OCWEN FINANCIAL CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended September 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File No. 1-13219

Ocwen Financial Corporation
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(Exact name of registrant as specified in its charter)

Florida 65-0039856
- --------------------------------------- --------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(561) 682-8000
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(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].

Number of shares of Common Stock, $.01 par value, outstanding as of November 12,
2003: 67,178,785 shares

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OCWEN FINANCIAL CORPORATION
FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION Page
----

Item 1. Interim Consolidated Financial Statements (Unaudited)......................................................... 3

Consolidated Statements of Financial Condition at September 30, 2003 and December 31, 2002.................... 3

Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002......... 4

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2003 5
and 2002......................................................................................................

Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 2003........ 6

Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002................... 7

Notes to Consolidated Financial Statements.................................................................... 9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 19

Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................... 59

Item 4. Controls and Procedures....................................................................................... 62

PART II - OTHER INFORMATION

Item 1. Legal Proceedings............................................................................................. 64

Item 6. Exhibits and Reports on Form 8-K.............................................................................. 64

Signature.............................................................................................................. 66

2

PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS (Unaudited)

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)

September 30, December 31,
2003 2002
-------------- --------------

Assets
Cash and amounts due from depository institutions.................................. $ 118,820 $ 76,598
Interest earning deposits.......................................................... 28,112 30,649
Federal funds sold and repurchase agreements....................................... 100,000 85,000
Trading securities, at fair value:
Collateralized mortgage obligations (AAA-rated) and U.S. Treasury securities.... 6,696 21,556
Subordinates, residuals and other securities.................................... 41,793 37,339
Investments in real estate......................................................... 55,631 58,676
Affordable housing properties...................................................... 9,578 15,319
Loans, net......................................................................... 28,196 76,857
Match funded assets................................................................ 133,767 167,744
Real estate owned, net............................................................. 53,380 62,039
Premises and equipment, net........................................................ 42,938 44,268
Advances on loans and loans serviced for others.................................... 390,952 266,356
Mortgage servicing rights.......................................................... 181,905 171,611
Receivables........................................................................ 71,565 78,944
Other assets....................................................................... 36,991 29,286
-------------- --------------
Total assets..................................................................... $ 1,300,324 $ 1,222,242
============== ==============

Liabilities and Stockholders' Equity
Liabilities
Deposits......................................................................... $ 430,460 $ 425,970
Escrow deposits on loans and loans serviced for others........................... 129,457 84,986
Bonds - match funded agreements.................................................. 113,785 147,071
Lines of credit and other secured borrowings..................................... 176,746 82,746
Notes and debentures............................................................. 99,724 76,975
Accrued interest payable......................................................... 6,825 7,435
Accrued expenses, payables and other liabilities................................. 31,834 28,314
-------------- --------------
Total liabilities............................................................... 988,831 853,497
-------------- --------------

Minority interest in subsidiaries.................................................. 1,470 1,778

Company obligated, mandatorily redeemable securities of subsidiary trust holding
solely junior subordinated debentures of the Company.............................. -- 56,249

Commitments and Contingencies (Note 8)

Stockholders' equity
Preferred stock, $.01 par value; 20,000,000 shares authorized; 0 shares issued and
outstanding...................................................................... -- --
Common stock, $.01 par value; 200,000,000 shares authorized; 67,100,113 and
67,339,773 shares issued and outstanding at September 30, 2003 and December 31,
2002, respectively............................................................... 671 673

Additional paid-in capital........................................................ 223,222 224,454
Retained earnings................................................................. 85,955 85,637
Accumulated other comprehensive income (loss), net of taxes
Net unrealized foreign currency translation gain (loss)......................... 175 (46)
-------------- --------------
Total stockholders' equity.................................................... 310,023 310,718
-------------- --------------
Total liabilities and stockholders' equity.................................. $ 1,300,324 $ 1,222,242
============== ==============

The accompanying notes are an integral part of these
consolidated financial statements.

3

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)

Three Months Nine Months
---------------------------- ---------------------------
For the periods ended September 30, 2003 2002 2003 2002
- ------------------------------------------------------------------ ------------ ------------ ------------ -----------

Net interest expense
Income ......................................................... $ 4,071 $ 8,612 $ 17,826 $ 30,132
Expense......................................................... 10,823 12,925 29,554 44,035
------------ ------------ ------------ -----------
Net interest income (expense) before provision for loan
losses ...................................................... (6,752) (4,313) (11,728) (13,903)
Provision for loan losses....................................... 415 (901) (2,670) 10,510
------------ ------------ ------------ -----------
Net interest income (expense) after provision for loan losses (7,167) (3,412) (9,058) (24,413)
------------ ------------ ------------ -----------

Non-interest income
Servicing and other fees........................................ 40,339 34,024 115,117 105,598
Gain (loss) on interest earning assets, net..................... -- -- 27 (2,773)
Gain (loss) on trading and match funded securities, net......... 159 944 2,924 3,897
Gain (loss) on real estate owned, net........................... 147 (337) 124 (16,307)
Gain (loss) on other non-interest earning assets, net........... 150 508 624 (333)
Net operating gains (losses) on investments in real estate...... 702 495 (3,000) (8,844)
Gain (loss) on repurchase of debt............................... (441) (35) (445) 1,039
Other income.................................................... 6,008 2,411 14,046 9,815
------------ ------------ ------------ -----------
Non-interest income........................................... 47,064 38,010 129,417 92,092
------------ ------------ ------------ -----------

Non-interest expense
Compensation and employee benefits.............................. 17,667 19,594 52,505 60,375
Occupancy and equipment......................................... 3,254 2,914 8,769 8,959
Technology and communication costs.............................. 5,583 6,899 14,577 17,960
Loan expenses................................................... 3,835 2,437 10,835 9,808
Net operating losses on investments in affordable housing
properties..................................................... 226 225 1,109 22,135
Professional services and regulatory fees....................... 2,511 2,573 21,855 10,341
Other operating expenses........................................ 2,172 2,434 7,023 7,040
------------ ------------ ------------ -----------
Non-interest expense.......................................... 35,248 37,076 116,673 136,618
------------ ------------ ------------ -----------

Distributions on Company-obligated, mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the Company........................... -- 1,529 3,058 4,758
------------ ------------ ------------ -----------
Income (loss) before minority interest, income taxes and effect
of change in accounting principle................................ 4,649 (4,007) 628 (73,697)
Minority interest in net income (loss) of subsidiaries............ 28 -- (308) --
Income tax expense................................................ 6 -- 618 1,166
------------ ------------ ------------ -----------
Net income (loss) before effect of change in accounting
principle...................................................... 4,615 (4,007) 318 (74,863)
Effect of change in accounting principle, net of taxes............ -- -- -- 16,166
------------ ------------- ------------ -----------
Net income (loss)............................................... $ 4,615 $ (4,007) $ 318 $ (58,697)
============ ============= ============ ===========

Earnings (loss) per share
Basic
Net income (loss) before effect of change in accounting
principle.................................................... $ 0.07 $ (0.06) $ 0.005 $ (1.11)
Effect of change in accounting principle, net of taxes........ -- -- -- .24
------------- ------------- ------------- -----------
Net income (loss).......................................... $ 0.07 $ (0.06) $ 0.005 $ (0.87)
============ ============= ============ ===========

Diluted
Net income (loss) before effect of change in accounting
principle..................................................... $ 0.07 $ (0.06) $ 0.005 $ (1.11)
Effect of change in accounting principle, net of taxes........ -- -- -- .24
------------ ------------ ------------ -----------
Net income (loss).......................................... $ 0.07 $ (0.06) $ 0.005 $ (0.87)
============ ============ ============ ===========

Weighted average common shares outstanding
Basic.......................................................... 66,865,412 67,336,246 67,148,447 67,315,913
Diluted........................................................ 67,880,310 67,336,246 67,864,096 67,315,913

The accompanying notes are an integral part of these
consolidated financial statements.

4

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)

Three Months Nine Months
---------------------------- ----------------------------
For the periods ended September 30, 2003 2002 2003 2002
- ------------------------------------------------- ------------ ------------ ------------ ------------

Net income (loss)................................ $ 4,615 $ (4,007) $ 318 $ (58,697)
Other comprehensive income (loss), net of taxes:
Change in unrealized foreign currency translation
adjustment arising during the period (1)........ (294) (34) 221 (33)
------------ ------------ ------------ ------------
Comprehensive income (loss)...................... $ 4,321 $ (4,041) $ 539 $ (58,730)
============ ============ ============ ============

(1) Net of tax benefit (expense) of $(149) and $21 for the three
months ended September 30, 2003 and 2002, respectively, and
$(201) and $36 for the nine months ended September 30, 2003 and
2002, respectively.

The accompanying notes are an integral part of these
consolidated financial statements.

5

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(Dollars in thousands)

Accumulated
Other
Common Stock Additional Comprehensive
--------------------------- Paid-in Retained Income (loss),
Shares Amount Capital Earnings Net of Taxes Total
------------- ---------- ---------- ---------- -------------- ----------

Balances at December 31, 2002 ................ 67,339,773 $ 673 $ 224,454 $ 85,637 $ (46) $ 310,718
Net income ................................... -- -- -- 318 -- 318
Issuance of common stock ..................... 236,461 2 932 -- -- 934
Repurchase of common stock ................... (500,000) (5) (2,257) -- -- (2,262)
Directors' compensation ...................... 19,085 1 70 -- -- 71
Exercise of common stock options ............. 4,794 -- 23 -- -- 23
Other comprehensive loss, net of taxes
Change in unrealized foreign currency
translation adjustment .................... -- -- -- -- 221 221
------------- ---------- ---------- ---------- -------------- ----------
Balances at September 30, 2003 ............... 67,100,113 $ 671 $ 223,222 $ 85,955 $ 175 $ 310,023
============= ========== ========== ========== ============== ==========

The accompanying notes are an integral part of these
consolidated financial statements.

6

OCWEN FINANCIAL COPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

For the nine months ended September 30, 2003 2002
- --------------------------------------------------------------------------------------------- ----------- -----------

Cash flows from operating activities
Net income (loss)............................................................................ $ 318 $ (58,697)
Adjustments to reconcile net loss to net cash provided (used) by operating activities
Net cash provided by trading activities.................................................... 20,474 151,145
Premium amortization on securities, net.................................................... 1,847 1,044
Depreciation and amortization.............................................................. 78,359 49,061
Provision for loan losses.................................................................. (2,670) 10,510
Provision for losses on real estate owned.................................................. 1,169 19,859
(Gain) loss on interest-earning assets, net................................................ (27) 2,773
(Gain) loss on trading and match funded securities......................................... (2,924) (3,897)
(Gain) loss on sale of other non-interest earning assets................................... (624) 333
Provisions for losses on affordable housing properties..................................... 432 21,294
Impairment charges on investments in real estate........................................... 5,526 15,317
Gain on sale of real estate owned.......................................................... (358) (2,835)
(Gain) loss on repurchase of long-term debt................................................ 445 (1,039)
Effect of change in accounting principle before taxes...................................... -- (15,000)
(Increase) decrease in advances and match funded advances on loans and loans serviced for (109,808) 9,699
others...................................................................................
(Increase) decrease in receivables and other assets, net................................... 4,114 21,929
Increase (decrease) in accrued expenses, interest payable and other liabilities............ 2,904 (928)
----------- -----------
Net cash provided (used) by operating activities............................................. (823) 220,568
----------- -----------

Cash flows from investing activities
Principal payments received on match funded loans.......................................... 10,991 13,416
Investment in affordable housing properties................................................ -- (3,563)
Proceeds from sales of affordable housing properties....................................... 2,245 14,757
Purchase of mortgage servicing rights...................................................... (78,971) (106,360)
Proceeds from sales of loans............................................................... 30,347 46,893
Proceeds from sale of real estate held for sale............................................ -- 13,932
Proceeds from sales of real estate held for investment..................................... 312 47,711
Purchase, originations and funded commitments of loans, net of undisbursed loan funds...... (6,225) (20,393)
Capital improvements to real estate held for investment.................................... (3,666) (8,399)
Principal payments received on loans....................................................... 28,166 34,663
Proceeds from sale of real estate owned.................................................... 9,712 38,895
Capital improvements to real estate owned.................................................. (1,691) (2,085)
Additions to premises and equipment........................................................ (9,195) (10,932)
----------- -----------
Net cash provided (used) by investing activities............................................. (17,975) 58,535
----------- -----------

The accompanying notes are an integral part of these
consolidated financial statements.

7

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)

For the nine months ended September 30, 2003 2002
- ----------------------------------------------------------------------------------------------- --------- ---------

Cash flows from financing activities
Increase (decrease) in deposits and escrow deposits on loans and loans serviced for
others ..................................................................................... 48,961 (169,201)
Proceeds from (repayment of) securities sold under agreements to repurchase ................. -- (79,405)
Proceeds from (repayment of) lines of credit and other secured borrowings, net .............. 94,000 8,263
Proceeds from (repayment of) bonds-match funded agreements, net ............................. (33,286) (15,326)
Repurchase of Capital Securities ............................................................ -- (3,796)
Repurchase of common stock .................................................................. (2,262) --
Repurchase of notes and subordinated debentures ............................................. (33,945) (3,585)
Repayment of other interest bearing obligations, net ........................................ -- (1,197)
Exercise of stock options ................................................................... 15 171
--------- ---------
Net cash provided (used) by financing activities .............................................. 73,483 (264,076)
--------- ---------

Net increase in cash and cash equivalents ..................................................... 54,685 15,027
Cash and cash equivalents at beginning of period .............................................. 192,247 260,655
--------- ---------
Cash and cash equivalents at end of period .................................................... $ 246,932 $ 275,682
========= =========

Reconciliation of cash and cash equivalents at end of period
Cash and amounts due from depository institutions ........................................... $ 118,820 $ 11,799
Interest-earning deposits ................................................................... 28,112 43,883
Federal funds sold and repurchase agreements ................................................ 100,000 220,000
--------- ---------
$ 246,932 $ 275,682
========= =========

Supplemental disclosure of cash flow information
Interest paid ............................................................................... $ 30,164 $ 43,907
========= =========
Income tax (payments) refunds ............................................................... $ (688) $ 582
========= =========

Supplemental schedule of non-cash investing and financing activities
Real estate owned acquired through foreclosure .............................................. $ 128 $ 9,578
========= =========
Exchange of real estate held for sale for loans ............................................. $ -- $ 9,153
========= =========
Accounts receivable from sale of affordable housing properties .............................. $ 3,309 $ 38,824
========= =========

The accompanying notes are an integral part of these
consolidated financial statements.

8

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Dollars in thousands)

NOTE 1 BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by U.S.
generally accepted accounting principles ("GAAP") for complete financial
statements. Ocwen Financial Corporation's ("OCN") interim consolidated financial
statements include the accounts of OCN and its subsidiaries. OCN owns directly
and indirectly all of the outstanding common and preferred stock of its primary
subsidiaries, Ocwen Federal Bank FSB (the "Bank"), Investors Mortgage Insurance
Holding Company, Ocwen Technology Xchange, Inc. ("OTX"), Ocwen Asset Investment
Corp. ("OAC") and Ocwen Financial Solutions, Private Limited ("India"). OCN also
owns 70% of Global Servicing Solutions, LLC ("GSS") with the remaining 30% held
by Merrill Lynch. As of December 31, 2002, OCN owned 99.6% of Ocwen Financial
Services, Inc. ("OFS"), with the remaining 0.4% owned by the shareholders of
Admiral Home Loan. As part of the arbitration settlement with the former owners
of Admiral Home Loan on April 24, 2003, OCN gained title to the remaining shares
of OFS, which increased our ownership to 100%. See Note 8 for additional
information regarding this settlement. We have eliminated all significant
intercompany transactions and balances in consolidation.

The Bank is a federally chartered savings bank regulated by the Office
of Thrift Supervision ("OTS"). OCN is a registered savings and loan holding
company under the Home Owner's Loan Act and as such is also regulated by the
OTS.

In our opinion, the accompanying unaudited financial statements contain
all adjustments, consisting only of normal recurring accruals, necessary for a
fair statement of our financial condition at September 30, 2003 and December 31,
2002, the results of our operations for the three and nine months ended
September 30, 2003 and 2002, our comprehensive loss for the three and nine
months ended September 30, 2003 and 2002, our changes in stockholders' equity
for the nine months ended September 30, 2003 and our cash flows for the nine
months ended September 30, 2003 and 2002, respectively. The results of
operations and other data for the three and nine months ended September 30, 2003
are not necessarily indicative of the results that may be expected for any other
interim periods or the entire year ending December 31, 2003. The unaudited
consolidated financial statements presented herein should be read in conjunction
with the audited consolidated financial statements and related notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2002.
Certain reclassifications have been made to the prior periods' interim
consolidated financial statements to conform to the September 30, 2003
presentation.

In preparing the consolidated financial statements, we are required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the statements of financial condition and revenues
and expenses for the periods covered. Material estimates that are particularly
significant in the near or medium term relate to our determination of the
allowance for loan losses and our valuation of securities, real estate,
affordable housing properties, servicing rights, intangibles and our deferred
tax asset. Actual results could differ from those estimates and assumptions.

NOTE 2 CURRENT ACCOUNTING PRONOUNCEMENTS

We adopted the provisions of Statement of Financial Accounting Standard
("SFAS") No. 142, "Goodwill and Other Intangible Assets," effective January 1,
2002. As a result, we reversed the unamortized balance of the excess of net
assets acquired over purchase price ("negative goodwill"). This reversal
resulted in a credit to income of $18,333. The impact from the adoption of other
elements of SFAS No. 142 resulted in our recording impairment charges of $3,333
on goodwill and intangible assets originally recorded in connection with the
formation of REALSynergy, Inc. in 1999. These amounts have been reported in the
first quarter of 2002 as the effect of a change in accounting principle, net of
an income tax benefit of $1,166.

In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" (EITF 94-3). The principal difference between SFAS No. 146
and EITF 94-3 relates to SFAS No. 146's requirements for recognition of a
liability for a cost associated with an exit or disposal activity. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost as generally defined in EITF 94-3 was recognized at
the date of an entity's commitment to an exit plan. We adopted the new standard
effective January 1, 2003. The adoption of SFAS No. 146 did not have a material
impact on our results of operations, financial position or cash flows.

In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". The interpretation elaborates on
the disclosures to be made by a guarantor in its financial statements under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. We adopted the
disclosure requirements of the Interpretation as of December 31, 2002, the date
upon which they became effective. These provisions of the Interpretation require
disclosure of the nature of the guarantee, the maximum potential amount of
future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of the
Interpretation were effective January 1, 2003. The implementation of the
recognition requirements of the Interpretation did not have a significant effect
on our consolidated results of operations.

9

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2003
(Dollars in thousands)

In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation
provides guidance with respect to the identification of variable interest
entities and when assets, liabilities, noncontrolling interests, and the results
of operations of a variable interest entity need to be included in a company's
consolidated financial statements. The Interpretation requires consolidation by
business enterprises of variable interest entities in certain cases. The factors
to be considered in making this determination include the adequacy of the equity
of the entity and the nature of the risks, rights and rewards of the equity
investors in the entity. The Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. On October
9, 2003 the FASB decided to defer the implementation date of FIN 46 to the first
reporting period ending after December 15, 2003 for variable interest entities
that existed prior to February 1, 2003. We are a limited partner in three
partnerships that developed low-income housing properties that may be subject to
the provisions of FIN 46. We do not consolidate these partnerships but rather
record our investment in them using the equity method of accounting. As of
September 30, 2003, our investment in such limited partnerships amounted to
$6,580. In addition, we had loans to these partnerships with a net book value of
$5,645 at September 30, 2003. We are evaluating the potential effect of FIN 46
on our accounting for our investment in the low-income housing partnerships and
our Company obligated, mandatorily redeemable securities of subsidiary trust
holding solely junior subordinated debentures of the Company ("Capital
Securities"). At this time we don't anticipate that our adoption of FIN 46 in
the fourth quarter of 2003 will have a significant effect on our consolidated
financial statements. See the discussion below regarding our adoption of SFAS
No. 150 and its effect on the reporting of our Capital Securities.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with the characteristics of both liabilities and
equity. The statement requires that certain securities, such as our Capital
Securities, which are classified between liabilities and equity in the statement
of financial condition, be classified as liabilities. Further, the distributions
on such securities are to be classified as interest cost. No restatement of
periods prior to the adoption of SFAS No. 150 is permitted. At the time this
statement was originally issued in May 2003, the provisions for SFAS No. 150
were effective immediately for financial instruments entered into or modified
after May 31, 2003, and for the first interim period beginning after June 15,
2003, for all other financial instruments. On October 29, 2003, the FASB decided
to defer the provisions of paragraphs 9 and 10 of SFAS No. 150 as they apply to
mandatorily redeemable noncontrollable interests. This deferral does not apply
to OCN and the Capital Securities. The impact from our adoption of SFAS No. 150
effective for the quarter beginning July 1, 2003 was to reclassify our Capital
Securities as liabilities (included with notes and debentures) and begin
reporting distributions on our Capital Securities as interest expense. Our
adoption of SFAS No. 150 had no other effect on our financial statements.

NOTE 3 COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY

In August 1997, the Ocwen Capital Trust ("OCT") issued $125,000 of
10.875% Capital Securities. Proceeds from the issuance of the Capital Securities
were invested in 10.875% Junior Subordinated Debentures issued by OCN. The
Junior Subordinated Debentures, which represent the sole assets of OCT, will
mature on August 1, 2027. To date, OCN has repurchased $68,751 of the Capital
Securities, although none were repurchased during the nine months ended
September 30, 2003.

Holders of the Capital Securities are entitled to receive cumulative
cash distributions accruing from the date of original issuance and payable
semiannually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10.875% of the liquidation amount of
$1,000 per Capital Security. Payment of distributions out of moneys held by OCT,
and payments on liquidation of OCT or the redemption of Capital Securities, are
guaranteed by OCN to the extent OCT has funds available. If OCN does not make
principal or interest payments on the Junior Subordinated Debentures, OCT will
not have sufficient funds to make distributions on the Capital Securities, in
which event the guarantee shall not apply to such distributions until OCT has
sufficient funds available therefore. Accumulated distributions payable on the
Capital Securities amounted to $1,020 at September 30, 2003 and $2,549 at
December 31, 2002, and are included in accrued interest payable. Distributions
amounted to $1,529 for both the third quarter of 2003 and 2002. For the nine
month periods, distributions amounted to $4,587 and $4,758 for 2003 and 2002,
respectively.

OCN has the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 10 consecutive semiannual periods with respect to each deferral
period, provided that no extension period may extend beyond the stated maturity
of the Junior Subordinated Debentures. Upon the termination of any such
extension period and the payment of all amounts then due on any interest payment
date, OCN may elect to begin a new extension period. Accordingly, there could be
multiple extension periods of varying lengths throughout the term of the Junior
Subordinated Debentures. If interest payments on the Junior Subordinated
Debentures are deferred, distributions on the Capital Securities will also be
deferred and OCN may not permit any subsidiary to, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, our capital stock or (ii) make any payment
of principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities that rank pari passu with or junior to the Junior Subordinated
Debentures. During an extension period, interest on the Junior Subordinated
Debentures will continue to accrue at the rate of 10.875% per annum, compounded
semiannually.

10

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2003
(Dollars in thousands)

The Junior Subordinated Debentures are redeemable prior to maturity at
our option, subject to the receipt of any necessary prior regulatory approval,
(i) in whole or in part on or after August 1, 2007, at a redemption price equal
to 105.438% of the principal amount thereof on August 1, 2007, declining ratably
on each August 1 thereafter to 100% on or after August 1, 2017, plus accrued
interest thereon, or (ii) at any time, in whole (but not in part), upon the
occurrence and continuation of a special event (defined as a tax event,
regulatory capital event or investment company event) at a redemption price
equal to the greater of (a) 100% of the principal amount thereof or (b) the sum
of the present values of the principal amount and premium payable with respect
to an optional redemption of such Junior Subordinated Debentures on August 1,
2007, together with scheduled payments of interest from the prepayment date to
August 1, 2007, discounted to the prepayment date on a semiannual basis at the
adjusted Treasury rate plus accrued interest thereon to the date of prepayment.
The Capital Securities are subject to mandatory redemption, in whole or in part,
upon repayment of the Junior Subordinated Debentures at maturity or their
earlier redemption, in an amount equal to the amount of the related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Junior Subordinated Debentures, plus
accumulated and unpaid distributions thereon to the date of redemption.

