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Note 2 BUSINESS ACQUISITIONS | 12 Months Ended
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Dec. 31, 2012
Mergers, Acquisitions and Dispositions Disclosures [Text Block] |
NOTE 2 | BUSINESS ACQUISITIONS
We completed the acquisitions of Homeward, Litton Loan Servicing Business and HomEq Servicing in order to expand our residential servicing business. We accounted for these transactions using the acquisition method which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. In a business combination, the initial 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). 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 pro forma consolidated results presented below for each business acquisition are not indicative of what Ocwen’s consolidated net earnings would have been had we completed the acquisition on the dates indicated because of differences in servicing practices and cost structure between Ocwen and the acquiree. 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 each acquisition. The acquisition of Homeward was treated as a stock purchase for U.S. tax purposes. The acquisitions of Litton Loan Servicing Business and HomEq Servicing are treated as asset acquisitions 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 purchase price allocation tables below. 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. Homeward Acquisition Ocwen completed the merger which resulted in the acquisition of Homeward on December 27, 2012. In the Homeward Acquisition, we acquired the MSRs and subservicing for approximately 421,000 residential mortgage loans with a UPB of approximately $77 billion. We also acquired Homeward’s loan origination platform and its diversified fee-based business that includes property valuation, REO management, title, closing and advisory services. We expect to sell the acquired diversified-based business to Altisource in March 2013. As consideration, Ocwen paid an aggregate purchase price of $765,724. Of this amount, $603,724 was paid in cash and $162,000 was paid in Preferred Stock. $85,000 of the consideration has been placed into escrow for a period of 21 months following the closing date to fund any loss sharing payments and certain other indemnification payments that may become owed to Ocwen, as well as to fund certain expenses. See Note 18 for information related to the preferred stock. Payment of the cash consideration was financed, in part, by a $100,000 incremental term loan from Barclays Bank PLC (Barclays) pursuant to the existing senior secured term loan (SSTL) facility we entered into on September 1, 2011 and $75,000 from Altisource, pursuant to a new senior unsecured loan agreement. See Note 14 for additional information regarding the terms of these agreements. Following the acquisition, we paid $350,000 to terminate the senior credit facility and revolving line of credit that we assumed from Homeward. Purchase Price Allocation The following table summarizes the fair values of assets acquired and liabilities assumed as part of the Homeward Acquisition:
Cash |  | $ | 79,511 |
Loans held for sale (1) |  |  | 558,721 |
Mortgage servicing rights (1) |  |  | 358,119 |
Advances and match funded advances (1) |  |  | 2,266,882 |
Deferred tax assets (1) |  |  | 47,346 |
Premises and equipment (1) |  |  | 16,803 |
Debt service accounts |  |  | 69,287 |
Investment in unconsolidated entities (1) |  |  | 5,485 |
Receivables and other assets (1) |  |  | 56,886 |
Match funded liabilities |  |  | (1,997,459 | )
Lines of credit and other secured borrowings |  |  | (864,969 | )
Accrued bonuses |  |  | (35,201 | )
Checks held for escheat (1) |  |  | (16,418 | )
Other liabilities (1) |  |  | (80,112 | )
Total identifiable net assets |  |  | 464,881 |
Goodwill (1) |  |  | 300,843 |
Total consideration |  | $ | 765,724 |
The estimated fair values of the assets acquired and liabilities assumed at the acquisition date, as set forth in the table above, includes some accounts that are based on preliminary fair value estimates. The following factors led to certain balances (denoted above) having preliminary fair value estimates:
| • | The proximity of the Homeward acquisition date (December 27, 2012) to our fiscal year end (December 31, 2012);
| • | The complex nature of certain acquired assets and liabilities prevented us from completing our valuations and reconciliations;
| • | We engaged a third party specialist to assist in valuing certain assets and liabilities and this work is not yet complete; and
| • | Underlying information such as UPB and other loan level details have not yet been boarded and reconciled onto our servicing platform and therefore we have not been able to fully validate and reconcile certain assets and liability balances correlated with UPB data.
Our purchase agreement with Homeward allows for us to fully assess the valuation of the assets and liabilities acquired during an evaluation period that extends beyond the date of these consolidated financial statements. Because the measurement period is still open we expect that certain fair value estimates will change once we receive all information necessary to make a final fair value assessment. We expect that the measurement period will extend until at least June 30, 2013. Any measurement period adjustments that we determine to be material will be applied retrospectively to the period of acquisition in our consolidated financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could also be affected. Post-Acquisition Results of Operations The following table presents the revenue and earnings of the Homeward that is included in our Consolidated Statement of Operations from the acquisition date of December 27, 2012 through December 31, 2012:
Revenues |  | $ | 5,881 |
Net income |  | $ | 44 |
Pro Forma Results of Operations The following table presents supplemental pro forma information as if the acquisition of Homeward occurred on January 1, 2011. Pro forma adjustments include:
| • | conforming servicing revenues to the revenue recognition policy followed by Ocwen;
| • | conforming the accounting for MSRs to the valuation and amortization policies of Ocwen;
| • | reversing depreciation recognized by Homeward 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 Homeward and to recognize interest expense as if the acquisition-related debt of Ocwen had been outstanding at January 1, 2011 and
| • | reporting acquisition-related charges for professional services related to the acquisition as if they had been incurred in 2011 rather than 2012.
