Q4 2022 Home Point Capital Inc Earnings Call
No doubt about it 2022 was an incredibly challenging year for mortgage banking. The year was marked by multiple headwinds, including higher interest rates low housing supply and significant overcapacity just to name a few this ultimately.
Only resulted in extreme conditions for all market participants.
Challenges have continued into 2023 with refinance transactions at all time lows seasonality has come back into a mortgage origination.
As such the first quarter of 2023 will likely be the low point in the current origination cycle.
The good news is that the seasonality curve slope upwards as we move into spring and summer the MBA projects, a 46% increase in origination volume in the second quarter of 2023 versus the first quarter propelled by a seasonal increase in home purchase activity.
At one point, we spent 2020 to resetting the organization to both navigate through the current challenging environment and as conditions improve start to sustainably grow again.
Our top priority has been to build and maintain a strong liquidity position, we have divested noncore businesses and sold noncore assets. We have maintained strong relationships with our leverage providers and have ample access to additional liquidity. In addition to our focus on margin over volume, we have rebalanced, our operating cash flow to best leverage the historically.
Strong performance in our servicing portfolio in the second quarter of 2023, we expect to be operationally cash flow positive, which is a massive shift from our position in 2021 and 2022.
This change in our cash flow dynamics is driven in large part by the historically strong performance in our servicing portfolio. This is driven by three factors historically low prepayments historically strong credit performance and historically high levels of earnings on our servicing related deposits to give you an idea of the historical scout prepayments are running at 3%, which.
Half of it the historic floor level of 6%.
Our servicing book is a critical input towards our path to profitability in 2023.
We have also made extremely difficult decisions to reduce the size of our organization, including an additional reduction in force in early 2023 are dramatically smaller cost profiles and the other primary driver of our path back to profitability during 2023.
Including all actions taken since the start of 2022, we have reduced our fixed expense base on an annualized basis by over $250 million we.
We have also expanded our efforts to reduce the overall size of our balance sheet with the objective of having it be more reflective of our current size and operational scope.
During the first half of 2023 plan are largely complete these efforts, which are both enhance our liquidity through select asset sales and improve our operational performance.
After all this hard work we are finally prepared for sustainable growth as the seasonality curve ramps up or at.
All obtainable data indicates that the wholesale channel provides the greatest opportunity for originations growth in 2023 and beyond the systemic benefits created by the broker wholesale lender partnership.
Our even more apparent in a challenging market as we saw by the increased migration of retail loan originators in 2022 were all wholesale all the time.
So what's the bottom line, we expect to be operationally cash flow positive starting in the second quarter of 2023, and we expect to be operationally profitable in the second half of 2023 with that I'd like to turn the call over to Mark.
Thanks, Willy and good morning, everyone.
We've included in the presentation and earnings release are standard period over period financial results.
I'm going to focus my discussion on the steps we've taken to best position our company for a return to growth in 2023.
I'll be happy to answer any questions you have regarding the financial results following our prepared remarks.
Looking back at our financial results for the fourth quarter and year ended December 31, 2022, we effectively delivered on three primary objectives, maintaining a strong liquidity and leverage position.
Executing on expense reduction and efficiency initiatives and improving our cash flow and earnings profile.
As Willy mentioned liquidity was our top priority in 2022 and.
In the fourth quarter, we completed the divestitures of nonstrategic assets and language and the H P. Mac asset management vehicles. We also sold approximately $6 billion of our Ginnie Mae MSR book.
These actions resulted in a year ending available liquidity of $663 million up from $569 million in Q3, a strong foundation to support our company for long term growth.
Moving forward, we will continue to Opportunistically sell Ginnie Mae servicing rights and strategically rightsize, our warehouse lines of credit to minimize associated costs and more efficiently operate and an increased interest rate environment.
On the expense side in the fourth quarter of 2022, we further reduced quarterly expenses by 31% quarter over quarter, excluding the $13 4 million restructuring and $10 8 million of goodwill impairment charges in the third quarter.
Comparing Q4 of 2022 for Q4 of 2021, we reduced our expenses by 58.5%.
As previously reported we took cost cutting measures that resulted in approximately 970 people exiting during the fourth quarter of 2022, reducing our year end head count down to approximately 830.
Additional actions in the first quarter of 2023 further reduced head count, which taken together will result in an annualized cost savings of approximately $80 million.
In the first half of 2023 work continues on the expense side as we review of contracts and facilities for additional cost reductions to support the current size of the organization.
