Q4 2021 Home Point Capital Inc Earnings Call
Good morning, and welcome to home point Capital's fourth quarter, 2021 financial results 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.
Please go to the IR website to obtain in the earnings materials.
I will now turn the call over to Ginger Wilcox head of Investor Relations at home point capital. Thank you you may begin.
Thank you operator, welcome to our fourth quarter 2021 earnings call. Joining me. This morning are Willy Niman, 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 in the event 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 quite as 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 result.
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 figure in <unk> earnings release, which is available on the company's website.
I'd now like to turn the call over to Willie Newman, President and Chief Executive Officer.
Thanks, Ginger and good morning, everyone.
During my prepared remarks, I'm going to briefly review our results for the fourth quarter and year ended December 31 2021.
I'll also talk about the key focus areas for our business in 2022, as we navigate through what we believe will be the most challenging part of the mortgage cycle.
After that Mark will provide more details on our results as well as insights into what we're seeing so far in the first quarter. We'll then open up the call to take your questions.
In the fourth quarter, we generated funded origination volume of $21 billion compared to $24 billion in the fourth quarter of 2020 and $21 billion in the third quarter of 2021.
For the full year 2021, we generated record origination volume of 96 billion, which is a 55% increase over 2020.
Origination volume was propelled by the strong finish we made to our partner base throughout the year.
In the fourth quarter, we had 560, new broker partners and in total for 2021, our third party partner relationships increased by nearly 50%.
We ended the fourth quarter with more than 8000 broker partners and 676 correspondent partners are.
Our new broker partners represent a significant opportunity and provide us with a springboard for market share growth in 2022.
Looking at our servicing portfolio, we ended the fourth quarter with nearly 426000 customers, which is up 22% year over year and down 1% from the third quarter.
As Mark will discuss shortly during the fourth quarter, we completed a ginnie Mae MSR sale with approximately 175 million in proceeds.
Even with MSR sales, our total balances grew 45% to 128 billion during 2021.
As discussed last quarter, we are evolving our servicing strategy by more actively managing and strategically monetizing the value of our MSR assets.
The liquidity generated will be used to strengthen our balance sheet by reducing outstanding debt and for investment in our partner experience.
From a financial perspective in 2021, and we recorded total net revenue of $962 million and net income of $166 million.
Notably even with the challenges presented in 2021, and we generated a 21% return on equity comfortably above our 15% minimum target.
In the fourth quarter, we generated total net revenue of $181 million and net income of $19 million or 14 cents per diluted share.
As we have discussed previously there has been significant pressure on margins, particularly in the wholesale channel.
Additionally, interest rates are rising which has put pressure on mortgage origination volume.
Offset some of that margin pressure, we continued to accelerate our efforts to deploy new technology that will lower costs and improve the efficiency of our operations in the fourth quarter, we made meaningful progress in expense management with a $23 million reduction in a direct origination costs versus the prior quarter.
Looking at 2020 to the mortgage industry is entering a challenging part of the mortgage cycle with higher rates, leading to a shrinking refinance market while industry capacity remains at an all time high.
We are focused on navigating through this downturn, while continuing to enable future growth.
As such these are home points priorities liquor.
Liquidity, we have thoroughly evaluated our balance sheet and are monetizing non strategic assets at attractive levels.
As previously noted these proceeds will be primarily used to reduce leverage and improve our financial ratios and create headroom for future growth.
Rigorous cost management, we have continued to reduce our direct cost to originate.
In addition to our recently announced relationship with service, Matt We expect the transition of our servicing platform to a lower variable expense construct. This also provides flexibility for active MSR management.
Additionally, we are in the process of executing a zero based cost review of our corporate functions.
Finally, we will continue to invest in the most significant growth opportunities and be well positioned to grow our wholesale market share. We strongly believe that efficiency is driven by the broker wholesale lender partnership will accelerate market share growth in the channel.
With regards to liquidity, we have agreements in place to sell Msr's and other non strategic assets, which are expected to generate proceeds in excess of $700 million.
These sales are anticipated to close in the first and second quarters of 2022.
On the expense side, we have been aggressively managing costs and origination since early 2021 in a sense the competitive driven dislocation in wholesale benefited us and then it forced us to look closely at cost before the overall market started the contract. This gave us a head start and we intend on leveraging that momentum as others are just starting to cost.
