Q3 2020 Mr. Cooper Group Inc Earnings Call
[music].
And welcome to the Mr. Cooper groups third quarter earnings call. At this time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your Touchtone telephone. Please be advised that todays conference is being recorded signals.
Or any further assistance. Please press star Zero I would now like to hand, the conference over to your host SVP of strategic planning and Investor Relations Ken Posner, Sir. Please go ahead.
Good morning, and welcome to Mr. Cooper group's third quarter earnings call. My name is Ken Posner and I'm SVP of strategic planning and Investor Relations with me today are Joe.
Jay Bray, Chairman, and CEO, and Chris Murphy, 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 and investors that Mr. Cooper group Uh Huh.
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 risks factors that we've identified in our 10-K and other FCC filings. We are not undertaking any commitment cathie said statements if conditions change I'll now turn the call over to Jay.
Thanks, Kim and good morning, everyone and welcome to our third quarter call list.
Let's start as always by reviewing the highlights.
Until mid 2026, which means we have no senior note maturities.
More than five years.
We further strengthen our liquidity by obtaining a two year committed line, Virginia may advances, we were the first servicing company to obtain this type of financing and it is a real game changer for us. It brings our total unused advanced capacity to 1.5 billion, which we fill positions us.
For an extremely adverse economics scenario should one occur and if one does not occur. It provides dry powder for future January acquisitions, Chris will give you an update on forbearance, but I will just mentioned, we feel increasingly optimistic about the trends.
Based on a robust liquidity in cash flow, we bought back 1.2 million shares and paid down some working capital facilities and still ended the quarter with 946 million and unrestricted cash.
As chairman and C. O. Mister Cooper is generally generally my practice to comment on financial results rather than the stock price, but I do think it's appropriate for me to point out that our valuation, which is below one times tangible book value and lessons six times 2021 consensus earnings does.
It seemed consistent with the results. We just shared with you whether it's the 51% R. O T C E or the stronger balance sheet also as a reminder, zone is a very valuable asset, which does not show up in book value and Ah and in our opinion, it's value is not appropriately reflected in our share price.
Given the valuation disconnect and the fact that we're seeing a number of market participants in the process of going public I'm going to spend a few minutes reviewing the company at a high level and then we'll dive into the into the details of the quarter as we always do.
I had some up our story by pointing to our people our technology and our balance business model as the key sources of strength.
If you'll turn to slide for I'll show you share with you a very simple philosophy. If you don't have to happy team members, you're not going to deliver the results that customers knee.
We demonstrate our commitment to our team members in many ways when the pandemic struck we move 97% of our employees to work from home and a matter of days and productivity actually increased.
We care about making Mister Cooper, a positive environment for our people and we've been recognized by the M. B a with the leadership of War award for diversity and inclusion.
I am, especially pleased to report that we've been certified as a great place to work for the second year in a row.
This certification is based on an in depth survey that goes out to all of our all our employees.
This year, we had an 88% participation rate and 87% of our team members describe Mister Cooper is a great place for them to work.
These metrics place us within a small group of special organizations worldwide.
Earlier this fall, we announced plans to add additional capacity to give you an update we brought onboard a thousand.
1100, new team member so far many of whom will be helping us build capacity in originations to my teammates I'd like to say welcome to our family I'm delighted that you've chosen to join our team.
Now, let's turn to technology, you've heard us talk about it and many different projects over the years, you'll recall that we spent almost $70 million in 2018 in 2019 on a series of investments that we call. It project tightened designed to upgrade our proprietary servicing platform cut costs.
Prove the customer experience and position us for the next chapter of growth.
One of the Titan investments that's paying dividends right now is the work we did automating modifications.
And another tightened project called ice we partnered with Google to develop an innovative approach to imaging files, which increases the accuracy of optical character recognition from 70% to over 90%. This capability is critical to improving the efficiency of claims processing and it also significantly.
Speeds up the Onboarding process for bulk acquisitions, we've recently been awarded three patents for this technology.
You'll recall home advisers, which we talked about last year is a hybrid sales and service concept, where we use algorithmic techniques to identify customers with high propensities to refinance and route them to especially trained agents.
This concept has driven a significant gain and gain and lead to lock conversion compared to the traditional model, which entails transfers from service ramp reps to mortgage originators with.
With the servicing platform in good shape. Many of our current projects are now focusing on originations last quarter. We commented on project Flash, which is designed to automate what we call. The middle office of originations by Digitizing repeatable task Flash is just the tip of the iceberg. However.
We have several projects underway designed to lower origination costs dry faster cycle times and improve the experience for both customers and team members.
Suffice it to say advanced technology is a core competency Ah Mister Cooper, it's something we've been investing in for years. It's one of the reasons, we were able to grow our servicing portfolio to 600 billion and it's one of the reasons, we were able to print a 51% R. O T C D 's quarter.
Now if you'll turn to slide six I'll comment on our balance business model, we're different from most of our peers and that we have bigger balance of servicing relative to originations. In fact as you can see from this chart or ratio is more than twice our public peers.
This balance is by design, because we believe that creating a strong customer relationship and retaining it for the life of alone are the key to long term value.
For now we see strong originations stretching into 2021, and possibly 2022. However, we know the rehab boom won't last forever and our large servicing portfolio will help sustain strong returns once it's over.
Before I turn the call over to Chris I want to talk about our priorities for the $946 million in cash on the balance sheet.
This is an important topic with respect to the stock price because when it comes to capital allocation the board and management team or acting as your stewards as we discussed last quarter, our commitment to balance sheet strength is non negotiable strong liquidity and capital will always be our top priorities.
For now we're in excellent shape, thanks to the huge progress we've made over the last year in terms of deleveraging and expanding are committed facilities.
Last quarter, the board authorized 100 million stock repurchase program, which we told you would take US 12 months to complete.
Today with 1.2 million shares retired so far we are exactly in line with that guidance.
