Q2 2022 Ocwen Financial Corp Earnings Call
Good morning, and welcome to the Ocwen Financial Corporation second quarter earnings and business update conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Diego <unk> Senior Vice President Corporate Communications.
Good morning, and thank you for joining us rock in second quarter earnings call. Please note that our earnings release and slide presentation are available on our website speaking on the call will be often chief Executive Officer, Glen Messina, and Chief Financial Officer, Shaun O'neil.
As a reminder, the presentation of our comments today may contain forward looking statements made pursuant to the safe Harbor provisions of the federal Securities laws.
These forward looking statements maybe identified by reference to a future period or by use of forward looking terminology and address matters that are to different degrees uncertain.
You should bear this uncertainty in mind, you should not place undue reliance on such statements forward looking statements involve assumptions risks and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2021, and our current and quarterly reports since such date in the past actual results have.
Differed materially from those suggested by forward looking statements and this may happen again.
Are we looking statements speak only as of the date. They are made and we disclaim any obligation to update or revise any forward looking statement, whether as a result of new information future events or otherwise.
In addition, the presentation of our comments contain references to non-GAAP financial measures such as adjusted pre tax income and adjusted expenses among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. Because they are measures that management uses to assess the financial performance of our op.
<unk> and allocate resources.
non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures as well as additional information regarding why management believes these <unk>.
Measures may be useful to investors may be found in the press release and the appendix to the Investor presentation, now I will turn the call over to Glen Messina.
Thanks, Steve Good morning, everyone and thanks for joining us we're looking forward to sharing our progress with you today I'd like to start by reviewing a few highlights for the second quarter and take you through our actions to address the challenging and dynamic mortgage market.
Please turn to slide three.
Yeah.
We believe our balanced business model is working as intended as expected for the first half of this year servicing appreciation and profit improvement is offsetting originations decline.
Our second quarter results reflect the impact of continued rising rates widening spreads and previously disclosed strategic asset sales as well as the benefits from our actions to address the market environment.
MSR values increased and we improved profitability in forward originations versus the first quarter. This was partially offset by losses and transaction costs of the Epo and MSR sales, we discussed last quarter as well as the market value decline of servicing assets other than msr's.
Our origination team drove meaningful profit improvement in forward originations, while reverse origination profitability was impacted by a steep increase in interest rates and severe spread widening.
We improved our mix of higher margin products and services, we had strong sub servicing additions and a growing potential opportunity pipeline.
We're reducing our cost structure enterprise wide and targeting roughly $60 million in annualized run rate expense reduction by the fourth quarter of this year versus the second quarter.
We've executed or identified actions to achieve at least 90% of that target and we expect to complete all actions in the third quarter and realize the full run rate benefit of cost reduction actions in the fourth quarter.
We closed the second quarter with $266 million in total liquidity.
This is a result of dynamically managing our owned MSR portfolio driving growth in sub servicing over own msr's, optimizing MSR warehouse advanced financing facilities and our custodial arrangements.
To support our capital efficient growth strategy, we're making progress in expanding our relationship with <unk> and other MSR funding partnerships.
Our prudent liquidity management supports our objective to allocate capital to share repurchases debt repurchases and opportunistic MSR investments to deliver value for shareholders.
Consistent with the surgeon bulk MSR trading activity. We are seeing we believe there will be an increase in M&A activity within the industry and we are maintaining flexibility to consider all value creating alternatives.
As we look forward to the second half of the year, our focus will be continuing to leverage our balanced and diversified business model.
The third quarter, we will continue to be a transitional period as we complete our cost reduction actions and other key business initiatives.
We are assuming reverse origination margins remain tight and volumes depressed and nominal reduction in forward servicing prepayments.
With successful execution of our key initiatives and assuming no further adverse market developments, we expect to deliver after tax ROE before notable items at or above our minimum target of 9% by the fourth quarter.
I believe we are well positioned for the risk of a recession in the near term.
We've taken decisive action to Derisk, our Ginnie Mae portfolio, particularly with our <unk> and sale of our most severely delinquent loans.
Additionally, more than 50% of our portfolio is sub servicing with reduced exposure to advances.
And we are a proven industry leader in special servicing as well as the Ginnie Mae tier one servicer.
I am pleased with the results in navigating this business cycle and remain confident in our ability to execute those items that are in our control.
Let's turn to slide four to discuss the environment and our key initiatives to address the market conditions.
Continued rising rates and rate volatility in the second quarter drove further deterioration of industry forward originations.
The MBA industry forecast for 2022 was revised down again in July .
