Q2 2022 Mr Cooper Group Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Good day and thank you for standing by welcome to Mr. Cooper Group Q2, 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star.
11 on your telephone please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Kenneth Posner.
May begin.
Good morning, and welcome to Mr. Cooper group's second quarter earnings call. My name is Ken Posner and I'm SVP of strategic planning and Investor Relations with me today are Jay Bray, Chairman and CEO , Chris Marshall, Vice Chairman and President and Jamie.
<unk> executive Vice President and CFO .
As a quick reminder, this call is being recorded.
Also you can find the slides on our Investor Relations webpage at investors got Mr. Cooper Group Dot com.
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 you should understand could be affected by risk factors.
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 I'll start with the quarter's highlights and then I'll spend a minute on how we're positioned to deal with the current cycle impossibly a recessionary environment.
Which obviously is a concern on everyone's mind right now.
And after me, Chris and Jeremy will take you through operations and the balance sheet as we always do and then we'll take your questions.
So let's start on slide three in summary, I'll say the quarter was consistent with our expectations and the guidance. We shared in May and then our results demonstrated the consistency and predictability of our business model.
We generated 151 million and net income thanks, largely to a positive mark on our MSR portfolio.
Strong net income drove tangible book value per share to $54.51, which is up 46% year over year.
And Thats certainly performance, we're quite pleased with.
Strong net income also drove our capital ratio of about 30%, which puts us in a phenomenal position.
Servicing segment earned $30 million in pre tax income up from 7 million last quarter driven by the rise in interest rates as we guided you to expect.
Based largely on the forward curve as well as continuous incremental operating efficiencies, we're now projecting servicing pretax income at or above $125 million in the fourth quarter.
The steep ramp in servicing income as a huge benefit in this transitional environment given the obvious pressure on originations. This is exactly the reason we operate with a balanced business model and it is a major differentiator for Mr. Cooper.
In terms of growth of the servicing portfolio exceeded 800 billion.
And it's exciting to be making progress towards our one trillion target, but you'll notice the growth was a little slower this quarter and that's because we use more cash for stock repurchase.
In fact, we bought back 100 million in shares this quarter almost three times the level of the first quarter, which shows you. How we are constantly thinking about capital allocation and where we can get the best possible returns.
You'll probably see us continue growing at a modest pace for the next few quarters as we watch to see if more stress develops in the mortgage market.
Now turning to originations pre tax income was $63 million, which was slightly ahead of guidance last quarter, we made the difficult but necessary decision to reduce capacity and we tried to do that in a manner that was fair and transparent.
Having taken the steps, we're now appropriately aligned with the current level of demand and are continuing to produce new loans with solid margins.
I'd like to complement the originations team for implementing the necessary changes quickly.
And without sacrificing our focus on our customers.
As a result, we hit the strategic target, we set last year of 60% refi recapture and then blew past in July to 68%.
Finally, I'll mention some results that don't show up on our income statement, but are just as important as those that do this quarter. We were proud to be certified as a great place to work for the fourth consecutive year.
And with World class team member engagement I might add.
In addition, just last month Fortune magazine named US as one of the best places to work in Texas and.
And finally <unk>.
It actually just yesterday Forbes magazine named US as one of the best employers for women.
I'm extremely proud of this recognition because it demonstrates a core element of our business philosophy.
We can best serve customers by providing a purposeful inclusive environment for our team members.
So let me pause here to say thank you to every single team member at Mr. Cooper for your contribution to the company's results.
Now, let's turn to slide four and talk about our track record, especially in the context of concerns about a possible recession.
You know that today, Mr. Cooper is the largest nonbank servicer.
For those of you who weren't following us during the last financial crisis I pointed out this was a time when our portfolio growth really started to take off.
All of our stakeholders, our investors the agencies regulators recognized us as the platform to help homeowners.
Their support and approval, we took on very large distressed portfolios from some of the leading banks.
We consistently demonstrated that we had the operational skills to work with our customers who are struggling with financial hardships and help them whenever possible to stay in their homes we.
We save millions of borrowers from going into foreclosure and we saved investors agencies hundreds of millions in losses.
Incidentally during this period, we cure delinquent loans at a much faster pace than the rest of the industry, which was again the best possible outcome for both borrowers and investors and of course, it allowed us to significantly expand our business.
It was also during this time that we began building our zone oxygen exchange with the goal of improving and streamlining the foreclosure process.
In my view, there's not another mortgage company with as much experience as Mr. Cooper in a severe recession I would expect to see a shakeout amongst servicers, who don't have our capabilities and I believe that would lead to new growth opportunities for us just like you saw after the last crisis.
Okay.
Clearly I am very proud of our track record, but now let's turn to slide five and talk about how we're positioned today and how we expect to deal with the obvious issues that may emerge in the future.
To start with in addition to our unmatched level of experience today, we have the industry's most efficient servicing platform due to the large investments we've made to develop and expand our best in class technology.
The investments we've made in automation and digital tools.
Means that whatever the next cycle looks like we'll be able to manage through it much faster and a significantly less cost than we did in the past for example, following the enactment of the cares Act you saw us rollout digital self service tools within days.