Given are low valuation, we'd like to be buying more than this however, I'd like to remind you that given the large DTA we own as a result of the <unk> merger there are limits to how much stock is prudent to repurchase without jeopardizing our tax benefits.
On the third anniversary of the merger, which will be in August 2021, we will have significantly more flexibility at that time, because the stock price still looks undervalue to us we will be in a position to consider a much larger return of capital.
In the meantime, we have cash available to deploy into the servicing portfolio you should see solid growth in <unk> in the fourth quarter and we look forward to welcoming welcoming these new customers and working with them in the months and years to come.
And on that note I'll turn the call over to Chris.
Okay, Thanks, J and good morning, everyone.
I'm going to start on page seven.
A summary of our financial results.
So.
Net income was $2, an 18 cents per share.
Pretax operating income was 348 million.
Discretionary steady state cash flow was $383 million and fully taxed R. O T C was 51% and as Jay said.
We were obviously very pleased with these results.
On an operating basis, we certainly characterize this as a record quarter.
Because if you remember are last call, we pointed out that the second quarter benefited from $34 million in revenue that we would normally have booked in Q1, but we didn't because we took a very cautious view of any potential pipeline fallout that could have resulted from the pandemic so adjusting for that extra.
Q2 income operating earnings in Q3 group, 10% sequentially.
Those story remains very simple originations and zone produced excellent results, while the servicing margin reflected the current low interest rate environment with.
With servicing benefited from another investor settlement.
Which contributed $46 million in the quarter and I'll comment further on that just a minute.
But now turning to the balance sheet you can see that are very strong earnings translated into very nice growth intangible book value, which increased to $23.95 a share and at the same time, the DTA declined by $47 million.
The DTA declined Moore.
Rapidly as a percentage of TBB falling from 71% to 62% in a single quarter and that's a big positive in terms of the quality of our capital and it should strengthen analyst views on the valuation where stock you should expect the DTA to continue declining relative to TBB as long as we remain in this injury.
Right environment.
Also and just as a reminder.
With the election only a few days away. If there is a change in the administration that results in higher corporate taxes.
Then you should expect a very significant right up and the value of the DTA.
You you may have noticed are weighted average diluted share count increase this quarter $95 million. Even after we bought back 1.2 million shares does that increase is driven by the improvement in the stock price in the quarter, which impacts the dilution associated with the equity equity grants that are part of management.
Nation following the <unk> merger, the board decided to shift.
<unk> of management's comp from cache to stock to better align the interests of the organization with investors.
And I'll make sure there's transparency into what this means for the share can we provided a sensitivity table for you which shows what the diluted share count would have been if the stock price had averaged $25 or higher for the quarter.
Now, let's let's turn to slide eight and discuss the MSR, which increased by a single point to 100 basis points of UBB.
The Mark was relatively small $29 million this quarter, which reflected the impact of two offsetting items on one hand, it twenty-three basis point decline and mortgage rates in the quarter did lead us to raise the CPR assumption. However, the MSR also benefited from an offsetting positive 46.
Million dollar estimate of revenues associated with a portion of our Ginnie Mae loans that are expected to go through streamline mobs as they exit forbearance.
As a reminder.
Under gap.
MSR is carry that fair value.
Based on assumptions that reflect the view of market participants.
And in this case, we point out that that view is much more conservative than our own outlook.
Now each quarter, we provide you with an estimate of how many.
Of our customers could save at least $200 per month by refinancing, which translates to roughly 35% of their monthly mortgage payment.
With rates, having drifted downward during the quarter. This number now stands at about 820000.
And that's pretty.
Conservative of a bar.
There are another 536000 customers that could lower their payments by $100, a month, which is still meaningful savings.
And Additionally, we have hundreds of thousands of customers with substantial equity in their homes, who could benefit from cash out refinances, which is not Canada that number.
So on that note, let's turn to slide nine and talk about the origination segment, which posted a 45% increase and funded volumes quarter over quarter to a record $15 6 billion.
Pretax income was a record 438 million up from $434 million and the prior quarter and as I just mentioned, excluding the $34 million and Q2 income that was delayed from Q1.
Origination.
Pretax income grew 10% sequentially.
As you may recall, the second quarter, we slowed down correspond volumes as we evaluated the environment, but since then we've been aggressively ramping it back up in fact, we had record corresponded volumes this quarter six 5 billion.
And we look at correspondent as a channel for new customer acquisition, rather than as a meaningful driver of profitability for now we liked the margins available and correspondent compared to bulk and we'd expect to continue growing this channel using the same technology enabled strategy that's proved.
So successful for DTC.
The DTC channel turn in another exceptional quarter <unk>.
Responding to huge customer demand and producing excellent margins. Despite the heavy volumes to refinance recapture ratio stable at 31% and some of you have asked what we're doing the raise recapture enhancers continue expanding capacity with both technology and people J mentioned, the 1100 new teammate.
Sweetheart since late summer and some of the many technology projects underway to improve cost and speed, but to help you better understand our recapture and compared to other originators. Let me give you some more color or a capture rates for different parts of the portfolio.
We operate with what we call a <unk> to see strategy meeting that we acquire customers through <unk> channels, such as bulk and corresponded and then we convert them to Mister Cooper customers by providing them with excellent technology and customer service in many cases by helping them refinance their loans.
And a large portion of our portfolio originated through bulk acquisitions and in many cases. These were older loans with smaller balances that have limited refinance opportunities and for those loans are recapture rate is generally lower in this third quarter was only 24%.
For newer loans.
Recently source through our correspondent channel.
Ah recapture rate was hires 41% in the quarter and finally for those customers with whom we've established a relationship by already refinancing them.
Recapture rate is even stronger at 63%.
Which compared to our competitors on this basis is already quite strong and going forward as we continue investing in technology and people and as our portfolio shifts overtime from initial bulking correspondent purchases DTC, we see significant upside potential in the overall and capture right.
So shifting gears to the margin it compressed in the quarter from 302 to 195 basis points right in line with our entry quarter guidance as we shifted back to a more typical channel mix correspondent was 42% of overall volume up from only 18%.
