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spk01: Good morning, and welcome to the new residential third quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Caitlin Moritz, head of investor relations. Please go ahead.
spk08: Great. Thank you, Alyssa, and good morning, everyone. I'd like to welcome you today to New Residential's third quarter 2020 earnings, and thank you all for joining us. Joining me here today are Michael Nirenberg, our chairman, CEO, and president, and Nick Santoro, our chief financial officer. In addition, we have members from the New Res management team, including Bruce Williams, CEO of New Res, Barron Silverstein, president of New Res, Kathy Donzillo, CFO of New Res, and Jack Navarro, president and CEO of the servicing division of New Res. Throughout the call this morning, we are going to reference the earnings supplement that was posted to the new residential website this morning. If you have not already done so, I'd encourage you to download the presentation now. Before I turn the call over to Michael, I'd like to point out that certain statements today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I'd encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we'll be discussing some non-GAAP financial measures during today's call. A reconciliation of these measures to the most directly comparable GAAP measures can also be found in our earnings supplement. And with that, I'll turn the call over to Michael.
spk13: Thanks, Kate. Good morning, everyone, and thanks for joining our Q3 earnings call today. As we look at the uncertainty in the world and the overall investing environment, our focus continues to be to fortify our balance sheet, lower our cost of funds and all of our financings, and take advantage of the great opportunities we are seeing in our operating business. We do not see great opportunities on the portfolio side today, and we'll maintain higher levels of cash and liquidity while being patient and being opportunistic. The earnings power of our company today between the investment portfolio and the operating business is extremely powerful. To illustrate, core earnings before amortization for the quarter are $1.52 today, cents per diluted share. Of course, you can't look at this in isolation. However, a slowdown in amortization and a pickup in market share in certain origination channels should lead to higher core earnings. The quarter was a good one on many fronts, as we did eight securitizations, lowering our cost of funds on advances in loans, and refinanced a term loan we did in May, lowering our cost of funds by 475 basis points as we issued our first unsecured debt deal. These financings will add $50 million of savings per year, or if you think of it this way, an incremental $50 million of earnings per year. With interest rates and mortgage rates at historically low levels, you couldn't ask for a better origination market, and our operating business continues to get better by the day. Our focus on helping borrowers through hard times is one of the core values of our company, and I'm proud to say that our team does great work there. While we had a great quarter in our mortgage company, I feel we have just begun, and I'm hopeful that, our market share will continue to grow even into a higher interest rate environment. I say this as we are still relatively new in the operating business and have plenty of room to improve. It is our belief that as we grow our DTC channel, we will pick up market share, slow down our amortization on our MSR portfolio, and drive book value significantly higher. This will help our MSR portfolio as recapture rates will rise and again drive higher earnings for the company. On the portfolio side, We're back in the call business. We have issued call notices for the month of November on up to 400 million of different non-agency deals. If you recall, we haven't done any calls since the early days of COVID, and this is the first time that we've issued some call notices. On the investment activity front, we were fairly muted during the quarter, away from our financing activity. The non-agency and loan positions are essentially all, for the most part, non-mark-to-market at this point. relatively small as we see the risk reward being very low in this current interest rate environment. During the quarter, we sold about $600 million in non-agency bonds and a little under $300 million of loans, and we purchased some agency MBS to offset our MSR portfolio. Before I turn to the supplement, I'd like to leave you with a few thoughts. We are committed to maintaining a disciplined approach during these uncertain times and will maintain higher levels of cash and liquidity. I remain confident in our ability to drive book value higher. As we grow core earnings, we look forward to growing our dividend. With many mortgage companies going public today and over the past few weeks, we'll continue to drive towards unlocking value in our operating business and seeing our equity trade where it should. I'll now refer to the supplement which has been posted online, and I'm going to start with page two. As you look at this slide, what we tried to do here is highlight our operating business and obviously our investment portfolio. Since inception, we've paid $3.4 billion in dividends. We have book equity of $5.3 billion. Our total shareholder return has been 40%, and our market cap at the end of 9-30 was $3.3 billion. When you look at assets as of 9-30, $20.2 billion in assets. We have an MSR portfolio a little bit under $600 billion, which we believe will offer great returns for shareholders when and if interest rates rise. As we think about the origination and servicing sectors, this year we project to do approximately $60 billion of origination. Our year-to-date pre-tax income so far is $554 million, and our year-to-date ROE is 189%. When you look at the servicing division, 310 billion UPB as it relates to the servicing portfolio. Pre-tax income year to date, $85 million and an ROE of 54%. For the quarter gap net income, $77.9 million or 19 cents per diluted share. Core earnings of $131.6 million or 31 cents per diluted share. For the Origination and Servicing Division, $342.6 million of pre-tax income. Quarter of a quarter, that's up 67%. Our common stock dividend at 15 cents per common share. We increase our dividend by 50 cents. Dividend yields 7.6% at the end of September. Cash on hand at the end of September, $841 million. Today we have a little bit under a billion dollars of cash and liquidity. Net equity, again, $5.3 billion. When you look at book value, before the write-down, not the write-down, before the write-off of the discount on the term loan that we refinanced, book value was $11.01. Taking into account the write-off of the term loan discount, that knocked us down by $0.15 to $10.86 per, from a book value perspective. Total economic return, 2.2% during the quarter. And again, representing a $0.09 increase in book value per common share. And again, reflecting a $0.15 dividend. Page four, just to take you through a quick book value summary. I'm not going to spend a lot of time on here. The