Q4 2024 Onity Group Inc Earnings Call
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Brandon.
If you need assistance during the conference today.
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Speaker Change: Good day, everyone and welcome to the Oddity group's fourth quarter earnings and business update conference call. At this time, all participants are in a listen only mode.
Speaker Change: You'll have the opportunity to ask questions. During the question and answer session. You May Register to ask a question at any time by pressing star one on your telephone keypad.
Speaker Change: They withdraw yourself into the queue by pressing star too please.
Speaker Change: Please note that this call may be recorded.
Speaker Change: And I'll be standing by should you need any assistance. It is now my pleasure to turn the conference over to Valerie Haertel, Vice President Investor Relations. Please go ahead ma'am.
Thank you Katie good morning, and welcome John It'd be group's fourth quarter and full year 2024 earnings call. Please note that our earnings release and presentation are available on our website at R&D group Dotcom.
Speaker Change: 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 be 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.
Speaker Change: 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 our SEC filings in the past actual results could differ materially from those suggested by forward looking statements and this may.
Speaker Change: Happen again in addition, the presentation and our comments contain references to non-GAAP financial measures such as adjusted pretax 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 operation and allocate.
Speaker Change: Resources non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and management's reasons for including them may be found in the press release and the appendix to the Investor presentation, now I would like to turn the.
Glen Messina: Call over to Glen Messina.
Glen Messina: Thanks, Valerie good morning, and thanks for joining our call looking forward to sharing a few highlights for the fourth quarter and full year as well as review our strategy and financial objectives to deliver long term value for our shareholders.
Glen Messina: Let's get started on slide three.
Glen Messina: 2024 was an incredible year for the honesty team and our shareholders. We started the year with an ambitious plan to improve our business across several dimensions and I'm pleased to report that we delivered on our objectives.
Glen Messina: For the full year, we delivered adjusted ROE of 20% and the highest net income since 2013, including previously disclosed debt restructuring costs.
Glen Messina: With our corporate debt restructuring, we reduced both the level and average effective cost of our corporate debt extended the maturity.
Glen Messina: And simplified the structure.
Glen Messina: We maintained our targeted 90% to 110% hedge coverage ratio and reported a favorable MSR valuation adjustments net of hedging.
We continue to invest in talent and advanced technologies to enhance performance productivity and capabilities.
Glen Messina: Our recapture improvement actions resulted in refinance recapped performance at levels equal to or better than several of our larger and more mature peers.
Glen Messina: We increased total servicing additions by 70% over 2023 and grew our portfolio to over 300 billion.
Glen Messina: Including the sale of $15 billion of MSR servicing released above book value.
Glen Messina: And finally, we rebranded the oddity to signify the company transformation.
Glen Messina: With our significant accomplishments in 2024, we're increasing our adjusted ROE guidance for 2025, and believe we've created a clear path to sustained profitability and value creation for our shareholders.
Glen Messina: Let's move to slide four to briefly discuss our fourth quarter and full year performance.
Yes.
Glen Messina: We delivered fourth quarter and full year results consistent with the guidance, we provided during our third quarter earnings call.
Glen Messina: Adjusted pretax income of $11 million in the quarter represents our ninth consecutive profitable quarter.
Glen Messina: Our results reflect expected increases in MSR runoff and client boarding expenses increased investment and recapture as well as differences in loan valuation adjustments versus the third quarter.
Our fourth quarter GAAP net loss reflects the previously disclosed charge to earnings of $41 million for the restructuring of our corporate debt net of the map sale gain.
Glen Messina: The originations team executed well in the fourth quarter, delivering total servicing additions of $25 billion.
Glen Messina: The highest since second quarter of 2022.
Glen Messina: For the full year adjusted pre tax income of $90 million was up 84% versus 23, generating a 20% adjusted ROE well above our guidance of 12% plus.
Glen Messina: GAAP net income attributable to common stockholders of $33 million was the highest since 2013 and again included a $41 million net charge for our debt restructuring.
Glen Messina: Let's turn to slide five to see our servicing and origination platforms.
Glen Messina: High performance through interest rate cycles.
Glen Messina: You can see even with the sharp increase in interest rates from 2021, our total business is delivering improved performance driven by our servicing platform.
Adjusted pre tax income for originations and servicing in the fourth quarter of $40 million combined is consistent with our estimate presented during the third quarter earnings call, resulting in $200 million in combined servicing and origination adjusted pre tax income for the full year.
Glen Messina: As expected servicing was still the earnings engine with originations earnings improving versus prior year.
