Q3 2022 Home Point Capital Inc Earnings Call
Greetings and welcome to the <unk> capital third quarter 'twenty to 'twenty two financial results call.
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A question and answer session will follow the formal presentation.
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It is not much Asia to introduce your host Naseby Ali He's got a H.
Thank you operator, welcome to homes third quarter 2022 earnings call.
Joining me. This morning are Willy Newman, President and Chief Executive Officer, and Mark L Baum Chief Financial Officer.
During their prepared remarks, we will be referring to a slide presentation, which is available in the events section of the home point Investor Relations website.
Before we begin I'd like to remind you. This call may include forward looking statements, which do not guarantee future events or performance.
Please refer to home Point's, most recent SEC filings, including the company's annual report on Form 10-K, which was filed on March 17th 2022 for factors, which could cause actual results to differ materially from these statements.
We may be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business.
These non-GAAP measures are reconciled to the nearest GAAP figures and home points earnings release, which is available on the company's website.
Now I'd like to turn the call over to Willie Newman, President and Chief Executive Officer.
Thanks, Leslie and good morning, everyone.
During our prepared remarks, I'm going to discuss the environment, which is becoming increasingly challenged also discuss how we continue to take action to support complex long term sustainability and success in the wholesale channel.
After that Mark will provide more details on our results for the third quarter as well as some initial insight into the fourth quarter well then open the call to take your questions.
The mortgage industry has been impacted by severe market volatility over the course of the year and those challenges intensified in the third quarter from interest rate movements to capital market volatility to an industry that is still significantly overcapacity. The result is the most challenging origination market since the financial crisis.
I'll point, we have taken proactive steps to best position our company for both the current environment and long term sustainability through significantly reducing expenses building liquidity and focusing on margins over loan volume.
Communicated on our last earnings call that we weren't afraid to get smaller.
During the third quarter, we took action to reduce our expense base by over $100 million annually. We have been ahead of the industry curve in this respect and we will continue to calibrate our cost to the environment.
Our objective is to get back to operational profitability as quickly as possible, while preserving the upside opportunity in wholesale.
In addition, we continued making progress in creating additional liquidity and divesting of noncore businesses most.
Most notably we signed a commitment to sell substantially all of our Ginnie Mae servicing.
This sale will add over $110 million in liquidity.
In addition, we completed the sale of our ownership stake in language financial in early October this added to our prior noncore divestitures.
Our sales and operational consolidations has resulted in a strengthened liquidity position.
From a balance sheet perspective in addition to enhancing our available liquidity, we are seeing historic lows and prepayments in our servicing portfolio.
Industry prepayment models establish a floor at 6% annual prepayment in September we experienced a less than 5% annualized rate with a continuing downward trend.
The superb support against the challenge origination environment.
On the origination front, we continue to see support for our decision to focus on wholesale.
Based on all available data, we're continuing to see rapid migration of loan originators into brokerages.
Since January 2021, almost 17000 loan originators, who joined our broker partners and the third quarter alone our broker partners added over 2700 loan originators, which raised our access point to over 53000 originators nationwide. This movement, which we expect to continue for the foreseeable future.
<unk>, especially as rates remain elevated creates an expanding opportunity for home point.
Why is this migration accelerating simple benefit to consumers or working with a mortgage broker with an over $9400 per loan advantage provided to consumers in 2021 and the sustainable efficiencies built into the broker wholesale process. We are confident that broker market share will continue to grow we are well positioned to benefit from that trend.
With our sole focus on the wholesale channel we are optimistic about our long term prospects in the interim we will remain highly focused on taking the actions required to navigate this extremely challenging market.
With that I'd like to turn the call over to Mark.
Thanks, Willy and good morning, everyone.
As we continue to navigate through these challenging market headwinds home point remains focused on executing on our plan.
Investing in key areas of our business to bolster our efforts within the wholesale channel, while managing our expenses and liquidity.
We've included in the presentation and earnings release are standard period over period financial results.
