Q4 2019 Earnings Call
[music].
Ladies and gentlemen, please continue to hold your conference call will begin momentarily.
[music].
Fourth quarter earnings conference call at this time, all participants are going to listen only mode.
So to speak of presentation, there will be a question and answer session to ask a question. During this session you need to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
When I like to end the conference over to your speaker today, the Ken Posner Senior Vice President of strategic planning and Investor Relations. Thank you. Please go ahead Sir.
Good morning, and welcome to Mr. Cooper group's fourth quarter earnings call. My name is Ken Posner, and I'm Senior Vice President of strategic planning and Investor relation with me today, as Jay Bray, Chairman and CEO.
First Marshall Vice Chairman CFO.
A quick reminder.
Be referring to slide that can be accessed on our investor Relations web page at investors Dod Mr. crude Mr. Cooper Green Dot com.
Also this call is being recorded during the call. We may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to slide deck.
And finally during the call. We may make forward looking statements you should understand that these statements could be affected by risk factors that we've identified in our 10-K and other FCC filings.
Further we are not undertaking any commitment to update these statements if conditions change I'll now turn the call over to check.
Thanks, Kim and good morning, everyone and welcome to our call.
I'm going to start by reviewing the highlights of the quarter on slide six we've reported net income of 461 million or $4, a 95 cents per share.
These results included a 285 million benefit from releasing the valuation allowance against deferred tax assets, a mark to market gain of 102 million.
Very strong pre tax operating income of 125 million equivalent Joe at 21% ROTC.
Once again, the origination segment produced excellent results with 138 million in pre tax earnings on a record 12.6 billion in funded loans and a margin of 1.1%, which was right in line with the update we provided in December.
The servicing portfolio was stable during the fourth quarter, which demonstrated our ability to replenish the portfolio with originations as there were no bulk acquisitions in the quarter.
In fact, there haven't been any bulk acquisitions since the first quarter.
We reported another solid quarter with pretax operating income increasing to 14 million. Thanks to strong momentum in the tire unit, which is benefiting from refinances.
Finally, subsequent to quarter in we called another hundred million of senior notes and issued 600 million and new seven year notes, which allowed us to refinance the remaining maturities in 2021 and 2022.
We were extremely happy with the market reception to this transaction, we had 100% subscription rate following the non deal Road show the deal ended up being six times oversubscribed and the notes were priced at record tight spreads for a single B rated financial services issuer.
Since the WMS age bond issuance in 2018, our spreads have come in by roughly 200 basis points.
Which we take as positive feedback from the market on our progress executing against our strategic goals.
If you'll turn to slide seven I'd like to talk more about the company's strategic direction.
As you recall and our fourth quarter call last year. We told you we were going to take a pause from growth to focus on immigration de leveraging and improving profitability.
And that's exactly what we've done.
During 2019, we completed the integration of our three acquisitions achieved our initial de leveraging target and significantly improve the company's overall profitability.
Now the question. Your mind is what's next in the answer is more the same as a management team and board of directors have reflected on our market position and competitive strengths. We've developed a series of strategic pillars that will guide to next chapter of Mr. Cooper story.
The overarching goal is to drive the stock up to tangible book value or higher and we'll do this positioning the company for sustainable long term growth and by generating consistent return on equity at or above our target of 12%.
The first priority I know these strategic pillars is strengthening the balance sheet.
To ensure Mr. Cooper continues to serve as a source of strength for the U.S. housing and mortgage markets, even if the economic environment environment turns adverse.
In this regard we're planning over the next two to three years for the ratio of tangible net worth to assets to increased to 15% or higher.
We expect to grow into this ratio about prioritizing the use of cash flow to retire senior notes on an opportunistic basis.
A strong balance sheet also means robust liquidity, the 600 million refinance transaction cleared out our maturities through July 2023, which leaves us with <unk> liquidity runway of three and one half years, which is a great position to be in should the environment deteriorate.
Now, let's turn to slide number eight and talk about the second major pillar of our strategic plan, which is to drive continuous improvement in our cost structure.
Put simply as we think about Mr. Cooper's business model, we believe that the key to profitability is continued improvement in productivity.
We regard this pillar as essential to sustaining ROTC in the face of headwinds such as the normalization of origination margins once capacity finally returns to the market.
You've heard US talk about project Titan, which was an initiative designed to improve the customer experience and drive meaningful cost savings.