Management process.
Specific to servicing as noted we.
We have entered into an agreement with serviceman to manage our servicing operations servicing is very much a scale business and as we transitioned to active MSR management. It became evident that the most effective way to get the advantages of scale was to partner with a like minded operator.
For home point, the result is lower and variable costs with the benefits of a growing platform investing in capabilities.
Additionally service Mac will take under servicing associates, which will both enable the transition and provide for continuity with our customers and partners.
While we believe the environment requires what may be considered defensive actions, we fully intend on continuing to play offense, where we believe the greatest opportunities lie for us that means wholesale.
As we've seen in previous cycles, including 2018, and 2019, a purchase centric origination market creates enormous opportunity for mortgage brokers in the wholesale channel because of the inherent cost advantages created by the alignment between brokers and wholesale lenders such as home point.
This in turn drives more loan officers to brokerages, which fuels market share growth in the wholesale segment.
According to select 2020 hummed of data the rates and fees offered to consumers through the top 10 wholesale lenders as compared to the top 10 retail lenders resulted in a $2600 average benefit to consumers.
Our recent securitization data is supportive of this advantage for consumers ongoing. This is a compelling benefit that would become even more valuable as interest rates rise and affordability increasingly becomes an issue.
The last time interest rates rose materially starting in 2018, the number of loan officers journey brokerages increased by 28% in the following year, we expect an even greater rate of growth in 2022.
And I'll point, we have strategically built our business for this type of cycle with our focus on the wholesale channel.
Mortgage brokers have strong relationships with local real estate professionals in a partnership with wholesale lenders like home point can provide a better experience for the consumer as rates go up consumer desire for the lowest possible interest rates closing costs and fees will be even stronger which brokers are best positioned to deliver.
In addition, the transition of our servicing operation to service, Matt will enable the redeployment of technology and process resources to support growth of the wholesale channel, including expanding product offerings and enhancing the partner experience.
We are especially focused on growing wallet share from the over 8000 partners. We are already engaged with.
Even considering widely expected contraction in the overall mortgage market, we continue to navigate through the competitive environment is one of the top mortgage lenders in the country our position as a leader in wholesale lending puts us in great position to both drive and leverage growth in the channel in summary, we will continue to build on the strengths of our flexible business model to.
Protect and ultimately grow our book value with that I'd like to turn the call over to Mark.
Thanks, Willy and good morning, everyone.
Starting with slide five of the earnings presentation as Willie noted 2021 was a record setting year for on point with loan volumes totaling $96 billion.
No doubt that in the previous two years, we've been the beneficiary of favorable market conditions and with the financial and process related strides. We've made we have built a solid foundation from which we can continue to execute on our long term strategy.
Even as interest rates began ticking upward and margins compressed in the fourth quarter, we continued to deliver strong performance across key origination and servicing metrics.
In addition, we have included a return on equity results for the full year of 2021, we showed a return on equity of 21%.
Turning to slide six we've provided a summary of our quarterly and annual financial results.
Total net revenue in the fourth quarter of $181 million compared to $275 million in the third quarter of 2021 and $454 million in the fourth quarter of 2020.
Our total expenses of 152 million in the fourth quarter of 2021 improved 32% versus the fourth quarter of 2020 and were 13% lower compared to the third quarter of 2021 due to our continued efficiency initiatives.
The sequential quarter improvement in expenses was due to reductions of 13% in the origination segment direct expenses, 15% in corporate expenses and 9% in servicing segment direct expenses.
We generated net income of $19 million in the fourth quarter of 2021 compared to net income of $184 million year over year and compared to net income of $71 million in the third quarter of 2021.
On slide seven we have included a quarterly breakdown of our funded origination volume by channel for the last five quarters.
In aggregate, we generated $21 billion of volume from FERC in the fourth quarter of 2021, and as mentioned previously 96 billion for the full year.
Consistent with our overall strategy of wholesale channel primarily drove our origination volume this quarter.
Slide eight includes a snapshot of our origination segment results for.
Origination segment revenue of $103 million in the fourth quarter of 2021 compared to $456 million year over year and $184 million in the third quarter of 2021.
