Q3 2021 Ocwen Financial Corp Earnings Call

November 8, 2021

Greetings and welcome to the Ocwen Financial Corporation third quarter earnings and business update conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

Reminder, this conference is being recorded I would now like to turn this conference over to your host Mr. Diego Aqua Dalian Senior Vice President Corporate communications. Thank you Sir you may begin.

Good morning, and thank you for joining us for Ocwen third quarter 2021 earnings call. Please note that our third quarter earnings release and slide presentation are available on our website.

Speaking on the call will be Ocwen, Chief Executive Officer, Glen Messina, and Chief Financial Officer, John Campbell.

As a reminder, the presentation. Our comments today may contain forward looking statements made pursuant to the safe Harbor provisions of the federal Securities laws.

Forward looking statements, maybe identified by reference to a future period or by use of forward looking terminology and address matters that are to different degrees uncertain.

You should bear this uncertainty in mind, when considering such statements and should not place undue reliance on such statements.

Forward looking statements involve assumptions risks and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2020, and our current and quarterly reports since such date in the past actual results have different materially from those suggested by forward looking statements and this may happen again.

Our forward looking statements speak only as of the date. They are made and we disclaim any obligation to update or revise any forward looking statement, whether as a result of new information future events or otherwise.

In addition, the presentation our comments contain references to non-GAAP financial measures such as adjusted pretax income and adjusted expenses among others.

We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition, and then alternate way to view certain aspects of our business that is instructive.

Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures maybe found in the press release and the appendix to the Investor presentation.

Now I will turn the call over to Glen Messina.

Thanks, Steve Good morning, everyone and thanks for joining us. So we're looking forward to sharing our progress with you. This morning. So we'll get started with some highlights for the third quarter. If you could please turn to slide four.

I'm really proud of what our team has accomplished and really appreciate all their hard work, we delivered strong GAAP net income and adjusted pre tax income and our our ROE exceeded guidance largely due to strong top line performance I believe this demonstrates the strong operating leverage we have in our business.

This was our eighth consecutive quarter of positive adjusted pre tax income you.

Our team continues to execute well against our operating objectives strong originations growth in servicing additions solid operational execution and performance cost reduction is tracking ahead of targets.

We also closed our planned call rights transaction for the third quarter and have deployed more than 50% of maps investment commitment.

Yeah October as well we had some milestone so in October we closed our acquisition of the RMS reverse mortgage servicing platform and also in October I'm pleased to announce that we exceeded our recapture rate objective.

We continue to make solid progress on our actions to expand our addressable market and we're growing and higher margin channels and services and products, giving us strong momentum.

And the RMS platform acquisition gives us access to a potential 86 billion dollar a reverse mortgage sub servicing market, which is an exciting new growth opportunity for us.

And finally, we continue to navigate a volatile and unpredictable environment and I'll talk a bit more about that later.

Turn to slide five for some highlights on originations.

[laughter] originations again delivered really solid performance against our operating objectives, we closed a $20 billion in total servicing additions in the third quarter with very strong performance in sub servicing additions.

With the closing of the PCB acquisition correspondent volume doubled versus last quarter. The T. C. B team is off to a really strong start and I'm. So glad to have them with us and appreciate the contributions they are making to the business.

We're seeing great results from our actions to grow sub servicing we secured a $20 billion in New awards and expect this volume to commence boarding in the fourth quarter.

Our sub servicing pipeline has never been more robust our top 10 prospects represent roughly $63 billion in opportunity and our total prospect pipeline has grown to a slightly over $200 billion. We're excited about this activity level and believe we have a very compelling value proposition I'll spend a little bit more time on our sub servicing.

Our value prop a little bit later.

Our enterprise sales approach and the TCP acquisition have allowed us to grow our base of sellers to 700 at the end of Q3, that's roughly two and a half times over third quarter last year, and we're continuing to grow non.

Non delegated and best efforts delivery services were rolled out as expected and we're seeing steady adoption as well our Ginnie Mae product mix is improving and jumped to about 10% of total originations excluding co issue, we're still well below industry mixing Ginnie Mae. So I believe we have room for improvement here.

You know we recently attended the MBA mortgage Bankers Association annual convention and client attendance at our meeting room exceeded our expectations and our response to the quality of our team and operating execution was very positive. So many thanks to all our correspondent co issue and sub servicing clients for choosing us as one of their key business partners.

We look forward to serving them and supporting new clients as we expand our addressable market.

Our consumer direct team continues to improve recapture performance, we did see a little bit of slippage in the third quarter versus the second quarter due to accelerated runoff and select client portfolios versus Q2, you know that said we saw a very strong recovery in October with refinance recapture rate achievement of 36.

Percent.

Which is a which is a milestone for us and a huge congratulations to our recapture team. We believe were on track to meet our 30% refinanced recapture rate objectives in the fourth quarter.

Overall, our originations team is making terrific progress against their objectives for this year and they're energized for the fourth quarter and for 2022.

Let's turn to slide six for a progress update on our margin and market expansion actions.

The team continues to make strong progress in growing higher margin products channels and services. These actions do help us expand our addressable market as well as deflect margin pressure as industry volume levels contract year over year consumer direct volume in both forward and reverse is up 61 per.

Both forward and reverse delivered record retail funding and lock volumes in October.

The marketing eligible population for our forward recapture business increased about 43% from the second quarter to the third quarter and we now have roughly 174000 loans, where borrowers could save $100 or more per month by refinancing and our team will be focused on trying to help these borrowers.

Total reverse originations were up 86% year over year, our team is executing very well our reverse market share is up from six.

Six 5% in third quarter 2022, 7% in third quarter of 2021, and this compares to about four 2% in the third quarter of 2019, so great progress by the team growing our share.

