Q4 2022 Mr Cooper Group Inc Earnings Call
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Good day, and thank you for standing by.
Welcome to the Mr. Cooper Group fourth quarter 2022 earnings Conference call.
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I would now like to hand, the conference over to your speaker today, Ken Posner.
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Good morning, and welcome to Mr. Cooper group's fourth quarter earnings call. My name is Ken Posner and 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 .
Quick reminder, this call is being recorded also you can find the slides on our Investor relations webpage at investors that Mr. Cooper Group Dot com.
During the call we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck.
Also we may make forward looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings, we are not undertaking any commitment to update these statements if conditions change.
I'll now turn the call over to Jay.
Thanks, Ken and good morning, everyone and welcome to our call I'll start with the quarterly highlights as we always do but first I want to comment on Mr. Cooper's performance during 2022.
Which was obviously a very challenging year for the industry due to one of the biggest rate increases on record Nonetheless.
Nonetheless, Mr. Cooper was able to deliver exceptional results, which I would summarize by focusing you on exactly two key metrics, we grew our customer portfolio by 23% and tangible book value per share by 29%.
Relative to our peers. This is outstanding performance, which validates our balanced strategy as well as the technology investments, we've made in our platform and the skills the commitment and the hard work of our team members.
And I'll add that 2023 is shaping up to be a year of meaningful opportunity for Mr. Cooper by.
By executing on our strategy, we've consistently shared with you and making the right tactical decisions, we stand to grow our customer base, even further plus put the company on the path to rising returns.
Now, let's turn to slide three and review the fourth quarter highlights.
In terms of financial metrics I would point to a 200 basis point lift in operating our OTC as servicing income nearly doubled in the quarter.
Bear in mind, our current return on equity is impacted by a very robust capital base, which you can see in the 31% ratio of tangible net worth to assets.
Turning to operations the servicing portfolio reached 870 billion or $4 1 million customers, which as I. Just mentioned is up 23% year over year and this growth plus rising rates help push servicing income to a record high of $159 million in the fourth quarter that exceeded our November guidance of one <unk>.
Third $40 million of CPR speeds surprise to the downside.
In originations as you know, we took rapid and decisive action last quarter to reduce capacity and as a result, we were roughly breakeven in the fourth quarter and are now on track for positive results, which will be in line with what we guided you to expect.
Shifting gears to capital management, we repurchased one 3 million shares for $54 million as we continue to allocate capital both to growing our portfolio and to stock repurchase with the goal of maximizing investor returns.
I want to mention that we've entered into a definitive agreement to acquire a registered investment adviser called Roosevelt management company and its sister company Rushmore loan services, which is a highly regarded special servicer.
This acquisition will provide us with an asset management platform to raise third party capital on an ongoing basis from institutional investors, who seek exposure to MSR and other mortgage assets.
We expect closing to occur mid year, following regulatory approval and we plan to go to market in the second half.
We haven't disclosed the financial terms due to an NDA with the seller, but the cash outlay is not material.
Now, let's turn to slide four I'd like to spend a moment on developments in the servicing industry and in particular, what we see as an unprecedented volume of MSR is coming to market. The chart on this page shows you our internal analysis on the size of this opportunity in summary, we're estimating that nearly four trillion.
We will trade over the next three years, which on an annual basis is nearly double the historical run rate now bear in mind. This surge in volume is taking place in the context of a concentrated market with a limited number of buyers and.
And as a result, we expect pools will trade at very attractive yields and in fact, we're already seeing some of the highest yield since the great recession.
Let's talk about what's driving the market as I would point you to two industry trends first during the pandemic. We saw a very noticeable change in originations behavior simply put they chose to retain a much higher volume of msr's than their historical practice for the obvious reason that they were a wash in cash and they can.
Afford to retain the servicing rights today, however, originators are facing the worst margins in years in fact, we're expecting for the first time ever to see three consecutive quarters of losses in the MBA quarterly origination performance survey and this also means for many operators that liquidity is becoming a pressing need.
Based on data for nearly 500 originators. We estimate there is a backlog of as much as $1 five trillion in UBB, which needs to be solved.
The second trend is consolidation.
Red public statements from industry leaders, who decided to shrink their servicing portfolios.
I will tell you that there are other large operators, we've quietly made the decision to exit.
