Home Loan Servicing Solutions acquired certain non-agency mortgage servicing assets with unpaid principal balances from Ocwen earlier this year. The impact has picked up its second quarter results.

By the end of the second quarter, the first full quarter of operations after the purchase, measures taken to adjust the firm’s book value to the asset swap place HLSS on solid ground, at least for the immediate future.

HLSS reported $0.33 earnings per share during 2Q2012. Net income was $4.7 million, a visible improvement compared to $1.3 million in the first quarter and losses of $17,000 in the second quarter of 2011.

According to the firm’s president John Van Vlack quarter earnings benefited form the addition of $2.9 billion in unpaid principal balance advances from Ocwen on May 1, 2012. The flow purchase brought the servicer’s UPB portfolio up to $17.3 billion.

“At this point we’re hedged on the LIBOR rate,” said SVP and CFO of HLSS, James Lauter. “It doesn’t impact us.”

Measures were taken to reflect the acquisition of Ocwen assets and the effect of the London Interbank Offered Rate Index on the asset value after the swap, rather than to hedge risk, says Lauter.

“We do not think there is any risk related to Ocwen,” even though these assets did affect the book value of the company, he said. “With respect to the LIBOR hedge, we really characterized it as risk,” which is why HLSS hedged its interest risk exposure related to the two acquisitions from Ocwen.

HLSS was doing business as usual. It took action before the U.S. and British government officials started dealing with the LIBOR scandal. More than a dozen banks that allegedly manipulated the LIBOR index may have caused hundreds of billions of dollars in financial damages to various private and state entities, Lauter says, but LIBOR will not have an impact on the firm’s current operations.

HLSS reported it has executed “a swap of variable rate LIBOR for a fixed rate of 60 basis points for a term of 48 months.” The move aims to cover “the projected interest exposure resulting from the acquisition.”

For the first acquisition the LIBOR rate was locked in at 63basis points for 48 months, Lauter said. In May when the firm purchased a smaller Ocwen asset, the rate was locked at 60 basis points for 48 months.

Since HLSS entered into those swap agreements “the LIBOR has come down,” he added, making it necessary to book the change of the value of those swaps under hedge accounting. “We booked the value as comprehensive income, or loss, so they don’t float through the income statement until we actually pay the interest,” he said.

The HLSS balance sheet includes a $10.6 million revenue adjustment under: Interest Income--Notes Receivable--Rights to MSRs that reflects the management reporting perspective. The total effect of these adjustments is a net zero, Lauter explained, “It’s just a reclassification of realigned items.”

The accounting the company follows for “gap accounting purposes “ is that MSRs are classified as financing. In the second quarter it consisted of servicing fees of $23 million, less a servicing expense to Ocwen of $9.7 million and amortization of $2.7 million.

“This statement is a reconciliation between gap accounting results and management reporting,” he said.

During the quarter HLSS sold 129,600 shares that generated net proceeds of $ 1.7 million, “to cover underwriters’ over allotment.”

Lower delinquency rates also contributed to quarter results, HLSS said. UPB delinquencies decreased to 21% and the ratio of advances to UPB improved to 2.5%.

Highlights include an annualized prepayment rate of 15.2% “with no change in servicing asset valuations.”

HLSS plans to further grow its UPB portfolio, “by drawing on Ocwen’s portfolio, which exceeds $100 billion of UPB of servicing owned,” Vlack said.

Roughly $15 million in excess cash generated after dividends were paid was used to purchase Ocwen assets and maintain the current portfolio size.

According to Lauter said HLSS does not have any specifically defined portfolio growth goals for the rest of 2012. These slow purchase type of acquisitions will serve to roughly “replenish the run off and maybe grow slightly.”

Going forward he sees additional equity and asset purchases “as catalysts for significant growth” of the existing portfolio. And again HLSS will use cash generated in excess of the HLSS dividend to complete the August purchase, he said.

A second Ocwen flow purchase is scheduled on August 1, 2012.


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