And our business.

You know in forward correspondent, we have meaningful opportunity to grow our best efforts and non delegated delivery services. We our team is focused there and we launched those recently you know today. These are these services are just a fraction of the levels, we see across the industry generally our long term goal is to get best effort to non delegated to roughly 25%.

30% of volume.

And about 40% to 50% of our gain on sale revenues.

Let's turn to slide seven to cover some highlights on our servicing business.

In servicing are continuing to improve cost and customer experience are the key objectives for us and the team is performing really well.

To achieve these objectives were focused on moving the needle in four key areas of technology process simplification scale and portfolio composition. The results have been good so far overall servicing operating costs are down roughly 25% from third quarter 2020 levels and we've already achieved our full year.

For 2021.

Technology is a big driver for us and our technology agenda has a three part focus that's reduced cost improve execution and improve the customer experience. We believe our actions to improve client borrower and investor experience are critical elements to support our growth and recapture rate objectives over the long run and with technology is the enabler we can re.

<unk> cost and improve execution at the same time.

In terms of scale, we've increased our total servicing U P. B about 33% versus the third quarter of 2020, and our percentage of Prime servicing is now 70% of our total servicing U P. B.

In terms of portfolio composition, increasing the percentage of agency loans is helping to increase average loan balance and decreased delinquencies. Both of these trends will improve our ratio of operating expenses as a percent of <unk>.

We believe we have tremendous operating leverage in our servicing platform and we're focused on increasing scale by growing our own servicing and sub servicing.

Now, let's turn to slide eight and look at some of our operating execution and servicing.

Again here the team continues to perform very well in several areas average speed of answer and call abandonment rate continued to outperform the industry average as reported by the MBA.

Our average speed of answer is just a fraction of the MBA average and abandonment rates are roughly half the industry average.

We continue to be laser focused on supporting borrowers who are exiting forbearance and helping them understand their options. We believe the best path for the homeowner and the Investor is defined what works within Investor guidelines to keep the consumer in their home in this regard we outperformed the industry as reported by the MBA relating to the percentage.

A borrowers with an agency loan who exit forbearance with the reinstatement or loss mitigation solution in place.

Between September 2020 in June 2021, roughly 93% of our borrowers who exited forbearance had a reinstatement or loss mitigation plan in place and that compares to the industry average of 83% of what that means is about 7% of our borrowers on forbearance have exited without a reinstatement plan our loss mitigation solution versus.

Over 17% for the industry.

Based on the MBA data, we're delivering 20% more loss mitigation solutions for homeowners versus the industry average and again I believe this demonstrates how our servicing capabilities to deliver superior performance for homeowners and investors.

NPS is up six points over third quarter of 2020, and that's even with the impact of boarding over 280000 loans in the third quarter onto our servicing platform and helping over 4700 borrowers exit forbearance.

Also worth, noting our Moody's and S&P upgraded our servicer quality assessment as master servicer, along with Fitch and along with Fitch, All three affirmed our servicer ratings.

Some of the key strengths noted by the agencies, where our reporting and rebidding processes proactive servicer oversight and master servicing management organization industry experienced multiple levels of internal controls and our intelligent response to the pandemic as well as our enterprise wide risk and compliance management framework.

Now, let's turn to slide nine and cover some highlights on our servicing revenue diversification opportunities.

We've put significant effort into diversifying our servicing revenue streams over the last two years. Our focus has been on growing owned servicing growing our sub servicing and taking advantage of our.

Ancillary or <unk> revenue streams in our business Ginnie Mae <unk> gain.

Gains at call right opportunities. These efforts have paid off as the percentage of our servicing revenue derived from the energy sub servicing agreement has been reduced by more than 50%. It's now just 17% of our revenues.

From a loan count perspective, the energy loans are down to 33% of the total as compared to 54% in third quarter of last year and the NRC loans also comprise about two thirds, 67% of our total nonperforming loans as of the third quarter of 2021.

E V O E B o's and call rates continued to be an opportunity for us we settled our planned call rights transaction in the third quarter involving seven deals and we're pleased with the results.

As of.

The third quarter of 2021, our call rights our owned call rights.

For approximately 121 deals and we estimate the near term opportunity for call rates that could potentially be actionable is about 30 to 40 deals.

Market appetite for seasoned non agency loans remained strong and there is sustained activity from other legacy non agency servicers.

Respect to our previously announced fourth quarter transaction, we received a request from the trustee Deutsche Bank.

Asking us to pause the cleanup calls they wanted to confirm that.

Loans are modified throughout 2022.

Now, let's turn to slide 10 to discuss our approach and sub servicing.

We believe we've built a best in class servicing platform for performing and special servicing with capacity for growth that can offer a compelling value proposition to existing and prospective clients.

During 2020 in 2021, we performed an end to end review of our platform and capabilities against what we believe our client expectations based on this review we believe our platform delivers best practice performance levels for clients across six CS of performance.

These include competency, putting the client first customer Centricity technology enabled capabilities.

Well staffed bank rate risk and compliance model and a strong value based culture that underpins everything we do.

We've made several investments in borrower and client facing technology to address the needs of clients and consumers.

And to streamline our business and improve the ability for consumer and client self service.

We can offer Swift onboarding responsive service to our clients and consumers and as we covered on pages seven and eight industry, leading operating performance.

We believe our operations can deliver superior total cost and service level performance versus our peers.

And we've been rewarded for the investments we've made in our platform, we secured $28 billion of sub servicing additions in the last 12 months, we secured $20 billion in New awards in the third quarter, and we have a $63 billion opportunity with our top 10 prospects and a potential prospect pipeline of $200 billion and growing.

