Q3 2020 New Residential Investment Corp Earnings Call
Good morning, and welcome to the new residential third quarter 2020 earnings Conference call.
All participants will be in listen only mode. So do you need assistance. Please signal a conference specialist by pressing the star keep all the base year olds.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like turn the conference over to Kip Landmark head of Investor Relations. Please go ahead.
Great. Thank you Melissa and good morning, everyone I'd like to welcome you today to new residential third quarter 2020 earnings and thank you all for joining us.
Joining me here today are Michael Nierenberg, our chairman CEO, and President Nixon to where our Chief Financial Officer. In addition, with members from the new resin management team, including Bruce Williams CEO get right.
Silverstein President undergrad copied on Zillow CFO of new rides and Jack in a bar presidents, yet see the servicing division of numerous threats.
Throughout the call. This morning, we are going to reference the earnings supplement that was posted to the new residential website. This morning. If you have not already done so I encourage you to download the presentation now.
Before I turn the call over to Michael I'd like to point out that certain statements today will be forward looking statements. These statements by their nature are uncertain and may differ materially from actual results.
I encourage you to review the disclaimers in our press release and earnings supplement regarding forward looking statements and to review the risk factors contained in our annual and quarterly reports filed with the FCC.
In addition, we'll be discussing some non-GAAP financial measures during today's call. A reconciliation of these measures to the most directly comparable GAAP measures can also be found in our earnings supplement and with that I'll turn the call over to Michael.
Thanks, Kate good morning, everyone and thanks for joining our Q3 earnings call today as we look at the uncertainty in the world and the overall investing environment. Our focus continues to be to fortify our balance sheet lower our cost of funds and all of our financings and take advantage of the great opportunities. We are seeing in our operating business.
We do not see great opportunities on the portfolio side today, and we'll maintain higher levels of cash and liquidity, while being patient and being opportunistic the.
The earnings power of our company today between the investment portfolio and the operating business is extremely powerful to illustrate core earnings before amortization for the quarter or dollar 52 cents per diluted share of course, you can't look at this in isolation, however, a slow down in amortization and a pickup in market share in certain origination channels.
Should lead to higher corn [laughter] the quarter was a good one on many fronts. Since we did eat securitizations lowering our cost of funds on advances in loans and refinanced the term loan we didn't make lowering our cost of funds by 475 basis points as we issued our first unsecured debt deal. These financings will add $50 million savings per year.
Well, if you think of it this way an incremental $50 million of earnings per year.
Interest rates and mortgage rates at historically low levels, you couldn't ask for a better origination market and our operating business continues to get better by the day.
Our focus on helping borrowers through hard times is what are the core values of our company and I'm proud to say that our team does it does great work there.
Well, we had a great quarter in our mortgage company I feel we have just begun and I'm hopeful that our market share will continue to grow even into a higher interest rate environment I see this as we were still relatively new in the operating business and have plenty of room to improve it is our belief that as we grow our DTC channel, we will pick up market share.
Slow down or amortization on our MSR portfolio and dry book value significantly higher this will help our MSR portfolio is recapture rates will rise and again driver higher earnings for the company on the portfolio side. We're back in the call business. We have issued call notices for the month of November.
On up to 400 million a different non agency deals. If you recall, we haven't done any calls since the early days of cobot and this is the first time that we've issued some call notices.
On the investment activity front were fairly muted during the quarter away from our financing activity. The non agency alone positions are essentially all for the most part non mark to market at this point relatively small as we don't as we see the risk reward being very low in this current interest rate environment during the quarter, we sold about $600 million.
Non agency bonds and a little under 300 million up alone. We purchased some agency MBS to offset our MSR portfolio before I turn to the supplement I'd like to leave you with a few thoughts.
We are committed to maintaining a disciplined approach during these uncertain times and will maintain higher levels of cash and liquidity I remain confident our ability to drive book value or higher as we grow core earnings we look forward to growing our dividend.
With many mortgage companies going public today and over the past few weeks, we will continue to drive towards unlocking value in our operating business and see in our equity trade, where it should I'll now refer to the supplement which has been posted online and I'm going to I'm going to start with page two [noise].
[noise] as you look at the slide what we tried to do here is highlight our operating business.
And obviously our investment portfolio.
Since inception, we paid $3.4 billion in dividends, we have book equity of $5.3 billion. Our total shareholder return has been 40% and a market cap at the end of 930 was $3.3 billion when.
When you look at assets as a night 30 $20.2 billion in assets, we have an MSR portfolio little bit under $600 billion, which we believe [noise].
Well offer a great return for shareholders when and if interest rates rise as we think about the origination and servicing our sectors. This year, we projected do approximately 60 billion origination our year to date pre tax income so far is $554 million in our year to date.
It really is 189% when.
When you look at the servicing Division 310 billion U P. B as as it relates to the servicing portfolio pre tax income year to date $85 million and <unk> are we used 54%.
[noise] for the quarter GAAP net income $77.9 million or 19 cents per diluted share core earnings a one $131.6 million or 31 cents per day per diluted share.
But they are pre origination and servicing division $342.6 million of pre tax income.
Quarter over quarter, that's up 67% or common stock dividend of 15 cents per common share we increased our dividend by 50 cents dividend yield 7.6% at the end of September yes.
Cash on hand at the end of September $841 million today, we have a little bit under a $1 billion in cash and liquidity.
Net equity again $5.3 billion when you look at book value before the write down or not to write down before the the write off of the discount on the term loan every refinanced book value was $11 and once said.