There's no mystery about the reason for consolidation pressure, it's the critical need for scale technology operational skills inefficiency just like in most other sectors in the financial services industry.
Among a handful of large servicers, we believe Mr. Cooper is in the best position of antibiotics to capitalize on this opportunity we have unmatched operational capacity to onboard large portfolios, we have industry, leading recapture strong relationships ample capital and liquidity and a sizeable ski.
<unk> advantage.
Now, let's turn to slide five and talk about key investment themes for Mr. Cooper in 2023.
With this MSR growth opportunity, which will include both acquisitions for our own account.
And our sub servicing business as we partner with investors.
Additionally, when we closed the acquisition of reservoir and Rushmore, our asset management platform will generate sub servicing plus investment management revenues from investors, who seek exposure to MSR economics, but don't have the infrastructure or licenses necessary for direct ownership.
Let's talk about the second theme, which is earnings visibility we benefited from a very strong ramp in servicing and we have clear line of sight into continued profitability, specifically, we're now projecting more than $600 million in servicing EBT. This year and I'd emphasize with the vast majority of mortgage customers well out of the <unk>.
This income stream will persist for years to come absent a major rate move.
At the same time, we're laser focused on driving operating leverage as Chris will comment on in a moment.
Now, let's talk about our origination segment as we all know the refi market has limited right now with most customers well out of the money. Nonetheless, our platform is profitable and extremely scalable as you know from watching us in 2019 and 2020.
And I'd add that we're continuing to invest in automation and other enhancements, which will put us in position for the next turn in the cycle whenever that may occur.
Finally for zone following a slow fourth quarter, we're now seeing stronger activity, including record net inflows and higher pull through rates, which suggests we may finally be passing through an inflection point based on our latest data we're projecting a visible ramp in the second half of the year, which should drive progress and our monetization.
Strategy.
To summarize we're really excited about the opportunities in 2023, and we couldnt be more pleased with how we're positioned I want to close by thanking every single member of our team for your commitment to Mr. Cooper's customers your tireless work and your enthusiasm.
And now I'll turn the call over to Chris who will take you through more of the operations.
Thanks, Jay and good morning, everyone.
I'm going to start on slide six and talk a little bit about the servicing portfolio, where you can see we really had a fantastic quarter.
Total <unk> was up 23% year over year to 870 billion.
Which represents the mortgages are $4 1 million customers.
During the quarter, we purchased Msr's with $23 billion in NPV at excellent prices demonstrating that we continue to maintain a very disciplined bidding strategy focused on portfolios with quality collateral at attractive yields that we're confident will help us drive higher return on equity.
With our scale, we see virtually every deal in the marketplace and more often than not where the sellers first call.
Because of our long history as an acquirer, we have vast amounts of data on how different types of solid portfolios have behaved, allowing us to form extremely accurate assumptions about credit and recapture performance.
Let me share a little more context on our acquisition process.
And our most recent back test we reviewed the nearly 300 deals we were offered over the last two years and over those deals we elected to analyze about two thirds.
And then chose to bid on a little under half.
We ended up winning 23% of what we bid on.
Or 11% of the total deal flow.
And going forward, we would expect those ratios to remain relatively constant.
We have a very good feel for what will come to market and an even better feel for how those portfolios will perform which is critical to earn our targeted returns.
I'd also point out that our back test validated the accuracy of our underwriting with 85% of our acquired pools modestly outperforming our deal models and only 15% are delivering less return, but only by a very very small amount.
Now turning to sub servicing we grew the portfolio sequentially. Despite that the boarding of $20 billion of <unk> from a single client, which we mentioned to you last quarter, but at the same time, we won two new clients.
Having said that some volatility in sub servicing balances should be expected over time, we're privileged to service portfolios for some of the most successful companies in the industry and we're committed to delight each one of them, but we also know our strategies wont always be perfectly aligned.
And the long term, we see significant growth opportunity in sub servicing and to Hell.
Maximize that potential.
We've recently appointed one of our most experienced executives Brian Budd.
Had our entire sub servicing business.
Brian's charges to grow our portfolio with the best clients.
And to do that by ensuring that our best in class service gets even better.
Now moving on to slide seven I'd like to highlight servicing earnings which were very strong in the quarter nearly doubling to $159 million as a result of higher balances lower costs and lower prepayments.
