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spk11: Good day and thank you for standing by. Welcome to the Mr. Cooper Group Q2 2024 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 will 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 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker at Mr. Cooper Group. Please go ahead.
spk02: 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, Mike Weinbach, President, and Kirk 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 I'll now turn the call over to Jay.
spk16: Thanks, Ken. Good morning, everyone, and welcome to our call. As you saw from our press release this morning, we've got a lot to cover, including super strong second quarter results and some exciting news, the acquisition of Flagstar's mortgage operations. We'll take you through the materials as we always do, making sure to leave plenty of time for your questions. But before we get into the acquisition, let's start on slide three with a quick review of the quarter, which was quite strong. For the second quarter, pre-tax operating income came in at $219 million, which is up 46% year-over-year. Operating RO2 CE was 15.3%, up nearly 400 basis points from a year ago. At the end of last year, we said we expected ROTCE in a range of 14 to 18% in 2025. We're pleased to be in that range already, and we're feeling positive about our momentum heading into next year. I'm super excited with the 17% year-over-year increase in TBV, which reached $68.67 at the end of the quarter. This was a function of earnings plus stock repurchase. which has reduced the share count by 4% over the last year and by a cumulative 35% since inception. The board approved an additional $200 million for stock repurchase. I would add that despite stock repurchase and asset growth, we've maintained a rock solid balance sheet with our capital ratio still above our stated target range in ample liquidity. Turning to operations, the servicing team produced fantastic results. with $288 million in pre-tax income, up a massive 58% from a year ago. These results reflect strong growth, with the portfolio ending the quarter at $1.2 trillion, together with exceptional efficiency gains. In fact, you couldn't ask for a better demonstration of operating leverage. Now shifting to originations, where the environment remains challenging, pre-tax operating income was $38 million. which was at the high end of our guidance thanks to strong execution in both our DTC and correspondent channels. Now, let's turn to slide four and take you through the transaction with Flagstar. We announced we're acquiring Flagstar's mortgage operation for $1.4 billion in cash. This is a simple transaction structure in that it's an acquisition of assets, not a business combination. The assets include Flagstar's MSRs and advances, which totals $1.2 billion, its subservicing business, with a total UPB of $270 billion, as well as a third-party lending platform. Additionally, we will subservice $9 billion in Flagstar loans remaining on their balance sheet. The total UPB is approximately $356 billion. The acquisition will be funded with cash on hand and MSR line draws. Flagstar's servicing operations will be integrated onto our platform in a quick, efficient, and thoughtful manner. On this note, I'd like to say welcome to Flagstar's team members who will be joining the Mr. Cooper family, and also thank you for all the hard work you've put into growing your business and taking care of your customers. Flagstar's customer-focused culture really lines up well with our core values, and we are excited about the opportunities. Now, if you'll pull up for a moment and think about what this transaction means, first, it's a collaborative win-win for us in Flagstar, which showcases Mr. Cooper's ability to provide a full-service solution. In this case, we help Flagstar solve for their balance sheet goals by selling their MSR asset at a fair price to a credible partner in a single, quick, low-risk transaction. We also help Flagstar simplify its operations by taking on their existing subservicing business, as well as providing servicing for some of their own loans. From an economic perspective, this transaction provides us with excellent returns on capital, thanks to the fee income from subservicing, which comes on top of the market yields on the MSR, and we get a major step up in scale and the opportunity to realize additional operating leverage. If you'll turn with me to page five, I'd like to put this transaction in the context of Mr. Cooper's strategic journey. If you recall, we started talking about the dislocation in the MSR marketplace nearly 18 months ago. Specifically, in our fourth quarter 2022 call, we highlighted a cycle-wide opportunity to acquire MSRs and suggested pools would trade at extremely attractive yields. If you go back and look at our slides or read the transcript, you'll see we pointed to financial pressure on originators and regulatory capital considerations for banks as the drivers of this dislocation. And we even shared with you our proprietary forecast for the bulk MSR market. We anticipated the dislocation, we moved swiftly and decisively to capitalize on the opportunity, and now you see the results. With our portfolio up 79% from year-end 2022, to $1.6 trillion in mortgages and 6.6 million customers. What this shows you is that we are the fundamental best buyers of MSRs. And as a subservicer, we are the best operating partner, period. We have robust operational capacity, we carefully manage our capital liquidity, and we have years of experience in the bulk market, including proprietary data amassed over a decade's worth of acquisitions, which allows us to underwrite assets quickly and accurately. We have relationships with sellers who trust us to close on time and take care of their customers. And we have special tools like Pyro, which is our proprietary patented AI system, which we use for document extraction and classification. And this gives us a major advantage in due diligence, negotiations, and onboarding. As we think about the industry strategically, it's clear that the servicing sector has entered a phase of rapid consolidation. While financial pressure and regulatory capital rules are recent catalysts, what's ultimately driving consolidation is the power of technology to create massive-scale economies, which is the same trend you see in many other sectors of the financial, fintech, payments, and processing industries, where the leaders control very significant market share. Our strategy at Mr. Cooper is to position ourselves for a highly concentrated in-state in mortgage servicing, We have a strong position today, but we are not pausing to celebrate. Instead, we're going to stay focused on building out the industry's most efficient and scalable platform, who will work even harder to provide an amazing experience for our customers and our clients. And we are committed to playing a constructive leadership role in the industry, earning the continued support of all our stakeholders. And with that, I'll turn the call over to our president, Mike Weinbach, to take you through our operational results in more detail.
