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Ocwen Financial Corporation (OCN -3.96%)
Q4Â 2018 Earnings Conference Call
Feb. 27, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Greetings, and welcome to Ocwen Financial Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to Hugo Arias, Managing Director of Investor Relations. Thank you. You may begin.
Hugo Arias -- Managing Director, Investor Relations
Good morning and thank you for joining us for Ocwen's Fourth Quarter 2018 Earnings Call. Please note that our fourth quarter 2018 earnings release and slide presentation have been released and are available on our website for your review. Speaking on the call will be Ocwen's Chief Executive Officer, Glen Messina, and Chief Accounting Officer, Cathy Dondzila.
As a reminder, the presentation and our comments today may contain forward-looking statements made pursuant to the Safe Harbor provisions of the federal securities law. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology. Forward-looking statements, by their nature, address matters that are, to different degrees, uncertain. Our business has been undergoing substantial change, which has magnified such uncertainties. You should bear these factors in mind when considering such statements and should not place undue reliance on such statements.
Forward-looking statements involve several assumptions, risks, and uncertainties that could cause actual results to differ materially. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement whether as a result of new information, future events, or otherwise.
In addition, the presentation and our comments contain references to non-GAAP financial measures such as available liquidity and an alternative view of the impact of our NRZ transactions among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. We also believe these non-GAAP financial measures provide an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the Company's reported results under accounting principles generally accepted in the United States. For an elaboration of the factors I just discussed, please refer to our presentation and today's earnings release as well as the Company's filings with the Securities and Exchange Commission, including Ocwen's 2018 forms 10-Q, and once filed, its 2018 Form 10-K.
Now I will turn the call over to Glen Messina.
Glen A. Messina -- President and Chief Executive Officer, Director
Thank you, Hugo. Good morning and thank you for joining us. Today, I'll provide an update regarding the key business initiatives we are pursuing to transform Ocwen into a stronger company and the opportunities and challenges ahead of us. Cathy Dondzila will then follow with a review of the fourth quarter financial results. I will close the call with some brief remarks before opening it up for questions.
Please turn to slide four. We've made solid progress in the quarter as we worked to realize the scale and cost reduction benefits of combining Ocwen and PHH and position the Company for future profitability. Last quarter, we discussed our primary focus is to return to profitability in the shortest time frame possible, taking into consideration the robust, prudent integration process we're undertaking to integrate PHH. To this end, we established a set of key initiatives to address our most critical near-term challenges and establish a foundation for the future.
The initiatives are; execute the integration to create value; reengineer our cost structure; replenish portfolio runoff and restore growth focus; establish funding for growth, and fulfill our regulatory commitment and resolve remaining legacy matters. We've been building our team and executing on our key initiatives. In parallel, we've assessed the Company's operations, financial performance, market conditions, and industry dynamics to better position us to address the opportunities and challenges ahead. We've added Tim Yanoti as our growth leader; June Campbell will be joining us on March 4th as CFO, and Joe Samarias is assuming the role of General Counsel on April 1st as part of an orderly succession process.
We've added Jenne Britell and Kevin Stein to the Ocwen Board. Their respective skills and experiences are well suited to support our efforts to maximize value for our shareholders. Loan boarding has commenced and we are on track to complete the migration of all legacy Ocwen loans onto the Black Knight LoanSphere or MSP platform in the second quarter.
We have reentered the MSR acquisition market and have closed or been awarded $5.4 billion in MSR UPB to date. We're executing plans to reenter forward correspondent lending and improve our portfolio retention efforts. We have identified over $340 million in annual cost reengineering opportunities against our second quarter 2018 baseline. Cost reduction actions have started and we plan to fully realize these savings over the next 12 to 18 months.
We continue to proactively work with our regulators and we're taking the necessary actions to meet our previous commitments. I believe the actions we're taking can position the Company to grow prudently, leveraging our core competency in credit-sensitive servicing and address the opportunities and challenges ahead, including potential consolidation opportunities that may be available going forward. If executed in full, our growth and cost reengineering actions could position the Company for profitability in the next 12 to 15 months, assuming there are no adverse changes in market conditions or legal and regulatory matters.
I'll now provide a detailed update on each of the initiatives to transform and strengthen our business. Please turn to slide five. With respect to our integration initiative, we have finalized our detailed integration plans and have commenced executing against them. We remain focused on executing our integration plans in a safe and sound manner. We have made substantial progress in the critical servicing system conversion to the MSP servicing platform.
After a rigorous phase of pre-boarding testing, we completed our first two major transfers of Ocwen loans earlier this month. These initial transfers involved approximately 240,000 loans, roughly 23% of the total loans to be transferred, and we're pleased with the outcome of the loan transfer process. We've been getting good support from our vendors for the loan transfer process. The team at Black Knight has provided substantial dedicated resources and has been intimately involved in all aspects of the transfers.
Similarly, we have worked closely with Altisource to update our agreement to support the transition and clarify our ongoing relationship. The remaining portfolio is expected to be transferred in multiple steps to manage the surge of operational activity associated with loan boarding and to minimize potential loan boarding defects. We are on track to complete the loan transfer process in the second quarter. However, the conversion timeline could be extended to the extent any unexpected challenges are encountered.
