Q2 2020 Mr. Cooper Group Inc Earnings Call
If it's called will begin momentarily once again, please stand by year Mr. Cooper Group second quarter 2020 earnings conference call will begin momentarily. Thank every patient than please continue to hold.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Mr. Cooper Group second quarter 2020 earnings call. At this time all participants are in listen only mode. After the speakers presentation. There will be good question and answer session to ask a question. During this session you need a press star one on your telephone.
Thanks program May be recorded I would now like to introduce your host good taste program, which again post or senior Vice President of strategic planning and Investor Relations. Please go ahead, the request and every time.
The weather today.
Good morning, and welcome to Mr. Cooper group's second quarter earnings call. My name is kinda Posner and I'm SVP of strategic planning and Investor Relations with me today, our Jay Bray, Chairman and CEO, and Chris Marshall, Vice Chairman and CFO.
As a quick reminder, this call is being recorded and you can find the slides on our Investor Relations Web page at investors Dot Mr. Cooper group <unk> Dot com.
During the call we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck.
Also.
We may make forward looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K in other STC filings.
We are not undertaking any commitment to update these statements if conditions change.
Now turn the call over to Jay.
Thanks, Ken and good morning, everyone, let's start as we normally do by reviewing the quarterly highlights on page six we reported GAAP net income of 73 million or 77 cents per share.
GAAP income was driven by record 350 million in pretax operating income, which would be equivalent to an ROTC a 55%.
Operating income was partially offset by a noncash mark on the MSR portfolio of 261 million. This mark reflects faster prepay assumptions and a conservative higher estimate for cost of service based on market participant opinions.
Cash flow and liquidity, we're extremely robust in the quarter and this drove unrestricted cash to 1 billion actually 1.0 for 1 billion to be precise which was up almost 500 million sequentially.
Based on this liquidity and the progress we've made an improving profitability. The board has authorized 100 million dollar share repurchase program, which we expect to completely over the next 12 months.
Record operating results were driven by the origination segment, which contributed over 400 million in pretax earnings on record margins.
At the moment the entire industry is enjoying a huge tailwind, but our direct to consumer team's execution has been flawless volumes and margins have remained quite strong so far in July and we are optimistic that originations will turned in another excellent performance in the third quarter.
The servicing margin declined 2.7 basis points, which was inline with what we guided you to expect this is obviously a thin margin, but you should think of it nothing more or less than the mathematical consequences of low interest rates, which impact us in terms of higher amortization and lower interest income.
Loan servicing margins go hand in hand, with outperformance in originations and taken together our overall results speak to the balance we've achieved in the Mr. Cooper business model.
I'm very pleased with the operating story in servicing and especially our continued progress in driving efficiencies as well as the decline in forbearance, which I'll comment on more in a second.
Finally zone results were frankly better than we expected on a very strong contribution from Tyler.
To summarize this was a great quarter from Mr. Cooper and I feel very optimistic about the outlook for the second half and 2021.
To be sure there's still enormous uncertainty concerning the pandemic and the economy and we think a conservative mindset remains absolutely necessary.
As far as business planning our base case, it seems a very slow recovery with unemployment hovering close to 10% throughout 2021.
But within this context the housing market is a bright spot primary residence inns have long been the most important asset for consumers and this seems to be even more of the case during the pandemic when many of them sheltering in place are working and schooling from.
And of course, low interest rates support housing demand.
We also believe we're well positioned within the mortgage industry, which has been consolidating for several years into the hands of a small number of operators. Among this group we enjoy the benefits of scale. We have excellent liquidity, we've built a proprietary automated low cost digital platform and most importantly, we haven't.
Team of tremendously talented and passionate associates, who believe deeply in our role as advocates for the cost for the customer.
Now, let's turn to slide seven and review the latest stayed on forbearance, which I know is top of mind for all of US. The good news is that the numbers are declining as of July 27, 5.9% of our customers were still on a forbearance plan.
Alan from the peak of 7.1% at the end of June.
The first cohort borrowers is rolling off of 90 day plans either because they remain current all the way through our because they no longer felt the need to deferred payments and elected to come off forbearance. Additionally, new forbearance take up has slowed a great deal and is now under a thousand customers per day.
Taking care of customers as our first priority and we'll always do what it takes when the pandemic hit there was tremendous support within the industry for the forbearance plans, but we and others questions implications for liquidity. Since then Fannie Freddie engine have come out with a series of policy updates, which we used.
Summarize for you in the table to the right.
And our view this is really a very positive outcome, which provides us with the right tools to assist customers while preserving liquidity.
