Q1 2022 Mr Cooper Group Inc Earnings Call
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[music].
Good day, and thank you for standing by welcome to the Mr. Cooper Group.
2022 earnings conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your Speaker today, Ken Posner. Please go ahead.
Good morning, and welcome to Mr. Cooper group's first quarter earnings call. My name is Ken Posner and I am SVP of strategic planning and Investor Relations with me today are Jay Bray, Chairman and CEO .
Chris Marshall, Vice Chairman, and President and Jamie Gow, Executive Vice President and CFO .
As a reminder, this call is being recorded.
So you can find the slides on our Investor relations webpage at investors that Mr. Cooper Group Dot Com <unk>.
During the call we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck.
Also we may make forward looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings.
We are not undertaking any commitment to update these statements if conditions change I'll now turn the call over to Jay.
Thanks, Ken and good morning, everyone and welcome to our call.
As we all know the first quarter was extremely volatile with the conflict and humanitarian crisis in Ukraine shocking to markets further supply chain disruptions, leading to headaches for many industries accelerating inflation, forcing the fed into action and the sharpest increase in mortgage rates and many years if not decades.
And really all of this has pushed the originations industry into a period of severe retrenchment.
But for Mr. Cooper this kind of environment demonstrate demonstrates the benefits of our balanced business model, which by design includes a much higher contribution from servicing than most of our peers.
The key things for us in this environment, our first very robust growth in book value second a sharp ramp in servicing profitability in the coming quarters and third the monetization process for xylem.
We'll talk more about these themes in a moment first though let's review the quarter's highlights for the first quarter of 2022, we generated very very strong net income of $658 million and as a result tangible book value increased to $52.01 per share.
She has an impressive 62% year over year gain.
Net income included operating results, which were in line with our guidance the gain from this agent transaction, which we closed in March and an MSR mark of $552 million, which was higher than what we previously guided to is interest interest rates continue to rise through quarter end.
On a GAAP basis, our return on tangible equity was 74%.
On an operating basis. The return was 8%, which is below the target range of 12% to 20%, which we guided you to expect in most environments.
The next couple of quarters or a transitional environment for us we expect our returns to trough in the second quarter after which we're projecting a sharp ramp in servicing profitability driven primarily by higher interest rates, which should curious by fourth quarter back into our target R. O T C range.
Zeroing in on the segments operating earnings were in line with our guidance with servicing contributing $7 million in pre tax income.
In originations contributing $157 million.
What was exciting to US was the growth we achieved as we took the portfolio to 796 billion, which was up 12% sequentially and 27% year over year.
Frankly, we've made faster progress towards our strategic goals than even I anticipated.
What youre seeing is that we can be extremely nimble when the opportunity presents itself will cause our team knows the market inside and out and our operations and technology are completely unmatched.
This quarter's grows sets the stage for strong recurring annuity like cash flow, which in the current rate environment will last for years and years to come.
Turning to capital management, we repurchased 700000 shares for $35 million during the quarter with.
With the recent selloff in our stock price, we've shipped have shifted our focus from MSR acquisitions to stock repurchase.
Which is exactly what you would expect us to do as stewards of your capital and we will talk more about this in a moment.
The balance sheet continues to be a good story at March 31, our capital ratio was 27% of assets and our cash and liquidity remains strong our stakeholders should feel confident and Mr. Cooper's ability to serve our 3.9 million customers even in a volatile environment.
Now, let's turn to slide four and let's talk about the outlook for the rest of 2022.
To start with our servicing portfolio puts us in position to benefit from higher interest rates. Thanks to the dramatically lower amortization, we believe servicing profitability bottomed in the first quarter and by the end of the year, we should be generating at least 100 million per quarter and pre tax income from this segment.
This projection primarily reflects the impact of higher interest rates, which obviously by outside of our control, but what we can control is how we run the platform and in that regard we're extremely focused on continuing to lower our cost and deliver an even better customer experience with the goal of <unk>.
Higher returns in 2023 and beyond.
Turning to originations, you'll see us operating with consistent profitability, albeit at lower levels. As this is clearly not the time to chase volume or market share we.
We've already taken several steps to adjust our capacity and you'll see us doing more having said that we have hundreds of thousands of customers with equity in their homes and we can help with cash out refis, which is a product we're very experienced with and we have strategic initiatives underway to drive efficiencies, including <unk>.
Flash, which will help us sustain our margins.
