Q2 2024 Onity Group Inc Earnings Call

Speaker Change: Good day, everyone, and welcome to this Onity Group's second quarter earnings and business update conference call. At this time, all participants are in a listen-only mode, but later you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone.

Operator: At this time, all participants are in a listen-only mode, but later you will have the opportunity to ask questions during the question-and-answer session. You may register to ask to question at any time by pressing the star and one on your touch-tone phone.

Operator: Please note today's session is being recorded, and I'll be standing by should you need any assistance.

Speaker Change: Please note today's session is being recorded and I'll be standing by should you need any assistance. It is now my pleasure to turn today's program over to Senior Vice President of Corporate Communications, Dico Akseraylian. Please go ahead, sir.

Dico Akseraylian: It is now my pleasure to turn today's program over to Senior Vice President of Corporate Communications Dico Akseraylian. Please go ahead, sir.

Glen Messina: Good morning and welcome to Onity Group's second quarter earnings call. Please note that our earnings release and presentation are available on our website at OnityGroup.com.

Speaker Change: Good morning and welcome to Onity Group's second quarter earnings call. Please note that our earnings release and presentation are available on our website at OnityGroup.com

Glen Messina: Speaking on the call of each air, President and Chief Executive Officer Glen Messina and Chief Financial Officer Sean O'Neill. As a reminder, our comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are uncertain. Forward looking statements speak only as of the date they are made and involve assumptions, risks, and uncertainties, including those described in RSEC violence. In the past, Dr. Results had differed materially from those suggested by forward-looking statements, and this may happen again.

Speaker Change: Speaking on the call will be Chair, President, and Chief Executive Officer, Glen Messina, and Chief Financial Officer, Sean O'Neill. As a reminder, our comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws.

Unnamed Speaker: These statements may be identified by reference to a future period or by the use of forward-looking terminology and address matters that are uncertain.

Speaker Change: These statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are uncertain.

Speaker Change: Forward-looking statements speak only as of the date they are made and involve assumptions, risks, and uncertainties, including those described in our SEC filings.

Speaker Change: In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. In addition, the presentation or comments contain references to non-GAAP financial measures, such as adjusted pre-tax income.

Glen Messina: In addition, the presentation or comments contain references to non-GAAP financial measures such as adjusted pre-tax income. We believe these non-GAAP measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the performance of our operations and allocate resources. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results.

Speaker Change: We believe these non-GAAP measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the performance of our operations and allocate resources.

Speaker Change: non-GAAP measures should be viewed in addition to, and not as an alternative for, the company's reported GAAP results.

Glen Messina: A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures and management's reasons for including them may be found in the press release in the appendix to the investor presentation.

Speaker Change: A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures and management's reasons for including them may be found in the press release in the appendix to the investor presentation. Now I will turn the call over to Glen Messina.

Glen Messina: Now I'll turn the call over to Glenn Messina. Thanks, Tiko, and good morning everyone, and thanks for joining our call. We're looking forward to sharing a few highlights for the second quarter and reviewing our strategy and financial objectives to deliver long-term value for our shareholders. Please turn to slide three. I'll begin with three key scenes today. First, we delivered strong and compelling financial performance in the second quarter. We reported our seventh consecutive quarter of improved adjusted pre-tax income and the highest level in 11 quarters. We also continue to de-leverage, increase book value, and delivered year-to-date return on equity on both a gap and an adjusted basis that is well above our target.

Dico Akseraylian: Thanks, Dico, and good morning, everyone, and thanks for joining our call. We're looking forward to sharing a few highlights for the second quarter and reviewing our strategy and financial objectives to deliver long-term value for our shareholders. Please turn to slide three.

Glenn Messina: Thanks Dico and good morning everyone and thanks for joining our call. We're looking forward to sharing a few highlights for the second quarter and reviewing our strategy and financial objectives to deliver long-term value for our shareholders.

Glen A. Messina: I'll begin with three key themes today. We reported our seventh consecutive quarter of improved adjusted pre-tax income and the highest level in the eleventh quarter. Our financial highlights for the quarter reflect improved performance across many of our key financial metrics. More to come on this in a few minutes, but we expect the secretive transaction will increase pre-tax income, strengthen our position and reverse servicing as a hedge to our forward servicing, provide incremental asset management opportunities, and improve our capital structure.

Glen Messina: I'll begin with three key themes today. First, we delivered strong and compelling financial performance in the second quarter.

Speaker Change: We reported our seventh consecutive quarter of improved adjusted pre-tax income and the highest level in 11 quarters.

Glen Messina: Second, this quarter is the clearest demonstration yet that our strategy and financial objectives are sound, and our ability to execute and deliver results is consistent and strong. Finally, we believe we continue to, we believe with the continued execution of our strategy and financial objectives, positions on it to close the valuation gap to our peers and analyst price targets. And that would translate into substantial value creation for our shareholders.

Glen Messina: Let's start to explore the second quarter in more detail on slide four. Our financial highlights for the quarter reflect improved performance across many of our key financial metrics. We reported an adjusted pre-tax income of 32 million, which results in an annualized adjusted ROE of 28 percent. Both metrics have materially improved on the sequential quarter and year-of-year basis, driven by strong performance in both servicing and originations. We reported net income of 11 million dollars and GAAP ROE of 10 percent. These results include height and hedge costs from significant interest rate volatility. Average servicing and subservicing UPP increased on a year-of-year and sequential quarter basis, driven by 19 billion dollars and total servicing additions to the quarter.

Glenn Messina: Let's start to explore the second quarter in more detail on slide four.

Glenn Messina: Our financial highlights for the quarter reflect improved performance across many of our key financial metrics.

Glenn Messina: We reported adjusted pre-tax income of $32 million, which results in an annualized adjusted ROE of 28%. Both metrics have materially improved on a sequential quarter and year-over-year basis driven by strong performance in both servicing and originations.

Glen Messina: We continued to focus on driving capital-like growth while we increased MSR originations to offset the impact of recent MSR sales and maintain our targeted own MSR range. Our strong financial performance also drove increased total liquidity, higher book value, and lower MSR debt versus the first quarter. And that combined allowed us to reach, on your term, leverage objective. I would note that others were also taking notice of our performance trend, as witnessed by Moody's increasing our corporate family debt rating to B3, in KBW raising our stock rating to outperform.

