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spk02: Hello, and welcome to the Ackman Financial Corporation Preliminary Third Quarter Earnings and Business Update Conference Call. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Decoax Aurelian. Please go ahead, sir.
spk05: Good morning. Good morning. And thank you for joining us for AQUIN's preliminary third quarter 2020 earnings and business update call. Please note that our preliminary third quarter 2020 earnings release and slide presentation are available on our website. Speaking on the call will be AQUIN's Chief Executive Officer, Glen Messina, and Chief Financial Officer, Gene Campbell. As a reminder, the presentation and our comments today may contain fully written statements made pursuant to the safe harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are, to different degrees, uncertain. You should bear this uncertainty in mind when considering such statements and should not place undue reliance on such statements. Forward-looking statements involve assumptions, risks, and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2019, and our current and quarterly reports on such dates. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. In addition, the presentation and our comments contain references to non-GAAP financial measures, such as adjusted pretax income, adjusted pre-tax income excluding amortization of NRZ loan fund payments and adjusted expenses among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition and an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures may be found in the press release in the appendix to the investor presentation available on our website. For an elaboration of the factors I just discussed, please refer to our presentation and this morning's preliminary earnings release as well as the company's filings with the SEC. Finally, this presentation and our comments refer to our preliminary third quarter financial results. These statements are based on currently available information and reflect our current estimates and assessments. The company has not finished its third quarter financial closing procedures. There can be no assurance that actual results will not differ from our current estimates and assessments, including as a result of third quarter financial closing procedures, and any such differences could be material. The company expects to release final third quarter 2020 results in early November. Now, I will turn the call over to Glen Messina.
spk06: Great. Thanks, Deco, and good morning, everyone. Thanks for joining our business update call today. I'm going to get started on slide three. You know, we continue to make great progress here, and I'm really excited to share our preliminary third quarter results with you today. You know, we've got a great team here. Everybody's working with a lot of passion and energy to deliver results for our consumers and investors. I really am just so proud of what they've been able to accomplish. Today we're a stronger, more efficient, more diversified business, and we're delivering on what we committed to do. Profitability is improving. Origination's volume continues to grow. We've got a competitive cost structure. We've built a diverse servicing portfolio that we believe can perform through the cycles. We're resolving our legacy regulatory matters, and we believe our capabilities line up really well with market trends and opportunities. We are focused on executing a straightforward strategy. It's all about balance, diversification, cost leadership, and operational excellence. And look, we believe continued execution of this strategy will enable long-term growth, profitability, and will create value for our shareholders. Let's turn to slide four just for a couple of words on today's AQUIN. We are a leading mortgage special servicer and originator who is focused on creating positive outcomes for homeowners, communities, and investors. We've got two principal business units, Servicing and Originations. We serve over 1 million borrowers, thousands of investors, and hundreds of clients with various mortgage products. We've got proven capabilities in creating non-foreclosure outcomes for borrowers and industry-leading performance against a number of independent benchmarks in operations and efficiency. We've also built a diverse multi-channel origination platform in both forward and reverse mortgages that's grown total volume by 115% over the past year. And we think we've got room for product channel and client-based expansion in originations. There's several industry trends and tailwinds that we believe we're well positioned to benefit from in both performing and reverse originations as well as special servicing. And these trends are really driven by interest rates, favorable first-time home buyer and retiree demographics, and expiring COVID plans. You know, our proven team has demonstrated the ability to deliver de novo growth, acquire and integrate, drive efficiency, and drive operational effectiveness. And we've built a low-cost, technology-enabled, controlled, scalable platform that we believe positions us really well to deliver profitability and capture growth opportunities in the current industry environment. Turning to slide five, maybe a couple of highlights on the quarter. We've continued to execute really well here in the third quarter. We delivered adjusted pre-tax earnings of $14 million, our fourth consecutive quarter of profitability as measured by adjusted pre-tax earnings. When you look at adjusted pre-tax profitability before the amortization of NRZ lump sum payments, we've improved that metric by more than $375 million since the second quarter 2018 baseline for AQUIN and PHH combined. That's just a remarkable performance. Our originations volume continues to grow. MSR and subservicing volume was up four times and 24% respectively over the last year. This is balancing the COVID and prepayment impact on our servicing platform. We are now including our interim subservicing additions in originations volume. This has been part of our business model for quite some time and is