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spk07: Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. Should you require any further assistance, please press star 0. I would now like to turn the call over to your host, SVP, Strategic Planning and Investor Relations, Ken Posner.
spk11: Good morning, and welcome to Mr. Cooper Group's first quarter earnings call. My name is Ken Posner, and I'm SVP of Strategic Planning and Investor Relations. With me today are Jay Bray, Chairman and CEO, and Chris Marshall, Vice Chairman and CFO. As a quick reminder, this call is being recorded, and you can find the slides on our Investor Relations webpage at investors.mrcoopergroup.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 that we've identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change. I'll now turn the call over to Jake.
spk02: Thanks, Ken, and good morning, everyone, and welcome to our first quarter call. We'll start with the highlights on slide three. This was an exceptionally strong quarter for Mr. Cooper, with $561 million in fully tax-affected net income, or $5.92 per share. Let me comment on two separate themes driving these results. The first is operating performance. This quarter, we generated a record $363 million in pretax operating income. That's equivalent to an ROTC of 43%, which, by the way, is the eighth consecutive quarter in which we've outperformed our minimum 12% target. This is a story about innovative technology, world-class operational and financial discipline, and a culture of people working together to help our customers. The second theme is the natural offsets in our balanced business model. which you saw in the $373 million mark to market on our MSR. This is a reminder that when interest rates go up and originations start to cool, we enjoy offsetting benefits from servicing. Tangible book value rose 22% to $31.97 per share. Let me give you some perspective on this metric. If you look back to the WMIH merger, which closed in the third quarter of 2018, TBV per share has increased by nearly 50 percent since then, and this despite well over $1 billion in negative MSR marks as interest rates were falling in 2019 and early 2020. While there was some volatility along the way, we've demonstrated solid profitability and resilience, which speaks once again to the balance in our business model and those offsets between servicing and originations. Let's drill down further into the operating results. Originations generated pre-tax income of $362 million on record fundings of $25 billion. In fact, we had record fundings in both DTC and correspondent. Servicing turned in a really good quarter with $109 million in EBO revenues, pushing the margin back up to 3.7 basis points. Also, we had 3% growth in the portfolio, or 12% annualized, and I was pleased to see the growth engine firing on all cylinders with good performance out of DTC and correspondent, plus strong co-issue acquisitions and wins in subservicing, and we remain optimistic about bulk opportunities in the coming quarters. Thanks to excellent operating results, we ended the quarter with a very robust cash position of $674 million And this is despite growing the portfolio and repurchasing $148 million in stock. So as you can tell, I could not be more pleased with our results. But now let's talk about the outlook. With mortgage rates up 50 basis points in the quarter and much of that move in March, there's been a great deal of commentary in the market about how the origination industry is now passing through an inflection point. And that's correct. This is the point in the cycle where some of the weaker players are forced to cut prices to sustain volumes. We warn you to expect this in the correspondent channel, and we are now seeing very intense price competition there. Further, higher mortgage rates have led to pressure on refi volumes in our DTC channel. Given the shift in the environment, we're looking for our originations profitability to normalize rapidly. Specifically, we're projecting pre-tax profits down from $363 million in the first quarter to somewhere between $200 and $225 million in the second quarter. This is not the first origination cycle we've been through, and we feel good about our people, platform, and technology. Margins in the correspondent channel may be under pressure, but the channel will still provide us with new servicing customers and also gives us natural exposure to the strong purchase market. In fact, historically, the purchase mix in our correspondent channel has averaged 63%. Additionally, DTC has tremendous experience with cash-out refinances. And as Chris will explain, we're already pivoting in that direction. Let me return to the theme of balance in our business model. Because of EBO revenues, we're going to enjoy a very profitable year in servicing. Then, as amortization slows, servicing margins will start to expand. When short rates finally go up, we'll make more money on custodial deposits. Plus, if mortgage rates rise further, we would expect additional positive marks on our MSR that would build book value. I can't give you exact guidance on how originations and servicing will offset each other because that depends on a lot of factors, including interest rates, the yield curve, and competitive intensity in the origination sector. But what I can tell you is that we still expect to generate strong earnings and very strong cash flow in 2021. Plus, we're expecting to receive $400 million in cash when the sale of Titles 365 closes in the second quarter. By the time we reach the second half of the year, we should have a small war chest of cash, which will allow us to invest significantly in the servicing portfolio, or depending on our stock price, retire a significant amount of shares. In closing, as you think about the outlook for Mr. Cooper, I'd encourage you to think first about our demonstrated operational strength, and second, about the natural offsets in our business model. And finally, think about how we can deploy this cash to generate shareholder value. And with that, I'll turn the call over to Chris.