Taking into account there with the write off of the term loan discount that knocked it down by 15 cents to $10.86 per from a book value perspective, total economic return, 2.2% during the quarter and again, representing a 9% increase in book value per.
For common share and again, reflecting a 15 cents dividend.
Page four just to take you through a quick book value a summary, I'm not going to spend a lot of time in here. The one thing I do want to point out where two things. One is again. The 11 data you can see on the bottom of the page 11, no. One book value before we wrote down the Sixtym wrote off that term loan discount of 15 cents Big number here have a look at the MSR asset.
In addition to that cost us $1.23 in the quarter, obviously, the origination business is doing extremely well the offset to that is we have higher levels of amortization when and if that does revert it's and I'll get into this later in the presentation. We believe that we're going to be able to capture more market share and origination business MSR amortization.
Mr amortization will slow down and the ending result should be higher core earnings for our business.
Page five an important one or some of the parts greater than a whole if you looked at the upper left side of the page we believe our implied book value today, its 16 to $19 per.
Per share our walk on the right side, which will get you there and essentially what this what this shows is if we if and when we unlock value in our mortgage company with mortgage companies trading roughly at five times EBITDA, that's gonna be worth anywhere from five to give or take a five and a half to seven and a half dollar.
Per share based on a give or take an $11 book value that should get you somewhere between 16 and $19 per.
For sure.
From a book value perspective, I mentioned earlier in my opening remarks liquidity, we are gonna carry high level higher levels of liquidity today as we don't know what the world is going to bring us as we look forward a couple of things to point out here Corning's 31 cents per diluted share we are holding a at the end of September 841 million.
Dollars of cash and liquidity if that was deployed you'd see an incremental three to four cents per.
Common share or get you to the 34 to 35 said the other thing to know the.
The term loan, which we took out in may which was 11% and we refinanced into is as to six in a quarter.
That closed at the end of Q or at the end of Q3. If in fact, we did that earlier in the quarter that was worth an extra two cents [noise].
Per share page seven talking about leverage I mentioned again in our opening remarks to fortify our balance sheet. If you have a look here a couple of things. One is we did eat securitizations in the quarter. They ranged anywhere from MSR nodes, the nonperforming loan deals to advance deals and.
Again refinancing the the secured term loan into our first unsecured term loan we refinanced our springcastle deal, which is our consumer deal. We also closed on a new Ginnie Mae MSR and advanced facility. So overall, great work by the team at reducing our cost of funds, reducing our <unk>.
Leverage locking down longer term financing and essentially driving extra extra revenue to the bottom line or extra earnings page eight delivering results.
Q3 accomplishments, one we want to navigate from a position of financial strength. What does that mean, we have 1.9 billion of unencumbered assets on our balance sheet of which $841 million or that is cash and liquidity and again that was as of 930 today, we have where you hover around $1 billion, we want to continue to grow origination.
Platform scale and profitability increased funded origination volume up E, 118% pre tax income of 72% quarter over quarter as.
As I pointed out a one of our key missions is to continue to help on homeowners.
The percentage of homeowner or bars in forbearance has decreased a 5.5% in October from 7.8% in July.
We want to continue to lower our overall leverage and risk profile, we reduced our daily Mark to market exposure to just 3% of the total investment portfolio.
The areas, where we do have mark to market exposure, our ltvs and those facilities are typically around 50%. So very very low leverage overall in our business and much more on a longer term financing well.
When we think about our additional term financing again, we price. These securitizations and were going to say $50 million a quarter. Finally, we want to generate attractive risk returns for our shareholders. We raised our common dividend by 50 cents in the quarter.
On the investment portfolio side on page nine are increasing in investments was driven by the purchase of agency Securities We purchased an extra.
Or repurchase about five five ish billion of specified pools in agency MBS to hedge our MSR portfolio.
When you look at the loan and residential security portfolio again, we sold a little under 300 million of residential loans, we sold about 600 million of.
Residential non agency securities how do we think about that we just see the risk return as being very low right. Now we want to continue to have a button down our balance sheet and and levels themselves are back to work towards pre cobot levels around many of the credit assets that we sold when we think about additional opportunities.
As we look forward I pointed out we're turning back on or a call business. We're going to continue that agency MBS as needed to hedge out our MSR portfolio, depending upon our view of interest rates, we've begun purchasing out a P.J. echoes that are in forbearance and then we will continue to grow our or.
So our portfolio.
Through our origination and servicing business.
[noise] paid and when we think about our MSR business.
To frame for all of you over the past a year to two years at one one to two years, we have written down our MSR portfolio about $1 billion. We do think MSR valuations are at historical lows.
Obviously, they've been lower but you know were towards the lows as interest rates rise MSR as will increase in value to give you a sense. When we think about what the way that we quote MSR as if you think about a servicing strip of 25 basis points, a threex multiple would equate to 75 basis points in price or three quarters of a point.
If in fact, and we saw this no problem.
Even less than a year ago, if MSR multiples went up one turn or went from a three multiple to four times that 25 basis points that would be an increase in value of on our on our MSR portfolio of $3.60 per diluted share again, right I point this out because at some point, we do think origination volumes.
We'll come off.
And as a result, we think our MSR portfolio, which will continue to add too will provide great returns for shareholders and again helped drive a higher a higher book value.
On page 12 on the MSR side again, I'm not going to spend a ton of time and that's a couple of things I want to point out when we think about the percentage of our portfolio that is refinance of both.