As Jay mentioned Cpr's surprises us to the downside, averaging five 3% for the quarter and even dropping below 5% in December which is something we've never seen before.
For 2023.
We expect to generate more than $600 million in EBT and I comment that we have very clear visibility into these numbers.
If you remember our guidance at the end of Q2, we told you to expect servicing earnings to double in Q3, and then double again in Q4 and Thats almost exactly what happened.
Just like those last two forecasts or projections for 2023 are based on nothing more than the forward curve, which assumes the fed funds rate reaches nearly 5% mortgage rate settlement around six CPR speeds averaged slightly under 6% for the year.
Additionally, we have several initiatives underway that promise to reduce costs, while significantly improving our customer experience.
And if you turn to slide eight you will see a chart with a multiyear perspective on our servicing efficiency ratio.
Breast in terms of basis points of the portfolio.
You can see a very impressive trend with this ratio down 44% over the last five years.
Just in the last year alone our portfolio growth of 23% significantly outpaced expense growth of 13%, helping to shave another basis point off the ratio.
Our strategy is to proactively drive down costs. So that we can realize positive operating leverage as we grow the portfolio, while deepening the competitive moat between us and peers to the point that no one will be able to compete with us.
In pursuit of efficiency, we have developed innovative technology applications, and we obsess over process improvement.
I personally spent at least 50% of my time every week evaluating process improvement opportunities and I'd add that over the last two years, we've identified close to 100 separate processes with gaps or access the variability where improvements will drive down both lower expenses for us and better experiences for our.
Customers.
Just in 2022 alone we drove a 16% reduction in inbound calls a 31% reduction in customer issues.
And by the way a 75% improvement in complements <unk>.
All while growing the portfolio by over 20%.
This slide lays out some of the many projects currently underway. For example, we have an initiative in place to drive down call volumes through the implementation of AI.
Which will predict which customers will call us and lives. So that we can send them information proactively. We're also working to encourage better utilization of our state of the art I VR as well as web tools and chat functionality.
Payments and S growth remain focused areas, where we believe we can further simplify the customer experience with easy to understand and more timely information, which will lower calls and delight our customers with a personalized friction free process.
Now many of you have asked about the risk of a credit cycle change impacting returns.
And our response would be first.
That we purposely carry excess operating capacity to absorb higher levels of loss mitigation activity.
And second.
We would look at a higher delinquency environment as an opportunity to grow our REIT path special servicing business.
As you may recall from our comments last quarter were very selective in the pools, we acquire focusing on those with very strong defense of quality and for now I would observe that our delinquencies barely moved in the fourth quarter <unk>.
Increasing sequentially by only three basis points.
Now, let's turn to slide nine and discuss the origination segment, which is a critical component of our balanced business model.
Last October as mortgage rates were trending higher we.
We took additional action to realign capacity to a much smaller market, which included taking the difficult but necessary decision to eliminate over 1000 positions most of which were in originations.
Thanks to this decision we were roughly breakeven in the fourth quarter and are now on target to earn approximately $10 million and EBT for the first quarter, which is consistent with the guidance. We gave you last fall and we feel good about driving these numbers higher if mortgage rates settle in at meaningfully lower.
<unk> or if MBS pricing improves as.
For now it's a relatively small market as you know with very few customers in the money for rate and term refis.
We fine tuned our marketing campaigns to focus on that subset of our customers, who can benefit from refi products, including cash out at the same time, we're finding ways to drive incremental efficiencies, which will pay very significant dividends when the market eventually recovers.
I would add that thanks to the company's overall profitability and cash flow, we're able to continue investing in our originations platform as you recall flash as our project to digitize, our originations workflow and I'm pleased to report that in the fourth quarter, we achieved our goal of extending.
Flash processing to 70% of our refinance volumes and now we're working on it driving implementation to a 100% which would also include purchase recapture which is an area of strategic focus for us.
Flash is one of many innovative applications developed by the company in recent years, including the X one title underwriting engine, which we monetize in our sale of the title unit two years ago.
Our pyro document processing engine, which gives us a huge advantage and rapidly due diligence ing and onboarding large portfolios in which we're focused on licensing right now.
And our native cloud based servicing application suite.
Which we sold to stage in last year.