By the end of the second quarter, we expect to complete the merger of Ocwen's primary licensed entities, Ocwen Loan Servicing and Homeward Residential into the primary PHH operating entity PHH Mortgage Corporation. Execution of the legal entity consolidation is progressing as expected to meet our timelines. The consolidation of these three licensed entities into one supports our cost reengineering objective.
Now please turn to slide six. The PHH acquisition is a catalyst to substantially reengineer our cost structure. We are using a four-step approach to capture integration synergies as well as all potential expense reduction and productivity opportunities. Our continued ability to meet the expectations of clients, consumers, regulators, and other constituents was a key consideration in our reengineering evaluation. We have completed an assessment of three of the steps; basic combination synergies, organization optimization, and process improvement and best practice benchmarking. We have identified actions to reduce annual operating expenses by over $340 million below the combined adjusted annualized second quarter 2018 expense base for Ocwen and PHH of $960 million as set forth on slide 21.
We are targeting to realize approximately $300 million in cost savings on an annualized run rate basis by the end of the fourth quarter of 2019 and at least an additional $40 million by the end of the fourth quarter of 2020. We have taken actions that resulted in $58 million of annualized cost savings in the fourth quarter of 2018.
We believe this level of cost reengineering will drive improved financial performance and provide strategic benefits including a comparative operating and overhead cost structure as compared to our larger non-bank servicing and subservicing competitors, fewer facilities and less geographic fragmentation to foster a stronger culture of coordination, collaboration, and elevated productivity, and proactively addressing through largely controllable cost actions, the future impact to our GAAP earnings as the amortization of the lump-sum payments we negotiated from NRZ ends in the second quarter of 2020. Cathy will discuss this impact in greater detail in the financial review section.
Please turn to slide seven. We believe executing our cost reengineering actions could allow us to achieve profitability in 12 to 15 months, assuming we fulfill our other objectives including maintaining a servicing portfolio of at least $260 billion in UPB and there are no adverse changes to current market and industry conditions or legal and regulatory matters. The development of our cost reengineering plan involves multiple work streams, led by each of our operations and functional leaders that address integration, organizational redesign, process and control redesign, human capital planning, offshore utilization, strategic sourcing, and facilities rationalization.
Our cost reengineering plans are broad-based as part of our actions are reduced by target total compensation by 20% and the Board has reduced its director cash retainer fee by 20%. We expect net staffing levels will be reduced by 2,100 positions by the end of 2019 from staffing levels at the end of the second quarter 2018 for the combined companies. Of this total reduction, approximately 700 positions have already been eliminated. In addition, we intend to reduce our existing primary US-based facilities footprint from 10 locations to four. Our primary domestic locations will be West Palm Beach, Florida; Mount Laurel, New Jersey; Rancho Cordova, California, and St. Croix, US Virgin Islands.
While the decision to reduce our workforce and close certain sites is difficult due to the impact on employees, they are necessary if we are to return to profitability. We thank all our employees for their commitment to Ocwen's success and we are committed to treating our employees with dignity and respect as we execute our reengineering plans.
Based on the current plans, the cost reengineering effort is targeting the following estimated annualized expense reductions by category; $135 million in compensation and benefits; $70 million in technology and communications; $65 million in legal and other professional fees; $20 million in facilities and occupancy costs, and $50 million in other operational savings and process improvements, including servicer non-recoverable expenses.
To achieve the higher estimated annual cost reengineering opportunity, we have also increased our estimate of upfront reengineering costs from $25 million to $30 million to $55 million to $65 million, which we expect will be comprised of the following estimated amount; $35 million to $40 million for severance, retention, and other personnel expenses; $6 million to $7 million for facilities related charges, and $14 million to $18 million for borrower communication and other expenses related to our licensed entity mergers among other costs.
We believe there may be additional opportunities for cost improvements available to us in the future. To this end, we continue to focus on the fourth step of our reengineering, digitization. This phase will focus on optimizing our usage of the MSP platform features and functionality in combination with call center features to introduce certain digital tools to automate repetitive tasks and enable additional customer self-service capability. We are also targeting a reduction in non-routine litigation expenses as we resolve legacy litigation and regulatory matters, and because of the operational improvements and risk and compliance investments we've made over the last several years.
The full amount of targeted annual cost reengineering is significant and is dependent on several complex actions. These include, but are not limited to, the MSP systems conversion; the legal entity mergers; the facilities consolidation, and our organizational redesign and staffing reductions.
Please turn to slide eight. Our third initiative is to replenish portfolio runoff and restore growth focus. As previously mentioned, our goal is to maintain a servicing portfolio of at least $260 billion in UPB. Based on current interest rates, this translates to replenishing roughly $35 billion in annualized portfolio runoff. Our progress to-date is consistent with this objective and we expect UPB additions in 2019 to be a higher mix of acquired MSRs versus subservicing and forward lending for reasons we will discuss in a moment.
We restarted MSR bulk acquisition activity at the end of 2018. As of early February, we had closed or have been awarded Agency and Ginnie Mae MSR with current UPB of $5.4 billion. So far in 2019, we continued to see a robust level of activity, consistent with 2018 levels. The market is highly competitive and we're seeing return levels at the low end of our previously discussed target range of 9% to 13%.
