Q4 2020 Mr. Cooper Group Inc Earnings Call
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Good morning, and welcome to Mr. Cooper group's fourth quarter earnings call. My name is Ken Posner and I am SVP of strategic planning and Investor Relations with me today are Jay Bray, Chairman, and CEO, and Chris Marshall, Vice Chairman and CFO.
As a quick reminder of this call is being recorded and you can find the slides on our Investor Relations webpage at investors day, Mr. Cooper Group Dotcom.
During the call we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck.
Also we may make forward looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings, we are not undertaking any commitment to update these statements if conditions change.
I'll now turn the call over to Jay.
Good morning, everyone.
We're going to start this morning, and as always by reviewing the quarterly highlights.
But first I want to express my deep appreciation to all of my team members of Mr. Cooper for your fantastic work in 2020.
Despite the serious challenges of the pandemic.
Never wavered and your commitment to our customers.
Together, we helped thousands with forbearance plans, we helped thousands of save money by refinancing.
And we were very diligent in managing the company through an incredibly volatile environment.
Mr Cooper to serve as the source of strength in the marketplace.
And we produced outstanding results for all our stakeholders for myself the board and the executive management team. Thank you very very much.
Now, let's turn to slide three and zero in on the highlights for the quarter.
We reported $2 per share and GAAP EPS.
With the pre tax operating income of $329 million.
Which is equivalent to an R. O T C E of 44 per cent and.
And that's more than three times our target.
Tangible book value grew at a very solid rate ending the quarter at $26 27 per share.
2021 is shaping up to be another excellent year for gross intangible book value earn.
Originations turned in excellent results with pretax income of 435 million for the quarter.
This is the third quoting of row of income over 400 million and I would add the first quarter of shaping out to be another exceptional quarter.
These very consistent results speak to the benefits of our unique model.
Which most of our originations profitability relates to serving our existing customers.
Funded volumes were up 57% sequentially to a new record level. Thanks to a very strong ramp of correspondent.
And last quarter, we told you to expect gross to pick up in the servicing portfolio and it did.
During the fourth quarter, we saw 7% growth to 626 billion.
We're feeling positive about opportunities to win more bulk deals in 2021.
For the full year, we're expecting the servicing portfolio to grow in the range of 5% to 10%.
And as you know capital allocation is it's a constant focus for us.
And as you saw we redeemed 100 million in senior notes during the quarter.
Which brings our debt to equity ratio back to the level. It was prior to the WMA H merger in 2018.
And during the fourth quarter, we also bought back 1.4 million shares of stock.
Finally, we ended the quarter with nearly 700 million of cash and we expect very strong cash flow from operations to continue throughout 2021.
If you'll turn me aside for I want to spend the few minutes and focus on return on equity.
Part of the Derby NIH merger, we were a controlled company with an operational mission the.
A merger transformed us into a fully independent public company, where the mandate to create investor value.
We initially set in our OTC target of 12% plus.
Which is a reasonable level for an institution of our Sars, but as we've demonstrated.
Emmons straight it over the last two years and the right market conditions, our returns can be much higher.
We all understand the market cycles, the market cycles of our huge driver of profitability in the mortgage industry, but I want you to know that Mr. Cooper is return on equity also reflects our multi year of focus on efficiency.
As you can see over the last five years, we've been driving steady improvements.
Net cost and by the servicing and originations and this progress is really a good measure of our capabilities with technology.
We've talked on past calls about project Titan home advisor project Flash or digital forbearance self service tools and many other initiatives and this is really where you see the results.
The return on equity also reflects our cost focus at the corporate level, where.
Where we've taken a variety of actions to rationalize expenses.
And this includes the refinancing and deleveraging I mentioned earlier.
Those actions of cut our funding costs by 41% for $81 million per year.
Going forward you should expect us to continue driving efficiency gains in every part of the business year in and year out.
In the normal environment with stable economic growth and interest rates moving within a reasonable band with.
The company did you did generate returns on equity in the range of 12 to 20 per cent.
2021, it looks like another exceptional year with returns likely to be well above this range.
Now, let's move to slide five and talk about growth.
You mentioned this quarter, we posted strong portfolio of growth of 7%.
And as you know over the last two years. We told you that we were taking a pause on growth in order to focus on integration.
Deleveraging inefficiency.
But we said pause and we didn't say stop.
The growth pauses now over all of them.
I want to remind you that proud of the pause Mr. Cooper had a very impressive growth record with the 12 year CAGR in our servicing portfolio of 39 per cent.
This gross propelled us to the number of one spot among non bank servicers and number three overall.
And this growth record of solid proof of our technology and operational capabilities.
From here, we're planning to grow the portfolio at a rate of five to 10 per cent per year of.
Although the actual rate could be faster or slower depending on the number of factors.
We've made the technology investments to drive new customer growth in the correspondent channel and to retain our customers and the direct to consumer channel.
We have an unmatched track record of acquiring large portfolios.
In terms of sub servicing we are of the partner of choice for MSR investors.
And we have the operational capacity the double our portfolio to more than one trillion.
So we think we're really well positioned but having said that we'd never chase market share we're not about to start now.
We will grow more quickly when financial returns of the market are attractive and more slowly or not at all if they are below our hurdles.
Furthermore, we will grow in a disciplined and responsible manner, which means strict attention to capital and liquidity and an unwavering focus on the customer experience.
I'm going to wrap up my comments on slide six with some thoughts on the outlook for 2021 and longer term.
For 2021, we see very strong housing fundamentals plus current low interest rates.
Underpinning of another year of outstanding financial performance, we expect to generate very strong R. O T C D well above consensus expectations.
