Q3 2019 Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the I couldn't financial third quarter earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
During the question Q you May Press Star then one on your telephone keypad.
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I would now like to turn the conference over to Hugo ARIA.
Senior Vice President Treasurer, and head of Investor Relations. Please go ahead.
Good morning.
For joining us for third quarter 2019 earnings call.
Please note that our third quarter 2019 earnings release slide presentation.
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Well on our website.
Speaking on the call well be which chief Executive Officer Glen Messina.
Chief Financial Officer, John Campbell.
A reminder, the presentation at our comments today may contain forward looking statements made pursuant to the safe Harbor provisions of the federal Securities laws.
Looking statements may be identified.
Reference to a future period or by U.S. up a forward looking terminology.
<unk> looking statements by their nature addressed matters that are different degrees I'm sure.
Our business has been undergoing substantial change which is magnified such uncertainties.
You should bear these factors in mind, when considering such statements and you should not place.
Such statements.
<unk> looking statements involve several assumptions risks and uncertainties.
Actual results could differ materially.
Yeah.
Actual results may differ from those suggested by forward looking statements.
Let me.
Forward looking statements speak only as of today. They are made and we disclaim any obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
In addition, the presentation in our comments contain references to non-GAAP financial measures such as expenses, excluding MSR valuation adjustments not an expense notables and pretax loss, excluding income statement notables and amortization of 10 hours a lump sum cash.
Among others. We believe these non-GAAP financial measures provide a useful supplement to discussions an analysis of our financial condition.
We also believe these non-GAAP financial measures provide an alternate way to be certain aspects of our business that is instructive.
non-GAAP financial measures should be viewed in addition to not as an alternative for the company's reported results under accounting principles generally accepted in the United States.
[laughter] 14 elaboration of factors I just discussed please refer to our presentation today's earnings release as well the company's filings with the Securities and Exchange Commission, including Wanes 2018 Form 10-K , and once filed its third quarter 29 pull.
<unk> Form 10-Q .
Now I will turn the call over to Glen Messina.
Thank you go good morning, and thank you for joining us.
Today I'll provide an update regarding our progress in executing our key business initiative and the actions we are taking to reposition off wonderful profitability at a long term value creation.
Our CFO John Campbell will follow with a review of our third quarter 20 lighting financial results.
I will then close the call some brief remarks before opening it up for questions.
Please turn to slide four.
During the third quarter, we made substantial progress against our key business initiatives, while proactively addressing more volatile, but on certain interest rate environment.
With integration activities why didn't go well intensifying, our focus and resource allocation by growth in continuous cost improvement.
Considered to be encouraged by our high level of execution.
Our integration efforts are largely complete.
In the fourth quarter, we expect to finalize our facilities consolidation and begin the final phase of our legal entity simplification.
In the third quarter, we realized $268 million of any whites expense savings, excluding net MSR valuation adjustments.
Expenses notables compare to the second quarter 2018, a drop of expenses for the combined awkward NPL change.
We remain on track to achieve at least $300 million of annualized adjusted Opex run rate expense savings by the fourth quarter 2019.
At approximately our current servicing your baby level, we are increasing our analyze total cost reengineering target to $400 million.
Expect to achieve this objective by the third quarter 2020.
Well I bloodletting traveled was up 29% over the same quarter last year, despite the loss apart and that our favorite captive audience.
We believe we can originate up to $10 billion, a father volumes from our lending and flow MSR trials and 2020, it's something we execute our plan and there was no change to the card market environment.
Since the end of the second quarter, we've been awarded $3 billion and close $1 billion in bulk MSR purchases.
We continue to be pardon and patient that our capital deployment in bulk MSR, considering the volatile interest rates than what we believed to be lower returns at Harvard Petrobras and the current market.
Due to the heightened interest rate volatility <unk> third quarter.
We have pulled back a derivative based hedging program, that's partially address the exposure for interest rate sensitive MSR portfolio, well, we built a natural hedge strong lending channels.