spk06: Thanks, Jay. Good morning, everyone. I'm going to take you through the details of the quarter, and as always, I'll start on page four. with a high-level summary of our results. I have to admit, it was a great feeling to book $561 million in net income, or $5.92 a share, which reflected record operating results plus a sizable mark-to-market gain on the MSR. On an operating basis, pre-tax income was $363 million, and as Jay mentioned, fully taxed operating ROTCE was 43%. And I'll repeat his comment that this was the eighth consecutive quarter during which we've exceeded our 12% target. Now, with interest rates on the rise, our results are not going to stay at quite this level. But with solid originations volumes and strong EBO gains in the pipeline, we're still expecting a very strong ROTCE for the full year and a minimum of 12% and 22% and beyond. Adjustments in the quarter totaled $4 million, which included $3 million in transaction costs related to the Title 365 sale and $1 million in severance in the corporate segment. In terms of other notable items, I'd point out that servicing benefited from $109 million in early buyout revenues as well as a $12 million reserve release, and I'll touch more on these items in just a minute. TBV grew at a very solid rate, ending the quarter at $31.97 per share. And I'd point out that our DTA decreased by $112 million in the quarter as our net operating loss carry-fords continue to limit our federal cash tax liabilities. Thanks to that decline, as well as strong growth in equity, The DTA dropped to 45% of tangible book value this quarter from a peak of 75% in the first quarter of last year. By the end of the year, we expect the ratio of DTA to tangible equity to be at the point where rating agencies and our high-yield investors will recognize the quality and strength of our capital base, and hopefully, This will also set the stage for a re-rating of the TBV multiple that the equity market applies to our shares. While we're on the subject of the DTA, I'd like to remind everyone that the Biden administration has proposed raising the corporate tax rate to as high as 28%. Now, if this goes through, it will result in a markup to our DTA by nearly $350 million, or about $4 per share in tangible book value. And while many of our competitors would see higher tax bills and reduced cash flow, our cash flow would not be affected until the deferred tax asset runs out completely, which we still expect would take several years. Capital allocation is a huge focus for the board and the management team as we believe that with the right decisions, we can create very meaningful shareholder value. At the end of March, we disclosed that the Board authorized the company to repurchase 3.7 million shares from KKR, bringing our total repurchases for the quarter to 4.5 million shares. We took this action because we're very optimistic that we'll end the year with significantly higher TBV and a very good profit outlook for 2022. Following this transaction, We'll be on pause for the next three months until August, at which time we'll have considerably more flexibility for stock repurchases. But for now, we're extremely pleased to have reduced our ending share count from 92 million last spring to 86 million today, which is nearly a 7% reduction, and which, in addition to our earnings, has contributed to the strong TBB performance that Jay mentioned over the last couple of quarters. Now let's turn to slide five and discuss the $373 million mark-to-market that we booked in the quarter, which excludes the fair value amortization expense of $19 million. The value of the MSR increased by 22 basis points to 122 basis points of UPB, which you'll note is very similar to what other companies have disclosed so far. Now, each quarter, we provide you with an estimate of how many of our customers could save at least $200 a month by refinancing. Now, based on mortgage rates rising year to date, we're estimating this population is now about 705,000 customers, which is down 11% from the beginning of the year. And this decline is similar to what we're seeing in DTC lock volumes, as I'll comment on in just a minute. I'd also point out that we have 686,000 customers with substantial equity in their homes who could benefit from cash-out refinancing. We have a lot of experience with this product, which I'll address as we get to DTC. So with that, let's go on to slide six and talk about originations. First quarter was another outstanding performance by the originations team, which produced pre-tax income of $362 million. Now, that result was down slightly from the $400 million-plus quarterly run rate we've been enjoying over the last three quarters, but still very strong compared to pre-pandemic levels. Funded volumes were in line with our expectations, coming in at $25 billion. And, in fact, this was another record quarter overall, and it was a record funding quarter for both the DTC and the correspondent channel. The pull-through adjusted lock volumes were also strong at $23 billion and down only 2% quarter over quarter. We were especially pleased with the volume trends in correspondent. In fact, March was one of the best months ever with $4.7 billion in pull-through adjusted locks, which we estimate on a preliminary basis places us at about number five in terms of market share based on the MBS data. Correspondent as you know, is an important channel for us for several reasons. First, it gives us exposure to the purchase market. And if you look back historically, our correspondent purchase mix has averaged about 63 percent in recent years. And in 2018, it was almost 90 percent. Second, correspondent helps us grow the servicing portfolio by acquiring new customers who are exactly in line with our credit criteria. And then third, we earn an attractive margin relative to bulk pricing. Correspondent is another example of the Mr. Cooper story in which we combine innovative technology, strong operational and financial discipline, and a collaborative culture. In Correspondent, we're very proud of our real-time analytics and our pricing engine, which allows us to bid on several billion dollars' worth of collateral on a daily basis, literally within minutes. Also, our platform integrates seamlessly with our clients' origination systems, and we've automated a large portion of the document review process, which makes this a streamlined and efficient process for both us and our