Speaking to our improved cash flow and earnings profile, our servicing segment earnings trended positively in the fourth quarter of 2022 generating an adjusted contribution margin of $33 $3 million in the period.
Our weighted average coupon on the servicing portfolio was 335% and 60 plus day delinquencies remained less than 1%, resulting in record low prepayment levels, which we continue to see thus far in Q1.
As Willy mentioned earlier, we strategically prioritize margins over volume.
<unk>, we produced total fourth quarter origination volume of $1 7 billion and.
And $27 $7 billion in total volume for the full year.
Gain on sale margins attributable to the channels before giving effect to the impact of capital markets and other activity increased to 86 basis points in the fourth quarter of 2022 compared to 51 basis points from the previous quarter and 58 basis points in the fourth quarter of 2021.
The other loss on sale declined to $8 $7 million from $17 $4 million in Q3, as a result of more stable capital market spreads lower charges to our inventory held for sale outside of agency execution and declining provision for repurchase reserves.
Serves are based on historical production levels and the margin is based on current production levels. So we do expect them to begin to align this year.
Reiterating willie's comments on our forward action plan and financial outlook, we view the proactive steps that our organization took in 2022 as necessary building blocks for a stronger performance in 2023.
We were able to hit the mark on objectives related to cost reduction liquidity enhancement and cash flow improvement and anticipate a return to the strategic production growth in 2023, even in the midst of continued market pressures.
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.
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One moment, while we poll for questions.
Our first question.
From Doug Harter.
Please go ahead.
Thanks Willie.
Your comment that you would expect I'm I guess, what was the cash flow the.
Cash flow breakeven and cash flow positive in the second quarter can you just talk about what type of volumes you would expect in that environment.
You know kind of how you would trade offs, I'm kind of volumes versus versus cash flow and in that scenario.
Sure Doug so.
Yeah, I mean, as Mike talked about where we are kind of fixing into a certain margin level. It approximates what we had in the fourth quarter I'm trying to get a little bit more out of it based on what's happening in the market and we're gonna, let volume kind of toggled. So I.
Volumes in the first quarter will be lower than they were in the fourth quarter and we would expect to increase from there, but I don't think mark at this point, where we have specific numbers on that we're not giving yet.
That level of forward guidance, but the point, Doug would be that the earnings off of the servicing portfolio are going to be.
Pretty high end outweighed at that lower production level, while we think second quarter production will be higher than first quarter production is still going to be relatively low and consequently, it burns a lot less cash coupled that with the expense reduction moves that we make that will be fully baked in by the time, we get to the second quarter, that's going to lead to cash.
<unk> positivity.
Got it and just on the the near term margin environment. It seems like.
The competitive environment, you know a little bit of a pull back from.
You know from some of the competitive pressures or are you seeing that and and one you know so far in the first quarter.
We are we have more recently, so I think the quarter started off pretty tight and it's kind of loosened up a little bit. So yeah, because we're fixing more in margin, we're going to see a little bit more inflows and so our flows have increased.
Certainly in March over what we saw in January and February .
Okay. Thank you.
Yes.
Our next question comes from me here that Yeah with Bank of America.
<unk>.
Hi, Good morning, and thank you for taking my question I wanted to start with the 64 basis points headwind.
Gain on sale just trying to bridge the gap between reported and the channel.
Get on sale margin.
You mentioned it briefly but can you provide a little bit more color on what what what exactly is happening there why has it been so challenging in 2022 and how long does the timing impact you talked about you know.
Oh peak to rectify it.
Yeah sure so.
We continue to have what I think we described in the past as a denominator problem and what I mean by that is.
The reserves and the provisions that we need to take for repurchase activity is based on a circa 12 month lag. So if you look at our volumes 12 months ago, we were originating maybe $20 million.
I forget exactly how much but a lot more than we're originating today substantially more and so those are the reserves were taken.
And because of the way GAAP works I look at margins based on current period production, which for this particular quarter was about $1 4 billion of total fallout adjusted locks. So if you look into the details you'll see that in the third quarter, we took provisions and other activity of about 17 million.
This quarter that number was down to about $8 $7 million, but because some dividing it by such a small denominator. It puts a lot of pressure on that on that top line number. So so that's what's going on the reality of it is that I expect that to normalize over time, if you're looking at a 12 month lag it should start to normalize itself out.
By the second part of 2023.
Just as you know because that tail starts to more more and more closely replicate our current level of production and in fact that could even reverse itself as I start to see production grow.
As we come through seasonality into a more normalized market right and that's what gives us a greater degree of comfort that we'll be proud operationally profitable in the second half is that we expect those things to converge.
