Mr. Cooper Group Inc. Q1 2023 Earnings Call
Okay.
Good day, and thank you for standing by and welcome to Mr. Cooper Group Q1, 2023 earnings Conference call.
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Good morning, and welcome to Mr. Cooper group's first quarter earnings call. My name is Ken Posner and I am SVP of strategic planning and Investor Relations with me today are Jay Bray, Chairman and CEO , Chris Marshall, Vice Chairman and President and Kurt Johnson Executive Vice.
President and CFO .
As a 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.
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'd like to introduce our new CFO Curt Johnson Curt has a 25 year industry veteran with extensive experience in operations Treasury and finance after joining Mr. Cooper in 2015.
He oversaw our project Titan servicing transformation.
Which as you recall consisted of a series of major technology investments in our platform.
He then served as chief risk and compliance officer during which time he emerged as a powerhouse not only inside the company, but also within the industry, where he is frequently salt out for his deep understanding of complex rules and regulations within the mortgage market welcome Kurt the Phil Kurtz prior role.
Order to welcome back Kristine Paxil Kristine is an expert in enterprise risk management and has nearly 20 years of experience, including roles at Wells Fargo Citigroup and capital.
Now, let's turn to slide three and review the highlights I'll start with operating our OTC, which increased to eight 6%. While this remains below our long term target I feel this is respectable performance given market conditions and our very large capital base. Thanks.
Thanks to positive operating results are increased MSR hedge and stock repurchase tangible book value ended the quarter at $56 72 per share which is.
<unk>, 9% year over year.
The balance sheet is in the best shape in the company's history with record levels of capital and liquidity, giving us substantial dry powder to grow the business now turning to operations.
<unk> reported a $157 million in pre tax income, which is the consistent recurring predictable earnings. We guided you to expect originations produced 23 million. Thanks to our DTC unit, which responded in a very nimble manner to the rally in mortgage rates earlier this quarter.
Our servicing portfolio ended the quarter at 853 billion, which was down slightly from the fourth quarter, but this is mostly timing as we've won some sizable deals which will be boarding in the next few months, including $57 billion in bulk MSR acquisitions.
Additionally, in connection with our pending acquisition of Roseville and Rushmore, We've agreed to take on Rushmore special servicing platform, which includes 37 billion in sub servicing contracts.
<unk> is a very well regarded operator in combining their business with right past will position Mr. Cooper as one of the leading special Servicers.
Now turning to capital management, we reacted to the pressure on our stock price by repurchasing $89 million in shares which was up from the $50 million run rate in prior quarters.
Finally, I want to mention that we were recognized by CIO magazine with a top 100 award for project Flash, which is the digital infrastructure, we built to automate the origination process.
Now if youll turn to slide four I'd like to provide some context on where we stand today given that we're operating in very uncertain times, which was hammered home in March with the troubles in the banking sector.
Nonetheless, we are in excellent position to play offense. Thanks in part to our strong balance sheet, let's kick off the metrics capital at 31% of assets liquidity up 640 million since year end.
A high quality portfolio with low delinquencies and to this you can now add in the fact that we've significantly increased our MSR hedge as we disclosed last month, which protects our capital from unexpected shocks.
The other point I'd make is that unlike most of our peers. Our return on equity has been steadily rising which of course reflects the growing contribution from services now many companies have talked about having a balanced business model, but if you look at our results in this environment as well as our performance during the refi boom.
Argue that we've proved out the concept yet we don't see this reflected in our stock price or bond yields we may not be able to control market prices, but what we can do is deploy our capital to grow the business and enhance returns.
The opportunities we're seeing right now are as exciting as anything we've looked at in recent memory and I expect us to exit this part of the cycle as a larger more profitable and even more dominant competitor.
So let me wrap up my prepared remarks, with some thoughts on where we're headed if youll turn to slide five I'll remind you of the strategic vision, we share which is to create the industry's leading platform. This is a platform for our customers for the customers of our sub servicing clients and for their customers associated with MSR.
Ours that will soon be acquiring for fun.
You are familiar with our strategic target of growing the portfolio to one trillion, but I'd share with you that we think of that as an absolute minimum or floor for where we can go.