We continue to see competitive pressure in forward originations and the volume and margin environment is impacting our sub servicing clients as well, we expect the timing of servicing additions to be delayed as potential clients deal with the origination challenges <unk> monetize their msr's.
As we and the industry reduce origination capacity the competitive pressures may subside, though we're not expecting that to be meaningfully this year.
A recent reversal in interest rates suggest rates may have peaked however, the probability of a recession has also increased with the heightened probability of a recession in the near term. We believe our special servicing skills will be increasingly valuable and may present, new growth opportunities for us.
The reverse market has been adversely impacted by the straight environment as well.
The reverse mortgage interest rates are up over 125 basis points in the second quarter after increasing about 25 basis points in the first quarter and in the second quarter reversed spreads widened to roughly four times our observed levels in 2021.
This has adversely impacted refinance opportunity in the reverse mortgage industry and the industry overall is pivoting to new customer acquisition.
Regarding reverse sub servicing we believe prospective clients are excited about our entry into the market our end to end capabilities and proven servicing skills.
Long term, we still like the reverse market demographic trends remained favorable with 12000 people turning age 65 every day senior home equity is at record levels with over 11 trillion at the end of the first quarter, an increase of over $500 billion versus the fourth quarter of 2021, we built.
Leave the legacy stigma.
Is diminishing around reverse mortgages and is becoming more accepted as a retirement planning tool.
In this business environment, we are focused on a deliberate strategy comprised of five initiatives to drive business performance and deliver value for our shareholders.
We're leveraging the strength of our balance and diversified business model were driving prudent growth adapted to the environment.
Reducing our cost structure across the organization.
Optimizing liquidity diversifying financing sources and repositioning for higher rates.
And allocating capital to maximize value for shareholders.
Now please turn to slide five.
We believe there are three main profitability drivers for us in this environment.
First our balanced business model is working servicing GAAP pre tax income in the quarter is up significantly versus the second quarter last year due to MSR value appreciation.
Slower amortization expense productivity and portfolio growth.
The improvement in servicing profitability and MSR value gains more than offset the decline in profitability in forward originations as well as the impact of our strategic asset sales to derisk, the servicing portfolio and harvest MSR value appreciation.
And this part of the market cycle originations will be a less important driver of earnings but is a critical element of our business to replenish and grow our servicing portfolio.
The second driver is sub servicing.
We've made great progress in growing our forward some servicing business supported by our global technology enabled scalable platform.
Our success here reflects our proven industry, leading operating performance that has been recognized by Fannie Mae Freddie Mac and HUD with top honors in the respective servicing performance recognition programs.
We continue to be a leader in special servicing supporting borrowers and investors and outperforming MBA and movies industry operations benchmarks.
We have earned our clients' trust as is evidenced by meaningful sub servicing additions renewal of our contract with rhythm, formerly <unk> and other potential new opportunities.
We've added $79 billion in sub servicing <unk> in the last 12 months.
We have a $14 billion in scheduled subservicing additions in the next six months and our opportunity pipeline for forward and reverse is over $400 billion in potential additions.
Our recognized special servicing skills position us to deliver value to clients investors and consumers in an economic downturn and with over 50% of our servicing portfolio comprised of sub servicing our exposure to higher cost and advances in the recession has reduced versus a 100% owned servicing portfolio.
The third driver is our reverse business.
We're the only large scale full service end to end reverse mortgage provider in the industry.
While origination volume and margins have been adversely impacted by record spread widening and rate increases we continue to believe the long term industry opportunity is attractive.
Margins have been and continue to be superior to the forward originations market and we are taking actions to adjust our cost structure to address recent margin compression.
A reverse sub servicing business is gaining scale profitability is improving and we have a robust potential opportunity pipeline.
Overall, we're excited about the potential for our business and do not believe the recent share price is reflective of our financial position our earnings power or the strength of our business.
Now, let's turn to slide six.
Our growth strategy has evolved for the current environment. The last this time last year, we were focused on driving MSR additions at attractive multiples.
However, this year, we opportunistically sold msr's as well as attractive levels and we've been prudent in selectively investing in new msr's in the first half of the year.
Our focus has been driving growth in sub servicing additions through new clients math.
Other MSR investment partners.
We believe the emphasis on sub servicing versus owned servicing and this part of the cycle supports our capital allocation flexibility and helps manage the risk of increased servicing advances and servicing profitability deterioration with increased delinquencies.
We're growing in higher margin products and services in forward originations, including Ginnie Mae best efforts and non delegated deliveries and direct to consumer in both forward and reverse.
We've increased the percentage mix of these products and services by six percentage points. This year year over year driven in large part to continued growth in our client base.