We're very pleased with where our momentum in originations and given the huge number of customers, who can save money by refinancing we expect to benefit from elevated margins throughout 2021.
Which will normalize as we roll into 2022.
However, we expect our results in 2022, and thereafter will benefit from ongoing technology investments many of which like project Slash are focused on further digitization and which will help us continue to drive down the unit costs.
Well, we've been very focused on refinances recently I want to remind you that we have a proven playbook for purchase markets too.
You saw us deliver on in 2018.
When our volumes were 65% purchase money.
The servicing margin will benefit from EPS in 2021.
As we move into 2022, the margin should benefit from slower prepayment speeds and reduce the amortization.
If interest rates drift upwards.
We stand the markup or Msr's, which could drive sizeable gains in tangible book value.
We believe this positioning is a major differentiator is most of our peers are heavily over weighted to originations.
Whereas our business model is much more balance.
Our cash and liquidity are strong and we're projecting robust cash flow throughout 2021.
As you know we've undertaken a strategic process to monetize our zone subsidiary.
That process is ongoing.
And the successful conclusion could generate significant additional cash also I'd remind you when projecting our cash flow.
Look the value of the net operating losses, we took on with the W. M H merger, which will shield us from paying federal taxes for many years to come.
Finally, acting as the stewards of your capital and we'll continue to be thoughtful and disciplined about how we allocate our capital and cash.
August 1st of this year marks the third anniversary of the W. That'd be my age merger.
At which point tax limitations will be reduced significantly.
Giving us considerably more flexibility to buy back stock starting in five months time and of that.
That's the best use of capital for investors.
That's what will turn.
And with that I'll turn the call over to Chris.
Hey, Thanks, Jay and good morning, everyone.
I'm going to take you through the details of the quarter and as always I'll start on page seven with the high level summary bar.
<unk>.
We were very pleased with net income of $191 million with $2 of share which included <unk>.
$85 million and breakage costs for the senior note refinancing we completed.
As well as $10 million in other adjustments as well as a 6 million dollar mark to market charge.
On an operating basis pretax operating income was $329 million.
As Jay mentioned fully taxed operating Aro, the TCE was 44%, which represents the seventh consecutive quarter during which we've exceeded our 12 per cent target.
As I said adjustments totaled $10 million. It was a 5 million dollar total of severance of crush the servicing zone.
Corporate segments related to the corporate actions.
Which if you recall on the efficiency initiatives, we've been working on over the past two years to lower expenses and standardize our operations.
Also we shut down the small unit of zone, whose contribution wasn't material.
Which resulted in.
Another $5 million charge.
In terms of other notable items I'd point out the servicing benefited from $81 million of early buyout revenue, which I'm going to talk more about in just a minute.
We're very happy with these results, which translated into excellent growth and tangible book value, which increased 10% quarter over quarter to.
The $26.27 a share.
Jay mentioned the potential for strong T be the growth in 'twenty and 'twenty one.
And depending on what happens in the macro and policy environment. There is potential for additional upside that could be quite meaningful so, let's turn to slide eight and.
And discuss the other catalysts for book value.
The chart on the left shows the benefit that rising interest rates would have on our MSR assets.
For example, if interest rates went up by 100 basis points.
We would expect to mark up the MSR by $418 million, which will equate to an increase of $3.54 a share of intangible book value now.
Now bear in mind. These estimates are based on models.
Which factor in many different variables.
As you know we carry the Amazon of books at fair value, which reflects market participant expectations. Neither own proprietary reviews. Also these estimates assume parallel rise of rates relative to what's already discounted the market expectations.
For the purpose of valuing the MSR the most important regions of the fixed mortgage rates as this drives prepayment speeds.
And of course, LIBOR and the swap curve also matters they drive the expectations for income on custodial deposits.
Now turning to the slide on the I'm.
I'm sorry of the chart on the right.
Let's talk about the DTA.
The biting the administration has proposed raising the corporate tax rate to 28%.
If this goes through the result in a markup to our DTA by almost $400 million, which would.
At $4.28 of tangible book value.
Which would be an increase of 16%.
In that scenario.
Cash flow will be unaffected by higher corporate tax rates since the Nols will shield us from paying federal taxes for many years to come.
I'd add that due to the tax planning strategies, we put in place the composition of the DTA is changing.
We've converted roughly one third of the DTA for Nols associated with the W. M of my age merger, which have expiration dates the ordinary Nols, which never expire.
The conversion will continue over the next two years or so.
Now, let's turn to slide nine and discuss the MSR.
Which was flat quarter over quarter of 100 basis points of view.
The Mark was relatively small $6 million and reflected lower mortgage rates in the quarter, leading to an increase in the lifetime CPR assumption, partially offset by higher swap rates, which as I just mentioned drive the expectations for custodial deposit income.
Each quarter, we provide you with an estimate of how many of our customers.
I would say at least $200 a month by refinancing.
Which would be roughly 35 per cent of the average monthly payment.
With rates, having drifted down during the quarter you won't be surprised to see approximately 800000 customers could.
Could benefit from refinancing.
We also have another 511000 customers.
<unk> lowered their payments by $100 of months, which would still provide very meaningful savings.
Additionally, we have hundreds of thousands of customers with substantial equity in their homes, who could benefit from cash out refinances, which is not counted in these numbers.
Our DTC channel has a lot of experience doing cash out refinances, which you saw from our performance in 2018.
This capability will help us sustain volumes.
Once the opportunity, but the rate and term refinances has returned to normal levels.
