Q4 2024 Mr. Cooper Group Inc Earnings Call
Good morning, welcome to Mr. Cooper Group fourth quarter 2024 earnings Conference call.
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Speaker Change: Like the hand, the conference over to Mr. Cooper Group.
Ken Posner: Good morning, and welcome to Mr. Cooper group's fourth quarter earnings call. My name is Ken Posner and I imagine VP of strategic planning and Investor Relations with me today are Jay Bray, Chairman and CEO, Mike Weinberg, President and Kirk Johnson.
Decorative vice President and CFO.
Ken Posner: As a reminder, this call is being recorded you can find the slides on our Investor Relations webpage at investors got Mr. Cooper Group Dot com during the call. We may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck also we may make forward looking statements, which you should understand could be affected by risk factors.
Ken Posner: That we've identified in our 10-K and other SEC filings.
Ken Posner: Not undertaking any commitment to update these statements if conditions change.
Jay Bray: Now turn the call over to Jay.
Jay Bray: Good morning, everyone and thank you for joining our call let's start on slide three with a review of fourth quarter results I'll summarize pre tax operating income was $235 million.
Jay Bray: Operating <unk> was 15, 8%.
Jay Bray: Tangible book value grew 12% year over year to $71 61 per share and our capital ratio was 24, 4% and.
Jay Bray: And liquidity was $3 4 billion.
Jay Bray: I'm exceptionally pleased with.
Jay Bray: These numbers demonstrate consistent predictable performance and what is especially notable as we delivered these results by closing on the acquisition of Flagstar is mortgage banking operations and Onboarding, one 1 million customers.
Jay Bray: This is by far the largest acquisition in our history and one of the largest customer transfers in the history of the mortgage industry.
Jay Bray: Drilling down into the segments servicing generated $318 million in pre tax income up 39% year over year, given the low level of prepayments. We project strong cash flows from our portfolio continuing throughout 2025 and long thereafter.
Jay Bray: Originations remain resilient, despite the sharp selloff in December generating $47 million and EBT.
Jay Bray: Funded volumes grew 38% sequentially significantly outpacing the market, reflecting very strong execution in the correspondent channel.
Jay Bray: Thanks to the hard work of our correspondent team and the trust of our clients, we have client into a top five market share position.
Jay Bray: As I mentioned on our last call our cost structure and retention make us the best buyer of Msr's in all channels.
Jay Bray: I'd like to comment on some other positives in the quarter. We proudly won the sharp Gold award, which is Freddie Mac's highest recognition for servicers.
Jay Bray: This award reflects our commitment to quality risk management and performance.
Jay Bray: Additionally, we have several of our sub servicing partners achieved gold level recognition through the strong performance we delivered on their portfolios.
Jay Bray: Our master servicing business received an upgrade from Fitch to one minus rating, which is a huge third party endorsement.
<unk> services is a business, which oversees the performance of other mortgage servicers on behalf of securitization and whole loan investors.
Jay Bray: By providing high Tech solutions and exceptional personal service our team has earned and sustain the number two position in the market.
Jay Bray: I'll add that master servicing generates valuable fee income.
Jay Bray: Mike will share some comments on how our fee income is becoming a meaningful part of our revenue story.
Jay Bray: Finally, we were pleased to see Moody's placed our corporate rating and positive outlook.
Jay Bray: They commented on the growing strength and scale of our franchise, our strong return on assets and solid liquidity and they cited our hedge program as a credit positive.
Jay Bray: Fourth quarter capped an amazing year for Mr. Cooper, and if Youll turn to slide four you'll see that 2024 was the culmination of a three year journey.
As we all remember 2022 and it was one of the most severe interest rate shocks on record with a fed tightening by 425 basis points and mortgage rates more than doubling.
Jay Bray: This shock created significant turmoil in the industry.
Jay Bray: We've responded with Swift and decisive action to reorient, our platforms and our nimble execution put us in position to anticipate new opportunities.
Jay Bray: If you go back to our fourth quarter 2022, investor presentation that Youll see us slide entitled expecting cycle wide opportunities for MSR acquisitions with a chart projecting a steep increase in MSR sales, peaking in 2024.
Jay Bray: On the call. We explained how originators had bulked up on Msr's and we're now facing a serious margin squeeze and report into strategic divestitures and the ongoing exit of banks is contributing to a supply demand imbalance.
Jay Bray: That was a good call and the results speak for themselves over the last two years, we've acquired 440 billion of Msr's at cycle wide OAS spreads, including the home point and flagstar transactions and many other tools.
Jay Bray: Today, our portfolio stands at $1 five trillion, representing the loans of over 6 million customers, making us the largest servicer in the U S. By a significant margin in fact, we're more than 50% larger than number two.
Jay Bray: We also took over the lead in sub servicing.
Our sizable scale and technology advantage has allowed us to generate positive operating leverage and rising returns on tangible equity.
Speaker Change: With those results don't show you Oliver is the momentum we are now experiencing the talent and enthusiasm of our people the promise of our technology and the depth of our competitive mode.
Speaker Change: Now turning to slide five let me wrap up with some high level thoughts on the outlook gives.
Speaker Change: Given our momentum we are increasing our OTC guidance range to 16% to 20% for 25% and 26, which is higher than our previous guidance of 14% to 18%.
