Q3 2023 Ocwen Financial Corp Earnings Call
Good morning, ladies and gentlemen, and welcome come to the Ocwen Financial Corporation third quarter earnings and business update conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time during this call you require immediate.
Assistance, Please press star zero for the operator.
This call is being recorded on Tuesday November 7th 2020 feet.
I would now like to turn the conference over to Mr. Decaux Axa real Yang Senior Vice President Corporate Communications. Please go ahead Sir.
Good morning, and thank you for joining us for Ocwen third quarter 2023 earnings call. Please note that our earnings release and slide presentation are available on our website.
Speaking on the call the office Chair and Chief Executive Officer, Glen Messina, and Chief Financial Officer, Shaun O'neil.
Kinder the presentation and 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.
Should bear this uncertainty in mind, you 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 different materially from those suggested by forward looking statements and this may happen again.
In addition, the presentation of 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 a 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.
Yes.
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 used in this presentation to their most directly comparable GAAP measures as well as management's view of why these measures may be useful to investors may be found in the press release in the appendix.
The Investor presentation, now I will turn the call over to Glen Messina.
Good morning, and thanks for joining our call today, we will review a few highlights for the third quarter and take you through our actions to address the market environment and deliver long term value for our shareholders now please turn to slide three.
I am excited to report our third quarter results, which reflect continued progress against our key initiatives and the benefits of our balanced and diversified business.
Adjusted pre tax income for the third quarter of $10 million was primarily driven by our servicing segment, both originations and servicing were profitable in the quarter.
Adjusted pre tax income for the quarter has improved materially versus the same quarter last year and slightly better than the second quarter, excluding the reverse whole loan transaction gains realized during that quarter.
Our third quarter results achieved a 9% annualized adjusted pre tax return on equity.
Net income of $8 million or $1 10 per share is above consensus, but lower than the second quarter again, largely driven by the reverse whole loan transaction gain reported into Q.
Notable items for the quarter were roughly zero, largely resulting from our increased hedge coverage ratio and our market based MSR evaluation and benchmarking process.
In the third quarter total servicing <unk> was up 2% versus the second quarter and up 5% versus the prior year driven by growth in sub servicing <unk>.
Sub servicing U P b with MSR capital partners and mortgage banking clients increased 6% versus the second quarter and 10% versus prior year.
We're pleased to report that we and Oaktree have mutually agreed to extend the commitment period for math through may of 2025 in.
In addition, we and rhythm have mutually agreed to extend our sub servicing agreement through December of 2024.
We greatly appreciate our relationships with Oaktree and rhythm and the confidence they have placed in US we would take their trust seriously and are committed to helping them achieve their objectives.
We continue to focus on enterprise wide cost management.
Third quarter annualized operating expenses, excluding expense notables are materially lower than our second quarter 'twenty to baseline and lower than the second quarter 2023.
During the third quarter, we opportunistically repurchased $14 million of our PHH notes at attractive prices and are prioritizing continued corporate debt reduction as excess liquidity is available.
Total liquidity of $194 million is down versus the prior year and due to the allocation of capital to reduce our corporate debt and the higher liquidity demands of our increased hedge coverage.
We're very pleased with our results this quarter the business is performing in line with our adjusted pre tax return on equity guidance.
Executing well against our key initiatives and we believe we're on track to achieve our return objectives for the remainder of 2023 and 2024.
Please turn to slide four.
The execution of our strategy and key business initiatives have helped us to reposition the business to operate profitably in the current industry environment.
While the origination environment remains challenging it's a favorable environment for servicing and we expect the current industry dynamics to persist for the foreseeable future.
We have continuously improved adjusted pretax income over the past five quarters.
The business is delivering financial performance in line with our ROE guidance without relying on a material income contribution from our origination segment.
Looking forward to the balance of 2023 and 2024, our financial objectives start with sustaining the financial and operating performance improvements we've achieved to date.
This will require a continued focus on cost improvement disciplined MSR investing and maintaining a prudent risk and compliance management approach, which we have demonstrated our core competencies for us.
Next we're focused on increasing return on equity and we have three levers to do this.
First by growing our sub servicing portfolio, while we hold our owned MSR <unk> in the $115 billion to $135 billion range.
We're laser focused on converting our sub servicing opportunity pipeline and working with our MSR capital partners to fund new originations and win bulk purchase opportunities.
Second as our excess liquidity permits we expect to continue to delever the business through opportunistic debt repurchases to further improve ROE as well as decrease enterprise risk and reduce volatility.
Third we believe we can further enhance ROE by improving the profitability of our legacy owned Msr's.
