Mr. Cooper Group Inc.

Good day, and thank you for standing by. Welcome to the Mr. Cooper Group third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ken Posner. Please go ahead.

Good morning, and welcome to Mr. Cooper Group's third 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 and President, and Jamie Gao, Executive Vice President and CFO. As a quick reminder, this call is being recorded. Also, 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're not undertaking any commitment to update these statements if conditions change. I'll now turn the call over to Jay.

Thanks, Ken, and good morning, everyone, and welcome to our call. I'm going to start with the highlights, as we always do, but then we'll pull up and talk about the recent interest rate shock and, more broadly, the macro backdrop, where a number of indicators are now signaling higher risk, and then discuss how we are positioning Mr. Cooper for an environment of heightened uncertainty. So, with that preface, let's go through the highlights on slide three. In summary, we had a very solid quarter with positive earnings and cash flow and strong capital generation. while continuing to grow our customer base. Net income was $113 million, which was a function of both operating earnings and a positive MSR mark. As a result, tangible book value per share rose to $56.35, which is up 36% year over year, and our capital ratio increased to a new record high of 31.3%. We talk a lot about our balanced business model, and this quarter's solid results demonstrate the obvious benefit of operating with a large servicing portfolio. Servicing income more than doubled to $81 million in the quarter, up from $30 million in the second quarter, and most of this increase is the predictable impact of higher rates on amortization and interest income, which we guided you to expect. Looking ahead, we project servicing income reaching $125 million or more in the fourth quarter, with strong results continuing into 2023, especially if the Fed continues on its current path. Turning to the portfolio, the UPB reached 854 billion, or 4.1 million customers, which is 28% year-over-year growth. Most of this growth was in our subservicing portfolio, where we continue to win new clients and gain wallet share. In subservicing, we believe we are the market leader, with a platform that's scalable, efficient, compliant with unparalleled recapture capabilities. Additionally, we believe as we enter into this uncertain environment, our strong loss mitigation track record and capabilities will be another key differentiator. Historically, we grew this business with a small number of very large clients, but today we are actively calling on a much broader segment of the marketplace. I think there are excellent opportunities for further growth as we take share from competitors who haven't invested in technology or loss mitigation. What's especially appealing about subservicing in this environment is that it allows us to grow our platform and our customer base, achieve greater scale, and drive down unit costs without employing capital. Now let's talk about originations, where the situation is clearly very challenging. We generated $45 million in EBT, which was in line with our guidance and reflects fantastic execution on the part of our originations team. However, with the recent moving rates, there's going to be significant pressure here. More on that in a second. Finally, in terms of capital management, during the quarter, we repurchased 1.1 million shares for 50 million, which I would describe as a measured pace and appropriate for the current macro backdrop. Okay, now let's pull up and talk more strategically about how we're positioning the company for an environment of heightened risk. As you'd expect, our leadership team tracks a large number of macro and market indicators very closely. Of concern right now, we see very elevated levels of volatility in both equity and fixed income markets, which tells us to prepare for a wide range of potential scenarios. We're monitoring liquidity and credit stress in the financial system, which means we need to be mindful not only of our own balance sheet, but how our partners are doing. We're obviously watching the deterioration in the leading economic indicators, which point to a growing risk of recession, as well as a housing correction, which has already begun. And the global backdrop looks quite fragile. Now, there are also some very positive indicators. Employment is currently very strong, as is consumer credit, where delinquency rates are only just starting to normalize and only in certain pockets. But net-net, it's our mission to serve customers in both good times and difficult times, which means we need to be prepared for adverse scenarios. So let's talk about how Mr. Cooper is positioned for heightened risk, including where we're pivoting and where we're staying the course. Starting with originations, as we all know, rates have moved very sharply in the last few weeks. To put this in some perspective, year-to-date, mortgage rates have more than doubled. which we believe is the most extreme shock the industry has experienced in its history. As a result, the rate and term refinance opportunity is basically nonexistent. And now we are seeing the cash-out market coming under pressure too, as many of our customers who would like to tap their equity are facing an affordability problem. In light of this situation, we're moving forward once again to realign capacity in our originations business. We want to serve our customers' needs where that makes sense financially, and we want to safeguard the high credit quality of our portfolio. In other words, this is not the time to loosen our credit standards or to take our eye off manufacturing quality. We're also taking a fresh look at corporate expenses in order to streamline overhead costs where appropriate. As always, we're reacting quickly and decisively to market changes while ensuring we continue to make smart investments in the business. On this point, longer term, we believe our origination business has enormous potential, especially our DTC platform, where we have initiatives underway to expand into new products and channels, and where we're continuing to invest in automation. And we'll talk more about these initiatives at a future point once the market is stabilized. Turning to servicing, the story is very different. We have terrific momentum. We've got the best technology in the industry. And we're making great strides with our process discipline, the result of which is the operating leverage you can see in our results. In terms of how we navigate the credit cycle, technology and process discipline are the keys to managing both current and delinquent loans. Also, as you know, last quarter we acquired RightPath, which is a special servicer with a sophisticated data-driven approach. Integration is on track and we're incredibly optimistic about growing right past client base and using their techniques for our own portfolio. Credit quality is also an important consideration. Chris will take you through our portfolio so you can understand our diversification and conservative approach to acquisitions. In summary, I'd emphasize that we have the scale, technology, people, and experience to play a leadership role if the mortgage market comes under stress. And I'd remind you that is exactly what we did during the last downturn. Now, turning the zone, we feel that the platform is in great shape from an operating and competitive standpoint. And, of course, a recession, if one happens, is only going to create more demand for the exchange. Right now, we are in a transition period where home prices are falling, but foreclosures are not yet rising. There's no change to our strategy, but we will need to be patient a little bit longer to see EBT ramp. which is the key to monetization. Finally, let's focus on the balance sheet, which I know everyone on this call would agree is the most important aspect of any company strategy when facing a risky macro situation. With respect to capital and liquidity, we're in great shape. In fact, the company's balance sheet has never been stronger. And in this environment, you should expect us to continue operating with a significant amount of excess capital and liquidity. Part of the reason for this posture is that we do expect to see more pain in the mortgage industry as the current players grapple with challenges that many of them have never faced. We have to be prepared to deal with stress and instability in our markets, which could also produce extraordinary opportunities. For now, when it comes to capital deployment, you should expect us to remain very thoughtful and disciplined and also very patient. And to wrap up my comments, the theme I'd like to emphasize is sustainability. We have a balanced business model. We have the best technology in significant scale, a conservative, high-quality portfolio, robust capital and liquidity, and a team that pivots quickly when conditions warrant. We don't know how the macro scenario will develop from here, but we're positioning ourselves to navigate the risk and emerge on the other side of this cycle in an even stronger position. And with that, I'll turn the call over to Chris.