Q3 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.

[music].

Yeah.

Good day and thank you for standing by welcome to the Mr. Cooper Group third quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone please.

Please be advised that today's conference is being recorded.

Like to hand, the conference over to your Speaker today, Ken Posner. Please go ahead.

Good morning, and welcome to Mr. Cooper group's third quarter earnings call. My name is Ken Posner and I am SVP of strategic planning and Investor Relations with me today are Jay Bray, Chairman and CEO , Chris Marshall, Vice Chairman, and President and Jamie Gow Executive Vice President and.

CFO .

Which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings were.

Undertaking any commitment to update these statements if conditions change.

Now turn the call over to check.

Thanks, again, and good morning, everyone and welcome to our call.

I'm going to start with the highlights as we always do but then we'll pull up and talk about the recent interest rate shock and more broadly the macro backdrop, where a number of indicators are now signaling higher risk and then discuss how we are positioning Mister Cooper for an environment of heightened uncertainty.

So with that process, let's go through the highlights on side three in summary, we had a very solid quarter with positive earnings and cash flow and strong capital generation, while continuing to grow our customer base.

Net income was $113 million, which was a function of both operating earnings in a positive MSR marked as a result tangible book value per share rose to $56.35, which is up 36% year over year, and our capital ratio increase to a new record high of 31.3%.

We talked a lot about our balanced business model in this quarter solid results demonstrate the obvious benefit of operating with a large servicing portfolio.

Servicing income more than doubled to $81 million in the quarter.

$30 million in the second quarter and most of this increase is the predictable impact of higher rates on amortization.

And interest income, which we gotta do to expect.

Looking ahead, we project servicing income, reaching $125 million or more in the fourth quarter with strong results continuing into 2023, especially if the fed continues on its current path.

Turning to the portfolio that <unk> reached $854 billion or 4.1 million customers, which is 28% year over year growth.

Most of this growth was in our sub servicing portfolio, where we continue to win new clients and gain wallet share.

And Subservicing, we believe we are the market leader with a platform that's scaleable efficient compliant with unparalleled recapture capabilities. Additionally, we believe as we enter into this uncertain environment are strong loss mitigation track record and capabilities will be another key differentiator.

Historically, we grew this business with a small number of very large clients, but today, we are actively calling on a much broader segment of the market place I think are excellent opportunities for further growth as we take share from competitors, who have an invested in technology or loss mitigation.

What's especially appealing about sub servicing Miss environment is that it allows us to grow our platform and our customer base achieve greater scale and drive down unit cost without employing capital.

Now, let's talk about originations, where the situation is clearly very challenging we generated $45 million and he be team, which was in line with our guidance and reflects fantastic execution on the part of our originations team.

However, with the recent moving rates, there's going to be significant pressure here more on that in a second finally in terms of capital management during the quarter, we repurchased 1.1 million shares for $50 million, which I would describe as a measured pace and appropriate for the current macro backdrop.

Okay, now, let's pull up and talk more strategically about how we're positioning the company for an environment of heightened risk.

As you would expect our leadership team tracks, a large number of macro and market indicators very closely.

Of concern right now, we see very elevated levels of volatility in both equity and fixed income markets, which tells us to prepare for a wide range of potential scenarios.

We're monitoring liquidity and credit stress in the financial system, which means we need to be mindful not only of our own balance sheet, but how our partners are doing.

We're obviously watching the deterioration in the leading economic indicators, which point to a growing risk of recession as well as a housing correction, which has already begun.

And the global backdrop looks quite fragile.

Now there are also some very positive indicators employment is currently very strong as as a consumer credit where delinquency rates are only just starting to normalize and only in certain pockets.

But net net it's our mission to serve customers in both good times and difficult times, which means we need to be prepared for adverse scenarios. So.

So let's talk about how Mister Cooper is positioned for heightened risk, including where we're pivoting and where we are staying the course.

Starting with originations as we all know rates of move very sharply in the last few weeks to put this in some perspective year to day.

Mortgage rates have more than doubled which we believe is the most extreme shock the industry has experienced in its history.

As a result, the rate and term refinance opportunity is basically nonexistent.

And now we are seeing the cash out market coming under pressure to as many of our customers who would like to tap their equity or facing an affordability problem in light of the situation. We're moving forward once again to realign capacity in our originations business, we want to serve our customers needs where that makes sense financially and we want to safeguard the high.

Credit quality of our portfolio.

In other words this is not the time to loosen our credit standards or to take our eye off manufacturing quality. We're also taking a fresh look at corporate expenses in order to streamline overhead cost where appropriate.

As always were reacting quickly and decisively to market changes, while ensuring we continue to make smart investments in the business.

On this point longer term, we believe our origination business has enormous potential, especially our DTC platform, where we have initiatives underway to expand in the new products and channels and we're we're continuing to invest in automation and we'll talk more about these initiatives at a future point once the market has stabilized.

Turning to servicing the story is very different we have terrific momentum we've got the best technology in the industry and we're making great strides with our process discipline. The result of which is the operating leverage you can see in our results and.