one thing I do want to point out are two things. One is, again, you can see on the bottom of the page the $11.01 book value before we wrote off the term loan discount of $0.15. Big number here, have a look at the MSR amortization. Cost us $1.23 in the quarter. Obviously, the origination business is doing extremely well. The offset to that is we have higher levels of amortization. When and if that does revert, and I'll get into this later in the presentation, we believe that we're going to be able to capture more market share in our origination business. MSR amortization will slow down, and the ending results should be higher core earnings for our business. Page five, an important one. Some of the parts greater than the whole. If you look to the upper left side of the page, we believe our implied book value today is $16 to $19 per share. Our walk on the right side, which will get you there, and essentially what this shows is if and when we unlock value in our mortgage company, with mortgage companies trading roughly at five times EBITDA, that's going to be worth anywhere from $500 to give or take $5.50 to $7.50 per share based on a give or take an $11 book value that should get you somewhere between $16 and $19 per share from a book value perspective. I mentioned earlier in my opening remarks liquidity. We are going to carry higher levels of liquidity today as we don't know what the world is going to bring us as we look forward. Couple things to point out here. Core earnings, $0.31 per diluted share. We are holding, at the end of September, $841 million of cash and liquidity. If that was deployed, you'd see an incremental $0.03 to $0.04 per common share, or get you to the $0.34 to $0.35. The other thing to note, the term loan, which we took out in May, which was 11%, and we refinanced into six and a quarter, that closed at the end of Q at the end of Q3. If, in fact, we did that earlier in the quarter, that was worth an extra two cents per share. Page seven, talking about leverage, I mentioned again in our opening remarks the fortifier balance sheet. If you have a look here, a couple things. One is we did eight securitizations in the quarter. They ranged anywhere from MSR notes to non-performing loan deals to advanced deals and, again, refinancing the secured term loan into our first unsecured term loan. We refinanced our Spring Castle deal, which is our consumer deal, and we also closed on a new Ginnie Mae MSR and advanced facility. So, overall, great work by the team reducing our cost of funds, reducing our leverage, locking down longer-term financing, and essentially driving extra revenue to the bottom line or extra earnings. Page 8, delivering results. Two, three accomplishments. One, we want to navigate from a position of financial strength. What does that mean? We have $1.9 billion of unencumbered assets on our balance sheet, of which $841 million of that is cash and liquidity. And again, that was as of 9-30. Today, we hover around $1 billion. We want to continue to grow our origination platform, scale and profitability. Increase funded origination volume up 118%. Pre-tax income up 72% quarter over quarter. As I pointed out, one of our key missions is to continue to help homeowners. The percentage of homeowners or borrowers in forbearance has decreased to 5.5% in October from 7.8% in July. We want to continue to lower our overall leverage and risk profile. We reduced our daily mark-to-market exposure to just 3% of the total investment portfolio. The areas where we do have mark-to-market exposure Our LTVs in those facilities are typically around 50%, so very, very low leverage overall in our business and much more longer-term financing. When we think about our additional term financing, again, we priced eight securitizations, and we're going to save $50 million a quarter. Finally, we want to generate attractive risk returns for our shareholders. We raised our common dividend by 50 cents in the quarter. On the investment portfolio side, on page nine, Our increase in investments was driven by the purchase of agency securities. We purchased about $5-ish billion of specified pools in agency MBS to hedge out our MSR portfolio. When you look at the loan and residential security portfolio, again, we sold a little under $300 million of residential loans, and we sold about $600 million of residential non-agency securities. How do we think about that? We just see the risk return as being very low right now. We want to continue to button down our balance sheet and levels themselves are back towards pre-COVID levels around many of the credit assets that we sold. When we think about additional opportunities as we look forward, I pointed out we're turning back on our call business. We're going to continue to add agency MBS as needed to hedge out our MSR portfolio depending upon our view of interest rates We've begun purchasing out FHA EBOs that are in forbearance, and then we'll continue to grow our MSR portfolio through our origination and servicing business. Page 10, when we think about our MSR business, just to frame for all of you, over the past year to two years, one to two years, we've written down our MSR portfolio about a billion dollars We do think MSR valuations are at historical lows. Obviously, they've been lower, but we're towards the lows. As interest rates rise, MSRs will increase in value. To give you a sense, the way that we quote MSRs, if you think about a servicing strip of 25 basis points, a three multiple would equate to 75 basis points in price or three quarters of a point. If, in fact, and we saw this even less than a year ago, if MSR multiples went up one turn or went from a three multiple to four times that 25 basis points, that would be an increase in value on our MSR portfolio of $3.60 per diluted share. Again, I point this out because at some point we do think origination volumes will come off. And as a result, we think our MSR portfolio, which we'll continue to add to, will provide great returns for shareholders and, again, help drive a higher book value. On page 12, on the MSR side, again, I'm not going to spend a ton of time on this. A couple things I want to point out. When we think about the percentage of our portfolio that's refinanceable, I think past quarters we hovered around 30%. Now we believe it's around 40%. For the industry, we believe it to be something around 75-ish percent. So what differentiates us from the industry when we think about our MSR book? One is the season nature of our portfolio. Our portfolio is seasoned at approximately 91 months or a little bit under eight years. That is a big deal. The credit-impaired portfolio is And the combination of the credit impaired portfolio and the seasoned portfolio should lead to higher valuations and slower speeds as we go forward, as we get out of this refi wave down the road. When you look at page 13, a couple things to point out here, which I think are important. One is on the loan side, when you look to the left, essentially the entire business is no daily mark to market. Total equity in the loan book today is $798 million. When you look at the bond book on the