part of our portfolio replenishment. But we used to report this in our roll forward of our servicing portfolio in the 10Q. So we'll be showing it here in our originations volume going forward to make it easier for investors to see. Now, we continue to make positive progress, as you can see, in our continuous cost improvement over the past two years. We've reduced our adjusted operating expenses by 43%, which is now up about two percentage points since last quarter. Continuous cost improvement is a key element of our go-forward strategy, and we do believe we've got room for continued improvement. We made great progress on our legacy legal and regulatory matters in the third quarter. As previously announced, we settled our legacy matter with Florida prior to mediation. With the Florida resolution, we've now resolved all state actions from 2017. The settlement with Florida includes a combined total payment of $5.2 million. In addition, $1 million is payable in two years in the event specific loan modification objectives are not met. And we've agreed to waive $5.5 million in late fees assessed to borrower accounts but not yet collected or recognized into income. In connection with settling this matter, during the third quarter we did book an incremental reserve of $2.7 million. On the other matters here, in addition, we've completed the post-loan boarding data integrity audit as required by New York and the final escrow review report has been issued to the participating states. While we're not at liberty to discuss the results in detail, the results for both these items were favorable to the company. And lastly, on legacy matters, we are scheduled to commence the mediation with the CFPB on October 23rd. You know, while settling the Florida matter has no direct impact on the CFPB matter, we do remain hopeful that our settlement with the state of Florida may offer a potential path forward. Our goal remains to resolve the CFPB matter in the shortest timeframe possible. That results in an acceptable outcome for our stakeholders. You know, again, just wrapping up here overall, we believe it was another strong quarter. We continue to execute well on our key priorities for 2020, and our performance is progressing right on track with our expectations. Turning to slide six, look, our multi-channel origination platform and enterprise sales team are making great progress. Total volume, including subservicing additions, is up 32% over the second quarter and up 115% over the third quarter of last year. We did see margins contract quite a bit in the third quarter versus the second quarter, largely in the correspondent and flow channels. So this was expected as industry volume, as the industry builds capacity to address the industry volumes, and MSR buyers ran to the market after the initial COVID shock in the second quarter, as well as our changing mix with continued growth in flow and correspondent volume. Again, our expectation here is margins would contract. That said, volume growth has largely offset the margin contraction, and June will talk about that in a moment. Our correspondent volume was up almost three times from the second quarter. We added 24 new sellers to our correspondent base. The team there is performing very well. Flow volume was up roughly 48% over the second quarter. We added about 14 new sellers to the S&P co-issue partner program. Again, enterprise sales team there doing well in terms of new sellers and co-issue partners. Our recapture platform continues to grow. Total fundings were up roughly 16 percent in the quarter. Our recapture rate for the quarter averaged 18 percent, and this was largely limited by staffing levels. Funded volume is running about three times what it was at this time last year. We are seeing increased activity in the subsurfacing space. We issued 12 proposals during the quarter. And we're in late stage discussions on about $15 billion in subservicing opportunities. MSR cash yields continue to be relatively high. Expected cash IRRs and MSRs originated in the third quarter, blended across all our channels. So it's roughly a 17% IRR, so very good, very strong compared to historical levels. And lastly, we continue to make great progress here in replenishment rate. It continues to improve despite record prepayment levels that we saw in the third quarter. Our replenishment rate excluding the terminated NRC subservicing was 104%, which is up from only 34% last year. So again, a really strong quarter for the Originations organization with every channel delivering year-over-year and sequential quarter growth. Turning to slide seven, again, our enterprise sales strategy is working and working well for us. We think we've just scratched the potential here for our enterprise sales approach. Our enterprise sales team offers a full portfolio of our existing product suite to potential new clients and our existing clients. We launched our marketing blitz in late third quarter, and our enterprise sales pipeline continues to grow. Our top 10 opportunities represents $125 billion in subservicing, flow MSR purchase, and recapture services opportunities over the next 24 months. We are targeting to grow our correspondent and flow seller base to over 250 by year-end 2020. and over 400 by year end 2021. So again, great progress there. You know, even with anticipated market contraction, you know, that growth in our seller base should allow us to deliver about $1.5 to $2 billion per month in correspondent flow volume. You know, to date, a nominal amount of our volume has been Ginnie Mae. You know, roughly 29% of the industry volume, originations volume overall, is in the Ginnie Mae space. And we expect to begin participation in the Ginnie Mae co-issue program in the first half of 2021 and look forward to Ginnie Mae products being a slightly greater share of our originations going forward. We continue to improve and grow our retention platform. As I said before, hiring there is our biggest challenge, and I think it's a challenge across the industry. We are targeting to increase our capacity by another 25% by the end of the year. And again, that's