Speaker Change: Though we are not immune to macro shifts we have built a balanced model that is resilient in the face of interest rate volatility and we're also well positioned to manage through a more adverse cycle.
Speaker Change: Let's talk about what's driving our confidence in the outlook.
Speaker Change: Investing in our culture is a huge focus for US Mr. Cooper has been certified as a great place to work for six years in a row and we see the tangible results of our high Trust culture and record low turnover a couple of weeks ago. We held a two day off site for the company's senior leaders in the energy.
Speaker Change: It was incredible and.
Speaker Change: In recent years, we've made tremendous progress improving the customer experience, but today, new technology is creating a whole new frontier of opportunities July and add value. We're exploring several several new value propositions for our customers some of which we plan to implement this year.
Speaker Change: AI is changing the world.
Speaker Change: And it may well be that one of the best applications for large language models is in the call Center environment.
Speaker Change: Mike will update you on our agent IQ rollout, which is generating rave reviews from our team members and I will just add that with our strategic relationship. We are light years ahead of peers on the journey to the cloud and true real time anytime processing.
Speaker Change: To summarize our strategic direction over the next two years I would remind you of the key drivers, which you've seen us deliver on consistently first we will stay laser focused on unit costs leveraging our lead in technology.
Speaker Change: We will keep investing in our origination platforms, both DTC and corresponded to generate higher volumes and gain market share.
Speaker Change: Third we will grow fee revenues by winning new clients for sub servicing master servicing and our other services businesses and by winning larger share of wallet.
Speaker Change: And finally, we will continue to analyze the market for acquisitions in a thoughtful and disciplined manner looking for opportunities to create value.
Speaker Change: And with that I'll turn the call over to our President Mike Wind back to take you through our operating results.
Mike Wind: Thanks, Jay and good morning, everyone I'd.
Speaker Change: I'd like to start by reviewing the servicing segment on slide six.
Speaker Change: We reported pretax income of $318 million, which is up 39% year over year, reflecting a favorable environment with low prepayment speeds and strong credit as well as the rapid growth in our portfolio and the operating leverage that resulted.
Turning to the portfolio the flagstar acquisition drove a substantial increase in scale on the owned side. We acquired 59 billion in <unk>, which is net of $18 billion, we sold to sub servicing clients with whom we have strategic relationships.
Speaker Change: With these sales we were able to keep the incremental scale benefits by retaining the subservicing, while providing a unique value added opportunity to our clients.
Speaker Change: Our ability to a range of these kinds of transactions is a distinct competitive advantage as is the quality of our platform as reflected in the Freddie sharp gold recognition for us and our clients that Jay mentioned.
Speaker Change: In terms of the outlook, we're excited about the growth opportunities we're seeing in 2025.
Speaker Change: Market yields for MSR is have returned to normal levels and there is plenty of competition, but we continue to see growth opportunities in correspondent and co issue.
Speaker Change: Within our return targets.
Speaker Change: Also we have started the new year with a small pipeline in bulk which is now growing a little and originate our profit margins remain under pressure, we would expect to see rising activity levels throughout the year.
Speaker Change: In terms of sub servicing the last year has been transformative we've doubled in size become the market leader in terms of share and has become the majority of our servicing book.
Speaker Change: There are a lot of factors contributing to our growth.
Speaker Change: Of course, the Flagstar transaction was a significant driver and you can see this added 275 billion of <unk> in the fourth quarter.
Speaker Change: This will decline slightly in Q1, when all of the Flagstar transfers are completed as the transaction contemplated some of the loans moving to other servicers.
Speaker Change: Another driver of growth as new clients and we were pleased to welcome New partners in 2024 and are in talks to add additional partners in 2025.
Speaker Change: What we're most proud of is the organic growth in this business.
Speaker Change: <unk> put our clients are winning.
Speaker Change: By leveraging our best in class servicing platform. They can focus on what they do best and whether that's asset management retail originations or banking, they're growing faster than the industry overall, which is driving our joint growth.
Speaker Change: Turning to earnings at current mortgage rates. The outlook is very strong through 2025 and well beyond as we continue to drive operating leverage in this business.
Speaker Change: For our first quarter, we'd guide you to a range of 315 million to $335 million of EDTA.
Speaker Change: If you'll turn to slide seven I'd like to give you an update on agent IQ, which youll recall, we talked about last quarter.
Speaker Change: <unk> IQ is what's called an Agentic framework application Thats designed to assist our call center team members by analyzing conversations in real time.
Speaker Change: Agent IQ helps detect customer intent and sentiment trends, providing insights to support agents in delivering better service.
Speaker Change: With train the model on millions of customer calls and this allows it to fetch relevant information and put it into the agents fingertips, including suggestions for next steps and of course, it generates a transcript and call summary, all of which is in compliance with applicable privacy laws and a responsible AI policy.
Speaker Change: We piloted agent IQ in the fourth quarter and today, it's fully rolled out in the servicing call Center, where it's now analyzing 400000 calls per month, and we're getting very enthusiastic reviews from our team members, including both newer agents and veterans.
Speaker Change: Our customers benefit from improved experience with quick clear answers to their questions and a higher percentage of questions resolved on the first call.
Speaker Change: <unk> is also a powerful tool for management.
Speaker Change: For example, we now get the automated summaries of topical issues in the call center and we can drill down into specific issues with the click of a mouse all the way down to individual calls.