I think past quarters, we hope it around 30% now we believe it's around 40% for the industry. We believe it to be something around 75 ish percent. So what differentiates us from the industry. When we think about our MSR book one is the season, the seasonal nature of our portfolio our portfolio season that approach.
I mean 91 months were a little bit under eight years.
That is a big deal the credit impaired portfolio.
And this and the combination of the credit impaired portfolio in a season portfolio should lead to a higher valuations and slower speeds as we go forward.
As we get into this refund wave down the road.
When you look at page 13, a couple of things to point out here, which I think are important one is on the loan side. When you look to the left essentially the entire businesses non no daily Mark to market total equity in the loan and the loan book today is $790 million. When you look at the bond book on the right 663 million.
Total equity we point out 85% of that is no daily Mark to market as I mentioned earlier. The other 15% are really limited to what I would call. Some iOS non agency iOS and other things, which which have something around a 50 LTV. The overall once again fortifying our balance sheet locking down our financing.
Maintaining higher levels of liquidity should lead us to the great results as we go forward page 14, servicer advances I'm quite frankly, not a time to talk about servicer advances or kind of where they were pre cove. It to two to be Frank I'm, joining that March period, where things were extremely uncertain.
We expected much higher levels of advance.
Advance balances, we took out a excess capacity from some of our bank friends.
There's been no need for any additional.
Financing around the servicer advances as we on page 15, the improvement in servicer advances that delinquencies came in much better than our original projections.
We have a much more positive outlook driven by the limited number of new forbearance requests and higher <unk> higher forbearance resolutions during the quarter, we recovered $141 million of advance equity.
During during Q3.
Page 16.
Kobin related forbearance.
Forbearance bound balances or percentages have continued to decline we identified 5.5% from a peak of 84% to 8.4%.
Now I'm going to turn it over to our operator I'm going to go through our operating business and then we'll open up for some culinary.
When we think about our operating business.
Energy and new raise which is formerly known as shell point partners came together in July of 2018 in my earlier opening remarks, when I say, we're kind of new and the operating business. The management team and you know when you look at Jack and you look at Bruce had been around for many years.
And done a great job building out different origination and servicing businesses. When we when we purchased the company in 2018 at the end of the year origination volumes were about $10 billion servicing I you know at the time of a bit of acquisition in that July period was about $30 billion. If you think about it today.
It's 60, but you know will be between 55 and 60 billion of origination.
And on the servicing side will be north of 300 billion and servicing so tremendous growth, but measured growth there.
There are a lot of things we could all of us can do to improve and we continue to work towards that when you think about our platform. It's a differentiated platform. We have multi channel. We have we have four different channels that we operate across some will benefit in different environments again, the big focus continues to be around the direct to consumer channels when you.
Look at our origination and servicing channel strategies, we have the ability to scale originations across all four of these channels the direct to consumer channel as that growth is going to help with recapture is going to help with retention on our MSR portfolio and gain on sale in the direct to consumer channels remain robust while they are coming in a little bit here.
Our third party servicing platform I do believe as one of the best in the industry. That's under the show point brand and we are well north of 50 different customers on that platform and that will continue to grow as we think about our potential to capture additional value. We're working on brands the four channels. So.
We have a huge commitment to this business not only to originate loans in what I would call. The best origination market any investor have ever seen but also to really grow and heavy full rounded mortgage company.
Financial performance.
2020, pre tax income $639 million is up 470% of our.
Our target this.
For the year is going to be something close to 900 million pre tax income year to date are only 142% and when we think about revenue year to date, it's $1.2 billion to rub, 190% the tremendous growth measured growth, but a lot more work to do when you look at page 19 and we.
We talk about the growth, which I just alluded to pre tax income.
Up 22 to 24 times.
Servicing portfolio six times increase in the servicing portfolio and then origination in gain on sale margins continue to be extremely robust and that division continues to perform.
Very well page 20, when we think about the multichannel platform again, I don't I cant harp on on the direct to consumer stuff enough.
That is a big part of our business again, retaining our MSR client and lowering our amortization is going to be a huge win for our company and there is a ton of focus there the offsets to that again is great origination gains.
If you look at the four different channels Ren.
Again direct to consumer JV retail wholesale and correspondent.
21.
Origination activity and business highlights a record profitability for the quarter $312 million or up 72% on a on the originations segment annualize, our we have 291%.
You look at Q3 lock volume up.
$21.8 billion or up 122% and then again, our year end estimate something between 55 and $60 billion of origination.
Page 22, I'm not going to harp on this because I've spoken about it 50 times already a significant increase in lock volume on the direct to consumer channels.
This is what we are extremely focused on our entire management team all of us to get better there and again.
It's not only should get better there around the origination gain side, but it's also to protect our.
What we think is our industry, leading MSR portfolio.
On page 23 servicing activity and highlights 30 million for the quarter up 24% annualized ROE 54%.
The portfolio has increased 56% year over year, and we estimate to close the year at about $380 billion of.
Yes.
Page 24, I mentioned, one of our core values and our company is helping people, helping homeowners during cold and helping homeowners quite frankly anytime.
Anytime.
So when you look at the statistics 18000, new forbearance request in the quarter down from 174000 in Q2 active forbearance is now just 36% of the population impacted by coded and then 50% of the overall Forbearances, which is over 100000 homeowners have been received.
Sales so great work by the servicing team during these hard times.
Finally wrapping.
Wrapping up on page 25, then we'll open up the Q and a obviously our operating partners are here today. So one is we do believe in our ability to drive attracted risk attractive risk adjusted returns.
Clearly, we got kicked in the teeth in March I think we've rebounded extremely well I think our book value is extremely understated I think the value of our equity is extremely understated and we are going to do anything and everything we can to get.
To get back to those pre coated levels on the on the equity price and hopefully down the road on our dividend MSR as historically low valuations a lot of room to improve we have a ton of kind of cash and liquidity on our balance sheet will continue to maintain that through this tough period.
Our management team when we talk about.
Experience and we look at the on the operating side.
Ton of experience Bruce has been doing this for 30 plus years, Jack his 30, plus years 30 years, Baroness here for 25 years, and Kathys, probably 25 years as well. So you got a nice old team here with that I'm going to turn it back to the operator, we'll open it up for questions.
Thank you we will now begin the question and answer session.
Good question you May Press Star then one on your Touchtone phone if you are.
Speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Our first question today comes from Doug Harter of Credit Suisse. Please go ahead.
Thanks Ian.
Talk a little bit about your expectations kind of as you head into 21 for the origination business I think the wall. The profitability was great. It looks like the direct to consumer volume was a little lower than what you had talked about last quarter.
And just kind of how you're seeing the the attractiveness of the various channels.
Yeah, why don't I, let Darren.
Fair and answer that one right. Good morning, So our our volumes were down from what we talked about last quarter in terms of our funded balances we've been able to pick up our lock volume.
Volume and you can see that on on one of the slides in the context that we did 4.9 billion and locks in only $3.4 billion in fundings.
Part of that is just really due to the landscape for trying to hire new staff, we have actually improved our hiring by bringing in approximately 500 people for the last two months in a row.
On to continue to try to build out our fulfillment framework. We think we're going to continue to grow out our funding capacity as we continue to bring in new employees I would also say that Michael talked a lot about it is you know.
Our view on growth in the context of how we believe each for channels will perform in differing interest rate environments.
We do believe that our JV retail channels will continue to be some.
Somewhat sticky and then not be as sensitive to the interest rate environment, our direct to consumer channel has a lot of headroom in interest given the size of our MSR portfolio.
We did pause elite and Michael talked about that in the second quarter, our TPL business as well as our correspondent business was able to continue to grow and take market shares in both of those channels. So we're very very much.
Optimistic about what our 2021 would look like and we're seeing that momentum for the fourth quarter as well.
One other thing to add when you think about percentages as the.
As all of the channels grow it's harder to.
See the correspondent side is a little bit easier to grow it in the direct to consumer side. So the overall percentage, while it may may be constant quarter over quarter, Youre seeing higher lock volumes today in our direct to consumer channel and when you think about the profitability in those channels, that's really where we're focused and again it's.
Parts about the profitability, but the other part is slowing down the amortization that we're seeing in our MSR portfolio.
And then Michael you mentioned kind of doing anything to kind of increase book value and the stock price. Just can you give us your updated thoughts on attractiveness of share repurchase.
We think our shares are cheaper I mean.
The one thing is if we think that we can make a difference in buying back stock.
Would we consider it the answer is yes I.
I think the opportunity to to grow because once you get back the capital sometimes its harder to get it back.
The opportunity to grow I think in thinking about being opportunistic during these uncertain times makes us feel like we want to continue to have you know.
More cash today than we have in the past and I think we're going to continue down that path I'm not I'm not we're not ruling that out at this point really our focus is how do we unlock value. When we think about really what we believe are true book value is how do we unlock value for shareholders.
And that's really what we're focused on.
Great. Thank you.
Yes.
The next question comes from Kevin Barker of Piper Sandler. Please go ahead.
Good morning.
Hey, <unk> refers to page five where the valuation of the originator service or you have at 550, 766, which was an increase from little over $4 per share last quarter.
And I believe most of that was due to an increase in the multiple so five to six times earnings from roughly three times earnings.
Can you explain why you think that valuation makes sense and do you expect this level of earnings of 2020.
To be sustainable into 2021 and 2022.
So as it relates to the multiple and how we derive that there's been I think.
Five to seven mortgage companies that have that have.
Gone public in the past four weeks or so when we look at where those are trading I'm not going to compares to rocket, which trades that you know anywhere from 12 to 16 times EBITDA, but when we look at where we if I think about where this company could trade as a standalone company in the public markets.
The comps are anywhere from five to six times. So that's why we put that number in there you know.
If you go back to last quarter, there weren't really a lot of new NUGU a mortgage companies come in public today, if we put ourselves from a comp perspective at five to six times. That's how you get that number as it relates to Cathy maybe you want to talk a little bit about how we how we think about.
2021 earnings and what were kind of projecting on the on the mortgage company side.
Yes for 2021, well, we still believe.
As Michael mentioned, we are a new we sort of growing organization and we think the market is fragmented enough that we still got runway to take market share.
Across the four channels, even in an up rate environment.
We still got runway in terms of volume and we also I think while we believe that margins will come down.
Of course.
And get back to sort of more normalized level.
Sure.
Expecting margins to stay higher certainly through the fourth quarter and into the beginning of next year. So.
Look in certain up rate environments, we do you think.
Our overall profitability.
Will trend down.
But we think the MSR is going to offset that the MSR value because we'll see.
The prepayment.
And we've got a lot of upside there. So again that natural hedge is going to sort of kick in as we move into 2021.
Okay. So when you look at the earnings base and you're basing it on 2020 and I believe a lot of the comps at five to six times earnings were based on 2021 earnings not 2020.
And so I guess, what you're saying is that there is market share gains that can continue within that channel in order to sustain earnings am I right in thinking that or would you expect some contraction.
Into 21.
Just given the increasing competition in various channels.
Kevin I think where you're going to see is us pick up market share and we do think that you're going to see contraction in origination gains and when you think about the overall company the combination of contraction in what you're going to see in the origination market as you have lower volumes, you're going to see higher valuations in our MSR.
Portfolio increased values in ER.
And that on that side, but overall, whether we do I mean in the mortgage business is very hard to gauge. So what do you do 850, or 900 and pre tax versus seven or 750 or whatever that number ends up being.
We wanted to use this as an illustrated per hour for illustrated purposes, as we think about unlocking value in our company and our investment vehicle. If you think about our company. Its an investment vehicle that makes investments we have been good investment portfolio and then we have the operating business now where we go with the operating business and unlocking value whether you traded at sales.
Yes times 21 of 21 was 500 for example that would give you 3 billion dollar number so whether your $5 $7 $10 a $3. The one thing we know what we believe is that the sum of our parts is greater than the hole and we think that the value of the operating business is not captured in our equity price.
If that was realized it would be a tremendous amount of upside to the value yeah yeah.
Just a quick follow up on the on the MSR and your point.
You've also been increasing your your.
Well at the same time, which traditionally was a hedge against the MSR. How do you think about the play between the value of the agency securities portfolio against the value of the MSR.
You know if multiples were to change or the rates, where tobacco. So great question I think on the I mean.
My own personal belief is that long rates will rise over time, the mortgage basis on the other side has been.
Pretty resilient youre seeing lower prices in mortgages.
We have a total I believe of $9 billion of specified pools.
Against their MSR portfolio as well as that we need to have 440 Act compliance we want to be nimble here and you know for example, I think we're going to maintain a short a bias.
In the long run then a longer bias and we had some interest rate swaps for example that were off that we're offsetting.
Where we were receiving on interest rate swaps, we have some on the other side payers, which means you are either long or short. So we are getting shorter there as well and we're using that to essentially hedge out what we think the interest rate risk will be against the agency side. So we want to be able to capture the upside in the MSR portfolio when rates rise.
We're not here to.
I don't want to get to a place where we're long term.
20 billion of agency mortgages, and we have no rate risk hedge on the other side other than the MSR.
So.
Point point noted, but but for us we're still extremely under hedged as it relates to our MSR portfolio and the amount of pass through that we think we would need to be fully hedged in this environment.
Okay. Thank you very much thank you.
Next question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
Morning.
My focus.
As a number of moving parts the adverse market refinance activity that goes into December 1st given your blocking loans now that I assume you saw all of the funded what should be at that goes into effect to be change prices on.
Loan.
ER equal, leaving it where it is so marked loans and you'll you'll take it rests on the gain on sale.
Well as you think about the impact so that business.
You know how much of your origination volumes currently refi versus purchase and then how do we think about the.
The impact on on Sars as well as the mark to market from a different mortgage rate, possibly on replies for agency MBS you just purchased.
Why don't I, let baron or Kathy take the first question as you think about the delivery of so fee. So the the market doesn't go into effect until 12 one.
But from the time, we are locking to the time were otherwise delivering them to securities.
There is that period of time is really kind of when that market fee would come into effect for us.
This time weve completely put in the market fee in our daily pricing.
Our understanding is the market as well as put in the adversity into their pricing it's.
It's hard to tell how people or otherwise incorporating it in as a cost of the borrower or if they're squeezing it for margins. My gut tells me that it's somewhere around the middle in the middle of the pack there.
Partially being passed down to the borrower and partially being from squeeze into the consumer.
But with capacity continuing to be constrained.
In the ability in just the amount of demand for our consumers looking to refinance.
My I do think that that margins will remain elevated as long as the dynamics in our industry are there and and to the extent that even rates continue to rise.
I think that you'll you'll see rate follow suit.
And Stephen Your second question was it was about re Fi and MSR ours is that what that was yes.
Yes parcel of that fee is passed on to the bar you have a higher mortgage rate than certainly I would think that that slows prepayments and would be a benefit to your MSR valuation, but may be a headwind to the agency.
Book values, because they they would be marked down and am I thinking about that right as I tried flow all of this through the different business segments on that so you goes into effect you are but the fee is 50 basis points. So approximately would be a little over 12, and a half basis points and rate or even 15 basis points and rate. So in my view.
My assumption as if it's going to be 50, 50, you'd be talking about maybe seven eight basis points you know on either side. So from an impact perspective, given where interest rates as the aggregate amount of the absolute amount of where interest rates are we.
We don't really think it has any material impact in todays market for the amount of refinance volume.
And Stephen to that point, when you think about.
Our ability to recapture on a on the MSR side without with our sales with our servicer on.
On all refinances were captured we're recapturing approximately twice.
20% to 25%, 20% to 30% of all bars that a refinancing and this is on the on the new res side to give you a framework every 2% increase in recapture rate.
Adds about 33 cents per share to our overall earnings or $135 million. So real when when we harp on the direct to consumer side and recapture while you know you have this increase and theoretically you're going to see that whether it's passed to the to the borrower.
Irets eaten by one of the mortgage companies.
That's going to lead at some point, we believe to higher rates as we do better on the recapture side that 2% is going to be a 135 million bucks per.
You know in earnings or 33 cents per share. So we think there's a ton of upside in the MSR side origination.
Origination volumes will get pinched at some point I don't think this is sustainable forever.
But the way that our company is set up with this large MSR portfolio, which will offset that a ton of cash.
Growth in our operating business I think we're in a great place.
Great and then one last question kind of shifting on the origination side.
As you you know up until Cobot, you guys looked at nonconforming loans see any thought of revisiting those originations or what's your outlook.
On the origination mix for 2021 do I, just simply you continue to conforming with three five essentially running off depending on on rates and whats rebuy eligible or do you look at non conforming originations as something to start back up as an opportunity for next year, Yes, we're doing a small amount of jumbo today that gets flowed into some of the.
Some of our bank friends.
Non QM is we're getting ready to start Nonqm again, you know the one thing that we want to be mindful of is that we need all the capacity, we can to grow our direct to consumer channels.
In the agency space, while saying that you know being that the credit markets have you know quite frankly come Roaring back. We are turned and we are going to be turning on our non QM origination set.
Segment here shortly.
Great I appreciate the comments this morning. Thank you.
The next question comes from Bose George of KBW. Please go ahead.
Hello, Good morning.
Let's see the first I just wanted to ask where is the recaps or is that on you guys.
That number.
And what do you think it could go on.
From his old the direct to consumer.
Recapture or is there another piece to that as well.
Our recapture rates are give or take around 20% right now, which you know if you think about historically.
Even going back to the the early Cooper days, you know we were hovering around 35% depending upon the product type. It was between 25 and 35%. So right now I would assume give or take about 20% recapture rates, we need to I mean.
We you know when I talk about areas to improve this is this is obviously one of the bigger things for our company growing or recaptured which will add to earnings slowdown ehrman amortization and give us.
And drive core significantly higher.
Yes, so there's obviously a range of receptor rents at some companies that given in summer.
Very high Seventys I mean, what's the sort of a reasonable way to think about where you guys could go in the next couple of years.
I go back to it one is it depends on volumes.
Obviously, the higher the volumes, it's harder to recapture because the industrys struggling with capacity. So there is really the you know there's the pros and cons right. So if you think about higher recapture what does that mean that means you have slower speeds.
That means potentially that rates are higher that means you may have lower origination. So one of the reasons why we love where we sit right. Now is when you think about the MSR in conjunction with that origination business. It's a fantastic place to be I think that we'll get back to the mid twentys into.
On conventional product I think you know we will be in the Thirtys and we probably are in certain segments on the FHLB and Ginnie Mae products.
So and again when you think about that in the context of every 2% is worth 135 million Bucks or 33 cents per share that's really what we're playing for right now.
Okay. So that makes sense. Thanks, and then just in terms of the business as a whole.
But normalized like where should that normalize.
Are we ready for you.
What do you need to get there because.
Noted slower Prepays will help but at that time, there was no since probably slows and third and also from a capital deployment standpoint, you have obviously, if somebody asked how much is that reducing sort of the run rate on that.
So let me take the latter part the amount of cash we have a reducing our core earnings by probably you coupled out with the term loan is probably three to five cents per per quarter and core. So when you think about we reported 31 sitting on cash the term loan got refinanced in.
In September.
It's probably a steady run rate of 35 cents ish from a core standpoint right.
Right now as we think about our always in going forward.
We could go out and buy non agency securities as I mentioned earlier in the comments that we sold 600 million and non agency bonds, which are more credit related that have recovered from the early days of coated.
We did that quite frankly to reduce risk and create some cash and we think a buying an agency mortgage quite frankly on a levered basis is.
Going to produce better results for our shareholders, then that having a mid and mid single digit Levered credit piece at this point <unk>.
The world changed dramatically, obviously eight months ago, where do we go I know you know once we get a vaccine or cure withdraw rooting for obviously do I think rates normalize a little bit and head higher and you start seeing hiring et cetera I do.
And that May open up a different different.
Different investment possibilities my point earlier is.
From a fiduciary perspective, retaining cash not to deploy it to drive earnings because we.
I think we need to I think as his fiscal year responsible I think retaining cash to do opportunistic things and drive corning's higher down the road is something that's extremely important so.
When I when we took our always I think our our OE, we looked at some numbers since inception has been in the mid teens something around that including through the coated period up to covert it was probably something close to 20%.
So I like where we stand I don't think the investing environment is that attractive to buy non agency bonds or loans and this and there are some loans that continue to come out and they're trading at kind of pre cobot levels as well. So when you think about it with financing you're in the single digits.
And that this doesn't work for our cost of capital right now.
Okay, great. Thanks.
One last thought both when you look at MSR values that we're creating you know a new production that you know give or take anywhere from three to three and a half times multiples three and a half times on unconventional product. We think that has a lot of upside and when you think about that on a levered return or Unlevered return that is going to be the best use of our capital right now.
Because at some point when rates do rise that they are going to go up and you're going to have a lot more income from your MSR portfolio.
Okay that makes sense, thanks, and just one last one just going back to slide five.
Valuation differential what you thought that the companies that are typical mortgage banks have less of a balance sheet.
You guys have and to the extent the market doesn't it sort of gives you the value over time could you think of other structures.
Matt let structures just separate the wheat and the mortgage banking set of potential license value over time.
Yes, what I said in the year and I think what I closed in my opening remarks is we continue to evaluate a way to drive our equity price higher for our shareholders and create value. So I would say everything's on the table.
Okay great.
Thank you.
The next question comes from Henry Coffey of Wedbush Securities. Please go ahead.
Good morning, and thanks for taking my call.
This information is very helpful. As we all kind of pick into this but no EPS.
Everybody on the call.
No. It was the mortgage business and probably a lot of your investors at least to institutional investors understand the business really well.
If you split.
The mortgage company from the investment portfolio looks like both suggest that looking at the Pennymac model what would be the role of the retained the equation, how how how would that would that would that be the ads would that be the company that held the MSR as how it how would that play out in your view or having to really.
But it yet.
Hi.
Oh, we started about it quite a bit and we continue to work on that right now.
Listen we have a great investment business, we have calls for up to 70 billion or the non agency market. Our MSR portfolio. Currently sits at 600 billion to EUR six give or take 600 billion of MSR is today and we do have some bonds and we do have loans as we go down the road you know one of the things if you think about the split of the.
Two companies.
How big is your operating business get how big is your operating business from a balance sheet standpoint, and what's left on the you know what I would say is think about Opco and think about you know the investment portfolio. So we are playing around with those numbers. The investment portfolio is a very very important part to our future as we go.
Forward, because I do think on the investment portfolio side there'll be significant MSR holdings. So the idea is maybe there was a way to unlock value you're seeing it in some of our peers that are out there you know going public at five to six times. That's why on page five we use this as an illustration to show where how we could unlock.
Book value.
How we cannot book value and hopefully drive our equity price to a higher level. So it remains we continue to work on this you know night and day and hopefully we get to a good result that Ed.
Where our share price.
Rises and.
As we get closer to what we think the implied book value is that would be the huge win for us I mean, obviously holding on to cash is a smart thing right now because it is hard to get too excited over the kind of investment opportunities yes.
This is this is a stupid technical question on page 31, where does the add back for the.
The write off of your term note discount orange that im looking through the numbers and trying to I just can't find whereas whereas what did you report that.
That will come through gain loss on some of those investments, there's approximately a $60 million charges related to the write off of the discount. Thanks.
Thank you. Thank you very much.
Thanks Bose.
Your next question comes from Trevor Cranston JMP Securities. Please go ahead.
All right. Thanks most.
Most of my questions have been answered, but I was curious you mentioned you know earlier in your remarks about doing some opportunistic so early buyouts in the journeys Bruce can.
Can you maybe comment on how much ability you have to do that in terms of the scale of loans that are eligible for bio right now.
And you know how much how tractor you see that opportunity is close to utilize some of your capital.
So the opportunity we think is it's a good one the one thing I'd caution on the other side as well.
We don't we're not the largest ginnie Mae MSR or servicer in the business. So we don't have a ton you know we have exposure I would see that to Ginnie Mae RF ha.
But we're not the largest there so you know we see it as an opportunity.
You know as our MSR portfolio on the Ginnie side grows you potentially could see a larger opportunity clearly were not rooting for that because we're rooting for homeowners all the time and.
You know its an opportunity today, but we'll see how it plays out we'll see what happens with delinquency trends as we go forward as if you think about it you're buying out to a bar that's delinquent you giving them the mod.
And we want everybody to be able to perform and obviously get the lowest cost of funds was around around the mortgage so.
It remains to be seen but I think the short answer is we're not the largest ginnie ports a player there is an opportunity for us though.
Okay got it and then in terms of gain on sale margin you know obviously there was some compression during the third quarter.
Your comment on sort of how that's continued to trend into into Fourq. You. I know you said you expect it to remain somewhat elevated in the near term, but some.
Has that number continue to compress further into the fourth quarter versus what we saw through too.
So Mike.
Margins, obviously depend upon the channels of origination, but just due to the demand.
We continue to see margins remaining elevated through the fourth quarter and I would say that that would be for three of the channels.
On the correspondent channel as competition continues to build up and then you have the embedded floor, which would be the agency cashed windows.
But we have seen margins remain steady there as well and thats the expectation going into the fourth quarter.
I don't think that you're going to see meaningful change in margins and less the amount of cash.
Consumer demand changes materially, which will either be based upon capacity or just you know the aggregate level of interest rates.
Okay got it and then last one can use can you say what percentage of your total origination volume in Threeq, you was purchase versus refi across all the channels. Thanks.
Across all the channels.
We're about in the third quarter were about 67% refinance and 33%.
And 33% purchase.
[noise] and that's a record.
Thanks Trevor.
Thank you.
The next question comes from Mike Smith of B. Riley Securities. Please go ahead.
Hey, Mike just a quick one for me could you provide quarter to date book value performance and just to give any commentary on book on performance during the month of October.
It's it's early Mike I would say were essentially you know.
Retake unchanged at this point so you.
You know something between I guess, our net reported number obtaining 10 86 and 11, but.
Oh, probably in that range.
That's all from me thanks for taking the question you.
The next question is from Giuliano Valonia of Compass point. Please go ahead.
Good morning, I guess kind of.
I'm back to the some of the DTC discussion.
Obviously interested to see volumes in the third quarter and last quarter. There was some discussion about.
Getting I guess third quarter to about 4.6 billion in fourth quarter to around 6 billion I'm sure. There are different assumptions about prepayment speeds or not but what I was trying to figure out what is kind of what the runway looks like given the environment going into the fourth quarter. Obviously, you gave us some monthly trends last quarter, but then beyond that the next part of that question is really.
What kind of volumes or you are really trying to target and that plant on the DTC side.
What does the growth potential there because obviously that's a huge factor in terms of stabilizing the portfolio because you have significant amortization expense flowing through at the moment.