In terms of how we navigate the credit cycle technology and process discipline are the key to managing both current and delinquent loans.

Also as you know the last quarter, we acquired Wright Patt.

Which is a special servicer with a sophisticated data driven approach integration is on track and we're incredibly optimistic about growing right past client base and using their techniques for our own portfolio.

Credit quality is also an important consideration Chris will take you through our portfolios. So you can understand our diversification and conservative approached acquisitions.

In summary, I would emphasize that we had the scale technology people and experience to play a leadership role if the mortgage market comes under stress and I would remind you that is exactly what we did during the last downturn now.

Now turning to zone, we feel that the platform is in great shape from an operating in competitive standpoint and of course, a recession. If one happens is only going to create more demand for the exchange.

Right now we are in a transition period, where home prices are following but foreclosures are not yet rising.

There's no change to our strategy, but we will need to be patient a little bit longer to C. E. B T ramp, which is the key to monetization.

Finalists focus on the balance sheet, which I know everyone. On this call would agree is the most important aspect of any company strategy when facing a risky macro situation.

With respect to capital and liquidity were in great shape in fact, the company's balance sheet has never been stronger.

And in this environment, you should expect us to continue operating with a significant amount of excess capital and liquidity.

The reason for this posture is that we do expect to see more pain in the mortgage industry is a current players grapple with challenges that many of them have never faced.

We have to be prepared to deal with stress and instability in our markets, which could also produce extraordinary opportunities for.

For now when it comes to Capitol employment, you should expect us to remain very thoughtful and discipline and also very patient.

And to wrap up my comments the same I would like to emphasize is sustainability, we have a balanced business model.

We have the best technology insignificant scale.

Ah Conservative high quality portfolio robust capital and liquidity and a team that pivots quickly when conditions more we don't know how the macro scenario will develop from here, but we're positioning ourselves to navigate the risks and emerge on the other side of the cycle and an even stronger position.

And with that I'll turn the call over to Chris.

Thanksgiving and good morning, everyone.

I'm Gonna start on slide five and give you a little bit of a deeper dive into the operating businesses.

I'll start with servicing income, which is ramping very nicely just as we got as you'd expect.

During the quarter servicing generated $81 million in pretax income more than doubling the second quarter level of $30 million.

Looking forward, we expect to generate at least $125 million in the fourth quarter as a function of a better mix lower amortization and higher interest income.

Meanwhile, since our last call. The consensus is now projecting the fed funds rate reached.

Reaching nearly 5% in 2023, which is almost 150 basis points higher than where expectations were last quarter. So I described the outlook for servicing in 2023 is excellent.

Now, let's spend a minute on operating expenses, which you can see are benefiting from scale as well as process and dances expenses were down 7 million sequentially as we've begun realizing synergies from the integration right path.

On a year over year basis expenses are up 9%, while you P. B has grown by 28%, which I hope you agree is a very compelling demonstration of positive operating leverage.

And I'd add that compared to our peers, our customer delight metrics like speed to answer and abandon rates are in excellent shape.

Our strategy is to drive down unit costs to levels that no one else in the industry can match and then to keep driving them down further by continuously optimizing our processes.

I know many of you have questions about cost to serve for performing in nonperforming loans. So you can model earnings and different scenarios and that's a very fair topic to discuss however cost to serve very significantly bicollateral type and credit profile. So it's hard to offer a snapshot for today, that's going to be relevant for tomorrow.

Second we are currently operating with excess capacity for nonperforming loans, which by the way. We don't think is the case for many of our peers and since we've used technology to automate many of the tasks involved with managing nonperforming loans are average cost will decline as we leveraged fixed costs with higher volumes.

Finally, since we have huge scale, we're able to shift resources across functional areas, which helps us manage costs more efficiently than or smaller peers.

I would remind you that we demonstrated significant positive operating leverage during the pandemic. Despite a huge volume of forbearance of modifications.

You are seeing outstanding cost management, continuing today and that will remain our focus in 2023.

We'll share more information on how we plan to manage causes the shape of the next credit cycle becomes more apparent but bear in mind if recession strikes in mid 2023 is most of us think as possible we.

Probably wouldn't see any impact on our costs until 2024.

Now, let's turn to slide six.

Talk a little bit about growth.

We ended the quarter with total UBB of $854 billion and 4.1 million customers are.

Our mission is to help these customers manage their most important financial asset.

Preserve their dream of home ownership and delight them with personalized friction free service.

The portfolio is up 6% sequentially and 28% year over year largely from strong growth in sub servicing where we one business from new accounts and expanded wallet share with existing clients.

Now as you've probably heard we do have a client which has decided to take their portfolio in the house following acquisition of the servicing platform.

We planted the board $20 billion in the fourth quarter and another $50 billion to $60 billion in 2023, which could potentially flatten out are you P. B growth for a couple of quarters, depending on what goes on with other opportunities.

We're always sorry to lose a customer harbor in our view the prevailing trend in the services sector is going to be consolidation.