Glen Messina: We believe having scale operations in originations and servicing provides the balance necessary to deliver strong financial performance through interest rate cycles.
Glen Messina: Given the current outlook for interest rates, we expect servicing will continue to be the predominant earnings contributor for 2025 and industry origination volumes are projected to increase modestly.
Glen Messina: Yeah.
Glen Messina: Please turn to slide six and we can talk more about our growth strategy.
Glen Messina: In 2024, we delivered a 70% increase in total servicing additions versus 2023 with more than 50% of total servicing additions in sub servicing consistent with our capital light growth strategy.
Glen Messina: Origination volume was up 33% in 2024 versus 23, which is quite favorable as compared to total industry origination volume, which increased 17% for the same period.
Glen Messina: During 2024, we added a record level of 16, new sub servicing clients with $30 billion of sub servicing additions in.
Glen Messina: In addition in 2024, we were selected as the sole sub servicer for the Veterans administration. The E. S. P program.
Glen Messina: Since year end 2020, we delivered about 75% growth in our sub servicing and E. S. S portfolio, while growing our total servicing portfolio by over 60%.
Glen Messina: Bear in mind, our yearend servicing portfolio level and growth metrics are muted by the $15 billion of servicing released MSR sales to capitalize on favorable bulk market pricing and support our corporate debt reduction and refinancing objectives.
Glen Messina: Please turn to slide seven.
Glen Messina: We can discuss the progress we made in our recapture platform.
Glen Messina: Our investments in consumer direct have resulted in continuous improvement and platform performance across multiple dimensions.
Glen Messina: As you can see on the left refinance volume in our consumer direct platform was up two five times in 2024 versus 2023 as compared to roughly two times for the industry overall.
Glen Messina: In the fourth quarter funded volume increased 64%, while lock volume declined 6% due to rising interest rates.
Glen Messina: Based on our refinance recapture benchmarking for full year reported results excluding home equity products. We believe our platform is performing better than several of our large peers and the ice reported averages through year to date Q3.
Glen Messina: Looking at refinance recap performance in the fourth quarter represented by the line on the chart, we've narrowed the gap to industry best practice to 11 percentage points.
Glen Messina: We believe there is upside opportunity to achieve industry best practice performance and we are continuing to invest in our platform to capture that opportunity.
Glen Messina: Our investments in consumer direct are generally concentrated in three key areas.
Glen Messina: First is technology to further streamline and simplify our processes and enhance the digital experience for our customers.
Glen Messina: Second is leveraging the power of predictive analytics, we are constantly expanding our universe of data and enhancing our proprietary models to improve our lead generation value proposition and conversion rate.
Glen Messina: Finally, we're working to expand our product offering with an improved home equity product set a proprietary reverse mortgage product and enhanced home purchase value proposition to broaden the range of options. We can offer our customers to meet their financial and homeownership goals.
Glen Messina: Now, let's move to slide eight to review some highlights about our servicing platform.
Glen Messina: Okay.
Glen Messina: We've built a strong and highly capable servicing platform that delivers industry leading performance.
Glen Messina: Winning new clients and have added $47 billion of new sub servicing UBB this year from both new and existing clients.
Glen Messina: We service or sub service $1 4 million loans with a total <unk> of over 300 billion on behalf of more than 4000 investors and 125 sub servicing clients.
Glen Messina: We serve as forward reverse and business purpose business purpose residential mortgages and our clients and loan investors include some of the largest financial institutions in the U S.
Glen Messina: We've been recognized by Fannie Mae Freddie Mac and HUD for industry, leading servicing performance for the past several years.
Glen Messina: In 2024, we were again recognized by Freddie Mac as a top tier sub servicer and achieved HUD tier one status.
Glen Messina: Our automation center of excellence has been recognized as best in class by Ssi when in 2024, and we were named as one of the National Association of mortgage brokers affiliate companies of the year for the past two years.
Glen Messina: Our investments in technology and global proprietary infrastructure enables a scale platform with a highly competitive cost structure.
Glen Messina: As we grow our total servicing U P b and continued to invest in technology and optimize our global work distribution. We believe our cost structure will continue to deliver increased profitability.
Glen Messina: Our investment in people process and technology has also allowed us to continue improving our net promoter score rating, which is our internal measure of customer satisfaction.
Glen Messina: Our servicing performance has been a fundamental reason why we've been able to grow our portfolio largely through organic growth.
Glen Messina: Let's turn to slide nine to discuss our investments in artificial intelligence.
Glen Messina: Yeah.
