Q1 2021 Mr. Cooper Group Inc Earnings Call

Ladies and gentlemen, thank you for standing by at this time, all participants are on a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference is.

Being recorded should you require any further assistance. Please press star zero and I would now like to turn the call over to your host SVP of strategic planning and Investor Relations Ken Posner.

Good morning, and welcome to Mr. Cooper group's first quarter earnings call.

My name is Ken Posner 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, 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.

And also we may make forward looking statements, which you should understand could be affected by risk factors and we've identified and our 10-K.

The other SEC filings.

And not undertaking any commitment to update these statements if conditions change I'll now turn the call over to Jamie.

Thanks, Ken and good morning, everyone and welcome to our first quarter call.

We will start with the highlights on slide three this was an exceptionally strong quarter from Mr. Cooper with $561 million and fully tax affected net income of $5 92 per share let.

And let me comment on two separate three themes driving these results. The first is operating performance. This.

And this quarter, we generated a record $363 million and pretax operating income.

That's equivalent to and our OTC of 43%, which by the way is the eighth consecutive quarter, and which we've outperformed our minimum 12 per cent target.

And this is a story about innovative technology world class operational and financial discipline, and a culture of people working together to help our customers.

The second thing is the natural offsets and our balanced business model, which you saw on the 373 million mark to market on our MSR.

This is a reminder, the when interest rates go up and origination and start to cool, we enjoy offsetting benefits from servicing.

Tangible book value rose, 22% to $31.97 per share let.

Let me give you of some perspective on this metric if you look back to the WMA to merger, which closed and the third quarter of 2018 TBB per share has increased by nearly 50%. Since then and this despite well over $1 billion and negative and Mr.

MSR marks as interest rates were falling and 2019 and early 2020.

While there was some volatility along the way we've demonstrated solid profitability and resilience, which speaks once again to the balance and our business model and those offsets between servicing and originations.

Let's drill down further into the operating results originations generated pretax income of 362 million on record fundings of 25 billion.

In fact, we had record fundings and both DTC and corresponded servicing turned in a really good quarter with $109 million and <unk> revenues pushing the margin back up to $3 seven basis points on.

Also we had 3% growth and the portfolio or 12% annualized and I was pleased to see the growth engine firing on all cylinders with good performance out of DTC and correspondent plus strong co issue acquisitions and wins and sub servicing and we remain optimistic about bulk opportunities.

<unk> and the coming quarters.

Thanks to excellent operating results, we ended the quarter with a very robust cash position of $674 million and this is despite growing the portfolio and repurchasing of $148 million and stock.

So as you can tell I could not be more pleased with our results, but now let's talk about the outlook with mortgage rates up 50 basis points and the quarter and much of that move and March theres been a great deal of commentary on the market and how the rich about how the origination of industry is now passing through and inflection point.

And that's correct. This is the point in the cycle, where some of the weaker players are forced to cut prices to sustain volumes. We warn you to expect us and the correspondent channel and we are now seeing very intense price competition. There further higher mortgage rates of led to pressure on refi volumes and our DTC channel.

Given the shift and the environment, we're looking for our originations profitability to normalize rapidly.

Specifically, we are projecting pre tax profits down from $363 million and the first quarter to somewhere between 200, and 225 million and the second quarter.

This is not and the first origination cycle, we've been through and we feel good about our people platform and technology margins and the correspondent channel may be under pressure, but the channel will still provide us with new servicing customers and also gives us natural exposure to the strong purchase market and fact historically the purchase.

Mix and our correspondent channel has average 63 per cent.

Additionally, DTC has tremendous experience with cash out refinances and as Chris will explain we're already pivoting and that direction.

Let me return to the theme of balance and our business model because because of the B O revenues, we're going to enjoy a very profitable year and servicing then as amortization slows and servicing margins will start to expand when short rates Fine line go up we'll make more money on custodial deposits.

Plus if mortgage rates rise further we would expect additional positive marks on our MSR that would bill of book value.

Can't give you exact guidance on how originations and servicing and will offset each other because that depends on a lot of factors, including interest rates the yield curve and competitive intensity in the origination sector, but what I can tell you is that we still expect to generate strong earnings and very strong cash flow and 2021.

Plus we are expecting to receive $400 million and cash when the sale of titles $3 65 closes and the second quarter while.

By the time, we reach the second half of the year, we should have a small war chest of cash which will allow us to invest significantly in the servicing portfolio or.

Or depending on our stock price retire a significant amount of shares.

In closing as you think about the outlook for Mr. Cooper I'd encourage you to think first about our demonstrated operational strength and second about the natural offsets and our business model and finally think about how we can deploy this cash to generate shareholder value and.

And with that I'll turn the call over to Chris.

Thanks, Jay Good morning, everyone I'm going to take you through the details of the quarter and as always I'll start on page four.

With the high level summary of our results.

And I have to admit it was of great feeling to book 561 million and net income of.

The $5 and 92 sets of share.

Which reflected record operating results plus the sizable mark to market gain on the MSR on and operating basis pretax income was $363 million and as Jay mentioned fully taxed operating Aro TCE was <unk> 43 per cent and.