Roughly $18 billion or 14% of our owned MSR <unk> is comprised of pre crisis subprime and Ginnie Mae loans originated prior to 2015.
This portfolio segment has a total delinquency of over 15% and is not delivering returns consistent with our target levels.
Lastly, we are continuously scanning the market to identify and capitalize on market cycle asset opportunities that match, our unique skill sets.
This includes positioning for distressed asset transactions as well as special and commercial sub servicing transaction and disruption, resulting from consolidation and other areas, where we have expertise.
As always we remain flexible and committed to considering all options in this dynamic market to maximize value for shareholders.
We're pleased with the performance improvements, we've driven and are committed to executing on our financial objectives to further deliver value for our shareholders.
Please turn to slide five.
Our balanced and diversified business offers several benefits in the current market cycle.
We are first and foremost our servicer and our servicing business enables us to navigate current market conditions from a position of strength.
Our servicing business is delivering strong earnings and cash flow performance driven by slow MSR runoff higher float earnings and continuous cost improvement.
Despite current market conditions, our originations business serves well its purpose to replenish our owned MSR portfolio as well as drive growth in sub servicing.
Our diverse capabilities and commercial and reverse sub servicing and within those niches strong default management and loss mitigation capability is giving rise to unique earnings opportunities to invest in distressed assets.
In the second quarter, our purchase and securitization of reverse whole loans was enabled by our special servicing skills and reverse mortgages.
This same expertise is also driving cash flow performance in these assets well above projected levels.
We've also been.
Able to carefully grow performing and delinquent small balanced commercial loans sub servicing over the past two years we.
We are optimistic about the potential growth in this higher margin sub servicing niche.
We are seeing increased opportunities in these areas and remain focused on acting on high return transactions, where we can add value to investors clients and consumers.
Lastly, we believe our diversified servicing portfolio with a growing mix of sub servicing helps mitigate business risk in the event of a recession.
Over 85% of our servicing portfolio is sub servicing and GSE owned MSR with a materially lower exposure to advances in the event of a recession as compared to Pls and Ginnie Mae on servicing.
Now please turn to slide six.
We remain focused on driving organic growth in our higher margin origination channels and products as well as growing some servicing.
In the third quarter, our mix of originations volume from higher margin channels and products increased 21 percentage points versus prior year.
We increased volume from our higher margin channels and products by 50% on a sequential quarter basis. However mix was down two percentage points due to an overall increase in total originations volume.
Our enterprise sales team delivered strong growth versus the second quarter and both owned MSR and sub servicing.
However, total servicing additions were down roughly 10% versus the prior year due to the contraction in total industry originations volume.
Sub servicing additions.
And sub servicing retained MSR sales to capital partners, a $15 billion for the third quarter was up 50% versus the second quarter and more than double prior year levels.
Our sub servicing growth with mortgage banking clients and our MSR capital partners has allowed us to significantly grow our sub servicing business more than offsetting runoff and the rhythm sub servicing portfolio.
Our sub servicing portfolio, excluding rhythm is up 9% on a sequential quarter basis, and up 20% versus the third quarter of last year.
We reported $111 billion and sub servicing additions in the last 24 months, including over $8 billion in sub servicing additions in the third quarter.
While interest remained strong we continue to see potential sub servicing clients extend RFP processes and decision, making or selling msr's due to the difficult originations market.
Our MSR capital partner relationships can be helpful. In these situations.
We can bid on msr's with a capital partner, giving us the ability to retain the business or win incremental sub servicing if our capital partner wins the MSR bid.
This is an optionality that several of our more traditional sub servicing competitors do not have.
Considering the client environment, we're targeting roughly 15% to 25 billion in new sub servicing additions through the second quarter of 2024.
Based on expected sub servicing additions, we expect our mix of sub servicing to increase to approximately 60% over the next two quarters with total servicing <unk> in the range of $305 to $315 billion.
Please turn to slide seven.
Our servicing platform continues to deliver industry top tier operational performance, while maintaining a highly competitive cost structure.
Our breadth of capabilities is unmatched in the industry and we've been recognized by Fannie Mae Freddie Mac and HUD for delivering industry, leading operating performance for investors.
We have also been named 2023 affiliated company of the year by the National Association of mortgage brokers for our expertise and reverse mortgages.
Across numerous numerous servicing metrics, we deliver superior performance versus other servicers.
In previous quarters, we spoke about the improvement in customer experience, we've delivered for clients our ability to cure 60, plus day delinquencies are superior HUD assignment claims performance and our ability to maximize Oreo sales price versus appraise value, while selling properties within the timeframe allowed by HUD.
Here again, you can see we also consistently achieve lower delinquency levels compared to the industry average as reported by inside mortgage finance.
