Home Loan Servicing Solutions, Ltd. HLSS $14.00-$16.00 13.3 million shares Underwriters: Wells Fargo Securities, Barclays Capital, Citigroup, Deutsche Bank Securities Co-Managers: RBC Capital Markets, KKR, Piper Jaffray Proposed trade date of 2/29 They are a newly incorporated Cayman Islands exempted company formed to acquire mortgage servicing assets, primarily subprime and Alt-A mortgage servicing rights and associated servicing advances.

Home Loan Servicing Solutions, Ltd. HLSS

13,333,333 shares to be offered between $14.00 and $16.00 per share
Underwriters: Wells Fargo Securities, Barclays Capital, Citigroup, Deutsche Bank Securities Co-Managers: RBC Capital Markets, KKR, Piper Jaffray
Proposed trade date of 2/29
Rating = 2

Click here to view the prospectus.

http://www.sec.gov/Archives/edgar/data/1513161/000119312512050739/d151656ds1a.htm

Company Overview

They are a newly incorporated Cayman Islands exempted company formed to acquire mortgage servicing assets consisting of mortgage servicing right, rights to fees and other income from servicing mortgage loans, and associated servicing advances. They will not originate or purchase mortgage loans, and as a result they will not be subject to the risk of loss related to the origination or ownership of mortgage loans. They will engage one or more high quality residential mortgage loan servicers to service the mortgage loans underlying their mortgage servicing assets and therefore do not intend to develop their own mortgage servicing platform. They believe that their revenue and expense structure will be predictable and will generate a stable income stream and that the quality of their assets will be strong. They believe this combination will accomplish their primary objective of delivering attractive and consistent risk-adjusted returns to their shareholders. They intend to distribute at least 90% of their net income to their shareholders in the form of a monthly cash dividend. In addition, unlike many income-oriented investment alternatives, they believe that their income stream and the valuation of their assets are not substantially correlated to movements in interest rates.

They have assembled an executive management team with extensive experience in the mortgage servicing industry. Their executive officers are currently in senior management roles at Ocwen Financial Corporation or “Ocwen.” Upon the completion of this offering, they will resign from their positions at Ocwen and become members of their executive management team.

William C. Erbey, the founder of their company and the Chairman of their Board of Directors and the Chairman of the Board of Directors of Ocwen, has agreed to purchase $10 million of their ordinary shares at a price per share equal to the initial public offering price in a private placement that will close concurrently with this offering, which they refer to as the “Concurrent Private Placement” and together with this offering, the “Offerings.” Following the completion of the Offerings, Mr. Erbey will continue to serve as the Chairman of the Board of Directors of Ocwen.

Their business strategy is focused on acquiring mortgage servicing rights. In many cases, however, the transfer of legal ownership of mortgage servicing rights requires the prior approval or consent of various third parties, including rating agencies. If the seller from which they have agreed to purchase mortgage servicing rights has not obtained the necessary approvals and consents to transfer legal ownership of the mortgage servicing rights to them, they will instead seek to acquire the rights to receive the servicing fees that the current servicer is entitled to receive, and the current servicer will continue to service the mortgage loans and will receive compensation from them for its servicing activities. They refer to these rights, along with the right to acquire legal ownership of the related mortgage servicing rights automatically upon obtaining the necessary approvals and consents to transfer the mortgage servicing rights, as “Rights to MSRs.” Upon receipt of the necessary third party approvals and consents, the seller would be obligated to transfer legal ownership of the mortgage servicing rights to them without any additional payment. Whether they acquire mortgage servicing rights or Rights to MSRs, they would also acquire servicing advances and other associated assets. They do not believe that their business strategy or financial performance will be materially affected by whether they directly own mortgage servicing rights or the related Rights to MSRs.

