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spk03: Thank you for standing by and welcome to Mr. Cooper Group's Q2 2021 Earnings Conference Call. 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 one on your telephone. Please be advised that today's conference is being recorded. Should you require any further assistance, please press star zero. I would now like to hand the conference over to your host, Ken Posner. Please go ahead.
spk09: Good morning and welcome to Mr. Cooper Group's second 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, Chris Marshall, Vice Chairman, President and CFO, and Jamie Gow, Deputy 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 Jay.
spk04: Jay Haynes Thanks, Ken. Good morning, everybody, and thanks for joining us. Let's start, as always, by reviewing the quarter's highlights. We've reported net income of $439 million, or $4.85 per share, which includes operating results, a mark to market on the MSR, and the gain from the sale of Title 365. As a result, tangible book value increased to $37.24 per share, which is up by more than $15 in the past year alone, and which now represents a 22% compound annual growth rate since the WMIH merger three years ago. Operating results were strong. Our O2CE was 23%, which was above our minimum target of 12%, and incidentally, this was the ninth quarter in a row in which we've exceeded that target. And based on the results so far in July, we would expect third quarter to be the tenth quarter above the target. Originations came in where we expected, with $213 million in operating EBT on $22 billion in volume. Pricing pressure in the correspondent channel has been very intense, but revenue margins in our DTC channel have been relatively stable. The refinance recapture rate rose to 42%, and cash-out refis increased to 30%. Both of these numbers are moving in the right direction. Servicing turned in an excellent quarter with strong EBO revenues of $181 million, and the portfolio grew 4% in the quarter or 16% on an annualized basis, thanks to solid performance in all of our channels. The balance sheet is in terrific shape. Thanks to the sale of Title 365 and strong operating cash flow, we started July with $1.2 billion in cash and $1.7 billion in immediately available liquidity, which is a huge amount of dry powder for both portfolio growth and stock repurchase. Our board has authorized a new stock repurchase program of $500 million. And with the three-year anniversary of the WMIH merger occurring in the next couple of we are likely to begin repurchasing stock very soon. As we announced after quarter end, we've entered into an agreement to sell our reverse mortgage portfolio. Reverse was a profitable initiative for us, but it was never a growth driver. Exiting this segment will help us focus on the core business, and the sell will be a huge positive for the balance sheet, as it will boost our capital ratio above our target of 15%. With the dispositions of title in reverse, we're following a disciplined strategy of rationalizing and simplifying the business model in order to focus on servicing and originations, where we see very exciting growth and where we believe we can strengthen our leadership position. With that, let's turn to the next slide and let's talk more about growth. We've commented before that we have the operational capacity to significantly expand our portfolio. And this morning, I'd like to share with you a new strategic target we set of reaching $1 trillion in UPB and approximately $5 million in customers. We think of Mr. Cooper as an integrated mortgage company with both servicing and originations. But as we look forward, we expect to see servicing and the related customers emerging as a strategic high ground for the industry. In coming years, we expect massive consolidation until the industry is dominated by a small number of mega-servicers with highly concentrated market share, similar to other technology-enabled sectors. These servicers will enjoy huge economies of scale and very high entry barriers, and they will be positioned to generate very significant revenues from reCAPTCHA, just as we saw in 2020. they will be positioned to retain customers for life. Very few mortgage servicers will make it to this level. Large strategic investments are necessary to build an efficient and scalable platform which can quickly incorporate changes in the legal and regulatory environment. Servicers, they must delight their customers with both digital tools and team members who go to bat on their behalf. And servicers must have strong capabilities and loss mitigation. At Mr. Cooper, we have the most efficient platform in the industry, and more scale will add to our advantage. We have state-of-the-art technology in which we're continuing to invest, and I firmly believe we have the right talent in place throughout the organization. How long will it take us to reach one trillion? We have plans in place to get there in as quick as three years, although the actual pace at which we grow will certainly depend on market conditions. because we have no intention of sacrificing margins or taking on imprudent risk of any type. We have been guiding to growth of five to 10% per year. But as I think about our current opportunities, I would say that if we do not grow at a 10% pace or faster, I'd be disappointed. So that's where we're going. And now I'll turn the call over to Chris, who'll take you through the quarter. Thank you, Jay.
