Q2 2023 Ocwen Financial Corporation Earnings Call

[music].

Okay.

Welcome to the Ocwen Financial Corporation second quarter earnings and business update conference call.

At this time, all participants will be in a listen only mode. Later, we will conduct a question and answer session.

I will now turn the call over to your host.

Do you go ex Soralium senior Vice President corporate Communications.

Mr. <unk> you may begin.

Good morning, and thank you for joining us Rockland second quarter 2023 earnings call. Please note that our earnings release and slide presentation are available on our website.

Speaking on the call the occupants chair and Chief Executive Officer, Glen Messina, and Chief Financial Officer, Sean O'neill as a reminder, the presentation. Our comments today may contain forward looking statements made pursuant to the safe Harbor provisions of the federal Securities laws.

These forward looking statements maybe identified by reference to a future period or by use of forward looking terminology and address matters that are to different degrees uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements forward looking statements, which speak only as of the date. They are made involve assumptions risks and uncertainties.

Including the risks and uncertainties described in our SEC filings in the past actual results have differed materially from those suggested by forward looking statements and this may happen again. In addition, the presentation. Our comments contain references to non-GAAP financial measures such as adjusted pre tax income among others. We believe these non-GAAP financial measures provide.

Useful supplement to discussions and analysis of our financial condition. Because they are measures that management uses to assess the financial performance of our operations and allocate resources non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of the non-GAAP measures using this presents.

Taishan to their most directly comparable GAAP measures as well as management's view on why these measures may be useful to investors may be found in the press release and the appendix to the Investor presentation, now I will turn the call over to Glen Messina.

Thank you Diego good morning, everyone and thanks for joining our call.

Today, We will review a few highlights for the second quarter take you through our actions to address the market environment and discuss why we believe our balanced and diversified business can deliver long term value.

Please turn to slide three.

I am pleased to report our second quarter results, which reflect the strength of our balanced and diversified business and continued progress against our key initiatives.

Adjusted pre tax income of $23 million for the second quarter has materially improved versus the first quarter largely driven by reverse servicing.

Profitability in originations and forward servicing improved slightly versus the first quarter as well.

We reported net income of $15 million or $2 <unk> per share, which includes $6 million a pre tax loss relating to notable items.

Notable items primarily include an unfavorable MSR fair value change due to interest rate assumptions offset in part by a favorable adjustment to our legal and regulatory reserves for various matters, including the CFPB litigation.

I'm also pleased to report the CFPB did not appealed the district Court's may 2023 ruling in our favor.

As a result that ruling is now final and the case, we remain closed we look forward to normalizing our relationship with the CFPB.

We're excited to put this legacy matter behind us the last of the matters filed against the company in 2017. We believe this removes what may be a perceived uncertainty in the eyes of potential counterparties.

Total servicing U P. P was down slightly at the end of the second quarter versus the first quarter, reflecting our continued discipline in purchasing msr's a sale by math of a $5 billion of MSR U P. B to optimize portfolio returns and consistent with expectations, we had nominal sub servicing boardings in the second quarter.

With both short term and mortgage interest rates at the highest levels in 20 years, we're reducing our MSR interest rate risk exposure with higher hedge coverage and utilizing synthetic sub servicing conversions and excess servicing spread financing.

Okay.

Our hedge coverage in the second quarter was roughly 92% we added another new MSR investor and converted $7 billion of owned MSR to synthetic sub servicing.

We've delivered over $100 million in annualized cost reduction.

Since <unk> last year, and our expense management actions throughout the company are on track.

We nearly achieved our year end expense ratio target by the end of the second quarter.

Total liquidity of $233 million is consistent with first quarter levels. Despite the higher liquidity demands of our increased hedge coverage.

We're very pleased with our results this quarter the business is performing consistent with our expectations and we believe we're on track to achieve our adjusted pre tax income and return objectives for the remainder of the year.

Now, let's turn to slide four to discuss the environment and our value creation plan.

Market conditions in the second quarter were generally consistent with expectations. We continue to see slow MSR runoff higher float earnings and low delinquencies.

During the second quarter MSR trading volumes in the bulk market remained elevated and I think it's fair to say it was largely a buyer's market.

