Mr. Cooper Group Inc.

Good day and thank you for standing by. Welcome to the Mr. Cooper Group fourth 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'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. 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.

Good morning, and welcome to Mr. Cooper Group's fourth 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 Gow, 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 are not undertaking any commitment to update these statements if conditions change. With that, I'll now turn the call over to Jay.

Thanks, Ken, and good morning, everyone, and welcome to our call. I'll start with the quarterly highlights, as we always do. But first, I want to comment on Mr. Cooper's performance during 2022, which was obviously a very challenging year for the industry due to one of the biggest rate increases on record. Nonetheless, Mr. Cooper was able to deliver exceptional results, which I would summarize by focusing you on exactly two key metrics. We grew our customer portfolio by 23% and tangible book value per share by 29%. Relative to our peers, this is outstanding performance, which validates our balance strategy as well as the technology investments we've made in our platform and the skills the commitment and the hard work of our team members. And I will add that 2023 is shaping up to be a year of meaningful opportunity for Mr. Cooper. By executing on the strategy we've consistently shared with you in making the right tactical decisions, we stand to grow our customer base even further, plus put the company on the path to rising returns. Now let's turn to slide three and review the fourth quarter highlights. In terms of financial metrics, I would point to a 200 basis point lift in operating ROTC as servicing income nearly doubled in the quarter. And bear in mind, our current return on equity is impacted by a very robust capital base, which you can see in the 31% ratio of tangible net worth to assets. Turning to operations, the servicing portfolio reached 870 billion or 4.1 million customers. which, as I just mentioned, is up 23% year over year. And this growth plus rising rates helped push servicing income to a record high, $159 million in the fourth quarter. That exceeded our November guidance of $140 million as CPR speeds surprised to the downside. In originations, as you know, we took rapid and decisive action last quarter to reduce capacity. And as a result, we were roughly breakeven in the fourth quarter, and are now on track for positive results, which will be in line with what we guided you to expect. Shifting gears to capital management, we repurchased 1.3 million shares for 54 million as we continue to allocate capital both to growing our portfolio and to stock repurchase with the goal of maximizing investor returns. Finally, I want to mention that we've entered into a definitive agreement to acquire a registered investment advisor called Roosevelt Management Company, and its sister company, Rushmore Loan Services, which is a highly regarded special servicer. This acquisition will provide us with an asset management platform to raise third-party capital on an ongoing basis from institutional investors who seek exposure to MSRs and other mortgage assets. We expect closing to occur at mid-year following regulatory approval, and we plan to go to market in the second half. We haven't disclosed the financial terms due to an NDA with the seller, but the cash outlay is not material. Now let's turn to slide four. I'd like to spend a moment on developments in the servicing industry, and in particular, what we see as an unprecedented volume of MSRs coming to market. The chart on this page shows you our internal analysis on the sides of this opportunity. In summary, we're estimating that nearly $4 trillion will trade over the next three years. which on an annual basis is nearly double the historical run rate. Now bear in mind, this surge in volume is taking place in the context of a concentrated market with a limited number of buyers. And as a result, we expect pools will trade at very attractive yields. And in fact, we're already seeing some of the highest yields since the Great Recession. Let's talk about what's driving the market as I point you to two industry turn-ins. First, during the pandemic, we saw a very noticeable change in originations behavior. Simply put, they chose to retain a much higher volume of MSRs than their historical practice for the obvious reason that they were awash in cash and they could afford to retain the servicing rights. Today, however, originators are facing the worst margins in years. In fact, we're expecting for the first time ever to see three consecutive quarters of losses in the MBA quarterly origination performance survey. And this also means for many operators that liquidity is becoming a pressing need. Based on data for nearly 500 originators, we estimate there's a backlog of as much as $1.5 trillion in UPV which needs to be sold. The second trend is consolidation. You've read public statements from industry leaders who've decided to shrink their servicing portfolios. And I will tell you that there are other large operators who've quietly made the decision to exit. There's no mystery about the reason for consolidation pressure. It's the critical need for scale, technology, operational skills, and efficiency, just like in most other sectors in the financial services industry. Among a handful of large servicers, we believe Mr. Cooper is in the best position of any buyer to capitalize on this opportunity. We have unmatched operational capacity to onboard large portfolios. We have industry-leading recapture, strong relationships, ample capital and liquidity, and a sizable scale advantage. Now let's turn to slide five and talk about key investment themes for Mr. Cooper in 2023, starting with this MSR growth opportunity, which will include both acquisitions for our own account and our subservicing business as we partner with investors. Additionally, when we close the acquisition of Roosevelt and Rushmore, Our asset management platform will generate subservicing plus investment management revenues from investors who seek exposure to MSR economics but don't have the infrastructure or licenses necessary for direct ownership. Let's talk about the second theme, which is earnings visibility. We've benefited from a very strong ramp in servicing, and we have clear line of sight into continued profitability. Specifically, we're now projecting more than $600 million in servicing EBT this year, and I'd emphasize with the vast majority of mortgage customers well out of the money, this income stream will persist for years to come, absent a major rate move. At the same time, we're laser-focused on driving operating leverage, as Chris will comment on in a moment. Now, let's talk about our origination segment. As we all know, the refi market is limited right now, with most customers well out of the money. Nonetheless, our platform is profitable and extremely scalable, as you know from watching us in 2019 and 2020. And I'd add that we're continuing to invest in automation and other enhancements, which will put us in position for the next turn in the cycle, whenever that may occur. Finally, for zone, following a slow fourth quarter, we're now seeing stronger activity, including record net inflows and higher pull-through rates. which suggests we may finally be passing through an inflection point. Based on our latest data, we're projecting a visible ramp in the second half of the year, which should drive progress in our monetization strategy. To summarize, we're really excited about the opportunities in 2023, and we couldn't be more pleased with how we're positioned. I want to close by thanking every single member of our team for your commitment to Mr. Cooper's customers, your tireless work, and your enthusiasm. And now I'll turn the call over to Chris who will take you through more of the operations.