spk05: And good morning, everyone. I'm gonna start on page five with a summary of our financial results. Now, let me repeat the high-level metrics. Net income was $439 million, or $4.85 a share. Pre-tax operating income was $227 million, just slightly above the high end of the range of $200 to $225 million that we guided you to expect at the end of last quarter. And as Jay mentioned, operating results were equivalent to an ROTCE of 23%. The gain on the sale of Title 365, as you can see, was $485 million pre-tax and $360 million after-tax, which was consistent with our previous guidance. Now, with mortgage rates down in the quarter, we took a $180 million mark-to-market charge on the MSR, of which $45 million was the excess of fair value amortization over cost. And finally, we had adjustments of $7 million related to severance in both servicing and in originations, which reflects ongoing actions taken to rationalize cost and drive efficiencies. You'll note that we're now reporting reverse and discontinued operations where total pre-tax income for the quarter was $16 million. This number includes both the impact of the sale and the second quarter operating results, which included a settlement of claims related to a legacy portfolio acquisition. Net income drove excellent growth in tangible book value, which increased 16% quarter over quarter to $37.24 a share. I'd also like to point out that our DTA decreased by $110 million in the quarter to $1.1 billion, reflecting the fact that our net operating losses reduced the cash tax liability associated with the quarter's strong income. As a percentage of TBV, the DTA is now down to 35%, which is half the level of a year ago. And we expect this ratio to continue dropping during the remainder of 2021 and well into 2022. And while we're on the topic of the DTA, I'd remind you that the Biden administration is working to enact an increase in corporate tax rates, which according to media reports could result in new tax rate of 25%. And that higher level if it were passed into law today, would result in a markup to our DTA of approximately $180 million, which would add about $2 per share to TBV. And of course, our cash flow would not be impacted by any higher federal tax rate until such time as we had fully exhausted our remaining net operating losses. Now, to summarize, our operations are clearly firing on all cylinders. The balance sheet has never been stronger and we have significant liquidity to buy back our stock as well as to grow our portfolio. And both of those strategies should drive shareholder value. So when we look at the current discounted valuation in our stock price, quite frankly, we see a major disconnect. Now let's turn to slide six and discuss the valuation of our MSR portfolio. During the quarter, Mortgage rates declined by 15 basis points, and swap rates were down by 10 basis points. And accordingly, we increased the lifetime CPR assumption for our own portfolio from 12.4 to 13.6 percent, which resulted in a $180 million charge. This brought the value of our MSR down by 7 bps to 115 basis points of UPB. Now, as you recall, Each quarter, we provide you with an estimate of the number of customers who are in the money, which we define conservatively as savings of at least $200 per month. As you know, mortgage rates rose in the beginning of the year, but with the recent decline this quarter, the number of customers in the money has risen from first quarter to roughly 717,000. Also, as we mentioned last quarter, We have another 630,000 customers with substantial equity in their homes who could benefit from cash-out refinancing. This is another large source of business for a direct-to-consumer channel, and we have very strong momentum here, as we commented last quarter. Now, let's turn to slide seven and talk about originations. We're at that point in the cycle where the industry now has excess capacity, And that, plus some aggressive jockeying for market share, is leading to intense price competition. And we're certainly not immune from the environment. But our business model is very different from our peers, since we rely on correspondent mainly for new customer acquisition, where our DTC channel produces most of our profits. In the second quarter, our team produced very solid results. with pre-tax operating income of $213 million on funded volume of $22 billion, which was exactly in line with our expectations. For us, the competitive frenzy was most intense and correspondent, and as a result, our volumes were off sequentially by about 15 percent. Now, we're very committed to this channel, but we remain very disciplined with regard to pricing. And during the quarter, we did relatively little volume in those parts of the market where we felt pricing got a little irrational. On a positive note, Correspondent is now giving us excellent exposure to the purchase market, which made up 43% of Correspondent volumes. And of course, we're continuing to invest in technology to drive down costs, speed up turn times, and improve our client experience. Just like we do with consumers, we aim to delight every corresponding client. Now, turning to DTC, funded volumes were down about 8% sequentially, which is much better performance than the refinance market as a whole, which the MBA is projecting to be down by 24%. Our key metrics were very strong, with the refinance recapture rate increasing sequentially from 37% to 42%, and cash-outs rising from 22% to 30% of funded volumes as we continue to pivot towards this product. In fact, so far in July, cash-out has been running at nearly 40%. Now, if you'll turn to slide eight, let's shift gears and talk a little bit about the margin. As you can see, the total pre-tax margin compressed