Glen Messina: For the past several years, we've been making focused and disciplined investments across the full spectrum of artificial intelligence applications to improve business performance capabilities and the customer experience. These.
Glen Messina: These investments fall into four categories robotics.
Glen Messina: <unk>, our optical character recognition.
Glen Messina: Natural language processing like voice and chat bots.
Glen Messina: And machine learning, which includes predictive analytics and generative AI.
Glen Messina: We have developed over 30 bots across 150 business processes that are saving over 50000 hours per month of manual effort.
Glen Messina: We're using optical character recognition and neural network enabled data extraction to index documents and populate information into our operating systems and databases.
Glen Messina: Our continued investment in technology has real resulted in 88% of customer inquiries being resolved through digital solutions in the fourth quarter.
Glen Messina: We're using decision models and predictive analytics to enhance our efficiency productivity and effectiveness enterprise wide.
Glen Messina: And we've recently announced the release of our new generative AI assisted sub servicing client support feature called lastly, within our loan span client portal.
Glen Messina: These are just some of the accomplishments of our award winning automation center of excellence.
Glen Messina: Now, let's turn to slide 10 to discuss our operating priorities for 2025, and the continued focus on leveraging the power of technology.
Glen Messina: Our operating priorities for 2025 are aligned with the key elements of our strategy, which remain unchanged and are focused on three areas accelerating organic growth differentiating operating performance and elevating the customer experience.
Glen Messina: To accelerate organic growth, we intend to retain more msr's that we did in 2020 for targeting a 50 50 mix of owned servicing and sub servicing to optimize earnings growth and returns.
Glen Messina: This will result in us holding over 135 billion of bond msr's, including ESF as we grow our total servicing portfolio.
Glen Messina: With limited refinancing opportunity, we intend to expand our product breadth and home equity and proprietary averse to grow our addressable market.
Glen Messina: This also helps maintain operating capacity and consumer direct to better support refinancing opportunity should rates fall.
Glen Messina: As we intend to expand our asset management activities with additional whole loan purchases and securitization activity.
Glen Messina: As well as taking advantage of opportunities created by the expected implementation of the new H M. P. S. Two point of rules.
Glen Messina: In the area of operating performance our goal is to strengthen alignment of operating outcomes with client and borrowing needs to further enhance our value delivery model relative to our competition.
Glen Messina: In the area of customer experience our goal is to elevate the experience with enhanced engagement and personalization.
Glen Messina: A common theme across all three priority areas is continued utilization of technology in the range of applications discussed on the prior page as a key enabler of performance.
Glen Messina: We intend to continue the deployment of automation machine learning and predictive analytics to increase recapture in win rate drive focused operating improvements in productivity.
Glen Messina: <unk>, our call center agents and loan officers to deliver efficient high touch service and minimize customer effort.
Glen Messina: Technology.
Glen Messina: <unk> and digital solutions are often referenced by us and several of our competitors. This is the new norm for our industry and we consider it a baseline requirement to remain competitive.
Glen Messina: Now I'll turn it over to Sean to cover our fourth quarter and full year performance in more details as well as our guidance for 2025.
Sean O'Neill: Thanks, Glenn let's turn to slide 11 for financial performance let.
Sean O'Neill: Let me start by reminding listeners that 2024 was one of our strongest years for our financial performance results in over a decade.
Sean O'Neill: The fourth quarter finished in line with guidance provided on the prior earnings call with a net loss of $29 million driven by the $41 million of corporate debt restructuring costs taken in the quarter. The bulk of this was about $37 million of accelerated unamortized original issue discount or OID.
Debt issuance cost from the prior notice.
Sean O'Neill: This acceleration of costs will improve our ability to generate earnings in the future as it is only bringing forward to costs, we would have.
Sean O'Neill: Curt anyway over the next three years and thus eliminate this expense in 2025 and beyond.
Sean O'Neill: For the quarter. This resulted in an ROE of negative, 25% and an adjusted pre tax ROA of positive 10% for the full year ROE was a positive 8% and on an adjusted basis, 20% in excess of our prior guidance. We also grew our book value per share from <unk>.
Sean O'Neill: $62 to $56 in 2024.
Sean O'Neill: The fourth quarter adjusted pretax income was $11 million driven by both our servicing and originations business. Overall, we had a strong quarter. We added scale to our servicing platform. We grew our owned MSR book by 18 billion of <unk> through both originations and bulk purchases.
Sean O'Neill: In addition, we boarded $7 billion of sub servicing portfolio is bringing us to 25 billion of gross additions in the quarter up from the $18 billion, we added in the third quarter.
