Q3 2023 Mr. Cooper Group Inc Earnings Call

Yeah.

Hello, and welcome to Mr. Cooper's third quarter 2023 earnings conference call.

This time, all participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one on your telephone.

You will then hear automated message advising your hand is race.

Withdraw your question. Please press star one again.

Now I'd like to hand, the conference over to begin.

Good morning, and welcome to Mr. Cooper group's third 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 and you can find the slides on our Investor relations webpage at investors that Mr. Cooper Group Dotcom.

During the call we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck.

So we may make forward looking statements, which you should understand it can be affected by risk factors that we've identified in our 10-K and other SEC filings, we're not undertaking any commitment to update these statements if conditions change I'll now turn the call over to Jay.

Thanks, Karen and good morning, everyone and welcome to our call.

I'll start with a review of our quarterly highlights on slide three starting with financial performance. We were delighted with operating ROE TCE of 13, 8%, which is back within our target range and at this point in the cycle double digit return on equity is a powerful validation of our balanced business model in may.

These are a differentiator from our peers, whose results are much less consistent.

Tangible book value was up nicely in the quarter to $62.78 and Theres a lot of good news here, you're seeing the benefit of continued strong operating results. The gain from the trust collapse, we mentioned last quarter and the accretion from closing the home point acquisition, which came in consistent with our guidance.

Now turning to operations the portfolio reached 937 billion.

And based on what we've seen from public disclosures. It appears that Mr. Cooper is now the number one servicer in the country.

This is an amazing accomplishment for the company, especially as I think back to our humble beginnings in the 90 miles an.

And I want to pause for a second and say thank you to our investors our partners clients and all our other stakeholders for placing your trust in us and especially to my fellow Cooper's for your tireless work on behalf of our customers.

Servicing generated $301 million in pre tax income, although bear in mind again from the trust collapse contributed $67 million and there were some other one time items in there as well, which Chris will elaborate on originations.

Originations reported EBIT of $29 million, which is excellent performance considering the rate environment and zone saw strong sales momentum and generated a small profit this quarter as we guided you to expect.

Third quarter was a very busy period for us in addition to Hong Kong, We closed the acquisition of Roosevelt management, which provides us the professional team and the infrastructure for our asset management strategy and I am pleased to report we've already kicked off the capital raising process for our first MSR further.

Turning to capital management, we repurchased 1 million shares for $58 million and since the <unk> merger established Mr. Cooper as a fully independent public company, our stock price has tripled.

But we still trade at a persistent discount to tangible book, which looks to us like a major disconnect given our consistent growth in our double digit our OTC.

Despite growth in return of capital, we reported record liquidity and very strong capital ratios. This was partially due to the self funding nature of the home Pointe acquisition, which we pointed out when we announced the deal and primarily due to our sound practices around capital and liquidity plan as the market's leading servicer with four.

3 million customers balance sheet strength is the foundation for all our strategic initiatives.

Finally, I'd like to mention the well deserved recognition, we received from Fortune and great place to work Foundation, who ranked Mr. Cooper as one of the best workplaces in financial services and insurance.

This is a positive reflection on our people and on the purpose of all inclusive work environment that we have created for them.

Now, let's shift to slide four and talk about it very important theme in the mortgage industry, mainly the ongoing retreat of banks from a sector, which is creating a major growth opportunity for us as.

As most of you are aware banks used to dominate the mortgage industry with close to 100% market share in both originations and servicing today, however that shares fallen to around 40%.

One of the drivers was the Basel III capital regime rolled out in the aftermath of the global financial crisis, which introduced higher capital standards for mortgages and Msr's. These standards came on top of severe operational challenges as some of you will recall Mr. Cooper's growth began to take off at this point when we acquired <unk>.

200 billion plus portfolio from bank of America.

Fast forward to today and a new set of regulations is on the horizon called Basel III and gain. These regulations. Once again include tighter requirements for mortgages and Msr's at the same time that rising rates are pressuring profitability and operations, we expect to see banks see more share in the mortgage sector.

<unk>, creating attractive growth opportunities for best in class operators like Mr. Cooper.

Moving to slide five while banks were dialing back Mr. Cooper made a commitment to serving mortgage borrowers and to continue making the necessary technology investments to do so efficiently.

And the result, as I mentioned already as we are now the industry's largest servicer. We're also the most efficient.

The annual MBA benchmarking survey as the authoritative study of mortgage industry performance and as you can see we steadily brought down our servicing costs over the last few years to the point, where we are now 33% more efficient than the large banks and the survey and nearly 50% more efficient than mid size banks.

If you consider our scale cost advantage industry, leading retention and the depth of our expertise Theres really no one in the industry, who can compete with us and servicing.

Now, let's move to slide six and talk about where we're going from here given the attractive yields available in the bulk market as well as new sub servicing agreements in place we will exceed our one trillion strategic target in the first quarter of next year at which point, we will return to update you with a new set of strategic targets.

Our comprehensive plan to achieve them for.

For now I'll remind you that we have several strategic initiatives underway many of which are focused on technology investment and cost leadership, both in servicing and originations as well as winning new subservicing clients.

In closing I'd like to highlight once again the disconnect between the dominant platform a strong growth prospects and double digit returns and a stock that trades at a discount.

We continue to execute there should be meaningful upside in both our stock and our high yield notes and.

And before I turn it over to Chris Let me address something that you'll no doubt noticed in the press release, Chris shared with US his intention to retire by year end 2024.

Chris joined US in January 2019, as Vice Chairman and CFO and quickly enhance the finance function implementing bank like processes as well as pushing for efficiency gains and deleveraging.

This served us extremely well when the pandemic hit year layer being well prepared for adverse scenarios, we were able to substantially expand our liquidity.

In 2021, and we promoted Chris <unk>, President and gave him the mandate to oversee operations, where he took our process discipline to the next level, leading to higher profitability across the enterprise and improvements to the customer experience as well as architect in some new directions within our technology strategy, including the investment in <unk>.

Hey, Jim.

And as the remaining time with US Chris will continue to lead operations with a goal of driving continued strong portfolio growth and return on equity. In addition to overseeing the capital raise for our first MSR fun.

As I look back on these five years Christmas brought to Mr. Cooper, a special kind of energy and intense focus on the needs of our customers our team members and investors and a real sense of urgency to deliver results.

Chris the improvements you've made of Mr. Cooper will endure and we know you will continue to make a big impact on the company ahead of your retirement.

I'll add that we put in place a process to identify a successor and while no. One can replace Chris. The initial feedback indicates a very high level of interest from some exceptionally talented candidates, which shouldn't be a surprise given how well the company is performing so more on this in due course.

Chris.

Thanks, Jay I appreciate those comments.

And before I start I am going to take just a second to share with my teammates. So much I appreciate your commitment and your hard work over the past five years.

I really couldnt be any more proud of what we've done together for our customers and for the excellent financial results, we produced for our investors.

You all know Mr. Cooper has been and continues to be a very special experience for me and the capstone to a long career.

But I'm not done quite yet so you should all expect me to continue pushing us to do more and to do it faster until I am done.

So with that let's talk about what we all care about.

Which is the Companys outstanding third quarter results.

I'm going to start on slide seven and talk about servicing where we generated a record $301 million in pre tax operating income this quarter now as Jay just mentioned this included the onetime $67 million from the trust collapse and I'd also call out $13 million in the boarding fees from a sub servicing client.

They took their portfolio in house, which we called out last quarter.

And as you look ahead to the fourth quarter I remind you that theres some seasonality in net interest income so I'd project servicing EBT to be roughly flat quarter over quarter at $210 million to $220 million after which we should expect to see excellent growth in 2020 for where to put this in terms of our prior guide.

$700 million in servicing EBT for full year 2023, which as a reminder, does not include the gain from the trust collapse. It looks like we will close out the year with at least $775 million.

Now as you know servicing income is affected by interest rates.

And we're in the camp of expecting rates to stay higher for longer which is an ideal environment for servicing but that's not how we run the company we're completely agnostic about rates since they're not in our control and.

And instead, we focus on those things, we can control, namely process improvement cost leadership and operating leverage.

We've talked in prior quarters about some of our current efficiency projects, which include driving down call volumes do chat technology digital tools enhancements to our IV <unk> as well as implementing AI for the call center, all of which provide a much better experience for our customers as well as lower cost for us and we're more.