We continue to reduce our cost of debt that approved match funding through the implementation of MSR financing solutions and enhancement to our existing structured finance programs.
We closed the third quarter with $345 million with cash on hand at believed that our liquidity position and planned capital actions that support our near term investment objectives.
We continue to proactively engage our regulators and truck or progress as it relates to our regulatory commitment.
As detailed on slide 22.
Our access to date have reduced the annualized pretax wall, excluding income statement notable and amortization at RC lump sum cash payments by nearly 50%.
We expect pretax income excluding income statement, notable but including amortization of NRC lump sum payments to approach breakeven in the fourth quarter of 29 team.
Lastly, we also believe we're on track to achieve pretax profitability, excluding income statement notable and amortization of NRC lump sum payment.
The third quarter 2020.
<unk> pre tax income targets, that's certainly a cheap objective and there are no adverse changes to current market and industry conditions or legal and regulatory matters.
Please turn to slide five.
We believe the actions we have taken over the past 12 months are reshaping offering into a diversified independent mortgage servicer originator that can deliver performance through mortgage industry cycles.
We are quickly building multiple child to drive portfolio replenishment and growth including correspondent loving.
Intrinsic I wish your programs well on the saw relationships participations on the bulk market.
And portfolio retention.
Our product and service offerings include photo reverse mortgages.
I, just see government and private investor products.
Residential and small balance commercial mortgage servicing and subservicing with a core competency and performing and special servicing.
With the diversified product and service offering.
Hey, servicing portfolio of over $200 billion and 1.4 billion customers.
Hi, servicer ratings from the agencies, we service for.
In an improving cost structure, we believe we have meaningfully improved our competitive position due to the acquisition of PHH and the implementation of our plants.
Please turn to slide six.
We believe we're implementing a clear at actionable road map to enhance our financial performance than competitive position.
This road map is crowded and what we believe our critical success factors for our business.
Adding capacity cost structure customer focused and satisfaction.
Potential with key stakeholders operational execution portfolio replenishment and recapture performance that floor income generation and access to cost effective capital.
We have identified several objectives that aligns with the critical success factors, including an industry top quartile cost structure.
Maintaining a high level of customer satisfaction.
Building, a multichannel and multi product portfolio replenishment capability.
[noise] leveraging structured financing at MSR capital vehicles for capital efficiency.
And maintaining a roughly 50 50 mix of owned servicing and Subservicing overtime.
Our key initiatives are intended to position often at the high quality mortgage servicer, an originator within industry top quartile cost structure.
Now please turn to slide seven.
[laughter], despite more unpredictable bulk MSR volumes and lower asset yield expectations for MSR investments, we continue to target achieving profitability on a pre tax basis, excluding income statement notable and the amortization of NRC lump sum payments by the third quarter of 2020.
We expect the improvement in adjusted pre tax earnings will be driven by a combination of factors that we currently estimate was approximately.
$132 million analyzed expense reduction from additional cost reengineering.
10 million annualized of lower interest expense due to corporate debt retirement.
And 30 million and watch revenue increase from higher lending volumes and MSR mix.
Our profitability road map, assuming to maintain a servicing portfolio you painting of at least $200 billion and achieving roughly 50 50 owned and Subservice mix over time.
However, we expect MSR replenishment rate well diary quarter over quarter, especially while we are dependent on the bulk MSR market.
As a result, our servicing everything I also vary from quarter to quarter.
I'll now provide additional detail on Iraq switching of our cost structure growth.
Capital and regulatory objectives.
Please turn to slide eight.
We are focused on executing three categories have access to achieve a highly competitive cost structure.
Integration related costs, reengineering and quoting merger synergies.
Expense reductions based on expectations for the size of the servicing portfolio.
And continuous cost improvement.
[noise], we're viewing continuous cost improvement as a core strength that if necessary for future success as such we're integrating all our efforts into one consolidated cost improvement program with an aggregate total reduction target of $400 million on an annualized basis.