Sean O'Neill: Other full year results include 2024, net income of $33 million, which was $4 and 13 of diluted earnings per share contribution. This is our best net income result in over a decade.
Sean O'Neill: With respect to adjusted pre tax income, we earned $90 million for the year and an adjusted ROE of 20% both of which are the highest since the 2018 PHH acquisition.
Sean O'Neill: Let's move to slide 12 to recap the various transactions, which we last mentioned on the earnings call and have all closed in the fourth quarter.
Sean O'Neill: We completed the debt issuance in October, including releasing the funds from escrow, which was contingent on the mat sale closing that took place in late November.
Sean O'Neill: The new debt along with other liquidity available allowed us to reduce our debt load by about 22% from year end 'twenty three to October.
Sean O'Neill: The early pay down of the two older debt stacks allowed us to bring forward to the fourth quarter, the OID and debt cost previously mentioned.
Sean O'Neill: For leaving future periods from an annualized interest expense of approximately $14 million in 2025, and frees up $10 million.
Sean O'Neill: To direct to other uses.
Sean O'Neill: The sale of our 15% ownership in our JV with those traded called MAF was completed in November this monetize the valuable investment that helped us grow and achieve scale.
Sean O'Neill: We remain partners with Oaktree and locked in the med sub servicing contract for five years and obtain some still restrictions on msr's for the next few years.
Sean O'Neill: Okay.
Sean O'Neill: In addition, we acquired perverse assets from waterfall. This was funded with preferred equity at an attractive rate as part of the post closing process with waterfall, we are discussing a potential adjustment relating to $14 million.
Sean O'Neill: <unk> of assets, we have not yet determined with waterfall the amount we're form of additional consideration if any with respect to those assets.
Sean O'Neill: In totality. This collection of transactions resulted in a stronger balance sheet lower leverage increased debt tender all while maintaining liquidity and help us increase book value to $56 per share.
Sean O'Neill: Please turn to slide 13 for forward and reverse servicing performance.
Sean O'Neill: Servicing segment remains a strong contributor to adjusted PTC by maintaining a consistent year over year performance sequentially as anticipated there was a seasonal decline in the fourth quarter compared to the third quarter.
Sean O'Neill: On the lower half of the page we discussed the sequential quarter comparison for Ford servicing driven mostly by higher runoff do visits due to the Q3 rate decline with accompanying payoff expenses as well as a reserve release that took place in the third quarter and slightly higher boarding costs and staffing due to large.
Sean O'Neill: New sub servicing client additions for.
Sean O'Neill: For the reverse business, we had a $9 million quarter over quarter drop due to several items. This includes a third quarter gain related to our asset management activities and lower marks on the buyout loans due to model and assumption changes.
Sean O'Neill: Full year <unk> servicing had impressive growth there for a strong 2023 result, mostly driven by higher revenues and flow due to more volume strong collections and continued efficiency efforts. This was slightly offset by higher portfolio runoff due to rates.
Sean O'Neill: Full year reverse servicing was strong but lower than the prior year due to a substantial 2023 gain on an asset transaction as well as higher runoff and lower revenues the UTV declined.
Sean O'Neill: As an added benefit to reverse assets arent effective natural hedge to the Ford MSR assets.
Sean O'Neill: We have more detail on how our servicing portfolio diversifies risk between owned and some service plus details on the various investor types in the appendix.
Sean O'Neill: Now, let's turn to slide 14 for the results of our origination segment.
Sean O'Neill: Originations both forward and reverse had another strong quarter across all segments and matched the third quarter results of $10 million of adjusted Pgi. This is despite the fourth quarter typically being a seasonally weaker period.
Sean O'Neill: This strength was primarily driven by strong volumes in our <unk> business, which led to higher income.
Sean O'Neill: In addition, recapture improved in the consumer direct and drove very highest funded volume improvements due to the increased pipeline from the September mortgage rate decline.
Sean O'Neill: One observation on consumer direct is our higher volumes are helping to support the recent hirings of loan originators.
Sean O'Neill: <unk> also had volume and margin gains in the quarter and you can see the volume and margin details on the next stage.
Sean O'Neill: Originations is posted significantly larger adjusted pre tax income numbers in 'twenty, four and 2023, which you can see on the upper half of the slide and is experiencing volume gains in all of our segments.
Sean O'Neill: Overall, we continue to operate in a region of originations business that is profitable with a wide range of services and we believe we are able to adapt to any interest rate environment.