For financial reporting purposes, OCT is treated as a subsidiary of OCN
and, accordingly, the accounts of OCT are included in the consolidated financial
statements of OCN. Intercompany transactions between OCT and OCN, including the
Junior Subordinated Debentures, are eliminated in the consolidated financial
statements of OCN. Prior to our adoption of SFAS No. 150 effective July 1, 2003,
the Capital Securities were presented as a separate caption between liabilities
and stockholders' equity in the consolidated statement of financial condition of
OCN as "Company-obligated, mandatorily redeemable securities of subsidiary trust
holding solely Junior Subordinated Debentures of the Company" and distributions
were reported as a separate caption immediately following non-interest expense
in the consolidated statements of operations of OCN. As discussed in Note 2,
effective with our adoption of SFAS No. 150 on July 1, 2003, the Capital
Securities are presented as a liability in the consolidated statement of
financial condition with notes and debentures. At the same time, we began
reporting distributions on our Capital Securities as interest expense in the
consolidated statement of operations.

In connection with the issuance of the Capital Securities, we incurred
certain costs, which have been capitalized and are being amortized over the term
of the Capital Securities. The unamortized balance of these issuance costs
amounted to $1,785 and $1,841 at September 30, 2003 and December 31, 2002,
respectively, and is included in other assets.

NOTE 4 DERIVATIVE FINANCIAL INSTRUMENTS

We use derivative financial instruments for the purpose of managing our
exposure to adverse fluctuations in interest and foreign currency exchange
rates.

Interest Rate Management

We have purchased amortizing caps and floors to hedge our interest rate
exposure relating to our match funded loans and securities. These caps and
floors do not qualify for hedge accounting; therefore, changes in fair value are
recorded in the income statement. The terms of these outstanding caps and floors
at September 30, 2003 and December 31, 2002 are as follows at the dates
indicated.

Notional
Amount Maturity Index Strike Rate Fair Value
---------- -------------- ----------------- ----------- ----------

September 30, 2003
Caps .............................. $ 102,164 October 2003 LIBOR 1 - Month 7.00% $ --
Floors ............................ $ 27,850 October 2003 CMT 2 - Year 4.35 66
----------
$ 66
==========
December 31, 2002
Caps .............................. $ 111,799 October 2003 LIBOR 1-Month 7.00% $ --
Floors ............................ $ 30,563 October 2003 CMT 2-Year 4.35 592
----------
$ 592
==========

11

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2003
(Dollars in thousands)

Foreign Currency Management

We enter into foreign currency derivatives to hedge our investments in
foreign subsidiaries that own residual interests backed by residential loans
originated in the UK ("UK residuals") and in our shopping center located in
Halifax, Nova Scotia (the "Nova Scotia Shopping Center"). It is our policy to
periodically adjust the amount of foreign currency derivative contracts we have
entered into in response to changes in our investments in these assets. We have
determined that the local currency of our investment in UK residuals and the
Nova Scotia Shopping Center is the functional currency. Our foreign currency
derivative financial instruments qualify for hedge accounting. Accordingly, we
include the gains or losses in the net unrealized foreign currency translation
in accumulated other comprehensive income in stockholders' equity. The following
table sets forth the terms and values of these foreign currency financial
instruments at September 30, 2003 and December 31, 2002:

Strike
Position Maturity Notional Amount Rate Fair Value
-------- ------------- --------------- ------ ----------

September 30, 2003
Canadian Dollar currency futures......... Short December 2003 C$ 13,900 0.7256 $ (168)
British Pound currency futures........... Short December 2003 (pound) 19,188 1.5768 (1,474)
----------
$ (1,642)
==========
December 31, 2002
Canadian Dollar currency futures......... Short March 2003 C$ 11,400 0.6390 $ 78
British Pound currency futures........... Short March 2003 (pound) 18,750 1.5599 (793)
----------
$ (715)
==========

NOTE 5 REGULATORY REQUIREMENTS

The Financial Institutions Reform, Recovery and Enforcement Act of 1989
and the regulations promulgated thereunder established certain minimum levels
of regulatory capital for savings institutions subject to OTS supervision. The
Bank must follow specific capital guidelines stipulated by the OTS, which
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance sheet items. An institution that fails to comply with its regulatory
capital requirements must obtain OTS approval of a capital plan and can be
subject to a capital directive and certain restrictions on its operations.

At September 30, 2003 the Bank was "well capitalized" under the prompt
corrective action regulations adopted by the OTS pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991. To be categorized as "well
capitalized," the Bank must maintain minimum core capital, Tier 1 risk-based
capital and risk-based capital ratios as set forth in the table below. The
Bank's capital amounts and classification are subject to review by federal
regulators regarding components, risk-weightings and other factors. There are no
conditions or events since September 30, 2003 that we believe have changed the
Bank's category.

Since 1997, the Bank has committed to the OTS to maintain a core capital
(leverage) ratio and a total risk-based capital ratio of at least 9.00% and
13.00%, respectively. The Bank continues to be in compliance with this
commitment as well as with the regulatory capital requirements of general
applicability (as indicated in the table below). In addition, we have recently
committed to maintain our investment in mortgage servicing rights at
approximately 60% of core capital (before any deduction thereto for mortgage
servicing rights) at the Bank and 50% of stockholders' equity on a consolidated
basis. We regularly review actual results, which currently exceed these
committed levels of investment in mortgage servicing rights, with the OTS.

Following the completion of the annual safety and soundness examination
of the OTS in 2000, we submitted a written business plan and budget to the OTS
regarding our plans for the business, primarily that of the Bank, over the next
several years. The OTS approved the initial plan in February 2001, and also
approved the revised plan submitted to them in April of 2002. The Plan included
as its primary focus the reduction of risk through the sale or resolution of our
non-core assets and the reduction of our reliance on brokered certificates of
deposit as a source of funding. This plan will formally conclude on December 31,
2003.

12

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2003
(Dollars in thousands)

The following table summarizes the Bank's actual and required regulatory
capital at September 30, 2003:

To be Well Capitalized
for
Minimum for Capital Prompt Corrective Committed Capital
Actual Adequacy Purposes Action Provisions Requirements
--------------------- ------------------- ---------------------- -----------------
Ratio Amount Ratio Amount Ratio Amount Ratio
------- ----------- ----- ---------- ----- ------------- -----------------

Stockholders' equity, and ratio to
total assets......................... 16.77% $ 176,358
Disallowed mortgage servicing rights.. (11,053)
Disallowed deferred tax assets........ (22,427)
Non-includable subsidiary............. (848)
Intangible assets (1)................. (2,489)
-----------
Tier 1 (core) capital and ratio to
adjusted total assets................ 13.75% 139,541 4.00% $ 40,591 5.00% $ 50,739 9.00%
========== =============
Non-mortgage servicing rights......... (2,095)
-----------
Tangible capital and ratio to
tangible assets...................... 13.57% $ 137,446 1.50% $ 15,190
=========== ==========

Tier 1 capital and ratio to
risk-weighted assets................. 18.15% $ 139,541 6.00% $ 46,132
----------- =============

Allowance for loan losses............. 6,617
Qualifying subordinated debentures
(2) ................................. --
-----------
Tier 2 capital......................... 6,617
-----------
Real estate owned required to be
deducted (3).......................... (40,948)
-----------
Total risk-based capital and ratio to
risk-weighted assets.................. 13.68% $ 105,210 8.00% $ 61,510 10.00% $ 76,887 13.00%
=========== ========== =============

Total regulatory assets............... $ 1,051,611
===========

Adjusted total assets................. $ 1,014,778
===========

Tangible assets....................... $ 1,012,683
===========

Risk-weighted assets.................. $ 768,872
===========

(1) Unamortized balance of capitalized computer software.

(2) On September 30, 2003 we redeemed the remaining $33,065 of our
12% subordinated debentures at a price of 101.333%.

(3) Large retail shopping mall property, which we originally
acquired in satisfaction of a debt and have held in excess of
five years.

13

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2003
(Dollars in thousands)

NOTE 6 INTEREST INCOME AND EXPENSE BEFORE PROVISION FOR LOAN LOSSES

Three Months Nine Months
------------------------ ------------------------
For the periods ended September 30, 2003 2002 2003 2002
- ----------------------------------------------------------- ---------- ---------- ---------- ----------

(Dollars in thousands)
Interest income
Interest earning cash and other ......................... $ 79 $ 59 $ 225 $ 220
Federal funds sold and repurchase agreements ............ 341 783 1,078 2,055
Trading securities ...................................... 2,749 3,507 12,371 12,024
Loans ................................................... 212 3,075 1,321 10,588
Match funded loans and securities ....................... 690 1,188 2,831 5,245
---------- ---------- ---------- ----------
4,071 8,612 17,826 30,132
---------- ---------- ---------- ----------
Interest expense
Deposits ................................................ 4,008 5,990 13,408 21,689
Securities sold under agreements to repurchase .......... -- 32 3 230
Bonds - match funded agreements ......................... 1,076 1,445 3,640 5,161
Lines of credit and other secured borrowings ............ 1,927 925 4,103 3,257
Notes and debentures .................................... 3,812 4,533 8,400 13,698
---------- ---------- ---------- ----------
10,823 12,925 29,554 44,035
---------- ---------- ---------- ----------

Net interest expense before provision for loan losses ... $ (6,752) $ (4,313) $ (11,728) $ (13,903)
========== ========== ========== ==========

NOTE 7 BUSINESS SEGMENT REPORTING

An operating segment is defined as a component of an enterprise (a) that
engages in business activities from which it may earn revenues and incur
expenses, (b) whose operating results are regularly reviewed by the enterprise's
chief operating decision maker to make decisions about resources to be allocated
to the segment and assess its performance, and (c) for which discrete financial
information is available.

For the past several years, we have been undergoing a fundamental
transition in the nature of our business. In late 1999 and early 2000, we began
to execute a strategic plan to shift our business activities away from
capital-intensive businesses involving the purchase or origination of loans,
real estate and related assets toward less capital-intensive businesses that
generate fee-based revenues. As a result, we generally ceased to originate loans
or invest in assets in certain of our business segments ("non-core businesses")
unless we were contractually committed to do so. However, we continue actively
to manage and resolve the remaining assets in these segments. A brief
description of our segments follows:

Core Businesses
. Residential Loan Servicing. Through this business we provide
loan servicing including asset management and resolution
services to third party owners of subprime residential mortgage
and high loan-to-value loans for a fee. We acquire the rights to
service loans and obtain such rights by purchasing them outright
or by entering into sub-servicing contracts.

. OTX. Through this segment we provide technology solutions for
the mortgage and real estate industries. OTX products include a
residential loan servicing system (REALServicing(TM)), a
commercial loan servicing system (REALSynergy(TM)) and an
Internet based mortgage loan processing application and vendor
management system (REALTrans(SM)).

. Ocwen Realty Advisors (ORA). Through ORA we provide residential
property valuation services.

. Unsecured Collections. This core business conducts collection
activities for third party owners of unsecured receivables and
for a portfolio of unsecured credit card receivables that we
acquired at a discount in 1999 and 2000.

. Global Outsourcing. This new business segment began operations
in December 2002. Global Outsourcing provides business process
outsourcing services to third parties and leverages the
operational capacity of our facilities in India.

. International Operations. This segment is being reported as a
business segment for the first time this year. In 2003, this
segment primarily represents the results of operations of Global
Servicing Solutions, LLC, our new joint servicing venture with
Merrill Lynch for the servicing of assets in various countries.
Results for 2002 primarily reflect a one time consulting project
for the government of Jamaica as well as other precedent
ventures.

14

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2003
(Dollars in thousands)

Non-Core Businesses
. Residential Discount Loans. This segment consisted of operations
to acquire at a discount and subsequently resolve sub-performing
and non-performing residential mortgage loans. We completed our
last acquisition of residential loans in 2000. Based on the
relative insignificance of the non-core assets remaining in this
segment, the remaining assets of this business and any related
income or loss arising from their resolution have been included
in the Corporate Items and Other segment beginning January 1,
2003.

. Commercial Finance. This segment comprised operations to acquire
sub-performing commercial loans at a discount, as well as
operations to invest in and reposition under-performing real
estate assets. No assets have been acquired since 2000; since
that time, this business has consisted of the repositioning,
management and resolution of the remaining loan and real estate
assets.

. Affordable Housing. Includes our investments, primarily through
limited partnerships, in qualified low-income rental housing for
the purpose of obtaining Federal income tax credits pursuant to
Section 42 of the Code. Except to complete those projects in
which an investment had already been made, we ceased making
investments in properties in 2000.

. Subprime Finance. In August 1999, we closed our domestic
subprime origination business, which had been conducted
primarily through OFS. Previously, activities of this segment
included our acquisition and origination of single family
residential loans to non-conforming borrowers. We have continued
to manage and resolve the remaining non-core assets, which
consist primarily of unrated single family subprime residual
securities.

Corporate Items and Other
This segment includes business activities that are individually
insignificant, interest income on cash and cash equivalents, interest
expense on corporate assets, gains and losses from debt repurchases and
general corporate expenses.

We allocate interest income and expense to each business segment for the
investment of funds raised or funding of investments made taking into
consideration the duration of such liabilities or assets. We also make
allocations of non-interest expense generated by corporate support
services to each business segment based upon our estimate of time and
effort spent in the respective activity.

15

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2003
(Dollars in thousands)

Financial information for our segments is as follows for the dates
indicated:

Net Interest Provision Pre-Tax
Income for Loan Non-Interest Non-Interest Income Total
(Expense) Losses Income Expense (Loss)(1) Assets
------------ ---------- ------------ ------------ --------- -----------

At or for the three months ended September 30, 2003
Core businesses
Residential Loan Servicing............................ $ (5,300) $ -- $ 30,292 $ 16,832 $ 8,159 $ 699,423
OTX................................................... -- -- 2,891 5,244 (2,353) 6,257
Ocwen Realty Advisors................................. (5) -- 4,687 3,526 1,157 814
Unsecured Collections................................. -- -- 2,952 1,812 1,141 426
Global Outsourcing.................................... (2) -- 1,877 872 1,003 1,814
International Operations.............................. (17) -- 1,294 1,615 (337) 4,907
------------ ---------- ------------ ------------ --------- -----------
(5,324) -- 43,993 29,901 8,770 713,641
------------ ---------- ------------ ------------ --------- -----------
Non-core businesses
Commercial Finance.................................... (1,853) 393 1,347 1,899 (2,798) 138,531
Affordable Housing.................................... (630) 1 1,606 979 (4) 52,528
Subprime Finance...................................... 2,008 -- 107 395 1,720 38,235
------------ ---------- ------------ ------------ --------- -----------
(475) 394 3,060 3,273 (1,082) 229,294
------------ ---------- ------------ ------------ --------- -----------

Corporate Items and Other............................. (953) 21 11 2,074 (3,039) 357,389
------------ ---------- ------------ ------------ --------- -----------
$ (6,752) $ 415 $ 47,064 $ 35,248 $ 4,649 $ 1,300,324
============ ========== ============ ============ ========= ===========

At or for the three months ended September 30, 2002
Core businesses
Residential Loan Servicing............................ $ (4,724) $ -- $ 28,664 $ 16,783 $ 7,157 $ 559,523
OTX (2)............................................... -- -- 1,780 7,773 (5,993) 8,950
Ocwen Realty Advisors................................. -- -- 3,232 2,330 902 216
Unsecured Collections................................. -- (28) 2,777 1,747 1,057 131
Global Outsourcing.................................... -- -- -- -- -- --
International Operations.............................. (10) -- 64 452 (399) 5,250
------------ ---------- ------------ ------------ --------- -----------
(4,734) (28) 36,517 29,085 2,724 574,070
------------ ---------- ------------ ------------ --------- -----------
Non-core businesses
Residential Discount Loans............................ 1,254 (2) (442) 1,380 (565) 49,331
Commercial Finance.................................... (1,249) (879) 1,259 2,259 (1,370) 222,009
Affordable Housing.................................... (1,054) 8 491 757 (1,329) 79,313
Subprime Finance...................................... 3,222 -- 1,443 1,202 3,464 44,566
------------ ---------- ------------ ------------ --------- -----------
2,173 (873) 2,751 5,598 200 395,219
------------ ---------- ------------ ------------ --------- -----------

Corporate Items and Other............................. (1,752) -- (1,258) 2,393 (6,931) 399,763
------------ ---------- ------------ ------------ --------- -----------
$ (4,313) $ (901) $ 38,010 $ 37,076 $ (4,007) $ 1,369,052
============ ========== ============ ============ ========= ===========

(1) Income (loss) before minority interest, income taxes and effect
of change in accounting principle.

(2) For the three months ended September 30, 2002, non-interest
income of OTX includes $1,101 of revenues earned from other
business segments.

16

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2003
(Dollars in thousands)

Net
Interest Provision Pre-Tax
Income for Loan Non-Interest Non-Interest Income Total
(Expense) Losses Income Expense (Loss)(1) Assets
------------ ---------- ------------ ------------ --------- -----------

At or for the nine months ended September 30, 2003
Core businesses
Residential Loan Servicing........................... $ (15,125) $ -- $ 89,685 $ 48,752 $ 25,808 $ 699,423
OTX.................................................. -- -- 7,898 16,222 (8,325) 6,257
Ocwen Realty Advisors................................ (14) -- 13,414 9,634 3,766 814
Unsecured Collections................................ -- -- 8,457 5,035 3,422 426
Global Outsourcing................................... (2) -- 2,629 1,620 1,007 1,814
International Operations............................. (50) -- 2,521 4,716 (2,245) 4,907
------------ ---------- ------------ ------------ --------- -----------
(15,191) -- 124,604 85,979 23,433 713,641
------------ ---------- ------------ ------------ --------- -----------
Non-core businesses
Commercial Finance................................... (6,250) (3,065) (364) 6,173 (9,723) 138,531
Affordable Housing................................... (2,278) 149 2,320 3,500 (3,608) 52,528
Subprime Finance..................................... 10,867 -- 2,570 13,417 20 38,235
------------ ---------- ------------ ------------ --------- -----------
2,339 (2,916) 4,526 23,090 (13,311) 229,294
------------ ---------- ------------ ------------ --------- -----------

Corporate Items and Other............................ 1,124 246 287 7,604 (9,494) 357,389
------------ ---------- ------------ ------------ --------- -----------
$ (11,728) $ (2,670) $ 129,417 $ 116,673 $ 628 $ 1,300,324
============ ========== ============ ============ ========= ===========

At or for the nine months ended September 30, 2002
Core businesses
Residential Loan Servicing........................... $ (13,461) $ -- $ 89,251 $ 53,001 $ 22,788 $ 559,523
OTX (2).............................................. -- -- 4,924 21,102 (16,179) 8,950
Ocwen Realty Advisors................................ -- -- 10,860 8,939 1,921 216
Unsecured Collections................................ -- (279) 8,242 5,381 3,140 131
Global Outsourcing................................... -- -- -- -- -- --
International Operations............................. (10) -- 1,443 1,769 (336) 5,250
------------ ---------- ------------ ------------ --------- -----------
(13,471) (279) 114,720 90,192 11,334 574,070
------------ ---------- ------------ ------------ --------- -----------
Non-core businesses
Residential Discount Loans........................... 5,303 (2,304) (2,210) 4,294 1,103 49,331
Commercial Finance................................... (4,837) 9,147 (23,347) 6,782 (44,114) 222,009
Affordable Housing................................... (3,926) 3,946 803 23,918 (30,987) 79,313
Subprime Finance..................................... 7,365 -- 4,613 3,653 8,325 44,566
------------ ---------- ------------ ------------ --------- -----------
3,905 10,789 (20,141) 38,647 (65,673) 395,219
------------ ---------- ------------ ------------ --------- -----------

Corporate Items and Other............................ (4,337) -- (2,487) 7,779 (19,358) 399,763
------------ ---------- ------------ ------------ --------- -----------
$ (13,903) $ 10,510 $ 92,092 $ 136,618 $ (73,697) $ 1,369,052
============ ========== ============ ============ ========= ===========

(1) Income (loss) before minority interest, income taxes and effect
of change in accounting principle.

(2) For the nine months ended September 30, 2002, non-interest
income of OTX includes $3,111 of revenues earned from other
business segments.

17

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2003
(Dollars in thousands)

NOTE 8 COMMITMENTS AND CONTINGENCIES

At September 30, 2003, we had commitments under outstanding letters of
credit in the amount of $190. Through our investment in subordinated securities
and subprime residual securities, which had a fair value of $41,793 at September
30, 2003, we support senior classes of securities.

On April 20, 1999, a complaint was filed on behalf of a putative class
of public shareholders of OCN in the Circuit Court of the Fifteenth Judicial
Circuit, Palm Beach County, Florida against OCN and OAC. On April 23, 1999, a
complaint was filed on behalf of a putative class of public shareholders of OAC
in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County,
Florida, against OAC and certain directors of OAC. The plaintiffs in both
complaints sought to enjoin consummation of the acquisition of OAC by OCN. The
cases were consolidated, and on September 13, 1999 a consolidated amended
complaint was filed. The injunction was denied, and on October 14, 1999 OCN was
dismissed as a party. Plaintiffs' remaining claims were for damages for alleged
breaches of common law fiduciary duties. In October 2001, the parties reached an
agreement in principle, which provides for a payment to plaintiffs in complete
settlement off all claims for damages and attorney's fees and costs. The
agreement in principle also requires us to pay a share of certain additional
administrative costs attendant to the settlement, in an amount not yet
determined. The agreement in principle is subject to the approval of the Court.
This matter is not expected to have a material impact on our financial
statements.

The former owners of Admiral Home Loan ("Claimants") filed a Demand for
Arbitration against OCN and William C. Erbey claiming damages in the amount of
$21,250 arising out of OCN's acquisition in 1997 of the assets of Admiral Home
Loan. An evidentiary hearing on the matter was concluded before a three-person
arbitration panel on February 24, 2003. In a 2 to 1 decision issued on April 24,
2003, the arbitration panel awarded the Claimants $6,000 plus interest and
costs. In the first quarter of 2003, we established a reserve in the amount of
$10,000 as a result of this award. All amounts due Claimants had been paid as of
September 30, 2003 thus bringing this matter to a final conclusion.

We are subject to various other pending legal proceedings. In our
opinion, the resolution of these other claims will not have a material effect on
the consolidated financial statements.

18

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(Dollars in thousands, except share data)

General

OCN is a financial services company headquartered in West Palm Beach,
Florida. Our primary business is the servicing and special servicing of
nonconforming, subperforming and nonperforming residential and commercial
mortgage loans. We also specialize in the development of related loan servicing
technology and software for the mortgage and real estate industries.

OCN is a registered savings and loan holding company subject to
regulation by the OTS. The Bank is subject to regulation by the OTS, its
chartering authority, and by the Federal Deposit Insurance Corporation ("FDIC")
as a result of its membership in the Savings Association Insurance Fund, which
insures the Bank's deposits up to the maximum extent permitted by law. The Bank
is also subject to regulation by the Board of Governors of the Federal Reserve
System and is currently a member of the Federal Home Loan Bank ("FHLB") of New
York, one of the 12 regional banks that comprise the FHLB System.

We operate one bank branch in Fort Lee, New Jersey. This location, which
provides most of our retail banking services, is primarily focused on the
issuance of retail certificates of deposit that serve as a supplementary source
of financing for us. We do not conduct loan origination activities in the Fort
Lee branch. In prior years, we had also issued brokered certificates of deposit
from our offices in West Palm Beach, Florida. However, we ceased the issuance of
brokered deposits in the summer of 2000 and have since paid off our maturing
brokered deposits as they have come due. We also currently operate several of
our core businesses primarily in the Bank: Residential Loan Servicing, ORA and
portions of Unsecured Collections. In addition, our non-core Affordable Housing
business operates in the Bank, as does a portion of our non-core Commercial
Finance business. Despite the reduction in our reliance on brokered certificates
of deposit as a funding source, the retail deposits issued by our banking
operation continue to provide an important source of financing for these
business activities. See "Liquidity, Commitments and Off-Balance Sheet Risks"
for additional discussion of brokered and non-brokered deposits as a source of
funding.