We are encouraged by our initial success and are cautiously optimistic we can achieve our MSR investment objectives subject to a continued robust volume of MSR transactions, maintaining enough liquidity for investment and the availability of MSRs with adequate returns on investment. We believe that our operational expertise in servicing higher credit risk loans will make us most competitive in higher margin, more credit-sensitive servicing such as Ginnie Mae, non-Agency and expanded credit products.
We will also seek to acquire Agency MSRs that meet our overall risk return objectives. To support achieving our desired return levels of MSR investments, we are also evaluating opportunities to enhance ancillary revenues from our servicing portfolio through our improved cross-sell to our 1.6 million consumers. We believe this is an important element in our profitability roadmap and is a core part of the economics from MSR investments.
In addition to our bulk MSR purchase plans, we are targeting to supplement our MSR investment activity through our origination channel offerings. Our plans include; reentering correspondent forward lending in the second quarter and improving our portfolio recapture performance through targeted product enhancements and systems, staffing, and process improvements. At this time, we expect the majority of our MSR investment activity will be from bulk purchases. We don't expect our subservicing portfolio additions to offset subservicing portfolio runoff in 2019. The subservicing market is highly priced competitive and the subservicing runoff is expected to be higher than previously anticipated as historical holders of MSRs who were subservicing clients of PHH are now MSR sellers.
Regarding portfolio retention, in the second half of 2019, we will no longer be providing certain portfolio recapture activities related to the MSRs we service for NRZ. These recapture activities currently require us to incur the full cost of the origination process while receiving no compensation for the transfer of the associated MSRs to NRZ. In the current origination market environment, the economics of the transaction make it difficult to achieve profitability on this portfolio. Therefore we do not believe this expected reduction in origination volume will have any material adverse effect on our financial results.
Please turn to slide nine. Our fourth initiative is to establish funding for growth. We are exploring several funding options to support our objective of replenishing MSR runoff and accommodate our business needs. As such, we are focused on funding structures that could provide us with the optimal mix of advance rate, cost, and funding flexibility. As a first step, we are actively working to put in place facilities to match our expected ramp up in funding need for varieties of MSR types. We believe there are several mechanisms that are available today to optimize funding and meet the evolving needs of our MSR portfolio. We are targeting to close our first MSR funding structure by the end of the second quarter.
We estimate that we would need to acquire at least $35 billion in UPB annually to replenish the natural runoff in our MSR portfolio, assuming no major change in market conditions. This would require an investment of at least $380 million in the next 10 months. Based on available advance rates on MSR funding structures, we also believe that approximately $140 million to $150 million of this investment would need to come from our existing liquidity for incremental leverage on existing servicing assets. Given the estimated liquidity requirements to execute our MSR investment plans, the amount of restructuring expense needed to achieve our cost reengineering objectives, and the ongoing liquidity needs to run our business, we do not expect to pursue any share repurchases or further on-schedule debt retirement in the near term.
Our ability to generate future cash flow necessary to continue to invest in MSRs at our targeted levels and fund other growth and productivity actions in the long term is dependent on successfully realizing our cost reengineering plans, achieving enough investment in MSRs in 2019 to replenish portfolio runoff as well as managing our balance sheet efficiently and maintaining continued access to the capital markets. For these reasons, we are prioritizing reengineering and MSRs in our capital allocation framework.
Please turn to slide 10. Our fifth initiative is to fulfill regulatory commitments and resolve remaining legacy matters. We have made significant investments over the past several years in building a three-liner defense with management model, improving management and Board oversight, and maintaining a compliance management framework to drive performance consistent with regulatory expectations. We have made several commitments to our regulators regarding behaviors and actions going forward replacing legacy technologies, ongoing reporting and controls, and evaluating our performance on certain activities.
We are proactively engaged with our regulators as well as the mortgage investors and clients we serve to inform them of our progress and address any concerns. Fulfilling our commitments and resolving our remaining legal and regulatory matters are critical steps to growing our business going forward. We regularly track our progress as it relates to our regulatory commitments and we are working with our regulators to support achieving them. We believe executing on our regulatory commitments is also key to reducing our legal and regulatory-related expenses and a critical aspect of our plan to return to profitability.
And now I will turn it over to Cathy who will discuss the results for the quarter.
Catherine M. Dondzila -- Senior Vice President, Chief Accounting Officer
Thank you, Glen. My comments today will focus on our fourth quarter results as compared to the prior quarter. Because we closed the PHH acquisition on October 4th, the fourth quarter comparisons to the third quarter will all be impacted. As previously noted, our fourth quarter investor presentation includes more details on our results and is available on our website. You will also find additional information in regards to the fourth quarter PHH results in our Form 10-K, which we expect to be filed later today.
Please turn to slide 12. While our fourth quarter 2018 net loss of $2 million compares favorably to the net loss of $41 million in the third quarter, our fourth quarter loss includes the bargain purchase gain of $64 million recognized in connection with the acquisition. While the acquisition was accretive to book value and cash on the acquisition date, the purchase price contemplated that PHH would incur losses after the acquisition date. To the extent those losses are realized, they are and will be included in our results from operations.