In addition, since the fourth quarter of 2020 more of our borrowers have exited forbearance, either as current painful or with an active loss mitigation plan than the industry average as reported by the MBA.
Our focus on continuous cost improvement has positioned us with a highly competitive cost structure, even when measured against competitors over twice our size.
Based on the results of the Nba's annual servicing operation study for 2022 are fully loaded forward residential servicing cost and basis points of view, PB or 27% lower than our large bank peers and on par with our large independent mortgage banking peers.
The large independent mortgage banking peer group includes three of the industry's largest servicers and two of the industry's largest pure play sub Servicers. This group has an average forward residential servicing E&P base more than twice our size.
Moreover, our servicing cost and basis points of view PB or inflated relative to large servicer peers due to our relative high concentration of pls servicing.
If we compare our cost per loan for performing and nonperforming loans versus this group were materially lower in every comparison.
Our cost competitiveness does not rely upon sheer size and scale. It comes from continuous process improvement strategic investments in technology.
And our global operating capability.
With roughly 30% of our cost structure servicing cost structure fixed or semi variable. We believe we can further improve efficiency as we grow our total servicing UBB.
I believe this along with the other metrics I discussed demonstrate that we are one of the strongest operators in the industry.
Please turn to slide eight.
While we are delivering improved efficiency were also delivering improved borrower and client experience.
While our net promoter scores were up six percentage points over last year and sub servicing client net promoter scores are up 18 percentage points.
Over the last several years, we've continued to invest in client and bar facing technology and automation to improve the customer experience by reducing cycle time, enhancing access to information, enabling 24, seven assistance and reducing process variation.
We're using multiple digital interface channels, such as our chat box and mobile app and additional enabling technologies like robotic process automation.
Our AI powered Chatbot has hosted 800000 sessions with an 80% success rate.
Our mobile App has over 100000 logins per month, and we have 26 spot supporting 156 processes with eight new box under development.
These technologies work together to improve access speed accuracy and responsiveness, while enabling further productivity as we scale up our platform.
To support our sub servicing clients, we have a robust and holistic infrastructure with 40 individuals dedicated to addressing client needs.
This team has an average tenure in the industry of 20 years and response to over 4000 client inquiries per year, most of which are addressed in less than 24 hours.
We've invested in technology to build our loan spanned discovery platform to provide transparency to clients about their portfolio and our operational performance as well as enable self service data mining for clients.
We're committed to investing in people process and technology to deliver a superior experience to both borrowers and clients.
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.
The most successful of these relationships is our joint venture with math, which is purchased $78 billion of MSR <unk> since the exception.
As I previously mentioned, we in Oaktree have mutually agreed to extend the investment period for Nab to May of 2025, and we have capacity to support 20% to 25 billion in.
In additional servicing acquisitions.
Over the past two years, we've grown total servicing APB supported by capital partners to 89 billion.
Using a variety of transaction structures over.
Over the last 12 months, we have leveraged active relationships with four capital partners to nearly double our <unk> funded.
All our capital partners have long term conviction about owning msr's nearly all of them currently have individually more capacity for investment in that.
With multiple investors, we can fund MSR perks through either our originations channels or the bulk market dependent on partner requirements.
Our investor driven approach to MSR purchases enhances our ability to generate capital light growth and helps manage our exposure to MSR valuation changes due to interest rates as well as introduces an added level of price discipline for the originations business.
Looking ahead, we're focused on developing additional investor relationships and evaluating a diverse range of potential structures to support our growth and scale objectives across multiple asset types.
I want to thank Oaktree and our other 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 third quarter.
Thank you Glenn Please turn to slide 10 for our financial highlights I'm very pleased with the performance in the third quarter from both financial and operational perspective.
Servicing and originations are profitable and after removing the positive impact of the opportunistic reverse whole loan transaction gain from the second quarter. We showed continued improvement in both GAAP net income and adjusted pre tax income or.
Our results continue to reflect the hard work and resilience of our dedicated employees the strength of our operations as well as our balanced business model.
Drilling into the Blue column in the third quarter of 2023, we recognized GAAP net income of $8 million.
GAAP net income at several significant drivers last quarter that did not occur this quarter, primarily of $15 million gain in the whole loan transaction and a $28 million positive impact from legal and regulatory settlements.
After adjusting for those we're pleased with the $8 million of GAAP net income, which reflects an improvement of over $3 million from originations and servicing businesses quarter over quarter as well as a $1 million gain from the repurchase and retirement of $14 million of corporate debt.
The adjusted pre tax income of $10 million closely aligns to GAAP, indicating no material notables this quarter as well as reflecting the lower volatility in our P&L due to a higher hedge coverage ratio.