In the prior quarter now everyone's focused on margin and we are planning for margins to eventually compressed normal levels starting in the correspondent channel.
So far through the end of October we see pricing stable.
We would expect margins to remain very attractive and the DTC channel for longer because of the much deeper relationships with our customers and the high quality service, we're known for.
Looking ahead, please remember that the fourth quarter has a shorter day count.
And typically at this time of year locks slow relative to fundings due to the holiday season, especially in the DTC channel.
As you've seen in past fourth quarters. This.
Often has the effect of temporarily compressing margins, but factoring that in base.
Based on what we've seen in October we're looking at another very strong quarter with expectations of operating EBT in originations segment somewhere in the range of $380 million to $420 million.
Now, let's turn to slide 10, and review the servicing portfolio.
Totally <unk> ended the quarter at 588 billion, which was roughly stable with the second quarter Cpr's rose to 30%, but we were able to replenish most of that runoff with stronger corresponded volumes.
Going forward would expect to see solid single digit growth in the fourth quarter and much of that growth will come from a correspondent and flow originations and we're also becoming more active with opportunistic bulk acquisitions in the third quarter and first half of October. We've won about 8 billion is small bulk portfolio.
<unk>, which will close in the fourth quarter and early next year and as I've said before we expect to see more deals coming to market is issuers who've been holding on to production in hopes of higher prices begin to capitulate.
And more importantly is the agencies and Ginnie Mae.
Grow more comfortable approving transfers.
As J mentioned, we expect to see solid growth in the <unk> in the fourth quarter and part of this will come from some services as we disclosed last quarter, we've entered into a contract with one of the largest most prestigious investment firms in the world and we expect to see loans boarding in the fourth quarter.
Better.
We're very proud to disclaim chose us because of our excellent technology and service standards and are strong recapture capabilities and we're hopeful this will be the start of an even larger long-term a mutually beneficial relationship.
Now, let's turn our attention to the servicing margin on slide 11.
Excluding the full mark the servicing margin was a negative 0.1 basis points, which was in line with our is recorded guidance are approximately breakeven.
Now as I mentioned earlier, the margin benefited from a $46 million investment settlement, so without that would've been negative three basis points and as painful as that is it's exactly what you should expect an this low interest rate environment with CPR at 30% interest rates near zero.
As the chart on the right illustrates the margin is compressed by six five basis points over the last year from higher amortization and lower income earned on custodial deposits. In fact, just the impact of higher amortization year over year is 156 million annualized, which we would recover into earnings of <unk>.
Reverted to a year ago levels now of course at the same time that we've absorbed higher amortization costs.
Certainly benefited from stronger DTC profits.
If you combined servicing an DTC together.
That would be equivalent to an all in margin of 27 basis points of view PB, which were obviously extremely happy with.
We have another potential settlement in the fourth quarter, but right now I'm expecting it will slip to Q1.
Which means the servicing margin is likely to remain negative.
But looking ahead into 2021, we'd expect cpr's to declined somewhat from these current historically high levels and also you should start to see some contribution from incentive fees and embo gains as we help customers exit forbearance.
If you consider a scenario.
With a sudden rise in interest rates than we would expect to enjoy recovering the service margin and a write up in the value of our MSR.
As J commented the balance we have now between servicing an originations is a differentiator for most of our peers.
And we certainly believe this warrants a much higher valuation for our stock.
J commented on the self service digital tools that we've been using the help our customers with forbearance.
We show you. Some examples on slide 12 of how we make information available to our customers through a forbearance dashboard.
78% of our customer base is digitally enabled.
Mean, they respond E mails and a manager accounts online.
And in terms of forbearance activity sick.
61% of our customers have used our forbearance dashboard to enter forbearance and.
43% have used it to exit are these are fantastic results demonstrating our best in class technology.
And that technology provides a very simple and streamline experience to those customers who are comfortable with that process and at the same time, it allows or modification specialists to focus on those customers who need more assistance.
In terms of an overall update on our forbearance status as of.
October 25th.
6.1% of our customers were on forbearance, which is down from a peak of seven 2%.
Of these customers, 17%, we're still current in their payments and more customers are now exiting and entering so we're feeling a great deal more confident in the outlook today <unk>.
Compared to earlier this year.
So turning the zone.
On slide 13.
Pretax operating income was 18 million this quarter up from $13 million in the second quarter. Thanks to can spin continued a strong performance and the title unit.
Which benefited from declining interest rates.
And it also included.
And those results was one time benefit of $2 million.
Related to a settlement with an insurance carrier.
Now on the subject to our stock price I would like to add my personal opinion that the market is failing to recognize the real value of zone, which is an outstanding technology driven business with an excellent management team.
As a reminder.
<unk> operates and four segments.
Titled Broker is called title III 65, and the team has done a tremendous job.
Putting it on track to generate about $60 million and pretax income. This year titled 365 also owns a 49% stake in X one analytics.
Which offers an industry, leading automated titled data and Decisioning engine.
Are already are arjo exchange is a proprietary digital foreclosed property platform that has very attractive margins and as you recall prior to the pandemic and the more moratorium on foreclosures.
We were bringing in record volumes, a third party clients.
Now obviously to.
Title exchange is idle right now, but we expected to enjoy a surge in activity once the moratoriums are lifted.
And finally, the valuation in field service units offer significant upside as we continued to reengineer those businesses and optimize their performance really is feeders for title and the Oreo exchange.
Is J mentioned zone doesn't show up in book value So to capture the value properly you would have to apply a separate and obviously much higher multiple.
Appropriate for a diversified data and technology driven operation as you would see from any appropriate comps.
Now to monetize devalue zone.
We're pursuing two strategies.
As you remember we brought in my girls one of our most experienced executives.
To lead the unit with a mandate to grow market share and earnings.
Additionally, we are now actively evaluating.
Broader strategic options for zone.
You should assume that everything's on the table.
From securing minority investment from a strategic partner.
To assume that too.
To a potential sale of.
The unit and parts.
Or altogether.
Look forward up data you on our progress but both.
With regards to our organic strategy and these other potential transactions.
All right, let me shift your focus to the balance sheet talk about liquidity.
Turn to slide 14 steady state cash flow was quite strong in the quarter at $383 million.
In addition to redeeming the senior notes and buying back shares we also pay down our MSR lines by $179 million.
The originations business consumed some incremental working capital due to the surgeon volumes, but even so net net.
We ended the quarter with $946 million an unrestricted cash.
Advances were essentially flat quarter over quarter.
But we guide you to expect some increases in advances in the fourth quarter due to typical seasonal trends as we begin funding escrow accounts for upcoming tax payments this time of year.
Now earlier this summer we disclose the terms renew two year fully committed financing facility for Ginnie Mae mortgage mortgage servicing rights and advances in the past we had no way to finance Ginnie Mae advances now we have a 900 million dollar facility.
Which is really a significant amount of funding capacity and what this means is that should we encountered any adverse scenario the drag on our discretionary cash flow would be limited to the haircut on advances in his J mentioned this is really the game changed your for us in terms of liquidity.
I'm happy to say that progress in deleveraging and liquidity together with our strong operating results has resulted in upgrades for both Moody's in SMP.
Who both raised our outlook back to stable.
Now, let's finish up some comments on capital of leverage on slide 15.
Back in the spring we.
We disclose to leverage target defined as the ratio of tangible network assets are.
15% or higher and in the third quarter, we face some headwinds on this ratio, which climbed at 10.1%, but that decline was due to a sizable increase in Ginnie Mae loans eligible for buyout from $1.2 billion to five 4 billion, reflecting the jumping forbearance.
Right, we experienced in the first half and the fact that many of these loans are now 90 days past due which gives us the right to buy them out.
From a credit perspective, they should not be a concern actually it's a positive.
Ginnie Mae loans are guaranteed by the government and for this reason they carry a low risk waiting. Additionally.
Under Jenny Maes streamlined modification program will have the opportunity to refinance these customers.
That had been impacted by the pandemic into a new loan with a market rate and immediately redelivered loan for again on sale. This is an excellent program for customers as it will help them get back on their feet and it's easy for us to administer since it doesn't require documentation where a trial period.
You should see revenues from this activity start to appear in early 2021.
At which time <unk> on our balance sheet should begin to decline.
And we remain committed to the 15% or higher target.
And expect to remain to achieve it.
In 2021, once we start modifying re delivering the cbo's.
Meanwhile to give you another perspective on how Mister Cooper's balance sheet has improved over the last two years you can see a chart on the ratio.
Of that tangible network and on this measure thanks to $300 million and senior notes that we've redeemed over the last year and thanks too strong retained earnings. We're now at a ratio of 1.19, which is just a hair above where we were prior to W. M IH merger.
We will continue delever the balance sheet, but as we said all along the time and we will be opportunistic it's not going to be on a regular cadence the.
The final tranche of the high cost that issue with the <unk> merger becomes callable next summer.
We expect to take additional steps at or before that time.
So with that I'll turn the call back over again for Q&A.
Thanks, Craig I'm going to ask our operator district acuity passion.
Thank you as a reminder to ask a question you will need to press star one on your telephone again that star wanting a touchtone telephones ask a question to withdraw your question press the pound key please stand by while we compiled Q&A roster.
Our first question comes from the line Giuliano belonging of Compas point airline is open.
Good morning Joanna.
On agriculture.
One of the things I was curious about was.
Some of the discussion around TTC and recapture volumes.
Is there a way of thinking about the percentage of the MSR portfolio that is that has been originated by through the DTC channel over time and how that's changed.
Just because in a sense cute originating higher volumes of GTC.
Msr's, you'll keep increasing the mix of your DTC originated which has a higher recapture right. So just trying to think about that portion of the portfolio as it evolves.
Yeah.
I don't have those percentages off the top of my head, but I think we.
It's a good question Giuliano quickly pull that together will follow up with the offline after the call.
Is.
Now that we started to talk about the portfolio.
The way, we did and recapture that way, we did I think we'll probably.
Add a slide in our disclosure Ah next time to break the portfolio out that way.
And then kind of going back to some of the commentary about obviously it has been very strong titled performance with the origination segment, which will most likely continue.
Jesse Williams continue but thinking forward from that.
As the other business start to ramp up would kind of be curious around here. How you think that business will evolve and then also what that business. What you think that this is worth it.
Well.
The title business has done a great job, but we actually have had a governor on it because.
Last year.
The completed a very.
Large scale integration of some of the <unk>.
Some of the business that we bought from assurance was integrated into our title business and it was really a distraction.
So this year as volumes have climbed we have been very conscious of turned times and so.
Mr. Cooper has been directing a fair amount of its title business to other providers, just so that we could ramp up.
Volume.
In a responsible way and maintain all of ourselves I think we're in the process now of transitioning another.
I would say, 10% to 15% of volume to them. So we think there they will continue to even though they're benefiting from high high levels of refi right now that volume, we expect to actually climb.
Don't don't factor that entire number and for the fourth quarter, but you'll see some improvement.
And we will continue to do that into the first quarter of next year the.
The benefit of a title is our title businesses.
They also have a very strong default title product line and so next year as the moratoriums lift and the foreclosure process starts you'll start to see.
That default.
Revenue start to roll through so we think it's a ton of 365 is is one of the premier title companies in the country and.
It's highly regarded I think in terms of value.
We'll see what that value is.
But I certainly think it's a business it's.
Got a lot of there's a lot of demand for title companies today and I think this is probably the best Standalone title business National title business.
And the industry yes.
Yeah, I think it's a pretty rare asset right because it's.
And can do business and.
All 50 states, it's got a pretty high percentage of third party business and even when you look at where strategic title companies tray and and Ah multiples there.
And when you take our 60 growing to $70 million and you even use strategic multiples, it's a very.
It's worth a lot of money for sure and I think the.
There's other there's other buyers in that community as well. So we're optimistic the other thing that has happened. This year I think is Mike Rossi leads that group has done a good job and increasing our margins. So we've seen pretty considerable increases in margin in the title business overall, and then if you break out.
The other pieces of the business option would be clearly the biggest and obviously with the moratorium, they're not producing anything tangible this year at all but when you look at once.
The inventory and it's building there.
It's very very large and I think I want some moratoriums lifted.
You can expect that to be a huge contributor to to zones of overall earnings and I think the multiples on the auction or the exchange business are frankly significantly higher than the title business. So combine it's.
It's a very valuable franchise.
That makes a lot of sense.
I just wanted to touch on briefly was it sounds like that commentary about next quarter's originations Eva tears somewhere in the range of kind of $380 million to $400 million, if I heard you correctly.
And then the second part of that is just trying to think about the mix of the volumes.
Should we expect Dts.
Question is should we expect TTC to come in a little bit because of the day count and holiday.
Question, and then interesting about the mix of TTC versus correspondent and a quarter.
I think DTC.
So far in October.
Performing right in line with.
Where we were in last quarter, and we expect that to continue but there'll be some slight dip because because of the holidays.
I think corresponded volume will be up.
Very significantly in the quarter, so the mix will change and.
And you should expect that will continue into.
Two 2021 is.
Some of these new hires.
Start to.
Add to our.
Our volumes, we should see DTC.
DTC volumes pick up a correspondent is going to grow quite quickly I think just looking at the month. So far volumes are extremely strong and.
In.
Correspondent there.
And just roughly looking at these numbers.
I'd say, they're double.
What we saw in the third quarter. So now we'll see as the quarter goes still.
It's still early but margins are very strong there's been we see no change in margin.
Again, we think fourthquarter is going to be very very strong.
Holiday will cut into it a little bit day, count will cut into a little bit but from that range. You should infer that we're we're expecting continued strong volume and I think the bigger point is.
And we tried to emphasize the number of customers that we have.
That could benefit substantially by refinancing and for that reason, even if rates were start to pick up a little bit.
We have so many.
Customers that would benefit and you can look at that chart that we just went through and know that there is no reason why you shouldn't expect us to have extremely strong production.
All through 2021.
Yes.
Christmas point, if you look at kind of our lakhs per day and.
And the DTC channel and it is very consistent maybe slightly higher than the third quarter. When you look a correspondent Christmas point I think you could see that double I mean, we're fully expecting 25% to 35% increase in funding volume for the fourth quarter and the margins are are definitely hanging in there and when you think about the <unk>.
Incremental hires that we are bringing on into predominantly direct to consumer.
When that once those get fully ramped you're looking at four to 5000 incremental fundings per month. So I think there's two Christmas point, there's a tremendous demand in that channel with our existing customer base and you know I think building the capacity is clearly the right thing.
You do and you're going to see.
Significant earnings come from from the additional capacity.
That makes a lot of times I really appreciate the time and I am going to jump back into cute. Thank you.
Thanks Julia.
Thank you. Our next question comes from the line of Mark degrees of Barclay. Your question. Please.
Good morning, Mark Hey, Good morning, just wanted to clarify one point I think Jay.
You mentioned, a data, which kind of the limitations on the buybacks from the DTA expire.
What date was that and also I think he said post that you expect to be able to consider.
Meaningfully larger buybacks could you dimension that at all for us.
Yes. This is Chris Mark.
There is a essentially at 10% safe harbor on buying back shares in the first three years.
After a merger so 382 essentially limits that and that's how we size the $100 million buyback.
So you should think of that as our our limit through August of next summer August for next year after which.
I think our message was let's hope our stock.
Improves in value, where it is today and what we expect to build and book value.
Over the next.
Five quarters, we think through stock is tremendous value of stock was trading where it was today in August we'd be buying our shares back far more aggressive way.
Got it makes sense.
And then just a follow up question around kind of a strategy comments on them.
You mentioned kind of a bill pong.
Focused on organic growth and then look at some of the strategic options could you just talk about what your focus there is among those two are you are you looking more.
To just drive the growth and hope the market comes around or is there some urgency right now to pursuing some of the the strategic options.
When the reality of the matter is we've had a lot of inbound interests.
On the zone platform. So I think it's you should you should assume it's a dual path I mean, we continue to.
Improve the operations within zone, and I think Mike and his team have done a good job there.
Like I said you have consistently seeing the title margins increased significantly we think there's more upside and title.
As we look into 2021.
And then the exchange business clearly is all upside from where we're at today and tremendous upside as you recall that business. Historically has been a big earnings driver and been significant margins, but there are there is significant interest in his assets and so I think you should assume it's parallel path.
Path.
If you want.
I think Jay mentioned before you could take the title business.
And just using public comps.
Get an idea of its valuation and.
In the auction business I mean, we are number two in a distant number to auction dot com, but we are growing our third party business very rapidly. If you saw if you went back to our last call. Prior to the pandemic. We were talking about record third party volumes coming into the funnel. So that is a <unk>.
Very valuable business and if you were to apply the valuation metrics that are applied to auction dot com and the public comps to the title business you'd certainly arrive at a number and a 1 billion dollar range and if you look at our company and say, we're not getting that value in our book.
And there are a lot of investors in this industry that start with a valuation on book value. We got a billion dollars half of our market cap that we don't get credit for then certainly we would.
Pursued that strategy now in the meantime, Mike.
Mike and his management team, we have an excellent management team and even in this short period of time. He has been there the changes they've made or dramatic we are operating that business with a continuous improvement mindset.
And we loved the business they are very well run business highly respected in the industry, we have a great customer base and so there's no urgency to do anything but to optimize the share price over time and as J said there has been.
A lot of inbound interest and certainly pursue those things, but there are other ways to monetize the company and so we'll consider all of that and now that we've.
Had this conversation you should expect will keep you abreast of that every quarter.
All right. It makes sense just one last one for me.
I think you guys made a decision to move.
Some of the tax prep work over to Corelogic, just curious what motivated that decision expenses.
Saves, which expect to see from that.
Yeah, I mean, I think it's we had historically been corelogic customer.
And.
And obviously, you're very familiar with their platform and had a.
Very good experience with Loretta.
But as we were.
We're a very as you know active buyer in the market.
Of Msr's and so when you look at the the seamless nature of.
Working with.
Alrighty that has the largest market share that that was one of the decision factors that led us to move back to Corelogic and yeah. I think they are clearly there will be expense say if they are not.
The material and frankly to to move the needle, but obviously.
It's a more favorable deal than we had previously.
Got it thank you.
Thank you. Our next question comes from the line of Doug harder of Credit Suisse. Your line is open.
Morning.
Good morning, I was wondering if you could help us.
Understand the potential revenue or profitability impact from the 5 billion of.
The Ginny loans that are available for repurchase.
Well, it's still.
It's still a little early as to what the timing will be but.
I don't want to talk out of both sides of him up I said that we had and.
An improvement in the.
<unk> that was roughly $50 million and that's the first cut at.
The third parties assigned to those volumes suffice to say, we think in 21 will see five times that at least.
So it's in the hundreds of millions of dollars now that's going to depend on what passed those customers take.
And so we're not going to give you a real hard.
Estimate but.
Those.
Helping those customers exit forbearance is absolutely going to be very profitable for us and and.
In 2021.
I mean, I think the way to think about it is if you if you like if you.
You take the FHA bars in particular right.
Two primary pass or partial claim or a streamline mine and we're seeing most of our customers are I'd tell us.
Higher than 60% of the customers move into a streamline my because it.
Frankly gives them a market ray puts them in a in a great position and that's our first priority is to do the right thing for the customer, but with the impact of the.
Going down the streamline my path.
That will necessitate a buyout and that then will result in a range of delivery of those loans to Christmas point.
Think the 5 billion is going to be much larger overtime.
And.
The the reason livery.
Proceeds or gains from that will be in the hundreds of millions of dollars.
Now I guess this quarter that showed up in kind of the M. S. R. Mark correct, I mean, I guess going forward doesn't show up in the MSR Mark first and then kind of come into earnings or will it just come into earnings just how should we think about that.
And see this is the first time that the evaluation firms have had to wrestle with exactly what.
<unk> was.
There's going to be managed.
The rules really just got nailed down.
So I expect that the majority of those estimates will evolve of course, we default to third party.
Views in terms of the Mark that we take internally our projections would suggest the number is much higher than I think is the volumes begin to.
De Minimis at this point, but as that volume starts to pick up in the profitability.
Begins to be evident I think you'll see those firms adjust there.
Would just their estimates.
But I think it's still required we're going to we're going to make the money historically, it's coming to earnings.
Come in.
Unless.
What will work through the accounting pieces of it with the different firms but.
I think it's going to be a sizeable.
A very material.
Contributor to servicing profitability in in 2021.
Great. Thank you.
Thank you. Our next question comes on the line of Mark Cameron of Bank of America airline is open.
Thank you.
Hey, Chris and Ken.
One question I haven't is about.
Good morning Ah question.
Around the comment around zone, one of the options I understood all of them, but I can't recall just misheard.
Chris, saying something about issuing debt at zone is going to be one of the options being considered.
If that it was.
You just talk me through.
The strategy there.
I'm, just saying there there are.
<unk>.
Xoma's a.
As.
An unrestricted subsidiary we could put.
That on so it doesn't carry anything today and I am just saying there are ways to demonstrate that.
Zone has real value in today, because it doesn't show up in our book value I think a lot of investors Mark I'm, not suggesting as as you, but do not understand how to properly evaluate it certainly shouldn't hold the P. P.
Price to earnings multiple you assigned to a mortgage company I mean, the auction platform is a very high tech proprietary platform and I think it's competitive there probably is a multiple.
In the high double digits. So that's one thing I would say title companies are trading at 95 or 10 times earnings. So if you were to apply those <unk>.
Multiples you'd see the value xoma's is quite significant.
And are real messages, it's not captured so we are going to do something to convert that value into.
An improvement in our stock price.
Yeah, I mean, I think if you look at.
We've mentioned this a couple of times, but if you look at the value was zoom earnings are this year.
Depending on again on what happens with the moratorium.
Clearly.
Nothing strategic happens xoma's going to double their earnings next year, I think thats clearly within the realm of possibilities and if not more again, depending on the timing of the moratorium et cetera, So that alone is pretty meaningful and pretty impactful and it's a fee based.
Business that is going to drive very no capital no basis.
From a multiple standpoint to Christmas point should be double digits.
15 to 20 times, so I think there's there's opportunity there, but again, we love the business we.
Started it from scratch, but.
Clearly the market, we're not getting any credit and book value today, and we don't think it's properly valued within the stock by any stretch and imagination when I.
Add the title business, which title industries and online industry, but we owned 49% of the industry, leading decisioning engine excellent analytics.
And.
If there's a disrupt disruptor in the industry. That's it. So again, if you think about how you would value them.
They certainly wouldn't carry the same multiple as a mortgage company.
So.
We we're not saying, we're choosing any path and we're not saying we've got to do something with any urgency we have to do it smartly, but.
The entire focus here is what's the best strategic option to maximize share price.
Got it and then just.
Clear my head one of those would be potentially to as you get it down and then dividend back.
<unk>.
Cooper and al potentially of the 90 options that might be considered is that right.
That's correct.
Okay got it thank you.
Thank you. Our next question comes from the line of Kevin Barker Piper Sandler.
Good morning.
Good morning, Thank you our Jacob.
Could you Ah.
Outline how much of the title business and.
His third party versus how much is derived from.
Mr Cooper origination.
It's about 50 50.
Third party is growing and as I said Mister Cooper.
Probably allocates about 50% of its orders two titled 365 knows amount exact numbers, but it's about that.
So.
I hate to say that we left some money on the table, but we we could have.
Essentially doubled.
Titled 365, volume, but just like everything else the ramp up.
An original options title business was so.
With so substantial.
That.
This is a business that for all our customers not just Mister Goober, a third party customers, we have very strict SLA as we've got a here too. So we took a very slow and deliberate.
Approach to <unk>.
Eliminating that volume so they can expand their capacity just like we were trying to do on the origination side, but.
We will begin while we are beginning to increase that volume.
Okay, and then I.
No Oreo brokerage fees for a large portion of the driver of earnings in the past, but that might have shifted over time, just given the growth. The other businesses could you provide a breakout for how much is Oreo garbage.
Perfect fees account for pretax earnings or pre type of our EBITDA on how are how you measure for his huh.
All right now Kevin it's it's.
Virtually zero right because we're because of the moratorium so I wouldn't even consider it really for for 2020 and any material manner in that business has evolved into.
You are traditional kind of Pls Oreo, which is what it was historically to more of the FHA CW CFT program.
So if you think about that universe.
A very large universe be it's a mandated process.
FHA and they require.
Their services to go through an auction process.
And so that's where the lion's share of the.
Of the growth is going to come from in the future.
And I don't quote me and I think.
The fee on that is three point and.
Again this is a business itself is.
Primarily technology until the margins are they are strong margins, but that's how you should think about the business in 2021, where it's been sore strom et cetera.
Okay, and then a follow up on some of the the Msr's the.
The amortization is very heavy your CPR rates running around 30%.
But the amortization expenses also.
Big headwind too servicing pretax margins.
At what point do you feel like you're going at you should mark down the MSR to reflect where the cpr's aren't today.
Just get more into running.
I understand that you are looking at it as a previous speeds will probably slow.
Going forward.
But eventually.
I'd say, we did markdown, we did raise the lifetime CPR in the quarter.
If not for so we would have had a.
A moderate Mark I'd say, we had a very small mark in the quarter.
But we had the offset from.
The.
Small DBO gains so I'd say that would've been another $50 million.
Mark.
I'm trying to remember what the what the quarter over quarter change us but of course, we are.
Our marketing for current.
CPR, we did raise the lifetime CPR, we do expect it to moderate in 21, and we're expecting to see that and the tail end of 21, but again, we expect in less interest rates change production is going to be very strong we're not the.
The only one who is going to have strong production next year. So.
You should assume that are mark reflects.
Current environment and and is totally reflects the the highest CPR that we're experiencing I mean, Kevin you know this better than anybody right. I mean, I think we've taken and Chris can correct me, but when a $1 billion billion two in the last 12 months of write downs to the MSR.
Predominantly driven by rates and so I think along the way we've clearly marked at appropriately the other thing that.
I think is.
Something that we always think about is that none of the recapture value is any MSR right and that's one of the slides that we have to kind of show the overall impact of and the recapture economics.
Combined with the servicing business, what does that look like so just for a minute.
GAAP accounting standpoint, you can't really recognize any recapture benefit in the MSR you can recognize any benefit from zone.
And your MSR and so I think when you think of that asset we've always thought of that asset as you know.
And there's there's multiple ways to help the customers and there's multiple ways to generate revenue streams from that asset but.
If you look at the write downs over the last four or five quarters they've been.
No you've been very material that 1.1 billion of a one two is from rates now as painful as it was.
And as much as we're looking to enjoy the very strong production through 21, if rates do begin to rise we're going to see a lot of that value come back into the portfolio, but I can assure you we have a an outstanding team that manages R.
Our MSR portfolio and their capabilities and modeling are.
As good as anyone in the industry and we used to highly regarded firms.
To Mark are MSR, and we are always in line with them and to the extent there is any difference like there is on the value of embo gains we defer to their estimates. So you should assume are MSR.
As thoroughly scrubbed and completely reflects.
The.
The elevated CPR speeds.
Okay. Thank you for taking my questions.
Thank you. Our next question comes from the line of Henry copy of why Bush.
Your line is open.
Good morning, everyone and thanks for taking my questions as well just to kind of keep.
Picking at the numbers you mentioned that there was a 46 million dollar.
Settlement and servicing.
Yes right.
And is that is that captured I know I'm looking at your earnings releases that captured in this adjustment between.
Pre tax gap and and operating net or.
Should we also be taking that out of the number.
I don't think you should take it out a number because if you look back in our quarters. We have we although we don't have a settlement every quarter.
We have an inventory of things that will settle over time, it's the nature of some of our large transfers. We don't we just given the volume of what we do we aggregate things with our investors and.
Periodically true those up.
So why can't say there'll be there every quarter.
We certainly don't view them as one off.
Non-recurring items they.
You'll see them probably in five of the last.
Seven quarters that I've been here.
And I think I will nature.
The nature of in Henry is it's operational in nature right, we really were.
Looking to establish the rules of the road on pieces of the portfolio and so we had been accruing if you will liability for that once we got two definitive answer.
But the operating rules of the road are going to be then that's.
That's really why we went ahead and recognize that but it's also a go forward.
<unk> that will continue to impact positively the operations.
It's how I think about them I'd, probably just misspoke when would you say settlements because their settlements or they are.
The.
Series of transactions Cuss collapses for example that which we do we.
We don't do them every quarter, but we do them with regularity. So I would say that category of revenue is more common than that.
Can you give me some sense in the last couple of quarters with that number has been.
Yes could but I can't pull off the top of my head but.
Well I will get.
I'll get it from Ken later.
I'm.
Looking at the business dynamics.
I know, we've talked a lot about title.
And I just want to kind of get the numbers straight again so.
The contribution from title. This quarter, you said was $60 million is that correct.
Revenue.
Zone was 16 million virtually all of that was titled because.
The the.
Exchange business as Los Angeles, Okay Zone had.
$108 million of revenue right.
$15 million of net.
So the $60 million is this annualizing that number.
That's right that's exactly okay.
Okay. So when we think about title as it stood today can you give us some sense of of the revenue.
It was.
Generated and the title business this quarter.
What's running about and correct me, if I'm wrong, Chris I think it's in <unk>.
<unk>, 28% to 30% margin.
Is what we're earning title business.
We'd have to do that math.
If it's.
Making 16 17 man.
Corner.
Yeah that that that would basically giving what the margin us.
Yeah.
I mean, we get the revenue hesitant to do we don't break out.
Revenue for the business lines and zone separately, we only disclosing as a whole.
But.
That gives you a general idea.
Well it certainly is.
So the title businesses is.
Probably about 70 million or something this quarter I'm just doing this off the top of my head that's dangerous.
The attachment.
The percentage of of.
Of of.
Internal loans, which would be your DTC business is about 50%.
But with direct to consumer you generally control that.
And you can continue to grow that part of the business.
Is that is that and so and so really this is just your way of getting a better will call wallet sure. This is a certain amount of money that is generated with every mortgage transaction in about half of it goes to the mortgage company and this is your way of growing that by increasing that penetration.
And that's something that's just a function of what you can do operationally correct.
That's correct and then there are some.
State limit I think I think the Max market share, we can get too.
Henry would probably be 80%. So it's not 100, because there are some restrictions there.
You are talking probably 80, if we but look the thing that.
<unk>.
The reasons, we are not one of the primary reasons, we bought assurant.
Titled 365, and others was to to have a balanced model and you know that's what we've done.
50% of the revenue now coming from from title and frankly, MSR coming from third parties and I think you're going to see we are seeing market share growth existing clients and we're seeing growth with new clients. So.
So you know I think it's a very balanced model today, which was one of our kind of medium term objectives. I think again mind can team of have done a good job of accomplishing.
And when those third party clients are those usually also our correspondent clients or.
No they're not actually there.
Most of them are.
Large.
Originations large banks and we have a very.
There's a mix of clients, but very.
Very I called them Blue chip names.
It's out of road.
For half the business is a very robust standalone product.
And half the businesses is coming from your existing book.
Yeah.
Yeah.
And I think I think they're both quite robust I think the Christmas 0.00 is coming from correspondents or less to say, it's a fraction I mean, the majority of the third party.
Bart majority of third party business would be large financial institutions are large non-bank.
Originators that you would be quite familiar with.
I think I would look at it is 90% of the top 25 lenders.
Use style 365 in some way not exclusively but.
We get a share of their business.
It's rare that any large lender uses a single title company, but our third party business is growing quite rapidly. This used to be a business that was all Mister Cooper and so although we can do.
Direct additional business to a limit is J said I think the real growth is coming from third parties.
This is going to come off as a question, but it might be considered an editorial.
Is there anything different about the upcoming fourth quarter seasonality.
That is different than anything any of us have seen and whether it's 20 years 30 years. We've all looked at mortgage for a really long time and yet every time you mentioned the word seasonality it seem stock fell off.
But now you were down big on the outbound and now less and less and less but.
I hear your frustration, but I mean.
Business has been seasonal forever, but every time investors here about it they seem to react.
It wasn't really seasonal last year. So if you go back fourthquarter last year, we had a record quarter.
We expected seasonality and it never happened now bye seasonality I mean December shuts down.
And that didn't happen, we had production right through the end of the year and now of course people are going to take some of our emilo's are going to have to there'll be a day. They have to take up they we will not have everyone charging hard, but we said we are expecting.
Very minimal decrease in.
DTC profitability as a range there, but it's it's minor.
So now we don't expect the typical.
Seasonality, we expect a little bit of a slowdown.
And.
But I.
Henry it's kind of it's going to.
It's going to blow away current consensus in my opinion the range that Chris gave on originations couldn't be more clear, obviously and so we expect it to be strong when you look to the box per day, we're getting in direct to consumer. It is in line with what we were seeing in the third quarter correspond.
Is frankly up considerably from the third quarter. So.
I think you're going to start to see the embo gains kind of start to come in to servicing and I won't be material and if the in the fourth as it will be in 21, but the short answer is no now.
If something happens on November 3rd and and the World goes into a.
A different place I mean, we can't predict that but when you look at the fundamentals of the business.
They are tremendously strong and I think you'll see very little impact frankly from seasonality when you look at what.
Even though people seem to worry about it you are actually beating the trend you're beating the long term trend.
Yeah, Yeah, I mean, we're we're very bullish on the fourth quarter and frankly very bullish on 2021, and I mean, and it's based on kind of the fundamentals of what we're seeing in business. I mean, we're not we're not hiring a thousand people just so they can come in and <unk>.
Not produce loans I mean, we fully expect to see incremental fundings.
In the fourth quarter and moving into 21 so.
There's a ton of runway when you look at Chris commented on and when you look at our customers.
We can help a lot of customers and yeah. I think that's one of the unique things about the platform and one of the great things about the balance of the platform is that we've got 862000 I think it was the number of customers that can still save $200 a month and so.
A lot of customers that we intend to to improve their lives in in there. So we got to keep building capacity and that's what we're doing.
I was at a conference where you were on a panel with one of our colleagues who said.
What's what's 2020, you're going to look like and he said three trillion dollars and everyone kind of you know.
Shrug their shoulders.
And we're way past that have you do you have your own thoughts about how big the market could be next year.
I think we would tend to.
I think the MBA forecast is too conservative I think we would probably lean more toward the Fannie and Freddie forecast.
We're quite at three trillion, but I think we're definitely significantly higher than than where they MVA that.
Great. Thank you for answering my questions and it's been a great year and we've seen some real solid returns. So so thank you for the effort.
Thank you Henry.
Is going to be just as strong so keep that in mind.
Thank you at this time I'd like to turn the call over to chairman and CEO J brain for closing remarks, Sir.
Great. We really appreciate everybody joining the call hope you have a great day and will be available for questions.
Throughout the next couple of days, Thanks, a lot.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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