More normalized level I guess, the new normal as it relates to volume.
Got it and then just.
Going back to I think like Doug's question, just about you know how are you.
Yet to be.
Operationally cash flow positive in <unk>, and then I guess profitable in two H 'twenty three.
All of the cost on the cost side do you feel like you have now taken all the actions I think theres, a little bit more of a right sizing of lightens it sounded like but beyond that like what my headphone.
Although cost savings perspective are the actions now already been taken and now it's just a point of like in the region as volumes come back a little bit.
What gets you there or is it like you still have to do more stuff on the cost side.
Yeah.
A point in the cycle I don't think we're ever done with the cost side. So we will continue to be very.
Focused on looking at everything that we are spending money on how were staffed to structure the organization et cetera.
I would say, it's like the very significant actions, we've taken it's gonna be smaller scope likely than what we've done previously, but we're still we're going to be on it consistently.
And you know what.
I would say, though that we're not wholly dependent on that focus in order to get the operational profitability, but its certainly supports getting there and maybe maybe gives us a little bit of cushion in case, there's variances in the market that are unforeseen at this point.
Got it. Thank you. Thank you for taking my questions.
Our next question comes from Rick Shane with Jpmorgan. Please go ahead.
Thanks, everybody for taking my question.
A question.
First thing obviously, one of the big factors in the fourth quarter.
It was a significant decline in the comp expense.
Curious as we look towards 23 is that the run rate or is there a variable function there that as volumes pick up we should anticipate.
Yeah, So here's how I would think of it Rick.
If you look at where we landed at the in the in the fourth quarter take that number and I had mentioned on the call that <unk>.
Actions, we took in the fourth quarter and additional actions. We took in the first quarter will result in a salary and benefit reduction of circa $80 million on an annualized basis. So figure that's roughly $20 million a quarter that should get fully baked by the time, we get into the second quarter.
And then I would add maybe a 20 basis point variable load to production. So whatever your volume production is it'll be 20 basis points on that and that is probably a decent way for you to forecast your.
Your your salary and benefits line.
Got it.
No.
And Mark just to so when we think about the total expenses in the fourth quarter were 63 million that normalizes.
That annualized to 250 million Youre, saying, there is $80 million of cost cuts from there then add the 20 basis points of variable.
Volume activity is that the run rate it.
Let's be careful with that so if we're at 63 and I'm just going to go forward or do you think are at 463, you can deduct 20 from that okay and that takes us to let's call. It 43 already in that 63 is circa 20 basis points of.
Variable cost on the one 7 billion that we funded okay. So now take your model and assume plus or minus one 7% attached 20 basis points to that variance.
Got it okay very helpful. Thank you for walking me through that.
The other question I have is obviously.
It's part of this you have.
In terms of both cost reduction and focus on margin.
Have.
Ceded substantial market share.
Cut your market share in half on a quarter over quarter basis, and could be down 80% on a year over year basis.
Do you think that with the revised cost structure, you will be in a position to start regaining market share will that comes naturally because of what's going on in the market or will you need to reinvest in the business in order to recap.
Some of that share going forward.
Yeah, Hey, Rick as well so I mean, we have been reinvesting in the business. We've been very focused on specific activities that will help us regain some of the market share that you referenced we've also been been able to preserve the significant majority of our coverage from a sales standpoint, and so it really does that combination.
Well result, and we'll get the natural growth from the seasonality care, but Additionally, we will start to take market share from.
Those markets some of the market share back that we've considered.
Got it Okay, Hey, guys I just want to acknowledge I know that theres been a lot of hard work and a lot of hard decisions to get where you are.
And it's gonna be interesting to see how it plays out over the next year. Thank you guys. Thank you.
Yeah.
Our next question comes from Kevin Barker.
Please go ahead.
Great. Thank you just to follow up on the losses or the provisions you put up four.
Reps and warrants due to higher interest rates could you give us you know.
Outline the level of reserves you have in place today and then also.
Have you taken a significant amount of losses throughout 2022, just because of higher rates impacting reps and warrants.
Yes, so Kevin where we are.
I mean, the answer is yes, we started 2022, we were able to trade or a scratch and dent inventory in the circa 90 context is where we started 2022 by the time, we got to where we are now that market is trading around the mid seventies low seventies. So that's a source of a lot of the losses that we've taken is just having.
Mark not only a scratch and dent inventory down but also the reserves for potential future repurchases, we had to increase the severity on that so that was the cause of a lot of the losses now.