by 27 bps to 136 basis points. And as a reminder, this is a production margin, which is net of costs. Many of our peers report gain on sale or revenue margins. And while we don't disclose gain on sale by channel, the charts on the right give you a sense of the trend, with correspondent gain on sale margins having fallen significantly in the last few months, while DTC has remained relatively stable. With interest rates having drifted lower recently, our locks are starting to rise again, and this should drive stable profitability in the third quarter. Specifically, our latest projection is for pre-tax profits of $200 to $225 million on funded volumes of $18 to $20 billion. Now, before we move on to servicing, I'd like to provide you some color on the technology we use to drive cash-out refinances. which you'll find on slide nine. As you know, we have both traditional loan officers and a large and growing team of specially trained home advisors who play a hybrid role, both answering customer service requests and helping customers with tailored refinance solutions. One of the ways we make these conversations productive is through our proprietary best fit engine. which instantly populates the home advisor's screen with the benefits to the customers from several options, including rate term refi, debt consolidation, and cash out. This makes it easy to engage the customer in a conversation about alternatives without having to ask the customer to fill out an application, since we have all of their information on file, and we can provide an estimate of the equity in their home using the proprietary technology we've built through our zone analytics business. The best fit engine takes this data and then matches it against a large number of product and pricing permutations to find the best money-saving opportunities for each customer. And it's particularly helpful when it comes to discussion cash-out refis. The best fit engine is a very sophisticated application that our technologists built in-house, and we believe its capabilities are state-of-the-art. Now, future calls will share more about our technology strategy and especially how we're digitizing the manufacturing process, which will take our origination platform to an even higher level in terms of performance. Now let's turn to slide 10 and review the servicing portfolio. Of note, we're now reporting UPB excluding the reverse portfolio, which was roughly $16 billion a quarter end. On this basis, the servicing portfolio grew 4% quarter over quarter, or 16% on an annualized basis, ending the quarter at $654 billion. As you can see from the chart, the growth was driven by solid execution in all of our channels, originations, acquisitions, and subservicing. Now, the $1 trillion target that Jay talked about is something that people in the company are obviously very excited about. Across our channels, we see plenty of opportunities, and we believe this is the right time for the company to shift back into a much more aggressive growth mode. In addition to strong originations, we book $16 billion in acquisitions. And now that margins are compressing, this would be the logical time for originators to unload their inventories so that they can generate cash. We remain very disciplined in our bidding but we're definitely seeing the pickup and deal flow, and we're optimistic that we'll see even more in the second half. We're also very pleased with the steady growth in subservicing, which is coming from a mix of clients who value a high level of customer service as well as our recapture capabilities. Now let's talk for a minute about forbearance. Currently, 3.6% of our customers are still on forbearance, but that's down from a peak of 7.2%. And one of the topics being discussed in the industry is what happens after forbearance ends. Now, we're obviously monitoring our customers very closely, especially those who have been impacted by the pandemic, and we're actively reaching out to ensure they're fully aware of every available option. And we expect the overwhelming majority will exit forbearance successfully thanks to the many options that are now available under government agency programs, as well as the current low interest rates and strong home price depreciation. Now, let's turn to slide 11, and let's review the servicing margin, which we'll discuss excluding the full mark. Now, bear in mind, the servicing margin now excludes the contribution from reverse, which is carried in discontinued operations. And on this basis, the servicing margin was 7.7 basis points in the second quarter, up from 3.6 basis points in the first quarter. The story here was very strong EBO revenues of $181 million, which was up from $109 million in the first quarter. Last year, we started this program very conservatively, as we wanted to make sure we understood the liquidity implications of the new programs. Once our analysis was complete, we worked with our bank partners to develop innovative financing structures that meet all of our risk requirements. Then we streamlined our pipeline management, which has improved the speed with which we re-deliver loans. And now you're seeing the results. Looking forward, we expect to see strong EBO revenues continuing in the third quarter, although they may be down about 30% sequentially. after which revenues will taper off as we near the end of our EBO inventory. But we're now projecting total EBO revenue for 2021 that will be in excess of $450 million. Now, let's spend a minute on amortization because this will help you understand the value of a balanced business model and how the servicing portfolio will help offset pressure on origination earnings once the environment normalizes. With speeds slowing, amortization