Q2 2021 Home Point Capital Inc Earnings Call

August 10, 2021

[music].

Good morning, and welcome to the home point Capital's second quarter 2021earnings conference call. During today's presentation. All callers will be placed in a listen only mode and following management's prepared remarks, the call will be opened for questions. Please be advised that today's conference call.

Is being recorded I would now like to turn this conference over to Gary Stein head of Investor Relations at home point capital. Thank you Sir you may begin.

Thank you operator.

Welcome to our second quarter 2021earnings call. Joining me. This morning are willing to <unk>, President and Chief Executive Officer, and Mark L Baum Chief Financial Officer.

During our prepared remarks, we will be referring to a slide presentation, which is available on the events section of the home point Investor Relations website.

Before we begin I'd like to remind you. This call may include forward looking statements, which do not guarantee future events or performance.

Please refer to home Point's, most recent SEC filings, including the company's annual report on form 10-K, which was filed on March 12, 2021 for factors, which could cause actual results to differ materially from these statements.

We may be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business.

These non-GAAP measures are reconciled to the nearest GAAP figures and home points earnings release, which is available on the company's website.

I'd now like to turn the call over to William <unk>, President and Chief Executive Officer.

Thanks, Gary and good morning, everyone. During our prepared remarks, I'm going to discuss our second quarter performance and the factors that impact performance. I'll, then discuss how we are adapting and evolving in a challenging operating environment. After that Mark will provide more details on our results for the second quarter as well as some initial insight into our.

July performance.

Well then open up the call to take your questions.

We entered the second quarter faced with an historic pricing dislocation in our primary origination channel wholesale revenue would compress to levels not seen in at least the past 8 years.

The pricing dislocation persisted throughout the second quarter with a resultant significant drop in our origination revenues versus the first quarter.

Are already compressed origination revenue was further impacted by certain capital markets movements.

Most notably pricing and product actions undertaken by the government sponsored enterprises or G. S E D.

These actions were undertaken without notice and disproportionately impacted nonbank third party lenders such as home point.

As a result, our total revenues were $84 million for the second quarter, and we incurred a net loss of $73 million, including MSR valuation adjustment net of hedge.

So what are we doing to take on these challenges I'll first address the competitive environment.

As discussed in our last call, while we felt that the pricing dislocation in wholesale was temporary in nature, we have taken several actions, including accelerating process and technology initiatives to reduce our origination cost per loan.

This is working.

Although we had slightly lower sequential origination volume in the second quarter at 25 billion, we were able to reduce our direct cost per loan by 9% during the quarter with even greater progress in our wholesale channel.

Our focus on cost reduction initiatives will continue through 2021 and into 2022, and we have lowered our long term direct cost per loan targeted in wholesale to $900 versus 1000 previously.

The anticipated benefits of the competitive dislocation in wholesale with the opportunity to increase the velocity of new broker partners at some point and this was validated in the second quarter with 715, new brokerage has added to our network.

We exited the first half of 2021 on a pace to exceed our enhanced target of 8000 brokerages by year end.

We also continue to focus on differentiating our broker partner offerings, most notably with the introduction of home point amplify at the end of June.

Amplify is a new service model for the wholesale channel that combines the localized support with our national platform tell mortgage brokers maximize efficiency and deliver a faster more personalized customer experience, especially in our purchase focused mortgage market.

Under the amplify model, we are forming support teams aligned with home 0.6 regions across the country.

Each region will have designated teams of loan coordinators.

Writers closers and loan funders paired with our in market account executives.

By organizing our operations and sales regionally, we are able to brighter broker partners with a personalized service typically only provided by a small local lender coupled with the tools and efficiencies of 1 of the leading wholesale lenders.

This is a paradigm shift in service delivery and its only possible because of the investments we've made in process improvement and component types of low code technology.

Transition to the amplify service model is in process and the initial feedback from our broker partners is extremely positive.

As we implement amplify we are carefully tracking key metrics relating to partner experience efficiency and quality. We are really pleased with the results. So far and we plan to complete the rollout of the amplify model during the remainder of 2021.

And a corresponding channel. We also saw increased price competition in the second quarter in response, we dialed back our origination activity in the channel.

This accounted for most of the decline in our overall volume versus the first quarter.

Finally, we continue to have strong results in our direct channel with refinance retention rates exceeding 40%.

Looking at our mortgage servicing portfolio. We ended the second quarter, serving more than 449000 customers, which is up 62% year over year.

