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NOTE 2 ACQUISITIONS | 12 Months Ended
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Dec. 31, 2011
Mergers, Acquisitions and Dispositions Disclosures [Text Block] | NOTE 2 ACQUISITIONS Litton Acquisition As disclosed in Note 1, Ocwen completed its acquisition of the Litton Loan Servicing Business on September 1, 2011. The transaction was completed in accordance with the provisions of the Purchase Agreement (the Agreement) between Ocwen and Goldman Sachs dated June 5, 2011. Ocwen completed the acquisition in order to expand its Servicing segment. The Litton Acquisition resulted in the acquisition by Ocwen of a servicing portfolio of approximately 245,000 primarily non-prime residential mortgage loans with approximately $38.6 billion in unpaid principal balance (UPB) and the servicing platform of Litton Loan Servicing Business based in Houston, Texas and McDonough, Georgia. The base purchase price for the Litton Acquisition was $247,154, which was paid in cash by Ocwen at closing. In addition, Ocwen repaid at closing Litton’s $2,423,123 outstanding debt on an existing servicing advance financing facility that was provided by an affiliate of Goldman Sachs and entered into a new advance financing facility under which it borrowed $2,126,742 from Goldman Sachs. On September 1, 2011, Ocwen and certain of its subsidiaries also entered into a $575,000 senior secured term loan facility agreement to fund the base purchase price and the amount by which the repayment of Litton’s advance financing facility debt exceeded the proceeds from the new advance financing facility. Borrowings under the senior secured term loan facility are net of an original issue discount of $11,500, which is being amortized over the life of the loan. See Note 13 and Note 15 for additional details of the new advance financing facility and the senior secured term loan. The actual base purchase price was increased by $214 as a result of post-closing adjustments specified in the Agreement for changes in Litton’s estimated closing date net worth, servicing portfolio UPB and advance balances, among others. We do not anticipate any significant adjustments to the purchase price subsequent to December 31, 2011. The transaction has been accounted for using the acquisition method of accounting which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the preliminary estimate of the fair values of assets acquired and liabilities assumed as part of the Litton Acquisition:
Cash |  | $ | 23,791 |
Advances |  |  | 2,468,137 |
MSRs |  |  | 144,314 |
Premises and equipment, net |  |  | 3,386 |
Other assets |  |  | 5,829 |
Servicing liabilities |  |  | (8,972 | )
Checks held for escheat |  |  | (6,145 | )
Accrued expenses |  |  | (25,471 | )
Total identifiable net assets |  |  | 2,604,869 |
Goodwill |  |  | 65,622 |
Total consideration |  |  | 2,670,491 |
Litton debt repaid to Goldman Sachs at closing |  |  | (2,423,123 | )
Base purchase price, as adjusted |  | $ | 247,368 |
The allocation of the purchase price is considered preliminary and therefore subject to change until the end of the measurement period (up to one year from the acquisition date). We do not anticipate any significant adjustments to the allocation of the purchase price subsequent to December 31, 2011. Consistent with our fair value policy for MSRs as disclosed in Note 3, we estimated the fair value of the MSRs by calculating the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. The initial valuation of premises and equipment was based on the in-use valuation premise, where the fair value of an asset is based on the highest and best use of the asset that would provide maximum value to market participants principally through its use with other assets as a group. This valuation presumed the continued operation of the Litton Loan Servicing Business platform as installed or otherwise configured for use. The acquired premises and equipment consisted primarily of computer hardware and software. During the fourth quarter of 2011, we ceased operation of the Litton Loan Servicing Business platform and sold the computer hardware and software to Altisource for a cash purchase price of $418. The proceeds received were significantly less than the appraised value at the time the transaction closed, as this appraisal reflected the value of each asset as part of a working platform which was no longer the case once we ceased operating the Litton Loan Servicing Business in the fourth quarter. These assets were initially valued at $21,302 on September 1, 2011. As a result of the sale, we reduced the provisional fair value assigned to these assets at the acquisition date to a value that reflects their subsequent sales price and increased the amount allocated to goodwill. In addition, certain of the acquired premises and equipment are no longer in use and have been written down to their salvage value. For those that will be abandoned after year end but before the end of their previously estimated useful life, depreciation has been adjusted to reflect the shortened life. Ocwen is considering subleasing office space acquired as part of the Litton Acquisition. Advances are non-interest bearing receivables that are expected to have a short average collections period and were, therefore, valued at their face amount, consistent with Ocwen’s fair value policy for servicing advances. Other assets and liabilities that are expected to have a short life were also valued at the face value of the specific assets and liabilities purchased, including receivables, prepaid expenses, accounts payable and accrued expenses. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined business. The goodwill portion of the purchase price allocation shown in the table above pertains to the Servicing segment. The acquisition of Litton is treated as an asset acquisition for U.S. tax purposes. We expect the opening tax basis for the acquired assets and liabilities to be the fair value as shown in the table above. We expect the MSRs and goodwill to be treated as intangible assets acquired in connection with the purchase of a trade or business and as such, amortized over 15 years for tax purposes. Additionally, the Agreement provides that the severance plans of Litton and Goldman Sachs remain in effect for one year. We recognized severance expense of $10,119 during 2011 as steps taken to reorganize and streamline the operations of Litton obligated Ocwen to pay severance under those plans. Severance expense is included in Compensation and benefits in our Consolidated Statements of Operations. In connection with the establishment of the match funded advance facility Ocwen funded a reserve in the initial amount of $42,535 which is held by the facility Indenture Trustee for the benefit of the note holders. Ocwen also paid Barclays an $11,500 arrangement fee in connection with the senior secured term loan agreement. This fee along with the discount and certain other professional fees incurred in connection with the establishment of the facility are being amortized over the five-year life of the loan. As part of the Litton Acquisition, Goldman Sachs and Ocwen have agreed to indemnification provisions for the benefit of the other party. Additionally, Goldman Sachs has agreed to retain certain contingent liabilities for fines and penalties that could potentially be imposed by certain government authorities relating to Litton’s pre-closing foreclosure and servicing practices. Further, Goldman Sachs and Ocwen have agreed to share certain losses arising out of third-party claims in connection with Litton’s pre-closing performance under its servicing agreements. Goldman Sachs has agreed to be liable for (i) 80% of any such losses until the amount paid by Goldman Sachs is equal to 80% of the Goldman Shared Loss Cap and (ii) thereafter, 20% of any such losses until the amount paid by Goldman Sachs is equal to the Goldman Shared Loss Cap. Ocwen has agreed to be liable for (i) 20% of any such losses until the amount paid by Ocwen is equal to 20% of the Goldman Shared Loss Cap, (ii) thereafter, 80% of any such losses until the amount paid by Ocwen is equal to the Goldman Shared Loss Cap and (iii) thereafter, 100% of any such losses in excess of the Goldman Shared Loss Cap. The “Goldman Shared Loss Cap” is currently approximately $123,684 or 50% of the adjusted base purchase price of the Litton Acquisition, but which may be further adjusted if any additional adjustments to the purchase price are made. In connection with the Litton Acquisition, Ocwen, Goldman Sachs Bank USA, Litton and the New York State Banking Department have entered into an agreement (the NY Agreement) that sets forth certain loan servicing practices and operational requirements. No fines, penalties or other payments were assessed against Ocwen or Litton under the terms of the NY Agreement. We do not believe that our commitments under the NY Agreement will have a material impact on our financial statements. The following table presents the revenue and earnings of the Litton Loan Servicing Business that is included in our Consolidated Statement of Operations from the acquisition date of September 1, 2011 through December 31, 2011:
Revenues |  | $ | 62,750 |
Net loss (1) |  | $ | (20,910 | )
(1) | Net loss includes non-recurring transaction related expenses of $49,552, including (i) $33,127 of severance and other compensation related to Litton employees, (ii) $6,778 of amortization of the acquired MSRs, (iii) $1,967 of depreciation resulting from the write-down of certain of the acquired furniture and fixtures that are no longer in use and (iv) $384 of fees for professional services related to the acquisition. Net loss does not include an allocation of costs related to the servicing of the Litton loans on Ocwen’s platform. We computed income taxes using a combined statutory rate of 36.12% for federal and state income taxes.
The following table presents supplemental pro forma information as if the acquisition of Litton occurred on January 1, 2010. Pro forma adjustments include:
| · | conforming revenues to the revenue recognition policy followed by Ocwen rather than the policies followed by Litton;
| · | conforming the accounting for MSRs to the valuation and amortization policy of Ocwen rather than the policies followed by Litton;
| · | reversing depreciation recognized by Litton and reporting depreciation based on the estimated fair values and remaining lives of the acquired premises and equipment at the date of acquisition;
| · | adjusting interest expense to eliminate the pre-acquisition interest expense of Litton and to recognize interest expense as if the acquisition-related debt of Ocwen had been outstanding at January 1, 2010; and
| · | reporting acquisition-related charges, including severance paid to Litton employees and fees for professional services related to the acquisition as if they had been incurred in 2010 rather than 2011.
The pro forma consolidated results are not indicative of what Ocwen’s consolidated net earnings would have been had Ocwen completed the acquisition of Litton on January 1, 2010 because of differences in servicing practices and cost structure between Ocwen and Litton. In addition, the pro forma consolidated results do not purport to project the future results of Ocwen combined nor do they reflect the expected realization of any cost savings associated with the Litton Acquisition.
|  | 2011 |  |  | 2010 (1) |
|  | (Unaudited) |  |  | (Unaudited) |
Revenues |  | $ | 642,033 |  |  | $ | 632,721 |
Net income (loss) |  | $ | 52,407 |  |  | $ | (169,886 | )
(1) | In December 2010, Litton deemed goodwill to be wholly impaired and wrote off the balance of $154,065. Litton also recorded a provision for losses on servicing advances of $33,734 in 2010.