And we expect over the next couple of years to see many more firms exiting and very few entering the business.

Service was face operational and compliance demands, which are extremely high and as you know regulators have raised their expectations in terms of capital and liquidity.

Regulators also care a great deal about loss mitigation capacity and.

And we don't think there's enough capacity in the industry.

We would expect even a mild credit cycled add considerable stress and create further opportunities for us to gain share with sub servicing.

Now turning MSR acquisitions, you can see where you are very selective in the quarter purchasing 6 billion, a new P. B at very attractive pricing.

Characterized yields on Amazon is mid to upper double digits.

We remain an active participant in the market in fact, as we speak with Google and you'd see $20 billion pool with attractive collateral pricing. However, the key themes for us at this point in the cycle or discipline and patience.

Given the macro backdrop, we believe there is unfortunately more pain in store for the industry, which is going to put pressure on MSR sellers and while I can't speak for other buyers we've been focusing on pools that we're comfortable we can manage through the credit cycle and we're looking for yields to compensate us for the risk of deploying Kappa.

<unk> and an uncertain environment.

You can see our portfolio mix increase the 54% sub servicing in the quarter looking.

Looking ahead, we continue to think 50 50 is a good long term target, although we may deviate to some degree as you are seeing right now based on where we see the best risk adjusted returns.

No, let's stay on the topic of credit quality, if you'll turn to slide seven.

It's been a minute.

On our portfolio composition.

Some of our peers have been quite aggressive about moving into ginny loans and other potentially higher risk segments of the market.

We've grown our portfolio and a defensive matter and consistently maintained our overall diversification.

To start with over half the portfolio is subservicing, which really requires no capital liquidity.

Furthermore, sub servicing contracts purveyor higher servicing fees and incentives for nonperforming loans.

Accordingly during the credit cycle, we'd expect that our subservicing margins would be stable or potentially expand.

Turning to our MSR portfolio on an overall basis, the weighted average FICO score of our portfolio has increased from 720, a year ago to 700007 today.

The weighted average LTV has decreased from 60% to 53%. So you can see that we've maintained our credit standards. Despite the pressure of lower origination volumes.

You can also see.

That we've maintained diversity within the own portfolio.

With respect to Ginnie Mae loans.

Whereas other services have focused primarily on this segment during the past couple of years, we took a more balanced approach and grew our agency servicing far faster than our journey book.

Furthermore, the majority of our growth in the journey portfolio came as a result of purchasing seasoned very high quality book, a VA loans from a client whose portfolio service for many years. So we're very comfortable with the performance of these loans and thank our prudent acquisition strategy will serve us well if there is a downturn.

And the market.

With respect to our Ginny book the boxes on the right of this page provide you with supplemental data on the breakdown of LTV and note rate for FH Ampa portfolios and as you can see the majority of our customers have substantial equity built up and also enjoy very low note rates, which bodes very well for credit.

<unk>.

Now turning the slide eight we continue to see stable delinquency numbers in fact, while we still have over 40000 customers in active Covid forbearance plans, who were behind on their mortgage payments, even when including that volume or delinquency levels are very low.

As you would expect we pay special attention to FHA delinquency rates as these customers tend to have higher debt to equity ratios lower reserves and lower FICO scores an agency bars.

There was a slight increase in delinquency rates.

Which rose from 2.8% in the second quarter to 3% in the third which we but a tribute to seizing of older vintages.

Even so compared to the rest of the industry are portfolio quality is excellent.

You can gauge performance of Ginny loans by tracking the compare ratio.

Which is publicly available.

This ratio looks at 90, plus days delinquent loans as a percentage of loans originated in the last two years and normalizes to the industry with 100, b industry average and levels below that showing better than industry performance.

Cause you can see Ah compare ratio was 42 in September which is well below industry average <unk>.

In fact, we're tied with one other issue with the lowest score in the industry.

Now, let's switch gears and talk about originations on slide nine.

Our teammates did a fantastic job closing up the quarter with $45 million DBT on volume of $5.7 billion. Despite rates have increased by over 100 basis points. Since we last spoke to you in September .

However, as you know rates were moving up towards the end of the quarter. So you're not seeing the full impact in these results.

For some perspective, where rates now stand we're facing the single most severe affordability shock in the history of the mortgage industry, which is eliminated right in term refi.

And is now putting a great deal of pressure on cash outs as well so.

So it's J mentioned, we're now moving forward with plans to relying capacity to a smaller market.

We will continue to serve our customers for whom the financial benefits of refinancing makes sense, but now that is a much smaller number than it was just three months ago, let alone a year ago and.

We don't think it's a good idea for either the company or our customers to support volumes by relaxing credit standards, rather our strategies to maintains a defensive quality of our portfolio.

Now will continue to invest in projects like flash and other automation projects and will continue to work on initiatives to extend DTC into other products and channels. These investments will help us exit the cycle with a very strong platform and even higher levels of profitability, but in the short term our priority is managing.

<unk> for.

For now I got you.