They will use the proceeds from the Offerings to purchase the right to receive servicing fees and other servicing revenue, associated servicing advances and other related assets from Ocwen Loan Servicing, LLC or “Ocwen Loan Servicing,” a wholly owned subsidiary of Ocwen, simultaneously with the closing of the Offerings. These Rights to MSRs are related to mortgage servicing rights owned by Ocwen Loan Servicing with respect to 116 pooling and servicing agreements with an unpaid principal balance of approximately $16 billion as of December 31, 2011, which they refer to as the “Initial Mortgage Servicing Rights.” Ocwen Loan Servicing will not have obtained the necessary third party approvals and consents to transfer legal ownership of the Initial Mortgage Servicing Rights to them prior to the closing of the Offerings, and as result, the transfer of legal ownership of the Initial Mortgage Servicing Rights will occur automatically only if and when such approvals and consents are received. As compensation for its servicing and subservicing activities, Ocwen Loan Servicing will receive from them a monthly base fee initially equal to 12% of such recognized servicing fee revenue. Ocwen Loan Servicing will also have the opportunity to earn a monthly performance based incentive fee that will fluctuate based on collections and servicing advance reduction criteria with respect to the underlying mortgage loans. The compensation to be paid to Ocwen Loan Servicing will not vary based on whether Ocwen Loan Servicing or they hold legal title to the underlying Initial Mortgage Servicing Rights.

Throughout this prospectus, when they refer to their “Mortgage Servicing Assets,” they are referring to the Rights to MSRs that they own and the mortgage servicing rights that they may acquire in the future, and when they refer to “Purchased Assets,” they are referring to the Mortgage Servicing Assets, together with the associated servicing advances and any other assets related to such Mortgage Servicing Assets that they have acquired..

They were incorporated as an exempted company in the Cayman Islands, which currently does not levy income taxes on individuals or companies. They expect to be treated as a passive foreign investment company (“PFIC”) under U.S. federal income tax laws. They intend to distribute at least 90% of their net income to their shareholders in the form of a monthly dividend that will primarily be based on projected annual earnings, although they are not required by law to do so. Payment of a monthly dividend is not a condition of their tax status, and their decision to pay this dividend is not expected to be impacted by any changes in their status for U.S. tax purposes. Except for their subsidiary that is taxed as a corporation for U.S. federal income tax purposes, they do not expect to be treated as engaged in a trade or business in the United States and thus do not expect to be subject to more than a nominal amount of U.S. federal income taxation.

On January 30, 2012, their Board of Directors declared a contingent interim dividend of $0.10 per ordinary share with respect to each of the three full calendar months following the completion of the Offerings and the Initial Acquisition. These dividends will be payable to holders of record of their ordinary shares on the last business day of each such month, subject to all applicable laws, and will be paid on the 10th day of the immediately following month, or the first business day thereafter if such date falls on a weekend or holiday. These dividends will be contingent upon the consummation of the Offerings and the successful completion of the Initial Acquisition

IPO Detail

This is the initial public offering of Home Loan Servicing Solutions, Ltd. and no public market currently exists for its common stock. Home Loan Servicing Solutions is offering 13,333,333 shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be $15.00 per share. The company has applied to list its common stock on the NASDAQ Global Market under the symbol “HLSS.”

Ordinary shares offered by the company

13,333,333 ordinary shares

Ordinary shares to be outstanding immediately after this offering

14,020,000 ordinary shares

Simultaneously with this offering, William C. Erbey, the founder of their company and the Chairman of their Board of Directors, will purchase $10 million of their ordinary shares at a price per share equal to the initial public offering price in a private placement.

Use of Proceeds

They estimate that the net proceeds to them from this offering will be approximately $182 million. Concurrently with this offering, William C. Erbey, the founder of their company and the Chairman of their Board of Directors, has agreed to purchase $10 million of their ordinary shares in the Concurrent Private Placement at a price per share equal to the initial public offering price, subject to the completion of this offering. No underwriting discounts or commissions will be paid in respect of these shares.

Pursuant to the Purchase Agreement, they will purchase the Rights to MSRs, associated servicing advances and related assets from Ocwen Loan Servicing, and expect to assume Ocwen Loan Servicing’s obligations under the existing advance financing facility, simultaneously with the closing of the Offerings. The closing of these transactions is a condition precedent to the closing of the Offerings. The estimated purchase price for these assets as of December 31, 2011 is $181 million (net of assumed match funded liabilities of $452 million and subject to certain closing adjustments). The outstanding amount owed on the advance financing facility was $383 million as of December 31, 2011.

