Home Point Capital Inc.

Welcome to our third 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 the 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 briefly review our third quarter results, and then I'll discuss how we are adapting and evolving in a challenging operating environment. After that, Mark will provide more details on our results for the third quarter and share some initial insights into our fourth quarter performance. We'll then open up the call to take your questions. Starting with our third quarter results, from an operational perspective, we had another solid quarter in terms of funded origination volume, which totaled nearly $21 billion. I'd also like to highlight that for the last 12 months, ended September 30th, our total funded volume reached $100 billion, which is a significant milestone for HomePoint as just a six-year-old company. We ended the third quarter of 2021 with more than 7,400 broker partners and 650 correspondent partners. In total, our third-party partner relationships have increased by almost 50% year over year and by 10% since last quarter. As I've noted previously, the significant shift in competitive dynamics in the wholesale channel, which began earlier this year, has created a strategic opportunity for HomePoint to accelerate our engagement with brokers and attract them to our platform. We have added more than 2,500 broker partners since the end of the third quarter of 2020 and over 700 brokers since the end of the second quarter of 2021. Looking at our mortgage servicing portfolio, we ended the third quarter with nearly 429,000 customers. which is up 40% year over year. Our total balances in the portfolio grew by 70% from the end of the third quarter of 2020 to reach 126 billion. From a financial perspective, we bounced back from a challenging second quarter. We generated total revenue in the third quarter of 275 million and net income of 71 million or 51 cents per share. As we have discussed previously, a unique set of circumstances in the wholesale channel has created a historic pricing dislocation. resulting in significant pressure on our margins. Since we cannot predict when this dynamic may change, we have been taking aggressive action to scale and optimize our business. Some of the key areas we have been targeting include more rapidly growing our broker network, accelerating productivity and efficiency initiatives across our business, continuing to enhance our partner and customer experience, and diversifying our capital markets execution alternative. I'm pleased to note we have made meaningful progress in all of these areas during the third quarter. Starting with our broker partners, one of the cornerstones of our business model is our use of in-market, highly experienced market sales leaders to acquire and build relationships with brokers across the country. Through this approach, we are able to optimize the relationships with our broker partners while ensuring the end customer has the best possible mortgage experience. While our differentiated model has enabled us to perform well in a variety of interest rate environments, We believe we are well positioned to gain market share as rates rise and purchase transactions outpace the growth of mortgage refinancing. Purchase transactions typically require far more customer interaction than refinancing, and they are particularly well suited to our customer-friendly broker-partner model. From an execution standpoint, during the third quarter, we continued to grow our broker-partner network, and based on our current pace, we are on track to exceed our enhanced target of partnering with more than 8,000 brokerages by the end of this year. In addition, during the quarter, we made significant progress in our implementation of HomePoint Amplify. We introduced this new and innovative service model for the wholesale channel at the end of the second quarter, and we expect to complete the rollout by the end of this year. Amplify combines locally focused support with HomePoint's national platform to help mortgage brokers maximize efficiency and deliver a faster, more personalized customer experience. From a process and technology perspective, At HomePoint, we have built a flexible infrastructure that is highly componentized, integrating both best-in-class, third-party, and proprietary solutions to maximize our flexibility and efficiency while optimizing partner and customer satisfaction. In response to the change in competitive dynamics in the wholesale channel, we have been accelerating our efforts in both process improvement and technology implementation. And we have made great progress in pulling forward a number of longer-term initiatives. As a result, during the third quarter, we were able to drive down our direct loan costs by approximately 10% as we continue to move closer to our long-term direct cost per loan target in wholesale of $900 per loan by the end of 2022. Turning to servicing, as discussed last quarter, we are focusing on an agency-centric platform strategy. This will give us the ability to lower costs and at the same time enhance the customer experience, driving greater lifetime value. As Mark will discuss shortly, During the third quarter, we sold an $11 billion GDME servicing portfolio, which is a segment where we had been a subscale servicer. This sale, which had strong execution, has enabled us to further streamline our servicing operations. The execution level also demonstrates the value we are creating through originations. As we noted last quarter, we continue to build a high-quality servicing portfolio with very low delinquencies. These factors, combined with slowing prepayment rates, are driving improved returns. Finally, I wanted to call out our successful and ongoing efforts to diversify capital markets execution alternatives. During the third quarter, we took several notable steps towards enhancing our execution, including accelerating our transition to MBS deliveries versus cash sales and trading nearly $1 billion in agency products into non-agency execution. Our third quarter results demonstrate that these actions have helped to both enhance revenues and reduce execution risk. In addition, just last week, a private non-owner-occupied securitization composed entirely of HomePoint-originated loans successfully closed. As we continue to navigate through the current market and competitive environment, we remain intently focused on executing our business plan and managing those elements within our control. We are building on the strengths of our flexible business model to continue to drive HomePoint towards a baseline return on equity of at least 15%. With that, I'd like to turn the call over to Mark.