At the same time, the total balance of our servicing portfolio nearly doubled from the second quarter of 2020 to reach 124 billion.

The portfolio continues to perform extremely well with already delinquencies continuing to decline.

Commensurate with the structure of the portfolio and a slowing origination environment. We are also seeing lower prepayment rates.

This all point to improve returns in the second half of 2021.

We are also streamlining our strategy in servicing studies, even more aligned with our overall business model.

Recognizing that we are a smaller scale, we plan to reduce our concentration in Ginnie Mae servicing through strategic sales.

This will give us the ability to further reduce costs and at the same time enhance our focus on the customer experience, which will drive retention and lifetime value.

In addition to the challenges we face from competitive pricing dislocation in the second quarter. We also faced challenges in the capital markets from GSE pricing and product actions.

We have taken several proactive steps to mitigate this type of risk going forward by diversifying our execution.

Most notably we accelerated our transition to MBS deliveries versus cash sales.

We also committed to sell nearly $1 billion in agency product focused on non owner occupied loans into non agency execution and have built the capacity to expand this form of execution.

Finally, we adjusted our valuation methodology on products with certain features that have been impacted by agency and market instability, which we believe will reduce variability going forward.

Summary, but we are heartened by the recent changes that FHFA and do not expect additional adverse impacts from the GSE we.

We are expanding our execution alternatives to both reduce this risk and enhance our revenues going forward.

Although our financial results for the second quarter were impacted by both competitive pressures and GSE driven capital markets actions, we continue to stay focused on execution we.

We delivered strong funded volume and broker partner growth during the quarter.

Continue to drive down our cost and commit to the continuation of this trend while at the same time enhancing both the partner and customer experience.

We are seeing reduced prepayments in our servicing portfolio and expect improved performance from this business during the second half of 2021.

While we do believe the competitive dislocation in wholesale will abate at some point, we are driving home point towards a baseline return on equity of at least 15%. This focus is supported by our July results, which Mark will touch on.

The challenges in the second quarter have only increased our leadership focus and resolve the a leader in the residential mortgage space.

With that I'd like to turn the call over to Mark.

Thanks, Willy and good morning, everyone.

I'd like to spend a few minutes discussing our financial results for the second quarter of 2021, as well as our liquidity and financial outlook.

Starting with slide 6 of the earnings presentation.

As Willie noted notwithstanding the challenging environment, we faced during the second quarter, we continued to deliver strong performance across some of our key origination and servicing metrics such as funded volume.

<unk> growth in the number of servicing customers.

Turning to slide 7 we've provided a summary of our financial results for the second quarter of 2021.

Total revenue in the second quarter of $84 million compared to $345 million in the second quarter of 2020.

$422 million in the first quarter of 2021.

Our revenues for the second quarter were adversely impacted by competitive pressure as well as the GSE pricing and product actions will be mentioned.

We had a net loss of 73 million in the second quarter of 2021, which compared with net income of $169 million in the second quarter of 2020 and $149 million in the first quarter of 2021.

The net loss in the quarter was primarily due to lower loan revenues as well as a $29 million reduction in the mark to market fair value net of hedge of our mortgage servicing rights portfolio.

Our total expenses of 198 million for the second quarter of 2021 or up from 118 million in the year ago quarter, which reflects the capacity we added to accommodate the tremendous growth we have generated over the last year.

However, I would like to highlight that our expenses were down 13% compared to the first quarter, which was primarily driven by a 17% reduction compensation and benefits as a result of our firm wide cost savings and efficiency initiatives.

On slide 8 we have included a quarterly breakdown of our funded origination volume by channel for the last 5 quarters.

In aggregate, we generated more than $25 billion in volume in the second quarter of 2021 and $97 billion for the last 12 months.

Consistent with our overall strategy the wholesale channel was the primary driver of our origination volume this quarter, while we scaled back our activity in the correspondent channel based on a compressed margin environment.

As a reminder, as part of the new disclosures, we added last quarter in the appendix of the slide deck. You will also find fallout adjusted lock volume by channel.

Slide 9 includes a snapshot of our origination segment results.

Origination segment revenues of $117 million in the second quarter of 2021 compared to $377 million year over year and $347 million in the first quarter of 2021.

Gain on sale margin attributable to the channels before giving effect to the impact of capital markets activity was 74 basis points from the second quarter versus 244 basis points in the second quarter of 2020, and 125 basis points in the prior quarter.

Gain on sale margin for the second quarter includes approximately $33 million of adjustments.