<unk> outstanding progress with these initiatives in fact, we've been able to add nearly 140000 customers year to date without increasing head count, which I hope you. All agree is a very impressive example of positive operating leverage and you're going to see a lot more of that in 2024.

On a separate note I'll add that we're very pleased with our progress in special servicing.

The combination of Rushmore, plus right path, which was our existing platform generated <unk> of nearly $20 million in the quarter.

And if the credit cycle were to turn more adverse special servicing could become a very meaningful contributor to our bottom line.

Now, let's turn to slide eight and talk about portfolio growth, which was very strong this quarter. Thanks to the Hong Kong acquisition and the other pools, we acquired which more than offset the boarding the sub servicing client I mentioned.

At quarter end the portfolio reached 937 billion up 10% year over year, which is a very comfortable growth rate for us to manage operationally.

And it's a pretty safe bet will grow at least that fast in 2024, given that we already have well over $100 billion of deals scheduled to close and onboard well into the first quarter.

We continue to see very attractive returns in the bulk market. This reflects the backlog of MSR is retained by originators during the refi boom, which they are now under pressure to sell due to very tight margins and limited liquidity.

Also we're starting to see banks, bringing MSR pools to market as they prepare for the Basel III and game regulations with a limited set of buyers the suppliers, creating very attractive conditions further growth at the same time.

We also see great opportunities in sub servicing.

If you stack us up against the competition there is really no comparison.

We're the clear scale leader.

Not only do we offer excellent customer service and industry, leading recapture were also a blue chip counterparty with a very strong balance sheet and an extremely on compliance function, which is very important for clients seeking to partner with a stable reliable institution.

No one matches, our depth of capabilities and quite frankly, no one even comes close.

By the way on this point.

I am delighted to share that we've just signed a new sub servicing client and won't begin onboarding their $80 billion portfolio in the first quarter.

Later in 2024, our MSR funds should become a source of additional sub servicing growth.

We're talking with institutional investors about opportunities to achieve double digit returns from an uncorrelated strategy with very limited exposure to interest rates, where macro shocks and while we're still very early in the process. So far the feedback we've received is very encouraging.

Now, let's shift gears to slide nine.

And talk about originations, where we turned in another outstanding quarter with $29 million in EBT, which is at the high end of our guidance.

Our recapture performance remains best in class with refinanced recapture reaching 83% in the quarter, which is nearly four times. The industry average, we've also been able to drive and sustain higher purchase recapture following a series of operational enhancements and new marketing campaigns.

Now looking ahead as you know fourth quarter is the seasonally weakest quarter of the year with a shorter day count and other distractions of the holidays and with mortgage rates well above 7%. Our customers are more likely to take advantage of second lien products, which is the right solution for them.

But it's a smaller margin product.

Also we are seeing pricing pressure returning the correspondent channel due to higher mortgage rates pressuring originations volumes. So as such we guide you to a range of $10 million to $20 million for fourth quarter.

Now if you turn to slide 10, I'll provide an update on zone, which continues to do an excellent job executing and gaining market share.

Sales grew 17% sequentially.

And a unit generated a profit of roughly $2 million, which is in line with our guidance and a step in the right direction, although nowhere close to zones ultimate potential.

Looking ahead, we guide you to flat results in the fourth quarter.

As we will begin to incur some expenses associated with continued investment in the platform as you know the FHA foreclosure market remains well below what we would consider a normal level and.

And we can't give you an estimate as to precisely land activity will normalize Nonetheless, we're investing now because we intend for zone to be the dominant competitor in this space whenever the market normalizes at which point Youll see its full earnings and monetization potential.

On that point.

Let me take a step back and comment on the Companys overall performance at.

At this moment servicing is producing terrific results. Thanks in large part to the investments we made over many years to perfect the platform with innovative technology and a strong process discipline and.

Operator: Hello, and welcome to Mr. Cooper's third quarter, 2023 earnings conference call. At this time, all participants on a listen only mode. After the speaker's presentation, there will be a question and answer session.

In contrast, originations and zone are operating well below potential due to where we are in their respective cycles, but you know how well they performed in the past and right. Now we are investing in these platforms to just like we did in service.

Operator: To ask the question during this session, you will need to press start 1-1 on your telephone. You will then hear automated message advising your hand is raised. To withdraw your question, please press start 1-1 again.

When originations and credit cycles turn I am confident they will generate spectacular results.

So with that I'll now turn it over to Kurt.

Ken Posner: I will now like to hand the conference over to begin. Good morning and welcome to Mr. Cooper Group's third quarter earnings call. My name is Ken Posner and I'm 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 and you can find the slides on our investor relations webpage at investors.

Thanks, Chris Good morning.

I'll start on slide 11, which gives you a summary of the financials.

Like to highlight four items.

First let me give you some color on the adjustments.

The <unk> transaction.

It required a bargain purchase gain of $96 million and incurred $5 million and deal costs, which together added $1, 47% of tangible book value.

Obviously this was stronger than our guidance of dollar in accretion and reflects very favorably on the performance of the MSR as we acquired as.

Ken Posner: MrCooperGroup.com. During the call, we may refer to non-GAP measures which are reconciled to GAP 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 10K and other SEC fileings. We're not undertaking any commitment to update these statements if conditions change.

As well as limited exposure to contingent liabilities after extensive diligence.

Other adjustments included $8 million and deal costs associated with the Rosebel acquisition.

And a $39 million loss from equity investments largely tied to retained interest entitled 365, which as you may recall, we sold the blend labs in 2021 for $450 million in cash and a $50 million retained interest in the title company.

Jay Bray: I'll now turn the call over to Jay. Thanks, Ken and good morning everyone and welcome to our call.

Jay Bray: Let's stop in with a review of our quarterly highlights on slide three. Starting with financial performance, we were delighted with operating ROTCE of 13.8%, which is back within our target range. At this point in the cycle, double-digit return on equity is a powerful validation of our balance business model and a major differentiator from our peers whose results are much less consistent. Tangible book value was up nicely in the quarter to $62.78 and there's a lot of good news here.

With this adjustment that retained interest is now marked down to $3 million on our balance sheet.

Second I comment that with the acquisition of Rosebel, you should expect corporate expenses to be roughly $2 million higher per quarter, which reflects the cost of our asset management strategy and the team which will be overseeing the MSR fund.

That expense will be more than offset by increased revenue. Once the fund has raised and starts acquiring msr's.

Third we marked up the MSR on our balance sheet by $254 million, reflecting higher interest rates and lower <unk>.

Jay Bray: You're seeing the benefit of continued strong operator results, the gain from the trust collapse we mentioned last quarter, and the accretion from closing the home point acquisition which came in consistent with our guidance. Now, turning to operations, the portfolio reached 937 billion and based on what we've seen from public disclosures, it appears that Mr. Cooper is now the number one servicer in the country. This is an amazing accomplishment for the company, especially as I think back to our humble beginnings in the 1990s.

Leading to a quarter end evaluating of 161 basis points of UBB are $5 three multiple of the base servicing fee strep.

This markup was offset by hedge losses of $192 million, which equates to coverage of 76% completely consistent with our target ratio, which remains at 75%.

Finally, I'd like to update you on our deferred tax assets, which declined by $158 million this quarter and now totals $499 million.

The significant decline reflects deferred tax liabilities assumed as part of the home point transaction as well as strong operating results.

Jay Bray: And I want to pause for a second and say thank you to our investors, our partners, clients, and all our other stakeholders for placing your trust in us and especially to my fellow Cooper's for your tireless work on behalf of our customers. Servicing generated 301 million in pre-tax income, although bear in mind the gain from the trust collapse contributed 67 million, and there were some other one-time items in there as well, which Chris will elaborate on. Originations reported the EBT of 29 million, which is excellent performance considering the rate environment, and zones saw strong sales momentum and generated a small profit this quarter as we guided you to expect.

When we merged with February My age in 2018, the DTA totaled $1 billion and the fact that we've been able to significantly reduce this asset speaks to our thoughtful approach to tax planning, but particularly the companys strong profitability.

We estimate the remaining balance will continue to limit our federal cash tax liabilities for at least the next three years continuing to maximize the cash generated by the company.

Now, let's turn to slide 12 I'd.