I'm going to focus my discussion on a handful of key metrics, we will be happy to answer any questions. You have regarding the financial results following our prepared remarks.
Rapid rise in rates had a significant impact on purchase demand has vastly decline consumer sentiment kept many people on the sidelines.
That drop in demand coincided with our decision to strategically focus on margins over volume.
As a result, our quarterly funded origination volume was $4 $1 billion and gain on sale margin attributable to channels for the third quarter was 51 basis points up from around 35 basis points in July .
In addition to the expense savings will he mentioned, which we expect to accrete in the fourth quarter.
We took steps to optimize our financing facilities by proactively terminating warehouse lines of credit with two lenders and allowing a third to mature without renewal as origination volumes necessitated.
During the third quarter, we maintained a strong liquidity position completing divestments from noncore operations and assets, notably we finalized the transition of our in house servicing platform to service Mac, which converted a fixed cost into a lower variable costs and providing increased flexibility.
If you key expenses materialized in the third quarter impacting our financial performance.
Related to our expense reduction efforts $13.4 million of severance costs contributed to our total expenses in the quarter.
The capital market spread deterioration that we saw last quarter further widened into Q3, resulting in a material charged or inventory held for sale outside of agency execution as well as our repurchase reserves.
As Willy mentioned, we completed the sale of our investment in long bridge on October three 2022.
Approximately $38 $9 million.
We recognized an impairment of our investment of approximately $8 8 million during the third quarter.
Also during the third quarter due to deteriorating market conditions, we saw a significant decline in our market capitalization and recognized a goodwill impairment charge of $10 $8 million.
Before I finish my prepared remarks, I would like to briefly discuss our forward action plan and financial outlook.
As we look at the fourth quarter of 2022 we see a slight easing of margin pressure that has existed through the first three quarters of the year, but do not expect to see them back at normalized levels.
In addition, we expect market seasonality increased rates and issues with housing inventory and affordability to continue to pressure origination volume until at least the middle of 2023.
Proceeds from our sale of Longbridge to Ellington financial and our fourth quarter MSR sale will serve as an additional source of liquidity.
We will continue to optimize our operational efficiency, while concentrating on our wholesale focused model.
We will continue to monitor the MSR market for opportunities to additionally, enhance our leverage and liquidity positions.
Prioritizing the growth of our gain on sale margins.
We believe that our sole focus on the wholesale channels will enable us to create long term value even in a reduced volume environment.
That concludes our prepared remarks for this morning, we are now ready to turn the call back to the operator to take your questions operator.
Thank you we will now be conducting a question and answer session.
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Our first question is from Doug Harter of Credit Suisse. Please go ahead.
Thanks.
I guess as we looked into the fourth quarter you know the combination of the MSR sale plus the long bird cell.
What are you thinking about uses for that additional cash.
And in that construct how are you thinking about you know kind of right sizing or optimizing your capital structure.
Oh, yeah. Thanks, Doug.
So at this point, we're going to maintain that kind of a N a as a liquid position as possible. So we may pay down some of our leverage that we have against our MSR. Yeah. We we could look at buying back some of our DAP and at this point, where we're going to maintain a position that's as liquid as possible.
Got it I mean I guess.
At what point do you kind of look to use some of that liquidity.
But the point that.
Yeah, but that you would that you would utilize some of that maybe try to take advantage of some of the discount that.
Unsecured our offering in the market to you know to kind of lower the debt cost.
Improved leverage sure I think for us what we're really looking at what market conditions are and considering the volatility in the market, we feel like being more liquid it's better than than kind of using that liquidity in a place where we're not able to get back to it.
To your point there there there is an opportunity to optimize buying back some of the debt and we'll continue to evaluate that Mark I don't know if you have anything to add to that.
That's exactly.
How we're looking at a dog is liquidity is better we wanted to be able to maintain as much runway as possible and so the way to do that is to make sure. We have adequate liquidity to continue to navigate through things I'm very mindful of where the bonds are trading at a discount that's available. So that's certainly on the table and will be evaluated but at this time.
