Onity Group Inc.: Form 10-Q for the period ended Sep 30, 2023

(Dollars in millions, except per share amounts and unless otherwise indicated)

OVERVIEW

General

We are a leading non-bank mortgage servicer and originator providing solutions through our primary brands, PHH Mortgage and Liberty Reverse Mortgage. PHH Mortgage is one of the largest servicers in the country, focused on delivering a variety of servicing and lending programs. Liberty is one of the nation’s largest reverse mortgage lenders dedicated to education and providing loans that help customers meet their personal and financial needs. We serviced 1.4 million loans with a total UPB of $295.7 billion on behalf of more than 3,800 investors and 117 subservicing clients as of September 30, 2023. We service all mortgage loan classes, including conventional, government-insured, non-Agency, small-balance commercial and multi-family loans. Our Originations business is part of our balanced business model to generate gains on loan sales and profitable returns, and to support the replenishment and the growth of our servicing portfolio. Through our retail, correspondent and wholesale channels, we originate and purchase conventional and government-insured forward and reverse mortgage loans that we sell or securitize on a servicing retained basis. In addition, we grow our mortgage servicing volume through MSR flow purchase agreements, Agency Cash Window and co-issue programs, bulk MSR purchase transactions, and subservicing agreements.

The table below summarizes the volume of Originations by channel in the third quarter of 2023 compared with the preceding quarter, and the nine months ended September 30, 2023 compared with the corresponding period of the prior year. The volume of Originations is a key driver of the profitability of our Originations segment, together with margins, and a key driver of the replenishment and growth of our Servicing segment. In the third quarter of 2023, we added $16.0 billion of new volume, with $8.3 billion of new subservicing and $7.5 billion of non-bulk new servicing, as further detailed in the below table.

$ in billions

(1) Represents the UPB of loans that have been originated or purchased (funded) during the respective periods and for which we recognize a new MSR on our consolidated balance sheets upon sale or securitization.

(2) Represents the UPB of loans for which the MSR is purchased. Bulk purchases include 12,931 loans with a UPB of $4.1 billion for which PMC was previously performing the subservicing that were purchased from third parties during the third quarter of 2022.

(3) Represents the UPB of reverse mortgage loans that have been securitized on a servicing retained basis. The loans are recognized on our consolidated balance sheets under GAAP without any separate recognition of MSRs.

(4) Includes interim subservicing, including the volume of UPB associated with short-term interim subservicing for certain clients as a support to their originate-to-sell business.

The following table summarizes the average volume of our Servicing segment during the third quarter of 2023 compared with the preceding quarter, and the nine months ended September 30, 2023 compared with the corresponding period of the prior year. The average servicing volume is a key driver of the profitability of our Servicing segment. The relative weight of performing and delinquent loans or servicing and subservicing also drive the gross revenue and expenses, and their timing.

$ in billions

As of September 30, 2023 and June 30, 2023, the total serviced and subserviced UPB amounted to $295.7 billion and $288.5 billion, respectively, a net increase of $7.1 billion or 2%.

The following table presents key market interest rates and respective changes in the periods presented. As further discussed, the 30-year fixed rate mortgage is a key driver of the Originations volumes, the 10-year Treasury rate is a key benchmark for MSR valuation and hedging activities, and the 1-month SOFR is a key benchmark for the profitability of our Servicing segment (including float earnings and asset-backed financing cost). In the third quarter of 2023, interest rates continued to rise at historically high levels following the decision of the Federal Reserve to continue to raise its federal funds target rate (+25 basis points in July 2023), the increased uncertainties associated with the economic and geopolitical environments, and the volatility in financial markets.

(1) Source: Freddie Mac PMMS - Primary Mortgage Market Survey

Financial Highlights

Results of operations for the third quarter of 2023

• Net income of $8.5 million, or $1.10 per share basic and $1.05 per share diluted
• Servicing and subservicing fee revenue of $237.8 million
• Originations gain on sale of $9.0 million
• $14.5 million MSR valuation gain in Servicing attributable to rate and assumption changes, net of hedging

Financial condition at the end of the third quarter of 2023

• Stockholders’ equity of $445.1 million, or $57.98 book value per common share
• MSR investment of $2.9 billion, up $194.6 million, with a mostly unchanged average serviced and subserviced UPB as compared with the previous quarter
• Cash position of $194.0 million
• Total assets of $13.0 billion

Business Initiatives

We established the following key operating objectives to return to sustainable profitability and drive improved value for shareholders. As our near-term priority remains to return to sustainable profitability, we continue to execute our strategy around these objectives:

• Leveraging the core strengths of our balanced and diversified business model through a continued focus on servicing and maintaining agility to address a potential recession;
• Driving prudent growth adapted for the environment, including emphasis on subservicing to drive servicing portfolio UPB growth and expansion of higher margin originations products and clients;
• Reducing cost structure across the organization to achieve industry cost leadership by maintaining continuous cost improvement discipline and optimizing technology, global operations, and scale;
• Optimizing liquidity, diversifying capital sources, including leveraging our MSR asset vehicle with Oaktree and expanding our multi-investor partnership model to fund new MSR originations, repositioning for higher rates and allocating capital to deliver value for shareholders.

Our growth strategy includes acquiring assets and/or operations of complementary businesses, by means of acquisition, merger or other transaction forms. Our strategy may also include pursuing large transactions, including bulk purchases or sales of MSRs. We have engaged in such transactions in the past, and we continue to explore opportunities that may be accretive to our business and stockholders’ value.

Results of Operations and Financial Condition

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations appearing in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2022.

Ocwen reported $8.5 million net income in the third quarter of 2023, a decline of $7.0 million as compared to the $15.5 million net income in the second quarter of 2023, mostly driven by the following:

• A $16.5 million decrease in revenue, primarily due to the $15.7 million gains recognized in the second quarter of 2023 on reverse loan buyouts opportunistically acquired at a discount.
• A $32.5 million lower loss on MSR valuation adjustments, net primarily due to favorable rate and assumption updates, net of hedging, mostly driven by a higher increase in market interest rates in the current quarter vs. the prior quarter and a lower hedge coverage ratio.
• A $25.7 million increase in operating expenses, primarily due to the reversal of our accrual related to the CFPB matter resolved during the second quarter of 2023 partially offset by lower Servicing expense in the third quarter of 2023.
• A $2.8 million decrease in Other income (expense), net, including a $1.2 million gain on extinguishment of the $13.9 million PMC Senior Secured Notes repurchased in the third quarter of 2023.

Total Revenue

The below table presents revenue by segment:

(1) Refer to Note 17 – Business Segment Reporting. for a reconciliation to Total revenue for the nine months ended September 30, 2022.

Total segment revenue for the three months ended September 30, 2023 decreased $16.5 million, or 6% as compared to the three months ended June 30, 2023, mostly due to a $17.2 million decrease in Servicing revenue and a $1.7 million increase in Originations revenue.

• The decrease in Servicing revenue is mostly due to $15.7 million gains recognized in the second quarter of 2023 on reverse loan buyouts opportunistically acquired at a discount.
• The increase in Originations revenue is mostly driven by a $1.5 million increase in correspondent and broker fees with higher origination volume.

As compared to the nine months ended September 30, 2022, total segment revenue for the nine months ended September 30, 2023 was $70.6 million or 10% higher, primarily due to a $130.6 million increase in Servicing revenue offset by a $64.4 million decrease in Originations revenue.

• The increase in Servicing revenue is mostly due to a $67.6 million increase in float earnings due to higher interest rates, $38.4 million increase in unrealized fair value gains on the reverse loans held for investment and HMBS-related borrowings, net attributable to less significant market rate increase and yield spread tightening in the current period as compared to the same period of the prior year, $15.7 million total gains on reverse loan buyouts opportunistically acquired at a discount in June 2023, and an $8.8 million loss reported in the second quarter of 2022 on certain delinquent and aged loans repurchased in connection with the Ginnie Mae EBO program.
• The decrease in Originations revenue is primarily driven by a decline in volume in our different channels due to drastic interest rate increases. Our reverse channels reported a $34.2 million decrease in gains with a 60% decline in volume, our forward channels reported a $22.8 million decrease in gains on sale, driven by lower recapture volume offset in part by higher margin, and a $7.4 million decrease in fees primarily due to the decline in volume.

MSR Valuation Adjustments, Net

Refer to the Servicing and Originations segments for a discussion and analysis of MSR valuation adjustments, net and Note 17 – Business Segment Reporting for a reconciliation to the segments.

Operating Expenses

Compensation and benefits expense for the three months ended September 30, 2023 decreased $2.0 million, as compared to the three months ended June 30, 2023, mostly due to a decrease in the fair value of cash-settled share-based awards in the quarter following the decline of our common stock price, as compared to an increase in the prior quarter.

As compared to the nine months ended September 30, 2022, Compensation and benefits expense for the nine months ended September 30, 2023 decreased $51.8 million, or 23% largely due to a $41.3 million decrease in salaries and benefits. Our total average headcount declined 16% (including a 37% decline in total average U.S. based headcount), driven by a 54% decline in Originations average headcount as part of our efforts to right size resources to market opportunities, and a 27% reduction in our average U.S. based Servicing headcount, reflecting our goal to improve efficiencies and create an industry leading cost structure. Severance expense decreased by $8.5 million. In addition, commissions decreased by $9.8 million due to lower production volume and headcount in our Originations segment. Offsetting in part was a $10.3 million increase in incentive compensation primarily due to an increase in expense for cash-settled share-based awards driven by the increase in our common stock price, new awards, and lower expense recognized in the first quarter of 2022 due to forfeitures.

Servicing and origination expense for the three months ended September 30, 2023 decreased $2.1 million, as compared to the three months ended June 30, 2023, mostly due to a decrease in Servicing expense. Refer to the Servicing segment discussion.

As compared to the nine months ended September 30, 2022, Servicing and origination expense for the nine months ended September 30, 2023 decreased $3.5 million, with a reduction in Origination expense partially offset by an increase in our CR Limited (CRL) claim loss reserve reported in the Corporate segment.

Professional services expense for the three months ended September 30, 2023 increased $30.4 million, as compared to the three months ended June 30, 2023, primarily due to the reversal of our accrual related to the CFPB matter resolved during the second quarter.

As compared to the nine months ended September 30, 2022, Professional services expense for the nine months ended September 30, 2023 decreased $28.2 million. The expense decrease is primarily due to the reversal of our accrual related to the

CFPB matter resolved during the second quarter of 2023, a reduction in expenses related to other legal matters and a decrease in other professional fees driven by our cost saving initiatives including the reduction of outsourced resources and insurance cost. These decreases in expense were partially offset by lower recoveries of prior year expenses in the nine months ended September 30, 2023 vs. the nine months ended September 30, 2022.

Technology and communications expense for the three months ended September 30, 2023 was mostly flat as compared to the three months ended June 30, 2023. As compared to the nine months ended September 30, 2022, Technology and communication expense for the nine months ended September 30, 2023 decreased $4.5 million mainly due to lower Originations volume, reduced headcount and cost reduction initiatives.

Occupancy and equipment expense was unchanged for the three months ended September 30, 2023 as compared to the three months ended June 30, 2023 and declined $7.9 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The expense reduction was primarily due to our exit or downsize of certain leased office facilities in the second half of 2022, including our exit from our New Jersey leased office facility, and lower mailing costs in our Originations segment due to lower production volumes.

Other expenses for the three months ended September 30, 2023 remained mostly flat as compared to the three months ended June 30, 2023. As compared to the nine months ended September 30, 2022, Other expenses for the nine months ended September 30, 2023 decreased $8.5 million mainly due to a $4.7 million decrease in advertising expense in our Originations segment due to lower production volumes and a $1.9 million decline in bank charges due to higher earnings credits as a result of higher interest rates.

Other Income (Loss)

Net interest expense for three months ended September 30, 2023 remained flat as compared to the three months ended June 30, 2023, with higher interest income due to a higher loan balance largely offset by higher interest expense to finance such loan balance increase.

As compared to the nine months ended September 30, 2022, Net interest expense for the nine months ended September 30, 2023 increased $49.1 million, primarily due to higher cost of funds of our servicing asset-backed financing facilities driven by a more than 300 basis points increase in market interest rates, and the repayment of a lower cost servicing advance facility during the third quarter of 2022.

Other, net expense for the three months ended September 30, 2023 decreased $5.7 million, as compared to the three months ended June 30, 2023, largely due to a decrease in early payoff protection expense in connection with our MSR sale transactions. As compared to the nine months ended September 30, 2022, Other, net expense for the nine months ended September 30, 2023 decreased $6.8 million driven by a decrease in early payoff protection expense, among other factors.