Now, let's talk about as you recall back in February we were commenting that activity got off to a little bit of a slower start than we'd expected as servicers were moving forward cautiously on foreclosures.
Wanting to make sure their borrowers had every possible opportunity to avoid it.
But there is no mistaking the growing backlog and Oreo in the last two months, we've seen much higher inflows and in March our inventories hit an all time high we continue to project revenues ramping up in the back half of the year, which supports a very strong outlook for 'twenty three and in a moment, Chris will give you an update on our strategic.
T J thinking presume.
Finally, I want to return to the theme of capital allocation over.
Over the next few quarters, we expect to acquire MSR is at a more measured pace.
This will give us the chance to digest recent purchases further strengthen our cash position and let sellers expectations cool after the recent run up in rates.
With our stock trading at a discount to book value were looking for opportunities to buyback more shares while at the same time, managing our capital and liquidity conservatively.
And with that I really like to thank every single team member at Mr. Cooper for your hardware, which produce such exceptional results and for your dedication to our customers.
Now Chris will take you through more details on originations servicing and zone and following Chris Jamie will take you through the financials last.
Last week I am excited to say, we promoted Jamie to executive Vice President and CFO and I couldn't be more pleased with the experience and leadership. He has brought to the company.
Over the last three years is really built a world class team of finance accounting and tax professionals significantly improved our processes and controls and manage the sell of the reverse portfolio to very successful outcome.
Jamie promotion will allow Chris and his role as president to shift its full focus to the business units.
And with that I'll turn the call over to Chris.
Thanks Jay.
And I'll add my congratulations to Jamie I've worked very closely with Jamie for well over a decade now.
And his promotion as part of a transition that began last June when Jay asked me to directly manage our business units actually with a focus on preparing them for the environment. We're now seeing unfold so over the last year.
Added more and more of the day to day CFO responsibilities to Jamie and his performance has been consistently excellent.
So I'm confident that youre going to see a very smooth.
No surprise transition.
So with that let's turn to slide five and start by reviewing the originations, which as Jay said is significantly retrenching at this point in the cycle for us.
Of course for the rest of the industry.
Just to give you some perspective with mortgage rates.
Currently hovering around 5% the percentage of customers in the marketplace or in the money for a right term refinance would now be in the low single digits.
Which makes this is difficult to rate term refinance environment as the industry has seen since the mid 19 nineties.
So against that backdrop.
We're very pleased with our performance in the quarter.
Which included EBT of $157 million and funded volume of 11.6 billion, which was right in line with our guidance.
However, given the magnitude of the move in rates over the last 90 days.
You to expect a significantly lower run rate from originations for the rest of 2022.
Specifically, we're now projecting quarterly EBT in the range of $65 million to $85 million.
On funded volume of around seven to 8 billion per quarter.
The main driver of this lower run rate is obviously the steep reduction in rate term refi volume as well as gradual compression in margin.
Now that said.
Given the historic home price appreciation that's occurred in most of the U S. We've had a huge surge in the number of customers with significant equity in their homes, which allows them opportunities to restructure their personal balance sheets and materially improve their cash flow.
Given high home prices and low inventories.
We'd expect to see large numbers of our customers use cash out refis to expand and renovate their homes and that is in fact exactly what we're seeing with cash out already up to 64% of our total production in March.
Keep in mind that one.
Mortgage rates are 5% to 6% may seem quite high compared to what's been available in the marketplace over the last two years in a historical context rates are really hovering around the long term average.
And I would remind you that given the tax advantages of mortgage debt. The after tax borrowing cost. We can provide our customers is very low compared to every other source of consumer debt.
Our team is excellent.
And has extensive experience with cash out products and as well versed in the needs based selling approach that we conduct using our proprietary sales desk technology.
So the good news is that all volumes are down our cost to market and originate are very low compared to the industry and DTC will continue to originate loans with strong margin and positive cash flow.
Now turning to correspondent.
You can see from the numbers on this page we pulled back even further this quarter.
At this point in the cycle of the correspondent market is suffering from extreme pricing pressure.
And we're sticking to our discipline and are prepared to be patient until margins improve.
Longer term, we remain very committed to the channel and especially to our clients and we expect to be back as a major force once margins return to acceptable levels.
Now turning to the margin, which we report net of expenses you.
You will notice an increase in the quarter by 12 basis points to 153 basis points overall, but that variance was solely due to our mix shifting to DTC, which was 67% of total volumes up from 52% in the fourth quarter.