And forward consumer direct we continue to shift to cash out and are refinanced recapture rate continues to improve achieving.
Record level for us at 51% during the second quarter.
More recently, we have begun to focus on purchase originations and consumer direct forward consumer directed us.
But we are really in the very early stages of building our capabilities here.
In reverse we also continued to grow direct to consumer retail originations, which have the highest revenue margins.
With increased competition expected in reverse.
<unk> legacy forward originators as well as traditional reverse originators in the market transition to customer acquisition and the larger correspondent clients, who may be shifting to direct H MBS issuance growing reverse direct to consumer retail is a critical component of our growth strategy.
Notwithstanding the unfortunate but necessary downsizing, we initiated we're pleased with our team's progress to reposition us to optimize performance for the current market environment.
Now please turn to slide seven.
Mortgage application volume recently dropped to levels not seen in 20 years in this part of the mortgage industry cycle any industry participant who as exposure to mortgage originations needs to make the difficult choice to aggressively reduce expenses to maintain profitability.
We've demonstrated our ability to reduce cost materially during the PHH integration.
Cost optimization productivity enhancement and continuous improvements are all part of our core DNA.
We're committed to reduce costs to support market demand and business needs. In this part of the industry cycle, while continuing to deliver on our commitments to customers clients and investors.
We're targeting annualized cost reduction of over $60 million across originations servicing and overhead functions and thats as measured by the fourth quarter over the second quarter of this year.
We've executed identified actions to achieve 90% of our annualized targets and expect to complete the remaining actions in Q3. So we are well underway here.
We expect to realize the full impact of our cost reduction actions in the fourth quarter and our focus is to drive sustainable cost reduction.
Driving demand management supporting the most essential activities and maintaining a prudent risk and compliance management framework.
The key actions include rationalizing staff levels vendor contract costs as well, we continue to leverage our seasoned mature global operating capabilities.
Our proprietary global operating platform has been in place for the last 20 years and provide services to support all aspects of our business.
Lastly, we continue to drive automation digital migration and other systemic process improvements consistent with our technology roadmap and focus on continuous process improvement.
Please turn to slide eight.
We are optimizing liquidity and financing sources and custodial arrangements to support the needs of our business. During this part of the market cycle.
Total liquidity has improved since year end 2021. This is a function of capital efficient growth and liability management actions.
As we mentioned earlier, we are actively managing our growth with a bias to capital light sub servicing we are dynamically managing our owned MSR portfolio to selectively harvest value appreciation.
We expect we will continue this approach going forward.
And we're focused on all of our asset base financing arrangements to ensure we have the optimum capacity aligning indices and improved spreads on warehouse borrowings.
We expanded our MSR financing facilities improved spreads advanced rates and aligned interest rate indices to match custodial arrangements.
Similarly in our warehouse lines, they've been right sized mitigating rate increases through optimized utilization and we've negotiated better terms.
We've also restructured advance lines to duration match interest indices to align with our custodial arrangements.
Improved cazorla, we've improved our custodial earnings rate by nearly 75 basis points with more expected in the third quarter.
And we're tying our accounts the sofa going forward.
We're making progress negotiating our mass upsized, we're targeting an incremental $250 million equity capacity and targeting to complete that upsize. In Q3. In addition, we are in discussions with two potential MSR funding partners and are targeting to complete at least one.
<unk> with these potential partners in the second half of this year.
Please turn to slide nine.
As we said last quarter given the current share price, we are optimizing our capital allocation to deliver value for shareholders.
In the second quarter, we Opportunistically purchased $25 million of PHH notes at 94, 5% of par. This delivered one time earnings of almost $1 million and has a positive effect on our leverage ratios.
Under our authorization for up to $50 million in share purchases, we've purchased $17 million through July 31 at an average price of just under $30 per share, which translates to roughly 574000 shares retired.
We continue to repurchase stock as laid out in our repurchase plan. We do not believe our recent share price is reflective of our financial position our earnings power or the strength of our business and with a book value per share of roughly $59. We believe repurchasing our shares at a substantial discount to book is a prudent value added <unk>.
<unk>.
We expect the optimization to remain in place until completion of exploration in November of 2022 subject to market and business conditions.
Recently, we have re engaged in the bulk MSR market Opportunistically given improved pricing that we're seeing we are pursuing our current opportunity pipeline of roughly $15 billion potential deals at various stages of evaluation, we would expect to fund potential bulk MSR purchases largely through math, though we also.
So expect some may be funded by PHH directly.
In addition to our robust bulk market. We believe the market headwinds may drive increased M&A opportunities as we have said before management and the board remain flexible to consider all actionable and value creating alternatives.
Now I'd like to introduce Sean O'neill, who recently joined Ocwen as our Chief Financial Officer, Sean Welcome to your first Ocwen earnings call.
I will pass the mic to you to discuss our results for the quarter.
Thank you Glenn Please turn to slide 10 for our financial highlights.
In the second quarter, we realized GAAP net income of $10 million for $1 12 earnings per share outcome, and a 22% year over year increase in book value per share to <unk> $59.
We saw higher rates positively impact MSR appreciation in our own servicing book as well as strong performance in our correspondent origination business, which offset the two negative drivers that I will now describe in the walk on the right side of the page. This.
This graph shows a quarter one to quarter two walk for adjusted pretax income, which is a non-GAAP measure.
The second quarter result was $26 million loss in the change from the $11 million loss in the first quarter was due to three primary items.
First a strong income improvement in Florida origination of $11 million over the first quarter due primarily to higher volume and margins in correspondent lending.
Second.
Spread widening and reverse origination drove the bulk of a $9 million quarter over quarter reduction as well as lower volume due to rising rates. So while still a positive income contributor it was down from the first quarter more on these items in the segment portion after this slide.
The final driver where impacts from strategic asset sales and mark to market items collectively these factors caused a $17 million income dropped quarter over quarter, primarily due to a previously disclosed sale of delinquent <unk> bought out of Ginnie Mae Securitizations.
This second quarter sale posted a $9 million loss, but derisk the portfolio by avoiding claim losses and servicing advances going forward.
The other items with a net impact of transaction costs and foregone pretax income from the MSR sale discussed in the first quarter, which reduces servicing revenues in the second quarter plus some adverse one time marks on loans held for sale.
These three items collectively bridge the decline from first to second quarter income.
I'd like to recap the notable items that connect our adjusted pre tax income to GAAP net income we provide adjusted pre tax income for greater investor transparency and it is a metric we use in managing the business.
Notables are composed primarily of $34 million of MSR fair value adjustments net of hedge this is due to changes in interest rates or valuation inputs.
$2 million in other notables, mostly from positive impact and litigation reserve release, due to favorable outcomes and a negative impact of severance and other items in the quarter.
For more detailed segment information. Please turn to page 11, where we will start with forward servicing.
Let's begin with adjusted pre tax income in the upper left chart.
Excluding the asset sale and Mark to market impacts previously mentioned the income was a positive $13 million.
Of the remaining negative $14 million servicing income in Q2, the majority of that is non recurring.
And as previously mentioned the asset sales either reduce future risk will provide liquidity to support debt in equity repurchases in the quarter as well as support new originations and MSR acquisitions.
Moving to the right sub servicing growth in our fluids business has been strong year over year and quarter over quarter, driven both by math and other sub servicing accounts.
Speeds continue to come down as rates rise thus.
Thus lowering runoff and creating less drag on servicing revenue quarter over quarter as well as preserving more custodial deposits for float income.
As Glenn mentioned, we have begun to see improvements in float income in the second quarter and anticipate more increases as we aggressively migrate balances to what I call best ex banks, who desire deposits as well as the impacts from the forward curve.
Finally in the bottom right. We have one of the most controllable functions for any successful servicer continuously improving our cost structure.
Regardless of the interest rate environment, our servicing team is always seeking out improvements via automation shift to paperless and other process improvements you can see in the lower right graph that improving trend with a target to lower cost by the fourth quarter.
I'd add here our cost structure includes all foreclosure and other liquidation expenses, which other servicers may exclude so keep that in mind, if you are making direct comparisons.
Please turn to page 12 for forward origination segment details.
Florida origination had a slight loss and adjusted pre tax income for the second quarter and shows improvement due to both cost control and strong correspondent performance.
Correspondent lending is the big story this quarter with a strong income growth of $10 million from last quarter, driven by both higher funded volume and better margins.
This is from adding active clients in high margin areas, such as best efforts non delegated Ginnie Mae and DTC as.
As an example, and best efforts active clients increased by 72% from the first quarter.
The consumer direct volume declined quarter over quarter.
But was able to offset most of that income decline with cost reductions and these efforts will be more apparent in the third quarter using head count as a leading indicator consumer direct head count was down 58% from end of year to the end of this quarter.
We anticipate total forward origination costs will continue to improve significantly into the fourth quarter, even as we are keeping a strong focus on both serving our correspondent and direct retail customers and maintaining a high standard for compliance in risk.
Okay.
Please turn to page 13 for segment details on the reverse business.
On this page, we look at both reverse origination and reverse servicing while.
While the long term reverse mortgage opportunity remains attractive due to borrower demographics and the reverse MSR counter cyclical behavior during a home price downturn there are near term headwinds in this business.
First mortgage rate increases reduce existing peckham refinance opportunities.
Secondly, the spreads on <unk>, MBS or H MBS have widened rapidly in the last quarter as discount margins went from 70 to 105 this impacts gain on sale and overall margins in that business right.
Great driven volume declines or further compounded by large correspondent sellers, who transitioned to direct <unk> issuance.
All of these headwinds are reflected in the drop in second quarter income relative to the first quarter and the accompanying margin decline. It is still a profitable business, but a smaller income contribution this quarter.
Over in reverse servicing this as an income growth story is sub servicing balance has increased the contribution to income is growing and a strong pipeline of servicing additions is evident for the rest of 2022, along with the same laser focus on controlling costs as well as integrating the RMS team from our recent 2021.
<unk>.
Please turn to page 14 for an updated path to our targeted returns by the fourth quarter.
Here, we would like to walk you from the second quarter adjusted pre tax income results of negative $26 million to a projected fourth quarter pre tax income that we expect will deliver a 9% ROE before notable items.
The first improvement of approximately $13 million is driven by nonrecurring items linked to the prior strategic asset sales and mark to market impacts that we just discussed.
Second.
We moved to our productivity and right sizing actions, which impacts all of our business segments and corporate functions that Glenn discussed on page seven.
Combined these first two actions will move us to a positive pretax income.
We then anticipate a return to profitability for origination primarily due to the shift to higher margin products.
Finally, our other net income contribution from servicing will increase due to higher volumes, especially in sub servicing such as Vms reduced runoff as speeds decline and to focus on cost control and improve processes.
<unk> these corporate wide efforts propel ocwen to a strong fourth quarter.
Back to you Glenn.
Thanks, Sean now if you could please turn to slide 15.
We believe our balanced and diversified business exemplary servicing performance prudent cost management and track record of execution position us well to navigate the market environment ahead.
Consistent with our expectations first half 2022 earnings were driven by MSR fair value adjustments offsetting origination headwinds and the build out of our reverse servicing platform.
We delivered positive net income book value per share appreciation and improved liquidity. Despite the impact of continued rising rates and spread widening.
And the adverse impact of our planned strategic asset sales.
Given the current market conditions, we're focused on a deliberate strategy comprised of five initiatives that permeates everything we do to drive business performance.
And shareholder value.
First we're leveraging our balanced and diversified business.
As we said servicing profitability has improved with higher rates and we have a strong value proposition as demonstrated by our sub servicing boarding and robust sub servicing opportunity pipeline.
Our recognized special servicing skills position us to deliver value to clients investors and consumers in an economic downturn and we have derisked our portfolio.
We believe we are uniquely positioned in our reverse mortgage market with end to end capabilities and the opportunity.
For favorable demographics and home price appreciation to drive future.
Growth within the market.
Second we're focused on delivering prudent growth through capital efficient servicing additions and expansion in higher margin products channels and services.
Third, we're reducing our cost structure to match market demand and improve profitability.
Fourth we're optimizing liquidity diversifying financing sources and positioning for higher rates and finally, we are allocating capital to maximize value for shareholders.
Despite the recent headwinds in reverse originations, we believe with the benefits of successful execution of our business initiatives. We can deliver after tax ROE before notable items in the fourth quarter at or above our minimum target of 9%.
I am proud of how our team is executing an unprecedented market conditions.
We have an established track record of successfully navigating multiple mortgage cycles with a focus on prudent growth cost management operational excellence and customer experience we.
We will be unrelenting and this focus.
And with that Danielle, let's open up the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
The first question comes from Eric Hagen of BTG. Please go ahead.
Hey, Thanks, Good morning, I Hope you guys are well.
Maybe a couple on liquidity here, you mentioned harvesting gains and MSR as a driver of earnings can you give more detail around.
Kind of what you mean by that and how to think about that relative to the amount of liquidity that you do carry.
And maybe more specifically, how youre thinking about repurchasing.
More stock and debt in light of being able to monetize on the Sars at their current value.
Yeah. Good morning, Eric Thanks for joining us today, so Eric yes.
Yes, we've been look I'd call it dynamically managing our MSR book, So last year, if you look at.
We focused a lot of our growth on MSR acquisitions last year through a correspondent or bulk transactions last year I think it's generally known that MSR multiples were probably in the mid fours lower than where they are today.
First quarter of the year as we discussed in our last quarter earnings call with MSR values appreciating.
And multiples getting up into the into the fives, Yes, we did take the opportunity to.
Harvest value appreciation.
And our MSR portfolio. So we got a very strong bid strong price for msr's in the first quarter.
It helped us validate where the market is was bid was for MSR.
And again, that's proven to be I think a good trade since MSR multiples quite frankly have come down a bit. Since then so I think we timed that one pretty well.
Our strategy has evolved we've now have.
We have NAV is our one of our key MSR funding partners.
It allows us to grow on a capitalized basis. Additionally, we are working on developing new MSR funding.
Partnerships, we've talked about two new providers, where we're in.
<unk> with and I think that gives us the flexibility to.
Dynamically manage our portfolio to optimize profitability as well as.
Optimize our liquidity position for.
Other investments could be M&A could be share repurchases debt repurchases. It gives us flexibility.
Got it that's helpful. Maybe just one follow up I mean is there a minimum level of liquidity.
That you aim to run the portfolio with.
Over the kind of near term versus maybe the medium to longer term.
Yes, so look here in the near term.
Look we want to make sure we have sufficient liquidity to support all of the initiatives that we have in the business, we want to grow our servicing portfolio and then complete our share repurchase program as well.
I think as I've mentioned before our liquidity varies greatly or I should say cash balances very greatly throughout the month as.
Yes.
As our <unk>.
Custodial balances change payments command payments go out.
Look we.
If you look at the fourth quarter of last year, we closed with roughly $196 million in cash on the balance sheet and a little bit more with the unused lines.
Our focus really right now is we think at the current cash levels, we have enough of cash.
<unk>.
And liquidity to support the initiatives for the business longer term I think as you know all of us and the industry will have to meet increased FHFA, our capital and liquidity guidelines, we are expecting them to be put in place.
Towards the end of this year.
And Ah.
Based on our initial work we think we're in compliance with those capital guidelines. We believe we can we can meet them.
So that is one of the things we take into consideration too.
Got it thanks, if I could sneak in one more if we were to think about the net equity in the company and how it's allocated how much equity do you think you have behind the MSR book.
Florida origination business.
And the reverse origination business and how easily would you say you can move capital back and forth between those segments of the business.
Yeah, we don't.
Publicly disclosed a specific <unk> capital allocation framework, but as a rough rule of thumb.
Look our.
The capital behind our where our originations businesses is basically the equity haircut on our warehouse lines right. So that is the fundamental equity invested in our businesses and our given our Q comes out Eric we can work with you to sort through that and see if there's a way we can we can navigate their through the queue.
And then for the MSR portfolio, it's our it's our.
The book value of our MSR is minus our MSR liability and then our secured borrowings against the MSR and then I'd say, our corporate debt stock is allocated just ratably across.
Look by definition, our servicing business carries I would say carries the majority of our equity.
<unk>.
Versus our origination businesses, especially now as origination volumes are coming down and warehouse balances are declining.
That's helpful. Thank you guys very much.
Yes, Sir thank you.
The next question comes from Matthew Howlett of B Riley. Please go ahead.
Oh, Hi, Brian Hi, Sean Thanks for taking that question.
Hey, Glenn you first got to commend you for the repurchases.
Driving.
Going to drive significant shareholder value.
Both the debt and the equity Ed.
So just want to go with capital allocation going forward.
How much I mean for the Mab upsizing and these other possible deals I mean, how much capital are we talking about.
Potentially going into the sidecar.
Yes, so for <unk>, we are targeting to increase the equity capacity in total by 250 million.
<unk>.
We are assuming.
Our current ownership structure of 85% owned by Oak tree and 15% owned by <unk>.
Ocwen that would be $37 $5 million of equity if it was fully funded and obviously if we chose to put put the equity in.
So.
And then in the other vehicles.
Matt I'm not we're not far enough along in the discussions to really talk about exact sizing on those facilities, but I would say stay tuned.
There is I think a robust appetite for MSR is out there in the market and I think we again offer a compelling value proposition to MSR investors and our ability to service. So yes more to come on that so right now you can assume for the map sidecar vehicle <unk>.
250.
Assuming we get it closed and signed and all that good stuff.
$250 million of incremental of equity investment capacity of which our share would be $37 5 million.
Got you, Okay that makes sense, that's sort of how it looks like the first round.
But when you look at that.
You are going through the share repurchases.
Very quickly or it could be done here.
Months.
And then of course, you are sort of doing one for one on the on that debt reduction.
One how and client are you and the board to.
Re up this when it's deal whether it's through the $50 million.
And then the guidance I look at the walk here.
And does it include need this path.
At 9% and 11%.
How much does that include.
Interest cost reduction.
Does it include ROE in terms of if you retired 11 million shares.