right, $663 million of total equity. We point out 85% of that is no daily mark-to-market. As I mentioned earlier, the other 15% are really limited to what I would call some IOs, non-agency IOs and other things which have something around a 50 LTV. So overall, once again, fortifying our balance sheet, locking down our financing, maintaining higher levels of liquidity should lead us to great results as we go forward. Page 14, servicer advances, quite frankly, not a ton to talk about. Servicer advances are kind of where they were pre-COVID, to be frank, during that March period where things were extremely uncertain. You know, we expected much higher levels of advanced balances. We took out excess capacity from some of our bank friends. There's been no need for any additional services. financing around the servicer advances. As we, on page 15, the improvement in servicer advances, the delinquencies came in much better than our original projections. We have a much more positive outlook driven by the limited number of new forbearance requests and higher forbearance resolutions. And during the quarter, we recovered 141 million of advance equity during Q3. Page 16, COVID-related forbearance balances or percentages have continued to decline. We're down to 5.5% from a peak of 8.4%. Now I'm going to go through our operating business, and then we'll open up for some Q&A. When we think about our operating business, NRZ and NURES, which is formerly known as Shell Point Partners, came together in July of 2018. In my earlier opening remarks, when I say we're kind of new in the operating business, the management team, and when you look at Jack and you look at Bruce, have been around for many years and done a great job building out different origination and servicing businesses. When we purchased the company in 2018, at the end of the year, origination volumes were about $10 billion worldwide. Servicing, you know, at the time of acquisition in that July period was about $30 billion. If you think about it today, it's 60, you know, will be between 55 and 60 billion of origination. And on the servicing side will be north of 300 billion in servicing. So tremendous growth, but measured growth. There are a lot of things we could all of us can do to improve and we continue to work towards that. When you think about our platform, it's a differentiated platform. We have multi-channel. We have four different channels that we operate across. Some will benefit in different environments. Again, the big focus continues to be around the direct-to-consumer channels. When you look at our origination and servicing strategies, we have the ability to scale originations across all four of these channels. The direct-to-consumer channel, as that grows, is going to help with recapture. It's going to help with retention on our MSR portfolio. and gain on sale in the direct-to-consumer channels remain robust while they are coming in a little bit here. Our third-party servicing platform, I do believe, is one of the best in the industry. That's under the Shell Point brand. We have well north of 50 different customers on that platform, and that will continue to grow. As we think about our potential to capture additional value, we're working on brands, the four channels. So we have a huge commitment to this business not only to originate loans in what I would call the best origination market any of us have ever seen, but also to really grow and have a full-rounded mortgage company. Financial performance, 2020 pre-tax income, $639 million is up 470%. Our target for the year is going to be something close to $900 million of pre-tax income. Year-to-date ROE, 142%. And when we think about revenue year to date, it's $1.2 billion or up 190%. So tremendous growth, measured growth, but a lot more work to do. When you look at page 19, and we talk about the growth, which I just alluded to, pre-tax income, you know, up 22 to 24 times. Servicing portfolio, six-time increase in the servicing portfolio. And then origination and gain on sale margins continue to be extremely robust, and that division continues to perform very well. Page 20, when we think about the multi-channel platform, again, I can't harp on the direct-to-consumer stuff enough. That is a big part of our business. Again, retaining our MSR clients and lowering our amortization is going to be a huge win for our company, and there's a ton of focus there. The offsets to that, again, is great origination gains. If you look at the four different channels we're in, again, direct-to-consumer, JV, retail, wholesale, and correspondent. Page 21, origination activity and business highlights. Record profitability for the quarter, 312 million or up 72% on the origination segment. Annualized ROE of 291%. When you look at Q3 lock volume, it's $21.8 billion or up 122%. And then again, our year-end estimate is something between $55 and $60 billion of origination. Page 22, I'm not going to harp on this because I've spoken about it 50 times already. Significant increase in lock volume on the direct-to-consumer channels. This is what we are extremely focused on, our entire management team, all of us, to get better there. And again, it's not only to get better there around the origination gain side, but it's also to protect what we think is our industry-leading MSR portfolio. On page 23, servicing activity and highlights, $30 million for the quarter, up 24%. Annualized ROE, 54%. The portfolio has increased 56% year over year, and we estimate to close the year at about $300-ish billion of assets. Page 24, I mentioned one of our core values in our company is helping people, helping homeowners during COVID, helping homeowners, quite frankly, anytime. So when you look at the statistics, 18,000 new forbearance requests in the quarter, down from 174,000 in Q2. Active forbearances are now just 36% of the population impacted by COVID. And then 50% of the overall forbearances, which is over 100,000 homeowners, have been resolved. So great work by the servicing team during these hard times. Finally, wrapping up page 25, then we'll open up to Q&A. Obviously, our operating partners are here today. One is we do believe in our ability to drive attractive risk-adjusted returns. Clearly, we got kicked in the teeth in March. I think we've rebounded extremely well. I think our book value is extremely understated. I think the value of our equity is extremely understated, and we are going to do anything and everything we can to get back to those pre-COVID levels on the equity price and hopefully down the road on our dividends. MSR is historically low valuations, a lot of room to improve. We have a ton of cash and liquidity on our balance sheet. We will continue to maintain that through this tough period. Our management team, when we talk about experience and we look on the operating side, a ton of experience. Bruce has been doing this for 30 plus years, Jack is 30 plus years, I'm 30 years. You know, Barron is here for 25 years, and Kathy's probably 25 years as well. So you've got a nice old team here. With that, I'm going to turn it back to the operator. We'll open it up for questions.