And by the way I should mentioned that <unk>, just completed an agreement to integrate the fins that core that fiserv just paid $1 billion for.
This is the final step in launching a completely modern cloud based platform that is decades ahead of the technology available in today's market.
Now at some point in the future refinance volumes will return and in that environment.
No we can scale at an extremely rapid pace and produce terrific margins.
Now if you turn to slide 10, I'd like to share an update on zone.
In summary, while the fourth quarter was slow we're now seeing a measurable pickup in activity.
Which leaves us to project a substantial ramp in earnings in the second half.
To start with we're seeing much stronger inflows from services as they are finally getting comfortable with the state and federal rules and Investor guidelines issued during the pandemic.
This drove stronger net inflows in January in fact, net inflows reached the highest level we've seen since before the pandemic.
I'd add that February is looking even stronger, which bodes well for the pace of sales.
As you can see sales were a little slow in the fourth quarter due to further pressure on the pull through rate, which we commented on last quarter, but the good news is that so far this year, we've seen that rate begin to rise.
We're also seeing stronger bidding activity higher web traffic and faster growth in new account registrations, which together makes it feel like we're finally, passing through an inflection point now that we've been through six straight months of home price declines.
So I'd guide you to look for stronger sales in the first quarter and modestly positive EBT in the second quarter with a more significant ramp in EBT occurring in the second half.
Meanwhile, we continue to engage in discussions with perspective investors, which we think will move forward in a productive fashion as zones earnings potential becomes more visible.
So with that I'll now turn it over to Jamie who will take you through the financials.
Thanks, Chris and good morning, everyone.
Now, let's turn to slide 11, and review the fourth quarter results to summarize the quarter net income came in at $1 million at $82 million in pre tax operating income was offset by a negative MSR mark of $58 million in adjustments totaling $33 million.
Adjustments included $23 million from severance and property consolidations that we mentioned last quarter and related to the right sizing of our origination business and $10 million associated with equity investments, which represent interest we took in the sale of our zone businesses.
Now Jay mentioned, when we bought back $54 million in shares this quarter that drove our weighted average diluted share count from $72 nine to 71 6 million shares and we ended the quarter at $69 3 million shares outstanding.
Between operating income and the reduction in our share count we saw strong growth in tangible book value per share this year, which increased by 29% since last year, reaching $56 72 per share.
We obviously were very pleased with this performance and once again validates our balanced business model.
Now, let's turn to slide 12, and review our mortgage servicing rights during the quarter mortgage rates decreased by 29 basis points, while swap rates increased by 16 basis points, leading to a negative mark of $58 million, which resulted in our MSR being flat at 162 basis points.
Now the servicing fee multiple which in our view as a better high level comparison with at a multiple of five one times the underlining servicing strip in the fourth quarter slightly below the five two times, we saw in the third quarter.
As you know we have a very disciplined evaluation process, which includes marks from multiple independent valuation experts. We additionally, benchmark our valuation metrics against public disclosure of the banks and mortgage companies and generally find that our multiple lives right in the middle of the pack, which we feel are consistent with having an accurate methodology.
And it should give you confidence in our balance sheet and in our tangible book value.
Now turning to slide 13, let's review the company's liquidity position at quarter end total available liquidity remained robust at $1 9 billion down from the record level in the third quarter, but still quite ample.
$527 million of liquidity with unrestricted cash with the remaining $1 3 billion being collateralized and available immediately.
And as a reminder, the majority of our MSR line does not mature until 2024.
Now during the quarter, we drew down an additional $370 million for MSR purchases, bringing our total draw to one 4 billion.
This accounts for 33% of our debt, which is somewhat higher than our historical ratio, but given our excess capital position, we are quite comfortable with it.
In the near term we may further tap this liquidity for value added opportunities as we continue to evaluate our overall capital mix.
From a cash flow perspective, our advances remain a good story down 17% year over year with over $1 billion in financing capacity for advances, including facilities earmark for Ginnie Mae and granted we believe that we're well prepared for credit normalization, Although Chris has mentioned, we're not seeing meaningful pressures on our customers at this.
Our cash flow during the quarter benefited from the steady ramping in servicing interest income and we expect servicing cash flow to remain robust in 2023.
Now I'm going to wrap up my comments on slide 14 by talking about our capital position.