Fourth quarter EBT for origination segment to be roughly breakeven.

Now if you turn to slide 10.

I would like to share our latest thoughts on its own with a platform is in excellent shape, but the market continues to go through transition.

As a result property sales and revenue were stable instead of ramping up further as we would have expected.

On the positive side the platform is doing great.

Market share was up to 32% in the quarter and based on discussions with clients. We continue to expect to hit 40% by year end.

Also inflows from servicer clients, who have been moving very conservatively to avoid regulatory criticism.

Finally, picking up and that's helping to push our inventories higher.

However, sales have not followed suit.

One reason is that we're still seeing quite a high level of foreclosures caring as borrowers enter modification plans shortly before the scheduled date.

A second issue is that buyers are starting to hesitate because their financing costs are suddenly much higher and now they're starting to see home prices falling.

At the same time services are relying on appraisals for their reserve prices, which are of course, a lagging indicator.

These two factors have negatively impacted our pull through rates.

So I'd characterize the market is in a transition phase for the moment and caution you that our sales and revenues could be choppy until buyer and seller expectations converge again, but there's no question that foreclosure levels will rise, it's only a question of timing.

In this regard there is no change in our monetization strategy the.

The exchange for now is operating at roughly breakeven at once sales start to rise given the very wide contribution margin, you'll see EBT start to ramp quickly.

That's the point when we would expect to see investors stepping up to pay a fair price for the platform and to the extent that recession impacts employment on top of the housing correction already underway.

Dennis potentially significant upside that zone.

So now I'm going to turn it over to Jamie who walk you through the financials.

Thanks, Chris and good morning, everyone now, let's turn to slide 11 reviewer third quarter results.

Net income was $113 million, which comprised of $56 million in pretax operating earning a positive MSR mark of $122 million and adjustments totalling $23 million.

Justin consisted of $18 million primary related to write down and the ownership interest we retained the sale of our title valuation and field service businesses last year and $5 million in lease breakage and other car charges incurred as we continued to optimize our operations.

Are weighted average diluted share count declined from $74 372.9 million shares and we ended the quarter with 76 million shares outstanding as a result of our continued share repurchases.

Between net income and the reduction in our share count resolve strong growth and our tangible put value per share, which increased by 36 per cent last year, reaching $56.35 per share.

Now, let's turn to slide 12, and discuss our mortgage service right.

During the quarter, the MSR value increased by 5% or seven basis points to 162 basis points.

Reflecting the recent rise and mortgage rates and a corresponding decrease in a lifetime CPR assumption seven 7% to 7.4% and.

And Additionally, so operates increased by 127 basis points with a corresponding higher expectation for service interesting.

Partially offsetting these positive we increase their discount rate from 11.3% to 11.4%.

We're also providing service fee multiple which in our view is a better high level comparison since the basis point valuation can be affected by mix and X district.

For the third quarter, we were at a multiple of 5.2 times the underlying servicing strip slightly above the five times you saw in the second quarter.

Now turning to slide 13, let's review the company record level of liquidity at.

Quarter, and total available liquidity with nearly $2.3 billion the highest in the company's history and of this amount $530 million with unrestricted cash and when we talk about liquidity. This is already Colorado and available immediately.

During the quarter, we expanded our capacity by another $400 million and we also extended maturity.

And with our committed MSR lines in particular, we pushed most of our maturity's out by two years.

During the quarter, we drew down an additional $90 million from our MSR line, which brings our outstanding balance to just over $1 billion, but relative to the total debt outstanding we remain at an extremely conservative level of 27 per cent.

Which we think is very appropriate given are considerable excess capital.

And we will continue to use MSR lines for working capital needs, an opportunistic MSR acquisition, but we would be very judicious in doing so at these lines do not represent a permanent form of financing.

And dances were down 7% in the quarter to $830 million and are now down 9% year over year.

Obviously this could change of the credit cycle turns but with over $1 billion in capacity. We believe we're in excellent shape.

Our cash flow during the quarter benefited from the steady ramping in service interest income.

And we would expect servicing cash flows to continue happening into the fourth quarter.

Now I'm going to wrap up my comments and slide 14 by talking about our capital position.

R capital ratio at quarter end as measured by tangible networked assets with 31.3%.

Up from 36% last quarter.

Excluding deferred tax asset <unk> R capital ratio rose, 31.4% from 29.7% last quarter, reflecting both strong capital generation in the quarter and the utilization of the D. T I.

I'd like to Echo Jays earlier comment on the heightened level of market volatility and macro risks that our industry is currently operating under.

In this environment, you should expect that domain extremely disciplined impatient when it comes to capital deployment.

And as you would expect us to continue operating with a sizeable buffer and excess capital and liquidity.

This past year will allow us to sustain a measured pace of growth.

Navigate the macro environment and continued to deliver on our mission to serve our customers.

Capital liquidity will also allow us to take advantage of special growth opportunities, which sometimes surfaced during stress period.

With that I'd like to thank you for listening to our presentation and now I'll turn the call back to Ken for Q&A.

Thank you, Jamie and Victoria, if you could please NASDAQ the Q&A session.

Sure as a reminder to ask a question you need to press Star one one on your telephone please them violent pocket kunai roster.

And our first question will come from the line of Kevin Parker from Piper Sandler and is opening.

Thank you.

So thanks.

Thanks for the comments regarding four key origination protecting come on breakeven does.

Does that breakeven.

Before taxes.

[laughter] some of the alignment expenses that you are likely to occur in the fourth quarter.

And do you expect the origination segment to start to show.

More consistent pretax profitability as we go into the first few quarters of 2023 [laughter], despite the headwinds receiving the refined market.

Yeah, Kevin I'd say Ah.

We will that number does not include a charge that we will undoubtedly take in.

In the quarter and more will announce that and disclose that but of course there is some.

Re alignment of fixed expenses that will have to come out a little bit slower than that.

That would include that the impact of that we.

We will obviously adjust those as we go through the quarter with the goal of repositioning originations of course be profitable in 2023. The reason, we're not giving you more guidance at this point is changes in rates and volatility have been.

So heightened.

We want to make sure when you give you guidance at stuff. We know we can deliver it so fourth quarter, we're going to have to make a lot of changes.

And we will be a charge that will be.

Taking a.

The dramatic number of other material number.

But the other impacts of this transition are yes included in that number.

Okay, all right and then.

Capital ratios are very high relative historical past.

<unk> [laughter] corporate raiding threshold.

Slides [laughter].

A gentleman bought back 1.1 million shares of stock despite training.

Roughly 80 per cent of book value today.

There is something there that makes you hesitate in deploying that capital whether it's macroeconomic conditions.

Or other.

Other potential capital and liquidity constraints.

I think I.

I think we well first of all are well aware of the amount of equity we have on the balance sheet and amount of flexibility we have we.

We have been very disciplined because we see lots of opportunity coming down the pipe no at the same time, we have been consistently buying back shares roughly.

Roughly a $50 million a quarter pace.

And that's we think that's a judicious use of capital, while we're patiently waiting for larger capital deployment opportunities to.

To come to fruition in fact, our board yesterday.

Give us a new authorization of an additional $200 million to.

On top of the I think we have $60 million of remaining authorization. So you should expect us to to continue to act prudently with capital, but there are definitely going to be opportunities and while that may be painful for others.

We've grown the company the returns on the assets were buying are extremely attractive and we really want to take advantage of the changes in the cycle.

To grow the company in a disciplined way, but a very very profitable way.

Yeah, I think Kevin if you look at the bulk market.

It's just gotten better and better and we see.

Fantastic opportunities in the area and we think it's going to continue I think there's gonna be more supply.

We want to be disciplined and.

Your point, where obviously in a very volatile environment. So we wanted to be prudent as well.

Okay. So so could you quantify what you what you expect expect a return on investment would be and the bulk MSR market, giving.

Valuations.

The potential refi opportunity, whether I'd ever emerges.

Within their smoke acquisitions.

Well.

I think we've talked about this a little bit and we made some comments on this call that.

Recently.

We're seeing depending on the quality of collateral type et cetera.

We're adding <unk>.

Small pools and more diligence and large bowls with.

[noise] returns between.

13, and 18% on an unlevered basis.

Those are returns that we couldn't dream about 18 months ago, and with some even larger pools coming in the market we would expect those.

Those returns could even be wider.

Okay, great. Thanks for taking questions.

Thank you again.

Thank you one moment for our next question.

Our next question comes from the lineup Boneless George from K VW. Your line is open.

Okay. Good morning.

The first time.

The 221 basis points valuation of your.

Capitalized servicing that's on site.

Slide 25.

What's the difference between that number and the value of capitalized servicing at lock is there like excess servicing and they're just curious what's driving that difference.

Yeah, the majority of that.

<unk> is excess servicing.

Given the volatility in the market given what we're seeing from the agencies we are keeping.

Almost all of the excess so that's what's really driving that.

Okay, great. Thanks for that and then the origination EBT guidance.

It declined really driven by volumes again on sale margins remaining fairly stable.

Both yeah, both I mean, the volume certainly have come down given the rapid rate increase so we're seeing less locks and submissions and as you know within the Mbas volatility are within the <unk> World. There's a lot of volatility Senator premiums.

On the higher coupon loans have have come down or.

R P.

Pretty moderate so it's a combination.

Volumes were soliciting less of our customers to we've shifted mainly to cash out financing. So when it makes sense for a customer.

Two who really needs cash and it's got a tap the equity in their home, we're here to serve them but for.

For the.

The majority of our customers that's not a good trade right now so we're soliciting less spending less a marketing where generating fewer applications. We think that's going to continue.

For for the foreseeable future.

The offset that.

Servicing profitability is going to continue to improve as we talked about and frankly benefit from that and a considerable way and we think that's the right economic decision for the company and the customer.

Okay that makes sense and then just one quick one on zone given your commentary.

What are your thoughts on I think you've discussed earlier that the EBIT run right there could be $120 million going into 23.

Your thoughts, but when that happens or is that just a little bit harder to tell when that kicks him now.

I I think 120 million made sense, when we talked about the.

The foreclosure sales coming back much faster than they they.

They have so we'll have to give you better guidance for twenty-three, but that number will certainly come down because we have probably moved back at least two quarters in terms of sales recovering.

We see it.

Happening, but it's happening at a much slower level, our inventories are much higher than we anticipated which is great.

But until the sales really start to pick up.

And when they do pick up the the margin on those sales is quite wide. It will not take long for EBT to grow very.

Quickly.

But the pace has been slower than we anticipated.

Having said that because once you once you get back to historical levels.

We did we still think that it's going to be achievable. That's just kind of I mean, the 120 is going to be achievable, but it's too early to.

To put a time period on that we you know we got to see more activity there.

Okay, Great. That's helpful. Thanks, a lot.

Thank you one moment for our next question.

Our next question comes from the line of Mark degrees from Barclays. Your line is open.

Yeah. Thanks.

One inning would you say that we are in in terms of kind of industry rationalization of capacity and what do you think the the the outlook is for again on sale margins once we've kind of gotten through that.

I I don't want to guess it again and sell margins mark because the volatility and changes that are happening much too fast.

Things stabilized a little bit will give you.

More clear guidance there in terms of rationalize expenses.

It's hard to talk about the industry. We can just talk about what we're doing and that is to move quickly and decisively to resize the business. So.

We are in a position to optimize profitability and twenty-three and we've been doing that and you'll see us do more of that very quickly.

Okay, and do you expect to get through most severe capacity rationalization by the end of this year.

Yes.

Okay great.

And then turning to the to the MSR market you know it.

It sounds like you're optimistic on the supply that you're going to see what are you seeing on the demand side is there is there a lot of competition.

You know for the servicing that's come into the market.

I'd say there is competition depending on the collateral.

But for the large pools.

There are very few buyers that have the capability to onboard large pools of MSR and the confidence of the agencies regulators to allow them.

And that is the single biggest differentiator for Mister Cooper in the industry, we have the capital clearly, but we have the experience we bought more msr's more large pools of msr's by a factor of.

Many over the years and we have a highly efficient automated process, we're doing it and I think we have.

The confidence of all the constituents to get approvals quickly to do that.

So competition there is.

Small handful of people that can say that and I think even among that small handful we are by far the best.

I'd I'd say overall, we consistently here from the dealers that are selling the bollocks that theirs.

There's not a lot of buyers. So I think it's a good environment for us.

Okay got it and then finally are you seeing any opportunities to convert.

<unk> service to own.

Partners, who may be a little bit liquidity constraints themselves in this kind of tough environment.

Well, we did that in a big way in the second quarter, I think where we bought a 50 billion dollar portfolio that we had some service for six years.

But those things don't come along.

Quite often.

Yeah, I don't think right now there's anything imminent.

And as you know you're in we service for a lot of.

Strong financial buyers.

Not that there will not be opportunities but.

But I don't think there's anything imminent.

Yeah, I'd say there are more opportunities with other service service either scaling down their operations or even exiting and that's where we're focusing a lot of our attention.

Okay, great. Thank you.

Okay.

One moment for next question.

Our next question comes flying of Eric Hagen from BTG. Your line is open.

Hey, Thanks, Good morning hope it goes well.

Just two quick follow ups on the M. S. R. Can you identify maybe a little more clearly heavy an incremental seller of M. S. R. As in this market and whether you think banks will.

Have a greater appetite to sell Msr's going for it and then also what are the conditions by which you would look to maybe draw more leverage against her MSR.

I'm Gonna start going forward excuse me.

Well.

With the sellers I think what you've seen consistently through the years and we wish we had been fully expecting.

Was that the originators that had been holding onto MSR.

Now all selling.

And what we had an.

Anticipated because we didn't expect rates to move. This quickly is that there are as I just said other servicers either exiting the market or they are being forced.

To sell MSR, they they would naturally hold just to generate cash because the origination businesses, losing significant amounts of money. So.

So that's a perfect storm for US we don't see banks.

As big sellers with the exception of one large money Center bank, whose announced there are they.

They they may be.

Making changes to the size of the mortgage operation I think that's a one off thing that may occur at some point in the future, but I don't see banks, we actually see banks stepping in and buying at certain times, depending on collateral type.

That's helpful. How 'bout the leverage on the MSR in the condition he looked drawn against that.

We use our MSR lines conservatively. So there's there's no reason to do that today if we.

Had opportunities to buy things at the right price, we would use our leverage judiciously with the only.

Only with a plan to be able to pay.

Pay it back to conservative levels over a short period of time.

Gotcha are MSR lines that are although.

They are.

We've recently gone through.

Extending and expanding them for this opportunity.

There are two year facility. So we don't want to be overly dependent on MSR lines.