Third quarter 2020.
Our continuous cost improvement efforts are focused on optimizing strategic sourcing offshoring lean process design and technology enabled productivity enhancements.
Our investment in technology was relatively modest but highly impactful.
For example, our initial application of robotic process automation have resulted in reduced cycle times for the if I could prophecies by over 90%.
The entire organization, that's highly engaged in our continuous cost improvement efforts.
Our employees have submitted approximate two water coffee and business improvement ideas, some of which had been incorporated into our total cost reengineering target.
Our cost competitiveness objective is to achieve and sustain an industry top cortile cost position and our servicing operations.
We measure our competitiveness on a servicing cost prolong basis with and without certain overhead allocations, which we benchmark to available M.B. I and other industry survey data.
You're driving servicing cost a lot is not an exact science because overhead allocations are not always comparable.
Because servicing cost for a long will vary depending upon loan types and to legacy status. However, with these caveats. We believe that we will achieve top quartile performance for servicing marginal call alone in the fourth quarter.
We are fully aware that our competitors are also engaged in some more efficiency efforts.
We believe that cost improvement needs to be a continuous effort to remain the top floor tile overtime.
We maintained our prior estimate of incurring approximately $65 million a total upfront cost related to our call for engineering program in 2019.
Through the end of the third quarter, we incurred $51 million are these costs.
We're currently evaluating it will need to incur additional upfront costs in 2020, because of increasing our trouble cost savings target.
Despite our progress on reengineer, our cost structure, we believe that long term profitability cannot be sustained without adequate scale. Therefore, we intend to make appropriate investments in growth to ensure that the size of our servicing portfolio is aligned with a relatively high fixed cost requirements, although leading mortgage servicing business.
Please turn to slide nine.
Going our lending business is a top priority as we look to create a more balanced business back at a natural hedge to our servicing portfolio.
Our lending volume in the third quarter was up 29% and the same quarter last year, despite the loss apart and NRC recapture volume.
We are seeing positive results from our correspondent lending build out any improvement we made to our recapture lending platform.
In correspondent lending, we have been optimizing our operations that have established relationships with over 60 correspondent lenders today.
We expect continued prudent growth in a number of correspond to Counterparties, we do business with that originating one right in line with our targets.
Since launching in June our correspondent lock volume and MSR purchases through the agency cast window programs have grown to $331 million in the month of October .
In addition, we have built the pipeline of approximately $2.2 billion per month and flow MSR purchase opportunities.
And our recaptured platform our actions have resulted in over a 20% improvement and sell more processor and underwriter productivity.
We are continuing to turn back in this critical business travel and are executing a defined road map of stopping increases cost improvements and technology upgrades.
We believe these actions will more than double our recapture rate of refinancing related portfolio run off eligible for solicitation.
Overall, we have achieved solid growth that our lending channel and realized annual run rate funded origination volume of $2.6 billion for the month of October .
In addition to our organic growth initiatives.
We continue to explore M&A opportunities to complement accelerate organic growth actions.
Were focused on potential targets that can generate significant by through mortgage lending cycles.
Assuming certain best attributes that expected valuation levels, we believe the acquisition of a sizable lending platform could represent our best at highest return on investment alternative while contributing to a more optimum business mix.
However, we can provide no assurances that any such transaction will be consummated.
[noise], we can take it to track and substantial pipeline of subservicing opportunities totaling over $20 billion and you pay day.
And I've received positive feedback from recent RFP activity and onsite visit from prospects.
The subservicing marketing cycle tends to be prolonged but we believe we're starting to see the benefits from our integration progress and are encouraged by the opportunities available in the market.
We've reviewed transactions totaling $69 billion in your PD and the bulk MSR markets since you have to the second quarter.
Despite our significant level of market engagement were awarded only $3 billion, a bulk servicing everyday and closed on $1 billion. Since the end of the second quarter. As we are unwilling to accept the higher risk or lower return levels required to win the larger packages coming to market.