Our capital ratio at quarter end as measured by tangible net worth assets was 31, 1% down slightly from 31, 3% last quarter.
Jan Chris comment on the massive opportunity in the servicing market.
And while there is no change to our disciplined and patient approach, which remains appropriate in the current environment. We are now seeing a substantial rise in acquisition opportunities ranging from small pools to major transactions.
As such I would guide you to expect deployment or at least some capital in 2023 into portfolios for the right mix of collateral and yield this capital deployment should help us generate higher returns on our equity over time.
With that I'd like to thank you for listening to our presentation and now I will turn the call back over to Ken for Q&A.
Alright, Thanks, Jamie and latest we'd now like to start the Q&A session. Please.
Yes.
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Okay.
Our first question comes from the line of Kevin Barker with Piper Sandler.
Good morning.
Thanks for the thanks for all the detail regarding the pipeline on the MSR portfolios out there.
Could you provide us.
A framework or how to think about.
Your your decision making on whether.
Whether to deploy capital into MSR portfolios.
Is there certain hurdle rates that you lay out there whether it's gross yield on the MSR.
Or.
Total return on investment.
And could you also help us think about do you include some level of refinance opportunity when making those decisions.
Or maybe looking at external capital partners in order to finances.
Good morning, Kevin It's Chris.
That's a great question and since we were in the midst of bidding competitively on a lot of things I'll answer it but I'll do it generally.
Yeah of course, we.
We look at everything you just said.
MSR yields and total returns are.
Essentially the same thing for US right now, we do consider recapture refinance expectations, but of course for most of the pools that are coming to market right now those.
Those levels would be quite modest but of course, we look at them one of the things as we just mentioned as we've got experience.
<unk> pulls from virtually every seller in the market multiple times. So we have a good idea how those pools will will behave.
Even in an environment like this so.
We look at everything and of course, we do look at financial partners, we have.
<unk> been planning.
For this environment as I think you well know for two years.
So we spent a lot of time building.
Much stronger liquidity working with our bank partners to be prepared to take advantage of this opportunity because yields are very very attractive.
But of course, our capitals finite so.
Should we be lucky too.
Use.
Our liquidity to its maximum them, where we will partner with other players, which we've done.
Over the past couple of years very successfully so we see this as a great opportunity.
We want to be able to take advantage of it to its fullest extent, but of course yields.
And target returns have got to fit our model. So don't expect us to buy every pool that comes to marketable by those that hit our hurdles that we know we can.
Service very efficiently and you Shouldnt expect us to deviate from that at all.
And I think Kevin.
You can think about it from a return profile again, we're active as we speak but I mean, we're looking at.
Mid teen kind of Unlevered.
In some cases higher returns.
So I think thats and Thats, how were thinking about this opportunity obviously that can change, but to Chris's point, we see it as a.
As a massive opportunity and we want to be patient because we do think theres going to be.
Coming to market.
Okay and then on.
On the flip side I guess.
You mentioned that it was competitively bid.
Yeah.
Theres other bidders out there for these types of portfolios, but could you help us understand how deep.
The buyer pool may be and in the current environment relative to what you've seen in the past.
What I mean by that is when you think about when you look at the.
Tens of billions or hundreds of billions of potential servicing that could transact.
How many bidders you use you expect to be for.
Those bigger portfolios.
Or at least as a percentage relative to what you're seeing.
And in 'twenty, one or 2019 or previous years.
Kevin I think.
The number of buyers is somewhat limited.
Especially as you get into it.
The larger portfolios so.
I think you've probably put them into three camps you'd have.
Financial buyers, so there'll be a handful of those I think that we will participate.
You'll have.
A few strategic like us that would participate and then the banks potentially but again I think the banks are pretty selective.
Our non a consistent participant in the market.
So as we step back and look at it I think we're best positioned I mean, if you look at the number of transfers that we've done.
I don't think anybody's done as many are unknown nobody has done the size and complexity of transfers that we've done and I think that's a key ingredient because I think these counterparties they really want a good customer experience they want to make sure. They can get approval from the other stakeholders.
Fannie Freddie FHFA Ginnie et cetera.
So I think it's a very kind of limited population at the end of the day. The other thing I would say is particularly on the Ginnie Mae side like if you were to look at Ginnie Mae versus conventional I think the population strengths considerably for the Ginnie Mae.