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question today comes from Doug Harder of Credit Suisse. Please go ahead.
spk03: Thanks. Can you just talk a little bit about your expectations kind of as you head into 21 for the origination business? You know, I think that while the profitability was great, it looked like the direct-to-consumer volume was a little lower than what you had talked about last quarter. and just kind of how you're seeing the attractiveness of the various channels.
spk13: Why don't I let Barron answer that one?
spk15: Right. Good morning. So our volumes were down from what we talked about last quarter in terms of funded balances. We've been able to pick up our lock volume, and you can see that on one of the slides in the context that we did $4.9 billion in locks and only $3.4 billion in fundings. Part of that is just really due to the landscape for trying to hire new staff. We have actually improved our hiring by bringing in approximately 500 people for the last two months in a row to continue to try to build out our fulfillment framework. We think we're going to continue to grow out our funding capacity as we continue to bring in new employees. I would also say, and Michael talked a lot about it, is our view on growth. In the context of how we believe each of our channels will perform in differing interest rate environments, we do believe that our JV retail channels will continue to be somewhat sticky and then not be as sensitive to the interest rate environment. Our direct-to-consumer channel has a lot of headroom in it, just given the size of our MSR portfolio. we did pause, and Michael talked about that in the second quarter, our TPO business as well as our correspondent business, and we're able to continue to grow and take market shares in both of those channels. So we're very, very much optimistic about what our 2021 would look like, and we're seeing that momentum for the fourth quarter as well.
spk13: Doug, one other thing to add, when you think about percentages, as the you know, as all of the channels grow, it's harder to, you know, obviously the correspondent side is a little bit easier to grow than the direct-to-consumer side. So the overall percentage, while it may be constant quarter over quarter, you're seeing higher lock volumes today in our direct-to-consumer channel. And when you think about the profitability in those channels, that's really where we're focused. And again, it's parts about the profitability, but the other part is, you know, slowing down the amortization that we're seeing in our MSR portfolio.
spk03: And then, Michael, you mentioned, you know, kind of doing anything to kind of increase book value and the stock price. You know, just can you give us your updated thoughts on attractiveness of share repurchase?
spk13: You know, we think our shares are cheap. I mean, you know, the one thing is if we think that we can make a difference in buying back stock, you know, You know, would we consider it? The answer is yes. I think the opportunity to grow, because once you give back the capital, sometimes it's harder to get it back. The opportunity to grow, I think, and think about being opportunistic during these uncertain times makes us feel like we want to continue to have, you know, more cash today than we have in the past. And I think we're going to continue down that path. We're not ruling that out at this point. Really, our focus is how do we unlock value when we think about really what we believe our true book value is? How do we unlock value for shareholders? And that's really what we're focused on.
spk03: Great. Thank you.
spk13: Thank you.
spk01: The next question comes from Kevin Barker of Piper Sandler. Please go ahead.
spk06: Good morning. Hey, Kevin. I referenced the page five where the valuation of the originator servicer, you have it $558,000 to $766,000, which was an increase from a little over $4 per share last quarter. And I believe most of that was due to an increase in the multiple, the five to six times earnings from roughly three times earnings. Can you explain why you think that valuation makes sense and Do you expect this level of earnings in 2020 to be sustainable into 2021 and 2022?
spk13: So as it relates to the multiple and how we derived it, there's been, I think, five to seven mortgage companies that have gone public in the past four weeks or so. When we look at where those are trading, I'm not going to compare us to Rocket, which trades at anywhere from 12 to 16 times EBITDA. But when we look at where we, if I think about where this company could trade as a standalone company in the public markets, the comps are anywhere from five to six times. So that's why we put that number in there. If you go back to last quarter, there weren't really a lot of new mortgage companies come in public. Today, if we put ourselves from a comp perspective at five to six times, that's how you get that number. As it relates to, Kathy, maybe you want to talk a little bit about how we think about 2021 earnings and what we're kind of projecting on the mortgage company side. Okay.
spk00: Yeah, so for 2021, look, we still believe, as Michael mentioned, we are a newly sort of growing organization, and we think the market's fragmented enough that we've still got runway to take market share. We think that across the four channels, even in an upright environment, we've still got runway in terms of volume. And we also, I think, while we believe that margins will come down, over the course of, you know, and get back to sort of more normalized levels. We're expecting margins to stay higher, certainly through the fourth quarter and into the beginning of next year. So, look, in certain upgrade environments, we do think that our overall profitability will trend down, but We think the MSR is going to offset that, the MSR value, because we'll see the prepayments flow. And we've got a lot of upside there. So, again, that natural hedge is going to sort of kick in as we move into 2021.
spk06: Okay. So when you look at the earnings base, you're basing it on 2020, and I believe a lot of the comps, at five to six times earnings were based on 2021 earnings, not 2020. And so I guess what you're saying is that there's market share gains that can continue within that channel in order to sustain earnings. Am I right in thinking that? Or would you expect some contraction into 21 just given the increase in competition in various channels?