About one third of the transactions, we evaluate it did not sell as bid levels did not meet seller expectations.
We believe this valuation disconnect, it's likely driven by the more volatile and uncertain freight environment, which may impact buyers and sellers of your diet.
As well as recent strong cash will experience a mortgage originators, which may reduce incentives for MSR sellers to transact.
For a portion of transactions that did close.
It appears that buyers are willing to accept risk your deal terms, particularly with respect to prepayment and rate risk.
In certain transactions, we're seeing MSR sellers imposing restrictions on recapture activity, then reducing a timeframe and level of prepare protections typically afforded to buyers or favorite transactions that fixed price with no adjustments for industry driven valuation changes from the time of bidding to closing.
That's a yield expectations appear to be coming down a reaction to the overall decline in market rates.
Although we are unwilling to take it on a reasonable amount of risk without appropriate pricing concessions, we've decided to lower our minimum order away for agency MSR from 9% to 85%, which translates into a leverage pretax return on equity of approximately 13%.
We continue to be focused on allocating capital to opportunities that provide us with appropriate risk adjusted returns.
We believe MSR sellers will demonstrate a greater willingness to transact in the future to the extent there is lower in straight uncertainty and a decline in refinancing volume and gain on sale margins from recent level.
[noise]. Nevertheless, the recent trends in the bulk MSR market confirmed the importance of developing sustainable sources of MSR replenishment by growing our lending and MSR flow channels.
Please turn to slide 10.
We continue to enhance our financial flexibility and believe our liquidity position and targeted capital actions can support our near term investment objectives.
During the third quarter, our MSR financing and corporate debt retirement actions were essentially offsetting as we got borrowings of $136 million under our MSR financing facility and repaid approximately $143 million of corporate debt.
Our liquidity position was bolstered by a refinancing of $470 million OMART servicing advance term ABS executed in early August .
Despite extreme capital markets volatility, we're able to achieve a higher advance rate that resulted in an additional $40 million of funding and record all time lows and funding cost for Omar.
We believe this transaction demonstrates our ability to access capital at attractive rates under a variety of capital market conditions.
As part of our capital structure optimization, well evaluating additional structured finance opportunities that could result, it up to $200 million of incremental funding.
That's part of this effort, we expect to close a new 100 million dollar Ginnie Mae MSR financing facility in the fourth quarter subject to completing the Ginnie backed altra process and finalizing facility documentation.
The facility is expected to have a two year term and initial borrowing should approximate $60 million to $70 million based on the size of our Ginnie Mae servicing portfolio as of September Thirtyth.
We continue to evaluate alternatives for MSR capital vehicles that could provide us with the ability to grow our servicing you'd be with significantly lower capital requirements compared to MSR acquisitions.
We are currently investing but MSR vehicles that would acquire agency MSR and enter into Subservicing and portfolio recapture arrangements with us.
We would also be invested alongside our partners and that's a lot in our investment objectives.
We expect to begin vetting potential investor interest in the fourth quarter and early next year.
The next phase of our MSR financing strategy and the MSR capital vehicle will be an area of focus over the next six to 12 months.
[noise] as part of our disciplined approach to capital allocation, we repurchased approximately $39 million of our 83% senior secured notes due 2022 during a third quarter.
We believe this was a prudent use of capital based on returns as well as the positive impact on our leverage and debt service costs.
To the extent, we are unable to allocate investment capital at appropriate risk adjusted returns, we will consider additional debt repurchases well, we pay that as an alternative use of capital.
We believe our capital structure and look what are the actions combined with a positive momentum in our business initiatives can be the factors as we look to extend the maturity date of our senior secured term loan which comes due on December 2020.
Please turn to slide 11.
We continue to proactively engage our regulators and truck or progress as it relates to regulatory commitments.
During the third quarter. Several regulatory reviews were completed that resulted in no material adverse findings, we continued to focus on driving strong compliance culture.
And fulfilling our regulatory commitments.