More important than size. However, as returns, which is why we remain fanatical about perfecting our platform through a combination of innovation and discipline.
One of the interesting projects, we're working on as we speak is to harness generative AI to more accurately anticipate customer calls.
This will help us provide them with proactive solutions and a better experience, which will also mean lower costs for the company.
We believe we already have the most efficient platform in the industry, but our goal is to keep driving down our cost to serve until no. One can compete with us.
We also talk about being the solution for our customers, which is part of our strategy of retaining customers for life, you've seen us demonstrate industry, leading recapture rates quarter over quarter year. After year and you know that at the right point in the cycle, we can generate origination profits well over a $1 billion.
A key part of our strategy is to keep investing in our direct to consumer platform. So that we're in a position whenever the cycle turns to do even more.
In summary, Mr. Cooper has emerged as the market leader in servicing we have significant competitive advantages a rock solid balance sheet and abundant liquidity. The company is on the path to higher returns on equity and we believe over time, a much higher stock price and with that I'll turn the call over to Chris.
Thanks, Jay and good morning, everyone.
I'm going to start on slide six.
And if you'll turn there you can see that we ended the quarter at 853 billion now that number is down slightly from the fourth quarter, but that's mostly timing as we $1 57 billion in MSR acquisitions during the quarter, which we're very pleased with.
And we expect these deals to board during the second and third quarters.
Meanwhile, given our strong capital and liquidity.
We're continuing to analyze a growing pipeline in fact, our portfolio team is working practically around the clock.
And there are some large opportunities we're focused on right now and we're very excited about them.
Also impacting the portfolio was $30 billion in deep boarding related to a single sub servicing client, which as you may recall recently acquired a servicing platform and decided to take their portfolio in house.
You could see more volatility in our total book over the balance of the year, but overall, we feel great about our sub servicing business and I'd note that we've already replaced a substantial portion of this loss with growth from other clients.
Now let me give you a brief update on our pending acquisition of Roosevelt Rushmore, which will provide the infrastructure for our asset management strategy.
After extensive due diligence and discussions with the seller we agreed to take on Rushmore as highly regarded special servicing platform, which includes 37 billion of <unk> and sub servicing contracts from a diversified group of very high quality investors.
We're delighted to welcome Rushmore exceptionally talented people to our company were low join our right Pat team and bringing to market one of the leading special servicers in the industry.
We are working towards the close of the sub servicing platform by the end of May and expect to close the rest of the transaction by the end of June of course subject to approval from all of our regulators.
Now, let's turn to slide seven and talk about servicing earnings where our theme here is consistent predictable recurring results just as we've been guiding you to expect.
Servicing EBT was $157 million for the quarter, roughly flat with the fourth quarter, but a little bit better than we originally planned as amortization declined in line with record low CPR is a four 4%.
Looking forward, we continue to guide you to $600 million and EBT for the year, but hopefully we'll see some upside in that number depending on the timing of acquisitions and the success of our efficiency projects and of course any significant changes in rates.
Obviously, there is considerable uncertainty about the outlook for interest rates and the housing market, but based on the current consensus outlook you should expect our amortization to increase somewhat reflecting the recent rally in mortgage rates as well as the spring selling season.
This should be offset by higher interest income as custodial deposits, which declined to $8 billion on slower prepays and seasonality begin growing again and as deposit yields ratchet up following the fed's most recent rate hike.
Putting aside interest rates the theme that we remain laser focused on is achieving positive operating leverage.
And we've got a large number of projects underway to drive incremental efficiencies.
For example, as Jay alluded to a moment ago, we've launched a really innovative project to use AI to anticipate customer calls. So we can provide them what they need on a proactive basis through digital self serve tools and further enhancements to our ABR will be implementing this project through the back half of the year.
<unk> and our goal is to take out $50 million in annual run rate expenses from our call Center operation.
Now if you turn to slide eight.
Let's talk about portfolio quality, which is a very important topic given widespread concerns about the risk of recession and the potential impact on our customers. The headline here is that for our portfolio 60 day delinquencies actually declined during the quarter falling by 19 basis points to two 4%.