Now on that note, let's turn to slide 10, and talk about the origination segment, which continued to produce excellent results with pretax income of $435 million in the quarter.
Which is the third consecutive quarter over $400 million.
Funded volumes increased 57% quarter over quarter to a new record level.
Last quarter, we guided you to expect a ramp in correspondent, which is a cost effective channel for new customer acquisition.
Over the last couple of years, we've been investing in technology.
Rationalizing the cost structure and growing our network of clients.
Fourth quarter saw record correspondent funded volumes of $13 6 billion, which was more than double the prior quarter.
We also had record fundings in D C C.
We're constantly improving our technology and in 2020 of those investments allowed us to smoothly and significantly expand capacity.
Those actions also helped us drive the refinanced recapture rate.
By four percentage points the 35%.
Similar to last quarter, we're showing you how the recapture rate varies for different parts of the portfolio for.
For DTC customers, meaning.
Meaning people have already gone through of refinance transaction loans, a recapture rate of 66%.
You should take debt is very good indication that our customers appreciate the service we provide and.
And the money, we help them save.
The refinanced recapture rate is also strong in the correspondent channel.
Each will make up a growing proportion of the portfolio now the ramping up volumes.
There's also opportunity for us to do more with the bulk portfolios. We've acquired although these portfolios do contain some older loans flow balances, which is part of the reason the recapture rates there tended to be lower.
Now turning of the outlook.
Just like <unk>.
Q4 origination volumes in January and so far in February.
Volume continued to be extremely strong.
And we're projected funded volumes to remain strong through the end of the quarter.
Turning to slide 11.
Let's shift gears for a minute and talk about margins.
The total pretax margin compressed only slightly by.
By nine basis points down to 186 basis points.
Slight compression was due entirely the mixture.
Our margin correspondent volumes ramped up to 55% of total funded bonds from only 41% in the prior quarter.
As a reminder, when we talk about origination margins. These are all net of costs.
Now, let's talk about revenues for a minute.
The chart on the right shows you the trend in revenue margins by which we mean gain on sale revenues plus associated fee income divided by net locks.
As you can see.
Corresponding gain on sale margin declined quarter over quarter, which was the result of more aggressive pricing the grow the channel.
We previously limited volume to focus on pockets in the market, where we could maximize revenues now we're bringing a pricing war in line with market. Although we have backed out of and we will continue to avoid certain niches.
Where we're seeing signs of of the rational competition.
While the corresponding gain on Mark.
Again on sale margins are down.
We significantly lowered cost certainty of the year, which helped us sustain overall profitability of the channel.
In the DTC channel gain on sale margins have been very strong over the last three quarters, reflecting favorable secondary market conditions.
Because these are existing customers who value their relationship for us our marketing costs for essentially zero.
Don't face the same level of competitive frenzy as you might see in the retail and wholesale markets and based on what we've seen so far in January and February we.
We expect our total originations margin to remain strong in the first quarter.
Now, let's turn to slide 12.
A review of the servicing portfolio.
Total of <unk> was up 7% ending the quarter at 626 billion.
The growth benefited from sub servicing in particular.
As you May recall last quarter, we commented on the new relationship for the large investment firm, which is off to an excellent start.
In addition to originations we added 11 billions of the portfolio through bulk and flow of deals where we have very strong relationships in the market.
Despite CPR is at 33%.
Our net MSR position, which excludes excess spread group.
Grew by 9% sequentially, which is equivalent to a net replenishment rate of 130%.
This means that if you net out the run off of attributable to excess spread investors. Our originations were more of an insufficient to sustain and grow the portfolio.
Going forward you should expect the portfolio to be up slightly in the first quarter, but as Jay mentioned earlier by the time, we get to the end of the year, we'd expect to see solid growth of 5% to 10%.
Strong correspondent volumes in the higher DTC recapture rates bode well for steady growth with upside potential from both sub servicing in bulk.
We're encouraged by a recent pickup in activity of the bulk market with the watching a number of sellers holding on the product over the last few quarters in hopes of better pricing, but recently, we've seen them starting to come to market and expect that to continue.
Now, let's talk for a moment about forbearance.
Since the cares act of the sort of signed with help of approximately 364000 homeowners go on forbearance.
And we felt the 186000 of them resolve and exit forbearance for.
Forbearance request continue to trend down the January we had 9000, new requests compared to an average of 13000 of months in the fourth quarter.
Currently about five 5% of customers are still one forbearance, which is down from our peak of seven 2%.
Now, let's turn our attention to the servicing margin on slide 13.
Excluding the full mark the servicing margin was negative one four basis points.
Now as you would expect SaaS <unk> and low interest rates continue to weigh on the servicing margin.
With amortization of eight six basis points for the quarter.
Which equals three three basis points.
The Gladstone margin over last year's already elevated rates.
However, just the state the obvious we get the benefit of low interest rates in the origination segment.
Matters to US is the company's overall profitability, which in this environment continues to be well above our target range.
As you think ahead to 2020 to.
Remember that we will naturally benefit in the servicing margin from slower CPR and reduced amortization.
Last quarter, we told you to expect at least $250 million in revenues associated early buyouts of Ginnie Mae loans in 2021.
During the fourth quarter, where the <unk> revenues of $81 million, which reflects buyouts of one 3 billion.
Re deliveries of $600 million in the margin in excess of 6%.
Youll see this under other ancillary revenues and the detailed servicing P&L, we provide in the appendix.
As you may recall under Ginnie Mae's streamlined modification program.
<unk> able to refinance qualifying customers impacted by the pandemic.
In two of new loan with the market rate and then buyout of redelivered that loan.
This is an excellent program for customers because it helps them get back on their feet.