And then.
And then.
So a surprise we didn't you didn't seem sort of like an improvement at servicing margins with lower lower prepays higher.
Escrow balance and is that all in there.
Yes, So let me unpack that Matt you've got you've got quite a bit there. So.
Sure.
Yes, yes, yes, so in terms of the share repurchase program look as I said on the call we think.
Our share price does not reflect the yes.
The potential of our business our earnings capability or the value, we can deliver to clients.
And given where our current book value per share as we think it's a prudent buying back our stock is a prudent investment.
The board and management continuously review our allocation of capital.
Obviously, we've stand behind the equity of the company management has bought the board has bought shares the company is buying back shares.
We will once we get close to the.
Exploration of the program.
As part of our capital allocation framework, we will take a look at what our investment opportunities are and decide then.
As you know, it's always subject to market conditions at that time right. So but look we have demonstrated our willingness to step behind the stock of the company and demonstrate our confidence in our plan.
Okay.
As it relates to the.
The forward look.
I said before we're not assuming any recovery in margins in <unk>.
Reverse.
At all we're assuming origination volumes remain depressed in the near term.
We're also not really assuming any further prepayment reduction on the forward side of the business.
You might say that that's conservative given what some other people out there, saying, but yes look we think prepayments have gone down to historical lows and we'll have to wait and see if they get any better than this.
So I think the businesses and if you look at what we have to do to deliver on.
Forward.
Our forward projections for the fourth quarter two of the biggest blocks and storms walk is one.
The nonrecurring losses from the asset sales and Mark to markets that we did in the second quarter and as well as our execution on cost reduction, which again, 90% of the actions have either taken place or expect to be completed with that by the end of the third quarter.
In terms of the servicing profitability.
First quarter versus second quarter.
Again, we the biggest hit to the servicing P&L this quarter MSR fair value change was a good guy on the on the bad guys side, Yes, It was $17 million in charges from our strategic asset sales and other unfavorable mark to market adjustments.
If you were to look at probably average average <unk> in the servicing portfolio roughly flat quarter over quarter, we did sell a big chunk of Msr's in the first quarter harvest value appreciation.
So net net.
Again, no no material change slight reduction in servicing amortization, but.
Yes, and on a go forward basis, when you look at the work we're not assuming.
Major improvements in servicing earnings in <unk> work.
Yes.
Hi.
As we see it.
Yes, I mean look we've got we've got <unk>.
Putting rate debt, which has offset the interest costs and that will go up interest earnings on escrow will go up so the assumption there is that those two generally offset each other and again, because we're not assuming speed slow any further than where we are and we're modestly growing the PB balances for the back half of the year, that's where we come.
And look if we're wrong and prepayment speeds slow.
Further than where they are today, that's a good thing for us and everybody else in the industry.
It certainly looks conservative to the some of the other guidance fee for it from the Servicers, but last question Glenn how much is left on that that reserve for litigation.
You release, something and then how much is the DTA that much as a reserve against the TTM, assuming it's still forward Richard could you give me those two numbers.
Yes.
Legal reserves will be in our Q when we release. It. This afternoon. So we can we can share that right. After the Qs released.
In terms of.
<unk> again at the I'll talk because our Q is not out at the end of the first quarter of 100% of our DTA as we're reserved.
And we can chat what that position looks like at the end of the at the end of the.
Yes.
Just second quarter, yes.
I think as.
I am sorry long term guidance.
Just in terms of the company is guided to be profitable going forward. They should investors distribute encourage investors just trying to look at that DTA.
As having value.
Yes look it's again when the Q comes out we can talk about the DTA I think as you know the accounting rules around that is as the company returns to profitability. We've got to demonstrate Sean where does it three years three years of profitability before you can start releasing the DTA reserve.
<unk>.
So.
We have not included any of that in any of our thinking around returns for the business going forward quite frankly.
Great then Shawn Thanks Lynn.
Yes. Thank you.
The next question comes from Tommy Moll of VW. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions here.
And then move down in rates.
And in.
In July could you talk about the magnitude of any downward pressure on the on the MSR markers on most of that population still out of the money to refinance you wouldn't expect much of a mug.
Yeah, So look it's.
The 10 year Treasury has been massively volatile as you know it's been up or down.
<unk>, probably over 80 basis points.
In the last 60 days.
Our Q when it comes out we'll have a the typical rate shocks table in the back of the queue, it's plus or minus 25 basis points.
Just generally speaking our portfolio has a.
Is has a lot of low coupon product in it there's not a lot of high coupon product in it.
