A lower cost capital structure utilizing call sufficient structured financing solutions.
And and MSR capital vehicle to create synthetic subservicing.
[noise] industry top quartile cost structure enabled through our offshore platform.
Automation lean scalable processes and operating execution.
Strong customer satisfaction demonstrate about high net promoter scores and low levels of consumer complaints.
And diversified revenue sources to comply ancillary income sources.
I want to thank the off with board of directors.
All our associates and our key vendor partners for their hard work and enduring commitment through our transformation.
And with that we're ready to take questions operator.
Certainly we will now begin the question and answer session.
To join the question queue, you May press Star one on your telephone keypad, you'll hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press star two we will pause for a moment as callers join the queue.
[noise].
Our first question comes from Bose George with KBW. Please go ahead Sir.
Hey, good morning, I'm actually first on the Subservicing portfolio that was moved are there any other portfolios that you think are at risk of being moved you noted the 6 billion in the third quarter, but just anything else that we need to think about.
Oh, good morning Bose the six 6 billion dollar portfolio. It was the only thing that we were aware of.
The okay and in terms of so this was really a client that was acting based on I mean, obviously, there's the transfer has kind of been in the works for a while so is there something incremental that caused it or was this I guess in line sort of in line with expectations like how would you characterize what happened.
Yeah Bose I'd I'd say it was in line with expectation on a previous earnings call. I said that we would expect subservicing runoff teksid subservicing replenishment. So yeah. We did have advance notice of of this client termination yelling at the end of the first quarter, we had a large 20 billion dollar servicing.
Acquisition Award, which would have nearly offset the PB and more than offset the revenue is but again the revenue impact here of the Subservicing termination is about $5 million relatively small.
Okay. Okay, great. Thanks, and then could you can you just remind me what happens when.
After the amortization of the NRC cash goes ways that I mean, its impact largely one of optics or is there anything is there an operating impact that we should think about.
All right you know there is no operating impact both the yeah. The amortization of lump sum payment is purely an accounting event. The cash that's already been received and we are amortizing that cash balance over the original term of the contract once the amortization stops the economics and RPL will look like a personal subservicing arrangement.
Okay, great. Thanks, and then actually the 31 million impact that you mentioned the non MSR expenses.
The change related to the previously expense numbers can you just go over what happened there just from an accounting standpoint.
I think you're referring to aid.
A notable item repair we reported in the first quarter.
Related to a settlement with the service provider, which are a positive $31 million.
Hi that did not recur in the second quarter.
The.
You should let me just make sure.
No actually I was looking at the.
Okay. So that was in the first where do you write think yes. Those those thanks for clarifying that so okay. Thanks, that's all from me.
[noise].
Once again, if you have a question. Please press star one we will pause for one more moment.
[noise].
This concludes the question and answer session I would like to turn the conference back over to Glen Messina for any closing remarks.
Thank you operator, but all those who joined the call. Thank you, Brian very much for being with US and your first for your support of awkward and look forward to talking to you next quarter.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Oh.
HM.
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