And the third quarter.
We receive court rulings are motions to dismiss both the CFPB and Florida matters that date back to April 27 team.
In the C. P D matter the court dismissed the CFPB his entire complaint without prejudice because the court found that the CFPB engage in permissible shot completing and held out to see a PD must specifically alleged and distinguish the facts between all claims.
The CFPB it was permitted to replay to the case and filed an amended complaint.
On November 1st we filed our answer and affirmative defenses.
And the Florida matter the court granted our motion to dismiss without prejudice.
As to Threeq claims and part of a fourth plane, which means these claims are no longer part of the case.
In addition, like in the CR P.B. case, the court dismissed the Florida case without prejudice, because if I'm not Florida had engaged and permissible shotgun plating.
Florida was also permitted to replace its case and did so on November 1st.
We are reviewing and planning our response to the revised bleeding.
Based on our review of the amended complaint.
It appears the allegations that remain have been narrowed and in some cases reorganized into new accounts, but remains substantially unchanged.
We continue to believe we have factual and legal defenses to the allegations in the CFPB in Florida matters, and we continue to vigorously defend ourselves.
Now I'll turn it over to Jim will discuss the results for the quarter.
Thank you Glenn My comments today will focus on our third quarter results as compared to prior quarter. As previously noted our third quarter Investor presentation includes more details I'll always all and is available on our website.
Please turn to slide 13.
Our third quarter 2019 reported net loss of $43 million was impacted by $18 million a bunch of world class $6 million on say the boat that valuation impacts and a 5 million dollar debt repurchase senior secured notes among other items.
Third quarter net loss compares favorably to the net loss of logging in dollars and the second quarter 2000 molecule largely driven by lower on favorable net valuation impacts.
The positive pretax Arnold impactful organization of the lump sum cash payments received from an RV well 2017, 2018 was $24 million, a third quarter $31 million in the prior quarter.
Amortization of these long some cash panels will have a 61 million dollar positive impact to our pretax income over future periods April thirtyth of 2020.
Revenue of $284 million increased by $9 million from the prior quarter. This included $5 million less favorable burst portfolio fair value chose compared to the prior quarter.
[noise] non almost all expenses of $179 million $5 million lower than the prior quarter as we continue to make progress at low cost rose <unk> actual which remain ahead of our expectation.
The favorable MSR valuation adjustment of $135 million look quarter is primarily due to a 252 low dollar favorable valuation adjustment to I know agency and that's ours associated with continued improved collateral performance, which was confirmed by a third party valuation provider and recently.
Market trading activity.
This favorability was partly offset by $63 million on favorable adjustments, primarily due to a 40 basis boating claro and the 10 year swap rate in other valuation updates.
The remaining $55 million reduction and that's our value was due to portfolio run off.
[noise] the favorable MSR valuation adjustments in the quarter was offset by $198 million, an unfavorable and ours. It's a long for the liability valuation change, which was recorded in interest expense.
We have provided additional information related to the MSR valuation impacts on slide 27.
I would now like to provide comments and our service <unk> London segment results.
As outlined on slide 14 of our services segment recorded a 13 million dollar pre tax loss compared to $59 million in the prior quarter largely driven by a 30 were a little dollars lower net unfavorable fair value tools compare to the second quarter.
[noise] servicing revenue of $250 million increased by $8 million, largely driven by timing of servicing fee collection in connection with the file NSP longboard own Jones.
Approximately $6 million or the higher servicing revenue was related to our RV offset interest expense.
[noise] servicing business remains focused on providing sustainable loan modification solutions to qualified borrowers.
We completed 6245 modifications in the quarter, 15% of which resulted in some type of debt forgiveness below $33 million.
As of September Thirtyth, the total U.P.B. of our servicing portfolio stood at $217 billion, which is down from $229 billion at June Thirtyth.
This reduction was largely driven by portfolio run off of long billion dollars and a lot $4 billion decrease in subsurface was primarily due to a legacy PHH subservicing quite termination, which we disclose last quarter.