And as we talked about at the end of during our earnings call last quarter that <unk> won or the dollar value change for one basis point change in interest rates has been compressing as rates have gone up because of prepayment speed burnout.
So again when the Q comes out we can give you. Some further guidance on what the <unk> is as model and we can we can share that with you later on this afternoon, but again as you can see first quarter big MSR value improvement second quarter smaller MSR value improvement as you work back down the curve that general pattern.
Tends to follow so.
Based on the S curve of prepayments in our portfolio.
Okay, Yeah, well keep our eyes out for that.
There will be discussion of any kind of capital allocation.
I hope that you're thinking about is there anything on the M&A side that might make sense.
Any areas that you feel like having more scale will be very beneficial.
Yeah, Tommy look scale in this business is good right. So.
<unk> servicing originations servicing and originations have relatively high fixed cost structure, particularly servicing so we constantly have our eye out for potential acquisitions that would give us scale.
Or enhance our capabilities.
We demonstrated our willingness to do that certainly last year as we were big buyers of Msr's.
Last year and we also did the TCP transaction last year, we did the reverse sub servicing business last year to expand capabilities. So look we have our eyes open an ear to the ground.
We obviously can't talk about anything specifically, but.
As we think through our capital allocation model.
Looking at acquisitions is something we always want to have some optionality to retain dry powder for.
Makes sense, thanks, a lot.
Yes, Sir.
As a reminder, if you have a question. Please press star one. The next question comes from Preston Graham of Stoney Stonegate capital. Please go ahead.
Hi, good morning, Thanks for taking my questions.
The FHFA guidelines you mentioned during Eric's question, I guess any additional detail there on sort of how you are positioned how that's affected you will be great.
Yes, So look we've we've run through our modeling based on the FHFA capital guidelines.
Sean I don't know.
Our footnotes in our financial statements talk specifically about.
How much capacity, we have vis vis the new potential guidelines, but what I can say.
Preston is look we've looked at that we think we've got adequate capital and liquidity to navigate those new guidelines, yes, I can tell you from a day to day operating perspective in the business.
When we look at our business operating reviews, our key risk metric dashboard, we're tracking to both the old and new capital guidelines to make sure that when implemented.
We'll be in.
We'll be in a position to.
Being compliance.
As you know those capital guidelines are probably more punitive on Ginnie Mae assets than they are on GSE assets <unk>.
Compared to others in the industry, we have a smaller.
Ginnie Mae book It doesn't quite match the overall industry composition of Ginnie Mae originations.
So we are somewhat benefited by that but we are looking to grow our ginnie Mae <unk> TMA business, but right now I'd say we are.
Only modestly growing.
In that space, but look I feel good right now based on what we know the capital guidelines and how we're positioned to address them upon implementation of the balance of this year and again, that's always subject to any changes or amendments that may be made by.
When they are finally implemented.
Got it Okay. That's helpful and then.
You touched on it in the prepared remarks, but sort of.
Maybe just some general commentary on how you think the business would perform in a recession would be helpful. Thank you.
Yeah. So kristen look in a recession. There are there are obviously pluses and delta is minuses that happen in the business. So during a recession.
Obviously from a from a servicing perspective.
For owned servicing and again thats less in slightly less than 50% of our portfolio today.
<unk> you would expect in a recession that delinquencies would rise and with rising delinquencies our cost to serve.
Service loans would go up servicing delinquent loans is more expensive than servicing performing loans.
Also you don't recognized revenue when loans go delinquent.
And you have to make servicer advances in the case of GSE loans, there's a stop advance after a couple of months couple of four months in case of Ginnie Mae loans, you've got to advance P&I and P&I forever until they get through foreclosure.
So there is a profitability compression that happens in owned servicing.
As as delinquencies rise that would also adversely impact the MSR fair value.
On the sub servicing side of our business, which again is slightly more than 50% of our business.
Yes, we're fairly insulated from what.
What happens with rising delinquencies most of our contracts do include provisions.
I'll call it a revenue enhancement provisions revenue escalation provisions.
As our cost to serve goes up we get incentives for servicing delinquent loans.
And there is also in some of our contracts.
Performance incentives as well as we <unk>.
Mitigate delinquencies compressed total delinquency cycle time, and those type of things.
And then we don't have in sub servicing there is no MSR. So there's no adverse impact to our balance sheet and.
And for.
No advancing requirements either advanced we're not providing servicer advances when we subsurface so again.
Downside in owned servicing I would say neutral to upside in sub servicing.
Given our legacy.
As a special servicer and again, we're a top ranked special servicer with.
Near perfect performance on Ginnie Mae.
Yes.
Okay.
Yes.
Great.
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