Mr. Cooper Group Inc.

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 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.

Thanks, Ken, and good morning, everyone, and welcome to our call. Let's turn to slide three and review the second quarter highlights. Starting with financial performance, I was extremely pleased with a 300 basis point gain in operating ROTCE, which hit 11.7%, and the growth in tangible book value per share, which increased to $58.81. At the same time, the capital and liquidity remain at near record levels. Turning to operations, the servicing team produced excellent results. with $182 million in pre-tax income. The portfolio reached $882 billion at quarter end, but if you include pending acquisitions such as HomePoint, we're over $950 billion, which is nearly on top of our $1 trillion target. Late last year, we told you to expect a surge in bulk MSR sales with cycle-wide yields, and that is now playing out as we foresaw. Also contributing to portfolio growth, we completed the acquisition of Rushmore Servicing, which now makes us one of the largest special servicers. I'd like to offer a hearty welcome to the 300 new team members who joined the Cooper family. We value the world-class skills you bring to our platform and the trusted relationships you've built with important institutional investors. Originations reported pre-tax income of $38 million, which exceeded the guidance we gave you last quarter. Despite incredible volatility in mortgage rates over the last years, we've never stopped investing in our platform, and I'm very pleased with our progress driving efficiencies through automation and our consistent best-in-class recapture performance. Now, turning to capital management, we repurchased 1.2 million shares for $57 million. which brings us to a cumulative 31% of shares repurchased since inception. Furthermore, I'm very pleased to announce that our Board has approved increasing the repurchase authorization by another $200 million. You should take this as a signal of our very strong confidence in Mr. Cooper's business model, and specifically the outlook for continued growth and strong returns, which we do not see reflected in the stock price. Finally, we were very pleased to be certified as a great place to work for the fifth consecutive year and with world-class team member engagement, I might add. It's very important for us to provide a purposeful, inclusive environment for our team members because their happiness is essential to providing our customers with the service and advocacy they deserve. So let me pause here to say thank you to everyone at Mr. Cooper for making this such a great team to be a part of. Now let's move to slide four, as I'd like to pull up for a minute and talk about the bigger picture. As you know, when it comes to residential mortgage servicing, Mr. Cooper has the strongest and most consistent growth record in the industry, with a portfolio CAGR of 30% over nearly 15 years. Now is not the time or place to dive into the details, but suffice it to say, over the last decade, we've acquired hundreds of portfolios, totaling over $700 billion, from more than 1,500 sellers, which, by the way, gives us a significant information advantage when bidding for pools. What I'd emphasize is that throughout this time, we were constantly investing in our servicing platform. In fact, internally, we talk about perfecting the platform, which of course is a never-ending process. But as a result, today we are the leader in all the key performance drivers, like cost of service, loss mitigation, and recapture. These are decisive competitive advantages and the reason why we are close to becoming the nation's largest servicer. I don't think any of our peers would dispute that we've earned our leadership position through focus, discipline, creativity, and hard work. Nor do I think there's much question among investors and analysts about our competitive advantage in servicing. So let's turn to slide five and talk about return on equity. In 2020 and 21, Mr. Cooper capitalized on the refinancing boom, driving ROTCE to very strong double-digit levels thanks to a fantastic performance in both our DTC and correspondent channels. During 2022, we passed through a transition period where origination earnings eased off due to the fastest mortgage rate increase in generations. And while it took a few quarters for servicing margins to kick back in, Thanks to our balanced business model and the contribution from our large portfolio, returns are now back on the cusp of our minimum target of 12%. We are, of course, pleased with the direction returns have been tracking, but honestly, we're focused on more ambitious goals. And I would add there's a lot of excitement internally about the potential for creating shareholder value as we continue to execute our plan and demonstrate to the market a sustained higher return on equity profile. So let's talk about some of the strategic initiatives we're working on. First, our strategy is premised on cost leadership. Based on benchmark data, we believe we already enjoy a significant cost advantage over peers. Nonetheless, we're working to drive further reductions in unit costs, which will help us generate greater operating leverage as we deploy capital into portfolio growth, and while at the same time deepening our competitive mode until no one can compete with us. Second, our DTC platform is extremely profitable, and we'd like to see it make a bigger contribution to overall results. That means continued work on cost, speed, and customer experience while we explore new products and channels. And third, we're working to grow our self-servicing business, which leverages our platform and provides incremental income, including gain on sale from recapture, without tying up capital or liquidity. We're in active discussions with potential new clients, and we're also building out our asset management capability in preparation for launching an MSR fund later this year. In closing, I'll comment that we were quite pleased to see the stock price reached a new high since the WMIH merger in 2018. However, with the stock still trading at a discount, we don't think the market fully appreciates our competitive advantages, the benefits of the HomePoint acquisition, and the progress we're making on strategic initiatives. And with that, I'll turn it over to Chris to discuss our strong operating results.