Revenue of $311 million increased by $73 million from the prior quarter, principally due to $72 million of PHH post acquisition revenue. Excluding PHH revenue, the $7 million decline in servicing revenue due to continued portfolio runoff was offset by the $9 million favorable valuation impacts from our reverse mortgage portfolio due to lower interest rates in the fourth quarter. Non-MSR expenses of $241 million were $65 million higher than the prior quarter, driven by $59 million of PHH post acquisition, non-MSR related expenses. Our cost improvements in the quarter were largely offset by higher acquisition, integration, and restructuring related costs.
With respect to the higher unfavorable MSR valuation adjustment in the fourth quarter, lower interest rates resulted in a reduction of the value of our Ginnie Mae and Agency MSRs. We have provided additional information related to the MSR valuation impacts on page 27 of the slide deck.
10-year swap rates declined 41 basis points in the fourth quarter, but ended the year 31 basis points higher. Secondary market trading of servicing assets show MSR prices remain at or near record multiples, in excess of five times annual cash flow for conventional servicing according to industry sources. While there are potential demand dynamics that may modestly improve valuations, it seems unlikely that we would see much upside in MSR valuations if rates rise from here. Similarly, the impact of recent rate drops had a muted impact on our MSR valuations as we did not recognize significant gains from the rate increases near year-end.
The majority of the unfavorable Agency MSR valuation was offset by favorable NRZ interest expense in the quarter, driven by the offsetting MSR financing liability valuation impacts. As a reminder, the PHH portfolio is primarily comprised of Agency MSRs, the majority of which were sold to NRZ and are more sensitive to changes in interest rates. This change in the composition of MSR related to the PHH portfolio has increased the sensitivity of the portfolio to changes in interest rates contributing to the increase in unfavorable MSR valuation adjustments in the quarter.
Under our NRZ agreements of July 2017, we received payments of approximately $335 million by monetizing a portion of the economics under the original agreements in exchange for reduced ongoing servicing economics under the new agreements. This has and will continue to result in positive earnings adjustments that we are amortizing through our income statement as a reduction to NRZ interest expense. The amortization commenced in September of 2017 and January 2018 and will continue through the April 2020 initial term of the original agreements.
This means that while the benefit of the contractual changes enacted in 2017 and 2018 have been fully realized from a cash flow perspective, the full earnings impact will not be reflected until the amortization of the lump-sum payments ends in the second quarter of next year. The positive impact of the amortization on our pre-tax earnings was $44 million and $151 million in 2017 and 2018 respectively and is expected to be $139 million from the beginning of 2019 through April of 2020.
On slide 13, we have provided an alternative view of the impacts of our NRZ transactions to more closely align with the economic substance of the transactions whereby we subservice MSRs we have sold to NRZ under multi-year subservicing agreements. Our fourth quarter results include the positive effect of $32 million of lump sum cash payment amortization.
I would now like to provide comments on our servicing and lending segment results. As outlined on slide 14, our servicing segment recorded a $41 million pre-tax loss compared to a $14 million loss in the prior quarter and included a $21 million post-acquisition PHH pre-tax loss. We experienced $32 billion UPB and portfolio runoff in the fourth quarter, of which $6 billion was related to the Ocwen legacy portfolio and $26 billion related to the PHH legacy portfolio. The PHH portfolio runoff included de-boarding of $23 billion UPB of PHH transfers disclosed prior to the acquisition close. As Glen highlighted earlier, we have already restarted bulk MSR acquisitions aimed at replenishing at a minimum portfolio runoff on a run rate basis later this year.
The servicing business remains focused on providing sustainable loan modification solutions to qualifying borrowers in need. We completed over 8,000 modifications in the quarter, 22% of which resulted in some type of debt forgiveness, totaling $49 million.
The decline in interest rates in the fourth quarter favorably impacted our lending segment where we recorded pre-tax income of $3 million in the fourth quarter. I refer you to slide 15 in the deck for more details.
Our forward lending business recorded a pre-tax loss of $5 million and included $2 million of PHH post-acquisition loss. The business was impacted by lower funded loan volume as our conversion rate or pull-through underperformed. We are focused on improving our portfolio retention and pull-through rates and expanding our platform by reentering the correspondent channel. Our reverse lending business recorded pre-tax income of $8 million as lower interest rates drove favorable valuations.
Funded loan volume continued to decline in line with industry trends for originations under the available HUD programs. HUD endorsements, a measure of market volume, continued to decline and were 18% lower than the third quarter. Proprietary products are becoming more readily available in response to HUD program changes. We successfully launched a proprietary jumbo reverse mortgage pilot program in the fourth quarter and continued to explore other new products and alternatives to capture more of the market. The business is also continuing to work on efficiencies through process automation and cost controls in sales and marketing in response to these market-based headwinds.
Our corporate segment reported pre-tax income of $30 million in the fourth quarter including a PHH pre-tax loss of $8 million and the $64 million bargain purchase gain, which resulted from the fair value of PHH's net assets, exceeding the purchase price we paid. Corporate results also include unallocated overhead, debt related expense and certain regulatory and legal costs. As previously outlined by Glen, a core focus area of our cost reengineering efforts will be to reduce operating costs and improve margins by eliminating redundancy and improving efficiency in our corporate functions.