Now if you'll turn to slide six.
Let's review some performance metrics.
You can see here as I mentioned, a moment ago that cash outs were up to 64% of the mix in March and of course, we fully expect that ratio to continue rising.
Refinanced recapture rates.
Increased from 43% to 50%.
Which was good.
And in March the rate was actually up to 54% as we continue to execute towards our strategic target of 60% or higher.
This goal remains extremely important to.
The team because every percentage point of improvement makes us a stronger bidder for portfolios.
A stronger sub servicer, which contributes to structurally higher returns for the company.
Turning to the gain on sale margins in the upper right chart for D. T. C. We're continuing to see a slow steady decline toward normalized levels, but without the intense competition and dramatic margin pressure.
You've been seeing in the retail and wholesale channels, where lenders are fighting over a very very small pool of new customers.
On a final note given lower volumes rationalizing capacity is an unavoidable theme for everyone. In originations now we've been very disciplined in managing capacity, but in the second quarter, you'll see us take the charge for staff reductions related to our lower volumes.
Having made that point.
At the same time continuing to invest in our originations platform. For example, as you heard last quarter, we're making extremely good progress with project Flash, which further automates, our middle office processes and continues to reduce our cost to originate.
Now, let's turn to slide seven and talk about the servicing portfolio, where the story is very strong growth this quarter and a ramp to sharply higher profitability for the rest of the year.
Let's start with growth, we had a fantastic quarter with both MSR acquisitions and sub servicing and.
In total the portfolio ended the quarter at 796 billion, which was up 12% sequentially and 27% from a year ago. That's.
That's $3 9 million customers, who will be serving for many years to come and.
And we are laser focused on doing an exceptional job for them and turning them into Mr. Cooper customers for life.
I think it was about a year ago that we shared with thesis with you that higher rates would force originators back into the market selling the MSR, which they had been accumulating since the pandemic started and that's turned out to be pretty accurate.
With the sharp rise in rates. This year, we saw a deluge of products hitting the market with very attractive pricing.
During the quarter, we acquired MSR.
With $81 billion of new P b.
Which should deliver an after tax levered IRR of approximately 17%, which is obviously very supportive of our long term corporate return targets.
Bear in mind, you'll see these returns show up over time, both in the servicing segment in terms of higher levels of servicing fees and EBT, which at current rates will extend for many years to come and also to a lesser extent in originations through incremental recapture opportunities over time.
This was also a great quarter for sub servicing where we acquire new clients and were rewarded by existing clients with large blocks of business.
These clients are choosing Mr. Cooper, because they're confident and our exceptional customer service recapture capabilities compliance default management.
Operational and controls as well as our strong and sound balance sheet.
As we commented last quarter, we acquired a large portfolio from an existing sub servicing client, which exited the business of holding msr's.
Let me give you a sense of our momentum excluding that one transaction during.
During the first quarter, we grew our sub servicing book by 16%.
By the way that transaction pushed our portfolio a little bit above our targeted mix of 50 50 owned and sub serviced.
With strong growth prospects in both businesses, we would expect to hover in this range of plus or minus 50% for the foreseeable future.
Now, let's turn to slide eight and talk about servicing income we guided you to expect breakeven results this quarter and we did slightly better than that with pre tax operating income of $7 million.
But from this point on we expect servicing income to improve significantly quarter by quarter throughout the rest of 2022, as we benefit from lower amortization and higher yields.
By the fourth quarter, we're projecting a quarterly run rate of $100 million to $120 million.
Quarter and EBT.
Forecast is based on the current yield curve, which is factor in roughly six additional fed rate hikes.
So that scenario should push CPR is down in Q4 to about 8%, which incidentally is about where they were when they bought them in 2018.
Normally we don't give you such specific guidance.
But the market is so volatile right now and we thought it would be helpful to provide you with just a little extra transparency.
Now, let's turn to slide nine to flesh out the story on amortization, which was $201 million in the first quarter up from $187 million in Q4 due to portfolio growth as well as higher valuation, partially offset by lower CPR.
Going forward and based on the current rate scenario, we'd expect amortization to decline to around $140 million by the fourth quarter, saving nearly $60 million a quarter or $240 million a year.
By the way this forecast assumes continued growth in our MSR balances through year end, but at a more modest single digit pace. Although it does not reflect any additional markup to the MSR from higher interest rates.