The purchase price will have two components. The purchase price for the Rights to MSRs will be based on their estimates of the value of such assets to be made near the time they enter into the Purchase Agreement and the outstanding unpaid principal balance of the underlying mortgage loans at closing. The purchase price for the associated servicing advances and other assets (such as the capitalized debt issue costs and facility reserve account) will be equal to the net consolidated book value as of the purchase date of all assets and liabilities of the special purpose entities established in connection with the advanced financing facility that owns these servicing advances, namely HomEq Servicer Advance Facility Transferor, LLC (“HomEq Transferor”) and HomEq Servicer Advance Receivables Trust 2010-ADV1 (the “Trust”), a Delaware statutory trust of which HomEq Transferor is the sole beneficiary.

They will automatically acquire legal ownership of the Initial Mortgage Servicing Rights without any additional payment to Ocwen Loan Servicing if and when they obtain the Required Third Party Consents and therefore, no proceeds from the Offerings will be used for that purpose.

They intend to use any remaining net proceeds from the Offerings for working capital and general corporate purposes, which may include the repayment of indebtedness or the purchase of additional Rights to MSRs or mortgage servicing rights.

Competition

Market Opportunity

· higher borrower delinquencies and defaults experienced over the last few years and increased regulatory oversight has led to substantially higher costs for mortgage servicers and negatively impacted their profitability;

· regulatory changes resulting from the implementation of Basel III, which will impose increased regulatory capital costs on depository institutions for owning mortgage servicing rights; and

· their belief that subprime and Alt-A mortgage servicing has become less attractive to many mortgage servicers due to increasingly negative publicity and heightened government and regulatory scrutiny.

They believe that their business model will allow them to be highly competitive in the acquisition of Mortgage Servicing Assets due to their cost structure, ability to access advance financing and their relationship with Ocwen Loan Servicing. They believe that if and when they obtain the Required Third Party Consents for the Initial Mortgage Servicing Rights, it will be easier for them to obtain any consents required for future acquisitions of mortgage servicing rights. They anticipate that most of their acquisitions of Mortgage Servicing Assets from sellers other than Ocwen Loan Servicing would involve engaging a party other than such seller to service the underlying mortgage loans. In addition, they may also pursue opportunities to purchase mortgage servicing rights relating to loans guaranteed or securitized by the U.S. government or government sponsored entities such as Fannie Mae and Freddie Mac (collectively, the “GSEs”).

CONSOLIDATED BALANCE SHEETS

(In dollars)


	December 31, 2010			December 31, 2011
ASSETS
CASH AND CASH EQUIVALENTS	$	300,000		$	283,447
PREPAID EXPENSES AND OTHER ASSETS		13,750			2,860,003

TOTAL ASSETS	$	313,750		$	3,143,450

LIABILITIES AND EQUITY
LIABILITIES
Accrued expenses	$	31,326		$	1,647,052
Due to affiliates		—			1,487,090

TOTAL LIABILITIES		31,326			3,134,142

COMMITMENTS AND CONTINGENCIES
EQUITY
Equity — ordinary shares, $0.01 par value; 5,000,000 shares authorized; 20,000 shares issued and outstanding		200			200
Additional paid-in-capital		299,800			299,800
Deficit accumulated during the development stage		(17,576	)		(290,692	)

Total equity		282,424			9,308

TOTAL LIABILITIES AND EQUITY	$	313,750		$	3,143,450

Target Markets

Their future success will be dependent on their ability to find, evaluate and acquire Mortgage Servicing Assets that meet their strategic and financial objectives.

Acquire Additional Mortgage Servicing Assets from Ocwen Loan Servicing. They believe that Ocwen Loan Servicing provides an attractive source of future Mortgage Servicing Assets. Over time, they expect to acquire substantially all of Ocwen Loan Servicing’s remaining mortgage servicing rights relating to subprime and Alt-A mortgage loans, which had an unpaid principal balance of $55 billion as of December 31, 2011 and which is expected to increase by approximately $42 billion of unpaid principal amount in connection with the Pending Ocwen Acquisitions.

