Q2 2021 Mr Cooper Group Inc Earnings Call
Okay.
Thank you for standing by and welcome to Mr. Cooper Group Q2, 2021earnings conference call. At this time, all participants are in a listen only mode. After the.
Presentation, there will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded should you require any further assistance. Please press star zero I would now like to hand, the conference over to your host Ken Posner. Please.
Please go ahead.
Good morning, and welcome to Mr. Cooper Group second 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, Chris Marshall, Vice Chairman, President and CFO, and Jamie Gao Deputy CFO.
As a quick reminder, this call is being recorded and you can find the slides on our Investor Relations webpage at investors that Mr. Cooper Group Dot com.
During the call.
We may refer.
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.
Thanks, Ken Good morning, everybody and thanks for joining us, let's start as always by reviewing the quarter's highlights.
We reported net income of $439 million or $4.85 per share which includes operating results are Martin.
<unk> in the market on the MSR and the gain from the sale of title $3.65.
As a result tangible book value increased to $37.24 per share, which is up by more than $15 in the past year alone and which now represents a 22% compound annual growth rate.
Since the WMA H merger 3 years ago.
Operating results were strong our OTC was 23%, which was above our minimum target of 12% and incidentally. This was the ninth quarter in a row in which we've exceeded that target and based on the results. So far in July we would expect third.
<unk> to be the 10th quarter above the target.
Originations came in where we expected with $213 million in operating EBT on $22 billion in volume.
Pricing pressure in the correspondent channel has been very intense but revenue margins in our DTC channel.
Corden relatively stable.
The refinanced recapture rate rose to 42% and cash out Refis increased to 30%. Both of these numbers are moving in the right direction.
Servicing turned in an excellent quarter was strong EBITDA revenues of $181 million.
And the portfolio grew 4% in the quarter or 16% on an annualized basis. Thanks to solid performance in all of our channels. The balance sheet is in terrific shape.
Thanks to the sale of title $3.65, and strong operating cash flow. We started July with 1.2 billion in.
On cash.
And $1.7 billion in immediately available liquidity, which is a huge amount of dry powder for both portfolio growth and stock repurchase our board has authorized a new stock or persons program on a $500 million and with the 3 year anniversary of the WMA to merger occurring.
In the next couple of days, we are likely to begin repurchasing stock very soon.
As we announced after quarter end, we've entered into an agreement to sell our reverse mortgage portfolio.
Reverse was a profitable initiative for us, but it was never a growth driver exiting this segment will help us focus on the core business.
Occurring and the sale will be a huge positive for the balance sheet as it will boost our capital ratio above our target of 15%.
With the dispositions are tied on reverse were following a disciplined strategy of rationalizing and simplifying the business model in order to focus on servicing and origination.
<unk>.
Where we see very exciting growth and where we believe we can strengthen our leadership position.
With that let's turn to the next line and let's talk more about growth. We've commented before that we have the operational capacity to significantly expand our portfolio and this morning, I would like to share with you our newest.
Nation T J target, we set of reaching 1 trillion in U P b and approximately $5 million and customers. We think of Mr. Cooper as an integrated mortgage company with both servicing and originations.
But as we look forward, we expect to see servicing and the related to customers emerging as a strategic.
Strategic high ground for the industry in coming years, we expect massive consolidation until the industry is dominated by a small number of mega servicers with highly concentrated market share similar to other technology enabled sectors.
The servicers will enjoy huge economies of scale.
Gil and very high entry barriers and they will be positioned to generate very significant revenues from recapture just as we saw on 2020 in fact, they will be positioned to retain customers for life.
Very few mortgage Servicers will make it to this level large strategic investor.
Events are necessary to build an efficient and scalable platform, which can quickly incorporate changes in the legal and regulatory environment.
Servicers they must delight their customers with both digital tools and team members, who go to bat on their behalf and Servicers must have strong capabilities in loss mitigation.
Investment Mr. Cooper, we have the most efficient platform in the industry and more scale will add to our advantage. We have state of the art technology, and which we're continuing to invest and I firmly believe we have the right talent in place throughout the organization.
How long will it take it take us to reach 1 trillion with.
Plans in place to get there and as quick as 3 years, although the actual pace at which we grow will certainly depend on market conditions, because we have no intention of sacrificing margins are taking on imprudent risk of anytime.
We have been guiding to growth of 5% to 10% per year, but as I think about our current opportune.
<unk> I would say that if we do not grow at 10% pace or faster I'd be disappointed so that's where we're going and now I'll turn the call over to Chris who will take you through the quarter.
Thank you Jay and good morning, everyone.