declined slightly, but only by about a third of a basis point in the quarter. Now, this obviously wasn't a major driver of earnings, but we expect a much bigger contribution once speeds normalize. For example, if you look back a year ago to second quarter of 2020, amortization was 2.6 basis points lower than it is today. And if amortization drops back to that level, it will be worth an incremental $200 million a year in pre-tax earnings. And if you think rates are going to rise significantly, you could go and look back at our 2018 results when speeds were running at about 10%. And that level of amortization would produce an incremental $450 million in earnings. These benefits will be important in the future in a slower prepayment environment. But as far as the third quarter, with rates where they are now, we're projecting CPRs and amortization to be roughly flat. All right, so let's turn to slide 12 and talk a little bit about liquidity. Advances remain a very good story, declining by 7% sequentially to $882 million. Our servicing advance funding capacity was just over $2 billion on committed lines of which $1.5 billion was unused. Our MSR line borrowings were flat quarter over quarter and remain at their contractual minimum with slightly over $500 million in unused capacity. Working capital was relatively neutral this quarter, with the largest cash use being the haircut on accelerated buyouts, which will recover as soon as these loans are re-delivered. And finally, as a reminder, we still have a six-year liquidity runway with no senior notes maturing until 2027. So clearly, overall, the company's liquidity is in excellent shape. All right, I'm going to wrap up my comments on slide 13 by talking about capital and leverage. I'd like to do that in the context of the trillion-dollar UPB goal because we believe a Fortress balance sheet is important for all of our stakeholders, from high yield and equity investors to government agencies and our regulators. In late 2019, we shared with you a capital target defined as the ratio of tangible net worth to assets of 15 percent or higher, which at the time was just slightly above 11 percent. Today, on a pro forma basis for the sale of reverse, we've achieved and even surpassed that target with a ratio of 17.6%. Now, excluding Ginnie Mae loans consolidated on our balance sheet, which should run off relatively quickly over the next few months, that ratio would be even higher at 22.6%. Now, we feel these are very solid numbers, especially when you consider our excess liquidity, strong balance sheet, and the fact that we have no senior note maturities for several years. So with that, I'll turn the call back over to Ken for Q&A.
spk09: Thanks, Chris. I'll now ask our operator to begin the Q&A session.
spk03: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, that's star 1 on your touchtone telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Kevin Barker of Piper Sandler. Your line is open.
spk07: Good morning. Congratulations on a good quarter.
spk05: Good morning, Kevin. Thank you.
spk07: Chris, in regards to the buyback program, the $500 million, is there a timeline on that? And do you expect that? cadence to be fairly quick in how you utilize that buyback? Or do you have any restrictions around how quickly you might utilize it?
spk05: I don't really. If you look back to our experience with our last authorization, you know, just using a standard buyback program, we were buying back shares at about $50 million a quarter. And, of course, you know there are lots of limitations. that we hope apply here, as in you're not buying shares with the stocks moving up. There are other blackout rules, et cetera. So if it's just the cadence of a normal buyback program, I think it would be fairly slow and consistent. Of course, if there are opportunities to buy back blocks of stock opportunistically at attractive prices, we'd certainly look at them. But beyond that, I couldn't really give you much in any way of timing guidance, Kevin.
spk07: Okay, but you would be open to blocks if they were made available, right?
spk05: If it's accretive to us, we certainly would be. Okay.
spk07: And then how would you measure accretiveness to you? Is it where it is on a price to book or how you look at what you view as like a P multiple on what your earnings expectations are? How would you define that?
spk05: since some of the people that might sell those blocks, maybe let's say this, I won't give you the whole formula, but I just started with tangible book, you know, I said, we created the tangible book with the stock trading up, you know, some of the might not be available, but we look at the obvious things starting with, you know, the impact on, on book. Okay.
spk07: And then with, with a lot of the restrictions being lifted here in August, and then, you know, you're utilizing more of your DTA and, Is there any other restrictions regarding your NOLs that could impact any other strategic initiatives you may have, whether it's divestitures or other strategic moves you could make?
spk05: No, there's not. As a reminder, most of the DTA, in fact, is only a small piece that remains as NOL, but the restrictions really are behind us now. So I think the short answer would be no. Okay. Thank you for taking my question. Thank you, Kevin.
spk03: Thank you. Our next question comes from Doug Harder of Credit Suisse. Your line is open.
spk10: Thanks. I'm hoping to just touch on some of the comments you made around amortization. You know, it looked like industry CPRs fell kind of more dramatically in the second quarter that didn't kind of show through? Is there something else that, you know, kind of is keeping amortization expense kind of flat in the short term?
spk05: I think it's purely a function of rates, and rates moved around a bit in the quarter. There was a little bit of a slowdown when they first backed up, but, you know, they're back at very attractive levels, so we're expecting amortization to be relatively flat next quarter. Now, if you listen to Chairman Powell, I guess there isn't a very clear guidance on where rates are going, but I think our expectation is setting aside what we think in the very, very short term that, you know, over the moderate term, rates will go up and CPR will come down, you know, I'd say at least moderately. in the next several quarters.
spk04: And I don't think, Doug, there's anything unique to our portfolio, if that's your question. I think it should, you know, over time, form consistent with the industry. So I don't know if that was your question, but I think, you know, I don't think there's anything unique. I think obviously we have a very strong recapture team and model. So, you know, We'll continue to benefit from that greatly, but as we think about it overall, I think it should perform consistent with the industry.
spk10: I guess just following up on that, on your comment about recapture, obviously you've made good progress on that. Where do you think that recapture rate can get to, and how much more improvement could there be on that?
spk04: Well, I'm hoping for 100%. And that's what we've challenged the team to get to. But, you know, realistically, look, if you look into some of the cohorts and some of the products, we're, you know, in the 65%, 70% range. And so I'd love to see us get, you know, overall above 60%. I think that should be a goal, and that's what we should target.
spk10: Great. Thank you.
spk03: Mm-hmm. Thank you. Our next question comes from Ryan Carr of Jefferies. Please go ahead.
spk01: Hi, good morning, guys, and congrats on the great quarter. Can you just touch briefly on the competitive environment across both channels and what drove the margin dynamics in your view?
spk05: Yeah, I think, as we said in our remarks, margin in DTC was relatively stable. We've said previously, over time we expect margins to compress, but definitely more gradually in DTC. Correspondent was very, very, very competitive, and I think that's an outgrowth of some of what's been referred to as a pricing war among some of the large players in wholesale, and that's bleeding over into correspondent. So we expect that to continue. Margin looks like it's picked up a little bit in the quarter, but it's really too soon to tell. And at the levels we're seeing, it's really not meaningful. Now, the channel is meaningful to us because that's our primary means for attracting new customers. But profitability, we expect profitability in that channel to be very muted at least through the third quarter and perhaps through the end of the year.
spk04: Yeah, I think on the direct-to-consumer side, we've had a strong start to the quarter. Margins there certainly have stabilized. It's not even gone up slightly. And so there we feel really good about the quarter and kind of the rest of the year. And given what rates have done, as Chris pointed out, there's more customers that we can help. Pretty bullish on that. And I think correspondent to his point, Chris's point, is just a function of what's going on in the marketplace. But still, when we look at, you know, what we're acquiring those MSRs for, it's still a very attractive return. And we'll continue to be, you know, active participants in that market, but disciplined as well.
spk01: Got it. And given some of the same kind of pricing dynamics on the originator side, what opportunities are you seeing in the prevailing MSR market? And how are you thinking about that in the context of your longer term goal that you mentioned in terms of servicing share?
spk04: We're very active. I mean, we're very active in the MSR market. We're looking at all the portfolios that come to market. I would say we're being proactive in our outreach. to other potential large sellers. And so I think you should expect a lot of activity there from us. And I think it'll be a component of the growth that we talked about. But again, we're going to be disciplined in our approach. We have target thresholds from a return standpoint. But we're going to be very active and aggressive and I think proactive in reaching out to potential sellers.
spk05: I think that, you know, the base of your question is as margins compress, and they compressed on what were historically very high levels where originators were able to hold on to their MSR, values were low, but they were still operating at cash flow positive levels, And so as the margins compress, I think you'll see more and more sellers just get back into a normal rhythm of selling their production to generate cash and to continue growing their business. And we've got great relationships with a lot of those clients. And so we're already seeing pools come to market. Activity has definitely picked up. I think you'll see more and more of that if rates stay where they are for the next couple of quarters. Well, not rates, but margins stay where they are for the next couple of quarters.
spk01: Got it. Thank you very much.
spk05: Thank you.
spk03: Thank you. Our next question comes from Bose George of KBW. Your question, please.
spk02: Good morning. Actually, first, just on the EBO, the guidance you gave for the 30 percent decline in the third quarter, the $450 million for the year, that suggests, I think, around $35 million of gains in the fourth quarter. Is that right? And then, so what would you see sort of going out into 22? Do you think that's largely done or we see that kind of run rate?
spk05: I think it'll be largely done. And that 450 is probably a bit of a conservative number because we don't know what gains will actually do. I mean, if we looked at it today, then, you know, the number is probably more like 500 million, but it'll be in that range, 450 to 500. There'll be a de minimis amount in,
spk02: Okay, great. Thanks. And then actually on the DTC channel, can you just remind me how much of the volume there is recapture and is there much purchase volume coming through there?
spk04: Predominantly refinance. So 95 plus percent is refinance. Very small purchase today. Now, having said that, Bose, you know, we've got several initiatives and are starting to see some positive progress in the purchase arena. But, you know, I don't think it will be meaningful in the next couple quarters. But over time, we want to get that purchase recapture, you know, to the 15% to 20% range. It's kind of the near term, call it 22 goings.
spk05: I think the story, in recapture, the real change in what had been pure refinance, rate-term refinance, is very significant growth in cash-out. And cash-out, as we told you, we pivot to that as rates rose. And even though rates have stayed low, we're still seeing a huge surge in cash-out. So that's up. In the second quarter, we were up. meaningfully to 30% of our total volumes. And I think we mentioned on the call that so far this quarter up to 40%. So that I think is more of a change quarter over quarter than a purchase number.
spk02: Okay. No, that's helpful. And just to clarify, so is there, is all the volume of the bulk of the volume coming through that channel recapture or is there sort of whatever third party, you know, kind of originations as well?
spk05: No, just think of it as recapture.
spk02: Okay, great. Thanks.
spk03: Thank you. Our next question comes from Henry Coffey of Wedbush. Your line is open.
spk06: Good morning and congrats on a good quarter and great execution and a whole number of items. The removal of the adverse marketing fee on refi, Does that work its way back into your retail margins? Does that work its way back into your correspondent margins? Or does that all get sort of competed away, you know, beginning in August when it kicks in?
spk05: Most of the impact of that fee goes back to the client. I mean, we tried to very quickly pivot and get most of it back to the client if we could. Of course, if rates were already – I mean, if loans were already – docks were out or loans were already closed and they were sitting in the pipeline, then that will end up flowing through the margin. That'll be a relatively small number. And I think that's what most of our competitors did, Henry. So you wouldn't expect to see a big jump in margin. And of course, we've reflected that in our ongoing pricing. Now, there may be a difference in how some people are handling pricing going forward. But that's how we handle the pipeline.
spk06: And then just two other questions. Just listening to the discussion, I think if I had gone back over the years, most of us think of you as a servicer with a great origination arm. Then 2020, everything was origination. Are we shifting back to that model where the real engine is servicing and all the related activities around refinance, recapture, cash out refinance, marketing, et cetera, that can lead from that? Is that where the business is growing? And is there room for, or opportunity for, you know, big bulk UPB acquisitions?
spk04: I mean, I think, Henry, it's, It's probably more of the same, right? Everything is really, if you think about our model, everything's linked, right? You've got on the origination side, you know, with our correspondent channel, it's a great customer acquisition channel. We're going to continue to grow that. And then I think on the, you know, the co-issue side, we're seeing a lot of positive progress there. And then on the bulk side, to your point, yeah, I do think there will be some, you know, large opportunities. But right now, it's mostly just kind of singles and doubles, pretty small pools, but we're very active there. But we really look at the platform as kind of a balanced business model, right? And Originations, you know, we want to continue to grow that and grow it in a meaningful way. So I don't think you can look at it as we're going back to, you know, when we were acquiring, you know, $200 billion MSR pools. I don't think you'll see that. But, you know, I think we want to stay disciplined. have a balanced business model, continue to grow originations, but certainly be active and opportunistic in the bulk world. So anything you'd add to that, Chris? No, I think you covered it.
spk06: On the buyback front or the return to capital front, are there any thoughts around a more aggressive strategy like a tender or a structured buyout or turning some of that money into a dividend?
spk05: I don't think that's something we're planning on in the near term. I mean, the whole focus is how do we generate better value for the shareholder. And if we're very, very bullish on our future. So, again, if we have opportunities to buy back shares at attractive prices, we're motivated to do that. Quite honestly, Henry, I think we see opportunities to invest and grow the business. that would offer better returns right now than just returning money via dividend. But at the end of the day, we're going to do the best thing for the shareholder. And if that ends up being the best option, that's what we'll do. But that's not where we are right now.
spk06: In terms of benchmarking your performance, how quickly should we expect to see or over what time frame should we expect to see you complete that buyback program?
spk05: I wouldn't give you a lot of guidance there other than if we, and I made this comment earlier, if we follow just a normal standard buyback, that would be fairly slow and steady. You should probably think of us as being able to buy back somewhere in the neighborhood of $50 million a quarter. Of course, that's due to market conditions, how the stock's trading, what the float is, et cetera. If we have opportunities to buy back blocks at attractive prices, then we would do that. But again, the thrust of the company is growth. And I think you're hearing us say, we intend to ramp up our growth. You've heard a lot of the newly public companies, you know, state claims to how much growth they're going to achieve and, We've been fairly quiet there, but we did grow in the second quarter at a 16% annualized rate. We expect to ramp that up, and so that'll take capital, and that's our number one priority.
spk06: And growth means growth in servicing, growth in originations, or both?
spk05: Well, it's both. Obviously, we lead with buying larger and larger amounts of MSR, but that leads to opportunities to grow our origination channel as well. So we think DTC is going to grow, correspondence is going to grow, but, yes, we are going to lead with more aggressively buying MSR in the market.
spk06: Great. And listen, great execution this year, lots of changes going on. Congrats on the sale, and we look forward to hearing more.
spk04: Thank you, Henry. Thanks, Henry.
spk03: Thank you. Our next question comes from Mark DeVries of Barclays. Your question, please.
spk08: Yeah, thank you. I was hoping to get your thoughts on the implications for your business of this Ginnie Mae proposal around risk-based capital requirements and risk weights if it gets ultimately promulgated. Is this constraining to you, or does it actually create more opportunity as less well-capitalized lenders are forced to sell more of their production into the correspondent channel?
spk05: It's a great question. It's too soon to know what that'll be. There's not going to be an impact on our business, but I think if you back up, we have the same goal as the leadership of Ginnie Mae, who we have a very strong relationship with, and we want a strong and stable servicing community. So It's a new proposal. There are a lot of pieces to it. We are preparing a very constructive response to Jenny, but I think there will be a lot of discussion around it. We reserve any further comment until we actually have an opportunity to speak with the leadership at Jenny.
spk08: Okay, fair enough. Jay, in your earlier comment, you alluded to the operating leverage you generate from getting to a much larger, you know, let's call it trillion dollar servicing portfolio. Can you just talk about how we should think about kind of your normalized servicing pre-tax margin trending as you continue to scale up the servicing portfolio?
spk05: Yeah, I'll start there. I think in the current environment, I'm not going to give you an exact number to put into your next note, but if you look at where we are today, obviously margins are up on the back of EBO gains. As we look out into next year, we think the margin profitability margin in servicing is going to hover somewhere around three, three basis points because amortization will come down. Maybe not as much as we alluded to, you know, if you went back to 2010, I'm sorry, 2018, but, uh, three basis points is probably all we'd expect next year unless short rates start to climb. When we get back into a normal rate environment, I think our profitability at its existing level is somewhere around five basis points. It'll be higher than that when we have one-off events, but five basis points is probably where it'll be. Now, we have invested a tremendous amount in our servicing platform. We think we have the best servicing, most efficient servicing platform in the industry and clearly the best servicing leadership team. So with all that investment and automation, the incremental profitability of adding to our portfolio is quite strong. Now, that'll come over time. I'd rather that we demonstrate that we can grow it at a more accelerated rate before we give you guidance on what the profitability is. But you should think of three basis points in the short term, five basis points in a normalized term, with that certainly growing as we add meaningfully to the UPP.
spk08: Okay. And are there any, you know, meaningful investments that need to be made in the platform to scale it up to a trillion?
spk04: No. I mean, we have, if you think about it from a technology perspective, we've made the investments there. We've got the capacity to get to that level. And so you'd really just be looking at, from a staffing standpoint, what would you need as a portfolio group? And that depends on the composition of the portfolio. So if it's more delinquent, obviously we'd need more staff. If it's very clean and current, we would need very little, if any. So it's really from an infrastructure standpoint, we're there today. We don't think there's any significant investment. It would just be around our team members based on what the composition of the new portfolio looks like.
spk08: Okay, great. Thank you.
spk03: Thank you. Our next question is from Kevin Barker of Piper Sandler. Your line is open.
spk07: Thank you. I just wanted to follow up on the impact of foreclosure moratoriums expiring and forbearance programs expiring as well. You have quite a bit of revenue and expense impacts. For instance, should we see ZOOM REO brokerage fees accelerate next year and what level would that look like? And then could you bring some of your operating expenses down in the servicing portfolio just given the amount of labor that was built up to address a lot of the forbearance?
spk05: That's a great question. Very timely, Kevin. We've been running through sort of preparatory tests for the final push of associated with the exits in forbearance. And the good news is, in terms of the operational cost, if you go back to sort of the crisis when foreclosures were high, we'll probably see levels about, you know, approximating those same peak levels, at least for a short period of time. But if you look at task by task, what we have to do to support those customers, 60% of those tasks are now automated. So, you know, the actual strain on the system is dramatically lower and costs should be, you know, should also be lower. And then with regard to ZOM, the short answer is absolutely yes, we'll see a growth in ZOM, but it probably will come in very gradually. And so we're expecting modest recovery in ZOM in 22, very strong recovery in 23, just because we're expecting the courts to have to take some time to ramp up for the activity. And so I think, again, we're expecting, and maybe it's conservative, but we're expecting a gradual climb in revenue in 22, but all driven by a lot of pent-up inventory.
spk04: Yeah, so I think the exchange business is going to be There's going to be a ton of opportunity there. Very bullish on it. I think to Chris's point, you know, you'll get a slow ramp, you know, in 22, but still it'll be meaningful for Zome. And I think 23 will be, you know, triple digit kind of numbers is what we're expecting out of that business for sure. And then to your point on the expenses, I think Chris is right. I mean, if you look at our remaining forbearance plans that are going to exit, you know, we think probably 70% of those will, you know, exit through some type of, you know, plan, mod, et cetera. And, you know, the remainder, you know, will go through the foreclosure process. We've automated a ton there. But ultimately, we will be able to take some costs, be able to take costs out as well. So I think you're right on target with your line of thinking.
spk07: So in regards to the exchange business, you're saying triple digits in 22 or 23? 23. And then when you think about that... I mean, as a guidepost, those are vague numbers.
spk05: So just as a real guidepost, right now, there's still a lot of unknown there. So I'd really caution... caution you that these numbers will undoubtedly change but as we look out at 22 now with all of the new options available to people the refi and what that would do to our pipeline and we factor all that in we think zone conservatively it's going to earn at least 50 million dollars in 22 and would expect somewhere around 150 million dollars in 23. okay and then
spk07: That's awful. And then in regards to strategic initiatives around the Zone platform, are you still considering some of those as well that you mentioned roughly over a year ago?
spk05: We are. We've got three remaining businesses with the auction platform being the 800-pound gorilla. But we have a valuations business and a field services business. We're really looking creatively. They're good businesses, but There's very limited growth within Mr. Cooper, and so we're looking for partnerships like the one we have with Blend where we might be able to find a strategic buyer or investor that can also provide a business and drive growth. These are good platforms in the right hands. They're going to be much more valuable than they are as part of our company, and we're actively working on that. probably have more to say next quarter.
spk07: Okay. And then the $150 million, is that what you would consider a normal year or was that, you know, much larger?
spk05: No, I think that'll be, there'll be pent up inventory. Now, I wouldn't give you a really accurate number here. We have been growing market share in auction very significantly and We're delivering excellent service to our clients. We have the metrics in that business that are as good or better than anyone in the industry. And so normalized is a hard number to define today. So the trajectory is up overall, but the 150 is definitely driven by the pent-up impact of the moratorium.
spk04: Yeah, and I think, Kevin, the other thing about the exchange business that makes it so valuable is that if you look out into 22 and 23, it's all third-party business, right? If you think back to when we started that business, we had a PLS portfolio that was part of the revenue and earnings component of the exchange business. That's essentially evaporated. You've really got a fully developed third-party business, to Chris's point. We're growing market share there, and it's obviously very capital-like. So from a valuation standpoint, we think it's a really attractive business. Okay.
spk07: Thank you for taking my question.
spk03: Yep. Thank you. At this time, I'd like to turn the call back over to Chairman and CEO Jay Bray for closing remarks. Sir?
spk04: Thanks, everyone, for joining us this morning, and we look forward to chatting further. Thank you.
spk03: And this concludes today's conference call. Thank you for participating. You may now disconnect.
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