Yep definitely makes sense. If there is a more material pickup in delinquencies that you see going forward do you have a sense for what the structure of loan modifications could look like you know in the last crisis. It was largely taken borrowers from a higher rate to a lower one, which obviously makes sense, but here we could be looking at folks that already have a really low rate and.

Modern a higher rate environment, So how do you see that.

<unk>.

I'm not quite sure of it.

Talk about that today I think the some of the government agencies are spending a lot of time right now trying to come up with new solutions for that to deal with the situation you're referring to right. Now people that are still exiting forbearance are facing raid setup far higher for the FHA VA customers for example.

So we expect there will be some solutions coming soon but I'm not going to guess at what those are.

I wouldn't make one comment one big change for modifications in the past is not so much the type is how we're gonna handle them.

One of the big and very timely investments. We made if you go back to project Titan was our seed mud system, which really is a fully digital automated solution for handling modifications, which were in the past. If you went back to the days of HAMP modifications. They 100 per cent manual so that's what we're.

Talking about as we do expect there will be high volumes of those but we're fortunate to have developed a state of the art digital solution to do so.

That's interesting.

If you if you look at the JSC portfolio I think you have more flexibility there to have the borrower remain if you will in their current coupons.

Versus CFA today, but.

But as we speak cause you know that.

Christmas point, the government's working on other solutions so.

I think I think there will be <unk>.

Solutions for customers.

Cross the board, but certainly Mcse land I think there are solutions today that can keep them in there.

Kind of existing coupon.

Territory.

Let's give commentary thank you guys very much.

Thank you one moment for our next question.

My next question confine dunk harder from credit Suisse. Your line is open.

Can.

Can you talk about the attractiveness of the correspondent channel as a way to acquire MSR today.

Correspondent margins are thin.

Right now on a historical basis so.

I.

I would say at this moment, it's less attractive than some of the other channels, we we acquire MSR through.

Obviously through the bulk market through co issue and through correspondent today co issue margins are better but that changes very quickly. So I wouldn't draw any long term trend from that.

And then just on the T C channel, while while clearly rates are moving and you know necessitates the need to take costs out how.

How how did these actions impact your ability to to benefit if you know if it's a mortgage spreads were to tighten and mortgage rates were to fall quickly you know.

At some point and not too distant future.

We will adjust the workforce, but we will retain 100% of the optionality to spring right back. So if rates move you will see us react.

In an instant.

That's why similar comments, if you went back in the.

Call, we're continuing to invest in project Flash, which is.

Says dramatically improved the efficiency of originations platform.

And some other.

Some other key initiatives that we think are going to provide new channels and.

Possibly some new products for the D T C and also.

We'll adjust appropriately.

But we're not going to give up any originations platform for our company is a critical part of of the business. It always will be we run a balanced business and just like.

Two years ago, when servicing was barely making any money.

Continued to invest in it and we're going to benefit from it now. So you say you are seeing.

Exactly what we told you that servicing income was gonna double quarter over quarter and double again, and we think it will be even stronger than twenty-three.

Originations is going to drop back but these are long term parts of the company and we are not going to do anything that would impact their ability to react quickly when rates are more favorable.

Thank you.

Thank you one moment for next question.

Our next question comes flying out Juliano Bellona from Compass point Your line is open.

Good morning.

From a from a starting 0.1 thing I was curious about picking your brain about.

Looking at the servicing segment.

They are calling for 125 million plus of our.

Next quarter and not for profit $44 million.

At 125 million versus the 81 million this quarter, if I looked at this slide you'll be what you're at the phone for roughly a $9 million benefit and amortization quarter over quarter I'm, just curious where the.

The mid 30 million dollar you know of.

Other Democratic Unquote throw is coming mostly from accents leverage or is it coming from.

A bump up and.

Income from escrow deposits are just.

Benefits longterm outside of amortization.

It's a combination of all three obviously.

Short term rates are up in interest income is going to benefit from that significantly.

But we're also seeing efficiencies in servicing.

We if you and and there aren't any number of areas we introduced.

State of the art.

Many channels of communication system, we've seen tremendous efficiency from our new Ivy our chats.

Chat features.

We've integrated right past and seeing efficiencies.

From that so expenses are still coming out of a servicing even though even though.

<unk> are up and we expect that to continue next year, we have a very comprehensive process optimization program that is a permanent part of servicing so.

There's not one area Giuliano, but.

Well see at least $125 million in the fourth quarter, and you'll see that improve as we get into twenty-three.

That's great.

Going back to compensate you, you're making earlier about the zone.

Are.

It makes me kind of one of the comments that there's enron three months away I'm curious when you just kind of going.

Dialing back the clock to last quarter last quarter, you guys are saying that was roughly call. The one month kind of course out and the timing I'm curious if the two months kind of inquiry throw that one month that we were talking about last quarter or is it kind of an additional two months.

Yeah, there there you're kind of referring to this quarter in terms of the timing of getting the volume up on the marquee back up.

I'm not sure I can recall the exact comments cause I think last quarter were saying things were moving out of the quarter.