Im going to start on page 5 on the summary of our financial results now let.
Repeat the high level metrics net income was $439 million or $4.85 a share.
Pretax operating income was 227 million just slightly above the high end of the range of $200 million to $225 million that we guided you to expect at the end of last quarter.
As Jay mentioned operating results were equivalent to an Aro TCE of 23%.
The gain on the sale of title III 65, as you can see was 485 million pre tax and $360 million after tax which was consistent with our previous guidance.
Now with mortgage rates during the quarter, we took $180 million mark to market charge on the MSR.
Of which $45 million was the excess of fair value amortization over cost.
And finally, we had adjustments of $7 million related to severance and both servicing and originations.
And to reflect ongoing actions taken to rationalize cost and drive efficiencies.
You'll note that we're now reporting reverse in discontinued operations, where total pretax income for the quarter was $16 million. This number includes both the impact of the sale and the second quarter operating results.
Which included a settlement of claims related to our legacy portfolio acquisition.
Net income drove excellent growth in tangible book value, which increased 16% quarter over quarter to $37.24 a share.
I'd also like to point out that our DTA decreased.
We're at $10 million in the quarter to 1.1 billion.
Reflecting the fact that our net operating losses reduced the cash tax liability associated with the quarter's strong income.
As a percentage of TBB. The DTA is now down to 35%.
Which is half the level of.
A year ago, and we expect this ratio to continue dropping during the remainder of 2021 and well into 2022.
And while we're on the topic of the DTA I'd remind you that day Biden administration is working to neck, and increasing corporate tax rates, which according to media reports could result in new tax rate of.
25%.
And that higher level, if it were passed into law today.
Would result in a markup to our DTA of approximately $180 million, which would add about $2 per share to TBD.
And of course, our cash flow would not be impacted by any higher federal.
Tax rate until such time, as we had fully exhausted our remaining net operating losses.
Now to summarize.
Our operations are clearly firing on all cylinders.
The balance sheet has never been stronger and we have significant liquidity to buyback our stock as well as to.
To grow our portfolio and both of those strategies should drive shareholder value. So when we look at the current discounted valuation on our stock price quite frankly, we see a major disconnect.
Now, let's turn to slide 6.
And discuss the valuation of our MSR portfolio.
During the quarter.
<unk> mortgage rates declined by 15 basis points and swap rates were down by 10 basis points and accordingly, we increased the lifetime CPR assumption for our own portfolio from 12, 4 to 13, 6%.
Which resulted in a $180 million charge.
This brought the value of our.
We're down by 7 bps to 115 basis points of <unk>.
Now as you recall each quarter, we provide you with an estimate of the number of customers who are in the money.
Which we defined conservatively.
Savings of at least $200 per month.
As.
As you know mortgage rates rose in the beginning of the year, but with the recent decline this quarter the number of customers in the money has risen from first quarter to roughly 717000.
Also as we mentioned last quarter, we have another 630000 customers with substantial.
<unk> equity in their homes, who could benefit from cash out refinancing and this is another large source of business for our direct to consumer channel.
And we have very strong momentum here as we commented last quarter.
Now, let's turn to slide 7.
And talk about originations.
We're at.
At that point in the cycle, where the industry now has excess capacity and that plus some aggressive jockeying for market share is leading to intense price competition.
And we're certainly not immune from the environment.
But our business model is very different from our peers since we rely on correspondent.
Mainly for new customer acquisition, or our DTC channel producers most of our profits.
In the second quarter, our team produced very solid results.
With pre tax operating income of $213 million on funded volume of 22 billion, which was exactly in line with our expectations.
<unk>.
For us.
The competitive frenzy was most intense in correspondent and as a result, our volumes were off sequentially by about 15%.
Now, we're very committed to this channel, but we remained very disciplined with regard to pricing during the quarter, we did relatively little volume.
And those parts of the market, where we felt pricing got a little irrational.
On a positive note.
Responded is now giving us excellent.
Exposure to the purchase market, which made up 43% of corresponding volumes and of course, we're continuing to invest in technology to drive down costs speed upturn.
Times and improve our client experience just like we do with consumers, we aimed to delight every corresponding client.
Now turning to DTC.
Funded volumes were down about 8% sequentially, which is much better performance than the refinance market as a whole which the <unk>.
MBA is projected to be down by 24%.
Our key metrics were very strong with the refinance recapture rate increasing sequentially from 37% to 42% and cash outs rising from 22% to 30% of funded volumes as we continue to pivot towards this.
Turns out in fact, so far in July cash out has been running at nearly 40%.