These tools enable borrowers to initiate and manage a forbearance plan.
Then using our automated modification system, we helped almost half a million borrowers exit forbearance and return their loans to current status at the same time, we improved our overall efficiency and widen our cost advantage over our peers as Chris will show you in a moment.
Now, let's talk about sub servicing which I'd remind you represents 51% of our portfolio in a recessionary environment, we expect our sub servicing margins to remain stable or even increase slightly because of our contracts include incentive fees based on delinquency status and our costs are very efficient.
Also we've launched a new specialty default servicer called right path, which we recently acquired the timing of this move wasn't accidental if we go into recession special servicing expertise and capacity will be another big differentiator for Servicers.
As you know we have a process underway to monetize our <unk> exchange, which is a higher margin digital franchise itself foreclosed properties.
We would expect the recessionary environment to drive higher volumes and earnings for the stones and potentially result in a higher valuation.
Finally, as Jeremy will take you through our capital on our own liquidity is rock solid.
Strong balance sheet makes us the partner of choice.
<unk> to exploit dislocations in the market should they occur.
And with that I'll turn the call over to Chris.
Okay, Thanks, Jay and good.
Morning, everyone.
So, let's turn to slide six and I'll start with the servicing portfolio.
Our total <unk> ended the quarter at 804 billion, which represents the mortgages are $3 9 million customers.
As you can see the portfolio is up 23% year over year, but as Jay mentioned, we intentionally slowed.
The growth in the second quarter in order to allocate more cash to stock repurchase which resulted in fewer bulk acquisitions this quarter now.
Now in terms of our Chilean <unk>.
Target frankly, we're running well ahead of plan.
So we're a little more inclined at this point to be more patient more opportunistic, especially given the uncertainty surrounding the economy, but we remain very active in the market.
Right now we're focused on a small number of bulk deals, which we believe would provide the opportunity for very attractive returns.
Jay also mentioned right path.
Our recently acquired default servicing arm, which included $20 billion in sub servicing <unk> and I'm going to talk more about right Patrick just a minute, but first I'd like to draw your attention to a transaction in which we sold 15 billion at one <unk> to an investor with whom we have a close relationship.
And with whom we have entered into now a broad sub servicing and recapture agreement now.
Now that transaction pushed our mix of owned <unk>.
Sub service back down to about 49% and provided us with additional liquidity to pursue other opportunities now pointing this out because it's a great example of the flexibility we have with our business model, which is to pivot to a more asset light strategy when that makes sense, which allows us to keep growing our cut.
<unk> base, and our operational scale without employing as much cash.
Now, let's turn to slide seven let's talk about servicing income, which is starting to ramp very quickly.
During the quarter servicing generated $30 million of pre tax income, which was right in line with our expectations and which was up from $7 million in the prior quarter as we're just starting to see the benefits of higher interest rates.
In the third quarter, you should expect servicing income to at least double from the second quarter and then the fourth quarter, we expected, it's going to double again, reaching somewhere around $125 million or more.
It should set us up for very robust earnings and cash flow as we head into 2023 and this transaction doesn't really require much imagination.
As for the most part simply a function of lower CPR.
Forward curve and the benefits of process optimization.
And lower amortization alone should equate to roughly $175 million per year and higher operating earnings on an annual basis.
So to sum this up this slide shows you the importance of our balanced business model, which provides us with solid earnings and cash flow during periods. When the originations market is under pressure as it obviously is now.
Now just to state the obvious this is a huge competitive differentiator for Mr. Cooper since as you know most of our peers are more concentrated in originations.
Now, let's shift our focus from interest rates to operational expense, which is something we can control and which lies right at the heart of our strategic thinking.
If youll turn to slide eight I think youll see that Theres, a very good story here.
The Upper left chart gives you some historical perspective.
Looking at operational expenses in basis points of the portfolio you can see we've driven a 39% reduction since 2018, which as you recall was when we completed the merger with <unk>.
Now for some extra perspective, you can compare our cost to serve using MBA peer survey, which is the chart on the lower left and as you can see we've widened our cost advantage for 15% below the peer average to 30.
It won't surprise you since we've just recently completed our transaction with Sage it that the main driver of lower costs has been a cloud native servicing technology, which is state of the art and best in class.
In the chart in the lower right shows you the significant increase in loans per FTE, we're able to handle given functionality and scalability of those systems.
Now turning to the upper right.
Zero in on the last five quarters now theres been obviously some quarter to quarter variability with some favorable accruals in the first quarter an increase in expenses in the second quarter, which by the way reflected the additional head count we added as part of the right path acquisition.
But in total what you see is 12% growth.
Year over year in expenses.
Versus 23% growth in <unk>, which I think you'll all agree is a pretty good example of positive operating leverage.
Now I don't want to guide you to expect the same pace every quarter, but we have set a long term strategic target for operating expenses that is significantly lower than where we are today.
So let's talk about how we're going to get there.
As part of our strategic planning process, we've identified a series of work streams to drive further significant operational efficiencies.
These include rolling out more digital self serve functionality.
