ONITY GROUP INC. (ONIT) FY 2023 MD&A

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share amounts and unless otherwise indicated)

The Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-K generally discusses 2023 and 2022 items and provides year-to-year comparisons between 2023 and 2022. Discussions of year-to-year comparisons between 2022 and 2021 are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 28, 2023.

OVERVIEW

We are a leading non-bank mortgage servicer and originator providing solutions through our primary brands, PHH Mortgage and Liberty Reverse Mortgage. PHH is one of the largest non-bank servicers in the country based on UPB, focused on delivering a variety of servicing and lending programs. PHH is one of the largest correspondent lenders in the U.S. based on origination UPB. Liberty is one of the nation’s largest reverse mortgage lenders and servicer based on origination and securitization UPB, dedicated to education and providing loans that help customers meet their personal and financial needs. We serviced or subserviced 1.3 million loans with a total UPB of $288.4 billion on behalf of more than 3,900 investors and 113 subservicing clients as of December 31, 2023. We service all mortgage loan classes, including conventional, government-insured, non-Agency, small-balance commercial and multi-family loans. Our Originations business is part of our balanced business model to generate gains on loan sales and profitable returns, and to support the replenishment and the growth of our servicing portfolio. Through our retail, correspondent and wholesale channels, we originate and purchase conventional and government-insured forward and reverse mortgage loans that we sell or securitize on a servicing retained basis. In addition, we grow our mortgage servicing volume through MSR flow purchase agreements, Agency Cash Window and co-issue programs, bulk MSR purchase transactions, and subservicing agreements.

The table below summarizes the volume of Originations by channel during 2023, compared with the volume of the two preceding years. The volume of Originations is a key driver of the profitability of our Originations segment, together with margins, and a key driver of the replenishment and growth of our Servicing segment. In 2023, we added $50.4 billion of new volume, mainly $27.6 billion of new subservicing and $22.3 billion of non-bulk new servicing, as further detailed in the below table.

(1)Represents the UPB of loans that have been originated or purchased (funded) during the respective periods and for which we recognize a new MSR on our consolidated balance sheets upon sale or securitization.

(2)Represents the UPB of loans for which the MSR is purchased.

(3)Represents the UPB of reverse mortgage loans that have been securitized on a servicing retained basis. The loans are recognized on our consolidated balance sheets under GAAP without any separate recognition of MSRs.

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(4)Includes interim subservicing, including the volume of UPB associated with short-term interim subservicing for certain clients as a support to their originate-to-sell business.

The following table summarizes the average volume of our Servicing segment in 2023, compared with the two preceding years. The average servicing volume is a key driver of the profitability of our Servicing segment. In 2023, our total average servicing and subservicing portfolio increased $10.9 billion, or 4%, net of runoff, primarily driven by a $9.4 billion increase in MAV UPB and $4.6 billion new MSR capital partners to whom we sell MSRs while retaining the subservicing, offset in part by a $5.0 billion runoff of Rithm servicing portfolio. Our average owned MSR servicing portfolio stayed relatively flat year over year, with a $1.9 billion, or 2% increase.

As of December 31, 2023 and 2022, the total servicing and subservicing UPB amounted to $288.4 billion and $289.8 billion, respectively, a net decrease of $1.3 billion or 0.5%.

The following table presents key market interest rates and respective changes in the periods presented. As further discussed, the 30-year fixed rate mortgage is a key driver of the Originations volumes, the 10-year Treasury rate is a key benchmark for MSR valuation and hedging activities, and the 1-month SOFR is a key benchmark for the profitability of our Servicing segment (including float earnings and asset-backed financing cost). In 2023, mortgage interest rates continued to rise following the decision of the Federal Reserve to continue to raise its federal funds target rate (with four times a 25-basis point increase from February to July 2023), resulting in the 30-year fixed rate mortgage reaching its peak 7.79% in October, 2023 and its yearly average up 1.5 percentage points higher than the prior year. This rate increase continued to depress the origination market, significantly limiting refinance opportunities and maintaining pressure on borrower affordability. The 30-year fixed rate mortgage dropped in the fourth quarter of 2023 to return to levels similar to December 31, 2022 (up 19 basis points). Similarly, while the 10-year Treasury rate, a benchmark for MSR fair value changes attributable to rates, stayed flat year-over-year, it increased 140 basis points from March 31, 2023 to October 31, 2023 and decreased 100 basis points from October 31, 2023 to December 31, 2023.

(1)Source: Freddie Mac PMMS - Primary Mortgage Market Survey

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Financial Highlights

Results of operations for 2023

•Net loss of $64 million, or $8.34 loss per share basic and diluted

•Servicing and subservicing fee revenue of $947 million

•Originations gain on sale of $30 million

• $89 million MSR valuation loss attributable to rate and assumption changes, net of hedging

Financial condition at the end of the year

•Stockholders’ equity of $402 million, or $52.29 book value per common share

•MSR investment of $2.3 billion, down $393 million, and $10.9 billion increase in the average serviced and subserviced UPB as compared to the prior year

•Cash position of $202 million

•Total assets of $12.5 billion

Business Initiatives

We established the following key operating objectives to return to sustainable profitability and create long-term value for shareholders. As our near-term priority remains to return to sustainable profitability, we continue to execute our strategy around these objectives:

•Leveraging the core strengths of our balanced and diversified business through a continued focus on servicing and maintaining agility to address market-cycle opportunities;

•Driving prudent growth adapted for the environment, including emphasis on subservicing to drive capital-light servicing portfolio UPB growth and expansion of higher margin originations products and clients to drive accretive MSR investments;

•Reducing cost structure across the organization to achieve industry cost leadership by maintaining continuous cost improvement discipline and optimizing technology, global operations, and scale;

•Delivering industry top-tier servicing operational performance and driving increased borrower and client satisfaction.

•Optimizing liquidity, diversifying capital sources, including our multi-investor partnership model to fund new MSR originations which enables capital-light servicing portfolio growth and interest rate risk mitigation, and allocating capital to deliver value for shareholders, including deleveraging through opportunistic repurchases of our senior secured notes.

Our growth strategy includes acquiring assets and/or operations of complementary businesses, by means of acquisition, merger or other transaction forms. Our strategy may also include pursuing large transactions, including bulk purchases or sales of MSRs. We have engaged in such transactions in the past, and we continue to explore opportunities that may be accretive to our business and stockholders’ value.

Results of Operations and Financial Condition

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our audited consolidated financial statements and the related notes thereto appearing elsewhere in this Annual Report on Form 10-K.

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Ocwen reported a $63.7 million net loss in 2023, as compared to $25.7 million net income in 2022, mostly driven by the following:

•A $112.8 million, or 12% increase in revenue, with $166.1 million, or 20% growth in Servicing revenue partially offset by lower revenue in Originations. With a 4% increase of our average servicing volume, the Servicing revenue increase is primarily driven by interest rates, with $87.1 million incremental float and other ancillary income in 2023 and $47.0 million fair value losses on our reverse portfolio reported in 2022. In addition, a net favorable $24.5 million fair value change year-over-year was attributable to two key transactions (with gains on mortgage buyouts acquisition and securitization in 2023 and losses on Ginnie Mae EBO delinquent loan buyouts and sale in 2022). The decline in Originations revenue is primarily driven by significant decreases in volumes across all channels due to higher market interest rates affecting borrower behaviors.

•A $221.8 million higher loss on MSR valuation adjustments, net, primarily driven by MSR fair value gains reported in 2022 with changes in market interest rates (the 10-year Treasury rate increased by more than 2 percentage points in 2022, and remained flat in 2023), unfavorable MSR interest rate hedging strategy performance, and additional unfavorable rate and assumption updates to reflect market participant perspectives on the fair value of our MSRs and MSR pledged liabilities with actual trade pricing levels in 2023.

•A $120.3 million decrease in operating expenses, primarily due to lower production volume and headcount in our Originations segment, additional cost reductions across all segments and the reversal of our accrual related to the CFPB matter resolved in 2023.

•A $94.3 million increase in Other expense, net primarily due to $55.2 million higher net interest expense driven by a more than 300 basis point increase in average short-term interest rates, the indices of our asset-backed financings, and a $41.3 million increase in Pledged MSR liability expense mostly due to an increase in servicing spread remittance on the Excess Servicing Spread (ESS) financing liabilities issued beginning in the third quarter of 2022.

•A $6.4 million increase in income tax expense, primarily due to income tax benefit recognized in 2022 related to the favorable resolution of uncertain tax positions.

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Total Revenue

The below table presents total revenue by segment:

(1)Refer to Note 23 — Business Segment Reporting for a reconciliation to Total revenue for 2022 and 2021 and the change in presentation of CRL activities.

Total segment revenue for 2023 was $97.1 million, or 10%, higher as compared to 2022 due to a $166.1 million increase in Servicing revenue partially offset by a $69.0 million decrease in Originations revenue.

•The $166.1 million, or 20% increase in Servicing revenue is driven by an $87.1 million increase in float and other ancillary income with higher interest rates, a $15.7 million revaluation gain on reverse mortgage buyouts opportunistically acquired at a discount and securitized in 2023, and a 4% increase in average volume. In addition, the year-over-year revenue increase is impacted by losses recognized in 2022, with $47.0 million fair value losses on the reverse loans held for investment and HMBS-related borrowings, net driven by increasing interest rates and widening yield spread in 2022, and an $8.8 million loss on certain delinquent and aged loans repurchased in connection with the Ginnie Mae EBO program and sold.

•The $69.0 million, or 49% decrease in Originations revenue is primarily driven by a decrease in volumes across all channels due to higher market interest rates affecting borrower behaviors. Our reverse channels reported a $38.0 million decrease in gains on a 53% decline in volume, our forward channels reported a $22.6 million decrease in gains on sale mostly driven by lower recapture volume offset in part by higher margin, and an $8.4 million decline in fees primarily due to lower production volume.

MSR Valuation Adjustments, Net

The table below presents the key components of MSR valuation adjustments, net which include MSRs, MSR pledged liabilities and ESS financing liabilities at fair value, together with MSR hedging derivatives:

(1)Excludes fair value changes of reverse mortgage loans held-for-investment and HMBS related borrowing due to rates and assumptions that are part of the MSR hedging strategy. Refer to the MSR Hedging Strategy section of Item 7A. Quantitative and Qualitative Disclosures about Market Risks for further detail.

The $232.2 million loss on MSR valuation adjustments, net in 2023 is comprised of $143.6 million runoff, $55.5 million fair value loss attributed to rates and assumptions and $33.1 million loss on MSR hedging derivatives. MSR valuation adjustments, net decreased by $221.8 million (higher loss) in 2023 compared to 2022 largely driven by interest rates, as discussed below.