As well as how the homeadvisor team boost recapture rates and improves profitability.
These are both examples of our focus on unit costs. The two charts on this page show you that we've made progress here in recent years, but not enough moving forward each of our business segments has a mandate to drive down unit costs by 5% per year yearend and Euro unit cost numbers may move around from quarter to quarter due to mix.
Changes or volumes and market conditions, but you should expect us to show progress here over time.
You've also heard you heard us talk about corporate actions, which represent various opportunities to streamline overhead cost.
Just kind of initiatives will be ongoing [noise].
Finally, I'll comment comment on the three other pillars, which relate to our customer and our customers in our talent.
These pillars don't link exactly to ROTC, our balance sheet metrics, but they are absolutely critical to all aspects of our business and we'll update you from time to time. When there are accomplishments are issues of note.
And on that note I'll turn the call over to Chris.
Thanks, Jay good morning, everyone.
I'm going to start with a high level review of our results on slide nine.
As you've seen we reported net income of 461 million on a GAAP basis, which is equal to $4 a 95 cents per share.
These results included the release of the valuation allowance against our deferred tax asset, which totaled 285 million.
As you know, we assumed 6 billion of net operating losses in connection with the W. My age merger and based on our projections at the time, we established a DTA of 1.2 billion with the allowance meant to cover a portion of the other wells, which we estimated would expire and utilized.
In conducting our 2019 year end review of the DTA. We concluded that the allowance was no longer appropriate due to the companys improved profitability and the implementation of a prudent tax planning strategy.
Based on the DTA carrying value at year end, we expect to say 1.3 billion in federal tax payments over time, which means more cash for de leveraging building liquidity, we're investing in growth.
Our GAAP results also benefited from a mark to market of 102 million, which I'll discuss in just a minute.
But first let's focus on pre tax operating income, which was a healthy hundred 25 million in the quarter down from the record 171 million in the prior quarter as originations margins normalized.
On a fully tax basis. This was equivalent to a 21.1% return on tangible common equity, which is well above our long term target of 12%.
In terms of adjustments, we excluded sixmillion severance charges, which were split evenly between zone in corporate.
And we expect to see a similar level of severance expense this quarter.
There were some other notable items in the quarter, which I'd like to point out servicing benefited from a $19 million recovery, which shows up as a reduction in expenses.
Also the corporate line included 7 million in cost associated with shutting down certain facilities and activities that are no longer core.
This cost and the severance charges are part of the corporate initiatives. We discussed with you last quarter, which were intended to streamline our operations and improved efficiency.
Now, let's turn to slide 10, and discuss the carrying value of an hour. So.
MSR portfolio, and 102 million dollar mark to market gain booked in the quarter.
The mark to market, primarily reflected the 10 basis point increase in mortgage rates during the fourth quarter and the implications for slightly slower prepayment speeds, which you'll see in the 10-K as a decrease in the lifetime CPR assumption from 13.9% to 13.1%.
Also the move in the short end of the curve help.
Implying a stronger outlook for net interest income.
As a result of these changes the value of the MSR portfolio increased from 109 to 118 basis points, which was similar to the change we've seen reported by others in the marketplace.
The current level of interest rates resulted in higher amortization expense in our servicing portfolio, but at the same time creates very favorable conditions for our DTC channel, which focuses on helping our existing customers refinance.
Taking a look at our portfolio, we estimate that 1.1 million of our customers or 28% of the total current position to save roughly $200 per month, if they refinanced right now which we.
Estimate is the equivalent of a two year payback, which for most people's a pretty good deal.
The sensitivity table shows you that absent a major rate move we'd expect volume in our DTC channel to remain strong for the foreseeable future.
So, let's turn to slide 11, and talk about originations with once again contributed excellent results with pretax earnings of 138 million in the fourth quarter, a record fundings of 12.6 billion.
These results, obviously reflect favorable market conditions, but they also point to the investments we've made in recent years, including the creation of our home advisor unit the acquisition of Pacific Union as well as important but intangible factors like the culture of people who are disciplined operators.
And extremely innovative.
As result of this progress in originations overall business model is more balanced and more profitable than it was in past cycles.
Margin remained strong.
And 110 basis points, which is right in line with the update we provide into December.
As you know we book revenues when the loan is locked and recognize expenses when the loan is funded.
The third quarter margin of 132 basis points was unusually high because locks outpaced fundings, whereas in the fourth quarter locks in fund. These are right in line with each other which is why the margin dropped to a more normalized level.