customers. Today, we have a customer base of over 800 active sellers, and unit costs that we believe are on par with the best players in the industry. Now, turning to DTC, This was also a record funding quarter, with recapture up to 37% in the quarter and reaching 38% in March. Now, as I just commented, we still have a large population of customers who could save money with a rate and term refinance, but with rates up 50 basis points in the quarter, that population has shrunk at the margin, and we did see locked volumes impacted in March down about 16% from the January level. Now, this is part of the cycle where cash-out refinances are going to play an important role. We've got enormous experience with that product, including state-of-the-art desktop technology, which proactively identifies cash-out solutions using an AI-driven benefits engine that sorts through thousands of products. Over the last quarter, our DTC leaders have been busy with training and call monitoring to help the sales force pivot back to this product And you can see in the chart in the lower right hand that cash out is already up to 22% in the first quarter. And the mix is in the 30s so far in April. For some perspective, if you go back to 2018, roughly 70% of our DTC volume was cash out refinance. And the refinance recapture rate at that time was over 50%. Now, we don't know if the market is going to return to those levels. But if it does, we're well-equipped to generate strong volumes and strong profits. Now, turning to slide seven, let's shift gears and talk about origination margins. As you can see, the total pre-tax margin compressed by 23 basis points to 163 basis points. Now, what's primarily going on here is very significant price competition in the correspondence channel. which is something we've been guiding you to expect, and at this point in the cycle, it's hardly a surprise. Just as we did last quarter, let's look at the trends in revenue margins, which consist of gain on sale and other fee revenues divided by pull-through adjusted lock volumes. The correspondent channel is seeing very aggressive competition, and that has continued with further pressure on revenue margins in April. As you can see from the dotted line, on the chart. It's hard for us to predict the next few quarters because this is a major inflection point for the industry, where some of the weaker players are suddenly realizing they've built too much capacity. As for us, our capacity is in a good place, and we plan to continue acquiring loans, but you should also expect us to step back from certain product niches or sectors when pricing there turns irrational. DTC revenue margins are also seeing some pressure at this point in the cycle, but in contrast to correspondent, they've been much more stable, reflecting the fact that these are existing customers who value the quality of our service more than very small differences in rate. As Jay mentioned, we're expecting pre-tax originations profit to drop to around $200 to $225 million in the second quarter. This would be driven by a rapid normalization of margins to approximately 110 basis points and a moderate decline in volumes to around 20 to 23 billion. Longer term, at what levels do our origination margins stabilize? Well, if you look back historically over the period 2015 to 2019, our margins averaged around 90 to 95 basis points. And we think that's a good guide to normalized levels, although we are investing in a number of technology projects designed to squeeze out costs and widen margins. Now, let's turn to slide eight and review the servicing portfolio. Total UPB was up 3% sequentially, or 12% on an annualized basis, ending the quarter at $646 billion. This growth reflected very strong execution in all of our channels, correspondent, DTC, subservicing, and acquisitions. Now let me spend a second on co-issue, which added $8 billion in UPB during the quarter. This is another relationship channel which consists of MSR acquisitions on a recurring or flow basis for mortgage banking clients who have enough scale to securitize their product but who aren't large enough to run an efficient servicing portfolio. The co-issue channel is similar to correspondent in that we have very strong client relationships based on seamless connectivity and a streamlined process. Since we don't securitize the loans, we don't earn any gain on sale margin, but we do enjoy a steady supply of MSRs at fair market value, which serves to grow the servicing portfolio with borrowers who meet our credit criteria. Growth in subservicing is coming from several clients, including investors who value our platform for the recapture capability and others who value our high level of customer service. I'd also mention that during the quarter we won three small bulk deals, totaling $9 billion in UPB, which should close in the second quarter. And after two years of focusing on Efficiency, deleveraging, and investing in the platform, during which we took a pause from growth, we now feel very good about growing the overall portfolio at a 5% to 10% rate this year, although we're laser-focused on returns. So the actual rate could be slower or faster, depending on what opportunities we see in the market. Now let's talk for a minute about forbearance. Since the CARES Act was first signed, we've helped approximately 385,000 customers go on forbearance, and we've already helped 236,000 of them resolve an exit. In fact, we had tremendous performance in March with 19,000 customers exiting in that month alone. Forbearance requests have continued to trend down with April at only 6,000 requests compared to an average of 8,700 per month in the first quarter. We're very pleased to see only 4.5% of our customers are still on forbearance, which is down from a peak of 7.2%. Now let's turn our attention to the servicing margin on slide nine. Excluding the full mark, the servicing margin was 3.7 basis points. For some perspective, the margin is obviously not what it was in prior years when interest rates were at more normal levels. Amortization alone was up to 9.6 basis points in the quarter, which is a loss of 4.8 basis points in margin year over year. And that's a lot of money for us. It's a $77 million hit to the quarterly run rate. If you went back to amortization levels in 2018, we've lost 6.6 basis points in comparison, which is a $114 million quarterly impact. We've also lost 1.1 basis point in interest income, which reflects