Gain on sale margin attributable to channels before giving effect to the impact of capital markets activity was 59 basis points in the fourth quarter of 2021 versus 177 basis points in the fourth quarter of 2020, and 73 basis points in the third quarter of 2021.
The originations segment contribution margin was $2 million in the fourth quarter of 2021 compares to $304 million in the fourth quarter of 2020 and $67 million in the third quarter of 2021.
At the end of the fourth quarter of 2021, our total third party partner relationships grew by 45% year over year to nearly 8700, which represents an increase of over 2700 net new relationships over the last 12 months and 584 net new relationships in the last quarter.
On slide nine we have provided a snapshot of our servicing segment financial results.
The number of customers in our servicing portfolio was nearly 426000 at the end of the fourth quarter of 2021.
A small reduction from the third quarter due to the sale of the Ginnie Mae servicing portfolio I will discuss in a moment.
The servicing portfolio U P. B surpassed 128 billion at the end of the fourth quarter of 2021, rising 45% year over year and up 2% compared to the third quarter of 2021.
Similar to last quarter, we saw a slowdown in prepayments during the fourth quarter, which is reflected in the decline and the change in MSR fair value from amortization.
Loan servicing fees of nearly $84 million in the fourth quarter of 2021 increased 54% from the fourth quarter of 2020, driven by the growth in our servicing portfolio and decreased 9% from the third quarter of 2021 due to the Ginnie Mae MSR sale.
Before including the impact of the Mark to market fair value of our MSR asset net of hedging the servicing segment generated what we refer to as an adjusted contribution margin a positive $31 million, which was an improvement from negative $34 million in the year ago quarter and from 9 million in the third quarter of 2020.
Servicing segment contribution margin for the fourth quarter of 2021 with $74 million compared to a negative $17 million in the fourth quarter of 2020 and positive 86 million in the third quarter of 2021.
Our 2021 fourth quarter contribution margin benefited from a $43 million increase in the mark to market fair value net of hedge of our MSR asset due primarily to an increase in interest rates during the quarter.
As Willy mentioned, the sale of MSR and non strategic assets, along with the recently announced servicing relationship with Servicemaster are examples of our ongoing strategy to monetize nonstrategic assets and manage costs.
During the fourth quarter, we completed a ginnie Mae MSR sale with an aggregate <unk> of approximately $13 1 billion, which represented approximately 77% of our Ginnie Mae MSR portfolio as of September 32021.
The total purchase price for the servicing rights was approximately $175 million.
With the MSR sales, we have excess capacity in our servicing operations, which would ultimately have had a notable impact on our cost per loan.
By partnering with Servicemaster and taking advantage of their scale, we expect to transition our servicing platform to a lower variable cost and provide additional flexibility to manage the MSR asset.
This strategic move also enables us to redeploy resources to support growth in our home points origination channels, including expanding product offerings and enhancing the broker partner experience.
Turning to slide 10, we have included a summary balance sheet, which highlights our capitalization and liquidity profile.
At the end of the fourth quarter of 2021, we had $555 million of available liquidity, while our total assets stood at $7 billion and our book value was $777 million or.
Our total warehouse capacity remains at seven 5 billion as of December 31st.
Some point Capital's board of directors has declared a cash dividend of <unk> per share for the fourth quarter of 2021 payable to shareholders of record as of March 10th.
It has also authorized a stock repurchase program.
The company May repurchase up to a total of $8 million of its issued and outstanding common stock.
The stock repurchase program expires on December 31 of 2022.
Before I finish my prepared remarks, I would like to briefly discuss our financial outlook.
As we look at the first quarter of 2022, we are focusing on improving margins.
This may result in a greater degree of variance on production. We are also taking steps to protect our book value through effective cost management, which will benefit us in all rate environments.
In the first quarter of 2022, we expect to fund between 12 and $15 billion with margins in the 60 to 70 basis point range.
With regard to our balance sheet as Willie noted we have agreements in place to sell non strategic assets.
These asset sales give us a path towards a corporate debt to TCE leverage ratio target of one times.
As to origination volume, we expect to benefit from expanded product offerings as well as benefit from the expansion and the new partner base, we established last year.
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.
Thank you.
At this time, we'll be conducting a question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
Press Star two if you'd like to them will be a question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing starkey.
Please limit to one question and one follow up.
Our first question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.