Since year end mortgage rates have declined by approximately 20 basis points and as a result, we've seen another surge in lot volumes.
During January total funded volume was 4 billion, while locks were starting to enjoy ahead at 4.1 billion. If this trend continues then we would expect to see the margin to see some expansion.
Now, let's turn to slide 12.
And review the servicing portfolio.
Total you PB ended the quarter at 643 billion, which was flat with the third quarter level and consistent with our guidance.
Looking at the components of the portfolio reverse and private label mortgages continued run off while Subservicing grew nicely and the owned portfolio was largely flat.
Despite elevated prepayments, we estimate our net replenishment rate held in right around 100%, which indicates that our originations are broadly speaking sufficient to saying sustain the portfolio net a runoff attributable to co investment partners without us having to pursue bulk MSR acquisitions.
As Jay pointed out that's pretty much what you've seen in 2019 since we haven't made any bulk acquisitions since closing the superior steel in the first quarter.
As we enter 2020.
We're planning for the total servicing you PB to be roughly flat and whether we grow a little shrink a little will probably depending on the performance of our Subservicing partner.
Now, let's turn to slide 13.
And review the servicing margin, which we'll discuss excluding the full mark.
On this basis, the servicing margin was 5.5 basis points down from 5.8 basis points in the third quarter due to higher CP ours, which peaked at 19.1% during the quarter and which translated into a much higher amortization.
This pressure was offset by a $19 million recovery from prior service are associated with a portfolio we acquired several years ago.
This benefit flows through as a reduction of foreclosure and other liquidation related expenses, which you can see in the appendix to the deck.
The reverse portfolio is in run off and not a material driver.
Hello.
It does introduce some variability into the margin due to the timing of recoveries and the impact of interest rates on the accounting treatment of financing costs. As you can see from the chart reverse contributed 0.3 basis points this quarter down from one basis point in the third quarter.
Finally, I'd comment that the delinquency trend remains very favorable with 60 day delinquencies dropping to 2%.
Now turning to zone on slide 14.
We were pleased with another solid quarter of performance with pre tax operating income rising sequentially from 13 to 14 million.
Highlight of the quarter zone with strong refinanced routing order flow in our title unit.
As we've commented previously.
Churn is now fully integrated except for efforts related to Onboarding, some customers through a new platforms.
That efforts on track and is being very carefully managed and feedback has been very positive.
You'll notice that the proportion of third party revenues dipped slightly from 53% to 51% in the fourth quarter.
This reflects the typical seasonal slowdown field services and should start moving up again later in the spring.
We announced in January that Mike Rals has taken over as CEO zone.
Mike is a highly respected member of our executive team a 20 year veteran of the company and for the last five years, he's led to servicing operation.
Mike brings vast experience in credibility to zone.
Will play an instrumental role in revenue generation as we compete to win new clients and cross sell multiple services to existing clients.
We remain confident in the $50 million guidance and pretax operating income for 2020 that we've already shared with you. However, first quarter is typically a seasonal low point, so you'll likely see a dip in earnings next quarter.
Now, let's wrap up on slide 15, with a review of liquidity and capital.
We ended the year with very strong liquidity, which allowed us to pay down operating lines by $90 million.
Some of you notice the FHLB recently came out with proposed new requirements for non bank mortgage servicers.
We are comfortably in compliance with these proposals and if they are implemented we don't expect any impact to our business.
Earlier this year, we shared with you an illustrative metric called steady state discretionary cash flow, which is the amount of cash available once we sustain MSR asset at its current level net of excess spread.
For the fourth quarter.
Steady state cash flows $129 million.
Now I'll reiterate jay's comments on how pleased we were with the market reception to our senior notes issuance in January.
As he pointed out this transaction clears out our maturities through July 2023, providing us with a three and a half year liquidity runway, which have very good position of being.
As you'd expect we're monitoring the market closely as we analyze alternatives for the 2023 maturities, which become callable in July of this year.
2026 maturities, which become callable next year.
Tangible net worth it to assets was 11% at year end.
As Jay mentioned, we're managing the company toward.
A 15% or higher target well, that's not a magic number but rather reflects the capital planning process, we've undertaken recently, which considered our current balance sheet and the river results of our internal simulation and stress test models.
Until we get closer to that range, we'll continue to prioritize retiring or senior notes.