The following discussion of our consolidated financial condition,
results of operations, capital resources and liquidity should be read in
conjunction with the Interim Consolidated Financial Statements and related Notes
included in Item 1 herein.

19

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

Increase (Decrease)
Selected Consolidated Financial Information September 30, December 31, -----------------------
Balance Sheet Data 2003 2002 $ %
------------- ------------ --------- ----------

Total assets................................................. $ 1,300,324 $ 1,222,242 $ 78,082 6%
Trading securities, at fair value.......................... 48,489 58,895 (10,406) (18)%
Investments in real estate................................. 55,631 58,676 (3,045) (5)%
Affordable housing properties.............................. 9,578 15,319 (5,741) (37)%
Loans, net................................................. 28,196 76,857 (48,661) (63)%
Match funded assets, net................................... 133,767 167,744 (33,977) (20)%
Real estate owned, net..................................... 53,380 62,039 (8,659) (14)%
Advances on loans and loans serviced for others............ 390,952 266,356 124,596 47%
Mortgage servicing rights.................................. 181,905 171,611 10,294 6%
Receivables................................................ 71,565 78,944 (7,379) (9)%
Other assets............................................... 36,991 29,286 7,705 26%
Total liabilities............................................ 988,831 853,497 135,334 16%
Deposits................................................... 430,460 425,970 4,490 1%
Escrow deposits on loans and loans serviced for others..... 129,457 84,986 44,471 52%
Bonds-match funded agreements.............................. 113,785 147,071 (33,286) (23)%
Lines of credit and other secured borrowings............... 176,746 82,746 94,000 114%
Notes and debentures....................................... 99,724 76,975 22,749 30%
Minority interest in subsidiary.............................. 1,470 1,778 (308) (17)%
Capital Securities (1)....................................... -- 56,249 (56,249) (100)%
Stockholders' equity......................................... 310,023 310,718 (695) --%

At or for the Three Months Ended September 30,
--------------------------------------------------------
Favorable/(Unfavorable)
-----------------------
Operations Data 2003 2002 $ %
------------- ------------ --------- ----------

Net income (loss)............................................ $ 4,615 $ (4,007) $ 8,622 215%
Net interest income (expense) (1)............................ (6,752) (4,313) (2,439) (57)
Provision for loan losses.................................... 415 (901) (1,316) (146)
Non-interest income.......................................... 47,064 38,010 9,054 24
Non-interest expense......................................... 35,248 37,076 1,828 5
Distributions on Capital Securities (1)...................... -- 1,529 1,529 100
Income tax expense........................................... 6 -- (6) --

Per Common Share
Net income (loss)
Basic and diluted.......................................... $ 0.07 $ (0.06) $ 0.13 217%
Stock price
High....................................................... $ 5.09 $ 5.80 $ (0.71) (12)%
Low ....................................................... 4.12 2.67 1.45 54%
Close...................................................... 4.55 2.90 1.65 57%

Key Ratios
Annualized return on average assets.......................... 1.38% (1.17)% N/A 218%
Annualized return on average equity.......................... 6.01% (4.96)% N/A 221%
Efficiency ratio (2)......................................... 88.35% 107.16% N/A 18%
Tier 1 (core) capital ratio.................................. 13.75% 14.58% N/A (6)%
Total risk-based capital ratio............................... 13.68% 22.34% N/A (39)%

(1) Effective with our adoption of SFAS No. 150 on July 1, 2003, we
reclassified our $56,249 balance of Capital Securities to notes and
debentures. Distributions for the third quarter of 2003 amounted to
$1,529 and are included with interest expense. See Notes 2 and 3 to the
Interim Consolidated Financial Statements.

(2) The efficiency ratio represents non-interest expense divided by the sum
of net interest income or expense after provision for loan losses and
non-interest income.

20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

At or for the Nine Months Ended September 30,
--------------------------------------------------------
Favorable/(Unfavorable)
-----------------------
Operations Data 2003 2002 $ %
------------- ------------ --------- ----------

Net income (loss)............................................ $ 318 $ (58,697) $ 59,015 101%
Net interest income (expense) (1)............................ (11,728) (13,903) 2,175 16
Provision for loan losses.................................... (2,670) 10,510 13,180 125
Non-interest income.......................................... 129,417 92,092 37,325 41
Non-interest expense......................................... 116,673 136,618 19,945 15
Distributions on Capital Securities (1)...................... 3,058 4,758 1,700 36
Income tax expense........................................... 618 1,166 548 47
Effect of change in accounting principle, net of taxes....... -- 16,166 (16,166) (100)

Per Common Share
Net (income) loss
Basic and diluted.......................................... $ 0.005 $ (0.87) $ 0.875 101%
Stock price
High....................................................... $ 5.09 $ 8.48 $ (3.39) (40)%
Low ....................................................... 2.71 2.67 0.04 1%

Key Ratios
Annualized return on average assets.......................... 0.03% (5.29)% N/A 101%
Annualized return on average equity.......................... 0.14% (21.98)% N/A 101%
Efficiency ratio (2)......................................... 96.94% 201.86% N/A 52%

(1) Effective with our adoption of SFAS No. 150 on July 1, 2003, we
reclassified our $56,249 balance of Capital Securities to notes and
debentures. Distributions for the third quarter of 2003 amounted to
$1,529 and are included with interest expense. See Notes 2 and 3 to the
Interim Consolidated Financial Statements.

(2) The efficiency ratio represents non-interest expense divided by the sum
of net interest income or expense after provision for loan losses and
non-interest income.

Overview of Risks and Related Critical Accounting Policies

For the past several years, we have been undergoing a fundamental
transition in the nature of our business. In late 1999 and early 2000, we began
to execute a strategic plan to shift our business activities away from
capital-intensive businesses involving the purchase or origination of loans,
real estate and related assets toward less capital-intensive businesses that
generate fee-based revenues. As a result, we generally ceased to originate loans
or invest in assets in certain of our business segments ("non-core businesses")
unless we were contractually committed to do so. However, we continue actively
to manage and resolve the remaining assets in these segments. As of September
30, 2003, our core and non-core businesses were as follows:

Core Businesses Non-Core Businesses
--------------- -------------------
Residential Loan Servicing Commercial Finance
Ocwen Technology Xchange ("OTX") Affordable Housing
Ocwen Realty Advisors ("ORA") Subprime Finance
Unsecured Collections
Global Outsourcing
International Operations

In addition to our business segments, we use our Corporate Items and
Other segment to account for certain items of revenue and expense that are not
directly related to a business unit. We include in our Corporate Items and Other
segment interest income on cash and cash equivalents, interest expense on
corporate assets, gains and losses from debt repurchases and general corporate
expenses.

21

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

Principal Risk Factors. We included a discussion of the principal risk
factors that relate to our businesses and may affect future results on pages 16
through 19 of Management's Discussion and Analysis of Operations and Financial
Conditions in our Annual Report on Form 10-K for the year ended December 31,
2002.

Critical Accounting Policies. Our strategies to exit non-core businesses
and expand our core businesses are affected by risks in the marketplace.
Further, our ability to measure and report our operating results and financial
position is heavily influenced by the need to estimate the impact or outcome of
these risks, or other future events. Our critical accounting policies are those
that relate to the estimation and measurement of these risks, and an
understanding of these policies is fundamental to understanding Management's
Discussion and Analysis of Results of Operations and Financial Condition. We
summarize our more subjective and complex accounting policies as they relate to
our overall business stategy on pages 19 and 20 of Management's Discussion and
Analysis of Results of Operations and Financial Condition in our Annual Report
on Form 10-K for the year ended December 31, 2002. We discuss our significant
accounting policies in detail in Note 1 to our Consolidated Financial Statements
included in our Annual Report on Form 10-K for the year ended December 31, 2002.

Results of Operations

General. We recorded net income of $4,615 for the third quarter of 2003,
as compared to a net loss of $(4,007) for the third quarter of 2002. Our
earnings per share were $0.07 for the third quarter of 2003, as compared to a
loss per share of $(0.06) for the third quarter of 2002. For the nine months
ended September 30, 2003 we recorded net income of $318 or $0.005 per share as
compared to a loss of $(58,697) or $(0.87) per share for the same period of
2002.

Our core businesses recorded combined pre-tax income of $8,770 in the
third quarter of 2003, an increase of $6,046 or 222% as compared to the third
quarter of 2002. Year to date through September 30, 2003, pre-tax income for our
core businesses was $23,433, an increase of $12,099 or 107% compared to the same
period of 2002. The improvement in combined pre-tax income from our core
business segments in 2003 as compared to 2002 is primarily due to declines in
OTX losses and an increase in Residential Loan Servicing income. Our non-core
business segments incurred a pre-tax loss of $(1,082) in the third quarter of
2003 as compared to pre-tax income of $200 for the third quarter of 2002. Year
to date through September 30, 2003 our non-core businesses incurred a pre-tax
loss of $(13,311), an improvement of $52,362 over the same period of 2002. The
improvement in the combined results of our non-core segments in 2003 as compared
to 2002 is largely due to a reduction in loss provisions and impairment charges
on Commercial and Affordable Housing assets. Results of our Corporate Items and
Other segment have also improved over 2002 as losses have continued to decline
in 2003 largely due to reduced interest expense, resulting from debt repurchases
in the fourth quarter of 2002 and a reduction in brokered deposits, and reduced
technology expenses. We discuss these segment results in detail in our review of
segment profitability, which follows.

Segment Profitability. In general, we have ceased conducting any new
business actvities related to our non-core businesses, although we are actively
engaged in the sale or other resolution of the remaining non-core assets. These
assets are comprised of loans, real estate owned (REO), investments in real
estate, securities held in our residual and subordinate trading portfolio and
affordable housing properties.

22

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

The following tables present the income (loss) and total assets for each
of our reportable segments at and for the dates indicated:

Pre Tax Income (Loss) (1)
----------------------------------------------------
Three Months Nine Months
------------------------ ------------------------
For the periods ended September 30, 2003 2002 2003 2002
- ---------------------------------------------------------- ---------- ---------- ----------- ----------

Core businesses:
Residential Loan Servicing ............................. $ 8,159 $ 7,157 $ 25,808 $ 22,788
OTX .................................................... (2,353) (5,993) (8,325) (16,179)
Ocwen Realty Advisors .................................. 1,157 902 3,766 1,921
Unsecured Collections .................................. 1,141 1,057 3,422 3,140
Global Outsourcing ..................................... 1,003 -- 1,007 --
International Operations ............................... (337) (399) (2,245) (336)
---------- ---------- ----------- ----------
8,770 2,724 23,433 11,334
---------- ---------- ----------- ----------

Non-core businesses:
Residential Discount Loans ............................ -- (565) -- 1,103
Commercial Finance .................................... (2,798) (1,370) (9,723) (44,114)
Affordable Housing .................................... (4) (1,329) (3,608) (30,987)
Subprime Finance ...................................... 1,720 3,464 20 8,325
---------- ---------- ----------- ----------
(1,082) 200 (13,311) (65,673)
---------- ---------- ----------- ----------

Corporate Items and Other ................................ (3,039) (6,931) (9,494) (19,358)
---------- ---------- ----------- ----------
$ 4,649 $ (4,007) $ 628 $ (73,697)
========== ========== =========== ==========

(1) Income (loss) before minority interest, income taxes and effect
of change in accounting principle.

Total Assets
----------------------------
September 30, December 31,
2003 2002
------------- ------------

Core businesses:
Residential Loan Servicing........................................................... $ 699,423 $ 579,114
OTX.................................................................................. 6,257 6,172
Ocwen Realty Advisors................................................................ 814 532
Unsecured Collections................................................................ 426 296
Global Outsourcing................................................................... 1,814 6
International Operations............................................................. 4,907 5,366
------------- ------------
713,641 591,486
------------- ------------
Non-Core Businesses:
Residential Discount Loans........................................................... -- 44,833
Commercial Finance................................................................... 138,531 196,269
Affordable Housing................................................................... 52,528 62,093
Subprime Finance..................................................................... 38,235 41,949
------------- ------------
229,294 345,144
------------- ------------

Corporate Items and Other.............................................................. 357,389 285,612
------------- ------------
$ 1,300,324 $ 1,222,242
============= ============

23

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

The following table summarizes our remaining investment in non-core
assets, which are included in the total asset amounts presented above:

Non-Core Assets
-----------------------------
September 30, December 31,
2003 2002
------------- ------------

Non-Core Businesses:
Residential Discount Loans ........................................... $ -- $ 4,633
Commercial Finance ................................................... 131,653 190,602
Affordable Housing ................................................... 15,997 21,548
Subprime Finance (1) ................................................. 37,901 33,447
Corporate Items and Other ............................................ 3,027 --
------------- ------------
$ 188,578 $ 250,230
============= ============

(1) The increase in non-core assets of the Subprime Finance segment
in 2003 is in large part due to the transfer of securities
formerly classified as "Match Funded Assets" to "Trading
Securities" during the second quarter as a result of the
repurchase and retirement of the associated match funded debt.
See "Changes in Financial Condition - Match Funded Assets."
These securities had a fair value of $5,606 and $8,057 at
September 30, 2003 and December 31, 2002, respectively.

The following is a discussion of pre-tax income (loss) before minority
interest, income taxes and effect of change in accounting principle for each of
our reportable business segments.

Residential Loan Servicing. Through this core business we provide loan
servicing, including asset management and resolution services, to third party
owners of subprime residential mortgage and "high loan to value" loans for a
fee. We acquire the rights to service loans and obtain such rights by purchasing
them outright or by entering into sub-servicing contracts. Results for the third
quarter and the nine months ended September 30, 2003 as compared to the same
periods of 2002 reflect growth in the volume of mortgage loans serviced, as
shown in the table below, and cost reduction efforts. In spite of the current
low interest rate environment, pre-tax income of this segment increased by
$1,002 in the third quarter of 2003 as compared to 2002. For the nine months
ended September 30, 2003, pre-tax income improved to $25,808, an increase of
$3,020 or 13% as compared to the same period of 2002.

2003 2002
------------- -------------

Number of loans at September 30 ................................................... 355,181 338,349
Unpaid principal balance at September 30 .......................................... $ 37,071,916 $ 29,832,033
Average unpaid principal balance for the following periods:
Three months ended September 30 ................................................. $ 35,746,464 $ 28,066,309
Nine months ended September 30 .................................................. $ 32,438,558 $ 25,322,853

Selected information Three Months Nine Months
----------------------- -----------------------
For the periods ended September 30, 2003 2002 2003 2002
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------

Pre-tax income (loss) ........................................... $ 8,159 $ 7,157 $ 25,808 $ 22,788
Net interest expense ............................................ 5,300 4,724 15,125 13,461
Servicing and other fees ........................................ 29,213 28,234 87,723 87,700
Non-interest expense ............................................ 16,832 16,783 48,752 53,001

.. Servicing fees have increased during both the three and nine months
ended September 30, 2003 as compared to the same periods of 2002 as a
result of volume growth. Offsetting the increase in servicing fees in
2003 was an increase in amortization of servicing rights due to
increased purchases of servicing rights and increased projected
prepayment volumes. Additionally, we continue to experience low earnings
on float balances due to the ongoing decline in short-term interest
rates. See "Non-Interest Income - Servicing and Other Fees" for a detail
of the principal components of servicing and other fees.

.. The trend of increasing net interest expense in 2003 reflects increased
average balances of advances and mortgage servicing rights, which do not
earn interest. See "Net interest Income (Expense)" for additional
information regarding average balances.

.. Year to date, non-interest expense declined $4,249 or 8% in 2003 as
compared to 2002. This decline in non-interest expense occurred in spite
of the fact that the number of assets we serviced actually increased
during 2003. The decline in such expenses was primarily the result of
cost reduction efforts in the areas of compensation and employee
benefits and technology and communication costs.

24

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

OTX. Through this core segment we provide technology solutions for the
mortgage and real estate industries. OTX products include a residential loan
servicing system (REALServicing), a commercial loan servicing system
(REALSynergy) and an internet-based mortgage loan processing application and
vendor management system (REALTrans). The losses incurred by this segment, which
began its operations in 1998, are a result of our continuing investment in the
development and marketing of these technology products. For the third quarter of
2003 the pre-tax loss was $(2,353), a $3,640 or 61% improvement over the third
quarter of 2002. For the year to date periods, the 2003 loss declined by $7,854
or 49% as compared to the 2002 loss. The significant declines in the losses
incurred in 2003 as compared to 2002 is largely the result of ongoing cost
reduction initiatives and an increase in software revenues.

Selected information Three Months Nine Months
-------------------------- --------------------------
For the periods ended September 30, 2003 2002 2003 2002
------------------------------------------------------------------ ----------- ----------- ----------- -----------

Pre-tax income (loss) .......................................... $ (2,353) $ (5,993) $ (8,325) $ (16,179)
Non-interest income ............................................ 2,891 1,780 7,898 4,924
Non-interest expense ........................................... 5,244 7,773 16,222 21,102

.. The increase in non-interest income for the three and nine months ended
September 30, 2003 as compared to the same periods of 2002 is primarily
due to an increase in transaction fees resulting from an increase in
REALTrans transaction volumes.

.. The $2,529 or 33% decline in non-interest expense in the third quarter
of 2003 as compared to 2002 primarily reflects a $1,774 decline in
technology and communication costs and a $698 decline in compensation
and benefits. Year to date 2003, non-interest expense declined by $4,880
primarily due to a $2,070 decline in compensation and benefits and a
$2,383 decline in technology and communication costs.

Ocwen Realty Advisors. Through ORA we provide residential property
valuation services. Results for the third quarter of 2003 reflect an improvement
in pre-tax earnings of $254 or 28% over the third quarter of 2002. Year to date,
pre-tax earnings improved by $1,845 or 96% in 2003 as compared to 2002.

Selected information Three Months Nine Months
------------------------ -----------------------
For the periods ended September 30, 2003 2002 2003 2002
- -------------------------------------------------------------------- ----------- ---------- ---------- ----------

Pre-tax income (loss) ............................................ $ 1,157 $ 902 $ 3,766 $ 1,921
Non-interest income .............................................. 4,687 3,232 13,414 10,860
Non-interest expense:
Valuation fees ................................................. 2,865 1,886 7,697 7,391
Other .......................................................... 661 444 1,937 1,548
Gross margin ..................................................... 1,823 1,356 5,717 3,469
Valuation expenses as a % of revenues ............................ 61% 58% 57% 68%

Unsecured Collections. This core business conducts collection activities
for third party owners of unsecured receivables and for a portfolio of unsecured
credit card receivables that we acquired at a discount in 1999 and 2000. We
accounted for collections of our unsecured credit card receivables portfolio
under the cost recovery method through the end of 2001, when we reduced the net
book value of these unsecured receivables to zero as a result of collections and
additional reserves.

Selected information Three Months Nine Months
------------------------ -----------------------
For the periods ended September 30, 2003 2002 2003 2002
- -------------------------------------------------------------------- ----------- ---------- ---------- ----------

Pre-tax income (loss) ............................................ $ 1,141 $ 1,057 $ 3,422 $ 3,140
Non-interest income:
Third-party fees ............................................... 2,232 1,808 6,127 4,780
Collections .................................................... 691 969 2,273 3,462
Other .......................................................... 29 -- 57 --
Non-interest expense ............................................. 1,812 1,747 5,035 5,381

Global Outsourcing. This new business segment began operations in
December 2002 and recorded pre-tax income of $1,003 in the third quarter of 2003
and $1,007 for the nine months ended September 30, 2003. These results primarily
reflect the initiation of new outsourcing contracts in the third quarter. Global
Outsourcing provides business process outsourcing services to third parties and
leverages the operational capacity of our facilities in India.

25

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

International Operations. This segment, which is being reported as a
core business segment for the first time this year, recorded a pre-tax loss of
$(337) in the second quarter and $(2,245) for the nine months ended September
30, 2003. In 2002, International Operations reported a pre-tax loss of $(399)
for the third quarter and $(336) year to date. In 2003, this segment primarily
represents the results of operations of Global Servicing Solutions, LLC, our new
joint servicing venture with Merrill Lynch for the servicing of assets in
various countries. GSS offices in Tokyo and Taiwan are now operational. Results
for 2002 primarily reflect a one time consulting project for the government of
Jamaica as well as other precedent ventures.

Residential Discount Loans. Based on the relative insignificance of the
non-core assets remaining in this segment, the remaining assets of this business
and any related income or loss arising from their resolution have been included
in the Corporate Items and Other segment beginning January 1, 2003. This segment
consisted of operations to acquire at a discount and subsequently resolve
sub-performing and non-performing residential mortgage loans. We completed our
last acquisition of residential discount loans in 2000. See "Changes in
Financial Condition - Loans, Net." This business held non-core assets of $4,633
at December 31, 2002.

Selected information Three Months Nine Months
----------------------- -----------------------
For the periods ended September 30, 2003 2002 2003 2002
- ------------------------------------------------------------------- ---------- ---------- ---------- ----------

Pre-tax income (loss) ........................................... $ -- $ (565) $ -- $ 1,103
Net interest income ............................................. -- 1,254 -- 5,303
Provision for loan losses ....................................... -- (2) -- (2,304)
Non-interest income:
Gain (loss) on interest earning assets, net ................... -- (1) -- (2,437)
Gain (loss) on REO, net ....................................... -- (113) -- 387
Other ......................................................... -- (328) -- (160)
Non-interest expense ............................................ -- 1,380 -- 4,294

. Loss on interest earning assets is primarily comprised of
losses from the sale of loans.

Commercial Finance. Results for this non-core segment reflect our
continuing exit from loan and real estate businesses. We have not purchased any
commercial assets since 2000. With the exception of loans made to facilitate the
sale of our own assets, we have also not originated any loans since 2000. See
"Changes in Financial Condition - Loans, Net." Since then, this business has
consisted of the management, repositioning, and resolution of the remaining
non-core assets. At September 30, 2003, the $131,653 of non-core assets
remaining in this business consisted of 13 loan and real estate assets and an
unrated subordinate security with a fair value of $2,577. These 13 assets
consisted of four loans totaling $21,005, four REO properties totaling $52,440
and five investments in real estate totaling $55,631. Of the 13 remaining
assets, the five largest amounted to $103,002 or 80% of the total. During the
third quarter of 2003, one loan was sold with a net book value prior to sale of
$6,360. While we believe that additional sales will occur during 2003, it is
probable that some properties will not be sold until 2004 or later.

We regularly assess the value of our remaining assets and provide
additional loss reserves or impairment charges as appropriate. Combined reserves
on our remaining commercial loans and REO balances at September 30, 2003
amounted to 28% of the book value of such assets, consistent with reserve levels
of 24% at December 31, 2002.

Selected information Three Months Nine Months
------------------------ ------------------------
For the periods ended September 30, 2003 2002 2003 2002
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------

Pre-tax income (loss) ......................................... $ (2,798) $ (1,370) $ (9,723) $ (44,114)
Net interest expense .......................................... 1,853 1,249 6,250 4,837
Provision for loan losses ..................................... 393 (879) (3,064) 9,147
Non-interest income:
Gain (loss) on REO, net ..................................... (371) (132) (174) (16,463)
Servicing and other fees .................................... 303 874 2,028 2,195
Net operating gain (loss) on investments in real estate ..... 702 494 (2,999) (8,844)
Other ....................................................... 713 23 781 (235)
Non-interest expense .......................................... 1,899 2,259 6,173 6,782

. The negative provision for loan losses year to date in 2003
primarily resulted from the recovery of excess reserves on loan
sales during the second quarter. Reserve levels on our remaining
commercial loans were 15% of book value at September 30, 2003 as
compared to 19% at December 31, 2002 and 12% at September 30,
2002. See "Provision for Loan Losses."

. The loss on REO for the third quarter of 2003 included a
provision for loss in fair value of $578 as compared to $553 for
the third quarter of 2002. For the year to date periods, the
provision for loss in fair value amounted to $914 and $18,305
for 2003 and 2002, respectively. The provision for loss in fair
value year to date 2002 reflects an increase in reserves on REO
properties held for more than one year. Reserves on our four
remaining commercial REO properties at September 30, 2003
amounted to 32% of book value. This compares to reserve levels
of 30% of book value at both December 31, 2002 and September 30,
2002.