Improving our online content.
<unk> much higher IV, our containment and digital engagement.
And streamlining our processes for key areas like payments in escrow.
Also we are improving our six sigma discipline with the goal of further reducing errors and rework and as an aside I would stress that none of this is coming at the expense of the customer experience.
So the contrary most of these initiatives will drive both efficiency gains and produce a more personalized friction free experience for our customers.
And over time, you should see not only lower expenses.
But in an upward trend in customer satisfaction metrics as well.
So to sum up this slide.
Cost leadership as a central element of our strategy.
And as we make more progress with costs, we're going to drive higher returns, we're going to deepen our competitive mode, and we're going to cement our position as the dominant residential mortgage servicer in the United States.
Slide nine gives you some more information at right past servicing.
<unk>.
As you all know is a specialty servicer with a focus on high touch or severely delinquent loans and.
And a very impressive 25 year track record.
We acquired this business in the second quarter together with an excellent leadership team in.
An existing sub servicing relationships with several large sophisticated investors.
Now notwithstanding our own very deep experience we.
We were very impressed with the tools and capabilities of this platform, including some very interesting work. They have done with machine learning techniques to optimize customer engagement drive very high modification conversion and cure rates and reduced recidivism, while improving customer satisfaction.
We're currently integrating right path onto Mr. Cooper's platform, and then we're going to take them out to market as part of our existing sub servicing capabilities.
As well as a standalone option for investors, whose current servicers may not have the capability to manage high touch loans.
Now if we do experience recessionary conditions.
Many of you expect.
There will be a very strong demand for REIT path, but even if the credit cycle is less severe we think theres an opportunity to expand our capacity and market share.
Now, let's turn to slide 10, and discuss the origination segment, which produced results basically in line with our expectations.
Pretax income for the second quarter was $63 million.
Unfunded volume of seven 8 billion.
Now Youll noticed the margin was down to 103 basis points, but that was due strictly to mix shift as the ratio of corresponded to DTC increased in the quarter.
Obviously this is well below the profits we generated in 2020 in 2021, but I think the good news is that we pretty much gotten our capacity in line with current market conditions and so as long as we don't see further swings in rates or a real deterioration in economic conditions. This should be.
New run rate for the foreseeable future at let's say plus or minus $50 million of pre tax income.
Now you all know that adjusting capacity is one of the key challenges in running our originations platform and the big swings in demand make it especially difficult to sustain the pace of investment and innovation that's needed to continuously evolved so let's turn to slide 11, and let's talk about how where it can.
Tenuously, improving our DTC platform.
As you would expect our primary focus right now are on projects that drive efficiencies and reduce cost to originate like project Flash, which you've heard us talk a lot about on past calls.
As a reminder, flash.
<unk> <unk>.
<unk>, what we call the middle office of originations and it includes not only digitizing various fulfillment related tasks, which used to be performed manually, but also using autonomous assistance to optimize workflow and to allocate tasks the specialized low cost resources.
As you can see from the chart on the left we've steadily increased the percentage of loans that are processed through flash.
14% of total fundings of year ago to 57% today and our team expects at 70% by year end. Those is critically important because flash has already driven a very meaningful 18% reduction in the total cost to originate for our DTC channel and if you think about <unk>.
On sale and EBT margins, that's a very important efficiency gain which will help us sustain margins during this difficult part of the cycle and.
And efficiency per se is not the only benefit that comes from flash is we're creating a faster in a more consistent experience for our customers, which is lifting our satisfactory metrics.
Finally flash is vastly more scalable than our legacy processes. So you should expect that when the originations market improves whenever that may be we will be in an excellent position to ramp up volumes and maximize our margins.
In addition to flash we've been working to optimize several customer facing processes with the goal of improving response times. These.
These include improvements and some basic functionalities like rolling out much more sophisticated text and chat capabilities.
And improving our online application technology, all of which are driving a better digital experience for our customers and our team members.
Now if you're wondering if these investments are paying off you can turn to the right side.
Of the page, where youll see some.
Although our most important kpis first as Jay mentioned, we hit our strategic target of 60% refi recapture which we established a year ago and we kept improving in July .
When we hit 68%.
For customers with whom we have a retail relationship means.
Meaning borrowers who have already gone through a transaction with US recapture is now 92%, which is best in class.
So we have a very good reason to think we're as good as if not better than anyone in this industry.
Now I'd like to talk about purchase recapture which historically wasn't a focus because it requires a very different sales process, but it is something we started working on about a year ago. When the rate was only about 2%.
As you can see from the second chart on the right.
We're making slow but steady progress.
And we're very pleased to be now running at about seven 2% now this isn't a level of brag about as many of our peers with distributed.
Branch networks report much higher numbers, but for a centralized DTC platform. It's a meaningful first step and importantly equates to about $500 million in funded volumes per quarter, which is material for us.
We're going to update you from time to time on purchase as we get closer to our near term target of 15%.
But the more important point here is that our DTC platform can be adapted to a variety of different products and approaches and it provides optionality for us in new channels, such as organic new customer acquisition and white label partnerships.