Thanks, Jay, and good morning, everyone. Hey, before I begin my comments, I also want to add my thanks to all my teammates at Mr. Cooper for their tremendous effort, which directly translated into the great results we had this quarter. I'm also extremely proud of being certified as a great place to work for the fifth year and also being named one of the best places to work in Texas. Well, all these accolades, you can assume things are going very well at Mr. Cooper right now. So with that, let's turn to slide six and talk about servicing, where we earned a record $182 million in pre-tax operating income. Based on these results, as well as the pending acquisitions we've announced, we're raising our full year of guidance for operating income by 17%, from $600 million to $700 million. And this doesn't include one-time gains from a trust collapse we're working on, which we expect to close in the second half, and which will contribute an additional $50 million or more. Now, this healthy contribution is exactly what you should expect from our balanced business model, as low CPR means limited activity for originations, but much stronger servicing earnings. And while many firms talk about having balance, you can see that our overall results are considerably more stable and consistent than our peers. However, while cyclical trends are favorable right now, the real story in servicing is our relentless focus on perfecting our platform, which is honestly like a religion for us. Currently, we're laser-focused on our customer call center, where we have a year-end goal of taking out $50 million in annual operating costs while improving our customers' experience. Our strategy is to drive lower call volume by making information much easier for customers to access on their own, which is a win-win for them and the company. We've been steadily making progress here, as you can see from the chart on the upper right, where calls per loan have dropped by 26%, with progress accelerating in the last few quarters. This is a huge productivity driver for us, as you can see in the chart on the lower right, where call center headcount has actually declined even as our portfolio has grown. As you may recall, last year we upgraded our IVR to a state-of-the-art system, which allows us to better leverage customer data and machine learning. And now we're starting to see very meaningful improvement in IVR containment, especially in areas like authentication and payments. We're also having considerable success with chat technology, including both human chat agents and the use of chat bots for standard servicing questions, where we're seeing excellent rates of first chat resolution. By putting the information they need at their fingertips, we're making life easier for our customers, and needless to say, for those customers who need help with more complicated issues, our people are always there to help them. Now let's turn to slide seven and take a closer look at our portfolio growth. As Jay mentioned, the portfolio ended the quarter at $882 billion, but factoring in pending transactions, it would have been $957 billion. I'd add that based on our internal forecast, we're expecting to hit our trillion-dollar target by year-end, which would be 12 to 18 months ahead of schedule. Although, as always, that would be subject to our first priority, which is returns. Among these pending transactions, the largest is the HomePoint acquisition at $83 billion in UPB, which is scheduled to close in the third quarter. Now, as a reminder, we're not taking over any operations, so there's no integration to speak of post-closing. We're planning to onboard the HomePoint loans in late 2023 or very early 2024, at which point we'll realize the full economics of this transaction. We also have $25 billion in pending bulk acquisitions, which include a large portfolio we're acquiring from a seller we know quite well. And what I'd share with you is that this seller values our strong customer service and very smooth onboarding process. And we continue to see a buyer's market for MSR with plenty of attractive pools trading at unlevered pre-tax yields, in the low double digits for conventional loans and even higher for Ginnie Mae, which is exactly what we guided you to expect when we shared our proprietary forecast late last year. What's new since then and what you'll find interesting following the turmoil earlier this spring, we're now seeing a sharp increase in regional banks bringing MSR pools to market. We're also excited about opportunities to grow our subservicing business. We have a very experienced executive team with very deep industry relationships calling on potential new clients, including originators, banks, and MSR investors. Additionally, as you know, we're in the process of launching an MSR fund, which is intended to be another source of subservicing. We're expecting our acquisition of the platform company to close in the third quarter, subject to regulatory approval. positioning us to begin a fundraising campaign in the fourth quarter. And finally, we've expanded our menu of subservicing products with our new special servicing capability. So let's turn to slide eight and spend just a minute on this. During the quarter, we closed on our acquisition of Rushmore Servicing, and we're now integrating Rushmore onto our platform and merging it with our existing special servicing unit, RightPath. Since Rushmore is a well-established and highly regarded player, we've decided to operate under their existing brand, and I'm pleased to share that we've not only retained Rushmore's existing clients, but we're already signing new ones. Should the credit cycle take a turn for the worst, Rushmore could play a very constructive role in the marketplace, helping MSR investors and other servicers manage delinquent portfolios. while working to keep as many customers as possible in their homes, which of course is everyone's goal. Now recession remains a concern for many economists, but if the economy were to hit a speed bump, we'd be in a very strong competitive position. Not only would Rushmore turn into a major growth opportunity for us, but we've constructed a high quality portfolio of owned MSR where most of our borrowers enjoy sizable equity cushions and low mortgage rates. As of today, we're not seeing any signs of strain with our 60-day delinquencies continuing to decline during the second quarter on both an overall basis and in each individual loan category. Now, we've gotten some questions recently about the end of student loan forgiveness coming up in September. As you know, there are millions of homeowners for whom this represents a potential payment strain. As of June 30th, 16% of our customers had student loans outstanding And as you'd expect, we're monitoring these borrowers and standing by to provide any assistance they may need. However, we're not anticipating any major impact for the simple reason that borrowers are generally better served prioritizing mortgage payments over other obligations so as not to put their home at risk. And we'll update you more on this next quarter as we have more data. So let's shift gears and turn to slide nine and talk about originations, which was another great story this quarter with 38 million EBT, which was above the high end of our guidance. During the quarter, we saw continued outstanding execution by our DTC platform and somewhat more rational competition in the correspondent channel. However, with mortgage rates hovering at 7%, we're going to keep our guidance unchanged at 20 to 30 million per quarter, And additionally, the second quarter of the year is traditionally the high watermark for origination, so seasonality may come into play in the coming quarters. Jay mentioned our ambitions to expand the scale and scope of our DTC platform, which is best in class in terms of refinance, recapture rates, and margins. Nonetheless, we're continuing to invest in the platform with the goal of making further gains in speed and efficiency and producing an even better customer experience. You've heard us talk about project flash, which involves digitizing and automating tasks in the originations workflow. And just to give you an update, you can see in the chart on the upper right, how we're driving impressive efficiency gains with direct processing costs per loan down 45% over last year. Not only does this mean lower costs today, but this progress bodes extremely well for our ability to scale up in the next cycle whenever that might occur. In addition to Flash, we're making a number of investments in our DTC sales platform, for example, rolling out more self-serve tools for digital-savvy customers and implementing much more powerful CRM databases. These investments will contribute to a more streamlined customer experience while driving further efficiency and scalability. Our recapture performance continues to be best in class with refinance recapture at 80% in the quarter, which is close to four times the industry average. This is extraordinary execution considering that most of our customers come to us through the correspondent and bulk channels. By the way, we recently signed a letter intent to provide recapture services to a leading MSR investor on a white-label basis. This is a first for us, and it represents a brand-new growth channel for DTC. We'll update you more on this after our contract is signed, and hopefully that will be next quarter. Regarding the Correspondent Channel, earlier in the year, we saw some signs of irrational competition in terms of pricing and MSR valuation assumptions. But since then, some of the more aggressive players have backed off Market pricing has improved, and as you can see, we nearly doubled volumes in the quarter. As a reminder, we're totally focused on returns and are completely channel agnostic. And at this point in the cycle, we continue to see higher returns in the bulk channel due to the huge volume of sellers and a relatively concentrated network of buyers with limited capacity. But more rational pricing and correspondent is creating a more compelling environment. Now, if you'll turn to slide 10, I'll provide an update on zone. Last quarter, we guided to zone breaking even on strong sales momentum, and that's exactly what's happened with a 25% improvement in sales and EBT actually being slightly positive. And while profitability is an important milestone, we're obviously looking ahead to the time when this unit is generating the much larger profits it's capable of. Now, it's hard for us to be precise on timing because many variables are in play. Across the entire market, foreclosure volumes are starting to pick up, with one data source citing a 13% increase year over year. However, we're not seeing much movement in the FHA data, whether you look at foreclosure inventories or sales, where levels are still quite low relative to pre-pandemic levels. Now bear in mind FHA data lags by a few months, so perhaps we'll see more movement in the next report, which would be more consistent with the sales momentum we're seeing on our own platform. And if the economy deteriorates and you see some weakness in the labor housing markets, foreclosures could move meaningfully higher, which would be a huge positive for Zones. On the other hand, I'd comment that in the second quarter, the FHA extended its pandemic-era streamlined and partial claims programs to all delinquent borrowers, and it subsequently sought comments on additional programs that could help borrowers facing financial hardship. Now, as a servicer, we think these are good, borrower-friendly programs, and we're seeing strong initial take-up rates among our own customers, with upwards of 20% of delinquent customers taking advantage of them since they were rolled out a month or so ago. Now, there may be significant recidivism as well, but nonetheless, we'd expect these programs to slow the pace of normalization and foreclosures. To summarize, we can't offer perfect clarity in the long-term outlook with respect to both macro and policy drivers. However, in the meantime, the ZOM Exchange is doing an excellent job with execution and market share. and I guide you to positive third quarter results with plus or minus $3 million in EBT fueled by continued sales momentum. And with that, I'll turn it over to Kurt.