Refer to Servicing segment for discussion and analysis of Pledged MSR liability expense and Earnings of equity method investee.

Income Tax Benefit (Expense)

Our effective tax rate for the periods indicated in the table above differs from the federal statutory income tax rate primarily due to the full valuation allowance recorded on our net U.S. federal and state deferred tax assets. We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. In these evaluations, we give more significant weight to objective evidence, such as our actual financial condition and historical results of operations, as compared to subjective evidence, such as projections of future taxable income or losses. The U.S. jurisdiction is in a cumulative loss position for the three-year period ended September 30, 2023. We recognize that cumulative losses in recent years is an objective form of negative evidence in assessing the need for a valuation allowance and that such negative evidence is difficult to overcome. Other factors considered in these evaluations are estimates of future taxable income, future reversals of temporary differences, taxable income in prior carryback years, and the impact of tax planning strategies that may be implemented, if warranted. We evaluated all positive and negative evidence and determined that a full valuation allowance at September 30, 2023 remains appropriate. The income tax expense (benefit) is primarily comprised of income taxes in foreign jurisdictions and changes in uncertain tax positions. Also refer to Note 19 - Income Taxes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022 for further details on deferred tax assets.

Income tax expense for three months ended September 30, 2023 remained flat as compared to the three months ended June 30, 2023. As compared with the nine months ended September 30, 2022, income tax expense for the nine months ended September 30, 2023 increased by $5.4 million primarily due to the recognition of an income tax benefit in the nine months ended September 30, 2022 related to the favorable resolution of uncertain tax positions. The decline in the effective tax rate is primarily due to the $116.2 million decrease in pre-tax earnings in the nine months ended September 30, 2023 compared to the same period in 2022, as well as the $5.4 million increase in income tax expense in the nine months ended September 30, 2023 compared to the same period in 2022.

Under our transfer pricing agreements, our operations in India and Philippines are compensated on a cost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from operations these foreign operations have taxable income, which is subject to statutory tax rates in these jurisdictions that are higher than the U.S. statutory rate of 21%.

Financial Condition

Total assets increased $612.5 million, or 5%, between December 31, 2022 and September 30, 2023 due to a $325.5 million increase in our loans held for sale portfolio mostly driven by higher forward loan production volumes, a $272.7 million fair value increase in reverse Loans held for investment mostly driven by capitalization of interest, and a $194.6 million increase in our MSR portfolio with newly originated and acquired MSRs more than offsetting portfolio runoff. These increases were offset in part by a $154.3 million decline in servicing advances that was mainly due to seasonal reduction of escrow balances (typically higher in December vs. September).

Total liabilities increased by $624.1 million, or 5%, as compared to December 31, 2022, with similar effects as described above. Our borrowings under mortgage loan financing facilities increased $331.9 million due to the higher loans held for sale balance at September 30, 2023, including the issuance of the OLIT Notes in connection with the securitization of reverse mortgage loan buyouts. Our HMBS-related borrowings increased by $286.8 million mostly due to fair value changes attributable to interest. The $243.0 million increase in Other financing liabilities is primarily due to the issuance of ESS financing liabilities and increased Pledged MSR liabilities in connection with MSR transfers that did not qualify for sale accounting. This increase in Other financing liabilities allowed for the repayment of MSR financing facilities, driving a $52.1 million decrease. This shift in financing instruments is the result of our strategy to use MSR capital partners and further de-risk our MSR exposure. Advance match funded liabilities decreased $110.6 million consistent with the decline in servicing advances discussed above.

Total equity decreased $11.6 million during the nine months ended September 30, 2023 due to the $16.2 million net loss for the period and $4.6 million equity-based compensation driven by additional awards.

Key Trends

The following discussion provides information regarding certain key drivers of our financial performance and includes certain forward-looking statements that are based on the current beliefs and expectations of Ocwen’s management and are subject to significant risks and uncertainties. Refer to Forward-Looking Statements beginning on page 2 of this Form 10-Q and Part I, Item 1.A. of our Annual Report on Form 10-K for the year ended December 31, 2022, for discussion of certain of those risks and uncertainties and other factors that could cause Ocwen’s actual results to differ materially because of those risks and uncertainties. There is no assurance that actual results will be in line with the outlook information set forth below, and Ocwen does not undertake to update any forward-looking statements. Also refer to the Segment results of operations section for further detail, the description of our business environment, initiatives and risks.

Servicing and subservicing fee revenue - Our servicing fee revenue is a function of the volume being serviced - UPB for servicing fees and loan count for subservicing fees. We expect we will continue to modestly grow our servicing portfolio through our multi-channel Originations platform and through MAV and other MSR capital partners, with an emphasis on subservicing. We have added $126.0 billion subservicing UPB since June 30, 2021.

Gain on sale of loans held for sale - Our gain on sale is driven by both volume and margin and is channel-sensitive. The industry outlook for loan origination for the remainder of 2023 and 2024 remains largely depressed, with historical low origination volumes and elevated mortgage interest rates. We expect recapture volumes in our Consumer Direct channel to remain at depressed levels, absent any significant interest rate decrease, and expect continued competitive pressure on margins across all channels. We expect to continue to prudently manage our Correspondent volume at margins that are accretive to the business.

Gain on reverse loans held for investment and HMBS-related borrowings, net - The reverse mortgage origination gain is driven by the same factors as gain on sale of loans held for sale, with smaller volumes in the reverse mortgage market and generally larger margins. With our experience and brand in the marketplace, we expect to continue to maintain or prudently grow our portfolio albeit with some channel mix changes. We expect continued uncertain market interest rate and spread conditions. The fair value of the net reverse servicing asset is expected to continue to follow market conditions, with fair value gains or losses generally associated with declining or increasing interest rates and spread, respectively, and is part of our forward MSR hedging strategy.

MSR valuation adjustments, net - Our net MSR fair value changes include multiple components. First, amortization of our investment is a function of the UPB, capitalized value of the MSR relative to the UPB, and the level of scheduled payments and prepayments. We expect the MSR realization of expected cash flows to follow the growth or size of our MSR portfolio offset by the ESS financing liabilities. Second, MSR fair value changes are driven by changes in interest rates and assumptions, such as forecasted prepayments. Third, the MSR fair value changes are partially offset by derivative fair value changes that economically hedge the MSR portfolio. We are exposed to increased interest rate volatility due to our interest rate sensitive GSE MSR portfolio. Our hedging strategy provides only partial hedge coverage and we would expect net MSR fair value losses if interest rates drop and conversely, net MSR fair value gains if interest rates rise, also dependent on our hedge coverage ratio. We expect that, other things being equal, the magnitude of the fair value changes of the MSR portfolio due to market interest rates, net of the MSR hedges, to decrease if our hedge coverage ratio increases, or vice versa. Refer to the sensitivity analysis in Item 3 - Quantitative and Qualitative Disclosures About Market Risk for further detail.

Operating expenses - Compensation and benefits are a significant component of our cost-to-service and cost-to-originate and is directly correlated to headcount levels. Headcount in Servicing is primarily driven by the number of loans or UPB being serviced and subserviced, and by the relative mix of performing, delinquent and defaulted loans. As servicing volume is expected to modestly increase (see above), we expect a stable workforce. We expect to continue to right-size and prudently manage our Originations headcount and operating expenses to align with funded volume. Our operating expenses are expected to correlate with volumes, with some productivity and efficiencies expected through our technology and continuous improvement initiatives. Elevated inflation may result in higher operating expenses due to increases in salaries and benefits and rates charged by our vendors.

SEGMENT RESULTS OF OPERATIONS

Our activities are organized into two reportable business segments that reflect our primary lines of business - Servicing and Originations - as well as a Corporate Items and Other segment.

SERVICING

We earn contractual monthly servicing fees pursuant to servicing agreements pertaining to MSRs we own, which are typically payable as a percentage of UPB, as well as ancillary fees, including late fees, modification incentive fees, REO referral commissions, float earnings and convenience or other loan collection fees, where permitted. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions, including Rithm and MAV, who own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Subservicing per-loan fees typically vary based on type of investor and on loan delinquency status.

As of September 30, 2023, we serviced 1.4 million mortgage loans with an aggregate UPB serviced and subserviced of $295.7 billion. The average UPB during the third quarter of 2023 was mostly flat (decreased by 0.4%) compared to the second quarter of 2023. Compared to the nine months ended September 30, 2022, the average UPB during the nine months ended September 30, 2023 increased by 5% or $13.5 billion. We manage the size of our servicing portfolio with our Originations business and by selectively purchasing MSRs based on capital allocation and financial return targets.

The financial performance of our servicing segment is impacted by the changes in fair value of the MSR portfolio due to changes in market interest rates, among other factors. As interest rates decrease, the value of the servicing portfolio typically decreases as a result of higher anticipated prepayment speeds. Conversely, as interest rates increase, the value of the servicing portfolio typically increases as a result of lower anticipated prepayment speeds. Prepayments do not vary linearly with interest rates resulting in the convexity of the MSR, i.e., the interest rate sensitivity of the MSR changes when interest rates change. Specifically, as interest rates further increase, the lower the fair value of the MSR increases. The sensitivity of MSR fair value to interest rates is typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of approximately 18 years, exhibiting little response to movements in market interest rates. Our hedging strategy is designed to partially reduce the volatility of the MSR portfolio to interest rates.

Concentration

Rithm (formerly NRZ) is our largest subservicing client. For the nine months ended September 30, 2023, servicing and subservicing fees from Rithm amounted to $175.1 million, or 32% of total servicing and subservicing fees (excluding ancillary income). Rithm servicing fees retained by Ocwen represented approximately 8% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to Rithm during the third quarter of 2023. Rithm accounted for 16% and 26% of the total serviced UPB and loan count, respectively, as of September 30, 2023, and 68% of all delinquent loans. Consistent with a subservicing relationship, Rithm is responsible for funding the advances we service on its behalf. The servicing agreements automatically renew annually unless notice of termination is provided. Refer to Note 8 — Other Financing Liabilities, at Fair Value.

For the nine months ended September 30, 2023, servicing and subservicing fees from MAV amounted to $54.9 million, or 10% of total servicing and subservicing fees (excluding ancillary income). MAV represented 19% and 15% of our total servicing portfolio UPB and loan count, respectively, as of September 30, 2023. PMC has exclusive rights to service the mortgage loans underlying MSRs owned by MAV. MAV provides us with a source of additional subservicing volume, either with the MSRs that MAV purchases outright from third parties or with the MSRs that MAV purchases from PMC. Although the servicing agreement is not cancellable without mutual agreement, MAV is permitted to sell its MSR portfolio, in whole or in part, without Ocwen’s consent after May 3, 2024. Refer to Note 10 - Investment in Equity Method Investee and Related Party Transactions.

Loan Resolutions

We have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors. Reducing delinquencies also enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Loan resolution activities address the pipeline of delinquent loans and generally lead to (i) modification of the loan terms, (ii) repayment plan alternatives, (iii) a discounted payoff of the loan (e.g., a “short sale”), or (iv) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting REO. Loan modifications must be made in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon, or even forbid, loan modifications. To select an appropriate loan modification option for a borrower, we perform a structured analysis, using a proprietary model, of all options using information provided by the borrower as well as external data, including recent broker price opinions to value the mortgaged property. Our proprietary model includes, among other things, an assessment of re-default risk.

Advance Obligation

As a servicer, we are generally obligated to advance funds in the event borrowers are delinquent on their monthly mortgage related payments. We advance principal and interest (P&I Advances), taxes and insurance (T&I Advances) and legal fees, property valuation fees, property inspection fees, maintenance costs and preservation costs on properties that have been foreclosed (Corporate Advances). For certain loans in non-Agency securitization trusts, we have the ability to cease making P&I advances and immediately recover advances previously made from the general collections of the respective trust if we determine that our P&I advances cannot be recovered from the projected future cash flows. With T&I and Corporate advances, we continue to advance if net future cash flows exceed projected future advances without regard to advances already made.

Most of our advances have the highest reimbursement priority (i.e., they are “top of the waterfall”) so that we are entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. The costs incurred in meeting these obligations consist principally of the interest expense incurred in financing the servicing advances. Most subservicing agreements, including our agreements with Rithm, provide for prompt reimbursement of any advances from the owner of the servicing rights.