Glenn Messina: Our strong financial performance also drove increased total liquidity, higher book value, and lower MSR debt versus the first quarter. And that combined allowed us to reach our near-term leverage objective.

Glenn Messina: I would note that others are also taking notice of our performance trend, as witnessed by Moody's increasing our corporate family debt rating to B3, and KBW raising our stock rating to outperform.

Glen Messina: The highlights have continued after quarter end. I'm pleased to announce that we've entered into a letter of intent to acquire reverse mortgage assets from Waterfall Asset Management. More to come on this in a few minutes, but we expect this accretive transaction will increase pre-tax income, strengthen our position in reverse servicing as a hedge to our forward servicing, providing incremental asset management opportunities, and improve our capital structure. We greatly appreciate the partnership we have with Waterfall and look forward to completing this important transaction and pursuing future opportunities together.

Glenn Messina: The highlights have continued after quarter end. I'm pleased to announce that we've entered into a letter of intent to acquire reverse mortgage assets from Waterfall Asset Management.

Glen A. Messina: We greatly appreciate the partnership we have with Waterfall and look forward to completing this important transaction and pursuing future opportunities together. Now, I promise I'm not going to read each item on this page, but for those newer to the story, this gives you a sense of the high activity level of the company in recent years. Simply put, the financial results we achieved in the second quarter are the direct result of substantial and purposeful actions aligned with our strategy and financial objectives. We've transformed our culture, bolstered our team with industry experts at many levels and across several disciplines, and been unrelenting in creating success for our borrowers, clients, and investors.

Glen Messina: Please turn to slide five. Now I promise I'm not going to read each item on this page, but for those newer to the story, this gives you a sense of the high activity level of the company in recent years. Simply put, the financial results we achieved in the second quarter are the direct result of substantial and purposeful actions, along with our strategy and financial objectives. The difference of where we are today versus where we come from is stark. Five years ago we were a special servicer with large client concentrations, shrinking portfolio, uploaded cost structure, and limited new business sources.

Glenn Messina: Now, I promise I'm not going to read each item on this page, but for those newer to the story, this gives you a sense of the high activity level of the company in recent years.

Glenn Messina: The difference of where we are today versus where we come from is stark.

Glenn Messina: Five years ago, we were a special servicer with large client concentrations, a shrinking portfolio, a bloated cost structure, and limited new business sources.

Glen Messina: Today we're growing, balanced, and diversified mortgage servicer and originator. We've invested heavily in technology throughout our operations and have an industry best in cloud servicing platform, and we've built broad capabilities. We've transformed our culture, bolstered our team with industry experts at many levels and across several disciplines. We have a tremendous team who've done an amazing job during a dynamic time in the mortgage industry. We're not the same company we were just a few years ago. We're better, stronger, and we're delivering on our commitments.

Glenn Messina: Today, we're a growing, balanced, and diversified mortgage servicer and originator. We've invested heavily in technology throughout our operations and have an industry best-in-class servicing platform, and we've built broad capabilities.

Glenn Messina: We've transformed our culture, bolstered our team with industry experts at many levels and across several disciplines.

Glen Messina: Please turn to slide six. To punctuate the fact that this is not the same company, on June 10th, we officially rebranded to ONIT and started trading under the ONIT ticker symbol. Our rebranding symbolizes our transformation, growth, and expansion into a company that is delivering results. It reflects our ability to execute on stated strategic and financial priorities, the confidence we have in our future, and our commitment to getting it done for customers, partners, and shareholders. Our brand stands for what we believe in, placing customers first and being unrelenting in creating success for our borrowers, clients, and investors.

Glenn Messina: Please turn to slide 6.

Glenn Messina: To punctuate the fact that this is not the same company, on June 10th, we officially rebranded to Onity and started trading under the Onit ticker symbol.

Glenn Messina: Our rebranding symbolizes our transformation, growth, and expansion into a company that is delivering results. It reflects our ability to execute on stated strategic and financial priorities, the confidence we have in our future, and our commitment to getting it done for customers, partners, and shareholders.

Speaker Change: Our brands dance for what we believe in, placing customers first, and being unrelenting in creating success for our borrowers, clients, and investors.

Glen Messina: Being better together, and doing great things with our people, teams, customers, and partners, and doing what we'll say we'll do, and delivering on our promises. The Onity brand also provides a platform to reintroduce our company to the investment community, and we look forward to continuing to expand our outreach to investors and analysts.

Glenn Messina: and doing what we'll say we'll do and delivering on our promises.

Sean O'Neill: With that brief overview, I'll turn the call over to Sean to take us through the second quarter financial results. Thank you, Glen. Please turn to slide eight for second quarter financial performance. This was a strong sequential quarter for financial results, both GAAP and adjusted pretext income. We continued the positive themes from the first quarter, with both our servicing and origination businesses extending their profitable trend. This resulted in a much increased adjusted pretext income, as well as a positive gap net income and growth and book value per share this quarter. Starting with the blue column to the right of the table, gap net income was positive $11 million versus the prior quarter's $30 million.

Speaker Change: This was a strong sequential quarter for financial results, both gapped and adjusted pre-tax income. We continued the positive themes from the first quarter with both our servicing and origination businesses extending their profitable trend.

Glen A. Messina: We continued the positive themes from the first quarter, with both our servicing and origination businesses extending their profitable trend. Operational performance, as reflected in our adjusted BTI, was up $32 million for the quarter, driven by outperformance in both servicing and origination. Our MSR valuation adjustment net of hedge somewhat offset our strong adjusted PTI, but we had robust returns with a 10% gap ROE and an adjusted pre-tax ROE of 28%. Total liquidity remained strong in the quarter, ending at over $230 million.

Sean O'Neill: Operational performance as reflected in our adjusted BTI was up $32 million for the quarter, driven by outperformance in both servicing and originations. Our MSR valuation adjustment net of hedge somewhat offset our strong adjusted BTI, but we had robust returns with the 10% gap ROE and an adjusted pretext ROE of 28%. Other key shareholder metrics include diluted earnings per share of $1.33 and $1.37 increase in book value per share to approximately $57. I'd like to point out that over the last two quarters, our book value per share has grown in impressive $4.59 or 9%. Total liquidity remains strong in the quarter, ending at over $230 million.