really driven through a combination of staffing, technology, and process-driven productivity enhancements and leveraging our global operations footprint. You know, these actions that we've done, these actions so far this year, and they've helped us double our recapture rate from the second quarter of 2019 to the 18% level where we are today. And we're still targeting recapture goals of about 30%. However, due to the hiring challenges that we're seeing in the marketplace, we've now We expect to get there by mid-2021. It's going to take a while to staff up the platform. Our current Rich Nation's run rate is over $40 billion in annualized volume. Again, just remarkable progress since we were a year ago. And growing off this base, considering the growth in our seller base as well as the opportunities we're seeing in the subservicing arena, we're now targeting over $60 billion in volume for 2021. with roughly a 40-60 mix of owned servicing and sub-servicing. Again, really, really proud of what our enterprise sales team here is driving for and accomplishing. Turning to slide 8, our servicing platform continues to perform really well. So servicing faced a number of expected headwinds this quarter with record prepayments driving over a 40% increase in MSR amortization versus the second quarter. as well as higher lien release expenses and reduced ancillary income. Some of this is anticipated in this type of environment. Despite these headwinds, our team reduced adjusted pre-tax loss before amortization of NRC lump sum payment by roughly two-thirds to nearly break even for the quarter. In June, we'll share those results with us in a moment. We continue to operate largely remotely. Employees remain engaged, productive, and committed to assisting our customers, clients, and investors. On the left-hand side of the page, here you can see several of the key metrics that impact investors and clients, namely the links to cycle times and claim effectiveness, which continue to perform well. Our cost per loan remains favorable to MBA benchmarks, and again, performing well for both performing and not performing loans. And as I said earlier, we believe our continuous cost improvement actions, global operations, and enabling technologies will help us maintain or should help us maintain a highly competitive direct servicing cost structure. Strong performance on the metrics here on the left side of the page results in a lower total cost and higher realized cash flow for our investors and MSR owners including ourselves. On the right-hand side of the page we continue to focus on performing for our customers. Our call center continues to outperform the industry on hold times and abandonment rate versus the weekly survey data that we're seeing from the MBA, notwithstanding the increase in assistance for borrowers as they're coming off forbearance. Customer satisfaction scores have continued to trend positively. We remain committed to enhancing the experience for both consumers and clients. And we're investing in a lot of technologies to help us do that. So technologies like robotic process automation, OCR, optical character recognition technology, advanced decisioning analytics, online agent appointment models, all with the goal to simplify customer and client access to their data and to us. These investments also help us reduce cycle times in our operation. It helps us improve accuracy and ultimately can help eliminate rework to the extent rework is necessary. Our servicing platform has a long track record of helping homeowners who are facing challenging times, and we continue to be laser focused on supporting our customers, especially those who have been harmed by the COVID-19 pandemic. And again, when you look at this page in totality, we think these servicing metrics are a picture that clearly indicates we have a really strong platform here that continues to deliver well for consumers and investors. Turning to slide nine, maybe an update here on our COVID-19 forbearance situation. So look, our exposure to loans on forbearance continues to diminish. You can see in the upper left that the total number of forbearance plans and the forbearance plans where we ultimately have the responsibility to advance continue to decline. As the chart reflects, there's a pretty big difference between total forbearance plans and the plans where we have the ultimate responsibility to advance. That's a function of and a benefit from, frankly, our strategy to maintain a mix of owned servicing and subservicing. Our owned servicing portfolio, again, where you have the responsibility to advance, is performing consistent with other non-bank servicers in terms of percentage of loans on forbearance. If you adjust for mixed differences between our portfolio and the industry average shown here in the MBA stats, our percentage of loans on forbearance as a percent of the total would be roughly 7.1% versus the industry at 6.8%. So again, very consistent performance. We are seeing roughly 40% of our borrowers on forbearance plans maturing reinstate. About 41% are extending. So roughly about 5% have progressed to loss mitigation and we're awaiting direction from the borrower on roughly about 14% of plans that have matured and we'll continue to work with them to see what makes the most sense for them. We are seeing about 30% of borrowers on forbearance continue to make payments. Our expectation is roughly 75% of those borrowers on forbearance will reinstate and roughly 25% will need some form of loss mitigation assistance. We believe consumers who have Genie Mae and PLS loans are likely to need the most assistance when they run out of forbearance options. We stand ready to assist these consumers and we'll continue to focus on what we do best, and that's creating positive outcomes for homeowners and investors. again within the permissions of our investor servicing guidelines. Turning to slide 10, I'd like to share with you how we think about our servicing portfolio. Our goal is to build a servicing portfolio that can perform well through changing business cycles and changing interest rates. We