26

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

. Year to date operating losses on investments in real estate for
2003 and 2002 included impairment charges of $5,526 and $15,317,
respectively, recorded in the second quarter. There were no
impairment charges in the third quarter of 2003 or 2002.
Earnings on loans accounted for as investments in real estate
declined to $371 year to date 2003 from $3,870 for the same
period of 2002 as a result of sales and resolutions. See
"Changes in Financial Condition - Investments in Real Estate".

Affordable Housing. Historically, we invested in affordable housing
properties primarily through a series of limited partnerships. Except to
complete those projects in which an investment had already been made, we ceased
making investments in properties in 2000 as part of our shift in strategy to
fee-based businesses and because the volume of tax credits being generated was
exceeding our ability to utilize them effectively. Since that time, we have been
marketing each of these properties for sale. Primarily as a result of sales, our
investment in affordable housing properties had been reduced to $9,578 at
September 30, 2003 from $15,319 at December 31, 2002. In addition, this segment
has $6,419 of loans outstanding including $5,645 to our limited partnership
properties that we do not consolidate in our financial statements. Assets of
this segment also included $27,082 and $40,299 of receivables at September 30,
2003 and December 31, 2002, respectively, arising from sales of affordable
housing properties. While we cannot project sales with certainty, we believe
that it is unlikely that we will sell the remaining properties before the end of
2003. However, we believe that it is possible that new sources of financing will
be established to repay the remaining loan balances before the end of 2003. We
regularly assess the carrying value of our remaining assets and provide
additional loss reserves as appropriate. At September 30, 2003, our combined
reserves associated with affordable housing properties and loans amounted to 54%
of the remaining book value of such assets as compared to 48% at December 31,
2002.

Selected information Three Months Nine Months
------------------------ ------------------------
For the periods ended September 30, 2003 2002 2003 2002
- ------------------------------------------------------------------- ---------- ---------- ---------- ----------

Pre-tax income (loss) ........................................... $ (4) $ (1,329) $ (3,608) $ (30,987)
Net interest expense ............................................ 630 1,054 2,278 3,926
Provision for loan losses ....................................... 1 8 149 3,946
Net operating losses on investments in certain affordable
housing properties ............................................. 226 225 1,109 22,135

. Net interest expense has declined primarily because of a decline
in the assets of this segment, most of which do not earn
interest.

. The provision for loan losses in 2002 reflects an increase in
reserves during the second quarter in response to revisions in
estimated permanent financing proceeds. Reserve levels on these
loans were 42% of book value at both September 30, 2003 and
December 31, 2002.

. Year to date net operating losses have declined in 2003
primarily because of a decline in charges we recorded for
estimated losses on the sale of the properties. These charges
amounted to $21,294 during the nine months ended September 30,
2002, none during the third quarter. Losses for 2003 included
$432 of such charges recorded in the first quarter. The reserves
associated with our remaining properties amounted to 60% at
September 30, 2003 as compared to 50% at December 31, 2002. See
"Changes in Financial Condition - Affordable Housing
Properties."

Subprime Finance. We were engaged in domestic subprime residential loan
origination prior to ceasing originations in August of 1999; however, we have
continued to manage and resolve the remaining non-core assets. At September 30,
2003, the non-core assets remaining in this business consisted primarily of
trading securities with a fair value of $37,813, including $5,606 of securities
reported as match funded assets prior to the second quarter of 2003. These
securities are presently generating income and return of principal through cash
flows.

Selected information Three Months Nine Months
----------------------- -----------------------
For the periods ended September 30, 2003 2002 2003 2002
- --------------------------------------------------------------------- ---------- ---------- ---------- ----------

Pre-tax income (loss) ............................................. $ 1,720 $ 3,464 $ 20 $ 8,325
Interest income ................................................... 2,501 3,658 11,987 9,845
Interest expense .................................................. 493 436 1,120 2,481
Gain (loss) on trading securities, net ............................ 111 1,191 2,577 4,529
Non-interest expense .............................................. 395 1,202 13,417 3,653

27

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

. The increase in interest income year to date 2003 as compared to
2002 is largely the result of an increase in cash flow
distributions received on unrated single family subprime
residual securities. Cash flow distributions on our U.K. unrated
subprime residual securities were lower in the third quarter of
2003 as compared to 2002, resulting in a $1,291 decline in
interest income on those securities.

. The year to date 2003 decline in interest expense is consistent
with the decline in the average balances of loans and
securities, including match funded securities and related
match-funded debt.

. Year to date gains on trading securities for 2002 included
$4,406 of realized gains from sales during the second quarter.

. The $9,764 increase in non-interest expense year to date 2003
compared to 2002 is primarily due to the $10,000 reserve related
to the Admiral Home Loan arbitration recorded during the first
quarter of 2003. See Note 8 to the Interim Consolidated
Financial Statements for additional information regarding this
litigation.

Corporate Items and Other. Pre-tax results for this segment include
business activities that are individually insignificant, interest income on cash
and cash equivalents, interest expense on corporate assets, gains and losses
from debt repurchases, and general corporate expenses. The table below presents
the more significant amounts included in each of the periods indicated.

Selected information Three Months Nine Months
------------------------ ------------------------
For the periods ended September 30, 2003 2002 2003 2002
- -------------------------------------------------------------------- ---------- ---------- ---------- ----------

Pre-tax income (loss) ............................................ $ (3,039) $ (6,931) $ (9,494) $ (19,358)
Net interest expense ............................................. 1,817 3,876 5,338 11,232
Technology and other corporate expenses .......................... 1,152 2,886 4,409 8,839
Gain (loss) on debt repurchases .................................. (441) (35) (445) 1,039

. As discussed in Note 2 to the Interim Consolidated Financial
Statements, distributions on our Capital Securities are reported
in the consolidated statement of operations as interest expense
beginning in the third quarter of 2003. For purposes of this
analysis, net interest expense includes distributions on Capital
Securities for all periods. These distributions amounted to
$1,529 for both the third quarter of 2003 and 2002. Year to date
distributions on Capital Securities were $4,587 and $4,758 for
2003 and 2002, respectively. Net interest expense declined in
2003 as compared to 2002 primarily as a result of significant
debt repurchases during the fourth quarter of 2002 and the
ongoing reduction in brokered deposits.

. Corporate expenses declined in 2003 as compared to 2002
primarily as a result of a reduction in technology and other
operating expenses retained in this segment. The decline in
technology and other corporate expenses retained in this segment
resulted primarily from cost savings initiatives that we
completed in the fourth quarter of 2002.

. The $441 loss on debt repurchases in the third quarter of 2003
resulted from our redemption of the remaining $33,065 balance of
our 12% subordinated debentures on September 30, 2003 at a price
of 101.333%.

See Note 7 to the Interim Consolidated Financial Statements, for
additional information related to our operating segments.

Net Interest Income (Expense). Net interest income (expense) is the
difference between the interest income earned from our interest-earning assets
and the interest expense incurred on our interest-bearing liabilities. Net
interest income (expense) is determined by net interest spread (i.e., the
difference between the yield earned on our interest-earning assets and the rates
incurred on our interest-bearing liabilities), the relative amount of
interest-earning assets and interest-bearing liabilities and the degree of
mismatch in the maturity and repricing characteristics of our interest-earning
assets and interest-bearing liabilities.

In addition to interest income reported in this caption, we also earn
interest on the balance of custodial accounts we hold in connection with our
Residential Loan Servicing business. These amounts are reported as servicing
fees and are not included in the following information. See "Non-Interest Income
- - Servicing and Other Fees".

Our net interest income and net interest margin began declining in 2000
and have been negative since 2001. This trend reflects a decline in the ratio of
interest-earning assets to interest-bearing liabilities, which has fallen from
98% in 1999 to 37% in the third quarter of 2003 (57% in the third quarter of
2002). Both our acquisition of OAC in 1999 and our change in strategic direction
from capital-intensive businesses to fee-based sources of income have
contributed to an increase in the relative amount of non-interest-earning assets
(such as real estate, advances on loans serviced for others and mortgage
servicing rights) that are funded by interest-bearing liabilities. We expect
this trend to continue as we dispose of our remaining non-core assets, a portion
of which are interest-bearing, and increase non-interest-earning assets of our
core businesses. While it has no impact on consolidated net income, the
reclassification of our 10.875% Capital Securities to interest-bearing
liabilities (notes and debentures) on July 1, 2003 as a result of our adoption
of SFAS No. 150 does have a negative impact on net interest income, margin and
spread. Our net interest income, spread and margin will however be positively
impacted in future periods by our redemption of the remaining $33,065 balance of
12% subordinated debentures on September 30, 2003, the maturity of the remaining
$43,475 of 11.875% notes on October 1, 2003 and the continuing maturity of
brokered certificates of deposit.

28

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

The following tables set forth, for the periods indicated, information
regarding the total amount of income from our interest-earning assets and the
resultant average yields, the interest expense associated with our
interest-bearing liabilities, expressed in dollars and rates, and the net
interest spread and net interest margin. Information is based on average daily
balances for the indicated periods:

29

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Three Months Ended September 30,
--------------------------------------------------------------------------
2003 2002
----------------------------------- -----------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- ---------- ---------- ---------- ---------- ----------

Average Assets
Interest earning cash and other ..................... $ 46,556 $ 79 0.68% $ 9,864 $ 59 2.39%
Federal funds sold and repurchase agreements ........ 136,617 341 1.00 174,642 783 1.79
Trading securities
U.S. Treasury Securities and CMOs (AAA-rated) .... 6,909 (4) (0.23) 69,280 23 0.13
Subordinates, residuals and other ................ 41,663 2,753 26.43 38,055 3,484 36.62
Loans (1) ........................................... 42,974 212 1.97 127,234 3,075 9.67
Match funded loans and securities ................... 29,845 690 9.25 63,321 1,188 7.50
---------- ---------- ---------- ----------
Total interest earning assets .................... 304,564 4,071 5.35 482,396 8,612 7.14
---------- ----------
Non-interest earning cash ........................... 100,290 69,203
Affordable housing properties ....................... 11,963 37,260
Real estate owned, net .............................. 53,652 83,238
Investment in real estate ........................... 55,594 59,669
Advances on loans and loans serviced for others ..... 337,463 259,024
Mortgage servicing rights ........................... 187,848 150,005
Match funded advances on loans serviced for others .. 124,513 97,983
Receivables ......................................... 75,614 78,165
Other assets ........................................ 83,805 49,607
---------- ----------
Total assets ..................................... $1,335,306 $1,366,550
========== ==========

Average Liabilities and Stockholders Equity
Interest-bearing demand deposits .................... $ 16,788 49 1.17% $ 15,311 58 1.52%
Savings deposits .................................... 1,618 3 0.74 1,641 5 1.22
Certificates of deposit ............................. 387,470 3,956 4.08 433,326 5,927 5.47
---------- ---------- ---------- ----------
Total interest-bearing deposits .................. 405,876 4,008 3.95 450,278 5,990 5.32
Securities sold under agreements to repurchase ...... -- -- -- 6,589 32 1.94
Bonds-match funded agreements ....................... 129,572 1,076 3.32 144,754 1,445 3.99
Lines of credit and other secured borrowings ........ 148,573 1,927 5.19 88,308 925 4.19
Notes and debentures ................................ 132,422 3,812 11.51 151,754 4,533 11.95
---------- ---------- ---------- ----------
Total interest-bearing liabilities ............... 816,443 10,823 5.30 841,683 12,925 6.14
---------- ----------
Non-interest bearing deposits ....................... 4,159 6,300
Escrow deposits ..................................... 119,126 96,587
Excess of net assets acquired over purchase price ... -- 1,478
Other liabilities ................................... 86,944 39,871
---------- ----------
Total liabilities ................................ 1,026,672 985,919
Capital Securities (2) .............................. -- 56,249
Minority interest ................................... 1,411 1,335
Stockholders' equity ................................ 307,223 323,047
---------- ----------
Total liabilities and stockholders' equity ....... $1,335,306 $1,366,550
========== ==========

Net interest income (expense) ....................... $ (6,752) $ (4,313)
========== ==========

Net interest spread ................................. 0.05% 1.00%

Net interest margin ................................. (8.87)% (3.58)%

Ratio of interest-earning assets to interest-bearing
liabilities ...................... 37.30% 57.31%

(1) The average balances include non-performing loans, interest on which is
recognized on a cash basis.

(2) Effective with our adoption of SFAS No. 150 on July 1, 2003, Capital
Securities are classified as an interest-bearing liability with notes
and debentures. Distributions are reported as interest expense beginning
in the third quarter of 2003.

30

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Nine Months Ended September 30,
--------------------------------------------------------------------------
2003 2002
----------------------------------- -----------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- ---------- ---------- ---------- ---------- ----------

Average Assets
Interest earning cash and other ..................... $ 29,396 $ 225 1.02% $ 12,540 $ 220 2.34%
Federal funds sold and repurchase agreements ........ 125,697 1,078 1.14 154,407 2,055 1.77
Trading securities
U.S. Treasury Securities and CMOs (AAA-rated) .... 11,176 (92) (1.10) 106,554 2,168 2.71
Subordinates, residuals and other ................ 38,340 12,463 43.34 47,556 9,856 27.63
Loans (1) ........................................... 79,264 1,321 2.22 156,476 10,588 9.02
Match funded loans and securities ................... 41,319 2,831 9.14 69,607 5,245 10.05
---------- ---------- ---------- ----------
Total interest earning assets .................... 325,192 17,826 7.31 547,140 30,132 7.34
---------- ----------
Non-interest earning cash ........................... 91,048 63,628
Affordable housing properties ....................... 13,415 67,089
Real estate owned, net .............................. 55,514 97,268
Investment in real estate ........................... 58,104 86,483
Real estate held for sale ........................... -- 4,425
Advances on loans and loans serviced for others ..... 302,718 265,700
Mortgage servicing rights ........................... 176,972 125,617
Match funded advances on loans serviced for others .. 121,013 99,432
Receivables ......................................... 78,738 63,250
Other assets ........................................ 63,448 59,513
---------- ----------
Total assets ..................................... $1,286,162 $1,479,545
========== ==========

Average Liabilities and Stockholders Equity
Interest-bearing demand deposits .................... $ 16,808 170 1.35% $ 14,170 184 1.73%
Savings deposits .................................... 1,533 9 0.78 1,605 14 1.16
Certificates of deposit ............................. 397,664 13,229 4.44 493,730 21,491 5.80
---------- ---------- ---------- ----------
Total interest-bearing deposits .................. 416,005 13,408 4.30 509,505 21,689 5.68
Securities sold under agreements to repurchase ...... 333 3 1.20 16,476 230 1.86
Bonds-match funded agreements ....................... 136,470 3,640 3.56 148,781 5,161 4.63
Lines of credit and other secured borrowings ........ 121,495 4,103 4.50 95,185 3,257 4.56
Notes and debentures ................................ 95,422 8,400 11.74 152,236 13,698 12.00
---------- ---------- ---------- ----------
Total interest-bearing liabilities ............... 769,725 29,554 5.12 922,183 44,035 6.37
---------- ----------
Non-interest bearing deposits ....................... 4,941 6,299
Escrow deposits ..................................... 101,867 86,636
Excess of net assets acquired over purchase price ... -- 1,478
Other liabilities ................................... 63,198 48,263
---------- ----------
Total liabilities ................................ 939,731 1,064,859
Capital Securities (2) .............................. 37,499 58,333
Minority interest ................................... 1,529 292
Stockholders' equity ................................ 307,403 356,061
---------- ----------
Total liabilities and stockholders' equity ....... $1,286,162 $1,479,545
========== ==========

Net interest income (expense) ....................... $ (11,728) $ (13,903)
========== ==========

Net interest spread ................................. 2.19% 0.97%

Net interest margin ................................. (4.81)% (3.39)%

Ratio of interest-earning assets to interest-bearing
liabilities ...................... 42.25% 59.33%

(1) The average balances include non-performing loans, interest on which is
recognized on a cash basis.

(2) Effective with our adoption of SFAS No. 150 on July 1, 2003, Capital
Securities are classified as an interest-bearing liability with notes
and debentures. Distributions are reported as interest expense beginning
in the third quarter of 2003.

31

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior rate), (ii) changes in rate (change
in rate multiplied by prior volume) and (iii) total change in rate and volume.
Changes attributable to both volume and rate have been allocated proportionately
to the change due to volume and the change due to rate.

Three Months Nine Months
-------------------------------------- --------------------------------------
For the period ended September 30, 2003 vs. 2002 2003 vs. 2002
- ----------------------------------------------- -------------------------------------- --------------------------------------
Favorable (Unfavorable) Variance Favorable (Unfavorable) Variance
Due To Due To
-------------------------------------- --------------------------------------
Rate Volume Total Rate Volume Total
---------- ---------- ---------- ---------- ---------- ----------

Interest Income from Interest-Earning Assets
Interest earning cash and other ............... $ (68) $ 88 $ 20 $ (173) $ 178 $ 5
Federal funds sold and repurchase agreements .. (296) (146) (442) (642) (335) (977)
Trading securities:
U.S. Treasury Securities and CMOs
(AAA-rated) ............................... (20) (7) (27) (1,380) (880) (2,260)
Subordinates, residuals and other .......... (1,038) 307 (731) 4,793 (2,186) 2,607
Loans ......................................... (1,563) (1,300) (2,863) (5,600) (3,667) (9,267)
Match funded loans and securities ............. 231 (729) (498) (441) (1,973) (2,414)
---------- ---------- ---------- ---------- ---------- ----------
Total interest income from
interest-earning assets ................... (2,754) (1,787) (4,541) (3,443) (8,863) (12,306)
---------- ---------- ---------- ---------- ---------- ----------

Interest Expense on Interest-Bearing
Liabilities
Interest-bearing demand deposits .............. 14 (5) 9 45 (31) 14
Savings deposits .............................. 2 -- 2 4 1 5
Certificates of deposit ....................... 1,391 580 1,971 4,526 3,736 8,262
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits ............ 1,407 575 1,982 4,575 3,706 8,281
Securities sold under agreements to
repurchase ................................... -- 32 32 60 167 227
Bonds-match funded agreements ................. 227 142 369 1,120 401 1,521
Lines of credit and other secured borrowings .. (259) (743) (1,002) 43 (889) (846)
Notes and debentures .......................... 160 561 721 291 5,007 5,298
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense on interest-bearing
liabilities .............................. 1,535 567 2,102 6,089 8,392 14,481
---------- ---------- ---------- ---------- ---------- ----------
Favorable (unfavorable) variance, net ......... $ (1,219) $ (1,220) $ (2,439) $ 2,646 $ (471) $ 2,175
========== ========== ========== ========== ========== ==========

We incurred net interest expense before provision for loan losses of
$(6,752) for the three months ended September 30, 2003 as compared to $(4,313)
for the same period of the prior year, an unfavorable variance of $2,439 or 57%.
This unfavorable variance was due to a decrease in the balance of our average
interest-bearing assets and a decrease in the net interest spread, offset by a
decrease in the balance of our average interest-bearing liabilities. The net
interest spread decreased 95 basis points as a result of a 179 basis-point
decrease in the weighted average yield on our interest-earning assets, offset by
an 84 basis-point decline in the weighted average rate on our interest-bearing
liabilities. The net impact of these rate changes was a $1,219 unfavorable
variance. The average balance of our interest-earning assets decreased by
$177,832 or 37% during the third quarter of 2003 and reduced interest income by
$1,787. The average balance of our interest-bearing liabilities decreased by
$25,240 or 3% during the third quarter of 2003 and decreased interest expense by
$567. The net impact of these volume changes resulted in a $1,220 unfavorable
variance.

Year to date 2003 we incurred net interest expense before provision for
loan losses of $(11,728) as compared to $(13,903) for the same period of the
prior year, a favorable variance of $2,175 or 16%. This favorable variance was
due to a decrease in the balance of our average interest-bearing liabilities and
an increase in the net interest spread, offset by a decrease in the balance of
our average interest-earning assets. The net interest spread increased 122 basis
points as a result of a 125 basis-point decrease in the weighted average rate on
our interest-bearing liabilities, offset by a 3 basis-point decline in the
weighted average yield on our interest-earning assets. The net impact of these
rate changes was a $2,646 favorable variance. The average balance of our
interest-earning assets decreased by $221,948 or 41% during the nine months
ended September 30, 2003 and reduced interest income by $8,863. The average
balance of our interest-bearing liabilities decreased by $152,458 or 17% year to
date 2003 and decreased interest expense by $8,392. The net impact of these
volume changes resulted in a $471 unfavorable variance.

32

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Annualized
Average Balance Increase Average Yield Increase
----------------------- (Decrease) ------------------------ (Decrease)
For the three months ended September 30, 2003 2002 $ 2003 2002 Basis Points
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ------------

Interest earning cash and other ............... 46,556 $ 9,864 $ 36,692 0.68% 2.39% (171)
Federal funds sold and repurchase agreements .. 136,617 174,642 (38,025) 1.00% 1.79% (79)
Trading securities:
CMOs (AAA-rated) and U.S. Treasury
securities .................................. 6,909 69,280 (62,371) (0.23)% 0.13% (36)
Subordinates, residuals and other ........... 41,663 38,055 3,608 26.43% 36.62% (1,019)
Loans ......................................... 42,974 127,234 (84,260) 1.97% 9.67% (770)
Match funded loans and securities ............. 29,845 63,321 (33,476) 9.25% 7.50% 175
---------- ---------- ----------
$ 304,564 $ 482,396 $ (177,832) 5.35% 7.14% (179)
========== ========== ==========

Annualized
Average Balance Increase Average Yield Increase
----------------------- (Decrease) ------------------------ (Decrease)
For the nine months ended September 30, 2003 2002 $ 2003 2002 Basis Points
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ------------
Interest earning cash and other ............... $ 29,396 $ 12,540 $ 16,856 1.02% 2.34% (132)
Federal funds sold and repurchase agreements... 125,697 154,407 (28,710) 1.14% 1.77% (63)
Trading securities:
CMOs (AAA-rated) ............................ 11,176 106,554 (95,378) (1.10)% 2.71% (381)
Subordinates, residuals and other ........... 38,340 47,556 (9,216) 43.34% 27.63% 1,571
Loans ......................................... 79,264 156,476 (77,212) 2.22% 9.02% (680)
Match funded loans and securities ............. 41,319 69,607 (28,288) 9.14% 10.05% (91)
---------- ---------- ----------
$ 325,192 $ 547,140 $ (221,948) 7.31% 7.34% (3)
========== ========== ==========

Interest income we earned on loans decreased by $2,863 or 93% during the
three months ended September 30, 2003 as compared to the same period of the
prior year primarily as a result of a $84,260 or 66% decline in the average
balance and a 770 basis-point decline in the average yield. Year to date 2003,
interest income on loans declined $9,267 or 88% as compared to the same period
of 2002 primarily as a result of a $77,212 or 49% decline in the average balance
and a 680 basis point decline in the average yield. Sales, resolutions,
foreclosures and the absence of acquisitions have resulted in the declines in
the average balance of loans during 2003. Resolution income declined from $3,295
for the nine months ended September 30, 2002 to $57 for the same period of 2003.
In addition, there was an increase in the proportion of non-performing loans in
the portfolio, on which we do not accrue interest. The yield on loans is likely
to fluctuate from period to period as a result of the timing of resolutions,
particularly the resolution of large multi-family residential and commercial
real estate loans, and the mix of the overall portfolio between performing and
non-performing loans. See "Changes in Financial Condition - Loans, Net."

Interest income we earned on match funded loans and securities decreased
$498 or 42% in the third quarter of 2003 as compared to the third quarter of
2002. This decrease was due to a $33,476 or 53% decline in the average balances,
offset by a 175 basis-point increase in the average yield. Year to date 2003,
interest income on match funded loans and securities declined $2,414 or 46%
compared to the same period of 2002 due to a $28,288 or 41% decline in the
average balance and a 91 basis point decline in the average yield. The decline
in the average balances during 2003 was primarily the result of principal
repayments received on both the loans and securities, as well as the transfer of
the match funded securities to residual trading securities during the second
quarter as a result of the repurchase and retirement of the related match funded
debt. See "Changes in Financial Condition - Match Funded Assets".