Thanks, Willie, and good morning, everyone. I'd like to spend a few minutes discussing our financial results for the third quarter of 2021, as well as our financial outlook. Starting with slide five of the earnings presentation, as Willie noted, notwithstanding the challenging environment we encountered during the third quarter, we continue to deliver strong performance across some of our key origination servicing metrics. Turning to slide six, we have provided a summary of our financial results for the third quarter of 2021. Total revenue in the third quarter of $275 million compared with $511 million in the third quarter of 2020 and $84 million in the second quarter of 2021. Our total expenses of $175 million for the third quarter of 2021 were up slightly versus the year-ago quarter, but our expenses were down $23 million, or 11%, compared to the second quarter of this year as a result of our firm-wide cost savings and efficiency initiatives. The sequential quarter decrease in total expenses was driven by a 16% decline in origination segment direct expenses and a 7% decline in the servicing segment direct expenses, while corporate expenses were held flat. We generated net income of $71 million in the third quarter of 2021, which compared to net income of $264 million in the third quarter of 2020 and a net loss of $73 million in the second quarter of 2021. On slide seven, we have included a quarterly breakdown of our funded origination volume by channel for the last five quarters. In aggregate, we generated nearly $21 billion of volume in the third quarter of 2021 and $100 billion for the last 12 months ended September 30th. Consistent with our overall strategy, the wholesale channel was the primary driver of our origination volume this quarter, while we scaled back our correspondent activity based on the capital-intensive nature of this channel as well as the compressed correspondent margin environment which persisted throughout the quarter. Slide 8 includes a snapshot of our origination segment results. Origination segment revenue of $184 million in the third quarter of 2021 compared to 532 million year over year and 117 million in the second quarter of 2021. Gain on sale margin attributable to the channels before giving effect to the impact of capital markets activity was 73 basis points in the third quarter versus 233 basis points in the third quarter of 2020 and flat versus 74 basis points in the prior quarter. Gain on sale margin for the third quarter includes a positive contribution of approximately $23 million related to capital market activity during the quarter, which is reflective of the concerted effort Willie described that we have been making to diversify and enhance our execution alternatives. The origination segment contribution margin of $67 million in the third quarter of 2021 compared to $424 million in the third quarter of 2020 and negative $21 million in the second quarter of 2021. At the end of the third quarter of 2021, our total third-party partner relationships grew by nearly 50% year-over-year to over 8,100, which represents an increase of almost 2,600 net new relationships over the last 12 months and 724 net new relationships in the last quarter. On slide 9, we have provided a snapshot of our servicing segment's financial results. The number of customers in our service portfolio was nearly 429,000 at the end of the third quarter of 2021, which increased 40% from the year ago quarter and decreased 5% from the second quarter of 2021. The sequential quarter decline was due to the sale of a Ginnie Mae servicing portfolio I will discuss in a moment. The servicing portfolio UPB reached 126 billion at the end of the third quarter of 2021. which was up 70% year-over-year and up 1% compared to the second quarter of 2021. Similar to last quarter, we saw a slowdown in prepayments during the third quarter, which is reflective in the decline in the change in MSR fair value from amortization from the second quarter. Loan servicing fees of $92 million in the second quarter of 2021 nearly doubled from the year-ago period, driven by the growth in our servicing portfolio and grew 7% from the second quarter of 2021. Before including the impact of the mark-to-market fair value of our MSR asset, net of hedging, the servicing segment generated what we refer to as an adjusted contribution margin of positive $9 million, which was up from negative $20 million in the year-ago quarter and negative $10 million in the prior quarter. Servicing segment contribution margin for the third quarter was positive $86 million, which compared to a negative $32 million in the year-ago quarter and negative $40 million in the prior quarter. Our third-quarter contribution margin benefited from a $78 million increase in the mark-to-market fair value net of hedge of our MSR asset due primarily to an increase in interest rates during the quarter. During the third quarter, we completed the sale of an MSR portfolio of single-family mortgage loans serviced for Ginnie Mae with an aggregate UPV of approximately $11 billion. which represented approximately 41% of our Ginnie Mae MSR portfolio as of June 30th. The total purchase price for the servicing rights was approximately $122 million, and we reported a gain of $7.4 million in connection with the sale, which is included in the other income line within our servicing segment. We're very pleased with the results of this sale, which is consistent with our strategy to become a more efficient and scaled agency-focused servicer by driving down our overall servicing costs and also reducing our delinquencies, which were less than 1% at the end of the third quarter. In addition, the sale provided us with incremental liquidity that we used to reduce our outstanding debt. Based on the strong execution of our third quarter Janie Mae MSR sale, we are in the market with an additional Janie Mae MSR portfolio. We expect this sale to close in the fourth quarter, subject to customary closing conditions. Turning to slide 10, we have included a summary balance sheet which highlights our capitalization and liquidity profile. At the end of the third quarter of 2021, we had a $550 million of liquidity, while our total assets stood at $9 billion and our book value was 761 million. During the third quarter, we increased our total warehouse capacity by 400 million from 7.1 billion to 7.5 billion as of September 30th. Before I finish my prepared remarks, I would like to briefly discuss our financial outlook. As we look at the fourth quarter, we anticipate funded volumes will again be within a range of 18 to 22 billion dollars for the quarter. The competitive pressures we experienced in the second and third quarters have continued to persist so far in the fourth quarter, and these pressures have been exacerbated by higher interest rates and a seasonal decline in purchase activity. Consequently, we expect our operating results in the fourth quarter to remain under pressure. This supports our continuing focus on efficiency across the business and also highlights the benefit from the value creation associated with our high-quality MSR asset, which we believe will continue to enhance HomePoint's book value going forward. That concludes our prepared remarks for this morning. We are now ready to turn the call back to the operator to take your questions.