Our liquidity is going to be the priority.
Okay. Thank you.
Yeah.
Hum.
Our next question is from Rick Shane of J P. Morgan. Please go ahead.
Good morning, guys. Thanks for taking my questions.
First in terms of the gene email Ginnie Mae sale, how much U P. B is coming off the books.
Argue when I take that sure it's gonna be about $8 $1 billion of notional.
So that'll be the the amount that will be coming off the books.
Got it and is there a gain associated with that you're talking about the cash income, but given where its marked a should we assume any gain in.
In the fourth quarter.
No I wouldn't I wouldn't assume again, we were able to sell it at roughly our fair value.
So are we.
And we marked it to where it needed to be by the AR in the third quarter and so I would expect to not see a game there might be a slight loss due to transaction costs and things like that that we would incur in the fourth quarter, but that would be what I'd expect.
Understood. Thank you and then you made the comment that from a margin.
Perspective.
Feels like things are starting to stabilize modestly in the fourth quarter.
You also highlight the excess capacity in the industry.
I'm curious as we enter what is generally a seasonally a weaker quarter or there's still excess capacity. What do you think is driving that.
Stabilization of margin is it just the industry starting to rationalize.
<unk> pricing is it reduced interest rate volatility what do you think is contributing to that.
Yeah, Rick So I think there's a couple of things one is that.
Obviously margins, especially in the wholesale side have gone down pretty materially.
We feel like you know based on what we're seeing out there that there's kind of a stabilization at all I'll say around allows secondly, more specifically as our strategy, which is to really.
Keep margin more constant and let volume be the variable. So mark maybe you should talk a little bit about what we saw in October .
Yeah sure. So I mean, there's a couple of things that where we're saying number one as we reported 51 basis points of margin if you'll recall in July we reported about 35 basis points. So there has certainly been some upward momentum there and then October our margin attributed channels will be about 72 basis points. It was about seven.
Two basis points. So that's what we're seeing as far as what's contributing to it a lot of it's our own focus on margin over volume, so and we're able to capture that margin. So.
So that's that's what we're saying just.
The marketplace right now.
Got it and then one last question obviously, there has been a drag on the net gain on sale, reflecting our repurchases et cetera, and a lot of that is driven by the denominator effect.
Long, especially given how much.
Volume compressed in the third quarter, how long should we assume that denominator effect will continue to create that drag.
Mark do you want to take that.
Sure.
Yeah.
Yes.
I, there's gonna be another couple of quarters of it it's really hard to know for sure but you know you're right. There is this denominator effect, which is that we're long ago repurchasing now are coming from a period of time, where we had a lot more volume than we are doing now and volumes are going to be.
We think pretty depressed here in the fourth quarter into the first quarter or maybe by the second quarter, we start to see some recovery in at that time also we will have worked through a lot of the.
Inventory, so it could be another quarter or two.
Got it Hey, I appreciate the clear answers and in a challenging environment. So thank you.
Thank you.
Our next question is from James Faucette of Morgan Stanley . Please go ahead.
Thanks. This is this is sandy BD on for James.
A question on the path to profitability how are you thinking about that.
What what what inning are we in and obviously, it's very difficult to forecast and end and similarly them on on the Opex cost cutting which which areas are you. Most focused on where have you found the most low hanging fruit in terms of getting towards profitability and how should we think about your actions.
In the near term going forward here.
Yeah. Thanks for the question so.
As far as that get the kind of the path certainly during 2023 to your point. There is there's a number of variables that are involved but I think what you've seen is that we're continuing to grind down costs talk to a point, where you know.
Assuming reasonable margins in a reasonable level of volume, we can get back to operational profitability. So so mark you want to talk a little more about some of the elements of the path.
Yeah, absolutely that's let's start with expenses because that's.