spk13: Kevin, I think what you're going to see is us pick up market share. We do think that you're going to see contraction in origination gains. And when you think about the overall company, the combination of contraction in what you're going to see in the origination market as you have lower volumes, you're going to see higher valuations in our MSR portfolio and increased values on that side. But overall, whether we do, I mean, and the mortgage business is very hard to gauge. So whether you do 850 or 900 in pre-tax versus 7 or 750 or whatever that number ends up being, we wanted to use this for illustrative purposes as we think about unlocking value in our company, in our investment vehicle. If you think about our company, it's an investment vehicle that makes investments. We have a good investment portfolio, and then we have the operating business. Now, where we go with the operating business and unlocking value, whether you trade it at six times 21, and if 21 was 500, for example, that would give you a $3 billion number. So whether you're $5, $7, $10, or $3, the one thing we know or we believe is that the sum of our parts is greater than the whole, and we think that the value of the operating business is not captured in our equity prices.
spk06: If that was realized, it would be a tremendous amount of upside to the value. Yeah. Just a quick follow-up on the MSR and your point. You've also been increasing your portfolio at the same time, which traditionally was a hedge against the MSR. How do you think about the play between the value of the agency securities portfolio against the value of the MSR portfolio? you know, if multiples were to change or the rates were to back up?
spk13: So, great question. I think on the, you know, my own personal belief is that long rates will rise over time. The mortgage basis on the other side has been, you know, pretty resilient. You are seeing lower prices in mortgages. We have a total, I believe, of $9 billion of specified pools against our MSR portfolio, as well as that we need to have for 40-act compliance. We want to be nimble here. And for example, I think we're going to maintain a shorter bias in the long run than a longer bias. And we had some interest rate swaps, for example, that were offsetting where we were receiving on interest rate swaps. We have some on the other side, payers, which means you're either long or short. So we're getting shorter there as well. And we're using that to essentially hedge out what we think the interest rate risk will be against the agency side. So we want to be able to capture the upside in the MSR portfolio when rates rise. We're not here to, you know, I don't want to get to a place where we're long, you know, 20 billion of agency mortgages and we have no rate risk hedge on the other side other than the MSR. So... Point noted, but for us, we're still extremely under-hedged as it relates to our MSR portfolio and the amount of pass-throughs that we think we would need to be fully hedged in this environment. Okay.
spk06: Thank you very much.
spk13: Thank you.
spk01: Next question comes from Stephen Laws with Raymond James. Please go ahead.
spk16: Good morning. Morning. My question is for you. There's a number of moving parts. The adverse market refinance fee that goes into effect December 1st, given you're blocking loans now that I assume you sell after they're funded, which would be after that goes into effect, if you change prices on loans or if you go leaving it where it is, so unlock loans and you'll take a progression on the gain on sale. As you think about the impact of that through the business, You know, how much of your origination volume currently refi versus purchase? And then how do we think about the impact on MSRs as well as the market from a different mortgage rate possibly on refis for the agency MBS you just purchased?
spk13: Why don't I let Barron or Kathy take the first question as you think about the delivery of the new fee?
spk15: So the market fee doesn't go into effect until 12-1. but from the time we are locking to the time we're otherwise delivering them to securities, that period of time is really kind of when that market fee would come into effect for us. At this time, we have completely put in the market fee in our daily pricing, and our understanding is the market as well has put in the adverse fee into that pricing. It's hard to tell how people are otherwise incorporating it as a cost to the borrower, or if they're squeezing it for margins, my gut tells me that it's somewhere around in the middle of the pack there, partially being passed down to the borrower and partially being from squeezing to the consumer. But with capacity continuing to be constrained in the ability and just the amount of demand for consumers looking to refinance, I do think that margins will remain elevated as long as the dynamics in our industry are there. And to the extent that even rates continue to rise, I think that you'll see rates fall soon.
spk13: And, Stephen, your second question was about refi and MSRs. Is that what that was?
spk16: Yeah, I mean, if partial of that fee is passed on to the borrower, you have a higher mortgage rate, then certainly I would think that slows prepayments and would be a benefit to your MSR valuation, but maybe a headwind to the agency book values because they would be marked down. Am I thinking about that right as I try and flow all of this through the different business segments when that fee goes into effect?
spk15: If you are, but the fee is 50 basis points, so approximately would be a little over 12.5 basis points in rate or even 15 basis points in rate. So in my assumption as if it's going to be 50-50, you'd be talking about maybe seven, eight basis points on either side. So from an impact perspective, given where interest rates, just the aggregate amount of the absolute amount of where interest rates are, we don't really think it has any material impact in today's market for the amount of refinance volume.
spk13: And, Stephen, to that point, when you think about our ability to recapture on the MSR side with our servicer, on all refinances, we're recapturing approximately, you know, 20% to 25%, 20% to 30% of all borrowers that are refinancing, and this is on the new res side. To give you a framework, every 2% increase in recapture rate adds about 33 cents per share to our overall earnings, or $135 million. So when we harp on the direct-to-consumer side and recapture, while you have this increase, and theoretically you're going to see that, whether it's passed to the borrower or it's eaten by one of the mortgage companies, That's going to lead at some point, we believe, to higher rates. As we do better on the recapture side, that 2% is going to be $135 million in earnings or $0.33 per share. So we think there's a ton of upside in the MSR side. Origination volumes will get pinched at some point. I don't think this is sustainable yet. uh, forever. Um, but you know, the way that our company is set up with this large MSR portfolio, which will offset that a ton of cash, um, the growth in, in, in our operating business, I think we're in a great place.
spk16: Great. And then one last question kind of shifting on the origination side. Um, you know, as you, you know, up until COVID, you guys looked at nonconforming loans, any thought of revisiting those originations or what's your outlook, uh, on the origination mix for 2021? Or just simply continue to conforming with refi eventually running off depending on rates and what's refi eligible? Or do you look at non-conforming originations as something to start back up as an opportunity for next year?