Speaker Change: Operational performance as reflected in our adjusted DTI was up 32 million dollars for the quarter driven by out performance in both servicing and originations.

Speaker Change: Our MSR valuation adjustment, net of hedge, somewhat offset our strong adjusted PTI, but we had robust returns with a 10% gap ROE and an adjusted pre-tax ROE of 28%.

Speaker Change: I'd like to point out that over the last two quarters, our book value per share has grown an impressive $4.59, or 9%.

Sean O'Neill: Finally, total servicing UPD grew by about $14 billion, bringing the quarter average to $305 billion. Please turn to slide 9. The second quarter was another sequential quarter improvement in adjusted pretext income and adjusted ROE, reflecting the execution of our strategy and financial objectives. Our financial objective start was sustained adjusted pretext income performance and reduced earnings volatility. Next, we focus on improving ROE and capital ratios, including deleveraging metrics. Finally, we capitalize on market cycle opportunities. This can range from selling or buying MSRs at the right time to some of our more recent asset management activities, either in the reverse or private label arena.

Glen A. Messina: Finally, total servicing UPB grew by about $14 billion, bringing the quarter average to $305 billion. The second quarter was another sequential quarter improvement in adjusted pre-tax income and adjusted ROE, reflecting the execution of our strategy and financial objectives. Both servicing and originations contributed to this $18 million growth and profitability, reflecting a strong and balanced business. Our intent is that, on close, we will use the proceeds to further reduce corporate debt by an anticipated amount of $40 million.

Speaker Change: Our financial objectives start with sustained adjusted pre-tax income performance and reduced earnings volatility. Next, we focus on improving ROE and capital ratios, including deleveraging metrics.

Sean O'Neill: This came to fruition this quarter with an impressive adjusted pre-tax income result. Both servicing and originations contributed to this $18 million growth and profitability, reflecting a strong and balanced business. Please turn to slide 10 for an overview of our servicing segment in both forward and reverse. Servicing yet, again, improved its contribution to adjusted pre-tax for the quarter. This was driven by the forward servicing business where higher revenues, including higher servicing fees and seasonally higher float, plus continued improvements in our cost structure combined to generate an additional $16 million in adjusted PTI versus the prior quarter.

Speaker Change: This came to fruition this quarter with an impressive adjusted pre-tax income result.

Speaker Change: plus continued improvements in our cost structure combined to generate an additional $16 million in adjusted PTI versus the prior quarter.

Sean O'Neill: Our average subservicing volume grew significantly in the quarter as we added over $8 billion of UPB to the business, plus seasonal improvements in MSR runoff. Our capital partners and subservicing client-based remain highly productive. We anticipate an additional $9 billion of bulk portfolios, plus additional flow volume to board in the second half of this year. More detail on how our servicing portfolio diversifies risk between the owned and subserviced books, plus detail on various investor types, such as Genese or the GSEs, can be found on page 25. Turn overview of the originations, both forward and reverse. Please turn to page 11.

Speaker Change: Our average subservicing volumes grew significantly in the quarter as we added over eight billion dollars of UPV to the business plus seasonal improvements in MSR runoff.

Speaker Change: Our capital partners and subservicing client base remain highly productive. We anticipate an additional $9 billion of bulk portfolios, plus additional flow volume to board in the second half of this year.

Speaker Change: More detail on how our servicing portfolio diversifies risk between the owned and subservice books, plus detail on various investor types such as GINIs or the GSEs, can be found on page 25.

Speaker Change: For an overview of the originations, both forward and reverse, please turn to page 11.

Sean O'Neill: Originations had a strong second quarter with the B2B channel, which is corresponding lending and co-issue, driving the bulk of the improvements. All of our origination channels had higher volumes quarter over quarter to drive the 51% increase in funded volume, where we hit $7 billion for the quarter. Details by channeler on page 26. Higher margins in the forward channel and enhancements to our cost-per-lone metric and other related metrics added to our improved results. Overall, we continue to operate an origination business that is profitable and able to adapt to any interest rate environment. Please turn to slide 12.

Speaker Change: Originations had a strong second quarter with the B2B channel, which is correspondent lending and co-issue, driving the bulk of the improvements.

Speaker Change: All of our origination channels had higher volumes quarter over quarter to drive the 51% increase in funded volume where we hit $7 billion for the quarter. Details by channel are on page 26.

Sean O'Neill: The left side shows the growth in subservicing accelerated by our capital-light approach. It also shows the impact of harvesting some opportunistic gains with targeted MSR sales of about $6 billion UPD that we alluded to last quarter. These sales provide room for originations to ramp up volume to replenish the own portfolio with higher coupon current MSRs. This will be beneficial to our recapture strategy in a down-rate environment. Currently, the mortgage servicing rights that we originate are more cost-effective to produce organically versus purchasing in the bulk market, in part to our continued focus on higher margin channels.

Speaker Change: Please turn to slide 12.

Speaker Change: Currently, the mortgage servicing rights that we originate are more cost-effective to produce organically versus purchasing in the bulk market, in part due to our continued focus on higher margin channels.

Sean O'Neill: Please turn to page 13 for details on the recent reverse mortgage asset transaction that Glenn alluded to. We are excited to announce a signed letter of intent with Waterfall Asset Management to acquire reverse mortgage assets with a projected UPD of $3 billion in a target total asset value of approximately $55 million. This deal is enabled by issuing preferred equity with a par amount of $51.7 million. The preferred is non-convertible, cumulative, and carries a 7 and 7-8 dividend, with a step up after year five. It is callable, by-onity at any point after year four. This transaction strengthens and expands an already healthy relationship between our two firms. As the waterfall affiliate, ma'am has been a subservicing client of ours for some time now, so we know these assets well from a performance perspective.

Speaker Change: Please turn to page 13 for details on the recent reverse mortgage asset transaction that Glen alluded to.

