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8 OCWEN'S TROUBLES WITH RATING AGENCIES, INVESTORS CONTINUE Ongoing regulatory scrutiny, along with allegations of servicing violations, have resulted in the removal of Ocwen Financial from Morningstar Credit Ratings' Alert and the lowering of the Atlanta- based servicer's operational risk assessment rankings. Morningstar's announcement came just one day after Ocwen CEO Ron Faris told his company's stakeholders he expected Ocwen's earnings in Q 4 to take a hit based on mounting regulatory pressures, expenses, and a ratings downgrade by Fitch Ratings. Ocwen's four operational risk assessment rankings as determined by Morningstar were all lowered: Ocwen Loan Servicing's residential non-prime servicer, residential prime servicer, and residential special servicer rankings were all lowered from "MOR RS3" down to "MOR RS2," while Ocwen Financial Solutions Pvt. Ltd.'s residential vendor ranking was dropped from "MOR RV3" down to "MOR RV2." "e forecast for all four rankings is negative," Morningstar said in the announcement. "Morningstar believes continuing regulatory scrutiny, litigation by mortgage bond investors, the increasing cost and associated liquidity pressures of servicing loans amid several regulatory settlements, and management and staff departures could have further negative consequences to OFC's residential mortgage servicing business. Morningstar will continue to monitor developments as they occur." e rankings were originally placed on Alert in December 2014 after the announcement that Ocwen had reached a $150 million settlement with the New York Department of Financial Services (DFS) to settle claims of mortgage servicing violations and issues related to corporate governance. e settlement was announced following a two-year investigation by the New York DFS, and the terms also included the departure of Ocwen's Chairman Bill Erbey in January. Erbey founded Ocwen in the mid-1980s. On January 23, 2015, Ocwen settled with the California Department of Business Oversight for $2.5 million to resolve claims of non- compliance with regards to mortgage servicing practices. As part of that settlement, Ocwen will be subject to third-party compliance review and will require regulatory approval for acquisition of any additional loan servicing rights in California. e same day that settlement was announced, a group of major investors issued a note accusing Ocwen of failing to collect payments on $82 billion worth of home loans. Ocwen fired back, calling the claims "baseless" and accusing the investors of pushing homeowners into foreclosure. According to Morningstar's announcement, Ocwen serviced a portfolio of more than 972,000 non- prime residential loans with an aggregate unpaid balance (UPB) of about $167 billion, as of June 30, 2014. Ocwen's residential mortgage special servicing portfolio consisted of 4,613 loans with an aggregate UPB of about $1.1 billion, and the company's prime residential mortgage servicing portfolio was made up of approximately 1.1 billion loans with about $191 billion in aggregate UPB. In a note to stakeholders, Faris reviewed a handful of the regulatory hurdles Ocwen had to deal with in the past year, including a long-running investigation from New York's top financial regulator that eventually resulted in a $150 million settlement. e company plans to take an additional $50 million charge to its Q 4 expenses as a result of that agreement after already setting aside $100 million in Q 3. Aside from that, Faris said Ocwen closed 25 exams from state regulators in the past year, leaving 21 pending investigations still open. Based on current dealings with regulators, the company doesn't expect any major fines, penalties, or settlements ahead, though management does anticipate resolving two legacy matters for a total of less than $1 million, he added. Also expected to take a toll on Q 4 earnings are an anticipated increase in servicing expenses and uncollectable receivables and a $13 million expense for third-party monitoring costs. "As a result of the items just discussed and other fourth quarter events, we expect to record a loss in the fourth quarter of 2014 and for the total year," Faris wrote. Looking ahead, Faris anticipates "the level of these types of expenses will decrease significantly" this year as Ocwen clears out some of its remaining legacy issues. Ocwen said its servicer ratings have fallen below the minimum criteria established in 482 private-label securities agreements. However, the company is currently not aware of plans from any securities trustee to move their servicing as a result of those changes. Responding to the Fitch announcement, Faris said recent actions have been based largely on public information and "have not pointed to actual servicing performance deficiencies." "Objective data on PLS performance continues to show that Ocwen excels in managing loss mitigation timelines, bringing borrowers current on their payments and keeping them current," he said. "For these reasons, we believe it is in the best interests of all stakeholders to continue to keep Ocwen on the job." Investors continue to be skittish. In light of the recent struggles, New York-based investor Mangrove Partners Master Fund, one of the 10 largest shareholders in Home Loan Servicing Solutions (HLSS) delivered a letter to the HLSS Board of Directors with regards to HLSS's relationship to Ocwen. Mangrove Partners originally wrote to the HLSS Board of Directors, requesting the mortgage servicer terminate its relationship with Ocwen immediately. "We believe that continuing to expose HLSS to Ocwen-related risks by leaving the Ocwen relationship intact constitutes a dereliction of your duty to the company and a grave risk to all shareholders," Mangrove Partners wrote in the letter. "Your response was inadequate. As a result, it is our intention to nominate a slate of replace- ment directors for election this year because time is not the company's friend, and you as the board are showing no signs of taking concrete action to protect shareholders in this serious situation." Mangrove Partners contended in the response letter that the downgrading of Ocwen's ratings in October by Moody's constituted a termination event which allows HLSS to exercise contractual rights to terminate its relationship with the troubled Atlanta-based mortgage servicer. According to the letter, a termination event is defined as "the occurrence of any one or more of the following events…(e) Seller [Ocwen] fails to maintain residential primary servicer ratings for subprime loans of at least 'Average' by Standard & Poor's Rating Services." e letter stated that yet another termination event occurred when Ocwen's ratings were downgraded again, this time by Morningstar. "We believe that there are compelling reasons why HLSS should immediately begin the process of exercising its rights to direct Ocwen to transfer the servicing rights to one or more different servicers," the letter stated. "Most importantly, servicing transfers will isolate HLSS from the risks of an ongoing relationship with Ocwen." According to Morningstar's announcement, Ocwen serviced a portfolio of more than 972,000 non- prime residential loans with an aggregate unpaid balance (UPB) of about $167 billion, as of June 30, 2014.

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