spk13: Yeah, we're doing a small amount of jumbo today that gets flowed into some of our bank friends. Non-QM is, you know, we're getting ready to start non-QM. Again, you know, the one thing that we want to be mindful of is that we need all the capacity we can to grow our direct-to-consumer channels in the agency space. While saying that, you know, being that the credit markets have, you know, quite frankly come roaring back, we are going to be turning on our non-QM origination segment here shortly. Great. Appreciate the comments this morning.
spk16: Thank you.
spk01: The next question comes from Boze George of KBW. Please go ahead.
spk11: Hey, all. Good morning. Actually, the first, I just wanted to ask, where is the recapture rate? I don't know if you guys gave that number. And where do you think it could go? And actually, just to confirm, is all the direct-to-consumer recapture, or is there another piece to that as well?
spk13: Our recapture rates are, give or take, around 20% right now, which, you know, if you think about historically, Even going back to the early Cooper days, we were hovering around 35%. Depending upon the product type, it was between 25% and 35%. So right now, I would assume, give or take, about 20% recapture rates. When I talk about areas to improve, this is obviously one of the bigger things for our company. Growing our recapture, which will add to earnings, slow down amortization, and give us you know, and drive core significantly higher.
spk11: And, you know, there's obviously a range of recapture rates that some companies have given and some are, you know, very high, whatever, in the 70s. I mean, what's sort of a reasonable way to think about where, you know, you guys could go in the next couple of years?
spk13: I go back to, you know, one is it depends on volumes. Obviously, the higher the volumes, it's harder to recapture because the industry's struggling with capacity. So there's really the pros and the cons, right? So if you think about higher recapture, what does that mean? That means you have slower speeds. That means potentially that rates are higher. That means you may have lower origination. So one of the reasons why we love where we sit right now is when you think about the MSR in conjunction with that origination business, it's a fantastic place to be. I think that we'll get back to the mid-20s on conventional product. I think we will be in the 30s, and we probably are in certain segments on the FHA and Ginnie Mae products. And again, when you think about that in the context of every 2% is worth $135 million or $0.33 per share, that's really what we're playing for right now.
spk11: Okay, that makes sense. Thanks. And then just in terms of the business as a whole, you know, what do you think about the normalized, like where should the normalized ROEs be for you? And, you know, what do you need to get there? Because, you know, you noted slower prepays will help, but at that time, originations probably slow a little bit. And also, from a capital deployment standpoint, you have obviously a fair amount of cash. Like, you know, how much? Is that reducing sort of the run rate ROE at the moment?
spk13: So let me take the latter part. The amount of cash we have is reducing our core earnings by probably, you couple that with a term loan, it's probably $0.03 to $0.05 per quarter in core. So when you think about, you know, we reported $0.31 sitting on cash. The term loan got refinanced in September. You know, that's probably a steady run rate of $0.35-ish from a core standpoint. right now. As we think about ROEs and going forward, we could go out and buy non-agency securities. I mentioned earlier in the comments that we sold $600 million in non-agency bonds, which are more credit-related that have recovered from the early days of COVID. We did that, quite frankly, to reduce risk and create some cash. And we think buying an agency mortgage, quite frankly, on a levered basis is going to produce better results for our shareholders than having a mid-single-digit levered credit piece at this point. You know, the world changed dramatically, obviously, you know, eight months ago. Where do we go on a, you know, once we get a vaccine or a cure, which we're all rooting for, obviously, do I think rates normalize a little bit and head higher and you start seeing hiring, et cetera? I do. And that may open up a different investment possibilities. My point earlier is, you know, from a fiduciary perspective, retaining cash, not just to deploy it to drive earnings because we think we need to, I think is fiscally irresponsible. I think retaining cash to do opportunistic things and drive earnings higher down the road is something that's extremely important. When we talk ROEs, I think our ROE, we looked at some numbers since inception, have been in the mid-teens, something around that, including through the COVID period. Up to COVID, it was probably something close to 20%. So I like where we stand. I don't think the investing environment is that attractive to buy non-agency bonds or loans. And there are some loans that continue to come out, and they're trading at kind of pre-COVID levels as well. So when you think about it with financing, you're in the single digits. And that just doesn't work for our cost of capital right now. Okay, great. That makes sense. One last thought, Bo. When you look at MSR values and we're creating them, you know, on new production at, you know, give or take anywhere from three to three and a half times multiples, three and a half times on conventional product, we think that has a lot of upside. And when you think about that on a levered return or unlevered return, that is going to be the best use of our capital right now. because at some point when rates do rise, they are going to go up and you're going to have a lot more income from your MSR portfolio.
spk11: Okay, that makes sense. Thanks. Actually, just one last one. Going back to slide five, just on that valuation differential, one thought is that the companies that are typical mortgage banks have less of a balance sheet than you guys have, and to the extent the market doesn't sort of give you the value over time, You know, could you think of other structures, you know, like a PennyMac type structure where you just separate the REIT and the mortgage bank, and is that a potential way to realize this value over time?
spk13: Yeah, what I said in the – I think what I closed in my opening remarks is we continue to evaluate a way to drive our equity price higher for our shareholders and create value. So I would say everything's on the table. Okay, great. Thanks. Thank you.
spk01: The next question comes from Henry Coffey of Wedbush Securities. Please go ahead.
spk14: Yeah, good morning, and thanks for taking my call. Now, this information is very helpful as we all kind of pick into this, but everybody on the call knows the mortgage business, and probably a lot of your investors, at least the institutional investors, understand the business really well. If you split the... mortgage company from the investment portfolio, like, you know, like Bo suggested, looking at the PennyMac model, what would be the, the role of the REIT in the equation? How, how, how would that, would that, would that be the, would that be the company that held the MSRs? How would, how would that play out in your view? Or haven't you really thought about it yet?
spk13: No, I believe we've thought about it quite a bit and we continue to work on that all the time. Um, Listen, we have a great investment business. We have calls for up to $70 billion of the non-agency market. Our MSR portfolio currently sits at $600 billion, give or take $600 billion of MSRs today. We do have some bonds and we do have loans. As we go down the road, one of the things, if you think about the split of the two companies, how big does your operating business get? How big is your operating business from a balance sheet standpoint and what's left on the You know, what I would say is think about OPCO and think about, you know, the investment portfolio. So we are playing around with those numbers. The investment portfolio is a very, very important part to our future as we go forward because I do think on the investment portfolio side, there'll be significant MSR holdings. So the idea is maybe there's a way to unlock value. You're seeing it in some of our peers that are out there, you know, going public at five to six times. That's why on page five, we use this as an illustration of, to show where, how we could unlock book value, how we can unlock book value and hopefully drive our equity price to a higher level. So it remains, you know, we continue to work on this, you know, night and day, and hopefully we get to a good result that, you know, where our share price rises and we get closer to what we think the implied book value is. That would be the huge win for us.
spk14: I mean, obviously holding on to cash is a smart thing right now because it is hard to get too excited over the kind of investment opportunities you have. This is just a stupid technical question on page 31. Where does the ad back for the right off of your term note discount, where is that? I'm looking through the numbers and trying to, I just can't find it. Where did you report that?
spk10: That would come through and gain loss on settlement of investments. There's approximately a $60 million charge in there related to the right off of the discount.
spk14: Thank you. Thank you very much.
spk10: Thanks, both.
spk01: The next question comes from Trevor Cranston of JMP Securities. Please go ahead.
spk05: All right. Thanks. Most of my questions have been answered. But I was curious, you mentioned earlier in your remarks about doing some opportunistic early buyouts in the Gini space. Can you maybe comment on how much ability you have to do that in terms of the scale of loans that are eligible for buyout right now and how attractive you see that opportunity as a place to utilize some of your capital?
spk13: So the opportunity we think is, it's a good one. The one thing I'd caution on the other side is we don't, we're not the largest Ginnie Mae MSR or servicer in the business. So we don't have a ton, you know, we have exposure, obviously, to Ginnie Mae or FHA, but we're not the largest there. So, you know, we see it as an opportunity to, You know, as our MSR portfolio on the Gini side grows, you potentially could see a larger opportunity. Clearly, we're not rooting for that because we're rooting for homeowners all the time. And, you know, it's an opportunity today, but we'll see how it plays out. We'll see what happens with delinquency trends as we go forward. Because if you think about it, you're buying out a borrower that's delinquent. You're giving them the mod. and we want everybody to be able to perform and obviously get the lowest cost of funds around the mortgage. So, you know, it remains to be seen, but I think the short answer is we're not the largest Gini player there. It is an opportunity for us, though.
spk05: Okay, got it. And then in terms of gain on sale margin, you know, obviously there was some compression during the third quarter, right? Can you comment on sort of how that's continued to trend into 4Q? I know you've said you expect it to remain somewhat elevated in the near term, but has that number continued to compress further into the fourth quarter versus where we saw it in 3Q?
spk15: So margins obviously depend upon the channel of origination, but just due to the demand, we continue to see margins remaining elevated somewhat. through the fourth quarter. And I would say that that would be for three of the channels. On the correspondent channel, as competition continues to build up, and then you have the embedded floor, which would be the agency cash windows. But we've seen margins remain steady there as well. And that's the expectation going into the fourth quarter. I don't think that you're going to see meaningful change in margins unless the amount of consumer demand changes materially. which will either be based upon capacity or just the aggregate level of interest rates.
spk05: Okay, got it. And then the last one, can you say what percentage of your total origination volume in 3Q was purchased versus refi across all the channels?
spk15: Thanks. Across all the channels, we're about In the third quarter, we're about 67% refi and 33% purchase. And that's it. Great. Thanks, Trevor. Thank you.
spk01: The next question comes from Mike Smith of B. Reilly Securities. Please go ahead.
spk12: Hey, Mike, just a quick one for me. Could you provide a quarter-to-date book value performance and just give any commentary on performance during the month of October?
spk13: It's early, Mike. I would say we're essentially, you know, give or take unchanged at this point. So, you know, something between, I guess, our net reported number of $10.86 and $11, so probably in that range.
spk12: That's all for me. Thanks for taking the question. Thank you.
spk01: The next question is from Juliano Bologna of Compass Point. Please go ahead.
spk02: Good morning. I guess kind of going back to some of the DTC discussion, you obviously increased DTC volumes in the third quarter. And last quarter there was some discussion about getting, I guess, third quarter to about $4.6 billion and fourth quarter to around $6 billion. And I'm sure there were different assumptions about prepayment speeds in that. But what I was trying to figure out was kind of what the runway looks like given the environment going into the fourth quarter. Obviously, you get some monthly trends last quarter. But then beyond that, the next part of that question is really what kind of volumes are you really trying to target on the DTC side? And what is the growth potential there? Because obviously, that's a huge factor in terms of stabilizing the portfolio because you have significant amortization expense flowing through at the moment.
spk15: So the biggest issue we've had is really just capacity to be able to fund loans. And that is just a market dynamic across the entire industry and the entire sector on either from a technological perspective to be able to put loans through the system as well as just having enough people to put loans through the system. What we realized is that we just were not able to bring in enough people fast enough. We've made moves in the third quarter to get ourselves to a better place. I talked a little bit about that before. We're hiring north of 500 people a month at this particular point in time in order to meet that capacity. We have a view as to how much we should be able to close for the month if you look at On slide 22, we talk about that we took in $4.9 million of locks, which we believe we should be able to catch up to that capacity going into the fourth quarter. Given thoughts on where we think the market is going to come into 2021, just given the size of our origination business versus the size of the MSR portfolio, and Michael talks about incremental growth, changes in if we can improve our recapture rate and have that continue to go up. We do believe that there is a lot of headroom, given the size of our MSR portfolio, to take advantage of the current opportunities. Does that mean that we can get ourselves to 40% recapture or 35% recapture? A lot is going to be driven by the amount of refinance activity on a go-forward basis going into 21.
spk13: And Juliano, when you think about what is the amount that we want to do in that channel, and quite frankly, it's as much as we possibly can that we think that we can handle. And that's kind of where we want to head with this. And again, the growth of the company has been tremendous. The amount of resources we have continues to grow. The equity investments we're making in in branding and marketing and technology is something that will continue as we build this company for the long run.
spk02: That makes a lot of sense. And what I was kind of trying to get at, in a sense, was also thinking about the kind of forward, you know, interplay between DDC and originations and amortization. And I'm curious, like, as a first part of this question, if you have any sense of how amortization is shaping up early in the fourth quarter. And then the second part of that is kind of getting back to the question I think was brought up, you know, met many different times and answered, you know, that you've, I'd say, addressed in a few different ways on the call. But you keep referring to unlocking value from the operating businesses. What I think is really interesting, what I'm kind of curious about is, like, what would you consider there if you can't get the value in the shares? Would you consider spinning the businesses? And then the question that kind of goes along with that would be, would you keep the servicing and originations in the sense of keep the actual assets of the MSRs with the originations platform and that type of, you know, a transition of the business? Or how would you think about where the pieces would fall?
spk13: You know, I think I pointed out either to Kevin or somebody, you know, we are working on all kinds of different iterations on how we think about the operating business, you know, versus the investment portfolio and the interplay between both. And that'll continue until I think we get to the right result for shareholders, which is a higher stock price.
spk02: That makes a lot of sense. Well, thanks for answering my questions, and I will jump back in the queue.
spk13: Thank you.
spk01: The next question is from Jason Stewart with Jones Trading. Please go ahead.
spk04: Hey, good morning. Thanks. Obviously, we had a large population of customers that took forbearance back in April, May, and we're hitting the six-month mark. You've given us some good disclosure, 50% roughly have ended forbearance. Does that mean that population is current? Can you give us some more color around that? And then active law submit, does that mean you're in contact? Just looking for some more context around those two buckets. Thanks.
spk07: Sure. Jack, you want to take that? Sure, Michael. Good morning, everybody. Happy to take that. You know, I would refer you to the chart on page 24. I think the most interesting statistic is one that Michael already stated, and I just would like to repeat that. And that's the fact that only 18,000 new forbearance requests in the third quarter versus 174,000 in the second quarter. Pretty dramatic. So in addition to that, we've seen a transition between those people who have requested forbearances into active forbearances. So that's that number that you see. It's about 75,000-ish in the second set of bars, the active forbearances. Of those forbearances, a higher percentage of those are delinquent than from the original number, and a good portion of the people who have transitioned into resolution have transitioned because they were paying current customers and now have just said they no longer need the forbearance protection program. And so a high percentage of those, about 80% of those active forbearances are in fact delinquent. And then in terms of active loss mitigation, that just means that we're in discussions with them to either defer or modify or in some cases reinstate. And so those people are in active discussions today. Okay.
spk04: Okay. Thanks for the call. I appreciate it. Yeah.
spk13: Thanks.
spk01: The next question is a follow-up from Kevin Barker of Piper Sandler. Please go ahead.
spk06: Thanks. I just wanted to follow up on the comments about correspondent margins. Have the correspondent margins come down the pre-COVID levels in the third quarter, and hence your comments about steady margins in the fourth quarter, or are they still elevated from where you saw that elevated compared to pre-COVID levels?
spk15: Right. They're definitely elevated versus pre-COVID levels. I would say that, you know, there are a few different ways to purchase correspondence. So really depending upon what the mix is in correspondent, whether you're buying Ginnie Mae's, whether you're buying agencies, and then also whether or not you're buying mandatory or or best efforts locks, or even non-delegated locks. So that impacts what margins are across the board. We are still seeing correspondent margins elevated versus pre-COVID. We're around 50 basis points all in on a pre-tax basis on correspondent margins.
spk06: So the competition still is not as strong as some others have said, or you're just saying there are certain channels that can continue to... I think there are certain channels within Correspondent that can continue to elevate margins.
spk15: There is no cash window, for example, on Ginnie Mae, so to the extent that you're able to continue or you have an interest in continuing to buy Ginnie Mae, that can help out your margins. It really depends on the channel mix within that, with the product mix within that channel.
spk06: Thank you very much.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Michael Nirenberg for any closing remarks.
spk13: Well, thanks for the call this morning and your support. We look forward to updating you throughout the quarter and into Q4. Have a great day and a great week. Thank you.
spk01: Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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