And provides of breaking their mortgage payments.
And it is straightforward for us to administer since it doesn't require extensive documentation.
For a lengthy trial for Ya.
For Ginnie Mae customers, who don't qualify for streamlined much we can still buy out of delinquent loans modify the terms and then we deliver them afterward trial for it.
Based on our latest projections for 2021 total <unk> revenue is looking likely to be meaningful higher than our previous $250 million estimate.
Now, let forbearance policies, having recently been extended.
The timing will continue to evolve.
And we'd expect to see larger buyout volumes in the second half of the year.
Also I'd note that for planning purposes.
We think 4% is of more realistic margin.
Looking at of the first quarter, we would expect the servicing margin.
The end up being right around breakeven.
Now turning to slide 14.
The zone produced another solid quarter.
Pre tax operating income of $18 million in line with the prior quarter. Thanks to continued strong performance in our title unit.
With Ginnie Mae foreclosure moratoriums now in place through the end of June.
Rio exchange continues to sit idle no contribution during the quarter of none expected.
Until the second half of the year.
While moratoriums are sensible policy the protect bars at some point there will be of backlog of oreos in the system that needs to be processed and cleared and at that time. The exchange will ramp back up again, and we would expect it to earn very strong profits once it is back in operation.
Last quarter, we talked about the question of whether zone is getting appropriate recognition in our stock price.
Given the fact that many investors focus on tangible book value.
And the book value associated with zone is immaterial.
We told you we were open to a variety of strategies to monetize the value of zone.
Including raising the minority stake issuing debt or considering the disposition parts of zone for the entire subsidiary.
Ever would position this very profitable and well run unit.
To get full market for credit from the market.
At this time I can report to you the strategic process is underway.
And we will let you know more about what decisions we come to once that process is complete.
Now if you'll turn to slide 15.
We will focus on the balance sheet and talk a little bit about liquidity.
We generated strong cash flow in the quarter with an estimated $370 million in steady state discretionary cash flow.
This allowed us to redeem $100 million in senior notes.
Absorb the breakage costs associated with the refinancing.
Buybacks $34 million in shares.
And invest the $100 million into flow and bulk MSR is on top of what we originated.
While ending the quarter with robust cash of nearly $700 million.
As we guided you to expect advances increased to approximately $1 billion. This quarter due to typical seasonal trends related to the tax payments.
So they are actually down by four 9% year over year, which is a much more positive trend than what we were planning for when the pandemic first hit.
From a liquidity perspective, however, we will continue to plan for adverse environments to ensure that Mr. Cooper always serves as a source of stability and strength.
Today, our liquidity is extremely robust.
Almost one 4 billion of an unused capacity for servicing advances on multi year committed lines, we have significant excess capacity on our originations and MSR of lines as well so from a liquidity standpoint, the company has never been in better shape.
Now, let's finish up with some comments on capital and leverage on slide 16.
Operating with strong capital is a clear expectation for any financial institution that plays an important role in the U S mortgage market.
At the beginning of 2020, we disclosed an internal leverage target defined as the ratio of tangible net worth the assets of 15% or higher.
Now that ratio is under temporary pressure from Ginnie Mae loans eligible for volume, which under accounting rules, we consolidate on our balance sheet as soon as the underlying loans go 90 days delinquent, whether we buy them out or not.
During the quarter consolidated EBITDA loss increased by $1 2 billion.
Excluding the <unk> our capital ratio has increased to 13, 2%.
From 11, 6% of year ago. So based on the current outlook, we expect to reach the 15% target during the second half of 2021.
Meanwhile to give you another perspective.
On how far we've come and building capital and deleveraging.
You can see on the right that our debt to equity ratio is now down to.
One O five which is well below where we were prior to the NIH merger in 2018.
Additionally, we significantly extend maturities to the point.
That we now have a liquidity runway with no senior notes maturing for six years.
Obviously, a great position of being so with that I'll turn the call back to Ken for Q&A.
Thank you, Chris and now we'd like to ask the operator to.
To start the Q&A session.
Thank you to ask the question you would need the press Star then one on your telephone to lift all of your question. Please press the pound key.
Our first question will come from the line of Bose George with <unk>. Your line is now open.
Hey, guys good morning.
Okay.
The question just on the <unk> gains this year.
And then it'll be losses on your other guidance, but just like when we think about you also like a simple.
Percent margin.
But is there a way to think about the volumes that you could see this year is I mean, the run rate for the fourth quarter of something we should look at it or.
On the guidance.
Yes.
Bose the first of all good morning, I think.
I'll give you.
Two ways to.
Consider that the $2 50 a ton.
Turns out to be conservative just given the number of.
Our customers.
That are electing the go.
The well the choices other customers are making that $2 50 would probably be $3 50 to 400.
But.
Youre aware that the extension of the foreclosure extension or the.
One of the Forbearance extension has just been extended last week so.
I think we're not giving you that firm guidance because some of that revenue may actually slip into the beginning of 'twenty two depending on.
What customers elect to do so far we don't have enough data to see how many customers you're going to elect to extend.
But the the.
The basic answer to your question is that $2 50 is probably somewhere between $3 50 of 400.
Before any impact of the extension.
Okay. Okay, great that's helpful. Thanks.
And then just on the servicing segment expenses.
The settlement, obviously took the debt last quarter is the number of this quarter and sort of the normalized number excluding the 10 million debt you guys highlighted of onetime costs.
Yeah I think.
The we should see a little bit of improvement in cost this year.