|  | 2012 |  |  | 2011 |
|  | (Unaudited) |  |  | (Unaudited) |
Revenues |  | $ | 1,362,927 |  |  | $ | 1,085,914 |
Net income (loss) |  | $ | 254,051 |  |  | $ | 163,647 |
Through December 31, 2012, we incurred approximately $990 of fees for professional services related to the Homeward Acquisition that are included in Operating expenses. Litton Acquisition Ocwen completed its acquisition of the Litton Loan Servicing Business on September 1, 2011. The Litton Acquisition included a servicing portfolio of approximately 245,000 primarily non-prime residential mortgage loans with approximately $38.6 billion in UPB and the servicing platform of the 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 and as part of the closing, Ocwen repaid Litton’s $2.4 billion outstanding debt on an existing servicing advance financing facility and entered into a new advance financing facility under which it borrowed $2.1 billion. On September 1, 2011, Ocwen and certain of its subsidiaries also entered into a $575,000 SSTL facility agreement to fund the base purchase price and the difference between the proceeds from the new advance financing facility and the amount repaid on Litton’s existing facility. The base purchase price was increased by $214 as a result of post-closing adjustments specified in the purchase agreement for changes in Litton’s estimated closing date net worth, servicing portfolio UPB and advance balances, among others. There were no adjustments to the purchase price subsequent to December 31, 2011. Purchase Price Allocation In August 2012, we finalized the purchase price allocation and recognized the following measurement-period adjustments:
|  | December 31, 2011 |  |  | Adjustments |  |  | Final |
Cash |  | $ | 23,791 |  |  | $ | — |  |  | $ | 23,791 |
Advances |  |  | 2,468,137 |  |  |  | — |  |  |  | 2,468,137 |
MSRs |  |  | 144,314 |  |  |  | — |  |  |  | 144,314 |
Premises and equipment |  |  | 3,386 |  |  |  | — |  |  |  | 3,386 |
Receivables |  |  | 2,159 |  |  |  | (941 | ) |  |  | 1,218 |
Other assets |  |  | 3,670 |  |  |  | — |  |  |  | 3,670 |
Servicing liabilities |  |  | (8,972 | ) |  |  | — |  |  |  | (8,972 | )
Checks held for escheat |  |  | (6,145 | ) |  |  | 2,206 |  |  |  | (3,939 | )
Accrued expenses |  |  | (25,471 | ) |  |  | 6,927 |  |  |  | (18,544 | )
Total identifiable net assets |  |  | 2,604,869 |  |  |  | 8,192 |  |  |  | 2,613,061 |
Goodwill |  |  | 65,622 |  |  |  | (8,192 | ) |  |  | 57,430 |
Total consideration |  |  | 2,670,491 |  |  |  | — |  |  |  | 2,670,491 |
Litton debt repaid to Goldman Sachs at closing |  |  | (2,423,123 | ) |  |  | — |  |  |  | (2,423,123 | )
Base purchase price, as adjusted |  | $ | 247,368 |  |  | $ | — |  |  | $ | 247,368 |
The December 31, 2011 comparative balance sheet has been revised to reflect the above measurement period adjustments. These adjustments had no effect on earnings. We estimated the fair value of the acquired advances, loans held for sale and MSRs and the assumed debt in a manner consistent with the methodology described in Note 4. 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. Premises and equipment which consisted primarily of computer hardware and software were initially valued 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. The initial valuation presumed the continued operation of the Litton Loan Servicing Business platform as installed or otherwise configured for use. 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 which was significantly less than the initial valuation because the individual assets were no longer valued as part of a working platform. As a result, we reduced the provisional fair value assigned to these assets at the acquisition date to a value that reflected their subsequent sales price and increased the amount allocated to goodwill. In addition, certain of the acquired premises and equipment were no longer in use and were written down to their salvage value. For those assets that were to be abandoned after year end but before the end of their previously estimated useful life, we adjusted depreciation to reflect the shortened life. Additionally, the purchase agreement provided 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 an $11,500 arrangement fee in connection with the SSTL 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. 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. Post-Acquisition Results of Operations 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.