[noise] one program in the table I'd highlight which was announced fairly recently is FHLB streamline modification program.
This is an option for customers, who have been impacted by independent and are unable to make their regular payments under this program. We can lowered the interest rate for these customers without going through the time consuming and costly underwriting process required and traditional modifications.
We can help these customers get back on their feet with a lower rate and then when they're in position to that and we're then or in a position to deliver the land back into a Ginnie Mae securities.
Going forward, we're expecting a large volume of customers will be coming off a forbearance and the second half.
But as I pointed out last quarter, we made significant investments and automating the modification process as part of project type.
And since then we've rolled out additional digital tools, we expect to provide a positive experience for those customers ready to resume payments and of course, our teammates will be focused on those customers who need extra help.
If you'll turn the page to slide eight I want to hammer on this thing the balance between servicing and originations.
Because I think this is really important to understanding our earnings going forward and the potential we see in the stock price.
The chart on the left shows you the pretax contribution from servicing origination and zone over the last five core quarters.
This chart drives home the point that is servicing earnings have come under pressure originations has filled the gap and then some.
Second chart shows you the trend in our cash flow defined using the steady state discretionary cash metric, we shared with you since early last year.
Thanks to the strong results in our originations segments, both earnings and cash flow have accelerating.
Finally, the chart on the right shows you the trend and tangible book value, which includes the operating results and the marks we take on the MSR.
As you can see we've grown tangible book value by more than 30% over the last five quarters.
Now, let me be clear about something we're certainly not taking a victory lap. This morning, because tangible book value is still 1% below the level, we reported in the third quarter 18, when we close the W. NIH merger.
However, please bear in mind since the WMS merger close we weathered a series of extremely adverse shocks from the point of view of a large servicer.
With mortgage rates down 160 basis points and live or down over 200 basis points do you have sustained tangible book value against this backdrop should give you a lot of confidence and the resilience of the Mr. Cooper business model as well as our teams careful approach to managing risk.
Now, we're expecting to sustain tangible book value growth through the remainder of this year and 2000 were 21 and you for years to come.
Let's turn to slide nine I'm going to wrap up my comments by talking about our priorities for allocation of cash which is a top focus for the board and the management team and our frequent question, we hear from both our equity and debt investors.
Our first priority is liquidity you should expect us to proceed at a cautious and deliberate ray before returning liquidity to pre crisis levels.
While recent forbearance trends are encouraging the path of the cobot pad pandemic is unknown and the economic outlook is highly uncertain, we take our role as a leading institution in the mortgage market very seriously and we don't want any of our stakeholders to worry about Mr. Cooper's ability to take care of our customers even in an extreme.
Adverse scenario.
Our second priority is de leveraging which remain which we remain committed to.
Strengthening our balance sheet is a key pillar of our strategic thinking and a key driver of high returns on equity.
And talking about de leveraging we've always emphasize that it would take place opportunistically rather than at a constant cadence over.
Over the last year, we've paid down 200 million of our senior notes and then in January we refinanced 600 million and it transaction that was six times oversubscribed and as a result, we now have an attractive liquidity runway with no maturities until 2023.
Today, we are monitoring the debt markets on a daily basis, and if the opportunity presents itself. We're prepared to retire a portion of our 2023 maturities and refinance the remainder provided we can do so at an attractive cost.
Now, let's talk about portfolio growth as you will recall over the last 18 months. We told you that growth was not a priority because we needed to focus on integration and efficiency.
Well today, all the integrations are complete.
And we've made substantial progress on profitability and efficiency.
What's also changes that we're seeing more attractive margins and the correspondent and flow channels and as a result, we resumed deploying cash there.
Depending on how things shake out it's possible, we may see acquisition opportunities at this at distressed prices, although so far we do not have much to report.
Finally, let's talk about the stock repurchase authorization speaking on behalf of the board we feel the company's made a lot of lot of progress since the WMS merger and while we have much work still to do the progress. So far does not appear to be reflected in the spot price now let me be very clear because I don't want to send mixed signals.
Liquidity and de leveraging our non negotiable share repurchase will be a second priority and something we will undertake on an opportunistic basis, depending on the stock price opportunities corporate portfolio grows and the broader economic context.
And with that I'd like to turn the call over to Chris.
Thanks, Jay good morning, everyone.
I'm going to still on page 10, which lays out of some review of our second quarter results.
And to briefly recap.
Net income was 77 cents a share pretax operating income was 350 million.
Discretionary steady state cash flow was 368 million.
Fully tax ROTC was 55% and our tangible book value increased to $21.42 a share.