Glenn Messina: We are excited to announce a signed letter of intent with Waterfall Asset Management to acquire reverse mortgage assets with a projected UPB of $3 billion and a target total asset value of approximately $55 million.

Glenn Messina: This deal is enabled by issuing preferred equity with a par amount of $51.7 million. The preferred is non-convertible.

Speaker Change: cumulative and carries a seven and seven-eighths dividend with a step up after year five. It is callable by anity at any point after year four.

Sean O'Neill: This deal is also accompanied by seller-provided financing, and it is accreted to both earnings per share and cash. Our intent is that on close, we use the proceeds to further reduce corporate debt by an anticipated amount of $40 million. The right side provides some of the key transaction metrics that I haven't mentioned, and on the next page I will talk about how this transaction accelerates our de-leveraging strategy. Our stretch goal is to close this transaction in the third quarter, subject to all required approvals from regulators. Please turn to page 14 for an update on our de-leveraging strategy.

Glenn Messina: This deal is also accompanied by seller-provided financing, and it is accretive to both earnings-per-share and cash.

Glenn Messina: Our intent is that on CLOSE, we use the proceeds to further reduce corporate debt by an anticipated amount of $40 million.

Glen A. Messina: The right side provides some of the key transaction metrics that I haven't mentioned. Our stretch goal is to close this transaction in the third quarter, subject to all required approvals from regulators, and should achieve a debt to equity ratio below three and a half to one.

Glenn Messina: And on the next page, I will talk about how this transaction accelerates our deleveraging strategy.

Speaker Change: Please turn to page 14 for an update on our deleveraging strategy.

Sean O'Neill: In the second quarter, we had already exceeded our full year 2024 guidance by attaining a 3.9 debt to equity ratio. We will continue to work to drive this metric even lower. We did not retire any corporate debt in this quarter, partly due to the higher price and subsequently lower yield, but we did lower MSR debt amounts by $36 million or 4% quarter over quarter. As I mentioned on the prior page, we expect a transaction with waterfall will provide liquidity to pay down additional debt, and it will also increase equity through the preferred. We have included a pro forma second quarter debt to equity ratio to illustrate the impact of just this transaction, which should achieve a debt to equity ratio below 3.5 to 1.

Glenn Messina: We will continue to work to drive this metric even lower.

Glenn Messina: As I mentioned on the prior page, we expect a transaction with Waterfall will provide liquidity to pay down additional debt, and it will also increase equity through the preferred.

Glenn Messina: which should achieve a debt-to-equity ratio below 3.5 to 1.

Sean O'Neill: We expect all these efforts and others will lead to our ultimate goal for our corporate debt, which is a cost-effective refinance in the next three quarters. We are pursuing some other transactions that could provide additional liquidity to facilitate more de-leveraging in the second half.

Glenn Messina: We expect all these efforts and others will lead to our ultimate goal for our corporate debt, which is a cost-effective refinance in the next three quarters.

Glen Messina: Back to you, Glenn. Thanks, Sean.

Clyde: Back to you, Glen.

Glen Messina: I'd ask everybody now to please turn to Slide 16. The financial results Sean discovered are powerful, and a direct result of our actions to transform the business. Our revolution starts with our culture, our people, and focusing on our mission, which is to create positive outcomes for homeowners, clients, investors, and communities.

Clyde: Thanks, Sean.

Clyde: I'd ask everybody now to please turn to slide 16.

Clyde: The financial results Sean just covered are powerful and a direct result of our actions to transform the business.

Clyde: Our evolution starts with our culture, our people, and focusing on our mission, which is to create positive outcomes for homeowners, clients, investors, and communities.

Glen Messina: For those not as familiar with the company, our actions are guided by our five-point strategy and our financial objectives. Balance and diversification to deliver strong financial performance through interest rate cycles, prudent capital-like growth, to reduce capital demands and interest rate risk exposure. Industry-leading cost structure to enhance our competitiveness, value proposition, and financial performance. Top tier operating performance and capabilities to enable positive outcomes for borrowers, clients, and investors and improve the customer experience and dynamic asset management to enhance earnings and cash flow. Our financial objectives remain consistent, sustaining adjusted pre-tax income performance through growth and continuous cost improvement, reducing earnings volatility associated with MSR fair value changes, improving return on equity and capital ratios by reducing debt and driving capital-like growth, and capitalizing on market cycle opportunities to enhance cash flow and returns.

Clyde: For those not as familiar with the company, our actions are guided by our five-point strategy and our financial objectives.

Clyde: Prudent capital-like growth to reduce capital demand and interest rate risk exposure.

Clyde: Industry-leading cost structure to enhance our competitiveness, value proposition, and financial performance.

Clyde: and Dynamic Asset Management to enhance earnings and cash flow.

Clyde: Our financial objectives remain consistent, sustaining adjusted pre-tax income performance through growth and continuous cost improvement.

Clyde: Reducing earnings volatility associated with MSR fair value changes.

Glen Messina: I'd like to briefly discuss how these strategies drive our performance and create value for shareholders, starting on slide 17. Our continued focus on balance and diversification positions us to operate profitably in both high and low in straight environments. For instance, while originations today are a modest earnings contributor, in 2021, when interest rates were lower, originations drove our earnings. As interest rates have risen, profitability and servicing have increased, offsetting the contraction in origination earnings. This balance between originations and servicing positions our business to deliver strong, consistent financial performance through interest rate cycles.

Clyde: Our continued focus on balance and diversification positions us to operate profitably in both high and low interest rate environments.

Clyde: For instance, while Originations today is a modest earnings contributor, in 2021, when interest rates were lower, Originations drove our earnings.

Clyde: This balance between origination and servicing positions our business to deliver strong, consistent financial performance through interest rate cycles.

Glen Messina: Let's turn to slide 18 to review our originations capabilities. With the increasing likelihood for lower interest rates, we believe our broad and capable originations platform is well positioned to support portfolio replenishment and growth, which we demonstrated in the second quarter. Our portfolio exposure to refinancing is consistent with industry average, with roughly 22 percent of our portfolio having no rates above 5 percent. Our recapture platform is delivering 1.7 times the industry average recapture performance, as reported by ICE Mortgage Monitor. This platform is now staffed with talent from some of the best recapture operators in the industry, and we believe it's only a matter of time before we realize the upside to industry best practice performance levels.