Thanks, I was hoping just talk more about the strategic non strategic asset sales.
$775 million.
Of the stake of Longbridge and included in that total.
Hey, good morning, its Willy yes. It is so the longer stake and the primarily the rest of it at this point our MSR assets.
And just on Longbridge can can you just tell us where that was marked at year end just to give us a frame of reference of $75 million.
L price.
I'll turn it to Mark.
Sure so.
It was marked at a it was.
Got it about.
About $62 million is where it was marked up to it.
Month end.
Got it so you'll have a.
Uh huh.
If you look at our yeah. If you go if you go to our balance sheet Youll see assets held for sale broken out separately, because we know we have the longbridge sale and that would be the longbridge stake at $63 seven actually.
Got it and then I guess the remaining MSR sales alright, just one can you talk about what steps you would look to to repay and then too.
Just as you're thinking about those sales how do you think about balancing the trade off of the cash flows from those servicing on the long term versus kind of.
The immediate liquidity it gives you.
Sure.
I'll take the first or the second part first which is.
If you look at what we're selling and it just because the balance afterwards, obviously, we've had a run up in values as well. So we'll still have $1 billion MSR $1 billion MSR asset after the sales and so we feel like well you will have sufficient kind of ban I'll turn them out for me.
Revenue slash cashless standpoint from the servicing.
Mark you can talk about the debt sure as for the the use of the proceeds will be using it to pay down the debt related to our MSR facility.
And the reason we think that's a good ideas because that gives us liquidity that we can redraw as we to willies point to add more MSR through new production, we'll have the ability to use that facility and and continue to use that to fund our MSR growth and you know should we choose to strategically sell MSR. Then we would then pay that down so it becomes kind of a working capital.
In that respect.
Thank you.
Our next question comes from the line of Kevin Barker with Piper Sandler. Please proceed with your question.
Good morning.
Could you outline.
The anticipated Kate.
Cadence of MSR sales is that all going to happen here in the near term or is that going to happen over a few quarters to get to that $1 billion balance number.
Hey, Kevin Good morning, it's Willie.
That will happen in this quarter and the next quarter.
700 million that we've outlined.
Okay, and then those have all been mark to market fair value at this point right. So real no big gain or loss on that is that right.
Yeah, Yeah go ahead Mark.
No that would be right that it's basically going to be at fair value.
So rates went up quite a bit in the first quarter do you what's the.
How much of your I mean, how much is your MSR marked up quarter to date.
Just given the move in rates so far.
Right.
Mark do you want to.
Sure Yeah, that's typically something we disclose and Furthermore, whatever answer I give you today will be wrong tomorrow, given what's happening with rates right. Now so stay tuned, we'll oh, it will be well be keeping them as well.
Thank you.
The important thing to them.
Hello, everyone I understand it is that you know obviously valuations have gone up substantially we've been able to monetize a meaningful percentage of that valuation ran up so we feel really good about the position that we're in both regards to monetize the asset and then they ask that that will continue to hold.
Yes, because we've seen markups.
Somewhere between 10, and 15 basis points for some of the others that have reported so far I'm just wondering if.
Yes, if that's also going to be supportive of book value going into the.
First quarter, just given everything thats coming on.
Okay and then.
Just.
You announced the buyback of $8 million.
But youre dead is also trading at a fairly steep discount to par.
Can you outline.
Why you feel like it makes sense to buy the equity versus the debt right now because you are delevering right and so youre targeting lower better capital ratios.
Why not just buy the corporate debt to net today with yields in the double digits.
So we feel like the having that debt out there at the rate that we have that is worth us maintaining as Mark said, we will pay down the debt that that is more operating in nature.
As far as the equity guys right now as you know we're selling in the neighborhood of 65 to 70.
Were sent at book value and we feel like that's.
A tremendous value anytime someone wants to sell me a dollar for 65 or 70.
Look at buying it.
Okay.
Thank you.
Our next question comes from the line of Brock Vandervliet with UBS. Please proceed with your question.
Hi, good morning, Thanks for the question.
I appreciate the disclosure on gain on sale by channel on Slide 14.
Can you can you talk about gain on sale dynamics and.
Where you see that in the pipeline by channel.
Yes, Hey, Brian Willey I'll start so.
We've changed our perspective, a little bit on how we're managing against hail or kind of more specifically margins and <unk>.