Speaker Change: This improves our compliance and quality control functions, where we can now get automated summaries on individual customer engagement and cast a wider net with much higher sampling rates. Most important this tool will accelerate our ongoing mission to identify customer priorities and develop better processes to assess them.
And this may surprise, you, but from the conceptualization of this tool to the full deployment took less than a year.
Speaker Change: We have a very robust tech stack excellent data standards and a supremely talented team of technologists.
Speaker Change: We plan to rollout <unk> to our originations team members a little later this year as soon as we complete a telephony upgrade.
Speaker Change: So now let's move on to slide eight and talk about originations, where we generated $47 million in EBT consistent with the rise in mortgage rates during the quarter.
Speaker Change: I'd Echo Jay that the highlight this quarter was continued incredible execution by our correspondent team who generated a 48% sequential increase in production following a very big third quarter.
Speaker Change: Thanks to their efforts Mr. Cooper is now a top five correspondent lender, which marks a significant improvement in share from a year ago, when we werent even in the top 10.
Speaker Change: As our efforts to reduce servicing costs improved our bids we shifted energy to a series of enhancements to our platform.
Speaker Change: This included upgrading our pricing models building out a new client portal revamping, our capital market strategies and relentlessly reviewing our relationship with every existing client and prospect.
<unk> acquisition also expanded our network of customers, particularly with banks and credit unions. The results speak for themselves and I'll add that we're happy with our margins as well.
Speaker Change: Turning to slide nine, let's focus on DTC, where volumes were up 16% quarter over quarter as we funded loans locked during the brief rally in third quarter.
Speaker Change: Just to put this in context, the customer benefits during the quarter, we helped nearly 2000 customers lower their monthly payments over 8500 access equity in their homes and over 1400 purchased new homes.
Speaker Change: As a company, we feel great about delivering that kind of value to our customers.
Speaker Change: Now you'll notice we had an atypical move in our refinance recapture rate, which dropped to 35%.
Speaker Change: And what's driving this is the impact of a single large portfolio with an unusual profile that we acquired last year.
Speaker Change: Specifically it was an at the money deal and we knew the originators would solicit their customers aggressively.
Speaker Change: We priced the deal for limited recapture and we included contractual safeguards to protect us against early payouts.
Speaker Change: While this didnt result in a material impact to our MSR value. It did impact the recapture ratio. Excluding this portfolio a refi recapture would have been 53%, which is consistent with what we would expect given the heavier volumes of rate and term refinances in the quarter.
Speaker Change: Looking ahead, given the current level of mortgage rates, we would guide you to $30 million to $50 million in first quarter EBT and potential upside later in the year driven by the growth in our servicing portfolio combined with our focus on enhancing the customer experience for.
Speaker Change: For some perspective, 20% of our customers have note rates of 6% or higher which means we are well positioned to capitalize on rally is even if they're brief just as you saw in the third quarter.
Speaker Change: Home equity is another growth driver and here the numbers are pretty interesting, 94% of our customers have at least 20% equity and our average customer is nearly 50%.
Speaker Change: This equates M theory to 675 billion in equity, which our customers could access should they want or need to monetize this value.
Speaker Change: Even in a higher for longer scenario cash out refinances and home equity loans should be a steady recurring source of business for us and value for our customers.
Speaker Change: The last thing I'd like to cover is to share a little more information about the composition of our revenues related to Jay's comments about the growing importance of fee income coming from sub servicing master servicing and other client related businesses.
Speaker Change: If youll turn to slide 10, you can see the percentage contribution of own servicing originations and fee income to our total revenue.
Speaker Change: Fee income is generated by a number of businesses the biggest of which is our market leading sub servicing platform, but other client service related businesses contribute fees as well, including master servicing special servicing partnership and technology solutions and zone.
Speaker Change: 2024 in total these service related fee revenues totaled 500 million, which made up more than 20% of our total revenue and this revenue stream has been growing at a double digit pace for the last three years.
Speaker Change: Importantly, these businesses do not require any material capital or liquidity contributing to our growing return on tangible common equity.
Speaker Change: With that I'll hand, it over to Kurt.
Kurt: Thanks, Mike and good morning.
Kurt: I'll start on slide 11, with a brief recap of our financials.
Kurt: To summarize net income was 204 million, which included a positive $92 million Mark net of hedge to.
Kurt: $235 million in pre tax operating earnings and adjustments of $39 million.
Kurt: Let me unpack those adjustments.
Kurt: First there is a $22 million charge for facility shutdown costs.
Kurt: Given our home centric model, we have significantly reduced our need for office space in the Dallas area, and we were able to negotiate very favorable terms to exit two large leases, which should provide us with meaningful savings going forward and funds invest in renovating our headquarters, which will contribute to a more vibrant experience when we come together to collaborate and.
Kurt: Celebrate.
Kurt: Second we accrued $18 million in connection with the court ruling in our lawsuit associated with the legacy business.
Kurt: Third there was a positive $9 million reserve release related to the home point acquisition.
Kurt: And then there were a few smaller miscellaneous charges.
Kurt: In terms of the overall operating results, Mike covered originations and servicing and I would draw your attention to the corporate segment, which incurred $51 million in expenses.
Kurt: And this number are some year end incentive accruals stock vesting and a small technology write off and zone was a slightly larger drag this quarter.