Finally, I had mentioned that our cash outperformance is excellent accounting for 81% of DTC volumes, which shouldnt be a surprise given our long history with this product.
As well as the special technology, we have developed and the huge amount of equity available to our customers.
May interest you to know that during the second quarter, our cash out customers had on average $140000 in equity and $60000 in consumer debt.
It should give you a sense of the opportunity we have here.
Now if you'll turn to slide 12, I'll share an update on its own.
During the second quarter zone was roughly breakeven, which was right in line with our guidance.
Another positive was the growth in our inventories, which reached a new high.
And we continue to see the business on track for 40% market share by year end.
So having made these points were still experienced some variability with inflows as servicers continue to take a very cautious stance relative to regulatory guidance, which is something we've talked about in recent calls.
As you may have heard during April the government mandated a 60 day pause for borrowers seeking additional assistance, which led to an overall slowdown in foreclosure activity.
However in July with that 60 day period, having expired or inflows are now running at nearly two times the level they were in June .
We continue to monitor the backlog of delinquent customers coming out of the pandemic.
According to the latest FHA data.
There were 309000 borrowers who.
Who are 90 days or more delinquent with many still on forbearance plans that will soon expire.
We get closer to year end, we would expect to see a much faster rate of migration to foreclosure status.
To put this data in perspective, so far there are only 46000 FHA foreclosures in process, which is less than half of what wed expect in a normalized market to say nothing about what we would expect during a recession.
Now with that I'll turn it over to Jamie Who's going to take you through the financials.
Thanks, Chris and good morning, everyone. If you turn to slide 13, I'll start with a brief recap of our results.
As you heard net income was 151 million, which included a positive MSR mark of $196 million.
$17 million in operating earnings and adjustments totaling $7 million.
Adjustments consisted of $3 million in severance charges $3 million in transaction costs related to the right path acquisition and $1 million and facility consolidations. Additionally, you may have noted that our corporate expenses were a little elevated in the quarter. This was driven by approximately $5 million in one time items that we do not expect to reoccur.
Our weighted average diluted share count declined from $76 six to $74 3 million shares and we ended the quarter at $71 7 million shares outstanding reflecting the impact of stock repurchases.
Our remaining authorization now stands at $117 million.
Now turning our focus to return on equity in the past you've heard us talk about a range of operating returns between 12% and 20%.
And that we would expect to operate in this range during most parts of the cycle.
Obviously this time last year, we were well above this range just as we are below it now.
The message I'd like to leave you with is that we have passed through the trough from here operating turn should start to build back towards that target range now how quickly we get back above 12% will depend on the pace at which we utilize our excess capital for growth or return it to investors.
Now, let's turn to slide 14, and talk about tangible book value per share, which we believe is an important evaluation measure for our stock.
Thanks to strong net income TBB was $54 51 per share up 46% year over year.
This was driven primarily by operating income and positive MSR marks demonstrating the power of our balanced business model. In addition over the last year, we've opportunistically repurchased $15 4 million shares for $587 million to date, we have retired 24% of our common shares through our stock repurchase program.
I'd also like to point out that we utilized $44 million of our deferred tax asset in the quarter, bringing the balance down to $750 million or 19% of TBD.
Now, let's turn to slide 15 to discuss the MSR during.
During the quarter mortgage rates rose by 103 basis points, leading to a decrease in the lifetime CPR assumption from eight 9% to seven 7%. Additionally, swap rates increased by 72 basis points, which drove higher expectations for servicing interest income.
However, as a partial offset we increased the discount rate from 10, 7% to 11, 3% as a result, MSR values increased by 6% to 155 basis points.
Recognizing that some people look at servicing valuations in terms of fee multiples for the second quarter. We were at a multiple of five times, the underlying servicing strip, which should be around the median for our peers.
Now turning to slide 16, let's review liquidity, which remains very strong.
Steady state discretionary cash flow of $23 million in the quarter and given the strong outlook for servicing income we'd guide you to expect robust cash flow in the third and fourth quarter.
Quarter end unrestricted cash was $514 million.
This plus undrawn capacity on our warehouse lines left us with $1 9 billion of liquidity.
One of the benefits of our balanced business model is that mark ups in the MSR portfolio translate into additional collateral available for liquidity.
This quarter, we increased MSR capacity by 600 million, which included a new multi year $400 million facility and a $200 million upsize of an existing facility.
We used a small portion of this increase in liquidity in the second quarter as we drew down $150 million to fund acquisitions, bringing our total line utilization to $950 million.
Now, we're very mindful of the mix of debt, we used to fund our assets as you can see in the lower right hand chart MSR lines ended the quarter at 25% of total debt.
Finally, I'd like to remind you that we have a five year liquidity runway with no maturities until 2027, which is a nice position to be and given the concerns about the economic outlook.
I'm going to wrap up my comments on slide 17 by talking about our robust capital.
Our capital ratio at quarter end as measured by tangible net worth assets with 36% up from 26, 8% last quarter and double our initial target of 15%.
Excluding deferred tax assets in <unk>, which is a metric that some debt investors focus on them.