spk13: Thanks, Jay, and good morning, everyone. Let's spend another minute on slide five, and I'll give you a little more color on the second quarter, just so you're clear on where we stand today prior to layering on the Flagstar portfolio. We ended the quarter at $1.2 trillion in mortgages, with close to $100 billion in additions during the quarter, reflecting both MSR deals and subservicing growth. With respect to subservicing, I did want to make a point about client selection. since we've deliberately partnered with the leaders among banks, investment companies, and originators. As they've grown, we've grown, and this played out nicely in the quarter. Also, I'll share that we're quite pleased with our Rushmore team's performance in growing our special servicing business, which is solidly profitable, has a roster of important blue chip clients, and represents a very important capability for the point where the cycle eventually turns. In total, once the Flagstar deal closes, subservicing will account for 52% of the total portfolio and owned MSRs will be 48%, which is closely in line with the 50-50 mix that we believe optimizes our profitability and balance sheet. Looking ahead, we're totally focused on providing Flagstar's customers with a smooth and seamless onboarding experience, as well as welcoming our new team members onto the Cooper platform. Our plan is to complete this process by early 2025. During this period, we aren't constrained from considering other growth opportunities. However, these would be a distant second priority to delivering on our commitments in this transaction. Turning to slide six, let's dig into servicing earnings. We reported pre-tax income of $288 million, up 58% year over year. reflecting the benefits of growth and operating leverage, while CPR speeds came in slightly below expectations. Now, the key theme for us is operating leverage, and it's worth spending a moment on this topic, given that Flagstar will add considerably more scale to our operations. For better perspective, let's look at the numbers over the last 12 months. Servicing revenues were up $162 million year-over-year, or 37%, which is very much in line with the growth of the portfolio. In contrast, expenses were only up $24 million year-over-year, or 16%. 37% revenue growth with 16% expense growth resulted in 58% growth in EBT, which we hope you'll agree is a pretty compelling demonstration of operating leverage. Now, let me clarify something. Operating leverage results in part from growth because we do have a certain level of fixed costs, but that's not the major driver. Rather, what you're seeing is the result of process improvement in technology investments, which has been an unremitting focus for years and years, really going all the way back to the company's formation. Let's talk about our digital first strategy, which is designed to improve the customer experience by anticipating their needs and proactively providing the information they're looking for so they don't have to pick up the phone and call us. As you can see from the chart in the lower left, our call volumes have been slowly and steadily drifting lower. In fact, the ratio of calls per loan has fallen by 50% over the last three years. Let me give you a few examples of what we're doing here. First, we're having lots of success with chat technology, which for many of our customers is their preferred means of engaging with us. A second focus area has been our IVR, which we're constantly fine tuning to get customers where they need to go as quickly as possible. And third, we've had very encouraging results from new self-serve tools. For example, we have a subset of customers who frequently make more than the required payments each month, which in the past led to lots of phone calls about how they wanted those extra funds applied. We recently rolled out a very simple online tool, which allows them to tell us their preference with a few clicks, and we're seeing significant customer adoption. Thanks to this and other initiatives, payments-related calls are down 57% year over year. At the same time, let me stress that when our customers do need to talk with someone, we're here for them. Based on recent benchmark data, we're comfortably outperforming the industry in terms of standard call center metrics like average speed to answer and abandonment rate. Before moving on, let's talk for a second about the macro environment. I'd be remiss if I didn't point out that amortization increased by 47 million sequentially, reflecting both portfolio growth and seasonality. For the third quarter, we'd guide you to expect servicing income to be roughly flat in the 280 to 300 million range if CPRs will likely hit their seasonal highs for the year. Looking farther ahead, as we all know, CPRs are at record low levels today with likely nowhere to go but up. This means that we expect amortization expense will be a headwind in 2025. Also, we're expecting Fed rate cuts possibly starting in September to put pressure on our interest income. These are macro forces which are obviously outside of our control, and we just want you to be conscious of them as you work on your models for 2025. What is under our control is portfolio growth, the customer experience, and operating leverage, and those are the areas where we're working to drive continued strong results. Now let's turn to slide seven and discuss originations. Our team generated a pre-tax income of $38 million coming in at the high end of our guidance. Reply recapture was back up at 73% this quarter as we adjusted some of our pricing and marketing strategies. Purchase loans accounted for 28% of total volumes and second liens remained strong at 14%, demonstrating