We do not currently anticipate any additional material subservicing termination.
Please turn to slide 15.
The lending segment recorded a pretax income of $9 million, one little dog favorable to the prior quarter.
Well with lending reported close to breakeven results in the quarter, which is $3 million favorable to prior quarter.
Revenue of $8 million was one little dollar favorable primarily due to higher margins will recapture all costs were lower due to cost and productivity improvement initiatives.
We successfully ramped up our we launched correspondent channel to $93 million of funded volume in the quarter.
The reverse lending business recorded pretax income of $9 million compared to $12 million in the prior quarter, largely driven by $5 million less favorable net fair value change compared to the second quarter.
[noise] reverse lending revenue $21 million was in line with prior quarter.
Excluding the less favorable net fair value change running you improved $5 million driven in part by 32% a higher volumes in the quarter.
As you can see on slide 16, we ended the quarter when $345 million of unrestricted cash at quarter end were fully funded on our servicing advance and committed warehouse facilities based on available collateral.
Oh liquidity was $34 million higher to acquire quarter, driven by $136 million of Cashel, a new NFL financing facility and $40 million from a better advance rate every flopped Omar ABS.
Offset by 138 low dollar cash use the repayment of T.H. bonds that matured in September 2000 local.
Me purchases of senior secured notes and scheduled amortization of our S. S T L.
Oh working capital needs will continue to change as we support the growth of our lending business.
We continue to closely monitor all balance sheet changes and look for opportunities to improve working capital requirements as part of our liquidity management initiatives.
We ended the quarter with corporate debt outstanding of $645 million follow the repayment of $98 million of PHH bonds and repurchases $39 million of senior secured notes and a corporate debt to equity ratio of 1.7 times.
I'll now turn it back over to go on.
Thank you Jim.
Please turn to slide 17.
Since our last earnings call. We have continued to make substantial progress with respect to our key business initiatives to position the company for profitability and growth.
Our team is executing well and committed to delivering on the objectives of our key initiatives.
We're taking actions to grow lending platform diversify our MSR sources further reduce costs lower cost of capital and maintaining a disciplined approach to capital allocation.
We believe our actions unplanned can result in a more diversified business that can deliver performance through the mortgage industry cycle and capitalize on growth opportunities.
Our integration efforts are largely complete in the fourth quarter, we expect to finalize our facilities consolidation and begin the final phase of our legal entity simplification.
In the third quarter, we realized $268 billion of analyzed expense savings, excluding net MSR valuation adjustments.
That expense notable compared to the second quarter 2018, adjusted expenses for the combined dock win and PHH.
We remain on track to achieve at least $300 million of annualized adjusted run rate expense savings by the fourth quarter 2019.
At approximately our current servicing you'd be levels, we're increasing our annualized total cost for engineering target to $400 million.
We expect to achieve this objective by the third quarter 2020.
Volume from our running trials was up 29% over the same quarter last year, despite the loss apart and ours he recapture volume.
We believe we can originate up to $10 billion are funded volume from our lending and flow origination child and 2020, assuming we execute our plants.
Since the end of the second quarter, we've been awarded $3 billion and close $1 billion in bulk MSR purchases.
We continued to be prudent and patient at our capital deployment in bulk MSR us.
We have well that's a derivative based hedging program that partially hedges the exposure for our interest rate sensitive MSR portfolio, while we build the natural hedge through our living trials.
We continue to reduce our cost of debt and improved match funding through the implementation of MSR financing solutions that enhancement to our existing structured finance programs.
And we continue to proactively engage our regulators and truck all progress as it relates to our regulatory commitments.
[noise] all actions today have reduced the annualized pretax loss, excluding income statement notable and amortization of NRC lump sum cash payments by nearly 50%.
We expect pre tax income.
Excluding income statement, notable but including amortization of NRC lump sum payments to approach breakeven in the fourth quarter of 2019.
We also believe we're on track to achieve pretax profitability. Excluding income statement notable and amortization of NRC lump sum payments by the third quarter 2020.
I want to thank the Auckland Board of directors and our associates for their hard work and enduring commitment through our transformation and with that we're ready to take questions operator.
Thank you.
We'll now begin the question and answer session.
To join the question Q. Please press Star then one on your telephone keypad, you'll hear a tone acknowledging your request.
If you are using a speakerphone please pick up your handset before pressing any keys to.
To withdraw your question. Please press Star then too we will pause for a moment as colors during the Q.
Our first question comes from Bose George of KBW.
Hey, Good morning, first just you give your target.
Total rate for agency and some of the 8%.
And also just on the Ginnie Mae side, you guys are they target and simplicity, where do you see the market true.
Good morning Bose.
Sure Yeah during the third quarter as result of your lowest rate environment. We have seen returned to drift a dropped a bit lower.
On MSR return. So you know, we historically have targeted up 9% to 11% range for agency MSR, and then 11% to 13% range on Ginnies, we've seen but you are they the market pricing on both asset levels asset level prices go up which means returns kinda down and we're saying returns in that.
After 9% range larger for agencies and Ginnies hovering right around 9%.
Now for off the top and just I mean, you.
I'm sorry, it was good.
Sorry go ahead.
Oh, It's Gonna say then you obviously, we love are those returns as well with MSR secured financings. So produces a a after leverage return of about 13% for us at the half percent level.
Okay, and then just given what you're seeing in the market are you.
Be comfortable that you can keep you're going to miss or <unk> or servicing portfolio pretty stable over the next year.
Yeah, we are focused on growing our lending channel in particular I you know I'm proud of the progress we made during the quarter, we have more work to do for sure.
We are growing our lending channel a rapidly.
And our goal is to you, but at least double the recapture rate in our portfolio retention platform continues to grow our correspondent lending platform and achieved annualized volume through our you know our lending Chattels plus our agency a cash went to flow relationships of of $10 billion.
And then obviously, we'll continue to participate on an opportunistic basis in the ballpark it to to achieve our portfolio replenishment objectives.
Okay, great. Thanks, and then.
On the Costco seemed to have a secret work on that.
The longer term in terms of.
Tending normalized profitability or is there way to gauge would you need to do on the revenue side, so that the level of you'd BB or.
Mhm volumes et cetera.
Yeah. The yeah, those I think the roadmap that we laid out gave all the key assumption. So how we're thinking about the business right. So we want to maintain at least $20 billion of U.P.B., we want to achieve about a 50 50 mix of owned servicing and Subservicing and then from a cost reduction perspective, you know achieving our 400 million dollar cost.
Saving subjective well have some interest expense savings as result of some of the corporate that actions that we've taken.
Then, saying about a $30 million revenue growth from our lending activities, which as you know again laid out and that road map. We think that gets the best ones too you know a place where are profitable in the third quarter 2020.
The.
Yeah sense seeking more of a.
That gets does that get you to sort of breakeven or a you know where you or whatever target normalized profitability and you know seeking more of what you need to get up to what did they got target reduce.
Yeah. So so again, we're you know as I'd think about the business from a framework perspective, you know where pricing our MSR is to achieve all levered return of around 13%.
So you know long term yeah. That's the earnings rate doesn't theories embedded into our assets you know assuming that the pricing assumptions are materialized on a go forward basis, and then yeah. We would expect a you know our lending channel says we continued to grow them, particularly our portfolio punishment Ah portfolio retention channel what contribute positive earnings as well to pop through.
The cycle, obviously more earnings in a down rate environment, unless earning so don't operate or purchase market environment.
Yeah. We continue to believe your business has to return its cost of capital, which we expect to being up low double digit range high single digit low double digit range for the business.
Well.
Thanks.
Once again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to Glen Messina for closing remarks.
Thank you everyone for joining the call today. We appreciate your continued interest in Auckland and I look forward to talking to your next call. Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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