•MSRs are subject to runoff, a fair value decline due to the realization of expected cash flows and yield based on projected borrower behavior, including scheduled amortization of the loan UPB together with projected voluntary prepayments. The favorable $20.9 million decrease in runoff year-over-year is mostly due to the ESS financing liabilities issued beginning in the third quarter of 2022 and MSR sales.

•The $55.5 million fair value loss due to rates and assumptions in 2023 is largely attributed to unfavorable assumption updates to reflect market participant perspectives on MSRs and MSR pledged liabilities with actual trade pricing levels

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as the 10-year Treasury rate remained flat in 2023. The change from a $261.0 million fair value gain in 2022 to a loss in 2023 is also due to changes in market interest rates as the 10-year Treasury rate increased 236 basis points in 2022.

•MSR hedging derivative fair value gains or losses are designed to partially offset the expected fair value losses or gains, respectively, of the net MSR, MSR pledged liabilities and ESS exposure, commensurate with our target hedge coverage ratio. As the 10-year Treasury rate remained flat in 2023, the $33.1 million derivative loss is primarily driven by hedge cost and hedge ineffectiveness associated with non-parallel changes in the interest rate curve, mortgage basis and market volatility, among other factors. The $73.8 million year-over-year decline in hedging losses is mainly due to an increase in interest rates in 2022, also considering the change in our hedge coverage ratio. Also refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk for further detail on our hedging strategy and its effectiveness and the Servicing segment for a further discussion of MSR valuation adjustments, net.

Operating Expenses

The table below presents the key components of operating expenses:

Compensation and benefits expense for 2023 decreased $60.2 million, or 21%, as compared to 2022 largely due to a $44.7 million decrease in salaries and benefits and a $10.8 million decrease in severance expense. Our total average headcount declined 15% (including a 33% decline in total average U.S. based headcount), driven by a 50% decline in Originations average headcount as part of our efforts to right size resources to market opportunities, and a 25% reduction in our average U.S. based Servicing headcount reflecting our goal to improve efficiencies and create an industry leading cost structure. In addition, commissions decreased by $11.4 million due to lower production volume and headcount in our Originations segment. Offsetting in part was a $9.2 million increase in incentive compensation related to our management performance-based plans primarily due to an increase in equity classified share-based awards expense attributed to new share-based awards granted in 2023, and at a higher average grant-date fair value, lower forfeitures in 2023, and an increase in cash awards.

Servicing and origination expense for 2023 decreased $7.6 million, or 12%, as compared to 2022, mostly driven by lower Originations volume and a reduction in indemnification reserves in 2023 due to favorable representation and warranty demand activity and resolutions. Servicing segment expense was mostly flat, as compared to 2022.

Technology and communications expense for 2023 decreased $5.4 million, or 9%, as compared to 2022 mainly due to cost reduction initiatives with our vendors for our Corporate support functions and lower Originations volume.

Professional services expense for 2023 decreased $27.0 million, or 55%, as compared to 2022 primarily due to a $13.7 million decline in legal expenses and a $13.3 million decrease in other professional fees. The decline in legal expenses is primarily due to the reversal of our accrual related to the CFPB matter resolved in 2023 offset in part by lower recoveries of prior year expenses in 2023 as compared to 2022. The decrease in other professional fees is driven by our cost saving initiatives including the reduction of outsourced resources and insurance costs.

Occupancy, equipment and mailing expense for 2023 decreased $10.0 million, or 24%, as compared to 2022. The expense reduction was primarily due to our exit or downsize of certain leased office facilities in the second half of 2022, including our exit from our New Jersey leased office facility, and lower mailing costs.

Other expenses for 2023 decreased $10.1 million as compared to 2022 mainly due to a $5.8 million decrease in advertising expense mostly attributed to our Originations segment and a decline in bank charges due to higher earnings credits as a result of higher interest rates.

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Other Income (Expense)

Net interest expense for 2023 increased $55.2 million, or 39%, as compared to 2022 primarily due to an increase in the cost of funds of our asset-backed financing facilities mostly driven by a more than 300 basis point increase in short-term interest rates, and the repayment of a lower-cost servicing advance facility during the third quarter of 2022.

In 2023 and 2022, we repurchased $15.0 million and $25.0 million, respectively, of PMC 7.875% Senior Secured Notes due March 2026 in the open market at a discount and recognized gains on extinguishment of the debt, net of the respective write-off of unamortized discount and debt issuance costs.

Other, net expense for 2023 decreased $13.0 million as compared to 2022 primarily driven by $5.7 million of compensation from a subservicer related to a negotiated subservicing termination in the fourth quarter of 2023. The payment received offsets an unfavorable impact to the fair value of the associated MSRs (reported as a loss in MSR valuation adjustments, net). In addition, early payoff protection expense decreased by $3.0 million in 2023 in connection with our MSR sale transactions.

Refer to Servicing segment for discussion and analysis of Pledged MSR liability expense and Earnings of equity method investee.

Income Tax Benefit (Expense)

Our effective tax rate for the periods indicated in the table above differs from the 21% federal statutory income tax rate primarily due to the full valuation allowance recorded on our net U.S. federal and state deferred tax assets. We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. In these evaluations, we give more significant weight to objective evidence, such as our actual financial condition and historical results of operations, as compared to subjective evidence, such as projections of future taxable income or losses. The U.S. jurisdiction is in a cumulative loss position for the three-year period ended December 31, 2023. We evaluated all positive and negative evidence and determined that a full valuation allowance at December 31, 2023 remains appropriate. The income tax expense (benefit) is primarily comprised of income taxes in foreign jurisdictions and changes in uncertain tax positions. Refer to Note 20 — Income Taxes for further details on deferred tax assets.

For 2023, income tax expense of $5.6 million was driven primarily by pre-tax earnings in foreign jurisdictions, current taxable income in the U.S., and the accrual of additional interest and penalties on uncertain tax positions. The $6.4 million increase in income tax expense for 2023, compared with 2022, is mostly due to the favorable resolution of uncertain tax positions in 2022 and current taxable income in the U.S. The decline in the effective tax rate is primarily due to the $83.0 million decrease in pre-tax earnings in 2023 compared to 2022, as well as the $6.4 million increase in income tax expense for 2023, compared to 2022.

Under our transfer pricing agreements, our operations in India and Philippines are compensated on a cost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from operations these foreign operations have taxable income, which is subject to statutory tax rates in these jurisdictions that are higher than the U.S. statutory rate of 21%.

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Financial Condition

Total assets increased by $114.5 million, or 1%, between December 31, 2022 and December 31, 2023 due to a $464.8 million increase in loans held for investment mostly driven by capitalization of interest, and a $54.5 million increase in our loans held for sale portfolio after our acquisition of reverse mortgage buyouts. These increases were offset by a $393.0 million decrease in our MSR portfolio mostly attributed to the derecognition of $421.7 million MSRs associated with Rithm servicing agreements for which MSR sale accounting criteria was met, and a $40.1 million decline in servicing advances, mainly due to the runoff of our non-Agency MSR portfolio and increased collection of foreclosure related advances associated with default resolutions.

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Total liabilities increased by $169.4 million, or 1%, as compared to December 31, 2022 with similar effects as described above. Our HMBS-related borrowings increased by $470.5 million mostly due to fair value changes attributable to interest. The $237.4 million decrease in Other financing liabilities is primarily due to the derecognition of $421.7 million Pledged MSR liabilities associated with Rithm servicing agreements for which MSR sale accounting criteria was met as disclosed above, offset in part by the issuance of ESS financing liabilities and increased other Pledged MSR liabilities in connection with MSR transfers that did not qualify for sale accounting. The issuance of ESS financing liabilities and increased other Pledged MSR liabilities allowed for the repayment of MSR financing facilities, driving a $37.6 million decrease. This shift in financing instruments is the result of our strategy to use MSR capital partners and further de-risk our MSR exposure. Advance match funded liabilities decreased $13.9 million consistent with the decline in servicing advances discussed above.

Total equity decreased $54.9 million during 2023 due to the $63.7 million net loss, partially offset by $7.5 million equity-based compensation driven by additional awards. See Note 16 — Stockholders’ Equity for additional information.

Key Trends

The following discussion provides information regarding certain key drivers of our financial performance and includes certain forward-looking statements that are based on the current beliefs and expectations of Ocwen’s management and are subject to significant risks and uncertainties. Refer to Forward-Looking Statements beginning on page 2 and the Risk Factors section beginning on page 18, for discussion of certain of those risks and uncertainties and other factors that could cause Ocwen’s actual results to differ materially because of those risks and uncertainties. There is no assurance that actual results will be in line with the outlook information set forth below, and Ocwen does not undertake to update any forward-looking statements. Also refer to the Segment results of operations section for further detail, the description of our business environment, initiatives and risks.

Servicing and subservicing fee revenue - Our servicing fee revenue is a function of the volume being serviced - UPB for servicing fees and loan count for subservicing fees. We expect we will continue to grow our servicing and subservicing portfolio through our multi-channel Originations platform and through MSR capital partners, with an emphasis on subservicing.

Gain on sale of loans held for sale - Our gain on sale is driven by both volume and margin and is channel-sensitive. The industry forecasts suggest an increase in loan origination in 2024 in excess of 20% as compared to historical low origination volumes in 2023, including refinance volume increase in excess of 50% with lower mortgage interest rates in the second half of 2024. We anticipate a significant growth in our Consumer Direct channel albeit lower than the industry forecast as we do not anticipate any substantial growth in our refinance recapture volume absent any notable decrease in prevailing mortgage rates. We expect to continue to prudently manage our Correspondent volume at margins that are accretive to the business. We expect continued competitive pressure on margins across all channels.

Gain on reverse loans held for investment and HMBS-related borrowings, net - The reverse mortgage origination gain is driven by the same factors as gain on sale of loans held for sale, with smaller volumes in the reverse mortgage market and generally larger margins. With our experience and brand in the marketplace, we expect to continue to maintain or prudently grow our portfolio albeit with some channel mix changes. We expect continued uncertain market interest rate and spread conditions. The fair value of the net reverse servicing asset is expected to continue to follow market conditions, with fair value gains or losses generally associated with declining or increasing interest rates and spread, respectively, and is part of our forward MSR hedging strategy.