the versatility of our platform where we've evolved the product set to keep pace with changing customer needs. Turning to correspondent, volumes picked up to 2.1 billion as we focused on deepening our relationships with key sellers. Now that we've passed the halfway point of the year, I think it's safe to say that 2024 will go down as one of the most challenging originations markets in recent history. However, as we look ahead to 2025, as mentioned, we'd expect CPRs to start rising, which given the size of our portfolio should translate into more meaningful recapture volumes. We've been putting a lot of work on our DTC platform to get ready for a bigger market. This includes continued investments in workflow automation, the customer experience, and scalability. The benefits of this work will show up in 2025 and will give you more color on the outlook as we get closer to year end. For now, as we look to third quarter, we'd guide you to expect originations EVT in the range of 35 to 45 million. And as always, this guidance assumes the current level of mortgage rates. If you'll turn to slide eight, I'd like to make one more comment on originations related to the 2025 outlook by walking you through the coupon stack in our MSR portfolio. Over the last two years, we've found some of the best OAS yields on deep out-of-the-money collateral, and you've heard us comment on the high-quality, stable cash flow those pools will provide us for years to come. But that's not all we've been buying. As you can see, today, 18% of the portfolio has coupons of 6% or higher. This is a big change from where we were in 2022, when only 3% of the portfolio was in that bucket. The MSR we're acquiring from Flagstar has a similar distribution of coupons. On a pro forma basis, we'll have $132 billion of mortgages with coupons above 6%, which, again, points to the opportunity to scale up originations in 2025. With that, I'd like to turn the call over to Kurt to take you through the company's financials.
spk04: Thanks, Mike, and good morning, everyone. I'll start on slide nine with some comments on adjustments in the MSR. Adjustments totaled $8 million this quarter and included a $4 million purchase price adjustment related to final tax calculations on the HomePoint acquisition, and $4 million representing our share of losses at Sage. Turning to the MSR, we marked up the asset to reflect higher rates and lower expected lifetime CPRs, resulting in a quarter-end valuation of 153 basis points of UPB and a multiple of 5.3 times the base servicing fee. Offsetting the markup, we incurred hedge losses of $103 million, equating to 72% realized coverage. The target hedge ratio remains at 75%. The mark line also includes the $27 million gain from selling the excess servicing strip on our Fannie Mae and Freddie Mac MSRs. As you may recall, in recent quarters, we retained a larger servicing strip from securitized pools above the 25 basis point contractual minimum to optimize capital market execution. With this transaction, we've monetized that trade, and in addition to the gain, the sale generated $222 million in cash. Bear in mind, by selling the excess strip, we do lose that recurring revenue in the servicing segment. which is part of the reason we're guiding to relatively stable servicing EBT in third quarter of $280 to $300 million. Slide 10 gives you an update on asset quality, which remains a real strong point for Mr. Cooper. In the interest of time, I won't comment beyond pointing out that our MSR delinquencies declined to 1.0%, which is a new record low. This is a function of thoughtful portfolio construction, which you can see in the rising FICO scores and declining LTV ratios for our customers, as well as our ongoing loss mitigation efforts, evident in a 34% year-over-year increase in loan modifications and workouts, which is a very important part of our mission to keep the dream of homeownership alive. The Flagstar MSR has a similar high-quality credit profile and will not materially affect these results. Now turning to slide 11, I'll comment that our balance sheet was in strong shape at quarter end. Before considering the Flagstar acquisition, liquidity remained near record levels at $3.2 billion, and our capital ratio, as measured by tangible net worth to assets, was still well above our target range at 28.4%, reflecting a strong pace of internal capital generation and discretionary cash flow. With the transaction, we will add $1.1 billion in MSRs and $85 million in advances. On a pro forma basis, our capital ratio would have been approximately 26% at quarter end, still somewhat above the upper end of our target range. We expect to pay for the acquisition by drawing down on our MSR lines, which will utilize some of our excess liquidity, although we will still be comfortably in compliance with our internal guidelines. Also, we continue to see favorable conditions in the high-yield market and are evaluating the prospects for new issuance as we'd like to continue increasing the mix of unsecured debt in our capital stack to keep upward pressure on our ratings. To wrap up, I'll reiterate Mike's comment about macro headwinds, namely rising amortization and lower deposit yields, and the offset, which is potentially higher origination earnings. Having said that, the Flagstar deal clearly provides us with additional momentum on top of our very strong execution. Thanks to the transaction, I would guide you with respect to the outlook for RRTCE in 2025 that we now feel comfortable at the midpoint of our 14% to 18% range. With that, I'd like to thank you for joining us on today's call and for your interest in Mr. Cooper. I'd now like to turn the call back over to Ken for Q&A.