Acquire Additional Mortgage Servicing Rights from other Owners and Originators. They believe their management team’s significant prior operating experience and extensive industry relationships will provide attractive opportunities to purchase mortgage servicing rights from third parties other than Ocwen. In the future, they may also pursue opportunities to purchase mortgage servicing rights relating to new Freddie Mac, Fannie Mae and Ginnie Mae securitizations.

Evaluation Criteria. They plan to evaluate all assets considered for purchase with a variety of criteria, including:

· risk-adjusted return based on the contemplated purchase price and asset structure;

· characteristics of the underlying mortgage loans;

· availability of pool level recovery with respect to servicing advances;

· terms and conditions imposed by the pooling and servicing agreements;

· servicing advances meeting the requirements for financing;

· seller willingness to make strong representations and warranties regarding servicing practices and servicing advances and perceived financial ability to fulfill obligations that might arise from such contingent obligations; and

· availability of a highly qualified servicer on favorable economic terms.

Their Servicer and Subservicer Selection Strategy

They do not intend to develop a mortgage servicing platform, nor do they intend to acquire and maintain mortgage servicing platforms, personnel or processes in connection with the acquisition of Mortgage Servicing Assets. Their success will be dependent, in part, on identifying, evaluating and engaging high-quality servicers and subservicers, such as Ocwen Loan Servicing, to perform substantially all of the servicing functions relating to the Mortgage Servicing Assets that they acquire.

Servicer and Subservicer Selection Criteria. They will select servicers and subservicers based on the following criteria:

· effectiveness of payment collections, customer service and loss mitigation techniques;

· ability to execute loan modifications and minimize default rates;

· scalability of servicing platform and pricing;

· development and utilization of new proprietary technology to service high volumes of performing and delinquent mortgage loans; and

· servicer rating, reputation, experience and financial strength.

They intend to use a similar selection criteria for identifying potential sellers of Mortgage Servicing Assets.

Structuring Subservicing Agreements. If and when legal ownership of any mortgaging servicing right is transferred to them, they will become contractually obligated to service the underlying mortgage loans and will need to engage one or more high quality subservicers to service the mortgage loans. They believe that they will be able to negotiate favorable pricing and other terms when entering into subservicing agreements with the subservicers that they identify based on their selection criteria. They will seek to negotiate agreements that will provide them with stable earnings and cash flows. They expect to pay their subservicers performance based incentive fees and believe this arrangement will align their interests with those of their subservicers.

Company's Unique Strengths

Asset Acquisition and Evaluation Expertise. They believe that their asset acquisition evaluation process, which includes using proprietary historical data to project the performance of mortgage loans, and their executive management team’s experience and judgment in identifying, assessing, valuing and acquiring new Mortgage Servicing Assets will enable them to accurately price assets.

Access to Mortgage Servicing Assets. Members of their executive management team have extensive relationships in the mortgage servicing industry, including relationships with mortgage loan originators and potential sellers of mortgage servicing rights. In addition, they intend to acquire substantially all of Ocwen Loan Servicing’s remaining mortgage servicing rights relating to subprime and Alt-A mortgage loans which had an unpaid principal balance of approximately $55 billion as of December 31, 2011, which is expected to increase by approximately $42 billion of unpaid principal amount in connection with the Pending Ocwen Acquisitions. Future acquisitions of Ocwen Loan Servicing’s remaining mortgage servicing rights will depend on various factors, including their ability to access financing and obtain the required third party approvals and consents, and may not take place.

Relationship with Ocwen. They intend to capitalize on the servicing capabilities of Ocwen Loan Servicing, which they view as superior relative to other servicers in terms of cost, management experience, technology infrastructure and platform scalability. Ocwen Loan Servicing will continue to service the mortgage loans underlying the Initial Mortgage Servicing Rights during the period of time prior to the transfer of legal ownership of the Initial Mortgage Servicing Rights to them. Thereafter, they will engage Ocwen Loan Servicing to service on their behalf the mortgage loans underlying any additional mortgage servicing rights that they may acquire from them in the future, provided that the performance criteria specified in the Subservicing Agreement are met. They may also engage Ocwen Loan Servicing to service mortgage loans underlying any mortgage servicing rights that they acquire from other third parties in the future.