With the closing of RMS as well, we are positioned to enter the $86 billion reverse mortgage servicing market. Once the integration is complete so while these opportunities do have a longer sales cycle I'm. Nonetheless, very excited about the opportunity we have here.

Now, let's turn to slide 11 to discuss our thoughts on the operating environment for 2022.

Yeah.

Generally this year industry volume levels continued to be very robust certainly as compared to historic levels of both forward and reverse we continue to deal with incredible interest rate volatility in August the 10 year Treasury rate was trading at 117 basis points by quarter and it was 153, it's now in the high 100 <unk>. So.

It's been it's been volatile we are seeing non parallel interest rate movements as well as mortgage treasury spread compression and discount margin volatility in reverse as well. These risks are not covered by our hedging program and we did feel the effects of this in the third quarter.

Jean will talk a little bit more about that later.

Consensus industry forecast is for rising rates and about a 28% average reduction in industry origination volumes. This is based upon the consensus of Fannie Mae Freddie Mac and MBA forecast that said 2022 projected volume levels are still relatively high compared to historic levels, especially in the 2000.

18 2019 timeframe.

Reverse mortgage endorsement volume remained strong and is expected to remain strong compared to last year.

In a contracting market, we would expect some continued pressure on originations margins until capacity excess capacity industry could be eliminated at that said margins were roughly stable in the third quarter.

With rising rates, we would expect increased servicing profitability and MSR values as payoffs and runoff portfolio runoff decreases.

And we also expect perhaps some M&A in bulk purchase opportunities may emerge as market participants consider exiting as the origination market contracts.

And we also expect to see the agencies buy box expand a bit with higher loan limits and support for first time and low to moderate income buyers.

To address the dynamic environment, we're focused on a few straightforward strategies prudent growth by expanding our client base products services and addressable markets.

Continuing to drive best in class operating performance to deliver superior value proposition to clients investors and consumers.

Providing a service experience that delivers on our commitments enhancing our competitiveness through scale and low cost.

Aggressively pursuing our sub servicing opportunity pipeline and expanding into reverse sub servicing and lastly, continuing to be prudent in bulk purchases through math and M&A opportunities to increase scale and capabilities.

Now, let's turn to slide 12 to discuss our operating objectives for the balance of 2021 and our initial thoughts on 2022.

By now you are familiar with our key operating objectives for 2021, and we're well on our way to <unk>.

Keeping our targets in each of the five categories. We believe we've got strong momentum and in our key operating objective framework will remain the same for 2022.

We are targeting over $100 billion in total owned servicing and Subservicing additions where.

We're targeting to maintain recapture rates over 30% with the long term objective of industry best practice levels by Investor type.

Continuous cost and process improvement is part of our DNA and we're driving based cost and variable cost productivity improvement to support our competitiveness retargeting roughly another one basis point reduction and servicing an overhead opex as a percent of <unk> from.

From third quarter 2021 levels.

Industry, leading operational execution and delivering on our commitments to clients borrowers and investors is a critical component of our value proposition. So this will continue to be a focus and emphasis for us in 2022 and beyond.

And for 2022, we're targeting about 50% growth in sub servicing additions and harvesting embedded Epo and call rights income to diversify and grow our revenue.

<unk> with our operating objectives. This year, we continue to target low double digit to mid teen after tax operating ROE in 2022, and with that I'll turn it over to June who will discuss our financial performance in more detail. Thank.

Thank you Glenn Please turn to slide 13, we reported $37 million and adjusted pre tax income and 32% and adjusted pretax ROE is.

This is the eighth consecutive quarter of positive adjusted pre tax income net.

Net income in the quarter was $22 million, including $27 million in unfavorable notables largely driven by MSR fair value changes from higher actual prepayments and modeled negative effects of basis risk, partially offset by higher market interest rates net of hedging.

We achieved 19% after tax GAAP Roe exceeding our low double digit to mid teen guidance.

Our earnings per share was $2 35, leading analysts consensus by over two times.

On the top right Bar chart, you can see that we're delivering on our growth objectives and cost leadership revenue increased 38% year over year, largely due to higher servicing fees on an additional $66 billion of new television and executing the call REIT transactions.

Operating expense as a percentage of average UCB was favorable year over year after absorbing costs to maintain capacity for both the new bulk volume reported in August and September.

Incurring temporary interim sub servicing expense on MSR bulk acquisitions, and as I mentioned previous quarters carrying excess costs during foreclosure moratoriums and expectation of borrower need.

Equity increased to $470 million and book value per share increased $2 to $51 per share.

Please turn to slide 14.

This slide demonstrates that our balanced business model is operating well with originations growth replenishing, our servicing portfolio more than offsetting runoff.

The replenishment rate in the quarter was 170%.

On the left side of the slide you can see that volume is up across all channels approximately 77% versus the same quarter last year.

Adjusted pre tax income was impacted by lower revaluation gains on MSR cash window and flow purchases.

And expected margin normalization.

You can see on the margins graph consumer direct margins increased slightly versus last quarter, but lower than this time last year.

Mix adjusted correspondent lending margins were relatively flat versus last quarter.

The adjustment in the second quarter correspondent margins is attributed to gains recognized in the second quarter on certain loans that were acquired under favorable circumstances.

Resulting in higher than market average margins for these loans.

Adjusting for these loans second quarter margins were consistent with the first quarter at approximately 12 basis points.

As Glenn mentioned, we're growing higher margin products channels and services, which we believe will help deflect margin pressure is industry volume levels contract.

On the right side of the slide you can see the results in our servicing segment from building scale.

Third quarter total servicing <unk> is $248 billion of $62 billion increase over the third quarter of 2020.