Long lateral for a variety of reasons and that's we've seen that historically as well.
Okay. Thank you Jay Thank you Chris.
Okay.
Our next question comes from the line of Eric Hagen with BTG, Eric Your line is now open.
Hey, Thanks, Good morning, I've got a few questions here.
The first one does the value of the capitalized servicing retained the 212 basis points on slide 25 does that include the $22 billion of servicing that you bought in the quarter like are there some low coupon.
MSR is let's get included in that are they are.
Are they all current coupon msr's.
And then if you were to.
Isolate the sub servicing business and think about the earnings being generated there what would you say is a good run rate or a way to think about that.
Including the amount of operating leverage you have legs for every $1 billion of sub servicing is there an approximate kind of pickup in earnings that you think you could get from that.
And then I think Rushmore was.
And talks maybe last fall to be acquired by a different special sub servicer can you talk about what transpired, but what maybe led you to them or them to you. Thanks.
Let's see.
Can you restate the question on Rushmore.
I think they were.
And talks to be acquired by a different special sub servicer.
At some point last year.
Hoping you.
Ill give some detail on that.
We can.
Can't really comment on that.
And I think just to be clear.
Buying really the entity.
And so I don't think I can really comment on their process.
But with regard to sub servicing.
I think your question was the pace of growth or profitability around sub servicing.
We think sub servicing as a.
<unk> to our own portfolio.
I think we can continue to grow it in.
In line with.
Our own portfolio as Jay just mentioned some of these large portfolios are going to trade into financial buyers that will seek us out as a sub servicer, because we consider our platform to be absolutely best in class.
In terms of profitability, we have a range of different services, we offer are our clients.
Some.
I would characterize as basic in standard some that are extremely sophisticated white label.
We are the only sub servicer that can provide differentiated service levels for sub servicing clients. So there isn't a single answer on profitability other than our sub servicing clients are profitable of course.
You look at them differently, because there is no real investment other than the pro rata share of investment we make in the platform.
So returns on investment are quite attractive, but obviously they are much more modest than those that we get when we buy the full strip.
Yes.
That's helpful and then I was looking at the.
212 basis points of capitalized servicing retained on slide 25 does that include the 22 billion or $23 billion of servicing you bought in the quarter like what's the composition of that 212. Thank you.
Hey, Eric it's Ken.
That disclosures for the capitalized originated MSR. So no. It does not include acquired Msr's.
Okay, and and bear in mind, we have another disclosure there.
The value of the originated servicing rights add lot.
Just on the base servicing strip was $1 56.
Alright Thats it from me thank you.
Thank you.
Okay.
Our next question comes from the line of Giuliano Bologna with Compass point.
Good morning, Congrats on the continued great execution, one thing I'd be curious about when you.
Thinking about the NSE.
MSR fund or funds or investment vehicles.
Curious if you're thinking about simply just managing third party capital.
And there are some vehicles or would you be willing to invest in those vehicles and what I mean.
By that or what im getting at is.
Would you be willing to put kind of a pro rata share of everything you buy into funds or are you looking to acquire separate pools that would go into those fund vehicles.
Okay.
Giuliano.
<unk> is to use this to manage third party capital we think.
There are opportunities for large institutional investors that have.
Major exposure to MBS that would find MSR investments attractive, but obviously you can't buy MSR unless your servicer. So.
We will seek to.
Two two.
Almost exclusively manage third party capital I don't want to rule anything out there could be unique situations, where we would certainly want to invest alongside those.
Those third party investors, if it made sense, but that's not the primary focus.
And then the second part of your question was.
That actually answered my.
My question.
My next question, which was.
On the origination side of the platform.
Okay.
The note about roughly $10 million of <unk> in the first quarter of 'twenty three.
I'd be curious how you think about the potential for that to step up throughout the year.
Just in terms of thinking.
I'm thinking about it.
Mary drivers, it's primarily volume or where that will come from and then somewhat related.
Obviously, a corresponding volume to come down significantly I'd be curious from your perspective is there a much greater incentive to buy bulk pools. If you can get more attractive pricing on the bulk side.
The correspondent business running at much lower volumes, probably higher margins.
Sector, So I'm kind of curious between the interplay between those two different pieces.