As you can see on slide 16, we ended the year with available liquidity of $392 million. This included $329 million of unrestricted cash. We view available liquidity as cash on hand plus foregone and available borrowing capacity on advanced facilities and warehouse lines, which we are choosing to fund with corporate cash that could be quickly converted into cash based on eligible collateral that can be pledged to these facilities.
During the fourth quarter, we called a seasoned RMBS second lien deal redeemed to the $3 million remaining balance of our unsecured bonds at par and repurchased $16 million of our second lien bonds at a discount. We ended the year with corporate debt outstanding of $681 million, representing about 1.2 times corporate debt to book equity ratio. We assumed $119 million in corporate debt in the PHH acquisition, $98 million of which matures in the third quarter of this year. As Glen discussed earlier, we are exploring several funding options to meet our objective of replenishing MSR runoff and accommodate our business needs.
And now I'll turn it back over to Glen.
Glen A. Messina -- President and Chief Executive Officer, Director
Thank you, Cathy. Please turn to slide 17. We've made solid progress in the quarter as we worked to realize the scale and cost reduction benefits of combining Ocwen and PHH and position the Company for future profitability. During the past quarter, we completed a thorough business assessment, which included a forward-looking view of multiple factors that could impact profitability in 2019 and beyond. As a result of this effort, we have identified a number of items that are being addressed through our key business initiatives, including subservicing UPB is likely to shrink going forward as additions will not replenish runoff. Therefore, the amount of capital required to maintain our target servicing portfolio size is greater than previous estimates. MSR acquisition market is highly competitive and returns are at the lower end of our 9% to 13% target range and the runoff of NRZ lump sum payment amortization in the second quarter 2020 needs to be addressed now.
To address these items and make Ocwen a stronger company, we're taking decisive action through our key initiatives including; we're attracting quality talent to help us execute on our key initiatives. We're executing the integration and we're on track to complete this effort earlier than previously expected. We've identified over $340 million in cost reengineering opportunities against our annualized second quarter 2018 baseline, resulting in a competitive cost structure. The magnitude and timing of cost reengineering offsets the NRZ lump sum payment amortization runoff and we've already commenced execution.
The MSR market continues to be robust and we've been a successful bidder for $5.4 billion in MSRs that are aligned with our capabilities. We are on track to restart forward correspondent lending and fully introduce non-agency lending products by the end of the second quarter. Multiple funding structures are potentially available to support our MSR acquisition objectives and we expect to have initial funding in place by the end of the second quarter 2019 and potentially attractive consolidation opportunities are emerging. We remain focused on our goal to restore profitability in the shortest time frame possible, taking into consideration the robust, prudent integration process we are undertaking to integrate PHH.
Our actions and key initiatives address the items identified through our business assessment effort. We believe we can return to profitability in 12 to 15 months, assuming we achieve our cost reengineering and growth objectives and there are no adverse development in market conditions and legal and regulatory matters. These are dynamic times for the non-bank mortgage industry, but we believe our key initiatives will position us to continue to play a leadership role in the industry and to make a difference in the lives of the customers we serve.
And with that, we're ready to take questions. Operator?
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question is from Bose George with KBW. Please proceed with your question.
Bose George -- Keefe, Bruyette & Woods -- Analyst
Hey, good morning. Actually, the first question, could you just go over what you said about the expectations for MSR acquisitions. I mean, you noted that the subservicing will be running up, I guess, faster than expected. So then the number that you gave for acquisitions, does that assume you can buy enough MSR to offset that as well? And so do you think you can keep the portfolio roughly flat this year?
Glen A. Messina -- President and Chief Executive Officer, Director
Good morning. Bose. So yeah, we do expect that subservicing additions will not replenish subservicing -- schedule of subservicing portfolio runoff. That said, we're looking to achieve a target servicing UPB of $260 billion, and based on current market conditions, we believe that it would take approximately $35 billion of UPB and MSR additions to replenish portfolio run off. As you probably know, MSRs generate more dollars of income per loan than subservicing does. So you don't necessarily have to replace subservicing runoff dollar for dollar from a UPB perspective with MSR investments.
Bose George -- Keefe, Bruyette & Woods -- Analyst
Okay. So that $35 billion you're contemplating is primarily MSR.
Glen A. Messina -- President and Chief Executive Officer, Director
Yes. It's correct.
Bose George -- Keefe, Bruyette & Woods -- Analyst
Okay, great. And then actually later in the year after the transfer of MSRs to MSP is complete, do you contemplate going back to regulators and getting that 2% limit on New York potentially removed?
Glen A. Messina -- President and Chief Executive Officer, Director
Bose, we do have -- as you mentioned, in New York, we do have the restriction for the 2% growth and part of the conditional approval is once we complete the boarding of loans on MSP, we'll do data integrity audits and we would be approaching New York for permission to lift those restrictions. So that is correct.
Bose George -- Keefe, Bruyette & Woods -- Analyst
Okay, thanks. And then the pipeline that you gave, the $400 billion, does that include Ditech? Can you comment on that?