That's certainly the are the easiest to control and in terms of low hanging fruit I mean, all of it is hard because she has to make difficult decisions and it's across the board. So there's no. One particular area that we're focused on it's across the board, but just to help.
Help you Dimensionalize that if you look at our third quarter, we had about $116 million of expenses.
As we noted on the call included in there were one time costs related to severance from actions. We took in the third quarter that was about 13 million and then the goodwill impairment was about $11 million. So.
So that would take us to about $92 million of expenses.
And then as we mentioned the actions we took resulted in a circa $100 million a year a reduction in salary and benefits. So that's about 25 million a quarter. So that would take us down to about 70, 560, excuse me $67 million under $70 million of our quarterly expenses.
From there I would expect to see us continue to moderate that level relative to volumes. So if volume continues to decline variable costs will come out we'll make additional capacity decisions as well so it could be we find our expenses somewhere in the in the low sixty's or even below so so that's where that would be second.
As we start to move into the purchase season of 2023 and to the extent that some more normalized period, we should expect to see margins continue to be in that upper seventies approaching 100 basis points area. So that's the path to profitability and to to willies points, where we're on that path. We're looking to accomplish this.
In 2023, I feel like we've got a good approach to our expenses and and you know with the focus on margins is really going to be helpful too.
Yeah, I think I would add to that is as you know.
<unk> talked about it in our prepared remarks is the servicing portfolio is really performing at historic levels from a prepayment standpoint, and so that's supportive of you know kind of supporting.
Through our through the challenges of the origination environment. It's also generating quite a bit of cash for us out kind of back to that point about liquidity liquidity really being the most important thing at this point for for from our perspective is that it's generating the type of liquidity that coupled with with these expense management actions kind of get to southern power, we can navigate through the environment.
And get back to that path to profitability.
Got it thank you and and I'll ask one follow up and you mentioned in terms of purchase them as the market becomes more purchase heavy obviously, the the pricing strategy versus volumes I'm keeping that in mind.
What can you do or are you still focused on initiatives to lean into purchase them is that a benefit or are an aspect of the broker channel that you can lean into him and how are you thinking about purchase versus refi, obviously in the context of a broader market share.
As the market continues to contract.
Or why are you hit on it is that the most important.
Initiative that we have going is to do business with mortgage brokers, they're perfectly position T. D. T D purchase volume because they are in market and they have the referral sources are established in order to do that and so it really is for us the organizational focus that we have which is to continue to evolve from an efficiency standpoint, a preview.
Experience focused on quality, all those things bode very well to support our broker partners into a purchase market. So it's really kind of the blocking and tackling that we've already established.
Got it thank you.
Okay.
Ladies and gentlemen, just another reminder, if you would like to ask a question Youre welcome to base stocks and then one.
Our next question is from Mihir Bhatia of Bank of America. Please go ahead.
Hi, Thank you for taking my questions I did.
Well go back a little bit to your comments about you know I think you mentioned 72 basis points in October .
I was curious how much of that is being driven by our focus on profitability are you, giving up additional volume.
I guess, what I'm trying to.
So for a little bit.
In regarding your comments on your path to profitability.
Is there enough volume at those margins that you've talked about you know the highest.
70.
One I think you mentioned for next year of 75 to one for next year in that range do you expect there to be enough volume, but your cost cuts will be enough or would you need to make more.
Yeah, I think that that is the challenge that we have and a lot of that depends on size of market and we do believe that that broker share will continue to grow as we said during our prepared remarks every indication is that that is happening and so it really isn't comment upon us to continue to focus on that those fundamentals that I had mentioned earlier.
In order to get the volume level up to the point, where that combination of results in us being operationally profitable.
Okay.
In terms of just the the movement towards the broker channel by.
Are you seeing any effect yet.
A few competitors who've gone out of business or are you starting to see more incoming so any like I guess.
Any benefits from that who are the competitors meeting the channel et cetera.
I would say that that we're seeing benefit in the level of the dialogue that we have with our broker partners and with our new broker partners as well you know again, we mentioned during our prepared remarks and migration of our loan originators.
The broker segment, specifically with our partners, which if you look at the flow of 2700 in a quarter is it is a significant increase in flow over at kind of the average over the last year and a half which has been which has been material I think transaction. We obviously, it's a it's a very competitive environment out there. The bar is set high in wholesale that's frankly, one of the <unk>.
Why why originators are migrating to broker and so again, it's incumbent upon us to make sure that we can reach that bar in order to take it to the day to grow market share and drive volume and.
Okay. Thank you.
Are you thinking about some of the questions and I will echo Rick's comments about appreciate you being.
As Franz bearing because you can in this type of environment. Thank you.
So they shouldn't be.
Our next question is from Kevin Barker of Piper Sandler. Please go ahead.
Good morning, Thanks for taking my questions.
Could you help us understand what the gain on sale margins look like through the third quarter and then what Youre seeing in the month of October I believe you referenced last quarter, you had about 35 basis points of margin in July would that look like in August and September .
Mark do I take that.
Sure so.
For the full quarter, Kevin we ended up at 51 basis points. So if we started at.
The quarter at about 35, we finished at 51. So that gives you a sense of that trajectory and then for October our gain on sale margins were 72 basis points.
Okay, great and so obviously some progress there.
Do you expect that to continue to move higher as you focus on higher margin business through the fourth quarter and into early 'twenty three.
Yeah, I think I mean, Kevin I think you can expect in that range. So you know, we we on a daily basis and look at.
Movie margins that movie marches down yeah. There is some sort of volume targets that we have but again, we're emphasizing the margin of our volumes out yeah, I think we feel pretty comfortable with those levels and we're trying to press it higher.
Okay and then.
Do you expect to proactively continue to sell Msr's and.
With that are you seeing.
The market for Msr's.
Continue you know seen bids you know near five and a half six time servicing multiple.
Yeah. So I think as we mentioned we'll be opportunistic I think at this point.
We feel really good about the liquidity position, we have so there's not a need to sell MSR is for us.
And the performance itself, it's really been supportive of the effort that we're making to to reset the origination side of the business. So again opportunistic mm, we're not seeing levels that we're not seeing a sales at the levels that you mentioned, so again, if and as a valuations are multiples move up you know we may.
To take advantage of that opportunity, but right now we feel very comfortable with our position kind of across the board for an asset standpoint.
Okay and then.
You know Ginnie and the FHA and put out these rules, which are a pretty controversial around capital.
Maybe got deferred or another year for a lot of people to get prepared but can you help us understand where you stand in relation to with the risk based capital rules for Ginnie Mae I understand there's like a corporate structure versus subsidiary that they may impact that but could you just give us an idea of where you are on that.
And what you can do to to manage around those rules.
Marshall I'd take that yeah sure. So so yeah, it's been deferred for a you know for another year, which is a which is just fine I guess, we we would be in compliance with the rules were in place today in terms of running through the detailed calculations I'm not really prepared to do that on the call, but I can say that if we.
If the rules were in place, let's say at year end, we would be in compliance.
So are you do you feel like you're.
Well above those levels by a large margin or is it.
I mean that youre going to need to manage over time, just given what you know how restricted they are around msr's.
Yeah look we're always going to be managing.
Those types of things monitoring it and managing it. So at this point I'm comfortable with where we are that's not to say I would take it for granted will be we'll be managing it like we do everything else.
Okay. Thank you Mark.
Yeah.
We have reached the end just a question and answer session I would now like to turn the call back over to really Newman for closing comments. Please go ahead Sir.
Yeah. Thank you.
Appreciate everybody's comments questions and Oh, well, it's as we've talked about we're very we're very focused.
And wholesale and executing and getting back to operational profitability side with that thanks very much.
Ladies and gentlemen that concludes today's conference. Thank you for joining US you may now disconnect your lines.