I would like to comment further on our balanced business model because it's a term that many of our peers years, despite reporting much less stable results in us.

Jay Bray: Third quarter was a very busy period for us. In addition to home point, we closed the acquisition of Rose Development Management, which provides us the professional team and the RIA infrastructure for our asset management strategy. And in police report, we've already kicked off the capital raising process for our first MSR fund. Turning to capital management, we repurchased 1 million shares for 58 million. And since the WMIH merger established Mr. Cooper as a fully independent public company, our stock price has tripled.

This slide provides you with our view on a relatively narrow range of returns on equity that we have would have generated using <unk> results as a baseline.

Even if mortgage rates had been 100 basis points higher or lower than what actually occurred.

Starting in the center of the table, we anchor the analysis on actual third quarter results, where mortgage rates averaged seven 2% and our CPR speeds were five 6%.

The left hand side shows the hypothetical scenario with mortgage rates 100 basis points lower than <unk> 90 basis points higher.

Jay Bray: But we still trade at a persistent discounted tangible book, which looks to us like a major disconnect, given our consistent growth and our double digit ROTC. Despite growth and return of capital, we reported record liquidity and very strong capital ratios. This was partially due to the self-funding nature of the home point acquisition, which we pointed out when we announced the deal, and primarily due to our sound practices around capital and liquidity planning. As the markets leading servicer with 4.3 million customers, balance sheet strength is the foundation for all our strategic initiatives.

In that scenario servicing suffers from higher amortization expense.

However, this pressure is mostly offset by originations, resulting in overall, our OTC, a 13, 2% slightly lower than what we actually reported in the quarter, but still quite healthy and within our target range.

<unk> if rates had risen 100 basis points, we estimate CPR would have only been down 30 bps.

The stronger servicing income and additional compression in originations profits, resulting in overall, our OTC a 13.0%.

The simple high level example shows how originations and servicing naturally offset each other leading to relatively stable results for companies that have the right balance between material.

Jay Bray: Finally, I'd like to mention the well-deserved recognition we received from Fortune and a great place to work foundation, who ranked Mr. Cooper as one of the best workplaces in financial services and insurance. This is a positive reflection on our people, and on the purposeful, inclusive work environment that we have created for them.

Now if you'll turn to slide 13, let's talk about another aspect of our balanced business model, namely the company's resilience to adverse credit environments.

We've carefully constructed our MSR portfolio.

Jay Bray: Now let's shift to 5.4 and talk about a very important theme in the mortgage industry. Namely, the ongoing retreat of banks from the sector, which is created in a major growth opportunity for us, is most of your aware banks used to dominate the mortgage industry with close to 100% market share in both the originations and servicing. Today, however, that shares fallen to around 40%.

You can see the quality and our 60 day delinquencies, which continued to decline during the third quarter on an overall basis and in each loan category with our MSR portfolio, showing the lowest delinquency levels in our history as a public company.

I would also point you to weighted average FICO scores, which have been rising nearly every quarter for the past three years and to our loan to value ratio, which remained at 54% in the third quarter. This speaks to the very substantial equity of our customers.

Jay Bray: One of the drivers was the Basel III capital regime rolled out in the aftermath of the global financial crisis, which introduced higher capital standards for mortgages and MSRs. These standards came on top of severe operational challenges. As some of you will recall, Mr. Cooper's growth began to take off at this point when we acquired 200 billion plus portfolio from Bank of America.

Not only is our portfolio quite solid we're also well positioned for more adverse environments by virtue of Rushmore are special servicing operation, which as Chris said is already generating nearly $20 million per quarter and EBT now.

Now in a stressed environment Rushmore play a very important role working with troubled borrowers to help them stay in their homes.

Jay Bray: Fast forward to today, and a new set of regulations is on the horizon, called Basel III in Gain. These regulations, once again, include tighter requirements for mortgages and MSRs, at the same time that rising rates are pressuring profitability and operations. We expect to see banks see more share in the mortgage sector, creating attractive growth opportunities for best-in-class operators like Mr. Cooper.

Needless to say this would also be a huge service to our clients and there could be substantial upside in reservoirs volumes not to mention a larger contribution from zone.

Now, let's turn to slide 14, and review liquidity as.

As you know balance sheet strength as a cornerstone of our strategy, which incorporates capital and liquidity planning asset quality compliance and enterprise risk management.

Jay Bray: Moving to slide 5, while banks were dialing back, Mr. Cooper made a commitment to serving mortgage borrowers and to continue making the necessary technology investments to do so efficiently. And the result, as I mentioned already, is we are now the industry's largest servicer. We're also the most efficient. The annual MBA benchmarking survey is the authoritative study of mortgage industry performance, and as you can see, we've steadily brought down our servicing costs over the last few years to the point where we are now 33% more efficient than the large banks in the survey, and nearly 50% more efficient than the mid-sized banks.

So let's dive into liquidity, where we had a record level of $2 7 billion at quarter end comprised of $553 million in cash with the remainder in MSR line capacity, which is fully collateralized and immediately available.

Important acquisition brought a $700 million of additional capacity secured by home points MSR of which we drew down $385 million to fund the acquisition.

Since last quarter, we have renegotiated our existing MSR lines pushing out substantially all maturities to 2025.

Finally, I'll comment briefly on advances, which declined 8% year over year, despite growth in the portfolio and thats consistent with the excellent delinquency trends I, just mentioned and strong performance from our servicing group.

Jay Bray: Thanks. If you consider our scale, cost advantage, industry leading retention and the depth of our expertise, there's really no one in the industry who can compete with us in servicing.

I'll wrap up my comments on slide 15, with a few thoughts on our strong capital position.

Jay Bray: Now let's move to slide six and talk about where we're going from here. Given the attractive yields available in the bulk market, as well as new subservicing agreements in place, we will exceed our one trillion strategic target in the first quarter of next year. At which point will return to the update to you with a new set of strategic targets and a comprehensive plan to achieve them. For now, I remind you that we have several strategic initiatives underway, many of which are focused on technology investment and cost leadership, both in servicing and originations, as well as winning new subservicing clients.

Our capital ratio increased to 31% as measured by tangible net worth assets. Thanks to strong operating results and the accretion from the <unk> transaction.

We've commented previously that we intend to deploy some of this capital into asset growth.

To provide you with more clarity around the goalposts, we're disclosing a new target capital ratio of 20% to 25%.

We think that range is appropriate because our balance sheet position changes somewhat with interest rates.

So right now our assets are more heavily weighted to MSR, whereas if rates were to rally we would expect a higher balance of loans held for sale.

Jay Bray: In closing, I'd like to highlight, once again, the disconnect between a dominant platform of strong growth prospects and double digit returns and a stock that trades at a discount. If we continue to execute, there should be meaningful upside in both our stock and our high yield notes. And before I turn it over to Chris, let me address something that you know, doubt, notice in the press release.

Looking ahead into 2024, we feel that the company is in great shape to grow the portfolio at the same time to drive and sustain higher levels of return on equity.

We intend to pursue growth through asset light strategy is also which emphasize sub servicing as well as prudent balance sheet growth consistent with our capital and liquidity targets.

We are also monitoring spreads on high yield debt issuance, we started receiving inquiries about potential issuance of high yield bonds and we're definitely considering the option.

Jay Bray: Chris has shared with us his intention to retire by year in 2024. Chris joined us in January 2019 as vice chairman and CFO and quickly enhanced the finance functions, implementing bank-like processes as well as pushing for efficiency gains and deleveraging. This served us extremely well when the pandemic hit year later, being well prepared for adverse scenarios, we were able to substantially expand our liquidity. In 2021, we promoted Chris to president and gave him a mandate to oversee operations where he took our process discipline to the next level, leading to higher profitability across the enterprise and improvements to the customer experience, as well as architecting some new directions within our technology strategy.

But only a spreads fairly reflect our strong credit profile.

In recent conversations with rating agencies and high yield investors, we're getting significant recognition for the Companys progress since we became fully independent in 2018.

These discussions centered around strong capital and liquidity.

<unk> asset quality rising profitability are 75% hedge ratio and of course, our long term track record of growth, which not only validates the competitive advantage of our business model, but leaves us today is the market's number one servicer.

With that I'd like to thank you for listening to our call and I'll turn the call back over to Ken for Q&A.