In line with what we saw last year, we've got a goal of reducing unit cost by at least 5% of year and so I think over the course of the year of the drag from reverse will be lower because of some improvements we've made in the fourth quarter that I think will will improve unit.
Even more than the but it's in that range.
Okay.
The guidance be due upon the purpose of the margin breakeven was that by year end.
No that was really we expect services margin to be.
At breakeven in this first quarter and it may be.
I would say, it's probably safe to assume it'll be breakeven through the year, depending on how much of the E. B O revenue stays in the year or shifts into next year.
Okay. Okay.
Thank you. Our next question comes from the line of Mark Hammond with Bank of America High yield. Your line is now open.
Thanks, Nitin Jain Cristina Ken.
First question would be on year your high yield debt when she alright.
It really tackled last year now stands at $2 1 billion and.
In the past you've said you wanted to return to a level.
Free W. NIH.
Debt level of around one nine but now your bonds area.
Much lower rates that all non callable debt.
One nine scale, where you would like can be or the $2 1 billion kind of where you'll have to be given.
The non call periods of your current bonds.
I think right now.
We're going to stay of you should expect us to stay right, where we are.
Mark we don't expect to do anything significant because of what you just said.
I think the actually I think the ratio pretty W. My age was 111 were down the 105 and that's what we said beginning in the first quarter of <unk> 19, and so that's where we wanted to get to.
But we'll reassess where we are at the end of the year and if there are any opportunities that makes sense flow, we will pursue them, but we.
Well, let you know in advance when we're not going to surprise you with.
With regard to debt.
Understood.
And my last question is more of an industry question about.
Youre seeing Western Alliance bank going out and buying.
Non bank mortgage firm.
Usually I see the other happen.
Could you just comment on our banks do you think trying to.
Get back in or looking to get back in or.
Kind of servicing and origination platform given what happened last year of this more of my call one off potential.
Well I wouldn't generalize based on Western line. So I thought it was really smart deal for Western Alliance.
I think it was 30% of accretive with a one year payback there is so much synergy.
Between banks and mortgage companies.
The industrial logic is extremely compelling and if I were running a bank again.
I would absolutely be looking at acquiring.
Our mortgage company, if you think about.
The cross sell opportunity with you when you think of US we've got 4 million customers and think about what a bank can do to monetize that we've got $10 billion in escrow deposits of banks could use.
We could use deposit funding to pay down even the cheap debt we now have.
So much lower rates and you've got access to FHA will be the so many things that makes sense.
The.
But im not sure.
There's a lot of banks have on their plate right now I would not be surprised however to see.
The more mergers in the future.
Got it.
It sounds like some of the big picture well. Thank you all.
Thank you. Our next question will come from the line of Kevin Barker with Piper Sandler Your line is now open.
Good morning.
Yeah.
Zone.
It's impacted pretty heavily by.
What's going on with the foreclosure moratoriums.
And given we've seen for parents of extended foreclosure moratoriums extended as well.
Long with.
Rapid increases in higher home prices.
Could you may.
Maybe give us a little more color on what your expectations are for XOMA revenue, specifically, the Oreo of brokerage fees.
And when we expect that to ramp.
And then maybe orders of magnitude as well just given that we have a lot more higher home prices and probably more flexibility for borrowers in distress.
Yes, Kevin I think the foreclosure moratorium first of all of it could be extended again.
We're not counting on.
Revenue from the exchange platform.
Through the end of the year.
Because number one we think there's a possibility there is a further extension of it will take a few months to ramp up activity. So if we have some that will be if we have some revenue there'll be some upside in the meantime the.
The other part of zone led by the title business is doing extremely well.
So.
I think you should expect more of the same of what you saw in the back half of last year.
The only caveat to that is we have an enormous backlog of orders and the.
The Oreo of exchange.
And even if some of those orders were to.
The window or.
Road because of the higher home prices.
Yeah.
The sheer number of orders is that once the foreclosure moratorium is lifted the exchange platform is going to be extremely profitable.
Right out of the gate, so and that will probably continue at very very elevated levels for <unk>.
18 months for two years I think you should think about 2021, Kevin very consistent with 2020, you will not see any meaningful earnings from the exchange business.
If any and but I do think Youll see continue to see strong title performance and then as you know.
One good thing on the exchange side of the business as we are continuing to win new clients and so you know once of the moratorium does get lifted and you move forward.
I think we will.
Have even more inventory.
And the <unk>.
As you know in the exchange, it's really FHA centric.
And so that'll be where the and the majority of the volume is coming from the Pls portfolio is kind of winding down.
Which will probably be less impacted by appreciation, but certainly that will have that will give customers options, which as you know real is the good thing. So that's how I'm thinking about it.
Okay and then.
Just given the delays in.
Or just the extensions that we're seeing would that impact your monetization of zone that you think you know.
Talked about today and in the past.
Yeah.
I think it's more likely that the exchange.
We would wait.
For some more clarity on at least the timing of the foreclosure moratorium being lifted before we tried to do anything with the exchange.
But it doesn't impact.
Actions, we would take with.
With the rest of the business.
Okay.
And then one housekeeping item.
Interest income pumped up in both the servicing and origination segments pretty significantly quarter over quarter. Despite rates the remaining very low on the short end of the curve.
Was there anything in particular that was that you shifted debt.
Driving interest income higher.
Nothing particular, I think it's still.
Unfortunately, it's still depressed we have been.
I'm trying to maximize.
Float income by consolidating.
Deposits.
Thanks for the value of them, a little bit more but.
That's about it.
Okay. Thank you for taking my questions I'll get back in the queue.
Yes.
Kevin the other the other part of that is the interest income on the loans, we're buying out.
So how much of that.