Glen A. Messina -- President and Chief Executive Officer, Director
The $400 billion is -- was our view of the MSR acquisition market in 2018. What we're seeing so far in the first quarter of 2019 is, say, an equally robust market. We -- I think the world knows that there is various options that Ditech is considering while they are in bankruptcy. We would consider all options to continue to grow our portfolio and maximize value for our shareholders, but I can't make any specific comments about any one individual transaction.
Bose George -- Keefe, Bruyette & Woods -- Analyst
Okay. Fair enough. And then actually yesterday, you guys put out an 8-K with an update on your relationship with Altisource. Can you just comment, are there any implications for Ocwen in terms of how that plays out? And specifically if NRZ decides to move any services to other vendors, does that any -- make any difference to you?
Glen A. Messina -- President and Chief Executive Officer, Director
From our perspective, look, we are happy that we reached agreement with Altisource to clarify and amend some of the key provisions of our contract. We do, by virtue of this amendment, have secured and clarified Altisource's support in getting off the REAL servicing platform and termination of the REAL servicing statement of work and as well as making sure we've got mechanisms to ensure we get good quality of data transferred over to us as part of the loan transfer process.
We've also clarified the mechanism around certain vendor services on mortgages that are being serviced by Ocwen. We've got -- we've set a future framework for negotiating service level agreements as part of that and we do anticipate that Ocwen's got the capability here to hire, under certain conditions, alternative service providers for up to 10% of certain portfolios that -- where we can control the direction of business and that will help us essentially get a better gauge of third-party performance and help benchmark that performance versus Altisource. Net-net, we do believe the agreements provide increased clarity, greater performance discipline, and will ultimately benefit us and probably Altisource as well.
Bose George -- Keefe, Bruyette & Woods -- Analyst
And just in that last part of it, just in terms of what -- if NRZ changes anything, I guess, you guys are kind of agnostic in terms of what they do?
Glen A. Messina -- President and Chief Executive Officer, Director
Look, we are -- I mean, NRZ, under the contract of Ocwen, has the right to designate service providers on their portfolio and we obviously would support NRZ's efforts to do so if they choose to do it.
Bose George -- Keefe, Bruyette & Woods -- Analyst
Okay, great. And actually one last one from me. In terms of other unusual expenses going forward, you guys highlighted that $55 million to $65 million. Is there anything else we should think about in terms of PHH integration expenses or legal regulatory?
Glen A. Messina -- President and Chief Executive Officer, Director
From the PHH integration perspective, the $55 million to $65 million is intended to cover all aspects of the integration to include costs associated with loan boarding, costs associated with the legal entity merger, and probably most significantly, the costs associated with our reengineering actions. Obviously to the extent that we would choose to enter into any settlement of any legacy legal and regulatory matter that's not been included in there, and to the extent that there were interest rate changes that would drive MSR valuation adjustments, that would be either a plus or a minus to our reported earnings depending on the nature of the interest rate adjustment.
Bose George -- Keefe, Bruyette & Woods -- Analyst
Okay, great. Thanks a lot.
Operator
Our next question is from Henry Coffey with Wedbush Securities. Please proceed with your question.
Henry Coffey -- Wedbush Securities -- Analyst
Good morning and thank you for taking my call. If we look at the servicing business, these are some simplistic numbers. There is sort of a fixed amount of revenue that you're going to get and it's somewhere between 25 and 35 -- I'm sorry, 25 and probably 35 basis points for GSE and servicing and maybe 50 basis points or slightly lower for Non-Agency servicing. Subservicing, I know nobody ever gives us a comment, but it looks like it's about a 5 or 6 basis point sort of business, and then there is direct cost. And if you sort through all those numbers, what does that business look like today? And I don't mean corporate allocations and accounting adjustments and MSR valuations and stuff, but just the direct cost of servicing alone in basis points, where do you think you are today?
Glen A. Messina -- President and Chief Executive Officer, Director
Henry, just overall from a cost perspective, look, I think it's obvious from the amount of cost reengineering that we plan to execute in the business to achieve a competitive cost structure. Our cost structure today is excessive particularly in corporate overhead.
Henry Coffey -- Wedbush Securities -- Analyst
Right. No, I mean, if we just look at the direct cost of servicing business.
Glen A. Messina -- President and Chief Executive Officer, Director
Yeah. Henry, look, I think our direct costs for servicing are consistent with market expectations for direct costs for servicing for both performing and delinquent loans. We've -- I think we've demonstrated that in our ability to win MSR -- bulk MSR acquisitions. We've not historically provided granular insight into the detailed cost per loan or basis points, but we do believe we are competitive with market on a direct cost basis.
Henry Coffey -- Wedbush Securities -- Analyst
So the servicing business, all the activity aside is -- do you think is profitable today?
Glen A. Messina -- President and Chief Executive Officer, Director
On a direct cost basis, that's correct. Yes.
Henry Coffey -- Wedbush Securities -- Analyst
Exactly. And then the interplay between Ocwen and Altisource and NRZ, so you are -- you are locked into use Altisource as a vendor on all but 10% of the related services. Is there a point where that contract, you've completed the transition and then that contract is completely open and goes to zero?