Related to agency pricing actions and other capital markets activity during the quarter, which directly impacted loan commitment that had been locked but not yet closed.

Consistent with the segments revenue and margin trends contribution margin of negative $21 million in the second quarter of 2021 compared.

Paired with $304 million in the second quarter of 2020 and $189 million in the first quarter of 2021.

The end of the second quarter of 2021, our third party.

Partner relationships grew by 50% year over year to 70, 380, which represents an increase of nearly 2500 net new relationships over the last 12 months and more than 730 net new relationships in the last quarter.

On slide 10, we've provided a snapshot of our servicing segment financial results.

Before I go through these results as a reminder, we modified the presentation of our servicing segment financials last quarter.

This revised view makes it easier to identify the key operational components in the segment, namely loan servicing fees and direct expenses before the impact of noncash items, such as the MSR amortization and changes in the MSR fair value Mark to market.

The number of customers in our servicing portfolio exceeded 449000 at the end of the second quarter of 2021.

Which was up 62% a year ago quarter, and 10% from the first quarter of 2021.

Servicing portfolio <unk> reached 124 billion at the end of the second quarter of 2021, which was up 86% year over year and up 17% compared to the first quarter of 2021.

As Willie noted we saw a slowdown in prepayments, which is reflected in the decline and the change in MSR fair value from amortization from the first quarter to the second quarter of 2021.

Home servicing fees of $86 million in the second quarter of 2021 grew 95% from the year ago period.

2% from the first quarter of 2021.

Before including the impact of noncash changes in fair value of our MSR asset the servicing segment generated what we refer to as a primary margin of $67 million, which was up more than 125% versus the year ago quarter and up 29% versus the prior quarter.

The servicing segment contribution margin for the second quarter was negative $40 million, which compared to negative $42 million in the year ago period, and positive $65 million in the prior quarter.

Our second quarter contribution margin impacted by a $29 million reduction or approximately <unk> 16 per share on an after tax basis in the mark to market fair value net of hedge of our MSR asset due in part to a decrease in interest rates during the quarter.

Our hedging strategy continues to work well and has been an effective tool for managing interest rate volatility.

Turning to slide 11, we have included a summary balance sheet, which highlights our capitalization and liquidity profile.

At the end of the second quarter of 2021.

Had a $482 million of liquidity, while our total assets stood at $8.4 billion and our book value was 709 million.

During the second quarter, we doubled our MSR financing capacity from $500 million to 1 billion and also increased our total warehouse capacity by $700 million of $6.4 billion to $7.1 billion as of June 30.

Sure.

In connection with home point capitals ongoing efficiency and capital management initiatives as Willy mentioned, we are assessing potential selective sales from the company's MSR portfolio, including Ginnie Mae MSR.

We believe any such sales would enable us to become a more efficient agency focused servicer and also provide us with incremental liquidity that we could use to reduce our debt.

Before I finish my prepared remarks, I would like to briefly discuss our financial outlook.

As we look at the third quarter, we anticipate fallout adjusted lock volumes will be within a range of $18 billion to $22 billion.

For the month of July gain on sale margins in the wholesale channel with similar to Q2 at approximately 74 basis points.

Importantly, we were profitable on an operating basis in the month of July and we are already starting to benefit from the diversification of our capital markets execution that Willy mentioned.

In addition, we have recently seen an improvement in wholesale market.

Although we view the current market dynamics as temporary we expect to operate profitably in an environment, where wholesale revenues are below historic norms through continued growth from adding new brokers and expanding current relationships.

<unk> gains from the productivity and technology initiatives that are already underway on.

Ongoing growth in our high quality agency focused servicing platform and rigorous expense management across the business.

That concludes our prepared remarks for this morning, we are now ready to turn the call back to the operator to take your questions operator.

Yes.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You may start to move your question from the queue for participants using speaker equipment, it may be necessary to pick.

Debris handset before pressing the star 1.

1 moment, while we poll for questions.

Our first question comes from the line of Brock Vandervliet with UBS. You May proceed with your question.

Hi, Good morning, Thanks for the question I, just wanted to square up.

The guidance with your comments about the.

30 years $33 million impact on gain on sale from agency repricing does that.

Come back.

In Q3.

Does it poor mainly into wholesale and also a correspondent.

Could you talk about those repricing actions.

What those were.

Thanks.

Sure Hey, Brian Good morning, its Wally.

So to answer your first question I would consider it more of a onetime impact in essence thee the agencies issued new pricing without protecting our pipeline which is.

Very atypical.

What we've seen historically.