Through December 31, 2011, we incurred approximately $1,170 of fees for professional services related to the Litton Acquisition that are included in Operating expenses. HomEq Acquisition On September 1, 2010, Ocwen completed the HomEq Acquisition. The sellers were Barclays Bank PLC, a corporation organized under the laws of England and Wales (Barclays), and Barclays Capital Real Estate Inc., a corporation organized under the laws of the State of Delaware (BCRE). The HomEq Acquisition was completed in accordance with the provisions of the Asset Purchase Agreement dated May 28, 2010 among Barclays, BCRE, OLS and Ocwen. This transaction did not result in the transfer of ownership of any legal entities. Ocwen acquired HomEq Servicing in order to grow its Servicing segment. With the close of the HomEq Acquisition, Ocwen boarded 134,000 residential mortgage loans with an aggregate unpaid principal balance of $22,400,000 onto its servicing platform. OLS paid an initial aggregate purchase price of $1,196,747 in cash upon completion of the HomEq Acquisition. Of this amount, $852,617 was funded by notes issued by a new $1,011,000 structured servicing advance financing facility, $150,000 was paid from funds held in escrow in accordance with the terms of the new $350,000 senior secured term loan facility and $194,130 consisted of cash and funds borrowed pursuant to the senior secured term loan facility. See Note 13 and Note 15 for additional details regarding the terms of the notes supporting these facilities. The initial purchase price was reduced by $29,625 pursuant to an initial true-up of advances as reflected in the table below. We recorded a receivable of $1,449 as of December 31, 2010 for amounts due to us for further true-up under adjustment mechanisms and repurchase rights as provided in the Asset Purchase Agreement. We collected this receivable in 2011. The transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the fair values of assets acquired and liabilities assumed as part of the HomEq Acquisition:
Mortgage servicing rights |  | $ | 84,324 |
Advances |  |  | 1,063,180 |
Receivables |  |  | 7,957 |
Premises and equipment, net |  |  | 6,728 |
Checks held for escheat |  |  | (4,616 | )
Accrued bonus |  |  | (3,037 | )
Servicing liabilities |  |  | (709 | )
Other liabilities |  |  | (964 | )
Total identifiable net assets |  |  | 1,152,863 |
Goodwill |  |  | 12,810 |
Total consideration |  | $ | 1,165,673 |
We estimated the fair value of the MSRs and consistent with Ocwen’s methodology as disclosed above and in Note 3. Receivables were valued at their face amount because of the short period between the acquisition date and realization. The valuation of premises and equipment was based on the in-use valuation premise where the highest and best use of the assets would provide maximum value to market participants principally through its use with other assets as a group. This valuation presumed the continued operation of the HomEq platform as installed or otherwise configured for use. The acquired premises and equipment consisted primarily of leasehold improvements. As disclosed in Note 10, subsequent to the acquisition we vacated the leased premises following termination of the former HomEq employees and recorded a charge of $5,840 to write off the leasehold improvements. Other liabilities that are expected to have a short life were valued at the face value of the specific liabilities purchased, including checks held for escheat, accrued bonuses and other liabilities. The goodwill portion of the purchase price allocation shown in the table above pertains to the Servicing segment. The acquisition of HomEq is treated as an asset acquisition for U.S. tax purposes. We expect the opening tax basis for the acquired assets and liabilities to be the fair value, which is shown in the table above. We expect the mortgage servicing rights and goodwill to be treated as intangible assets acquired in connection with the purchase of a trade or business and as such, amortized over 15 years for tax purposes. The asset purchase agreement provided for a 90-day true-up process for Advances and Mortgage servicing rights under limited circumstances. Payment for advances in the amount of $3,500 was held back in an escrow account under a four-year agreement during which Ocwen can seek reimbursement for existing and future uncollectible advances on certain pooling and servicing agreements under limited circumstances. Notwithstanding this holdback amount, the agreement provides for the reimbursement of uncollectible advances under all pooling and servicing agreements under limited circumstances. Severance payments for all HomEq Servicing employees who entered an employment agreement with Ocwen were recorded as steps were taken that obligated Ocwen to pay severance for all such employees. Severance expense of $20,727 is included in Compensation and benefits in our Consolidated Statement of Operations. In connection with the establishment of the match funded advance facility Ocwen paid Barclays a $10,110 securitization fee and funded a reserve in the initial amount of $14,342 held by the facility Indenture Trustee for the benefit of the note holders. The securitization fee along with and certain other professional fees paid in connection with the establishment of the facility will be amortized over the expected three-year life of the notes. Ocwen has no material financial obligation for litigation related to the operations of HomEq prior to the closing. The following table presents the revenue and earnings of HomEq Servicing that are included in our Consolidated Statement of Operations from the acquisition date of September 1, 2010 through December 31, 2010:
Revenues |  | $ | 43,127 |
Net loss (1) |  | $ | (26,953 | )
(1) | Net loss includes non-recurring transaction-related expenses of $51,136, including (i) $32,954 of severance and other compensation related to HomEq employees who accepted employment with Ocwen, (ii) $7,794 of lease termination costs, (iii) $5,840 of depreciation resulting from the write off of leasehold improvements, (iv) $5,486 of amortization of the acquired MSRs and (v) $2,556 of fees for professional services related to the acquisition. Net loss does not include an allocation of costs related to the servicing of the HomEq loans on Ocwen’s platform. We computed income taxes using a combined statutory rate of 37% for federal and state income taxes.