And I'll repeat his comment that this was the eighth consecutive quarter during which we've exceeded our 12% of target.

Now with interest rates on on the rise of results are not going to stay quite this level.

With solid originations volumes and strong E B O gains and the pipeline, we're still expecting a very strong R. O T C for the full year and a minimum of 12% and 22 and beyond.

Adjustments from the quarter totaled 4 million, which included $3 million and transaction costs related to the title of 365 sale and $1 million and severance and the corporate segment.

In terms of <unk>.

Other notable items I'd point out debt servicing benefited from a $109 million.

And early buyout revenues as well as a 12 million dollar reserve release and I'll touch more on these items and just a minute.

T. B V grew at a very solid rate ending the quarter at $31 and 97 per share and I would point out that our DTA decreased by $112 million and the quarter as our net operating loss carry forwards continue to limit of our federal cash tax liabilities.

Thanks to the decline as well as strong growth and equity.

The DTA dropped to 45% of tangible book value of this quarter from a peak of 75% and the first quarter of last year.

And by the end of the year, we expect the ratio of DTA to tangible equity to be at the point, where rating agencies and our high yield investors will recognize the quality and strength of our capital base and hopefully this will also set the stage for a re rating of the TBB multiple debt the equity market applies to our shares.

And while we're on the subject of the DTA I'd like to remind everyone that the Biden and administration has proposed raising the corporate tax rate to as high as 28% now if this goes through the floor.

The result, and a mark up to our DTA by nearly $350 million.

Or about $4 per share and tangible book value and while many of our competitors would see higher tax bills and reduced cash flow our cash flow would not be affected until the deferred tax asset runs out completely which we still expect would take several years.

Capital allocation is a huge focus for the board and the management team as we believe that with the right decisions, we can create very meaningful shareholder value.

At the end of March we disclosed that the board authorized the company to repurchase three 7 million shares from KKR, bringing our total repurchases for the quarter to four and a half million shares.

We took this action because we're very optimistic that we'll end the year with significantly higher <unk> and a very good profit outlook for 2020 two.

Following this transaction.

We'll be on pause for the next three months into August at which time, we'll have considerably more flexibility for stock repurchases, but for now we're extremely pleased to have reduced our ending share count from $92 million last spring to 86 million.

A day, which was nearly a 7% reduction and which in addition to our earnings has contributed to the strong TBB performance of that Jay mentioned over the last couple of quarters.

Now, let's turn to slide five and discuss the $373 million Mark to market that we booked in the quarter, which excludes the fair value amortization expense of $19 million.

The value of the MSR increased by 22 basis points to 122 basis points of U P. B, which you'll note is very similar to what other companies have disclosed so far.

Now each quarter, we provide you with an estimate of how many of our customers could save at least $200 a month by refinancing.

Based on mortgage rates rising year to date. We're estimating this population is now about 705000 customers, which is down 11% from the beginning of the year and this decline is similar to what we're seeing and DTC lock volumes as I'll comment on and just a minute.

I'd also point out that we have 686000 customers with substantial equity in their homes, who could benefit from cash out refinancing.

And we have a lot of experience with this product, which will address as we get to DTC. So with that let's go on to slide six and.

And talk about originations.

First quarter was another outstanding performance by the originations team, which produced pretax income of $362 million.

And that result was down slightly from the 400 million plus quarterly run rate, we've been enjoying over the last three quarters, but still very strong compared to pre pandemic levels.

Funded volumes were in line with our expectations coming in at 25 billion and in fact this was another record quarter overall and it was a record funding quarter for both the DTC and the corresponding channel.

The pull through adjusted lock volumes were also strong at 23 billion and down only 2% quarter over quarter.

We were especially pleased with the volume trends and correspondent and in fact March was one of the best months ever with $4 7 billion and pull through adjusted locks, which we estimate on a preliminary basis places us at about number of five in terms of market share based on the MBS data.

Correspondent as you know is an important channel for us for several reasons.

First it gives us exposure to the purchase market and if you look back historically and our correspondent purchase mix has averaged about 63% in recent years and in 2018, it was almost 90%.

Second correspond and helps us grow the servicing portfolio by acquiring new customers, who are exactly in line with our credit criteria and and third we earn attractive margin relative to the bulk pricing.

On a correspondent is another example of the Mr. Cooper story, and which we combine innovative technology strong operational and financial financial discipline.

And the collaborative culture and correspondent, we're very proud of our real time analytics and our pricing engine, which allows us to bid on several billion dollars' worth of collateral on a daily basis literally within minutes.

Also our platform integrates seamlessly with our clients' origination systems and we've automated a large portion of the document review process, which makes us a streamlined and efficient process for both us and of our customers today.

Today, we have of customer base of over 800 active sellers and unit cost debt. We believe are on par with the best players and the industry.

Now turning to the DC DTC.

This was also a record funding quarter with recapture up to 37% and the quarter and reaching 38% in March.

Now as I just commented we still have a large population of customers, who could save money with the rate and term refinance but with rates up 50 basis points and the quarter that population is strong at the margin and we did see locked volumes impacted in March down about 16% from the January of <unk>.