And as a result, there was kind of an instant markdown in the pipeline just occurred several times during the quarter.

And different elements, so that that really constitutes.

The vast majority of $33 million. So then I guess the way I would characterize it is it doesn't it doesn't come back but it also doesn't impact our third quarter in other words, there that we don't expect any additional mark like that and so kind of just stepping back more broadly.

Overall from a capital market standpoint, the Delta.

Between the second quarter into the third quarter that we see it's $45 million and so it's really the $33 million that you had mentioned and then as Mark and I talked about the enhanced execution as we've diversified our methods of execution, both through the agency MBS versus cash sales and through.

Through non agency execution on agency product, we're seeing enhanced revenue there. So that's kind of the macro delta between the second quarter and third quarter that we expect.

Okay, and just to just to follow up on all that.

Should we kind of look at the second quarter as.

Yes.

As the flush where is that.

Latest pressure is now.

Rearview mirror or are you.

How should we think about the go forward.

<unk> you are profitable in <unk>.

July but just.

Yeah characterized it better.

Yeah, So I'll start and maybe Mark you can add to this I.

I would say from a capital market standpoint, yes in other words, we do not expect.

Replication of the second quarter third quarter and forward, we're really encouraged by FHFA and obviously the action that they took early on with regard to the refinanced the 50 basis point refinance fee I think from a competitive standpoint.

Still certainly is pressure on margins.

Eric mentioned, we have seen some.

Relief.

In the last couple of weeks, but by no means.

We're here to say that we're going to expect us to start.

Migrating back to historic norms. So we are really positioning the organization. So that we can be profitable maintain profitability and target minimum 15% return.

Even in this type of margin environment.

The only thing I would add to what will it yes, I think I would add to what we just said.

He had talked about the competitive environment, which we're starting to see a beta you had talked about also the the agency environment, which is.

Far more accommodative.

And also from an expense perspective, the second quarter was a.

A quarter, where we pivoted.

And made some I think important moves since we're anticipating to see expense improvements even more so in the third quarter as we as second or the third quarter as a result of actions.

In the second quarter would be the third element.

Our next question comes from the line of dogs.

<unk> with credit Suisse. You May proceed with your question.

Thanks.

Thank you Kurt.

Hi.

Virginia portfolio.

With that.

Yes.

I think with any precision.

I think you broke up a little bit Doug.

I think you asked about the Ginnie Mae portfolio.

Yes right.

Yes.

The size of the Ginnie Mae portfolio, and then any which debt you would prioritize.

Sure. So yes, I'll touch on the portfolio itself. The Ginnie Mae segment is about 20% of our servicing portfolio currently and kind of think about our strategy on the origination side to be extremely efficient and focus on that.

Partner experience.

Consistent on the servicing side, where we stepped back and said where is the best opportunity for us to be extremely efficient and focus on that that customer experience understanding that there are larger servicers out there who may ascribe more value to certain of our assets and so that's kind of ultimately how we got to the point, where we said Ginnie Mae as a good opportunity.

Unity for us too.

To optimize what we're doing operationally to focus on the experience and at the same time create some liquidity. So so mark I'll, let you touch a little bit on liquidity side.

Sure happy to so.

I think the second part of your question was what debt we would prioritize.

It would be the MSR debt facility.

Would prioritize with that and what that would enable us to do is delever.

From an operational perspective, as Willie walked through we think it enhances our our servicing.

Platform opportunity, where we would have more scale in the part of the platform that we are.

We have more scale and then in terms of the proceeds that would enable us to delever the.

The MSR debt facility.

Our next question comes from the line of Henry Coffey with Wedbush You May proceed with your question.

Good morning, a couple of questions first now outside of the General Agency Circle.

You did mentioned that you have a $1 billion of sort of qualified.

<unk>.

Assets that youre going to be securitizing.

Other opportunities such as pricing mismatches in jumbo that you could take advantage of.

Is there more room to build on this this other product.

How are you doing it alone or are you doing it in concert with with another mortgage bank what is what is the.

What is both the opportunity set and the pricing opportunity in this area.

Sure he's areas.

Yeah, so thanks, Henry and good morning.

So yes, we can.

Mentioned about $1 billion outstanding with actually 6 Counterparties and so it's been a combination of yes.

I called traditional whole loan sales to to those that are securitizing and we are starting to look at stronger partnerships to I'll say coke co securitize or leverage.

Turning to the buyer shelves I think the fact that we have 6 counterparties at this point underscores what we believe to be the depth of the market and the expanded opportunity at this point, we're more focused on optimizing the execution of our agency product.