Now as I'm sure you're tracking them rates have continued to move up this quarter. So there's also a sensitivity analysis on this slide that you can refer to if you want to see what that May mean, or if you have a different view on the outlook for <unk>.
Our interest income is also factoring into our servicing EBT forecast. We ended the first quarter with $12 billion in custodial deposits, which will decline gradually to approximately $10 billion by the fourth quarter due to lower prepayment speeds and incremental yields will move up as the fed raises ray.
<unk>.
Bear in mind that the benefit will be partially offset by higher expense on advanced and MSR warehouse lines.
Now, let's switch gears and talk about zone, which has the potential to be a major contributor to our earnings and book value.
If youll turn to slide 10.
I'll start with the market backdrop.
As you can see from the chart on the left 90 day delinquencies in the FHA market, which is our main source of product for the exchange are still quite elevated at over 5% as forbearance programs are winding down.
Before closure inventories at year end 2021 were only <unk>, 6%.
Or has the normal level prior to the pandemic.
So even without considering the foreclosure backlog over the last two years, we would expect inventories to roughly double from here just to reach normal levels.
Now if you shift your attention to the chart on the right. What we're showing you is a sizable increase in inflows to zones auction exchange, which took us up to a record inventory level of 18200 units.
This is partly the foreclosure market coming back to life, but.
But it's also the fact that we're gaining market share.
During the quarter, we signed up new clients, and we significantly expanded market share with existing clients who happen to be.
Major players in the industry.
We estimate that our FHA market share is currently around 30% and we believe we have a clear line of sight to reaching 40% by year end.
The outlook for the auction exchange is excellent.
After losing a small amount of money for the past two years due to the moratorium we're projecting the exchange breaking even in the second quarter and as we exit 2022 and entered 2023, we'd look for our quarterly EBIT run rate that would equate to full year 2023 earnings of $120 million or <unk>.
Sure.
That was a caveat back in February .
We reported on a slower start to the year than we'd been expecting as mortgage servicers, we're taking a very cautious approach to restarting therefore closures.
They wanted to make sure borrowers have every opportunity to modify their loans.
We may see this caution persist, which could delay our revenue ramp.
But sooner or later foreclosure inventory has to be cleared.
And not to mention.
If the economy were to weaken foreclosure volumes would be substantially higher for an extended period of time.
As we think about the potential resume we are not wavering in our commitment to our investors to realize the full value for this business.
We regard the auction exchange is a world class fully digital business with huge revenue potential.
And none of that is reflected in our stock price.
We're currently having initial conversations with bankers to advise us on monetization alternatives and I look forward to giving you further updates next quarter.
I'll now turn it over to Jamie will take you through the financials.
Thanks, Chris and good morning, everyone. If you turn to slide 11, I'll start with a brief recap of the income statement and some observations on our outlook to.
To summarize net income was 658 million, which included a positive 552 million MSR Mark $223 million gain from the staging transaction 96 million in operating earnings.
And adjustments of $3 million, which related to severance charges I'd also point out that the weighted average diluted share count declined from 77.4 to $76 6 million shares and we ended the quarter at 73 9 million shares outstanding reflecting the impact of stock repurchases.
Our repurchase authorization now stands at $217 million.
As Jay mentioned, we expect earnings to drop in the second quarter as our originations volumes ratchet down quickly while servicing will take until the fourth quarter to reach the $100 million level that Chris mentioned a moment ago.
Following the second quarter.
We're projecting profitability rebounding sharply driven by higher contributions from servicing based.
Based on the current interest rate outlook, we would expect to exit the fourth quarter back within our targeted range of 12% to 20% our OTC.
Let's turn to slide 12, and talk about tangible book value per share, which we believe is an important evaluation measure for the analysts and investor community.
Thanks to strong net income TBB increased $52.01 per share up 62% year over year. The chart on the right provides you with that work.
The growth was driven primarily by strong operating income and positive MSR marks which demonstrates the power of our balanced business model.
In addition over the last year, we opportunistically repurchased $13 1 million shares were $487 million, which added $2 24 per share at a TBD.
I'd like to point out that our very strong net income this quarter utilize a $197 million of our deferred tax asset.
The balance down to $794 million.
The DTA is now down to 21% of TBB, which is half the levels of a year ago.
The DTA is still an important asset to us and to drive sustainable cash flow by limiting our federal tax payments and it will continue to do so for some years to come but it is no longer a material component of our equity base, which is a positive for our evaluation.