spk02: Thanks, Kurt. Siobhan, if you could now start the Q&A process, please.
spk11: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.
spk08: Our first question comes from the line,
spk11: of Terry Ma from Barclays. Your line is open.
spk14: Hey, thanks. Good morning. Maybe just on a little bit more on the rationale for the deal, as you kind of evaluated it, what was some of the key, I guess, attractive points? Was it mainly just size and scale, or were there kind of aspects of the MSR book, both subserviced and owned, that kind of attracted you to it?
spk16: Yeah, look, I think very strategically this still just makes perfect sense for us, right? It's right up the middle of the fairway. Think of it as, you know, two pieces, and you said that one is the acquisition of the MSR. The MSR is very similar to our portfolio overall, as we discussed. We like it, and we like the value. And the subservicing is just additional subservicing, you know, on our platform. It just made a ton of strategic sense, and we're super excited about it.
spk14: Got it. And I guess now your capital levels are toward the high end of your range. As you kind of look for additional opportunities may present themselves, I guess what are you looking for? Does this kind of raise the bar in terms of other deals? Yes.
spk16: Well, look, I mean, first and foremost, we're going to take care of this deal, right? And we're going to take care of these customers and these homeowners, and that will be the first priority. And we're, you know, the best company, candidly, to do that. I think as we think about other opportunities, we'll be measured, we'll be thoughtful, and, you know, we'll stay consistent with our capital deployment, you know, And so we will be very, very disciplined as we look at other opportunities. We still think there's going to be a lot of opportunity in the marketplace. We still think there's going to be a lot of MSRs coming to market. But again, as always, we're going to be disciplined and we're going to take care of this transaction first.
spk14: Great. Thank you.
spk11: Thank you. And our next question comes from the line of Mark Devries of Deutsche Bank. Your line is now open.
spk03: Yeah, thanks. You know, I see that pro forma, this still keeps you above your kind of target range for tangible net worth assets. Just wanted to confirm that there's not going to be any need to raise any equity as part of this transaction.
spk16: No, absolutely not.
spk04: Okay. And Mark... We continue, as we did this quarter, to actually repurchase stock. And we've indicated that we'd be repurchasing about $50 million a quarter. We've been a little bit light the last couple of quarters. But, you know, we still see value in our stock at where it's trading.
spk03: Okay. That's helpful. Is there any guidance you can provide us on how to think about kind of the earnings accretion you expect to generate from this transaction?
spk16: I mean, I think, and Kurt, you can jump in. Again, you have to think of it in two ways. One, on the MSR, it's consistent with the way we, you know, acquired MSRs in the past. So, you know, nice kind of mid to high team return there. And then on the subservicing side, you know, think of that as our existing, you know, subservicing book. So blended, you know, I think we think this transaction will be at the high end of our ROTCE range is how we're thinking about it. Yeah, I think that makes perfect sense.
spk04: And, you know, we finished the quarter with an ROTCE of 15.3%. I think we've guided 2025 to be a little higher, and I think Flagstar is the contributing factor to that.
spk00: Yeah.
spk04: Okay, got it.
spk03: And How should we think about this impacting your operating expenses in 2025?
spk13: Yeah, we'll have some new team members joining us from Flagstar, so that will add some additional expense. But it's, you know, we... We continue on our relentless quest to invest in the platform and become more efficient and nothing changes. So, you know, we're excited about the opportunity to continue to realize operating leverage in the business. But as we get larger, we'll be adding expense. We'll have new team members. And first and foremost, as Jay indicated, our top priority is making sure that that we execute this with excellence for our customers, for our subservicing partners, and for our team members.