I don't have the broken out.
I should have that for you, but I don't so.
We'll follow up with you after the call.
Okay, and then one other item.
Is there a reversal of Oreo expense expected in the first quarter I believe you are forecast at the or guided to that previously.
Oreo expense.
Was there any recover faster settlements.
We expect it in the pipeline.
I don't remember the other.
The Jack on the because I don't think we're expecting anything in the first quarter net at this point, Okay alright. Thank you.
Thank you. Our next question comes from the line of beds Harter with credit Suisse. Your line is now open.
Thanks.
Hoping you could talk a little bit about your.
Your plans for kind of the level of liquidity Youre planning on holding and kind of how you would see kind of cash deployment or MSR growth.
Kind of comparing to your cash flow generation.
In 2021.
Yes, I mean I think the.
Ken If you look at 2021 from a cash flow generation standpoint, as we mentioned, we think it's going to be quite strong and I think our current focus when you look at kind of the current landscape.
Our view is that there is going to be more MSR portfolios for sale.
And we are going to participate in that market and we think there's there's growth opportunities. There. So I think you should think of cash deployment at the moment.
And the next couple of quarters as valley.
Evaluating those opportunities as I said in my comments were.
We're looking at whats in the marketplace, but we're being very selective and very disciplined in that approach.
But again based on conversations we've had with kind of market participants I think youre going to see a lot more activity there at and we think there will be some of them at attractive levels.
Okay.
And then I guess just.
Youre thinking about the 5% to 10% growth for.
For for this year in terms of balances.
How much of that sub servicing versus kind of of alone.
You should assume it's half and half I mean, it's not going to be that way every quarter, obviously, but.
That's what our.
We.
We are of a long term goal of maintaining about a 50 50 split because of the big sub servicing contract we added in the fourth quarter.
Sub servicing has ticked up a little bit more but long term, we expect it to be about half of that.
I mean, I think one of the key takeaways is if you look at our MSR owned book.
With our current origination capability.
Through correspond the direct to consumer as well as co issue and some other channels I mean, we're going to be able to replenish and grow the MSR one book.
Just with our existing originations so I think thats.
We've been talking about that you know the replenishment and our capability there I think thats huge and Youll see that continue to be very strong.
Great. Thank you.
Thank you. Our next question comes from the line of Giuliano Bologna with.
What's accomplished point your line is now open.
Good morning, I guess thinking about about cash.
Capital deployment kind of of your allocation of capital going forward.
Now that your share prices.
Slightly above tangible book value at this point, although you do have a pretty good outlook there for sure.
I get you.
It makes the current stock price below tangible book value in the near term.
How do we think about share buybacks.
Use of capital and kind of what your sensitivity is.
The relative valuation and then with that is there any sense of thinking about leverage because you're also not really writing for selling much excess spread strips at this point.
Richard also kind of Delevering and kind of levering the.
MSR is that you're accumulating is there any way to think about kind of capital allocation of how you might consider different uses of your capital.
Yes, I think it's as simple.
Simple answer Giuliano.
We're going to prioritize growth of the business as Jay said, we think we can we know we can of.
Double the size of the portfolio of their existing infrastructure, we already have the most efficient platform and we want to take advantage of that especially at these prices and we think we'll have an opportunity to deploy a significant amount of capital this year towards MSR purchases.
But our shares while they're trading at a premium it's an extremely slight premium the idea of that our business our balanced business model the.
The strong.
Earnings were generating is the only.
<unk> of 10% premium to book, so as our shares are really cheap.
And at the rate, we expect to grow tangible book value, we would expect to see a larger premium. So we think our shares are very attractive at these levels.
The.
You should expect us to continue to look at share buybacks as a very viable option at our current share price.
That makes a lot of sense of and I agree with you in the sense that you also have upside from higher rates.
For tax rates you can also have a line of leverage on top of strong earnings that could really propel book value.
From a little bit of different perspective is there any interest in potentially investing into different origination channels.
Obviously given COVID-19.
Direct to consumer platform, the rig correspondent platform for the ever be any interest of expanding and investing in the other other channels to build out over time.
Yes, I think look we we look at every platform that comes to market and we've had several conversations with folks.
Around their platforms today.
I don't know that Theres anything imminent and I think we like where we sit today, we like our capabilities I mean, obviously, our direct to consumer channel is certainly top tier in our correspondent channel has no sense of post kind of Pacific Union acquisition, just done a tremendous job.
And we like those channels, a lot and as I said the replenishment capability of those channels is quite strong.
So we will continue to evaluate but you know I'm very cautious on on the transaction just given the the culture integration.
Gration the systems integration et cetera et cetera.
But we will evaluate them, there's really nothing that I think in the near term horizon.
That we would you know.
We're going to act on it.
That sounds good. Thank you for taking my questions and I'll jump back in the queue.
Thanks Julien.
Thank you. Our next question comes from the line of Henry Coffey with Wedbush. Your line is now open.
Yes, good morning, everyone and congrats on a great quarter.
This year.
Does the strong in terms of gain on sale in DTC margins.
The net.
We.
The first quarter is as good as the fourth or does it mean that its probably going to be a little bit better than the fourth.
I'd say the first quarter of it looks every bit as strong as the fourth quarter.
The.
Gauging, where we are in the middle of the quarter. There was one small blip because of the storm, we had that will probably cost us I don't know.
$5 million or so in revenue of not not a huge number but I think the first quarter looks like it's right in line with the fourth quarter.
Could be maybe a little little bit.
Better, but think of it as flattish for the fourth quarter.
The flow volume and margin.
The.