Clyde: Let's turn to slide 18 to review our Originations capabilities.

Clyde: Our portfolio exposure to refinancing is consistent with industry average with roughly 22% of our portfolio having note rates above 5%.

Glen Messina: Our originations platform, which we started largely from scratch back in mid 2019, is now a top 10 correspondent lender, top 5 reverse mortgage originator, and we also participate in the agency MSR exchanges. We believe our position as a top reverse lender creates additional earnings upside opportunity with lower interest rates. Reverse originations volume and profitability have historically increased with falling interest rates.

Clyde: Our RichNations platform, which we started largely from scratch back in mid-2019, is now a top-10 correspondent lender, top-5 reverse mortgage originator.

Glen A. Messina: and we also participate in the agency MSR exchanges. We believe our position as a top reverse lender creates additional earnings upside opportunity with lower interest rates. We are continually winning new clients and have added nearly $30 billion of new subservicing UPB this year. We service forward, reverse, and small balance commercial mortgage loans, and our clients include: Please turn to slide 20 to discuss the value creation potential.

Clyde: And we also participate in the agency MSR exchanges.

Clyde: We believe our position as a top reverse lender creates additional earnings upside opportunity with lower interest rates.

Clyde: Reverse origination's volume and profitability have historically increased with falling interest rates.

Glen Messina: Turning to slide 19, I'd like to make a few points about our core strength in servicing. We've built a strong and capable servicing platform that delivers industry-leading performance. We are continually winning new clients, and have added nearly $30 billion of new subservicing UPP this year. We support more than 1.3 million homeowners, over 100 clients, and over 150 investors, with the servicing portfolio size of over $300 billion. We serve as forward, reverse, and small-vows commercial mortgage loans, and our clients include some of the largest financial investors and institutions in the US. Our platform is scalable, with a highly competitive cost structure.

Clyde: We've built a strong and capable servicing platform that delivers industry-leading performance. We are continually winning new clients and have added nearly $30 billion of new subservicing UPV this year.

Clyde: We support more than 1.3 million homeowners, over a hundred clients, and over a hundred and fifty investors with the servicing portfolio size of over three hundred billion dollars.

Clyde: Some of the largest financial investors and institutions in the U.S.

Glen Messina: We believe our cost structure will continue to deliver increased profitability as we grow total servicing UPP. We've been recognized by Fannie Mae, Freddie Mac, and HUD for industry-leading servicing performance for the past several years. In our progress in investment in technology has recently been awarded for best-in-class Intelligent Automation Center of Excellence. Our servicing performance has been a fundamental reason why we've been able to grow our portfolio largely through organic growth.

Clyde: We've been recognized by Fannie Mae, Freddie Mac, and HUD for industry-leading servicing performance for the past several years.

Glen Messina: Please turn to slide 20 to discuss about value creation potential. While we've mainly improved business performance capabilities and potential for growth, we do not believe our share price reflects the results we've delivered, nor the potential for our business. We believe this spells opportunity for both existing and new investors. While several of our peers are trading at over book value, we're trading at a discount to both book and our analyst price targets. We're focused on closing the evaluation gap relative to our peers through the continued execution of our strategy, delivering strong financial performance, ongoing de-leveraging, and increased investor awareness.

Clyde: While we've meaningfully improved business performance capabilities and potential for growth, we do not believe our share price reflects the results we've delivered nor the potential for our business.

Glen A. Messina: While several of our peers are trading at overbook value, we're trading at a discount to both book and our analyst price target. We're focused on closing the valuation gap relative to our peers through the continued execution of our strategy, delivering strong financial performance, ongoing deleveraging, and increased investor awareness. I'm proud of the enormous progress our team has made. All this comes together to suggest a share price that we believe has excellent upsides. And we intend to continue to take the necessary actions and extend the outreach to close that gap for the benefit of all shareholders.

Glen Messina: Turning to slide 21, I'd like to make a few points to wrap up. I'm proud of the enormous progress our team has made. I believe we are well positioned to navigate the market environment ahead and deliver long-term value for our shareholders. We've delivered a robust increase in profitability and returns in the first half of 2024 and made meaningful progress against our strategic and financial objectives. Our performance is driven by our demonstrated operational excellence, focus on prudent capital-like growth, and commitment to de-leveraging the balance sheet while maintaining solid liquidity levels. All this comes together to suggest a share price that we believe has excellent upside, and we intend to continue to take the necessary actions and extend the outreach to close that gap for the benefit of all shareholders.

Clyde: I'm proud of the enormous progress our team has made.

Clyde: I believe we are well-positioned to navigate the market environment ahead and deliver long-term value for our shareholders.

Clyde: We've delivered a robust increase in profitability and returns in the first half of 2024 and made meaningful progress against our strategic and financial objectives.

Clyde: Our performance is driven by our demonstrated operational excellence, focus on prudent capital-like growth, and commitment to deleveraging the balance sheet while maintaining solid liquidity levels.

Glen Messina: Overall, we could not be more optimistic about the potential for our business.

Operator: With that, Jim, let's open up the call for questions. Mr. Messina, I'd be happy to thank you, and to our phone audience joining today. If you would like to ask a question, please press the star and one on your touchstone phone. You may remove yourself from the queue at any time by pressing the star and two if you find your question has been asked. Once again, that is star and one to ask a question, ladies and gentlemen.

Clyde: With that, Jim, let's open up the call for questions.

Clyde: Mr. Messina, I'd be happy to. Thank you. And to our phone audience joining today, if you would like to ask a question, please press the star and 1 on your touchtone phone.

Speaker Change: You may remove yourself from the queue at any time by pressing the star and two if you find your question has been asked. Once again, that is star and one to ask a question, ladies and gentlemen. We'll hear first today from Bose George at KBW.

Bose George: We'll hear first today from BoseGeorge at KVW.

Bose George: Hey, everyone. Good morning. I wanted to start with just a question on leverage, so you get you spoke about potential transactions over the next few quarters that could reduce leverage further. Would they look sort of like the preferred to waterfall?