Our capital ratio was 29, 7%, reflecting both strong capital generation in the quarter and the utilization of the DTA.
Like to add that a threshold for <unk> III rating 17, 5%. So we see the company remaining on its path to higher ratings.
Okay second ratio, which is important to debt investors as the ratio of debt to tangible network, which has remained consistently below one times.
To wrap up our prepared remarks, these capital ratios, meaning that we have great optionality, having the best operating platform in the industry backed by huge capital and liquidity allows us to patiently watch the market to see how recession fears play out or.
Our ability to significantly boost our OTC through our owned and sub servicing growth combined with our stock repurchase capabilities truly highlights the flexibility of our balance business model.
With that I'd like to thank you for listening to our presentation and now I will turn the call back to Ken for Q&A.
Alright, Thanks, Jamey and I would like to ask Justin now to start the Q&A process.
As a reminder to ask a question you will need to press star one on your telephone please be standby, we compile the Q&A roster.
And our first question comes from Kevin Barker from Piper Sandler Your line is now open.
Good morning, Thanks for taking my questions I wanted to follow up on the MSR I noticed that you are.
Five times servicing fee.
It up this quarter, but you had some hedging to offset that I believe is equal to about 29%.
The markup in the MSR.
Would you given the evaluations today anyhow.
Any outlook for a certain outlook would you consider potentially increasing the hedge on the MSR to protect.
Protect book value here, given it is an important metric that youre looking at.
Yes.
It's very timely question.
Question Kevin.
The answer is overall longer term, we'd consider that if you remember back a couple of years ago. We had no hedge in place today were we hedged about 25% of the portfolio, which really reflects the part of the portfolio, that's leveraged and that's really to protect liquidity and avoid margin calls.
Think longer term.
Yes, we will consider that and we've had lots of debates about it right now there's so much volatility in rates.
That.
The number one priority for us is making sure we.
Maintain our liquidity and don't see anything unusual happen now that unusual period may pass in 30 days and we'll rethink it but longer term. We think it is important to always be considering.
Preserving book value given current.
Valuations, but liquidity is up it will always be priority number one for us.
Considering your liquidity today.
Would you have the capacity to put on a hedge that would be the majority of the value of the MSR just given your liquidity position.
With $1 $9 billion of cash okay.
Yes.
100%, if we if we hedged our entire portfolio I want to say given a realistic.
Chuck I mean, we've got $1 9 billion liquidity. So I don't want anyone to misunderstand. My comments said, we've got concerns about debt liquidity is the best it's ever been in the company, but it's also we're in a period, where there are very unique opportunities and we want to make sure. We keep every bit of dry powder to take advantage of that but having said that if we were a hedging the entire.
Portfolio than we had.
Maybe.
Hundred basis point shock it would cost us several hundred million dollars of liquidity and we just.
That's not a huge number compared to a 1 billion nine but.
Again, there's a lot of near term volatility a lot of uncertainty in the economy, we want to make sure we preserve that dry powder to take advantage of some of the dislocation that's happening.
And.
But to your question absolutely over the long term.
We will probably move to have more of a hedge.
Okay, and then just can you expand upon those comments a bit about opportunities in the market I mean, you've been active in the MSR space, where you're buying back your stock.
Supporting earnings.
In the near term.
Long term.
But there has been some dislocation of cost to market or are you seeing other opportunities maybe maybe M&A I know you guys haven't been active for quite some time, but is that is that a possibility as well.
Well I think Kevin This is Jay I mean, what you're seeing happen in the marketplace is exactly what we predicted and <unk> discussed youre seeing more and more MSR assets come to market.
I would say we are seeing.
Double the activity.
Currently that we saw same time last quarter and a lot of thats coming from independent mortgage banks. So.
And frankly.
<unk>.
The purchase price there is attractive I mean, the yields are very attractive in there there is going to be a lot of opportunity. So.
We are actively looking at that but we're being patient there as well from a platform standpoint, it's unlikely.
It would have to be a platform that would bring something differentiated to the table, whether that was technology or something that we don't have today.
Simply believe we have the best servicing platform.
Direct to consumer platform and the <unk>.
Place from a retention standpoint, so it has to be a really exceptional platform for us to take a look at but.
Look I think we think theres going to be more disruption, we think theres going to be more opportunities and I think the prudent thing to do is continue to.
Keep the dry powder to chris's point to to be ready.
When that comes.
Okay.
Thank you for the comments, Joe and Chris.
Thank you Kevin.
Thank you.
And one moment for questions.
Hey, guys good morning.
Thank you Serge.
Just on the servicing it looks like your base servicing fee was up to 63 basis points from $14. Five was that just driven by the increase in the owned MSR.
Or anything else to call out there.
Yes, it's exactly right we did as you remember.
Some large acquisitions in the first quarter. So that's all it's a reflection of the mix has changed a little bit.
But I'd remind everyone that while we're saying there's some great opportunities we grew the portfolio.
83% year over year, and although we didn't have as much growth this quarter, we actually sold some MSR.
But.
You should expect that that that number will move around a little bit, but just as a function of mix.
Okay.
<unk> retained sub servicing basis in our growing service and relationships.