Obviously this quarter's performance is no guarantee that they won't go up in the future, but the point I'd like to get across is that we have enormous experience with credit cycles, which is why we have deliberately constructed a high credit quality portfolio.
Now, let's drill down a little further.
Just over half of the portfolio was sub servicing where we benefited from higher servicing fees for nonperforming loans and incentives to mitigate losses.
A higher delinquency environment, we'd expect sub servicing margins to remain stable.
Or you can potentially expand.
For the MSR, we hold on balance sheet, we pay very close attention to concentration, particularly for Ginnie Mae loans. Since these customers tend to have higher debt to equity ratios and lower FICO scores than conventional borrowers.
Our owned FHA and VA books are relatively small, making up only 9% and 6% respectively of our total book.
Also our FHA and VA customers have substantial equity built up at low note rates, which bodes very well for credit performance and in fact, we saw sequential declines in delinquencies for both our FHA NVA portfolios during the quarter.
For the entire portfolio, our credit metrics have been very stable average FICO was flat at $7 25 year over year, while the LTV declined very slightly.
When we evaluate stress scenarios, we think we're well positioned to withstand a turn in the credit cycle, given our scale technology and loss mitigation capacity and on that point the acquisition of Rushmore special servicing business brings us additional capacity and positions us for revenue growth opportunities across.
A wide range of environments.
On a final note I would add that one of the keys to managing through the next cycle will be to understand the latest government programs and offer them at scale to customers who need help you.
You may have noticed the FHA recently approved a new streamlined workout solution for all delinquent borrowers, which are identical to the options available to COVID-19 impacted customers coming off of forbearance.
In our view intelligently designed programs like Fha's can play a very constructive role keeping more borrowers in their homes, while also providing appropriate financial incentives for servicers.
Okay, I'm going to turn to slide nine shifts to originations, where we were very pleased with the $23 million in EBT, we reported which was more than double the forecast. We shared last quarter. Now. These are small numbers of course relative to what we generated in the past few years, but the key point is that our DTC platform. It is very nimble.
And does an excellent job of taking advantage of even small moves in rates and this has helped us generate consistently higher origination margins than peers at all different points in the cycle.
Consistent profitability allows us to keep investing in the platform, whether it's project flash and further automation, we're fine tuning our marketing campaigns. These investments will put us in position to scale up quickly once the cycle turns.
For now I'd guide you to expect 20% to $30 million is a good run rate for current conditions, recognizing that we're still dealing with high levels of rate volatility and weak housing dynamics and of course, the vast majority of our customers are out of the money.
With that let's turn to slide 10 and talk about zone.
Last quarter, we guided you to expect stronger sales on this AUM exchange first quarter.
Breakeven in second quarter, and a ramp in profitability in the second half and based on the latest data we remain on track for exactly that.
So let me go through the metrics, starting with inventories, which hit a new record of 27000 units are much healthier flows from servicing clients. In fact March was a record month for client inflows, which are running at roughly triple the average of 2022.
Part of this is services getting more comfortable with their compliance processes, but our team has also been actively selling to new customers and as a result, our market share of Ginnie Mae Foreclosures is now rising above the 40% target we laid out for you a year ago.
Turning to sales the very strong 37% sequential increase was in line with our projections and we look for this number to increase again in the second quarter.
We're seeing more investor activity on the exchange, which includes more visits to our website stronger bidding activity more bids per asset and improving pull through rates.
So with that I'm delighted to turn the call over to my good friend and Mr. Cooper's New CFO Curt Johnson.
Thanks, Chris.
Like to start by saying that I look forward to getting to know everyone on the call I consider an important part of my job providing you. The information you need to understand Mr Cooper and getting your feedback.
I'll start on slide 11, which gives you a summary of the financials most of which we've already discussed.
Let me provide some additional clarity on the $11 million in adjustments.
These consisted of $1 million in severance.
$3 million in markdowns for equity positions that we took in connection with the sale of <unk> valuation and title businesses.
And a $7 million share in the lawsuits agent, which we account for under the equity method.