Level.

And this is part of the cycle.

We're cash out refinances are going to play an important role.

We've got enormous experience with that product, including state of the art desktop technology, which proactively identifies cash out of solutions using an AI driven benefits engine the sorts through thousands of products.

Over the last quarter of DTC leaders have been busy with training and call monitoring to help the sales force pivot back to this product and you can see on the chart in the lower right hand, the cash out is already up to 22% and the first quarter and the mixes and the <unk> so far in April.

And for some perspective, if you go back to 2018, roughly 70% of our DTC volume was cash out refinance and the refinanced recapture rate at that time was over 50% now we don't know if the market is going to return of those levels of it.

Does we're well equipped to generate strong volumes and strong profit.

Now turning to slide seven let's shift gears and talk about origination margins.

As you can see the total pre tax margin compressed by 23 basis points to 163 basis points.

Now, what's primarily going on here is very significant price competition and the correspondent channel, which is something we've been guiding you to expect and at this point and this cycle and it's hardly a surprise.

Just as we did last quarter, let's look at the trends and revenue margins, which consist of gain on sale and other fee revenues divided by pull through adjusted lock volume.

And the correspondent channel is seeing very aggressive competition and that has continued with further pressure on revenue margins and April.

As you can see from the dotted line on the chart.

It's hard for us to predict the next few quarters. Because this is a major inflection point for the industry with some of the weaker players or suddenly realizing they built too much capacity.

As for us our capacities and a good place and we plan to continue acquiring loans, but you should also expect us to step back from certain product niches or sectors when pricing there in terms of rational.

DTC revenue margins were also seeing some pressure at this point of the cycle, but in contrast, the correspondent they've been much more stable, reflecting the fact the.

These are existing customers, who value of the quality of our service more than very small differences of rate.

As Jay mentioned, we're expecting pretax originations profit to drop to around $200 million to $225 million and the second quarter and this would be driven by a rapid normalization of margins to approximately 110 basis points and a moderate decline in volumes to around 20.

<unk> to 'twenty.

23 billion.

Longer term.

And what level do our origination margin stabilized well if you look back historically over the period 2015 of 2019 on margins averaged around 90% to 95 basis points and we think that's a good guide to normalized levels. Although we are investing and a number of technology projects designed to squeeze out of <unk>.

Costs and widen margins.

Now, let's turn to slide eight.

And review of the servicing portfolio.

Total <unk> was up 3% sequentially or 12% on an annualized basis ending the quarter at 646 billion.

This growth reflected very strong execution and all of our channels of correspondent DTC sub servicing and acquisitions.

Now, let me spend a second on co issue, which added 8 billion of new <unk> during the quarter.

This is another relationship channel and which consists of MSR acquisitions on a recurring or flow basis for mortgage banking clients, who have enough scale to securitize their product, but who are aren't large enough to run and efficient servicing portfolio. The.

The co issue channel is similar to correspondent and that we have very strong client relationships based on seamless connectivity and a streamlined process.

Since we don't securitize the loans, we don't earn any gain on sale margin, but we do enjoy a steady supply of MSR is at fair market value, which serves to grow the servicing portfolio with borrowers who meet our credit criteria.

Growth and sub servicing is coming from several clients, including investors who value of our platform for the recapture capability and others, who value of our high level of customer service.

I'd also mention that during the quarter, we won three small bulk deals.

Totaling 9 billion of UBB, which should close and the second quarter and after two years of focusing on efficiency deleveraging and investing and the platform during which we took a pause from growth. We now feel very good about growing the overall portfolio and a 5% to 10% rate this year.

Although we're laser focused on returns and so.

So the actual rate could be slower or faster, depending on what opportunities, we see and the market.

Now, let's talk for a minute about forbearance.

Since the cares Act was first signed.

We've helped approximately 385000 customers go on forbearance and.

And we've already helped 236000 of them resolve and exit.

In fact, we had tremendous performance in March with 19000 customers exiting and that month alone.

Forbearance requests of continued to trend down with April and only 6000 requests compared to an average of 8700 per month and the first quarter.

We're very pleased to see only four 5% of our customers are still on forbearance.

Which is down from a peak of seven 2%.

Now, let's turn our attention to the servicing margin on slide nine.

Excluding the full mark the servicing margin was three seven basis points.

For some perspective the margin is obviously not what it was in prior years when interest rates were at more normal levels.

Amortization of alone was up to nine six basis points and the quarter, which is the loss of $4 eight basis points and margin year over year, and that's a lot of money for us to $77 million hit to the quarterly run rate.

And if you went back to amortization levels in 2018.

We've lost six six basis points and comparison, which is a $114 million quarterly impact.

We've also lost one one basis points and interest income, which reflects low yields on our custodial deposits, which cost us another $18 million per quarter. So as you can tell there's a lot of potential earnings power of the servicing portfolio as interest rates transition up to prior levels, which is why.

We encourage you to think about Mr. Cooper is benefiting from offsetting impacts and different rate scenarios.

We had another good quarter for <unk> revenues, which totaled 109 million. Thanks to buyouts of $2 1 billion re deliveries of $1 7 billion and of margin of five 6%.