Jay Bray: Including the investments agent. And as the remaining time with us, Chris will continue to lead operations with a goal of driving continued strong portfolio growth and maternal equity in addition to overseeing the capital raise for our first MSR fund. As I look back on these five years, Chris has brought to Mr Cooper a special kind of energy and intense focus on the needs of our customers, our team members and investors. And a real sense of urgency to deliver it results.

Thanks ill turn into and if you could start the Q&A session. Please.

Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and wait to hear your name announce.

So it's all your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Okay.

Jay Bray: Chris, the improvements you made at Mr Cooper will endure and we know you will continue to make a big impact on the company ahead of your retirement. I'll add that we put in place a process to identify success and while no one can replace Chris, the initial feedback indicates a very high level interest from some exceptionally talented candidates, which shouldn't be a surprise given how well the company is performing.

Our first question comes from the line of Kevin Barker with Piper Sandler Your line is open.

Good morning, Thanks for taking my questions first off Mike Congrats.

Jay Bray: So more on this in due course.

Congrats to Chris and I wish you the best in retirement.

You will be missed.

And then just a follow up on.

Just a follow up on the servicing earnings.

There is quite a bit of momentum, particularly on the top line just given years this shift into more servicing island versus sub servicing.

Chris Marshall: Chris, thanks Jay. I appreciate those comments. And before I start, I'm going to take just a second to share with my teammates how much I appreciate your commitment and your hard work over the past five years. I really couldn't be any more proud of what we've done together for our customers and for the excellent financial results we've produced for our investors. Sanders.

Do you expect.

The pre tax income per UBB.

To remain relatively stable or even increasing as we go into the first half of 'twenty four.

And as it does present quite a bit of a tailwind to the return on tangible equity, which seems like it can drift higher so any color you can provide on the trajectory of servicing pretax margins.

Chris Marshall: You all know Mr. Cooper has been and continues to be a very special experience for me and the capstone to a long career. But I'm not done quite yet. So you should all expect me to continue pushing us to do more and to do it faster until I am done.

Hey, Kevin It's Chris first of all thank you.

The comments, but.

Yes, you should expect.

Our overall profitability to trend marginally higher consistently throughout 24 based on the scale, we are adding the efficiencies we're generating those are going to continue.

Chris Marshall: So with that, let's talk about what we all care about, which is the company's outstanding third quarter results. I'm going to start on slide seven and talk about servicing where regenerated a record three hundred and one million pre-tax operated income this quarter. Now, as Jay just mentioned, this included the one time 67 million from the trust collapse. And I'd also call out 13 million in the boarding fees from a subservicing client that took their portfolio and house, which we called out last quarter.

So there is not a is that going to be a giant step up you should just expect consistent improvement in profitability throughout the year.

Okay and then.

Just given the acquisitions you've made.

And your targeted capital ratios.

You feel that a.

Mid teens run rate on return on equity is achievable.

Chris Marshall: And as you look ahead to the fourth quarter, I remind you that there's some seasonality and net interest income. So I project servicing EBT to be roughly flat quarter of a quarter at 210 to 220 million, after which we should expect to see excellent growth in 2024, or to put this in terms of our prior guidance, the 700 million in servicing EBT. For full year 2023, which as a reminder does not include the gain from the trust collapse, it looks like we'll close out the year with at least 775 million.

By mid of next year, just given the capital you deployed or capital Youre planning to deploy over the next couple of quarters.

Well, Ken is going to kick me under the table if I give you a specific guidance right now, but you should expect our OTC to improve along the same lines I'd point you back to.

A comment with just one example of being able to add 140000 customers without any additional labor expense with that kind of operating efficiency is going to continue through the year, but.

Chris Marshall: Now, as you know, servicing income is affected by interest rates. And we're in the camp of expecting rates to stay higher for longer, which is an ideal environment for servicing. But that's not how we run the company. We're completely agnostic about rates since they're not in our control. And instead we focus on those things, we can control namely process improvement, cost leadership, and operating leverage. We've talked in prior quarters about some of our current efficiency projects, which include driving down call volumes through chat technology, digital tools, enhancements to our IVR, as well as implementing AI for the call center, all of which provide a much better experience for our customers, as well as lower costs for us.

I don't think we're prepared to give specific guidance other than we expect to remain well within our 12% to 20%.

Target for returns recognizing that there is some seasonality in the fourth quarter and the first but as we get through the middle of the year you should see you should see that continue to grow.

Okay, great. Thanks for taking my questions.

Thank you Kevin.

Thank you ladies sandbox <unk> question.

Our next question comes from the line of Bose George with <unk>. Your line is open.

Hey, everyone. Good morning.

Chris Marshall: And we're making outstanding progress with these initiatives. In fact, we've been able to add nearly 140,000 customers year to date without increasing headcount, which I hope you all agree is a very impressive example of positive operating leverage. And you're going to see a lot more of that in 2024.

Wanted to ask first about the target ratio on capital, yes. Thanks for that so just back of the envelope.

That suggests that there is investable capital at something in the range of sort of $700 million on your balance sheet is that a reasonable way of looking at it.

Yes.

Chris Marshall: On a separate note, that we're very pleased with our progress in special servicing. The combination of Rushmore plus Wright Path, which was our existing platform generated EBT of nearly 20 million in the quarter. And if the credit cycle were to turn more adverse, special servicing could become a very meaningful contributor to our bottom line.

Kevin It's Eric.

Hey, Bose it's Curt.

I think.

<unk> that.

Thats.

Okay way of looking at it.

We.

Do need to save some room.

Rates rally in originations grow right and if that's the case then our assets will grow but yes, I think we have we have excess liquidity and.

And we can grow our asset base, we'd be comfortable.

Chris Marshall: Now let's turn to slide eight and talk about portfolio growth, which was very strong this quarter, thanks to the home point acquisition and the other polls we required, which more than offset deboarding the subsurface and client I mentioned. At quarter end, the portfolio reached 937 billion, a 10% year-over-year, which is a very comfortable growth rate for us to manage operationally. And it's a pretty safe bet. We'll grow at least that fast in 2024, given that we already have well over 100 billion dollars of deals scheduled to close and onboard well into the first quarter.

Deploying that.

<unk>.

Maybe not the full $700 million, but.

A fraction of that and we do think that we've got some some deals lined up that will utilize that capital or into the first quarter.

But we do want to say.

We wanted to save some dry powder for breakthrough rally.

I'd just add that we've had a good strong.

Year to date in terms of acquisitions, but between now and the end of the first quarter, we're going to board another $125 billion worth of loans. So we have some deals have already committed to.

Chris Marshall: We continue to see very attractive returns in the bulk market. This reflects the backlog of MSRs retained by originators during the RIFI boom, which they're now under pressure to sell due to very tight margins and limited liquidity. Also, we're starting to see banks bringing MSR pools to market as they prepare for the Basel III endgame regulations. With a limited set of buyers, this applies creating very attractive conditions for the growth. At the same time, we also see great opportunities in subservicing.

Which will eat up some of that liquidity that's right.

I would say the other good news.

The other good news, but on the acquisition front is.

We've had a lot of consistency with sellers I mean, we've been able to because of the boarding process because of our scale because of all the operational capability. We've had sellers that have come back to us repeatedly this year and we would expect that to continue. So we've we've got a lot of opportunity ahead of us.

Chris Marshall: If you stack us up against the competition, there's really no comparison. We're the clear scale leader, and not only do we offer excellent customer service and industry leading recapture. We're also a blue-chipped counterparty with a very strong balance sheet and an extremely compliant function, which is very important for clients seeking to partner with a stable, reliable employee. There's no one on institution.

Okay, Great and Chris the 125 billion you referred to so that $80 billion of that sub servicing you mentioned and then the rest is the rest owned servicing.

That you'll be acquiring yes.

Yes, those are deals we've already signed.

<unk> board some of it in the fourth quarter a lot of it in the first quarter in the first quarter.

Chris Marshall: No one matches our depth of capabilities, and quite frankly, no one even comes close.

Okay, Great and then just in terms of the seasonality of servicing income in the fourth quarter is that mainly the float income taxes and insurance gets paid or.

Chris Marshall: By the way, on this point, I'm delighted to share that we've just signed a new subservicing client and won't begin onboarding their $80 billion portfolio in the first quarter. Later in 2024, our MSR funds should become a source of additional subservicing growth.