As Glenn pointed out liquidity is down slightly this quarter due to the debt repurchase the hedging instruments and has higher cash use and originations to support higher volume.
Our liquidity remains well in excess of the new FHFA and Judy may liquidity requirements.
With the positive GAAP net income result, you can see that our effective tax rate for the quarter is only about 11% due to our existing portfolio of tax net operating loss carryforwards.
We do expect to continue to deliver nine plus percent adjusted pre tax income ROE going forward with some seasonal impacts throughout 2024, and we will provide more robust guidance assumptions for 2024 on our year end earnings call.
For a more detailed view of the quarter over quarter changes in adjusted pre tax income. Please turn to page 11.
The <unk> segment view on the upper left clearly shows the positive and growing trend in adjusted pre tax income.
When the positive $15 million impact for the whole loan transaction is removed for consecutive quarter comparison. This indicates our balanced business model is delivering net income growth in the blue bar at the bottom shows the growth in adjusted <unk> ROE as well.
The total segment view on the upper right shows the impact of the improving profitability of both the original servicing offset with some corporate impacts and I'll cover the segments in more detail in a few pages.
Page 12 highlights the debt repurchase we initiated in the third quarter the transaction actually bridge the quarter into early October. So we are showing the total impact for both quarters as well as the Q3 quarter or Q3 impact alone.
In my comments I'm going to be referring to the total impact that bridges Q3 and Q4.
We used excess liquidity to repurchase $15 million of corporate debt held at the PHH entity. This debt now stands at $360 million down from $400 million.
18 months ago.
Our payment obligations have been reduced as well as our ongoing interest expense, we bought the data to discount industry recorded a gain of $1 $3 million upon retirement of the debt. This is in line with the guidance. We have provided which is to delever the balance sheet to bring our debt to equity metrics in line with our publicly traded competitors.
On page 13, I will describe our hedging approach and the impact of our capital light strategy on interest rate risk.
The graphs on the left shows the difference between what appears on our balance sheet for MSR assets. We show it here both in <unk> and fair value for the third quarter. The fair value of $2 86 billion in the third quarter represents the GAAP balance sheet, but due to transactions that didn't achieve accounting true sale.
Which is $1 1 billion at fair value.
The excess servicing spread transactions, which is an additional $255 million of fair value that leaves us with about $1 5 billion of fair value of MSR assets. This represents the amount of our net MSR exposure that we actually hedge this illustrates our capital light strategy, where we intend to maintain a consistently.
Size book in the range of 115 to 135 billion UTP of owned MSR to reduce our interest rate risks.
As we've discussed our MSR valuation is based upon input from two independent valuation experts that used market observed trading levels as well as comparisons to public filings Pwc KPMG surveys and our own model output.
Our mark to market approach is different than a mark to model approach.
The right graph shows the last three quarters of our hedge coverage ratio and the consistently higher hedge coverage ratio mitigates the earnings volatility from both rising and falling interest rates.
The last two quarters coming in at 73% and 92% of hedge coverage ratio at or above the target of 60% that we set in the second quarter of this year.
Now we will cover in more detailed segment information on page 14, where we start with the servicing segment. This is the data on forward and reverse.
The upper left chart of adjusted pre tax income shows an improvement in reverse servicing from $3 million to $4 million quarter over quarter due to lower operating expenses from process improvements.
Word servicing PCI, which excludes asset sales and mark to market was down slightly quarter over quarter due to higher run off in the third quarter as well as lower revenues from the migration of some assets to sub servicing.
Float income continues to improve as balances grew in the <unk> sub servicing volume grew across quarters by $9 billion or 7% and 10% year over year.
Please turn to page 15 for an overview of our origination segment also the forward and reverse.
The origination business improved adjusted pretax income by $3 million quarter over quarter, but lagged versus prior year when correspondent margins were significantly higher.
Correspondent lending and co issue saw significantly higher volumes this quarter than in the prior quarter Theyre up 63% for a quarterly total of $7 2 billion of <unk>. We continue to price this product for an appropriate yield linked to our corporate cost of capital.
Consumer direct or the retail channel continues to increase volumes and experienced margin declines to stay slightly below breakeven. This channel has shifted from a rate term refinancing to a purchase cash out focus it will be a key driver of future profitability when mortgage rates.
Do decline.
<unk> had flat origination volumes and the <unk> spreads continue to be wider than recent historical averages, which suppresses gain on sale.
We continue to ensure that the origination segment is sized appropriately for the prevailing market volumes, which can be seen by our better cost to originate both year over year and quarter over quarter.
This data in the lower right quarter is even more impressive when you consider the year over year volume was essentially flat.