Sub servicing plus Nab <unk> and as you know we began sub servicing now this quarter doubled year over year, largely replacing the <unk> decline.

<unk> concentration dropped from 46% to 24% year over year.

We expect this trend to accelerate as we grow sub servicing for other clients in math.

Servicing adjusted pre tax income of $41 million was largely driven by higher servicing fees from higher <unk>.

Expanding servicing revenue with approximately $23 million and call right gains as well as cost leadership.

You saw earlier that servicing operating costs down three basis points year over year, and we expect continued improvement, which I'll show you on the next slide.

Please turn to slide 15.

This is our road map page, we told you last quarter that we are positioned for a step function change in profitability in the second half of the year and we delivered on this in the third quarter with GAAP earnings 19% Roe.

This is our operating framework for 2022, assuming a stable interest rate environment and no adverse changes in market conditions or legal and regulatory environment.

The pages broken down by our operating objectives in the origination servicing and corporate segments.

I'll provide a few highlights but please let me know if any of you want to review in more detail separately and I'd be happy to.

We reflect the full quarterly impact from the bulk transactions closed in June we talked about last quarter.

Flow MSR volume was redirected to <unk> in the third quarter, we continue to grow performing sub servicing which results in a mix shift to higher margin consumer direct and reverse channels.

We expect <unk> call rights and other revenue diversification in the range of 20% to $25 million.

And the segments continue to achieve productivity targets.

Now I'll turn it back over to Glenn.

Thanks, Jim and if you could all please turn to slide 16, a couple of comments just to wrap up before questions.

We had a great quarter delivered really strong financial performance.

Out of how the team is executing and we're excited about the opportunities ahead.

We're demonstrating a solid track record of delivering on our operational and financial commitments and continued development of our balanced and diversified business model.

You were focused on a few straightforward strategy to navigate this dynamic market environment prudent growth by expanding client base product services to expand addressable markets.

Superior value proposition to clients investors and consumers through best in class operating performance.

Providing a service experience that delivers on our commitments.

And enhancing our competitiveness through scale and low cost.

I have to thank and recognize our board of directors and global <unk> team for the hard work and enduring commitment to our success proud of what our team accomplished in the third quarter and very appreciative of all of their efforts.

And with that Laura lets open up the call for questions.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two chair move your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before.

Pressing the star keys, one moment, while we poll for questions.

Our first question comes from the line of Bauxite George with <unk>. You May proceed with your question.

Hey, everyone.

Yeah.

Just wanted to ask for.

Just about gain on sale trends, what you guys are seeing.

Kober by channel and then what Youre sort of expecting going into next year.

Sure Bose.

In.

In forward forward retail our consumer direct platform your channels, where we're roughly flat maybe up slightly and.

<unk> correspondent on the surface. It did look like margins came down youll see in our Q.

In our June presentation, there was type margins reflected down although in the second quarter. Yes, we did have an opportunistic purchase of a pool of loans that had an extraordinarily.

Large margin.

Embedded in them. So if you normalize out for that.

You know basically to Q4.

Forward correspondent margins were about 12 basis points <unk> was again about that 12 basis points range third quarter was about 10 basis points, so maybe a little bit of pressure.

But I think within the range of reasonableness don't get me wrong, it's competitive we fight for every <unk>.

Every deal with every customer so we've got to keep our pencil sharp, but it's been pretty consistent like that for the past.

Six months or so.

In reverse we're seeing a little bit of volatility.

When you look at our K, you'll see we had.

Discount margin.

The tail gains.

And that tends to move around a little bit moved around a little bit during the third quarter with the industry volatility I spoke about.

So those margins came down a little bit so generally again nothing out of line that we would expect to see in this environment and frankly relatively stable on a forward Todd.

Okay, great. Thanks, and then just on the corresponded you noted.

The mix shift.

More best efforts versus mandatory and can you just talk about what that implies like what are the margin differences. There you know how that could impact your margin outlook in correspondent.

Yeah June Q2 under addressed that Oh sure. So we are expecting the best effort to non delegated margins to two improved period over period.

What we reported last.

Last quarter in our deck is that the non delegated is about two times the mandatory corresponded margin and we expect to continue at that level.

Okay, great. Thanks, and then just one last one.

The comments you guys made on the Deutsche Bank and the call rights.

Just in terms of how that's playing into your expectation for call rights in the fourth quarter and next year.

Is that sort of pushing out some of the call rights into next year, just yeah, just how's that going to impact Q sort of operationally in terms of windows.

These are called.

Sure. So Bose, yes look we.

We agreed we agreed to cooperate with Deutsche Bank, We believe we calculate the call price correctly. We've done are consistent with our past practice, we've done it consistent with our prior dealings with Deutsche Bank, and frankly, very consistent with how under other industry.

<unk> been through one.

These legacy Pri.

Private calls performed our calculations it will push.

Push out our fourth quarter transact excuse me, our fourth quarter transactions. So.

We did agree to put that on hold so we do expect to push that it's going to be pushed into into into next year June do you have some just one thing to add is in Q2, we provided some guidance the EEO and call rights, we would achieve about $35 million to $40 million and actual to date. We're at about 49. So we don't expect the.

The call right the way to have an impact on our Q4 results.

Okay.

Hey, great. Thanks, a lot.

Our next question comes from the line of Marco Rodriguez with Stonegate Capital You May proceed with your question.

Good morning, everybody and thank you for taking my questions.

Hey, good morning, Mark.

Good morning, I was wondering are you guys seeing any increased competition in the reverse mortgage market just sort of given the favorable demographic outlook.

So mark the answer is yes, while market competition has increased we've been successful in increasing our market share over the past.