Non agency delivered non agency executions versus versus adding product, but certainly that we've established.

The infrastructure and the capacity to be able to expand out over time. So at this point, we're going to make sure that we're getting the best execution possible on the product that we're producing and then look at additional product going forward.

What about on the Jumbos this is sort of qualified <unk>.

<unk> product what about on the jumbo side, which would be sort of prime Super Prime.

Sure So again.

We look at that at some point in the future that we would add that would add to our stable of products right. Now we're focused more on executing efficiently on the agency product non agency delivery.

But with the sale of the Ginnie Mae do you also surrendered the Epo opportunity.

We do however for US <unk> has been a very small part if you look at our portfolio. It's extremely high performing so again, we like that.

And the total revenue associated with the portfolio compared to the cost structure associated with it and we decided it made more sense to look at the alternatives are really focused on the agency side.

And then is there a reason why you couldnt use some of the proceeds from an MSR sales.

To pay down your corporate debt or is or is the premium too high.

Or to buy back the debt assuming that it's not trading at par.

Alright, I'll, let mark touch on that.

Hum.

We could we could evaluate that but the.

I guess, we could evaluate that it would be I think in terms of our ability to continue to advance the growth of the business probably better for us to pay down the MSR debt because we have the ability to redraw then as we as we grow whereas the corporate debt once pay down so we wouldn't have that ability to redraw on it so.

That's my initial thought on why we would want to probably.

Prioritize the MSR debt first.

Our next question comes from the line of Kevin Barker with Piper Sandler You May proceed with your question. Thanks.

Thanks.

To your cost saving initiatives.

Can you give us an idea of where you expect.

Total expenses as a percent of originations going into the back half of this year.

And then.

Have a run rate on expenses.

As of the end of the quarter and how to think about that.

Good morning, Kevin Mark I'll, let you start with that 1 and I'll follow up.

Sure so so.

As I'm looking at the at our Q3 expenses relative to Q2, our expense run rate is going to look more like a $170 million, we're expecting about a $25 million to $30 million reduction in expenses quarter over quarter.

Most of that is going to be in the origination segment, you probably noticed we had already taken.

A lot of our corporate expenses out so I think that run rate is going to be pretty close to what you see there.

Servicing will continue to be relatively stable and grow a little bit as the portfolio grows.

But the origination segment is where we have the most opportunity and that's largely a result of a lot of the moves that we made in the second quarter around comp and around efficiency. So that's where I would expect to see that so.

Funding forecast will be similar to our fallout adjusted locks forecast, which is in the $18 billion to $22 billion range, So $170 million on let's call. It $20 billion. If you want to split the difference would be roughly <unk>, our expected run rate going forward at least into the third quarter.

As we move on beyond that we're not we're not done looking for efficiency opportunities and so as willing had mentioned we're looking at a cost per loan targets continue to decrease in the origination segment and so we should see.

Additional efficiency as we move into 2022.

Okay, and then in regards to the corporate segment would.

Would you continue to see expenses dropped there or would that to stabilize around that.

I think it's.

Putting the origination services somewhere around $41 million.

Yeah, I would expect us to stay in that 41 ish area corporate expenses, there is a fair amount of it.

Expense that we've already been able to take out what's left there is pretty.

Central as it relates to <unk>.

Our status as a public company and the kinds of things we need.

I think that's that's pretty stable at that level.

Our next question comes from the line of Don <unk> with Wells Fargo. You May proceed with your question.

Mark 2 questions 1 can you quantify.

Improvement Youre seeing in April and then secondly, do you think.

The gain on sale margin improvement is just the normal sort of capacity leveling out or do you think the larger players.

Essentially the pricing war, and wholesaler or making a conscious decision.

Up here.

Sure. So I assume you meant the improvement in July because I, just see a lot of improvement in April that's I'm, sorry August I thought you had said that you have.

August movement beyond the all in margin and in August Yes, yes.

Yeah. So we were at about 74 basis points in the wholesale channel and I'm, saying that start to creep up.

Don't really want to commit to a number yet because it moves up and down but we are encouraged number 1 by the slow.

We're saying and number 2 by the.

But the increase in margins with chart on let's just say north of 74, but even at 74, we were profitable in July and so that's what I was referencing in that is a function of.

The expenses that we're seeing as well as to willies point, So some capital markets improvements and thirdly, we had mentioned this but servicing before.

Mark to market showed about a $10 million loss in the second quarter.