Howard Amster: Hey, everyone, good morning. I wanted to start with just a question on leverage. So you got you spoke about potential transactions over the next few quarters that, you know, could reduce leverage further, you know, would they look sort of like this preferred to waterfall? Could you see, you know, MSR sales, where you switch that to subservicing or just, you know, give us a little color on what some of these could look like.

Bose George: I wanted to start with just a question on leverage. So you spoke about potential transactions over the next few quarters that could reduce leverage further. Would they look sort of like the preferred-to-waterfall? Could you see MSR sales where you switch that to subservicing or just give us a little color on what some of these could look like?

Bose George: Could you see MSR sales where you switch that to subservicing or just give us a little color on what some of these could look like? Thanks.

Glen Messina: Good morning, Bose. Yeah, some of the transactions we're thinking about are really more in the asset management realm. It's more of excavating the similar asset management transactions they've done in the past, which I've been great castle generators for the business and we've been able to use that castle to help deliver our corporate debt.

Bose George: Thanks.

Speaker Change: Yeah, some of the transactions we're thinking about are really more in the asset management realm. So it's more of executing the similar asset management transactions we've done in the past.

Clyde: which, yeah, have been great cash flow generators for the business and we've been able to use that cash flow to help to lever, you know, our corporate debt.

Bose George: Okay. Yeah, that makes a lot of sense.

Bose George: Thanks.

Bose George: And then actually switching over to the waterfall deal, a couple of little questions. What's the step up after your... on the coupon.

Sean O'Neill: Yeah, Sean, do you want to take those questions? Sure thing. Yes, Bose, the step up is two and a half percent per year, per year, okay.

Glen A. Messina: Yeah, Sean, do you want to take those questions?

Speaker Change: Yeah, Sean, do you want to take those questions?

Sean O'Neill: Yes, Bose, the step-up is 2.5% per year.

Howard Amster: And then just on the MSR that you'll be acquiring, what's the unlevered yield, and then, in general, on the reverse, how do the returns on that compare to the forward servicing?

Unnamed Speaker: per year. OK.

Bose George: And then just on the MSR that you'll be acquiring, what's the unlearned yield, and then what's in general on the reverse, how does the returns on that compared to the forward servicing?

Bose George: per year, okay. And then just on the MSR that you'll be acquiring, what's the unlevered yield? And then what's in general on the reverse? How does the returns on that compare to the forward servicing?

Sean O'Neill: In terms of reverse servicing, the returns are very strong. It just happens to be a smaller business. It's a smaller pool of either subservicing candidates or just fewer assets to originate and own. You know, so as you can imagine, that there is a correspondent in a broker market on the original nation's reverse side that we do participate in to acquire the reverse MSRs, but that doesn't have quite the volume that the forward market has. It continues to be profitable for us.

Speaker Change: In terms of reverse servicing,

Glen A. Messina: The returns are very strong. It just happens to be a smaller business. There is a smaller pool of either subservicing candidates or just fewer assets to originate and own. As you can imagine, there is a correspondent and a broker market.

Speaker Change: on the Originations Reverse side that we do participate in to acquire the Reverse MSRs, but that doesn't have quite the volume that the Ford market has.

Sean O'Neill: And then what was the question more specifically on just the waterfall transaction within reverse? Yeah, just the expected sort of the way to think about the return on that either are we, you know, return on the asset or just we have to think about the return from that yield. We haven't disclosed any returns yet because we're waiting for the deal to close and receive final valuation, you know, on both the assets and the preferred. But we expect it will be a strong return. As I mentioned, it is both accretive to cash and earnings for share.

Glen A. Messina: Yeah, just the expected return on that, either ROE, you know, return on the asset, or just ways to think about the return from that deal.

Speaker Change: Yeah, just the expected, the way to think about the return on that, either ROE, return on the asset, or just ways to think about the return from that deal.

Glen A. Messina: We haven't disclosed any returns yet because we're waiting for the deal to close and receive final valuation, you know, on both the assets and the preferred. But we expect it will be a strong return, as I mentioned, it is both accretive to cash and earnings per share.

Speaker Change: We haven't disclosed any returns yet because we're waiting for the deal to close and receive final valuation you know on both the assets and the preferred but we expect it'll be a strong return as I mentioned it is both accretive to cash and earnings per share.

Bose George: Okay, great. Yeah, I suppose maybe to help you have frightened that a little bit, you know, as we think about, you know, target returns and yields that we're seeing in the marketplace, you know, generally, GSC MSRs are probably the 9 to 10 percent range, GDMAs and the 11 to 12 percent range, and your reverse everything tends to be a little bit higher than Genese, around 12 to 13. So, you know, that's how we see the economics based on, you know, our economic modeling assumptions. Okay, great. Very helpful. Thanks, Ben.

Speaker Change: You know, GSE, MSRs are probably in the 9 to 10 percent range, GDMA is in the 11 to 12 percent range, and your reverse servicing tends to be a little bit higher than GDMAs, around 12 to 13. So, you know, that's how we see the economics based on, you know, our economic modeling assumptions.

Unnamed Speaker: Okay, great. Very helpful.

Derek Sommers: Next we'll hear from the line of Derek Summers at Jefferies. Please go ahead. Hey, good morning, everyone.

Glen Messina: I was wondering if you talked about the growth you guys saw in the corresponding co-issue originations, maybe kind of break that down between what was co-respondent and what was co-issue, and then kind of, you know, also seeing some pretty healthy incremental margins there and talk about better dynamics as well. Yeah, I'll provide some high-level comments then, Sean. I know you've got a, you know, patient appendix.

Glen Messina: You can, you know, take it through some of the details, you know, on the chat on the specific channel details. But, you know, Derek, we, you know, we saw, yeah, I think our originations seem to be a great job in the second quarter, 55 percent increase in MSR originations volume. Yeah, the B2B channels, you know, for us, yeah, have been a core staple for our business. You know, we do, you know, pretty much everything in the co-respondent space, mandatory best efforts, non-delegated and, you know, we participate in the MSR exchanges, SMP, CRX, and, you know, Genome Pit.