Sean O'Neill: We are launching new products as Glenn mentioned, and we continue to be laser focus on enhancing our already strong recapture capabilities.
Sean O'Neill: Page 15 shows you more details on the volume and revenue margin in our origination segments.
Sean O'Neill: B, which is corresponded in the co issue business combined continues to drive the bulk of our origination volume and it Replenishes our owned MSR book following our opportunistic bulk sales in the second and third quarter of last year.
Sean O'Neill: The higher margin segments of consumer direct and reverse also continued to demonstrate both year over year and quarter over quarter growth.
Sean O'Neill: Finally turn to page 16 for guidance for 2025 moving.
Sean O'Neill: Moving left to right. We recap first our strategy and then our financial objectives. These remain largely unchanged from earlier presentations.
Sean O'Neill: For 2025, we expect a strong adjusted ROE in the range of 16% to 18%.
Sean O'Neill: We expect continued growth in our servicing book in both sub servicing and MSR volume and we're targeting over 10% year over year growth.
Sean O'Neill: We do not anticipate changing our hedge ratio from our current 90% to 110% target and we also expect to maintain a consistent efficiency ratio as we add revenue commensurate with new costs. In summary, we had a great year. We believe we accomplished everything we set out to do and are entering 2025 in a strong position.
Sean O'Neill: As for accelerated growth, regardless of the interest rate environment.
Sean O'Neill: You bet.
Sean O'Neill: Thanks, Sean.
Sean O'Neill: Please turn to slide 17.
Sean O'Neill: Okay.
Sean O'Neill: I am 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.
Sean O'Neill: We have delivered a robust increase in profitability and returns in 2024 and made meaningful progress against our strategic and financial objectives.
Sean O'Neill: Our performance is the result of our balanced business focus on prudent capital light growth demonstrated operational excellence and investment in technology to improve operating outcomes and the customer experience.
Sean O'Neill: Our execution is driven by experienced business team, who are relentlessly focused on delivering on our commitments.
Sean O'Neill: This all comes together to suggest a share price that we believe has excellent upside and.
Sean O'Neill: And we intend to continue to take the necessary actions to extend the outreach to harvest that value for the benefit of all shareholders.
Sean O'Neill: Overall, we could not be more optimistic about the potential for our business.
Speaker Change: With that Katy, let's open up the call for questions.
Speaker Change: Thank you at this time, if you would like to ask a question. Please press star one on your telephone keypad, you may remove yourself from the queue at any time by pressing star Q. Once again that is star one to ask a question, we'll pause for just a moment to allow questions to queue.
Speaker Change: Thank you. Our first question will come from Bose, George with K B W. Your line is now open.
George Bose: Hey, everyone. Good morning.
George Bose: So first just on the restructuring I.
George Bose: I guess you guys noted the $14 million benefit so I guess the back of the envelope math is that kind of a couple of points to your ROE going forward does that does that.
George Bose: It would seem right.
George Bose: Yes, 14 is for this year 2025, Boes and you're correct that.
George Bose: Allows us to redeploy capital that we normally would have.
George Bose: Right.
George Bose: On more debt.
George Bose: Okay, Great and then actually have the gain on sale margin.
George Bose: I was trying to.
George Bose: What you're providing the income statement that $59 million of gain for the full year.
George Bose: Yeah.
George Bose: You said on the quarterly number eight where it seems to work out something like $6 million.
George Bose: From last quarter, but the PTA that you showed is roughly flat. So I'm just wondering what else is going through that gain on sale line item that you guys.
In the release.
George Bose: Sorry, you're back in the appendix on the income statement.
George Bose: Actually just in the press release on the income statement it shows that $59 million gain on sales for 2024.
George Bose: And it doesn't show that the quarters. So if we just use that.
George Bose: Would you showed for the last quarter and it looks like that number would work out to something like 6 million for four <unk>.
George Bose: From last quarter.
George Bose: Versus a roughly flat and in the slide. So I was just trying to net that out I mean, we can do it separately if that's easier.
George Bose: Yes, we will come back to you on that Bose It may be driven by co issue, which.
George Bose: <unk> and.
George Bose: In our origination volumes.
It doesn't reflect loan gain on sale because that's direct purchase of Msr's.
George Bose: Okay.
George Bose: Okay that sounds good but I can check with you guys. After that and then just the share count dilution going away is that with the transaction as well with the warrants being removed.
George Bose: The share count.
George Bose: In the appendix should show the warrants.
George Bose: Based on the new language fifth.
George Bose: Shows a net settlement on the warrants.