Company's Unique Risks

They may be unable to implement their business strategy or operate their business as currently expected, including being unable to obtain the Required Third Party Consents. Generally, most pooling and servicing agreements require the consent of various parties, including the rating agencies, the trustees of the related securitization trusts, the sponsors of the securitization transactions, any master servicer or any bond insurers or other credit enhancers insuring the mortgage-backed securities issued by the securitization trusts, prior to the transfer of legal ownership of the related mortgage servicing rights. At this time, some but not all of the rating agencies have indicated that they would issue a statement that the transfer of legal ownership of the Initial Mortgage Servicing Rights to them would not result in a downgrade to the rating of the related mortgage-backed securities, and they have not received all of the other Required Third Party Consents.

A bankruptcy of Ocwen Loan Servicing could adversely affect their business, expected dividends on their ordinary shares and the value of your investment in them. If Ocwen Loan Servicing becomes subject to a bankruptcy proceeding, their business could be materially adversely affected, and you could suffer losses. The validity or priority of their security interest in the Initial Mortgage Servicing Rights could be challenged in a bankruptcy proceeding of Ocwen Loan Servicing, and the Purchase Agreement could be rejected in such proceeding. Ocwen Loan Servicing’s obligations under the Purchase Agreement with respect to the Rights to MSRs will be secured by a security interest in the Initial Mortgage Servicing Rights and the proceeds of the Initial Mortgage Servicing Rights. They will undertake all requirements under applicable law to properly create and perfect this security interest, including pledging the collateral in the Purchase Agreement and filing financing statements in appropriate jurisdictions to perfect it. Nonetheless, their security interest may be ruled unenforceable or ineffective by a bankruptcy court. They will have increased risk related to their relationship with Ocwen Loan Servicing so long as it retains legal ownership of the Initial Mortgage Servicing Rights.

Their assumptions in determining the purchase price for Mortgage Servicing Assets may be inaccurate or the basis for such assumptions may change, which could adversely affect their results of operations.

If their assumptions regarding the rates at which delinquent mortgages loans will become performing or be resolved through loan modifications are higher than the actual rates, then the unpaid principal balance of the mortgage loans underlying their Mortgage Servicing Assets will decline more quickly than they have anticipated, and the amount and duration of outstanding servicing advances would increase, which would adversely affect their operating results.

Ocwen Loan Servicing or they may be terminated as servicer under a pooling and servicing agreement. Many pooling and servicing agreements for subprime and Alt-A mortgage loans also contain servicer termination events or events of default based upon the number of delinquent loans or the loss performance of the related mortgage loans. They believe that these servicer termination events or events of default have been triggered in most pooling and servicing agreements for subprime and Alt-A mortgage loans that were entered into prior to 2008. Servicer termination events or events of default have been triggered in pooling and servicing agreements representing approximately 83% of the unpaid principal balance of the mortgage loans underlying the Initial Mortgage Servicing Rights as of December 31, 2011, and the parties to the related securitization transactions could enforce their rights against Ocwen Loan Servicing or them at any time as a result. They believe that one possible reason that the parties to pooling and servicing agreements that have the right to terminate a servicer upon the occurrence of such servicer termination events or events of default have not exercised such rights may be because the transfer of servicing could lead to a disruption of servicing activities which could lead to increased delinquencies and decreased recovery on the underlying mortgage loans, which could result in a loss on the related mortgage-backed securities. While the parties to the securitization transactions have not exercised their right to terminate Ocwen Loan Servicing as servicer under the pooling and servicing agreements related to the Initial Mortgage Servicing Rights to date, they could enforce their rights against Ocwen Loan Servicing prior to the transfer of the Initial Mortgage Servicing Rights to them, or against them if and when they acquire the Initial Mortgage Servicing Rights at a later date. In addition, most of the pooling and servicing agreements related to the Initial Mortgage Servicing Rights also contain servicer termination events or events of default that require the servicer to maintain a tangible net worth of between $15 million and $50 million.