Youll see these revenues under other ancillary revenues and the servicing P&L on the appendix.

We're obviously very pleased with execution and we now expect full year <unk> revenues of at least $400 million.

I'd also call your attention.

So the $12 million reserve release, and the Oreo expense line, which you will also find and the servicing P&L and the appendix. This release reflects the fact that our expectation of losses on servicing advances turned out to be a little too conservative.

As you can tell from the chart, there's been some variability and the Oreo expense line over the last few quarters and as a reminder, this line has included benefits associated with Investor settlements and similar nonrecurring activities.

Now looking past fluctuations and Oreo expense you can see some very nice year over year improvements and operational expense, which were down nine basis points from a year ago to eight four and the quarter, reflecting the benefits of project Titan and the digital tools, we've rolled out.

To help customers as well as the other corporate actions, we've taken to streamline our operations.

Operating costs remained and ongoing focus is driving incremental unit cost savings is one of the company's core strategic pillars.

And looking at second quarter, we'd expect the margin to remain at or above three basis points.

Turning to slide 10, I'm not going to comment on zone.

Because title III 65 is in the regulatory review and in connection with the sale agreement earnings from title III 65 are now being held for the benefit of the buyer and therefore, the unit will not contribute to earnings and the second quarter.

Closing is still expected in the second quarter, and we continue to estimate and after tax gain on the sale of $350 million and cash proceeds net of cash taxes and transaction costs of approximately $400 million.

Additionally.

<unk>.

And the Oreo auction exchange remains idle foreclosure moratoriums are still in effect.

With that let's wrap up by turning to the balance sheet.

Starting with advances and the liquidity on.

On slide 11.

You can see we generated strong cash flow and the quarter with an estimated $379 million and steady state discretionary cash flow.

This allowed us to buyback of $148 million and shares and invest $356 million into msr's through originations and co issue, while ending the quarter with robust cash of $674 million, which was essentially flat quarter over quarter.

Advances remain a good story as they declined 10% to $945 million from of seasonally high fourth quarter, where balances were elevated due to escrow tax payments.

Okay.

Our servicing advance funding capacity remained at just over 2 billion of multiyear committed loans of which one 4 billion was unused.

We continue to have significant excess capacity on our originations and MSR lines and from a liquidity standpoint overall the company is and at an extremely strong position.

Furthermore, our cash outlook is very promising.

Even with the increase and mortgage rates and the normalization and our originations profit, we still expect to generate elevated profitability for the remainder of the year as well as strong operating cash flow.

The working capital outlook is also good as we're expecting advances to remain stable, while some cooling and the origination markets will allow us to recover working capital from that segment.

Finally, as we've highlighted the $400 million and proceeds from the closing of title III 65 will further enhance our liquidity position.

We expect cash will soon represent a very large percentage of our tangible equity.

So with that.

And let's finish up with some comments on capital and leverage on slide 12.

Operating with strong capital is a clear expectation for any financial institution that plays an important role and the U S housing market.

And early 2020, we disclosed the leverage target defined as the ratio of tangible net worth to assets of <unk>.

15% or higher.

And we ended the first quarter of 11, 2% up from nine eight and the fourth quarter due to strong operating earnings and the Mark to the markup of the MSR.

As Youre aware our.

Our ratio was under temporary pressure from loans subject to repurchase from Ginnie Mae, which under accounting rules, we consolidated on our balance sheet as soon as the underlying loans go 90 days delinquent, whether we buy the matter or not.

Consolidated <unk> at the end of the quarter were $5 8 billion now excluding these <unk> our capital ratio would have been 14, 7% at the end of the first quarter were just shy of our target and we expect to reach the 15% target by the end of 2021.

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 down to nine ex which is well below where we were prior to the <unk> <unk> merger in 2018.

We were pleased to see both Moody's and S&P raised our outlook from stable to positive.

We believe that with continued progress on these capital ratios as well as continued utilization of our DTA, we will put ourselves in position for ratings upgrades and continued favorable performance of our senior notes and that the benefits of the strong balance sheet will be appreciated by equity investors and.

Well, so with that I'll turn the call back to Ken for Q&A.

Thanks, Chris and with that and what is the operator to start the Q&A session.

As a reminder to ask the question you will need to press star one on your telephone and again Thats Star one on your Touchtone telephone to ask the question to withdraw your question press the pound key place.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Doug Harter.

Credit Suisse. Your line is open.

Thanks.

Hoping you could touch a little bit more on the capital deployment on the cash deployment kind of once you've got the $400 million.

And I guess, how are you seeing the MSR opportunities.

And kind of the thoughts on the impact to the leverage ratio as you talked about at the end. If you were to do a sizable buyback and your willingness to kind of.

Temporarily.

And as many of those metrics lower.

Good morning, Doug.

I guess I would give you.

Two parts.

And that answered that question of.

First of all yes, we do see more MSR come in the market, we see just as we've been predicting that.

And that some of the larger aggregators with guys that don't traditionally hold the MSR are beginning to bring pools to market.

The volumes are still on a relative on a historical basis, there's still relatively low but they are increasing.