As we've previously shared staging and is in the process of integrating the IP and acquired from us onto our cloud based core processor.
Once the integration work is complete they will go to market with the industry's first and only cloud native platform.
Offering customers significant benefits and cost and speed to market compared to other servicing platforms.
We expect <unk> to continue operating slightly below breakeven until the integration is complete which we would estimate around year end.
Now, let's turn to slide 12, and review our mortgage servicing rights.
As you know during the quarter interest rates were down modestly with mortgage rates down 17 basis points and swap rates down 35 bps.
As a result, we marked down the value of our MSR by three bps to 159 basis points of the owned portfolio.
If you look at valuation as a multiple of the base servicing strip, which we believe is a more meaningful metric.
The multiple declined from $5 one at year end to five <unk> times at the end of the first quarter.
Some of you have asked for more clarity around the composition of the servicing portfolio.
Return to the chart on the right you will see the MSR portfolio broken out by mortgage coupon.
And you won't be surprised to find that our portfolio is significantly out of the money.
But the average coupon of three 7% well below current market rates.
As time goes by we will see the average coupon migrate upwards as we acquire loans at higher market yields through our correspondent and co issue channels.
But for now this remains an environment with very limited refinance opportunities, which on a positive note helps shield the value of the portfolio from rate shocks. It would take a very significant move well in excess of 100 basis points, but more than a small number of our borrowers back in the money for a rate and term refinance.
While a shock of that magnitude seems unlikely we're aware of the volatility in the fixed income markets has remained stubbornly high.
So, let's turn to slide 13, and talk about our hedging strategy.
The strategy behind the hedge is to protect capital and tangible book value from unexpected shocks, specifically the risk of declining interest rates, which would lead to mark downs on the MSR.
We've been operating with a hedge in place since 2020, when we implemented a small position and gradually increase the size of the edge.
Fine tuned our policy systems and processes.
Since then we have regularly communicated that we would increase the hedging more meaningfully when the time was appropriate.
For many reasons, we believe our first quarter increases were both timely and appropriate.
Our hedge team works under a policy limit of a plus or minus 10% of the target ratio.
In this case that means the actual hedge position could range on a daily basis between 60, and 82% of the net duration risk in the portfolio.
As of March 31, the actual hedge position was 69%.
Our hedge consists of simple derivatives, such as TBA is treasury futures and swap futures.
We do not use options at this time given.
Given the cost and the natural hedge against tail risk provided by our strong direct to consumer recapture platform.
Okay.
During the quarter the Mark on the MSR was $122 million.
Of that $96 million related to interest rates, while the remainder had to do with operational assumptions, but can't be hedged.
The hedge benefit was $59 million or 61% of the rate related mark.
Bear in mind, we started the quarter with a hedge ratio of 25%.
So the actual performance matches, the average position over the quarter quite closely.
Now, let's turn to slide 14, and review liquidity, which is a really good story.
Since year end, we've upsized several of our MSR line facilities, increasing aggregate capacity by one 5 billion.
And these measures have brought our total liquidity of $2 4 billion, which is up $641 million from the beginning of the year.
Given the turmoil in the financial markets were very pleased that our banking partners continue to see us as a sound counterparty with strong capital and risk management and controls and that they were eager to support our growth throughout the quarter.
The $2 4 billion in liquidity consists of $534 million in cash with the remainder consisting of fully collateralized immediately available liquidity on our lives.
Actual MSR line usage was moderate during the quarter as we took down an incremental $30 million.
Plan to make further draws to support the $57 billion in portfolios that will be boarding in the coming months and we would expect these portfolios can bring us additional borrowing capacity as well.
I'll comment briefly on advances, which actually declined 11% year on year, consistent with our favorable credit quality trends that Chris discussed.
While we are not seeing credit pressure at this time, we continue to maintain nearly $1 billion in borrowing capacity for advances, which we believe would be more than sufficient to manage through return on the cycle.
I'll wrap up my comments on slide 15.
From a strategic perspective, we have long believed the balance sheet strength is critical for any major servicer and as Jay commented our capital ratio at 31% is rock solid.
In fact, this ratio was close to double what we believe would be necessary for us to be considered for a rating upgrade.
If you consider the fact that our MSR is now substantially hedged asset quality trends remained solid our increasing profitability and our track record of operational compliance and enterprise risk management, we believe that Mr. Cooper presents the market with an outstanding credit profile.
Accordingly, our goal is to bring down the capital ratio over time.
Primarily by investing in MSR acquisitions, and our own stock.
As we've mentioned before our existing unsecured that doesn't start to mature until 2027. So we have the luxury of being patient.
In addition to using MSR lines, we could employ securitizations, our excess spread transactions and the successful monetization of zone could generate significant cash to achieve our leverage and growth goals.
In closing we regard the eight 6% of our OTC generated this quarter is a significant accomplishment given the various substantial capital base and the denominator.
Through capital deployment as well as continued focus on positive operating leverage we expect to generate much higher returns over time and we believe this strategy should also drive a much higher stock price.
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.
Thanks, Jeff and we can now start the Q&A process. Please.
And thank you and one moment.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby we compile the Q&A roster.
One moment for our first question.
And our first question comes from Kevin Barker.
Piper Sandler your line is now open.
Thank you very much.
I would like to follow up on the acquisitions that you guys announced today, particularly Rushmore and 57 billion in net MSR acquisitions could you give us an idea of the pre tax profit margin is expected from Rushmore.
And then how do you see that playing out.
And when it comes onboard.
Put it in your $600 million pre.
Pretax income guide for the year in the servicing segment.
Yeah, Kevin it's Chris.
I'd say, we expect yes. It is included in the $600 million.
And hopefully you heard me say.
We hope to see some upside in that number.
We'll board, we intend to board those sub servicing contracts.
In the beginning of June .
Closed the deal at the end of May.
For them in the beginning of <unk>.
Or transfer them I should say at the beginning of June and then board them later in the summer.
First year, we don't expect we're going to earn anything because of the deal costs.
And nonrecurring costs that are going through the transition.
The following year, we expected to be significantly accretive to our earnings we're not going to give you exactly the exact guidance on that now but we.
We do expect it to be a very profitable addition to our special servicing unit.
Okay and then in regards to reservoir just to elaborate on that we're going to be bringing over several hundred people. We've got to retrain those people on a new platform. There is just there is some nonrecurring expenses that would say any profitability in year is going to be minimal, but next year it will be cigna.
<unk>.
Okay.
Can you help us frame.
The profitability of special servicing versus owned servicing.
And to get a feel for.
The opportunity set or at least the earnings that could potentially occur as we start to see higher delinquency rates.
And if the potential advantages for Rushmore right way.
It was special servicing versus what we're talking about is sub servicing.
The return on investment is essentially infinite.
And it can be very profitable obviously the fees you earn for special servicing are much higher and the incentives are much higher.
All designed to help.
And investor avoid losses. So you can make a lot of money at it today volumes are are low and they have been really has been very little demand for that business over the last say 10 years, but we do expect that to pick up significantly going into next year. So there's an opportunity there I wouldn't compare it.
One sub servicing where clearly use the returns are.
Are much wider and costs are less.
But of course, it takes investment to buy those those msr's, but we're talking about expanding a sub servicing business.
Great.
I want to thank Kevin on the the margin Youre, just thinking about it from a margin perspective.
Rushmore special servicing business, it's going to be.
25% to 50% higher than a year.
The current sub servicing book that we would have so it's meaningful.
The Christmas point, when we look at.
Once we get it integrated the profit is going to be a meaningful contributor to the overall services segment.
The one other thing I would mention is that the client list that is used rushmore in the past Rushmore got a very strong well established brand in the industry and that's evidenced by the extremely high quality clients that have used them.
But the backdrop in the industry that I pointed out to you is that the other two leading platforms in the industry.
At least rumored to be for sale. So Sps was for sale. There is another platform that we've been told is coming to market. So with a lot of change in that industry I think the timing for us is perfect to bring on a well recognized brand.
Buying it with our existing REIT path business.
And go to market at a time when theres going to be a lot of dislocation. So we think theres a real opportunity to do to win business, even more business from existing clients or win new clients to our platform.
And then just a quick follow up on the MSR the $57 billion of purchases.
Could you just give us a feel for where these lower coupon higher coupon.
Were they.
Ginny Mae or AUC portfolios and then what's your expected unlevered yields on those assets.
Hey, Kevin it's Kurt I'll address that so it is.
All agency business.
For the 57 billion. It is low coupon it is fairly seasoned.
The yields that we're seeing in the marketplace right now are still in the low double digits. So call. It 10, 13% ish and we expect this to be obviously boarded late second quarter early third quarter and contribute to a latter half of the year.
Okay.
Kurt Chris Sanjay.
Yes.
Thank you Kevin.
Thank you.
And one moment our next question.
And our next question comes from Doug Harter from Credit Suisse. Your line is now open.
Thanks.
Can you talk about how you are or what youre seeing in terms of banks in terms of.
Either appetite to sell MSR or.
So were looking to purchase MSR kind of given the.
The changes that have happened in the past month or so in the banking system.
I mean, I think what you're seeing is it's still I'd say, it's in a state of transition right you have certain financial institutions that.
They were all aware of that have publicly stated they want to.
Shrink their portfolio and we're seeing that play out in <unk> and we are going.
Going to be I think a big partner for that entity.
And then youre seeing some other banks that have come to market.
With some msr's that.
And that ultimately I think there's going to be more so I think it's still kind of a little bit of a state of transition Nancy's everybody Digest, what's happened in the last.
Month or two.
But we do expect more to come from the banks and.
And we expect it to be active there and so we'll see how it ultimately plays out.
And then can you just talk about.
The number of bidders.
Bidders in the appetite of bidders.
Kind of looking to.
To take advantage of this opportunity.
It varies right. If you look at in the Ginnie Mae portfolio its much smaller set of buyers and bidders.
Still you know several that are that are active and GSE land I think there's there's more bidders there.
But still when you look at it you can count on two hands I mean, this is not a significant number.
Bidders, but it's competitive there's definitely.
In a set of financial buyers as well as in our entities like ours that are that are active.
But when you step back and let me know.
57 in the first quarter.
The pipeline is looking really strong for the second and.
I think we will continue to be disciplined.
And thoughtful but.
There are bidders out there, but again theres enough supply.
We feel really good about our opportunities going forward.
I'd add that for the smaller pools.
We bought a couple of or at least one large pool.
On mid sized pool, and then several small pools from the smaller pools, there's lots of competition.
As the pools get larger certainly as they get above 10 or $20 billion. There is a handful of.
Potential buyers because the sellers and the buyers are usually very focused on.
A smooth customer transition and when youre dealing with pools of that size.
There are very few buyers that have done that successfully in the past. So there are there is certainly competition for those large pools as well, but they are the traditional large companies that you would expect and that's about it.
Great. Thank you.
And thank you.
And one moment our next question.
And our next question comes from Ciano Valonia from Compass point. Your line is now open.
Hello, Good morning, and congratulations on another great quarter.
<unk> execution.
One thing I'd be curious about that as.
As mentioned in the prepared remarks was trying to roughly $50 million I think rental costs out of our call Center I'd be curious, where you think in terms of like the timing for that next year.
It might be or is that kind of a 23 initiatives as I've kind of multi year goals.
No I'd say, it's over the next 12 months, we will be implementing we referred to the AI project, which.
It will be implemented over the back half of the year. So in terms of taking out the costs. It will it will phase in over the back half of the year. It will probably be more towards the end of the year because that's when the project we fully completed.
But there are several phases to that Giuliano if you think about what we're trying to do it's really to replicate the Amazon model.
I'm sure everyone on this call uses Amazon and yet I doubt anyone has ever spoken to anyone at Amazon. That's because you don't have to.
And so our goal here is to be able to provide real time information proactively to our customers much more simply.
We're able to have an <unk>, that's very friendly we've made massive investment in the state of the art AVR and we are fully leveraging its capabilities. So.
This is just the beginning of a multiyear.
Project too.
To move to that type of model.
The first phase is $50 million, but we spent several hundred million.
Sure.
On our call center operations and so we have a lot of work ahead of us.
But we think it's a it's a <unk>.
Big opportunity big opportunity not just to eliminate expense, but to make the experience much much better for our customers.
That's great.
It's great to see even more.
Yes.
<unk> added where you currently are.
Kind of ahead of the curve in terms of where most of your peers are in terms of cost savings and efficiency there.
On a slightly different topic.
Yes.
Target tangible net worth to tangible assets ratio to 17 15.
I was curious if that's transient.
Mary Jane.
Macro backdrop or is that more of a permanent change I realize it doesn't have a huge impact when you're so close to double both levels. Some work, but curious how about you.
Thought process there.
Okay.
Do they have more than that as a rating agency thresholds.
Think about great possibilities and based on our conversations with the <unk>.
Great agencies, Thats and Thats a level.
We're comfortable with and contemplating an upgrade so it's really no fundamental change we just wanted to provide that insight into how the agencies are thinking about it.
That's great.
Thank you for taking my questions and I will jump back in the queue.
Thanks, Joanna thank you.
Thank you.
And there the one model with our next question.
And our next question comes from Boss George with.
With <unk> your line is now open.
Hey, guys good morning.
Back to the MSR investments is there a way for us to think about how much sort of incremental capital you could deploy into MSR is this year.
Hi.
Im not sure. There is an exact number we would give you is though we've set up a budget to invest this year.
We've we've kind of gone through our liquidity.
And capital I will just leave it as this is opportunity rich environment, we've been planning for for two two and a half years.
<unk>.
I don't think we'd give you an exact number that we would be setting as a budget to invest we're going to buy as much.
As much product that comes to market that hits, our return thresholds.
Bose.
<unk>.
I would think of.
If you wanted to try to construct something I'd look at our capital and liquidity, which is quite robust Australian goal and say, we expect to make a lot of progress towards that trillion dollars goal in 2023.
Yes, I think Bose you, probably you probably heard.
And Chris Davis chat about.
Our increase in liquidity quarter over quarter.
Over $600 million.
Obviously that was intentional so we really don't see any impediment to kind of the.
The rest of the year as we think about acquisitions, what's possible who some of the larger sellers are I think where we are.
Aligned to be able to acquire.
As much as we choose to and as much as that.
As long as it hits our <unk>.
Consistent discipline in our return targets.
So yes that we put a lot of work in the building the balance sheet building the capital requirements and building liquidity so were we.
We're very very prepared for this cycle.
Okay, Great fair enough that makes sense and then actually just switching to Ginnie Mae MSR as you noted the return on the agency side can you just talk about the returns on <unk> and just how your comfort level in terms of investing in those assets.
Yes, Bose, it's Curt so, yes, I'd mentioned kind of.
Low double digits for the.
The conventional on the <unk> side, we're seeing in kind of the mid double digits, so call it 13% to 16% yields effective yields there.
And it really depends on the pool those I mean in some cases some of the smaller pools youre seeing.
Almost 20% high teens almost 20% so.
So quite attractive again pool specific.
Okay, Great and then just in terms of your comfort level there.
Ginny pulls out there you are comfortable with the risk.
Very comfortable with the risk I mean ill, let Kirk comment on.
Our current portfolio and some of the underlying characteristics of it but.
We've we've just been through a lot of cycles, we have significant talent in the organization to me. If you recall in the last cycle. We were one of the only few entities that really made a huge difference in keeping homeowners in their homes.
So it's core to our DNA to be able to manage the ginnie portfolio of Ginnie Mae portfolio and the risk associated with it on top of that our portfolio.
It looks quite good so encourage you can comment on that.
So so Chris had mentioned.
The composition of the covered portfolio is 9% FHA and 6% VA.
A lot of the originations we did obviously just like a lot of others were in 2020 through early 2022, but keep in mind that the original data.
A lot of those were significantly earlier, because those were streamlined rate term refinance so we have.
60% of our FHA portfolio now has the market LTV of less than 60% and keep in mind right. When when most people originate and initial FHA, it's kind of a 96, 5% LTV. So we've got a lot of equity and we're seeing pools trade with a lot of equity as well and we will be pretty disciplined about that and we think there's an opportunity.
Turning to layer in some current coupon into that as well without really expanding the rest of our overall portfolio.
Okay, Great. That's helpful. Thank you.
And thank you.
Okay.
And one moment our next question.
And our next question comes from Eric Hagen from <unk>. Your line is now open.
Hey, Thanks. Good morning Hope you guys are well following up on the MSR acquisitions can you say, how much capital and leverage you expect to use in financing that portfolio and also how the cost of MSR financing compares on the new lines that youre sourcing versus the lines that you have had in place.
Yes.
The lines are essentially the same we've expanded existing lines for the most part rather than opening new lines. So the cost of financing is relatively similar.
In terms of.
In terms of capital utilization as we're acquiring these MSR as we have.
We are given by the banks.
Call it 60%.
The value of the underlying MSR.
In terms of that financing and so you can kind of utilize that as.
As a benchmark.
Sure actually I'm glad that you brought up the advance rate is a question about that is the advance rate dependent on whether youre borrowing against an unrealized gain and the MSR versus financing new msr's.
And we do kind of mark with our banks on a pretty regular basis, and they're very consistent with our with our market.
Market rather.
And keep in mind, we do use third party valuation firms and we tend to be right down the middle in terms of valuation.
So so we are very aligned with our banks.
Yes, one more if I may.
Can you talk about how you would recapture expectations.
Or even the framework around recapturing loans differs for the MSR is that you buy from third parties like <unk> like you're Onboarding rate right now or are in the process of onboarding.
The loans that you originated in house.
Yes, I would say that loans that we buy from others.
Chris Eric Good morning.
We bought it for others, our recapture rates tend to run at about double the industry average so we are.
We have always set the pace for the industry in terms of that so thats, we buy a pool from someone else were recaptured in the 50% level for someone who has already done a transaction with us.
We've already refinanced.
We capture it.
Approaching 80%.
There is a difference, but even with a freshly purchased pool originated by someone else, we're going to recapture at twice the industry average.
And for the full number.
Holds whereby it depends for.
So the polls are buying I think it depends on the coupon right ultimately how in the money or out of the money.
The portfolio is.
But obviously its model in that manner.
Every pool is.
Loan level kind of from a modeling standpoint and the recapture.
The answer will depend on where the where the.
Overall portfolio is and where the coupon is within that portfolio.
Every potential purchase when you look at we look at our past history recapturing.
Loans from that seller.
So we model our expected recapture.
Obviously, one of the major factors in price.
Assembling our bid and when we back test.
How well we perform against those models.
Extremely.
Very very strong performance.
The gap between what we expect and what we actually see it.
As.
Extremely close.
Yes, thanks for all the good detail there. Thank you guys.
And thank you.
And one moment our next question.
And our next question comes from Derek <unk> from Jefferies. Your line is now open.
Hi, good morning, everyone.
How do you evaluate allocating capital towards bulk MSR purchases versus scaling the correspondent channel and how dynamic is that capital allocation.
We look at it all the time I think at the moment. Our view is the bulk opportunities are as we've discussed there is a lot of supply for significant return opportunities there.
And that's why we see at the moment.
Sure.
Where we should be allocating more capital correspondent is.
It's a channel that we like it's a channel that we're active in.
But we're really we look at this frankly on a daily basis formally on a weekly basis from a capital allocation standpoint, and make the decisions based on where we think the best opportunity is.
Yes.
Got it. Thank you and then one more quick one will the 75%.
Interest rate hedge be.
Kept on for second quarter.
Yes, you should assume that that hedges.
We've talked about expanding our hedged at the appropriate time, we think this was the appropriate time to do it so for the foreseeable future that it will be our position may not be forever, but you should not expect any change in that position.
Got it thank you very much.
And thank you.
And I am showing no further questions I would now like to turn the call back over to Jay Bray for closing remarks.
Thank you guys really appreciate you joining the call have a great day, and we will certainly be around for additional questions.
This concludes today's conference call. Thank you for participating you may now disconnect.
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