MSR valuation adjustments, net - Our net MSR fair value changes include multiple components. First, amortization of our investment is a function of the UPB, capitalized value of the MSR relative to the UPB, and the level of scheduled payments and prepayments. We expect the MSR realization of expected cash flows to follow the growth or size of our MSR portfolio net of ESS financing liabilities and pledged MSR liabilities with our MSR capital partners. Second, MSR fair value changes are driven by changes in interest rates and assumptions, such as forecasted prepayments. Third, the MSR fair value changes are partially offset by derivative fair value changes that economically hedge the MSR portfolio. We are exposed to increased interest rate volatility due to our interest rate sensitive GSE MSR portfolio. Our hedging strategy provides only partial hedge coverage and we would expect net MSR fair value losses if interest rates drop and conversely, net MSR fair value gains if interest rates rise, also dependent on our hedge coverage ratio. We expect that, other things being equal, the magnitude of the fair value changes of the MSR portfolio due to market interest rates, net of the MSR hedges, to decrease if our hedge coverage ratio increases, or vice versa. Refer to the sensitivity analysis in the Market Risk sections of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for further detail.

Operating expenses - Compensation and benefits are a significant component of our cost-to-service and cost-to-originate and is directly correlated to headcount levels. Headcount in Servicing is primarily driven by the number of loans or UPB being serviced and subserviced, and by the relative mix of performing, delinquent and defaulted loans. As servicing volume is expected to modestly increase (see above), we expect a stable workforce with productivity gains. We expect to continue to prudently manage our Originations headcount and operating expenses to align with funded volume. Our operating expenses are expected to correlate with volumes, with some productivity and efficiencies expected through our technology and continuous

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improvement initiatives. Elevated inflation may result in higher operating expenses due to increases in salaries and benefits and rates charged by our vendors.

Stockholders’ equity - With the above considerations, we expect our businesses to generate net income and increase our equity in 2024, absent any significant adverse change in interest rates or other factors.

SEGMENT RESULTS OF OPERATIONS

We report our activities in three segments, Servicing, Originations and Corporate Items and Other that reflect other business activities that are currently individually insignificant. Our business segments reflect the internal reporting that we use to evaluate operating and financial performance and to assess the allocation of our resources.

Servicing

We earn contractual monthly servicing fees pursuant to servicing agreements pertaining to MSRs we own, which are typically payable as a percentage of UPB, as well as ancillary fees, including late fees, modification incentive fees, REO referral commissions, float earnings and convenience or other loan collection fees, where permitted. We also earn fees under subservicing arrangements with banks and other institutions, that are typically on a per-loan basis and vary based on loan delinquency status.

As of December 31, 2023, we serviced 1.3 million mortgage loans with an aggregate UPB of $288.4 billion, a decrease of 2% and 0.5%, respectively, from December 31, 2022. The average UPB during 2023 increased by 4% or $10.9 billion compared to 2022.

Effective in the fourth quarter of 2023, the Servicing segment includes CR Limited (CRL), our wholly-owned captive reinsurance subsidiary previously included in the Corporate Items and Other segment. Segment results for 2022 and 2021 have been recast to conform to the current segment presentation. CRL provides re-insurance related to coverage on foreclosed real estate properties owned or serviced by us. CRL assumes a 60% quota share of REO insurance coverage written by a third-party insurer under a blanket policy issued to PHH. The underlying REO policy provides coverage for direct physical loss on commercial and residential properties, subject to certain limitations.

Concentration

Rithm is one of our largest subservicing clients. Servicing and subservicing fees from Rithm amounted to $230.2 million, or 31% of total servicing and subservicing fees (excluding ancillary income) in 2023. Rithm accounted for 16% and 27% of the total serviced UPB and loan count, respectively, of our servicing and subservicing portfolio as of December 31, 2023, and 67% of all delinquent loans that Ocwen serviced, for which the cost to service and the associated risks are higher. Rithm servicing fees retained by Ocwen represented approximately 12% and 13% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to Rithm, for 2023 and 2022, respectively. Consistent with a subservicing relationship, Rithm is responsible for funding the advances we service on its behalf. The servicing agreements automatically renew annually unless notice of termination is provided. Refer to Note 8 — Other Financing Liabilities, at Fair Value.

Servicing and subservicing fees from MAV amounted to $75.3 million or 10% of total servicing and subservicing fees (excluding ancillary income) in 2023. MAV represented 19% and 15% of our total servicing and subservicing portfolio UPB and loan count, respectively, as of December 31, 2023. In May 2021, PHH entered into a subservicing agreement with MAV for exclusive rights to service the mortgage loans underlying MSRs owned by MAV. MAV provides us with a source of additional subservicing volume, either with the MSRs that MAV purchases outright from third parties or with the MSRs that MAV purchases from PHH. Although the servicing agreement is not cancellable without mutual agreement, MAV is permitted to sell its MSR portfolio, in whole or in part, without Ocwen’s consent after May 3, 2024. Refer to Note 12 — Investment in Equity Method Investee and Related Party Transactions.

Loan Resolutions

We have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors. Reducing delinquencies also enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Loan resolution activities address the pipeline of delinquent loans and generally lead to (i) modification of the loan terms, (ii) repayment plan alternatives, (iii) a discounted payoff of the loan (e.g., a “short sale”), or (iv) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting REO. Loan modifications must be made in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon, or even forbid, loan modifications. To select an appropriate loan modification option for a borrower, we perform a structured analysis, using a proprietary model, of all options using information provided by the borrower as well as external data, including recent broker price opinions to value the mortgaged property. Our proprietary model includes, among other things, an assessment of re-default risk.

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Advance Obligation

As a servicer, we are generally obligated to advance funds in the event borrowers are delinquent on their monthly mortgage related payments. We advance principal and interest (P&I Advances), taxes and insurance (T&I Advances) and legal fees, property valuation fees, property inspection fees, maintenance costs and preservation costs on properties that have been foreclosed (Corporate Advances). For certain loans in non-Agency securitization trusts, we have the ability to cease making P&I advances and immediately recover advances previously made from the general collections of the respective trust if we determine that our P&I advances cannot be recovered from the projected future cash flows. With T&I and Corporate advances, we continue to advance if net future cash flows exceed projected future advances without regard to advances already made.

Most of our advances have the highest reimbursement priority (i.e., they are “top of the waterfall”) so that we are entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. The costs incurred in meeting these obligations consist principally of the interest expense incurred in financing the servicing advances. Most subservicing agreements, including our agreements with Rithm and MAV, provide for prompt reimbursement of any advances from the owner of the servicing rights. Refer to Note 25 — Commitments to the Consolidated Financial Statements for further description of servicer advance obligations.

MSR Valuation Adjustments

The financial performance of our Servicing segment is impacted by the changes in fair value of the MSR portfolio due to changes in market interest rates, among other factors. Our MSR portfolio is carried at fair value, with changes in fair value recorded in earnings, within MSR valuation adjustments, net. The fair value of our MSRs is typically correlated to changes in market interest rates; as interest rates decrease, the value of the MSR portfolio typically decreases as a result of higher anticipated prepayment speeds. Conversely, as interest rates increase, the value of the servicing portfolio typically increases as a result of lower anticipated prepayment speeds. Prepayments do not vary linearly with interest rates resulting in the convexity of the MSR, i.e., the interest rate sensitivity of the MSR changes when interest rates change. Specifically, as interest rates further increase, the lower the fair value of the MSR increases. The sensitivity of MSR fair value to interest rates is typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of approximately 18 years, exhibiting little response to movements in market interest rates.

Our MSR hedging policy is designed to reduce the expected volatility of the MSR portfolio fair value due to market interest rates commensurate with the target hedge coverage ratio determined by our Market Risk Committee. The target hedge coverage ratio increased in 2023 from 25% to 60% in the second quarter and 100% in December 2023. Also refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk for further detail on our hedging strategy.

MSR valuation adjustments, net includes the loss on the MSR portfolio associated with the realization of its expected cash flows, or runoff, due to the passage of time, and any fair value gains or losses due to inputs, market interest rates or assumptions, net of hedging gains and losses. Included in MSR valuation adjustments, net are fair value gains and losses of the MSR pledged liability associated with the MSR transfers that do not meet sale accounting and the ESS financing liabilities for which we elected the fair value option and that is collateralized by MSRs.

To determine fair value, we engage third-party valuation experts who generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model and prepayment model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, generally the bulk market, incorporating available industry survey results and client feedback, and including risk premiums and liquidity adjustments. While interest rates are a key value driver, MSR fair value may change for other market-driven factors, including but not limited to the supply and demand of the market or the required yield or perceived value by investors of such MSRs.

Significant Variables

The following factors could significantly impact the results of our Servicing segment from period to period.

Aggregate UPB and Loan Count. Servicing fees are generally earned as a percentage of UPB and subservicing fees are earned on a per-loan basis or as a percentage of UPB. As a result, the change in aggregate UPB and loan count for which we have servicing rights or subservice will directly impact our revenue contributed by our Servicing segment. Aggregate UPB and loan count decline over time as a result of portfolio run-off or sales and increase to the extent we retain MSRs from new originations or engage in MSR acquisitions.

Cost to Service and Operating Efficiency. Our operating results for our Servicing segment are heavily dependent on our ability to scale our operations to cost-effectively and efficiently perform servicing activities in accordance with our servicing agreements.

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Delinquencies. Delinquencies impact our financial results and operating cash flows for our Servicing segment. Non-performing loans are more expensive to service because the loss mitigation activities that we must undertake to keep borrowers in their homes or to foreclose, if necessary, are costlier than the activities required to service a performing loan. These loss mitigation activities include increased contact with the borrower for collection and the development of forbearance plans or loan modifications by highly skilled associates who command higher compensation as well as the higher compliance costs associated with these, and similar activities. In addition, when borrowers are delinquent, the amount of funds that we are required to advance to the investors increases. We utilize servicing advance financing facilities, which are asset-backed (i.e., match funded liabilities) securitization facilities, to finance a portion of our advances. As a result, increased delinquencies result in increased interest expense.

Prepayment Speed. The rate at which portfolio UPB declines can have a significant impact on our Servicing segment. Items reducing UPB include scheduled and unscheduled principal payments (runoff), refinancing, loan modifications involving forgiveness of principal, voluntary property sales and involuntary property sales such as foreclosures. Prepayment speed impacts future servicing fees, runoff and valuation of MSRs, float earnings on float balances and interest expense on advances. Increases in anticipated lifetime prepayment speeds generally cause MSR valuation adjustments to increase because MSRs are valued based on total expected servicing income over the life of a portfolio. The converse is true when expectations for prepayment speeds decrease. Prepayments do not vary linearly with interest rates resulting in the convexity of the MSR, i.e., the interest rate sensitivity of the MSR changes when interest rates change. Specifically, as interest rates further increase, the lower the fair value of the MSR increases.

Interest rates. In addition to the impact of interest rate changes on prepayment speeds, the fair value of the MSR and associated hedging activities, float earnings on float balances, and the funding cost of servicing advances and MSR financing facilities are directly impacted by interest rate changes.