Because the environment is challenging we are really looking at how we can move margin up which I know it sounds a little bit counterintuitive, but.
We're willing to let volume fluctuate a bit more than historically, we have in order to.
Push margins up so we're trying to establish really a cadence where we move margin up over time.
Mark if you want to talk a little more specifically about that.
Sure. So so Brock we we talked about margin our margin forecast for the first quarter being in the 60 to 70 basis point range and that would be related to the 58 basis points that we showed on page 14. So so it is creeping up a little bit from there and then between seasonality high.
Our rates as well as our willingness to get more margin, we're expecting our volumes to be in the $12 billion to $15 billion range and that would be down from about 20, and a half billion dollars. This quarter. So anyway. That's hopefully helpful. In terms of where we're seeing margins.
Yes, just as a follow up I had.
I hadn't heard that guide that's interesting how are you able to drive that higher because I would think there would be loans in pipeline that are that are underwater relative to mortgage rates and that might further pressure again on sale. How are you how you're seeing the increase there for Q1.
Yeah, Hey, Brian Willey again, so I'd say, a combination of improving our analytics and how we price specifically around our partners.
On the wholesale side.
And then just a greater degree of discipline around the pricing itself. So as I said, we're willing to let volume fluctuate a bit more than we have historically in order to accomplish that but we think in the long run.
Better position to be in.
Thank you.
Our next question comes from the line of Rick Shane with Jpmorgan. Please proceed with your question.
Thanks, everybody for taking my questions. This morning.
First thing.
My understanding is the guidance that you just provided is in terms of.
<unk> for the first quarter funding thats kind of a.
Partially forward, partially backward looking metric given.
The law what is the outlook for locks during the first quarter given that that's really what the gain on sales calculated at all.
Sure Good question and yes.
Answer is like would give the same guidance of 12 to 15 billion both for fundings as well as for locks.
Great. That's helpful. Thank you and then the other question I have is if we look at the MSR Mark.
Youre carrying the MSR currently I apologize I want to say it's 119.
If we look at where the portfolio was sold in the fourth quarter was sold at $1 34 and is carried at 111.
When we think about the sales that are coming.
Over the next couple of quarters.
Is it fair to expect them to be closer to that 134 I know in response to Kevin's question. You said you didn't expect any additional gains but it does seem like there's a little bit of a gap there that could be profitable.
So I would say that the fair value is migrated closer to where the execution was we we really did get extraordinary execution on those Ginnie Mae sales. So I wouldn't expect that certainly that level of of spread ongoing and as you know overall values have migrated up so as Mark said.
Expect closer to fair value on the execution, but we still feel like especially with the run up we're getting strong execution and we have a lot of interest in our product.
Thank you.
Our next question comes from the line of James Faucette with Morgan Stanley . Please proceed with your question.
Great. Thank you wanted to ask.
The interest rate environment is changing and you're looking at kind of the composition of that market can you give us a sense of what's happening with the.
The contribution from things like cash out Refis and then what have you been seeing in terms of purchase volumes.
Just the beginning of the year as interest rates have moved up.
Hey, James So yeah, obviously, the composition has changed substantially from a refinance standpoint, we're like we see about 65% of our refinances to be cashed out at this point, which is obviously.
Extremely.
Clearly different mix than what it was just last quarter.
Purchase standpoint, now, we're migrating or over 50% of our flowers is purchase and.
I'd say that there the activity is a little bit muted in part as you know because of the supply challenges overall in the market. We do believe that there will be some increase from seasonality, but it remains to be seen how much that will be based on the supply challenges that we're seeing.
Thanks, and then you mentioned quite a bit and taking advantage of the time to invest in capabilities and in growing the broker channel I guess I just have a couple of questions. There like how you're balancing investment what you're focused on are you undertaking new technology initiatives, Firstly and secondly.
What are you expecting in terms of.
Churn of brokers as we go through the cycle, obviously, you've been successful in adding those but are you going to have to.
Increase the spend around making sure that you secure new brokers, if theres a higher array right.
Excuse me a rising level of churns.
So it was really a question so from a technology process standpoint, it's really the same path that we'd been on previously which is specifically.
Specifically on the technology side, continuing to implement our low code componentized.
Technology kind of I will say across the origination process.