The following table presents supplemental pro forma information as if the acquisition HomEq Servicing occurred on January 1, 2009. Pro forma adjustments are the same as those described above for the Litton Acquisition. In addition, the pro forma adjustments include reversing revenues recognized by HomEq for business not acquired by Ocwen. The pro forma consolidated results are not indicative of what Ocwen’s consolidated net earnings would have been had Ocwen completed the acquisition HomEq Servicing on January 1, 2009 because of differences in servicing practices and cost structure between Ocwen and HomEq Servicing. In addition, the pro forma consolidated results do not purport to project the future results of Ocwen combined nor do they reflect the expected realization of any cost savings associated with the HomEq Acquisition.
|  | 2010 |  |  | 2009 |
|  | (Unaudited) |  |  | (Unaudited) |
Revenues |  | $ | 458,548 |  |  | $ | 591,505 |
Net income (loss) |  | $ | 42,786 |  |  | $ | (26,824 | )
Through December 31, 2010, we incurred approximately $3,977 of fees for professional services related to the HomEq Acquisition which are also included in Operating expenses. Facility Closure Costs During 2010, we accrued facility closure costs primarily consisting of severance, Worker Adjustment and Retraining Notification Act (WARN Act) compensation and lease termination costs for closure of the leased HomEq facilities. Following the acquisition, we terminated the former HomEq employees and vacated the leased facilities. Following the Litton Acquisition we also incurred severance and WARN Act compensation during 2011 related to terminated employees. The following table provides a reconciliation of the beginning and ending liability balances for HomEq and Litton employee termination benefits and for HomEq lease termination costs:
|  | Employee termination benefits (1) |  |  | Lease termination costs (2) |  |  | Total |
Liability balance as at January 1, 2010 |  | $ | — |  |  | $ | — |  |  | $ | — |
Additions charged to operations (3) |  |  | 32,954 |  |  |  | 7,794 |  |  |  | 40,748 |
Payments |  |  | (31,622 | ) |  |  | — |  |  |  | (31,622 | )
Liability balance as at December 31, 2010 (3) |  |  | 1,332 |  |  |  | 7,794 |  |  |  | 9,126 |
Additions charged to operations (3) |  |  | 33,127 |  |  |  | — |  |  |  | 33,127 |
Amortization of discount |  |  | — |  |  |  | 99 |  |  |  | 99 |
Payments |  |  | (29,296 | ) |  |  | (2,606 | ) |  |  | (31,902 | )
Liability balance as at December 31, 2011 (3) |  | $ | 5,163 |  |  | $ | 5,287 |  |  | $ | 10,450 |
(1) | Employee termination benefits include severance expense of $20,727 and $10,119 related to HomEq Servicing and Litton, respectively. The remaining liability of $1,332 for employee termination benefits related to the HomEq Acquisition was settled in 2011. We expect to pay the remaining liability of $5,163 for employee termination benefits related to the Litton Acquisition during the first quarter of 2012.
(2) | The lease agreements that we assumed for the HomEq facilities expire in 2017 and 2018. In December 2010, we exercised our option to terminate the HomEq lease agreements effective in 2013 and provided formal notice to the lessors. At that time, we recorded a charge of $7,794 to establish a reserve for the remaining lease payments discounted through the early termination date, including early termination penalties due in 2013. These charges are reported in Occupancy and equipment expense. See Note 30 for additional information regarding these leases.
(3) | All charges were recorded in the Servicing segment. The liabilities are included in Other liabilities in the Consolidated Balance Sheet.
In addition to the HomEq facility closure costs described above, we recorded a depreciation charge of $5,840 to write off the leasehold improvements related to the closed HomEq facilities.

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References No definition available. + Details
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