George Bose: Okay. So that's what effectively I guess removes the dilution and so it's because the basic shares now I'd like to it looks like there.
George Bose: The same is the or.
George Bose: Or the diluted shares looks like its same as the basic is that right.
Speaker Change: No theres still going to be some dilution when the warrants are exercised its just more definable number.
Speaker Change: Okay. Thanks, Yale check with you guys on that as well.
Speaker Change: In the release.
Speaker Change: The basic and the diluted now as both the $7 9 million.
Speaker Change: Yes, Thanks, I'll follow up with you guys on that as well.
Ross: Thanks Ross.
Speaker Change: Thank you. Our next question will come from Eric Hagen with BPI, Jim Your line is open.
Hey, Thanks, good morning, guys.
Speaker Change: So looking through some of the expense line items and you guys talked about this in your opening remarks about technology and stuff, but you spend $50 million a year on.
Speaker Change: Tech and communications can you maybe provide any guidance on the item for the year.
Speaker Change: And what the nature of the expenses are and maybe how you benchmark the success of those expenses.
Speaker Change: Sure So Eric.
Speaker Change: Eric we don't necessarily provide specific guidance on what our tech spend is going to be in every year. We're focused on obviously managing the overall expense ratios and expense productivity for the company.
Speaker Change: And to the extent that we spend more from a technology perspective, the expectation is and part of our business processes.
Speaker Change: A business case around that technology spend in that technology spend is to produce a payback and a return on investment within our investment criteria.
Speaker Change: So we typically unless we're dealing with something that has to do with regulatory compliance where you just have to make a change to our business or have to make a change in technology too.
Speaker Change: Comply we really as we make our technology investments, maybe we may run smaller pilots to do a proof of concept to make sure. It's going to have the expected benefit we want but we are fairly disciplined in running a investment process that requires each one of our investments to produce.
Speaker Change: Our return on investment and the payback.
Speaker Change: Okay, alright, thanks for sharing that.
Speaker Change: Switching over to sub servicing I mean is there a way to quantify the operating leverage that you have and sub servicing at this point.
Speaker Change: Right now if we say that you're out of a $1 billion of incremental sub servicing UBB. The expenses go up by some certain amount on the next bill.
Speaker Change: It is.
Speaker Change: Another certain amount I mean is there a way to.
Speaker Change: Drill down and quantify some of us.
Speaker Change: Yes.
Sean O'Neill: Our platform is very scalable and Sean if I think back to prior earnings discussions I think in 2020.
Sean O'Neill: Three beginning in 2024, we did have a page in our earnings presentation that showed if you add 50 75 $100 billion of new sub servicing what the incremental <unk>.
Sean O'Neill: Contribution margin would be for that sub servicing it was in the range of two ish basis points on average across those three columns.
Sean O'Neill: Eight.
Sean O'Neill: Incremental again contribution margin, we didn't break it out between here's the revenue here's the expenses in here is the contribution margin that may give people some insights into our pricing approach. So it is something we wouldn't want to do in a public forum, but yeah. We generally look at it as.
Sean O'Neill: No.
Sean O'Neill: Sub servicing generally delivers anywhere from one to three basis points of incremental contribution margin.
Sean O'Neill: And.
Sean O'Neill: On average we typically look at it it's about two.
Okay, great color, Okay. That's helpful.
Sean O'Neill: Especially as you guys lean in their last last one from me I mean, you guys mentioned, the H MBS to Plano structure going into effect I mean, how exactly do you see that contributing.
Sean O'Neill: Contributing to tighter risk management or an opportunity to grow in this segment of the market are.
Sean O'Neill: Flesh out kind of what.
Sean O'Neill: What it means for you guys as that structure goes into effect. Thank you.
Sean O'Neill: Yes, Eric it's a bit of both so the <unk> two point out structure. It does a couple of things so.
Sean O'Neill: Generally it creates more liquidity for issuers of or participants in the reverse mortgage space, so dealing with things like tales buyout loans and whatnot.
Sean O'Neill: There are more options to.
Sean O'Neill: Monetize those those loans.
Sean O'Neill: And create liquidity faster.
Sean O'Neill: Which shouldn't should reduce risk for the business and in some of those.
Sean O'Neill: Some elements of the H M B S to point out.
Lending mechanisms you can actually deflect interest rate risk if you so choose.
Sean O'Neill: Think about how much of that we want to do as you know we use our reverse mortgage assets to hedge the forward mortgage asset so.
Sean O'Neill: Mitigating interest rate risk there.
Sean O'Neill: You may not make sense for us depending upon how much of.