Kurt: For the first quarter, we anticipate corporate expenses remaining at this level due to the timing of annual stock compensation before settling down to a more normalized run rate of 40% to $45 million in the second quarter.
Kurt: Okay.
Kurt: Turning to the Mark to market line, we marked up the MSR to reflect rising interest rates and expectations for lower <unk>, leading to a quarter end valuation of 159 basis points of UBB or a five five multiple of the base servicing strip.
Kurt: Offsetting this gain were $581 million in hedge losses, which equates to 85% coverage somewhat above our 75% target.
Kurt: We're extremely pleased with the hedges performance, which over the last seven quarters is track the target fairly closely and contributed to stable and predictable results.
Kurt: Now if youll turn to slide 12, I'll comment briefly on credit.
Kurt: Our high quality mortgage portfolio continued to perform extremely well with MSR delinquencies up slightly by 11 basis points to one 2% level that remains quite strong compared to peer and industry metrics.
Kurt: Low delinquencies reflect our thoughtful portfolio construction, which you can see in the rising FICO scores and declining LTV ratios for our customers as well as our ongoing loss mitigation efforts evident and a 47% year over year increase in loan modifications and workouts, which is a very important part of our mission to keep the dream of homeownership.
Kurt: Clive.
Kurt: We keep a close eye on Ginnie Mae delinquency trends and we've noticed a small but consistent deterioration in industry wide performance across all product types and vintages, which is especially notable for loans, which have already gone through modifications.
Kurt: You can see this trend in our Ginnie Mae delinquencies too, but I would note that this portfolio has grown by less than 4% of the past year and today represents only 19% of our total loan portfolio and thus is not a material exposure.
Kurt: Now turning to slide 13, let me update you on our key balance sheet metrics.
We ended the fourth quarter with liquidity of $3 4 billion, which was down from the $4 1 billion in the third quarter as we utilized MSR lines to fund the acquisition of $1 $3 billion in assets from Flagstar, which principally consists of the mortgage servicing rights.
Kurt: Liquidity consisted of $753 million of unrestricted cash with the remaining in MSR line capacity, which is fully collateralized and immediately available.
Kurt: Our capital ratio as measured by tangible net worth to assets ended the fourth quarter and 24, 4% down from 27, 9%, reflecting the increase in both MSR assets and higher loans held for sale due to strong correspondent growth.
Kurt: We are now operating comfortably within our target range. The level that we believe is appropriate for the current environment and mix of assets on our balance sheet on.
Kurt: On a final note ill.
Speaker Change: Comment that the 16 and 20% our OTC range that Jay mentioned earlier, it's not reliant on expanding leverage or decreasing our robust liquidity.
Ken Posner: Thanks for listening to our report and I'll now turn the call back to Ken for Q&A.
Ken Posner: Thanks, Kurt and Marvin that you now start the Q&A process.
Ken Posner: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Ken Posner: Please standby, while we compile the Q&A roster.
Speaker Change: And our first question comes from the line of Terry MA of Barclays. Your line is now open.
Terry MA: Hey, Thank you good morning.
Terry MA: Maybe just starting with the revised ROE target range, you touched on it a little bit.
Terry MA: But can you maybe just talk about the drivers that could get you to 20%.
Much of the high end is actually kind of rate dependent or can you kind of hit that target even if it were to stay in this rate environment.
Terry MA: Hey, Terry its Kurt good morning, and thanks for the question.
Terry MA: I think we've touched on that a couple of times before and I think Mike will go into a little bit but the services segment that we called out this quarter generates obviously fee based income, which can generate a higher RPC.
Terry MA: Again given.
Speaker Change: Got it.
Speaker Change: It's asset light nature and equity like in nature.
Speaker Change: And we are excited originations as you saw in Q3.
Speaker Change: If we have a better originations environment.
Speaker Change: That's essentially fee based income as well and so that could drive us to the higher end of our OTC, but the higher for a longer environment.
Speaker Change: It worked well for us and we think we're going to be within that range, regardless of what the rate environment looks like.
Speaker Change: Go ahead, I'll, just say I would add operating leverage to that I mean, if you think about the power of the organization. We added 440 billion of servicing the last couple of years.
Speaker Change: I think added less than 20 people. So just to wrap your head around that it's pretty incredible so great job by J Jones and his team and candidly we think we're in the middle innings of that we think there's tremendous leverage.
Speaker Change: Tremendous cost.
Speaker Change: A better customer experience and we're focused on that every day, so I think thats going to be a key driver as well.
Speaker Change: The last thing I'll just add.
Speaker Change: Its execution that is not interest rates.
Speaker Change: We feel really good about the balanced business model, we can deliver.
Speaker Change: On the return targets.
Speaker Change: Most of what's happening in terms of the interest rate environment, and we have a lot of momentum and just about every part of our business. So we are seeing.
Speaker Change: <unk> origination as we talked about the huge increase in correspondent.
Speaker Change: <unk> seen growth in our direct to consumer business and we highlighted the home equity opportunity, which we think is quite significant.
Speaker Change: And as Jay mentioned, we continue to execute on servicing and.
Speaker Change: Theres validation, whether it's the <unk>.
Speaker Change: Any sharp awards, where there were super proud not just to win gold and the large servicer category, but to see clients for whom we sub service windows and the medium and smaller servicer category. So a clean sweep of the gold.
Speaker Change: So we're going to continue to focus on execution keep the momentum and if we do it well we could be in the higher end of the range.