And building liquidity over acquisitions.
We believe that putting the strongest operating platform in the industry.
Top of a very strong balance sheet is a good strategy that will result in a sustainable 12% or higher return on equity and the stock price at or above tangible book value. So with that I'll turn it back to Ken for QNX.
Thanks, Chris I'm going to ask our operator to start the came in a session.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key please standby why we compile the Q and a roster.
Our first question comes from Bose George from KBW. Please go ahead.
Good morning.
Hi, good one on purpose.
So you can look we bought at night.
All that.
Like in the run rate or.
864 million.
Great.
Got it.
Run rate number.
Good.
Well.
It looks to keep those upstart interruptible or have an art I am hearing you could you.
Yes.
Sorry, because they've got better.
Yes. It is.
Okay great.
I wanted to start with your question on production.
No.
Thank the 9 million and that you called out.
The run rate for that line item would be 154 million.
No down from the third quarter snow.
When you get some color on hiring.
Line item going into next year, we've had a pretty good run rate.
I I think you should think of the run rate for servicing to be.
At or about five basis points at a core and it's going to vary off of that depending on.
Onetime items.
Which happened quite frequently.
And amortization, which is really peaked last quarter.
So absent the one time items, yes, the number would have been down.
By a modest amount because.
P. ours peaked at over 19%.
In a more normal if you were looking at our servicing.
Margin.
Over the last I don't know.
Eight quarters.
And excluded both the and I think we have a chart in the deck that we could go through with you. If you were excluding onetime items and more and applied more normalized.
Amortization, I think you'd see the number hanging in threeq steadily at about five basis points. So I think thats a pretty good outlook now we do have a number of one time items that we're always working on.
And that vary the very well could occur this quarter and for that matter every quarter this year, but I wouldnt.
I wouldn't want you to forecast them because the timing of them is very hard to to estimate just like last quarter. We included a negotiation with the prior servicer for portfolio you bought several years ago and we've been working on that settlement.
Probably two years.
So the the timing of when these things come the closure and we booked the results very hard to predict so again I go back to assume five basis points.
And.
That number will vary depending on amortization and those onetime items, yeah, and I think because if you look quarter over quarter.
Quarter over quarter amortization was a big part of the story I think it was up 11 or 12 million from third to fourth quarter. So that it would explain a big piece of that enter Chris This point.
There is a reasonable number I think we will have some onetime items and candidly from an operational standpoint.
We're always looking for improvements as well, which can help that.
I think we've identified some that'll flow in throughout the year. So I think thats, how you should think about it.
Okay, great. Thanks.
On the reverse like what.
Normalized.
Okay Super Bowl.
But it sounds a little bit as well.
Yes, I don't think.
We expect to see any.
Contribution from or worse over the course of the year the businesses and run off.
And in fact it may.
It may be slightly negative as we are continuing to try to right size the overhead with the.
The dwindling.
Asset base.
The the variability that we mentioned, it's just that is related to the purchase accounting.
That occurred when we did WH merger and as we Mark the bonds.
Those marks.
Accelerate or slow down depending on interest rates.
So you'll see a little bit of variability, but you should think of that as a business that will breakeven or maybe be slightly negative possibly slightly positive.
But as its in run off I don't think thats going to change much for the next couple of years.
Okay. Thank you one last one.
Welcome.
We were.
Well the negative we read now you've grown the mortgage from quite a bit.
No pricing.
You would equal new properly.
What do you.
Great.
I would say.
I'm not sure I can give you.
An exact answer there going forward I'd say, if you look at what we did in.
Over the last year, we were neutral.
And that our marks were higher than the operating profit that we generated.
Out of our origination segment, but that's really timing driven over the long haul we expect.
Our origination segment too.
Two.
Benefit from lower rates and to recover those marks and then some but I'm not sure if.
I give you.
The definitive position on whether on or neutral not because I think you're.
Asking that within a very specific time period.
Yes, I think most of the way we think about it.
You know the Mark is going to happen if you haven't MSR mark depending on where rates are add going to happen at one point in time and then the origination business.
So it's going to benefit from that for multiple quarters and as Chris alluded I mean, we're seeing an incredibly strong.
January and you know.
The origination business and we expect that to continue so where we think about it is the market. It's kind of a one onetime event and then over the coming quarters, you're going to recover that through the origination business as a dollar for dollar obviously time will tell and timing associated with that but that's that's how we're thinking.