Please turn to page 16 for a view on our stock price.
Using the same starting point of year end 2020, our stock is now performing in line with the Russell 2000 index, but slightly underperforming a group of our peers. The discount to book also gave back some recent progress likely due to the strong increase in the 10 year treasury yield, which can have a negative impact on an origination centric.
Company However.
However, the bulk of our profits have come from the servicing business for the last six quarters.
The discount to book in the lower graph is measured as the share price following our earnings release versus at quarter end book value.
We continue to assert that our positive growth trends in profitability.
The growth in our servicing book.
The ability to run originations at a profit during a difficult market period, and our willingness to reduce our senior secured debt all support a stronger stock price than we currently receive.
Back to you.
Thanks, Sean Please turn to slide 17 for a few wrap up comments before we go to Q&A.
I am proud of how our team is executing in the third quarter, we delivered results.
And achieved our annualized adjusted pre tax Roe target.
Our balanced and diversified business creates opportunities mitigates risks and supports our ability to perform across multiple business cycles.
We are executing a focused prudent growth strategy, leveraging our superior operating capabilities to grow sub servicing across multiple investor and product types.
Through our investment in technology, and global operating capability, we've built an efficient and mature platform with capacity for growth that delivers industry leading performance.
And measurable improvements for clients and investors.
We remain steadfast in our pursuit of industry servicing cost leadership by driving continuous cost and process improvement.
Our investment in people process improvements and technology are driving improved borrower and client satisfaction and we remain committed to delivering a superior experience to borrowers and clients.
We continue to expand our capital partner relationships to enable sub servicing growth and capitalize on unique investment opportunities.
With the support of these relationships, we are prudently managing capital and liquidity for economic and interest rate volatility and deleveraging our balance sheet as excess liquidity permits to further improve financial performance and mitigate capital structure related risks.
Overall, we're excited about the potential for our business and do not believe our recent share price is reflective of our strong financial position growth opportunities and the strength of our business.
As we continue to execute our business strategy. We believe we are well positioned to navigate the market environment ahead, and deliver long term value for our shareholders and with that Laura let's open up the call for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchtone fine you're welcome Anthony Teng Pons acknowledging your request should you wish to decline from your polling process. Please press star followed by the number.
If you are using a speaker phone please lift your handset before pressing any keith.
We have our first question coming from the line of <unk> George from <unk>. Please go ahead.
Good morning.
First wanted to just ask about the cost of service with your servicing UBB DAU growing.
As you said about 20% or a little more over the next couple of quarters, how do you see your cost to service.
And over the course of the next year.
Hey, Bose Thanks for your question.
As I said, we've got about 30% of our servicing.
Costs that are in that are fixed and semi variable and obviously those costs don't scale.
As we grow our business so.
Can think about we're going to continue to drive new call it 3% to 5% variable cost productivity and our servicing platform we.
Expect to deliver that on a go forward basis and to the extent that we are successful in delivering our growth objectives.
Yes that 30% of our servicing cost base gets leveraged quite nicely. So we think we'll continue to compare quite favorably.
Against our peers and believe that puts us in a strong competitive position.
Okay, Great. That's helpful. Thanks, and then actually switching to the <unk>. The Mark on that is that was that on wider spreads like what are the drivers.
The valuation of the head come servicing and.
And also I assume theres no hedging on that piece.
Yes, so our <unk> servicing just generally acts as a hedge against our forward servicing so heck.
MSR so to speak.
React in an inverse way to interest rates than forward MSR. So if rates go up.
Heck of MSR is actually lose value and then obviously that value.
It can change as well by spreads widening their contracting if spreads widen.
The all other things being equal that the heck of MSR value would be.
Lower NSA tightened heck of MSR value would be wider so we look at it as a <unk>.
The reverse msr's, that's a coke yielding hedge against our forward MSR.
And as part of our overall hedging strategy.
Okay that makes sense.
One small one.
The share count.
The diluted share count looks like it went up quarter over quarter.
What drove that.
Yes, typically you would certainly didnt issue any shares so typically the only family drive the diluted share count would be.
The maturation of share.
Share based compensation plans for.
Our employees.
Okay, Okay, great. Thanks.
Thanks Brooks.
Our next question comes from the line of Kyle Joseph from Jefferies. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
On the.
Correspondent channel, obviously, you guys saw good volumes, a little bit of margin compression, but if you could just give us.
An update on the competitive dynamics. There, obviously you had some banks pulling out.
Rising mortgage rates in the quarter, but just give us an update on where things are competitively in that channel.
Sure Heiko.
Yes look the corresponding channel continues to be.
Fiercely competitive I would say.