are targeting both diversification and balance based on four macro characteristics. Those are owned servicing, subservicing, performing servicing, and special servicing. The objective here is to pivot our emphasis on each one of those quadrants or dynamics based on market returns and the economic cycle. Maybe a couple of characteristics here. Owned servicing, while capital intensive, has profitability dynamics that are counter-cyclical to origination, so it does balance our origination's business. Owned servicing offers higher net income per loan than subservicing, but profitability does deteriorate when prepayments accelerate and delinquencies rise. Performing servicing generally has lower relative returns and higher prepayment volatility but reduced credit-related return volatility. Special servicing generally has higher relative returns than performing servicing but lower prepayment volatility but higher credit-related return volatility. So our goal here through our new originations is to improve our vintage. an increased average loan balance, both of which are key factors to our profitability improvement plan. We also expect to replace our legacy subprime servicing portfolio runoff with GDMA profit. Over the next 12 months, we are targeting to grow our own servicing to about $90 billion. This is a bit below our previous target, but that's really due to the increased repayment environment. and quite frankly, the progress we're making in our continuous cost improvement, which actually lowers our optimum scale point. On the right-hand side of the page, maybe a little bit about subservicing. Subservicing provides fee-based income with limited capital commitment. If structured with a cost per loan framework, profitability is generally unaffected by prepayment acceleration, assuming you replenish the portfolio. And profitability is maintained or can improve when delinquencies increase. We continue to get paid when a loan is delinquent in subservicing as compared to onservicing where our revenue stops when a loan goes delinquent. Performing subservicing is less resource intensive and provides a good base to absorb fixed costs. Special subservicing is more resource intensive but offers higher margins and fewer subservicers are proficient in this type of servicing and we have a core competency here. In the next 12 months we are targeting to maintain our subservicing at a level of at least $100 billion. Replenishment and growth here will be driven by existing client ads, new client ads, synthetic subservicing through our MSR asset vehicle, and obviously performing recapture services. Moving out to slide 11, here you can see we closed the quarter with a strong liquidity position. Unrestricted cash was $320 million plus an additional $91 million in borrowing capacity that could have been drawn but went unused, giving us a total liquidity position of $411 million, which is up quite a bit from the second quarter. Servicing advances closed the quarter roughly 27% below our forecast at the beginning of the crisis. We fully realized our balance sheet optimization actions for the third quarter and our planned actions for the rest of the year do remain on track. Team's doing a great job there. In this margin environment, origination cash consumption continues to be low relative to the pre-COVID environment. As well, higher prepayments can help fund P&I advances and, you know, wider originations margins does translate to a lower cash cost for MSR acquisitions and originations. The combination of these dynamics allow us to replenish the portfolio and fund forbearance-related advances while consuming less cash. We are using available cash to reduce debt where we can to minimize interest expense. We do believe it has been prudent to keep higher than usual cash reserves given our growth objectives and uncertainties in the economic environment. But we believe we can run the business with less cash going forward as the environment stabilizes. Based on our assumption that margins will return to normal levels, we do expect originations will be more cash consumptive going forward. On the other hand, available funding alternatives are improving, so we believe we can continue to fund our growth going forward. Our capital allocation framework right now continues to prioritize investing in growth and replenishment to support our long-term profitability objectives, and that's where we're allocating our capital. We do believe our cash and liquidity position will permit us to fund our operating needs and support our targeted MSR investment objectives for the balance of the year and for 2021. As previously discussed, we've been working on an MSR asset vehicle, or MAV, to accelerate our growth and support the creation of synthetic subservicing. We continue to make sound progress here on approvals for MAV, and we're in advanced discussions now with investors to provide funding in MAV for up to $55 billion of MSR UPB that we would subservice and provide recapture services for. So we're really excited about this, and maybe we can turn to page 12, and I can share with you some highlights about our continued progress on MAV. So again, MAV is an MSR investment vehicle that we created from one of the excess licensed legal entities from the PHH integration. The way MAV works is an investor would invest equity capital into MAV for roughly 85% of the amount of MSRs to be purchased. Aquin would invest the remaining 15%. This investment would be leveraged up with roughly an equal amount of debt to purchase MSRs. AQUIN will assist MAV in purchasing MSRs and provide certain other administrative services to MAV. AQUIN will subservice the portfolio and perform portfolio recapture services. We believe we are on track for GSE approvals. And again, we're seeing high investor interest here and we're in advanced discussion with investors. Operationalizing MAV would give us the capacity to fund volume in excess of our estimates, all of which would be categorized as subservicing. And as such, it would alter our anticipated mix of owned servicing and subservicing originations. Now, we are targeting