It was a win win.
Okay, great. Thanks makes sense and then just the increased discount rate on the MSR was that just a reflection of.
The increase in market rates or anything else there and then just on a related note.
Just with the move down in rates.
Any take on this.
Reduction in the MSR value this quarter.
I think that was just a little bit of conservatism on our part Bose we try to do.
A little bit of conservatism all time in the MSR marks but.
There was a lot of product in the market and so we just thought it was prudent to except expect that there might be.
Product trading at higher returns and so we just did that proactively I guess.
So it wasn't dramatic but we thought it was the right thing to do.
Okay, and then just in terms of.
The impact on the MSR from rates declining this quarter is that meaningful yet.
It's not significant.
Right.
But it will be what it is at the end of the quarter.
Okay, great. Thanks.
Okay.
And thank you.
And one moment for questions.
And our next question comes from Jay Mccanless from Wedbush. Your line is now open.
Hey, good morning, Thanks for taking my questions.
I guess the first question. We have is if we think about the third quarter.
Do you think that 50 to 60 million guidance that you had provided for the second quarter on volume side. The 6 billion do you think that's replicable in the third quarter.
I think yes, I think it's.
Saying that.
Balance of their $50 million plus or minus is about where we expect to be every quarter. It could be 60, it could be 40% it could be.
It's going to be in that range right now I feel good about the production we have.
It's only a month into the quarter, but we feel good about it.
So yes, we definitely think we'll replicate that and at.
At the same time, we're going to see servicing.
Income double in the quarter, if not more than double in the quarter. So I think the second quarter youre going to really see.
When we talk about a balanced business model.
I think on the second quarter's over that's going to jump off the page.
Third quarter, I mean third quarter excuse me, yes, I think Jay I mean, we really we.
We feel good about originations and we think it settled in at a level, where we're seeing.
Locks and leads kind of come in where we expected I think we've right sized it.
To the right place so.
We're seeing pretty stable consistent performance there.
Even a slight improvement.
Last couple of weeks. So I think the long answer is we feel good.
Okay great.
And then our second question.
Talking about slide 12 in the deck.
I know you guys are using the historical average of where foreclosures have gone on the delinquency book, but.
Dean.
And I guess looking at maybe what's happened on the conforming side that when the <unk>.
<unk> have rolled off.
Forbearance has rolled off you didn't really seen big spike in the foreclosures that I think we would have anticipated I guess, what what do you think is different than the FHA book.
And how how is that going to benefit the zone exchange.
Well first of all you got to kind of frame the FHA book versus GSE right. It's obviously different credit different profile different HP et cetera. So I think you've got to start there I think second when you think about what's left in forbearance.
<unk>.
Honestly a lot of those loans were even delinquent before the pandemic.
So I think youre going to see a different outcome than what we've seen.
In the last few months, especially with the agency book. So I think we don't have any problem whatsoever getting to kind of a normalized rate when you're just really look at the underlying credit characteristics of those borrowers you have to tell into forbearance.
Lot of those were delinquent previously so I think that's how we're thinking about it.
Okay.
And then the benefits I guess just running.
Running more of that through this book as well as is there any with adding right pass on is there anything we should think about in terms of accelerated or expanded business opportunities from from right path in terms of the FHA book.
Yes look I think right path has a fantastic reputation in.
In the industry.
They are not obviously they are at the size and scale that we are today, but we think there'll be some incremental but I don't think it will be.
Overly material, but there will definitely be some some benefit and we think we'll grow that business, obviously, if the environment gets worse.
There is an opportunity to grow that business in a meaningful way.
Okay, Great. That's all we have thanks for taking the questions.
Okay.
Thank you.
One moment for questions.
And our next question comes from Giuliano Bologna from Compass point. Your line is now open.
Thank you.
I'd be curious about.
Yes.
We've all heard your commentary around share repurchases.
Yes, we obviously have a tremendous liquidity position.
Obviously, youre building, even more capital going forward.
Improving cash flow improves.
VR is coming down.
Curious.
If there is an incentive to lock in book value and repurchase more stock or how you think about the balance between material because I was actually I was trading.
At a pretty substantial discount to book value. If it was a great return and buying back buying.
Buying back our stock and there are also potential accretive things that could happen over time that could be significantly more accretive to book value. So I'm curious, how you think about repurchasing stock and Thats more of a near term next couple of quarters or at risk.
Forward basis.
What's kind of forward looking at two or three year outlook. When do you think about the year.
Accretion potential.
Well, it's a great question Giuliano, it's something that we had a board meeting yesterday, we had a long debate on that.
The we've always said, but the most.
Important priority for us is to grow the portfolio when we can get the right returns and.
And right now we see an opportunity to get some pretty good returns now we're extremely disciplined and so that's another element of why we didn't buy as much even though there's more product in the market.
In the first quarter, we completed a lot of acquisitions at what we consider to be excellent returns.
We could do the same thing this quarter and we are looking at some pools and we will do that.
But at the same time, we just bought back $100 million worth of stock.
We think the stock is cheap.