Got it long term you look at the 1.1 million customers that are in the money so to speak.
If rates stabilize.
Now clearly there.
Down this quarter.
But if they were stable and we had 1.1 million customers that we can really refinance.
We'd certainly makes a lot of money for the foreseeable future.
No.
My question is moving along.
I understand the timing difference.
Like.
Good long term Boes I'm, sorry, we are having trouble hearing you again.
Okay sorry.
But my question <unk> long term.
I understand.
Doug.
Look like.
The rally in rates would help you longer terms. So that was the question. Thanks very much yes, yes, that's accurate.
Absolutely.
Thank you.
Our next question comes from Doug Harter from Credit Suisse. Please go ahead.
Hi, Thanks.
Thinking about your your tangible net worth two assets test how do you think about.
The reverse business in that context, now kind of given that it grosses up the balance sheet, but now not not really a recourse asset.
Yeah, I guess, how do you think about adjusting for that.
Well, we think you can adjust where we haven't but we agree with you that that's a very very low risk item and probably needs less capital allocated against it.
But we are setting this as long term target as the reverse book.
Runs off that will help contribute to hitting that target.
I guess, how do we agree with what your general premise, Doug Yeah. I think we've always thought of that is kind of non recourse should it could be excluded our target is going to be total assets, but clearly I think you're thinking about it correctly.
Right, because obviously, if you exclude those assets that you're you're ready well above the 15, yeah. So I mean I guess.
Quickly to those assets run off.
You know.
And I guess, how should we how should we I guess thinking about that run off and relief from that.
They are running off about 20% year, yeah, we expect that to continue.
Got it and then no cash flow Yeah, you you indicated that you know that the the.
The 23 notes are callable in July I guess, how should we think about your thoughts on cash flow in the first half of the year. You know until you know until you have that callable amount.
Hi cash flow is.
Is stable and solid I think.
Some of that will depend on what happens with rates in our origination channel between now and the middle of the year, but we feel very good about our opportunity to refinance the.
20 threes that.
Very good rates.
Great. Thank you.
Thank you.
Next question comes from Mark Hammond from Bank of America. Please go ahead.
Thanks, Hi, Jay Christen Ken.
On slide eight.
You had that it's helpful to servicing cost per loan of $195 in 2019.
Yes delinquencies double.
What could that number be.
Parallel.
I I think I'd want to think about that run and give you a number off my head mark but.
I don't have something like unfolding.
I can follow up on that.
And then could you go into a bit more detailed out why the 15% is the right number for tangible net worth.
Intangible assets as far as like what the stress test it implied.
How you arrived at 15%.
I appreciate the question and our comments did say that that was a result of our stress test our stress test.
You know really.
We were in pretty good shape than that.
We would certainly a survival recession.
What I think the bigger picture is as.
The largest nonbank servicer.
And really trusted counterparty to Fannie and Freddie.
And then we just feel holding more capital is prudent and as a market leader again I think it sounds this may sound, a little trite, but we feel we have the best operating platform in the industry and putting that on an even stronger balance sheet I think will signal to people.
This is really a strong company that can generate sustainable returns.
Into the future and at the end of the day that is what's going to drive improvement in our stock price. So that's really the.
The basis for us.
Setting that target.
Got it.
And then the last on it.
Just putting two in two together said the discretionary steady state cash side, which is just help on great. They put that together with your tangible net worth goal.
All right you can pay down the 20 threes in two years with cash flow roughly.
Continuing at that state and get to your 15% goal.
Is that the base case or as a re fire partial rifai with a high yield issuance more likely.
Well because we've got the 20 threes and then the 26 is behind them.
I think we look at them both.
As an opportunity we do intend to continue to pay down debt.
But.
If the market provides us an opportunity to.
To smooth out on maturities and refinance at an attractive rate than.
We would take that and we'll.
We'll have more to say about that in the next couple of months.
Sure.
Got it thanks, Jay Christian can.
Thank you. My next question comes from Kevin Barker from Piper Sandler. Please go ahead.
Morning.
Good morning, Kevin So there's a problem boses question about the run rate on the servicing expenses.
It looks like the Oreo expense was a negative 29 this quarter versus a positive 11 million.
Run rate of roughly 23 million year to date.
Specifically around the area what was what else impacted that besides the $90 million recovery.
And.
What would your expectation for the Oreo expense on a go forward.