to operationalize MAV in 2021, and we intend to revisit our volume estimates and mix of owned and subservice volumes. We have greater clarity on exactly when MAV can be operationalized. Turning to slide 13, you know, maybe a little bit about, you know, how we see the market unfolding for us here in the future. The current market dynamics present potential near-term and long-term opportunities that we're pretty well positioned for. In the near term, GSEs are projecting interest rate levels will drive industry originations volumes to $3.8 trillion for 2020 and about $2.6 trillion for 2021. Look, 2021 industry value projections are still relatively high to historical levels and demonstrate strength in both the purchase and refinancing markets. Black Knight estimates that there are still 19.3 million high-quality refinance homeowners, as well as $6.5 trillion of untapped home equity. And as well, based on Zillow's analysis of U.S. Census data, they're projecting 44.9 million people over the next decade will turn age 34, which is the median age of first-time homebuyers. So when you look at these factors combined with the A Fed who's targeting to keep interest rates near historic lows suggests that, look, it's going to be a relatively strong home purchase market for the foreseeable future. Longer term, as loans come off forbearance, unfortunately not all MSR owners, and if they do not directly service their subservicers, are well equipped to deal with the loss mitigation volumes that will emerge from the current forbearance levels. We expect opportunities and non-performing assets will emerge, likely centered around Ginnie Mae and PLS or non-QM, where pools are experiencing forbearance rates of 10% and sometimes as high as 20%. This opportunity, we estimate, equals roughly 1.9 million homeowners. Roughly 40% of these borrowers are extending their forbearance plans. And again, we expect about 25% will need loss mitigation assistance. We do believe our industry-leading operational cost performance will drive better outcomes for MSR owners, mortgage investors, and consumers here. And we are positioned, I think, very well to take advantage of this opportunity. A little bit maybe about the reverse mortgage opportunity. We do expect the maturing baby boomer generation will create potential growth opportunities for our very profitable reverse mortgage business. The National Reverse Mortgage Lenders Association reports that seniors have $7.7 trillion of untapped home equity to support their retirement needs. And unfortunately, many of these seniors do not have sufficient savings and cash flow for their retirement. We do have the necessary skills in general that align to all these opportunities. And as I've said before, our primary growth limitation will be our access to available capital. As we've noted in this regard, we are exploring all strategic options to leverage our proven operating capability in this environment to realize the full value potential of our platform. And we are working with our advisors, Barclays and Credit Suisse, to evaluate a broad range of options and alternatives to maximize value of our platform. So let me stop here and turn it over to June, who will cover the financials for the quarter and our roadmap and timeline to achieve our profitability objectives.
spk00: Thank you, Glenn. Please turn to slide 15. This is our fourth consecutive quarter of adjusted pre-tax income. Revenue increased quarter over quarter, driven primarily by volume growth across all originations channels. Operating expense improvement is from leveraging technology and productivity actions as we continue to invest in our originations platform. MSR adjustment increase is driven by higher runoff from prior vintages. We continue to grow our MSR originations to offset higher runoff. Adjusted pre-tax income is $14 million, $5 million higher than prior quarter, as higher revenue and lower expenses offset higher runoff. You can see that we had income tax favorability during the quarter, driven primarily by CARES Act net tax benefit, partly offset by offshore tax expenses. Please turn to slide 16. A balanced business model is operating well. Origination's growth and profitability is replenishing the servicing portfolio and offsetting runoff. On the left side of this slide, you can see that our multi-channel platform is fueling strong originations volume, with growth up 32% quarter-over-quarter. Originated volume for the quarter is up 67% quarter-over-quarter, driving strong replenishment of 104%. Adjusted pre-tax income is $35 million, 8% lower than the prior quarter, as higher volume was offset by expected margin normalization and investment in our platform. On the right side of our slide, servicing segment is demonstrating strong performance through the refinance cycle, delivering improved results quarter of quarter in spite of increased MSR runoff. Productivity savings and leveraging technology is improving efficiency and driving down operating costs. UPB runoff is being replenished through newly originated servicing and subservicing. We have a strong subservicing pipeline with our top 10 prospects at $125 billion with additional opportunities from MAV. Please turn to slide 17. We're driving growth, balance, and diversification in our segments and cost leadership and operational excellence to create long-term value. We told you in our Q2 business update that we expect to generate positive adjusted pre-tax income for 2020, positive gap earnings in 2021, with low to mid-teen after-tax ROE by mid-2021. This page is a roadmap to achieving these results. The key drivers to our business are market dynamics, originations growth, balance and diversification, and cost leadership and operational excellence. We show on the page how we see these key drivers impact performance in our originations, servicing and corporate segments from now to the end of December 2021. I won't go through the details on the call here today, but please let me know if you'd like to review it another time, and I would be happy to walk you through it. With that, I'll turn it back over to Glenn.
spk06: Great, June. Thanks. Let's turn to slide 18 to wrap up and move into Q&A. So again, we've built a great team who are working together with passion and energy to deliver results for our consumers and investors. And I really couldn't be prouder of what they've accomplished. Today we're a stronger, more efficient, diversified business, and we're delivering on what we committed to do. Profitability is improving. Origination's volume is growing. We've got a competitive cost structure. We've built a diverse servicing portfolio that we believe can perform through the cycles. We're resolving our legacy regulatory matters. And we believe our capabilities line up very well with market trends and opportunities. We are laser focused on executing a straightforward strategy of balance, diversification, cost leadership, and operational excellence. And we believe continued execution of this strategy will enable long-term growth, profitability, and value creation for our shareholders. And with that, I'll turn it over to the operator to address any questions. Kevin?
spk02: Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Bose George from KBW. Your line is now live.
spk04: Glenn, thank you. Good morning. A couple of things. First, actually, on the origination, the $11.4 billion that you guys gave on slide six of originations and you break it out into servicing and subservicing ads, I just wanted to make sure I understood that. Is that because normally that is like whatever, you know, correspondence flow is Can you just sort of break that out into how that works?
spk06: Yeah, Bo, so good morning. The servicing additions is really coming from correspondence flow and portfolio retention, and the details of that by channel will come out with our queue, so that will be following shortly. And, you know, in our subservicing additions, those are really from new portfolio ads with existing subservicing clients who continue to flow business to us on a monthly basis under interim subservicing arrangements.
spk04: So when I think of that $11.4 billion, you know, are those, should I think of those as sort of originations where you book a gain on sale, or are some of them fall into that category, but some of them are also flow business? loans that go into the servicing portfolio that go through income on the income statement?
spk06: Yeah, those for the four point, you know, for third quarter, the 4.7 in subservicing additions, there's no gain on sale for that, right? That just flows into the portfolio. For the 6.7 million in servicing additions, you know, there's a gain on sale or positive MSR fair value adjustment associated with those loans.
spk04: Okay, great. Thanks. And then you noted that the normalization of margins on the correspondence side. Can you just talk about the recapture, how margins did there versus last quarter?
spk06: Yeah, sure. So recapture margins are actually holding in there fairly well. I don't think we're the only ones who are facing hiring challenges in the industry. Retail generally I think is probably the most capacity constrained. So while there's been some level of contraction in margins there, not nearly to the degree of what we see in correspondent and flow, which are coming, you know, correspondent and flow margins are coming very close to, I would say, historical levels. But, you know, in recapture, again, margins are still historically very strong.
spk04: Okay, great. Thanks. And then in terms of your growth expectations, the, you know, the 250 correspondents by, you know, year-end, 400 by next year, Can you just characterize the competitive landscape on that side? It seems like there are obviously a lot of companies now coming public, et cetera. Is there focus more on retail and wholesale versus corresponding? Can you just give us a lay of the land there?
spk06: Sure. You know, the competitive landscape in correspondent and flow on the S&P program and the agency cash window, look, I'd say the competitive environment is, you know, probably less competitive than it was immediately prior to the COVID crisis. You know, there are probably fewer players in that segment right now. Not to say it's, you know, it's not competitive. Correspondent flow has always been competitive, but, you know, a lot of, you know, there have been a number of historic MSR originators in Correspondent and Flow who are not there now. You know, on the retail side, as you've seen from, you know, Rocket, United Wholesale, a number of others, right, there continues to be a lot of people in the retail segment, you know, with big platforms growing aggressively. But, you know, our portfolio retention platform continues to perform well. So, yeah, encouraged by the competitive environment.
spk04: Okay, great. That's all I had. Thanks a lot.
spk06: Thanks, Moses.
spk02: Once again, as a reminder, that's star one to be placed into question Q. Our next question today is coming from Lee Cooperman from Omega Family Office. Your line is now live.
spk01: Yeah, hi. Thanks. I appreciate it. I guess on July 17th, you publicly stated that Aqua was exploring strategic alternatives. You mentioned you've engaged an investment banker. Have we received any credible approaches at this point in time? Anything you could talk about that? I have several questions.
spk06: Sure, Lee. Good morning. Good morning. I'm not going to speculate on all of the options and alternatives that we've been looking at, but we are working with our bankers on a number of different things, a broad range of options, as we've talked about before, and we continue to make progress there, so nothing to update us at this time.
spk01: Well, I wasn't actually speculating. I just asked, do you have any credible approaches? That's not speculating. They're saying yes or no.
spk06: We're looking at a number of different approaches that we think can be of great value for shareholders.
spk01: Also, given the way you want to run the business, this is a second question, what is a credible return on the shareholder's investment that you expect to achieve, and what is your timetable to get there? Our book value is $49, and we're reporting nominal earnings. What do you think a reasonable return on our shareholder's investment is? and how long you think it will take you to get there.
spk06: Yeah, Lee, so consistent with what, you know, June talked about earlier, we are, you know, expecting positive gap earnings and positive adjusted earnings in 2021 with low double digits to mid-teen after-tax ROEs by mid-2021. Oh, okay.
spk01: I missed that. Okay, thank you. Okay, well, we'll talk later. Thank you very much. Congratulations on your improvement. My only observation would be we should be more aggressive in cutting costs, but I'll leave that up to you.
spk06: Great, Lee. Thank you very much. Look forward to speaking later.
spk02: Thank you. Once again, that's star one to be placed into question Q. Our next question is coming from Marco Rodriguez from Stonegate Capital Markets. Your line is now live.
spk03: Good morning. Thank you for taking my questions. I was wondering if maybe you could talk a little bit more just from a higher level perspective. You know, you had a very nice presentation on a slide, excuse me, slide presentation of particular opportunities near-term and long-term for Aquin. If perhaps you can drill down a little bit more just for the next 12 months, if you could just talk about the biggest opportunities you see for Aquin, and then also on the flip side, just what are the biggest risks you're focused on?
spk06: Yeah, Marco, how are you? Good morning. Yeah, look, I think there's, as we talked about, the opportunities here for us in the near term really focus around, let's say, maturing our originations platform, so expanding that seller base in both correspondent and flow sellers, as well as executing on conversion of our enterprise sales pipeline. So we've got a very robust pipeline there that we've built. $125 million of combined subservicing and flow opportunity and portfolio recapture services. So again, near-term opportunity, we do believe, is in that performing originations and subservicing space. And historically, we've not really originated a lot of GDMA product. And as we expand into the GDMA flow program in the first quarter of 2021, Again, I think we can fuel continued growth of our business despite an overall shrinking market. Longer term, I do think there's two dynamics that we're positioned very well for. One is in the special servicing arena. Look, it is a very tough time for pockets of consumer segments out there. It's particularly when you look at Ginnie Mae loans and PLS loans or non-QM. you know, millions of borrowers who are on forbearance plans who are going to need help. We're seeing these borrowers extend their forbearance plans, and unfortunately, you know, the hotel sector, transportation, travel, you know, those sectors, restaurant industry, being adversely impacted, and you've just got to feel for these consumers, and they're going to need help. And look, I think given our proven capabilities in creating non-foreclosure outcomes for consumers, We can help. We can help consumers. We can help investors. And we can do that either through sub-servicing portfolios of people where they have concentrations like this, or like we did following the financial crisis, to the extent that people don't want to own these assets, we can buy them and service them profitably, assuming obviously we buy them at the right price. And then last, third I'd say on a long-term side, The whole demographics around the aging population in the United States, we've got a great little reverse mortgage business. We're one of the top originators and servicers in the reverse mortgage space. Liberty Reverse Mortgage is our brand we go to market with there. Again, that's an area where there's lots of untapped equity in seniors' homes. And unfortunately for a lot of seniors, their cash flow – um doesn't really match their their expenditures in retirement so you know a reverse mortgage is a good product to help there so that's you know that's how i see the environment going forward again i think it's balanced both near term and long term very helpful and last question just uh circling back on the enterprise sales force um just kind of wondering if maybe you can help us understand and frame that opportunity there in the last few calls you've
spk03: You've mentioned the fact that you're just sort of scratching the surface, to use the phrase that you've had there. So can you help us maybe understand and frame out maybe a timeline-wise when it's no longer just scratching the surface and then sort of what it's going to take to kind of get there, if you will?