On a noticeable pace. So what we thought would occur looks like it's occurring and we are having some positive but still preliminary conversations with some.

The large holders of the MSR, so that may in fact come to.

And to play out exactly as we said but of course the returns have got to be appropriate.

With regard to your the other part of your question I don't see any scenario, where we don't hit our target.

I'll just leave it at that I mean, we are going to be building book value through the.

For the year.

If you just look at your own estimate or earnings or of consensus estimate.

So the company is going to be building quite a bit of equity over the balance of the year, even while were buying pools of MSR. So we are we said we grow 5% to 10% this year.

<unk> grew 3% and the quarter on and Thats on and ending balance. If you look on an average balances more like four and a half.

And we're doing that while we're building book value I think it's hard to imagine us not ending the year with TBD at or above.

$40 of share so I don't think theres any.

Any worry here about us.

The continuing to buy MSR and growing the portfolio at a reasonable rate and at the same time strengthening of the balance sheet and to match the cash.

And that would put us in a position to.

And to buyback more shares as the as the year and goes on.

Great. Thank you.

Thank you. Our next question comes from Bose George of the K B W.

<unk> please.

Hey, good morning, and actually it can you talk about your expectations for <unk> revenues. Once once you get into 2022, and then just for the back half of the year, just sort of the cadence for the what's left is that perhaps fairly kind of spread out over the next two quarters.

Yes, Thank you both and good morning the.

The initial ex will be had it was $3 $50 of $4 50 that number and still.

The.

A pretty good number overall, the $4 50 may may increase a little bit.

But what we've said this morning.

And stick to that at.

At least 400 of that is going to.

Be produced in 2021, and the balance of it will be in the beginning of 'twenty. Two I can't give you an exact amount quarter over quarter, but I think what we saw on the first quarter, we're going to see about that level every quarter through the year and again whatever doesn't get completed.

In the fourth quarter, we will probably slip into the first quarter of 'twenty two.

Okay, great. Thanks, and then can you just repeat what you said about the earnings expectations for <unk> and I think it was for the origination segment that I just didn't fully catch them.

Well I think it's the origination segment and our overall expectation for earnings we think the servicing is going to stay out of about this level through the year it could be some upside of amortization really slows down materially.

And short rates move, but right now we think we're probably going to stay at this level.

Originations earnings, while there will still be well above.

The historical levels are they arent going to cool a bit so we were saying that originations would come down.

Somewhere in the two and the quarter range 202, and a quarter, maybe a little bit higher than that but overall earnings. We're also expecting to be.

In that range.

Operating income is what I'm, referring to and that number at 200 to 202000 $25 million is where we would expect the quarter to be.

And of course, that's operating earnings not reflecting the gain from title III 65.

Okay. So the 200 to 225 as operating earnings for the company as a whole as well as for the origination segment both.

Both of those range of Europe actually about the same number.

Okay.

Okay, Great. That's all I had thanks very much.

Thank you.

Thank you and next question comes from Kevin Barker of Piper Sandler Your line is open.

Good morning, Kevin Good morning, and.

Good morning, Mike and Chris could you just quickly address.

And the payments issue that came out and I know you guys issued a press release and CFPB mentioned something but.

And it appears he was.

He was there.

Result of one of your vendors.

And you know is that fully resolved and the other remediation efforts youre doing to make whole for customers.

Yes, I think Kevin.

What we put in the press releases and it's pretty consistent with where we're at.

Saturday, we discovered that electronics payment vendor ACI worldwide.

And the inadvertently issued incorrect mortgage payment drafts and.

On a per conversations with them and.

It looks like they were testing the system from a capacity standpoint, and then putting test files into the production environment.

So we obviously once we identify that through our normal process of Saturday morning, and immediately.

Immediately reported this area to our customers banks, we've worked with them to prevent any financial impact of our customer accounts and credits and reverse and continue.

And correct gas and fees.

Non of security breach, obviously, and we did not receive any funds from customer accounts.

And as a result of the team's action really of Mr. Cooper out of the 480000 customers and it could have been impacted we are only aware of a few hundred that.

And of incurred NSF fees.

We're going through those as we speak and and providing refunds.

All of the result, obviously of.

ACI there and then look at from a customer standpoint.

Nothing is more important.

And then the trust of our customers and one.

In addition to all of the work we did to the fixed Aci's era, we are sort of immediately started communicating with our customers.

Learn and our customers through email on Saturday evening website, social media posts and blog and.

Brought in extra staff on the call centers and so I think overall right now we feel like we and mitigated the impact of this error and.

And we're tracking it on a daily basis of our call volumes are back to normal and we're just not seeing a lot of activity around this.

Around the ear from by ACI.

Thank you for the additional color there.

And then.

No.

Given your comments and the correspondent channel where.

Competition is much more intense.

But you've created more efficiencies in order to make it worthwhile.

Can you help us and an idea of what your estimated pro forma on return on equity would be.

On new production within the correspondent channel.

Yes, I think you have to think of the correspondent channel as the returns there are consistent with the <unk>.

<unk>, we buy and the purchase market minus whatever the profit margin is I mean were and the corresponding channel largely to acquire new customers and two.