You've given us a sense of where the the <unk>.
Gross margins on the two primary channels Youre going can you give us some specifics around.
What sort of margins, you're realizing in correspondent and what sort of margins you are realizing in DTC and sometimes origination business is more just creating MSR is for sometimes it's cash flow positive. So I was wondering if you could kind of address those related issues.
Okay.
We've never broken those numbers out separately, so I'd, rather not do it now, but I would say you should expect the DTC margin too certainly this quarter.
Continues to be very strong we see no cracks in the margin.
On the DTC channel, we expect a lot of volatility and we've already seen it in the correspondent channel.
Everybody all of the new newly public companies of the ones that want to go public or saying theyre going to grow correspondent volume.
50 to 100 200, 300% over the next few years and so we expect tremendous amount of price competition.
But because of the.
No matter what the margin is.
We're going to be.
The major player there and we're going to be able to use that even if the margins shrink.
It's still the primary way, we get new customers and replenish our runoff. So for US I think we're in a much better position than those guys that are focusing on it exclusively for the.
Overall profitability, but we are not going to break out the numbers for you today, but I appreciate the question and the state the obvious.
You know this that the direct consumer channel is <unk>.
Significantly cash flow positive, obviously, given the margins there and you know.
Youre thinking about it correctly, we look at it as what's the cost to acquire and the Christmas point.
Obviously, there is no cost of acquiring direct to consumer because of the cash flow positive nature of it and we like the return profile of correspondent business significantly so.
I think you should expect us to stay the course.
People will have a positive bias towards servicing because they understand it and they can predict it.
And you've proven over and over again the correspondent is of great way to keep debt business alive.
On the acquisition side I know in the past.
You talked about perhaps seeing more ginnie Mae deals out there what are your thoughts about what sort of bulk acquisitions might come your way and is it going to be someone just selling of flow business or is it going to be someone getting up in the morning, and saying I don't want to be in servicing.
I'm going to sell it to Mr. Cooper group.
I think it's going to be more of the latter I mean I think there are when you look at what's in the marketplace. Today, It's probably 50, 50, Ginnie and Fannie Freddie, but we think theres going to be some large ginnie Mae transactions that take place.
Throughout the year and you know we plan to be very engaged in that.
So I think it's more of the latter on US I mean, there is we have flow of partners today, I think there will be some flow but.
I think it's more people are going to want to sell of the majority of their portfolios.
Great. Thank you very much for answering my questions.
Thanks Amy.
Thank you. Our next question will come from the line of Lee Cooperman with Omega family Office. Your line is now open. Thank you very much and let me first just congratulate you guys and you've had a rising tide, but you've capitalize on it and the extremely effective way and I think it should be congratulated revenue performance, but I have four of them.
I have questions, they're all kind of interrelated. So maybe I can get them out and then you can handle them in the one of the you want.
Number one what is the minimum cash needed to operate the business you had 695 million of unrestricted cash what do you need in the way of minimum to operate the business secondly is the very large.
Range between the 12 and the 'twenty in terms of return on equity what are you assuming that the <unk>.
Number in terms of capital management, and what are the four of five things that would determine whether it's 20% of 12% what do we watch.
You mentioned and I know it used to be the case that the the stock restrictions repurchase restrictions come off in August.
What is that and then enable you to do basically.
And fourthly and let me just give you a little speech of Mr question.
Do you have the value of the view of the value of your business.
And what I mean by that Warren Buffett has said that he doesn't like since buying back stock in a sense of your trading against your shareholders. He wants to show the snow exactly what's going through his mind. He tells you know what.
The price to book and what kind of cash level and et cetera. He would require before buying back stock, but it just seems to me. Your stock is very mispriced, I think you've seem to agree with that but do you have a view of the value of your business and lastly, what is the likelihood of of transactions zone.
Okay. Lee let me, let me start with a couple of other things first of all the normalized cash if you think back before the pandemic, we would run the company with the minimum amount of liquidity.
On any given day, the minimum was $300 million of liquidity of which cash was generally about $100 million.
Hmm.
We wouldn't operate the business that way today.
Because of.
Because we're.
We're still in the midst of the pandemic in forbearance and things like the extensions that are occurring of the potential to impact our liquidity in ways that we we've.
Run multiple scenarios and there are times when we need more cash we clearly have more cash than we need to operate the business.
In.
Today is.
The status quo, then we'd have more cash than we need and we're holding that because we think we are going to have some very attractive opportunities to acquire more MSR.
The second part of your question was 12% to 20% of 12% to 20% is the range that we think we can operate in the obviously there are the plus there are factors of number of them, but the biggest there of rates and I think it's in any given year.
While we have a balanced business. It does take time to re size your workforce or do other things if rates were to rise dramatically. For example, we'd see big write ups of the MSR portfolio, but we'd have to resize. The other parts of the business. So I would say you should think that we are targeting somewhere in the middle of that.
The range consistently.
Over any period of time, but it could be we may be at the lower end of the range one year, because there's been a shock in interest rates and we may be at the higher end of the range because things are more stable and we're able to continue to improve unit costs, which is something you should expect us to do every year.
The third third question had to do with what happens after the end of.
August.
We're permitted to have.
A very small change in and owners.
Ownership, 5% owners.
And.
Part of that is driven by how much.
Stock buyback this year.
Prior to August Theres of Safe Harbor that we've operated under and buying back stock that could be no more than 10% of our outstanding shares in August that would shift to 50%.
So we'd have my volume or for the 85 of <unk> five of them.
Hi.
Yes.
The.
Of the likelihood of a zone.
<unk>.
I've got to tell you Theres a lot of interest in our businesses.