We are not the market price leader, we don't aim our strive to be the market price leader.
There are other players.
Who I think we all know well.
<unk> home and others, who have.
Very strong correspondent presence and are fiercely competitive and that channel, even though some other people have either de emphasized or exited the channels. So.
With industry volume contracting as it has in 2023 and frankly, the NBA in Fannie may forecast for 2024.
Wouldn't suggest there is going to be a material rebound in volume levels. We expect it's going to continue to be a competitive highly competitive channel.
And again, we expect to remain disciplined and continue to focus on originating msr's as opportunity permits consistent with our cost of capital.
Got it helpful and then staying on the banks more on the servicing side.
We're literally seven month, Allison silly Valeant and obviously this we've seen a lot of headlines on capital requirements, but just in terms of behavior, you're seeing in terms of net net selling.
From that industry and potential opportunities for Ocwen non a go forward basis.
Yes look I think wells Fargo was the most prominent and announcing theyre downsizing their MSR portfolio, we are seeing.
Our other smaller banks as well really think long and hard about do they want to own msr's on a go forward basis, and we are seeing some MSR packages enter the bulk market from the banking community.
We expect unfortunately, the Basel III and game rules are likely to put further pressure on banks, who own msr's and don't have.
The capacity within the Basel III end game rules too.
Hold MSR so.
We do think the bulk market is going to continue to be.
Fairly robust.
For the for the coming several quarters as a result of just a really tough originations market affecting largely <unk> and.
The constraints increasing constraints that banks are facing I'm holding MSR some mortgage assets.
Got it very helpful. Thanks for answering my questions.
Thanks, Tom.
Our next question comes from the line of Eric Hagen from BTG. Please go ahead.
Hey, Thanks. Good morning, Hope you guys are well hedged so the outlook for a 9% pretax ROA next year.
How do you feel like that would maybe change in response to interest rates being a little higher or lower and how much of that return do you feel like is coming from the forward versus reverse.
Information and servicing side of the business.
Yeah hair.
Right now I'd say its pretty obvious looking at our results. The majority of the returns are coming from our servicing platform period full stop.
Yes.
We expect on a go forward basis that will continue to see.
If interest rates stay steady.
Strong performance out of our servicing platform that said if rates to change in a material way.
Again, I think that profit dynamic.
We expect with shift we'd see more profitability coming from originations less coming from servicing as MSR runoff would go up.
And yet <unk>.
Creasing originations volume typically would mean more opportunity for originations as well as.
Historically margins have typically widened as interest rates have go down and refinancing volume picks up.
Terms of relative performance of reverse versus forward.
Sean you laid out that look our reverse servicing and sub servicing platform.
Continues to be profitable and generates good returns, but reverse originations is struggling just like forward is.
Yes look it's the benefits of our balanced business model.
<unk>, both forward and reverse servicing and originations allows us to.
Balance and.
<unk>.
<unk>.
Balanced out the impact of the interest rate environment, and we expect that will continue to serve us well on a go forward basis.
Yes.
Hey.
A follow up on that I mean, if marks.
Mark to market and other one time items contribute to the ROE.
Exceeding 9%.
Something about like do you think that would change our approach to buying back either stock or debt.
So this quarter I think.
As you saw there was really zero neutral impact from any notable items there wasn't any opportunistic transaction gains.
And distressed assets in MSR values.
Yeah.
We're essentially fully hedged.
Throughout the quarter.
Sure.
Our priority continues to be focused on deleveraging the balance sheet as we think about it look or higher financial leverage relative to peers does contribute to.
Higher earnings volatility and we do think our stock to <unk>.
Trading price of our stock reflects the fact that we have a higher higher leverage against the company, which.
Which creates more capital structure risk and.
Increased potential earnings volatile so are our preference here in the near term is really to allocate excess liquidity when it's available to repurchase debt and as are.
Our debt ratios.
Some more consistent with our peer group average then we can think about a variety of different applications for.
Our capital.
Yes.
No that makes sense.
Just a couple of questions around sub servicing I mean, how should someone thinks about the gross margin on like incremental sub servicing like is there a rule of thumb for every $1 billion of sub servicing you add from here, what's the kind of pre tax profit margin I think.
Heard you guys talk about commercial.
Sub servicing can you talk about the nature of what you are.
Sub servicing there and kind of how the costs may be comparative forward.
<unk>.
Servicing.
Yes, So let me let me go in reverse order, so commercial and reverse some servicing has a much higher cost structure than rather than <unk> forward.
Yes, the requirements are more complex, particularly at the I'll call. It end of life of reverse assets writes a more complex loss mitigation and conveyance processor can bank loans back to HUD and Theres more things you have to do occupancy certs property inspections to make sure that there.