Are there other seasonal sort of components as well.

No you're exactly right that's exactly why we see seasonality.

Yes, Okay, yes. Thank you Didnt ask just one more on the <unk> acquisition now that the MSR is on.

Chris Marshall: We're talking with institutional investors about opportunities to achieve double-digit returns from an uncorrelated strategy with very limited exposure to interest rates or macro shocks, and while we're still very early in the process, so far the feedback we've received is very encouraging.

I guess some of the boardings are still not done yet as that happens is it just the.

So to the benefit of your servicing versus the cost of using a sub service or is that sort of the incremental piece from home point that's left.

Yes, the incremental piece from home point right the benefits our kind of our cost.

Chris Marshall: Now let's shift gears to slide nine and talk about originations, where we turned in another outstanding quarter with $29 million in EBT, which is at the high end of our guidance. Our recapture performance remains best in class with refinanced recapture reaching 83% in the quarter, which is nearly four times the industry average. We've also been able to drive and sustain higher purchase recapture following a series of operational enhancements and new marketing campaigns.

Youre right that will probably.

Major oil probably board in the first quarter, but then the other aspect of that right is that as those board our originations will have additional.

<unk> opportunities.

Haven't right now because we will start to know those customers will be able to start to source of those customers a little bit more. So you can see originations start to trend up a little bit in <unk> and <unk> as a result of that.

Okay, great. Thanks, a lot.

Chris Marshall: Now, looking ahead, as you know, fourth quarter is the seasonally weakest quarter of the year with a shorter day count and other distractions of the holidays. And with mortgage rates well above 7%, our customers are more likely to take advantage of second lean products, which is the right solution for them, but it's a smaller margin product. Also, we're seeing pricing pressure return in the correspondent channel due to higher mortgage rates, pressuring originations volumes. So as such, we've got you to a range of 10 to 20 million for fourth quarter.

Yes.

Thank you.

Please standby for our next question.

Our next question comes from the line, Eric Hagen with <unk>. Your line is open.

Hey, Thanks, good morning.

Yes.

Quick one here I mean are you are you projecting any increase in delinquency rates as a result of higher interest rates and mortgage rates and are there any kind of assumptions around the credit environment, which appeared.

And the earnings sensitivity that you have on slide 12.

Chris Marshall: Now if you turn to slide 10, I'll provide an update on zone, which continues to do an excellent job executing and gaining market share. Sales grew 17% sequentially and a unit generated a profit of roughly two million, which is in line with our guidance and a step in the right direction, although nowhere close to zone's ultimate potential.

Hey, Eric it's Curt.

So we.

We are projecting a slight increase in delinquencies from here, we're starting to see.

Not just in our portfolio, but portfolios overall.

A tick up in delinquencies and other consumer products, so primarily auto but student.

Chris Marshall: Looking ahead, we guide you to flat results in the fourth quarter as we'll begin to encourage some expenses associated with continued investment in the platform. As you know, the FHA foreclosure market remains well below what we consider a normal level, and we can't give you an estimate as to precisely when activity will normalize. Nonetheless, we're investing now because we intend for zone to be the dominant competitor in this space, whenever the market normalizes, at which point you'll see its full earnings and monetization potential.

But.

Credit cards are picking up as well.

So we do anticipate a small increase however, our market LTV is 54%.

Good.

It's pretty clear that this time around.

<unk> definitely prioritizing their mortgages. So we indicated that the 2% delinquency rate that we saw in the quarter was about was the lowest that we've ever seen in our portfolio. So while.

Yes, it will tick up slightly and we anticipate it to tick up slightly it probably won't be a material adverse environment for us in 2024.

Chris Marshall: On that point, let me take a step back and comment on the company's overall performance. At this moment, servicing is producing terrific results. Thanks in large part to the investment we made over many years to perfect the platform with innovative technology and a strong process discipline. In contrast, originations and zone are operating well below potential due to where we are in their respective cycles. But you know how well they performed in the past and right now we're investing in these platforms too, just like we did in servicing.

Got it Thats helpful.

From a modeling standpoint, what are the kind of like drivers of conditions, you might look at for selling our financing.

Chris Marshall: When originations and credit cycles turn, I'm confident it will generate spectacular results.

Yes, the excess spread.

Maybe how to think about that benefit to the bottom line and even your cash flow your leverage.

Next year.

Yes, so if.

If you look at kind of the supplement you see that.

We retained was a 225 basis points and that's not because we're paying a bigger.

A big multiple for that is because we are actually retaining a bigger strip.

Kurt Johnson: So with that, I'll now turn it over to Kurt. Thanks, Chris.

So we're looking probably in <unk> III or <unk> to be able to do another access transaction like we did in <unk> of this year.

Kurt Johnson: Good morning. I'll start on slide 11, which gives you a summary of the financials. I'd like to highlight four items. First, let me give you some color on the adjustments. From the home point transaction, we required a burden purchase gain of 96 million and incurred 5 million in deal costs, which together added $1.47 to tangible book value. Obviously, this was stronger than our guidance dollar and accretion reflects a very favorably on the performance of the MSR's we required as well as limited exposure to contingent liabilities after extensive diligence.

Kurt Johnson: Other adjustments include 8 million in deal costs associated with the Roosevelt acquisition and a 39 million loss from equity investments largely tied to retained interest in title 365, which is you may recall. We sold to blend labs in 2021 for 450 million in cash and a 50 million retained interest in the title company with this adjustment that retained interest is now marked down to 3 million on our balance sheet. Second, I comment that with the acquisition of Roosevelt, you should expect corporate expenses to be roughly 2 million higher per quarter, which reflects the cost of our asset management strategy and the team which will be overseeing the MSR fund.

Got it Okay and then just.

Following up on the.

Conversation around capital I mean it.

It sounds like you guys kind of alluded to it but you mentioned youre looking at the high yield market. It sounds like maybe you tap that market just to be opportunistic and.

Just kind of keep a cushion of cash is that am I reading that correctly.

Just kind of what you might access the high yield market for just being clear about that thank you.

Yes, I mean I think.

Exactly that we're certainly looking at kind of where we're trading right now.

We're talking to three agencies, we're gauging the theatrics or high yield to.

Investors, but.

We think doing that.

Paying down some of our MSR lines is sort of a.

It's something we think about pursuing maybe not this quarter, but as we're going into the holidays, but maybe in the first quarter of next year.

Got it that's helpful. Thank you guys.

Thanks Archie.

Thank you.

Please standby for our next question.

Kurt Johnson: That expense will be more than offset by increased revenue once the fund is raised and starts acquiring MSR's. Third, we marked up the MSR on a balance sheet by 254 million, reflecting higher interest rates and lower CPR's leading to a quarter and valuing of 161 basis points of UPB or 5.3 multiple of the base servicing fee strip. This markup was offset by hedge losses of 192 million, which equates to coverage of 76%, completely consistent with our target ratio, which remains at 75%.

Our next question comes from the line of Julianna Bolano with Compass point Your line is open.

Good morning.

Gratulation.

Another great quarter here.

Chris.

Great working with you and I'm looking forward to working with you for the next year.

Let me move on.

At the end of next year.

<unk>.

The one thing I was curious about.

It was when I look at the deals you've done and you've obviously made a lot of acquisitions in a quarter at a ton of lines in the past couple of quarters, you still have a strong pipeline going into <unk>.

Kurt Johnson: Finally, I'd like to update you on our deferred tax asset, which declined by 158 million this quarter and now total is 499 million. The significant decline reflects deferred tax liabilities assumed as part of the home point transaction, as well as strong operating results. When we merged with WMIH in 2018, the DTA totaled a billion dollars and the fact that we've been able to significantly reduce this asset speaks to our thoughtful approach to tax planning, but particularly the company's strong profitability.

I'm curious about your appetite for doing larger deals in the high teens or $100 plus range.

If that's something that we should think Kara.

Happened later in the <unk> range, obviously, it depends on market conditions.

As a good way to think about how you try and scale of things or is there any limitations to how much you'd be bored.

Two or three quarter ends.

Kurt Johnson: Revolve. We estimate the remaining balance will continue to limit our federal cash tax liabilities for at least the next three years, continuing to maximize the cash generated by the company.