Reverse Mortgages

Our reverse business activities include both the subservicing of reverse mortgage loans on behalf of investors and the servicing of our owned portfolio.

The activities and financial performance related to our owned portfolio of reverse mortgage loans that are securitized and classified as held for investment, at fair value, together with the HMBS-related borrowings, at fair value are reflected in the Servicing segment. Once a reverse mortgage loan is securitized, our activities are generally consistent with other loan servicing as described above, with the following variations.

Under the terms of ARM-based HECM loan agreements, the borrowers have additional borrowing capacity of $1.8 billion at December 31, 2023. These draws or tails are funded by the servicer and are subsequently securitized. We do not incur any substantive underwriting, marketing or compensation costs in connection with any future draws, although we must maintain sufficient capital resources and available borrowing capacity to ensure that we are able to fund these future draws prior to securitization with Ginnie Mae (generally less than 30 days).

As an HMBS issuer, we assume certain obligations related to each security issued. In addition to our obligation to fund tails, the most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once they reach 98% of the maximum claim amount (MCA repurchases or active buyouts). Active repurchased loans or buyouts are assigned to HUD and payment is received from HUD through a claims process, generally within 90 days. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount; we bear the risk of exposure if the outstanding balance on a loan exceeds the maximum claim amount. Inactive repurchased loans or buyouts (loans that are in default for one of the following reasons - title conveyances or the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments) are generally liquidated through foreclosure and subsequent sale of REO. State specific foreclosure and REO liquidation timelines have a significant impact on the timing and amount of our recovery. If we are unable to sell the property securing the inactive reverse loan for an acceptable price within the timeframe established by HUD (six months), we are required to make an appraisal-based claim to HUD. In such cases, HUD reimburses us for the loan balance, eligible expenses and interest, less the appraised value of the underlying property. Thereafter, all the risks and costs associated with maintaining and liquidating the property remains with us; we may incur additional losses on REO properties as they progress through the liquidation processes related to delayed timelines due to market conditions, sales commissions, property preservation costs or property tax and insurance advances. The significance of future losses associated with appraisal-based claims is dependent upon the volume of inactive loans, condition of foreclosed properties and the general real estate market.

The Gain on reverse loans held for investment and HMBS-related borrowings, net reported within the Servicing segment includes the net fair value changes of securitized reverse mortgage loans held for investment and HMBS-related borrowings, for which we elected the fair value accounting option. The net fair value changes of the reverse mortgage loans and related borrowings reported within the Servicing segment include the following:

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•contractual interest income earned on securitized reverse mortgage loans, or HECM loans, net of interest expense on HMBS-related borrowings, that is, the servicing fee we are contractually entitled to and collect on a monthly basis under the Ginnie Mae MBS Guide regarding servicing HMBS; and

•other fair value changes of the net balance of securitized loans held for investment and HMBS-related borrowings, that effectively represents servicing and tails. Tails are participations in previously securitized HECMs and are created by additions to principal for borrower draws on lines-of-credit (scheduled and unscheduled), interest, servicing fees, and mortgage insurance premiums.

The fair value of our Ginnie Mae securitized HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall (see Item 7A - Quantitative and qualitative disclosures about market risk, Loans Held for Investment and HMBS-related Borrowings and the associated interest rate sensitivity disclosure).

Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net strictly reflects the financial performance of owned loans/servicing and excludes any subservicing activity. The financial performance associated with the subservicing of reverse mortgage loans on behalf of investors is primarily reflected within Servicing and subservicing fees, net.

The following table presents selected results of operations of our Servicing segment. The amounts presented are before the elimination of balances and transactions with our other segments:

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The following table provides selected operating statistics for our Servicing segment:

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(1)Performing loans include those loans that are less than 90 days past due and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing.

(2)Conventional loans at December 31, 2023 include 37,893 prime loans with a UPB of $9.7 billion that we service or subservice. This compares to 66,796 prime loans with a UPB of $13.2 billion at December 31, 2022. Prime loans are generally good credit quality loans that meet GSE underwriting standards.

(3)Includes $8.0 billion UPB of reverse mortgage loans that are recognized in our consolidated balance sheet at December 31, 2023.

(4)Includes $27.1 billion UPB subserviced and $28.8 billion UPB of MSRs sold to MAV that did not achieve sale accounting treatment. Excludes subserviced loans with a UPB of $0.3 billion that have not yet transferred onto the PHH servicing system as of December 31, 2023.

(5)Loans serviced pursuant to our sale or transfer agreements with MAV, Rithm and others for which sale accounting is not achieved, and loans subserviced.

(6)Includes $35.1 billion UPB of subserviced loans on behalf of Rithm at December 31, 2023.

(7)Total 12-month % CPR includes voluntary and involuntary prepayments, as shown in the table, plus scheduled principal amortization.

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The following table provides selected operating statistics related to our owned reverse mortgage loans held for investment reported within our Servicing segment:

(1)Securitized loans only; excludes unsecuritized loans as reported within the Originations segment.

(2)Buyouts are reported as Loans held for sale, Receivables or REO depending on the loan and foreclosure status.

The following table provides a breakdown of our servicer advances, net of allowance for losses:

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The following table provides the rollforward of activity of our portfolio of mortgage loans serviced for the years ended December 31, that includes MSRs, whole loans and subserviced loans, both forward and reverse:

(1)Includes the volume of UPB associated with short-term interim subservicing for some clients as a support to their originate-to-sell business, where loans may be boarded and deboarded within the same quarter.

(2)Includes MSRs sold to an unrelated third party in the first quarter of 2022 consisting of 38,850 loans with a UPB of $11.1 billion, with the remaining active loans transferred out of the PHH servicing system in the third quarter of 2022, and for which PHH performed interim subservicing.

(3)Additions include purchased MSRs on portfolios consisting of 49 loans with a UPB of $14.9 million that have not yet transferred to the PHH servicing system as of December 31, 2023. Because we have legal title to the MSRs, the UPB and count of the loans are included in our reported servicing portfolio. The seller continues to subservice the loans on an interim basis between the transaction closing date and the servicing transfer date.

(4)Excludes MSRs acquired from unrelated third parties in the third quarter of 2022 consisting of 12,931 loans with a UPB of $4.1 billion for which PHH was previously performing the subservicing.

Servicing and Subservicing Fees

The following tables and discussion present the respective drivers of servicing and subservicing fees and ancillary income.

(1) In $ billions, (2) In % of UPB, annualized, (3) In $ millions, (4) In thousands, (5) In dollars.

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Servicing and subservicing fees (excluding ancillary income) for 2023 decreased $2.5 million, with a $3.7 million decrease in servicing fees partially offset by a $1.3 million increase in subservicing fees. The decrease in servicing fees is mostly driven by the timing of collections and the mix of the portfolio, with the runoff of higher fee portfolios (including the Rithm portfolio) and the growth of relatively lower fee portfolios. Higher fee portfolios are generally associated with higher delinquencies, thus generally require higher cost to service. The increase in subservicing fees is due to a 19% increase in the forward sub-servicing portfolio ($8.4 million higher forward subservicing fee), partially offset by a 15% decline in the reverse mortgage subservicing portfolio due to runoff ($7.1 million lower subservicing fees).

The following table presents the detail of our ancillary income:

Ancillary income for 2023 increased by $87.1 million, or 71% as compared to 2022 largely driven by an $84.5 million increase in float earnings due to higher short term market interest rates. A $13.1 million increase in reverse subservicing ancillary fees recognized on loans boarded under the agreement with MAM (RMS), primarily due to higher volume of claims filed on behalf of clients, was partially offset by lower recording fees and late charges driven by the reduction in payoff volume.

Gain (Loss) on Loans Held for Sale, Net

We recognized a $10.3 million gain on loans held for sale, net for 2023, as compared to the $15.1 million loss recognized in 2022. The $25.4 million improvement is mostly driven by the $15.7 million revaluation gain on reverse mortgage buyouts opportunistically acquired at a discount and securitized in 2023, and the $8.8 million loss recognized in 2022 on certain delinquent and aged loans repurchased in connection with the Ginnie Mae EBO program (net of the associated Ginnie Mae MSR fair value adjustment).

Gain (Loss) on Reverse Loans Held for Investment and HMBS-Related Borrowings, Net

Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net reported in the Servicing segment is the net change in fair value of securitized loans held for investment and HMBS-related borrowings. It excludes reverse subservicing that is reflected in Servicing and subservicing fees.

The following table presents the components of the net fair value change and is comprised of net interest income and other fair value gains or losses. Net interest income is primarily driven by the volume of securitized UPB as it is the interest income earned on the securitized loans offset against interest expense incurred on the HMBS-related borrowings, and represents a key component of our compensation for servicing the portfolio, which is generally a fixed percentage of the outstanding UPB. Other fair value changes are primarily driven by changes in market-based inputs or assumptions. Lower interest rates generally result in favorable net fair value impacts on our HECM reverse mortgage loans and the related HMBS financing liability and higher interest rates generally result in unfavorable net fair value impacts. Note that the fair value changes of the net asset value between securitized HECM loans and HMBS (referred to as our reverse MSR) attributable to interest rate changes are effectively used as a hedge of our forward MSR portfolio. See further description of our hedging strategy and its effectiveness in Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

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Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net for 2023 was $23.5 million, a $48.6 million, favorable change as compared to the $25.1 million loss for 2022, mostly driven by interest rates. Interest rates and yield spreads remain relatively flat in 2023 (from December 31, 2022 to December 31, 2023) resulting in a $0.1 million other fair value loss recorded in 2023. The $47.0 million other fair value loss recorded in 2022 is primarily driven by increasing interest rates (while not the only benchmark for the reverse mortgage exposure, the 10-year Treasury rate increased 236 basis points in 2022) and widening yield spread directly reducing projected asset life and the tail value of the HECM reverse mortgage loans. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach the 98% maximum claim amount liquidation event more quickly, shortening the life of the servicing net asset. Other fair value gains (losses) are partially hedged with our forward MSR hedge strategy. Net interest income, that effectively represents the servicing fee that we collect through monthly securitization increased $1.6 million in 2023 as compared with 2022, mostly due to the 6% growth of the loan portfolio.

MSR Valuation Adjustments, Net

Refer to the discussion above within Overview.

Compensation and Benefits

Compensation and benefits expense for 2023 declined $19.0 million, or 15%, as compared to 2022 largely driven by a decrease in salaries and benefits. Our average headcount decreased by 6% overall, with a 25% decrease in the U.S., reflecting our goal to improve efficiencies and create an industry leading cost structure, also driven by the further integration of reverse servicing. The offshore-to-total average headcount ratio for Servicing increased by 5 percentage points from 2022 to 2023.