While this represents a potential investment opportunity at the same time it can put downward pressure on MSR values, all other valuation factors being equal.

Potential client interest in sub servicing remains stronger than ever in our opportunity pipeline continues to grow.

We continue to see clients, extending RFP processes and decision, making due to market factors and conflicting priorities.

Opportunistic asset person purchase transactions are beginning to appear as is interest from investors, who are seeking partners to source and service msr's whole loans and nonperforming loans.

Moving to originations, we expect market conditions to continue to be reflective of interest rates being higher and for longer than expected at the beginning of 2023.

This is impacting both forward and reverse origination volume opportunity as a result competition remains intense but conditions are improving versus the first quarter.

Consistent with the first quarter, we continue to observe market leaders, having an aggressive view of new MSR values relative to bulk market levels.

We are seeing heightened M&A opportunities in both originations and servicing.

However, seller price expectations may restrict opportunity as we've said before the board and management are committed to evaluating all options to maximize value for shareholders.

Overall, we believe the environment continues to favor our core strength in servicing and we remain focused on leveraging our balanced and diversified business prudent growth adapted for the environment.

Industry, leading servicing cost structure.

Top tier operational performance and unmatched breadth of capabilities and capital partner relationships to support our growth.

We believe we have a strong foundation to create value for shareholders in the current environment.

Let's turn to slide five to discuss our balanced and diversified business.

Over the past several quarters, while originations adjusted P. T. I has been depressed due to rising interest rates and declining industry volume levels higher interest rates are helping to drive improvement in servicing adjusted pre tax income.

In addition in the second quarter. We also took advantage of a unique special servicing opportunity that further contributed to servicing adjusted pre tax income will talk more about this in a moment.

Based on projected seasonality in home purchase activity, we do expect to see seasonal changes in origination volume portfolio prepayments in MSR runoff.

Early trends in property tax remittances, and escalating insurance costs and their effect on escrow balances will also drive seasonal changes in MSR runoff.

As in the past changes in interest rates and bulk market trading prices of Msr's do impact the value of our MSR and can drive quarterly volatility in our GAAP net income.

Market conditions in forward originations are beginning to improve we remain laser focused on yields versus volume and increasing our mix of higher margin channels and products total origination volume was up 6% versus the first quarter and margins and forward are up as well.

After our decisive cost actions originations returned to profitability in May and June and was roughly breakeven for the quarter. We continue to closely manage reverse originations where industry volume levels remain depressed and we have been impacted by spread volatility in the second quarter.

Despite current market conditions, our origination business serves well its purpose to replenish our MSR portfolio.

Our focus on diversification is evident when looking at our portfolio composition.

Our operating performance and proven capabilities have supported material growth and forwarded reverse of servicing.

We believe our emphasis on growing sub servicing and GSE owned Msr's also helps mitigate our exposure to liquidity demands due to advance a requirement in the event of a recession.

Let's turn to slide six to discuss our growth focus in the current environment.

In this environment, we're focused on growing our higher margin origination channels and products capital light sub servicing and leveraging our unique special servicing skills to capitalize on high return investment opportunities.

As I just mentioned our originations team delivered 6% growth in total originations volume quarter over quarter and correspondent was up 8% versus the first quarter.

Our mix of higher margin channels and products increased by 11 percentage points versus the first quarter and 22 percentage points over the second quarter of last year.

As mentioned earlier opportunistic asset purchase transactions are emerging.

We did execute on one such opportunity in the second quarter, which was enabled by our superior performance in special servicing.

We purchased a $133 million portfolio of reverse whole loans and REO previously repurchased from <unk> Securities.

We combine these assets with roughly $167 million of our own existing buyouts and successfully financed the pool and the new nonrecourse non mark to market securitization.

This securitization allowed us to diversify our sources of funding and reduced our potential exposure to mark to market volatility.

The combined transactions generated approximately $15 million and adjusted pre tax income was favorable for liquidity and provided a stable financing source for future transactions.

This is a terrific example of how our superior operating capabilities and diversified business allows us to capitalize on unique opportunities that are emerging in this environment.

We continue to evaluate other similar opportunities however, the timing and the profitability of any such transaction cannot be estimated at this time.

Regarding sub servicing demand remains stronger than ever and our total opportunity pipeline continues to grow in the last 24 months, we've added $118 billion in new loan on boardings.

As expected sub servicing additions were roughly $3 billion in the quarter as we're seeing clients extend RFP processes and decision, making due to market factors and conflicting priorities.

With the delays, we're seeing we're now expecting roughly 15% to $25 billion and new sub servicing additions through the first quarter 2024 down from roughly 30 billion through the end of Q4.

With those additions, we expect our mix of sub servicing to increase to approximately 60% over the next three quarters and total servicing APB of roughly $305 billion to $315 billion.

Please turn to slide seven for an update on our expense management actions.

We remain committed to achieving and maintaining an industry, leading servicing cost structure, while at the same time, improving customer experience and maintaining an appropriate risk and compliance framework.

In the second quarter servicing operating expenses as a percent of <unk> declined by one eight basis points or roughly 15% versus second quarter last year with comparable U P. P levels.

We've made solid progress towards achieving our year end servicing operating expense efficiency objective.

The year over year improvement in this operating expense ratio with servicing <unk> roughly flat demonstrates we're getting true unit cost productivity through execution of our technology roadmap process reengineering and improving utilization of our global platform.

While we are driving improved efficiency were also improving the borrower and sub servicing client experience with net promoter score is up 11% and 12 percentage points, respectively over last year.

With the improvements in our cost structure, we believe scaling up our sub servicing portfolio with capitalized sub servicing can add between two and a half to three basis points in pretax income per $1 billion of UBB at.

We would expect the profit contribution from government reverse commercial and special servicing additions to have more favorable pre tax income contribution.

Please turn to slide eight for an update on our operating performance.

We continue to maintain industry, leading operational performance improved service delivery to customers clients and investors and sustained a prudent risk and compliance framework.

Our breadth of capabilities is unmatched in the industry.

We service forward reverse and small balance commercial loan portfolios, covering GSE and Ginnie Mae Federal home loan bank and private label products.

We've been recognized by Fannie Mae Freddie Mac, and HUD for delivering industry, leading operating performance for investors.

Over the last several years, while we have been driving productivity improvements we've continued to invest in the client and bar facing technology and robotic process automation to improve customer experience.

The execution of our technology roadmap has enabled reduced cycle time enhanced access to information and $24 seven assistance through multiple digital interface channels.

For example, our artificial intelligence powered borrowed.

Borrower Chatbot has hosted 600000 sessions with an 80% success rate, giving customers improved responsiveness and minimizing calls to our call Center.

Our mobile App and loss mitigation bonds are also aimed at increasing responsiveness to borrowers to improve their experience.

We believe our investments in technology will allow us to further improve productivity without adversely impacting bar experience as we scale up our platform.

We continued to demonstrate proven leadership and special servicing in both forward and reverse.

Last quarter, we spoke about the significant performance improvements in customer experience, we delivered for one of our key sub servicing clients.

Our ability to cure 60, plus delinquencies and our superior HUD claims assignment performance.

As you can see.

On the right. We also demonstrates strong performance and maximizing Oreo sales price versus appraise value, while selling within the timeframe allowed by HUD, which maximizes our claim recovery.

These performance elements were key drivers that enabled the financial outcome of our opportunistic reverse whole loan purchase in the second quarter.

Yeah.

Now please turn to slide nine.

We continue to focus on expanding our capital partner relationships to support our growth objectives on a capital light basis.

Over the past two years, we have grown servicing <unk> supported by capital partners to $79 billion.

Using a variety of sub servicing synthetic sub servicing which includes math and E. S. S transaction structures.

In the last 12 months, we have grown our <unk> funded with capital partners by over 75% and we now have active relationships with four capital partners.

With multiple investors, we have the capacity to fund MSR is purchased through our origination channels and bulk transactions, which meet investor requirements further enhancing our ability to generate capital light growth as we manage our exposure to MSR valuation changes due to interest rates.

Looking ahead, we're focused on developing additional investor relationships to support our growth objectives across multiple asset types.

We're evaluating a diverse range of potential structures with several potential investors to satisfy their unique needs and further diversify our structural alternatives.

We believe the development of Investor relationships will further help us achieve our servicing scale objectives.

In addition, our investor driven approach to MSR purchases introduces an added level of price discipline for the originations business.

I want to thank our business partners at Oaktree, and our new MSR Investor partners for the trust and confidence they have placed in our team to help them achieve their growth and profitability objectives.

Now I'll turn it over to Sean to discuss our results for the second quarter and outlook for 2023.

Thank you Glen Please turn to slide 10 for our financial highlights I am very pleased with the performance in the second quarter, especially the material improvement in adjusted pre tax income from last quarter. Our results represent the hard work and resilience of our dedicated employees.

Going to the Blue column in the second quarter, we recognized GAAP net income was $15 million due primarily to strong adjusted pretax net income of $23 million.

Add to that a net notable and income tax result of a negative $6 million to result in earnings per share of $2 <unk>.

Book value per share of <unk> $57.

Finishing off the table to the left I would note liquidity was stable quarter over quarter at about $230 million and expected to be well within excess of the new FHFA Ginnie Mae liquidity requirements. Starting this September .

With respect to liquidity in addition to our reverse securitization transaction, we conducted this quarter.

Other drivers had been our strong track record in obtaining extending renewing and rebalancing various asset backed financing facilities throughout the quarter to support our growth and reduce our cost of debt.

On the right side of the page first I'll note that quarter over quarter, our GAAP net income improved by about $56 million.

This was driven by a $15 million gain from the opportunistic whole loan and Oreo purchase in the reverse space, which was then.

Subsequently securitized in the same quarter.

This securitization was our first private label securitization as Glen mentioned and it was quite successful in terms of generating liquidity and migrating our assets to a more stable and safe financing structure, which includes being non mark to market and nonrecourse.

In addition, we saw about $7 million from improved operations across our businesses $28 million due to significant legal and regulatory settlements during the quarter and an improvement in the MSR valuation quarter over quarter of $6 million.

With the positive GAAP net income result, you can see that our effective tax rate is only about 5% due to our existing portfolio of tax net operating loss carryforwards. The tax impact we did record was due to our Asia Pacific operations.

Adjusted pretax income showed a strong improvement quarter over quarter up $17 million with the same business drivers shown in GAAP net income, but it excludes as always the MSR valuation adjustments and other notables.

Finally at the bottom of the page I would mentioned, we expect our third quarter adjusted pre tax income to be closer to our first quarter levels.

This is due to seasonally higher run off in the third quarter slightly lower pre tax income due to the migration of $15 billion AUM to a sub service status and lack of another opportunistic reverse transaction in the third quarter.

I'd like to recap the notable items for the quarter that connect adjusted pre tax income to GAAP net income we provide adjusted pre tax income as a supplemental measure for greater investor transparency and it is a metric we use in managing the business.

Second quarter notables, which are detailed in the appendix are comprised primarily of two items a $33 million decline in MSR valuation adjustments net of hedge. This is due primarily to changes in the valuation model assumptions made by a third party valuation agents in response to market indications and this includes two.

Significant MSR transactions, we recently initiated.

Okay that we anticipate will continue to improve in the near term.

On page 12, I will describe our hedging approach and the impact of our capital light strategy on interest rate risk.

The graph on the left shows the difference between what appears on our balance sheet for MSR assets about $2.7 billion, a fair market value.

Versus the amount of our net exposure that we actually Heche, which is about 1.7 billion a fair market value the.

The difference is primarily the transactions that don't achieve true sale like the map or rhythm assets for which we do not assume any interest rate risk.

The hedge for interest rate impacts is focused on the smaller amount on the right of that graph.

Furthermore, that 1.7 billion includes assets like the excess servicing spread or Essas transaction here, we only hedge a fraction of the total net exposure of the $259 million to match the economics that we retain.

In addition, we also have the Pls MSR book or non agency, MSR, but which is primarily hedged only on a float component given that they have very low interest rate sensitivity.

Our hedge coverage ratio for the quarter was in the low 90% range.

Very high hedge coverage ratio will diminish the impact on the P&L of either interest rate increases or decreases.

On the right. This graph shows the rapid growth of our excess servicing spreads structures over the last few quarters more detail on Esfs can also be found in our queue, which we release at the end of business day to day.

Since we retain title to these esfs msr's they remain on our balance sheet cannot be sold or have the servicing transferred unlike a standard sub servicing contract.

In addition to the S S and math structure, we have other synthetic servicing transactions, where we sell the MSR title and the bulk of the economics to a third party in return for liquidity and retain servicing rights often we have very high termination fees in the first few years to discourage the contract from being moved.

Early in the life of the M. S. S R.

In conclusion, we've leveraged synthetic servicing including Nabb N E S S transactions, which translates to less capital on the edge and less risk in a declining interest rates scenario.

Now we'll go into more detail on the segment information on page 13.

We'll start with servicing where we show adjusted pretax income in the upper left sharp. In addition to the previously mentioned reverse transaction servicing so I'm screwed slow income due to both higher balances, which are seasonal and higher rates and of course lower expenses.

Some servicing volume saw gross adds of about $3 billion offset by runoff in both forward and reverse the.

The reverse runoff was primarily due to higher assignment volume, which helps the MSR owner maximize returns delivering alone back to Ginnie Mae faster, but lowers the balance serviced.

As a recap the annual cost reduction year over year, and you're the second quarter was $45 million for the servicing segment.

Please turn to page 14 for an overview of our origination segment, both forward and reverse.

Originate Shinde Ford business is starting to normalize chorus.

Correspondent lending and flow that's C. L. On the upper left chart experiencing much better margins and slightly higher volumes in the first quarter.

Mainly due to continued focus on high margin products, such as best effort and Ginnie Mae loans, you can see here the margin improvement in the upper right graph product growth in the lower left client growth in the lower right.

This return the corresponding channel back to a positive adjusted pretax income this quarter. We believe we are on a good trajectory for the rest of the year and we will continue to price this product for inappropriate yield linked to our corporate cost of capital.

Consumer direct continues to have improved volumes, albeit off a small first quarter base as well as better margins and is tracking towards profitability. This chambliss shifted to a purchase cash out focus versus refinancing.

Reverse had stronger origination volume, but experienced spread widening in the quarter similar to the third quarter of last year. This was mostly driven by the regional bank crisis and inflationary pressures.

We continue to ensure that the origination segment is sized appropriately for the prevailing market volumes in 2023.

Please turn to page 15 for review on our stock price.

Using the same starting point, which is euro 2020 that we have used in prior years. Our stock continues to outperform not just the Russell 2000, but also a basket of our peers, which we listed our proxy and also show in the notes.

We believe this performance is due to the strength of our balance business industry, leading cost structure chopped.

Top tier operational performance and prudent capital light growth.

As well as our agility and brought expertise to execute on accretive opportunities such as the reverse hold loan in Oreo transaction and other opportunities going forward.

While we are pleased with our performance versus our peers at the end of July 2023, our stock was trading at about 60% of current book.

This is an improvement over most of the 2000 twenty-three trading range, but we think this discount is still not representative of the value we are creating the strength of our current balance sheet.

Before I turn the Mike back to Glen I want to point out to investors a few additional data points in our appendix.

We continue to provide data on fully diluted shares in equity on page 27, alright.

MSR valuation assumptions on page 28, so many valuation parameters across the three major investor types.

With respect to our balance sheet, we provide a more granular view on page 20, which delineates assets that required matching asset and liability gross ups under GAAP treatment.

These are primarily due to an inability to achieve accounting true sale. These balance sheet impacts fall into three categories.

<unk> rhythm assets that I referred to earlier reverse heck I'm assets and Ginnie Mae Msr's that are eligible for an early buyout.

As a reminder, the excess servicing spread asset set within the all other MSR category on the far right at this stage.

<unk> Glen.

Thanks, Sean.

Ask you to please turn to slide 16 for a few wrap up comments before we go to Q&A.

I'm proud of our team is executing and a strong results will be delivered in the second quarter, we've made solid progress towards achieving our financial objectives I'd.

I'd like to thank and recognize our goal, but business team for the hard work and commitment to our success.

As we continue to execute our business strategy, we believe for awhile possession to navigate the market environment ahead, and deliver a longterm value for our shareholders.

Are balanced and diversify business supports our ability to perform across multiple cycles.

We're executing a focused growth strategy, leveraging our superior operating capabilities to gross up servicing across multiple investor and product types.

Our sub servicing opportunity pipeline is robust and we our position to deliver value to clients investors and consumers and any economic environment.

Remain steadfast in our pursuit industry servicing costs leadership by driving continuous cost and process improvement and will continue to optimize expenses further during 2023.

We remain equally determined to maintain our industry leading operational performance.

We have delivered measurable performance improvement for our clients ours and investors.

And provide an unmatched breadth of capabilities.

Through our investment in technology, and global operating capability, we felt an efficient immature platform with capacity for growth that delivers industry, leading performance and improved financial outcomes for clients.

<unk> continued to expand our capital partner relationships are prudently managing capital and liquidity for economic and interest rate volatility as well as the market risks and opportunities.

Lastly, we're excited to put the legacy CFPB matter behind us the last of the matters filed against the company in 2017.

We believe this removes but maybe a perceived uncertainty and the item potential kind of parties.

Overall, we're excited about the potential for our business and do not believe a reason share prices reflective of our financial position growth opportunities or strength of our business.

With that let's open up the call for questions.

Thank you.

You would like to ask a question. Please press.

One on your telephone keypad now.

You'll be placed into the queue in the order received.

Please be prepared to ask your question when prompted.

Once again, if you have a question please press star one.

And your phone now.

And our first question comes from Erik Hagen with B T I D.

Hi, Good morning, I hope it goes well a couple of questions here I mean at this point do you think you'd support a stronger Roy.

[noise] rates are higher or lower than where they are today like how much upside in do you feel like there is an M. S r's.

[noise] higher how are you thinking about the impacts of hedging and what you could potentially recaptured and maybe just the overall growth rate for the market the phrase sort of come down.

And then there's a follow up to that I mean, when you're sort of guide to get into.

Plus billion of servicing into early next year like you do on I think it's five six.

For how much incremental capital you're using to get there or even how much you might even free up.

With the with the portfolio that test.

Sure Yeah. Good morning, Eric you know look at.

I think in the industry to look overall, it's fair to say that originations in a stable environment are certainly in a downward right environment generates a substantially higher return on equity then servicing daughters. I think that's just that's just the dynamics of our industry. So it you know look I think with you on embedded base, a very low coupon msr's I think for.

Further upside value appreciation.

In Msr's as interest rates rise is gonna be limited and not consistent with historical historical I Miss our value increases we've seen C. S curve effective prepayment speed so to speak so from a from a return on equity perspective, and as alcohol did Justin pre tax <unk> I think <unk>.

Pre tax roe's would be probably better with rage trending down because it creates refi opportunity, which again creates originations uses must capital. So you had the <unk> Martin typically expand in a downward right environment.

You know as I think about the growth in our portfolio Eric look our strategy is capital light growth. So as we're growing our portfolio forward, we don't expect to deploy incremental capital to do that with the exception of the opportunistic transactions like we executed in.

Second quarter for special servicing opportunities I was always require a little bit of capital, but have very high returns as we demonstrated in the second quarter. So yeah. The growth that we're expecting in the portfolio is really gonna come from growth in our sub servicing both both with news do third party sub servicing relationships and growth in our capital partner book.

Okay.

Okay. That's helpful directions on slide 10 years.

Liquidity quarter over quarter.

Even though the you know the book value went up normally maybe what did you have more liquidity. If your capital position is improving and what did you say that there's a threshold for liquidity if it even strengthened enough where you might look to repurchase some stuff.

Eric It's Sean good morning, good morning.

So what we what we do is we sometimes delever assets.

Is needed because we don't Wanna have excess cash since it's a pretty low returning asset.

With respect to having excess liquidity in our options that that's pretty much remains the same is recent quarters, where we would consider.

Repurchase in stock buyback currently we're probably leaning more into a debt repurchase given our high degree of leverage on the company and then you know having cash for either opportunistic asset purchases or for M&A transactions is also the other variable that we're considering.

Okay. Thank you guys very much.

Thank you thank you Sir.

And our next question will come from Matt how it with be Riley Securities.

Good morning, everyone. This is Mike from Matt.

So I was wondering if you could give some commentary on the the overall reverse space in the context of interest rate volatility that we're seeing and kind of how you'd expect that outlook to adapt as <unk> as the fed roadmap develops.

Hey, Mike. Thanks for your question look into reverse space. You know look it's no surprise reverse originations the reverse originations market opportunity has declined substantially probably more than 50% with the rise in interest rates heck of mortgages are valuable right shortlisted.

The curve is very high so you again in the amount of even though there's been home price appreciation because interest rates have gone up quite a bit the amount of equity or that people could tap in their house with a reverse mortgage is limited by the level of interest rate. So yeah, we have seen originations buying come down.

Uhm that said I think it's fair to say that you know we are we are if you look at the league tables on <unk> you know, we're still either number number three or number four in league tables, and Europe share is going up.

You know what we've seen during the course of 2023 has been a fair amount of volatility in what's called the discount margin or spread essentially that reverse mortgage backed securities get price off of <unk> securities get priced off upset spread volatility has impacted our originations business and frankly is impacted.

The valuation of our MSR portfolio.

As market conditions continue to normalize who would expect to see those spreads stabilized and approach no longer term averages and you know.

Say over right now <unk> probably.

2030 basis points that the minimum about the long term average may be even more.

You know into servicing space, you know the servicing side of the business continues perform very well for us.

The platform, we apart from RMS reverse mortgage servicing the ma'am waterfall had previously owned performing well, we've driven a lot of cost productivity and yes, we discussed the special servicing side of that business performance extremely well and has given us the opportunity to.

Take advantage of opportunistic assets purchases and generate decent returns for the company. So you know.

I think the reverse space is still one we like I still think the demographics of the the U S population.

Support longterm stable.

Stable consistent growth in reverse mortgage originations, but it's been a choppy market and that's been this affected the industry and I think it's on others, but again, we think there's longterm opportunity in both the origination and servicing Sir.

Sure. Thank you.

So as far as the opportunistic side of.

Of the reverse segment.

I see on the deck that you're not expecting any whole loan purchases and and.

Q3, but I was curious if you could quantify what you might think that would look like for the next year.

So you know it's because these are opportunistic asset purchases, it's really hard to quantify and I think I sat on the call that luck. We you know it's right now trying to hear while we are working on a couple of things uhm, both on the forward and reverse side.

You know, it's really hard to dimension it yeah that could be small opportunities can be large opportunity. So unfortunately right now I just can't I really can't dimension. It other than to say that yeah. We are seeing an increased number of opportunities pop up in the market adhere. Obviously, you know you've caught it by the <unk>.

That's right you got a price them right, but I'm convinced that the assets come to market and you know we we can acquire them at a fair price that makes sense for us we.

Certainly have the servicing skills to address it and uhm generate nice returns.

Alright sounds good I appreciate it thank you.

Thank you ma'am.

As a reminder, if you would like to ask a question.

Pricing star one on your telephone now.

And our next question will come from Derek Summers with Jeffrey.

Good morning, everyone, just given the increased capital requirements for mortgage activities at banks and.

Of course, the Bali correspondent volume trends at Wells Fargo was wondering if you you all could provide I'm an update on how things are shaking out among the correspondent sellers has is that market share been reallocated Mister walch here still shifting or things stabilized.

Good morning, Dark. Thanks for your question. So you know we are seeing look we saw the correspondent correspondent market conditions improve in the second quarter.

Yeah, we still you know it's like I said on the call. We still believe you know there's certain market leaders who have.

Yeah cause view of MSR values is not necessarily reflective of what we're seeing in the bulk market that aside our volume right up and our margins went up as well too. So I think the market is beginning to improve you know I'd say the capacity that existed or that shifted from wells Fargo is kind of balanced around I think.

There's always an opportunity for <unk>.

Performance relationship you know an opportunity to you know expand our customer base yard is Shawn talked about our correspondent customer base continues to grew grow.

In the second quarter and you had the team is continuing to look to add new sellers for the balance of the year. So I still think there's an opportunity to grow and the correspondents space with the balance of the year you know a correspondent we were getting very attractive.

Cash on cash yields which includes the quote origination margin so essentially you're buying the MSR at a price lower than its fair value.

So we are yeah, we we feel good about our position and correspondent I think our team. There is executing really well I think returns we're seeing are attractive and we're approaching the market with a very disciplined and thoughtful approach you know, making sure reprice consistent with our cost of capital N where are MSR investors or.

Looking to if the returns are looking to get.

So you know I I think with the new bank capital standards.

It's gonna create more opportunity for.

Those who aren't affected by those capital standards.

You know our focus on growing our portfolio and are capitalized basis with.

MSR Investor Partners, we've got for now we're looking to expand that I think the more cap on apartments, we have in the portfolio within reason.

Gives us multiple investors with different by box appetite, so to speak which will allow us to you know take advantage of the growth opportunity should volume shift into the correspondents sector and the bulk market as a result of your.

Banks, perhaps exiting or not being as aggressive in the msr's spaces have been historically, so take some exciting time for us and others in this industry.

Got it. Thank you. It's helpful commentary and then just one more just on the on the guidance it seems <unk>.

Consistent quarter to quarter and previously nine per cent free texts are you is contingent upon the origination segment normalizing.

Uhm with this quarter's improvement and gain on sale margin do you do you view the.

Normalization uhm.

You know primarily missing volume or further increases in margins are what's the missing piece for for that appointment to normalize.

Yeah, I mean for US I think it would be a little bit more volume yoga.

Z as thick as fairly widely known looked at.

Home sales transactions are just not robust bright for all the reasons that people talk about you know people have golden handcuffs with low mortgage rates and all kinds of good stuff right. So would love to see a little bit more volume activity in the marketplace I think that would be good and healthy for the industry and certainly couldn't healthy for homebuyer homebuilder Sir.

<unk> as well too so I think it has a volume issue at this stage of the game again I think conditions are improving we did see find go up in the second quarter.

Yeah, right now I'd say the early read on the third quarter from what we saw in the press is your home sales were up Virginia, which and into your home purchase applications are up in June so that will bode well for July and August some are buying season, but it's just not as robust as I think as people as we'd like to see it.

Got it. Thank you that's all for me.

Great. Thanks, Sir.

Your next question today will come from Howard Amster with Raymond Securities.

Uhm, Hi, Glen just wondered why the.

Employee costs went up like $28 million for the quarter.

And also from the previous year.

Okay and Howard good morning by the way. Thank you for your question is great to hear from you.

Good morning Howard.

Our staffing was flat quarter over quarter, we did pay higher incentive calm.

And.

Some of the businesses like a correspondent N C D. Given the much higher volumes, we experienced some of those channels. So that was the primary driver of that as well as merit races came through.

Which during that period of high inflation.

No.

That's one of the things we we have to do to make sure. We're taking care of our employees to get married so <unk> staffing state level.

Alright, she was any of that do two severance or I mean 28 million.

<unk> 56 million <unk> really high just maybe.

Mirrored increases.

You know I'm looking at the three months ended Uhm page 21 of our appendix.

Yeah. Three months ended June 20 to compensate it was 84 million three months ended June 30th 2023 was 58, so I am seeing a reduction and it looks like it's relatively flat to the first quarter as well trying to my reading that right.

I I, maybe I misunderstood.

Glen before.

Yeah, How're you may be looking at it said June 30. It starts June 30, 22, and then it jumps.

And it's Q1 to end of Q2 and Q1 Q U on page 21 is 558.

Gotcha, Okay I must have <unk>. Thank you very much. Thank you numerous servers all good yeah.

Since this concludes our question and answer session I'd like to turn the call back to Ya Glen Massena for any additional or closing remarks.

Thank you Jen look I I'd like to thank our shareholders in key business partners for their unyielding support of our business and I also like to thank and recognize a board of directors and global business team for their continued hard work and commitment to our success I'm excited about the results, we dillard for the quarter and I look forward to update you on.

[noise] progress.

At our next earnings call. Thank you.

And this concludes today's conference. Thank you all for attending have a pleasant day.

The House has ended this call goodbye.