Copies are kept in good stead and like so and servicing costs are.
Are a lot higher FERC for small balanced commercial and multifamily as well as for the reverse portfolio.
If you look at our.
Last quarter's presentation, we did show that for your typical sub servicing contract on a marginal basis. We continue to grow we would expect that profitability would average between two to three basis points on sub servicing growth as we go forward.
Obviously, depending upon the size of the relationship to scale our relationship.
Yes, if it's a plain vanilla portfolio Thats largely current.
That can have a pretty broad range of one to three basis points, but.
Generally call it 225 to three basis points of profitability on a marginal basis for a typical.
Yes.
Servicing portfolio, a sub servicing relationships.
That's really helpful. Thank you guys so much.
Thank you.
Ladies and gentlemen, just a reminder, so do you have a question. Please press star followed by the number one on your Touchstone.
We have our next question coming from the line of Matthew Howlett from B Riley. Please go ahead.
Oh, Hey, guys. Good morning, Thanks for taking my question.
Congrats on all around good quarter I want to focus on debt repurchases of $15 million. I think you said that included October.
Glenn you mentioned, taking down leverage to the peer group My question is sort of.
How much can you knock down that that senior debt is that the area you want to focus on in terms of deleveraging and then in terms of liquidity.
Did some of those synthetic transactions last quarter, clearly, there's going to be some seasonality with the origination business.
What can you do what steps can you do to gel.
More cash for deleveraging.
So Matt look we.
We said our growth is primarily going to be.
We expect our growth to primarily be in sub servicing and leveraging our MSR capital partners, we do need to maintain a.
A target level of owned MSR <unk>.
Our target levels between $115 billion to $135 billion to maintain what we believe are appropriate.
Debt service coverage ratio. So while we do have our corporate debt balances, we focus on debt service coverage as well so look as excess liquidity permits on a go forward basis, we would expect to continue to allocate that excess liquidity to pay down our debt.
So far in the last.
18 months or so it's about $40 million of corporate debt reduction.
<unk> debt to reduce is the PHH.
Senior secured notes in the marketplace.
Obviously, we will continue to focus on.
Very stratification of our debt as opportunities permit.
To further reduce yes at this stage of the game, we've not set a specific or get of how much.
You know that we want to reduce by quarter, we do think we need to maintain.
Our prudent and flexible approach to allocation allocating our capital.
Against the priority of maintaining our owned servicing <unk> and as well allocating excess liquidity when available too.
We reduced debt.
And match it that it's Sean.
The other thing you mentioned was engaging in more synthetic subservicing transactions to promote liquidity too.
Do something else, whether it be delever et cetera.
The constant attention we have to measure is.
We make significantly more than any other service to make significantly more on an owned MSR then a sub service MSR. It can see all that in the queue.
And so it's kind of.
It's a <unk>.
Relevant target to watch where the market is and so when the market rewards us to sell into sub servicing then it could be a useful transaction, but.
It frees up cash today is with the commensurate lower cash flows in the future. So that's something.
Something you have to take a two to four year kind of NPV on and understand what youre doing to your total cash production capability. If you move in that direction.
No look I appreciate all of the actions Youre, taking and I certainly.
Understand the Aro as Youre getting on the owned portfolio, but let me maybe I'll ask it a different way do you feel you feel confident you can take the leverage profile I think you said.
Down to in line with peers, it was being with Penny Mac and Cooper.
I mean do you feel like Glenn over time going to China, you can bring it down to peer levels.
Over a short amount of time is that sort of the goal here.
Yes look the goal is to try to have a more normative.
More normative.
<unk> structure and leverage ratio as compared to our peers and look we believe that's the right priority for the business we believe it's.
The right way to allocate our capital on a go forward basis to.
Eliminate.
Risk potentially eliminate risk and volatility in our earnings.
But look as of now.
Yes look it.
Capital allocated we review capital allocation all the time with the board.
So as the market environment changes, we will continuously evaluate our capital allocation priorities and make the decisions that we think are most accretive to shareholders on a go forward basis.
I'm not looking certainly deserve.
Multiple in line with those folks so congrats all upon the progress youre, making on the sub servicing most of that's going to be through your third party capital partners. You have discussions you've entered with sub servicing with some banks in the past.
So there's some negotiated transactions and you still have that in the pipeline, where you could do it if the wind business without a.
Third Party capital partners, you could just go in and sub servicing subsurface portfolio for a bank call. It.
Yes, so we've got a variety of different.
Client profile, so to speak in our sub servicing portfolio. So it would include.
Banks credit unions independent mortgage banks.
And financial investors those are kind of the four towers essentially client profiles that we tend to look at.