Speaker Change: That's what we're working hard to do every day.
Speaker Change: Got it and then maybe just to follow up on the.
Speaker Change: Services fee revenue I'm, just curious can you kind of sustain that double digit growth for that revenue stream going forward and then maybe just longer term, what's the steady state mix of services revenue that youre kind of targeting if there is a target I mean, that's a higher multiple earnings stream in my view. So I would imagine you would want to maximize that somewhat.
Speaker Change: Thank you.
Speaker Change: Yes, I mean, I think what we're most proud of with our fee based revenue.
Speaker Change: But we show it and we do often refer to it as services is.
Speaker Change: It's essentially taking all of the things that we're really good at and making it available to the rest of the industry.
Speaker Change: And.
Speaker Change: We showed it to you as a percentage of overall revenue and you asked about that.
Speaker Change: But as we've talked about there is some volatility in other parts of our revenue stream you can see how big of originations was in 'twenty, one and 'twenty, two and how much that changed over 23 and 'twenty four.
Speaker Change: But the services revenue stream is quite steady.
Speaker Change: And shouldnt have that level of volatility. So we think theres enormous opportunity to do more for the clients that we already work with and there is a number of new clients that were in discussions with.
Speaker Change: Continue to grow that business so.
Speaker Change: I guess, a long way of saying, yes, we do think we can sustain the growth in that business and see a lot of opportunity with that and.
Speaker Change: We agree with you. It's these businesses and other companies tend to attract a higher multiple than that.
Speaker Change: The high single digit multiple empowered earnings that we have today.
Speaker Change: Thank you Amit for next question.
Speaker Change: And our next question comes from the line of Mark Devries of Deutsche Bank. Your line is now open.
Mark Devries: Yes. Thanks.
Mark Devries: Could you just talk about the pipeline for bulk MSR.
Mark Devries: Platform sales here I mean, it seems like.
Mark Devries: While you are now within the.
Mark Devries: The range on your tangible net worth to assets you still have a lot of capital flexibility.
Mark Devries: So just.
I wanted to get a sense of how you're sizing up the opportunity set there and also.
Mark Devries: As well kind of what the returns look like are they still kind of accretive to that 16% to 20% range you've kind of targeted for the next two years.
Speaker Change: Yes, I think the bulk market as Curt mentioned is coming back and certainly at attractive levels and if you think about if we're in a higher for longer environment. I think that will certainly help to bulk market because youre going to see more originators that are going to need to sell so we think thats going to.
Speaker Change: Throughout the year and we are starting to see certainly more activity there and I think from an acquisition standpoint in my view.
Speaker Change: Still fundamentally believe there's kind of a deconsolidation in our industry.
Speaker Change: And you've seen us be very selective and very disciplined in looking at those opportunities.
Speaker Change: But I'm pretty bullish that theres going to be opportunities that are going to be attractive.
Speaker Change: So I think again consolidation will continue and we will be a part of it.
Speaker Change: In terms of the returns I mean, I think we're still seeing.
Speaker Change: They may not be the cycle best returns that we saw a couple of years ago, but they are still solid risk adjusted returns.
Speaker Change: Our hedging has held up really well and so we do think.
Speaker Change: And to that 60% to 20% range as we're acquiring and we've always said, we're not going to chase yields will be very disciplined about our purchases and we continue to be that way.
Speaker Change: Okay great.
Speaker Change: As you pointed out in the presentation your special servicing business.
Speaker Change: In digital real estate auction marketplace gives you a kind of a nice counter cyclical revenue stream or are you still thinking about potentially monetizing them.
Speaker Change: If the revenue picture improves or do you just kind of like it now.
Speaker Change: Is that kind of countercyclical hedge.
Speaker Change: No I think we look at it.
Speaker Change: <unk> done a great job at the end of that you know we've made investments there we've increased our market share.
Speaker Change: As the market turns to your point it is going to be a very valuable asset.
Speaker Change: I think ultimately we do think some sort of monetization makes sense for all or part of it.
Speaker Change: Just to be able to capture all of our business as we've discussed et cetera et cetera. So I don't think strategically our thoughts.
Speaker Change: Shifted around them, we like the business, we're going to be patient.
Speaker Change: We will get the right value for it but at some point.
Speaker Change: We will extract.
Speaker Change: Some value there.
Speaker Change: Got it thank you.
Speaker Change: Mhm.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And our next question comes from the line of Christopher <unk> of Piper Sandler. Your line is now open.
Speaker Change: Thank you and good morning, everyone first on servicing expenses do you continue to drive efficiencies and improvements there expenses were $5 three bps of the servicing portfolio. As you look forward do you believe that you can continue to drive that $5 three bps lower through scale Tac AI and other areas.
Speaker Change: Or is there a period, where you expect that to have flat overtime.
Speaker Change: No look I think as I said and Mike Please jump in but I think as I said earlier, we really believe we're in the middle innings of what's possible. There I mean, if you look at our 25% and 26 investments. They are AI centric. They are in a process centric, where we're going to continue to be able to drive cost out.
Speaker Change: And slash allow us to grow.
Speaker Change: To continue to grow in a very scalable way. So we think there's a lot of opportunity there.
Speaker Change: And we're making investments as we speak yes, and I'll just add.
Speaker Change: Ed.