Either replenish the amortization and the portfolio or to contribute to some nominal growth. So when we're buying MSR and we're looking for returns and the low to mid to high teens, depending on the nature of the MSR and more of our expectations are for recapture opportunities and so.

So I think of correspond and even though what we're saying is earnings the margin of our overall margin is going to compress.

As we get on the second quarter of and we already saw a little bit of it it's really being driven by extreme compression and the correspondent channel, but even at these very thin margins right. Now we think that will normalize at some point, but we are still ending up.

Acquiring MSR that we would otherwise be buying and the bulk market. So we're still getting at a discount. So that's how I think of the the return.

They are still good returns now we're not going to and we will stay on the market. We will compete and I think everyone is going to see everyone that is the player and that market.

Market is going to see the same very intense pressure for some period of time.

It'll sort itself out but were doing it too.

And again acquire new customers and replenish our run off so to us it's still a discount to what we pay and the bulk market and still make sense, but we wouldn't stay there just.

The stay where and the correspondent channel so of pricing gets really irrational and we see some segments of the market, where we can't make money and then you should expect us to drop out and our funding to the fall off but we built a very very efficient machine here we're on.

Big player and corresponded now and we have the advantage of being able to buy one.

Again, it's fueling our overall strategy, but if.

Margins turned negative and then youll see us back away.

And you've seen that we did that and the path. We've been through these cycles as you know and we will maintain strict discipline around our return goals, but to Chris's point today of correspond the co issue. They are still very attractive from an overall return profile and we will just continue to see how the market.

Lays out.

So are you seeing that competition emerge from banks or Nonbanks in particular and.

And do you see your your competitive advantage there as your recapture rates on loans that are running off from the portfolios you're purchasing through that channel.

Yes.

And the recapture rate, we see I mean really differs almost client by client and we price accordingly for that so I wouldn't give you a blank and answer on that this quarter. We did see more competition from a couple of banks that have large correspondent activity, but there's been.

And we have a number of newly public companies to stated very aggressive growth targets and that's playing out as fierce price competition.

I don't think for the average reasons people will.

Allow it to continue at that level I think we will see people make decisions on growth over price.

The oil price over growth and.

And retained profitability, but again for us since it is a means to an and.

As long as we're acquiring the MSR, we want to acquire at a discount on the bulk market and its.

It is a positive force, yes, Kevin and I bifurcated, a little bit and the junior FHA product I'd say, it's still predominantly non banks, you're not seeing really any bank competition to chris's point on the GSE side of La.

A little bit more from the banks.

And undoubtedly recapture is a huge advantage for us as we've talked about in the past.

But that will vary by pool, but still even on those tools, we're going to we're certainly going to be able to recapture and more lines and then anybody else.

Okay. Thank you I'll get back in the queue.

Thank you Ken.

Thank you might make the question comes from Mark degrees of <unk>.

Barclays. Your line is open.

Yes. Thanks.

Just had a follow up question for Chris on.

The capital return potential if you just think about where consensus estimates are for your earnings and then the title of game and then you layer on the potential for 5% to 10% MSR growth.

If if that's where you ended up at 5% to 10% how much capital would that leave you kind of at the end of the day for potential repurchases.

I mean, if you look at our plan and our cash flow from the ear. Chris you can comment on this is is growing.

The materially throughout the rest of the year and within that plan is the growth of 5% to 10%.

And the portfolio so I think.

And we'll have plenty of excess cash.

And it's going to continued growth throughout the year and we ended the quarter at $654 million, we expect 400 million from.

From.

The title III 65, we expect to be cash flow positive through the year. So you can do the math and say, it's easy to see us being.

And having an excess of $1 billion by the end of the year or even two.

Towards the middle of the year and of course, we've got to hold some of that cash.

And.

Yes.

And for normal operating but.

And it's certainly.

A number that is.

And it's not $1 billion, it's in that 750 of $800 million range, that's available for investment, whether it's investment and growing the company, which again is our priority, but if we can't put it all to work and we're sitting here of when the stock that's at $34 and on.

Almost under any scenario tangible book is going to grow to 40 or more just on the basis of consensus earnings absent some massive mark to market impact negative mark to market impact, which I don't think anyone expects it doesn't consider further positive mark to market. So I think based on the fed.

The comments yesterday on inflationary pressures I think everyone's expecting over the long term for rates to go up which means more positive marks on our book and it doesn't include any change and the tax rate those things I'll say the stock could be well into the <unk>. So if we're sitting here with a lot of cash towards the end of.

Of the year and the stock Thats trading where it is now it seems to be a no brainer that we'd want to buyback our shares and a much higher level.

And given where tangible book is.

Now given the consistent.

The ability we've been earning you would think we'd be trading at a premium and so those levels and hopefully the stock is there, but if not then we will have considerable amount of capital.

To fund buybacks.

Got it makes sense and then.

And I think on past calls you've commented about considering starting to the hedge the MSR, but it didn't really make sense at the time, just given where rates were and then rate.

The rate risk was kind of asymmetric where you'd only benefit on your MSR value, but now that the rates of backed up some and your MSR value was up a little bit of.