Servicing Expense

Servicing expense primarily includes claim losses and interest curtailments on government-insured loans, provision expense for advances and servicing representation and warranties, and certain loan-volume related expenses. Servicing expense was mostly flat, as compared to 2022.

Other Operating Expenses

Other operating expenses (total operating expenses less Compensation and benefit expense and Servicing expense) for 2023 increased by $4.5 million as compared to 2022, with an $8.5 million increase in Professional services partially offset by a $3.1 million decrease in Occupancy, equipment and mailing expense driven by lower occupancy cost allocation and mailing and postage expenses. The increase in Professional services is primarily due to a $14.0 million increase in legal expenses, mostly driven by reimbursements received from mortgage loan investors in 2022 related to prior year legal expenses and payments received following resolution of legacy litigation matters. Offsetting this increase, other professional services declined $5.6 million primarily due to cost reduction initiatives in our forward servicing and reverse subservicing businesses.

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Other Income (Expense)

Other income (expense) primarily includes net interest expense and pledged MSR liability expense.

Interest expense for 2023 increased by $58.5 million, or 51%, compared to 2022, mostly driven by a more than 300 basis point increase in short-term market interest rates. The increase in market interest rates resulted in the $23.5 million increase in interest expense on MSR financing facilities partially offset by a lower average debt balance. Interest expense on advance match funded facilities increased $21.7 million despite the lower average borrowings as a result of market interest rate increase and our repayment of lower-cost OMART term notes during the third quarter of 2022. The $12.3 million increase in interest expense on mortgage loan financing facilities was due to higher interest cost of funds and an increase in average debt balance driven by our reverse buyout opportunistic acquisition in the second quarter of 2023.

Interest income for 2023 increased $8.8 million, or 68%, compared to 2022 primarily due to an increase in interest rates, higher reverse mortgage buyouts opportunistically acquired in the second quarter of 2023, and larger reverse mortgage buyout volumes.

Pledged MSR liability expense includes the servicing fee remittance related to the MSR sales or transfers that do not meet sale accounting criteria and are presented on a gross basis in our consolidated financial statements, together with the servicing spread remittance associated with our ESS financing liability at fair value. See Note 8 — Other Financing Liabilities, at Fair Value to the Consolidated Financial Statements.

The following table provides the components of Pledged MSR liability expense:

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(1)For MSR transfers that do not meet sale accounting criteria. See Note 8 — Other Financing Liabilities, at Fair Value to the Consolidated Financial Statements.

Pledged MSR liability expense for 2023 increased $41.4 million as compared to 2022, primarily due to a $42.4 million increase in servicing spread remittance on the ESS financing liabilities issued beginning in the third quarter of 2022.

Rithm represented the largest portfolio of MSRs transferred, failing sale accounting, and the largest component of Pledged MSR liability expense during the three years 2021 through 2023. The following table presents a subset of the above table related to Rithm, specifically the subservicing fees retained by Ocwen together with the associated serviced UPB on behalf of Rithm:

(1)Reported within Pledged MSR liability expense. The Rithm servicing fee includes the total servicing fees collected on behalf of Rithm relating to the MSR sold but not derecognized from our balance sheet. Under GAAP, we separately present servicing fees collected and remitted on a gross basis, with the servicing fees remitted to Rithm reported as Pledged MSR liability expense.

(2)Excludes ancillary income.

The net retained subservicing fee on our Rithm portfolio for 2023 declined by $6.9 million, or 9% as compared to 2022 driven by the decline in the average UPB of 10% due to portfolio runoff and prepayments. The retained subservicing fee percentage of UPB for Rithm (0.14%) reflects the nature of the portfolio (mostly non-Agency) and delinquencies (25% delinquent more than 30 days as of December 31, 2023). Also refer to Note 7 — Mortgage Servicing.

With the exception of the MSRs for which title has not transferred to Rithm ($9.9 billion UPB at December 31, 2023), the MSR sale accounting criteria for MSRs previously sold to Rithm were met effective December 31, 2023 and the MSR and Pledged MSR liability associated with Rithm servicing agreements were derecognized. The statement of operations will prospectively reflect subservicing fee revenue as opposed to the current gross presentation of servicing fee revenue and separate presentation of servicing fee remittances within Pledged MSR liability expense. Servicing fees and Pledged MSR liability expense recognized in 2023 related to MSRs for which sale accounting criteria were met effective December 31, 2023 was $185.7 million and $132.1 million, respectively.

Earnings of equity method investee, namely MAV Canopy, for 2023 declined $11.2 million, as compared to 2022, mostly attributable to unfavorable fair value changes of MAV’s MSR portfolio, partially offset by increased profitability of the business with a 22% increase in its average servicing volume. The unfavorable MSR fair value changes year-over-year are driven by gains recognized by MAV in 2022, as the 10-year Treasury rate remained flat in 2023 as compared to a 236 basis point increase in 2022.

Other, net expense for 2023 declined $12.5 million, as compared to 2022. Other income for 2023 includes $5.7 million compensation from a subservicer relating to a negotiated subservicing termination in the fourth quarter of 2023. The payment received offsets an unfavorable impact to the fair value of the associated MSRs (reported as a loss in MSR valuation adjustments, net). In addition, early payoff protection expense decreased by $3.0 million in 2023 in connection with our MSR sale transactions.

Originations

We originate and purchase loans and MSRs through multiple channels, including retail, wholesale, correspondent, flow MSR purchase agreements, the Agency Cash Window and Co-issue programs and bulk MSR purchases.

We originate and purchase conventional loans (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government-insured (FHA, VA or USDA) forward mortgage loans. The GSEs and Ginnie Mae guarantee these mortgage securitizations. We originate HECM loans, or reverse mortgages, which are mostly insured by the FHA and we are an approved issuer of HMBS that are guaranteed by Ginnie Mae. We originate non-Agency loans to applicable investor guidelines that we sell on a whole loan basis to investors.

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Within retail, our Consumer Direct channel for forward mortgage loans focuses on targeting existing servicing customers by offering them competitive mortgage refinance opportunities, where permitted by the governing servicing and pooling agreement. In doing so, we generate revenues for our forward lending business and protect the servicing portfolio by retaining these customers. A portion of our servicing portfolio is susceptible to refinance activity during periods of declining interest rates. Origination recapture volume and related gains are a natural economic hedge, to a certain degree, to the impact of declining MSR values as interest rates decline. In addition to rate and term refinance activities, our Consumer Direct channel targets purchase mortgage loans, cash-out, debt consolidation, mortgage insurance premium reduction, and new customer acquisition.

Our forward lending correspondent channel drives higher servicing portfolio replenishment. We purchase closed loans that have been underwritten to investor guidelines from our network of correspondent sellers and sell and securitize them, on a servicing retained basis. We offer correspondent sellers the choice to take out mandatory or best efforts contracts, under which the seller's obligation to deliver the mortgage loan becomes mandatory only when and if the mortgage is closed and funded. Additionally, we offer correspondent sellers the opportunity to leverage a non-delegated underwriting option for best-efforts deliveries. As of December 31, 2023, we have relationships with 712 approved correspondent sellers, or 112 net new sellers since December 31, 2022.

We originate and purchase reverse mortgage loans through our retail, wholesale and correspondent lending channels, under the guidelines of the HECM reverse mortgage insurance program of the FHA. Loans originated under this program are generally insured by the FHA, which provides protection against risk of borrower default.

After origination, we generally sell the loans in the secondary mortgage market, through GSE and Ginnie Mae securitizations on a servicing retained basis, or to investors on a whole loan basis, i.e., servicing released. Origination revenue mostly includes gain on sale, which represents the difference between the origination or purchase value and the sale value of the loan including its MSR value, and fee income earned at origination. As the securitizations of reverse mortgage loans do not achieve sale accounting treatment and the loans are classified as Loans held for investment, at fair value, originations revenue mostly include the fair value changes of the loan from lock date to securitization date that are reported in Gain on reverse loans held for investment and HMBS-related borrowings, net and fee income that is reported in Other revenue, net.

We provide customary origination representations and warranties to investors in connection with our loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved correspondent lenders. We recognize the fair value of the liability for our representations and warranties at the time of sale. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the mortgage loan investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur. We actively monitor our counterparty risk associated with our network of correspondent sellers.

We purchase MSRs through flow purchase agreements, the Agency Cash Window co-issue programs and bulk MSR purchases. The Agency Cash Window programs we participate in, and purchase MSR from, allow mortgage companies and financial institutions to sell whole loans servicing released to the respective agency and sell the MSR to the winning bidder. In addition, we partner with other originators to replenish our MSRs through flow purchase agreements. We do not provide or assume any origination representations and warranties in connection with our MSR purchases. As of December 31, 2023, we have relationships with 280 approved sellers through the Agency Cash Window co-issue programs, or 42 net new sellers since December 31, 2022.

We initially recognize our MSR originations and purchases with the associated economics in our Originations segment, and transfer the MSR to our Servicing segment once the MSR is initially recognized on our balance sheet with all subsequent performance associated with the MSR, including funding cost, run-off and other fair value changes reflected in our Servicing segment.

We source additional servicing volume through our subservicing and interim servicing agreements, through our existing relationships and our enterprise sales initiatives. We do not report any revenue or gain associated with subservicing within the Originations segment as the impact is captured in the Servicing segment. However, sales efforts and certain costs - marginal compensation and benefits - are managed and reported within the Originations segment.

For 2023, our Originations business originated or purchased forward and reverse mortgage loans with a UPB of $12.5 billion and $0.7 billion, respectively. In addition, we purchased $9.1 billion UPB MSR through the Agency Cash Window and flow purchase programs during 2023.

Significant Variables

The following factors could significantly impact the results of our Originations segment from period to period.

Mortgage Rates. Changes in mortgage rates, primarily the 30-year fixed rate mortgage, directly impact the demand for both purchase and refinance forward mortgages and therefore impact the production volumes and financial results of our

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Originations segment. Small changes in mortgage rates directly impact housing affordability for both first-time and move-up home buyers and affect their ability to purchase a home. For refinance loans, current market mortgage rates must be considered relative to the rates on the current mortgage debt outstanding.

Market Size and Composition. The volume of new or refinanced loans is impacted by changes to existing, or development of new, GSE or other government sponsored programs. Changes in GSE or HUD guidelines and costs and the availability of alternative financing sources, such as non-Agency proprietary loans and traditional home equity loans, impact borrower demand for forward and reverse mortgages and therefore can impact the volume of mortgage originations.

Margins. Changes in pricing margin for mortgages are closely correlated with changes in market size for mortgage loans. As loan demand and market capacity move out of alignment, pricing adjusts. In a growing market, margins expand and in a contracting market, margins tighten as lenders seek to keep their production at or close to full capacity. Managing capacity and cost is critical as volumes change. Among our channels, our margins per loan are highest in the retail channel and lowest in the correspondent channel. We work directly with the borrower to process, underwrite and close loans in our retail and reverse wholesale channels. In our retail channel, we also identify the customer and take loan applications. As a result, our retail channel is the most people- and cost-intensive and experiences the greatest volume volatility.

Investor Demand. The liquidity of the secondary market for mortgage loans impacts the size of the mortgage loan market by defining loan attributes and credit guidelines for loans that investors are willing to buy and at what price. In recent years, the GSEs have been the dominant providers of secondary market liquidity for forward mortgages, keeping the product and credit spectrum relatively homogeneous and risk averse (higher credit standards).

Economic Conditions. General economic conditions can impact the growth and revenue of our Originations segment by impacting the capacity for consumer credit and the supply of capital. More specifically, employment levels and home prices are variables that can each have a material impact on mortgage volume. Employment levels, the level of wages and the stability of employment are underlying factors that impact credit qualification. The effect of home prices on lending volumes is significant and complex. As home prices go up, home equity increases and this improves the position of existing homeowners either to refinance or to sell their home, which often leads to a new home purchase and a new forward mortgage loan, or in the case of a reverse mortgage, increase the size of the mortgage loan available and the number of potential borrowers. However, if home prices increase rapidly, the effect on affordability for first-time and move-up buyers can dampen the demand for mortgage loans. The more restrictive standards for loan to value (LTV) ratios, debt to income (DTI) ratios and employment that characterize the current market amplify the significance and sensitivity of the housing market and related mortgage lending volumes to employment levels and home prices. If home prices decline due to increased mortgage interest rates or for other reasons, home sales may decline and it may be more difficult for homeowners to refinance existing mortgages, thereby negatively impacting mortgage volume.

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The following table presents the results of operations of our Originations segment. The amounts presented are before the elimination of balances and transactions with our other segments:

(1)Includes $2.1 million, $2.1 million and $8.5 million ancillary fee income related to MSR acquisitions reported as Servicing and subservicing fees at the consolidated level for 2023, 2022 and 2021, respectively.

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The following table provides selected statistics for our Originations segment:

(1)Loan production excludes reverse mortgage loan draws by borrowers disbursed subsequent to origination that are reported within the Servicing segment.

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Gain on Loans Held for Sale, Net

The following table provides information regarding Gain on loans held for sale by channel and the related forward loan origination volumes and margins (excluding fees that are presented in Other revenue, net):

(1)Defined as the UPB of loans funded in the period.

(2)Ratio of gain on Loans held for sale to funded UPB. Note that the ratio differs from the day-one gain on sale margin upon lock.

Gain on loans held for sale, net, declined $22.6 million, or 43%, as compared to 2022 with a $16.8 million decrease in our Consumer Direct channel and a $5.8 million decrease in our Correspondent channel. The lower gain in 2023 is due to a 26% decrease in total volume and a more pronounced volume decline in Consumer Direct that is a higher margin channel. While the Correspondent margin remained relatively flat and the Consumer Direct margin increased, the aggregate margin declined due to the change in the channel mix. The elevated interest rate environment continues to adversely impact both purchase and refinance borrower activities due to a lack of affordability. We continue to expand higher margin products such as Ginnie Mae loans and best efforts deliveries.

Gain on Reverse Loans Held for Investment and HMBS-Related Borrowings, Net

The following table provides information regarding Gain on reverse loans held for investment and HMBS-related borrowings, net of the Originations segment that comprises fair value changes of the pipeline and unsecuritized reverse mortgage loans held for investment, at fair value, together with volume and margin (including loan fees):

(1)Defined as the UPB of loans funded in the period.

(2)Ratio of origination gain to funded UPB. Note that the ratio includes loan fees.

Gain on reverse loans held for investment and HMBS-related borrowings, net decreased $38.0 million, or 62% as compared to 2022 as both total origination volume and aggregate margin declined. $28.1 million of the decrease is attributed to our higher margin Retail channel with a 77% decline in volume and a relatively flat margin. $9.9 million of the decrease is attributed to the Wholesale and Correspondent channels that experienced significantly lower volumes too due to elevated market interest rates. Industry-wide HECM securitization volume saw a 62% decrease in volumes when comparing 2023 to 2022, and industry-wide HECM endorsements were similarly down 48%. By comparison, our total funded volumes were down 53% in this same time period. Higher rates directly reduce HECM loan proceeds available to borrowers and have been a material driving force in reducing HECM market volume. Our aggregate margin decreased with our Retail and Wholesale channels generating lower margins, partially offset by a higher margin generated by our Correspondent channel and a different channel mix. The lower margins were mostly due to increased competition and lessened market opportunity for reverse mortgages in 2023.

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Other revenue, net

Other revenue, net for 2023 declined $8.4 million as compared to 2022 primarily due to a $5.0 million decline in setup fees earned for loans boarded on our servicing platform, mostly related to a decline in Consumer Direct volume, and a $2.6 million decrease in correspondent and broker fees due to the decline in production volume.

MSR Valuation Adjustments, Net

MSR valuation adjustments, net includes revaluation gains on certain MSRs opportunistically purchased through the Agency Cash Window programs, and flow purchases. As an aggregator of MSRs, we may purchase MSRs from smaller originators with a purchase price at a discount to fair value and we recognize valuation adjustments for differences in exit markets in accordance with the accounting fair value guidance. We record such valuation adjustments as MSR valuation adjustments, net within the Originations segment since the segment’s business objective is the sourcing of new MSRs at targeted returns.

Operating Expenses

Operating expenses for 2023 decreased $67.7 million, or 46%, as compared to 2022. Compensation and benefits decreased by $42.1 million, or 49%, as a result of our efforts to right size our resources to lower market opportunities initiated in 2022. The decline in Compensation and benefits includes a $25.3 million decrease in salary and benefits, a $10.7 million decrease in commissions due to lower production volume and headcount and a $4.3 million decrease in severance expense. The decrease in salaries and benefits expense is primarily driven by the 50% decrease in Originations average total headcount as compared to 2022, and the effect of relatively lower-cost resources with an 8 percentage-point increase of offshore-to-total average headcount ratio from 2022 to 2023.

Other operating expenses (total operating expenses less Compensation and benefit expense) decreased $25.6 million primarily attributed to the decline in production volumes and average headcount and our cost initiatives. All expense categories decreased, including an $8.4 million decrease in Originations expense driven by lower production volume and a provision release for representation and warranty indemnification in 2023 due to favorable resolution of demands, a $5.5 million decrease in advertising expense, and a $2.9 million decrease in Professional services driven by lower outsourced resources.

Other Income (Expense)

Interest income consists primarily of interest earned on newly-originated and purchased loans during the pipeline period prior to securitization or sale to investors. Interest expense is incurred to finance the mortgage loans during the same pipeline period, which is generally approximately 20 days. We finance mortgage loans with repurchase and participation agreements, commonly referred to as warehouse lines. Our net interest margin is driven by the difference between the average mortgage note rate and the average warehouse line cost of funds, and by the average number of days loans remain in the pipeline.

Interest income for 2023 increased $20.6 million as compared to 2022 largely due to higher interest rates with higher average loans held for sale balances. Similarly, Interest expense for 2023 increased $27.6 million as compared to 2022 primarily due to an increase in short term interest rates and an increase in average warehouse financing debt balance, consistent with higher average loans held for sale balances.

Corporate Items and Other

Corporate Items and Other includes revenues and expenses of corporate support services, inactive entities, and our other business activities that are currently individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash, gain or loss on repurchases of debt, interest expense on unallocated corporate debt and foreign currency exchange gains or losses. Interest expense on corporate debt is allocated to the Servicing segment and the Originations segment based on relative financing requirements, with the exception of the OFC Senior Secured Notes. Accordingly, the financing cost of the Servicing and Originations segments reflects and is consistent with the financing structure of the licensed entity PHH that carries out these businesses and does not depend on the financing structure strategy of its parent, as a holding company.

Corporate support services include finance, facilities, human resources, internal audit, legal, risk and compliance, capital markets, corporate development and technology functions. Certain expenses incurred by corporate support services are allocated to the Servicing and Originations segments using various methodologies intended to approximate the utilization of such services. Various measurements of utilization of corporate support services are maintained, primarily time studies, personnel volumes and service consumption levels. Support service costs not allocated to the Servicing and Originations segments are retained in the Corporate Items and Other segment along with certain other costs including certain litigation and settlement related expenses or recoveries, and other costs related to operating as a public company. Effective in the fourth quarter of 2023, CRL, our wholly-owned captive reinsurance subsidiary, is reported in the Servicing segment. Segment results for 2022 and 2021 have been recast to conform to the current segment presentation.

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The following table presents selected results of operations of Corporate Items and Other. The amounts presented are before the elimination of balances and transactions with our other segments:

Compensation and Benefits

Compensation and benefits expense for 2023 was mostly flat as compared to 2022. A $10.1 million increase in incentive compensation was offset by a $5.6 million decline in severance expense and a $3.6 million decline in salaries and benefit expense. The increase in incentive compensation related to our management performance-based plans is primarily due to an increase in equity classified share-based awards expense associated with new awards granted and lower forfeitures in 2023, and an increase in cash awards. The decline in salaries and benefit expense and severance expense is due to headcount reduction as part of our cost-reduction efforts. The average Corporate headcount declined by 10% and the offshore-to-total average headcount ratio increased by 1 percentage point from 2022 to 2023.

Professional Services

Professional services expense for 2023 declined $32.6 million as compared to 2022, primarily due to a $27.7 million decrease in legal expenses and a $4.8 million decline in other professional fees. The net decline in legal expenses is mostly due to the reversal of our accrual related to the CFPB and other matters resolved in 2023, offset in part by lower reimbursements received from mortgage loan investors related to prior year legal expenses. The decline in other professional fees is mostly due to lower insurance expense driven by cost reduction initiatives and lower utilization of consulting services related to corporate strategy and business initiatives.

Other Operating Expenses

Technology and communications expense for 2023 decreased $3.0 million, or 12%, as compared to 2022, primarily due to cost reduction initiatives. Occupancy, equipment and mailing expense for 2023 decreased $4.4 million or 73%, as compared to 2022, primarily due to exit or downsize of certain leased office facilities in 2022. As compared to 2022, Other expenses for 2023 decreased $3.6 million primarily driven by cost reduction initiatives and a reduction in bank charges due to higher earnings credits as a result of higher interest rates.