Significant Variables

The following factors could significantly impact the results of our Servicing segment from period to period.

Aggregate UPB and Loan Count. Servicing fees are generally earned as a percentage of UPB and subservicing fees are earned on a per-loan basis or as a percentage of UPB. As a result, the change in aggregate UPB and loan count for which we have servicing rights or subservicing rights will directly impact our revenue contributed by our Servicing segment. Aggregate UPB and loan count decline as a result of portfolio run-off and increase to the extent we retain MSRs from new originations or engage in MSR acquisitions.

Cost to Service and Operating Efficiency. Our operating results for our Servicing segment are heavily dependent on our ability to scale our operations to cost-effectively and efficiently perform servicing activities in accordance with our servicing agreements.

Delinquencies. Delinquencies impact our financial results and operating cash flows for our Servicing segment. Non-performing loans are more expensive to service because the loss mitigation activities that we must undertake to keep borrowers in their homes or to foreclose, if necessary, are costlier than the activities required to service a performing loan. These loss mitigation activities include increased contact with the borrower for collection and the development of forbearance plans or loan modifications by highly skilled associates who command higher compensation as well as the higher compliance costs associated with these, and similar activities. While the higher cost is somewhat offset by ancillary fees for severely delinquent loans or loans that enter the foreclosure process, the incremental revenue opportunities are generally not sufficient to cover our increased costs.

In addition, when borrowers are delinquent, the amount of funds that we are required to advance to the investors increases. We utilize servicing advance financing facilities, which are asset-backed (i.e., match funded liabilities) securitization facilities, to finance a portion of our advances. As a result, increased delinquencies result in increased interest expense.

Prepayment Speed. The rate at which portfolio UPB declines can have a significant impact on our Servicing segment. Items reducing UPB include scheduled and unscheduled principal payments (runoff), refinancing, loan modifications involving forgiveness of principal, voluntary property sales and involuntary property sales such as foreclosures. Prepayment speed impacts future servicing fees, runoff and valuation of MSRs. Increases in anticipated lifetime prepayment speeds generally cause MSR valuation adjustments to increase because MSRs are valued based on total expected servicing income over the life of a portfolio. The converse is true when expectations for prepayment speeds decrease. Prepayments do not vary linearly with interest rates resulting in the convexity of the MSR, i.e., the interest rate sensitivity of the MSR changes when interest rates change. Specifically, as interest rates further increase, the lower the fair value of the MSR increases.

Interest rates. In addition to the impact of interest rate changes on prepayment speeds, the fair value of the MSR and associated hedging activities, float earnings on float balances, and the funding cost of servicing advances and MSR financing facilities are directly impacted by interest rate changes.

Reverse Mortgages

Our business activities include both the subservicing of reverse mortgage loans on behalf of investors and the servicing of our owned portfolio.

The activities and financial performance related to our owned portfolio of reverse mortgage loans that are securitized and classified as held for investment, at fair value, together with the HMBS-related borrowings, at fair value are reflected in the Servicing segment, consistent with how the activities are managed and internally reported. Once a reverse mortgage loan is securitized, our activities are generally consistent with other loan servicing as described above, with the following variations.

Under the terms of ARM-based HECM loan agreements, the borrowers have additional borrowing capacity of $1.8 billion at September 30, 2023. These draws or tails are funded by the servicer and are subsequently securitized. We do not incur any substantive underwriting, marketing or compensation costs in connection with any future draws, although we must maintain sufficient capital resources and available borrowing capacity to ensure that we are able to fund these future draws prior to securitization with Ginnie Mae (generally less than 30 days).

As an HMBS issuer, we assume certain obligations related to each security issued. In addition to our obligation to fund tails, the most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once they reach 98% of the maximum claim amount (MCA repurchases or active buyouts). Active repurchased loans or buyouts are assigned to HUD and payment is received from HUD through a claims process, generally within 90 days. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount; we bear the risk of exposure if the outstanding balance on a loan exceeds the maximum claim amount. Inactive repurchased loans or buyouts (loans that are in default for one of the following reasons - title conveyances or the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments) are generally liquidated through foreclosure and subsequent sale of REO. State specific foreclosure and REO liquidation timelines have a significant impact on the timing and amount of our recovery. If we are unable to sell the property securing the inactive reverse loan for an acceptable price within the timeframe established by HUD (six months), we are required to make an appraisal-based claim to HUD. In such cases, HUD reimburses us for the loan balance, eligible expenses and interest, less the appraised value of the underlying property. Thereafter, all the risks and costs associated with maintaining and liquidating the property remains with us; we may incur additional losses on REO properties as they progress through the liquidation processes related to delayed timelines due to market conditions, sales commissions, property preservation costs or property tax and insurance advances. The significance of future losses associated with appraisal-based claims is dependent upon the volume of inactive loans, condition of foreclosed properties and the general real estate market.

The Gain on reverse loans held for investment and HMBS-related borrowings, net reported within the Servicing segment includes the net fair value changes of securitized reverse mortgage loans held for investment and HMBS-related borrowings, for which we elected the fair value accounting option. The net fair value changes of the reverse mortgage loans and related borrowings reported within the Servicing segment include the following:

• contractual interest income earned on securitized reverse mortgage loans, net of interest expense on HMBS-related borrowings, that is, the servicing fee we are contractually entitled to and collect on a monthly basis under the Ginnie Mae MBS Guide regarding servicing HMBS;
• cash gains on tail securitization. Tails are participations in previously securitized HECMs and are created by additions to principal for borrower draws on lines-of-credit (scheduled and unscheduled), interest, servicing fees, and mortgage insurance premiums;
• fair value changes due to the realization of other expected cash flows of the net asset balance of securitized loans held for investment and HMBS-related borrowings; and
• fair value changes due to the inputs and assumptions of the net balance of securitized loans held for investment and HMBS-related borrowings.

The fair value of our Ginnie Mae securitized HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, with lower interest rates extending the timeline to liquidation. HECM loans have a longer duration than HMBS-related borrowings as a result of the future draw commitments, and our obligations as issuer of HMBS to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM loan is equal to 98% of the maximum claim amount.

Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net strictly reflects the financial performance of owned loans/servicing and excludes any subservicing activity. The financial performance associated with the subservicing of reverse mortgage loans on behalf of investors is primarily reflected within Servicing and subservicing fees, net. We collect higher subservicing fees for inactive loans relative to the base subservicing fee for performing loans or active repurchased loans, commensurate with the level of servicing efforts, as described above.

Third-Party Servicer Ratings

Like other servicers, we are the subject of mortgage servicer ratings or rankings (collectively, ratings) issued and revised from time to time by rating agencies including Moody’s Investors Service, Inc. (Moody’s), S&P Global Ratings, Inc. (S&P)

and Fitch Ratings, Inc.(Fitch). Favorable ratings from these agencies are important to the conduct of our loan servicing and lending businesses.

The following table summarizes our latest key servicer ratings:

In addition to servicer ratings, each of the agencies will from time to time assign an outlook (or a ratings watch such as Moody’s review status) to the rating status of a mortgage servicer. A negative outlook is generally used to indicate that a rating “may be lowered,” while a positive outlook is generally used to indicate a rating “may be raised”.

On August 10,2023, Moody’s upgraded the ratings for residential prime, subprime, special servicer and second lien quality (SQ) assessments from SQ3 to SQ3+, and affirmed the master servicer assessment at SQ3+. Moody’s ratings reflects i) significant investment in technology, ii) improvement in loan boarding, iii) improvement in document management and iv) improvement in bank account reconciliation process.

On March 22, 2023, S&P raised the ratings for residential mortgage primary, special, subprime and subordinate-lien servicer from Average to Above Average and affirmed the overall Above Average ranking as a residential mortgage loan master servicer and the ratings outlook as Stable. S&P’s rankings reflects i) senior and middle management teams, which have sound industry experience and tenure levels and low turnover, ii) multiple levels of internal controls to monitor the operations, iii) internal or external audit findings - no material findings noted, based on the reports provided, iv) effective and industry-recognized technology systems and good level of automation in reporting, accounting, and cash administration, v) proactive servicer oversight program and comprehensive practices to monitor default activity to mitigate losses; and vi) continued portfolio runoff, reflecting the securitization market's limited new business opportunities and high competition levels with several master servicers competing for those transactions.

The following table presents selected results of operations of our Servicing segment. The amounts presented are before the elimination of balances and transactions with our other segments:

66

The following table provides selected operating statistics for our Servicing segment:

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(1) Performing loans include those loans that are less than 90 days past due and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing.

(2) Conventional loans include 65,199 and 65,796 prime loans with a UPB of $13.3 billion and $13.3 billion at September 30, 2023 and June 30, 2023, respectively, that we service or subservice. This compares to 67,752 prime loans with a UPB of $13.3 billion at September 30, 2022. Prime loans are generally good credit quality loans that meet GSE underwriting standards.

(3) Includes 35,698 reverse mortgage loans with a UPB of $7.9 billion that are recognized in our consolidated balance sheet at September 30, 2023.

(4) Includes $27.5 billion UPB subserviced and $29.2 billion UPB of MSRs sold to MAV that did not achieve sale accounting treatment at September 30, 2023.

(5) Loans serviced or subserviced pursuant to our agreements with MAV, Rithm or others for which sale accounting is not achieved.

(6) Includes $1.8 billion UPB of subserviced loans on behalf of Rithm at September 30, 2023.

(7) Total 3-month % CPR includes voluntary and involuntary prepayments, as shown in the table, plus scheduled principal amortization.

The following table provides the rollforward of activity of our portfolio of mortgage loans serviced that includes MSRs, whole loans and subserviced loans, both forward and reverse:

(1) Includes the volume UPB associated with short-term interim subservicing for some clients as a support to their originate-to-sell business, where loans may be boarded and deboarded within the same quarter.

(2) Includes MSRs sold to an unrelated third party in the first quarter of 2022 consisting of 38,850 loans with a UPB of $11.1 billion, with the remaining active loans transferred out of the PMC servicing system in the third quarter of 2022, and for which PMC performed interim subservicing.

(3) Additions include purchased MSRs on portfolios consisting of 577 loans with a UPB of $113.0 million that have not yet transferred to the PMC servicing system as of September 30, 2023. Because we have legal title to the MSRs, the UPB and count of the loans are included in our reported servicing portfolio. The seller continues to subservice the loans on an interim basis between the transaction closing date and the servicing transfer date.

(4) Additions include purchased MSRs on portfolios consisting of 962 loans with a UPB of $258.8 million that have not yet transferred to the PMC servicing system as of September 30, 2022. Because we have legal title to the MSRs, the UPB and count of the loans are included in our reported servicing portfolio. The seller continues to subservice the loans on an interim basis between the transaction closing date and the servicing transfer date.

(5) Excludes MSRs acquired from unrelated third parties in the third quarter of 2022 consisting of 12,931 loans with a UPB of $4.1 billion for which PMC was previously performing the subservicing.

The following table provides a breakdown of our servicer advances:

The following table provides selected operating statistics related to our reverse mortgage loans reported within our Servicing segment:

(1) Securitized loans only; excludes unsecuritized loans reported within the Originations segment.

(2) Buyouts are reported as Loans held for sale, Accounts Receivable or REO depending on the loan and foreclosure status.

(3) Internally referred to as HECM or reverse MSR.

Servicing and Subservicing Fees

The following tables and discussion present the respective drivers of servicing and subservicing fees and ancillary income.

(1) In $ billions, (2) In % of UPB, annualized, (3) In $ millions, (4) In thousands, (5) In dollars.

Comparing the three months ended September 30, 2023 to the three months ended June 30, 2023, servicing and subservicing fees (excluding ancillary income) decreased $3.6 million, or 2%. This decrease reflects a $2.7 million, or 2% decrease in servicing fees and a $0.9 million decline in subservicing fees primarily due to a decrease in the average number of loans in our reverse subservicing portfolio. The 2% decrease in servicing fees is driven by timing of collections and the runoff of higher fee portfolios.

As compared to the nine months ended September 30, 2022, our servicing and subservicing fees (excluding ancillary income) for the nine months ended September 30, 2023 decreased $4.1 million, with a $7.7 million decrease in servicing fees partially offset by a $3.6 million increase in subservicing fees. The decrease in servicing fees is mostly driven by the timing of collections and the mix of the portfolio, with the runoff of higher fee portfolios (including the Rithm portfolio) and the growth of relatively lower fee portfolios. The $3.6 million increase in subservicing fees is mostly driven by the 12% growth of the forward subservicing portfolio ($7.2 million higher forward subservicing fee, including $2.1 million higher subservicing fees on the MAV portfolio), partially offset by a decrease in the reverse mortgage portfolio due to runoff ($3.6 million lower subservicing fees).