spk16: But make no mistake, we'll 100% continue to drive cost per loan down. I mean, we are maniacally focused on that. The investments we're making that we discussed in the last call from an AI perspective, et cetera, will drive cost per loan down. And so you should expect to see that. Okay, got it. Thank you.
spk11: Thank you. And our next question comes from the line of Bose George from KBW. Your line is now open.
spk17: Yeah, good morning. Just one more on the Flagstar. Of the $1.4 billion that you're paying, you know, how much of it is, you know, is equity? How much of it is debt that you're, you know, the advances, I guess, the funding lines, and then how much goodwill is going to be created?
spk04: So, Bose, I think we broke it out. It's about a little over $1.1 billion on the MSR, about $85 million of advances, So about $1.2 billion of that was the purchase of the MSRs. It's all utilizing advance lines for the advances, but MSR lines. So it's all debt. It's not an equity issue. deal for us at all. We have the available liquidity as we've reported in prior quarters. In terms of goodwill, I think we're still finalizing that. But I think depending on kind of where we see the asset boarding, you can expect some level of intangible to be added once the deal closes at the end of the year.
spk17: Okay, great. Thanks. And then, actually, just going back to the question on accretion, so, I mean, I guess as a way to think about it, your ROE would have been, you know, more like 15, so it could add like a point or a point and a half of ROE, something like that?
spk13: Yeah, I don't think we'd want to give anything overly specific, but you're thinking about it directionally correctly.
spk17: Okay, great. Thanks.
spk11: Thank you. And our next question comes from the line of Crispin Love from Piper Sandler. Your line is now open.
spk12: Thanks. Good morning. I appreciate you taking my questions. Yeah, just starting on the Flagstar transaction, just looking at NYCD's balance sheet today, they have the MSR marked at roughly $1.1 billion, and you mentioned that value as well. But can you just talk a little bit about about how you think of the value of the MSR under the Coop platform. Tremendous scale, low cost of service and a team. So curious on how you think about that, the scale this adds and efficiency you can incorporate from the deal as well.
spk04: Yeah, that's a great question and appreciate it. Look, I think the answer is we probably value it a little bit higher for all the reasons you talked about, right? We are the low-cost producer, so that factors into our MSR valuation. We have a high recapture rate, and as Mike pointed out in his commentary, 20% of this portfolio has an above 6% coupon rate. So we do think there's some attractive refinance opportunities here. So, you know, I think you would see us value it probably a little bit higher than New York community did.
spk12: Okay, great. That's helpful. And then also the deal is going to meaningfully increase your subservicing portfolio. So As you look forward on the complexion of the company, how do you expect owned versus subservicing to trend to the roughly pro forma 50-50 complexion with this deal? And just what makes you most excited about adding substantial subservicing with Flagstar in the current environment right now?
spk13: Yeah, I think we've long talked about seeing a 50-50 mix between owned and subservicing as the ideal mix for managing subservicing. the business and capital deployment and earnings. So we're excited about this. This is a big step for us in the subservicing business, but it's part of the continued progress we've been making. And we really like the subservicing business. It's a capital lighter business. And I talked about this a little bit up front, Jay did as well, but we have some awesome partners. And this allows us... to develop even deeper partnerships with some of our most important partners and develop new partnerships with some others. And we think it works really well because we get to focus on what we do best so our partners can focus on what they do best. And this has really been a winning combination for our partners and ourselves that's led to steady growth in the subservicing business. So we're excited about this big step and we're excited about continuing to win with our partners.
spk09: Great. Thank you. I appreciate you taking my questions.
spk08: Thank you.
spk11: Our next question comes from the line of Doug Harder from UBS. Your line is now open.
spk06: Thanks. Jay, you talked about expecting to see continued opportunity for consolidation and servicing. Do you expect it to be larger platform transactions like Flagstar or kind of bulk pools like you have been kind of doing over the past year plus?
spk16: Yeah, I think, Doug, it'll be a combination, right? Look, we've been acquiring bulk MSRs for 20 years, and I think that's going to continue for years and years to come. And then there will be opportunities that present themselves like Flagstar and over time. And I just, you know, when you think about our platform, you think about the investments we've made and continue to make, I think we, and this is a perfect example, I think we are the best partner for folks that really want to enter into a strategic transaction like Flagstar did. So I think it'll be a combination, but, you know, you're going to always see MSRs trading, and we'll expect to be part of that going forward.
spk06: Great. And then can you give us an update as to how you're currently thinking about your origination capacity and the ability to handle increased recapture volume and what incremental costs might be needed to scale that up? Or will you see operating scale there as volumes increase?
spk13: Yeah, it's a great question. And we talked a little bit earlier and showed you in the slides the way the portfolio is changing. So we still have more than 50% of our customers have less than 4% rate, but we now have almost 30% over 5% and getting close to 20% over 6%. And we don't know exactly what's going to happen with rates, but we're preparing for the point when the cycle turn and rates will come down. And so we've been relentlessly investing in perfecting the platform on the direct-to-consumer origination side. We've talked about Project Flash, which is componentizing the parts, which helps us be able to ramp more quickly. using our existing data that we have, knowing our customers so well on the servicing side to be able to pull that data into the origination flow and make it more efficient. We're rolling out better self-service tools. And the goal is to get more scalable, to be faster to react when rates move, and more efficient. And the only other thing I'll add is, you know, we have been adding staff. We hired close to 100 LOs in the second quarter. So, you know, we're carrying a little bit of extra capacity now, and we don't know exactly when it's going to happen, but when it does, we'll be ready.
spk04: The only thing I would add to that is that we are actually doing, from a unit count standpoint, a lot higher volume. If you see in our presentation, 14% of our origination volume in the past quarter was second liens, which has, on average, a UPB of about a quarter of the amount of our first liens. And so in terms of unit count, we're actually doing a lot of production today. And obviously, that capacity can be utilized if there is a rate rally for first lien rate term refis.
spk16: But to Mike's point, we've been very intentional the last few quarters about adding capacity, Doug, and we're ready if something does happen on the right side.
spk06: And then I guess just on any of the subservicing, how much recapture agreements do you have there, either for a fee for the MSR owner or for your own benefits?
spk16: We really don't comment on specific around that, but you should think of it as a blend. Our clients, some want our recapture capability, and some have their own recapture capability. So it's really a mix depending on the client. I mean, our goal is to just maximize the service to them and maximize the service to their customers and their homeowners. So it's a blend on the economics as well as the different clients' needs.
spk06: Great. Appreciate the answers. Thank you.
spk11: Our next question comes from the line of Shanna Kui from Barclays. Your line is now open.
spk10: Hey, guys. Thanks for taking my questions. I know you guys are still within your targeted capital ratios of 20 to 25% following the transaction. Curious if you guys had any conversations with the rating agencies on the Flagstar transaction, if they provided you any indication on the view following the transaction.
spk04: Hey Shannon, it's Kurt. Yeah, thanks. Yes, absolutely. We had conversations with the rating agencies. around the transaction around the quarter as well. I think, by and large, we received positive feedback. Obviously can't comment on how they're going to come out, but we received pretty positive commentary around this. As Jay said earlier, our first and foremost priority at this point in time is to take care of these customers. We have, you know, $360 billion of loan boarding will not be simple, and we're going to really, really focus on that. And I think that that will allow us to build capital through the remainder of the year, but will still allow us to be opportunistic.
spk10: Great. Thanks, Kurt. And then a follow-up for me, you know, maybe digging a little bit more on the valuations. How much value are you guys attributing of the $1.4 billion to maybe the origination platform and subservicing versus the multiple that you paid on the MSR. I think if you look at attributing minimal value to the origination subservicing, you're kind of looking at a 5.6 times multiple on the MSR, which is kind of in line with what we've heard from MSR brokers in the past of what bulk sales are going for. So I just wanted to confirm and see if that was kind of the case.
spk04: So, you know, I think what we'd say, Shannon, and we haven't given specifics on this, obviously, but we did say, you know, the $1.2 billion is where Flagstar's carrying it. We're probably valuing it a little bit above that. You know, I think attributing zero to the remainder would be non-accurate. So, you know, the multiples that we pay may be a little bit lower than 5.6 that you mentioned. And I think that we do see value in the subservicing and originations platforms as well.
spk10: Okay, great. Thank you.
spk09: Thanks.
spk11: Thank you. And our next question comes from the line of Eric Hagan from BPIG. Your line is now open.
spk01: Hey, thanks. Good morning. So will you hedge the MSR any differently as a result of drawing on the MSR lines to fund the Flagstar deal? And then after you borrow against the MSR to fund the deal, how much headroom do you expect to have on the remaining MSR financing lines? Thank you, guys.
spk04: Hey, Eric. So... Obviously, this transaction will give us more capacity on MSR lines as well. So call it 65% of the value of our MSRs will be an increase to our MSR facilities. We still think we will have fairly significant amounts of capacity and liquidity available to us afterwards. I think we showed 3.3 roughly billion at the end of the quarter. So pro forma, you know, you can expect to see it's still in the high $2 billion in terms of liquidity. And then the hedging will be no different, right? Yeah, I think we stated on the call that we continue to target a 75% hedge ratio. And I think we've been, you know, fairly accurate for the last since we initiated about six quarters ago of right around plus or minus 10% of that target.
spk01: Right. I mean, following up on that point, I mean, with the Fed on the brink of cutting interest rates, how do you feel like that could affect the value of MSRs? Do you feel like the hedges that are in place will be effective in maybe offsetting some of the impact of the Fed cutting rates?
spk04: Yes. Yes and, I would say. you know, I think to some degree the forward curve already has projections of Fed cuts in place, right? Two this year and an additional four cuts next year. And so when the forward curve has that in place, the valuation of your MSRs already takes that into consideration. If the Fed's more aggressive, yes, the hedge will take care of it. And I would say that we are probably overhedged at the short end of the curve for exactly that reason.
spk13: And, Eric, you know, we – aim to have a balanced business model. So we want to be prepared for whatever happens with interest rates. Part of that is a 75% hedge. Part of it is being prepared in our direct-to-consumer business should rates go down. Obviously, if they do, it'll create some headwinds on servicing, but we think we'll be able to make it up in other places.
spk01: Yep. Thank you guys for the perspective. Appreciate it. Thanks. Thank you.
spk11: Thank you. And our next question comes from the line of Derek Somers from Jefferies. Your line is now open.
spk15: Hey, good morning, everyone. Quick question on servicing OpEx. How much of the kind of expense efficiency there do you all attribute to declining delinquencies?
spk13: I mean, that's certainly a part of it because servicing delinquent loans costs more than servicing performing loans. But that's what's really driving the story are the investments that we're making in the platform. So, you know, we talked last quarter extensively about some of the things that we're doing with AI. We've talked about our Pyro platform, which allows us to consume documents and pull data out of that into our systems in a way that used to require a lot of people to do it. We're developing technology that assists our agents. Think about it as a call to help a customer might take 10, 12 minutes. But part of that time are our agents having to search through our systems to find documents and find what the customer is looking for. We're developing technology that anticipates what customer is looking for and brings that directly to them. You know, I talked about some of these things are really simple, but it is that kind of blocking and tackling that makes a difference. summarizing the agent calls, which people used to have to do, say it was about 40 seconds off the call time, and then the one we just rolled out giving customers the ability to reapply payments that weren't applied exactly the way they want in a few clicks through our digital sites. All of those little things together are what end up making the big difference that drives the operating leverage in the business.
spk16: Yeah, I would say post-COVID, zero is due to delinquency levels personally, and it's all the things that Mike just talked about. I mean, the operating leverage that we've achieved in the last four years has been due to those investments and the fantastic job that the servicing team has done and the technology team has done executing those initiatives.
spk04: The only thing I'd add is, you know, we've actually done a significant volume of modifications and really kudos to the housing policy agencies through the pandemic in terms of implementing policies that are really helping customers stay in their homes and are easy to implement and execute. Not always incredibly easy to implement. I mean, there's definitely work to do there. But, for example, FHA just recently rolled out what they call a payment supplement partial claim program, which allows customers to utilize an interest-free loan to reduce their monthly principal and interest payment by 25%. We're rolling that program out this weekend. It's just allowing us to get streamlined modification programs to our customers, which is what's keeping the delinquency rates so low as well.
spk15: Got it, very helpful color there. And then just to circle back to the recapture implications on the subservicing portfolio, is there any sort of mix or directional trend you could provide on the fee-based white label income versus just true normal recapture originations?
spk09: I mean, I think, look,
spk16: The portfolio is, call it 50-50 right now, on a pro forma basis, when subservicing is owned. I'm not sure I completely understand your question, but from a recapture standpoint, obviously all the owned is, we capture all the economics there, and then for the 50% that's subservice, like I mentioned earlier, a composition of our clients, use our recapture services, and we collect fee-based income for that. So that's how I would think about it. Okay. Got it. Thank you.
spk11: And our next question comes from the line of Juliano Bologna of Compass Point. Your line is now open.
spk05: Good morning, and congratulations on continuing to execute extremely well. My first question is kind of related to the Flagstar acquisition. Obviously, the release mentions that you're bringing on some of the third-party origination capabilities from Flagstar. I'd be curious if you think about that kind of isolation. Is there a rough sense of how much volume that's doing and how the margins compare to what you're originating? And then kind of related to that, I'm curious roughly speaking, what the replenishment rate looks like for kind of the acquired business when you think about the MSR subservicing and the origination platform coming alongside with it.
spk04: So I'll touch on the first portion of the question, and then Mike can touch on the second. So the Flagstar TPO business, They're a good business that's been around for a long time, has a really great client base. originating, I think if you kind of look at their earnings releases, they're originating in excess of a billion dollars a month. So it's, you know, I think it will be good and complimentary to our business. In terms of the margins, you know, we don't really break out our margins on the correspondent product, but we see correspondent margins sort of in line universally across the industry. So we think it's probably pretty comparable.
spk13: Yeah, and I'll just add to that. First of all, you have to recognize we just announced the deal this morning. So we're going to get the opportunity to talk to the team much more deeply and understand the relationships they have. The third-party origination business is about client relationships and personal relationships. And it's also largely about pricing, and it's a very competitive market. So the short answer is we don't have a long answer. We're looking forward to getting to know the business best. It complements what we have already in this space, and we look forward to the opportunity to deepen relationships with our existing customers and develop new relationships that they have that we didn't yet have.
spk05: That is very helpful. And I guess I can kind of get there from the numbers you're providing. But if it was currently doing over a billion a month, obviously things might change a little bit as you bring it over and integrate and make some adjustments. But it seems like, at least on the owned MSR side, it's probably replenishing more than 100% of runoff already. Is that a good way to think about that portfolio, kind of the way it looks? Well, as you're acquiring it, that is.
spk16: Yeah, I think that is a good way to think about it, and as we've discussed on previous calls, when you look at our origination capabilities across the channels we're in, we're replenishing over 100% today. We expect that will continue.
spk05: That is very helpful. I really appreciate the time, and congratulations, and we'll jump back in the queue.
spk04: Sure. Thank you.
spk11: Our next question comes from the line of Brian Violino of Wedbush Securities. Your line is now open.
spk07: Great answer to my question. Both have been asked and answered, but I just wanted to confirm that it doesn't sound like we should expect any real growth in either the subservicing or own servicing portfolio over the next few quarters outside of Plex. Sorry, is that fair?
spk04: So I think the question is over the next couple of quarters, do we anticipate any growth in servicing and subservicing? You know, as Jay just pointed out, we replenish based on kind of our originations volumes. And so we would anticipate, you know, continued replenishment and slight growth there. I think, obviously, this acquisition, which will close in the fourth quarter, is bringing on, you know, close to $360 billion, almost $80 billion of owned MSRP. and roughly $280 billion of subservicing. So that's going to be the material component of our growth over the next couple of quarters. But as the opportunities present themselves, we will be opportunistic, but we're never going to kind of chase volume. Everything that we do is geared toward the return to our shareholders and our other investors.
spk13: Yeah. And just to tie it all together, I mean, to reiterate the points that I think we've all made, our top priority is executing on this transaction and executing, taking care of customers. But at the same time, with our strong capital position, it doesn't preclude us from being able to do other things. And the The reason why we've been growing and have a little bit of a tailwind, which has nothing to do with the transaction that will remain in place, are the investments that we've been making in the platform. Servicing is a challenging business, and for a lot of originators, it benefits them to focus on what they're doing best, which is helping customers get into new homes. and to have a partner that can help them realize the efficiency that comes with the investments in servicing. And we do that through some of the ways that we buy servicing, and we do that through some of the ways we partner and provide subservicing. And the partners who've been utilizing us for that are able to focus more on what they do best, so they've been growing, and we've been growing along with them. And that's you know, a little bit of a tailwind that'll be there regardless of any bulk acquisitions and why we think the portfolio will continue to grow.
spk07: Great, thanks. And just one last one. Any update on the MSR fund?
spk16: Yeah, we continue to make progress there, actually. Really good progress recently. So, you know, I think as we've said, You know, we've got some significant partners that we're working with and looking, you know, to continue to get commitments from them, you know, through probably the last half of this year is how I would think about it. But I would say that progress has been really – we've got a lot of momentum right now, and I feel good about it.
spk00: Great. Thank you.
spk11: I'm showing no further questions at this time. I would now like to turn it back over to Jay Bray for any closing remarks.
spk16: We appreciate everybody joining the call and look forward to continuing chat. Thank you.
spk11: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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