Interest income we earned from our combined trading securities portfolio
decreased from $3,507 during the third quarter of 2002 to $2,749 in the third
quarter of 2003, a $758 or 22% decrease. Subordinates and residuals accounted
for $731 of this decline in interest income as a result of a 1,019 basis-point
decline in the average yield earned, offset in part by a $3,608 or 9% increase
in the average balance. The decline in the average yield is largely the result
of lower interest related to our U.K. unrated single family subprime residual
securities. For the nine months ended September 30, 2003, interest income on
trading securities increased $347 or 3% as compared to the same period of 2002.
Interest income on subordinates and residuals increased $2,607 while interest
income on CMOs and U.S. Treasury securities decreased by $2,260. The increase in
interest income on subordinates and residuals is the result of a 1,571
basis-point increase in the average yield earned, offset in part by a $9,216 or
19% decline in the average balance. The increase in the average yield on
subordinate and residual securities year to date 2003 is largely the result of
sales of low-yielding unrated subprime residuals during 2002 and an increase in
interest on unrated single family subprime residuals. The decline in our average
investment in subordinates and residuals during 2003 is primarily the result of
sales, principal repayments and amortization, offset in part by the transfer in
the second quarter of securities previously reported as match funded. The
decrease in interest income on CMOs and U.S. Treasury securities year to date
2003 is due to a 381 basis-point decline in the average yield earned and a
$95,378 or 90% decrease in the average balance. The declines in our average
investment in CMOs and U.S. Treasury securities during 2003 is primarily the
result of principal maturities, principal repayments and amortization of premium
related to CMOs. This trend reflects the fact that we no longer need to hold
these securities to meet the Qualified Thrift Lender requirements. Our
investment in CMOs declined to $0 in July 2003. See "Changes in Financial
Condition - Trading Securities". The decline in the average yield on CMOs and
U.S. Treasury securities is primarily the result of declining interest rates and
increased prepayments of the underlying mortgages that back the CMO bonds. When
prepayments occur faster than anticipated, the amortization of premiums paid
when the CMO bonds were purchased is accelerated resulting in a lower or
negative yield.

33

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Average Balance Increase
----------------------------- (Decrease)
For the three months ended September 30, 2003 2002 $
- ----------------------------------------------- ------------ ------------ ------------

Interest-bearing deposits ..................... $ 405,876 $ 450,278 $ (44,402)
Securities sold under agreements to
repurchase ................................... -- 6,589 (6,589)
Bonds-match funded agreements ................. 129,572 144,754 (15,182)
Lines of credit and other secured borrowings .. 148,573 88,308 60,265
Notes and debentures .......................... 132,422 151,754 (19,332)
------------ ------------ ------------
$ 816,443 $ 841,683 $ (25,240)
============ ============ ============

Annualized
Average Rate Increase
----------------------------- (Decrease)
For the three months ended September 30, 2003 2002 Basis Points
- ----------------------------------------------- ------------ ------------ ------------

Interest-bearing deposits ..................... 3.95% 5.32% (137)
Securities sold under agreements to
repurchase ................................... --% 1.94% (194)
Bonds-match funded agreements ................. 3.32% 3.99% (67)
Lines of credit and other secured borrowings .. 5.19% 4.19% 100
Notes and debentures .......................... 11.51% 11.95% (44)

5.30% 6.14% (84)

Average Balance Increase
----------------------------- (Decrease)
For the nine months ended September 30, 2003 2002 $
- ----------------------------------------------- ------------ ------------ ------------

Interest-bearing deposits ..................... $ 416,005 $ 509,505 $ (93,500)
Securities sold under agreements to
repurchase ................................... 333 16,476 (16,143)
Bonds-match funded agreements ................. 136,470 148,781 (12,311)
Lines of credit and other secured borrowings .. 121,495 95,185 26,310
Notes and debentures .......................... 95,422 152,236 (56,814)
------------ ------------ ------------
$ 769,725 $ 922,183 $ (152,458)
============ ============ ============

Annualized
Average Rate Increase
----------------------------- (Decrease)
For the nine months ended September 30, 2003 2002 Basis Points
- ----------------------------------------------- ------------ ------------ ------------

Interest-bearing deposits ..................... 4.30% 5.68% (138)
Securities sold under agreements to
repurchase ................................... 1.20% 1.86% (66)
Bonds-match funded agreements ................. 3.56% 4.63% (107)
Lines of credit and other secured borrowings .. 4.50% 4.56% (6)
Notes and debentures .......................... 11.74% 12.00% (26)

5.12% 6.37% (125)

Interest expense we incurred on our interest-bearing deposits decreased
$1,982 or 33% during the three months ended September 30, 2003 as compared to
the same period of the prior year due to a $44,402 or 10% decrease in the
average balance and a 137 basis-point decline in the average rate. Year to date
2003, interest expense on deposits declined $8,281 or 38% as compared to the
same period of 2002 as a result of a $93,500 or 18% decline in the average
balance and a 138 basis point decline in the average rate. The decline in the
average balance of deposits during 2003 resulted primarily from maturing
brokered certificates of deposit. We have not issued any new brokered
certificates of deposit since 2000 and, at this time, do not intend to issue any
such deposits in the foreseeable future. We do however plan to retain
non-brokered deposits as a source of financing. The declines in the average
rates in 2003 reflects the replacement of maturing brokered certificates of
deposit with non-brokered certificates of deposit which have a lower rate of
interest. See "Changes in Financial Condition - Deposits."

Interest expense on notes and debentures declined by $721 or 16% during
the third quarter of 2003 as compared to the third quarter of 2002. This decline
was primarily due to a $19,332 or 13% decline in the average outstanding
balance. For the nine months ended September 30, 2003, interest expense on notes
and debentures declined $5,298 or 39% as compared to the same period of 2002
primarily due to a $56,814 or 37% decline in the average balances outstanding.
The declines in average balance outstanding resulted primarily from our November
2002 call redemption of $40,000 of our 11.875% notes and $33,500 of our 12%
subordinated debentures. We redeemed the remaining $33,065 outstanding balance
of our 12% subordinated debentures on September 30, 2003. This decline was
offset in part by the transfer of our 10.875% Capital Securities to notes and
debentures effective with the adoption of SFAS No. 150 on July 1, 2003.
Distributions on Capital Securities amounted to $1,529 for the third quarter of
2003 and are included in interest expense on notes and debentures. See "Changes
in Financial Condition - Notes and Debentures."

Interest expense we incurred on bonds-match funded agreements declined
$369 or 26% during the three months ended September 30, 2003 as compared to the
same period of the prior year as a result of a 67 basis-point decline in the
average rate and a $15,182 or 10% decrease in the average balance outstanding.
For the nine months ended September 30, 2003 interest expense on match funded
agreements declined $1,521 or 29% due to a 107 basis point decline in the
average rate and a $12,311 or 8% decline in the average outstanding balance. The
decline in the average rates during the 2003 is largely due to declines in
LIBOR. The decrease in the average balances during 2003 is due to principal
repayments, as well as the redemption of bonds-match funded agreements secured
by residual securities during the second quarter. See "Changes in Financial
Condition - Bonds - Match Funded Agreements."

34

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Provisions for Loan Losses. At September 30, 2003, our total net loan
balance was $28,196 or 2.2% of total assets. Of the balance remaining at
September 30, 2003, $21,005 represents four loans held in our Commercial Finance
segment and $6,419 represents three multi-family loans held in our Affordable
Housing segment. Because of the small number of remaining loans, we are able to
perform a specific risk assessment on each Commercial Finance and Affordable
Housing loan. Our risk assessment of Commercial Finance loans includes a review
of the underlying loan collateral, general and local economic conditions,
property type risk, borrower's capacity and willingness to pay, and projections
of prospective cash flows based on property-specific events. For loans held in
our Affordable Housing business, we project the amounts to be realized from the
disposition of the property to determine the appropriate allowance for loan
losses. We also analyze the historical trends in the gains or losses on
disposition and resolution of loans as compared to the allowance for loan losses
at the time of disposition and resolution. The results of this analysis are also
taken into consideration in evaluating the allowance for loan losses on the
remaining loans. The allowance for loan losses is management's best estimate of
probable inherent loan losses incurred as of September 30, 2003. Provisions we
record for losses on our loans are charged to operations to maintain an
allowance for losses on our loans at a level we consider adequate based upon an
evaluation of known and inherent risks in such portfolios, as described above.

The following table presents the provisions for loan losses by business
segment for the periods indicated:

Three Months Nine Months
----------------------------------------------------
For the periods ended September 30, 2003 2002 2003 2002
- --------------------------------------- ---------- ---------- ---------- ----------

Loans:
Unsecured Collections .............. $ -- $ (28) $ -- $ (279)
Residential Discount Loans ......... -- 54 -- (2,296)
Commercial Finance ................. 393 (879) (3,065) 9,147
Affordable Housing ................. 1 8 149 3,946
Corporate Items and Other .......... 65 -- 286 --
---------- ---------- ---------- ----------
459 (845) (2,630) 10,518
Match funded loans:
Residential Discount Loans ......... -- (56) -- (8)
Corporate Items and Other .......... (44) -- (40) --
---------- ---------- ---------- ----------
$ 415 $ (901) $ (2,670) $ 10,510
========== ========== ========== ==========

The provision we recorded on loans during the three months ended
September 30, 2003 results primarily from a $450 increase in reserves on a hotel
loan in our Commercial Finance segment. The negative loan loss provision for
2003 year to date resulted primarily from the recovery of reserves on sales of
commercial loans, which were non-performing, during the second quarter. Our
allowance for loan losses as a percentage of non-performing loans has increased
from 27.5% at December 31, 2002 to 38.8% at September 30, 2003. For additional
information regarding non-performing loans, see "Changes in Financial Condition
- - Loans, Net." As indicated in the table below, our allowance as a percentage of
loans increased from 14.6% at September 30, 2002 to 21.3% at December 31, 2002
and to 23.2% at September 30, 2003.

35

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

The following table sets forth the allowance for loan losses as a
percentage of the respective loan balances by business segment at the dates
indicated:

Allowance
Loan as a % of
Allowance Balance Loans
---------- ---------- ----------

September 30, 2003
Loans:
Commercial Finance ............................. $ 3,822 $ 24,827 15.4%
Affordable Housing ............................. 4,578 10,997 41.6%
Corporate Items and Other ...................... 107 879 12.2%
---------- ----------
8,507 36,703 23.2%
Match funded loans:
Corporate Items and Other ...................... 104 27,173 0.4%
---------- ----------
$ 8,611 $ 63,876 13.5%
========== ==========
December 31, 2002
Loans:
Residential Discount Loans ..................... $ 154 $ 1,584 9.7%
Commercial Finance ............................. 16,179 85,377 19.0%
Affordable Housing ............................. 4,428 10,657 41.6%
---------- ----------
20,761 97,618 21.3%
Match funded loans:
Residential Discount Loans ..................... 144 38,129 0.4%
---------- ----------
$ 20,905 $ 135,747 15.4%
========== ==========
September 30, 2002
Loans:
Residential Discount Loans ..................... $ 157 $ 1,467 10.7%
Commercial Finance ............................. 12,500 101,410 12.3%
Affordable Housing ............................. 4,982 17,595 28.3%
---------- ----------
17,639 120,472 14.6%
Match funded loans:
Residential Discount Loans ..................... 162 41,174 0.4%
---------- ----------
$ 17,801 $ 161,646 11.0%
========== ==========

For additional information regarding our allowance for loan losses on
the above portfolios, see "Changes in Financial Condition - Allowance for Loan
Losses." For information relating to our valuation allowance on real estate
owned, see "Changes in Financial Condition - Real Estate Owned."

Non-Interest Income. The following table sets forth the principal
components of our non-interest income during the periods indicated:

Three Months Nine Months
------------------------ ------------------------
For the periods ended September 30, 2003 2002 2003 2002
- ----------------------------------------------------------- ---------- ---------- ---------- ----------

Servicing and other fees .................................. $ 40,339 $ 34,024 $ 115,117 $ 105,598
Gain (loss) on interest earning assets, net ............... -- -- 27 (2,773)
Gain (loss) on trading and match funded securities, net ... 159 944 2,924 3,897
Gain (loss) on real estate owned, net ..................... 147 (337) 124 (16,307)
Gain (loss) on other non-interest earning assets, net ..... 150 508 624 (333)
Net operating gains (losses) on investments in real estate 702 495 (3,000) (8,844)
Gain (loss) on repurchase of debt ......................... (441) (35) (445) 1,039
Other income .............................................. 6,008 2,411 14,046 9,815
---------- ---------- ---------- ----------
$ 47,064 $ 38,010 $ 129,417 $ 92,092
========== ========== ========== ==========

36

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Servicing and Other Fees. Our servicing and other fees are primarily
comprised of fees we earned from investors for servicing residential mortgage
loans on their behalf. The following table sets forth the principal components
of our servicing and other fees by segment for the periods indicated:

For the three months ended September 30, 2003 2002
- --------------------------------------------- --------------------------------------- --------------------------------------
Residential Residential
Loan Other Loan Other
Servicing Segments Total Servicing Segments Total
----------- ---------- ---------- ----------- ---------- ----------

Loan servicing and related fees:
Loan servicing fees (1) ................... $ 44,059 $ 2,666 $ 46,725 $ 35,394 $ 1,813 $ 37,207
Late charges .............................. 9,188 (196) 8,992 6,896 370 7,266
Interest on custodial accounts (float) (2) 3,255 1 3,256 2,109 -- 2,109
Special servicing fees .................... 434 -- 434 806 -- 806
Compensating interest expense (3) ......... (8,658) -- (8,658) (5,552) -- (5,552)
Amortization of servicing rights (4) ...... (25,272) -- (25,272) (15,283) -- (15,283)
Other, net ................................ (174) 3,085 2,911 355 326 681
----------- ---------- ---------- ----------- ---------- ----------
22,832 5,556 28,388 24,725 2,509 27,234
Other fees:
Property valuation fees (ORA) ............. -- 4,688 4,688 -- 3,242 3,242
Default servicing fees .................... 1,014 205 1,219 1,052 -- 1,052
Retail banking fees ....................... 1,982 2 1,984 1,084 6 1,090
Other ..................................... 3,385 675 4,060 1,373 33 1,406
----------- ---------- ---------- ----------- ---------- ----------
$ 29,213 $ 11,126 $ 40,339 $ 28,234 $ 5,790 $ 34,024
=========== ========== ========== =========== ========== ==========

For the Nine months ended September 30, 2003 2002
- --------------------------------------------- -------------------------------------- --------------------------------------
Residential Residential
Loan Other Loan Other
Servicing Segments Total Servicing Segments Total
----------- ---------- ---------- ----------- ---------- ----------

Loan servicing and related fees:
Loan servicing fees (1) ................... $ 122,021 $ 7,134 $ 129,155 $ 100,443 $ 5,026 $ 105,469
Late charges .............................. 27,234 658 27,892 20,476 824 21,300
Interest on custodial accounts (float) (2) 7,529 1 7,530 5,845 -- 5,845
Special servicing fees .................... 1,613 -- 1,613 3,079 -- 3,079
Compensating interest expense (3) ......... (22,278) -- (22,278) (14,331) -- (14,331)
Amortization of servicing rights (4) ...... (68,290) -- (68,290) (39,367) (109) (39,476)
Other, net ................................ 3,100 4,991 8,091 1,335 877 2,212
---------- ---------- ---------- ----------- ---------- ----------
70,929 12,784 83,713 77,480 6,618 84,098
Other fees:
Property valuation fees (ORA) ............. -- 13,414 13,414 -- 10,984 10,984
Default servicing fees .................... 3,007 387 3,394 3,464 -- 3,464
Retail banking fees ....................... 5,531 15 5,546 3,157 26 3,183
Other ..................................... 8,256 794 9,050 3,599 270 3,869
---------- ---------- ---------- ----------- ---------- ----------
$ 87,723 $ 27,394 $ 115,117 $ 87,700 $ 17,898 $ 105,598
========== ========== ========== =========== ========== ==========

(1) The increase in loan servicing fees during 2003 as compared to 2002 is
largely due to the growth in residential loans we serviced for others.
The average unpaid principal balance of all loans we serviced during the
three months ended September 30, 2003 and 2002 amounted to $36,699,157
and $29,503,115, respectively. The average unpaid principal during the
nine months ended September 30, 2003 and 2002 was $33,458,387 and
$26,761,093, respectively.

(2) Interest we earned on custodial accounts during the holding period
between collection of borrower payments and remittance to investors.
These custodial accounts are held by an unaffiliated bank and are
excluded from our statement of financial condition. The average balances
held in these custodial accounts were approximately $1,142,000 and
$507,000 for the third quarters of 2003 and 2002, respectively, and
$890,000 and $464,000 for the nine months ended September 30, 2003 and
2002, respectively.

(3) A servicer of securitized loans is typically obligated to pay the
securitization trust the difference between a full month of interest and
the interest collected on loans that are repaid before the end of a
calendar month.

37

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

(4) The increase in amortization expense during 2003 as compared to 2002
reflects an increase in our purchases of rights to service loans for
others and an increase in our rate of amortization to reflect increased
projected prepayment volumes. See "Changes in Financial Condition -
Mortgage Servicing Rights".

The following table sets forth loans we serviced at the dates indicated:

Subprime Loans (1) Other Loans Total
--------------------------- --------------------------- ---------------------------
No. of No. of No. of
Amount Loans Amount Loans Amount Loans
------------ ------------ ------------ ------------ ------------ ------------

September 30, 2003
Performing: (2)
Residential servicing .............. $ 32,920,283 302,370 $ 846,422 14,091 $ 33,766,705 316,461
Commercial servicing ............... -- -- 529,463 496 529,463 496
------------ ------------ ------------ ------------ ------------ ------------
$ 32,920,283 302,370 $ 1,375,885 14,587 $ 34,296,168 316,957
============ ============ ============ ============ ============ ============
Non-performing: (2)
Residential servicing .............. $ 3,091,154 35,115 $ 214,057 3,605 $ 3,305,211 38,720
Commercial servicing ............... -- -- 362,583 281 362,583 281
============ ------------ ------------ ------------ ------------ ------------
$ 3,091,154 35,115 $ 576,640 3,886 $ 3,667,794 39,001
============ ============ ============ ============ ============ ============
Total loans serviced for others:
Residential servicing .............. $ 36,011,437 337,485 $ 1,060,479 17,696 $ 37,071,916 355,181
Commercial servicing ............... -- -- 892,046 777 892,046 777
------------ ------------ ------------ ------------ ------------ ------------
$ 36,011,437 337,485 $ 1,952,525 18,473 $ 37,963,962 355,958
============ ============ ============ ============ ============ ============

December 31, 2002
Performing: (2)
Residential servicing .............. $ 26,817,731 282,926 $ 1,089,109 17,204 $ 27,906,840 300,130
Commercial servicing ............... -- -- 752,722 407 752,722 407
------------ ------------ ------------ ------------ ------------ ------------
$ 26,817,731 282,926 $ 1,841,831 17,611 $ 28,659,562 300,537
============ ============ ============ ============ ============ ============
Non-performing: (2)
Residential servicing .............. $ 2,565,823 31,626 $ 261,014 4,277 $ 2,826,837 35,903
Commercial servicing ............... -- -- 582,964 238 582,964 238
------------ ------------ ------------ ------------ ------------ ------------
$ 2,565,823 31,626 $ 843,978 4,515 $ 3,409,801 36,141
============ ============ ============ ============ ============ ============
Total loans serviced for others:
Residential servicing .............. $ 29,383,554 314,552 $ 1,350,123 21,481 $ 30,733,677 336,033
Commercial servicing ............... -- -- 1,335,686 645 1,335,686 645
------------ ------------ ------------ ------------ ------------ ------------
$ 29,383,554 314,552 $ 2,685,809 22,126 $ 32,069,363 336,678
============ ============ ============ ============ ============ ============

(1) Subprime loans represent loans we service which were made by others to
borrowers who did not qualify under guidelines of the Fannie Mae and
Freddie Mac ("nonconforming loans").

(2) Non-performing loans serviced for others have been delinquent for 90
days of more. Performing loans serviced for others are current or have
been delinquent for less than 90 days.

38

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Loss on Interest Earning Assets, Net. Losses for 2002 of $(2,773)
resulted primarily from $(2,454) of losses on sales of residential discount
loans.

Gain on Trading and Match Funded Securities, Net. The gain on trading
and match funded securities, net, includes both unrealized gains and losses on
securities and realized gains and losses resulting from sales thereof. Changes
in fair value are reported in income in the period of change.

Three Months Nine Months
------------------- --------------------
For the periods ended September 30, 2003 2002 2003 2002
- ----------------------------------- -------- -------- -------- --------
Unrealized gain (loss):
Trading securities .............. $ 159 $ 855 $ 3,172 $ (336)
Match funded securities ......... -- 77 (248) 350
-------- -------- -------- --------
159 932 2,924 14
Realized gain (loss):
Trading securities .............. -- 12 -- 3,883
-------- -------- -------- --------
$ 159 $ 944 $ 2,924 $ 3,897
======== ======== ======== ========

Gain (Loss) on Real Estate Owned, Net. The following table sets forth
the results of our real estate owned (which does not include investments in real
estate that are discussed below), during the periods indicated:

Three Months Nine Months
-------------------- --------------------
For the periods ended September 30, 2003 2002 2003 2002
- ------------------------------------ -------- -------- -------- --------

Gains on sales ..................... $ 266 $ 272 $ 358 $ 2,835
Provision for losses in fair value . (685) (783) (1,169) (19,859)
Operating income (expense), net (1). 566 174 935 717
-------- -------- -------- --------
$ 147 $ (337) $ 124 $(16,307)
======== ======== ======== ========

(1) Includes rental income and expenses associated with holding and
maintaining properties.

The results of our real estate owned for the periods presented above
reflect a decline in the number of properties owned. The provision for losses in
fair value in 2002 reflects an increase in reserves on commercial properties
held for more then one year. See "Changes in Financial Condition - Real Estate
Owned" for additional information regarding real estate owned and related
reserves for losses in fair value.

Net Operating Gains (Losses) on Investments in Real Estate. The
following table sets forth the results of our investment in real estate
operations during the periods indicated:

Three Months Nine Months
--------------------- ----------------------
For the periods ended September 30, 2003 2002 2003 2002
- ------------------------------------------- --------- --------- --------- ---------

Operating income (expense), net (1) ....... $ 677 $ 534 $ 2,155 $ 2,603
Equity in earnings of loans accounted
for as investments in real estate (2).. 25 (39) 371 3,870
Impairment charges (3) .................... -- -- (5,526) (15,317)
--------- --------- --------- ---------
$ 702 $ 495 $ (3,000) $ (8,844)
========= ========= ========= =========

(1) Includes rental income, depreciation expense and operating expenses
associated with holding and maintaining our properties held for
investment.

(2) The decrease in year to date equity in earnings for 2003 related to
certain loans accounted for as investments in real estate is primarily
the result of significant resolution gains earned in connection with the
repayment of loans during the first quarter of 2002. Only one such loan
remains as of September 30, 2003.

(3) Impairment charges during 2003 and 2002 included write-downs totaling
$5,526 and $14,549, respectively, of the carrying value of our remaining
properties held for investment to our estimate of their realizable
values. See "Changes in Financial Condition - Investments in Real
Estate".

39

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Other Income. The following table sets forth the principal components of
other income for the periods indicated:

Three Months Nine Months
------------------- -------------------
For the periods ended September 30, 2003 2002 2003 2002
- ---------------------------------------- -------- -------- -------- --------

Software revenue (1) ................... $ 2,886 $ 672 $ 7,916 $ 1,674
Collections of credit card receivables.. 691 973 2,237 3,463
Brokerage commissions (2) .............. 695 480 1,636 1,732
Consulting fees(3) ..................... 28 -- 170 1,398
Other .................................. 1,708 286 2,087 1,548
-------- -------- -------- --------
$ 6,008 $ 2,411 $ 14,046 $ 9,815
======== ======== ======== ========

(1) Software revenues earned by OTX from unaffiliated customers. These
amounts exclude revenues earned from other consolidated affiliates,
which have been eliminated in consolidation. See Note 7 to the Interim
Consolidated Financial Statements.