Hi, I'm not sure I can give you a forecast a reconciliation of the on the spot Kevin. The 19 was the biggest driver in that number but.
So Kevin you follow up with you offline and give you a full reconciliation of it.
Should our young spend and then beyond that I expect the line to be stable.
Just because of.
Of credit trends are very muted effect, there or delinquencies are down some but I expect that line the be stable from the rest of the year.
So you expect set out would be negative.
Mega et cetera.
That absent the recovery that we had in the quarter, but we'll give you a reconciliation following the call.
Okay and then.
Was there any trust collapses like you've had in previous quarters coming through this quarter as well.
No.
We do not have interest glass.
Okay.
And then your MSR Mark.
Was in line with most of the industry this quarter nine basis points give or take and but the marked down throughout the year was.
Less severe.
It was there anything in particular within the portfolio that shifted throughout this year never call. It the MSR marks throughout the year to be less severe compared to most of the industry.
No.
I think.
The answer would be no.
Okay.
And then.
Regarding the I think your phase new liquidity capital requirements.
Do you expect any impact on how you manage the balance sheet, whether it's additional lines of credit or sources of liquidity.
Or just in particular around the FHLB, which seemed a little bit more severe doesn't seem like there's anything in particular that stands out just given your balance sheet, but.
Oh, I I don't think Theres that hey thing.
Anything particular, I'd say we.
It long before these requirements came out in starting the beginning of year we.
Significantly expanded our El program and.
Thank you should expect that will.
The.
More active in buying out loans to manage.
Just.
Have a better financing.
Answer.
To certain delinquent loans, but.
Beyond that Theres, no change and and with regard to U.S.A.J. requirements.
I think it's interesting I came out with them, but you know our own internal policies actually requires the whole liquidity and cash Ed.
Higher levels, so there's no impact to our business.
But I think it's an interesting announcement and the interest and you see if anything else follows that.
Okay and then.
On your you'd be roll forward in servicing portfolio from page 23 of the presentation.
Got a transfer to sub servicing.
Did you receive common compensation for the move to sub servicing or was that just.
Part of some of the portfolios that you bought.
[noise] transfers Subservicing Im sorry would you nine nine and a half billion dollars' worth of you'd be.
That was in that forward and servicing that was transferred to sub servicing.
So pretty.
So.
Yes.
Oh, Yes, we sold a pool and our Subservicing subservicing.
Until.
The actual transfer.
Okay.
[music].
Thanks for taking my question.
Thank you.
Our next question comes from Henry Coffey from Wedbush. Please go ahead.
Yes. Good morning, you gave us some since January and made some positive comments on unlikely margins I'm, assuming you've had a decent sense. What February is all about as well.
With that Corona virus with the distraction from the election in the south of the Super Tuesday States.
Sort of et cetera, what does the housing mortgage equation look like from your perspective is it is it still is strong as it was before everyone started talking about Corona is or.
Yeah, I don't want to it.
Yeah, No I think.
We haven't seen any impact certainly we're aware like everybody else is watching the headlines and.
Watching the market yesterday, but in terms of refinance activity our pipelines remain very very strong margin is very solid.
And with the rate move yesterday will we'll see what how that plays out and mortgage Reits.
So.
It's too early to tell but I think prior to that.
We were already expecting the quarter to be very strong.
Yeah, I imagine there if.
You look Henry a lot.
Even prior to yesterday.
The we were having lots at all time highs we continue to have very very strong days.
Oh really endpoint. So the trend in February was was quoted as good as january's or some version thereof.
Yes, yes.
And then in and in terms of where are your customers are thinking I mean is it refinancing there are.
People living breathing people out there that haven't.
Figured out they can refinance their mortgage.
Is it improving credit where the people are finally able to take advantage of the rate.
Is it purchase money you, what what's really driving me equation.
Uh huh.
It's a combination right I think it's still a majority is rate term response to your point. There's there's people that are coming back again, a there's people that never have refinanced or some of its credit cares and you know we've always had a strong capability in a cash out kind of day.
Consolidation piece as well, but that's probably 20% or implied 30% of what we're doing today. So it's a cross section of what's going on a in the market I mean as you know appreciation has been very strong. So you still are seeing a reasonable amount called it there.
That are doing the debt consolidation cash out product, but and the remainder is rate term and.
Those are folks that have never done a refinancing the pass or coming back again.
It may surprise, you that people haven't taken advantage of that opportunity yet, but again, we have 1.1 million customers nearly 30% of our customer base could refinance today in say $200 a month and that's not taking into account people I could say even more through that consolidation. So there is.
Still huge opportunity for people to cash in on this refund them.
And we're really listen I mean, your origination has seen is just farming right. We made the investments we didn't talk about that as much last year, because we focused on tighten a lot and servicing but we've made investments in the origination business through the Homeadvisor program that we've talked about no through ourselves das, which as a tool that allows all.
Our loan officers and home advisor so really.
Worked with the customer and a very efficient manner to give them in the right product given all the options they need really at their fingertips. So you know, we're saying that's resulting in a really two things one it's it reduces our cost originate.
Over a thousand Bucks.
Last year and it also has resulted in just a more efficient better customer experience and frankly, and we don't have to hire as many folks because we just got the right tools.
Thank you very much good quarter.
Thank you thank you Eric.
Thank you.
Next question comes from Mark Devries from Barclays. Please go ahead.
Yeah. Thanks. Thank you as you mentioned, you're you're going on so margins are benefiting from capacity constraints across the industry could you just talking about what you're seeing.
Yeah from competitors in terms of adding capacity is everyone remaining relatively disciplined here in <unk>.
And just thoughts for different applications and not the intermediate term for the margin.
Well, we go back to what we told you last quarter.
Remains the same that we expect the margin to normalize over the course of the year, we do see people adding.
Capacity and we expect them to continue at to add capacity. So eventually gain on sale margins will come in.
It's just a matter when so we expected.
The margin to normalize more in the first quarter.
And we haven't seen that.
So.
We're not hoping for we're not but we expect it.
Beyond that I wouldn't give me any more specific.
Forecast.
Yeah, we actually expected to see normalization occur in the fourth quarter and it didn't happen so.
Yes, I mean, it feels to me like I was with a few of our peers. The his last week at a conference in it does appear to me at least on the non bank side I don't really have a great. You ended the banks, but there is more discipline. This time around I mean folks are adding capacity I mean, we're still adding capacity, but it's not.
No, it's not significant and so it feels to me that Chris This point at some point I'm sure there will be more capacity in place, but I do think people are definitely being more disciplined than we've seen in the past.
Okay. That's helpful and it sounds like these new I'm, you know F <unk> requirements for nonbank, Servicers isn't really going to impact you materially.
But any thoughts on whether it could you know impact other nonbank servicers and if so could that create some opportunity.
You guys get active again doing some bulk acquisitions.
I think it will impact some and I think they run some analysis and across their servicing population. So they know.
Yeah, the folks that it will impact I don't think it's a significant number but clearly there's going to be a category that that will be impacted or will that present opportunity. You know I think our focus is like we've been saying focus on the core we think we've got to best operating platform out there I think we've got a lot of momentum.
In the origination business lot of momentum in servicing business now we're going to take out when it still I think early the middle middle innings of taking cost out. So it's yeah I wanted to focus focused focus on the core and you know if you think about what would what would be available in the March.
Second place.
I don't know that it would have to be something pretty special write some capability that we do not have and I just don't know what that would be it at this moment in time, we got a long runway of opportunity and a long runway on this on these strategic pillars, so I'm pretty happy about where we're at and continuing to grow.
So.
And the profitability of the business and the return on the business.
Okay. Thank you.
Okay.
Thank you. Our next question comes from Kevin Barker from Piper Sandler. Please go ahead.
Yeah, I just wanted to get an update I'm. So far this quarter on where are your prepay speeds are coming in given the move in rates I know, it's been I've been pretty volatile here recently, but just trying to get it feel for prepay speeds versus the 18% that's running it.
Oh, we expected them to be modestly down this quarter and they are modestly down, but there's still elevated alone had the exact number through the quarter, but.
I'll just leave it at that they're down modestly from where they were.
Fourth quarter.
Okay. So would the lock volume that you're projecting january be driven mostly by correspondent or would that be due to consumer direct volumes driving most of the increase in line.
It's it's I was quite a consumer direct.
Very focused on the consumer direct piece of the <unk> Lucky increases all consumer direct and I'm speaking primarily yeah.
Okay. Thank you.
Thank you.
Actually no further questions in the queue at this time I like to turn the call over to Jay Bray, Chairman and CEO for closing remarks. Please go ahead.
Thank you thanks, guys for joining us and I will be available for questions layer upgrade I appreciate it.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].