Speaker Change: The level of investments that we're making in technology is increasing and we're feeling more comfortable investing more because the team has executed so well and so all of the.
Speaker Change: The things you mentioned scale continued investment.
Speaker Change: Relentlessly waking up every day.
Speaker Change: Thinking about how we can do things better for our customers. How we can let customers do things for themselves that they want and how we can make our team members who serve our customers more effective it's all of those little things that are adding up to the improvements we're seeing and we're bullish on the opportunities ahead of us.
Speaker Change: Great. Thank you I appreciate that and then following up on the New Aro TCE Guide last quarter. You said you were very comfortable at the midpoint of the prior guide, which would have been about 16% would you say you are comfortable on hitting the midpoint of the new guide for 2025 or should it be upward sloping over the next.
Speaker Change: Two years and of course being rate dependent.
Speaker Change: And just curious on what your view of some of the major changes from three months ago to today, just driving that guide. Thank you.
Yes, it's a great question. So I mean, I think we've said that we're 60% to 20% for the two years that doesn't mean that every quarter is going to be.
Speaker Change: At the midpoint or above.
Speaker Change: Potentially even at the low point, but we're comfortable with the 16% to 20% I think what youre seeing as we're adding that incremental business from a services perspective were driving that incremental scale from an operational efficiency perspective, and we're just going to continue to work on that day. After day. After day is what we've done.
Speaker Change: What we're good at and I think Youll see that our OTC you sort of climb over the course of the two years as a result of all of us.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Doug Harter of UBS. Your line is now open.
Speaker Change: Thanks can you talk about your.
Speaker Change: Our capacity in the origination business and the ability to kind of maintain recapture rates if and when we see the next.
Speaker Change: The next refi opportunity.
Speaker Change: Yes.
Speaker Change: As we've talked about in through most of 2024.
Speaker Change: We kept a little bit of a buffer capacity to be able to handle expected dips in rates than we saw in September when rates drop we were in position to be able to capitalize on that and saw a nice increase in our.
Speaker Change: Rate term refi originations in our earnings.
Speaker Change: And as rates have risen and the right term opportunity has become much smaller.
Speaker Change: We again have excess capacity and we're working hard to fill it the big opportunity that we see and.
Speaker Change: We saw it in the quarter and we're already seeing it in the early part of the first quarter is with home equity.
Speaker Change: The majority of our portfolio, our customers still have rates below 4%.
Speaker Change: And as home values have increased the amount of equity in their home has grown with it so for customers that are carrying credit card that they wanted to do home renovations.
Speaker Change: Validate other debt.
Speaker Change: Home equity represents a great opportunity.
Speaker Change: And we've grow this is a product that we launched two years ago.
Speaker Change: And it has grown steadily since launch, but if we look at where we are we're still the majority of our customers that are getting home equity loans are still getting them away from us. So we see enormous opportunity to help our customers and we're making investments and enhancements.
Speaker Change: <unk> every day.
Speaker Change: And it's becoming an increasing share of what we're doing and we felt confident that we will be able to fill that capacity with new products that meet our customers' needs and we like the idea of continuing to keep a buffer through this year because rates will be volatile and we wanted to be ready to capture the opportunities when they come.
Speaker Change: The only thing I would say to that is and we haven't talked as much about the investments that we've made.
Speaker Change: The origination platform as we have in servicing but over the last few years, we've made significant investments in the origination business effectively component <unk>.
Speaker Change: Most every aspect of the origination process, so our ability to scale today.
Speaker Change: As night and day or day compared to where it was two years ago.
Speaker Change: And the team has done a good job there, but we can we can scale up pretty quickly now with the investments we've made and we continue to make those.
Speaker Change: This year and next so oil leg of it only going to become more efficient and more scalable there.
Speaker Change: Alright, great. Thank you guys.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Bose George of <unk>. Your line is now open.
Speaker Change: Hey, guys. Good morning on the corresponding market share obviously up meaningfully do you see room for this for sure to increase further from here or is this kind of a good run rate.
Speaker Change: Also should we think about one more month of flagstar production since that deal closed end of October.
Speaker Change: Yes, I think good morning, bodes I think on the correspondent absolutely you should expect us to.
Speaker Change: Continue to grow and grow share.
Speaker Change: It's really not super complicated right at the end of the day, we're going to continue to focus like we said on our scale and our cost leadership. So we're driving costs down continue to focus.
Speaker Change: On retention and where ultimately we think the best buyer of Msr's and so what's the power of the platform now and the scale of the platform, we think theres going to be a lot of opportunity to continue to grow our correspondent at very attractive returns.
Speaker Change: And you can comment more on slack on the Texstar Flagstar is a pretty simple which is yes. We closed October 31, we had two months in Q4 loss of three months in Q1, so pretty.
Speaker Change: Pretty pretty simple answer I think to that those thanks.
Speaker Change: Hey, great. Thanks, and then it looks like you recently sold the Flagstar is tpa businesses that did not fit into what you guys wanted to do on the origination side.
Speaker Change: Yes, and Mike you can jump in but we look at that.
Mike: Took a hard look at it and thought about it strategically, but yes, ultimately made a decision on that.
The broker channel was not something that we wanted to move forward, yes, having said that we were very very intentional about finding a great partner and finding a home for the team members and so.
Mike: That was a real commitment.
Mike: We made to the flagstar team members and the Mr. Cooper team did a great job on that and we feel like India is a great home for them.