So yeah, we've we do sub servicing today for banks.
It's good business, especially if its a smaller regional and community bank.
Scott a couple of billion dollars.
In.
Mortgages outstanding really tough for them to service anywhere near a cost competitive profile.
To make Msr's return and make MSR returns that would be commensurate with their with their return objectives. So.
Averaging our sub servicing capabilities with a larger scale platform with a more competitive cost structure is a good way for them to participate in offering a product to their consumers that now have the burden of the operating responsibilities.
And that's part of the guidance range that you have some of those in the guidance or is that is it all sort of third party capital just curious whether that mix is going to include.
It's all in.
Look we don't necessarily have.
Have established growth targets, so to speak by each client profile that we discussed publicly our guidance on our expected growth in sub servicing and what we believe we can achieve <unk>.
Includes sub servicing transactions from all client profile types.
Got you Great and then last question Sean for you.
It looks like Youre going to end the year profitable again, I always focus on that deferred tax asset did you release any reserve on that deferred tax asset. This quarter does it look like you did could you give us sort of the estimated size of it and whether or not.
The outlook on really fulfilling that reserve, partially or fully because.
Cause I know it is substantial.
Yes, so we.
To your I'll go backwards to your last question, we don't update our valuation allowance and total deferred tax asset, which is offset by the valuation allowance except for annually. So you won't see that except in the K.
As of the last K it was a little north of $107 million.
Our tax.
Deferred tax asset.
Youre going to see.
Youll have to see several more quarters of continued profitability before we can release that either partially or fully so there have been no no.
No transactions that involve that other than.
Offsetting any existing profit with the net operating losses, but the valuation allowance does not been lifted to free up the deferred tax asset at this point.
Got you and then.
You said it was 100, let me and he said it was $170 million or $107 million.
I believe ought to go back and look at our cash it was.
The actual valuation allowance.
Includes the deferred tax asset plus some other drivers.
I can get you the exact number out of the K I don't have it handy on me right now.
Got it.
I mean, if I'm looking at right it could be but youre, saying it could be as much as $20 per share that could come on.
Theoretically the book value that reserve was fully released at some point in time.
At some point in time.
Good.
With input from our external tax counsel.
Yes that could have a significant impact.
No.
The reason.
It also declines over time, because as you produce msr's, Brian <unk> created a deferred tax liability that can offset that but thats usually partial.
But we believe we're not look we believe in VA releases, it should be a significant improvement to our network.
Yes that the ratio is going to look completely different and you're obviously not going to be a taxpayer.
It's kind of a period.
I appreciate that and look forward to the update congrats on really solid results and guidance. Thank you.
Thanks, Matt Thank you Matt.
Ladies and gentlemen, just a reminder, should you have a question. Please press star followed by the number one on your Touchtone filing.
We have a follow up question coming from the line of Eric Hagen from <unk>. Please go ahead.
Hey, thanks.
I think you mentioned the MSR portfolio that is owned by you is around 1 billion and $5.
Can you say what the advanced funding is thats associated with that 1 billion and a half and as the $642 million of.
Net advances is that.
How does that how is that allocated thank.
Thank you guys.
Yes, so a few if you look near the end of the.
The earnings deck, there is a page on MSR valuation I think it is our second stage 29 this quarter.
And from there.
You look at the third quarter, you can see the gse's or the Fannie Freddie column.
As fairly normal for delinquencies, it's pretty low 30, 60, 90 buckets one eight.
And then you can see the pls or the non agency column is the other extreme at 15% and the journeys are somewhere in the middle and the Ginnie is as Glen pointed out earlier actually a mix of newer genies, which had low what I'd call normal delinquencies and very old.
The 2008 crisis journeys, which are very delinquent.
The delinquent Ginnie Mae delinquent Pls drive the bulk of our advances.
No.
The vast majority of our advances are coming out of that non agency book.
Glenn's comment that we've had a renewed focus for several quarters now to improve.
Improve resolution on our non agency book, because that will bring our advances down in terms of our kind of newer book, which would be the newer genies in all the gse's that has relatively normally advances.
Aligned with a fairly low delinquencies on that and we have.
Excess advanced capacity right now to finance in the event that advanced to see pick up.
That's great. Thanks for the follow up.
No worries there.
Thank you there are no further questions at this time I would now like to turn the call back over to Mr. Glen Messina for final closing comments.
Thanks, Laura I'd like to thank our shareholders and key business partners for their support of our business I also like to thank and recognize our board of directors and our global business team for their hard work and commitment to our success.
Look forward to updating everyone on our progress on our next quarter earnings call. Thank you.
Thank you so much ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a lovely day.
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