Are you starting to reconsider that on kind of a go forward basis.

I'll give you a more general answer I think.

We will have a more comprehensive hedge program at some point and the future today. The only MSR that we hedge is that which is financed and we do that out of an abundance of caution just to mitigate any kind of capital cost.

And rates if rates ever became volatile that's very small 10% of the portfolio or less.

So do we.

If the answer is are we going to hedge more comprehensively I think the answer would be yes, but I don't think rates of backed up to a point now where we are.

We would begin doing that at some point and the future of though.

Likely.

Okay got it thank you.

Yeah.

Thank you. Our next question comes from Lee on copper.

On Mega family Office and your line is open.

First of all we congratulate you guys on excellent performance.

You give all of the different numbers, but.

Net.

That one could look at and.

<unk> reached their own independent conclusions, but I have a few questions.

I would like to draw the add on.

I'm asking for your bottom line, rather than giving us a lot of the inputs you mentioned of men.

And the expectation of the 12% ROE and what do you think the normalized ROE is if you look at your book value at year end at 40, what do you think you'd normally earn net book value.

We said minimum of 12%.

And we say that because we think that's sort of the price of entry we've got to earn that but we offered a range of 12% to 20 and with any of our.

And I wouldn't give you an exact number but I think the range of the expectation for us would be the earn somewhere in the 12% to 20 on a consistent basis gotcha. Okay. Good. Okay. Second question is what is the minimum cash and need to run your business. The way you want to run it.

Because you mentioned you would have probably have over $1 billion and cash tomorrow and.

Of the year and $1, two or something like that what is the minimum cash you would be comfortable to run your business.

So on a stable environment.

We actually focus on.

Mediate liquidity.

And of which cash could be a third to a half of that and that's somewhere in the $400 million range. So cash really only has to be a couple of hundred 100 of $200 million.

So you have probably six seven and $800 million of excess cash presently or will have at the end of the year.

I have no idea of what Kkr's intentions are but you know Wednesday sell some I assume.

And there will be willing to sell at all.

Do you have the mental.

Orientation and the interest in buying the mouth should that start to become available.

We can certainly.

We certainly want to be able to do that.

I think one thing about KKR as they've been and incredible shareholder and.

For obvious reasons, they want to make sure of the stock prices of optimized. So I don't think they have made any day.

Certainly havent communicated to us and a formal decision.

And when they would exit or how fast or what that would look like however is the private equity firm I think we all know that they hold investments for a period of time, and then look to recycle that capital and.

And they've helped us investing for a long time, so if they were to do that yes, we would certainly.

Book to put our cash to work for their shares or anybody else, who is looking to exit their position.

The last question and I know, if you want and it would be willing to answer it but.

What is your view of the value of the equity.

<unk> been very right for quite some time now about saying the equity was very mispriced and.

And I'm curious.

And what's your view of the value of the equity.

Well, if you think of the audience.

The answer this one if you think of our tangible equity and is largely the value of our MSR and we could sell that of market prices as that book value essentially value of our business is nothing well I think that's ridiculous.

We've already said the title III 65 is with the setup is worth $500 million of book value was almost nothing same thing with our exchange business and it's hard to make the case for the moratorium, but that business earned $60 million of year.

Year on year out or more so what is it worth it's another 500 million 600 million that has no book value. So.

And I wouldn't put an exact price I think our stock is materially undervalued. When you think of the earnings power of this business.

But separate and distinct from the value of the MSR portfolio.

And right now because of the taxes.

Are you basically out of being able to buy back stock until August now given what you've already done so far this year.

We are great okay.

Well I would just say is and endorsement of what Youre doing is I would buy every share you could buy back because you're talking about.

$567 earner.

12% of return on book, you ought to be at least book value if not more.

And you're doing a great job and have great confidence of what you're up to good luck.

Thank you. Thank you we appreciate that support.

Okay.

The next question comes from Henry Coffey of Wedbush Your line is.

Is open.

Yeah.

Good morning, and really.

Great Yeah, great quarter by the way thank you.

Thank you.

Somewhat unrelated questions first with ACI.

Any future majority of regulatory action.

Around the issue.

Does that stick with them or is there any way that could migrate towards you.

Well Henry the.

One of the other things that we did do once we identify the ACR there we did reach out to.

All of our stakeholders, including the regulatory community to make them aware of it and.

We've had discussions.

The number of them.

And those discussions have gone well I think clearly there and.

They're going to want to see how this continues to unfold again, we see call level of call.

Volumes back to normal, we see less and less inquiries around this from customers just the level of activity and we're all has gone down so I think the fact that it.

Ultimately is not going to be any material impact and to our customers I think that will.

And I will influence the regulatory community and from.

ACI standpoint, yes, I wouldn't expect and they certainly will get it.

Many of attention from regulators because they're not.

We're not the only customer right. So I think.

There'll be more.

And more scrutiny on that on them for sure.

On the origination front I know when I go back.

It relates to the name change.

Development of our product and our platform.

The way you really could help you of consumer customers manage.

And how they how they dealt with their own debt and now we're into a cash out refinance market where the.

That's an obvious opportunity.