(2) Commissions earned from sales of REO properties.

(3) For 2002, these fees consisted principally of consulting fees earned
during the first quarter as advisor to Jamaica's Financial Sector
Adjustment Company in the resolution or liquidation of non-performing
loans and real estate assets.

Non-Interest Expense. The following table sets forth the principal
components of our non-interest expense during the periods indicated:

Three Months Nine Months
--------------------- ---------------------
For the periods ended September 30, 2003 2002 2003 2002
- -------------------------------------------------- --------- --------- --------- ---------

Compensation and employee benefits ............... $ 17,667 $ 19,594 $ 52,505 $ 60,375
Occupancy and equipment .......................... 3,254 2,914 8,769 8,959
Technology and communication costs ............... 5,583 6,899 14,577 17,960
Loan expenses .................................... 3,835 2,437 10,835 9,808
Net operating losses on investments in affordable
housing properties .............................. 226 225 1,109 22,135
Professional services and regulatory fees ........ 2,511 2,573 21,855 10,341
Other operating expenses ......................... 2,172 2,434 7,023 7,040
--------- --------- --------- ---------
$ 35,248 $ 37,076 $ 116,673 $ 136,618
========= ========= ========= =========

Compensation and Employee Benefits. The following table presents the
principal components of compensation and benefits we incurred for the periods
indicated:

Three Months Nine Months
--------------------- ---------------------
For the periods ended September 30, 2003 2002 2003 2002
- -------------------------------------------------- --------- --------- --------- ---------

Salaries (1) ..................................... $ 12,487 $ 13,227 $ 36,116 $ 41,074
Bonuses (2) ...................................... 2,364 2,171 7,607 6,753
Payroll taxes .................................... 837 946 2,861 3,554
Commissions ...................................... 597 780 1,398 2,802
Insurance ........................................ 554 668 1,628 2,055
Severance ........................................ 89 1,051 906 1,652
Other ............................................ 739 751 1,989 2,485
--------- --------- --------- ---------
$ 17,667 $ 19,594 $ 52,505 $ 60,375
========= ========= ========= =========

(1) Salaries include fees paid for the services of temporary employees.

(2) Bonus expense includes compensation related to employee incentive awards
of restricted stock and stock options.

Salary expense has declined during 2003 as compared to 2002 in spite of
an increase in the average number of total employees. This is due in large part
to our ongoing globalization initiative to reduce labor costs through the
migration of certain functions (primarily in support of Residential Loan
Servicing and OTX) to our offices in Bangalore and Mumbai, India. This
initiative has resulted in a significant increase in the concentration of our
workforce in India. During the third quarter of 2003, we had an average of 2,120
total employees, including an average of 1,225 in our India offices. For the
third quarter of 2002, our total number of employees averaged 1,813 and included
an average of 621 employees in our India locations. Year to date 2003, we had
average total employment of 1,983, including 1,054 in India, as compared to
1,757 in total and 452 in India year to date 2002. We may experience additional
growth in our India staff during the remainder of 2003, dependent upon the
growth of our new business initiatives, primarily Global Outsourcing. The
decline in salaries, in spite of the increase in the number of employees, is
also the result of a change in the mix of our workforce in the United States to
a greater concentration of clerical level employees. This change in mix has
occurred as we have exited capital-intensive businesses in favor of fee-based
businesses, primarily Residential Loan Servicing.

40

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Occupancy and Equipment. Occupancy and equipment costs consist
principally of rents, depreciation, building maintenance, mail and delivery
expenses and other costs of our office operations.

Technology and Communication Costs. Technology and communication costs
consist primarily of depreciation on our computer hardware and software,
telephone expenses and amortization of capitalized software development costs.
The decline in technology and communication costs during the three and nine
months ended September 30, 2003 as compared to the same periods of 2002 is
primarily due to declines in other miscellaneous technology costs of our
Residential Loan Servicing and OTX business segments.

Loan Expenses. Loan expenses are largely comprised of appraisal fees
incurred in connection with property valuation services we provided through ORA.
See "Segment Profitability - Ocwen Realty Advisors" for additional discussion of
these costs. Loan expenses also include other miscellaneous expenses incurred in
connection with loans we own and those we service for others.

Net Operating Losses on Investments in Affordable Housing Properties.
Net operating losses on our investments in affordable housing properties have
declined significantly year to date 2003 as compared to 2002. This decline is
primarily the result of lower charges that we recorded for expected losses from
the sale of properties. These charges reflect revisions to completion cost
estimates and modifications to projected sales results and amounted to $21,294
during the nine months ended September 30, 2002. For 2003, $432 of such charges
were recorded during the first quarter. See "Changes in Financial Condition -
Affordable Housing Properties".

Professional Services and Regulatory Fees. Professional services and
regulatory fees are primarily comprised of legal fees and settlements;
non-technology related consulting fees, audit fees and insurance. Professional
services and regulatory fees increased by $11,514 year to date 2003 as compared
to 2002. This increase was primarily due to a $12,564 increase in legal fees and
settlements, most significantly a $10,000 reserve established in the first
quarter of 2003 in connection with the arbitration award to the former owners of
Admiral Home Loan. See Note 8 to the Interim Consolidated Financial Statements
for additional information regarding this award. The year to date increase in
legal fees and settlements in 2003 was offset in part by a $924 decline in
consulting fees.

Other Operating Expenses. Other operating expenses primarily include
travel costs; check processing and other deposit related costs, amortization of
deferred costs and provisions for uncollectible receivables.

Distributions on Company Obligated, Mandatorily Redeemable Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company.
Cash distributions on the Capital Securities are payable semi-annually in
arrears on February 1 and August 1 of each year at an annual rate of 10.875%. We
recorded $1,529 of such distributions to holders of the Capital Securities
during both the three months ended September 30, 2003 and 2002. Effective July
1, 2003 with our adoption of SFAS No. 150, these distributions are reported in
the consolidated statement of operations as interest expense. For the nine-month
periods, these distributions amounted to $3,058 and $4,758 during 2003 and 2002,
respectively. See Notes 2 and 3 to the Interim Consolidated Financial Statements
and "Changes in Financial Condition - Company-Obligated, Mandatorily Redeemable
Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of
the Company."

Income Tax Expense (Benefit). The following table provides details of
our income tax expense (benefit) for the periods indicated:

Three Months Nine Months
------------------------ ------------------------
For the periods ended September 30, 2003 2002 2003 2002
- --------------------------------------------------------------- ---------- ---------- ---------- ----------

Income tax expense (benefit) on income (loss) before
taxes and effect of change in accounting principle ........... $ 1,035 $ (2,276) $ (957) $ (28,156)
Provision for valuation allowance on current year's
deferred tax asset ........................................... (1,029) 2,276 1,575 29,322
---------- ---------- ---------- ----------

Income tax expense ............................................ 6 -- 618 1,166
Income tax benefit on effect of change in accounting principle. -- -- -- (1,166)
---------- ---------- ---------- ----------
Total income tax expense ...................................... $ 6 $ -- $ 618 $ --
========== ========== ========== ==========

Total income tax expense of $618 for the nine months ended September 30,
2003 primarily represents tax payments related to our investment in non-economic
tax residual securities that have no book value. Excluding the effect of these
tax payments, our effective tax rate was 0% for the nine months ended September
30, 2003 and 2002. Income tax expense includes the effects of tax credits of
$598 and $599 during the three months ended September 30, 2003 and 2002,
respectively, and $1,795 and $2,087, respectively during the nine months ended
September 30, 2003 and 2002, resulting from our investment in affordable housing
properties.

41

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Year to date 2002, our effective tax rate was 0% as income tax expense
of $1,166 offset the benefit of $1,166 related to the effect of the change in
accounting principle recorded during the second quarter.

The provision for deferred tax asset valuation allowance is a non-cash
charge increasing the aggregate valuation allowance based on our estimate under
the applicable accounting rules of the amount of the deferred tax asset that we
are more likely than not to realize.

Changes in Financial Condition

Trading Securities. The following table sets forth the fair value of our
trading securities at the dates indicated:

September 30, December 31,
2003 2002
------------- ------------

Collateralized mortgage obligations and U.S. Treasury securities:
Collateralized mortgage obligations (AAA-rated) (1) ........... $ -- $ 20,540
U.S. Treasury securities ...................................... 6,696 1,016
------------- ------------
$ 6,696 $ 21,556
============= ============
Subordinates and residuals:
Single family residential
BB-rated subordinates ...................................... $ 582 $ 599
B-rated subordinates ....................................... 583 606
Unrated subordinates ....................................... 238 344
Unrated subprime residuals (2) ............................. 37,813 33,213
------------- ------------
39,216 34,762
Commercial unrated subordinates ............................... 2,577 2,577
------------- ------------
$ 41,793 $ 37,339
============= ============

(1) During the nine months ended September 30, 2003, our investment in CMO
trading securities declined to $0 as a result of maturities and
principal repayments.

(2) During the nine months ended September 30, 2003, unrated subprime
residual trading securities increased by $4,454. This increase was
primarily due to due to the transfer of securities formerly classified
as "Match Funded Assets" to "Trading Securities" during the second
quarter as a result of the repurchase and retirement of the associated
match funded debt. These securities had a fair value of $5,606 at
September 30, 2003. See "Changes in Financial Condition - Match Funded
Assets".

Subordinate and residual interests in mortgage-related securities
provide credit support to the more senior classes of the mortgage-related
securities. Principal from the underlying mortgage loans generally is allocated
first to the senior classes, with the most senior class having a priority right
to the cash flow from the mortgage loans until its payment requirements are
satisfied. To the extent that there are defaults and unrecoverable losses on the
underlying mortgage loans, resulting in reduced cash flows, the most subordinate
security will be the first to bear this loss. Because subordinate and residual
interests generally have no credit support, to the extent there are realized
losses on the mortgage loans comprising the mortgage collateral for such
securities, we may not recover the full amount or, indeed, any of our initial
investment in such subordinate and residual interests.

Subordinate and residual interests are affected by the rate and timing
of payments of principal (including prepayments, repurchase, defaults and
liquidations) on the mortgage loans underlying a series of mortgage-related
securities. The rate of principal payments may vary significantly over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the mortgage loans underlying a series of mortgage-related
securities are generally allocated to the more senior classes of
mortgage-related securities. Although in the absence of defaults or interest
shortfalls all subordinates receive interest, amounts otherwise allocable to
residuals generally are used to make payments on more senior classes or to fund
a reserve account for the protection of senior classes until over
collateralization or the balance in the reserve account reaches a specified
level. For residual interests in residential mortgage-backed securities, over
collateralization is the amount by which the collateral balance exceeds the sum
of the bond principal amounts. Over collateralization is achieved by applying
monthly a portion of the interest payments of the underlying mortgages toward
the reduction of the senior class certificate principal amounts, causing them to
amortize more rapidly than the aggregate loan balance. Over collateralization
represents the first tier of loss protection afforded to the non-residual
holders. To the extent not consumed by losses on more highly rated bonds, over
collateralization is remitted to the residual holders. In periods of declining
interest rates, rates of prepayments on mortgage loans generally increase, and
if the rate of prepayments is faster than anticipated, then the yield on
subordinates will be positively affected and the yield on residuals will be
negatively affected.

42

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

We periodically assess the carrying value of our subordinate and
residual securities. There can be no assurance that our estimates used to
determine the value of those securities will remain appropriate for the life of
each securitization. If actual loan prepayments or defaults exceed our
estimates, the carrying value of the securities may be decreased during the
period in which we recognized the disparity.

The following table presents information regarding our subordinate and
residual trading securities summarized by classification and rating at September
30, 2003:

Anticipated Anticipated Anticipated
Yield to Yield to Weighted
Percent Maturity at Maturity at Average
Owned Purchase 09/30/03 Remaining
Rating/Description (1) Fair Value by Ocwen (2)(3) (2)(4) Coupon Life (2)(5)
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------

Residential:
BB-rated subordinates ........ $ 582 100.00% 16.80% 9.04% 6.07% 3.28
B-rated subordinates ......... 583 100.00 17.40 24.89 6.21 1.79
Unrated subordinates ......... 238 100.00 14.60 29.11 6.93 0.05
Unrated subprime residuals.... 37,813 100.00 17.16 6.25 N/A 5.33
------------
39,216
Commercial:
Unrated subordinates ......... 2,577 100.00 22.15 12.10 7.37 1.35
------------
$ 41,793
============

(1) Refers to the credit rating designated by the rating agency for each
securitization transaction. Classes designated "A" have a superior claim
on payment to those rated "B". Additionally, multiple letters have a
superior claim to designations with fewer letters. Thus, for example,
"BBB" is superior to "BB", which in turn is superior to "B". The lower
class designations in any securitization will receive interest payments
after senior classes and will experience losses before any senior class.
The lowest potential class designation is "unrated" which, if included
in a securitization, will always receive interest last and experience
losses first.

(2) Subordinate and residual securities do not have a contractual maturity
but are paid down over time as cash distributions are received. Because
they do not have a stated maturity, we disclose the weighted average
life of these securities.

(3) Represents the effective yield from inception to maturity based on the
purchase price and anticipated future cash flows under pricing
assumptions.

(4) Represents the effective yield based on the purchase price, actual cash
flows received from inception until the respective date, and the then
current estimate of future cash flows under the assumptions at the
respective date. Changes in the September 30, 2003 anticipated yield to
maturity from that originally anticipated are primarily the result of
changes in prepayment assumptions and loss assumptions.

(5) Represents the weighted average life in years based on the September 30,
2003 book value.

43

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

The following table sets forth the principal amount of mortgage loans by
the geographic location of the property securing the mortgages that underlie our
subordinate and residual trading securities at September 30, 2003:

New
Description U.K. California New York Florida Jersey Other (1) Total
- -------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Single family residential ... $ 68,068 $ 39,099 $ 29,388 $ 26,674 $ 27,343 $ 231,645 $ 422,217
Commercial .................. -- 12,765 -- -- -- 40,656 53,421
Multi-family residential .... -- 594 319 244 683 2,114 3,954
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ....................... $ 68,068 $ 52,458 $ 29,707 $ 26,918 $ 28,026 $ 274,415 $ 479,592
========== ========== ========== ========== ========== ========== ==========

Percentage of total ......... 14.19% 10.94% 6.19% 5.61% 5.85% 57.22% 100.00%
========== ========== ========== ========== ========== ========== ==========

(1) Consists of properties located in 46 other states, none of which
aggregated over $28,411 in any one state.

Investments in Real Estate. Our investments in real estate totaled
$55,631 or 4.3% of total assets at September 30, 2003 and consisted of the
following at the dates indicated:

September 30, December 31,
2003 2002
------------- -------------

Properties held for investment:
Office building .............................................. $ 21,443 $ 27,602
Retail shopping center ....................................... 10,577 9,090
Building improvements ........................................ 17,749 17,387
Tenant improvements and lease commissions .................... 5,453 2,795
Furniture and fixtures ....................................... 34 30
------------- -------------
55,256 56,904
Accumulated depreciation ..................................... (6,589) (5,316)
------------- -------------
48,667 51,588

Commercial loans accounted for as investments in real estate ... 1,878 2,188

Investment in real estate partnerships ......................... 5,086 4,900
------------- -------------
$ 55,631 $ 58,676
============= =============

Properties Held for Investment. Properties held for investment at
September 30, 2003 and December 31, 2002 consisted of one office building
located in Jacksonville, Florida and one shopping center located in Halifax,
Nova Scotia. At September 30, 2003 the office building was approximately 63.6%
leased and the shopping center was approximately 76% leased. The $1,648 decline
in the aggregate gross carrying value of our properties held for investment
during the nine months ended September 30, 2003 was primarily due to an
impairment charge of $5,526 recorded during the second quarter on our office
building investment, offset in part by capitalized improvements of $3,666.

Loans Accounted for as Investments in Real Estate. We acquired certain
acquisition, development and construction loans in January 2000 in which we
participated in the expected residual profits of the underlying real estate, and
where the borrower had not contributed substantial equity to the project. As
such, we accounted for these loans under the equity method of accounting as
though we had an investment in a real estate limited partnership. Our investment
at September 30, 2003 and December 31, 2002 consisted of one loan.

Investments in Real Estate Partnerships. Our investment at September 30,
2003 and December 31, 2002 consisted of interests in two limited partnerships
operating as real estate ventures, consisting of multi-family type properties.

44

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Affordable Housing Properties. Historically, we invested in multi-family
residential projects that have been allocated low-income housing tax credits
under Section 42 of the Internal Revenue Code of 1986, as amended, by a state
tax credit allocating agency. We ceased making new investments in 2000 as part
of our shift in strategy to fee-based businesses and because the volume of tax
credits being generated was exceeding our ability to utilize them effectively.
Since that time, we have been marketing each of these properties for sale. As a
result, our investment in affordable housing properties has been declining and
consisted of only six investments at September 30, 2003. The carrying values of
our affordable housing investments amounted to $9,578 or 0.7% of total assets at
September 30, 2003 as compared to $15,319 or 1.3% of total assets at December
31, 2003.

The $5,741 decline in the balances during the nine months ended
September 30, 2003 was primarily due to sales of projects with a combined book
value at December 31, 2002 of $4,764, including one project sold during the
third quarter with a book value of $3,167.

The qualified affordable housing projects underlying our investments in
low-income housing tax credit interests are geographically located throughout
the United States. At September 30, 2003, our largest single investment was
$5,389, which relates to a project located in N. Wildwood, New Jersey.

Low-income housing tax credit partnerships in which we invest both as a
limited and, through a subsidiary, as general partner are presented on a
consolidated basis and totaled $2,998 and $3,357 at September 30, 2003 and
December 31, 2002, respectively. Our investment in partnerships in which we
invest only as a limited partner amounted to $6,580 and $11,962 at September 30,
2003 and December 31, 2002, respectively, and are accounted for using the equity
method. We recorded a loss from operations after depreciation of $226 and $225
for the three months ended September 30, 2003 and 2002, respectively and $1,109
and $22,135 for the nine months ended September 30, 2003 and 2002, respectively.
For the nine months ended September 30, 2002, the loss from operations included
$21,294 of provisions for estimated losses on properties. The year to date 2002
provision included a charge of $3,944 to record a discount on a long-term
receivable that arose from the sale of seven properties in the second quarter.
For the nine months ended September 30, 2003, the loss from operations includes
$432 of provisions recorded in the first quarter for estimated losses. There
were no provisions for estimated losses for the third quarter of 2003 or 2002.
See "Results of Operations - Non-Interest Expense - Net Operating Losses on
Investments in Affordable Housing Properties".

Loans, Net. Our total net investment in loans of $28,196 at September
30, 2003 represents 2.2% of total assets. Originations in 2003 and 2002
represent loans we made to facilitate sales of real estate assets we owned and
fundings of pre-existing commitments on construction loans. Otherwise, we have
not originated or acquired any new loans since 2000. This reflects our strategy
to dispose of assets associated with non-core business lines.

45

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Composition of Loans, Net. The following table sets forth the
composition of our loans by business segment and type of loan at the dates
indicated:

September 30, December 31,
2003 2002
------------- ------------

Residential Discount Loans: (1)
Unpaid principal balance
Single family residential loans ......... $ -- $ 2,163
Unaccreted discount and deferred fees ..... -- (579)
Allowance for loan losses ............ .... -- (154)
------------- ------------
-- 1,430
------------- ------------
Affordable Housing:
Unpaid principal balance
Multi-family residential loans ......... 10,997 11,003
Undisbursed loan funds ................... -- (346)
Allowance for loan losses ................ (4,578) (4,428)
------------- ------------
6,419 6,229
------------- ------------
Commercial Finance:
Unpaid principal balance
Office buildings ....................... -- 41,215
Hotels ................................. 10,600 11,668
Retail properties ...................... -- 27,500
Multifamily residential loans .......... 14,964 15,215
Other properties ....................... 100 1,188
------------- ------------
25,664 96,786
Unaccreted discount and deferred fees .... (837) (11,409)
Allowance for loan losses ................ (3,822) (16,179)
------------- ------------
21,005 69,198
------------- ------------
Corporate Items and Other:
Unpaid principal balance
Single family residential loans ........ 1,423 --
Unaccreted discount and deferred fees .... (544) --
Allowance for loan losses ................ (107) --
------------- ------------
772 --
------------- ------------

Loans, net .................................. $ 28,196 $ 76,857
============= ============

(1) Loans and all other assets of the Residential Discount Loans segment
were transferred to the Corporate Items and Other segment, effective
January 1, 2003.

Loans are secured by mortgages on property located throughout the United
States. The following table sets forth the five states in which the largest
amount of properties securing our loans were located at September 30, 2003:

Corporate
Items and Affordable Commercial
Other Housing Finance Total
---------- ---------- ---------- ----------
New Jersey ...... $ -- $ 5,645 $ -- $ 5,645
Michigan ........ -- -- 5,400 5,400
Texas ........... -- -- 4,772 4,772
Pennsylvania .... 182 -- 3,567 3,749
Virginia ........ -- -- 3,609 3,609
Other (1) ....... 590 774 3,657 5,021
---------- ---------- ---------- ----------
Total ........ $ 772 $ 6,419 $ 21,005 $ 28,196
========== ========== ========== ==========

(1) Consists of properties located in 9 other states, none of which
aggregated over $3,567 in any one state.

46

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Activity in Loans. The following table sets forth our loan activity during the
periods indicated:

Three Months Nine Months
---------------------------- ----------------------------
For the period ended September30, 2003 2002 2003 2002
- --------------------------------------------------- ------------ ------------ ------------ ------------

Balance at beginning of period .................... $ 35,922 $ 122,009 $ 76,857 $ 185,293
Originations (1)
Affordable Housing ............................. -- 1,146 -- 1,146
Commercial Finance ............................. 148 -- 6,148 16,569
Corporate Items and Other ...................... -- 118 420 997
------------ ------------ ------------ ------------
148 1,264 6,568 18,712
------------ ------------ ------------ ------------

Resolutions and repayments (2) .................... (1,207) (19,796) (29,143) (41,488)
Loans transferred to real estate owned ............ -- (2,864) (157) (16,079)
Sales ............................................. (7,068) -- (49,110) (64,002)
Decrease in undisbursed loan proceeds ............. -- 246 346 2,008
(Increase) decrease in discount and deferred
fees .............................................. -- 1,083 10,582 25,614
(Increase) decrease in allowance for loan losses... 401 891 12,253 (7,225)
------------ ------------ ------------ ------------
Balance at end of period .......................... $ 28,196 $ 102,833 $ 28,196 $ 102,833
============ ============ ============ ============

(1) Commercial Finance originations represent loans made to facilitate sales
of our own assets and fundings of construction loans we originated in
prior years. Commercial originations during the nine months ended
September 30, 2003 included a loan in the amount of $6,000 made during
the first quarter to facilitate the sale of a hotel REO property.
Commercial originations during the nine months ended September 30, 2002
included a loan of $9,153 that we made during the first quarter to
facilitate the sale of three assisted living facilities. Originations in
the Corporate Items and Other segment represent repurchases of single
family loans previously sold.

(2) Resolutions and repayments consists of loans that were resolved in a
manner that resulted in partial or full repayment of the loan to us, as
well as principal payments on loans that have been brought current in
accordance with their original or modified terms (whether pursuant to
forbearance agreements or otherwise) or on other loans that have not
been resolved.

The following table sets forth certain information relating to our
non-performing loans at the dates indicated:

September 30, December 31,
2003 2002
------------- -------------
Non-performing loans: (1)
Corporate Items and Other ................. $ 879 $ --
Residential Discount Loans ................ -- 1,345
Affordable Housing ........................ 10,477 9,798
Commercial Finance ........................ 10,573 64,406
------------- -------------
$ 21,929 $ 75,549
============= =============

Non-performing loans as a percentage of: (1)
Total loans (2) ........................... 59.7% 77.4%
Total assets .............................. 1.7% 6.2%

Allowance for loan losses as a percentage of:
Total loans (2) ........................... 23.2% 21.3%
Non-performing loans (1) .................. 38.8% 27.5%

(1) Loans which are contractually past due 90 days or more in accordance
with the original terms of the loan agreement. We do not accrue interest
on loans past due 90 days or more. The decline in non-performing loans
held in our Commercial Finance Segment occurred because of sales during
the second quarter.