Sean O'Neill: Yeah, I'll provide some high-level comments then, Sean. I know you've got a, you know, page in the appendix. You can, you know, take us through some of the details, you know, on the chat, on the specific channel details. But, you know, Derek, we, you know, we saw, yeah, I think our Originations team did a great job in the second quarter, 55% increase in MSR Originations volume.

Speaker Change: You know, the B2B channels, you know, for us, you know, have been a core staple for our business.

Sean O'Neill: You know, we do pretty much everything in the correspondence space, mandatory best efforts, non-delegated, and we participate in the MSR exchanges, SMP, CRX.

Glen A. Messina: You know, Ginnie Mae Pitt, you know, and our approach is, you know, look, we are, on a relative basis, agnostic to the delivery channel our customer wants to deliver product to us through. And if it makes more sense for them to go through the, you know, MSR exchanges, great. If they want to go through mandatory best efforts, non-Dell, great; then we'll support that as well, too. So it's all part of a comprehensive strategy to meet the customer where they want to transact and do business.

Sean O'Neill: You know, in our approaches, you know, look, we are on a relative basis agnostic to the delivery channel. Our customer wants to deliver product to us through. And if it makes more sense for them to go through the, you know, MSR exchanges, great. If they want to go through mandatory best efforts, non-delegated, great. Then we'll support that as well, too. So it's all part of a comprehensive strategy to, you know, meet the customer, you know, at the place where they want to transact and do business.

Speaker Change: near Ginnie Mae Pett

Speaker Change: Great, then we'll support that as well, too. So it's all part of a comprehensive strategy to meet the customer at the place where they want to transact and do business. You know, Sean, maybe you could take us through some of the details on Originations.

Sean O'Neill: You know, Sean, maybe you could take us through some of the details on our on-a-rechnation.

Unnamed Speaker: Uh, sure thing. Morning, Derek.

Sean O'Neill: Sure thing, morning, Derek. If you look at page 26, you'll see we don't split out volumes between co-issue and correspondent, but you can see collectively that we just call that B2B or business to business. You can see collectively that that channel increase substantially both in volume and in margin, so it's not like we were paying up to get more volume; we just have a pretty deep and broad range of corresponding clients that we work with, and we also participate heavily in the various agency MSR exchange markets. Obviously, the co-issue just results in an MSR moving over, so you can also look at funded volume on loans and make some inferences from that as well.

Sean O'Neill: Sure thing. Morning, Derek. If you look at page 26,

Glen A. Messina: If you look at page 26, you'll see that we don't split out volumes between co-issue and correspondent, but you can see collectively that, we just call that B2B or business to business, you can see collectively that that channel increased substantially both in volume and in margin. So it's not like we were, you know, paying up to get more volume. We just have a pretty deep and broad range of clients that we work with, and we also participate heavily in the various agency MSR Exchange Markets. Obviously, the co-issue just results in an MSR moving over. So you can also look at, you know, the funded volume on loans and make some inferences from that as well.

Sean O'Neill: increase substantially both in volume and in margin so it's not like we were you know paying up to get more volume we just have

Sean O'Neill: a pretty deep and broad range of corresponding clients that we that we work with and we also participate heavily in the various agency

Derek Sommers: Got it, thank you, and then just staying on page 26, is there any kind of color you guys could give on kind of how run rates for August and the consumer direct channel have been trending? Seems like the 30-year rate is starting to cooperate with us a little bit. Yeah, generally for consumer direct, the team has done a great job, as you can see by quarter, they've been inching up their performance from a funded volume perspective. Look, we let out in our investor presentation, we've got portions of our portfolio stratified by no rate band and assuming that the average consumer typically is willing to refinance with a 50-basis point incentive, the R team is poised and ready to go.

Howard Amster: Got it, thank you. And then, just, you know, staying on page 26, is there any kind of color you guys could give on kind of how run rates for August and the Consumer Direct channel have been trending? It seems like the 30-year rate is starting to cooperate with us a little bit.

Speaker Change: Got it, thank you. And then just, you know, staying on page 26, is there any kind of color you guys could give on kind of how run rates for August and the Consumer Direct channel have been trending? It seems like the 30-year rate is starting to cooperate with us a little bit.

Speaker Change: And, you know, look, we laid out in our investor presentation, yeah, we've got, you know, portions of our portfolio stratified by, you know, no rate band.

Derek Sommers: So as mortgage rates are coming down, our team is on it and they're engaging with customers and doing everything again to drive higher and better recapture rate, which is already performing at 1.7 times industry average. And again, we think there's upside to industry best practice levels.

Speaker Change: Yeah, our team is poised and ready to go so as you know mortgage rates are coming down

Derek Sommers: Yeah, thank you for the call from me.

Unnamed Speaker: Got it. Thank you for the color. That's all from me.

Eric Hagen: Our next question today comes from Eric Hagen at BTIG. Some information expense on the servicing portfolio in the quarter. Do you have that handy?

Unnamed Speaker: Amortization expense on the servicing portfolio in the quarter.

Speaker Change: Amortization expense on the servicing portfolio in the quarter.

Eric Hagen: Eric, the first part of your question was chopped off. We didn't get your full question. Looking for the amortization expense on the MSR portfolio in the quarter, if you guys have that handy?

Speaker Change: Eric, the first part of your question was chopped off, we didn't get your full question.

Unnamed Speaker: Looking for the amortization expense on the MSR portfolio?

Eric: Looking for the amortization expense on the MSR portfolio in the quarter, if you guys have that handy.

Sean O'Neill: Yeah, Sean, do you have that handy mafe in our press release? Yeah, so Eric, yeah, MSR valuation adjustment net for June 30th, 2024 was 32.7 million. Okay.

Speaker Change: Yeah, Sean, do you have that handy? It may have been in our press release.

Speaker Change: Okay.

Unnamed Speaker: Okay, yeah, looking for just the cash flow amortization expense portion of that. But maybe we could switch to, you know, how you guys are hedging the MSR portfolio for lower rates? I mean, do you feel like there's a lot of mark-to-market risk in the MSR if the Fed does cut rates? And what is the outlook for what you guys are focused on doing. Thank you.

Eric Hagen: Yeah, looking for the cash flow amortization expense portion of that.