Two years, and we've delivered about 86% growth year over year in the third quarter and in total endorsement volume yeah. The RMS transaction will position ocwen as the only reverse originator issuer and direct servicer in the industry. We think this unique ability will allow us to capitalize.

On the demographics, the demographic outlook and.

And position us positions us very well as compared to competitors.

Got it.

That same kind of line of thinking here, maybe you can kind of broadly outline what differentiates you from your competitors.

Why do you actually think that youre going to be the winners in this industry.

Yeah look Mako I believe we're entering 2022 from a position of strength we are new.

We built a very high performing.

Correspondent consumer direct and reverse mortgage business with that said, we are a new entrant and originations and we believe we can generate growth by expanding our addressable market.

And we're doing that with expansion into higher margin products and services.

And growing our client base.

Our sales team has been very effective with the enterprise sales model.

Helping to grow our sub servicing and.

And we have.

Demonstrate terrific performance vis vis the MBA and Moody's reported statistics across multiple dimensions of our servicing operating performance.

We believe we've got a technology enabled controlled.

Scalable servicing platform that delivers.

Leading operating and cost performance and as I, just mentioned with the acquisition of the RMS reverse servicing platform. We are the only end to end reverse mortgage provider give.

Giving us access to an estimated $6 billion.

Potentially reverse sub servicing opportunities.

And lastly, you'll look we've got a relationship a strategic alliance with.

Financial and capital partners to help support our business as we go forward. So I'm excited about how we're positioned and looking forward to competing effectively in 2022.

Okay. That's a great great information there any plans to improve your brand awareness going forward.

Yes, Marco look that.

I'll say more about this later, but we are such a different company today than when we were.

Just a few short years ago. So we are rethinking the company brand is something we're considering.

We've transformed our business is now a balanced business model, we do both performing and special it is not quite aqua and its not quite PHH. We really are something completely different. So we do want to ensure our brand reflects who we are today and our vision. So we're evaluating.

Our potential opportunities here.

Got it. Thank you very much I appreciate your time.

Yes, Sir thank you.

Our next question comes from the line of.

<unk> <unk> with B Riley you May proceed with your question.

Thanks for taking my question can you.

Glenn and the team really turnaround the story here.

Question is on capital.

The type of capital the guidance with the the one that I realised sub servicing because they require much capital, but what are your options going to pursue new capital to talk a little bit about what might be available and if you'd look to that at some point in 'twenty two.

Sure. So look we are a first and foremost Matt. Thank you for your kind words and your comments the team really appreciates it.

Look we are focused on driving prudent sensible growth in the business.

June's laid out the framework we have for the business. We believe we believe we have the capital base to support that operating framework for 2022.

We've been very successful in capital deployment through math, so we've deployed about 50% of the targeted investment commitment for math.

<unk> have really enjoyed the working relationship with Oaktree, they're great partners.

C extent map performs well, we certainly wouldn't be shy about going too.

Exploring with Oaktree, expanding madness capability or capacity there.

So look if you know if the opportunity presents itself for something that is special for our business and can really drive extraordinary growth in extraordinary performance, assuming it's in the best interest of our shareholders. We would evaluate options to take advantage of the growth for the business and explore different mechanisms on raising cash.

If the situation permits and again, if it makes sense for shareholders.

No. Thanks for that and that was my question on <unk>.

You'd look to expand and it sounds like it's off to a great start we look forward to hearing more about that but on.

Talked to rating agencies in terms of capabilities.

Preferred work as a peer of yours in the market that now all of that is that has that opened for discussion or is it something that needs a lot of work with the rating agencies and so forth.

You'll look we've been in touch with we always stay in touch with the rating agencies and with our our banking partners so to speak investment banking partners.

Our preferred is something we would consider again, it's a way to be to not dilute common shareholders' rights. So that makes a lot of sense.

Pricing is attractive I know a number of our competitors have issued preferred at attractive prices. So it definitely is something we would consider.

We are talking to the rating agencies every quarter with our financial performance and reminding them of how strong the business performances.

Yes, they gave us great remarks, great comments on the servicing servicer performance ratings, but for the total corporate ratings again, we are continuing to pound the message home.

That we are a different company, we are driving superior performance in our business and yeah.

We certainly would consider all options and preferred being one of them too.

Take advantage of growth opportunities that they present themselves.

So we really look forward, we really really appreciate it and look forward to hearing more about it and then on that topic on the bulk market.

Read the industry reports at the ballpark its opening back up you guys are right in the mix.

Talk a little bit about just the dynamics that are going on pricing, whether or not that's going to accelerate as we get potentially consolidation in the mortgage industry.

So look I think it will it's one of the things I mentioned in my overview of the industry as rates back up.

A lot of originators have capped.

MSR on their balance sheet and cash margins in the origination space continues to compress at this part of the market cycle people who have held.

Msr's tend to sell MSR. So we are seeing a bit of a pickup in the bulk market look I think pricing has tightened competitive I think people are leaning into prepayment speed assumptions.

Interest rates are at record lows.

The expectation is for rates to continue to go up.

Personally I believe we're going to see speeds if rates go up the way the industry is predicting speeds will be the slowest probably that the industry has ever seen.

And I don't think I'm unique in sharing our perspective, I think a lot of other share that perspective so.

I expect to see some increase in bulk I expect it's going to be competitive I think people will be leaning into speeds.

And we're going to be prudent in our approach and work with our partners Oaktree to prudently acquire business that delivers the appropriate returns from Avon for Oaktree and our shareholders.

Glenn I appreciate it's good to see Ocwen back in the mix.

Thanks, Matt appreciate it.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, one moment, while we poll for questions.

Our next question comes from the line of drew Mackintosh with Mackintosh Investor Relations. You May proceed with your question.

Hi, guys my questions have actually already been answered, but a great job on the quarter.