Now if you'll turn to slide 8.
Let's shift gears and talk a little bit about the margin.
As you can see the total pretax margin compressed by 27 bps to 136 basis points.
And as a reminder, this is our production margin, which is net of costs. Many of our peers report gain on sale of revenue margins.
And while we don't disclose gain on sale by channel. The charts on the right gives you a sense of the trend with corresponding gain on sale margins have been falling significantly.
Last few months, while DTC has remained relatively stable.
With interest rates, having drifted lower recently, our locks are starting to rise again and this should drive stable profitability in the third quarter.
Specifically, our latest projections for pre tax profits of 200 to.
$225 million on funded volumes of 18 to 20 billion.
Now before we move on to servicing.
I'd like to provide you some color on the technology, we use to drive cash out refinances, which you'll find on slide 9.
As you know we have both traditional loan officers.
Officers and a large and growing team, especially trained home advisors, who play a hybrid role both answering customer service requests and helping customers with tailored refinance solutions.
1 of the ways, we make these conversations productive is through our proprietary best fit engine.
Which instantly populate the home advisor screen with the benefits to the customers from several options, including rate term refi debt consolidation and cash out. This makes it easy to engage the customer in a conversation about alternatives without having to ask the customer to fill out an application.
Since we have all of their information.
On file and we can provide an estimate of the equity in their home using the proprietary technology, we have built through our zone analytics business.
The best fit engine takes this data in the matches it against a large number of product and pricing permutations to find the best money saving opportunities for each cut.
<unk> is particularly helpful. When it comes to discussing cash out refis.
The best fit engine is a very sophisticated application that are technologist built in house and we believe its capabilities are state of the art now.
On a future calls, we'll share more about our technology strategy and especially how.
We're digitizing the manufacturing process, which will take our origination platform to an even higher level in terms of performance.
Now, let's turn to slide 10.
And review the servicing portfolio.
Of note, we're now reporting UBB, excluding the reverse.
Portfolio.
Which was roughly $16 billion at quarter end.
On this basis, the servicing portfolio grew 4% quarter over quarter or 16% on an annualized basis ending the quarter at 654 billion.
As you can see from the chart.
The growth was driven by solid execution in all of our channels originations acquisitions and sub servicing.
On the 1 trillion target that Jay talked about is something that people on the company are obviously very excited about.
Across our channels, we see.
<unk> plenty of opportunities and we believe this is the right time for the company shift back into a much more aggressive growth mode.
In addition, as strong originations.
We booked $16 billion on acquisitions.
Now that margins are compressing this would be the logical time for originators to unload their inventory.
So that they can generate cash.
We remain very disciplined in our bidding.
But we're definitely seeing a pickup in deal flow and we're optimistic that we'll see even more on the second half.
We were also very pleased with the steady steady growth in sub servicing which is coming from mix of clients.
Who value a high level of customer service as well as our recapture capabilities.
Let's talk for a minute about forbearance.
Currently 3.6% of our customers are still on forbearance, but that's down from a peak of 7.2%.
On 1 of the topics.
X being discussed in the industry is what happens after forbearance.
Now, we're obviously monitoring our customers very closely.
Especially those who have been impacted by the pandemic and we're actively reaching out to ensure they are fully aware of every available option.
And we expect the overwhelming.
On the majority.
Is it forbearance successfully thanks to the many options that are now available under government agency programs.
As well as the current low interest rates and strong home price appreciation.
Now, let's turn to slide 11.
Now, let's review the servicing margin.
Which we'll discuss excluding the full mark.
Now bear in mind, the servicing margin now excludes the contribution from reverse which is carried in discontinued operations.
And on this basis, the servicing margin was 7.7 basis points in the second quarter.
From.
From 3.6 basis points in the first quarter.
The story here with very strong <unk> revenues.
From a $181 million, which is up from $109 million in the first quarter.
Last year, we started this program very conservatively as we wanted to make sure we understood the liquidity.
Any implications of the new programs.
But once our analysis was complete we worked with our bank partners to develop innovative financing structures that meet all of our risk requirements. Then we streamlined our pipeline management, which has improved the speed with which we redeliver loans and now youre seeing the results.
Looking forward, we expect to see strong <unk> revenues continuing into the third quarter, although they may be down about 30% sequentially after which revenues will taper off as we near the end of our <unk> inventory.
But we're now projecting total <unk> revenue for 2021 that will be.
SaaS a $450 million.
Now, let's spend a minute on amortization.
Because this will help you understand the value of our balanced business model and how the servicing portfolio will help offset pressure on origination earnings once the environment normalizes.