Well as you know we've got three channels that we acquire MSR.
Correspondent.
Through our co issue channel and bulk acquisitions right now yields on bulk acquisitions for the reasons Jay pointed out there are limited buyers and there is a lot of lot of.
Assets coming to market yields are more attractive there, but we pivot constantly.
We do have some expectation that correspondent yields will begin to pick up.
This year, we have.
Got a great team in place, but that's a fluid decision is literally in every Thursday meeting, where we are reviewing our strategies, but I wouldnt suspect that bulk pools will deliver the best returns for most of this year now with regard to profitability and originations.
Our outlook is still pretty much.
Where we guided you would expect things to be this quarter when we spoke last fall.
But there is some sign that rates may begin to stabilize and I think thats the first part right.
Clients are still.
Getting used to the volatility in rates. So if they stabilize there'll be one leg of things moving up if MBS prices return to normal spreads thats.
Another factor and of course, if rates settled in at lower levels meaningful low leverage then we could see much more material improvement, but for now we'd rather guide you to where we have clear line of sight. There is upside, but we don't want to.
We don't want to over promise at this point.
And I would add Joanna if you look at our platform and the investments we've made in flash the ability to scale up it'll be night and day versus what you saw in 2020, I mean, we can scale our platform.
In a significant way.
And in a very efficient way.
If so needed so the investments we've made have really put us kind of in a different category as we think about needing to scale up again, so that I think we're really excited about the originations team has done an amazing job there, but we've really transformed the platform to be able to say.
Adapt quickly if needed to.
At a more attractive environment.
Alright.
I will jump back in the queue.
Thank you.
Our next question comes from the line of Doug Harter with credit Suisse.
Thanks can you talk about.
In your guidance for the $600 million of servicing profitability what that assumes for.
Additions kind of given the pipeline that you see.
Sure.
Doug.
We've got modest growth in that number.
The growth that we know we can achieve just.
Based on performance over the last few years the amount of capital we have.
It doesn't anticipate the large bulk purchases that are.
Potential.
So we're not committing to a number that requires us to go out and win.
$100 billion <unk>, but.
So that's upside.
I'd say the $600 million is a conservative number for the year.
If we have just modest growth.
And I'd also point out that as you probably know first quarter is seasonally low for the year. So we will see the fourth quarter results come down probably.
10% or so just due to lower custodial balances and then return to slightly higher levels, but $600 million is a number we have a lot of confidence in.
And again with some success in acquiring some of the assets coming to market, we could see that number.
Improve.
And then on the opportunity for MSR.
I guess, how are you thinking about the opportunity.
Just buying bulk MSR versus possibly buying.
Whole companies.
MSR that might also have some origination capabilities.
And how you would weigh those opportunities.
Yes, I think look our preference would be.
Our bias I guess is to buy portfolios.
And if you look at our track record we've consistently bought <unk>.
<unk> number of portfolios over the years, we have bought a couple of platforms.
And we will look at the platforms, but what comes with the platforms. Obviously as you know.
People culture technology et cetera, and so we.
We approach that in a very.
Cautious manner, so I think our in our strong bias, we continue to focus on portfolios.
Great. Thank you.
Okay.
Our next question comes from the line of Bose George with <unk>.
Hey, guys. This is actually Mike Smith on for Bose.
Maybe just another one on the capital deployment front.
Look you guys pretty bullish on the opportunity with MSR.
Howard.
How are you thinking about kind of balancing that with potentially buying back more stock just given the discount to book.
But you should expect us to continue what we've done in the past.
We have.
Plenty of liquidity, we think our stock is extremely cheap and we've been consistently in the market.
<unk> shares back at a measured pace.
Unless things change hopefully our stock.
Closes the gap to tangible book very quickly, but if it does and you should expect us to continue to.
To buy back shares.
I think we're fortunate to have enough capital and liquidity to continue to do both.
And.
You Shouldnt expect any change there.
Great. Thank you and then maybe just one more on the origination business you guys have done a good job taking down expenses just kind of wondering how far do you think the industry is in terms of just pulling out broader capacity and kind of what inning. You think we are in there.
For the industry.
Yes, I think look we were very proactive there and we took out as you know cigna.
Significant.
Capacity.