Mentioned that we expected that to stabilize as we move into the second half of the year and in fact be breakeven and in fact, it was profitable in July so.

So those are the things that are encouraging us.

Feel that we are in a position to be profitable and drive towards 15% ROE, even if margins stay where they are right now.

Yeah, Hey, Dan.

So as far as the <unk>.

Margin.

We do see a little bit of movement from those that had caused the dislocation.

You know, it's certainly not declaring victory at this point as far as that movement, but we have seen a little bit of flax and.

Yes, that's certainly a positive sign but tomorrow point, we're going to we're going to focus on executing as they are are as they were maybe and then to the extent that they are they get better they will just be upside opportunity for us from a return perspective.

Okay. Thank you.

Okay.

Our next question comes from the line of Rick Shane with Jpmorgan. You May proceed with your question.

Hey, guys. Thanks for taking my questions. This morning.

If we look at slide I believe it.

King.

Which details the gain on sale by channel.

2 sort of big numbers on there or the $150 million of margin attributable to channels and the gain on sale margin of 117 net of the 33 marks.

Great.

How do we reconcile that 2% to $75 million of gain on sale, that's shown through the P&L and it looks like.

There was an adjustment.

On this page to what we saw last quarter in terms of gain on sale margin can you walk through.

How to reconcile all of that.

Yes, I'll take that 1 mark.

Yeah sure so.

Hundred and 17, yeah. So we're gonna have to get into the weeds, a little bit, but the 117 gain on sale margin as the total revenue attributed to the channel.

So that would include the gain on loans, which is the $75 million you were referencing Leslie.

Plus loan fees plus net interest so.

So it's the entirety of the of what's available as far as revenue so the origination segment.

So that and that is a change we had previously.

Decompose, that's a foot to just the gain on sale.

We thought this is a more useful presentation, because when we have conversations such as the 1 we're having right now we tend to talk about total revenue to the channel.

So if we're going to decompose it at the channel level, we thought it made more sense to decompose. The total revenue that would then flip to the total segment revenue, which is $217 million.

Got it but if I total of those 3 on the P&L and again.

Now having to sort of go back in response to what you're saying.

If I total the gain on sale of 75 million the loan fee income $39.5 and NII.

Minus of negative $9, 5 that's $105 million.

So.

Again, how do I sort of tie that out too I'm, assuming that that's roughly comparable to the $1.17, but what's the differential there then.

Got it got it. So you go back to page 9 of the earnings presentation, you'll see the origination segment.

By itself.

The.

Biggest delta as the net interest income, which was $2.7 attributed to the origination segment we've got.

Interest expense related to the corporate debt and other things that would be part of our corporate overhead.

So that would be that that <unk>.

Difference, we don't attribute the net.

Net interest from the corporate debt to the.

The resignation segment. So if you look at page 9 I think that'll.

Put it for you.

Okay, Great that's helpful.

Second question, what was the actual end of period share count I didn't see that anywhere in the disclosures and it helps us in terms of settling out models.

Gary do you happen to have that number handy.

And if not we can get back to you.

Okay, and then last question Oh, sorry go.

Sean.

Sorry, it's on.

Slide slide 12.

Okay.

And then last question and sorry, if I did my 13th sorry about that.

That's the worst.

Last question is related to the dividend policy, obviously in light of.

The quarter that we just saw and sort of guidance for the third quarter, how should we interpret the decision right now to start returning capital to shareholders in the form of a dividend in light of the.

The uncertainty that you're facing.

Sure so.

We had said in our IPO that we haven't declared quarterly dividend starting this quarter and.

The board felt it was important to fulfill that commitment obviously as mark talked about with regard to our liquidity position is strong and we can support the payment of the dividend.

Having said that we will reassess the dividend decision each quarter, obviously, the mortgage market does move pretty significantly sometimes quarter over quarter and it will of course take a variety of factors into consideration, including the financial condition operations are available or available liquidity and cash needs and then of course capital expenditures.

So well evaluate that at the end of the next quarter.

Our next question comes from the line of James <unk> with Morgan Stanley You May proceed with your question.

Hi.

So James Fawcett with just kind of like a fountain I guess, but.

It's.

Yeah.

The question I appreciate all the detail of that you gave have given so far on different elements I'm wondering on the cost side is Blake.

You seem like Youre doing a pretty good job already reducing your cost and cost per loan et cetera.

How much opportunity or how low do you think you can drive those in Guyana.

At least give a framework for those programs.

Hi, yes, good morning.

Phosphate found.