Mike: And good things will happen there, but that's how we thought about it strategically.
Mike: Okay, great. Thanks.
Thank you Amit for next question.
Derek Summers: And our next question comes from the line of Derek Summers with Jefferies. Your line is now open.
Derek Summers: Hi, Good morning, everyone. I know you guys don't disclose margins by channel, but just given the kind of channel mix shifts could you provide some directional color.
Derek Summers: On how those trended kind of how we should think about that in the near term.
Derek Summers: Yes, Derrick I'll take it.
Derek Summers: Look realistically from the fourth quarter to the first quarter the margins Didnt really change materially.
Derek Summers: But channel by channel they are about consistent and they've been consistent.
Derek Summers: Even even in the.
Derek Summers: The drop in rates at the end of Q3, we didn't see a real increase in margins. So we've seen a.
Derek Summers: Pretty consistent margins hold and thats by a byproduct and by channel all the way through.
Derek Summers: Got it thank you.
Speaker Change: Historically, you guys have targeted a 50 50 mix of sub servicing and owned.
<unk>, but kind of given where the portfolio sits in your earlier comments.
Speaker Change: About increasing wallet share amongst sub servicing clients should we kind of think about that.
Speaker Change: Target changing a bit.
Speaker Change: Yes, <unk> you see the shift to where we're now larger in sub servicing than we are in owned servicing.
Speaker Change: And as I mentioned in some of the upfront comments, we're seeing really strong organic growth in that business. So a lot of the big increase that happened was due to flagstar, but what we feel best about.
Speaker Change: Is.
Speaker Change: The clients that use us for sub servicing are benefiting from our superior efficiency quality.
Speaker Change: Customer experience and they're seeing their business grow more quickly than the rest of the market and we're going to be there and its been partner to grow with them and so we may see the percentage subservicing grow a little bit more quickly than owned servicing which obviously requires capital liquidity use of our balance sheet.
Speaker Change: We see opportunities for growth in both parts of the business frankly.
Speaker Change: Thank you that's all for me.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Eric Hagen of <unk>.
Speaker Change: Your line is now open.
Speaker Change: Hey, Thanks, good morning, guys.
Speaker Change: When we think about the inputs and assumptions used for the MSR valuation.
Speaker Change: Can you remind us if theres, a recapture estimate which is factored into the fair market value.
Speaker Change: And then along those same lines I mean.
Speaker Change: I noticed that you guys use it an option adjusted spread is one of the key inputs to that valuation.
Speaker Change: Hopefully without maybe going down a complicated rabbit hole is there a way to think about the spread in this rate environment.
Speaker Change: Just how sensitive it is to rates or other conditions in the market.
Speaker Change: Hey, Eric it's Curt.
Speaker Change: I'll try not to take us down a rabbit hole here because.
Speaker Change: Because I want to do it and I won't do it.
Speaker Change: But.
Speaker Change: Yes, I mean, we do.
Speaker Change: We do factor in recapture into our value, but the reality is that recapture whether it's implicit and.
Speaker Change: Exports of them in the model or implied because of it.
Speaker Change: The discount rate is in everybody's model because thats the way the MSR as trade these days and in terms of option adjusted spread yes, we moved to that model almost three years ago now.
Speaker Change: And realistically.
Speaker Change: Or a lot of the loans that are four coupon and lower.
Speaker Change: Sure.
Speaker Change: Now all of the of those loans those will factor into it at all so youre looking at essentially just a straight.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: Doesn't vary all that much warehouse.
Speaker Change: On loans that are closer to out the money you see the option adjusted spread kind of widening a little bit and thats. The way that we look at the portfolio.
That's why we were purchasing a lot of deep discount bonds with 22 and 2020.
Speaker Change: Okay, great interesting color. Thank you guys.
Speaker Change: How do you see any dismantling of resources at the CFPB, maybe changing your business.
Speaker Change: Maybe in either direction. Thank you guys.
Speaker Change: Look I think.
Speaker Change: Our view is as you know consistently we are going to work with the regulators in a review them.
Speaker Change: The way they think about goals of helping customers is the same as the way we think about it so we will.
Speaker Change: Obviously be very involved and engaged but we don't see anything changing imminently with them and more kind of navigate that as things unfold.
Speaker Change: Okay I appreciate it guys. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Macau government of citizens.
Speaker Change: Your line is now open.
Speaker Change: Hey, good morning, guys. Thank you.
Speaker Change: If I could just follow up on the.
Speaker Change: The range that you guys are the guidance that you provided for for originations of $30 million to $50 million in the first quarter.
Speaker Change: I guess, taking.
Speaker Change: What would what would need to happen for you guys to sort of hit the upper end of that range would it be a continued.
Speaker Change: Momentum in Fantastic quarter, you guys had in the fourth quarter and in the in the correspondence space would it be an increase in the DTC space and how do you guys kind of sort of think about the mix between those two and what would cause you to hit.
Speaker Change: Hit the upper bound that range. Thank you.
Speaker Change: Yes, I mean, the short answer is the biggest driver would be a drop in interest rates.
Speaker Change: The correspondent business is going to continue to grow it's relatively low margin. So it makes up a smaller part of the originations earnings but is a really important part of feeding our servicing business.
Speaker Change: For our direct to consumer business right now.
Speaker Change: With mortgage rates over 7%, there really isn't any rate term refinance opportunity to speak of.