But again, we also made investments where we do think we can ramp.
If necessary quickly I think from an industry standpoint, we're probably.
I don't know in the late innings I think people are have major adjustments and recalibration.
But I think there's still more to go but I would say we were in the late in the late innings.
Taking capacity out.
Great. Thanks, a lot for taking my questions.
Yeah.
Our next question comes from the line of Kevin Barker with Piper Sandler.
Thanks.
So you had a portfolio running off in the sub servicing and then you had two new.
Portfolio to new wins.
Should we expect a.
The decline here in the first quarter on a total servicing portfolio, just because of that run off or.
Is that going to be held up fairly well just given near term acquisitions.
I think in the first quarter I don't expect a big change in the first quarter.
It's hard to tell over time that first.
Client that had 20 billion runoff has additional.
Additional.
<unk> on our platform and it will run off as they are.
To manage it.
We will work with them to do.
Do that.
In a way that is.
Smooth it but I think there is some fluidity to that schedule and we'll give you guidance as that happens, but but Kevin we've been very successful in attracting other people to the.
The platform. So we don't expect any big change in the quarter, there could be some volatility either way but.
Long term, we don't think that's that's an issue.
And when we think about.
Potential portfolio growth you have.
$60 billion and $50 60 billion.
A sub servicing rolling off and then other client wins that are going to come in and probably supplement that maybe over the next few quarters is that fair to say.
That's right that's exactly right and I think the $50 to 60, Kevin is as moving out a bit I don't think it is certainly not a first quarter.
No.
As always it's going to be spaced out over the year, but I do think it's been extended a little bit that could change, but I wouldn't consider it a big factor.
And then you made some comments about.
Sage at implementing some technology.
Pretty quick I didn't quite get that could give us a little more depth on what has been implemented there and how that could potentially support your business.
Or the potential return on investment on other MSR, just given a technology advantage that you may have.
Well our application suite as you know we sold this agent and that is a.
Very modern native cloud.
So the.
Patients.
That are for a lot of reasons way ahead of the competition. The the one thing that was missing was a core we ran on <unk>.
<unk>. This is something that was referred to as L. Sam's, It's a 50 year old core.
And by the way every other platform out there is 50 years old we have the only modern native application suite.
Now <unk> has just signed an agreement.
With Pfizer to license their fins that core <unk> as a company we've been working with for the last two years, we were going to integrated ourselves.
And I don't want to get too far off but since <unk> is a company started by.
Absolutely the most successful iconic software developer and financial services in the last 40 years, Frank Sanchez sold Zac.
Jack.
Fiserv Fiserv is going to replace corn every apple in every application they have.
With this new core Sei Jin is going to use it and so that completes the platform.
And I think it's going to be a massive differentiator because it's not.
Cloud native doesn't mean that much.
Everyone, but having a modern application suite.
Provides tremendous efficiencies for our servicer.
Tasks that you had to do manually suddenly are done is done faster. So I won't spend a lot more time and steal <unk> Thunder, but we're very very bullish.
That now that they've they are now.
<unk> will be integrating <unk> into the application suite it'll be a massive differentiator.
Okay with that.
Potentially add further efficiencies to the platform as well.
Absolutely.
Okay absolutely.
Alright, great you should really think of it Kevin it's going to be a game changer from.
Both the team member standpoint.
Our actual servicing team members and also the customers.
Chris.
We're going to make it a much more efficient and automated self serve environment that will bring significant efficiencies.
Any way to quantify those efficiencies.
I know it hasnt been implemented yet.
But when you think about the.
Stack of expenses associated especially with labor.
Or servicing being fairly labor intensive business.
The way to quantify that.
I Wouldnt quantify but analogy I would give you is a few.
Okay.
The latest Mac.
And look at the power books that was out in 1990 and think about doing your work on one versus the other.
And of course.
It's a sea change.
And.
Yes.
It's that dramatic.
So.
I don't want to.
Cite a number here, but when you think about the combination of our application and fins egg versus technology that everyone is out there.
Trying to sell its 50 years old.
Theres, obviously going to be a major change in efficiency.
Great.
Thank you for those comments.
Thank you Kevin.
That concludes today's question and answer session I would like to turn the call back to Jay Bray for closing remarks.
Thank you everybody for joining the call and will be available for <unk>. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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