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Other Income (Expense)

Interest income for 2023 increased $3.1 million, or 207%, primarily due to higher interest rates on interest-earning cash and term deposits.

Interest expense for 2023 increased $1.5 million, or 3%, as compared to 2022, due to the increase in the debt balance of the Corporate segment that is not allocated to the Servicing and Originations segments.

LIQUIDITY AND CAPITAL RESOURCES

Overview

In the normal course of business, we are actively engaged with existing and potential lenders and as a result add, terminate, replace or extend our debt agreements to the extent necessary to finance our operations and optimize our financing costs.

In addition, we completed the following transactions during 2023:

•Opportunistically repurchased $15.0 million of our PMC Senior Secured Notes in the open market for a price of $13.5 million, and recognized a $1.3 million net gain on debt extinguishment;

•Completed a private placement securitization of HECM loans that are insured by the FHA and REO properties, also referred to as reverse mortgage buyouts. Different classes of asset-backed notes with an initial principal amount of $264.9 million were issued at a discount, with a stated interest rate of 3.0% and a mandatory call date of June 2026;

•Entered into ESS financing transactions and MSR financing transactions with MSR capital partners for aggregated proceeds of $68.7 million and $181.0 million, respectively. ESS financing transactions require PHH to remit to a third party a specified percentage of future servicing fee collections on reference pools of mortgage loans which PHH is entitled to as owner of the related MSRs. MSR financing transactions with MSR capital partners, including MAV, consist of MSR sales, where MSR title and ownership have generally passed, while PHH retains subservicing; and

•Increased our GSE advance facility capacity to facilitate our implementation of the new Agency liquidity rules.

A summary of borrowing capacity under our advance facilities, mortgage warehouse facilities and MSR financing facilities is as follows (see Note 14 — Borrowings to the Consolidated Financial Statements for additional information):

(1)Total Borrowing Capacity represents the maximum amount which can be borrowed, subject to eligible collateral. Available Borrowing Capacity represents Total Borrowing Capacity less outstanding borrowings.

At December 31, 2023, none of the available borrowing capacity under our advance financing facilities could be funded based on the amount of eligible collateral that had been pledged to such facilities. Also, none of our uncommitted borrowing capacity was available to fund advances at December 31, 2023 under our Ginnie Mae MSR financing facility based on the amount of eligible collateral. We may utilize committed borrowing capacity under our mortgage loan financing facilities and MSR financing facilities to the extent we have sufficient eligible collateral to borrow against and otherwise satisfy the applicable conditions to funding. At December 31, 2023, we had $39.2 million committed borrowing capacity under our mortgage loan financing facilities and $0.7 million committed borrowing capacity under our MSR financing facilities, based on the amount of eligible collateral. Uncommitted amounts can be advanced at the discretion of the lender, and there can be no assurance that any uncommitted amounts will be available to us at any particular time.

At December 31, 2023, our total liquidity was $241.6 million compared to $219.1 million at December 31, 2022, which comprised an unrestricted cash position of $201.6 million compared to $208.0 million at December 31, 2022, and the available borrowing capacity discussed above.

Effective September 30, 2023, we implemented the revised minimum tangible net worth and liquidity requirements for GSE and Ginnie Mae seller/servicers. We believe that we are in compliance with these requirements as of December 31, 2023. Ginnie Mae announced a new risk-based capital ratio effective on December 31, 2024 for Ginnie Mae issuers. PHH would not

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be in compliance with the upcoming risk-based capital requirements if they were in effect as of December 31, 2023. We have identified, and are commencing activities to implement, a course of actions intended to achieve compliance with the requirements. If we are unable to execute this solution in a timely and cost-effective manner that allows us to continue the Ginnie Mae related businesses and are unable to replace the lost income from these activities, or if we misjudge the magnitude of the costs and benefits and their impacts on our business, our financial results, liquidity, financing activities and reputation could be negatively impacted. Also refer to Note 24 — Regulatory Requirements.

We optimize our daily cash position to reduce financing costs while closely monitoring our liquidity needs and ongoing funding requirements. We regularly monitor and project cash flows over various time horizons to anticipate and mitigate liquidity risk. We maintain liquidity buffers to be responsive to the level of risks, including stressed market interest rate conditions and operational risk.

Use of Funds

Our primary near-term uses of funds in the normal course include:

•Payment of operating costs and corporate expenses;

•Payments for servicing advances in excess of collections;

•Investment in MSRs (purchased and originated), other asset acquisitions and MAV Canopy equity contributions;

•Originated, purchased and repurchased loans, including reverse mortgage buyouts;

•Payment of margin calls under our MSR financing facilities and derivative instruments;

•Debt service and repayments of borrowings, including under our MSR financing, advance financing and warehouse facilities, and payment of interest expense; and

•Net negative working capital and other general corporate cash outflows.

We have short-term commitments to lend $614.6 million in connection with our forward and reverse mortgage loan IRLCs, respectively, outstanding at December 31, 2023. In addition, we have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of $1.8 billion at December 31, 2023. During 2023, we funded $258.4 million out of the $1.8 billion borrowing capacity available as of December 31, 2022. As an HMBS issuer, we are required to repurchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the loan is equal to or greater than 98% of the maximum claim amount (MCA repurchases).We carry these repurchases until reimbursement by HUD and/or property liquidation if inactive. Our reverse subservicing clients bear the financial obligation and risks associated with purchasing loans out of securitization pools within the portfolio we subservice. See Note 25 — Commitments to the Consolidated Financial Statements for additional information.

Regarding the current maturities of our borrowings, as of December 31, 2023, we have approximately $1.0 billion of debt outstanding that would either come due, begin amortizing or require partial repayment in the next 12 months. This amount is comprised of $567.2 million of borrowings under forward and reverse mortgage loan warehouse facilities, $455.4 million outstanding under GSE and Ginnie Mae MSR financing facilities maturing in the next 12 months, and $13.8 million of scheduled principal amortization on the PLS Notes secured by PLS MSRs.

With respect to liquidity management, we consider our servicing advance requirements during each investor remittance period and the uncertainties of daily margin calls on our collateralized debt facilities and derivative instruments due to interest rate fluctuations.

As servicer, we are required to advance to investors the loan P&I installments not collected from borrowers for those delinquent loans, including those on forbearance plans. Loan payoffs and prepayments are a source of additional liquidity and are dependent on the interest rate environment. We also advance T&I and Corporate advances primarily on properties that are in default or have been foreclosed. Our obligations to make these advances are governed by servicing agreements or guides, depending on investors or guarantor. Refer to Note 25 — Commitments to the Consolidated Financial Statements for further description of our servicer advance obligations. As subservicer, we are also required to make P&I, T&I and Corporate advances on behalf of servicers following the servicing agreements or guides. However, servicers are generally required to reimburse us within 30 days of our advancing under the terms of the subservicing agreements, and we are generally reimbursed by Rithm the same day we fund P&I advances, or within no more than three days for certain servicing advances.

We are generally subject to daily margining requirements under the terms of our MSR financing facilities and daily cash calls for our TBAs, interest rate swap futures or other derivatives. Declines in fair value of our MSRs due to declines in market interest rates, assumption updates or other factors require that we provide additional collateral to our lenders under MSR financing facilities. Similarly, declines in fair value of our derivative instruments require that we provide additional collateral to the clearing counterparties. While the objective of our hedging strategy is to reduce volatility due to interest rates, it is also designed to address cash and liquidity considerations. Refer to the sensitivity analysis in the Market Risk section of Risk Management for our quantitative and qualitative disclosures about market risk.

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Our medium- and long-term requirements for cash include:

•Payment of interest and principal repayment of our PLS Notes that mature in 2025 and our senior secured notes that mature in 2026 and 2027;

•Any payments associated with the confirmation of loss contingencies; and

•Any other payments required under contractual obligations discussed above that extend beyond one year.

We are focused on ensuring that we have sufficient liquidity sources to continue to operate and support our business initiatives. We continuously evaluate alternative financings to diversify our sources of funds, optimize maturities and reduce our funding cost. In addition, we evaluate investment and capital allocation opportunities for any excess liquidity, including a partial repurchase of our senior secured notes as one of our objectives is to de-risk and deleverage our balance sheet.

Sources of Funds

Our primary sources of funds for near-term liquidity in normal course include:

•Collections of servicing and subservicing fees and ancillary revenues;

•Collections of advances in excess of new advances;

•Proceeds from match funded advance financing facilities;

•Proceeds from other borrowings, including warehouse facilities, MSR financing facilities, MSR transfers and ESS financing;

•Proceeds from sales and securitizations of originated loans and purchased loans; and

•Net positive working capital from changes in other assets and liabilities.

Servicing advances are an important component of our business and represent amounts that we, as servicer, are required to advance to, or on behalf of, our servicing clients if we do not receive such amounts from borrowers. Our use of advance financing facilities is integral to our cash and liquidity management strategy. Additionally, certain of our financing and subservicing agreements permit us to retain advance collections for a period ranging from one to two business days before remittance, thus providing a source of short-term liquidity.

We use mortgage loan repurchase and participation facilities (commonly called warehouse lines) to fund newly-originated or purchased loans on a short-term basis until they are sold or securitized to secondary market investors, including GSEs or other third-party investors, and to fund repurchases of certain Ginnie Mae forward loans, HECM loans, second-lien loans and other types of loans. These facilities contain eligibility criteria that include aging and concentration limits by loan type among other provisions. Currently, our financing agreements generally have maximum terms of 364-days. The funds are typically repaid using the proceeds from the sale of the loans to the secondary market investors, usually within 30 days.

We also rely on the secondary mortgage market as a source of consistent liquidity to support our lending operations. Substantially all of the mortgage loans that we originate or purchase are sold or securitized in the secondary mortgage market in the form of residential mortgage-backed securities guaranteed by Fannie Mae or Freddie Mac and, in the case of mortgage-backed securities guaranteed by Ginnie Mae, are mortgage loans insured or guaranteed by the FHA, VA or United States Department of Agriculture (USDA). As disclosed above, in 2023 we issued a private placement securitization of reverse mortgage buyouts with an initial principal amount of $264.9 million, expanding our access to capital markets and reducing our reliance on warehouse financing facilities. In February 2024, we issued a second private placement securitization of reverse mortgage buyouts, refer to Note 27 — Subsequent Events to our Consolidated Financial Statements.

We regularly evaluate financing structure options that we believe will most effectively provide the necessary capacity to support our investment plans, address upcoming debt maturities and accommodate our business needs. We strive to diversify our sources of funds and reduce our reliance on existing asset-backed financing facilities. We continuously evaluate the allocation of our capital to MSR investments, the related returns, funding and liquidity requirements. The relationships with MAV and other MSR capital partners may continue to provide PHH with additional means to grow servicing volume and finance MSRs while maintaining capital and liquidity.