So I don't want to confuse anyone about that now locking in the value of the portfolio and buying back the shares.
I almost implies like we've just decided it's game over and we reached a maximum and we're now going to liquidate and that's that's not our.
That's not our plan.
But your question's a good one just like Kevin asked.
Values are high.
And we don't want to see those values just dribbled away from us. So we are not going to.
I think what we have is.
What we consider to be the right position for a period of extreme.
Volatility and its just not rates going up or down if you look at the correlation of the 10 year and mortgage rates over the last month, there has been some pretty weird behavior there.
And actually to go back to those as question I'd say.
Quarter to date.
Mark maybe a negative mark because they move down maybe 100 million Bucks I think some of that's going to normalize.
Between now and the end of the quarter and things should.
It will be a little bit more predictable, but making any big strategic change right now when theres such uncertainty around the economy and Theres a lot of.
The potential for more product, even even better prices to come to market.
Don't want to jump too soon we want to be smart and very opportunistic and if the best returns for our shareholders come by buying more shares back we will do that.
So and it's a real benefit of having a balanced business model, but I think youll see more of the same right we've been very consistent.
Been buying portfolios, we've been buying back shares and making investments in the company, where we think we can drive a better.
More efficient process and a better customer experience.
We've also been increasing our hedge position. So I think balance is the order of the day and frankly prudent.
Cautious going into this environment is that's the way we're thinking about it.
That makes sense.
Not related somewhat related topic.
Last quarter, you guys mentioned, having some initial preliminary discussions.
With bankers about potentially monetizing.
James platform.
While this has been a lot of volatility.
But we're also moving into a cycle, where that business can outperform through deferred silver.
If we're going into a recession I am curious if theres been any.
Progress on discussions or at least yes.
If there's any movement.
Any movement in the process there and also interest obviously.
Moving the right direction.
A very interesting asset that's countercyclical essentially going into a recession here.
Yeah.
Yes, there has been progress we have retained.
Two banks to help us through this process.
Also as we pointed out the government did.
Mandate, a 60 day pause for four borrowers that were seeking assistance.
From their states and would that really cause.
Really all services to do is to go back scrubber portfolio try to figure out who might be doing that and who who those borrowers where whether it really met was essentially 60 day pause on all activity now that's over.
And I think as we pointed out.
Activity is ramping in July was double the rate of June .
But we're behind where we expect it to be.
So we thought we would be running a process in the fourth quarter, it's probably the first quarter it may be.
It's going to be when we hit a normalized run rate is very obvious to investors what the revenue and returns of the business or the other thing is.
Look to be honest this is not a.
Run of the mill commodity business, it's a high technology Fintech business, that's very it's got very big margins.
It's got an emerging leadership position in the market.
And we wanted to get the best value for it but it takes a little bit of buyer education. So we're going to have probably longer than average period of really putting together. The material every buyer is going to need to understand the nuances of the FHA.
Market.
And how the business works and how what we've invested in the technology and.
I expect this there'll be a successful prost.
Process, but we're not going to rush. It. This is a valuable business who's just now breaking even so.
<unk> no reason to try to convince people.
That it is going to be wildly profitable.
Better to let them see it is actually wildly profitable.
If we're going to maximize.
The proceeds.
That's great.
And then I just had one.
So much simpler question.
Similar to the question that Bose asked earlier on about it.
The servicing income.
R&D base servicing fees over just simply the owned MSR as the mix would be the.
Self service it looks like the base servicing fee went up to about 33 basis points from 36 last quarter.
If I just start on that basis is there something that would have changed that because historically Jenny is accretive, but there hasnt been that make shift in the mix.
Fannie Freddie versus Ginnie, and not able to say I'm just curious what may have gone into that increase in revenue.
So that should never back or does it stay in and around that Zip code.
Yes.
Youre talking about the owned piece is that.
Jesse.
And Dave servicing fee.
Compared to the average of owned MSR is that that basis point number. That's my calculation that Eric was 33 three basis points up from 36 basis points last quarter.
Curious what may have got it got it.
I think it's got to be the acquisitions that we.
That we onboard it would be my guess.
Ken and team can get yes, well follow up with you on that John It sounds like.
Thanks for answering all my questions I'll.
I will jump back in queue, thanks to them.
Thank you.
And one more for questions.
And our next question comes from Kyle Joseph from Jefferies. Your line is now open.
Hey, good morning, Thanks for taking my questions actually been answered.
Just one follow up on the gain on sale margin, obviously I understand the mix shift Joe.
Majority of that but can you give us a sense for gain on sale margins by channel in the quarter.
They were largely flat.
There was a little bit of movement in both but it's not material the real driver of the.
The reduction in the overall margin was just <unk>.
<unk> come in where we expected we did a little bit more.
Correspondent.
And just.
That ratio of correspondent was larger this quarter than it was last quarter. That's that's the only material factor.
Got it that's it for me thanks for taking my question.
Sure and <unk>.
Thank you.
And one moment for questions.
And our next question comes from Lee Cooperman from Omega family Office.
Thank you very much let me first congratulate you guys you guys have done a fabulous job for shareholders and being a large show that I'm very appreciative.