The good news if you will is that we're starting to see that market certainly bottom up if not recover and we're starting to see the numbers that are closer to the mid seventy's to high 70. So we feel at least that that's trending better I think that's a combination of credit risk spreads tightening and theres a fair amount of demand for the paper.
Our R. R scratching that inventory tends to be performing it tends to have dock defects. So if you think about a performing loan that you can buy at less than 80 cents on the dollar that's a pretty nice yielding asset and so that's what we're seeing with our scratch and dent inventory, but that's the source of a lot of the a lot of the losses that we've taken the additional provisions.
We took in the fourth quarter.
A bit less than they had been in previous quarters in part because number one we're starting to see that stabilization that I mentioned and number two.
So we're getting caught up in terms of the audits and the repurchase requests as well.
The agencies are working their way through that so that's why I have reason to believe that as we move through 2023, we're going to start to see that relationship normalize relative to current production.
Yes.
At the end of the balance was about $26 million in reserves and thats reserves against potential future repurchases that are that.
That are not yet on our balance sheet, yeah. The other thing that's happening cabinets.
Our rate gap is narrowing because rates are obviously floating kind of high but but the repurchases because of the lag Mark mentioned, we're kind of not only are we getting the lags kind of catching up to our lower level of production. It is also catching up to the higher rates for that lower level of production. So you kind of have two or three positive trends.
In a.
Two to kind of start to narrow what's been happening.
And then could you remind us how far back the agencies could look back.
For any loans that may have defects.
They could look back as long as three years Kevin.
But typically.
They have like an upfront review where.
For some review at the beginning right to try to.
Typically review upfront and then try to do as much as they can.
Most of that if the loan is performing and it's in a pool, it's not really in their interest to try to find loans to have us buyback. If the loan goes into default that might be a different issue and they could certainly look at it at that point and buyback, but most of the review happens.
With earlier fresher production, if you will although.
They are behind and so we do have this one one year lag roughly.
Yes.
With our servicing performance that's why we feel good about where we're at from a reserve standpoint.
Okay, and so that provision was it.
By my math $8 $8 7 million in the fourth quarter on $1 7 billion of production, which would imply.
But roughly 51 basis points of headwind in the fourth quarter.
It's a high margin.
Yes, except that if you if we were to do it on a vintage basis that $8 seven would be applied to a much larger denominator, but that's just not the way the math works.
The way the math works with the way you described it.
Okay, and so what was the average amount of basis points.
Okay.
On gain on sale that you recorded in 2021.
Win rates.
Rates were I would say.
Less volatile or not persistently increasingly we saw.
Try and get at is like what is a normalized gain on sale that.
But you would be producing right now actually I'm going to move in and provision.
Yes, I understand your question. So so on every loan that we originate we have to put aside something for potential rep and warrant losses in 2021 that number was circa two to three basis points now that number looks more like.
Between six and seven basis points on every loan on every new loan that we put up yeah, I would say a normalized level is somewhere in between those two numbers I would agree I would agree. The reason it's so much higher now is because im providing it around the you know.
The low seventies number for severity thats, probably not going to persist because we're going to have rates and.
And Rick if current note rates and.
An investor required rates for scratch and dent theyre going to converge.
Okay. So in a benign interest rate environment, we should see.
Absolutely.
And then the Moorish context, yet okay.
Okay, Alright, thank you for taking my questions.
Sure.
Our next question comes Dan D D.
<unk> P.
And ladies.
Please go ahead.
Thanks, Hey, good morning, Willy Mark and congrats on all the progress you've made on expenses and the operational overall.
Look I was going to Kevin did a good job on the gain on sale I was going to kind of hit the same thing so I'll move on to something else.
You've targeted your Ginnie mae's as the MSR product that you are primarily trying to reduce is that due to just higher general operating cost of service or just credit come into that as a as a big factor and why you're sticking with the gse's, but moving away a bit from Ginny.
Yeah, Hey, Steve as well he fell exactly yes.
Jay.
And my experience, especially if youre not.
Youre not servicing the Ginnie Mae product yourself and then this is not to say anything bad about it.
Servicing provider, it's just that we're one step removed from the action and it tends to be hidden costs associated with Ginnie servicing as with the advances for nonperforming whether it's some of the gains that you take when you actually saw the servicing that you may not recognize as easily when you're you're holding the servicing and so all of that in the <unk>.
Fact that as you know we've sold.
Sold a significant part of Virginia May previously just led us to the point where to create liquidity and two.
Make our servicing more predictive from a from a return and performance standpoint. It just made sense for us to salvage any got it got it that makes sense.