low yields on our custodial deposits, which cost us another $18 million per quarter. So, as you can tell, there's a lot of potential earnings power in the servicing portfolio as interest rates transition up to prior levels, which is why we encourage you to think about Mr. Cooper as benefiting from offsetting impacts in different rate scenarios. We had another good quarter for EBO revenues, which totaled $109 million, thanks to buyouts of $2.1 billion, redeliveries of $1.7 billion, and a margin of 5.6%. You'll see these revenues under other ancillary revenues in the servicing P&O in the appendix. We're obviously very pleased with execution and will now expect full-year EBO revenues of at least $400 million. I'd also call your attention to the $12 million reserve release in the REO expense line, which you'll also find in the servicing P&L in the appendix. This release reflects the fact that our expectation of losses on servicing advances turned out to be a little too conservative. As you can tell from the chart, there's been some variability in the REO expense line over the last few quarters, and as a reminder, This line has included benefits associated with investor settlements and similar non-recurring activities. Now, looking past fluctuations in REO expense, you can see some very nice year-over-year improvements in operational expense, which were down 0.9 basis points from a year ago to 8.4 in the quarter, reflecting the benefits of Project Titan and the digital tools we've rolled out to help customers as well as the other corporate actions we've taken to streamline our operations. Operating costs remain an ongoing focus as driving incremental unit cost savings is one of the company's core strategic pillars. Looking at second quarter, we'd expect the margin to remain at or above three basis points. Turning to slide 10, I'm not going to comment on ZOMB because Title 365 is in regulatory review, and in connection with the sale agreement, earnings from Title 365 are now being held for the benefit of the buyer. Therefore, the unit will not contribute to earnings in the second quarter. Closing is still expected in the second quarter, and we continue to estimate an after-tax gain on the sale of $350 million in cash proceeds, net of cash taxes, and transaction costs of approximately $400 million. Additionally, the REO auction exchange remains idle while foreclosure moratoriums are still in effect. So, with that, let's wrap up by turning to the balance sheet, starting with advances and liquidity on slide 11. You can see we generated strong cash flow in the quarter with an estimated $379 million in steady-state discretionary cash flow. This allowed us to buy back $148 million in shares and invest $356 million into MSRs through originations and co-issue, while ending the quarter with robust cash of $674 million, which was essentially flat quarter-over-quarter. Advances remained a good story as they declined 10% to $945 million from a seasonally high fourth quarter where balances were elevated due to escrow tax payments. Our servicing advanced funding capacity remained at just over $2 billion on multi-year committed lines of which $1.4 billion was unused. We continue to have significant excess capacity on our Originations and MSR lines. And from a liquidity standpoint overall, the company is in an extremely strong position. Furthermore, our cash outlook is very promising. Even with the increase in mortgage rates and the normalization in our originations profits, we still expect to generate elevated profitability for the remainder of the year, as well as strong operating cash flow. The working capital outlook is also good, as we're expecting advances to remain stable while some cooling in the origination markets will allow us to recover working capital from that segment. Finally, as we've highlighted, the $400 million in proceeds from the closing of Title 365 will further enhance our liquidity position. We expect cash will soon represent a very large percentage of our tangible equity. So with that, Let's finish up with some comments on capital and leverage on slide 12. Operating with strong capital is a clear expectation for any financial institution that plays an important role in the U.S. housing market. In early 2020, we disclosed a leverage target defined as the ratio of tangible net worth to assets of 15% or higher. We ended the first quarter at 11.2%, up from 9.8% in the fourth quarter due to strong operating earnings and the markup of the MSR. As you're aware, our ratio is under temporary pressure from loans subject to repurchase from Ginnie Mae, which under accounting rules, we consolidate on our balance sheet as soon as the underlying loans go 90 days delinquent, whether we buy them out or not. Consolidated EBOs at the end of the quarter were $5.8 billion. Now, excluding these EBOs, our capital ratio would have been 14.7 percent at the end of the first quarter. We're just shy of our target, and we expect to reach the 15 percent target by the end of 2021. To give you another perspective on how far we've come in building capital and deleveraging, You can see on the right that our debt-to-equity ratio is down to 0.9x, which is well below where we were prior to the WMIH merger in 2018. We were pleased to see both Moody's and S&P raise our outlook from stable to positive. We believe that with continued progress on these capital ratios, as well as continued utilization of our DTA, we will put ourselves in position for ratings, upgrades, and continued favorable performance of our senior notes, and that the benefits of a strong balance sheet will be appreciated by equity investors as well. So with that, I'll turn the call back to Ken for Q&A.
spk11: Thanks, Chris. And with that, I'm going to ask the operator to start the Q&A session.
spk07: As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that's star 1 on your touch-tone telephone to ask a question. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Doug Harder of Credit Suisse. Your line is open.
spk10: Thanks. Just hoping you could touch a little bit more on the capital deployment or the cash deployment kind of once you get the $400 million. I guess how are you seeing the MSR opportunities and kind of the thoughts on the impact to the leverage ratio as you talked about at the end if you were to do a sizable buyback and your willingness to kind of temporarily move those metrics lower?
spk05: Good morning, Doug.
spk06: I guess I'd give you two parts to that question. First of all, yes, we do see more MSR coming to market. We see, just as we've been predicting, that some of the larger aggregators with guys that don't traditionally hold MSR are beginning to bring pools to market. The volumes are still, on a historical basis, they're still relatively low, but they're increasing at a noticeable pace. So what we thought would occur looks like it's occurring, and we are having some positive but still preliminary conversations with some large holders of MSR. So that may, in fact, come to play out exactly as we said, But, of course, the returns have got to be appropriate. With regard to the other part of your question, I don't see any scenario where we don't hit our target. I'll just leave it at that. I mean, we're going to be building book value through the year. If you just look at your own estimate for our earnings or a consensus estimate, This is a company that's going to be building quite a bit of equity over the balance of the year, even while we're buying pools of MSR. So we said we grow 5% to 10% this year. We just grew 3% in the quarter, and that's on an ending balance. If you look on an average balance, it's more like 4.5%. And we're doing that while we're building book value. I think it's hard to imagine us not ending the year with TBV at or above 4%. you know, $40 a share. So I don't think there's any worry here about us continuing to buy MSR and growing the portfolio at a reasonable rate and at the same time strengthening the balance sheet and amassing cash that would put us in a position to buy back more shares as the year goes on.
spk05: Great. Thank you.
spk07: Thank you. Our next question comes from Bose George of KBW. Your question, please.
spk09: Hey, good morning. Actually, can you talk about your expectations for EBO revenues once you get into 2022? And then just for the back half of the year, sort of the cadence for what's left, is that fairly kind of spread out over the next two quarters?
spk06: Yes. Thank you, Bose, and good morning. The The initial estimate we had of 350 to 450, that number is still a pretty good number overall. The 450 may increase a little bit. But what we said this morning, I'd stick to that, that at least 400 of that is going to be produced in 2021. The balance of it will be in the beginning of 2022. I can't give you an exact amount quarter over quarter, but I think what we saw in the first quarter, we're going to see about that level every quarter through the year. And again, whatever doesn't get completed in the fourth quarter will probably slip into the first quarter of 2022.
spk09: Okay, great. Thanks. And then can you just repeat what you said about the earnings expectations for 2Q and And I think it was for the origination segment that I just didn't fully catch that.
spk06: I think it's the origination segment and our overall expectation for earnings. We think servicing is going to stay at or about this level through the year. It could be some upside if amortization really slows down materially and short rates move. But right now we think we're probably going to stay at this level for Originations earnings, while they'll still be well above historical levels, they are going to cool a bit. So we were saying that originations would come down somewhere in the two and a quarter range, 200, two and a quarter, maybe a little bit higher than that. But overall earnings, we're also expecting to be in that range. Operating income is what I'm referring to, and that number at 200 to, say, 20, 25 million is where we would expect the quarter to be. Of course, that's operating earnings, not reflecting the gain from Title 365. Okay.
spk09: So the 200 to 225 is operating earnings for the company as a whole as well as for the origination segment?
spk06: Yeah, both of those ranges are actually about the same number.
spk09: Okay, great. That's all I had. Thanks very much.
spk06: Thank you.
spk07: Thank you. Our next question comes from Kevin Barker of Piper Sandler. Your line is open.
spk01: Good morning, Kevin. Good morning, Chris. Could you just quickly address the payment issue that came out? I know you guys issued a press release and CFPB mentioned something, but it appears it was... It was a result of one of your vendors. Can you explain, you know, is that fully resolved and any other remediation efforts you're doing to make whole for customers?
spk02: Yeah, I think, Kevin, what we put in the press releases is pretty consistent with where we're at. You know, on Saturday, we discovered that, you know, our electronics payment vendor, ACI Worldwide, they inadvertently issued incorrect mortgage payment drafts, and per conversations with them, it looks like they were testing their system from a capacity standpoint and ended up putting test files into the production environment. So we obviously, once we identified it through a normal process there in the morning, immediately reported this error to our customers' banks. We worked with them to prevent any financial impact to our customer accounts. by providing credits and reversing the incorrect drafts and fees. This was not a security breach, obviously, and we did not receive any funds from customer accounts. And as a result of the team's action, really, at Mr. Cooper, out of the 480,000 customers who could have been impacted, we're only aware of, you know, a few hundred that have incurred NSF fees. And, you know, we're going through those as we speak and providing refunds. all a result, obviously, of ACI's error. And then, you know, look, from a customer standpoint, nothing's more important to us, you know, than the trust of our customers. So in addition to all the work we did to fix ACI's error, we also immediately started communicating with our customers. You know, we alerted our customers through email on Saturday evening, website, social media posts, and blog posts. and, you know, brought in extra staff for the call centers. And so, you know, I think overall right now we feel like we have mitigated, you know, the impact of this error, and we're, you know, tracking it on a daily basis. Our call volumes are, you know, back to normal, and we're just not seeing a lot of activity around this, you know, around the error by ACI.
spk01: Okay. Thank you for the additional color there. And then, you know, Given your comments in the correspondent channel where competition is much more intense, but you've created more efficiencies in order to make it worthwhile, can you help us get an idea of what your estimated pro forma return on equity would be on new production within the correspondent channel?
spk06: Yeah, I think you have to think of the correspondent channel as the returns there are consistent with the MSR we buy in the purchase market minus whatever the profit margin is. I mean, we're in the correspondent channel largely to acquire new customers and to either replenish the amortization in the portfolio or to, you know, contribute to some nominal growth. So when we're buying MSR, we're looking for returns in the low to mid to, high teams depending on the nature of the MSR and what our expectations are for recapture opportunities. And so I think of correspondent, even though what we're saying is earnings, the margin, our overall margin is going to compress, uh, as we get in the second quarter. We already saw a little bit of it. It's really being driven by extreme compression in the correspondent channel. But even at these very thin margins right now, we think that'll normalize at some point. But we're still ending up acquiring MSR that we would otherwise be buying in the bulk market. So we're still getting it at discounts. So that's how I think of the returns. They're still good returns. Now, we're not going to, we'll stay in the market, we'll compete, and I think everyone is going to see, everyone that is a player in that market is going to see the same very intense pressure for some period of time. It'll sort itself out, but we're doing it to again, acquire new customers and replenish our runoff. So to us, it's still a discount to what we pay in the bulk market. It still makes sense. But we wouldn't stay there just to say we're in the correspondent channel. So if pricing gets really irrational and we see some segments of the market where we can't make money, then you should expect us to drop out and our funding to fall off. But we built a very, very efficient machine here We're a big player in correspondent now, and we have the advantage of being able to buy when it's, you know, again, it's fueling our overall strategy. But if margins turn negative, then you'll see us back away.
spk02: And you've seen us do that in the past, Kevin, right? We've been through these cycles, as you know, and we'll maintain strict discipline around our return sales. But to Chris's point, today correspondent, co-issue, they're still very attractive from an overall return profile and we'll just continue to see how the market plays out.
spk01: So are you seeing that competition emerge from banks or non banks in particular? And do you see your, your added advantage there is your recapture rates on loans that are running off from the portfolios you're purchasing through that channel? Yeah. You know, um,
spk06: The recapture rate we see, I mean, it really differs almost client by client, and we price accordingly for that. So I wouldn't give you a blank answer on that. This quarter we did see more competition from a couple of banks that have large correspondent activity. But there's been, you know, we have a number of newly public companies who've stated very aggressive growth targets, and that's playing out as, you know, fierce price competition. I don't think for the obvious reasons people will allow it to continue at that level. I think we'll see people make decisions on growth over price or price over growth and retain profitability. But again, for us, since it is a means to an end, as long as we're acquiring the MSR we want to acquire at a discount to the bulk market, then it's a positive for us.
spk02: Yeah, Kevin, I bifurcated a little bit in the junior FHA product. I'd say it's still predominantly non-banks. You're not seeing really any bank competition there. To Chris's point, on the GSE side, you know, a little bit more from the banks. And undoubtedly, recapture is a huge advantage for us, as we've talked about in the past. But that will vary by pool. But still, even, you know, most pools, we're going to, we're certainly going to be able to recapture more loans than anybody else.
spk05: Thank you. I'll get back into Q. Thank you, Jim.
spk07: Thank you. Our next question comes from Mark DeVries of Barclays. Your line is open.
spk08: Yeah, thanks. Just had a follow-up question for Chris on the capital return potential. If If you just think about where consensus estimates are for your earnings and then the title gain, and then you layer on the potential for 5% to 10% MSR growth, if that's where you ended up at 5% to 10%, how much capital would that leave you kind of at the end of the day for potential repurchases?
spk02: I mean, if you look at our plan, Our cash flow for the year, Chris, you can comment on this, is growing materially throughout the rest of the year, and within that plan is the growth of 5% to 10% in the portfolio. So I think we'll have plenty of excess cash, and it's going to continue to grow throughout the year.
spk06: We ended the quarter at $654 million. We expect $400 million from... from Title 365, we expect to be cash flow positive through the year. So you can do the math and say it's easy to see us being, you know, having in excess of a billion dollars by the end of the year or even towards the middle of the year. And, of course, we've got to hold some of that cash, you know, just for normal operating. But, you know, it's certainly – a number that's, you know, if it's not a billion dollars, it's in that $750 or $800 million range that's available for investment, whether it's investment in growing the company, which again is our priority, but if we can't put it all to work and we're sitting here with a stock that's at $34 and almost under any scenario, Tangible Book is going to grow to $40 or more just on the basis of consensus earnings, absent some massive mark-to-market impact, negative mark-to-market impact, which I don't think anyone expects, it doesn't consider further positive mark-to-market. So I think based on the Fed's comments yesterday on inflationary pressures, I think everyone's expecting over the long term for rates to go up, which means more positive marks on our book. And it doesn't include any change in the tax rate. Those things all say the stock could be well into the 40s. So if we're sitting here with a lot of cash towards the end of the year and a stock that's trading where it is now, it seems to be a no-brainer that we'd want to buy back our shares in a much higher level just given where Tangible Book is. Now, given the consistent profitability we've been earning, you would think we'd be trading at a premium to those levels. And hopefully the stock is there But if not, then we'll have a considerable amount of capital to fund buybacks.
spk08: Got it. Makes sense. And then I think in past calls you commented about considering starting to hedge the MSR, but it didn't really make sense at the time just given where rates were, and then rate risk was kind of asymmetric where you'd only benefit on your MSR value. But now that rates have backed up some and your MSR value is up a little bit, Are you starting to reconsider that on kind of a go-forward basis?
spk06: I'll give you a more general answer. I think we will have a more comprehensive hedge program at some point in the future. Today the only MSR that we hedge is that which is financed, and we do that out of an abundance of caution just to mitigate any kind of capital costs. when rates, you know, if rates ever became volatile. That's very small, 10% of the portfolio or less. So, you know, if the answer is are we going to hedge more comprehensively, I think the answer would be yes, but I don't think rates have backed up to a point now where we would begin doing that. At some point in the future, though, that's likely.
spk08: Okay. Got it. Thank you.
spk07: Thank you. Our next question comes from Leon Copperman of Omega Family Office. Your line is open.
spk03: First, let me congratulate you guys on excellent performance. You give all the different numbers that one could look at and reach their own independent conclusions, but I have a few questions that I would like to draw you out on. where I'm asking you for your bottom line rather than giving us a lot of the inputs. You mentioned a minimum expectation of a 12% ROE. What do you think your normalized ROE is? You know, if you look at your book value at year end at 40, what do you think you'd normally earn in that book value?
spk06: We say a minimum of 12%, and we say that because we think that's sort of the price of entry. We've got to earn that. But we offer the range of 12 to 20. I wouldn't give you an exact number, but I think the range of expectation for us would be to earn somewhere in the 12 to 20 on a consistent basis.
spk03: Gotcha. Okay, good. Second question is, what is the minimum cash you need to run your business the way you want to run it? Because you mentioned you'd probably have over a billion dollars in cash tomorrow, end of the year at a billion two or something like that. What is the minimum cash you would be comfortable to run your business?
spk06: So in a stable environment, we actually focus on immediate liquidity, of which cash could be a third to a half of that. And that's somewhere in the $400 million range. So cash really only has to be a couple hundred, $100 to $200 million.
spk03: So you have probably, you know, $600, $700, $800 million of excess cash presently or will have at the end of the year. I have no idea what KKR's intentions are, but once they sell some, I assume they'll be willing to sell it all. Do you have the mental orientation and the interest in buying them out should that stock become available?
spk06: We certainly want to be able to do that. I think One thing about KKR, they've been an incredible shareholder and are, for obvious reasons, they want to make sure the stock price is optimized. So I don't think they have made any, they certainly haven't communicated to us any formal decision when they would exit or how fast or what that would look like. However, as a private equity firm, I think we all know that they hold investments for a period of time and then look to recycle that capital, and they've held this investment for a long time. So if they were to do that, yes, we would certainly look to put our cash to work for their shares or anybody else who was looking to exit their positions.
spk03: The last question, I don't know if you'd be willing to answer it, but what is your view of the value of the equity? I mean, you've been very right for quite some time now about saying that equity is very mispriced, but I'm curious, basically, what's your view of the value of the equity?
spk06: Well, I'll answer it this way. If you think of our tangible equity as largely the value of our MSR, and we could sell that at market prices, it's that book value. That says the value of our business is nothing? Well, I think that's ridiculous. We've already said that Title 365 is worth $500 million. The book value is almost nothing. Same thing with our exchange business. It's hard to make a case for it with a moratorium, but that business earns $60 million a year. year in, year out, or more. So what's it worth? It's another $500 million, $600 million? That has no book value. So I wouldn't put an exact price on it. I think our stock is materially undervalued when you think of the earnings power of this business, separate and distinct from the value of the MSR portfolio.
spk03: Right. Now, because of the tax... Are you basically out of being able to buy back stock until August now, given what you've already done so far this year? We are. Right, okay. I would just say as an endorsement of what you're doing is I would buy every share you could buy back because you're talking about your $5, $6, $7 earner, you know, 12% return on book. You ought to be at least book value, if not more. And you're doing a great job and have great confidence in what you're up to. Good luck.
spk06: Thank you. Thank you, Lee. We appreciate that support.
spk07: Thank you. Our next question comes from Henry Cossey of Wedbush. Your line is open.
spk04: Good morning, Henry. Great quarter, by the way. Thank you. Thank you. Three somewhat unrelated questions. First with ACI, any future pejorative regulatory action around the issue? Does that stick with them, or is there any way that could migrate towards you?
spk02: Well, Henry, you know, one of the other things that we did do once we, you know, identified ACI Zero, we did reach out to, you know, all of our stakeholders, including the regulatory community, to make them aware of it. And, you know, we've had discussions, you know, a number of them, and those discussions have gone well. I think clearly they're going to want to see how this continues to unfold. Again, we see call volumes back to normal. We see less and less inquiries around this from customers. Just the level of activity overall has gone down. So I think the fact that it's ultimately is not going to be any material impact, you know, to our customers. I think that'll influence the regulatory community. And from a, you know, ACI standpoint, yeah, I would expect that they certainly will get plenty of attention, you know, from regulators because they're, you know, we're not their only customer, right? So I think there will be more scrutiny on them for sure.
spk04: On the origination front, I know when I go back really to the name change, there was this development of a product and a platform where you really could help your customers manage how they dealt with their own debt, and now we're into a cash-out refinance market where that's an obvious opportunity. How well developed are those products and what's the resistance point with customers? Are you able to get them? Do they get it? Are they using it? Or is there still a lot of friction around getting people to use the equity in the house to pay off higher-costing debt?
spk06: I wouldn't describe anything as friction, and I'd say in terms of our products, they're outstanding. The tools we built were really built with cash out, debt consolidation, and really managing customers, helping them manage their personal balance sheet better. That's how they were built. And so we're in an outstanding position to take advantage as the market pivots that way. And you've already seen, or you will see, and it's early days, but that product as an overall component of our originations is already growing. I expect you'll see that when we report second quarter, that it's more and more growing. of the volume that we're doing. So, yeah, I think that's going to be a big positive for us. Our customers have a lot of equity in their home, and to the extent they have other debts that they can consolidate and save a lot of money, at the end of the day, it's all, can we help them improve their bottom line? That's what we're here to do.
spk02: Yeah, and Henry, you said it. We have the tools already. That machine's humming. It's humming as we speak, right? We've got over 30% already cash out refi, and that number's going to continue to grow. And so I think it'll be a massive opportunity for us.
spk04: And then, you know, on the consolidation front, I think it's fair to say that all of those companies that came public seemed that were not raising capital as much as trying to cash out key investors. There's probably still an appetite for that. When you look at the marketplace, what sort of opportunities do you see? Is it going to be, as you said on the call, buying MSRs? Are there origination platforms that could fit into your acquisition strategy? Maybe none of the public companies are obvious targets because of their relative size, but are there other smaller companies that are likely to come up for sale? How does that play out?
spk06: You know, looking at M&A and buying an origination platform is really not top of mind for us right now. We've got an outstanding platform. If we saw something, we look at every transaction that comes to market, obviously. We get one of the first calls. But it's something we'd have to have such tremendously compelling accretion for us to want to do it. We're not looking to... by someone else's business at the top of the market. And we don't think we need to continue to grow and generate shareholder value. I think the other part of it is someone looking at us as an opportunity to help their franchise. And we've gotten a lot of phone calls along that regard. But for right now, we're almost entirely focused on exactly what we said, growing the business at the right return levels, and if we can't get the share price to the right level, then we'll have the flexibility to buy back more shares and generate shareholder value that way.
spk02: Yeah, and again, if you look at us historically, right, we have traditionally just bought assets and bought MSRs. Obviously, we bought Pacific Union. which turned out to be a good acquisition for us. It would have to be something that, to Chris's point, is very accretive and something that we really do not have in the franchise today, whether that's a different channel, whether that's technology, but we're going to continue to stay focused, as Chris just outlined.
spk04: Great, and thanks for taking my questions.
spk02: Thank you, Henry. Thanks, Henry.
spk07: Thank you. Again, to ask a question, please press star 1 on your touch-tone telephone. Our next question comes from the line of Kevin Barker of Piper Sandler. Your line is open.
spk01: Just to follow up on some of the M&A comments, you have a vested interest to push to increase your earnings as much as possible. You'll do that organically as much as you can to create efficiencies, but Is there any other ways that you can accelerate the utilization of the deferred tax asset in order to, you know, improve the balance sheet and bring, you know, increase the cash balances for the company?
spk06: Well, certainly we look for those opportunities every day, Kevin, and I know why you're asking the question. We wouldn't do an acquisition just to accelerate the use of the DTA. We think now that we have been actively converting the DTA from an NOL to temporary difference DTA, what we've done is, and we expect that to be completed even faster than we thought, probably by the end of this year. So that will lock in a permanent asset And while we'd love to use it as quickly as possible and convert it to cash, you know, outside of looking at opportunities to optimize profitability in the company, we don't have any special plan to just try to accelerate that. Okay.
spk05: Thanks for taking my question.
spk07: You have a question from the line of Leon Koppelman of Omega Family Office. Your line is open.
spk03: Okay, we'll take it. I've been called worse. All the talk recently has been about who you're acquiring. Let me ask you a different question. With the M&A environment improving and with the tremendous value that we offer, your huge escrow balances, the tremendous number of client relationships you have, Would we be attractive acquisition to another financial institution, and would we consider it?
spk06: Well, certainly we'd consider anything that generates incremental value to our shareholder. That's, at the end of the day, what would make all of our strategic decisions for us. Do I think so? Yeah, I think you've seen a couple of transactions recently where banks specifically are looking at mortgage companies and seeing the very significant synergy between the arbitrage between how similar assets are valued in those two sectors. So, yes, I think long-term, well, I should say, Lee, long-term, I expect to see a lot more of that type of M&A, banks acquiring mortgage platforms. Whether or not we find the, you know, we see somebody interested in Mr. Cooper specifically that we think is a good marriage. That hasn't materialized yet, but we certainly consider if it happens.
spk03: Okay. Thank you. Thank you. Good luck.
spk02: Thanks, Luke.
spk07: Thank you. At this time, I'd like to turn the call back over for closing remarks.
spk02: Thank you, guys, for your participation, and I look forward to chatting with you throughout the day. Appreciate it.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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