With speeds.
<unk> slowing.
Amortization declined slightly but only by about a third of a basis point in the quarter. Now. This obviously wasn't a major driver of earnings, but we expect a much bigger contribution once speeds normalize.
For example, if you look back a year ago to second quarter of 2020.
Amortization was $2.6 basis points lower than it is today.
And if amortization drops back to that level, it will be worth an incremental $200 million per year in pretax earnings.
And if you think rates are going to rise significantly.
If you go and look back at our 2018 results when speed.
We're running at about 10%.
And that level of amortization would produce an incremental $450 million on earnings.
These benefits will be important in the future and a slower prepayment environment.
But as far as the third quarter with rates, where they are now we're projecting <unk> and amortization.
Probably flat.
Okay.
Alright, so let's turn to slide 12.
And talk a little bit about liquidity.
Advances remain a very good story declining by 7% sequentially to $882 million.
Our servicing advance funding capacity.
B, Rob was just over $2 billion on committed lines of which $1.5 billion was unused.
Our MSR line borrowings were flat quarter over quarter and remain at their contractual minimum.
With slightly over $500 million in unused capacity.
Working capital.
It was relatively neutral this quarter with the largest cash use being the haircut on accelerated buyouts, which will recover as soon as these loans are redelivered and finally as a reminder.
We still have a 6 year liquidity runway with no senior notes maturing until 2027 so.
Capital overall, the company's liquidity is in excellent shape.
Alright, im going to wrap up my comments on slide 13.
Talking about capital on leverage.
I'd like to do that in the context of the trillion <unk> goal because.
Clearly a fortress balance sheet is important for all of our stakeholders from.
From high yield and equity investors.
2 government agencies on our regulators.
In late 2019, we shared with you our capital target defined as the ratio of tangible net worth to assets.
We believe 15% or higher which at the time, which is slightly above 11%.
Today on a pro forma basis for the sale of reverse.
We've achieved and even surpass that target with a ratio of 17, 6%.
Now, excluding Ginnie Mae loans consolidated.
On our balance sheet, which should run off relatively quickly over the next few months debt ratio would be even higher at 22, 6%.
And we feel these are very solid numbers, especially when you consider our excess liquidity strong balance sheet and the fact that we have no senior.
Ideating on maturities for several years.
So with that I'll turn the call back over to Ken for Q&A.
Thanks, Chris I'll now ask our operator to begin the Q&A session.
As a reminder to ask a question you will need to press star 1 on your telephone to withdraw your.
No Jim press the pound key again Thats star 1 on your Touchtone telephone to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Kevin Barker of Piper Sandler Your line is open.
Good morning Congrats.
Your question good question.
Good morning, Kevin Thank you and good morning, Chris.
Chris in regards to the buyback program the $500 million is there a timeline on that.
Do you expect that.
Cadence to be fairly quick and how you utilize that buyback.
Or.
Congrats on the restrictions around how quickly you might utilize it.
I don't really on if you look back to our experience with our last authorization.
Using a standard buyback program.
We were buying back shares at about $50 million per quarter.
Do you have any recourse you know there are lots of limitations that.
Debt, we hope apply here as in you are not buying shares when the stocks.
Moving up.
On the blackout rules et cetera. So if it's just the cadence of a normal buyback program I think it would be fairly slow and consistent of course.
If there are opportunities to buyback blocks of stock opportunistically at attractive prices, we'd certainly look at them, but beyond that.
Really give you much.
<unk> timing guidance Kevin.
Okay, but you would be open to blocks if they were made available right.
If it's accretive to us.
We certainly would be okay.
And then how would you measure accretive.
Accretive newness to you on.
Is it where it is on a price to book or how you look at it.
Or your view is.
P multiple on what your earnings expectations are.
How would you define low.
Since.
With people that might sell those blocks, maybe let's say on this I won't give you the old formula, but I'll just start with tangible book.
Accretive to tangible book and with the stock trading up some of that.
Might not be available, but we.
We look at the obvious things starting with.
The impact on on book.
Okay.
On some of the name with a lot of the restrictions being lifted here in August and then.
Youre utilizing more of your DTA.
Is there any other restrictions regarding your your Nols that could impact any other strategic initiatives you may have whether it's divestitures or other.
Strategic moves.
No there's not.
As a reminder, most of the DTA in fact is only a small piece that remains.
NOL, but the restrictions really are behind us now so.
I think the short answer would be no.
You can make on thank you for taking my question.
Thank you Kevin.
Thank you. Our next question comes from Doug Harter of.
Credit Suisse. Your line is open.
Thanks.
And to just touch on on some of the comments you made around amortization.
It.
Looked like industry Cpr's fell.
More dramatically in the second quarter that didn't kind of.
Show through or is there something else that debt.
Kind of as keeping amortization expense kind of flattened in the short term.
I think it's purely a function of rates.
And rates moved around a bit in the quarter there was a.
Little bit of a slowdown when they when they first backed up but they are back.
At very attractive levels. So we're expecting amortization to be relatively flat next quarter now if you listen to chairman <unk> Tao.
I guess, there isn't a very clear guidance on where rates are going but I think our expectation is.
Setting aside what we think in the very very short term debt over to moderate term rates will go up in CPR will come down.
No.
I'd say at least moderately.
And the next several quarters.
And I don't think Theres anything unique to our portfolio. If that's your question I think it should.
Overtime performed consistent with the industry.
<unk>.
So I don't know if that was your question, but I think.
I think there is anything unique.
I think.
Obviously, we have a very strong recapture.
<unk> and model so.
Net.
We'll continue to benefit from that greatly but as we think about it overall.
It should perform consistent with the industry.
And then I guess just following up on that on your.
About recapture obviously you've made good progress on that.
Where do you think that recapture rate can get to and how much more improvement could there be on that.
Well I'm, hoping for 100%.
Hi.
Net.
We've challenged the team to get to but.
A comment on.
Realistically look we if you look into some of the cohorts and some of the products were in the $65.70% range.
I'd love to see us get overall above 60% I think that should be our goal and that's what we should target.
Great. Thank you.
Hmm.
Thank you. Our next question comes from Brian <unk> of Jefferies. Please go ahead.
Hi, Good morning, guys and congrats on the great quarter can you just touch briefly on the competitive environment across the channels and what drove that margin dynamics in your view.
Yes.
I think.
As we said in our remarks margin in DTC was relatively stable we've.
Previously over time, we expect margins to compress, but definitely more gradually and DTC correspondent was very.
Very.
Very very competitive and I think thats, an outgrowth of some of what's been referred to as a pricing war amongst some of the large players in.
Wholesale and thats bleeding over into correspondent so.
We expect that to continue.
Margin looks like it's.
Ticked up a little bit.
In the quarter, but it's really too soon to tell and at the levels, we're seeing them, it's really not meaningful now.
It's the channel is meaningful to us.
That's our primary means for attracting new customers, but profitability, we expect profitability on that.
But to be very muted.
At least through the third quarter and perhaps through the end of the year.
Yeah, and I think on the direct to consumer side.
We've had a strong.
Start to the quarter margins, there certainly have stabilized it's not even gone up slightly and so there.
There, we feel really good about.
In the quarter and kind of the rest of the year and given what rates have done as Chris pointed out there is more customers that we can help so pretty bullish on that and I think correspondent disappoint chris's points, just a function of what's going on in the marketplace.
But still when we look at.
What we're acquiring is msr's 4 is still a very attractive return.
And we will continue to be active participants in that market, but but discipline as well.
Got it and then given some of the same kind of pricing dynamics on the originator side.
What opportunities are you seeing in the prevailing MSR market.
How are you thinking about that in the context of your longer term goal that you mentioned in terms of debt service and care.
We're very active I mean, we're very active in the MSR market. We're.
We're looking at.
All of the portfolios that debt.
Come Tomorrow.
Yeah.
I would say, we're being proactive in our outreach to.
Yeah to other potential large sellers and so I think you should expect a lot of activity there from us and I think it'll be a component of the growth that we talked about but you know those.
As you know again, we're going to be disciplined on our approach we're going on we have.
Target thresholds from a return standpoint.
But we're going to be very active and aggressive in <unk> and.
And I think proactive in reaching out to potential sellers.
I think that the.
Mark to your question is as margins compressed.
And they have compressed from what were historically very high levels.
Were originated or as we're able to hold onto their MSR values were low but they are still operating on a cash flow positive.
Levels and so as the margin compress.
Basically more and more sellers just get back into a normal rhythm of selling their production to generate cash and to continue growing their business and and we've got great relationships with a lot of those clients and so we're already seeing pools come to market activity has definitely picked up I think youll see more and more of that if rates stay where they are for the next couple of quarters.
We're not rates, but margin stay where they are from the next couple of quarters.
Got it thank you very much.
Thank you.
Thank you. Our next question comes from Bose George of K B W. Your question. Please.
Good morning, Keith.
First just on.
The Epo.
The guidance you gave for the 30% decline in the third quarter, the $450 million on a year that suggests I think around $35 million of gain in the fourth quarter.
Is that right and then so what would you see sort of going out into 'twenty..2 do you think that's largely done or we keep that kind of run rate.
I think.
Largely done and that 450 is probably a bit of a conservative number because we don't know what Gainesville actually do I mean, if we looked at it today then.
The number is probably.
More like $500 million, but.
It'll be in that range $4.50 to 500 there'll be de Minimis.
It'll be in.
In 'twenty 2.
Okay, great. Thanks, and then actually on the DTC channel can you just remind me.
How much of the volume there is recapture.
And is there much purchase volume coming through there.
Predominantly.
Refinance.
Mt.
95, plus percent is refinance very small purchase today.
Now on them per se.
Having said that we've got several initiatives and are starting to see some positive progress.
And the purchase arena.
Yes.
I don't think it'll be meaningful.
And the next couple of quarters, but over time, we want to get that purchase recapture in a day.
15% to 20% range.
As kind of the near term call. It 20 to go on.
I think the story on recapture.
The real change in.
What had been pure refinance rate term refinance is very significant growth in cash out.
And cash as we told you we'd pivot to that as rates rose.
And even though rates have stayed low.
Are still seeing a huge surge.
Serge and cash out so that's up.
On the second quarter, we were up meaningfully to 30% of our total volumes.
And I think we mentioned on the call that so far this quarter, we're up to 40% so.
That I think is more of a change quarter over quarter.
Then purchase number.
Okay now thats helpful and just to clarify so is there is all the volume of the bulk of the volume coming through that channel recapture or is there sort of whatever third party.
Originations as well.
No you think just think of it as recapture.
Right.
Okay, great. Thanks.
Thank you. Our next question comes from Henry Coffey of Wedbush. Your line is open.
And congrats on a good quarter and great execution on a whole number of items.
Thanks.
What when you know.
On the removal of the adverse marketing fee on refi.
Does that work its way back into your retail margins does that work its way back into your correspondent margins or does that all get sort of competitive competed away beginning in August.
When it when it kicks in.
Most of the impact of that fee.
It goes back to the client I mean that we tried to very quickly pivot and get most of it back to the client if we could of course if rates were already I mean, if loans were already.
Docks, we're out or loans already closed.
<unk> and they were sitting on the pipeline and that will end up flowing through the margin that'd be a relatively small number and I think that's what most of the most of our competitors did Henry.
<unk>.
So you wouldn't expect to see a big jump in margin in and of course, we've reflected that in our ongoing pricing.
I guess may be there may be a difference.
And how some people are handling pricing going forward, but that is how we handle the pipeline.
And then just 2 other questions.
Just listening to the discussion.
I think if I had gone back over.
For the year as most of US think of you as a servicer with great origination arm.
Then 2000.
'twenty everything was origination.
<unk>.
Are we shifting back to that model, where the real engine is servicing and all the related activities.
Now that on refinanced recapture.
Cash out refinance marketing et cetera that that can can lead from that.
Is that where the business is growing and is there are there is there room for our opportunity for.
Big bulk U P b acquisitions.
These are on.
I mean, I think generally it's it's probably more of the same right everything is really if you think about our model everything's linked right you've got on the origination side.
With our correspondent channel, it's a great customer acquisition channel, we're going to continue to grow that.
And then I think on the.
On the.
<unk> side, we're seeing a lot of positive progress there.
And then on the bulk side to your to your point, Yes, I do think there will be some large opportunities.
But right now, it's mostly just kind of singles and doubles pretty small pools, but we're very active there but.
Really look at the platform as kind of the balance business model right in originations.
We want to continue to grow that and grow it in a meaningful way. So I don't think you can look at it is we're going back to when we were acquiring $200 billion MSR pools, I don't think you'll see that.
Right.
We think we want to stay disciplined on our balanced business model continuing to grow originations, but certainly be active and opportunistic in the bulk and the bulk world. So.
Anything you'd add to that Chris No I think you've covered it.
On the on the buyback front Oh, the return of capital front.
Are there any thoughts around a more aggressive strategy like a tender or a structured buyout or turning some of that money into a dividend.
I don't think that's something we are planning on a near term I mean, the whole focus is how do we generate.
Better.
For the shareholder.
If we're very very bullish on our future.
So again, if we have opportunities to buy.
Buy back shares at attractive prices.
We're motivated to do that quite honestly, Henry I think we see opportunities to invest and grow the business.
Value that would be offer better returns right. Now then just returning money via dividend, but at the end of the day, we're going to do the best thing for the shareholder.
If.
That ends up being the best option, that's what we'll do but that's not where we are right now.