Now, let's turn to slide 13 and discuss the MSR.
During the quarter mortgage rates rose 156 basis points, leading to a decrease in the lifetime CPR assumption. Additionally.
Additionally, swap rates increased 162 basis points, which drove higher expectations for custodial deposit income.
Together these rate moves resulted in a positive mark of $552 million, which brought the value of our MSR up 22 basis points to 146 basis points of U P. B.
The chart on the right shows you an updated view of the rate sensitivity of our position, which is shown net of excess spread and hedges.
For example in a parallel 50 basis point rate shock scenario, we would expect to record a net mark of $175 million.
In terms of hedging we have increased the hedging ratio from 10% of the interest rate risk in our portfolio to approximately 25% since the upside potential for higher rates starting to level off leaving us with a greater relative exposure to downward shocks.
In making this decision we are focusing on the benefits of preserving TBD and capital against unexpected shocks, but we also factor in the capabilities of our DTC platform to recover marks through higher volumes and margin.
And the liquidity cost of derivative instruments.
Turning to slide 14, let's review the company's liquidity.
During the quarter, we generated strong cash flow with $86 million in steady state discretionary cash flow, which included contributions from both servicing and originations.
We expect cash flow to trough in the second quarter and then it should rebound in the second half of the year driven by increasing profitability from our servicing segment.
Given the outlook for reduced volumes originates and segment will make a smaller contribution to overall cash although we expect our DTC originations to remain cash flow positive.
You will notice we have increased borrowings on our MSR lines to 800 million, which.
Which we used this quarter to fund MSR acquisitions.
As we shared before we regard MSR financing as a source of working capital rather than permanent capital. So you should expect us to pay down those lines to lower levels as the year progresses.
At quarter end unrestricted cash was $579 million this plus the available undrawn capacity on our warehouse lines left us with one point.
3 billion of liquidity this was down from $2 1 billion in the prior quarter as we deploy liquidity to acquire Msr's.
However, this is still a very robust level for us and well above regulatory requirements.
Finally, as a reminder, we have a five year liquidity runway with no maturities until 2027.
I'm going to wrap up my comments on slide 15 by talking about capital.
Our capital ratio at quarter end as measured by tangible net worth to assets was 26, 8% up from 23% last quarter and nearly double our target of 15% plus.
We understand the fact that investors measure our capital using a variety of metrics. So let me speak to a couple of days.
Excluding deferred tax assets in our capital ratio was 24, 6% at quarter end, reflecting both strong capital generation in the quarter and the utilization of the DTA. We regard this as a very healthy ratio.
Our second ratio, which is important to investors as the ratio of debt to tangible net worth which as you can see remained comfortably and sustainably below one times.
We're sharing these ratios because we believe a strong balance sheet is a defining attribute of a market leader and we think these metrics put us on the path to a rating upgrades strong performing senior notes and a solid long term profitability.
And with that I'll turn the call back to Ken for Q&A.
Thanks, very much Jamie and now I'm going to ask Shannon If you could please start the Q&A session.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
While we compile the Q&A roster.
So.
Our first question is from Kevin Barker with Piper Sandler Your line is open.
Good afternoon, and thanks for taking my questions.
Want to follow up on the capital side. It seems like you have.
And the amount of capital relative to your needs.
Could you talk about how much stock.
Stock you've bought back so far this quarter and what your plans are.
Given the MSR market is not as attractive as it was relative to <unk>.
Stock buybacks given your comments you made during the call.
Hey, good afternoon, Kevin Yeah, I'm not sure I'd say exorbitant, but we do have a lot of capital.
We intend to continue growing through MSR purchases, but will be more selective right now because youre right prices have.
Have exceeded.
We thought they'd be at this point and quite frankly, they are sharply higher from where they were when we did a significant amount of purchases last quarter with regard to stock buybacks.
We've been in blackout through today. So we haven't bought back any shares this quarter, but we certainly will be back in the market. We think the stock is trading well below.
The appropriate value and so.
We will.
Good.
<unk>.
Continue buying back shares for the foreseeable future.
And if you look Kevin really overall, we have I think over 200 million in authorization.
And you would expect us to buy back at least $50 million.
Per quarter.
Potentially more.
That's the way I would think about it and you know the board is certainly supportive.
Share buybacks, especially at this level.
So could you quantify.
Okay.
What you the amount of excess capital you currently have on your balance sheet that could be deployed whether it's to MSR purchases or buybacks.
I think you should we ended the quarter with tangible net worth to assets at 27%, we set our minimum targets 15. So you could say you could take 12% of that.
I'm not sure I'd categorize it as excess but we certainly.
Intend to stay at a minimum of 15% or higher.
A lot of capital to do both MSR purchases and an awful lot of stock repurchases.
So we bought back $35 million of shares.
Shares in the first quarter, you should expect us to buy more of that in the second quarter.
Okay. Thanks for taking my questions.
Thank you Kevin.
Our next question comes from Guiliano with Compass point Your line is open.
Thanks sure.
Taking my question one thing I was curious about was.
To provide some commentary about hedging on the MSR portfolio.
Hedging the MSR portfolio.
<unk> gone from 10% to 25% I'm curious when you think about hedging, especially as we get to.
Okay.
Thank you guys I prefer carnival faster from a recovery perspective.
Is there a sense around where.
You might normalize that of course, you might ramp that up throughout the year as long as our values continue to slide a little bit higher.
No no.
I wouldn't give you a target but we.
We hedged primarily for liquidity risk.
Of course, we're very mindful of the <unk>.
MSR value.
And so at MSR value were to continue to grow unimpeded, you would expect us to hedge more over time, but we're primarily looking at liquidity risk.
And so we started out hedging.
To really cover the amount of MSR, we had as collateral against our MSR borrowings so.
I wouldn't say anymore than that.
I wouldn't be surprised if our.
Overall profile expanded somewhat.
In the quarter, but there's no specific target that we're trying to get to.
Oh.
And then when we.
You think about the capital return and share repurchases.
Obviously, youre trying a discount to our tangible book value is now, but what I'm curious about is when you think about tangible book value on a forward basis.
You've obviously had some classes.
Doesn't accurately reflect the value of the auction exchange platform.
I agree with you there.
Great.
My estimates.
Yes.
Guys.
The team here inside there.
There is obviously potential for book value to grow materially over the next couple of years, if you were to monetize.
Ill can exchange platform. When you think about buybacks do you take that into consideration from a kind of a medium term perspective, because there will be enormous accretion for you continuing to buy back stock in and around these levels and even higher on a forward basis.
Okay.
Simple answer is yes, we too we certainly do we think the business is extremely valuable and that should be more fully reflected in the stock price, but if you look back over the last couple of years we've.
Had an enormous appetite for our own chairs and.
That's one of the primary reasons. So you should expect us again to be active in the market buying back our shares at these levels.
Yeah.
And then one last question.
Yes.
Looking at the overall market whenever it makes sense to consider acquisitions.
Other mortgage companies out there there are a handful trading at very large discounts to nickel probably in the public markets and they're also I'm assuming that there are similar opportunities in the private markets wherever it makes sense to take that approach as a way of acquiring MSR and assets rather than simply looking at MSR portfolios.
Yeah.
Well and I look at the end of the day it never say never and we're certainly seeing a lot more activity there, but as we've said before.
It would have to be accretive.
And we'd have to it would have to be a platform that has something we don't have today.
So I think we're going to we would be very selective in looking at that and very <unk>.
Careful about the cultural fit as well as the integration risk so.
We think it's a really accretive opportunity who will spend time on it I think is a simple way to think about it.
That makes sense. Thank you for taking my questions ill jump back in the queue.
Our next question comes from Eric Hagen with <unk>. Your line is open.
Hi, Thanks, good afternoon.
The disclosure around the sensitivity of the Mark to market for the MSR is definitely helpful. In terms of I think gauging the upside.
That could be remaining I'm curious how closely connected the marks might be to a stronger bid for MSR in the marketplace.
Or would you really say that the upside or the potential upside remaining is essentially only tied to <unk>.
Improving metrics at the loan level.
The upside or at least the sensitivity that we have in those disclosures.
As poorly.
Driven by <unk>.
Our models at the loan level.
If I'm hearing your question correctly.
Right, but if the market for MSR yep Okay.
Mark process doesn't really to Chris's point, it's model driven and it's obviously validated by third parties.
Just like most processes or most companies like us.
It's not driven really by MSR prices in the market that doesn't really determining.
How much upside there is if that answers your question.
Yes. It does that's helpful. Thank you.
And then just on the MSR market in general understood that you guys might be bidding less frequently going forward, but how would you describe the kind of conditions to acquire MSR in the bulk market versus the flow channel right.
Right now in any kind of color around <unk>.
Conditions in that market would be helpful. Both markets.
Well I don't want to be careful because we are a very big buyer of MSR and we have been for 15 years I am sure we bought more MSR than anybody else in the industry and over time, we will continue to do that we've been clear about our goal to grow the servicing book to a trillion.
There's a more and so at 800 billion, while we have grown significantly we still have a lot of growth ahead of us.
When we say we're going to be more selective we're talking about it over the next couple of months, we expect to be more selective and right now volume has dropped off a little bit there was a lot more than the market in the first quarter.
So that's one thing I want to make clear. The second thing is we're very active in correspondent co issue and in bulk.
And.
I would say.
While prices may have traded up.
Returns are better than they were.
Six months ago.
There is still if you look at some of the sellers in the market.
They are.
We made these comments earlier these are folks who had been able to sit on their servicing because they were operating with very wide margins and we're cash flow positive today, that's not the case margin said.
<unk> shrunk quite a bit in the correspondent and wholesale channels and so people are actively selling and thats, causing while prices are up returns are up as well.
Yes, I would say at this moment in time flows more attractive than bulk, but we I personally expect a lot of product to come to market based on what Chris. Just said you will have originators that will have to sell.
Yes, that's helpful color. Thank you guys very much.
Thank you Eric.
Our next.
<unk> comes from Mark Devries Barclays. Your line is open.
Yes. Thanks, I had a question about the outlook for the gain on sale margin it looks like.
You know in both the direct to consumer and correspondent.
It's holding up quite well maybe down marginally so far in April do you have enough room to kind of take out expenses that you can keep those margins fairly level.
Here or are there going to be some operating leverage issues if volumes continue to soften.
Well, there's a couple of things that go into that margins will come down over time, we've been saying that for several quarters, and we expect them to but what youre seeing is volte.
Volume dropping off more significantly in correspondent where margins are smaller.
We will protect the margin to some degree we are reducing expenses.
We have been consistently now for three quarters.
But we still think there'll be a gradual decline in margin. The one thing I would point out in our business as we can control that a little bit more because we're dealing with.
And the originations channel in the DTC channel.
At least with.
Our own customers so.
The margin is we're able to pace it a little bit more but nonetheless, we do expect it to return to more normalized levels over the next.
Three or four quarters.
Direct to consumer is still very strong.
But to Chris's point, given its focused on our portfolio. We don't have significant marketing expenses and we are actively taking.
Capacity out now.
I'll give you. One example, just to elaborate there we've talked a lot about project Flash and this is a program where we are automating.
A lot of our middle office.
We started this about four.
Four quarters ago about a year ago by the end of this year.
I'd say 60 to <unk>.
70% of all of our originations will run through flash in bi.
The middle of next year, 100% of it well so that we will talk more about flash overtime.
As a proprietary technology, but that is reducing our middle office is expense by half or more.
Okay got it.
And <unk> had some questions about activity in zone.
Sorry, if I missed this in your prepared comments, but what drove the big.
Q over Q jump in the inflows is that just borrowers coming out of forbearance.
We're able to kind of modify their loans, we get current and did you have some pretty meaningful liquidation activity in the quarter because it looks like based on kind of the graph.
Inventory didn't move up that much particularly relative to the very big inflows that you saw.
Okay.
The inflows are not tied to individual customers or inflows are coming from our clients. So that the ramp up in inflows is a reflection of our market share growing significantly before the pandemic we were in the high teens with.
Line of sight to 20 or.
Low twenties.
Today, we're at 30%.
Got line of sight to 40, so what youre seeing is a shift in allocations from some of the biggest.
Servicers in the country.
We're winning more business.
And if you look at zone compared to the other players in the market and even the market leader all.
All the performance metrics.
Any client would look at.
Indicate that xoma's.
As good or better than <unk>.
Any other platform.
No.
It's a great business performance is outstanding and we have been very effective in selling the platform.
Yes. It is.
Specs right the moratorium is lifted.
Youre going to see more activity there.
As you know was slower than we originally forecasted, but it's coming and it was a strong very strong quarter from an inflow standpoint to Chris's point.
Given our market share growth and just overall more active foreclosure activity.
Got it and then just one last question on on the point about you know kind of expectations then zone for the that.
That foreclosure level to kind of get back.
Doubling from here to get back to more of a normal more normal level, just based on what youre seeing with your own customers, but I mean, one of them one of the things we have going for them. Even if they are going to struggle to make payments on their mortgage out of out of forbearance is that they are sitting on a significant amount of equity given all the the home price appreciation and so are you seeing borrowers.
If they can't really modifying get current who are able to just sell their home and capture equity as opposed to to go to foreclosure.
That's certainly a factor but.
I think our expectation for <unk>.
Levels to double.
It would be for overall foreclosures to go back to pre pandemic levels.
Or the lowest point in.
10, or 12 years.
You got to think about.
Those pre pandemic levels around 210000 foreclosures.
That's the one credit was at its best.
And that's certainly we expect that to deteriorate so.
Strongly suggest that foreclosure levels doubling is an extremely conservative measure.
Now the one thing I would point out that there is a timing factor.
People in the industry have been very focused on making sure.
Customers get every opportunity to modify loans and the regulators are making sure that everyone's doing that so there could be some delays there could be further delays, we've already pushed out our ramp by almost six months that could that could be pushed out a little bit further but theres no question that no.
Question that foreclosure levels are going to double if not more if you take the pre pandemic level of roughly 210000 foreclosures that doesn't factor in all of the built in inventory that there haven't been any in two years. So yes, theres been home price appreciation, but delinquency levels will definitely.
Rise from where they were.
And again I'd say, that's a very conservative measure.
Okay fair enough.
Thank you very much.
Our next question comes from Doug Harter with Credit Suisse. Your line is open.
Yes.
Thanks.
Hoping you could talk about the origination volume outlook and pass out just how willing are customers still.
How willing are they to still do cash out just given how much mortgage rates of rhythm.
Well, there's definitely a little bit of rate shock for folks, but the it's not it's not that we expect people to do cash out because they are attracted by the rate that they have need for cash.
So there's a lot of things we've seen anecdotally of where our customers are doing they're either not able to move up to the next house because.
Not just because rates are high because home price appreciation have pushed those homes.
Out of their reach so that renovating their homes or expanding the homes that they're in and they're doing cash out refinancing to do that but theres any other number of reasons why people will tap the equity in their home.
<unk> said that we don't expect volumes to be anywhere near where they were for the last two years, we expected to be about half that level and thats consistent with what we saw.
We went back to 2018.
When we were in a similar environment, we saw a similar drop off in <unk>.
We've already seen it happen in the first quarter.
Two thirds of our refinancing were cash out refinancing and as of.
Everyday Apple today that ratio is increasing.
So.
People are willing to do it and I say it again, if you think of rates, 5% to 6% after tax and you compare that to any other form of consumer debt.
It's.
Ridiculously inexpensive to tap the equity in your home.
Yeah, Doug I mean, it's anchored on wheat, we just went back and looked at historically.
What what we've done in a similar environment and so I think the.
We think theres a lot of opportunity there a lot of opportunity.
Okay.
Thanks.
Our next question a follow up from Kevin Barker with Sandler Your line is open.
Thank you.
I just wanted to follow up on some of the comments around zone what percent of your pipeline.
Pipeline is third parties versus.
Coming from Coupe servicing portfolio and how does that compare to what it was a couple of years ago pre pandemic.
Well a couple of years ago was almost all Mr. Cooper today.
Day, it's 80% third parties in the 20% that Mr. Cooper is providing is falling rapidly.
So it's a completely different business today than what it was three years ago.
And then what percent of market share would you estimate you have today and that in that industry.
Industry.
I think you might've mentioned, 30%, but could you clarify that number.
That's correct.
Today, it's 30% as if we factor in allocations, we believe our increasing we've been we've been in discussions with clients that intend to shift if they don't use a single provider.
We share allocations with one or more other.
Platforms, and we are fully expecting those allocations to increase that by year end, we expect to be at 40%.
Okay, and then on the <unk>.
Early buyout revenue, obviously being impacted by higher rates here.
Do you expect that to.
Go down to near zero or minimal levels or is that would you expect to sustain some early buyout revenue if rates were to stabilize.
Uh huh.
I think <unk> revenues.
De Minimis at this point.
So, yes, I'd say, it's down to zero.
For modeling purposes.
Okay.
Thank you for taking my follow ups. Thanks, Chris.
Thank you Kevin.
Thank you. This concludes the question and listen I'd now like to call back over to Jay Bray for closing remarks.
Thanks, everybody appreciate your participation in the call have a great day.
This concludes today's conference call. Thank you for participating you may now.
[music].
Okay.