But I am not good at.
Turning that into probabilities I'm, good accounting money, but not guessing what people will do we're having lots of positive discussion and we've got great businesses can we can we find an opportunity to monetize the met the right price.
We'd rather surprise you and tell you we've got a deal then lead you.
To have some expectation that doesn't come true in the next quarter or two so we're actively working on that.
And in terms of the business what is it worth.
And so hard question at the.
To answer, but I, certainly think that the shares that I own are going to be worth a lot more in the future I think we have an opportunity to the 25% of RTC, we've given out one thing for us.
I'm sure you've noticed as we were conservative in the guidance. We gave we feel very very comfortable that we'll deliver that this year if not more so you add that potential for monetization of some or all of zone.
You think about the changes in tax rates that are almost certain to occur and you can see our tangible book.
Value be up by 50% the.
The question is how much premium while we're going to get in the marketplace. When you look at the multiples that some of our competitors are trading at we look like of dirt cheap stock.
And that's my impression of like well, that's my impression as well you have of two point shouldn't moving down market cap. When you look at the deferred tax assets values zone, and the the earning power of that you're generating it would seem to be very mispriced.
Yeah, so anyway image of a lead.
Yes, but congratulations you guys have done a great job.
Thank you.
Thank you our last question comes from the line of Matthew Howlett.
Research Your line is now open.
Oh, Hey, guys. Thanks for taking my question. Most of my question is the answer but just quick could you give us an overview.
Various technology investments, but what's budgeted for the year of what they are.
Well.
There are a number of them.
But I'd say the biggest are in the originations area, where we've talked in the past about project flash.
The project flashes.
Is really digitizing, the middle and back offices of the origination platform and we've got some great technologies for their butt.
No.
Theres nothing sexy about it it's really taking big processes as we say, we take the big rocks, we break them down into little Pebbles, and then we digitize each one of those pebbles and that's the.
That's the biggest thing.
Of all mentioned was the piece of the technology, because I think it's a mass of efficiency.
Enabler for US we've just completed a big project called the ice.
And ice allows us to ingest massive amounts of data.
Think about what goes into buying and boarding large portfolios.
I think we are the best in the business at doing that I think were widely recognized ice is going to make us dramatically even better because we can ingest massive I mean massive amounts of data.
At rates.
But with.
The accuracy rates far better than any OCR technology that exists today. So we have developed the state of the yard for OCR technology, and it's just not text. It's all of the unusual things you see when you ingest mortgage documents things like tax stamps and Ken.
We use.
AI to train the system.
This is the.
This is something we've just gotten the patent with we developed in partnership with Google.
And I think it's.
Another example of the really outstanding proprietary technology, we have in the company that enables us to operate the most efficient.
<unk> platform in the industry.
Right.
<unk> on the <unk>.
The back of the direct consumer you mentioned in the investment Derrick.
Do you spend on do you expect to grow that call it non portfolio of.
<unk> indirect Mr. What you've heard some people talk about growing the brand looking outside the portfolio just curious where you stand.
I mean, I think there's we're going to stay the course I think there's so many customers that we can still help in our existing portfolio and obviously the cost to acquire there.
As.
Very economical and then you know we will stay the course of of course, we are making some technology investments and correspondent as well.
I think that will include improve the customer experience.
So make the the loan.
The process more efficient.
I think we'll stay the course, I mean look I'd love to see us and I think we can get continue to get recapture decline right and if you can get recapture decline.
The 510 15 points beyond where it's at today, that's just so powerful.
It's a real cash flow generation machine and profitability of machine and.
I think thats, where we need to focus.
Down the road once we get to that level and we've.
We are taking care of our customers and delivering the experience that the.
That gets us to those levels.
And you could start contemplating do we want to spend money on different types of customer acquisition, but until we get to that point. We just have so much opportunity in front of us that I want to stay focused.
Have you as a position of having the largest servicing book.
Great appreciate it and just last question I know no one can get mortgage rates in the industry has sort of various forecasts out there, but the you'll get the substantial drop in the second or the back half of 'twenty one of origination volume.
Can you give us some great color on the incentives in your portfolio of refinance any comments on sort of of the industry forecast today I think the market structure at the drop off at some point this year and refinancing so just curious what.
What do you believe the level of mortgage rates would have the deep for that to occur.
I think I would direct you back to the table I forget what pages on the shows we assumed at the beginning of the year mortgage rates would.
Would increase by somewhere in the neighborhood of 50 basis points already seen that.
But you can see from that table that we've got 811000 customers, let's say of at least $200. A month I mean, you think about the debt.
Debt, so massive number another 500000 of save $100 a month.
I think the 811 goes down.
600, and change where the 50 basis point increase for our refinances forget about the industry.
Less concerned about that for our refinances rates would have to go up by 100 150 basis points for us to for our customers too.
Not be able to save meaningful amounts of money the likelihood of that happening and really dropping off this year is pretty slim.
And you think about and you know this I mean, the housing market overall is quite strong right and so even if rates drift upwards.
We've proven before we would do it again, we would we're going to recalibrate to a needs based selling and go to a cash out refi product and then our purchase business within our customer base is growing as well and we're going to make investments there. So speaking to Mr. Cooper, we don't see that true.
Mailing offer for all of those reasons.
Yes, you guys have demonstrated in the past I really appreciate it thanks a lot.
Alright. Thank you. Thank you moving.
Thank you. This concludes today's question and answer session I would now turn the call back the Zayn Bray for closing remarks.
Thank you I just would thank everyone for their participation and look forward to chat and further have a great day. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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Yes.
Sure.
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