(2) Total loans are net of unaccreted discount, unamortized deferred fees
and undisbursed loan funds.

47

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

See "Changes in Financial Condition - Allowance for Loan Losses" below
for additional information regarding the allowance for loan losses.

Match Funded Assets. Match funded assets are comprised of the following
at the dates indicated:

September 30, December 31,
2003 2002
------------- -------------

Single family residential loans (1) ............... $ 27,173 $ 38,129
Allowance for loan losses ......................... (104) (144)
------------- -------------
Match funded loans, net .......................... 27,069 37,985
------------- -------------

Match funded securities ........................... -- 8,057
------------- -------------

Match funded advances on loans serviced for others
Principal and interest ........................... 51,963 66,524
Taxes and insurance .............................. 29,177 30,301
Other ............................................ 25,558 24,877
------------- -------------
106,698 121,702
------------- -------------
$ 133,767 $ 167,744
============= =============

(1) Includes $2,258 and $3,120 of non-performing loans at September 30, 2003
and December 31, 2002, respectively.

We acquired single family residential match funded loans in connection
with our acquisition of OAC. OAC had previously securitized these loans and
transferred them to a real estate mortgage investment conduit on November 13,
1998. The transfer did not qualify as a sale for accounting purposes since we
retained effective control of the loans transferred. Accordingly, we recorded
the proceeds that we received from the transfer as a liability (bonds-match
funded agreements). The $10,916 decline in the balance during 2003 year to date
was largely due to repayment of loan principal.

The match funded loans are secured by mortgages on properties located
throughout the United States. The following table sets forth the five states in
which the largest amount of properties securing our loans were located at
September 30, 2003:

Michigan ............................................................ $ 4,006
Texas ............................................................... 2,618
California .......................................................... 1,861
Illinois ............................................................ 1,600
Florida ............................................................. 1,588
Other (1) ........................................................... 15,500
--------
$ 27,173
========

(1) Consists of properties located in 35 other states, none of which
aggregated over $1,533 in any one state.

Match funded securities resulted from our transfer of four unrated
residual securities to a trust on December 16, 1999 in exchange for non-recourse
notes. The transfer did not qualify as a sale for accounting purposes since we
retained effective control over the securities transferred. Accordingly, we
reported the amount of proceeds we received from the transfer as a secured
borrowing with pledge of collateral (bonds-match funded agreements). In June
2003, the Ocwen NIM Trust 1999 - OAC1 adopted a plan of complete liquidation,
which caused the early redemption of the related bonds-match funded agreements.
The match funded securities, which had a fair value of $5,926 at the time of
transfer, were transferred to trading securities. See "Changes in Financial
Conditions - Trading Securities" and - "Bonds - Match Funded Agreements."

Match funded advances on loans serviced for others resulted from our
transfer of certain residential loan servicing related advances to a third party
in exchange for cash. The original and subsequent transfers did not qualify as a
sale for accounting purposes since we retained effective control of the
advances. Accordingly, we report the amount of proceeds we received from the
transfers as a secured borrowing with pledge of collateral (bonds-match funded
agreements.) See "Bonds-Match Funded Agreements."

48

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Allowances for Loan Losses. As discussed in the "Results of Operations -
Provision for Loan Losses" section, we maintain an allowance for loan losses for
each of our loans at a level that we consider adequate to provide for probable
losses based upon an evaluation of known and inherent risks.

The following table sets forth the breakdown of the allowance for loan
losses on our loans and match funded loans and the percentage of allowance and
loans in each segment to totals in the respective portfolios at the dates
indicated:

September 30, 2003 December 31, 2002
-------------------------------------------- --------------------------------------------
Allowance Loan Balance Allowance Loan Balance
-------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- -------- -------- --------

Loans:
Residential Discount loans .. $ -- --% $ -- --% $ 154 1% $ 1,584 2%
Affordable Housing .......... 4,578 54% 10,997 30% 4,428 21% 10,657 11%
Commercial Finance (1) ...... 3,822 45% 24,827 68% 16,179 78% 85,377 87%
Corporate Items and Other ... 107 1% 879 2% -- --% -- --%
-------- -------- -------- -------- -------- -------- -------- --------
$ 8,507 100% $ 36,703 100% $ 20,761 100% $ 97,618 100%
======== ======== ======== ======== ======== ======== ======== ========

Match funded loans:
Corporate Items and Other ... $ 104 100% $ 27,173 100% $ 144 100% $ 38,129 100%
======== ======== ======== ======== ======== ======== ======== ========

(1) The decline in the allowance on Commercial Finance loans during 2003 is
primarily the result of sales. The allowance as a percentage of loan
value for this segment was 15.4% at September 30, 2003 as compared to
19.0% at December 31, 2002. See "Results of Operations-Provisions for
Loan Losses" for additional information regarding our allowance as a
percentage of loans.

The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict use of the allowance to absorb
losses in any other category.

The following table sets forth an analysis of activity in the allowance
for loan losses relating to our loans during the three and nine months ended
September 30, 2003:

Three Months Nine Months
------------------------ ------------------------
For the periods ended September 30, 2003 2002 2003 2002
- ----------------------------------- ---------- ---------- ---------- ----------

Balance at beginning of period $ 8,909 $ 18,528 $ 20,761 $ 10,414
Provision for loan losses .......... 459 (845) (2,630) 10,518
Charge-offs:
Residential Discount Loans ...... -- (74) -- (948)
Commercial Finance .............. (781) (3) (9,292) (2,552)
Corporate Items and Other ....... (80) -- (332) --
Affordable Housing .............. -- -- -- (233)
---------- ---------- ---------- ----------
Total charge-offs ............ (861) (77) (9,624) (3,733)
Recoveries:
Residential Discount Loans ...... -- -- -- --
Commercial Finance .............. -- 4 -- 161
Unsecured Collections ........... -- 29 -- 279
---------- ---------- ---------- ----------
Net charge-offs .............. (861) (44) (9,624) (3,293)
---------- ---------- ---------- ----------
Balance at end of period ........... $ 8,507 $ 17,639 $ 8,507 $ 17,639
========== ========== ========== ==========

Real Estate Owned, Net. REO, net, has been declining since 1998 as sales
have more than offset loan foreclosures. At September 30, 2003 our portfolio of
REO consisted of only 26 properties, including four commercial properties, and
totaled $53,380, or 4.1% of total assets. The absence of loan acquisitions since
2000 is the principal reason for the decline in foreclosures. Our REO consists
almost entirely of properties we acquired by foreclosure or deed-in-lieu thereof
on loans we previously acquired at a discount.

49

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

The following table sets forth the composition of our REO at the dates
indicated:

September 30, December 31,
2003 2002
------------- -------------
Residential Discount Loans .................. $ -- $ 1,887
Commercial Finance .......................... 52,440 60,152
Corporate Items and Other ................... 940 --
------------- -------------
$ 53,380 $ 62,039
============= =============

The following table sets forth certain geographical information at
September 30, 2003 related to our REO:

Corporate Items Commercial
and Other Finance Total
----------------------- ----------------------- -----------------------
No. of No. of No. of
Amount Properties Amount Properties Amount Properties
---------- ---------- ---------- ---------- ---------- ----------

Florida ........... $ -- -- 40,948 1 $ 40,948 1
Michigan .......... -- -- 10,957 2 10,957 2
California ........ -- -- 535 1 535 1
New York .......... 353 2 -- -- 353 2
North Carolina .... 132 1 -- -- 132 1
Other (1) ......... 455 19 -- -- 455 19
---------- ---------- ---------- ---------- ---------- ----------
$ 940 22 $ 52,440 4 $ 53,380 26
========== ========== ========== ========== ========== ==========

(1) Consists of properties located in 14 other states, none of which
aggregated over $88 in any one state.

The following tables set forth the activity in REO during the periods
indicated:

Three Months Nine Months
------------------------ ------------------------
For the period ended September 30, 2003 2002 2003 2002
- -------------------------------------------------------- ---------- ---------- ---------- ----------

Amount
Balance at beginning of period ......................... $ 53,781 $ 84,101 $ 62,039 $ 110,465
Properties acquired through foreclosure or deed-in-lieu
thereof:
Loans ................................................ 21 2,864 178 16,079
Less discount transferred ............................ (21) (901) (50) (6,755)
Add advances transferred ............................. 7 43 33 254
---------- ---------- ---------- ----------
53,788 86,107 62,200 120,043
---------- ---------- ---------- ----------
Capital improvements ................................... 633 493 1,691 2,085
Sales .................................................. (449) (27,181) (11,053) (48,038)
Decrease (increase) in valuation allowance ............. (592) 6,013 542 (8,658)
---------- ---------- ---------- ----------
Balance at end of period ............................... $ 53,380 $ 65,432 $ 53,380 $ 65,432
========== ========== ========== ==========

Three Months Nine Months
------------------------ ------------------------
For the period ended September 30, 2003 2002 2003 2002
- -------------------------------------------------------- ---------- ---------- ---------- ----------

Number of Properties
Balance at beginning of period ......................... 32 132 55 389
Properties acquired through foreclosure or deed-in-lieu
thereof ............................................... 1 3 3 22
Sales .................................................. (7) (41) (32) (317)
---------- ---------- ---------- ----------
Balance at end of period ............................... 26 94 26 94
========== ========== ========== ==========

50

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

The following tables set forth the amount of time that we have held our
REO at the dates indicated:

Commercial Corporate Items
September 30, 2003 Finance and Other Total
- ---------------------- ----------------------- ----------------------- -----------------------
Net Book Net Book Net Book
Holding Period: Value Count Value Count Value Count
---------- ---------- ---------- ---------- ---------- ----------

One to six months ............ $ -- -- $ 68 2 $ 68 2
Seven to 12 months ........... -- -- 88 1 88 1
13 to 24 months .............. -- -- 158 2 158 2
Over 24 months ............... 52,440 4 626 17 53,066 21
---------- ---------- ---------- ---------- ---------- ----------
$ 52,440 4 $ 940 22 $ 53,380 26
========== ========== ========== ========== ========== ==========

Commercial Residential
December 31, 2002 Finance Discount Loans Total
- ---------------------- ----------------------- ----------------------- -----------------------
Net Book Net Book Net Book
Holding Period: Value Count Value Count Value Count
---------- ---------- ---------- ---------- ---------- ----------

One to six months ............ $ -- -- $ -- -- $ -- --
Seven to 12 months ........... -- -- 176 3 176 3
13 to 24 months .............. 18,616 4 609 19 19,225 23
Over 24 months ............... 41,536 2 1,102 27 42,638 29
---------- ---------- ---------- ---------- ---------- ----------
$ 60,152 6 $ 1,887 49 $ 62,039 55
========== ========== ========== ========== ========== ==========

Our sales of REO resulted in losses, net of the provision for loss, of
$(419) and $(511) during the third quarter of 2003 and 2002, respectively, which
are included in determining our total net gain (loss) on REO. We recorded losses
of $(811) and $(17,024), net of provision for loss, for the nine months ended
September 30, 2003 and 2002, respectively. Commercial REO that we have held in
excess of 24 months at September 30, 2003 consisted primarily of a single large
retail shopping mall with a carrying value of $40,948 and two hotels with a
combined carrying value of $10,957. As anticipated, the shopping mall property
migrated into the over 24 month category in 2000 because it was being
repositioned for sale. Commercial properties held for 13 to 24 months as of
December 31, 2002 consisted of four hotels, two of which we sold during 2003.
The average period during which we held the REO which was sold during the
quarters ended September 30, 2003 and 2002, was 40 months and 17 months,
respectively.

We value properties acquired through foreclosure or by deed-in-lieu
thereof at the lower of amortized cost or fair value less costs of disposition.
We periodically reevaluate properties included in the our REO portfolio to
determine that we are carrying them at the lower of cost or fair value less
estimated costs to sell. We record holding and maintenance costs we incur
related to properties as expenses in the period incurred. We recognize decreases
in value in REO after acquisition as a valuation allowance. We reflect
subsequent increases related to the valuation of REO as a reduction in the
valuation allowance, but not below zero. We charge or credit to income increases
and decreases in the valuation allowance, respectively.

51

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

The following table sets forth the activity, in aggregate, in the
valuation allowances on real estate owned during the periods indicated:

Three Months Nine Months
------------------------- -------------------------
For the periods ended September 30, 2003 2002 2003 2002
- --------------------------------------------------- ---------- ---------- ---------- ----------

Balance at beginning of period .................... $ 24,510 $ 33,769 $ 25,644 $ 19,098
Provisions for losses ............................. 685 783 1,169 19,859
Sales ............................................. (105) (3,673) (595) (6,022)
Charge-offs ....................................... 12 (3,122) (1,116) (5,178)
---------- ---------- ---------- ----------
Balance at end of period .......................... $ 25,102 $ 27,757 $ 25,102 $ 27,757
========== ========== ========== ==========

Valuation allowance as a percentage of total gross
real estate owned (1) ............................ 32.0% 29.8% 32.0% 29.8%

(1) The valuation allowance has not declined proportionately to the decline
in the balance of gross REO primarily because of the large retail
shopping mall that we are repositioning for sale, as discussed above,
which had a valuation allowance of $22,755 at September 30, 2003.
Therefore, this ratio has increased in 2003 as compared to 2002. At
December 31, 2002, the valuation allowance as a percentage of total
gross real estate owned was 29.3%.

Advances on Loans and Loans Serviced for Others. Advances related to our
loan portfolios and loans we serviced for others consisted of the following at
the dates indicated:

September 30, December 31,
2003 2002
------------- -------------

Loans:
Taxes and insurance ................................... $ 133 $ 136
Other ................................................. 284 502
------------- -------------
417 638
------------- -------------
Loans serviced for others:
Principal and interest ................................ 142,926 63,326
Taxes and insurance ................................... 139,482 117,937
Other ................................................. 108,127 84,455
------------- -------------
390,535 265,718
------------- -------------
$ 390,952 $ 266,356
============= =============

During any period in which the borrower is not making payments, we are
required under certain servicing agreements to advance our own funds to meet
contractual principal and interest remittance requirements for certain
investors, pay property taxes and insurance premiums and process foreclosures.
We generally recover such advances from borrowers for reinstated and performing
loans and from investors for foreclosed loans. We record a charge to servicing
income to the extent that we estimate that advances are uncollectible under
provisions of the servicing contracts, taking into consideration historical loss
and delinquency experience, length of delinquency and amount of the advance. The
balances of advances on loans serviced for others do not include match funded
advances that are transferred to a third party in a transaction that does not
qualify as a sale for accounting purposes and that we account for as a secured
borrowing. See "Changes in Financial Condition - Match Funded Assets".

Mortgage Servicing Rights. The unamortized balance of our mortgage
servicing rights is predominantly residential and increased by $10,294 during
the nine months ended September 30, 2003 as purchases exceeded amortization. The
following table sets forth the activity in our mortgage servicing rights during
the periods indicated:

Three Months Nine Months
---------------------- ----------------------
For the periods ended September 30, 2003 2002 2003 2002
- ------------------------------------ --------- --------- --------- ---------

Balance at beginning of period ..... $ 180,789 $ 133,677 $ 171,611 $ 101,107
Purchases .......................... 26,388 49,363 78,971 106,360
Amortization ....................... (25,272) (15,283) (68,290) (39,476)
Impairment ......................... -- -- (387) --
Sales .............................. -- -- -- (234)
--------- --------- --------- ---------
Balance at end of period ........... $ 181,905 $ 167,757 $ 181,905 $ 167,757
========= ========= ========= =========

52

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

At September 30, 2003, we serviced loans under approximately 400
servicing agreements for 21 clients. Purchases year to date in 2003 were all
residential, and $30,037 were acquired under flow agreements with third party
lenders whereby we have committed to purchase newly originated mortgage
servicing rights up to an agreed upon amount.

Receivables. Receivables consisted of the following at the dates
indicated:

September 30, December 31,
2003 2002
------------- -------------

Affordable housing sales, net (1) .......................... $ 27,082 $ 40,299
Income taxes ............................................... 21,402 20,841
Trade, net (2) ............................................. 10,691 10,819
Rent ....................................................... 1,738 1,586
Accrued interest ........................................... 406 734
Other ...................................................... 10,246 4,665
------------- -------------
$ 71,565 $ 78,944
============= =============

(1) Represents uncollected proceeds from the sale of affordable housing
properties. See "Changes in Financial Conditions - Affordable Housing
Properties." Includes reserves for doubtful accounts of $3,843 and
$1,340 as of September 30, 2003 and December 31, 2002, respectively, and
unaccreted discount of $3,161 and $3,400, respectively.

(2) Trade receivables are principally generated by the operations of our
Loan Servicing, OTX, Global Outsourcing, Ocwen Realty Advisors and
Unsecured Collections business segments. Includes reserves for doubtful
accounts of $2,173 and $2,032 as of September 30, 2003 and December 31,
2002, respectively.

Other Assets. Other assets consisted of the following at the dates
indicated:

September 30, December 31,
2003 2002
------------- -------------

Capitalized software development costs, net ................ $ 2,956 $ 4,010
Interest earning collateral deposits ....................... 8,795 --
Goodwill, net .............................................. 1,618 1,618
Deferred debt issuance costs, net .......................... 3,445 2,946
Investment securities, at cost ............................. 4,293 5,361
Deferred tax asset, net (1) ................................ 7,805 8,387
Other ...................................................... 8,079 6,964
------------- -------------
$ 36,991 $ 29,286
============= =============

(1) Deferred tax assets are net of valuation allowances. See "results of
Operations - Income Tax Expense (Benefit)."

Deposits. The following table sets forth information related to our
deposits at the dates indicated:

September 30, 2003 December 31, 2002
------------------------------------ ------------------------------------
Weighted Weighted
Average % of Total Average % of Total
Amount Rate Deposits Amount Rate Deposits
--------- -------- ----------- --------- -------- -----------

Non-interest bearing checking accounts..... $ 4,824 --% 1.1% $ 4,378 --% 1.0%
NOW and money market checking accounts..... 16,057 1.00% 3.7 17,720 1.20% 4.2
Savings accounts........................... 1,636 .75% 0.4 1,592 1.00% 0.4
--------- ----------- --------- -----------
22,517 5.2 23,690 5.6
--------- ---------
Certificates of deposit.................... 408,179 402,917
Unamortized deferred fees.................. (236) (637)
--------- ---------
Total certificates of deposit.............. 407,943 3.67% 94.8 402,280 4.89% 94.4
--------- ----------- --------- -----------
Total deposits.......................... $ 430,460 100.0% $ 425,970 100.0%
========= =========== ========= ===========

53

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Certificates of deposit included $119,957 and $198,248 at September 30,
2003 and December 31, 2002, respectively, of brokered deposits originated
through national, regional and local investment banking firms that solicit
deposits from their customers, all of which are non-cancelable at September 30,
2003. During the second quarter of 2003, we exercised our right to call brokered
certificates of deposit with a face value of $18,194 that carried an interest
rate of 6%, in order to further reduce interest expense. We have not issued any
new brokered certificates of deposit since 2000 and, at this time, do not intend
to issue any such deposits in the foreseeable future. We do however plan to
retain non-brokered deposits as a source of financing our operations.

At September 30, 2003 and December 31, 2002, certificates of deposit
with outstanding balances of $100 or more amounted to $180,081 and $125,451,
respectively. Of those deposits at September 30, 2003, $102,642 were from
political subdivision in New Jersey and were secured or collateralized as
required under state law. The following table sets forth the remaining
maturities of our time deposits with balances of $100 or more at September 30,
2003:

Matures within three months ..................................... $ 89,728
Matures after three months through six months ................... 43,213
Matures after six months through twelve months .................. 15,421
Matures after twelve months ..................................... 31,719
----------
$ 180,081
==========

Escrow Deposits on Loans and Loans Serviced for Others. Escrow deposits
on our loans and loans we serviced for others amounted to $129,457 and $84,986
at September 30, 2003 and December 31, 2002, respectively. The balance consisted
principally of custodial deposit balances representing collections that we made
from borrowers for the payment of taxes and insurance premiums on mortgage
properties underlying loans that we serviced for others. See "Results of
Operations - Non-Interest Income - Servicing and Other Fees."

Bonds-Match Funded Agreements. Bonds-match funded agreements represent
proceeds received from transfers of loans, residual securities and advances on
our loans serviced for others. Because we retained effective control over the
assets transferred, these transfers did not qualify as sales for accounting
purposes and, therefore, we report them as secured borrowings with pledges of
collateral. Bonds-match funded agreements were comprised of the following at the
dates indicated:

September 30, December 31,
2003 2002
------------- -------------

Collateral (Interest Rate)
Single family loans (LIBOR plus 65-70 basis points) (1) ................. $ 22,984 $ 32,217
Unrated residual securities (9.50%) (2) ................................. -- 8,057
Advances on loans serviced for others (LIBOR plus 160 basis points) (3).. 90,801 106,797
------------- -------------
$ 113,785 $ 147,071
============= =============

(1) The decline in the balance outstanding during the nine months ended
September 30, 2003 was due to principal repayments, offset by
amortization of discount.

(2) During the second quarter of 2003, the Ocwen NIM Trust 1999 - OAC1
adopted a plan of complete liquidation and, thereby, caused the early
redemption of the bonds-match funded agreements that were secured by
residual securities. See "Changes in Financial Condition - Match Funded
Assets."

(3) Under the terms of the agreement, we are eligible to sell additional
advances on loans serviced for others up to a maximum balance of
$200,000.

54

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Lines of Credit and Other Secured Borrowings. We have obtained secured
borrowings from unaffiliated financial institutions as follows:

September 30, December 31,
Borrowing Type Collateral Maturity Interest Rate (1) 2003 2002
- --------------------- --------------------- ---------- ---------------------- ------------- ------------

Line of credit Advances on loans March 2004 LIBOR + 200 basis $ 100,000 $ 78,511
serviced for others points
(2)
Mortgage note Investment in real May 2005 LIBOR + 350 basis 20,000 --
estate - office points, floor of 5.75%
building,
Jacksonville,
Florida
Secured loan Trading securities - June 2004 LIBOR + 275 basis 15,046 --
unrated subprime points
residuals (UK)
Senior secured credit Purchased mortgage April 2004 LIBOR + 162.5 or 225 32,074 --
agreement servicing rights basis points
and advances on
loans serviced for
others (3)
Installment notes Purchased mortgage July 2004 5.19% 6,391 --
servicing rights
Term loan Loan receivable March 2005 LIBOR + 250 basis 3,235 4,235
points, floor of 8.00%
------------- ------------
$ 176,746 $ 82,746
============= ============

(1) 1-month LIBOR was 1.12% and 1.38% at September 30, 2003 and December 31,
2002, respectively.

(2) Maximum amount of borrowing under this facility is $100,000.

(3) Maximum amount of borrowing under this facility is $60,000.

During 2003, we have entered in to a number of additional secured
borrowing agreements. These actions are consistent with the strategic plan that
we adopted in 2000, which included, among other things, a commitment to reduce
our reliance on brokered deposits and long-term debt as sources of financing for
our operations. See "Liquidity, Commitments and Off-Balance Sheet Risks."

Notes and Debentures. Notes and debentures mature as follows:

September 30, December 31,
2003 2002
------------- ---------------

2003:
11.875% Notes due October 1 ................................ $ 43,475 $ 43,475
2005:
12% Subordinated Debentures due September 15 (1) ........... -- 33,500
2027:
10.875% Capital Securities due August 1 (2) ................ 56,249 --
------------- ---------------
$ 99,724 $ 76,975
============= ===============

(1) On September 30, 2003 we exercised our redemption option and called the
remaining balance of $33,065 at a price of 101.333%, or a premium of
$441. During the second quarter of 2003 we repurchased $435 in the open
market resulting in a loss of $(4).

(2) Reclassified as a liability effective July 1, 2003 with our adoption of
SFAS No. 150. See Notes 2 and 3 to the Interim Consolidated Financial
Statements.

Company Obligated, Mandatorily Redeemable Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures of the Company. As indicated
above, the outstanding balance of the 10.875% Capital Securities due August 1,
2027 of $56,249 has been classified as a liability ("Notes and Debentures")
effective July 1, 2003 upon our adoption of SFAS No. 150. See Notes 2 and 3 to
the Interim Consolidated Financial Statements.