In terms of adjustments, we had a million dollars severance which was related to closing down the wholesale channel, which was a decision we made before the did that.
Now if you refer to the balance sheet in our earnings release published this morning, you'll see the DTA decreased by $20 million in the quarter.
I know so have you may be starting to think about different election scenarios in November.
And I'd like to point out as I'm sure you're aware that our DTA could increase in value significantly into corporate tax rate were raised after November.
As we look out to 2021.
We feel very optimistic about the outlook look for earnings cash flow.
And growth and tangible book value to start with the current interest rates, we'd expect to see strong origination market conditions persist being well into next year.
In addition, we're looking at several strategies to enhance earnings growth independent of originations, which includes lowering our cost of debt from de leveraging and refinancing.
Growing servicing portfolio at attractive margins and taking zones contribution up to the next level.
Additionally, we are continuing scrutinized costs throughout the organization has implemented a zero based budgeting approach as we plan for 2021.
Now, let's turn to slide 11 to discuss the $261 million Mark to Mark we booked in the quarter, which reduced the value of the MSR by 7% from 170 basis points of view BBB 99.
The market is primarily driven by an interest rates mortgage rates down 37 basis points in the quarter.
Swap swap rates down 20, which led us to raise the lifetime CPR.
To 14.2%.
64 million of our more.
Related to higher cost to serve assumptions.
For our current population of delinquent loans, we project a cumulative default rate of 19% and apply cost of service of approximately $600 for defaulted loan.
Now bear in mind leisure market participant assumptions, which were required to use under GAAP and they don't reflect the unique benefits of our low cost platform or our track record of superior loss mitigation.
In case you wondering.
We continue to manage the portfolio on an unhedged basis, we do have an in house team and overseas interest rate risk in hedging and we're constantly evaluating the optimal strategy for the MSR. However at this time, we have not implemented an MSR hedge with rates, so low and prepay.
Payments speech, so high the downside risks seems much more limited to us today compared to what we've already experienced over the last few years to be specific as of June Thirtyth, we estimate that a 25 basis point, which will result in a mark to market loss of 93 million, which we earn back.
Total DTC crop is in a relatively short period of time.
As you saw in second quarter.
We did just that we recovered the Mark and then some within the same quarter.
If you look at the table, we provided on the refinance ability of our portfolio.
Don't be surprised to see we have these huge opportunity.
So unless there's a sudden change we'd expect to be busy helping customers save money with rate and term refinances throughout 2020 and well into 2021.
On that note, let's turn to slide 12.
And talk about the origination segment, which produced record results with pretax income of 434 million of nearly threefold from 158 million in the first quarter.
As you'll recall at the KBW mortgage Finance conference, we provided intra quarter update with an estimated 10 billion in fundings and a margin of approximately 3% and that's pretty much where we came in with 10.7 billion and fundings and an overall margin of 3.29% I'd point out that eight.
Point 6 billion of those findings and from our highly profitable DTC channel has been growing significantly over the past few years.
Now as we mentioned in our first quarter call, we temporarily suspended the correspondent channel as precautionary step on the National Emergency was first declared and disruptions in the capital markets.
Now, let's call it straight out of our risk management playbook and it was responsible thing to do and you saw similar decisions that many of the banks.
Once we had taking stock of the new environment uninsured or liquidity was watertight.
Turning to correspondent channel back on the correspondent is important to us because our primary channel for acquiring new customers.
We're seeing very good margins right now.
But we do expect them to normalize quickly as capacity is returning to the market.
I will mention that we're working on some very important efficiency plans, which should position us to significantly grow correspondent as we entered 2021.
For now we guide you to look for volumes with turning to pre crisis levels.
The DTC channel executing flawlessly in the quarter scaling up in response to huge customer demand.
And producing excellent margins.
We'll know recapture rate declined to 31% in the quarter from 38 in the first quarter, but as we pointed out before this is the normal pattern for us during refinanced groups. It reflects the fact that we add capacity at a deliberate pace with an eye on the long term and additionally, when the crisis hit and we shifted to work.
For home status that slowed our hiring and are on board.
I will now back to growing our teams, including your home advisors and we should see progress in the third quarter.
We're also investing in new automation designed to speed up certain workflows and support faster turn times.
Lower costs.
And produce higher volumes project is referred to as project Flash.
We look forward to tell you more about this initiative is the results become more visible in our numbers.
Looking ahead and based on July results and assuming no further change in interest stage, we're expecting fundings of roughly 14 billion in the third quarter.
Our margins may drop back below 3%.
And that's just going to be reflecting a more typical balanced between DTC correspondent.
And when you soon blocks in funds will be running closer in line in the quarter.
Now, let's turn to slide 13 and reviewed servicing portfolio.
Total you PV ended the quarter 596 billion.
Down from 629 billion in the first quarter on elevated runoff in both the MSR and the sub servicing portfolios as well as our decision to temporarily suspended the correspondent channel as you can see it was a pretty dramatic spike in CPR to 26%.
In 2019.
We told you we're going to take a pause from growth to focus on integration de leveraging and profitability.
And that's exactly what we did at same time returns in the market were compressing.
The unattractive level, so we didnt really missile of opportunities to create shareholder value, but today the market should we're seeing excellent margins in originations and coal issuance. We're also seeing some interesting opportunities in the bulk market, although not yet anything.
Characterize is really stressed.
We're currently reviewing several deals so though you should expect us to remain extremely disciplined bear in mind, we often get to buy this is the apple since we're not the women's buyer, we might still be operator that financial investors turnkey for Subservicing and that was exactly the case earlier. This month when we were selected to some served.
$20 billion pool that was purchased by a highly respected asset manager.
Now subject to final contract negotiations, we're hopeful that this transaction will grow into a large long term immune mutually beneficial relationship.
Net net.
Given continuing high levels of prepayments speeds and the timing of boarding this new relationship you may see another decline in the portfolio in the third quarter, although that would probably be of a much smaller magnitude.
The by year end, we'd expect you could be growing again.
At least at a moderate pace.
Now, let's turn our attention to the servicing margin.
On slide 14.
Excluding the full mark the servicing margin was 0.7 basis points.
Down from 3.9 basis points in the first quarter, which was inline with our guidance of plus or minus breakeven.
As Jay mentioned servicing margin reflects nothing more than the math of low interest rates as you can see the chart on the right over the last year amortization has roughly doubled while the interest income we earn on custodial deposits has declined significantly.
Over the last year. These two factors taken together accounted for six basis points in margin progression.
As Jay pointed out.
The right way to look at our businesses to combine servicing and originations together.
Servicing margin loss to low interest rates has been recover and then so by the excellent recapture economics in DTC.
In fact, this quarter not only did the contribution from originations offset a decline in servicing it also paid for the Mark resulting in positive GAAP results. Despite the unprecedented environment.
If you want to consider an alternative metric for evaluating the business is in combining servicing DTC and the interest rate component of the Mark.
Would be equivalent to an all in margin of 15.4 basis points of GPV.
Now looking past interest rates.
Really good story reserves.
Total expenses are down 67 million year over year, reflecting the benefits of both project Titan and our corporate actions.
We'll see the same trends in the latest edition of the benchmark study published by the mortgage Bankers Association, which once again showed us with lower direct costs than peers and with the gap actually widening in our favor year over year.
Foreclosure expenses also down significantly year over year, which reflects progress rationalizing the reverse portfolio.
And ongoing recoveries from prior Servicers.
Looking ahead, we expect the servicing margin to be flattish in the third quarter and then begin to recover.
In the fourth quarter as higher incentive fees should become more visible as we hopefully growing number of customers exit forbearance.
At the same time unless interest rates fall further.
Amortization should level off and begin to decline.
Now turning to XOMA on slide 15 pretax operating income was 13 million this quarter.
Flat for the first quarter, which was quite a bit better than we expected.
As you'll recall, we caution you that.
Nationwide foreclosure moratoriums with put at our very profitable Oreo exchange on hold and those revenues largely disappeared in the quarter.
However, our title unit outperformed our expectations aided by further declines in interest rates and the resulting surge in refinance volumes.
We expect strong results in the third quarter, although likely moderating somewhat from the second quarter levels.
Now once the moratoriums were lifted in the exchange comes back online zone should make a significant contribution to our overall results. However, I don't want you to think we're sitting around waiting for this to happen expenses are down $6 million its own year over year, reflecting the benefit of corporate actions, we've taken to streamline costs and more efficiency plan.
Our in the works.
In the short term, while the Oreo exchanges idle, we've redeployed team members to originations and surgeon.
As a reminder.
Zone doesn't require capital.
Contributing much of anything to TBD.
You should keep in mind and evaluate our stock or evaluate our leverage ratio.
Now I'm going to wrap up my prepared remarks. This morning by commenting on the balance sheet Slide 16 gives you an update on our advances and financially lives you can see that advances were flat quarter over quarter at 812 million.
Hi, prepayments fees gave us extra float this quarter, which more than offset the impact of forbearance.
During the quarter unrestricted cash grew by 462 million to just over $1 billion.
The most important source of cash was our operating performance.
We estimate discretionary steady state cash flow was 368 million in the quarter, which is net of the investment required to sustain the MSR.
Also helping cash balances, we drew down 150 million on MSR runs to ensure we were prepared for an extremely adverse environment. So far hasn't materialized. So since quarter end, we began paying those lines, but now.
Offsetting these inflows, which some short term swings working capital.
Last quarter.
We disclosed in $850 million increase in committed facilities for financing GSV in private label advances, which we said then they continue to believe are more than adequate for an extremely adverse scenario.
We also said that we plan to finance.
Ginnie advances with corporate cash flow.
Today.
With close to finalizing a new significantly expanded Ginnie Mae facility with a premier bank the finance, both MSR and advantages.
Pending final approvals this facility should close some point in the third quarter.
This is a very important development for us.
What it means that even in a more adverse environment. The only drain on our corporate cash flow would be the haircut on advanced facilities.
Which would be a manageable amount of cash in any scenario, we can imagine.
Now, let's finish up with some comments on capital and leverage on slide 17.
As you know strengthening the balance sheet is a key pillar in our strategic thinking.
In our fourth quarter call, we laid out of capital target of 15% or higher and tangible net worth to tangible assets. The target was based on feedback from investors.
Together with a thoughtful assessment of our current business model, taking into account risk based capital calculations as well as the results were stress test model and analysis of our peers.
And we ended second quarter, and 11.5%, which was up from 10.8% in the first quarter.
Based on our current outlook.
We'd expect further expansion in this ratio in the third quarter, and we're optimistic about achieving or target.
During 2021.
In addition to progress on the ratio I'd also point out that the composition of balance sheet has changed significantly over the last year, which further bolsters our credit profile.
Year over year cash is gone from 1% to 6% of total assets, reflecting robust liquidity.
The MSR asset, which is our primary risk exposure has declined from 19% infill allows us to 16%.
Same time, we've demonstrated that the origination segment is a very powerful natural hedge in fact as I mentioned earlier in this quarter DTC recovered the mark entirely within the quarter.
Mortgage loans held for sale.
Have remained relatively flat.
Considering the extreme capital markets volatility in the quarter I think it's fair to say, we've demonstrated strong competency in our pipeline hedging liquidity management.
The reverse portfolio, which were running off has been shrinking in line really guidance as a reminder, reverse mortgages make up almost half of our total assets.
What are a low risk government guaranteed asset, which are consolidated for accounting purposes, you might find it interesting to note.
That reverse mortgages are excluded from a ginnie Mae capital requirements. So please consider this when you evaluate our balance sheet.
And finally.
The DTA increased from a year ago, but thats, primarily due to the release of the valuation allowance, which reflects the companys improved profitability.
Now when we look at the stock price, we conclude as the markets too conservative.
About the ready, which will utilize the DTA or it's not assigning enough value to zone.
Or doesn't believe weve achieved the sustainable balance between searching originations were confident that the stock is undervalued and it's going to appreciate significantly over time.
So with that ill turn it back to Ken acumen.
Thank you Chris I'll now ask our operator start acuity session.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one and you touched on telephone. If your question has been answered and you'd like to move yourself from the Q. Please press the pound key our first question comes from the line of Bose George from KBW. Your question. Please.
Hey, guys good morning.
Good morning are you said the.
The expectation for volumes in third quarter is going to be is 14 million can you give us a mix of retail versus correspondent and then just talk about gain on sale margin trends so far in July.
I was 14 billion.
Those Chuck 14 billion.
The billion upwards the night, yes.
We'll see growth than a DTC and say that will be.
$9 billion ish maybe.
Slightly higher than that and then balance to be correspondent.
Okay, and then the gain on sale margin trends are they pretty remain pretty high.
Yes, yes, as the market seems pretty strong we don't expect overall margin.
To change much but of course will be more balance in the in the channels and so that's the only reason we're saying.
The overall margin may slip below 3%.
And it makes sense and then just you noted the MSR Mark on the 25 basis point adverse shock would be 93 million. When you look at that is that based on the primary mortgage rates. So is that what we should be looking at.
This is primary mortgage really and swap rates of both of those drive the.
The impact.
Okay. So quarter to date right now it's the move is seems pretty minimal based on the primary rates is that fair.
Yes, there has been some deterioration in the first month in race, but.
At a much more modest it's very much more modest decline on it was this time last quarter.
And then actually just one on the Ginnie Mae.
Loans it when does it make sense for you to buy those loans out of the pool is there it or the economics, there be that's something that could make sense anytime for use capital for that purpose.
Yes, we think there would be a big opportunity as people come off of.
Forbearance and.
And I think.
Ginnie Mae and FHLB have been extremely customer friendly.
In designing a program that's perfect for the current economic environment, So it's going to be.
Much less burdensome on the customer and we should be able to.
Outcome.
Modify their loan or.
Or refinanced their loan.
Very efficiently.
And I think those you know this is Jay now about the streamline mine program that FHLB came out with which.
Chris This point I think is very customer sharing link and really eliminates a lot of friction between us and the borrower and should be a really good customer experience and I think if the bar needs that modification, how obviously, we'll be able to to redeliver that.
And we know it should be meaningful from a profitability standpoint.
Okay, great good quarter guys.
Thank you thanks.
Thank you. Our next question comes from lineup, Doug Harter from Credit Suisse. Your question. Please.
Thanks.
I've talked about kind of deleveraging just any sense as to kind of.
Sizing that that de leveraging that you'd be looking to do today versus.
How much of it occurs in the future.
I think overall our.
Approach to de leveraging horizon has it changed Doug We said, we wanted to bring the company back down to pre merger debt levels.
And between the.
The debt that scalable now on the debt that will be called next year, we think we get to that level.
I think how much we do today versus a year from now is going to be market dependent.
But we are I mean, I want to make sure everybody hears in her Jay very very clearly our priority is liquidity number one.
We are awash in liquidity and feel great about all the facilities, we've been able to put in place and the cash regenerating.
But the.
The crisis in November so we're going to remain conservative there and we are going to de leverage so as I don't want to commit to a number today, but our overall plan has not changed.
Got it and then just on that.
Maintaining liquidity.
Hey can you just talk a little bit more about kind of.
You mentioned, a little detail, but what exactly you're planning on in terms of forbearance and.
How much Cushing, you're kind of building in on that end relative to kind of where we are today.
Kind of given the continued uncertainty.
Well.
The honest answer is there's still some unknowns about what forbearance will be.
But I think we've taken a very conservative approach in fact, our forbearance levels.
Our less than half of what we originally projected and the requests regaining continued to decline and thats been consistent for the last.
For six weeks.
The other thing I'd point out is there one of the big assumptions, we had in our forecasts projections was the rate of which people would exit and that was a pure on known.
But in fact, we estimate a 20% of our customers would exit forbearance. After the first 90 days and in fact, we had more than 20% I just.
I'd also say in terms of the customers there on forbearance.
29% of on more still not 30 days delinquent 17% of them.
Made their payments consistently.
Another 12% have yet to Mr payment noble theyre less than 30 days delinquent. So we look at them into separate buckets, but thats, 29% of the population. So we feel very good about.
Continuing.
On the past that.
We're on.
These the one on known is what happens when Forbearances over we have relatively conservative estimates of the number of customers that are going to lead default.
At 19% or the total population that is not current on their loans.
And the cost that we are assuming again, that's a market position in cost that is not a cost that reflects our internal efficiencies.
So.
I can't tell you, we have 100% accuracy on forbearance because of the unknown, but so far everything we've done has been conservative we've lined up facilities that are more than adequate for any scenario, we can imagine.
And so we think we're in a very good place, but we're going to remain extremely cautious and conservative.
And the only thing I would add to that if if you look at our overall forecasting methodology, we are using moodys kinda baseline scenarios and stress scenarios, which would have seen unemployment in as I mentioned in his script remains xeno and the double digits.
Throughout 2021, and the overall forbearance levels, frankly, new forbearance continue to come down and even below the you know the thousand then I that I mentioned.
On the earlier on the call.
Great. Thank you.
Thank you. Our next question comes on line to Mark payment from Bank of America. Your question. Please.
Hi, Jay Christian attend.
[music].
Regarding a possible.
Partial refined the 2020 threes.
Is that contemplated in your comments about working to get back to the tangible net worth.
So 15%.
Yeah, we're forecasting.
Certain amount of deleveraging we're forecasting.
The.
Conservative.
Execution of a buyback program and we're the most important thing we're.
We are forecasting is.
Mark I hope you can appreciate that we'd have been very conservative given guidance on originations and we've shied away from giving future guidance on what the market was going to do but at this point, we don't see anything changing strong strong originations performance.
Through well into 2021, so the profitability from.
From that and the cash flow Thats generating is really the biggest driver and this getting to that 15%.
Got it Chris in EMEA and my follow up.
Which is just.
What is it going to take for the industry origination margins to normalize.
Is there some supportive earn out.
Or.
Yes, I am sure at some point in time will be borne out in the meantime, we'd have to be awash with tens of thousands of new loan officers and processors. It's we're in this perfect situation, where you got to have trained people online and all of the large origination.
From the mortgage companies are adding people to the platform as are we I think we had.
300, new hires last week.
So we are moving very aggressively to do that but in a in a measured way and we've got to train people on our systems and yes, even at those levels, it's hard to keep up with the massive amount of our customers that would benefit materially by refinancing rates are so low.
It's going to take a while to catch up to that so absent rates turning around in rising quickly, which nobody is going to forecast.
Companies with.
Strong officially origination platform, which should do very very well for the foreseeable future.
And it really it's a compact capacity play at this point I mean, we we could do significantly more locks per day in and we had more capacity and that's to Christmas point, we're building that capacity in you know there's.
And within our portfolio, obviously, we've mentioned it but well over a million customers that we think we can help and we want to help and we plan to help so long long runway there and we expect significant profitability to come from that originations business and significant cash flow to come from that.
Business So I'm.
I'm really bullish on it.
Alright, Thank you all.
Thank you. Our next question comes in the line, Kevin Barker from Piper Sandler Your question. Please.
Good morning, I, just like a reference the.
Modification programs that you laid out where those programs officially announced by Freddie and Fannie.
And then.
What those just with the potential fees that you could retain on them.
Be purely on the loans that have gone through forbearance or is this an all defaulted loans that go through a modification.
Okay.
Go ahead, Chris.
I'll answer your question.
Sequence.
Beyond the agency size of the plans have been announced in the maybe.
[music] nuances that continue to come out.
And then on the Ajay side things are not completely final, but I think we have good idea as to where they're heading I would say again that the agencies.
The FHLB say dr. collaborative.
The FHLB debridement gumtree in Ginnie Mae.
All of the agencies have work to make the modification.
Process, very very customer friendly and of course, we're benefiting tremendously because the investments we made in our automated claims versus last year.
Yeah, I would add to that Kevin I would think of it as in two buckets. One on the forbearance plans, yes. The GNC has just come out with their deferral plan that come out with how that works as well as the fees were going to earn on that and so I think that's that's crystal clear I would not want that end, where the traditional modified.
Station right, it's the customer cannot and Doesnt can't qualify for you will or the deferral doesn't work for them than there are you know other modification programs that are the more traditional Fannie Freddie modification programs and we would get pay a fee for that as well. So I would think of it that way.
Furthermore, we kind of.
Second in the waterfall, if the customer can't make all the payment that they were born on and then the second piece will be the traditional months on the F.A.J. The streamline mine has been announced the partial claim has been announced.
And on Yeah, the streamline mine as we talked about earlier I can't.
I think FHLB has been a real leader here and rolling that out and to our porn or earlier once we my that loan where a customer that does need payment assistants, we're going to redeliver that any you know earn anywhere from five to six points. So it's a very meaningful PNM will impact.
And I think it's a great solution for the customer 'cause. It you know it reduces their rate frankly to the market rate, that's assuming that again they can't continue with their their current.
The current rate and resume their payments.
So that's the way to think about is that makes sense. Okay. And then when we think about the population of potential borrowers that could go through a modification or.
Or refinance or what have you.
Do we look at the 5.9% forbearance outstanding that you disclosed on slide seven and apply that to the entire servicing portfolio or should we just look at the servicing portfolio that's owned versus sub serviced.
It would be the entire.
Okay.
And then you made reference to a 3% gain on sale sub 3% gain on sale margin in origination channel did you mean gain on sale margin or do you mean pre tax margin per year Phebe.
Pre tax margin per you PB.
Okay. Thanks for clarifying that right.
Thank you. Our next question comes from the line Giuliano bundling it from BP. Your question. Please.
Good morning, and congratulations on great quarter.
Thank you Julie.
I guess, starting off where things.
Curious about is and thinking about the loans are coming offer forbearance is there a sense of the mix of how they're coming off.
In the sense are they using the.
Payment deferral program are these modifications or are they re performing im just curious if there's a sense of what the mixers for loans coming off forbearance.
Yeah. If you look at kind of the first cohort and I mean that get these exactly right, but effectively us, but 30% came off.
And of that 30%.
That 80% of that 30% just came off the resuming their normal payments. So some of those were already making their parent payments, even though they were on forbearance plan and so they just came off the plan and continue to make the payments others can't buy catching up on the payments and resuming a normal payments.
And then a small percentage came off the some type of modification type solution. So we're very I mean honestly to Christmas point, we're extremely pleased with two things one the overall level forbearance has been much slower than we had forecasted in much.
Lower than we sized our financing capacity to and too you know the first group of customers that have come off the forbearance plans have exceeded our expectations as well about how many are resuming their normal payments. So I think the early you know percent I mean, the early results are now.
Really fantastic.
And then from a we've we don't talk enough about this but when you look at the tools, we've rolled out for our customers we rolled out some digital tools for both going on the forbearance plans and then customers that are coming off the forbearance plans and really the ones that are going on we're seeing 70% plus are using our.
Digital tools and not really you know requiring discussion with our customer service reps, which is a great experience for the customer and obviously.
From an expense standpoint is good for us and for those that are coming off we're actually seeing a lot of those are using digital tools as well I think it's close to a third and so I'm you know, we're seeing great progress there.
So I think look at the end of the day it's.
The way I find having lived through the last crisis. This is.
This is as you know we are well ahead of you know anything we can conceive of.
You know, especially compared to last crisis, there better tools for the customers.
From a technology standpoint, we have significantly better technology, both thing on the backend for our team members, but especially on the front end as well for our customers and so I think it's a it's just so far it's been a very positive experience.
For all our stakeholders and I think and we'll see what happens in latter half the year, obviously, we're going to remain cautious and conservative, but so far it's been it's significantly exceeded our expectations in a positive way.
That's great I guess kind of drilling down a little bit more on that since a lot since a large portion.
We performed by making their payments are kind of continuing.
I think Fannie and Freddie have a re performance fee. If you we perform within a certain number for a certain number of payments that table I just wonder if I'm correct on that Andy.
Second part of that as we think about the FHLB streamline product.
Because you're able to report those loans you should be only got some sort of the gain on the reporting I would assume and if you have to get a sense of what kind of games are able to get on read on pulling those modified Dutch Jenny loans into.
New pools, and then where will that profitability for through.
From a more so yes, you know geography perspective.
Yeah, I think on the recalling question as part of comparable to what we talked about previously its its end to end today's market. It's in the five to six point range. Since it other you PB such a very meaningful amount of revenue and that will flow through the servicing segment.
That's great on online.
But I guess that kind of covers my questions for now and ill jump back into queue I really appreciate the time. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Mark degrees from Barclays. Your question. Please.
Yes. Thank you just wanted to clarify some of the comments around the correspondent business Im Chris I think you indicated that you expect for the balance for the year for volumes kind of revert back to kind of pre covered levels.
But that you were looking to make some changes for 2021, where you can really step that that volume up is did I hear you correctly and if so can you give us any color on how much you. We should expect Sharon corresponded to kind of increase in 2021.
Yes, Mark.
Appreciate the question because they didn't want to touch on that but.
We're not going to give you guidance today I would say.
We are building out some.
Technology, and we're not going to.
Car route and technology investments like we've done the best because it just so much part of the company now.
The project Flash view love that name.
It is really a broad based.
Set of investments in New York originations business due to employee.
Bob Thats in automation in a lot of the underwriting.
Quality control parts of the business I think thats going to help us move much more quickly we're not going to set a market share a goal today about our AR.
Overall, we like the idea of having a balance between DTC corresponding today.
DTC, which is incredibly profitable has grown so fast so essentially doubled in the last year and continues to grow so we've got plenty of room for corresponding to catch up.
Okay got it and I was just hoping you could help us think through the moving pieces on on the servicing margin.
You know and what's going to help kind of contribute to I guess starting for Q.
A recovery not margin.
Well for Q4, Q, we do expect CPR is to slow down a little bit Thats just.
Sure the historical cycle.
And actually I wouldn't feel that if they did because it just means we're going to be originating more loans.
And that trade is more profitable, but we do expect them to moderate a little bit NIM, we should see a little bit more the modification.
Fees start to show up that we just discussed.
But again I would encourage you to look at both businesses together. The reality is six basis points of compression come straight for amortization doubling in the last year and LIBOR completely collapsing. So eventually.
Amortization will stabilize and start to decline.
When Livewatch comes back is anybody's guess, so I would expect the whole industry servicing.
Margins to be.
In fact, it for a while but.
Make no mistake about it that amortization is feeding our originations engine and so.
Looked at separately is one store and looked at together, it's a very strong story.
Yep understood alright, thank you.
Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to the Jay Bray, Chairman and CEO for any further remarks.
Yes. Thank you thanks, everyone for joining them. We appreciate your timing will be available for follow up questions have a great day. Thank you.
Thank you ladies and gentlemen, if your participation in today's conference. This does conclude the program you may now disconnect good day.
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