Mr. Cooper Group Inc.

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, Mike Weinbach, President, and Kurt Johnson, Executive Vice President and CFO. As a reminder, this call is being recorded. 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. And with that, I'll now turn the call over to Jay.

Thanks, Ken, and good morning, everyone, and welcome to our call. This morning, I plan to talk about Mr. Cooper's technology strategy, which has been a major driver of our growth and which is the key to sustaining higher returns. But first, let's review the quarterly highlights on slide three. Operating ROTCE hit 14.5%, which was a great way to start the year as this gets us into our guidance range of 14 to 18%. And we continue to see opportunities to progress higher into this range by executing on our strategy. We were pleased to report tangible book value up 15% year-over-year to $65.48. Turning to servicing, the portfolio hit $1.1 trillion as we acquired $54 billion in MSRs with double-digit yields and completed onboarding a $90 billion portfolio from an important new subservicing client. On a year-over-year basis, the portfolio is up 33%. At this point in the cycle, we are clearly pulling away from competitors in terms of building scale. Thanks to fast portfolio growth and impressive operating leverage, servicing income reached $273 million. Mike will comment more on the pipeline in a minute, but I'll steal a little bit of his thunder and tell you we're continuing to see super attractive opportunities in the bulk market. which we believe reflects the shakeout going on in the industry, with banks pulling back from the asset class and originators seeking a source of liquidity. Turning to originations, our team did a great job generating $32 million in pre-tax income while continuing to be an industry leader in retention. As you'll recall, during the quarter, we issued $1 billion in high-yield notes, priced the yield 7.25%. which I would add represents the tightest spread in the company's history. That was a nice vote of confidence from the high yield community, and we were also encouraged to see Moody's upgrade our corporate credit rating by two notches and S&P upgrade our outlook to positive. We finished the quarter with record liquidity and a very strong capital ratio, as Kurt will take you through, while also continuing our share repurchases, albeit at a slightly lower level given the strong returns we saw in the bulk MSR market. Now let's pull up and spend a moment on technology. If you'll turn to slide four, we've built our business model around a series of self-reinforcing competitive advantages. A great customer experience leads to strong retention, which maximizes returns and makes us the best bid for acquiring MSRs. Growing scale, in turn, gives us the resources to invest in technology, which is how we've delivered the operational and cost leadership, which has propelled the company over nearly 30 years to become the nation's largest servicer. Let's turn to slide five and talk about our strategy. AI is in the headlines, as it should be, but to implement AI, you need a state-of-the-art platform. So let's start by talking about the cloud. which we embraced much earlier than our peers. In fact, we built our servicing platform to be cloud-native from the start, which is why we were able to sell the IP to Sajent in early 2022 for a 20% interest in their firm. Sajent is now integrating our technology onto a cloud-native core to create a new platform called DARA, which will offer real-time, anytime, end-to-end processing and will be the first to benefit. But more importantly, by picking the right partner for cloud-native servicing technology, we were able to reallocate resources to other strategically important projects. These include building proprietary tools for customer retention, loan modification, and onboarding portfolios. We've also devoted resources to further digitizing processes and originations in servicing and improving our foundation. And of course, a top priority for us over several years now has been machine learning and AI. Let's turn to slide six and talk about Pyro, our patented mortgage-centric AI platform, which we've been actively developing since 2019 in partnership with Google. Initially, we focused Pyro on document extraction and classification, which is a huge project for servicers, since we deal with vast quantities