Pro Forma Results of Operations 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;
| • | conforming the accounting for MSRs to the valuation and amortization policy of Ocwen;
| • | 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.
|  | 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 Ocwen completed the HomEq Acquisition on September 1, 2010. This transaction did not result in the transfer of ownership of any legal entities. With the close of the HomEq Acquisition, OLS boarded 134,000 residential mortgage loans with an aggregate unpaid principal balance of $22.4 billion onto its servicing platform. OLS paid an initial aggregate purchase price of $1.2 billion in cash upon completion of the HomEq Acquisition. Of this amount, $852,617 was funded by notes issued by a new $1.0 billion structured servicing advance financing facility, $150,000 was paid from funds held in escrow in accordance with the terms of the new $350,000 SSTL facility and $194,130 consisted of cash and funds borrowed pursuant to the SSTL facility. See Note 13 and Note 14 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 HomEq Agreement. We collected this receivable in 2011. Purchase Price Allocation The following table summarizes the final purchase price allocation:
Mortgage servicing rights |  | $ | 84,324 |
Advances |  |  | 1,063,180 |
Receivables |  |  | 7,957 |
Premises and equipment |  |  | 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 acquired advances, loans held for sale and MSRs and the assumed debt in a manner consistent with the methodology described in Note 4. 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. 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. Subsequent to the acquisition, we vacated the leased premises in 2010 following termination of the former HomEq employees and recorded a charge of $5,840 to write off the leasehold improvements. We sold the equipment acquired from HomEq to Altisource for cash proceeds equal to the acquisition fair value of $888. 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. Ocwen has no material financial obligation for litigation related to the operations of HomEq prior to the closing. Post-Acquisition Results of Operations 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.
Pro Forma Results of Operations The following table presents supplemental pro forma information as if the acquisition of HomEq Servicing occurred on January 1, 2009. Pro forma adjustments include:
| • | conforming revenues to the revenue recognition policy followed by Ocwen;
| • | reversing revenues for servicing portfolios not acquired by Ocwen;
| • | conforming the accounting for MSRs to the valuation and amortization policy of Ocwen;
| • | reversing depreciation recognized by HomEq 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 HomEq 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 HomEq employees and fees for professional services related to the acquisition as if they had been incurred in 2009 rather than 2010.
|  | 2010 |
|  | (Unaudited) |
Revenues |  | $ | 458,548 |
Net income (loss) |  | $ | 42,786 |
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 incurred 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. During 2011 and 2012, we incurred similar costs related to the Litton Acquisition. The following table provides a reconciliation of the beginning and ending liability balances for these 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 |
Additions charged to operations (3) |  |  | 2,869 |  |  |  | 5,030 |  |  |  | 7,899 |
Amortization of discount |  |  | — |  |  |  | 176 |  |  |  | 176 |
Payments |  |  | (8,032 | ) |  |  | (5,602 | ) |  |  | (13,634 | )
Liability balance as at December 31, 2012 (3) |  | $ | — |  |  | $ | 4,891 |  |  | $ | 4,891 |
(1) | Employee termination benefits include severance expense of $20,727 and $10,119 related to HomEq Servicing and Litton, respectively. The remaining liability for employee termination benefits related to the HomEq Acquisition was settled in 2011. We paid the liability for employee termination benefits related to the Litton Acquisition during 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. The balance at December 31, 2011 represented the remainder of the liability for the HomEq lease payments. In March 2012, we ceased using the Litton Georgia facility and recorded a charge of $4,779 to establish a liability for the remaining lease payments discounted through the lease expiration date in 2017. This lease does not contain an option for early termination, and we are actively attempting to sublease the space. In June 2012, we negotiated a buyout of the lease on the HomEq California facility for $2,900 which resulted in an additional expense of $251 as the payment exceeded the liability, net of unamortized discount.
(3) | All charges were recorded in the Servicing segment. Charges related to employee termination benefits and lease termination costs are reported in Compensation and benefits expense and Occupancy and equipment expense, respectively, in the Consolidated Statements of Operations. 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 in 2010 to write off the leasehold improvements related to the closed HomEq facilities. Goodwill The following table provides a reconciliation of the beginning and ending balances of goodwill for 2012:
|  | Homeward Acquisition |  |  | Litton Acquisition |  |  | HomEq Acquisition |  |  | Total |
Balance at December 31, 2011 |  | $ | — |  |  | $ | 57,430 |  |  | $ | 12,810 |  |  | $ | 70,240 |
Homeward Acquisition |  |  | 300,843 |  |  |  | — |  |  |  | — |  |  |  | 300,843 |
Balance at December 31, 2012 |  | $ | 300,843 |  |  | $ | 57,430 |  |  | $ | 12,810 |  |  | $ | 371,083 |
For Homeward, $102,374 of the goodwill portion of the purchase price allocation has been assigned to the Servicing segment, $121,458 has been assigned to the Lending segment and the remaining $77,011 has been assigned to the diversified fee-based business which is included in Corporate Items and Other. For Litton and HomEq, the entire balance of goodwill pertains to the Servicing segment. As disclosed above, we finalized the Litton purchase price allocation in August 2012 and recognized measurement-period adjustments which resulted in a reduction in goodwill of $8,192. The December 31, 2011 balance sheet was revised to reflect these adjustments. We have not recognized any impairment on the goodwill associated with these three business acquisitions.

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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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