55

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Minority Interest in Subsidiary. Minority interest of $1,470 and $1,778
at September 30, 2003 and December 31, 2002, respectively, represents the
investment by others in GSS, which we formed during the third quarter of 2002 to
establish, license and operate distressed asset management servicing companies
in various countries around the world. At September 30, 2003, the minority
interest represents a 30% ownership in GSS held by Merill Lynch and a 10%
ownership in a Japanese subsidiary of GSS held by an unrelated third party.

Stockholders' Equity. Stockholders' equity decreased $695 during the
nine months ended September 30, 2003. The decrease was primarily due to our
repurchase of 500,000 shares of our common stock for $2,262, offset in part by
the issuance of 236,461 shares in the amount of $934 as part of our annual
incentive awards to employees for service in 2002 and year to date net income of
$318. See Consolidated Statements of Changes in Stockholders' Equity of the
Interim Consolidated Financial Statements.

Liquidity, Commitments and Off-Balance Sheet Risks

Our primary sources of funds for liquidity are:

. Deposits

. Lines of credit and other secured borrowings

. Match funded debt

. Securities sold under agreements to repurchase

. Payments received on loans and securities

. Proceeds from sales of assets

. Servicing fees

We plan to retain non-brokered deposits as a source of financing our
operations while at the same time reducing our reliance on brokered deposits. We
plan to reduce this reliance by using proceeds from the sale of non-core assets
to pay off maturing brokered deposits and by diversifying our funding sources
through obtaining credit facilities for servicing rights and advances. Our
ability to continue to attract new non-brokered deposits and rollover existing
non-brokered deposits depends largely on our ability to compete with interest
rates offered by other banks in the northern New Jersey area. In 2002 and year
to date 2003, we were able to increase the amount of non-brokered deposits
outstanding. If we are unable to maintain the amount of non-brokered deposits
outstanding and must replace them with alternative sources of funds, it is
likely that we would have to incur higher interest costs to fund our assets.

In the last several years, our Residential Loan Servicing business has
grown through the purchase of servicing rights. Servicing rights entitle the
owner to earn servicing fees and other types of ancillary income and impose
various obligations on the servicer. Among these are the obligation to make
advances for delinquent principal and interest, taxes, insurance and various
other items that are required to preserve the assets being serviced.

Our ability to continue to expand our servicing business depends in part
on our ability to obtain additional financing to purchase new servicing rights
and to fund servicing advances. We currently use a variety of sources of debt to
finance these assets, including deposits, credit facilities and other seller
financing. Our credit facilities provide financing to us at amounts that are
less than the full value of the related servicing advances that serve as the
collateral for the credit facilities. If we cannot replace or renew these
sources as they mature or obtain additional sources of financing, we may unable
to acquire new servicing rights and make the associated advances.

Under a match funding agreement that we entered into on December 20,
2001, we are eligible to sell advances on loans serviced for others up to a
maximum debt balance of $200,000 at any one time. At September 30, 2003 we had
$90,801 of bonds-match funded agreements outstanding under this facility, which,
if not renewed, will mature in December 2003. The sales of advances did not
qualify as sales for accounting purposes; therefore, we report them as secured
borrowings with pledges of collateral. We have accounted for additional sales
under this facility in the same manner.

Under a revolving credit facility executed in April 2001 we have the
right to pledge servicing advances as collateral for a loan up to $100,000. The
facility will mature in March 2004. The balance outstanding under this facility
at September 30, 2003 was $100,000.

In April 2003, we also entered into a $60,000 secured credit agreement
that may be used to fund servicing advances and acquisitions of servicing
rights. The amount of this agreement may be increased to a maximum of $200,000
if increased commitments from existing lenders or new commitments from
prospective lenders can be obtained. The agreement matures April 2004 and bears
interest at LIBOR plus 162.5 basis points for funding of servicing advances or
225 basis points for funding of acquisitions of servicing rights. As of
September 30, 2003, we had a balance outstanding under this agreement of
$32,074.

In June 2003, we entered, for the first time, into an agreement for
seller financing of purchased mortgage servicing rights. As of September 30,
2003, we had $6,391 outstanding under two such agreements with a weighted
average interest rate of 5.19%.

Also in June, we entered into a secured loan agreement under which we
borrowed $18,846. This agreement, which is secured by the assignment of our
interest in certain unrated subprime residual securities, matures in June 2004
and bears interest at LIBOR plus 275 basis points. As of September 30, 2003 the
outstanding balance had been reduced to $15,046 through the assignment of
principal and interest payments received on our unrated subprime residual
securities.

56

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

At September 30, 2003, we had $234,017 of unrestricted cash and cash
equivalents.

We closely monitor our liquidity position and ongoing funding
requirements. Among the risks and challenges associated with our funding
activities are the following:

. Scheduled maturities of all certificates of deposit for the twelve
months ending September 30, 2004, the twelve months ending September
30, 2005 and thereafter amount to $292,130, $104,891 and $11,158,
respectively.

. Maturity of existing collateralized lines of credit and other secured
borrowings totaling $153,511 at various dates through July 2004,
including $100,000 in March 2004.

. Maturity of our match funded servicing advance funding facility in
December 2003, as discussed above.

. Maturity of our 11.875% notes on October 1, 2003 in the amount of
$43,475.

. Potential extension of resolution and sale timelines for non-core
assets in the current weak economic environment.

. Ongoing cash requirements to fund operations of our holding company
and OTX.

. Cash requirements to fund our acquisition of additional servicing
rights and related advances.

We believe that our existing sources of liquidity, including internally
generated funds, will be adequate to fund our planned activities for the
foreseeable future, although there can be no assurances in this regard. As
discussed above, we continue to evaluate other sources of liquidity, such as
lines of credit from unaffiliated parties, match funded debt and other secured
borrowings.

Our operating activities provided (used) $(823) and $220,568 of cash
flows during the nine months ended September 30, 2003 and 2002, respectively.
During the year to date 2002 period, cash was generated from operating
activities, despite the net losses recorded, for two reasons. First, the net
losses included non-cash reserves and impairment charges, depreciation of
premises and equipment and amortization of purchased mortgage-servicing rights
in both years. Second, our securities portfolio generated positive cash flow
through sales, interest and principal payments. The decline in cash flows
provided by operating activities in the first nine months of 2003 as compared to
2002 was primarily the result of a decline in cash provided by our trading
securities and an increase in advances on loans we serviced for others.

Our investing activities provided (used) cash flows totaling $(17,975)
and $58,535 during the nine months ended September 30, 2003 and 2002,
respectively. During the foregoing periods, cash flows from our investing
activities were provided primarily from principal payments on our loans and
proceeds from sales of loans and real estate. We used cash flows from our
investing activities primarily to purchase mortgage servicing rights and fund
loans made to facilitate the sales of real estate assets. The decline in net
cash provided by investing activities year to date 2003 as compared to 2002 is
primarily due to a decline in proceeds from sales of loans, real estate and
affordable housing properties, offset in part by a decline in purchases of
mortgage servicing rights.

Our financing activities provided (used) cash flows of $73,483 and
$(264,076) during the nine months ended September 30, 2003 and 2002,
respectively. Cash flows related to our financing activities primarily resulted
from changes in deposits, proceeds from lines of credit and other secured
borrowings, repayment of match funded debt and repurchases of notes and
debentures. The increase in cash provided by financing activities year to date
2003 as compared to the same period of 2002 resulted primarily from an increase
in deposits and escrows, an increase in proceeds from lines of credit and other
secured borrowings and a decline in repayments of securities sold under
agreements to repurchase, offset in part by an increase in repayments of
bonds-match funded agreements and the repurchase of the remaining $33,065
balance of our 12% subordinated debentures on September 30, 2003.

See the Consolidated Statements of Cash Flows of the Interim
Consolidated Financial Statements for additional details regarding cash flows
during the nine months ended September 30, 2003 and 2002.

Commitments. See Note 8 to our Interim Consolidated Financial Statements
for a discussion of our commitments as of September 30, 2003. We believe that we
have adequate resources to fund all such unfunded commitments to the extent
required and that substantially all of such unfunded commitments will be funded
during 2003.

57

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousands, except share data)

Off-Balance Sheet Risks. In addition to commitments to extend credit, we
are party to various off-balance sheet financial instruments in the normal
course of our business to manage our interest rate risk and foreign currency
exchange rate risk. See Note 4 to our Interim Consolidated Financial Statements
and "Asset and Liability Management".

We conduct business with a variety of financial institutions and other
companies in the normal course of business, including counter parties to our
off-balance sheet financial instruments. We are subject to potential financial
loss if the counter party is unable to complete an agreed upon transaction. We
seek to limit counter party risk through financial analysis, dollar limits and
other monitoring procedures.

Regulatory Capital and Other Requirements

See Note 5 to our Interim Consolidated Financial Statements.

Recent Accounting Developments

For information relating to the effects of our adoption of recent
accounting standards, see Note 2 to our Interim Consolidated Financial
Statements.

58

Item 3. Quantitative and Qualitative Disclosures About Market Risk
(Dollars in thousands)

Asset and Liability Management

Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. Our objective is to
attempt to control risks associated with interest rate and foreign currency
exchange rate movements. In general, our strategy is to match asset and
liability balances within maturity categories and to manage foreign currency
rate exposure related to our investments in non-U.S. dollar functional currency
operations in order to limit our exposure to earnings variations and variations
in the value of assets and liabilities as interest rates and foreign currency
exchange rates change over time. Our Asset/Liability Management Committee (the
"Committee"), which is composed of certain directors and officers, formulates
and monitors our asset and liability management in accordance with policies
approved by OCN's Board of Directors. The Committee meets to review, among other
things, the sensitivity of our assets and liabilities to interest rate changes
and foreign currency exchange rate changes, the book and market values of assets
and liabilities, unrealized gains and losses, including those attributable to
hedging transactions, purchase and sale activity, and maturities of investments
and borrowings. The Committee also approves and establishes pricing and funding
decisions with respect to overall asset and liability composition.

The Committee's methods for evaluating interest rate risk include an
analysis of our interest rate sensitivity "gap," which is defined as the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.

The following table sets forth the estimated maturity or repricing of
our interest-earning assets and interest-bearing liabilities at September 30,
2003. The amounts of assets and liabilities shown within a particular period
were determined in accordance with the contractual terms of the assets and
liabilities, except:

. Adjustable-rate loans, performing discount loans and securities are
included in the period in which they are first scheduled to adjust and
not in the period in which they mature,

. Fixed-rate mortgage-related securities reflect estimated prepayments,
which were estimated based on analyses of broker estimates, the
results of a prepayment model that we use and empirical data,

. Non-performing discount loans reflect the estimated timing of
resolutions that result in repayment to us,

. Mortgage servicing rights reflect estimated prepayments and
delinquency rates that are projected at the individual loan level.

. NOW and money market checking deposits and savings deposits, which do
not have contractual maturities, reflect estimated levels of
attrition, which are based on our detailed studies of each such
category of deposit and

. Escrow deposits and other non-interest bearing checking accounts,
which amounted to $134,281 at September 30, 2003, are excluded.

Our management believes that these assumptions approximate actual
experience and considers them reasonable; however, the interest rate sensitivity
of our assets and liabilities in the table could vary substantially if different
assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.

59

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (CONTINUED)
(Dollars in thousands)

September 30, 2003
-------------------------------------------------------------------------
Four to More Than
Within Three Twelve One Year to Three Years
Months Months Three Years and Over Total
------------ ------------- ------------ ------------ -------------

Rate-Sensitive Assets
Interest-earning deposits...................... $ 28,112 $ -- $ -- $ -- $ 28,112
Federal funds sold and repurchase agreements... 100,000 -- -- -- 100,000
Trading securities............................. 2,785 11,505 17,164 17,035 48,489
Loans, net (1)................................. 5,244 5,781 12,842 4,329 28,196
Investment securities, net..................... 4,293 -- -- -- 4,293
Match funded loans (1)......................... 444 14,687 7,146 4,792 27,069
Mortgage servicing rights...................... 21,398 51,320 66,154 43,033 181,905
------------ ------------- ------------ ------------ -------------
Total rate-sensitive assets................... 162,276 83,293 103,306 69,189 418,064
------------ ------------- ------------ ------------ ------------
Rate-Sensitive Liabilities
NOW and money market checking deposits......... 14,343 197 421 1,096 16,057
Savings deposits............................... 115 234 463 824 1,636
Certificates of deposit........................ 138,759 155,282 105,923 7,979 407,943
------------ ------------- ------------ ------------ ------------
Total interest-bearing deposits................ 153,217 155,713 106,807 9,899 425,636
Bond-match funded loan agreements.............. 113,785 -- -- -- 113,785
Lines of credit and other secured borrowings... 176,746 -- -- -- 176,746
Notes and debentures........................... 43,475 -- -- 56,249 99,724
------------ ------------- ------------ ------------ ------------
Total rate-sensitive liabilities.............. 487,223 155,713 106,807 66,148 815,891
------------ ------------- ------------ ------------ ------------
Interest rate sensitivity gap excluding financial
instruments.................................... (324,947) (72,420) (3,501) 3,041 (397,827)
Financial Instruments
Interest rate floors............................. (66) -- -- -- (66)
------------ ------------- ------------ ------------ ------------
Total rate-sensitive financial instruments....... (66) -- -- -- (66)
------------ ------------- ------------ ------------ ------------
Interest rate sensitivity gap including financial
instruments.................................... $ (325,013) $ (72,420) $ (3,501) $ 3,041 $ (397,893)
============ ============= ============ ============ ============

Cumulative interest rate sensitivity gap......... $ (325,013) $ (397,433) $ (400,934) $ (397,893)
============ ============= ============ ============
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets...... (77.74)% (95.07)% (95.90)% (95.18)%

(1) Balances have not been reduced for non-performing loans.

We have experienced a large negative interest rate sensitivity gap in
recent years. The negative interest rate sensitivity gap reflects the economics
of our residential loan servicing business. Servicing advances, the largest
asset class on our balance sheet, is not sensitive to changes in interest rates.
However, we finance servicing advances with interest rate sensitive liabilities.

60

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (CONTINUED)
(Dollars in thousands)

The OTS has established specific minimum guidelines for thrift
institutions to observe in the area of interest rate risk as described in Thrift
Bulletin No. 13a, "Management of Interest Rate Risk, Investment Securities, and
Derivative Activities" ("TB 13a"). Under TB 13a, institutions are required to
establish and demonstrate quarterly compliance with board-approved limits on
interest rate risk that are defined in terms of net portfolio value ("NPV"),
which is defined as the net present value of an institution's existing assets,
liabilities and off-balance sheet instruments. These limits specify the minimum
net portfolio value ratio ("NPV Ratio") allowable under current interest rates
and hypothetical interest rate scenarios. An institution's NPV Ratio for a given
interest rate scenario is calculated by dividing the NPV that would result in
that scenario by the present value of the institution's assets in that same
scenario. In the current, low interest rate environment the hypothetical
scenarios are represented by immediate, permanent, parallel movements (shocks)
in the term structure of interest rates of plus 100, 200 and 300 basis points
and minus 100 basis points from the actual term structure observed at quarter
end. The current NPV Ratio for each of the five rate scenarios and the
corresponding limits approved by OCN's Board of Directors, and as applied to
OCN, are as follows at September 30, 2003:

Board Limits Current
Rate Shock in basis points (minimum NPV Ratios) NPV Ratios
- ------------------------------ ------------------------ --------------
+300 5.00% 30.98%
+200 6.00% 28.99%
+100 7.00% 26.65%
0 8.00% 24.41%
-100 7.00% 21.87%

The Committee also regularly reviews interest rate risk by forecasting
the impact of alternative interest rate environments on net interest income and
NPV and evaluating such impacts against the maximum potential changes in net
interest income and NPV that is authorized by OCN's Board of Directors, and as
applied to OCN. The following table quantifies the potential changes in net
interest income and net portfolio value should interest rates go up or down
(shocked) 300 or 100 basis points, respectively, assuming the yield curves of
the rate shocks will be parallel to each other. The cash flows associated with
loans and securities are calculated based on prepayment and default rates that
vary by asset. Projected losses, as well as prepayments, are generated based
upon the actual experience with the subject pool, as well as similar, more
seasoned pools. To the extent available, loan characteristics such as
loan-to-value ratio, interest rate, credit history, prepayment penalty terms and
product types are used to produce the projected loss and prepayment assumptions
that are included in the cash flow projections of the assets. When interest
rates are shocked, these projected loss and prepayment assumptions are further
adjusted. Changes in prepayment rates and delinquency rates under different
interest rate shocks for mortgage servicing rights are calculated using third
part and proprietary models. Prepayment and delinquency rates are projected at
the individual loan level based on characteristics such as borrower credit
score, note interest rate and prepayment penalty and aggregated into
stratifications of the portfolio based on loan type (Subprime, Alt A, High LTV
and 2nd Mortgage) and by year of the origination. The base interest rate
scenario assumes interest rates at September 30, 2003. Actual results could
differ significantly from the OCN results estimated in the following table:

Estimated Changes in
-----------------------------------------
Rate Shock in basis points Net Interest NPV
- ------------------------------ ------------------------ --------------
+300 24.19% 34.85%
+200 16.13% 23.77%
+100 8.06% 11.22%
0 0.00% 0.00%
-100 -8.06% -12.33%

The Committee is authorized to utilize a wide variety of off-balance
sheet financial techniques to assist it in the management of interest rate risk
and foreign currency exchange rate risk. These techniques include interest rate
caps and floors and foreign currency futures contracts.

Interest Rate Risk Management. We have purchased amortizing caps and
floors to hedge our interest rate exposure relating to match funded loans and
securities. See the "Interest Rate Management" section of Note 4 to the Interim
Consolidated Financial Statements for additional disclosures regarding these
interest rate derivative financial instruments.

Foreign Currency Exchange Rate Risk Management. We have entered into
foreign currency futures to hedge our investments in foreign subsidiaries that
own the shopping center located in Halifax, Nova Scotia and residual interests
backed by residential loans originated in the UK. See the "Foreign Currency
Management" section of Note 4 to the Interim Consolidated Financial Statements
for additional disclosures regarding these foreign currency derivative financial
instruments.

61

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures

As of the end of the period covered by this report and pursuant to Rule
13a - 15 of the Securities Exchange Act of 1934 (the "Exchange Act"),
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness and design of our disclosure
controls and procedures (as that term is defined in Rules 13a - 15(e) and
15d - 15(e) of the Exchange Act). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded, as of the end of the
period covered by this report, that our disclosure controls and procedures were
effective in recording, processing, summarizing and reporting information
required to be disclosed by us, within the time periods specified in the
Securities and Exchange Commission's rules and forms.

Changes in internal controls

In addition and as of the end of the period covered by this report,
there have been no changes in internal control over financial reporting (as
defined in Rule 13a - 15(f) and 15d - 15(f) of the Exchange Act) during the
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the internal control over financial
reporting.

62

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including, but
not limited to discussions of the future availability of funds, beliefs
regarding regulatory compliance, expectations as to resolution of our non-core
assets, predictions on loan yield and the adequacy of our funding needs, our
intentions with regard to the issuance of brokered deposits, our estimates for
loan losses and carrying values, and plans for growth in India. Forward-looking
statements are not guarantees of future performance, and involve a number of
assumptions, risks and uncertainties that could cause actual results to differ
materially.

Important factors that could cause actual results to differ materially from
those suggested by the forward-looking statements include, but are not limited
to, the following: general economic and market conditions, prevailing interest
or currency exchange rates, governmental regulations and policies, international
political and economic uncertainty, availability of adequate and timely sources
of liquidity, uncertainty related to dispute resolution and litigation, and real
estate market conditions and trends, as well as other risks detailed in OCN's
reports and filings with the Securities and Exchange Commission, including its
periodic reports on Form 10-Q for the quarters ended March 31, 2003 and June 30,
2003 and Form 10-K for the year ended December 31, 2002. The forward-looking
statements speak only as of the date they are made and should not be relied
upon. OCN undertakes no obligation to update or revise the forward-looking
statements.

63

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

See "Note 8 Commitments and Contingencies" of Ocwen Financial
Coporation's Interim Consolidated Financial Statements.

Item 6. Exhibits and Reports on Form 8-K.

(a)3 Exhibits.

2.1 Agreement of Merger dated as of July 25, 1999 among Ocwen
Financial Corporation, Ocwen Asset Investment Corp. and Ocwen
Acquisition Company (1)
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (3)
4.0 Form of Certificate of Common Stock (2)
4.1 Form of Indenture between OCN and Bank One, Columbus, NA as
Trustee (2)
4.2 Form of Note due 2003 (Included in Exhibit 4.1) (2)
4.3 Certificate of Trust of Ocwen Capital Trust I (4)
4.4 Amended and Restated Declaration of Trust of Ocwen Capital Trust I
(4)
4.5 Form of Capital Security of Ocwen Capital Trust I (Included in
Exhibit 4.4) (4)
4.6 Form of Indenture relating to 10.875% Junior Subordinated
Debentures due 2027 of OCN (4)
4.7 Form of 10.875% Junior Subordinated Debentures due 2027 of OCN
(Included in Exhibit 4.6) (4)
4.8 Form of Guarantee of the OCN relating to the Capital Securities of
Ocwen Capital Trust I (4)
4.9 Form of Indenture between Ocwen Federal Bank FSB and The Bank of
New York as Trustee (5)
4.10 Form of Subordinated Debentures due 2005 (5)
10.1 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (6)
10.2 Ocwen Financial Corporation 1998 Annual Incentive Plan (7)
10.3 Compensation and Indemnification Agreement, dated as of May 6,
1999, between OAC and the independent committee of the Board of
Directors (8)
10.4 Indemnity agreement, dated August 24, 1999, among OCN and OAC's
Board of Directors (9)
10.5 Amended Ocwen Financial Corporation 1991 Non-Qualified Stock
Option Plan, dated October 26, 1999 (9)
10.6 First Amendment to Agreement, dated March 31, 2000, between HCT
Investments, Inc. and OAIC Partnership I, L. P. (9)
10.7 Form of Employment Agreement dated as of April 1, 2001, by and
between Ocwen Financial Corporation and Arthur D. Ringwald (10)
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of the Chief Executive Officer pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 Certification of the Chief Financial Officer pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)

(1) Incorporated by reference from the similarly described exhibit
included with the Registrant's Current Report on Form 8-K filed
with the Commission on July 26, 1999.

(2) Incorporated by reference from the similarly described exhibit
filed in connection with the Registrant's Registration
Statement on Form S-1 (File No. 333-5153), as amended, declared
effective by the Commission on September 25, 1996.

(3) Incorporated by reference from the similarly described exhibit
included with the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998.

(4) Incorporated by reference from the similarly described exhibit
filed in connection with Ocwen Financial Corporation's
Registration Statement on Form S-1 (File No. 333-28889), as
amended, declared effective by the Commission on August 6,
1997.

(5) Incorporated by reference from the similarly described exhibit
filed in connection with Amendment No. 2 to Offering Circular
on Form OC (on Form S-1) filed on September 7, 1995.

(6) Incorporated by reference from the similarly described exhibit
filed in connection with the Registrant's Registration
Statement on Form S-8 (File No. 333-44999), effective when
filed with the Commission on January 28, 1998.

64

PART II - OTHER INFORMATION

(7) Incorporated by reference from the similarly described exhibit
to Ocwen Financial Corporation's Definitive Proxy Statement
with respect to Ocwen Financial Corporation's 1998 Annual
Meeting of Shareholders filed with the Commission on March 31,
1998.

(8) Incorporated by reference from OAC's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999.

(9) Incorporated by reference from the similarly described exhibit
included with Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2000.

(10) Incorporated by reference from the similarly described exhibit
included with the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001.

(b) Reports on Form 8-K Filed during the Quarter Ended August 30, 2003.

(1) A Form 8-K was filed by OCN on August 7, 2003 that contained a
news release announcing Ocwen Financial Corporation's
financial results for the second quarter ended June 30, 2003.

65

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

OCWEN FINANCIAL CORPORATION

By: /s/ Mark S. Zeidman
----------------------------
Mark S. Zeidman,
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and as its
principal financial officer)

Date: November 14, 2003

66