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HLSS > SEC Filings for HLSS > Form 10-Q on 18-Oct-2012All Recent SEC Filings




Quarterly Report

OF OPERATIONS (Dollars in thousands unless otherwise stated, except share data)


This Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this report including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.

These forward-looking statements include declarations regarding our management's beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "intend," "consider," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict" or "continue" or the negative of such terms or other comparable terminology. Such statements are not guarantees of future performance as they are subject to certain assumptions, inherent risks and uncertainties in predicting future results. Important factors that could cause actual results to differ materially include, but are not limited to, the following:

estimates regarding prepayment speeds, delinquency rates, servicing advances, amortization of mortgage servicing assets, custodial account balances, interest income and other drivers of our results;

assumptions related to sources of liquidity, our ability to fund servicing advances and the adequacy of our financial resources;

our ability to obtain the Required Third Party Consents;

our ability to pay monthly dividends;

assumptions about the availability of additional portfolios of subprime and Alt-A mortgage servicing rights and our ability to acquire additional mortgage servicing assets from Ocwen and others;

the performance of Ocwen as mortgage servicer and our ability to add new mortgage servicing assets on terms consistent with our business and economic model;

assumptions about the effectiveness of our hedging strategy;

expectations regarding incentive fees in our servicing contract and the stability of our gross servicing margin;

the susceptibility of our mortgage servicing assets to impairment charges;

our competitive position;

uncertainty related to future government regulation;

assumptions regarding the availability of refinancing options for subprime and Alt-A borrowers;

general economic and market conditions;

assumptions regarding amount and timing of additional equity offerings and

assumptions regarding amount and timing of additional purchases of servicing assets from Ocwen.

Further information on the risks specific to our business is detailed within this report and our other reports and filings with the SEC including our final prospectus dated September 6, 2012. Forward-looking statements speak only as of the date they were made and should not be relied upon. Home Loan Servicing Solutions, Ltd. undertakes no obligation to update or revise forward-looking statements.


The following discussion of our results of operations, change in financial condition and liquidity should be read in conjunction with our Interim Condensed Consolidated Financial Statements and the related notes, all included elsewhere in this report on Form 10-Q and with our final prospectus dated September 6, 2012.


Strategic Priorities

On March 5, 2012, we launched operations using proceeds from our IPO and a concurrent private placement with our founder and chairman of our board of directors to acquire mortgage servicing assets related to a portfolio with $15.2 billion of UPB from Ocwen. Specifically, we purchased:

the contractual right to receive the servicing fees and investment earnings on the custodial accounts related to Mortgage Servicing Rights and the right to automatically obtain legal ownership, without any additional payment to Ocwen, of each Mortgage Servicing Right upon the receipt of the Required Third Party Consents;

the outstanding servicing advances associated with the related pooling and servicing agreements and

other assets related to the foregoing.

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We also assumed a related match funded servicing advance financing facility from Ocwen effective upon the closing of the Initial Acquisition (which was subsequently amended on September 13, 2012). At closing on March 5, 2012, HLSS paid cash of $149,798 to Ocwen for the estimated purchase price of the Initial Purchased Assets (net of assumed liabilities), subject to certain closing adjustments. The purchase price for the Rights to MSRs was based on the value of such assets at the time HLSS entered into the Purchase Agreement and the estimated outstanding UPB of the underlying mortgage loans at closing. The purchase price for the associated servicing advances and other assets was equal to the net consolidated book value, which approximated fair value, as of the purchase date of all assets and liabilities of the subsidiary and special purpose entity established in connection with the advance financing facility that owns these servicing advances. On March 31, 2012, HLSS and Ocwen, pursuant to the terms of the Purchase Agreement, agreed to a final purchase price of $138,792 for the Initial Purchased Assets (net of assumed liabilities of $359,176), reflecting post-closing adjustments of $11,006 that principally resulted from declines in match funded advances.

Having achieved our business and financial objectives in the first quarter, on May 1, 2012 we purchased additional assets from Ocwen that are substantially similar to our initial portfolio under substantially similar terms. This purchase was funded primarily from excess proceeds from the Offerings and cash generated in excess of our dividend. The final purchase price for the transaction was $103,428 (initially $103,826; but was subsequently adjusted). To finance that amount, we used $25,940 in cash and borrowed $77,886 under an existing servicing advance facility with Barclays Bank PLC against the $92,593 in servicing advances associated with the Rights to MSRs.

During the current quarter, we made three additional asset purchases from Ocwen:
the Flow Two and first Follow on Offering purchases. The Flow Two purchase price of $76,251 was funded from our servicing advance facility ($56,123), cash on hand ($18,602) and an amount due to Ocwen for post-closing adjustments ($1,526). We subsequently settled the $1,526 due to Ocwen balance. This purchase allowed us to grow serviced UPB by $2.1b. The Follow on Offering purchase was in two parts; the first purchase cost $792,968 and was funded from our servicing facility ($590,419) and cash raised from our equity offering during the quarter ($202,549). The second purchase of $242,384 was funded from available borrowing capacity ($207,480), cash raised from our equity offering ($30,644) and an amount due to Ocwen of $4,260. These three purchases in the aggregate allowed us to grow serviced UPB by $29.9b; total UPB serviced as a result of all the purchases noted above was $46.5b as of September 30, 2012.

On September 13, 2012, in connection with the closing of the first of the Follow on Offering purchases, HLSS Holdings amended and restated its outstanding servicing advance financing facility with Barclays Bank PLC. These agreements are substantially similar to those described in "The Business - Description of Servicing Advance Facility Agreements and Advance Financing Facility" in our Prospectus dated September 6, 2012 with the following additional material features:

The Base Indenture is structured to allow the issuance of multiple series of notes with varying maturity dates and credit ratings ranging from AAA to BBB;

Pursuant to the series 2012-MM1 indenture supplement, a $265,000 Rule 2a-7 money market eligible note with a one-year term and a fixed interest rate per annum of 0.65% has been issued; and

A "Class A" draw note with an expected two-year term and a variable interest rate of one month LIBOR + 200 bps.

On September 28, 2012, in connection with the closing of the second of the Follow on Offering purchases, we issued a $28,500 "Class B" note with a two-year term and a fixed interest rate per annum of 2.75%.

Earnings for the quarter ended on September 30, 2012 exceeded dividends declared for the period by $674. Earnings included a $593 benefit from reduced amortization due to the deferral of certain modifications as Ocwen tested delinquent loans for HAMP 2 eligibility, and ending the quarter on a Sunday delayed the receipt of certain loan payoffs. These factors combined to reduce the annualized prepayment rate to 12.6% from 15.2% in the second quarter. We are seeing increased loan modifications and payoff collections in October, and, accordingly, we expect to see a rebound in the prepayment rate in the fourth quarter. From an operational perspective, the transactions between HLSS and Ocwen were completed as planned, and we believe that all servicing requirements under the pooling and servicing agreements were met in all material respects.

We intend to continue to acquire additional substantially similar servicing assets from Ocwen in the near term in two ways:

In order to remain fully invested and to offset the impact of prepayments in our servicing portfolio, we expect to continue to utilize cash flow from operations in excess of our dividend to purchase servicing assets that are substantially similar to our initial portfolio from Ocwen under substantially similar terms. We will refer to such transactions as flow transactions, which we expect to take place at regular intervals. Certain terms of such flow transactions-including the servicing incentive fee and advance ratio targets-will vary from transaction to transaction. We expect to be able to maintain or moderately grow the size of our servicing portfolio over time through these transactions.

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In order to increase the scale of our business we will look for opportunities to issue additional equity in the form of ordinary shares to allow us to execute larger purchases of mortgage servicing assets substantially similar to our initial portfolio from Ocwen under substantially similar terms. These follow-on purchases will be subject to equity market conditions and will likely require that additional advance financing capacity be arranged in advance or concurrent with each transaction in order to maintain leverage similar to our current level.

Ocwen stated that as of September 30, 2012 it has servicing assets with approximately $65 billion of UPB that are substantially similar to the assets that HLSS purchased in the transactions described above. In connection with Ocwen's announced acquisition of Homeward Residential Holdings, Inc. ("Homeward") from WL Ross and Co. LLC, Ocwen will acquire rights to service over $55 billion of UPB that are substantially similar to those in our current portfolio. We believe the existing Ocwen servicing assets as well as the expected Homeward assets potentially provide a strong servicing assets pipeline, one which could help grow our servicing portfolio. We believe that Ocwen perceives that it has benefited from the transfer of Rights to MSRs to us. Although we cannot guarantee that future transactions will occur, we believe that Ocwen will benefit from such transactions and will,therefore, continue to sell mortgage servicing assets to us in this manner which will allow us to grow the UPB of our servicing portfolio.

HLSS remains open to purchasing assets from third parties other than Ocwen, but given the large amount of servicing assets remaining at Ocwen, we do not view initiating purchases from other third parties as a near-term priority. Considering this and our ability to meet our financial and business objectives for some time without purchasing assets from other third parties we will not engage in a discussion of the competitive dynamics driving the current market for the acquisition of servicing assets at this time. Should Ocwen be unwilling or unable to sell mortgage servicing assets to us in the near future, we expect that there will continue to be opportunities to purchase mortgage servicing assets from other parties.

A continued strategic priority for HLSS is to receive the consents necessary for us to become the named servicer for the securitizations where we currently own Rights to MSRs and the associated servicing advances. Based on our current dialogue with consent parties, our near term goal in pursuit of such consents is to establish an operating history that demonstrates a continued capability to perform the servicing requirements, specifically our obligation to fund servicing advances and to make principal and interest remittances in conformity with all requirements of the pooling and servicing agreements.

Our results for the periods ended September 30, 2012 are discussed in more detail below.

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