We are we feel like all of our long term target. We I think we put it in the in the script, but our long term target on wholesale which is obviously the primary driver of origination cost. We've moved down we had a $1000. We moved it down to $900 and that's really based on the progress that we've made to date both from a process improvement standpoint in implementing <unk>.

Our low code technology.

In essence every enhancement that we've made has turned out better.

From an efficiency standpoint than what we had estimated so we felt comfortable setting a longer term target of 900 versus the 1000 and that specifically is direct cost per loan.

So to give you an idea of what the work is and Mark maybe you could talk about where we're at today just to give a point of reference.

Sure. So we ended the.

Florida at around 1500, prolonged we think we're going to be in the third quarter, we're going to chip away at that and then to willies point will continue to migrate towards a towards 7 towards towards 900.

Into 2022, so that kind of gives you a sense of.

You know call it $600 alone of room between now and then.

In 2022.

And when you say 2022 do you think you can be at that kind of $900 level for the entirety of the year or is that where you will get to during 2022.

I would say it's more during 2022.

We want to balance productivity improvements and reducing cost per loan on efficiency with customer experience and make sure that we're providing superior customer experience. So.

So while we are encouraged by everything we've seen so far into willies point, we still got more room to run on on this topic.

We're not going to do it in such a way that will disrupt customer experience. So so.

So I want to be a little more thoughtful about that and I would I would say you should expect that to happen during the course of 2022.

I think the key from our perspective is the consistency so consistently moving cost and to Mark's point, if we kind of ratchet it down to rapidly we can't jeopardize the partner experience, which is obviously, they're going to be the primary driver of growth, especially with our amplify program.

Our next question comes from the line of <unk> Bhatia with Bank of America. You May proceed with your question.

Hi, good morning, and thanks for taking my question.

What are the first to go back to the $33 million.

Yes.

Adjustments that happened this quarter related to the.

J S. T point can you maybe provide a little more detail on that is that the adverse market fees, that's something else in there what exactly is that.

Yes.

Bill with physical order.

No. So I'll start with that and Mark you can follow up as needed. So it really was a series of pricing actions that were taken directly against us as a lender. So it wasn't it didn't have anything to do with the adverse market. The refinance adverse market fee. It had to do with pricing adjustments that were made to us at all in other.

Non banks third party.

Lenders.

As a segment.

It was it was really pricing actions that were taken in and I think what was it was certainly different from past cycles. When actions, we're taking let like the adverse the refinance adverse fee is that we were given notice. So in other words the pipeline had to be marked down based on the actions that were taken versus traditionally a.

Pipeline protection was given in other words advanced notice was given by the agency. So so that's what was different and again it was really a direct charge not not anything that was kind of more what I'll call customer oriented.

Okay.

It does.

Okay.

In terms of your maybe maybe can you just give us an update on the there's been some talk about the non all keeping the loans and in restaurant loans. If you will the gse's, reducing exposure what percent of your year to date.

Production has been that and are you seeing any impact from the cap the GSE has been skewed.

Mark I don't know if we have the exact production number year to date.

I don't have that handy, but thats something we can we can circle back, but let's talk about what we're doing about it because you are right there are limitations.

Address those.

We should just talk about that sure.

Yes, so as I mentioned, we really expanded the execution on those loans outside of the agencies. So certainly initially the limitation.

1 again, we're really given without sufficient notice.

It really effectively manage the pipeline down so we had anticipated.

Handing it to non agency execution, whether it's agency non agency loans during 2021, and so we really accelerated that and as a result, we were able to maintain our percentage of production I believe mark has been higher than what the agency agency.

Limits are at the same time, we've actually got an enhanced execution versus the agency.

Pricing execution. So we feel like this is an opportunity for us to continue to grow above and beyond being dependent on the agencies and as we talked about with Henry It really have any infrastructure in place to be able to expand out whether it's with agency product or non agency product overtime.

Our next question comes from the line of Kevin Barker with Piper Sandler You May proceed with your question.

Thanks, I just wanted to get some clarification on your comment you are profitable you said you were profitable on an operating basis in July.

All in with the corporate segment in the servicing segment or is that purely on the origination.

That would be all in the caveat around operating basis as its exclusive of the MSR mark to market. So it would be.

Including everything about the MSR mark to market.

Okay and then.

The improvement in broker margins you saw in the last couple of weeks or any way you can size that up for.

You bet.

This is incremental at this point.

It's incremental.

Incremental okay. Thanks for taking my follow up question.

Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Gary Stein for closing remarks.