The following table presents the detail of our ancillary income:

Ancillary income for the three months ended September 30, 2023 increased by $3.4 million as compared to the three months ended June 30, 2023 primarily because of a $5.3 million increase in float earnings driven by higher average float balances and higher interest rates, offset by a $1.7 million decline in reverse subservicing ancillary fees due to portfolio runoff.

As compared to the nine months ended September 30, 2022, ancillary income for the nine months ended September 30, 2023 increased by $68.4 million largely driven by a $67.6 million increase in float earnings due to higher interest rates and an $11.8 million increase in reverse subservicing ancillary fees recognized on reverse mortgage loans boarded under the subservicing agreement with MAM (RMS) during the first half of 2022. Partially offsetting these increases, recording fees and late charges were lower by $3.9 million and $3.5 million, respectively, mostly due to the reduction in payoff volume.

Gain (Loss) on Loans Held for Sale, Net

We recognized a $0.8 million loss on loans held for sale, net for the three months ended September 30, 2023, as compared to a $15.1 million gain for the three months ended June 30, 2023. The gain reported in the three months ended June 30, 2023 is mostly attributable to the revaluation of reverse mortgage buyouts opportunistically acquired at a discount and securitized in the second quarter of 2023. The loss reported in the three months ended September 30, 2023 is related to repurchased loans in connection with Ginnie Mae loan modifications and buyout activities due to the unfavorable impact of higher interest rates on redelivery.

For the nine months ended September 30, 2023, we recognized a gain on loans held for sale, net of $13.0 million, as compared to the $14.0 million loss recognized in the nine months ended September 30, 2022. The $27.0 million improvement is mostly driven by the $15.7 million revaluation gain of reverse mortgage buyouts discussed above in the second quarter of 2023 and the $8.8 million loss reported in the second quarter of 2022 on certain delinquent and aged loans repurchased in connection with the Ginnie Mae EBO program. In addition, losses were recognized in the nine months ended September 30, 2022 on the sale of repurchased uninsured residential mortgage loans and redelivery of repurchased loans in connection with Ginnie Mae loan modifications and EBO activities, as a result of higher market interest rates.

Gain (Loss) on Reverse Loans Held for Investment and HMBS-Related Borrowings, Net

Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net reported in the Servicing segment is the net change in fair value of securitized loans held for investment and HMBS-related borrowings. It excludes reverse subservicing that is reflected in Servicing and subservicing fees.

The following table presents the components of the net fair value change and is comprised of net interest income and other fair value gains or losses. Net interest income is primarily driven by the volume of securitized UPB as it is the interest income earned on the securitized loans offset against interest expense incurred on the HMBS-related borrowings, and represents a component of our compensation for servicing the portfolio, which is a percentage of the outstanding UPB. Other fair value changes are primarily driven by changes in market-based inputs or assumptions. Lower interest rates generally result in favorable net fair value impacts on our HECM reverse mortgage loans and the related HMBS financing liability and higher interest rates generally result in unfavorable net fair value impacts. Note that the fair value changes of the net asset value between securitized HECM loans and HMBS (referred to as our reverse MSR) attributable to interest rate changes are effectively used as a hedge of our forward MSR portfolio. See further description of our hedging strategy in Item 3. Quantitative and Qualitative Disclosures about Market Risk.

(1) Includes realization of cash flows and fair value gains and losses due to inputs and assumptions.

Loss on reverse loans held for investment and HMBS-related borrowings, net increased $2.0 million for the three months ended September 30, 2023 as compared to the three months ended June 30, 2023 mostly due to unrealized fair value losses on the HECM loan portfolio, net of HMBS attributable to higher market rates, partially offset by tighter yield spread.

Gain on reverse loans held for investment and HMBS-related borrowings, net for the nine months ended September 30, 2023 was $3.9 million, a $38.4 million favorable change compared to the $34.5 million loss in the nine months ended September 30, 2022. The $37.4 million decline in unrealized fair value losses is mostly attributable to less significant market rate increase and yield spread tightening in the current period as compared to the same period of the prior year. Market interest rates and yield spreads directly impact projected asset life and the tail value of the HECM reverse mortgage loans. Tails represent the future draws of borrowers, scheduled and unscheduled, as well as capitalized interest and are included in the fair value of the underlying loans. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach the 98% maximum claim amount liquidation event more quickly. Tails are securitized on a monthly basis and a widening yield spread results in lower cash gain on securitization while a narrowing yield spread results in higher gains.

MSR Valuation Adjustments, Net

The following table summarizes the components of MSR valuation adjustments, net reported in our Servicing segment which include MSRs, MSR pledged liabilities and ESS financing liabilities at fair value:

(1) Excludes fair value changes of reverse mortgage loans held-for-investment and HMBS related borrowing due to rates and assumptions that are part of the MSR hedging strategy. Also refer to the MSR Hedging Strategy section of Item 3. Quantitative and Qualitative Disclosures about Market Risks for further detail.

MSR valuation adjustments, net includes the loss on the MSR portfolio associated with the realization of its expected cash flows, or runoff, due to the passage of time, and any fair value gains or losses due to inputs, market interest rates or assumptions, net of hedging gains and losses. Included in MSR valuation adjustments, net are fair value gains and losses of the MSR pledged liability associated with the MSR transfers that do not meet sale accounting treatment and the ESS financing liabilities for which we elected the fair value option and that is collateralized by MSRs. We engage third-party valuation experts who generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model and prepayment model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, generally the bulk market, incorporating available industry survey results and client feedback, and including risk premiums and liquidity adjustments. While interest rates are a key value driver, MSR fair value may change for other market-driven factors, including but not limited to the supply and demand of the market or the required yield or perceived value by investors of such MSRs.

The $21.0 million loss in MSR valuation adjustments, net for the three months ended September 30, 2023 is comprised of $35.4 million runoff and a $14.5 million fair value gain attributed to rates and assumptions, net of hedging. The runoff in the three months ended September 30, 2023 was flat compared to the three months ended June 30, 2023 (decreased by $0.4 million) consistent with the average serviced UPB in the respective periods. The $14.5 million fair value gain due to rates and assumptions, net of hedging is primarily due to an increase in market interest rates (e.g., the 10-year Treasury rate increased by 78 basis points in the three months ended September 30, 2023) that resulted in fair value gains net of hedging loss, partially offset by unfavorable assumption updates to reflect market participant perspectives on MSRs and MSR pledged liabilities and actual trade levels. The interest rate exposure was hedged under our MSR hedging strategy with an average 73% hedge coverage ratio during the three months ended September 30, 2023.

MSR valuation adjustments, net for the three months ended September 30, 2023 increased $29.5 million (lower loss) as compared to the three months ended June 30, 2023 primarily due to a $29.1 million favorable increase attributed to rate and assumption change, net of hedging gains and losses, as the portfolio runoff remained flat. This improvement is mostly driven by the change in hedge coverage ratio and a larger increase in market interest rates in the current quarter vs. the prior quarter. The 10-year Treasury rate increased by 78 basis points in the three months ended September 30, 2023 as compared to an increase of 33 basis points in the three months ended June 30, 2023. The average hedge coverage ratio decreased from 92% to 73% during the three months ended September 30, 2023.

As compared to the nine months ended September 30, 2022, MSR valuation adjustments, net declined $205.1 million (higher loss) mainly due to the loss reported in the nine months ended September 30, 2023 and the gain reported in the nine months ended September 30, 2022 attributed to rate and assumption change, net of hedging. The change from a gain to a loss is primarily due to changes in market interest rates (e.g., the 10-year Treasury rate increased by 71 basis points in the nine months ended September 30, 2023 and by 231 basis points in the nine months ended September 30, 2022), assumption updates discussed above and the change in hedge coverage ratio. The average hedge coverage ratio during the nine months ended September 30, 2023 increased from 40% to 97%, as compared to the nine months ended September 30, 2022. Our MSR hedging policy is designed to partially reduce the volatility of the MSR portfolio fair value due to market interest rates. Refer to Item 3 - Quantitative and Qualitative Disclosures about Market Risk for further detail on our hedging strategy and its effectiveness. The $20.8 million decrease in runoff is in part due to the ESS financing liabilities issued beginning in the third quarter of 2022 and MSR sales.

Compensation and Benefits

Compensation and benefits expense for the three months ended September 30, 2023 decreased $1.5 million or 5% as compared to the three months ended June 30, 2023 primarily as a result of a decrease in incentive compensation and lower headcount. The fair value of cash-settled share-based awards decreased in the quarter following the decline of our common stock price, as compared to an increase in the prior quarter.

As compared to the nine months ended September 30, 2022, Compensation and benefits expense for the nine months ended September 30, 2023 decreased $16.3 million or 17%, largely driven by a $15.0 million decrease in salary and benefits expense and a $1.2 million decrease in severance expense. The decrease in salaries and benefit expense is driven by a 27% reduction in our average U.S. Servicing headcount, reflecting our goal to improve efficiencies and create an industry leading cost structure, also driven by the further integration of reverse servicing. The offshore-to-total average headcount ratio for Servicing increased from 72% for the nine months ended September 30, 2022 to 78% for the nine months ended September 30, 2023.

Servicing Expense

Servicing expense primarily includes claim losses and interest curtailments on government-insured loans, provision expense for advances and servicing representation and warranties, and certain loan-volume related expenses.

Servicing expense declined $3.6 million in the three months ended September 30, 2023 as compared to the three months ended June 30, 2023, primarily due to a provision reversal in the third quarter of 2023 (reduction in our loss reserve) on our forward portfolio and additional expense on our reverse mortgage portfolio in the second quarter of 2023.

As compared to the nine months ended September 30, 2022, Servicing expense for the nine months ended September 30, 2023 was flat (declined $0.5 million or 1%). The $4.6 million reduction in satisfaction and interest on payoff expense attributable to lower payoff volume was largely offset by a $1.9 million increase in provision expense and claim losses on government-insured claims receivables driven by our reverse mortgage portfolio, and a $1.7 million increase in provision for indemnification driven by favorable settlements recorded in the nine months ended September 30, 2022.

Other Operating Expenses

Other operating expenses (total operating expenses less Compensation and benefits and Servicing expense) for the three months ended September 30, 2023 decreased by $3.4 million as compared to the three months ended June 30, 2023, mostly due to a $3.1 million decline in Professional services. We incurred lower legal expenses, lower litigation settlement expenses and lower other professional fees (driven by transactions in the second quarter of 2023) during the third quarter of 2023.

As compared to the nine months ended September 30, 2022, other operating expenses for the nine months ended September 30, 2023 increased by $4.5 million, with a $7.1 million increase in Professional services partially offset by a $1.6 million reduction in Occupancy and equipment expense driven by lower headcount and cost saving initiatives. The increase in

Professional services is mostly driven by reimbursements received from mortgage loan investors in the nine months ended September 30, 2022 related to prior legal expenses and payments received following resolution of legacy litigation matters. In addition, other professional services declined primarily due to cost reduction initiatives in our forward servicing and reverse subservicing businesses.

Other Income (Expense)

Other income (expense) primarily includes net interest expense and pledged MSR liability expense.

Interest expense for the three months ended September 30, 2023 was unchanged as compared to the three months ended June 30, 2023. The increase in market interest rates on our variable rate, asset-backed financing facilities was more than offset by a decrease in average debt balances. The $1.5 million increase in escrow interest expense driven by higher escrow balances was mostly offset by the $1.2 million decrease in MSR financing cost driven by a decline in the MSR facility balance. The $179.5 million transfers/sales of MSRs to MSR capital partners in the second and third quarter of 2023 resulted in the replacement of the MSR financing facilities by other financing liabilities at fair value (failed sale accounting).

As compared to the nine months ended September 30, 2022, interest expense for the nine months ended September 30, 2023 increased $51.8 million, or 68%, mostly driven by a more than 300 basis points increase in short-term market interest rates. The increase in market interest rates resulted in the $21.7 million increase in interest expense on MSR financing facilities partially offset by a lower average debt balance. The $8.9 million increase in interest expense on mortgage loan financing facilities was due to higher interest cost of funds and an increase in average debt balance as part of our reverse buyout opportunistic acquisition in the second quarter of 2023. Interest expense on advance match funded facilities increased $20.5 million despite the lower average borrowings as a result of market rate increase and our repayment of lower cost OMART term notes during the third quarter of 2022.