Glen A. Messina -- President and Chief Executive Officer, Director
Henry, as you may recall, the contract between Altisource and Ocwen was put in place at the time Altisource was spun off out of the Ocwen family of companies. That agreement runs until 2025 and Altisource is our service provider for portfolios where Ocwen controls the -- Ocwen controls the direction of services with the exception of we can direct up to 10% of the business off to a third party. For areas where we do not control -- portfolios where we do not control the provision of services, third-party services, the party we're subservicing for, they have the discretion to designate whoever they want to. So obviously for the NRZ portfolio, they can designate who their service provider is. For portfolios where we can control, we could designate up to 10% to an alternative service provider.
Henry Coffey -- Wedbush Securities -- Analyst
And this -- that would include newly acquired MSRs?
Glen A. Messina -- President and Chief Executive Officer, Director
That's correct. Now, obviously, that's all subject to Altisource maintaining the performance standards they agreed to in the agreement, to the extent that there is a failure, they have a secure period, but they have to perform to earn that business, as you might expect. That's traditional in any service contract.
Henry Coffey -- Wedbush Securities -- Analyst
And then when you've completed the transition to Black Knight, the only remaining relationship with Altisource will be around sort of asset preservation and resolution services or would there be other relationships?
Glen A. Messina -- President and Chief Executive Officer, Director
Well, it's the breadth of services that they do for their provision -- for our servicing operations, the vast majority of which are around the back-end processes, the property preservation, OREO, that type of stuff.
Henry Coffey -- Wedbush Securities -- Analyst
And then finally with the regulators, it always seems kind of murky to us, but is there an active dialog? Is there a point of resolution where everybody is happy? I hate to use that word. I'm sure that's not a legal term. And how close are we to that point where people sit back and say, we have a good -- the state and other regulators you deal with sit back and say, hey, I think we have a constructive relationship and the penalties are over and the legal wrangling is over and everybody is on good terms with each other?
Glen A. Messina -- President and Chief Executive Officer, Director
Henry, we are maintaining very active, I would say, proactive dialog with all of our regulators through the PHH integration process. We actually have regular integration update calls with all of our regulators. Certain regulators, we go see personally and do follow-up presentations, but we are maintaining a very active and engaged dialog for the express purpose of making sure we manage those relationships proactively and address any issues or concerns that our regulators may have during the integration process. And so far it's been a very productive exchange and a productive dialog. We're addressing issues to the extent they have any and I feel good about the progress we're making.
Henry Coffey -- Wedbush Securities -- Analyst
Is there a point where the costs related to all that become just sort of a rounding error or...
Glen A. Messina -- President and Chief Executive Officer, Director
Well, our cost to manage the regulatory relationships is just going to be an ongoing part of the business that...
Henry Coffey -- Wedbush Securities -- Analyst
No, I meant any legal fines and the like.
Glen A. Messina -- President and Chief Executive Officer, Director
As we expect -- as we continue to work toward resolution of the remaining legacy, legal, and regulatory matters, we do expect our non-routine litigation expenses would decline. And as I said during the earnings call -- formal portion of the earnings call, we've made significant investments in our compliance and risk management infrastructure and our compliance management system, we've improved operational performance, and we expect that over time that should help result in lower non-routine litigation expenses.
Henry Coffey -- Wedbush Securities -- Analyst
Great. Thank you. A tremendous amount of work going on here and it's obviously you are well positioned to keep moving forward. So thank you for your comments.
Glen A. Messina -- President and Chief Executive Officer, Director
Yes, sir. Thank you.
Operator
Our next question is from Giuliano Bologna with BTIG. Please proceed with your question.
Giuliano Anderes-Bologna -- BTIG -- Analyst
Good morning and thank you for taking my questions.
Glen A. Messina -- President and Chief Executive Officer, Director
Good morning.
Giuliano Anderes-Bologna -- BTIG -- Analyst
So just trying to true up a couple of the additional disclosure around the cost savings, obviously you've made great progress getting from the $200 million range to $340 million, but thinking about that, there is a little mismatch between the time frame of achieving profitability and those cost saves. The cost saves are supposed to come over 12 to 15 months, or -- sorry, the profitability is 12 to 15 months and the cost saves will go in over the next 12 to 18 months. How should we think about the amount needed to get to profitability?
Glen A. Messina -- President and Chief Executive Officer, Director
Yeah. Giuliano, the cost savings are actually going to be -- if you look at that 12 to 18-month time frame, the real bulk of the cost savings occur after the loan boarding event and the legal entity merger. So that would be effectively the back half of 2019. We're expecting by the fourth quarter of 2019 that we will have taken actions to realize $300 million of annual run rate savings. So almost all of the $340 million gets realized within the 2019 calendar year just afterwards -- after we complete the loan boarding. There is another at least $40 million that we expect to realize during the course of 2019 that's largely coming from operational process improvements -- I'm sorry, 2020, $40 million in 2020 that's coming from continued operational process improvements and facilities closure costs that will be coming in, I guess, fairly ratably during the course of 2020.
Giuliano Anderes-Bologna -- BTIG -- Analyst
That makes sense. And then just thinking about the (inaudible) on the cost side, how should we think about the allocation of those costs and kind of the timing for the $55 million to $65 million?
Glen A. Messina -- President and Chief Executive Officer, Director
Yeah. The $55 million to $65 million in upfront costs would almost follow the recognition of the cost takeout or the cost reduction. One of the biggest categories that we do have in the cost reduction is related to severance and retention for people, so -- and there are significant people actions that are happening during the course of this. So it again will be timed as absent any accounting accrual requirements to record things early, the actual cash expenditure is going to be timed as staffing -- as positions are liberated and staffing rolls off out of the business.
Giuliano Anderes-Bologna -- BTIG -- Analyst
That makes sense. And then just on the bulk acquisitions that the Company closed in the fourth quarter and year-to-date, have you disclosed the amount that happened in 2019 versus the 4Q?
Glen A. Messina -- President and Chief Executive Officer, Director
Well, so far in 2019 in the bulk MSR acquisitions, yeah, $5.4 billion is what we've been either awarded or have closed on. That's a combination of both Agency and Ginnie Mae MSRs. We're excited that we've come out of the gate strong. There is a strong market, albeit pricing is probably at the lower end of the range of what we thought, but we are cautiously optimistic that there is going to continue to be a robust MSR acquisition market, which can help us achieve our growth objectives.
Giuliano Anderes-Bologna -- BTIG -- Analyst
That makes sense, and while I'm sort of annualizing, that is not necessarily the right way to look at it, but that gets you, if you were to do that throughout the year, that would get you into the $30 billion range plus originations and I'm assuming that's probably another basis for thinking about your ability to get to $35 billion of MSRs on the balance sheet to replenish.
Glen A. Messina -- President and Chief Executive Officer, Director
Yeah. The annualization math would suggest that. Look, we are subject to market timing of deals coming into the marketplace. We did mention that our restart-up -- our restart or reentry of the correspondent forward lending business is going to occur late second quarter. So that will be -- that volume will be essentially back-end loaded. So look, I -- we're cautiously optimistic that we can achieve our objectives, but obviously we are subject to market volumes for sure.
Giuliano Anderes-Bologna -- BTIG -- Analyst
That's great. I appreciate the time. Thank you very much.
Glen A. Messina -- President and Chief Executive Officer, Director
Thank you.
Operator
We now have a follow-up question from Bose George. Please proceed with your question.
Bose George -- Keefe, Bruyette & Woods -- Analyst
Great. Thanks. I just wanted to go back to slide 13. Can you just go over what happens exactly after April 2020?
Catherine M. Dondzila -- Senior Vice President, Chief Accounting Officer
Sure. This is Cathy, Bose. What we have is the remaining amortization. If you think about sort of how the original upfront lump sum cash is going to be rolling out, we're going to be amortizing that into income, the remaining balance, which I think we disclosed was around $139 million. That will be amortizing similar to, if you look on slide 13, you see for the fiscal year 2018, that was around $151 million, down there was the prior year impact, '18. So we'll be taking that $139 million over the remaining, I'm going to say, 15 months or so of that transaction starting here in January.
Glen A. Messina -- President and Chief Executive Officer, Director
And Bose, this is Glen. So I think you were looking for what happens after, right, what happens after -- it -- mean effectively the income statement will reflect more traditional subservicing economics, right? So there is -- there would be these entries that are reflected on slide 13 effectively get down-scaled and you would see more traditional subservicing economics flowing through our P&L.
Bose George -- Keefe, Bruyette & Woods -- Analyst
And the $139 million, is that kind of a declining number? So by the end of that period -- it's not kind of a straight line, right?
Catherine M. Dondzila -- Senior Vice President, Chief Accounting Officer
No. It sort of goes down like a mortgage amortizes. So it will amortize off over the next 15 months to zero by the end of April of 2020.
Bose George -- Keefe, Bruyette & Woods -- Analyst
And your profitability guidance incorporates that runoff of that amortization. Is that right?
Glen A. Messina -- President and Chief Executive Officer, Director
Yes, it does. As a matter of fact, the $340 million in cost reengineering savings that we're expecting to realize is more than enough to offset that amortization.
Bose George -- Keefe, Bruyette & Woods -- Analyst
Okay. Great. Thank you.
Glen A. Messina -- President and Chief Executive Officer, Director
You're welcome.
Operator
We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.
Glen A. Messina -- President and Chief Executive Officer, Director
Great. Thank you, operator. We've made a tremendous amount of progress in a short period of time and we've got a roadmap where we believe we can get the Company back to profitability in 12 to 15 months, assuming execution of our cost reengineering and growth objectives and assuming no other changes in market conditions or legal and regulatory matters. We thank you for your continued interest in Ocwen, and look forward to speaking to you next quarter.
Operator
Thank you. This concludes today's conference. You may disconnect your lines at this time, and have a great day.
Duration: 58 minutes
Call participants:
Hugo Arias -- Managing Director, Investor Relations
Glen A. Messina -- President and Chief Executive Officer, Director
Catherine M. Dondzila -- Senior Vice President, Chief Accounting Officer
Bose George -- Keefe, Bruyette & Woods -- Analyst
Henry Coffey -- Wedbush Securities -- Analyst
Giuliano Anderes-Bologna -- BTIG -- Analyst
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