So your total U P b drop about $5 billion in the fourth quarter obviously.
Base of shrinkage in servicing has really slowed.
Where do you see is it have you reached sort of a stabilization point and just looking out over the balance of 2023.
For year end would you expect your MSR U P b to be smaller than the 89 million or flat or what's kind of your outlook for the size of the servicing book, it's going to be in that neighborhood I think.
So far prepays are extraordinarily slow, but so too is the amount the level to which we're replenishing it but I would expect us to be able to replenish a little bit faster than our speeds as we move through our through the cycle and get out of the seasonality period, but not substantially I think 90 ish, we are going to continue to sell ginnie by the way. So that's good.
You know that's going to be a negative on that number.
And we have a ginnie sale teed up for.
We're closing in the second quarter.
So that's that's coming as well so but you could think of it being in that high <unk> 90 area.
Thanks, Mark that's helpful and one final quick thing Willy.
I realize this is premature.
But in your.
In this market. If you can do long range planning I guess, that's anything past next week, but.
Like the board when the decision was made to.
Eliminate the smaller four cent dividend are there any like benchmarks and I'm thinking 2000, and for let's say or whatever that point is of accomplishment of stability and where.
Conversations with the board.
What timeframe should we think and investors think is realistic to have any expectation of the possible reinstatement of a cash dividend. Thanks.
That's it for me.
Thanks, Steve So I think for kind of first things first for US, which is let's let's stabilize the cash flow I'll get cash flow positive and let's get the earnings positive and then after we do that for a period of time, we'll consider other alternatives I think right now because we are creating liquidity our primary focus is on.
Making sure the business to support it which at this low level. They would have to be very significant shocks before we would suffer from a business standpoint, and then secondly is to pay down some of the debt that we have.
Got it got it I can understand the debt. Thank you both for your comments you got it.
Okay.
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Our next question comes from Doug Harter.
Please go ahead.
Thanks, following up on that last comment.
About paying down debt.
You know as you've kind of returned to operating cash flow positive kind of how how do you think about using your liquidity in order to pay down debt.
You know just kind of what are your thoughts around using that returned to cash flow positivity.
Yeah. So.
So Doug as I mentioned, it really our focus primary focus right now is in paying down our debt.
Especially R R.
MSR line is based on short term rates and with the curve being where it is that's gotten a lot more expensive than it was previously so it really because we're in that position, where we're generating cash and we also have additional asset sales as Mark mentioned, so we're going to be able to make a meaningful reduction in that line over the next couple of quarters.
That will be our area of focus.
And then I guess, just how do you think about you know the MSR lines versus.
The unsecured debt, which obviously trades at a meaningful discount.
Being able to create.
Some you know some equity value by paying down at a discount.
Yeah.
We certainly will consider that as well.
We went we wanted to first get to that operationally cash flow positive point, so we don't want to be too premature and committing.
The cash that we're generating into something that is based on that longer term tenure.
10 are under that so, but it's certainly something that we've looked at and we will consider.
Got it and then lastly for me just kind of given the.
The smaller size of the business. Just you know how do you think about long term kind of staying kind of staying independent versus possibly.
Considering strategic alternatives.
Selling the business.
Well I think you have to be cognizant of what's happening in the market and.
We are a smaller footprint.
We also have lots of liquidity that we're in the process of generating and have access to so.
We're looking out and seeing what might make sense.
And.
Being a public company.
We're kind of open to having dialogue in either direction, but.
But it.
It is an environment, where we do believe things will consolidate and we are.
However, it is open about that.
Okay. Thank you.
There are no further questions at this time I would like to turn the floor back over to Bill in Nielsen for closing comments. Please go ahead.
Yeah. Thanks, So first of all I really appreciate the questions and your interest in home point with the having the smaller footprint, sometimes we wonder how much interest will have but we do we do appreciate that.
Questions in the intelligence of the questions.
I do want to recognize mark before we sign off.
I'd say it again, because everybody knows March leaving the organization and a couple of weeks and Mark came into our organization.
When the business in the company, we're growing very rapidly and at the same time, we are doing this little thing called an IPO and so he had he had to learn to kind of about who we were and what we were doing at the same time he had to really be one of the leaders in taking us public so and he did both those things extremely well.
Then he was.
Based with the challenging market that we've experienced over the last 18 months and he has helped us navigate through in a way where now we again, we're looking at growth and opt.
Opportunity so yeah, Mark I want to thank you wish you the best in all your future endeavors and.
<unk> always be a friend of home point, so and thanks.
Again for your interest.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you.
<unk>.
Sure.
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