A downgrade in Ocwen Loan Servicing’s servicer rating and that of any future subservicer with whom they enter into subservicing agreements could have an adverse effect on their business, financial condition or results of operations.

They may not be able to pay dividends on their ordinary shares. They intend to declare and pay regular cash dividends on their ordinary shares. They intend to distribute at least 90% of their net income to shareholders on a monthly basis, although they are not required by law to do so.

Bottom Line

Their business strategy is focused on acquiring mortgage servicing rights. They will not originate or purchase mortgage loans, and as a result they will not be subject to the risk of loss related to the origination or ownership of mortgage loans. They will engage one or more residential mortgage loan servicers to service the mortgage loans and do not intend to develop their own mortgage servicing platform. They intend to distribute at least 90% of their net income to their shareholders in the form of a monthly cash dividend.

Over time, they expect to acquire substantially all of Ocwen Loan Servicing’s remaining mortgage servicing rights relating to subprime and Alt-A mortgage loans, which had an unpaid principal balance of $55 billion as of December 31, 2011 and which is expected to increase by approximately $42 billion of unpaid principal amount in connection with the Pending Ocwen Acquisitions.

As of December 31, 2011, the mortgages serviced under the MSRs to be purchased from Ocwen Loan Servicing were approximately $55 billion of unpaid principal balance of subprime and Alt-A mortgage loans. This amount is expected to increase by approximately $42 billion of unpaid principal amount in connection with the Pending Ocwen Acquisitions. They believe that competitive and regulatory dynamics in the mortgage servicing industry will present them with opportunities to acquire Mortgage Servicing Assets from banks, other financial institutions and independent mortgage servicers. They intend to primarily fund any future acquisition of Mortgage Servicing Assets and associated servicing advances with the proceeds of issuances of additional ordinary shares and additional advance financing facilities or other financing arrangements. They may also engage Ocwen Loan Servicing to service mortgage loans underlying any mortgage servicing rights that they acquire from other third parties in the future.

They believe that the current dynamics of the subprime and Alt-A mortgage servicing market have created a unique opportunity where the supply of mortgage servicing rights potentially for sale outweighs the number of potential buyers. They may also pursue opportunities to purchase mortgage servicing rights relating to loans guaranteed or securitized by the U.S. government or government sponsored entities such as Fannie Mae and Freddie Mac (collectively, the “GSEs”).

Upon receipt of the necessary third party approvals and consents, the seller of MSRs is obligated to transfer legal ownership of the mortgage servicing rights to them without any additional payment. They do not believe that their business strategy or financial performance will be materially affected by whether they directly own mortgage servicing rights or the related Rights to MSRs. Ocwen Loan Servicing will receive from them a monthly base fee initially equal to 12% of such recognized servicing fee revenue. The compensation to be paid to Ocwen Loan Servicing will not vary based on whether Ocwen Loan Servicing or they hold legal title to the underlying Initial Mortgage Servicing Rights. However, they will have increased risk related to their relationship with Ocwen Loan Servicing so long as it retains legal ownership of the Initial Mortgage Servicing Rights as the validity or priority of their security interest in the Initial Mortgage Servicing Rights could be challenged in a bankruptcy proceeding of Ocwen Loan Servicing, and the Purchase Agreement could be rejected in such proceeding.

Servicer termination events or events of default have been triggered in pooling and servicing agreements representing approximately 83% of the unpaid principal balance of the mortgage loans underlying the Initial Mortgage Servicing Rights as of December 31, 2011. They believe that one possible reason that the parties to pooling and servicing agreements have not exercised such rights may be because the transfer of servicing could lead to a disruption of servicing activities which could lead to increased delinquencies and decreased recovery on the underlying mortgage loans, which could result in a loss on the related mortgage-backed securities. However, they could enforce their rights against Ocwen or Home Loan Servicing at a later date. Rating = 2

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