Well developed but are those products and how whats the resistance point with customers and you're able to get them do they get it are they using it or is there still of lot of friction around.

Getting people to use all of that direct the equity on the house to pay off higher cost and debt.

I wouldn't describe anything as friction and I'd say in terms of of our products. They are outstanding and the tools we built.

We're really built.

With cash.

Cash out.

Debt consolidation and really managing.

Customer, helping them manage their personal balance sheet and better.

That's how they were built and so of warrant and an outstanding position to take advantage as the market pivots that way and you've already seen or you will see and it's early days, but that.

And that product as an overall component of our originations is already growing I expect you'll see that when we report second quarter of that it's more and more.

On.

The volume that we're doing so yes, I think thats going to be.

A big positive force, our customers have a lot of equity and their home.

And to the extent they have other debts that they can consolidate and save a lot of money. It's at the end of the day. It's all can we help them improve their bottom line and that's what we're here to do and.

And are you said it we have the tools already that machines humming and some and as we speak right. We've got over 30% already cash out refi and that number is going to continue to grow and.

I think it will be a massive opportunity for us.

And then on the consolidation front I think it's fair to say that all of those companies that came public themed.

We're not raising capital as much as trying to cash out key investors and.

It's probably still and appetite for that.

<unk>.

When you look at the market place what sort of opportunities do you see is it going to be as you said on the call buying MSR.

Our origination platforms that could fit into your acquisition strategy.

And maybe none of the public companies or our obvious targets because of the relative size, but are there other.

Smaller companies that are likely to come up for sale, how does that play out.

By the look.

And M&A and buying and origination platform is really not top of mind for US right now we've got an outstanding platform.

If we saw something and we look at every transaction that comes to market obviously.

We got one of the first calls.

But it's something we'd have to have such tremendously compelling accretion for us to want to do it we're not looking too.

By someone else's business at the top of the market.

And we don't think we need to continue to grow and and generate shareholder value I think.

It's the the other part of it is someone looking at us.

And the opportunity to to help their franchise and we've gotten a lot of phone calls on that.

And that regard, but for right now.

Most entirely focused on exactly.

Exactly what we said growing the business at the right return levels and.

And if we can't get the share price to the right level.

We will have the flexibility of the buyback more shares and generate shareholder value of that way.

Yes, I think and re look.

Looking at the store if you look at us historically right.

And traditionally just bought assets and bought Msr's, obviously, we bought the Pacific Union, which turned out to be a good acquisition for us it would have to be something that.

The point is very accretive and something that we really do not have and the franchise today.

And whether that's different channel, whether that's technology, but.

And we're going to continue to stay focused and as Chris just outlined.

Great and thanks for taking my questions.

Thank you Henry Thanks, Amy.

Thank you again to answer the question. Please press star one on your Touchtone telephone and next question comes from the line of Kevin Barker of Piper Sandler Your line is open.

Yeah.

Just a follow up on some of the M&A comments I mean, you of a vested interest to you.

The push to increase your earnings as much as possible.

Yes.

And you'll do that organically as much as you can create efficiencies but.

Is there any other ways that you can accelerate the utilization of the deferred tax assets.

In order to improve the balance sheet and.

Bringing.

Increase the cash balances on.

On the from the company.

Although certainly we.

We look for those opportunities every day, Kevin and for obvious and I know why you're asking the question.

And we wouldn't do an acquisition and just to just to accelerate the use of the DTA.

Now that we have.

And then actively converting the DTA from and NOL to temporary difference of DTA. What we've done is and we expect that to be completed even faster than we thought probably by the end of this year.

So that will lock in a permanent.

Asset for us.

And while we'd love to use it as quickly as possible and converted to cash.

Outside of looking at opportunities to optimize profitability and the company. We don't have any special plan to just try to accelerate debt.

Okay. Thanks for taking my questions.

Thank you and have a question from the line.

Leon Cooperman of Omega family Office Your line is open.

Okay, we'll take it and I've been called worse.

All of the talk recently, it's been about who Youre acquiring let me ask the different question, you know with the M&A environment, improving and with the tremendous value.

And that we offer huge.

The escrow balances the tremendous number of client relationships you have.

Would we be attractive acquisition to another financial institution and would we consider it.

Well, certainly we consider or anything of that generates incremental value of our shareholders at the end of the day, what will make all of our strategic decisions force.

Do I think so yes, I think you've seen a couple of transactions recently, where banks specifically are looking at mortgage companies and seeing the very significant synergy the.

The arbitrage.

Between out of similar assets are valued and those two sectors.

So, yes, I think long term well I should say long term I expect to see a lot more of that type of M&A banks.

Acquiring mortgage platforms.

Whether or not we find the.

We see somebody.

Interest and the Mr. Cooper, specifically that we think the good marriage that hasn't materialized, yet, but we certainly.

And we certainly consider if it happened.

Alright. Thank you. Thank you good luck.

Thanks, Mike.

Thank you at this time I would like to turn the call back over for closing remarks.

Thank you guys for your participation and look forward to chat and linear throughout the day I appreciate it.

This concludes today's conference call and thank you for participating you may now disconnect.

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