Covenants

Our debt agreements contain various qualitative and quantitative covenants including financial covenants, covenants to operate in material compliance with applicable laws and regulations, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates. These covenants may limit the manner in which we conduct our business and may limit our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs.

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In addition, breaches or events that may result in a default under our debt agreements include, among other things, nonpayment of principal or interest, noncompliance with our covenants, breach of representations, the occurrence of a material adverse change, insolvency, bankruptcy, certain material judgments and litigation and changes of control. See Note 14 — Borrowings to the Consolidated Financial Statements for additional information regarding our covenants. The most restrictive liquidity requirement under our debt agreements, excluding additional Agency minimum liquidity requirements, is for a minimum of $75.0 million in consolidated liquidity, as defined, under certain of our mortgage loan financing and MSR financing facilities agreements. At December 31, 2023, we held unrestricted cash in excess of this minimum amount. The minimum liquidity requirements for PHH contained in some debt agreements are also subject to the minimum requirement set forth by the Agencies. Refer to Note 24 — Regulatory Requirements.

In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations, and other legal remedies, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We believe that we are in compliance with the covenants in our debt agreements as of December 31, 2023.

Credit Ratings

Credit ratings are intended to be an indicator of the creditworthiness of a company’s debt obligations. Lower ratings generally result in higher borrowing costs and reduced access to capital markets. The following table summarizes our current ratings and outlook by the respective nationally recognized rating agencies. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time.

On August 15, 2022, Moody’s reaffirmed their ratings of Caa1 and revised their outlook to Positive from Stable. In its affirmation of PHH’s ratings, Moody’s referenced weak but improving profitability and modest capital levels. In its change in PHH’s outlook to Positive from Stable, Moody’s cited the progress the company is making in transitioning its strategy to focus on originations and servicing of non-delinquent forward and reverse mortgages from the servicing of seriously delinquent loans, which should lead to a more resilient business model and more stable earnings profile. The Positive outlook also reflects Moody's expectation that PHH will maintain stable financial metrics in the next 12-18 months with respect to capitalization and liquidity, continue to strengthen its servicing and origination franchises and make progress with respect to its strategic plan to improve profitability.

On January 25, 2024, S&P affirmed the long-term corporate rating of Ocwen at B- and affirmed the “B” rating of the PMC Senior Secured Notes. In affirming the ratings, S&P noted Ocwen's leverage has improved due to improving operating margins and continued subservicing growth. However, S&P also noted a reliance on warehouse facilities continues to weigh on the rating.

It is possible that additional actions by credit rating agencies could have a material adverse impact on our liquidity and funding position, including materially changing the terms on which we may be able to borrow money.

Cash Flows

Our operating cash flow is primarily impacted by operating results, changes in our servicing advance balances, the level of mortgage loan production, the timing of sales and securitizations of mortgage loans, and the margin calls required under our MSR financing facilities or derivative instruments. As one of the main differences between proceeds from sale and origination or purchase of loans held for sale, newly originated MSRs are effectively classified as operating cash flows. Purchases of MSRs through flow purchase agreements, Agency Cash Window and bulk acquisitions are classified as investing activity. MSR investments, whether originated or purchased, represent a key indicator of our ability to generate future income in our Servicing business.

We classify changes in HECM loans held for investment as investing activity and changes in the related HMBS borrowings as financing activity. Our MSR transfer agreements with MAV, Rithm and others have a significant impact on our consolidated statements of cash flows. Because the payments we received in connection with the HECM loan securitizations and MSR transfer agreements are recorded as secured financings, additions to, and reductions in, the balance of those secured financings are presented as financing activity in our consolidated statements of cash flows, excluding the changes in fair value attributable to inputs and assumptions.

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Our cash flows are summarized as follows:

Cash flows for the year ended December 31, 2023

Our operating activities provided a net $10.4 million of cash during the year, after $257.9 million net cash paid on loans held for sale, with loan production volumes exceeding sales, $183.0 million of which was used to finance newly originated MSRs. Operating cash flows included $76.1 million net collections of servicing advances and earnings distributions of $7.3 million received from our equity method investee MAV Canopy.

Our investing activities used $100.3 million of cash. The primary use of cash in our investing activities was $120.0 million to purchase MSRs, $42.2 million to acquire advances in connection with MSR transactions, and $10.7 million to purchase real estate. Offsetting cash inflows include $44.6 million net cash inflows in connection with our HECM reverse mortgages, $18.5 million proceeds from the sale of real estate, and $4.4 million of capital distributions received, net of contributions, from our equity method investee MAV Canopy.

Our financing activities provided $70.8 million of cash. Financing cash inflows are primarily comprised of $174.7 million of proceeds from the sale of MSRs accounted for as a financing in connection with sales of MSRs and $68.7 million of proceeds from ESS financings. Offsetting cash outflows include $95.3 million of net payments on the financing liabilities related to MSRs transferred and ESS financings due to runoff, $36.0 million net repayments of borrowings under our MSR financing facilities, and $13.9 million of net repayments on advance match funded liabilities. We also paid $13.5 million to repurchase $15.0 million of our 7.875% PHH Senior Secured Notes. Cash inflows of $1.05 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, were more than offset by repayments on the related financing liability of $1.07 billion.

Cash flows for the year ended December 31, 2022

Our operating activities provided $173.2 million of cash, including net collections of servicing advances of $28.3 million and net cash received on loans held for sale of $8.1 million, due to lower forward loan production volumes. In addition, we received earnings distributions of $18.5 million from our equity method investee MAV Canopy.

Our investing activities used $149.1 million of cash. The primary uses of cash in our investing activities include $199.4 million to purchase MSRs, $77.0 million net cash outflows in connection with our HECM reverse mortgages, $6.9 million acquisition of reverse mortgage subservicing intangible assets and $19.0 million of capital contributions, net of distributions, to our equity method investee MAV Canopy. Offsetting cash inflows include $155.7 million proceeds from the sale of MSRs to unrelated third-parties.

Our financing activities used $13.4 million of cash. Cash outflows include a $327.1 million net repayment of borrowings under our mortgage loan financing and MSR financing facilities due to decline in loans held for sale and $111.9 million of net payments on the financing liabilities related to MSRs transferred due to runoff. We also paid $23.6 million to repurchase $25.0 million of our 7.875% PHH Senior Secured Notes and $50.0 million to repurchase 1,750,557 shares of our common stock, Cash inflows include $1.8 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, largely offset by repayments on the related financing liability of $1.6 billion, $86.2 million of proceeds from sale of MSRs accounted for as a financing in connection with sales of MSRs to MAV, $200.9 million of proceeds from the new ESS financings and $1.4 million of net proceeds on advance match funded liabilities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events based on information available at the date of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. We have processes in place to monitor these judgments and assumptions, and management is required to review critical accounting policies and estimates with

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the Audit Committee of the Board of Directors. The following is a summary of certain accounting policies and estimates involving significant judgments. Our significant accounting policies and critical accounting estimates are described in Note 1 — Organization, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements.

Fair Value Measurements

We use fair value for recognition, subsequent measurement and disclosure of certain instruments. Refer to Note 3 — Fair Value to the Consolidated Financial Statements for the fair value hierarchy, descriptions of valuation methodologies used to measure significant assets and liabilities at fair value and details of the valuation models, key inputs to those models, significant assumptions utilized, and sensitivity analyses. We follow the fair value hierarchy to prioritize the inputs utilized to measure fair value and classify instruments as Level 3 when the valuation technique requires significant unobservable inputs or assumptions. We review and modify, as necessary, our fair value hierarchy classifications on a quarterly basis. The determination of the fair value of these Level 3 financial assets and liabilities and MSRs requires significant management judgment and estimation. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for a sensitivity analysis reflecting the estimated change in the fair value of our MSRs, HECM loans held for investment and loans held for sale carried at fair value as well as any related derivatives at December 31, 2023, given hypothetical instantaneous parallel shifts in the yield curve.

The following table summarizes assets and liabilities measured at fair value on a recurring and nonrecurring basis and the amounts measured using Level 3 inputs:

We have various internal controls in place to ensure the appropriateness of fair value measurements. Significant fair value measures are subject to analysis and management review and approval. Additionally, we utilize a number of controls to ensure the results are reasonable, including comparison, or “back testing,” of model results against actual performance and monitoring the market for recent trades, including our own price discovery in connection with potential and completed sales, and other market information that can be used to benchmark inputs or outputs. Considerable judgment is used in forming conclusions about Level 3 inputs such as prepayment speeds and discount rates. Changes to these inputs could have a significant effect on fair value measurements.

Valuation of Reverse Mortgage Loans Held for Investment and HMBS-related Borrowings

Reverse mortgage loans are insured by the FHA and transferred into Ginnie Mae guaranteed securities (or HMBS). Loan transfers in these Ginnie Mae securitizations do not qualify for sale accounting and are recorded as secured financings. We record both loans held for investment and the corresponding HMBS borrowings at fair value. Our net exposure to reverse mortgages and the HMBS-related borrowings is limited to the residual value we retain, including future draw commitments and servicing value. Changes in the fair value of the loans held for investment are largely offset by changes in the value of the related secured financing. As of December 31, 2023, we reported $7.9 billion securitized loans held for investment at fair value and $7.8 billion HMBS-related borrowings at fair value, with a residual, net asset value of $71.2 million. In 2023, we recorded

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a net $23.5 million gain on change in fair value of securitized loans held for investment and HMBS-related borrowings reported in Gain (loss) on reverse loans held for investment and HMBS-related borrowings, net in our Servicing segment.

The fair value of both reverse mortgage loans held for investment and HMBS-related borrowings is based primarily on discounted cash flow methodologies. Inputs to the discounted cash flows of these assets include future draws and tail securitization spreads, conditional prepayment rate (including voluntary and involuntary prepayments) and discount rate. The determination of fair value requires management judgment due to the significant unobservable assumptions, including conditional prepayment rate and discount rate.

We engage third-party valuation experts to support our valuation and provide observations and assumptions related to market activities. We evaluate the reasonableness of our fair value estimate and assumptions using historical experience, or cash flow backtesting, adjusted for prevailing market conditions and benchmarks with third-party expert valuations. We believe that our back-testing and benchmarking procedures provide reasonable assurance that the fair value used in our consolidated financial statements complies with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.

The following table provides the range and weighted average of significant unobservable assumptions used (expressed as a percentage of UPB) as of December 31, 2023 and December 31, 2022: