This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good day, and thank you for standing by, and welcome to Mr. Cooper Group Q1 2023 earnings conference call. At this time, all participants are on 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.
spk01: We will now begin our conference.
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, Chris Marshall, Vice Chairman and President, and Kirk Johnson, 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. I'll now turn the call over to Jay.
spk04: 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'd like to introduce our new CFO, Kurt Johnson. Kurt is a 25-year industry veteran with extensive experience in operations, treasury, and finance. After joining Mr. Cooper in 2015, he oversaw our Project Titan servicing transformation, which as you recall, consisted of a series of major technology investments in our platform. He then served as Chief Risk and Compliance Officer, during which time he emerged as a powerhouse, not only inside the company, but also within the industry where he has frequently sought out for his deep understanding of complex rules and regulations within the mortgage market. Welcome, Kurt. To fill Kurt's prior role, I'm delighted to welcome back Christine Paxson. Christine is an expert in enterprise risk management and has nearly 20 years of experience including roles at Wells Fargo, Citigroup, and Capital One. Now let's turn to slide three and review the highlights. I'll start with operating ROTCE, which increased to 8.6%. While this remains below our long-term target, I feel this is respectable performance given market conditions and our very large capital base. Thanks to positive operating results, our increased MSR hedge and stock repurchase, tangible book value ended the quarter at $56.72 per share, which is up 9% year-over-year. The balance sheet is in the best shape in the company's history, with record levels of capital and liquidity giving us substantial dry powder to grow the business. Now, turning to operations, servicing reported $157 million in pre-tax income, which is the consistent, recurring, predictable earnings we guided you to expect. Originations produced $23 million, thanks to our DTC unit, which responded effectively in a very nimble manner to the rally in mortgage rates earlier this quarter. The servicing portfolio ended the quarter at $853 billion, which was down slightly from the fourth quarter, but this is mostly timing, as we've won some sizable deals which we'll be boarding in the next few months, including $57 billion in bulk MSR acquisitions. Additionally, in connection with our pending acquisition of Roosevelt and Rushmore, we've agreed to take on Rushmore's special servicing platform, which includes $37 billion in subservicing contracts. Rushmore is a very well-regarded operator and combining their business with RightPath will position Mr. Cooper as one of the leading special servicers. Now turning to capital management, we reacted to the pressure on our stock price by repurchasing $89 million in shares, which was up from the $50 million run rate in prior quarters. Finally, I want to mention that we were recognized by CIO Magazine with a top 100 award for Project Flash, which is the digital infrastructure we've built to automate the origination process. Now, if you'll turn to slide four, I'd like to provide some context on where we stand today, given that we're operating in very uncertain times, which was hammered home in March with the troubles in the banking sector. Nonetheless, we are in excellent position to play offense, thanks in part to our strong balance sheet. Let's tick off the metrics. Capital at 31% of assets, liquidity up $640 million since year-end, a high-quality portfolio with low delinquencies, and to this, you can now add the fact that we've significantly increased our MSR hedge as we disclosed last month, which protects our capital from unexpected shocks. The other point I make is that unlike most of our peers, our return on equity has been steadily rising, which of course reflects the growing contribution from servicing. Now, many companies have talked about having a balanced business model, but if you look at our results in this environment, as well as our performance during the refi boom, I'd argue that we've proved out the concept, yet we don't see this reflected in our stock price or bond yields. We may not be able to control market prices, but what we can do is deploy our capital to grow the business and enhance returns. The opportunities we're seeing right now are as exciting as anything we've looked at in recent memory, and I'd expect us to exit this part of the cycle as a larger, more profitable, and even more dominant competitor. So let me wrap up my prepared remarks with some thoughts on where we're headed. If you'll turn to slide five, I'll remind you of the strategic vision we shared, which is to create the industry's leading platform. This is a platform for our customers, for the customers of our subservicing clients, and for the customers associated with MSRs that will soon be acquiring for our fund. You're familiar with our strategic target of growing the portfolio to $1 trillion, but I'd share with you that we think of that as an absolute minimum or four for where we can go. More important than size, however, is returns, which is why we remain fanatical about perfecting the platform through a combination of innovation and discipline. One of the interesting projects we're working on as we speak is to harness generative AI to more accurately anticipate customer calls. This will help us provide them with proactive solutions and a better experience, which will also mean lower cost for the company. We believe we already have the most efficient platform in the industry, but our goal is to keep driving down our cost to serve until no one can compete with us. We also talk about being the solution for our customers, which is part of our strategy of retaining customers for life. You've seen us demonstrate industry-leading recapture rates quarter over quarter, year after year, and you know that at the right point in the cycle, we can generate origination profits well over a billion. A key part of our strategy is to keep investing in our direct-to-consumer platform so that we're in position whenever the cycle turns to do even more. In summary, Mr. Cooper has emerged as the market leader in servicing. We have significant competitive advantages, a rock-solid balance sheet, and abundant liquidity. The company is on the path to higher returns on equity, and we believe, over time, a much higher stock price. And with that, I'll turn the call over to Chris.
spk05: Thanks, Jay. Good morning, everyone. I'm going to start on slide six. And if you'll turn there, you can see that we ended the quarter at $853 billion. Now, that number is down slightly from the fourth quarter, but that's mostly timing, as we won $57 billion in MSR acquisitions during the quarter, which we're very pleased with. And we expect these deals to board during the second and third quarters. Now, meanwhile, given our strong capital and liquidity, We're continuing to analyze a growing pipeline. In fact, our portfolio team is working practically around the clock. And there are some large opportunities we're focused on right now, and we're very excited about them. Also impacting the portfolio was $30 billion in deboarding related to a single subservicing client, which, as you may recall, recently acquired a servicing platform and decided to take their portfolio in-house. Now, you could see more volatility in our total book over the balance of the year, but overall, we feel great about our subservicing business, and I'd note that we've already replaced a substantial portion of this loss with growth from other clients. Now, let me give you a brief update on our pending acquisition of Roosevelt and Rushmore, which will provide the infrastructure for our asset management strategy. After extensive due diligence and discussions with the seller, we agreed to take on Rushmore's highly regarded special servicing platform, which includes 37 billion of UPB and subservicing contracts from a diversified group of very high quality investors. We're delighted to welcome Rushmore's exceptionally talented people to our company, where they'll join our RightPath team in bringing to market one of the leading special servicers in the industry. We're working towards the close of the subservicing platform by the end of May and expect to close the rest of the transaction by the end of June, of course, subject to approval from all of our regulators. Now, let's turn to slide seven and talk about servicing earnings, where our theme here is consistent, predictable, recurring results, just as we've been guiding you to expect. Servicing EBT was $157 million for the quarter, roughly flat with the fourth quarter. but a little bit better than we originally planned as amortization declined in line with record low CPRs of 4.4%. Looking forward, we continue to guide you to $600 million in EBT for the year, but hopefully we'll see some upside in that number depending on the timing of acquisitions and the success of our efficiency projects and, of course, any significant changes in rates. Obviously, there's considerable uncertainty about the outlook for interest rates and the housing market, but based on the current consensus outlook, you should expect our amortization to increase somewhat, reflecting the recent rally in mortgage rates as well as the spring selling season. This should be offset by higher interest income as custodial deposits, which declined to $8 billion on slower prepays and seasonality, begin growing again, and as deposit yields ratchet up following the Fed's most recent rate hike. Putting aside interest rates, The theme that we remain laser focused on is achieving positive operating leverage. And we've got a large number of projects underway to drive incremental efficiencies. For example, as Jay alluded to a moment ago, we've launched a really innovative project to use AI to anticipate customer calls so we can provide them what they need on a proactive basis through digital self-serve tools and further enhancements to our IVR. We'll be implementing this project through the back half of the year, and our goal is to take out $50 million in annual run rate expenses from our call center operation. Now, if you turn to slide eight, let's talk about portfolio quality, which is a very important topic given widespread concerns about the risk of recession and the potential impact on our customers. The headline here is that for our portfolio, 60-day delinquencies actually declined during the quarter, falling by 19 basis points to 2.4%. Obviously, this quarter's performance is no guarantee that they won't go up in the future, but the point I'd like to get across is that we have enormous experience with credit cycles, which is why we have deliberately constructed a high credit quality portfolio. Now, let's drill down a little further. Just over half of the portfolio is subservicing, where we benefit from higher servicing fees for non-performing loans and incentives to mitigate losses. In a higher delinquency environment, we'd expect subservicing margins to remain stable or even potentially expand. For the MSRs we hold on balance sheet, we pay very close attention to concentration, particularly for GMA loans, since these customers tend to have higher debt-to-equity ratios and lower FICO scores than conventional borrowers. Our owned FHA and VA books are relatively small, making up only 9% and 6% respectively of our total book. Also, our FHA and VA customers have substantial equity built up and low note rates, which bodes very well for credit performance. And in fact, we saw sequential declines in delinquencies for both our FHA and VA portfolios during the quarter. For the entire portfolio, our credit metrics have been very stable. Average FICO was flat at 725 year-over-year, while the CLTV declined very slightly. When we evaluate stress scenarios, we think we're well-positioned to withstand a turn in the credit cycle, given our scale, technology, and loss mitigation capacity. And on that point, the acquisition of Rushmore's special servicing business brings us additional capacity and positions us for revenue growth opportunities across a wide range of environments. On a final note, I'd add that one of the keys to managing through the next cycle will be to understand the latest government programs and offer them at scale to customers who need help. You may have noticed the FHA recently approved a new streamlined workout solution for all delinquent borrowers which are identical to the options available to COVID-impacted customers coming off of forbearance. In our view, intelligently designed programs like FHAs can play a very constructive role in keeping more borrowers in their homes while also providing appropriate financial incentives for servicers. Okay, I'm going to turn to slide nine and shift to originations. where we were very pleased with the 23 million in EBT we reported, which is more than double the forecast we shared last quarter. Now, these are small numbers, of course, relative to what we generated in the past few years, but the key point is that our DTC platform is very nimble and does an excellent job of taking advantage of even small moves of rates, and this has helped us generate consistently higher origination margins than peers at all different points in the cycle. Consistent profitability allows us to keep investing in the platform, whether it's project flash and further automation or fine-tuning our marketing campaigns. These investments will put us in position to scale up quickly once the cycle turns. For now, I guide you to expect $20 to $30 million as a good run rate for current conditions, recognizing that we're still dealing with high levels of rate volatility and weak housing dynamics. And, of course, the vast majority of our customers are out of the money. With that, let's turn to slide 10 and talk about zone. Last quarter, we guided you to expect stronger sales on the zone exchange in first quarter, break even in second quarter, and a ramp in profitability in the second half. And based on the latest data, we remain on track for exactly that. So let me go through the metrics, starting with inventories, which hit a new record of 27,000 units of much healthier flows from servicing clients. In fact, March was a record month for client inflows, which are running at roughly triple the average of 2022. Part of this is servicers getting more comfortable with their compliance processes, but our team has also been actively selling to new customers. And as a result, our market share of Ginnie Mae foreclosures is now rising above the 40% target we laid out for you a year ago. Turning to sales, The very strong 37% sequential increase was in line with our projections, and we'd look for this number to increase again in second quarter. We're seeing more investor activity on the exchange, which includes more visits to our website, stronger bidding activity, more bids per asset, and improving pull-through rates. So with that, I'm delighted to turn the call over to my good friend and Mr. Cooper's new CFO, Kurt Johnson. Thanks, Chris.
spk10: I'd like to start by saying that I look forward to getting to know everyone on the call. I consider it an important part of my job providing you the information you need to understand Mr. Cooper and getting your feedback. I'll start on slide 11, which gives you a summary of the financials, most of which we've already discussed. Let me provide some additional clarity on the $11 million in adjustments. These consisted of $1 million in severance, $3 million in markdowns for equity positions that we took in connection with the sale of Zones valuation and title businesses, and a $7 million share in the loss at Sajan, which we account for under the equity method. As we've previously shared, Sajan is in the process of integrating the IP it acquired from us on their cloud-based core processor. Once the integration work is complete, they'll go to market with the industry's first and only cloud-native platform, offering customers significant benefits in cost and speed to market compared to other servicing platforms. We expect Sagen to continue operating slightly below break-even until the integration is complete, which we'd estimate around year-end. Now let's turn to slide 12 and review our mortgage servicing rights. As you know, during the quarter, interest rates were down modestly, with mortgage rates down 17 basis points and swap rates down 35 bps. As a result, we marked down the value of our MSR by 3 bps to 159 basis points of the owned portfolio. If you look at valuation as a multiple of the base servicing strip, which we believe is a more meaningful metric, the multiple declined from 5.1 at year end to 5.0 times at the end of the first quarter. Some of you have asked for more clarity around the composition of the servicing portfolio. If you turn to the chart on the right, you'll see the MSR portfolio broken out by mortgage coupon, and you won't be surprised to find that our portfolio is significantly out of the money, with the average coupon of 3.7% well below current market rates. As time goes by, we'll see the average coupon migrate upwards as we acquire loans at higher market yields through our corresponding co-issue channels. But for now, this remains an environment with very limited refinance opportunities, which on a positive note, helps shield the value of the portfolio from rate shocks. It would take a very significant move, well in excess of 100 basis points, to put more than a small number of our borrowers back in the money for a rate and term refinance. While a shock of that magnitude seems unlikely, we're aware that volatility in the fixed income markets has remained stubbornly high. So let's turn to slide 13 and talk about our hedging strategy. The strategy behind the hedge is to protect capital and tangible book value from unexpected shocks, specifically the risk of declining interest rates, which would lead to markdowns on the MSR. We've been operating with a hedge in place since 2020 when we implemented a small position and gradually increased the size of the hedge as we fine-tuned our policy systems and processes. Since then, we have regularly communicated that we would increase the hedge more meaningfully when the time was appropriate. For many reasons, we believe our first quarter increases were both timely and appropriate. Our hedge team works under a policy limit of plus or minus 10% of the target ratio. In this case, that means the actual hedge position could range on a daily basis between 68% and 82% of the net duration risk in the portfolio. As of March 31st, the actual hedge position was 69%. Our hedge consists of simple derivatives such as TBAs, treasury futures, and swap futures. We do not use options at this time, given the cost and the natural hedge against tail risk provided by our strong direct-to-consumer recapture platform. During the quarter, the mark on the MSR was $122 million. Of that, $96 million related to interest rates, while the remainder had to do with operational assumptions that can't be hedged. The hedge benefit was $59 million, or 61% of the rate-related mark. Bear in mind, we started the quarter with a hedge ratio at 25%, so the actual performance matches the average position over the quarter quite closely. Now let's turn to slide 14 and review liquidity, which is a really good story. Since year end, we've upsized several of our MSR line facilities, increasing aggregate capacity by $1.5 billion. And these moves have brought our total liquidity to $2.4 billion, which is up $641 million from the beginning of the year. Given the turmoil in the financial markets, we're very pleased that our banking partners continue to see us as a sound counterparty with strong capital, risk management, and controls, and that they were eager to support our growth throughout the quarter. The $2.4 billion in liquidity consists of $534 million in cash, with the remainder consisting of fully collateralized, immediately available liquidity on our lines. Actual MSR line usage was moderate during the quarter, as we took down an incremental $30 million. We plan to make further draws to support the $57 billion in portfolios that we'll be boarding in the coming months. And we would expect these portfolios to bring us additional borrowing capacity as well. I'll comment briefly on advances, which actually declined 11% year on year, consistent with the favorable credit quality trends that Chris discussed. While we are not seeing credit pressure at this time, we continue to maintain nearly a billion dollars in borrowing capacity for advances, which we believe would be more than sufficient to manage through a turn in the cycle. I'll wrap up my comments on slide 15. From a strategic perspective, we've long believed that balance sheet strength is critical for any major servicer. And as Jay commented, our capital ratio at 31% is rock solid. In fact, this ratio is close to double what we believe would be necessary for us to be considered for a rating upgrade. If you consider the fact that our MSR is now substantially hedged, asset quality trends remain solid, our increasing profitability, and our track record of operational compliance and enterprise risk management, we believe that Mr. Cooper presents the market with an outstanding credit profile. Accordingly, our goal is to bring down the capital ratio over time, primarily by investing in MSR acquisitions and our own stock. The quickest way for us to re-leverage the balance sheet would be to issue high yield notes, but we don't view the trading levels for our bonds as consistent with our strong credit profile. So we'll wait for a more opportune time to tap that market. As we've mentioned before, our existing unsecured debt doesn't start to mature until 2027. So we have the luxury of being patient. In addition to using MSR lines, we could employ securitizations or excess spread transactions. And a successful monetization of zone could generate significant cash to achieve our leverage and growth goals. In closing, we regard the 8.6% ROTCE generated this quarter as a significant accomplishment, given the very substantial capital base in the denominator. Through capital deployment, as well as continued focus on positive operating leverage, we expect to generate much higher returns over time, and we believe this strategy should also drive a much higher stock price. With that, I'd like to thank you for listening to our presentation, and now I'll turn the call back over to Ken for Q&A.
spk11: Thanks, Justin. And we can now start the Q&A process, please.
spk02: And thank you. And one moment. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by. We compile the Q&A roster.
spk01: one moment for our first question.
spk02: And our first question comes from Kevin Barker from Piper Sandler. Your line is now open.
spk06: Thank you very much. I would like to follow up on the acquisitions that you guys announced today, particularly Rushmore and the $57 billion in MSR acquisitions. Could you give us an idea of the pre-tax profit margins expected from Rushmore and then how, how you see that playing out with when it comes on board and is that included in your $600 million, um, pre-tax income guide for the year in the servicing segment?
spk05: Yeah, Kevin, it's Chris. Um, I'd say we expect, yes, it is included in the 600 million. Um, and hopefully you heard me say, uh, We hope to see some upside in that number. We intend to board those subservicing contracts in the beginning of June, close the deal at the end of May, or transfer them, I should say, in the beginning of June, and then board them later in the summer. The first year, we don't expect we're going to earn anything because of the deal costs and non-recurring costs that will go into the transition. The following year, we expect it to be significantly accretive to our earnings. We're not going to give you exact guidance on that now, but we do expect it to be a very profitable addition to our special servicing unit. Okay, and then in regards to Rushmore? Just to elaborate on that, we're going to be bringing over several hundred people. We've got to retrain those people on a new platform. There are some non-recurring expenses that would say any profitability in a year is going to be minimal, but next year it will be significant.
spk06: Okay, can you help us frame the profitability – of special servicing versus own servicing and to get a feel for, you know, the opportunity set or at least the earnings set that could potentially occur as we start to see higher delinquency rates and the potential advantages for Rushmore and RightWay?
spk05: Well, special servicing versus what we're talking about is subservicing. So the return on investment is essentially infinite. And it can be very profitable. Obviously, the fees you earn for special servicing are much higher and the incentives are much higher, all designed to help the end investor avoid losses. So you can make a lot of money at it today. Volumes are low and there really has been very little demand for that business over the last, say, 10 years. but we do expect that to pick up significantly going into next year. So there's an opportunity there. I wouldn't compare it to own subservicing where clearly the returns are much wider, costs are less, but, of course, it takes investment to buy those MSRs. We're talking about expanding a subservicing business. Great.
spk04: And I would say, Kevin, on the margin – If you were to think about it from a margin perspective, in the Rushmore special servicing business, it's going to be, you know, 25% to 50% higher than kind of the current subservicing book that we would have. So it's meaningful. And to Chris's point, when we look at, you know, once we get it integrated, the profit's going to be a meaningful contributor to the overall servicing segment.
spk05: The one other thing I would mention is that the client list that has used Rushmore in the past, Rushmore has got a very strong, well-established brand in the industry, and that's evidenced by the extremely high-quality clients that have used them. But the backdrop in the industry that I'd point out to you is that the other two leading platforms in the industry are a at least rumored to be for sale. So SPS was for sale. There's another platform that we've been told is coming to market. So with a lot of change in that industry, I think the timing for us is perfect to bring on a well-recognized brand, combine it with our existing Right Path business, and go to market at a time when there's going to be a lot of dislocation. So we think there's a real opportunity to to win business, either more business from existing clients or win new clients to our platform.
spk06: And then just a quick follow-up on the 57 billion in purchases. Could you just give us a feel for where they use lower coupon, higher coupon? Were they Ginnie Mae or agency portfolios? And then what's your expected unlevered yields on those assets? Thank you.
spk10: Hey, Kevin, it's Kurt. I'll address that. So it is all agency business for the $57 billion. It is low coupon. It is fairly seasoned. The yields that we're seeing in the marketplace right now are still in the low double digits, so call it 10% to 13%-ish. And we expect this to be obviously boarded late second quarter, early third quarter, and contribute to the latter half of the year.
spk06: Thank you, Kurt, Chris, and Jay.
spk02: Thank you. Thank you, Kim. And thank you.
spk01: And one moment for our next question. And our next question comes from Doug Harder from Credit Suisse. Your line is now open.
spk12: Thanks. can you talk about how you're or what you're seeing in terms of, of banks in terms of either appetite to sell MSR or, or looking to purchase MSR kind of given, you know, the changes that have happened in the past month or so in the banking system.
spk04: I mean, I think what you're seeing Doug is it's still, I'd say it's in a state of transition, right? You have, certain financial institutions that we're all aware of that have publicly stated they want to shrink their portfolio. And we're seeing that play out, and we are going to be, I think, a big partner for that entity. And then you're seeing some other banks that have come to market. with some MSRs that, you know, that ultimately I think there's going to be more. So, you know, I think it's still kind of a little bit of a state of transition as everybody digests what's happened in the last, you know, month or two. But we do expect more to come from the banks. We expect it to be active there. And so, you know, we'll see how it ultimately plays out.
spk12: And then can you just talk about on the number of bidders and the appetite of bidders that are kind of, you know, looking to take advantage of this opportunity?
spk04: It varies, right? If you look at in the GMA portfolio, it's a much smaller set of buyers and bidders. Still, you know, several that are active. In GSE land, I think there's more bidders there. But still, when you look at it, you can count it on two hands. I mean, it's not a significant number of bidders, but it's competitive. There's definitely a set of financial buyers as well as entities like ours that are active. But when you step back and let me know, we bought 57 in the first quarter. Pipeline's looking really strong for the second. And, you know, I think we'll continue to be disciplined and thoughtful. But, you know, there are bidders out there. But, again, there's enough supply that we feel really good about, you know, opportunities going forward.
spk05: I'd add that for the smaller pools – I mean, we bought a couple of – or at least one large pool, one mid-sized pool, and then several small pools. For the smaller pools, there's lots of competition. As the pools get larger, certainly as they get above $10 or $20 billion, there's a handful of potential buyers because the sellers and the buyers are usually very focused on a smooth – customer transition, and when you're dealing with pools of that size, there are very few buyers that have done that successfully in the past. So there's certainly competition for those large pools as well, but they're the traditional large companies that you would expect, and that's about it.
spk01: Great. Thank you. And thank you. And one moment for our next question.
spk02: And our next question comes from Giano Bologna from Compass Point. Your line is now open.
spk09: Hello. Good morning and congratulations on another great quarter of the performance and execution. One thing I'd be curious about that was mentioned in the prepared remarks was trying to, you know, cut roughly 50 million, I think, rental costs out of the call center. I'd be curious what you think in terms of, like, the timing of that initiative might be. Is that kind of a 23 initiative or is that kind of a multiyear goal?
spk05: No, I'd say so over the next 12 months. We will be implementing, we referred to the AI project, which it will be implemented over the back half of the year. So in terms of taking out the cost, it'll phase in over the back half of the year. It'll probably be more towards the end of the year because that's when the project will be fully completed. But, you know, there are several phases to that, Juliano. If you think about what we're trying to do, it's really to replicate the Amazon model. I'm sure everyone on this call uses Amazon, and yet I doubt anyone has ever spoken to anyone at Amazon that's because you don't have to and so our goal here is to be able to provide real-time information proactively to our customers much more simply to be able to have an IVR that's very friendly we've made massive investment in a state-of-the-art IVR and we are fully leveraging its capability so this is just the beginning of a multi-year project to move to that type of model. The first phase is $50 million, but we spend several hundred million dollars on our call center operations, and so we have a lot of work ahead of us. But we think it's a big opportunity. Big opportunity not just to eliminate expense, but to make the experience much, much better for our customers.
spk09: That's great. And it's great to see even more goals out of where you currently are because I think you're kind of ahead of the curve in terms of where most of your peers are in terms of cost savings and efficiency there. On a slightly different topic, I see that you have increased the target tangible net worth, tangible assets ratio to 17.5 to 15. I was curious if that's transient or temporary change because of the kind of macro backdrop or is that more of a permanent change? I realize it doesn't have a huge impact when you're so close to double both levels or more, but I'm curious about your thought process there.
spk04: Do they have more than, that's a rating agency threshold, you know, as you think about upgrade possibilities and based on our conversations with the rating agencies, that's a level that they're comfortable with and contemplating an upgrade. So it's really no fundamental change. We just wanted to provide that insight into how the agencies are thinking about it.
spk09: That's great. Thank you for taking my questions, and we'll jump back in the queue.
spk02: Thanks, Juliano. Thank you. And thank you.
spk01: And there will be one moment with our next question.
spk02: And our next question comes from Boss George with KBW. Your line is now open.
spk07: Hey, guys. Good morning. Going back to the MSR investments, is there a way for us to think about how much sort of incremental capital you could deploy into MSRs this year?
spk05: I'm not sure there's an exact number we would consider. give you as though we've set up a budget to invest this year. We've kind of gone through our liquidity and capital. I would just leave it as this is an opportunity-rich environment we've been planning for for two, two and a half years. And I don't think we'd give you an exact number that we would be setting as a budget to invest. We're going to buy as much as much product that comes to market that hits our return threshold, Bose. And, you know, I would think of, if you wanted to try to construct something, I'd look at our capital and liquidity, which is quite robust, our trillion-dollar goal, and say we expect to make a lot of progress towards that trillion-dollar goal in 2023.
spk04: Yeah, I think, Bose, you probably heard Kurt and Chris Abos chat about our increase in liquidity quarter over quarter of over $600 million. Obviously, that was intentional. We really don't see any impediment to the rest of the year as we think about acquisitions, what's possible, who some of the larger sellers are. I think we're aligned to be able to acquire you know, as much as we choose to and as long as it hits our kind of consistent, you know, discipline, you know, return targets. So, yeah, we put a lot of work into building the balance sheet, building the capital requirements, and building liquidity. So we're very, very prepared for this cycle.
spk07: Okay, great. Yeah, fair enough. That makes sense. And then actually just switching to Ginnie Mae MSRs, you noted the return on the agency side. Can you just talk about the returns on GDMA MSRs and just how your comfort level in terms of investing in those assets?
spk10: Yeah, Boze, it's Kurt. So, yeah, I mentioned, you know, kind of low double digits for the conventional. On the guppy side, we're seeing in kind of the mid double digits, so call it 13% to 16% effective yields there.
spk04: And it really depends on the pool bows. I mean, in some cases, some of the smaller pools you're seeing high double, almost 20%, high teens, almost 20%. So, so quite attractive again, pool specific, but.
spk07: Okay, great. And then just in terms of your comfort level there, I mean, there are any pools out there you're comfortable with the risk.
spk04: Very comfortable with the risk. I mean, I'll let Kurt comment on the, our current portfolio and some of the underlying characteristics of it. But, you know, look, we've been through a lot of cycles. We have significant talent in the organization. If you recall in the last cycle, we were one of the only few entities that really made a huge difference in keeping homeowners, you know, in their homes. So it's just core to our DNA to be able to manage the GENIE portfolio, a GENIE-made portfolio and the risk associated with it. On top of that, our portfolio, you know, looks quite good. So, Kurt, you can comment on that.
spk10: Yeah, Bo. So Chris had mentioned that the composition of the Govey portfolio is 9% FHA and 6% VA. A lot of the originations we did, obviously, just like a lot of others, were in 2020 through early 2022. But keep in mind that the original dates on a lot of those were significantly earlier because those were streamlined rate term refinance. So we have almost 60% of our FHA portfolio now has a market LTV of less than 60%. And keep in mind, right, when most people originate An initial FHA, it's kind of at the 96.5% LTV. So we've got a lot of equity, and we're seeing pools trade with a lot of equity as well. And we'll be pretty disciplined about that. And we think there's an opportunity to layer in some current coupon into that as well without really expanding the risk of our overall portfolio.
spk07: Okay, great. That's helpful. Thank you.
spk01: And thank you. And one moment for our next question. And our next question comes from Eric Hagan from BTIG.
spk02: Your line is now open.
spk08: Hey, thanks. Good morning. Hope you guys are well. Following up on the MSR acquisitions, can you say how much capital and leverage you expect to use in financing that portfolio and also how the cost of MSR financing compares on the new lines that you're sourcing versus the lines that you have had in place?
spk10: Yeah. The lines are essentially the same. We've expanded existing lines for the most part rather than opening new lines, so the cost of financing is relatively similar. In terms of capital utilization, as we're acquiring these MSRs, we're given by the banks about call it 60% of the value of the underlying MSRs in terms of debt financing. And so you can kind of utilize that as a benchmark.
spk08: Sure. Actually, I'm glad that you brought up the advance rate. A question about that. Is the advance rate dependent on whether you're borrowing against an unrealized gain in the MSR versus financing new MSRs?
spk10: No, and we do kind of mark with our banks on a pretty regular basis, and they're very consistent with our market, our mark-to-market, rather. And keep in mind, we do use third-party valuation firms, and we tend to be right down the middle in terms of valuation. So we are very aligned with our banks.
spk08: Yep. One more, if I may. Can you talk about how you recapture expectations? or even the framework around recapturing loans differs for the MSRs that you buy from third parties, like you're onboarding right now or in the process of onboarding, versus the loans that you originate in-house?
spk05: Yeah, I'd say the loans that we buy from others, this is Chris, Eric, good morning. Loans we buy for others, our recapture rates tend to run at about double the industry average, so we're we have always set the pace for the industry in terms of that so that's we buy a pull from someone else we'll recapture it in the 50 level for someone who has already done a transaction with us that we've already refinanced uh we capture it you know approaching 80 so um there is a difference but Even with a freshly purchased pool originated by someone else, we're going to recapture twice the industry average.
spk04: And for the pools we're buying, it depends. For the pools we're buying, I think, you know, it depends on the coupon, right? Ultimately, how in the money or out of the money the portfolio is. But, obviously, it's modeled in that manner. Yeah. You know, every pool is, you know, loan level kind of from a modeling standpoint, and the recapture, you know, answer will depend on where the, you know, overall portfolio is and where the coupon is within that portfolio.
spk05: Every potential purchase we look at, we look at our past history recapturing loans from that seller. So we model our expected recapture rate. is obviously one of the major factors in price in assembling our bid. And when we backtest how well we perform against those models, it's extremely very, very strong performance. I mean, the gap between what we expect and what we actually see is extremely close.
spk08: Yeah. Thanks for all the good detail there. Thank you, guys.
spk02: And thank you.
spk01: And one moment for our next question. And our next question comes from Derek Somers from Jefferies. Your line is now open.
spk03: Hi. Good morning, everyone. How do you evaluate allocating capital towards bulk MSR purchases versus scaling the correspondent channel, and how dynamic is that capital allocation?
spk04: We look at it all the time. I think at the moment our view is the bulk opportunities are, as we've discussed, there's a lot of supply. There's significant return opportunities there, and that's where we see at the moment where we should be allocating more capital. Correspondent is a channel that we like. It's a channel that we're active in. but we look at this, frankly, on a daily basis, formally on a weekly basis from a capital allocation standpoint and make the decisions based on where we think the best opportunity is.
spk03: Got it. Thank you. And then one more quick one. Will the 75% interest rate hedge be kept on for second quarter?
spk05: Yes. You should assume that that hedge is We've talked about expanding our hedge at the appropriate time. We think this was the appropriate time to do it. So for the foreseeable future, that will be our position. It may not be forever, but you should not expect any change in that position.
spk03: Got it. Thank you very much.
spk02: And thank you. And I am showing no further questions. I would now like to turn the call back over to Jay Bray for closing remarks.
spk04: Thank you, guys. Really appreciate you joining the call. Have a great day, and we will certainly be around for additional questions. See you.
spk02: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer