Home Point Capital Inc.

Greetings and welcome to HomePoint Capital's first quarter 2022 financial results call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference call, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Jinjo Bullcox.

Thank you, operator. Welcome to our first quarter 2022 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 event 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 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, Ginger, and good morning, everyone. During our prepared remarks, I'm going to discuss how we are positioning HomePoint for future success by increasing our support and commitment to the wholesale channel and why we believe brokers will win in this market cycle. I will also discuss our strategy and which we deployed ahead of other industry participants to navigate through the most challenging mortgage market in many years. In 2018, we made the strategic decision to invest in the wholesale channel as our primary source for originations. While at the time broker share was materially less than the heights reached in the early 2000s, it was evident that how the channel had evolved post-crisis resulted in a more sustainable version of wholesale that, when optimized through our broker partners, could be the most efficient way for a consumer to obtain a mortgage loan. We now have the data to prove this. An in-depth analysis of select 2018 to 2020 HMDA data shows that brokers provided an over $8,000 average lifetime benefit to consumers on loans originated through the wholesale channel. In addition, brokers are substantially more effective at reaching into low and moderate income and minority communities. In an environment where every loan, every dollar of savings, and every efficiency matter, We strongly believe that continuing to invest in wholesale will provide the greatest upside opportunity to all participants. Loan officers, consumers, and efficient wholesale lenders focus on the customer experience. At HomePoint, we intend on being at the leading edge of wholesale lending. I'll discuss several offerings that support this position shortly. At the same time, we are in an industry which is experiencing a severe dislocation. Over the last two years, the industry has built up capacity to handle originations exceeding $4 trillion, as production forecasts have been lowered to $2.5 trillion, with refinances all but disappearing from the originations landscape. The dramatic increase in interest rates, coupled with record low inventories, are putting further pressure on the purchase origination market. Because of the competitive dislocation specific to the wholesale channel experienced last year, We have been taking actions to navigate through this industry-wide dislocation months in advance of others. Recent actions we have taken, including those in process, are divesting of non-core operations and assets, the sale of our investment in Longbridge. We expect to close on this transaction in the second quarter. The sale of select MSRs. We completed a large sale in the first quarter and have an additional sale planned in the second quarter. This enhances both our leverage and liquidity positions. the sale of our correspondent division. This recently announced sale also provides an opportunity for us to reduce our leverage as well as our corporate expense footprint and allows for reallocation of resources to focus on our wholesale business. Next, our platform and operational consolidations. We are on time and on task for the consolidation of our servicing platform into ServiceMac. As discussed previously, this will convert a fixed cost into a lower variable cost. In addition, we recently redeployed a segment of our direct originations unit within our wholesale line of business. While our direct team executed extremely well during times of high refinance, the reduced size of our servicing portfolio, coupled with a dramatically reduced opportunity set, dictated that we reduce this operational footprint. This also demonstrates the commitment to our broker partners as we are now fully invested in their ability to help us retain customers as the market allows. Finally, investing in our broker partner experience. In the first quarter of 2022, we made progress on several initiatives that will enhance our partner experience. We launched a new platform that streamlines the appraisal process for our partners, making it easier for them to order and manage appraisals. We also launched significant enhancements to back office technology for our underwriters. These enhancements will create a more efficient underwriting process and faster turn times for our partners. We also expanded our product offerings, adding solutions for jumbo mortgages, adjustable rate mortgages, and TBD locks. The addition of these programs expands our addressable market with our broker partners. In addition to these more traditional enhancements, we are bringing innovative solutions to attack the issues that are most impacting both our broker partners and potential home buyers. To address the issue of housing supply, we have launched HomePoint New Build, a program we're offering through a partnership with Level Capital. This program is designed to help brokers function as a one-stop shop for small to medium-sized home builders. With this program, we connect our broker partners with construction financing through level capital, and we partner with our brokers to provide the end mortgage after the home is built. To address the issue of increasing buy-side competition, we launched HomePoint Cash Compete, a cash offer program powered by Accept. HomePoint Cash Compete is the first cash offer program available to independent loan originators, elevating their presence as a go-to resource for helping homebuyers and their real estate agents win deals against all cash offers. In summary, we continue to enhance our focus and investment in the channel that we believe will win, wholesale. The data demonstrates that mortgage brokers enabled by scaled wholesale lenders like HomePoint are better for consumers. Ultimately, this should result in market share growth in the channel. We are positioned to drive that growth. At the same time, like everyone in the industry, we are challenged by a significantly changed environment. Fortunately, we have been taking actions to navigate through since mid-2021. While we are now seeing others in the industry take actions to reduce capacity, which is what is required to get back to a more normalized revenue environment, we continue to operate based on current conditions and are staying focused on liquidity, costs, and the greatest opportunity for future upside as we push through this cycle. With that, I'd like to turn the call over to Mark.

Thanks, Willie, and good morning, everyone. We've included in the presentation and earnings release our standard period-over-period financial results. I'm going to focus my discussion on a handful of key metrics. We'll be happy to answer any questions you have regarding the financial results following our prepared remarks. HomePoint generated quarterly funded origination volume of $12.6 billion in the first quarter of 2022. Gain on sale margin attributable to the channels before giving effect to the impact of capital markets and other activity was 61 basis points in the first quarter of 2022. versus 125 basis points in the first quarter of 2021 and 58 basis points in the fourth quarter of 2021. In the first quarter of 2022, we added 364 new wholesale partners, growing our broker partner base to 8,376. Starting this quarter, we will begin reporting on partner activation as represented by the number of active broker partners locking a loan. In the first quarter of 2022, we had 3,603 active broker partners, an increase of 3.5% from the fourth quarter and up over 24% from the prior year. As Willie mentioned, we've continued to be aggressive on measures to shore up our business and cut costs. Total expenses of $137 million in the first quarter of 2022 were improved 40% versus the first quarter of 2021 and were 10% lower compared to the fourth quarter of 2021. This was primarily driven by 20% quarter-over-quarter reduction in expenses in the origination segment. During the quarter, HomePoint completed previously announced sales of mortgage servicing rights. The aggregate unpaid principal balance of the portfolio was approximately $37.1 billion, and the total purchase price for the servicing rights was approximately $435 million. Due to the sale of MSR assets, the total number of servicing customers declined 18% in the first quarter of 2022 compared to the fourth quarter of 2021. Servicing portfolio UPB was $102 billion at the end of the first quarter of 2022, declining 3.6% year-over-year and down 20.5% compared to the fourth quarter of 2021 due to the sale of MSR assets. As of March 31, 2022, we had $656 million of available liquidity, while our total assets stood at $5.2 billion, and our total equity was $783 million. HomePoint Capital's Board of Directors has declared a cash dividend of $0.04 per share for the first quarter of 2022, payable to shareholders of record as of May 24, 2022. As we previously discussed, HomePoint Capital's Board of Directors authorized a stock repurchase program where the company may repurchase up to a total of $8 million of its issued and outstanding common stock, and the repurchase program expires on December 31st of 2022. During the first quarter, we repurchased over 460,000 shares for $1.5 million under the repurchase program. Before I finish my prepared remarks, I would like to briefly discuss our financial outlook. As we look at the second quarter of 2022, the market volatility and competitive pressure the industry faced in the first quarter has persisted. For the second quarter of 2022, we expect our volume level and gain on sale margins to be relatively consistent with what we saw in the first quarter. Because it is difficult to predict when excess capacity will be removed, we will continue to optimize our business and further reduce costs. We believe that the combination of our strong capital and liquidity position the strength of our partner network, and the proactive measures that Willie discussed, we are well positioned to navigate it. That concludes our prepared remarks for this morning. We are now ready to turn the call back to the operator to take your questions. Operator.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove yourself from the question queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys.

One moment, please, while we pause for questions. The first question comes from Doug Harter from Credit Suisse.

Please proceed with your question, Doug.

Hi, this is John Kilachowski on for Doug. Just a few questions. I would like to get your thoughts around sort of the health of the dividend going forward. And then maybe also if we could talk about the decision between continuation of stock buybacks versus buying back debt sheet. And then sort of lastly, the pacing of MSR sales.

Mark, do you want to start with that?

The board has declared a dividend for the coming quarter, and that's where we are on that. In terms of stock buyback versus debt repurchase, you know, the stock buyback, we've been authorized up to $8 million, so it's a pretty modest number. And so that's where that is, and we'll be evaluating a debt buyback as we look in the context of our overall liquidity position. On the question of MSRs, we'll continue to strategically look at our MSR portfolio and the opportunity in the market and our liquidity position and be in the market as we think is appropriate. So really, none of those strategies are different than what we have said in the last quarter.

Got it. Thank you.

Doug, do you have any further questions?

I do not.

Okay, thank you. The next question comes from Steve Delaney from JMP Securities. Please proceed with your question, Steve.

Good morning, everyone. And look, tough market, so congrats on posting a profit, regardless of how we have to do it these days. So, Willie, looking at the expenses, which I'm sure you and Mark are doing very closely, it seemed odd that corporate expenses went up by about $4 million quarter-to-quarter today. almost 40 versus 35 in the fourth quarter. Was there any one-time items in there? And maybe looking forward, where do you see that line item settling down quarterly over the balance of the year? Thank you.

Yeah, sure. Morning, Steve. So I'll start. So the primary difference is that we started accruing for bonus. So we felt that was important from an organizational standpoint to have some level of incentive compensation out there. I'll let Mark talk a little bit about future trends.

Sure, yeah. So, Steve, that's the primary difference is what Willie said. You know, I would focus on the entirety of our expense base, and we've got to look at it in the context of the market opportunity, and corporate is not going to be viewed any differently. There's less flexibility, of course, with corporate because there's a certain amount of things you have to do. But having said that, with the sale of correspondent, with the outsourcing of our servicing operation in partnership with ServiceMac, there's going to be opportunities to look at corporate as well, and we will be doing that. So I would expect downward trends on the corporate expense line as well.

And on the origination segment expenses, down, but obviously volume was down from $20 billion to $12.5 billion. Do you have in your mind, Mark, a sort of a percentage of origination volume that we could expect that origination segment direct expenses to run at just in terms of a range of basis points?

Yeah, we were at about 64 basis points this quarter. I'd like to see it lower than that. Of course, with the volume drop being what it was, we were at that 64 basis point level. The challenge, Steve, is that as you try to get capacity out of the system, it doesn't happen instantaneously with volume drops. You need the personnel on board to close the existing loans, and you never want to compromise on the partner and customer experience. So the expense coming out will always lag, but having said that, we're focused on it, and we want to get our expenses lower than where they are right now in concert with where we see the market opportunity.

Great. Thank you both for the comments, and we appreciate the new upcoming disclosure about active brokers on a quarterly basis. Thanks.

Thank you. The next question comes from Kevin Barker from Piper Sandler. Please proceed with your question, Kevin.

Thank you. I just want to follow up on the expense side. Obviously, maybe some incremental decline in corporate expense, but what other expenses could we see decline Just given, you know, the exit of the correspondent channel, the outsourcing, the servicing, is there, you know, how should we consider a run rate operating expenses as we move into the second and third quarter of this year?

You want to start with that, Mark?

Sure, glad to. So let's start with the servicing expenses. As I've said in the past, I expect the servicing expenses to be more variable with the size of the portfolio as well as lower overall. So I thought the fourth quarter level of servicing expenses was a reasonable proxy. Even the first quarter, I would expect that number to come down as the portfolio declines. You'll notice that we did a pretty substantial sale. That happened at the very end of the quarter, so our average UPB was pretty flat to where it was in the fourth quarter, but our ending was lower, so I think you can expect to see a similar decrease going forward and just mirror that with the size of the portfolio going forward. On the origination side, we're going to see an expense drop. To my earlier point, though, it won't be... dollar for dollar as the volume drops because there tends to be a lag on that sort of thing as, again, you have to close out the pipeline and it takes time to move those expenses out. But we will be moving expenses out of the origination segment as well, again, with the goal of getting it lower than where we were this quarter, which was 64 basis points. We'd like to see it lower than that.

Okay. And then in regards to, you know, you're raising cash, selling MSRs. You know, why continue to pay the dividend or do stock buybacks if you're attempting to increase your cash flow and de-lever? Seems a little counterintuitive to go down that route. You know, is there any, you know, discussions around potentially increasing, you know, your capital or continuing to increase cash beyond the initiatives you've already put in place or discussed on this call?

Yeah, thanks, Kevin. So we obviously discuss this on a regular basis, and you can see the impact of what we've been doing in the reduction in the debt ratio and the increase in available liquidity. Constant discussion about how to balance it out. We feel like at this point we have sufficient liquidity, sufficient access or sources of liquidity to be able to continue to pay the dividend, continue to buy back stock, and at the same time look at buying back some of our debt. So it's going to be a balancing. We're going to balance between those various things, but I think you can see, you can expect to see all of the above from us.

Okay. And then I believe your corporate debt to equity ratio dropped to 1.2% and TCE ratios was nearly 15%. I believe you're trying to get incrementally a little bit less leverage there. Do you have specific goals that you can lay out? And I believe you discussed these recently. and when you think you'll reach them given the state of the market today?

You want to start with that, Mark? Sure. So our stated goal on the debt to tangible common is one times. We went from one six to one two times this quarter. So we're very pleased with the progress we've made. The goal is to get to one times. Having said that, you said the most important thing there, which is given the market environment. Our long-term goal is to get to one times. We'll be focused on moving towards that direction. The variable is going to be the market, the opportunity to sell MSR, the opportunity to create more E in that equation, and we'll see how that evolves over time. But our goal is still to get to one times.

Got it. Okay. And then your gain on sale margins in the wholesale channel are running below good portion of the market or from what we can observe from other competitors um do you see any opportunity or initiatives to be able to you know drive pricing slightly higher given you know what is a very competitive market but i mean is there any initiatives in place that you can really tweak the pricing there to maybe increase cash flow um from that perspective yeah so so i think

You know, the first quarter, Kevin, it was obviously differentiated between those that hedge MSRs and those that do not hedge MSRs. And that extends not only to the MSR portfolio itself, but also to your originations pipeline and kind of loans and process between being closed and being sold. So as you know, we have a hedging strategy, a deliberate hedging strategy that reduces our risk and at the same time periodically gives us upside opportunity as observed in the first quarter. But I think it's hard to tell what others who are not hedging MSR's margins are X the dramatic MSR movement in the first quarter. That said, we do have a number of initiatives, some of which were talked about in the recorder remarks. But I'd say most notably is that our turn times are now, I'm sorry, our cycle times are now in the neighborhood of 19 days. which we think is very competitive relative to others in the marketplace. So I'd say that and the partner experience are the two things that we're very focused on in order to try to drive up margin.

Okay. Thank you. Thank you, Willie. Thank you, Mark.

Thank you. Ladies and gentlemen, just another reminder, if you'd like to ask a question, please press star, then one. If you'd like to ask a question, please press star, then one. The next question comes from James Fawcett from Morgan Stanley. Please proceed with your question, James.

Hi, this is Blake Netter on the line for James. Um, earlier you mentioned some positive developments in terms of the number of active broker partners on your platform. I was wondering how much of that growth was driven by the migration of retail loan officers to the broker channel and where do you see things going from here?

Yeah, it's a good question. It's a, The vast majority of the quarter-over-quarter growth was from existing broker partners and loan officers that have been in the channel. That said, we are seeing an increasing migration of loan officers from the retail channel into the broker segment and wholesale channel. We are in the process of refining our analysis associated with that, and we hope to publish more discrete numbers, but minimum anecdotally and certainly From an activation standpoint, an initial activation standpoint, we're starting to see more of that. So we do believe that that will be an additional opportunity, upside opportunity for us, especially as it becomes clearer the benefit that brokers provide to consumers that we stated in our remarks.

Got it. That's helpful. And earlier you mentioned your cycle times are down to around 19 days or so. I'm just curious, anything to share in terms of how your costs originate or trending and how that's shared in recent quarters?

Sure. I'll give that to Mark. Sure. So, you know, nothing more than what I previously said, which is that, you know, reduction of cycle times does create more efficiency. It does improve the customer experience and it does enable you to lower costs. And we did see a 20% reduction in origination costs this quarter. The volume dropped by more than that, of course, so our basis points are higher. And that's why we need to continue to leverage the productivity improvements to look at our workforce and make sure we have that optimized. So as I said earlier, I expect to see some further downward momentum in terms of our overall expenses to more closely mirror what the volumes look like. But the point Willie made around cycle times is certainly a key component of that productivity.

Got it. That's helpful. And then one more question. As the market turns to become more purchase heavy, can you talk about any other potential new verticals that you're thinking about leaning into, whether that's in the non-agency space or in other places?

Sure. So, you know, we did announce the two programs that we think we're really looking at a little bit differently. We have what we think is an appropriate product set in place. But for us to be the kind of the next kind of non-agency or non-QM lender doesn't seem to make a lot of sense versus more directly attacking the challenges that our broker partners are facing. So HomePoint Cash Compete, is one example of that. The partnership we have with Global Capital for Builders is another example of that. So those are really two ways in which we're really trying to get on the leading edge of driving activity and addressing the true issues that our broker partners are facing out there.

Okay, great. Thanks for taking my questions.

Thank you. The next question comes from Mahir Bhatia from Bank of America.

Please proceed with your question, Mahir.

Hi, and good morning. Thank you for taking my questions. I wanted to go back to some of the questions I think Kevin was talking about just in terms of your liquidity and managing your debt to equity. Your debt is yielding, I think, double digits as of this morning. I was just wondering, have you any consideration to buying back debt versus maybe some of the other actions you've been taking?

Yeah. Hey, it's Willie. So we are currently considering buying back debt as well. So as I As I mentioned in Kevin's question, to us, all of that is on the table now. So whether it's equity buyback, our dividend, and debt buyback, we feel all of those things are in scope for us now.

Okay. That is a consideration. It's good to know. In terms of the – one other question, just maybe a little in the weeds here, but In terms of the MSR sale, I think I saw there was a $59 million loss on the MSR sale this quarter. And can you maybe just talk about that a little bit? Was there a mark issue? I mean, rates have only gone up since you marked your books in December. So I'm just trying to understand exactly what's going on there.

Do you want to take that, Mark? Sure.

I'm not sure where we would have seen a loss, but What we did with our MSR sale is that we saw that prices are where they are, to your good point, with rates being up, values are higher. And instead of marking up the book, we monetized it and sold it and took advantage of the liquidity opportunity. So maybe our marks were not as high as other people, but largely that's because, number one, our hedge strategy, and number two, the fact that we sold a substantial amount of that book. So that's... So that's what we saw there. It wasn't a loss on the sale. In fact, we sold it at our mark. If the marks ran up after the time of the sale, we wouldn't have gotten that. But frankly, that wasn't our strategy. Our strategy was to capitalize on where the values are now and monetize that asset.

Okay. I guess we could talk about it offline. I was just looking at the footnote two on the summary segment results. That's where I was looking at it. But we can talk about that offline. The other question I had, just in terms of going back to the cost structure, is there anything you can help us with, maybe like thinking about Q3, right? Once you've sold, the subservicing is in place, you've sold the correspondence segment, what does the overall cost structure look like when we get to like Q3, Q4? I understand it moves around a little bit with volume, but anything you can help us with on that?

Sure, so... Again, there'll be downward momentum on both the servicing segment as we move towards a more variable structure and a smaller servicing book, and on the corporate overhead segment as we simplify the operation because of the streamlining that we've talked about. In terms of specific numbers, I'm not prepared to give those, but that's kind of some general guidance that should hopefully be helpful. On the origination segment, I previously said we'd like to have that number at around 50 basis points. Whether we can get there by the third quarter or not, I'm not sure, but we are striving to have it lower than 64. So whatever your volume levels are, expect the production expense to go down accordingly, or if we have similar volume, it'll be similar.

Yeah, hopefully what you've seen from us is that If you look at what happened last year, I mentioned in my prepared remarks that we're very proactive in scoping and scaling the operation to what we believe the opportunity set is. And so we look at it that we're ahead of the general market where you've had a demand shock, significant demand shock out there. And most companies have responded at what I would say more incrementally. We've responded more aggressively even starting last year. And so you can expect that we will calibrate both our operational expense and our corporate expense to where we believe the opportunity set is. And as Mark indicated, because we have divested of some of our businesses, there's kind of a natural component to that that will take place over the next several months.

Thank you for taking my questions.

Thank you. The next question is a follow-up question from Kevin Barker from Piper Sandler.

Please proceed with your question, Kevin.

Ned, thank you. I just wanted to follow up on the cash side of the business. You have obviously raised a lot of cash with the MSR sales. When you look through the rest of this year, you know, origination income is close to break-even, maybe slight decline, and then that would require quite a bit of cash outlay and investment in MSRs. Would you... Do you see... MSR sales as a better option to continue to increase cash, or do you see potentially doing servicing released on your originations today in order to continue to generate cash?

Yes, I think you can expect us to, as Mark indicated, Kevin, to be in the market to sell MSRs. What we don't want to do is be a for-seller of MSRs. So we have... ample access to liquidity through our leverage. And we will move in and out of both the leverage and the MSR sales as the market dictates, as opportunity dictates, and as we have a need for liquidity. So I think, again, you can expect us to be active in all of the above.

Okay. And then your origination purchase refi mix, leans a little bit more refi relative to some of the industry estimates for purchase refi mix. And you guided to, I believe it was flat or funded volume in the second quarter. Are you seeing better traction with your broker partners on generating more purchase volume? Or have you seen like significant trends where that's coming into place at least over the last two quarters, you know, with rates moving higher?

Yeah, we're certainly seeing it as far as forward look, as far as new rate locks, for example. We're definitely seeing a trend towards it. I mean, everyone's increased purchase, but we're much more in line with what the market is at this point as far as kind of the forward flows. Okay.

All right. Thank you for taking my question.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Ginger Wilcox for closing remarks. Please proceed, ma'am.

Thanks Operator and thanks everyone for joining us this morning for our quarterly earnings call. Please feel free to contact me if you have any questions and we look forward to speaking with you again next quarter. Operator?

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you very much for your participation.