of documents, including lots of non-standard forms. In 2020, we used Pyro to process 150 million pages of data, and today we are running at well north of 600 million pages per year. How does Pyro help us? When we buy a portfolio of MSRs, we typically ingest hundreds of thousands of documents. Pyro scans and reads these documents using mortgage-specific learning models, harnessing AI to recognize and classify the data and populate it directly into our systems. And in addition to capturing standard loan and customer attributes, our technology also detects unstructured content such as signatures and stamps. Pyro is fast, typically processing a new portfolio within 24 hours. And now that it's been trained on hundreds of millions of documents, it's very accurate, with accuracy rates of 97% or higher without any humans in the loop. When it comes to bidding on portfolios, Pyro gives us a massive advantage because we can respond to sellers with great speed and confidence. For example, think of the complexity that goes into modeling advances for a pool of MSRs. Before Pyro, we'd spend months reconciling invoices and filing claims with sellers. And for large portfolios with missing files, this process sometimes dragged on for years. Today with Pyro, we get a crystal clear understanding of advances within hours of reviewing the deal tape, which allows us to price the deal quickly and accurately while the seller doesn't need to worry about a tale of liabilities. Pyro also helps us provide our new customers with a seamless onboarding experience since we have all their data properly recorded. Now to be sure, thanks to Pyro, we've definitely trimmed expenses. with fewer people dedicated to data entry, indexing, and reconciliations. But more importantly, with four years of experience, we're now ready to roll out PIRO in many other areas. If you'll turn to slide seven, let's talk about where we're taking PIRO from here. Over the next few years, AI will radically transform our operations in many ways. For example, we're starting to apply supervised learning techniques to solve unstructured problems. The way this works in the call center is that Pyro continually gathers diagnostic information by listening to calls in real time, monitoring agent actions, and tracking the outcomes. Then the platform uses this information to optimize the flow of calls by recognizing patterns, anticipating issues, and routing calls to the right teams, and prompting agents with the information the customers need. Supervised learning in the call center will mean fewer, faster calls and happier customers whose needs are solved quickly. Now, this won't happen overnight, and you can't implement these kinds of solutions without a robust digital platform. But over time, these applications will result in massive efficiency gains. We're already taking the first steps on this journey, for example, by using Pyro to automatically summarize calls and trigger follow-up actions. The summaries free up agents from note-taking, allowing them to focus on their customers. And we're finding this application shaves roughly 40 seconds off the average call, which for an operation with thousands of calls per day, adds up to millions of dollars in savings. Now, as with any new technology, AI brings risks. That's why we and other companies operate under a rubric of responsible AI, which includes controls to ensure the applications are unbiased, compliant, and secure. To wrap up, I'll leave you with a final point, which is that our technology strategy has benefited from our balanced business model, which shelters us from the extreme swings in profitability of origination-focused peers, and which has allowed us to invest in technology on a consistent basis year in and year out as we work on the never-ending goal of perfecting our platform. Today, given our momentum and the challenges facing the rest of the industry, we have an opportunity to take our competitive advantages and make them decisive. In other words, we'll use the cloud, AI, and other applications to provide world-class service to our customers, operate as the trusted partner for our agency and investor stakeholders, and drive unmatched costs and operational leadership, which will translate into the rising ROTCE we're guiding you to expect. With that, I'll turn the call over to President Mike Weinbach to take you through the operating results.

Thanks, Jay, and good morning, everyone. I'd like to start by saying how thrilled I am to be a part of the Mr. Cooper team and how excited I feel to be playing offense in an industry which has such an important customer mission. I'm going to start on slide eight and discuss the servicing portfolio, where we're clearly enjoying a period of rapid growth. As of March 31st, the portfolio has reached $1.1 trillion, which is up 33% from a year ago. We now have over 5 million customers whom we look forward to serving for many years to come. Growth in the first quarter was split between MSR acquisitions and subservicing. In the MSR market, we've seen very robust volumes so far this year, reflecting the two key trends which are reshaping the servicing industry. Originators are selling MSRs for liquidity if they deal with nearly two years of negative margins in what is one of the most difficult markets in memory. And second, banks are reassessing their exposure to MSRs due to regulatory capital concerns and the technology investments required to stay competitive relative to their reduced market share. These trends are translating into very strong supply in the bulk market. In the first quarter, our pipeline hit a record level as we evaluated 52 bulk transactions, which is up nearly 50% from the level a year ago. These include deals brought to market by the MSR broker community, where we have excellent relationships, as well as the considerable volume of transactions which sellers bring us directly. For many sellers, Mr. Cooper is the preferred buyer. That's because of our hard-earned reputation for timely closing and smooth onboarding. And, as Jay just explained, pyro means we can respond to sellers with even greater speed and accuracy. This was also a great quarter for our subservicing business, where Mr. Cooper is rapidly becoming the platform of choice. In addition to the new client we onboarded, we're benefiting from portfolio growth at many of our existing partners. Our team is actively talking with various MSR owners, including investors, originators, and regional banks, and we're optimistic that we'll be able to win new clients. Subservicing is central to our growth strategy because it adds to our scale advantages and generates fee income without requiring capital or liquidity and is thus an important lever for raising ROTC into that high teens range. Looking ahead to the second quarter, the momentum should continue with approximately another $100 billion in UPBs scheduled to board, again, split between MSRs and subservicing. After that, growth will depend on the yields available in the market. While we're optimistic about a continued robust supply of MSRs, we're also seeing some signs of aggressive pricing, especially for portfolios that are closer to the money. You should expect us to remain disciplined in how we deploy our capital. We have no problem taking a pause from growth if conditions warrant. Turning to slide nine, let's spend a moment on servicing earnings, which were quite strong at $273 million this quarter, up from $229 million in the fourth quarter. There were several factors driving strong performance, of which the most important was portfolio growth, which drove a $70 million sequential lift in operational revenues. Additionally, servicing earnings benefited from very low CPRs, which came in at 4.2% during the first quarter, minimizing our amortization expense. Finally, we did an outstanding job generating positive operating leverage with expenses up only $6 million sequentially despite our rapid growth. This leverage is the payoff from the intense focus on technology and operations that Jay discussed. Now, please don't project this level of operating leverage every quarter as you should expect ongoing investments in new applications as well as ensuring we have the right number of people to take care of our customers. That said, we expect continued operating leverage even as we continue to invest in the platform. Looking ahead to the second quarter, we guide you to servicing income being flat to up in a range of 270 to 290 million, depending on the impact of CPRs from the recent uptick in mortgage rates. Now let's turn to slide 10 and discuss originations, where we reported pre-tax earnings of 32 million, which came in slightly above guidance. As you recall, when mortgage rates dipped toward the end of last year, our direct-to-consumer team was very nimble in helping customers take advantage of the opportunity to save money. As a result, we saw a slight uptick in rate and term refis, which made up 12% of funded volumes in the first quarter. Otherwise, the mix remains dominated by cash-out purchase and second liens, which are the products that provide the most value for our customers in this environment. You'll notice our refi recapture rates dipped slightly to 70%, and the industry dropped from 20% to 18%. Now, this was partly due to a lower mix of cash-out refis, which provides some lift to the ratio since a new cash-out loan has a higher UPB than the payoff. Overall, our recapture remains strong at almost four times the industry average. To maximize the value for our customers, we're continuing to invest in our DTC platform. You'll recall last year we talked about how Project Flash helped us realize 20% unit cost savings in processing by digitizing those workflows, which means breaking them down into discrete steps, which can then be automated. Well, now we're applying Flash underwriting with similar productivity goals. We're also investing in a range of enhancements designed to make the application experience quicker and easier. and we're starting to use AI in originations as well, such as in automating income verification. We're beginning to see a return on these investments in the form of faster cycle times, higher pull-through, and lower cost per loan to originate. As we look ahead, the originations environment remains difficult, but as we continue to grow our servicing portfolio, that means more opportunities to help customers save money or access the equity they built in their homes. For the second quarter, we'd guide you to expect Originations Earnings Before Tax to be flat to up in the range of $30 to $40 million. Now, I'll turn the call over to Kurt, who'll take you through our financial performance.