Probably better said across the operations processes for the organization.
So that's I'd say, it's more status quo one of the things we are able to do because of the service Mac relationship is to the resources that we formerly had focused on our servicing operation and focus us on the origination side specifically in wholesale so that should give us additional base you bought from a capacity standpoint and are absolutely speed to market.
As it relates to the broker market overall I think you saw from our remarks that we really look at the cycle very similar to and.
We believe even more significant than 2018 19, when you saw rates up.
You saw the benefits of wholesale and the alignment between wholesale lenders and broker partners.
Bear out.
And as a result, there was a significant inflow of loan officers into the broker space. So I'd say the churn element for us we have significant opportunity to be 8000 partners. We've already signed up we believe the number I'll say partner opportunities will grow more materially than it has previously and it has been.
Nearly 20% growth path over the last couple of years, so that we're more we're for.
At this point on expanding our relationships with those that we have in the fold and then expanding the market overall.
Yeah.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.
Good morning willing or mark.
One of the things that hadn't been touched on yet that I think.
Some progress as your corporate expenses it looks like they fell 6 million to $35 million in the fourth quarter is there further room for efficiency and process in that line that expense line.
So mark why don't you take that one.
Sure. So as Willy mentioned, we are conducting a zero based budgeting exercise, which is gonna be frankly across the entire company, but certainly that will impact corporate.
And it's I think just good corporate hygiene, especially as we are looking at volumes and margins dropping so just reassess everything and this is a journey we started back in the second quarter and will continue.
So.
So we're doing that analysis to make sure we have the right balance of of what we need versus what are what's nice to have and and and we'll be looking at opportunities. There. So I'm not prepared to tell you.
Exactly what our targets are where we're going with that but I am certainly.
Certainly optimistic that we're going to do a thorough review of that and get that to the right level.
Okay and my follow up we had Doug mentioned Longbridge, we noticed that last night as well.
And looking at Ellington.
It sounds like with Europe , being selective to selling down the ginnie servicing to selling your interest in our remaining interest in long bridge.
But you're really looking at the business and trying to be really focused on your core wholesale business and maximize that are there any other.
Kind of tangential equity investments or affiliates attached to home point that might also be divested up going forward.
Yeah. This is Willie we do intend to fill that.
To look at potential opportunities within the balance sheet.
Okay. So theres some other non core I guess the way I would describe it things that.
You may now not.
Interested in identifying or being specific about but we could see this type of activity.
Going forward as is what I'm hearing you say, yeah. That's right. So I think it's kind of interesting doing this this call today based on what's happened.
Over in the Ukraine, but I think yeah.
Business for a long time been through a lot of cycles and to me.
Were focus which is one.
As I said liquidity and getting as liquid as we can get and in a volatile environment. I think that there is no better place to be than being liquid to us being laser focused on the cost side and.
And again haven't been through a lot of cycles, I think a lot of folks.
You'd hope is a strategy to hold onto their cost and as Mark indicated we're being we're being very focused and very deliberate about what is necessary for us to continue to carry and whats important but at the same time.
Three is investing and where we see the greatest opportunities and as you identified Steven S. Historical trends are showing and current trends are starting to indicate the wholesale segment is really where it's at and especially for us the way we're positioned so.
That's where we're going to be focused.
Thank you.
Our next question comes from the line of Mihir Bhatia with Bank of America. Please proceed with your question.
Good morning.
For taking my question I wanted to let me just start just on the Smith well.
The announcement from a few weeks ago I guess, maybe just help us understand is.
Is there a way to quantify what the cost savings will look like and how would that change your.
I guess it does it change your strategy in any way I am thinking, particularly on the direct.
Right now that you have to go through.
So mark why don't you talk about the cost piece and then I'll come back to the strategic part.
Sure so.
So as we're looking at our MSR asset as more of a strategic asset and and doing sales.
Had we kept the platform in house that would have created a number of operational challenges not the least of which is that we would have excess capacity on that platform and.
Our per unit cost would have risen.
But the service Mac relationship enables us to do is to continue to have the same level of.
Service to our customers keep our employees, they're going to move over to Servicemaster, and then convert that cost to a variable cost at a lower level. So it enables us to keep more consistency on a per unit basis, rather than what would've happened, which is our costs might have stayed flattish in the aggregate on a notional basis.
Per unit would have gone up quite a bit. So so that's the benefit of it youll start to see now our servicing portfolio costs or cost of service.
<unk> up and rise down depending on how much servicing we choose to to hold so we've converted a.
Our fixed cost to a variable cost at a lower level.
Yeah as it relates to strategically specifically around Iraq, I mean, obviously draught has now got a different dynamic based on the interest rate environment, but that said one of the benefits many benefits of working with service Mac is the continuity with regard to our associates in the servicing function and with that the ability to maintain the workflow between.
The two organizations as it relates to customers who are interested in and.
Origination with home point is there so it will be building those workflows in conjunction with service Mac.
In a way that will continue that our customers will continue to have the great experience. They had when it was one entity.
Got it. Thank you and then just the other.
The question I had was just around margins.
Maybe looking just at the fourth quarter.
Came down a fair amount is there any way for us.
For you like maybe disaggregate, how much of that was just driven by interest rate movements versus maybe like competitive intensity I guess, the real question I'm trying to get out there just trying to understand how much is competition like what is the competitive intensity like it did it increase in the fourth quarter, that's what drove margins in the world.
Just trying to understand the dynamics. So yeah. It's a really good question I'd say yeah. The short answer is it's really hard to discern, but generally it wasn't it was really more of the origination environment.
You would seasonality taking hold in November and December there was just last one around and as I mentioned in my earlier remarks, the industry really hasnt shed much capacity at this point so.
You know that ultimately is what puts pressure on margins you had auto originations and you have a lot of capacity out there. So I think as Mark indicated that's why we're being very proactive from a both a capacity management standpoint technology and process standpoint, but certainly overall from a cost perspective.
Thank you.
Our next question comes from the line of Kevin Barker with Piper Sandler. Please proceed with your question.
Just a follow up on some of the servicing questions that were already asked.
Your your costs your servicing operating expense as a percentage of the overall UBB.
As been cut in half.
And in the last like six quarters.
Do you expect.
The servicing operating expense remained relatively flat from the fourth quarter levels.
When measured against the <unk>.
Total UBB outstanding.
Or would that be embedded in the MSR Mark given your cost of service could change and change your value of the MSR.
Mark you want to take that.
Sure Yeah. So.
Yes. Good observation, we certainly made a lot of progress in lowering our internal cost to serve as a result of building scale as well as some of the moves we made with respect to moving off Ginnie Mae. So that's what created that we also have a very high quality servicing book and that's part of why the relationship with service macro so attractive frankly to both sides what I would.
Going forward is on a per unit basis on a per unit basis, the cost to remain similar to where it is now but it'll become more variable in nature. So in other words right now for this quarter. For example, we had circa $16 million of expenses attributable to the servicing segment.
As the portfolio decreases once we fully transition to servicemaster that'll ratio metrically go down or up on a per unit basis, depending on the amount of servicing we're carrying.
And then I want to have an impact.
Go ahead sorry.
Alright, it won't impact the MSR valuation that was that was going to follow up with that very same thing yes.
Okay valuation yep.
Okay. Thank you for taking my questions.
Thank you.
Our next question comes from the line of <unk> with Goldman Sachs. Please proceed with your question.
Hey, guys. Thanks for taking my questions. Most of them were answered, but I just wanted to follow up on the balance sheet real quickly if you'll give me a second I know the 10-K hasn't come out yet and so if you can help me on the on the term debt and other borrowing so it went up about 116 billion.
Just the MSR lines or was it something else.
No that would have just been the MSR lines and that'll as the next couple of quarters progress that'll get paid down quite a bit.
Awesome and just a follow up on the MSR. So what's the proportion of your MSR is originated this quarter were held versus sold.
So all of the MSR that were created this quarter are held most of the MSR that was was sold would've been let's call it portfolio MSR.
Understood I appreciate you guys sticking out my questions. Thank you so much and best of luck.
Thank you ladies.
Ladies and gentlemen, we have reached the end of our question and answer session. I will now turn the call over to Ginger Wilcox for closing remarks.
Thank you operator, and thanks to everyone for joining us. This morning for Accordingly earnings call. Please feel free to contact me. If you have any questions and we look forward to speaking with you again next quarter.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
[music].
[music].
[music].