Home Point Capital Inc.

Good morning and welcome to the HomePoint Capital second quarter 2021 earnings conference call. During today's presentation, all callers will be placed in a listen-only mode. And following management's prepared remarks, the call will be open for questions. Please be advised that today's conference call is being recorded. I would now like to turn this conference over to Gary Stein, head of investor relations at HomePoint Capital. Thank you, sir. You may begin.

Thank you, operator. Welcome to our second quarter 2021 earnings call. Joining me this morning are Willie Newman, President and Chief Executive Officer, and Mark Elbaum, Chief Financial Officer. During our prepared remarks, we will be referring to a slide presentation, which is available in the events section of the HomePoint Investor Relations website. Before we begin, I'd like to remind you this call may include forward-looking statements, which do not guarantee future events or performance. Please refer to HomePoint's most recent SEC filings including the company's annual report on Form 10-K, which was filed on March 12, 2021, for factors which could cause actual results to differ materially from these statements. We may be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to the nearest GAAP figures in HomePoint's earnings release, which is available on the company's website. I'd now like to turn the call over to Willie Newman, President and Chief Executive Officer.

Thanks, Gary, and good morning, everyone. During our prepared remarks, I'm going to discuss our second quarter performance and the factors that impact this performance. I'll then discuss how we are adapting and evolving in a challenging operating environment. After that, Mark will provide more details on our results for the second quarter, as well as some initial insight into our July performance. We'll then open up the call to take your questions. We entered the second quarter faced with an historic pricing dislocation in our primary origination channel, wholesale. Revenue had compressed to levels not seen in at least the past eight years. The pricing dislocation persisted throughout the second quarter, with a resultant significant drop in our origination revenues versus the first quarter. Our already compressed origination revenue was further impacted by certain capital markets movements, most notably pricing and product actions undertaken by the government-sponsored enterprises, or GSEs. These actions were undertaken without notice and disproportionately impacted non-bank, third-party lenders such as HomePointe. As a result, our total revenues were $84 million for the second quarter, and we incurred a net loss of $73 million, including MSR valuation adjustments net of hedge. So what are we doing to take on these challenges? I'll first address the competitive environment. As discussed in our last call, while we felt that the pricing dislocation in wholesale was temporary in nature, we have taken several actions, including accelerating process and technology initiatives to reduce our origination cost per loan. This is working. Although we had slightly lower sequential origination volume in the second quarter at $25 billion, we were able to reduce our direct cost per loan by 9% during the quarter, with even greater progress in our wholesale channel. Our focus on cost reduction initiatives will continue through 2021 and into 2022, and we have lowered our long-term direct cost per loan targeted in wholesale to $900 versus $1,000 previously. One of the anticipated benefits of the competitive dislocation in wholesale was the opportunity to increase the velocity of new broker partners with HomePoint. And this was validated in the second quarter with 715 new brokerages added to our network. We exited the first half of 2021 on a pace to exceed our enhanced target of 8,000 brokerages by year end. We also continue to focus on differentiating our broker partner offerings, most notably with the introduction of HomePoint Amplify at the end of June. Amplify is a new service model for the wholesale channel that combines the localized support with our national platform to help mortgage brokers maximize efficiency and deliver a faster, more personalized customer experience, especially in a purchase-focused mortgage market. Under the Amplify model, we are forming support teams aligned with HomePoint six regions across the country. Each region will have designated teams of loan coordinators, underwriters, closers, and loan funders, paired with our in-market account executives By organizing our operations and sales regionally, we are able to provide our broker partners with a personalized service typically only provided by a small local lender, coupled with the tools and efficiencies of one of the leading wholesale lenders. This is a paradigm shift in service delivery and is only possible because of the investments we have made in process improvement and componentized low-code technology. Transition to the Amplify service model is in process, and the initial feedback from our broker partners is extremely positive. As we implement Amplify, we are carefully tracking key metrics relating to partner experience, efficiency, and quality. We are really pleased with the results so far, and we plan to complete the rollout of the Amplify model during the remainder of 2021. In our correspondent channel, we also saw increased price competition in the second quarter. In response, we dialed back our origination activity in the channel. This accounted for most of the decline in our overall volume versus the first quarter. Finally, We continue to have strong results in our direct channel with refinance retention rates exceeding 40%. Looking at our mortgage servicing portfolio, we ended the second quarter serving more than 449,000 customers, which is up 62% year over year. At the same time, the total balance of our servicing portfolio nearly doubled from the second quarter of 2020 to reach $124 billion. The portfolio continues to perform extremely well, with already-dueled delinquencies continuing to decline. Commensurate with the structure of the portfolio and its flowing origination environment, we are also seeing lower prepayment rates. This all points to improved returns in the second half of 2021. We are also streamlining our strategy and servicing so it is even more aligned with our overall business model. Recognizing that we are of smaller scale, we plan to reduce our concentration in GDMA servicing through strategic sales. This will give us the ability to further reduce costs and at the same time enhance our focus on the customer experience. which will drive retention and lifetime value. In addition to the challenges we face from competitive pricing dislocation in the second quarter, we also face challenges in the capital market from GSE pricing and product actions. We have taken several proactive steps to mitigate this type of risk going forward by diversifying our execution. Most notably, we accelerated our transition to MBS deliveries versus cash sales. We also committed to sell nearly $1 billion in agency products focused on non-owner-occupied loans into non-agency execution and have built the capacity to expand this form of execution. Finally, we adjusted our valuation methodology on products with certain features that have been impacted by agency and market instability, which we believe will reduce variability going forward. In summary, while we are heartened by the recent changes at FHFA and do not expect additional adverse impacts from the GFCs, we are expanding our execution alternatives to both reduce this risk and enhance our revenues going forward. Although our financial results for the second quarter were impacted by both competitive pressures and GSE-driven capital markets actions, we continue to stay focused on execution. We delivered strong funded volume and broker-partner growth during the quarter. We continue to drive down our costs and commit to the continuation of this trend, while at the same time enhancing both the partner and customer experience. We are seeing reduced prepayments in our servicing portfolio and expect improved performance from this business during the second half of 2021. While we do believe the competitive dislocation in wholesale will abate at some point, we are driving home points towards a baseline return on equity of at least 15%. This focus is supported by our July results, which Mark will touch on. The challenges of the second quarter have only increased our leadership's focus and resolve to be a leader in the residential mortgage space. With that, I'd like to turn the call over to Mark.