Giuliano first of all thank you for the comment and I just remind you 15 months is a long time, so you'll hear a lot from me between now and then.

But that aside we have a very large appetite for very large deals.

Kurt Johnson: Now let's turn to slide 12. I'd like to comment further on our balance business model because it's a term that many of our peers use, despite reporting much less stable results than us. This slide provides you with our view on the relatively narrow range of returns on equity that we would have generated using three key results as a baseline, even if mortgage rates have been 100 basis points higher or lower than what actually occurred.

Where the buyer of choice in the industry.

One of only a few buyers that could even operationally take on those large pools.

So we've been preparing for this for a couple of years and now as Basel III end game in place, we think a number of larger banks regional banks will begin, bringing some large pools to market. So we're expecting to see that happen. We're prepared for it we have the liquidity lined up we're going to be.

Kurt Johnson: Starting in the center of the table, we anchor the analysis on actual third quarter results where mortgage rates average 7.2 percent and our CPR speeds were 5.6 percent. The left hand side shows hypothetical scenario with mortgage rates 100 basis points lower and CPR's 90 basis points higher. In this scenario, servicing staffers from higher averageization expense. However, this pressure is mostly offset by originations, resulting in overall ROTC of 13.2 percent, slightly lower than what we actually reported in the quarter, but still quite healthy in within our target range.

Raising.

Fund to take advantage of those returns as well. So I think you should assume our appetite is very strong probably the strongest in the industry.

But we're well prepared for it.

And we have the capability, obviously, you've seen consistently we are buying.

$5 million to $20 million pools, as we speak obviously home point was 80 billion. The sub servicing we announced that we just won is $80 billion and to Chris' point and ours were starting to have strategic conversations with some large entities that.

Kurt Johnson: Conversely, if rates had risen 100 basis points, we estimate CPR's would have only been down 30 bets, leading to stronger servicing income and additional compression and originations profits, resulting in overall ROTC of 13.0 percent. The simple high level example shows how originations and servicing naturally offset each other, leading to relatively stable results for companies that have the right balance between the two.

Could really result in a significant size and fully prepared to take those on.

Yes.

Christmas point also we're probably the only counterparty that can really move that kind of size.

Kurt Johnson: Now, if you'll turn to slide 13, let's talk about another aspect of our balanced business model, namely the company's resilience to adverse credit environments. We've carefully constructed our MSR portfolio. You can see this quality in our 60-day delinquencies, which continued to decline during the third quarter, on an overall basis and in each loan category, with our MSR portfolio showing the lowest delinquency levels in our history as a public company. I would also point you to weighted average bike scores, which have been rising nearly every quarter for the past three years, and to our loan-to-value ratio, which remained 54 percent in the third quarter.

Your question about operational limitations, yes, there is some but we've got an outstanding platform J Jones who's our leader over there running.

Running servicing has on boarded some massive massive amount of.

Loans in the last two years so.

I think we've proven we can do it we have developed a lot of proprietary technology that allows us to do that much more seamlessly than anyone was able to do in the past. So there is a limitation, but we space out certain boardings to avoid ever tripping that and I think we can buy lots of volume next year without in any way.

Kurt Johnson: This speaks to the very substantial equity of our customers. Not only is our portfolio quite solid, we're also well positioned for more adverse environments by virtue of Rushmore, our special servicing operation, which, as Chris said, is already generating nearly 20 million per quarter in EBT. Now, in a stressed environment, Rushmore would play a very important role, working with trouble borrowers to help them stay in their homes. Needless to say, this would also be a huge service to our clients, and there could be substantial upside in Rushmore's volumes, not to mention a larger contribution from zone.

Cause come even close to what our limitations are.

That's great.

Thanks.

The next thing.

So I'm just.

Taking on versa.

When I think about the originations.

Sorry about farm gradually bring on a lot more you could again that should translate into more opportunities.

To originate.

It seems like theres going to be a quarter to have home plant up and running.

Good way to think of it and then I realized we're probably not at.

At the troffer, probably close to the trough from where volumes or is that volumes will probably go should we think about that in more of a linear way as <unk> grows over the next.

Kurt Johnson: Now, let's turn to slide 14 and review liquidity.

Kurt Johnson: As you know, balance sheet strength is a cornerstone of our strategy, which incorporates capital and liquidity planning, asset quality, compliance, and enterprise risk management. So, let's dive into liquidity, where we had a record level of 2.7 billion a quarter end, comprised of 553 million in cash, with a remainder in MSR line capacity, which is fully collateralized and immediately available. The home point acquisition brought a 700 million of additional capacity secured by home points MSR, of which we drew down 385 million to find the acquisition.

Two quarters in terms of where urgency to go or is there any other optionality.

Is that Youre looking at it exactly right a lot of the portfolio is I'd say, probably half of them have not really been solicited.

In the last couple of years. So we would expect to have marginally higher opportunity. There of course rates are higher were at the trough for originations, but was more portfolio. We have more at bats. So you should see originations do a little bit better.

Kurt Johnson: Since last quarter, we have renegotiated our existing MSR lines, pushing out substantially all maturities to 2025. Finally, I'll comment briefly on advances, which declined a percent year over year despite growth in the portfolio. Now, that's consistent with the excellent delinquency trends I just mentioned and strong performance from our servicing group.

The second thing I mentioned on originations were making some very large investments in originations right now even though we are at the trough, we are preparing to be much more efficient and to be able to ramp much more quickly when the cycle does turn the other way just like we did with servicing back in 2019 and 2020.

So we're seeing the benefit of that now will eventually see the benefit later.

Kurt Johnson: I'll wrap up my comment on slide 15 with a few thoughts on our strong capital position. Our capital ratio increased to 31% as measured by tangible net worth asset thanks to strong operating results and the accretion from the home point transaction. We've commented previously that we intended to play some of this capital into asset growth. To provide you with more clarity around the goalposts, we're disclosing a new target capital ratio of 20 to 25%.

But in the near term, we should see incrementally higher opportunity in originations.

That's great.

And Chris.

Alright him and look forward to working with you for the next 15 months.

Good runway there.

Okay. Thank you.

Thank you.

Please standby for our next question.

Kurt Johnson: We think that range is appropriate because our balance position changes somewhat with interest rates. So right now our assets are more heavily weighted MSRs, whereas rates were growing rally, we would expect a higher balance of loans help for sale.

Our next question comes from the line of Kyle Joseph with Jefferies. Your line is open.

Hey, good morning, Thanks for taking my questions.

Just try and touch on the on the MSR fund any IEA for offensive.

Kurt Johnson: Looking ahead into 2024, we feel that the company is in great shape to grow the portfolio and same time drive and sustain higher levels of return on equity. We intend to proceed growth through asset life strategies also, which emphasize subservicing, as well as prudent balance sheet growth consistent with our capital and liquidity targets. We are also monitoring spreads on high yield debt issuance. We started receiving inquiries about potential issuance of high yield bonds and we're definitely considering the option, but only a spread fairly reflect our strong credit profile.

Targeted assets under management and fee.

<unk> and then how that will fluctuate.

Alex it's up and running.

I appreciate the call Cal we have.

High hopes for our first fund.

We're targeting a $1 billion fund but.

We've gotten some very positive feedback, but we are in the very late in the first inning.

So we hope to close that first fund by the end of the first quarter.

Kurt Johnson: In recent conversations with rating agencies and high yield investors were getting significant recognition for the company's progress since we became fully independent in 2018. These discussions center around strong capital and liquidity, excellent asset quality, rising profitability, or 75% hedge ratio, and of course our long-term track record of growth, which not only validates the competitive advantage of our business model, but leaves us today as the markets number one servicer.

And then start to put that money to work in the second quarter, probably really hit our stride in the third but as you know and as you.

Im sure you know and as I've experienced many many times in the past things.

<unk> seen great Youll get out and start making calls and its a long process. So I'd rather as we tell you a little bit more.

Specifically in terms of details and timelines as we progress through the fourth quarter or maybe the beginning of the first quarter, but that's our target.

Operator: With that, I'd like to thank you for listening to our call, and I'll turn the call back over to Canada for Q&A. Thanks, Kurt, and to wonder if you could start the Q&A session, please. Thank you. Ladies and gentlemen, as a reminder to ask the question, please press start 1-1 on your telephone, and then wait to hear your name and out. So withdraw your question, please press start 1-1 again. Please stand by while we compile the Q&A roster.

Got it that's totally fair and then just one follow up for me I think you mentioned youre seeing some margin compression in the.

Our correspondent channel that just a function of rate movements or just give us an update on the.

The competitive dynamics in that channel.

I think they are both linked.

Higher rates means lower volume across the country and you've got all of the correspondent focused companies competing for that smaller amount of volume. So there's naturally going to be more pricing pressure.

And I think youll see that as long as great stay high in volume are low.

Kevin Barker: Our first question comes from the line of Cabin Walker with Piper Sandler. Your line is open. Morning, thanks for taking my questions.

But that's the only that's the only reason that we see causing the compression.

Chris Marshall: First off, let's say I'm right to Chris and wish you the best in retirement. You will be missed. And then just to follow up on the servicing earnings, there's quite a bit of momentum, particularly on the top line. Just giving you the shift into more servicing on versus subservicing. Do you expect the pre-tax income per UPB to remain relatively stable or even increasing as we go into the first half of 24? Those present quite a bit of tailwind to the return on tangible equity, which seems like it can drift higher. So any color you can provide on the trajectory of servicing pre-tax margins.

And the only thing I'd add to that is I want to say, we're indifferent to it but as we've told you guys. Many times.

We deploy our capital where the highest returns are and clearly right now we're seeing the highest returns in the bulk market.

We're achieving.

Mid teen Unlevered returns in that market. We think that's going to continue we also play in the co issue market, we see similar returns there.

So while the margins have compressed we will continue to be a player, but we're going to allocate our capital where the highest returns are and we're extremely bullish on the bulk market.

Chris Marshall: Hey, Kevin, it's Chris. First of all, thank you for the comments. But yeah, you should expect our overall profitability to turn marginally higher consistently throughout 24 base on the scale we're adding. The efficiencies we're generating that, you know, those are going to continue. So there's not a, is that going to be a giant step up? You should just expect consistent improvement in profitability throughout the year.

Got it thanks very much for answering my questions.

Okay. Thank you Scott.

Thank you.

As a reminder, ladies and gentlemen that star one to ask a question.

Please standby for our next question.

Thank you next question comes from the line of Brian <unk> with Wedbush Securities. Your line is open.

Hey, Thanks for taking my question Congrats on a good quarter just one quick one from me related to the earlier credit question.

Chris Marshall: Okay, and then just given the acquisitions you've made and your targeted capital ratios, do you feel that a, you know, mid teens run rate on return equity is achievable? You know, by middle next year, just given the capital you've deployed or capital you're planning to deploy over the next couple of quarters? Well, Ken's going to kick me under the table if I give you specific guidance right now, but you should expect our ROTC to improve along the same lines.

Strong delinquency performance, so far but there wasn't a sequential increase in modifications and workout. So I was just wondering is that related to home point in the Roosevelt coming on or is there. Some other sort of increase in the organic portfolio.

Any commentary there and I guess, how do you see those trending.

In the near term.

Yes, it's Kurt Thanks for the question.

We're actually not really seeing it from home point, where we're seeing it is in our Ginnie Mae portfolio, and particularly our FHA portfolio.

Chris Marshall: I have points you back to a comment with just one example of being able to add 140,000 customers without any additional labor expense. We that kind of operate efficiency is going to continue through the year, but I don't think we're prepared to give specific guidance other than we expect to remain well within our 12 to 20% target for returns. Recognizing that there's some seasonality in the fourth quarter in the first, but as we get through the middle of the year, you should see, you know, you should see that continue to grow.

<unk> rolled out.

Not a new program and expansion of eligibility.

In the early part of the year and it was really well received by our customers and we were able as a result of that to take the delinquencies down from FHA. It also drove part.

Part of our ancillary income increase as well as FHA pays a success fee for those modifications, but you can see I think I'm on page.

15 of the presentation, our FHA delinquencies, how much of that come down and they are in fact crossover via the USDA.

Kevin Barker: And great, thanks for taking my questions. Thank you.

Lower than that.

Bose George: Please stand by for our next question. Our next question comes from the line of both George with KBW. Your line is open.

USDA portfolio, but that's primarily where the delinquencies come down.

Just really just due to the new program.

The new program.

Okay, great. Thank you.

Thank you.

Bose George: Everyone, good morning. What I just asked about the, you know, the target ratio and capital, you know, thanks for that. So just back at the envelope that suggests that there's investible capital of something in the range of sort of 700 million on your balance sheet. Is that reasonably of looking at it? Yeah, I mean, Kevin, it's sorry, I suppose it's, it's correct. I think, I think that that's a, an okay way of looking at it.

I'm showing no further questions in the queue I would now like to turn the call back over to Jay for closing remarks.

Alright, Thank you everybody for joining us and we look forward to continued conversations have a great day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

Bose George: Look, we do need to save some room. If rates rally and originations grow, right? And if that's the case, then our assets will grow. But yes, I think we have, you know, we have access liquidity. And we can grow our asset base. We'd be comfortable to deploying that growing, maybe not the full 700 million, but you know, a fraction of that. And we do think that we've got some, some deals lined up that will utilize that capital into the first quarter.

Okay.

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Bose George: So we do want to save, you know, we want to save some time powder for our efforts to rally. Yeah, I just had that we've had a good strong year to date in terms of acquisitions, but between now and the end of the first quarter, we're going to board another 125 billion dollars worth of loans. So we have some deals have already committed to, which will eat up some of that liquidity.

Yes.

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Bose George: That's right. That's like the other good news, but on the acquisition front is we've had a lot of consistency with sellers and we've been able to, because of the boarding process, because of our scale, because of all the operational capability, we've had sellers that have come back to us repeatedly this year and we would expect that to continue. So we've, we've got a lot of opportunity ahead of us.

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Bose George: Okay, great. And Chris, the 125 billion you referred to, so that's 80 billion of the subservicing you mentioned, and then the rest is, is that the rest owned servicing that you'll be more acquiring. Yeah, those are deals we've already signed, but we'll board some of it in the fourth quarter, a lot of it in the first quarter in the first quarter. Okay, great.

Bose George: And then just in terms of the seasonality of servicing income in the fourth quarter, is that mainly the float income just as the taxes and insurance gets paid or are there other seasonal sort of components as well. No, you're exactly right. That's exactly why we see seasonality. Okay, actually, just one more on the home point acquisition now that the MSR is on as, and I guess some of the boardings are still not done yet, as that happens, is it just the, you know, sort of the benefit of your servicing versus the cost of using a subservicer is that sort of the incremental piece from home point that's left.

Bose George: Yes, the incremental piece from home point, right, the benefits are kind of our cost, you're right, that will probably the remainder will probably warden the first quarter, but then the other aspect of that right is that as those board are originations will have additional opportunities that they haven't right now, because we will start to know those customers will be able to start to solicit those customers a little bit more. So you can see your origination starts to turn up a little bit and two Q and three Q as a result of that.

Bose George: Okay, great. Thanks a lot.

Operator: Thank you.

Eric Hagen: Will you stand by for our next question? Our next question comes from the line of Erghaegen with BTIG. Yalan is open. Hi, thanks. How are we doing? Good morning.

Kurt Johnson: I mean, are you are you projecting any increase in delinquency rates as a result of higher interest rates and mortgage rates? And are there any kind of assumptions around the credit environment, which, you know, appear in the earning sensitivity that you have on, I think it's slide 12. Hey, Erghaegen, so we are projecting a slight increase in delinquencies from here. We're starting to see not just in our portfolio, but portfolio is overall a take up in delinquencies in other consumer products.

Kurt Johnson: So primarily auto, but student, but credit cards are taking up as well. So we do anticipate a small increase however our market LTB is 54% and, you know, it's pretty clear that this time around consumers are definitely prioritizing their mortgages. So we indicated that the 2% delinquency rate that we saw at the end of the quarter was about the lowest that we've ever seen in our portfolio. So while, you know, yes, it will take up slightly and we anticipate to take up slightly, it probably won't be a material adverse environment for us in 2024. Yeah, got it, that's helpful.

Kurt Johnson: You know, from a modeling standpoint, you know, what are the kind of like drivers or conditions you might look at for, you know, selling or financing, you know, you know, the access spread, you know, maybe how to think about that benefit to the bottom line and even your, you know, your cash flow and your leverage into the next year. Yeah, and so if you look at kind of the supplement, you see that, you know, we, we, the retained was a 225 basis points, and that's not because we're paying a big, a big multiple for that.

Kurt Johnson: It's because we are actually retaining a bigger strip. So we're looking probably in two, three or three, or three to be able to do another access transaction, like we did in two queue this year. Got it. Okay.

Kurt Johnson: And then just, you know, falling up on the conversation around capital. I mean, it sounds like you guys kind of alluded to it, but you mentioned you're looking at the high yield market. It sounds like, you know, maybe you'd tap that market just to be opportunistic and kind of keep a cushion of cash. Is that, are we reading that correctly? And, you know, just kind of what you might access the high yield market for just being clear about that.

Kurt Johnson: Thank you. Yeah, I mean, I think exactly that were, were certainly looking at kind of where we're trading right now. We're talking to the agencies were engaging the interest of high yield investors, but we think doing that and paying down some of our MSR lines is sort of a, it's something we think about pursuing. Maybe not this quarter, but we're going into the holidays, but maybe in first quarter of next year. Got it. That's helpful. Thank you, guys. Thank you.

Julianna Belano: Please stand by for our next question. Our next question comes from the line of Julianna Belano with compass point. The line is open.

Chris Marshall: Good morning. Congratulations on the another right quarter here. And Chris. Great working with you, and I'm looking forward to working with you for the next year. When you move on from, yeah, at the end of next year. The one thing I was curious about was when I look at the deals you've done, you've obviously made a lot of acquisitions and quartered a ton of loans. In the past couple quarters, you still have a strong pipeline going into one queue.

Chris Marshall: I'm curious about your appetite for doing larger deals, you know, in the high tens or, you know, 100 billion plus range. And if that, you know, if that's something that we should think, you know, would happen a little later in the two key three three range, obviously depends on more conditions. Is that a good way to think about, you know, how you try and scale things or is there any limitations to how much you can board in a two or three quarter range.

Chris Marshall: You know, there's Julian. First of all, thank you for the comment and I just remind you, you know, 15 months is a long time. So you'll hear a lot from me between now and then. But that aside, we have a very large appetite for very large deals. And we're the buyer of choice in the industry where one of only a few buyers that could even operationally take on those large polls. And so we've been preparing for this for a couple of years.

Chris Marshall: And now with Basel three end game in place, we think a number of larger banks, regional banks will begin bringing some large polls to market. So we're we're expecting to see that happen. We're prepared for it. We have the liquidity lined up. We're going to be raising a fund to take advantage of those returns as well. So I think you should assume our appetite is very strong and probably the strongest in the industry, but we're well prepared for it.

Chris Marshall: and we have the capability obviously seen consistently we're buying you know five to twenty billion dollar pools as we speak obviously home point was you know eighty billion the subservicing we announced that we just won is eighty billion and the crisis point you know we're we're starting to have strategic conversations with some you know large entities that could really result in significant size and fully prepared to take those on and I think you know we're to Chris's point also where they probably the only counterparting that can really move that kind of size and you're question about operational limitations yeah there's some but you know we've got an outstanding platform Jay Jones who's our leader over there running servicing has onboarded some massive massive amount of loans in the last two years so I think we prove and we can do it we developed a lot of proprietary technology that allows us to do that much more seamlessly than anyone was able to do in the past so there is a limitation but we space out certain boardings to avoid ever tripping that and I think we can buy lots of volume next year without in any way causes you know coming even close to what our limitations are that's great and thanks to that the the next thing that I was just you know picking on for a second was what when I think about the originations so platform you're obviously bring on a lot more you begin that's your friends with more opportunities to originate you know it seems like there's going to be quarter to the way to have home point up and running but is that is a good way to think of it and you know every other probably you know if you're not at the trough or by close to the trough from where you know volumes original volumes will probably go so we think about that in more linear way as you could be grows over the next yeah cheek quarters in terms of where originally you could go or is there any other optionality there that you're looking at exactly right a lot of the portfolios I'd say probably half of them have not really been solicited in the last couple of years so we would expect to have marginally higher opportunity there of course rates are higher we're at the trough for originations but with more portfolio we have more at that so you should see originations do a little bit better the second thing I mentioned on originations we're making some very large investments in originations right now even though we are at the trough we are preparing to be much more efficient and to be able to ramp much more quickly when the cycle does turn the other way just like we did with servicing back in 2019 and 2020 so we're seeing the benefit now we'll eventually see the benefit later but in the near term we should see incrementally higher opportunity and originations that's great thank you so much and Chris you're right I'm looking I'm looking forward to working with you for the next 15 months so you're still a good runway there thank you thank you please stand by for our next question Our next question comes from the line of Kyle Joseph with Jeffries.

Kyle Joseph: Yaline is open. Hey, good morning. Thanks for taking my questions. Just wanted to touch on the MSR fund. Any idea for the sense of target assets under management and the fee structure and then how that will flow through the P&L once it's up and running? I appreciate the call, Kyle. We have high hopes for our first fund. We're targeting a billion dollar fund, but and we've gotten some very positive feedback, but we are in the very we're in the first inning.

Kyle Joseph: So we hope to close that first fund by the end of the first quarter. And then start to put that money to work in second quarter, probably really hit our stride in the third. But as you know, and as you I'm sure you know, and as I've experienced many, many times in the past, things seem great. You get out and start making calls and it's a long process. So I'd rather us we tell you a little bit more specifically in terms of details and timelines as we progress through the fourth quarter.

Kyle Joseph: Or maybe the beginning of the first quarter, but that's our target. Got it. That's totally fair. And then just one follow up for me. I think you mentioned you've seen some margin compression in the the correspondent channel. That's just a function of rate movements or just give us an update on the competitive dynamics in that channel. I think they're both linked, you know, there was higher rates means lower volume across the country.

Kyle Joseph: And you've got all the correspondent focused companies competing for that smaller amount of volume. So it's actually going to be more pricing pressure. And I think you'll see that as long as rates pay high and volume are low. But that's the only that's the only reason that we see causing the compression. And the only thing I added that is I want to say we're indifferent to it. But as we've told you guys many times, you know, we deploy our capital where the highest returns are.

Kyle Joseph: And clearly right now we're seeing the highest returns in the bulk market. We're achieving, you know, 15 unlearned returns in that market. We think that's going to continue. We also play in the co-issue market. We see similar returns there. And so, you know, while the margins have compressed, we'll continue to be a player. But we're going to allocate our capital where the highest returns are. And we're extremely bullish on the bulk market. Yeah, thanks very much for answering my questions.

Chris Marshall: Thank you.

Operator: As a reminder, ladies and gentlemen, that start one one to ask the question.

Operator: Please stand by for our next question.

Brian Violino: Next question comes from the line of Ryan Violino with wet bush securities. The line is open. Hey, thanks for taking my question.

Kurt Johnson: Congrats on your quarter. Just one quick one from a related to the earlier, quote, credit question, and strong delinquency performance so far. But there was a sequential increase in modifications and workouts. I was just wondering, is that related to home point and the Roosevelt coming on, or is there some other sort of increase in the organic portfolio? Any commentary there? And I guess how do you see those trending in the near term?

Kurt Johnson: Yeah, it's Kurt. Thanks for a question. We're actually not really seeing it from home point where we're seeing it. Is that our Jenny May portfolio? In particular, our FHA portfolio, FHA rolled out a, not a new program but an expansion of eligibility in the early part of the year. And it was really well received by our customers. And we were able as a result of that to take the delinquencies down from FHA.

Kurt Johnson: It also drove part of our ancillary income increase as well. As FHA pays a success fee for those modifications, but you can see, I think on page, I want to say 15 of the presentation, our FHA delinquencies how much they've come down and they've been fact crossed over VA USDA and are lower than the VA USDA but portfolio, but that's primarily where the delinquencies come down. It's really just due to the new program, right? It's a real new program. Yeah. Okay, great.

Operator: Thank you. I'm trying to further questions in the queue.

Jay Bray: I would now like to turn the call back over to Jay for closing remarks. Thank you everybody for joining us and we look forward to continued conversation.

Jay Bray: Have a great day. Thank you.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Operator: You may now disconnect.