Thank you I appreciate it.

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. Glen Messina for closing remarks.

Thanks, Laura.

To wrap up.

I just completed three years with Ocwen in October and looking back from where we came the transformation is incredible.

<unk> 2019.

When I joined the company with the amount of challenges in front of US we were digging out of a <unk> 2018 pro forma annualized adjusted pre tax loss of over $300 million for Ocwen and PHH combined with.

We faced a large scale integration that affected every function in the business because we have to convert 1 million loans onto a new servicing system enterprise wide technology and telephony modernization.

Cutting our cost structure almost in half massive single client concentration risk building sustainable origination capabilities from scratch.

Inadequate recapture performance refinancing our capital structure addressing legacy regulatory matters. It was just a mountain of things that this team had to overcome and here. We are today I believe we're entering 2022 from a position of strength, we've delivered eight consecutive quarters of positive adjusted pre tax income we are winning in our target market.

We're delivering on our growth and return objectives, and our origination and servicing platforms have capacity for growth and strong operating leverage.

Our multichannel origination platform is focused on expanding our addressable market through new products and services and expanding our client base, our servicing platform delivers industry, leading performance and multiple loan types has a highly competitive cost structure and we are relentless in our pursuit of delivering on our commitments.

We modernized our technology platform with proprietary centers of excellence driving automation and lean process reengineering and I just couldn't be more excited about our potential for 2022 and really couldnt be.

Prouder more proud of the Ocwen team and just so thankful for what they've accomplished and helped us doing the business. So thank you for your continued interest in Ocwen and I look forward to speaking with you on the next quarter business update.

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

Yeah.

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Yes.

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I was reminded this conference is being recorded I would now like to turn this conference over to your host Mr. Diego Aqua Alien Senior Vice President Corporate communications. Thank you Sir you may begin.

Good morning, and thank you for joining us Rockland third quarter 2021 earnings call. Please note that our third quarter earnings release and slide presentation are available on our website.

Speaking on the call will be Ocwen, Chief Executive Officer, Glen Messina, and Chief Financial Officer, Jim Campbell.

As a reminder, the presentation. Our comments today may contain forward looking statements made pursuant to the safe Harbor provisions of the Federal Securities laws. These forward looking statements maybe identified by reference to a future period or by use of forward looking terminology and address matters that are to different degrees uncertain.

You should bear this uncertainty in mind, when considering such statements and should not place undue reliance on such statements.

Forward looking statements involve assumptions risks and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2020, and our current quarterly report since such date in the past actual results have different materially from those suggested by forward looking statements and this may happen again.

In addition, the presentation our comments contain references to non-GAAP financial measures such as adjusted pretax income and adjusted expenses among others we.

We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition and an alternate way to view certain aspects of our business that is instructive non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States.

A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures may be found in the press release and the appendix to the investor presentation.

Now I will turn the call over to Glen Messina.

Thanks, Nicole good morning, everyone and thanks for joining us we're looking forward to sharing our progress with you. This morning. So we'll get started with some highlights for the third quarter. If you could please turn to slide four.

I'm really proud of what our team has accomplished and really appreciate all their hard work, we delivered strong GAAP net income and adjusted pre tax income and ROE exceeded guidance largely due to strong top line performance I believe this demonstrates the strong operating leverage we have in our business.

This was our eighth consecutive quarter of positive adjusted pre tax income you.

We also closed our plans call rights transaction for the third quarter and have deployed more than 50% of maps investment commitment.

Yeah October as well we had some milestones so in October we closed our acquisition of the RMS reverse mortgage servicing platform and also in October I'm pleased to announce that we exceeded our recapture rate objective.

We continue to make solid progress on our actions to expand our addressable market and we're growing and higher margin channel services and products, giving us strong momentum.

The RMS platform acquisition gives us access to a potential $86 billion of reverse mortgage sub servicing market, which is an exciting new growth opportunity for us.

And finally, we continue to navigate a volatile and unpredictable environment and I'll talk a bit more about that later.

Turn to slide five for some highlights on originations.

Originations again delivered really solid performance against our operating objectives, we closed $20 billion in total servicing additions in the third quarter with very strong performance in sub servicing conditions.

With the closing of the PCB acquisition correspondent volume doubled versus last quarter. The <unk> team is off to a really strong start and I'm. So glad to have them with us and appreciate the contributions are making to the business.

We're seeing great results from our actions to grow sub servicing we secured $20 billion in New awards and expect this volume to commence boarding in the fourth quarter.

Our sub servicing pipeline has never been more robust our top 10 prospects represent roughly $63 billion in opportunity and our total prospect pipeline has grown to slightly over $200 billion. We're excited about this activity level and believe we have a very compelling value proposition I'll spend a little bit more time on our sub servicing.

Our value prop a little bit later.

Our enterprise sales approach and the TCP acquisition have allowed us to grow our base of sellers to 700 at the end of Q3, that's roughly two five times over third quarter last year, and we're continuing to grow non.

Non delegated and best efforts delivery services were rolled out as expected and we're seeing steady adoption as well our Ginnie Mae product mix is improving its up to about 10% of total originations excluding co issue, we're still well below industry mix in Ginnie Mae. So I believe we have room for improvement here.

We recently attended the MBA mortgage Bankers Association annual convention and client attendance at our meeting room exceeded our expectations and our response to the quality of our team and operating execution was very positive. So many thanks to all our correspondent co issue and sub servicing clients for choosing us as one of their key business partners.

We look forward to serving them and supporting new clients as we expand our addressable market.

Percent.

Which is which is a milestone for us and a huge congratulations to our recapture team. We believe we are on track to meet our 30% refinanced recapture rate objectives in the fourth quarter.

Overall, our originations team is making terrific progress against their objectives for this year and Theyre energized for the fourth quarter and for 2022.

Let's turn to slide six for a progress update on our margin and market expansion actions.

Both forward and reverse delivered record retail funding and lock volumes in October.

Total reverse originations were up 86% year over year team.

Team is executing very well our reverse market share is up from.

Six 5% in third quarter 2022, 7% in third quarter of 2021, and this compares to about four 2% in the third quarter of 2019, so great progress by the team growing our share.

And our business.

And forward correspondent, we have meaningful opportunity to grow our best efforts and non delegated delivery services. We our team is focused there and we launched those recently here today. These.

These services are just a fraction of the levels, we see across the industry generally our long term goal is to get best effort to non delegated to roughly 25% to 30% of volume.

And about 40% to 50% of our gain on sale revenues.

Let's turn to slide seven to cover some highlights on our servicing business.

And servicing continuing to improve cost and customer experience are the key objectives for us and the team is performing really well.

For 2021.

Technology is a big driver for us and our technology agenda has a three part focus that's reduced cost improve execution and improve the customer experience.

We believe our actions to improve client borrower and investor experience are critical elements to support our growth and recapture rate objectives over the long run and with technology is the enabler, we can reduce cost and improve execution at the same time.

In terms of scale, we've increased our total servicing <unk> about 33% versus the third quarter of 2020, and our percentage of Prime servicing is now 70% of our total servicing <unk>.

We believe we have tremendous operating leverage in our servicing platform and we're focused on increasing scale by growing our own servicing and sub servicing.

Now, let's turn to slide eight and look at some of our operating execution and servicing.

Yeah.

Again here the team continues to perform very well in several areas average speed of answer and call abandonment rate continued to outperform the industry average as reported by the MBA. Our average speed of answer is just a fraction of the MBA average and abandonment rates are roughly half the industry average.

Borrowers with an agency loan who exit forbearance with the reinstatement or loss mitigation solution in place.

Between September 2020 in June 2021, roughly 93% of our borrowers who exited forbearance had a reinstatement or loss mitigation plan in place and that compares to the industry average of 83% and what that means is about 7% of our borrowers on forbearance have exited without a reinstatement plan our loss mitigation solution versus <unk>.

Over 17% for the industry.

NPS is up six points over third quarter of 2020, and Thats, even with the impact of boarding over 280000 loans in the third quarter onto our servicing platform and helping over 4700 borrowers exit forbearance.

Also worth, noting Moody's and S&P upgraded our servicer quality assessment as master servicer, along with Fitch and along with Fitch, All three affirmed our servicer ratings.

Some of the key strengths noted by the agencies, where our reporting and Rebidding processes proactive servicer oversight in master servicing management organization industry experienced multiple levels of internal controls and our intelligent response to the pandemic as well as our enterprise wide risk and compliance management framework.

Now, let's turn to slide nine and cover some highlights on our servicing revenue diversification opportunities.

We've put significant effort into diversifying our servicing revenue streams over the last two years. Our focus has been on growing owned servicing growing our sub servicing and taking advantage of.

Ancillary or transit revenue streams in our business Ginnie Mae <unk>.

Gains at call rate opportunities.

These efforts have paid off as the percentage of our servicing revenue derived from the NRC sub servicing agreement has been reduced by more than 50%. It's now just 17% of our revenues from our loan count perspective, the energy loans are down to 33% of the total as compared to 54% in third quarter of last year.

The NRC loans also comprise about two thirds, 67% of our total nonperforming loans as of the third quarter of 2021.

Epo <unk> and call rates continued to be an opportunity for us we settled our planned call rights transaction in the third quarter involving seven deals and we're pleased with the results.

As of.

The third quarter of 2021, our call rights our own call rights for approximately 121 deals and we estimate the near term opportunity for call rates that could potentially be actionable is about 30% to 40 deals.

<unk> appetite for seasoned non agency loans remains strong and there is sustained activity from other legacy non agency servicers.

With respect to our previously announced fourth quarter transaction, we received a request from the trustee of Deutsche Bank.

Asking us to pause the cleanup calls they wanted to confirm the call price met the requirements of underlying <unk>.

We believe the call price, we've calculated is consistent with the applicable PSA has in our course of conduct with Deutsche Bank and relative relevant third parties.

And with established industry practice, we intend to work with Deutsche Bank and their analysis, including of Deutsche Bank choose to seek input from our core competence jurisdiction. Meanwhile, we have agreed to pause or to allow that analysis to take place.

Regarding <unk>, we realized $12 $3 million in Epo gains year to date third quarter with loans now emerging from forbearance, we expect to see an increase.

In EDI Epo activity as loans are modified throughout 2022.

Now, let's turn to slide 10 to discuss our approach and sub servicing.

During 2020 in 2021, we performed an end to end review of our platform and capabilities against what we believe our client expectations.

Based on this review, we believe our platform delivers best practice performance levels for clients across six six of performance.

These include competency, putting the client first customer Centricity technology enabled capabilities.

Staffed bank, great risk and compliance model and a strong value based culture that underpins everything we do.

We've made several investments in borrower and client facing technology to address the needs of clients and consumers and to streamline our business and improve the ability for consumer and client self service.

We can offer Swift onboarding responsive service to our clients and consumers and as we covered on pages seven and eight industry, leading operating performance.

We believe our operations can deliver superior total cost and service level performance versus our peers and.

And we've been rewarded for the investments we've made in our platform. We have secured $28 billion of sub servicing additions in the last 12 months, we secured $20 billion in New awards in the third quarter, and we have a $63 billion opportunity with our top 10 prospects and a potential prospect pipeline of $200 billion and growing.