But.

I'll have to go back in.

And look at the comments I think right now.

We expected to be at a full run rate.

At this point.

And you know the.

The good news Bad news with zone is and go back to James J S comment about when we get to a.

Normalized run right.

Four foreclosures and there's no reason that won't occur.

It's just a matter of timing when we do $120 million a year as a realistic number four zone.

If we get to a normalised run rate and those levels rise because we go into recession, which I think is becoming a very strong consensus in the country. Those levels are going to be higher than the earnings are going to be higher.

So zalm as well possessed efficient but.

There are lots of factors Hawaii.

Sales have not picked up faster.

The thing that's right in front of US now is individual buyers seeing their financing costs up home prices falling so there is some.

There's some disconnect that's got to happen, but that's going to converge. These homes are going to sell and lease foreclosure levels. There's no reason that foreclosure levels will not rise again from.

Essentially zero it just.

Take some time and.

Really are forecast back to the 120 is based on a pre pandemic foreclosure levels. So overall it was.

That was still per daily low foreclosure levels, but that's what we're.

Basing our longterm thoughts on.

What the E B T will be for zone. So I think it's very realistic.

[noise] Downingtown.

If I could.

Yeah.

High level question from capital allocation perspective.

When I look at.

Where are you calling from.

The fact that you're kind of like training.

Below 75 per cent of the tangible.

When you think about capital allocation.

Basis, you, obviously have the potential monetization of zone for sure.

Timing is everything while I was thinking about things like timing on that today, which can be you know make a pusher, but would probably significantly hiring.

Reduce at the account and.

Quite fair value in the future.

Do you think about the the combination of that versus buying msr's.

Okay I met teams.

Yale.

In some ways buying your stock back yet.

30% gift counter for example at this time.

For four o'clock value if he can generate allowed.

Hello to maintain these return on equity could generate a higher things.

Type return on a relative basis.

How do you think about the.

The interplay between.

<unk> trading in the market versus buying back their shock over the next few quarters or.

On a global basis.

That's a lot to respond to I think I agree with at all I think the essential point, you are making us our stock seems to be undervalued in buying it back produces a great return and that's why we have been buying his back consistently but I go back to where it is very unprecedented times juliano, we want to come out on top.

So we are going to deploy capital in the.

And only the way that we think and have lots of confidence and it's going to produce the best long term return for our shareholders, including US who are large shareholders. So we're being patient and that may not sound sexy. This morning, but we are going to take advantage of the changes in the cycle in the absolute best way.

That bill's shareholder value long term.

Oh, that's great. Thank you very much and I'll come back in here.

Thank you one moment for next question.

Our next question comes from the line of Jeans Mccandless from Wedbush. Your line is open.

Hi, Good morning, a couple of questions on the first one we had and I think it's almost slide forward the deck.

Put on there that you're managing it for 2023 monetization as that new updated thinking on that or it's a plan always been sometime in 2003 to get that monetize.

No. It's always been the plan that we would monetize twenty-three it's it may be.

Quarter or two later in 2003, but we are <unk>.

Spending a lot of time with our bankers now just.

Just beginning.

Conversations with potential interested parties, but we don't think that will sell until some point next year.

And we'll update you on timing is we have a better beat on that.

So we've consistently said twenty-three so there's no change there.

Okay. Thank you.

And then the other question I had just property sales, which had been churning up sequentially, we're down a little bit this quarter.

Understanding that mortgage rates went up pretty significantly is it just weakness in the market or a decision to sit on some of these properties longer.

Oh I I think it's just that I mean, when you see interest rates.

Individual buyers out there seeing their financing costs have doubled while they were looking at homes and at the same time. If you looked at month over month change in housing prices starting to come down it's understandable you'd see people pause a little bit but as prices reset is appraisals start to reflect.

<unk> real value those guys are going to jump back in and buy.

Do I guess, you've talked a lot on the call today about prices coming in I mean, what do you have any kind of outlook forecasts, we think home values and priced home prices go over the next three to four quarters.

No I'm not going to forecast that but I think we are seeing a trend I mean the cost of.

Your mortgage payment in house prices are strongly correlated so if rates go from three and a half to seven and a half you guy to assume home prices are gonna come down one price affordability, which I think was at one O. Two on the index last June I don't know, where that's going to end up but I wouldn't be surprised it was at 85 <unk>.

After the full impact of this rate rise is factored in so now keep in mind. If you look at home prices you look in case Shiller I think they peaked at 100.

21, or 22% for the year.

And that was in April from April two I guess it was last month's September .

They've dropped 7%. So I don't know if that's long enough to say it trained by fully expect home prices come down I wouldn't put a number on it but I think I think our views consistent with the overall market, which is in that 15% range. So.

That's that's kind of our current macro view.

Keep an eye on it.

That sounds great. Thanks for the color.

Thank you and that's all the time, we have a Q&A today I'd like to turn the call back over to Jane Bray for any closing remarks.

Thanks, everybody for joining the call and we look forward to additional conversations have a great day. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

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