Speaker Change: We feel good about being able to operate within the guidance range based on the opportunities we have to help our customers take.
Speaker Change: Take advantage of the equity they have in their homes through cash out refinances and through home equity.
Speaker Change: As well as purchase so but if there were it happened very quickly in September if there were a rate drop like that will be standing by ready to help customers take advantage of it and lower their monthly payments.
Speaker Change: And that should add a lot of value for our customers and for our originations business.
Mike Wind: I will say in the quarter I mean, we are seeing positive results on DTC and to Mikes point earlier from a second lien standpoint.
Mike Wind: We've seen a lot of we've made a lot of progress there and we're growing that business and we think there's a massive opportunity. So I think that those can be some drivers as well to kind of.
Speaker Change: As you think about the range.
And we've really only been in the second lien product in any material way for about a year and a half and investors are now getting more and more comfortable with the product, but we are delivering because it is all from our customers. So we know the performance and the performance has been excellent we're getting great execution, and I think more and more of that's allowing us to go great.
Speaker Change: <unk> to our customers, which is just going to accelerate that cycle.
Speaker Change: Okay great.
Speaker Change: Great. Thank you for that color and best of luck going forward.
Speaker Change: Thanks, Mike Thank you.
Speaker Change: Thank you Amit for next question.
Speaker Change: Our next question comes from the line of Giuliano Bologna of Compass point. Your line is now open.
Giuliano Bologna: Good morning, congratulations on the.
Speaker Change: Thermal performance.
Speaker Change: The first question.
Speaker Change: And hopefully not too complicated but.
Speaker Change: If I assume you are at the midpoint of the 16% to 20% of our call. It 18% ROTC. Even if you are buying back a couple hundred million dollars of stock in originations are growing.
Speaker Change: You'd still be delevering, unless youre growing the MSR book somewhere in the teens.
Speaker Change: Yeah, probably even.
Speaker Change: Yes.
Speaker Change: Is the mid teens, so I'm curious when you think about.
Speaker Change: The growth in <unk> and the growth.
Speaker Change: Your servicing UCB.
Speaker Change: Should we be thinking about it in terms of like low double digits.
Speaker Change: Mid double digits could it go higher I realize that the market is changing there is probably less both deals and youre going to be a bit more focus on correspondent.
Speaker Change: Just trying to think about.
Speaker Change: Roughly where you think.
Speaker Change: The growth rate in <unk>.
Speaker Change: At least in the near term.
Speaker Change: Medium term.
Speaker Change: Hey, Julien this is Kurt thanks.
Julien: Thanks for the comment on further question I think Youre right I think looking at it in kind of a growth in the low double digits, but as we said earlier, we're not going to be chasing yield and we know that.
Speaker Change: All right.
Speaker Change: I mean, obviously, our stock has performed really really well.
Speaker Change: Pleased with that but we're still trading at about eight times four P. So we still are going to be active.
Speaker Change: <unk> and kind of repurchasing stock and to your point.
Speaker Change: Yes.
Speaker Change: If we're not seeing great opportunities now we use the opportunity to delever, a little bit keep some dry powder and be ready for when things improve again and so while we have that in our plan in terms of kind of low double digit growth, we're going to be opportunistic around it.
Speaker Change: That's very helpful.
Speaker Change: Thinking about the origination side.
Speaker Change: You gave us up 57%.
Speaker Change: This year.
Speaker Change: And that's obviously the DTC.
Speaker Change: Channel is internally focused so I would assume that you should have still have some pretty strong growth as you kind of integrate the flagstar portfolio.
Yes.
Speaker Change: Stabilized portfolio was acquired and start working on the recapture opportunities within that book.
Speaker Change: Is it fair to assume you still grow even regardless of the rate environment.
Speaker Change: Over the next few quarters.
Speaker Change: So I'm curious what would really move the needle in terms of.
Speaker Change: Accelerate DTC growth would you need to kind of 50 basis points 100 basis points or is there any kind of view level.
Speaker Change: Level, where you'd see a real acceleration.
Speaker Change: DTC volumes in your in your in your opinion.
Yes, Hey, Julianna.
Speaker Change: Short answer is yes, there is wind at our back as the portfolio continues to grow so we would expect growth throughout the year.
Speaker Change: And it's the opportunities beyond that and are very much the things that we talked about.
Speaker Change: Continued.
Speaker Change: Execution.
Speaker Change: The huge opportunity that we see in home equity.
Speaker Change: We're making investments in.
Speaker Change: The scalability of the business, we're continuing to drive our cost leadership. There. So we expect our cost to originate to go down over the course of the year.
Speaker Change: If and when rates do drop and we start to use our capacity, we're now able to add new people and get them ramped up much more quickly than we used to be able to in the past.
Speaker Change: We're investing in digital self service tools, so customers can help themselves. We're investing in automation. So you put the growth in the portfolio with the investments, we're making and we feel really great about the opportunities. We see ahead in this business.
Speaker Change: That's very helpful. I appreciate the question.
Speaker Change: And I will jump back in queue.
Speaker Change: Thank you I'm showing no further questions at this time I would now like to turn it back to Ken Posner for closing remarks.
Speaker Change: Great.
Speaker Change: Thanks, very much for joining us and if you have follow up questions. Please reach out to the Investor Relations team are here to answer them. Thank you. Thank you.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].