Now, let's turn to slide 11 to discuss our thoughts on the operating environment for 2022.

So it's been it's been volatile we are seeing non parallel interest rate movements as well as mortgage treasury spread compression and discount margin volatility in reverse as well. These risks are not covered by our hedging program and we did feel the effects of this in the third quarter.

John will talk a little bit more about that later.

<unk> 2019 timeframe.

Reverse mortgage endorsement volume remained strong and is expected to remain strong compared to last year.

With rising rates, we would expect increased servicing profitability and MSR values as payoffs and runoff portfolio runoff decreases.

And we also expect perhaps some M&A in bulk purchase opportunities may emerge as market participants consider exiting as the origination market contracts.

And we also expect to see the agencies buy box expand a bit with higher loan limits and support for first time in low to moderate income buyers.

To address the dynamic environment, we are focused on a few straightforward strategies prudent growth by expanding our client base product services and addressable markets.

Continuing to drive best in class operating performance to deliver superior value proposition to clients investors and consumers.

Providing a service experience that delivers on our commitments.

Enhancing our competitiveness through scale and low cost agree.

Aggressively pursuing our sub servicing opportunity pipeline and expanding into reverse sub servicing.

And lastly, continuing to be prudent in bulk purchases through math and M&A opportunities to increase scale and capabilities.

Now, let's turn to slide 12 to discuss our operating objectives for the balance of 2021 and our initial thoughts on 2022.

By now you are familiar with our key operating objectives for 2021, and we're well on our way too.

Achieving our targets in each of the five categories. We believe we've got strong momentum.

And our key operating effective framework will remain the same for 2022.

We are targeting over $100 billion in total owned servicing and Subservicing additions.

We're targeting to maintain recapture rates over 30% with the long term objective of industry best practice levels by Investor type.

Continuous cost and process improvement is part of our DNA and we're driving based cost and variable cost productivity improvement to support our competitiveness.

Targeting roughly another one basis point reduction and servicing an overhead opex as a percentage of <unk> from third quarter 2021 levels.

And for 2022, we're targeting about 50% growth in sub servicing additions and harvesting embedded <unk> and call rights income to diversify and grow our revenue.

Consistent with our operating objectives. This year, we continue to target low double digit to mid teen after tax operating ROE in 2022, and with that I'll turn it over to June who will discuss our financial performance in more detail.

Thank you Glenn Please turn to slide 13, we reported $37 million and adjusted pre tax income and 32% and adjusted pretax ROE is.

This is the eighth consecutive quarter of positive adjusted pre tax income.

Net income in the quarter was $22 million, including $27 million in unfavorable notables largely driven by MSR fair value changes from higher actual prepayments than modeled negative effects of basis risk, partially offset by higher market interest rates net of hedging.

We achieved 19% after tax GAAP Roe exceeding our low double digit mid teen guidance.

Our earnings per share was $2 35, speeding analysts consensus by over two times.

Operating expense as a percentage of average <unk> was favorable year over year after absorbing cost to maintain capacity for both the new bulk volume reported in August and September.

Incurring temporary interim sub servicing expense on MSR bulk acquisitions, and as I mentioned previous quarters carrying excess costs during foreclosure moratoriums and expectation of borrower need.

Equity increased to $470 million and book value per share increased $2 to $51 per share.

Please turn to slide 14.

This slide demonstrates that our balanced business model is operating well with originations growth replenishing, our servicing portfolio more than offsetting runoff.

The replenishment rate in the quarter was 170%.

On the left side of the slide you can see that volume is up across all channels approximately 77% versus the same quarter last year.

Adjusted pre tax income was impacted by lower revaluation gains on MSR cash window and flow purchases and expected margin normalization.

You can see on the margins graph consumer direct margins increased slightly versus last quarter, but lower than this time last year.

Mix adjusted correspondent lending margins were relatively flat versus last quarter.

The adjustment in the second quarter correspondent margins is attributed to gains recognized in the second quarter on certain loans that were acquired under favorable circumstances.

Resulting in higher than market average margins for these loans.

Adjusting for these loans second quarter margins were consistent with the first quarter at approximately 12 basis points.

As Glenn mentioned, we're growing higher margin products channels and services, which we believe will help deflect margin pressure is industry volume levels contract.

On the right side of the slide you can see the results in our servicing segment from building scale.

Third quarter total servicing UBB is $248 billion to $62 billion increase over the third quarter of 2020.

Sub servicing plus Nab <unk> and as you know we began sub servicing now this quarter doubled year over year, largely replacing the <unk> decline.

And ours, the UPC concentration dropped from 46% to 24% year over year.

We expect this trend to accelerate as we grow sub servicing for other clients in math.

Servicing adjusted pre tax income of $41 million was largely driven by higher servicing fees from higher <unk>.

Expanding servicing revenue with approximately $23 million in call rate gains as well as cost leadership.

You saw earlier that servicing operating costs down three basis points year over year, and we expect continued improvement, which I'll show you on the next slide.

Please turn to slide 15.

This is our roadmap page, we told you last quarter that we are positioned for a step function change in profitability in the second half of the year and we delivered on this in the third quarter with GAAP earnings and 19% Roe.

This is our operating framework for 2022, assuming a stable interest rate environment and no adverse changes in market conditions or legal and regulatory environment.

The pages broken down by our operating objectives in the origination servicing and corporate segments.

I'll provide a few highlights but please let me know if any of you want to review in more detail separately and I'd be happy to.

We reflect the full quarterly impact from the bulk transactions closed in June we talked about last quarter.

Flow MSR volume was redirected to <unk> in the third quarter, and we continue to grow performing sub servicing which results in a mix shift to higher margin consumer direct and reverse channels.