Interest income for the three months ended September 30, 2023 remained flat as compared to the three months ended June 30, 2023. As compared to the nine months ended September 30, 2022, interest income for the nine months ended September 30, 2023 increased by $6.0 million mostly due to the reverse mortgage buyouts opportunistically acquired in the second quarter of 2023 discussed above and larger reverse mortgage buyout volumes, partially offset by a decline in forward Ginnie Mae modification repurchase volumes.

Pledged MSR liability expense includes the servicing fee remittance related to the MSR sales or transfers that do not meet sale accounting criteria and are presented on a gross basis in our consolidated financial statements, together with the servicing spread remittance associated with our ESS financing liability at fair value. See Note 8 — Other Financing Liabilities, at Fair Value to the Unaudited Consolidated Financial Statements.

The following table provides the components of Pledged MSR liability expense:

(1) For MSR transfers that do not meet sale accounting criteria. See Note 8 — Other Financing Liabilities, at Fair Value.

Pledged MSR liability expense for the three months ended September 30, 2023 increased $3.4 million, as compared to the three months ended June 30, 2023, largely due to the growth of the transferred or sold MSR portfolio, with MAV and other counterparties, offset in part by the runoff of the Rithm portfolio.

As compared to the nine months ended September 30, 2022, Pledged MSR liability expense for the nine months ended September 30, 2023 increased $31.5 million, mostly due to $36.8 million increase in servicing spread remittance on the ESS financing liabilities issued beginning in the third quarter of 2022. This increase was offset in part by the decrease in net servicing fee remittance with the decline in the Rithm portfolio (non-Agency) exceeding the growth in the MAV and other portfolios (Agency).

Rithm represents the largest portfolio of MSRs transferred, failing sale accounting, and the largest component of Pledged MSR liability expense. The following table presents a subset of the above table related to Rithm, specifically the subservicing fees retained by Ocwen together with the associated serviced UPB on behalf of Rithm:

(1) Reported within Pledged MSR liability expense. The Rithm servicing fee includes the total servicing fees collected on behalf of Rithm relating to the MSR sold but not derecognized from our balance sheet. Under GAAP, we separately present servicing fees collected and remitted on a gross basis, with the servicing fees remitted to Rithm reported as Pledged MSR liability expense.

(2) Excludes ancillary income.

For the three months ended September 30, 2023, the net retained subservicing fee on our Rithm portfolio decreased $0.4 million or 2%, consistent with the underlying serviced UPB, as compared to the three months ended June 30, 2023. As compared to the nine months ended September 30, 2022, the net retained subservicing fee on our Rithm portfolio in the nine months ended September 30, 2023 decreased $5.2 million or 9%, driven by the decline in the average UPB due to portfolio runoff and prepayments. The retained subservicing fee percentage of UPB for Rithm (0.14%) reflects the nature of the portfolio (mostly non-Agency) and delinquencies (23% delinquent more than 30 days as of September 30, 2023). Also refer to Note 7 – Mortgage Servicing.

With the exception of the MSRs for which title has not transferred to Rithm ($10.1 billion UPB at September 30, 2023), the MSR sale accounting criteria for MSR previously sold to Rithm will be met effective December 31, 2023. The statement of operations will prospectively reflect subservicing fee revenue as opposed to the current gross presentation of servicing fee revenue (collections) and separate presentation of servicing fee remittances within Pledged MSR liability expense.

Earnings of equity method investee represents our 15% share of MAV Canopy. Earnings for the three months ended September 30, 2023 remained flat (decreased $0.1 million) as compared to the three months ended June 30, 2023. The $13.4 million decrease in earnings for the nine months ended September 30, 2023 is predominantly driven by the fair value gains recorded by MAV Canopy during the nine months ended September 30, 2022 on its MSR portfolio due to interest rates rising more in 2022 than 2023 (e.g., the 10-year Treasury rate increased by 71 basis points in the nine months ended September 30, 2023 and by 231 basis points in the nine months ended September 30, 2022).

Other, net expense for the three months ended September 30, 2023 decreased $4.8 million, as compared to the three months ended June 30, 2023, largely due to a decrease in early payoff protection expense in connection with our MSR sale transactions. As compared to the nine months ended September 30, 2022, similarly, Other, net expense for the nine months ended September 30, 2023 decreased $4.0 million primarily due to a decrease in early payoff protection expense.

ORIGINATIONS

We originate and purchase loans and MSRs through multiple channels, including retail, wholesale, correspondent, flow MSR purchase agreements, the Agency Cash Window and Co-issue programs and bulk MSR purchases.

We originate and purchase conventional loans (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government-insured (FHA, VA or USDA) forward mortgage loans. The GSEs and Ginnie Mae guarantee these mortgage securitizations. We originate HECM loans, or reverse mortgages, which are mostly insured by the FHA and we are an approved issuer of HMBS that are guaranteed by Ginnie Mae.

Within retail, our Consumer Direct channel for forward mortgage loans focuses on targeting existing servicing customers by offering them competitive mortgage refinance opportunities, where permitted by the governing servicing and pooling agreement. In doing so, we generate revenues for our forward lending business and protect the servicing portfolio by retaining these customers. A portion of our servicing portfolio is susceptible to refinance activity during periods of declining interest rates. Origination recapture volume and related gains are a natural economic hedge, to a certain degree, to the impact of declining MSR values as interest rates decline. In addition to rate and term refinance activities, our Consumer Direct channel targets purchase mortgage loans, cash-out, debt consolidation, mortgage insurance premium reduction, and new customer acquisition.

Our forward lending correspondent channel drives higher servicing portfolio replenishment. We purchase closed loans that have been underwritten to investor guidelines from our network of correspondent sellers and sell and securitize them, on a servicing retained basis. We offer correspondent sellers the choice to take out mandatory or best efforts contracts, under which the seller's obligation to deliver the mortgage loan becomes mandatory only when and if the mortgage is closed and funded. Additionally, we offer correspondent sellers the opportunity to leverage a non-delegated underwriting option for best-efforts deliveries. As of September 30, 2023, we have relationships with 688 approved correspondent sellers, or 88 new sellers since December 31, 2022.

We originate and purchase reverse mortgage loans through our retail, wholesale and correspondent lending channels, under the guidelines of the HECM reverse mortgage insurance program of the FHA. Loans originated under this program are generally insured by the FHA, which provides protection against risk of borrower default.

After origination, we sell the loans in the secondary mortgage market, through GSE and Ginnie Mae securitizations on a servicing retained basis. Origination revenue mostly includes gain on sale, which represents the difference between the origination or purchase value and the sale value of the loan including its MSR value, and fee income earned at origination. As the securitizations of reverse mortgage loans do not achieve sale accounting treatment and the loans are classified as Loans held for investment, at fair value, originations revenue mostly include the fair value changes of the loan from lock date to securitization date that are reported in Gain on reverse loans held for investment and HMBS-related borrowings, net and fee income that is reported in Other revenue, net.

We provide customary origination representations and warranties to investors in connection with our GSE loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved correspondent lenders. We recognize the fair value of the liability for our representations and warranties at the time of sale. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the mortgage loan investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur. We actively monitor our counterparty risk associated with our network of correspondent lenders-sellers.

We purchase MSRs through flow purchase agreements, the Agency Cash Window co-issue programs and bulk MSR purchases. The Agency Cash Window programs we participate in, and purchase MSR from, allow mortgage companies and financial institutions to sell whole loans servicing released to the respective agency and sell the MSR to the winning bidder. In addition, we partner with other originators to replenish our MSRs through flow purchase agreements. We do not provide or assume any origination representations and warranties in connection with our MSR purchases. As of September 30, 2023, we have relationships with 265 approved sellers through the Agency Cash Window co-issue programs, or 27 new sellers since December 31, 2022.

We initially recognize our MSR originations and purchases with the associated economics in our Originations segment, and transfer the MSR to our Servicing segment once the MSR is initially recognized on our balance sheet with all subsequent performance associated with the MSR, including funding cost, run-off and other fair value changes reflected in our Servicing segment.

We source additional servicing volume through our subservicing and interim servicing agreements, through our existing relationships and our enterprise sales initiatives. We do not report any revenue or gain associated with subservicing within the Originations segment as the impact is captured in the Servicing segment. However, sales efforts and certain costs - marginal compensation and benefits - are managed and reported within the Originations segment.

For the third quarter of 2023, our Originations business originated or purchased forward and reverse mortgage loans with a UPB of $4.4 billion and $181.0 million, respectively. In addition, we purchased $3.0 billion UPB MSR through the Agency Cash Window and flow purchase programs during the third quarter of 2023.

Significant Variables

The following factors could significantly impact the results of our Originations segment from period to period.

Mortgage Rates. Changes in mortgage rates directly impact the demand for both purchase and refinance forward mortgages and therefore impact the financial results of our Originations segment. Small changes in mortgage rates directly impact housing affordability for both first-time and move-up home buyers and affect their ability to purchase a home. For refinance loans, current market mortgage rates must be considered relative to the rates on the current mortgage debt outstanding. As the time and cost to refinance has decreased, relatively small reductions in mortgage rates can trigger higher refinancing activity. Given the large size of U.S. residential forward mortgage debt outstanding, the impact of mortgage rate changes can drive significant swings in mortgage refinance volume.

Market Size and Composition. The volume of new or refinanced loans is impacted by changes to existing, or development of new, GSE or other government sponsored programs. Changes in GSE or HUD guidelines and costs and the availability of alternative financing sources, such as non-Agency proprietary loans and traditional home equity loans, impact borrower demand for forward and reverse mortgages and therefore can impact the volume of mortgage originations.

Margins. Changes in pricing margin for mortgages are closely correlated with changes in market size for mortgage loans. As loan demand and market capacity move out of alignment, pricing adjusts. In a growing market, margins expand and in a contracting market, margins tighten as lenders seek to keep their production at or close to full capacity. Managing capacity and cost is critical as volumes change. Among our channels, our margins per loan are highest in the retail channel and lowest in the correspondent channel. We work directly with the borrower to process, underwrite and close loans in our retail and reverse wholesale channels. In our retail channel, we also identify the customer and take loan applications. As a result, our retail channel is the most people- and cost-intensive and experiences the greatest volume volatility.

Investor Demand. The liquidity of the secondary market for mortgage loans impacts the size of the mortgage loan market by defining loan attributes and credit guidelines for loans that investors are willing to buy and at what price. In recent years, the GSEs have been the dominant providers of secondary market liquidity for forward mortgages, keeping the product and credit spectrum relatively homogeneous and risk averse (higher credit standards).

Economic Conditions. General economic conditions can impact the growth and revenue of our Originations segment by impacting the capacity for consumer credit and the supply of capital. More specifically, employment levels and home prices are variables that can each have a material impact on mortgage volume. Employment levels, the level of wages and the stability of employment are underlying factors that impact credit qualification. The effect of home prices on lending volumes is significant and complex. As home prices go up, home equity increases and this improves the position of existing homeowners either to refinance or to sell their home, which often leads to a new home purchase and a new forward mortgage loan, or in the case of a reverse mortgage, increase the size of the mortgage loan available and the number of potential borrowers. However, if home prices increase rapidly, the effect on affordability for first-time and move-up buyers can dampen the demand for mortgage loans. The more restrictive standards for loan to value (LTV) ratios, debt to income (DTI) ratios and employment that characterize the current market amplify the significance and sensitivity of the housing market and related mortgage lending volumes to employment levels and home prices. If home prices decline due to increased mortgage interest rates or for other reasons, home sales may decline and it may be more difficult for homeowners to refinance existing mortgages, thereby negatively impacting mortgage volume.

The following table presents the results of operations of our Originations segment. The amounts presented are before the elimination of balances and transactions with our other segments:

(1) Includes ancillary fee income related to MSR acquisitions reported as Servicing and subservicing fees at the consolidated level of $0.8 million and $1.6 million for the three and nine months ended September 30, 2023, respectively, $0.4 million for the three months ended June 30, 2023 and $1.6 million for the nine months ended September 30, 2022.

The following table provides selected operating statistics for our Originations segment:

(1) Loan production excludes reverse mortgage loan draws by borrowers disbursed subsequent to origination that are reported within the Servicing segment.

Gain on Loans Held for Sale, Net

The following table provides information regarding Gain on loans held for sale by channel and the related forward loan origination volumes and margins (excluding fees that are presented in Other revenue, net):

(1) Includes realized gains on loan sales and related new MSR capitalization, changes in fair value of IRLCs, changes in fair value of loans held for sale and economic hedging gains and losses.

(2) Ratio of gain on Loans held for sale to Origination UPB. Note that the ratio differs from the day-one gain on sale margin upon lock.

(3) Defined as the UPB of loans funded in the period.

Gain on loans held for sale, net for the three months ended September 30, 2023 decreased by $1.2 million as compared to the three months ended June 30, 2023, mostly in our Correspondent channel. The gain decrease is due to a decrease in margin, partially offset by a 60% increase in volume quarter over quarter. The elevated and rising interest rate environment continues to adversely impact both purchase and refinance borrower activities due to a decline in affordability. The decrease in margin is driven by competitive pressure in the market and uncertain market conditions.

As compared to the nine months ended September 30, 2022, Gain on loans held for sale, net for the nine months ended September 30, 2023 declined $22.8 million or 49%, with a $17.7 million decrease in our Consumer Direct channel and a $5.0 million decrease in our Correspondent channel. The decline in Consumer Direct gain is driven by a 77% decrease in loan production volume, offset in part by a higher margin. We continue to expand higher margin products such as Ginnie Mae loans and best efforts deliveries. In our Correspondent channel, the lower gain is mostly due to a 20% decrease in loan production volume.

Gain on Reverse Loans Held for Investment and HMBS-Related Borrowings, Net

The following table provides information regarding Gain on reverse loans held for investment and HMBS-related borrowings, net of the Originations segment that comprises fair value changes of the pipeline and unsecuritized reverse mortgage loans held for investment, at fair value, together with volume and margin:

(1) Defined as the UPB of loans funded in the period.

(2) Ratio of origination gain and fees - see (3) below - to origination UPB. Note that the ratio includes gains or losses on IRLCs.

(3) Includes gain on new origination, and loan fees and other. Includes non-cash gain on securitization of newly originated loans of $4.7 million and $14.1 million for the three and nine months ended September 30, 2023, respectively, $4.7 million for the three months ended June 30, 2023 and $27.6 million for the nine months ended September 30, 2022.

We reported $5.7 million Originations Gain on reverse loans held for investment and HMBS-related borrowings, net for the three months ended September 30, 2023, a $0.8 million, or 17% increase as compared to the three months ended June 30, 2023, primarily driven by higher margins in our Correspondent and Wholesale channels, partially offset by lower margins in our Retail channel. The higher margins were mostly driven by HECM spreads tightening (approximately 5 basis points) during the third quarter of 2023, while spreads widened (approximately 20 basis points) during the second quarter of 2023 mostly due to economic conditions and investors’ interest for reverse mortgage products.

As compared to the nine months ended September 30, 2022, Gain on reverse loans held for investment and HMBS-related borrowings, net for the nine months ended September 30, 2023 decreased $34.2 million, or 66%. $26.0 million of the gain decrease is attributable to our Retail channel. The decrease is primarily driven by a decline in volume. While the Retail channel was mostly impacted by declining volumes, all channels experienced significantly lower volumes largely due to a drastic increase in market interest rates. Industry-wide HECM securitization volume saw a 66% decrease in volumes when comparing these two periods, and industry-wide HECM endorsements were similarly down 52%. By comparison, our funded volumes were down 60% in this same time period. Higher rates directly reduce HECM loan proceeds available to borrowers and have been a material driving force in reducing HECM market volume. While our Retail and Correspondent channels reported higher margins, and our Wholesale channel margin was flat, the aggregate margin decreased due to the significant decline in relative weight of the higher margin Retail channel due to its more pronounced volume decline.

Other Revenue, net

Other revenue for the three months ended September 30, 2023 increased $2.0 million as compared to the three months ended June 30, 2023 primarily due to an increase in correspondent fees with higher origination volume. As compared to the nine months ended September 30, 2022, Other revenue for the nine months ended September 30, 2023 declined $7.4 million primarily due to a decline in volume.

MSR Valuation Adjustments, Net

MSR valuation adjustments, net includes revaluation gains on certain MSRs opportunistically purchased through the Agency Cash Window programs, and flow purchases. As an aggregator of MSRs, we may purchase MSRs from smaller originators with a purchase price at a discount to fair value and we recognize valuation adjustments for differences in exit markets in accordance with the accounting fair value guidance. We record such valuation adjustments as MSR valuation adjustments, net within the Originations segment since the segment’s business objective is the sourcing of new MSRs at targeted returns. Quarter over quarter changes in MSR valuation adjustments, net are mostly due to volume changes.

Operating Expenses

Operating expenses for the three months ended September 30, 2023 increased $1.3 million, or 6%, as compared to the three months ended June 30, 2023. The increase is primarily attributed to the increase in production volume.

As compared to the nine months ended September 30, 2022, Operating expenses for the nine months ended September 30, 2023 declined $59.9 million or 49%, as a result of our efforts to right size our resources to lower market opportunities. Compensation and benefits decreased $38.5 million, or 55% with a $25.2 million decrease in salaries and benefit expenses, a $9.3 million decrease in commissions due to lower production volume and headcount and a $3.8 million decrease in severance expense. The decrease in salaries and benefit expenses is primarily driven by the 54% decrease in Originations average total headcount. Other operating expenses (total operating expenses less Compensation and benefits) decreased $21.3 million as compared to the nine months ended September 30, 2022, primarily attributed to the decline in production volumes. All expense categories decreased, including a $6.2 million decrease in Origination expense driven by lower production volume, $4.7 million decrease in advertising expense, $2.8 million decrease in Professional services driven by lower outsourced resources, $2.2 million decrease in Occupancy and equipment expense driven by lower occupancy cost allocation and mailing and postage expenses, $2.0 million decrease in Technology and communications due to lower origination volume and $2.3 million decrease in overhead allocations due to lower corporate overhead and average headcount.

Other Income (Expense)

Interest income consists primarily of interest earned on newly-originated and purchased loans during the pipeline period prior to securitization or sale to investors. Interest expense is incurred to finance the mortgage loans during the same pipeline period, generally approximately 20 days. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, commonly referred to as warehouse lines. Our net interest margin is driven by the difference between the average mortgage note rate and the average warehouse line cost of funds, and by the average number of days loans remain in the pipeline.

Interest income for the three months ended September 30, 2023 increased $5.6 million as compared to the three months ended June 30, 2023 primarily due to the increase in origination volume. Similarly, interest expense for the three months ended September 30, 2023 increased $5.9 million as compared to the three months ended June 30, 2023 primarily due to the increase in average warehouse facility debt balances consistent with higher average held for sale loan balances.

As compared to the nine months ended September 30, 2022, interest income for the nine months ended September 30, 2023 increased $20.9 million primarily due to higher interest rates, offset in part by lower origination volume. Similarly, interest expense for the nine months ended September 30, 2023 increased $25.7 million primarily due to an increase in effective interest rates.

CORPORATE ITEMS AND OTHER

Corporate Items and Other includes revenues and expenses of corporate support services, our reinsurance business CRL, inactive entities, and our other business activities that are currently individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash, gain or loss on repurchases of debt, interest expense on unallocated corporate debt and foreign currency exchange gains or losses. Interest expense on corporate debt is allocated to the Servicing segment and the Originations segment based on relative financing requirements, with the exception of the OFC Senior Secured Notes. Accordingly, the financing cost of the Servicing and Originations segments reflects and is consistent with the financing structure of the licensed entity PMC that carries out these businesses and does not depend on the financing structure strategy of its parent, as a holding company.

Corporate support services include finance, facilities, human resources, internal audit, legal, risk and compliance, capital markets and technology functions. Certain expenses incurred by corporate support services are allocated to the Servicing and Originations segments using various methodologies intended to approximate the utilization of such services. Various measurements of utilization of corporate support services are maintained, primarily time studies, personnel volumes and service consumption levels. Support service costs not allocated to the Servicing and Originations segments are retained in the Corporate Items and Other segment along with certain other costs including certain litigation and settlement related expenses or recoveries, and other costs related to operating as a public company.

CRL, our wholly-owned captive reinsurance subsidiary, provides re-insurance related to coverage on REO properties owned or serviced by us. CRL assumes a quota share of REO insurance coverage written by a third-party insurer under a blanket policy issued to PMC. The underlying REO policy provides coverage for direct physical loss on commercial and residential properties, subject to certain limitations. Under the terms of the reinsurance agreement, CRL assumes a 60% quota share of premiums and all related losses and loss adjustment expenses incurred by the third-party insurer. The reinsurance agreement expires on June 30, 2024, but may be terminated by either party at any time with six months advance written notice. The agreement will automatically renew for additional one-year terms unless either party provides 180 days advance written notice prior to renewal.

The following table presents selected results of operations of Corporate Items and Other. The amounts presented are before the elimination of balances and transactions with our other segments:

Compensation and Benefits

Compensation and benefits expense for the three months ended September 30, 2023 declined $1.3 million, or 6%, as compared to the three months ended June 30, 2023 primarily as a result of a decrease in incentive compensation with a decrease in the fair value of cash-settled share-based awards in the quarter following the decline of our common stock price, as compared to an increase in the prior quarter.

As compared to the nine months ended September 30, 2022, Compensation and benefits expense for the nine months ended September 30, 2023 increased $3.0 million, or 5%, primarily as a result of an $9.8 million increase in incentive compensation offset by a $3.6 million decline in severance and a $2.9 million decline in salaries and benefit expense. The increase in incentive compensation is primarily due to an increase in share-based awards expense associated with the change in our common stock price, new awards and lower expense in the first quarter of 2022 due to forfeitures. The average Corporate headcount declined by 11% and the offshore-to-total average headcount ratio increased from 73% for the nine months ended September 30, 2022 to 75% for the nine months ended September 30, 2023.

Professional Services

Professional services expense for the three months ended September 30, 2023 increased $33.2 million as compared to the three months ended June 30, 2023, primarily due to the reversal of our accrual related to the CFPB matter resolved in the second quarter of 2023 and certain recoveries of prior years’ legal expenses from private mortgage insurers recorded in the second quarter of 2023.

As compared to the nine months ended September 30, 2022, Professional services expense for the nine months ended September 30, 2023 declined $32.5 million due to a $27.9 million decline in legal expense and a $3.8 million decline in other professional fees. The net decline in legal expenses is mostly due to the reversal of our accrual related to the CFPB matter during the second quarter of 2023, as described above, offset by a $3.4 million reduction in reimbursements received from mortgage loan investors related to prior year legal expenses. The decline in other professional fees is mostly due to lower insurance expense driven by cost reduction initiatives and our exit or downsize of certain leased office facilities in the second half of 2022, and lower utilization of consulting services related to corporate strategy and business initiatives.

Other Operating Expenses

Occupancy and equipment expense was mostly flat for the three months ended September 30, 2023 as compared to the three months ended June 30, 2023. As compared to the nine months ended September 30, 2022, Occupancy and equipment expense for the nine months ended September 30, 2023 declined $4.1 million primarily due to our exit or downsize of certain leased office facilities in the second half of 2022, offset in part by a treduction in expense allocated to the Servicing and Originations segments due to lower corporate overhead and headcount.

Technology and communications expense for the three months ended September 30, 2023 was mostly flat as compared to the three months ended June 30, 2023. As compared to the nine months ended September 30, 2022, Technology and communication expense for the nine months ended September 30, 2023 declined $2.2 million mainly due to cost reduction initiatives.

As compared to the nine months ended September 30, 2022, Servicing and originations expense for the nine months ended September 30, 2023 increased $3.2 million primarily due to an increase in our claim losses associated with a higher average number of REO properties insured, consistent with the increase in CRL reinsurance premium revenue.

Other expenses for the three months ended September 30, 2023 remained mostly flat as compared to the three months ended June 30, 2023. As compared to the nine months ended September 30, 2022, Other expenses for the nine months ended September 30, 2023 decreased $2.7 million mainly driven by a decline in bank charges due to higher earnings credits as a result of higher interest rates, and other corporate expenses due to cost reduction initiatives.

LIQUIDITY AND CAPITAL RESOURCES

Overview

In the normal course of business, we are actively engaged with our lenders and as a result, renew, replace or extend our debt agreements to the extent necessary to finance our operations and optimize our financing costs. See Note 12 – Borrowings to the Unaudited Consolidated Financial Statements for additional information.

A summary of borrowing capacity under our advance facilities, mortgage warehouse facilities and MSR financing facilities is as follows:

(1) Total Borrowing Capacity represents the maximum amount which can be borrowed, subject to eligible collateral. Available Borrowing Capacity represents Total Borrowing Capacity less outstanding borrowings.

At September 30, 2023, none of the available borrowing capacity under our advance financing facilities could be funded based on the amount of eligible collateral that had been pledged to such facilities. Also, none of our uncommitted borrowing capacity was available to fund advances at September 30, 2023 under our Ginnie Mae MSR financing facility based on the amount of eligible collateral. We may utilize committed borrowing capacity under our mortgage loan financing facilities and MSR financing facilities to the extent we have sufficient eligible collateral to borrow against and otherwise satisfy the applicable conditions to funding. At September 30, 2023, we had no committed borrowing capacity under our mortgage loan financing facilities and no committed borrowing capacity under our MSR financing facilities, based on the amount of eligible collateral. Uncommitted amounts can be advanced at the discretion of the lender, and there can be no assurance that any uncommitted amounts will be available to us at any particular time.

At September 30, 2023, our total liquidity was $194.0 million compared to $219.1 million at December 31, 2022, which comprised an unrestricted cash position of $194.0 million compared to $208.0 million at December 31, 2022. The decrease of our cash position is primarily driven by our $13.9 million corporate debt buy-back (PMC Senior Secured Notes) at the end of September 2023.

Effective September 30, 2023, we implemented the revised minimum capital and liquidity requirements for GSE and Ginnie Mae seller/servicers. Also refer to Note 18 – Regulatory Requirements.

We typically invest cash in excess of our immediate operating needs in deposit accounts and other liquid assets. We optimize our daily cash position to reduce financing costs while closely monitoring our liquidity needs and ongoing funding requirements. We regularly monitor and project cash flows over various time horizons to anticipate and mitigate liquidity risk. We maintain liquidity buffers to be responsive to the level of risks, including stressed market interest rate conditions and operational risk.

Use of Funds

Our primary near-term uses of funds in the normal course include:

• Payment of operating costs and corporate expenses;
• Payments for servicing advances in excess of collections;
• Investment in MSRs, other asset acquisitions and MAV Canopy equity contributions;
• Originated, purchased and repurchased loans;
• Payment of margin calls under our MSR financing facilities and derivative instruments;
• Repayments of borrowings, including under our MSR financing, advance financing and warehouse facilities, and payment of interest expense; and
• Net negative working capital and other general corporate cash outflows.

We have short-term commitments to lend $937.1 million in connection with our forward and reverse mortgage loan IRLCs outstanding at September 30, 2023. In addition, we have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $1.8 billion at September 30, 2023. During the nine months ended September 30, 2023, we funded $198.6 million out of the $1.8 billion borrowing capacity available as of December 31, 2022. As an HMBS issuer, we are required to repurchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the loan is equal to or greater than 98% of the maximum claim amount (MCA repurchases). We carry these repurchases until reimbursement by HUD and/or property liquidation if inactive. Our reverse subservicing clients bear the financial obligation and risks associated with purchasing loans out of securitization pools within the portfolio we subservice.

Regarding the current maturities of our borrowings, as of September 30, 2023, we have approximately $1.3 billion of debt outstanding that would either come due, begin amortizing or require partial repayment in the next 12 months. This amount is comprised of $868.3 million of borrowings under forward and reverse mortgage loan warehouse facilities, none of notes under advance financing facilities, $431.3 million outstanding under Agency and Ginnie Mae MSR financing facilities maturing in the next 12 months and $14.7 million of scheduled principal amortization on the PLS Notes secured by PLS MSRs.

As servicer, we are required to advance to investors the loan P&I installments not collected from borrowers for those delinquent loans, including those on forbearance plans. Loan payoffs and prepayments are a source of additional liquidity and are dependent on the interest rate environment. We also advance T&I and Corporate advances primarily on properties that are in default or have been foreclosed. Our obligations to make these advances are governed by servicing agreements or guides, depending on investors or guarantor. As subservicer, we are also required to make P&I, T&I and Corporate advances on behalf of servicers following the servicing agreements or guides. However, servicers are generally required to reimburse us within 30 days of our advancing under the terms of the subservicing agreements, and we are generally reimbursed by Rithm the same day we fund P&I advances, or within no more than three days for servicing advances and certain P&I advances under the Ocwen agreements.

We are generally subject to daily margining requirements under the terms of our MSR financing facilities and daily cash calls for our TBAs, interest rate swap futures or other derivatives. Declines in fair value of our MSRs due to declines in market interest rates, assumption updates or other factors require that we provide additional collateral to our lenders under MSR financing facilities. Similarly, declines in fair value of our derivative instruments require that we provide additional collateral to the clearing counterparties. While the objective of our hedging strategy is to reduce volatility due to interest rates, it is also designed to address cash and liquidity considerations.

Our medium- and long-term requirements for cash include:

• Payment of interest and principal repayment of our corporate debt that matures in 2026 and 2027;
• Any payments associated with the confirmation of loss contingencies; and
• Any other payments required under contractual obligations discussed above that extend beyond one year.

We are focused on ensuring that we have sufficient liquidity sources to continue to operate and support our business initiatives. We continuously evaluate alternative financings to diversify our sources of funds, optimize maturities and reduce our funding cost.

Sources of Funds

Our primary sources of funds for near-term liquidity in normal course include:

• Collections of servicing and subservicing fees and ancillary revenues;
• Collections of advances in excess of new advances;
• Proceeds from match funded advance financing facilities;
• Proceeds from other borrowings, including warehouse facilities, MSR financing facilities, MSR transfers and ESS financing;
• Proceeds from sales and securitizations of originated loans and purchased loans; and
• Net positive working capital from changes in other assets and liabilities.

Servicing advances are an important component of our business and represent amounts that we, as servicer, are required to advance to, or on behalf of, our servicing clients if we do not receive such amounts from borrowers. Our use of advance financing facilities is integral to our cash and liquidity management strategy. Revolving variable funding notes issued under our advance financing facilities typically have a revolving period of 12 months. Additionally, certain of our financing and subservicing agreements permit us to retain advance collections for a period ranging from one to two business days before remittance, thus providing a source of short-term liquidity.

We use mortgage loan repurchase and participation facilities (commonly called warehouse lines) to fund newly-originated or purchased loans on a short-term basis until they are sold or securitized to secondary market investors, including GSEs or other third-party investors, and to fund repurchases of certain Ginnie Mae forward loans, HECM loans, second-lien loans and other types of loans. These facilities contain eligibility criteria that include aging and concentration limits by loan type among other provisions. Currently, our financing agreements generally have maximum terms of 364 days. The funds are typically repaid using the proceeds from the sale of the loans to the secondary market investors, usually within 30 days.

We also rely on the secondary mortgage market as a source of consistent liquidity to support our lending operations. Substantially all of the mortgage loans that we originate or purchase are sold or securitized in the secondary mortgage market in the form of residential mortgage backed securities guaranteed by Fannie Mae or Freddie Mac and, in the case of mortgage backed securities guaranteed by Ginnie Mae, are mortgage loans insured or guaranteed by the FHA, VA or USDA. In June 2023, we issued a private placement securitization of reverse mortgage buyouts with an initial principal amount of $264.9 million, expanding our access to capital markets and reducing our reliance on warehouse financing facilities.

We regularly evaluate financing structure options that we believe will most effectively provide the necessary capacity to support our investment plans, address upcoming debt maturities and accommodate our business needs. We strive to diversify our sources of funds and reduce our reliance on existing asset-backed financing facilities. We continuously evaluate the allocation of our capital to MSR investments, the related returns, funding and liquidity requirements. The relationship with MAV and other MSR capital partners may continue to provide PMC with an additional means to finance MSRs and maintain liquidity while maintaining servicing volume. With the development of MAV and our relationships with other MSR capital partners, additional opportunities to rebalance our servicing and subservicing portfolio mix are available to us and may result in further sales of MSRs while we would perform subservicing for the sold portfolio (i.e., subservicing retained), or further ESS issuances.

Covenants

Our debt agreements contain various qualitative and quantitative covenants including financial covenants, covenants to operate in material compliance with applicable laws and regulations, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates. These covenants may limit the manner in which we conduct our business and may limit our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, nonpayment of principal or interest, noncompliance with our covenants, breach of representations, the occurrence of a material adverse change, insolvency, bankruptcy, certain material judgments and litigation and changes of control. See Note 12 – Borrowings to the Unaudited Consolidated Financial Statements for additional information regarding our covenants. The most restrictive liquidity requirement under our debt agreements is for a minimum of $75.0 million in consolidated liquidity, as defined, under certain of our mortgage loan financing and MSR financing facilities agreements. At September 30, 2023, we held unrestricted cash in excess of this minimum amount.

In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations, and other legal remedies, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We believe that we are in compliance with the covenants in our debt agreements as of September 30, 2023.

Credit Ratings

Credit ratings are intended to be an indicator of the creditworthiness of a company’s debt obligations. Lower ratings generally result in higher borrowing costs and reduced access to capital markets. The following table summarizes our current ratings and outlook by the respective nationally recognized rating agencies. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time.

On January 24, 2023, S&P affirmed the long-term corporate rating of Ocwen at “B-” and affirmed the “B” rating of the PMC Senior Secured Notes.

It is possible that additional actions by credit rating agencies could have a material adverse impact on our liquidity and funding position, including materially changing the terms on which we may be able to borrow money.

Cash Flows

Our operating cash flow is primarily impacted by operating results, changes in our servicing advance balances, the level of mortgage loan production, the timing of sales and securitizations of mortgage loans, and the margin calls required under our MSR financing facilities or derivative instruments. We classify purchases of MSRs through flow purchase agreements, Agency Cash Window and bulk acquisitions as investing activity. We classify changes in HECM loans held for investment as investing activity and changes in the related HMBS borrowings as financing activity.

Our Rithm agreements represent an important component of our liquidity management, and have a significant impact on our consolidated statements of cash flows. Because the payments we received in connection with our agreements with Rithm were recorded as secured financings, additions to, and reductions in, the balance of those secured financings were presented as financing activity in our consolidated statements of cash flows. Excluding the impact of changes to the secured financings attributed to changes in fair value, changes in the balance of these secured financings are reflected in cash flows from operating activities despite having no impact on our consolidated cash balance.

Our cash flows are summarized as follows:

$ in millions

Cash flows for the nine months ended September 30, 2023

Our operating activities used $271.4 million of cash primarily due to net cash paid on loans held for sale of $488.7 million as loan production volume exceeded sales. Offsetting operating cash inflows include net collections of servicing advances of $147.7 million.

Our investing activities used $43.6 million of cash. The primary use of cash in our investing activities was $89.6 million to purchase MSRs. Offsetting cash inflows include $36.3 million net cash inflows in connection with our HECM reverse mortgages, $2.7 million of capital distributions, net of contributions, from our equity method investee MAV Canopy and $6.1 million proceeds from the sale of advances.

Our financing activities provided $306.7 million of cash. Financing cash inflows are primarily comprised of $332.9 million net from borrowings under our mortgage loan financing facilities, including the OLIT securitization, due to the increase in loans held for sale, $173.1 million of proceeds from the sale of MSRs accounted for as a financing in connection with sales of MSRs. and $68.7 million of proceeds from excess servicing spread (ESS) financing. Offsetting cash outflows include $110.6 million of net repayments on advance match funded liabilities due to the decline in servicing advances, $51.0 million of net repayments on MSR financing facilities, and $70.3 million of net payments on the financing liabilities related to MSRs transferred and ESS financings due to runoff. We also paid $12.5 million to repurchase $13.9 million of our 7.875% PMC Senior Secured Notes. Cash inflows of $783.7 million received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, were more than offset by repayments on the related financing liability of $802.4 million.

Cash flows for the nine months ended September 30, 2022

Our operating activities provided $270.6 million of cash including net collections of servicing advances of $101.8 million, mostly T&I advances, and net cash received on loans held for sale of $38.2 million due to higher forward loan production volumes. In addition, we received earnings distributions of $19.3 million from MAV Canopy.

Our investing activities used $220.6 million of cash. The primary uses of cash in our investing activities include $174.9 million to purchase MSRs, $171.4 million net cash outflows in connection with our HECM reverse mortgages, $6.9 million acquisition of reverse subservicing agreement and $15.5 million of capital contributions, net of distributions, to MAV Canopy. Offsetting cash inflows include $149.1 million proceeds from the sale of MSRs to an unrelated third party.

Our financing activities used $41.6 million of cash. Cash outflows include $143.5 million net repayments of borrowings under our mortgage loan financing facilities and MSR financing facilities due to the decline in loans held for sale, $54.8 million of net repayments on advance match funded liabilities due to the decline in servicing advances, and $80.6 million of net payments on the financing liabilities related to MSRs transferred due to runoff. We also paid $23.6 million to repurchase $25.0 million of our 7.875% PMC Senior Secured Notes and $38.8 million to repurchase 1,338,498 shares of our common stock. Cash inflows include $1.5 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, partially offset by repayments on the related financing liability of $1.3 billion, $78.7 million of proceeds from the sale of MSRs accounted for as a financing in connection with sales of MSRs to MAV, and $36.2 million of proceeds from the ESS financing.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events based on information available at the date of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. We have processes in place to monitor these judgments and assumptions, and management is required to review critical accounting policies and estimates with the Audit Committee of the Board of Directors.

Our accounting policies and estimates involving significant judgments primarily relate to fair value measurements, income taxes, allowance for losses, and loss contingencies, including indemnification obligations and litigation proceedings. We use fair value measurements to record fair value adjustments to certain instruments in our statement of operations and to determine fair value disclosures, including but not limited to MSRs, Pledged MSR liabilities, Loans held for sale, Loans held for investment-Reverse mortgages, and HMBS-related borrowings. As of September 30, 2023, 89% of our assets and 72% of our liabilities were reported at fair value, with fair value changes reported in our statement of operations. Substantially all our assets and liabilities at fair value were classified as Level 3 instruments due to unobservable inputs.

Our significant accounting policies and critical accounting estimates are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 in Note 1 to the Consolidated Financial Statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations under “Critical Accounting Policies and Estimates.”

RECENT ACCOUNTING DEVELOPMENTS

See Note 1 - Organization and Basis of Presentation to the Unaudited Consolidated Financial Statements for information related to recent accounting standards updates.

Interest Rates

Our principal market risk exposure is the impact of interest rate changes on our mortgage-related assets and commitments, including MSRs, loans held for sale, loans held for investment, IRLCs and other derivative instruments. In addition, changes in interest rates could materially and adversely affect the amount of escrow and float income, the volume of mortgage loan originations or result in MSR fair value changes. We also have exposure to the effects of changes in interest rates on our floating-rate borrowings, including MSR and advance financing facilities.

Our management-level Market Risk Committee establishes and maintains policies that govern our risk appetite and associated hedging programs, including such factors as market volatility, duration and interest rate sensitivity measures, limits, targeted hedge ratios, the hedge instruments that we are permitted to use in our hedging activities, the counterparties with whom we are permitted to enter into hedging transactions and our liquidity risk profile. See Note 14 – Derivative Financial Instruments and Hedging Activities to the Unaudited Consolidated Financial Statements for additional information regarding our use of derivatives.

MSR Hedging Strategy

MSRs are carried at fair value with changes in fair value being recorded in earnings in the period in which the changes occur. The fair value of MSRs is subject to changes in market interest rates, among other inputs and assumptions.

The objective of our risk management MSR hedge policy is to protect against the fair value volatility of interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. The interest-rate sensitive MSR portfolio exposure is defined as follows:

• Agency MSR portfolio,
• expected Agency MSR bulk transactions subject to letters of intent (LOI),
• less the Agency MSRs subject to our sale agreements with Rithm, MAV and others (See Note 8 — Other Financing Liabilities, at Fair Value),
• less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings (internally referred to as Reverse MSR).

The hedge coverage ratio, defined as the ratio of hedge and asset rate sensitivity (referred to as DV01) at the time of measurement, is subject to lower and upper thresholds, as modeled. Our MSR hedge policy establishes a minimum 25% and 30% hedge coverage ratio required for interest rate declines less than, and more than 50 basis points, respectively. Prior to September 30, 2022, the hedge coverage ratio was required to remain within a minimum of 40% and maximum of 60%. MSRs subject to LOI may be covered under a separate hedge coverage ratio requirement sufficient to preserve the economics of the intended transactions. Accordingly, the changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate changes. We periodically evaluate the hedge coverage ratio at the intended shock interval to determine if it is relevant or warrants adjustment based on market conditions, symmetry of interest rate risk exposure, and liquidity impacts of both the hedge and asset profile under shock scenarios. As the market dictates, management may choose to maintain hedge coverage ratio levels at or beyond the above thresholds, with approval of the Market Risk Committee, in order to preserve liquidity and/or optimize asset returns. During the second quarter of 2023, management raised its minimum hedge coverage ratio to 60%. In addition, while DV01 measures may remain within the range of our hedging strategy’s objective, actual changes in fair value of the derivatives and MSR portfolio may not offset to the same extent, due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and hedging instruments, among other factors. We continuously evaluate the use of hedging instruments to strive to enhance the effectiveness and efficiency of our interest rate hedging strategy.

The following table illustrates the interest rate sensitivity of our MSR portfolio exposure and associated hedges at September 30, 2023. Hypothetical change in values of the MSR and hedges are presented under a set instantaneous +/- 25 basis point parallel move in rates. Refer to the description below under Sensitivity Analysis for more details. Changes in fair value cannot be extrapolated because the relationship to the change in fair value may not be linear and other factors may apply, such as change in yield or other assumptions. The amounts based on market risk sensitive measures are hypothetical and presented for illustrative purposes only.

(1) The baseline for the hypothetical change in fair value is based on a 10-year swap rate of 4.55% at September 30, 2023.

(2) The hypothetical hedge coverage ratio above is calculated as the change in fair value of the total hedge position divided by the change in value of the Agency MSR position.

The above hypothetical hedge coverage ratio reflects the instrument sensitivities as of September 30, 2023. The actual hedge coverage ratio during the three months ended September 30, 2023, as monitored by Risk Management, may be summarized as follows:

Our derivative instruments include Agency TBAs with different banking counterparties, exchange-traded interest rate swap futures and interest rate options. TBAs, or To-Be-Announced securities are actively traded, forward contracts to purchase or sell Agency MBS on a specific future date. These derivative instruments are not designated as accounting hedges. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations, within the Servicing segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to minimize the use of third-party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements.

The derivative instruments are subject to margin requirements, posted as either initial or variation margin. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties through margin calls, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating may require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.

Loans Held for Investment and HMBS-related Borrowings

The fair value of our HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, while lower interest rates extend the timeline to reach maximum claim amount liquidation. Additionally, portfolio value is heavily influenced by market spreads for fixed and discount margin for ARMs.

The fair value of our securitized HECM loan portfolio net of the fair value of the HMBS-related borrowings represent a reverse mortgage economic MSR (HMSR) for risk management purposes. The HMSR acts as a partial hedge for our forward MSR value sensitivity. This HMSR exposure is used as a partial offset to our forward MSR exposure and managed as part of our MSR hedging strategy described above.

Pipeline Hedging Strategy - Loans Held for Sale and IRLCs

In our Originations business, we are exposed to interest rate risk and related price risk during the period from the date of the interest rate lock commitment through (i) the lock commitment cancellation or expiration date or (ii) through the date of sale of the resulting loan into the secondary mortgage market. Loan commitments for forward loans generally range from 5 to 75 days, with the majority of our commitments to borrowers for 40 to 60 days and our commitments to correspondent sellers for 5 to 15 days. The interest rate exposure of loans held for sale and IRLCs is economically hedged with derivative instruments, including forward sales of Agency TBAs. The objective of our pipeline hedging strategy is to provide hedge coverage of locks and loans within certain tolerance levels. The net daily market risk position of net pull-though adjusted locks and loans held for sale, less the offsetting hedges of the forward and reverse pipelines, is monitored daily and its daily limit is the greater of +/- 5% or +/- $15 million. We report changes in fair value of these derivative instruments in gain on loans held for sale in our consolidated statements of operations, within the Originations segment. We establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to minimize the use of third-party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements. Reverse origination pipeline is hedged under the same principles as described above, for unsecuritized loans held for investment.

Interest Rate-Sensitive Financial Instruments

The tables below present the notional amounts of our financial instruments that are sensitive to changes in interest rates and the related fair value of these instruments at the dates indicated. We use certain assumptions to estimate the fair value of these instruments.

(1) See Note 3 – Fair Value to the Unaudited Consolidated Financial Statements for additional fair value information on financial instruments.

(2) Net of valuation allowances and including non-performing loans.

(3) Excludes financing liabilities that result from sales of assets that do not qualify as sales for accounting purposes and, therefore, are accounted for as secured financings, which have no contractual maturity and are amortized over the life of the related assets.

(4) Amounts are exclusive of any related discount or unamortized debt issuance costs.

Sensitivity Analysis

Fair Value MSRs, Loans Held for Sale, Loans Held for Investment and Related Derivatives

We assess and manage our interest rate risk primarily using sensitivity analyses. Sensitivity analyses are used to determine the impact on the balance sheet and earnings across various interest rate scenarios that could be expected over different time horizons. The following table summarizes the estimated change in the fair value of our MSRs, HECM loans held for investment and loans held for sale that we have elected to carry at fair value as well as any related derivatives at September 30, 2023, given hypothetical instantaneous parallel shifts in the yield curve. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship to the change in fair value may not be linear.

(1) Primarily reflects the impact of market interest rate changes on projected prepayments on the Agency MSR portfolio, Rithm and MAV pledged MSR financing liabilities and ESS financing liabilities.

The decrease in our net sensitivity from December 31, 2022 to September 30, 2023 (from approximately $23.5 - $(26.1) million) to $16.7 - $(18.6) million for a 25 basis point parallel shift in the yield curve, up and down, respectively) is primarily driven by the increase in interest rates on our MSR portfolio (due to convexity), the sales of owned MSRs as part of our de-risking strategy, and the increased use of hedging instruments and higher hedge coverage ratio in the nine months ended September 30, 2023.

Borrowings

The majority of the collateralized debt used to finance our operations is based on variable rates, but remains exposed to interest rate fluctuations between repricing dates. Our corporate debt is based on fixed interest rates. As servicer, we are also exposed to the impact of interest rate fluctuations on the float income we earn on balances held in trust from the date a loan payment is received from borrowers to the date funds are forwarded to investors.

Based on September 30, 2023 balances, if interest rates were to increase by 100 bps on our variable-rate debt and cash and float balances, we estimate a net positive impact of approximately $5.2 million resulting from an increase of $24.5 million in annual interest income and other credits on deposits, and an increase of $19.4 million in annual interest expense.

Foreign Currency Exchange Rate Risk

Our operations in India and the Philippines expose us to foreign currency exchange rate risk to the extent that our foreign exchange positions remain unhedged. Depending on the magnitude and risk of our positions we may enter into forward exchange contracts to hedge against the effect of changes in the value of the India Rupee or Philippine Peso. We did not enter into any foreign currency hedging derivative instruments during the nine months ended September 30, 2023.

Home Prices

Inactive reverse mortgage loans for which the maximum claim amount has not been met are generally foreclosed upon on behalf of Ginnie Mae with the REO remaining in the related HMBS until liquidation. Inactive MCA repurchased loans are generally foreclosed upon and liquidated by the HMBS issuer. Although active and inactive reverse mortgage loans are insured by FHA, we may incur expenses and losses in the process of repurchasing and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines. In addition, in certain circumstances, we may be subject to real estate price risk to the extent we are unable to liquidate REO within the FHA program guidelines. As our reverse mortgage portfolio seasons, and the volume of MCA repurchases increases, our exposure to this risk will increase.

Our management, under the supervision of and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), as of September 30, 2023.

Based on such evaluation, management concluded that our disclosure controls and procedures as of September 30, 2023 were (1) designed and functioning effectively to ensure that material information relating to Ocwen, including its consolidated subsidiaries, is made known to our principal executive officer and principal financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) operating effectively in that they provided reasonable assurance that information required to be disclosed by Ocwen in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officer or principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There have not been any changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

An investment in our common stock involves significant risk. We describe the most significant risks that management believes affect or could affect us under Part I, Item 1.A. of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2022. Understanding these risks is important to understanding any statement in such reports and in our subsequent SEC filings (including this Form 10-Q) and to evaluating an investment in our common stock. You should carefully read and consider the risks and uncertainties described therein together with all the other information included or incorporated by reference in such Annual Report and in our subsequent SEC filings before you make any decision regarding an investment in our common stock. You should also consider the information set forth under “Forward-Looking Statements.” If any of the risks actually occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose some or all of your investment.