So now let me get my questions given.
Given the way you want to run the business what would you say is your amount of excess capital at the present time.
That's a great question I think long term Lee we have a minimum.
Our.
Our equity to assets is 30%.
Our minimum target is 15%.
We don't really have a we've never published a long term target, but at 30%, we think thats more certainly more than we need to run the business.
And so we would expect that to manage that down as we acquire more assets to buyback more shares but.
I don't think we've said, we want to be at 20% or more.
18, or 22, but we're certainly above the level that you should expect us to be over the long term.
Alright, I am assuming that we see.
<unk> had a number in mind for your question.
I think over the long term your average repurchase price has been something like 30.
I got you any numbers you have eight conference calls this morning, I apologize, but your average repurchase price has been the mid thirties and a more recent one is like my.
Hi.
Youre bullish on the business would you are you should be basically.
Have you thought about getting out ahead of the curve and buying a lot of stock back 10, 15 20 million shares.
Arrow in life, where this guy Henry Singleton, who regrettably passed away. He was brilliant but he did eight self tender offers and retired 90% of his stock before anybody talked and I understood stock repurchase.
So have you thought about doing.
Some large scale rather than onesies and twosies.
We've thought about it and.
Actually I started my career working for Henry Singleton, So I appreciate your comment but.
The.
There is a limiting factor.
When we've had the opportunity to buy a big block of shares at the right price. We did that when we bought back KKR shares and we'd certainly consider that but you did see us buyback of $100 million of shares which was really double what we were expecting to do in the quarter. Now you are right. We did pay a higher price we paid $44.
22, a share when the stock was trading down.
A couple of days when I thought maybe we should wait wait a little bit but.
On average.
In summary, we are extremely bullish on the shares we got.
Tangible book value, we feel very confident and we think that's going to grow it reflects basically zero for zone. So anyone can put their own number on it but yes, we will consider it.
It's not like.
Anyone.
Indicated that Theres, a big block forest, but we're out in the market I think in the first quarter second quarter, we bought all the shares we could based on it.
Trading program.
I'm not telling you what to do because like I said at the outset, you guys had done a masterful job of running the business.
But I would just tell you.
If youre very bullish of the business you think your stock is undervalued, you're seeing a lot of excess capital.
And I realize we have an uncertain environment, but the uncertainty is what creates the opportunity.
And so I would just point out it may or may 6th of 19 <unk>.
For Teledyne stock was 155, and three quarters and Dr. Singleton, who you work for or for $200 a share. It by 5 million shares $8 7 million shares with tended 44% of the company took at all.
And basically it was extremely accretive to stock went up quite a bit.
So I just put it on the table, but I'll, let you guys run the business and my other question is really is the reverse of Kevin Barker, who.
Actually a good question about acquisitions.
My answer to your question would you.
Is there a logical buyer of the business and would you consider selling the company if the right price was offered.
And the second question, 100%.
You own the shares that you own a bigger.
The company, then Jay and I do although we're big shareholders. So if somebody is willing to offer more value than we can deliver to the shareholder.
So tomorrow.
Yes, well.
What is the amount of customer balances you have that youre, earning interest is at about $10 billion or more.
This quarter I'd say it was closer to $12 billion, it'll probably because that includes some prepayment cash that we hold.
That will probably continue to decline and we will probably settle in with an 800 billion portfolio, probably will hold about $10 billion of cash at any time.
And you guys earn.
Interest is that correct right.
Some of it some of it some of it goes back to the borrowers.
Yes, we earn.
Certainly.
The majority of it.
So stepping.
Stepping back and just ask you when I look at in terms of stock repurchase it makes sense under certain scenarios first one is most publicly traded companies have to values. So called auction market value, which is the price we pay for one share 1000 shares of 100000 shares in your case that is roughly I Gotta go looking at machine here.
Nevertheless sale is.
Uh huh.
Get to me too many numbers 44, 71, that's public market value and the other value was private market value, what would a strategic or financial investors pay for the entire company and so you guys have a better handle on that than I do but I think it's well above the last sale.
That's the first.
Deteriorate second criteria as you put your five year budget to a given discount model where appropriate assumptions.
Had a value of X, if youre, 20% below X.
And you are confident in X is a second reason to buy back stock I'm sorry for luxury was you guys understand it or the third thing is what is repurchase due to book value per share dividend capacity per share cash flow per share and given where we are selling relative to earnings it would certainly make sense.
Fourth we have to recognize buying back stock weakens. The company have less cash you have more debt relative to equity when a buy back so much stock is to basically.
Radically changed the risk profile of the company and you wanted to maintain flexibility, but I would say that if you had three or four or $5 million of excess capital might want to think of doing the tender offer windows next trip down the stock. Mr. Market gives you a chance that shipped but you guys have done a great job Brian It kept me I'm happy to be in your hands.
What are the best Thank you very much really appreciate it. Thank you.
And thank you and I'm showing no further questions I would now like to turn the call back over to Jay Bray for closing remarks.
Thank you everybody. We appreciate you joining the call and will be following up with them.
Additional conversations have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yeah.