In terms of benchmarking your performance.
How quickly should we expect to see or over what timeframe should we expect to see you.
Complete that buyback program.
I wouldn't give you a lot of guidance there other than if we may.
Made this comment earlier, if I if we follow just.
<unk> normal standard buyback that would be fairly slow and steady you should probably think of us as being able to buyback somewhere in the neighborhood of $50 million a quarter.
Of course, that's due to market conditions, how the stocks trading with the float is et cetera, if we have opportunities to buy.
Just on blocks at attractive prices, then we would do that.
But again.
The thrust of the company.
Is growth and I think you're hearing us say, we intend to ramp up our growth.
On a lot of the newly public companies.
State claims to how much growth youre going to achieve and.
We've been fairly quiet there.
But we did grow in the second quarter, and a 16% annualized rate, we expect to ramp that up and so that will take capital and that's our number 1 priority.
And growth growth means growth in services.
Servicing growth on originations or both.
Well it's both.
Obviously, we lead with buying.
Larger and larger amounts of MSR.
<unk>, but that leads to opportunities to grow our.
Our origination channel as well so we think.
Think DTC is going to grow correspondent is going to grow but yes, we are going to lead with.
More.
Resolutely buying MSR on the market.
Great and lets say on it that's great.
Great execution this year lots of changes going on and congrats on the sale.
And we look.
Look forward to hearing more.
Thank you Henry Thanks Henry.
Thank you. Our next question comes from Mark Devries of Barclays. Your question. Please.
Yes. Thank you was hoping to get your thoughts on the implications for your business of this.
Ginnie Mae proposal around risk based capital.
Tournaments.
And risk weighted if it gets ultimately promulgated as this concerning to you or does it actually create more opportunity is less well capitalized lenders are forced to sell more of their production into the correspondent channel.
Yeah.
It's a great question.
Soon to know what that will be there.
We're going to be an impact on our business, but.
I think if you back up we have the same goal as the leadership of Ginnie Mae who we have a very strong relationship with them.
We want a strong and stable servicing community.
So it's a new proposal.
There are a lot of pieces to it we are.
Preparing a very constructive response to ginnie, but.
I think there'll be a lot of discussion around it.
We would reserve any further comment until we actually have an opportunity to speak with the leadership.
Jenny.
Okay fair enough.
Jay in your earlier comments you alluded to.
The operating leverage you generate from getting to a much larger cultural and dollars servicing portfolio can you just talk about.
How we should think about kind of your normalized servicing pretax margin.
Trending as you continue.
To scale up the servicing portfolio.
Yeah, I'll start there I think.
In the current environment.
Not going to give you an exact number to 2.
Put into your next note but.
If you look at where we are today obviously.
Wages are up on the back of EBITDA gains as we look out into next year, we think the margin profitability margin and servicing is going to hover somewhere around 3.3 basis points, because amortization will come down maybe not as much as.
We alluded to if you went back to 2010.
Mark.
Sorry 2018.
But.
3 basis points is probably all we would expect next year unless short rates start to climb when.
When we get back into a normal rate environment.
Our our profitability at its existing level is somewhere around 5 basis.
<unk> points, it'll be higher than that when we have 1 off events by 5 basis points is probably where it will be now we have invested a tremendous amount in our <unk>.
Servicing platform, we think we have the best servicing most efficient servicing platform in the industry and clearly divest servicing leadership.
Chip team.
So with all of that investment in automation, the incremental profitability of adding.
2 to our portfolio.
<unk> is quite strong now that will come over time I'd rather.
That we demonstrate that we can grow it at a more accelerate.
Basis of Great before we give you guidance on what the profitability is but you should think of 3 basis points in the short term 5 basis points on a normalized term with that.
Certainly growing as.
As we add meaningfully to the <unk>.
Okay and are there any.
No meaningful investments.
They need to be made on the platform to scale it up to a trillion.
No I mean, we have if you just think about it from a technology perspective, we've made the investments there we've got the capacity.
To get to that level.
And so you would really just be looking at from.
Having standpoint, what would you need and as the portfolio grew.
And that depends on the composition of.
The portfolio. So if it's more delinquent obviously, we'd need it.
More staff, if it's very clean and current and we would need very little.
If any so.
Steadily from an infrastructure standpoint, we're there today, we don't think theres any significant investment it would just be around.
Team members based on what the composition of the new portfolio looks like.
Okay, great. Thank you.
Okay.
Thank you.
It's a question is from Kevin Barker of Piper Sandler Your line is open.
Thank you I just wanted to follow up on the impact of.
Foreclosure moratoriums expiring in forbearance programs expiring as well.
You have quite a bit.
Our revenue and expense impacts.
For instance.
The.
Okay.
Should we see zone.
Our REO brokerage fees accelerate next year and like what level would that look like.
Then could you bring some of your operating expenses down in the servicing portfolio just given the amount of labor that was buildup to address.
Our next goal on the forbearance.
Okay.
Great question, a very timely Kevin.
We've been running through.
Sort of preparatory tests for.
The final push of.
Associated with the exits and forbearance.
The good.
In terms of the operational cost if you go back to sort of the crisis.
1.1%.
Foreclosures were high.
We'll probably see levels about approximating those same peak levels or at least for a short period of time, but if you look at task by task what we.
News due to support those customers, 60% of those tasks are now automated.
So the actual <unk>.
Strain on the system is dramatically lower and costs should be.
It should also be lower.
And then with regard to zone.
The short answer.
We have absolutely, yes, we'll see.
Growth in zone, but it probably will come in very gradually and so we're expecting modest recovery in zone in 'twenty, 2 very strong recovery in 'twenty 3 just because were expecting the courts.
For us to have to take some time to ramp up.
For the activity and so I think again, we're expecting and maybe it's conservative but we are expecting.
Gradual climb in revenue.
'twenty 2.
But all driven by a lot of pent up inventory.
Inventory.
So I think the exchange business is going to be there's going to be a ton of opportunity there.
Very bullish on it and I think to Chris's point.
We'll get there.
A slow ramp in 'twenty, 2 but still it will be meaningful for zone and I think.
'twenty 3 we will be.
Yes.
Triple digit kind of numbers is what we're expecting on on that business force.
Sure and then to your point on the expenses I think Chris is right. I mean, if you look at our remaining forbearance plans et cetera that are going to exit.
We think probably 70% loans.
Exit through some type.
<unk>.
Plan.
On et cetera.
The remainder.
He will go through the foreclosure process, we've automated a time there, but ultimately we will be able to take some cost be able to take cost out as well. So I think youre right on target with your line I think.
<unk>.
So in regards to the exchange business, Youre, saying triple digits in 'twenty, 2 or 'twenty 3.
Good morning.
Alright, Great and then when you think about that.
As a guidepost is a vague number so just as a real guidepost right now there's still a lot of unknown there so I really caution.
<unk>.
Caution you that these numbers will undoubtedly change, but as we look out at 22 now with all of the new options available to people to refi and what that would do to our pipeline and we factor all that in we think zone conservatively its going to earn at least 50.
Thank you Ian.
In 'twenty, 2 and we would expect somewhere around $150 million in 'twenty 3.
Okay and then.
That's helpful and then in regards to.
Strategic initiatives around the zone platform or are you still considering some of those as well that you mentioned roughly over a year.
<unk> million dollars.
We are we've got 3 remaining businesses.
But the auction platform being the 800 pound gorilla, but we have evaluations business and our field services business, we're really looking creatively, they're good businesses, but there is very limited growth within Mr. Cooper.
Cooper and so we're looking for partnerships like the 1 we have with blend where.
We might be able to find a strategic buyer of investor that can also provide.
Business and drive growth. These are good platforms in the right hands, they're going to be much more valuable than they are.
As part of our company and we're actively working on that probably have more to say next quarter.
Okay, and then the $150 million is that.
What you would consider a normal.
Year or was that.
Much larger just given I think that it'll be there'll be.
Pent up.
Inventory now.
Wouldn't give you a really accurate number here, we have been growing market share.
Auction very significantly.
Delivering excellent service to our clients, we had the metrics in that business are as good or better than anyone in the industry and so.
Normalized.
So.
That's a hard number to define today, so the trajectories up overall, but the 150 is definitely.
Driven by the pent up.
The impact of the moratorium.
Okay.
And I think I think Kevin the other thing about the exchange business that it makes it so valuable.
Is that if you look out into 'twenty, 2 and 'twenty 3 it's all third party business right.
If you think back to when we started that business we.
We had a pls portfolio.
That was.
Part of the revenue and earnings.
A component of the exchange business.
Essentially evaporated, so you've really got.
Fully develop third party business to Chris's point, we're growing market share there.
And it's obviously very capital.
So from a valuation standpoint.
We think it's a really attractive business.
Okay. Thank you for taking my questions.
Yep.
Thank you at this time I'd like to turn the call back over to chairman and CEO, Jay Bray for closing remarks, Sir.
Sure. Thanks, everyone for joining us this morning, and we look forward to chat and further thank you.
Okay.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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