So are the biggest issue. We've had is really just capacity to be able to fund loan and that is just a market dynamic across the entire industry and in our sector on either from a tech technological perspective to be able to put loans through the system as well.
Just having enough people to put loans through the system and what we realized is that we we just were not able to bring in enough people fast enough. We've made moves in the third quarter to get ourselves to a better place and I talked a little bit about that before we're hiring north of 500 people a month.
At this particular point in time in order to meet that capacity.
We have a view as to how much we should be able to close for the month. If you look at on Slide 22, we talk about that we took in $4.9 billion of locks.
Which we believe will we should be able to catch up to that capacity going into into the fourth quarter.
We don't given thoughts on or where we think the market is going to come into 2021 on just given the size of our origination business versus the size of the MSR portfolio and Michael talks about incremental changes in.
If we can improve our recapture rate and have that continue to go up but we do believe that there is a lot of headroom given the size of our MSR portfolio to.
To take advantage of the current opportunity does that mean that we can get ourselves to 40% recapture a 35% recapture a lot is going to be driven by the.
The amount of refinance activity on a go forward basis going into 21.
And Julianna. This you know when you when you think about what is the amount that we want to do in that channel and quite frankly, it's as much as we possibly can.
That that we think you know that we can handle and that is.
That's kind of where we went ahead with this and again the.
The growth of the company has been tremendous the amount of resources. We have continues to grow the equity investments, we're making in in branding and marketing and technology is something that will continue as we build this company for the long run.
That makes sense and what I was kind of trying to together in a sense was also thinking about the kind of forward interplay between do you see in originations and amortization I'm curious as the first part of this question. If you have any sense of how amortization is shaping up and early in the fourth quarter in them and then the second part of that is kind of getting back to that.
To your question I think was brought up yeah.
Many different times in an answer to that yet.
You've done, let's say addressed in a few different ways on the call, but you keep referring to unlocking value from the operating businesses.
Well I think it was is really what I'm kind of curious about is like what do you. What would you consider there if you can't get there the value in the Schurz what would you consider spinning to businesses and then the question I kind of with that goes along with that was would be would you keep the servicing and originations in the sense of keep the actual assets of the MSR is with it with the originations platform and that type of.
A a a transition of the business.
How would you think about the where the pieces would fall.
You know, we I think I pointed out either to Kevin or somebody you know we are working on and all kinds of DEFINITY durations on how we think about the operating business for you know versus the investment portfolio.
And the interplay between both and that'll continue until I think we get to the right result for our shareholders, which is a higher stock price.
That makes a lot of sense well, thanks for answering my questions and I will jump back in the queue. Thank.
Thank you.
The next question is from Jason Stewart, That's Jones trading. Please go ahead.
Good morning, Thanks, obviously.
Obviously, we had a lot of large population of customers that took forbearance back in April may and we're hitting the six month, Mark you've given us some good disclosure 50% roughly.
Did forbearance does that mean that population is current can.
Can you give us more color around that and then active last met does that mean you're in contact.
Just looking for some more context around those two buckets. Thanks sure Jack you want to take that.
Sure Michael Good morning, everybody I'm happy to take that.
I I would refer you to chart. The chart on page 24, I I think the most interesting statistic is one that Michael already stated and I just would like to repeat and that's the fact that only 18000, a new forbearance requests in the third quarter versus 174000 in the second quarter pretty dramatic so.
In addition to that we've seen a transition between those people who have requested forbearances into active forbearances. So that's that number that you see it's about 75000 ish in the second set of bars the active forbearances.
Those of those Forbearances a higher percentage of those are delinquent then from the original number and a good portion of the people who have transitioned into resolution have transition because they were paying.
Current customers and now have just said they no longer need to forbearance protection.
And and so a high percentage of those about 80% of those active forbearances are in fact delinquent and then in terms of actual act of loss mitigation that just means that we're in discussions with them to either defer or modify.
Or in some cases, reinstate and and so those people are in active discussions.
Today.
Okay. Thanks for the color I appreciate it.
[music].
Thanks.
The next question is a follow up from Kevin Barker of Piper Sandler. Please go ahead. Thanks, I just wanted to follow up on the comments about correspondent margins I have the corresponding margins come down the pre cobot levels in the third quarter and hence your your comments about steady.
The margins in the fourth quarter or are they still elevated from where you saw that.
Elevated compared to pre current levels.
Oh right there there there definitely elevated versus pre cold at levels I would say that you know there are a few different ways to purchase a correspondent so really depending upon what the mix is in correspondent whether you're buying ginnie maes, whether you're buying agencies, and then also whether or not you're buying.
Mandatory or best efforts locks or even non delegated locks that impacts what margins are across the board that we are still seeing correspondent margins elevated versus pre coded were around 50 basis points all in on a pre tax basis on corresponding horn.
So the so their competition still is not as strong as some others have said or you're just saying there are certain channels. It can continue to I think theres certain theres certain channels within correspondent that can continue to elevate margins are there is no cash window. For example on Ginnie Mae so to the extent that you're able to contain or you haven't done it.
Trust and continuing to buy Ginnie Maes I can help out your margins it really depends on the channel mix within that with with the product mix within that channel.
Okay. Thank you very much.
This concludes our question and answer session I would like to turn the conference back over to Michael Nierenberg for any closing remarks.
Well thanks for thanks for the call this morning and your support.
We look forward to updating you throughout the quarter and ER and into Q4 have a great day and a great week. Thank you.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.