Sean O'Neill: Reverse mortgages, we want a hedge against our forward MSR.
Sean O'Neill: But we think the incremental liquidity provided by our I should say liquidity sources provided by the new <unk> creates more options for us.
Sean O'Neill: To work Opportunistically within within a reverse space.
Sean O'Neill: For both new MSR and whole loans.
Speaker Change: Great stuff. We appreciate you guys. Thank you.
Sean O'Neill: I appreciate you.
Speaker Change: Thank you once again that is star one if you would like to ask a question.
Speaker Change: Our next question comes from Randy Binner with B Riley Your line is open.
Randy Binner: Hey, Thanks for taking the question.
Randy Binner: I have a more of a product question and that the with the <unk>.
Randy Binner: The new.
Randy Binner: Home equity and then prop reverse products.
Randy Binner: What are the different features and I guess really the consumer value proposition that.
Randy Binner: Do you think makes these products attractive to consumers in a higher interest rate environment.
Randy Binner: So yes, we do today offer a closed end second product and a HELOC product.
Randy Binner: Unfortunately, we end.
Randy Binner: Yes, we did throughout the course of 2024.
Randy Binner: We did.
Randy Binner: I'll take the opportunity to get a fair amount of customer feedback on how they perceive the products. How what was the ease of process for them that the products really satisfy their needs were they able to get the amount of equity out of their home that they wanted to get it is all about getting voice of the customer and there were a number of opportunities for us to improve or tweak that product off.
Randy Binner: Ring to better match the needs of the consumer some of those are actually product features.
Randy Binner: In terms of either.
Randy Binner: Pricing and door.
Randy Binner: The amount of equity that could get out of their home.
Randy Binner: Others were.
Randy Binner: Related to the process and how the approval process was and how the consumer felt during the approval process and yes. There were they were clearly opportunities to simplify so we've worked with our we are working with our investors kind of tweak the operational requirements around the product tweak the pricing tweak the features to make it easier to produce.
Randy Binner: Our product and deliver product to consumers that's easier for them delivers a better customer experience and helps them better accomplish their financial objectives.
Randy Binner: Yes.
Randy Binner: In the home equity related products clearly with the expectation that yeah. This is the 10 year Treasury and a 30 year mortgage rates probably going to be.
Randy Binner: North of 6% for quite some time there is a large population of consumers, which have few who have mortgage rates that are below 6% and aren't really interested in refinancing, but still have need to either redeploy capital by caching equity out of their home or doing that consolidation things of that nature. So.
Randy Binner: The home equity product.
Randy Binner: It was a great products, we believe for consumers to tap that equity and preserve the very low interest rate first mortgage they have on their home such the value proposition.
Randy Binner: For our proprietary reverse pivoting to that product.
Randy Binner: The heck arm.
Randy Binner: Mortgage product has a fair amount of limitations around age maximum amount you can borrow your home equity.
Randy Binner: And cost.
Randy Binner: And just like there are for example, a jumbo mortgage on the forward side. The proprietary reverse product you can think of it almost sounds like the jumbo mortgage of the reverse side.
Randy Binner: And it allows consumer to tap more of their equity because it will yes, you can accommodate.
Randy Binner: Total total total advance amount that's greater than what you can have an impact on product. So.
Randy Binner: It expands the addressable market that we could go after.
Randy Binner: As you know a fair amount of seniors are quite frankly wanting to age out in their primary residence and not really move or downside. So.
Randy Binner: It's a great cash flow and the state planning tool for people we think.
Speaker Change: That's super helpful. And then just on the on the <unk> as it is that still following kind of a demographic growth curve I think it's been a little while since I've looked at that product, but is that you still view that as kind of a baby boomer.
Randy Binner: Growth area <unk>.
Randy Binner: Demographically.
Randy Binner: Yes, we look at the reverse mortgage product again reverse mortgages, a niche business for us.
Randy Binner: Fraction of the size of our forward business.
Randy Binner: Yes, it's a great option on the aging baby Boomer population.
Randy Binner: To have a product that serves their needs.
Randy Binner: But it is a product that has whose attractiveness is very tied to the level of interest rates. So when interest rates are higher like they are now consumers can get generally can't get as much equity out of their homes as they can when interest rates are lower so.
Randy Binner: Yes, we tend to see origination volumes increase as rates go down just like refinancing volume increases on the forward mortgage side.
Randy Binner: And again as a hedge to the forward business reverse msr's tend to appreciate in value as rates go down.
Randy Binner: <unk>.
Randy Binner: Versus.
Randy Binner: Depreciate when rates go up.
Randy Binner: So yeah. It serves its a multipurpose tool for us it's a hedge to the forward business and an option on the aging population.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you. Our next question will come from Derek Summers with Jefferies. Your line is open.
Derek Summers: Hi, good morning, everyone.
Derek Summers: Slide 23 in the presentation I noticed you guys raised the range on <unk>.
Derek Summers: Owned MSR, what's driving that is that the kind of improved balance sheet positioning opportunities youre seeing in the market a little bit of both.
Derek Summers: Okay.
Derek Summers: Yeah, Hey, Derek little bit of both so look during 2023 and 2024 as we're coming up on our corporate debt maturities, we're very conscious of the need to maintain our own msr's in a in a very tight range and that $1 15 to $1 35 range and that is excluding <unk>.
Derek Summers: And we were very open about our asset management around the MSR and monetizing msr's to generate capital to pay down our corporate debt.
Derek Summers: Still have the objective to want to deleverage the company as we look forward, yes, maintaining that 50 50 balance between owned servicing and sub servicing for US. We think is the sweet spot that allows us to grow earnings as well as achieve the return targets of 16% to 18% that Sean talked about the adjusted pre tax return targets of <unk>.
Derek Summers: 6% to 18%.
Derek Summers: So it allows us to grow earnings, which increases our book value, which reduces our leverage and.
Derek Summers: So again with that 50 50 split of owned servicing and sub servicing it allows us to zero it hasn't that return target objective that we have.
Speaker Change: Got it and apologies if I missed this in the prepared remarks, but did you all provide update on your sub servicing pipeline or any outlook.
Derek Summers: Near term additions for sub servicing.
Derek Summers: We didn't we didn't put an update on the pipeline it is dynamic.
Derek Summers: We're constantly cycling through the pipeline I'll say it Eric look two.
Derek Summers: 2024 was just a terrific year for organic growth for us in the sub servicing space. So we added 16, new clients. During the course of the year, that's more than a new client per month.
Derek Summers: The sub servicing business development team did an awesome job last year.
Derek Summers: And it's really enabled by the quality of our servicing platform and our operating performance. There third yes, we are.
Derek Summers: Are able to demonstrate improved performance versus for our clients versus our customers, we're continuing to invest in that in our sub servicing.
Derek Summers: <unk> breath.
Derek Summers: Expanding into business purpose residential in a very thoughtful and methodical way.
Derek Summers: As we talked about we just introduced our new AI.
Derek Summers: Customer agent assist for our loan spanned platform, which allows.
Derek Summers: Our sub servicing clients to ask reform questions.
Derek Summers: And to load and span about their portfolio and get and lastly, we'll go retrieve that data and bring it back for them. So you got to look.
Derek Summers: It's all about delivering value that matters to your sub servicing client, they're all a bit different they all have a different hopper and so you're really taking the time to understand your clients' financial objectives their business objectives zero in on those and make sure you put together a a business framework.
Derek Summers: That drives the performance that matters to our clients so looking forward to it.
Derek Summers: We are excited about the opportunities for us in sub servicing on a go forward basis.
Derek Summers: And hopefully we can have another record year.
Derek Summers: Eric the guidance, we gave was 10% plus growth total UTV and that includes both sub servicing and owned MSR growth. So as Glenn pointed out we're enhancing and increasing our focus on landing new sub servicing clients and that continues to be a critical part of our business for capital light growth.
Derek Summers: But in prior years, we found ourselves quite often selling msr's to create liquidity to pay down debt now we may have the opportunity to grow the owned MSR book Cats, what you picked up on page 23, and so therefore that UPC growth just reflects growth across both.
Derek Summers: Both sides of this service Iba owned and sub service.
Derek Summers: Got it that's helpful color. Thanks for taking my questions.
Speaker Change: Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: We will pause for just a moment again that is star one if you would like to ask a question.
Speaker Change: And it appears we have no further questions at this time I will now turn the program back over to our presenters for any additional or closing remarks.
Speaker Change: Thanks, Katie and again I'd like to thank everybody for joining the call today and certainly thank our shareholders and our key business partner for supporting our business.
Speaker Change: I also want to thank and recognize reported directors and global business team for their hard work and commitment to our success and with that we'll conclude the call I look forward to speaking with everyone on our first quarter earnings call. Thank you so much.
Speaker Change: Thank you ladies and gentlemen. This concludes today's event you may now disconnect.
Speaker Change: Okay.
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Speaker Change: Yes.
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