Great. Thanks, operator, thanks, everyone for joining us. This morning, please feel free to circle back if you have any follow up questions.

Thank you for joining US today. This concludes today's topic you may disconnect your lines at this time.

Yes.

[music].

Okay.

[music].

Right.

Uh huh.

Okay.

[music].

Good morning, and welcome to the home point Capital's second quarter 2021earnings conference call. During today's presentation, all callers will be placed in a listen only mode and following management's prepared remarks.

All will be open for questions. Please be advised that today's conference call is being recorded I would now like to turn the conference over to Gary Stein head of Investor Relations at home point capital. Thank you Sir you may begin.

Thank you operator.

Welcome to our second quarter 2021 earnings call. Joining me. This morning are willing to have been president and Chief Executive Officer, and Mark L Baum Chief Financial Officer.

During our prepared remarks, we will be referring to a slide presentation, which is available on the events section of the home point Investor Relations Web site.

Before we begin I'd like to remind you. This call may include forward looking statements, which do not guarantee future events or performance.

Please refer to home point, most recent SEC filings, including the company's annual report on form 10-K, which was filed on March 12.2021.

Factors, which could cause actual results to differ materially from these statements.

We may be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business.

These non-GAAP measures are reconciled to the nearest GAAP figures and home points earnings release, which is available on the company's website.

I'd now like to turn the call over to William <unk>, President and Chief Executive Officer.

July performance, well, then open up the call to take care of questions.

<unk> entered the second quarter faced with an historic pricing dislocation in our primary origination channel wholesale revenue and compress to levels not seen in at least the past 8 years.

The pricing dislocation persisted throughout the second quarter with a resultant significant drop in our origination revenues versus the first quarter.

Are already compressed origination revenue was further impacted by certain capital markets movements.

Most notably pricing and product actions undertaken by the government sponsored enterprises or GSE.

These actions were undertaken without notice and disproportionately impacted nonbank third party lenders such as home point.

As a result, our total revenues were $84 million for the second quarter.

<unk> incurred a net loss of $73 million, including MSR valuation adjustment net of hedge.

So what are we doing to take on these challenges.

I'll first address the competitive environment.

As discussed in our last call, while we felt that the pricing dislocation wholesale was temporary in nature, we have taken several actions, including an accelerating process and technology initiatives to reduce our origination cost per loan. This is working.

Our focus on cost reduction initiatives will continue through 2021 and into 2022, and we have lowered our long term direct cost per loan targeted in wholesale to $900 versus 1000 previously.

The anticipated benefits of the competitive dislocation in wholesale with the opportunity to increase the velocity of new broker partners with home point and this was validated in the second quarter with 715, new brokerage has added to our network.

We exited the first half of 2021 on a pace to exceed our enhanced target of 8000 brokerages by year end.

We also continue to focus on differentiating our broker partner offerings, most notably with the introduction of home point amplify at the end of June.

Amplify is a new service model for the wholesale channel that combines the localized support with our national platform to help mortgage brokers maximize efficiency and deliver a faster more personalized customer experience, especially in our purchase focused mortgage market.

Under the amplify model, we are forming support teams aligned with home 0.6 regions across the country.

Each region will have designated teams of loan coordinators.

Writers closers and loan funders paired with our in market account executives.

By organizing our operations and sales regionally, we are able to provide our broker partners with a personalized service typically only provided by a small local lender coupled with the tools and efficiencies of 1 of the leading wholesale lenders. This.

This is a paradigm shift in service delivery and is only possible because of the investments. We have made in process improvement and component is low code technology.

Transition to the amplify service model is in process and the initial feedback from our broker partners is extremely positive.

As we implement amplify we are carefully tracking key metrics relating to partner experienced efficiency and quality. We are really pleased with the results. So far and we plan to complete the rollout of the amplify model during the remainder of 2021.

And our correspondent channel. We also saw increased price competition in the second quarter in response, we dialed back our origination activity in the channel.

This accounted for most of the decline in our overall volume versus the first quarter. Finally, we continue to have strong results in our direct channel with refinance retention rates exceeding 40%.

Looking at our mortgage servicing portfolio. We ended the second quarter, serving more than 449000 customers, which is up 62% year over year.

At the same time, the total balance of our servicing portfolio nearly doubled from the second quarter of 2020 to reach 124 billion.

The portfolio continues to perform extremely well with already delinquencies continuing to decline.

Commensurate with the structure of the portfolio and a slowing origination environment. We are also seeing lower prepayment rate.