Eric: Okay, yeah looking for the just the cash flow amortization expense portion of that but maybe we could switch to like you know how you guys are hedging the MSR portfolio for lower rates I mean do you feel like there's a lot of mark to market risk in the MSR if the Fed does cut rates and how does the outlook for

Eric Hagen: But maybe we could switch to how you guys are hedging the MSR portfolio for lower rates. I mean, do you feel like there's a lot of market risk in the MSR? If the Fed does cut rates, how does the outlook for MSR volatility maybe change your outlook for buying back the debt? that you guys are focused on doing. Thank you.

Speaker Change: MSR Volatility, maybe change your outlook for buying back the debt.

Sean O'Neill: Eric Wheat, as you know, we continue to target a relatively higher hedge cobertrator than we have in the past. We're still operating in that 90 to 110 percent range, with an eye towards falling rates who want to protect book value and hedge that MSR as tightly as we can. We're evaluating our hedging strategy continuously to optimize the basket of instruments and make sure that we're maintaining that strong hedge performance. You're definitely speaking, I'd say, we are still seeing bids in the MSR bulk market that are at or above the carrying buyer of our MSR. That's as recently as trades that occur this past week, quite frankly.

Speaker Change: Eric, as you know, we continue to target a relatively higher hedge cover trader than we have in the past. We're still operating in that 90 to 110 percent range.

Speaker Change: You know, bids in the MSR bulk market that are at or above, you know, the carrying value of our MSR, and that's, you know, as recently as, you know, trades that occurred this past week, quite frankly.

Sean O'Neill: So I don't know that we're actually seeing any degradation in market levels of MSR pricing with the prospect for declining rates. So that's not something we're necessarily concerned about here in the very near term. Yeah, so we, again, I think we've got good hedge coverage, good hedge protection, and we've got a recapture platform that's outperforming industry average by a wide margin with, I think, good upside potential. Okay, yeah, so it's helpful.

Speaker Change: So I don't know that we're actually seeing any degradation in market levels of MSR pricing with the prospect for declining rates.

Speaker Change: So that's, you know, that's not something we're necessarily concerned about here in the very near term.

Unnamed Speaker: Okay, yeah, that's helpful. Following up on the leverage, do you have a target leverage range in mind as you repurchase some of the unsecured debt? And would the leverage, you know, would that range maybe change if rates were lower? Or how do you see that range kind of evolving with Ray?

Glen Messina: Following up on the leverage, I mean, do you have a target leverage range in mind as you repurchase some of the unsecured debt, and with the leverage, you know, with that range maybe change if rates were lower, or how do you see that range kind of evolving with rates? Yeah, so obviously we consider our leverage targets in the context of what's happening in the overall market. Right now, our objective is to continue to drive the leverage down to peer normative levels. It takes time to get there. We recognize that. I think we've delivered substantive progress in a very short period of time, and hit our target, your near term target mid-year, and demonstrated that with a waterfall transaction.

Speaker Change: Okay, yeah, that's helpful. Following up on the leverage, I mean, do you have a target leverage range in mind as you repurchase some of the unsecured debt? And with the leverage, would that range maybe change if rates were lower? Or how do you see that range kind of evolving?

Speaker Change: yeah so our you know obviously we consider our leverage targets in the context of what's happening in the overall market you know right now our objective is to continue to drive

Speaker Change: you know, the leverage down, you know, to peer normative levels. We, you know, look, it takes time to get there. We recognize that. I think we've delivered.

Speaker Change: substantive progress in a very short period of time.

Glen Messina: We could drive that even lower, and as Sean mentioned, we're considering additional transactions to drive the leverage even lower. I think, as you know, a large portion of our capital structure, actually the largest portion of our capital structure, is not really corporate debt, you know, the either the on-a-t group debt or the PHH debt. It really is MSR financing, and MSR financing will decline as MSR values decline, and that's one of the reasons why we hedge, and we hedge with a high hedge coverage ratio so that it's fundamentally, you know, the design is such that any, you know, margin calls in MSR debt is offset by cash proceeds from our hedge and our derivatives.

Speaker Change: As Sean mentioned, we're considering additional transactions to drive the leverage even lower.

Sean O'Neill: debt or the PHH debt. It really is MSR financing. And MSR financing will decline as MSR values decline. And that's one of the reasons why we hedge. And we hedge with a high hedge coverage ratio so that it's fundamentally any...

Unnamed Speaker: You know, the design is such that any, you know, margin calls on MSR debt are offset by cash proceeds from

Glen Messina: So, you know, the derivative portfolio basically will help fundamentally pay back and de-leverage the MSR debt.

Eric Hagen: Yeah, okay, that's really helpful.

Eric Hagen: Thank you.

Operator: Once more to our phone audience today, that is star and one. If you would like to ask a question, we will pause for just a few moments to give everyone the opportunity. to Signal. Once more, ladies and gentlemen, that is Starr and one. Also, a friendly reminder that if you're joining on a speaker phone, please return to your handset to be certain that your signal does reach our equipment.

Operator: Once more, ladies and gentlemen, that is star and one. Also, a friendly reminder that if you're joining on a speakerphone, please return to your handset to be certain that your signal does reach our equipment.

Operator: And we have no signals from our phone audience.

Glen Messina: I'd like to turn it back to the Onity leadership team for any additional closing remarks. Great, Jim. Thanks much. And look, I'd like to thank our shareholders and keep business partners to their support of our business. I'd also like to thank and recognize our Board of Directors and global business team for all their hard work and their commitment to our success.

Speaker Change: Great, Jim. Thanks much. And look, I'd like to thank our shareholders and key business partners for their support of our business. I'd also like to thank and recognize our board of directors and global business team for all their hard work and their commitment to our success. And I look forward to updating everyone on our progress at our next quarter earnings poll. Thank you.

Glen Messina: Now, I look forward to updating everyone on our progress at our next quarter or any school. Thank you.

Operator: Ladies and gentlemen, this does conclude today's teleconference, and we do thank you all for your participation. You may now disconnect your lines and have a great day.

Speaker Change: Ladies and gentlemen, this does conclude today's teleconference and we do thank you all for your participation. You may now disconnect your lines and have a great day.

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