spk06: Yeah, so I think, you know, We will have a matured origination platform probably by the end of 2021. Again, I think we have a lot more room to grow our seller base. We've laid out those objectives there. So in terms of the details, and in portfolio retention as well, too, our goal is to get to the 30% recapture rate. So I think the objectives there are seller base growth, and that's how we're going to measure ourselves going forward in addition to volume, how we're growing our seller base. Second is capacity expansion in our retention services platform. So as we continue to expand operating capacity and continue to increase closed loans and drive higher recapture rate, those would be the key metrics there. And then conversion of our subservicing pipeline or enterprise sales pipeline. I think those are the metrics that we'll look at and continue to talk about through the balance of 2021. Got it.
spk03: Very helpful. Thank you, guys. I really appreciate your time.
spk06: Thank you, Mark. I appreciate it.
spk02: Thank you. As a reminder, that's star one to be placed in the question queue. Our next question today is coming from Jonathan Winnick from Clark Street Capital. Your line is now live.
spk07: Len and June, good progress this quarter. I did see that last week we had another record low rate of the 30-year fixed rate. I believe it was 2.81%. How long do you see this mortgage origination boom lasting, and how does Aquin seize more of this opportunity without adding a lot of costs that won't be needed when the mortgage rate is slow?
spk06: Hey, good morning, John. Thanks for your question. You know, I covered on slide 13, there's the data from Black Knight that said there's 19.3 million high-quality refinance-eligible borrowers with about $6.5 trillion of untapped home equity. That is a massive opportunity that obviously the entire industry is going after. You know, industry, so far, originations volumes this quarter are not backing off. We're not seeing a reduction in volume. You know, the MBA and Fannie Mae are expecting to see originations tail off in 2020 and 2021. So, you know, right now, John, I don't have any better information than the MBA and Fannie Mae forecast. But I have to say when I look at the Fannie Mae forecast and the Black Knight data, the Black Knight data would suggest, you know, the robust originations market probably has more runway. than what I see in the Fannie Mae forecast. And in terms of the second part of your question, how do we go after that without adding a lot of cost, I do think our strategy of growing our correspondent platform and our flow seller base through our enterprise sales approach is a very efficient way to grow our originations and portfolio replenishment. Our cost structure there, one of the things we may want to think about is the differential in cost structure between correspondent and retail, for example. If you just go to general industry statistics, there are drastically different cost structures between a correspondent and flow platform and a retail platform. Your retail cost per loan is $7,000 to $8,000 per loan, where in correspondent and flow, your industry average cost structure is probably less than $1,000 a loan. Growing that side of our business makes sense from an efficiency standpoint. It's the way to replenish the portfolio the fastest with the least amount of investment in infrastructure. But obviously it's a balancing game because retail margins are very, very strong, a lot higher than you see in correspondent and flow. And the more you can build that direct relationship with the consumer, the better off you are for long-term portfolio retention. So it is a balancing act, but again, a lot of our portfolio replenishment is coming from correspondent where it's very efficient.
spk07: Can you comment on the... I know you've talked about the MSR historic opportunity in the past. Obviously, you're launching this vehicle early next year. Can you comment on what you're seeing in the market for MSRs? Are you seeing more opportunities, or is there still a gap between buyers and sellers?
spk06: I think it varies, John, by product type. So, you know, in the agency market, Fannie Freddie, for example... Yeah, I think there's a value alignment between buyers and sellers, generally speaking. It is a robust market. We're seeing, again, a lot of volume being delivered through the flow channels, the FITM S&P program, the Freddie Mac Co-issue Exchange program. There's lots of bulk packages that are going around in the marketplace. The place where we've not seen a lot of bulk transactions get done is in the Ginnie Mae space. I do think there's still some A bid-ask spread difference there, but a lot of the Ginnie Mae volume today is being done in their co-issue program, which is something we want to participate in in the first quarter of next year. So MSR volume continues to be robust, particularly on the GSE side and the agency side. In the Ginnie Mae space, I think a lot of independent mortgage banks are holding that product, and I would expect to see more volume coming to market in the next six months.
spk07: Thanks, Glenn. Thanks, June.
spk06: Thanks, Rob. Thank you.
spk02: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Glenn for any further closing comments.
spk06: Everyone who joined the call today, thank you for your continued interest in Aquin. We appreciate your support. We are, again, we're working with Passion Energy to deliver results for our consumers and investors. We're delivering on what we committed to do. performance trends in the business are looking great, and we're very excited about the opportunities for the future. So thank you for your interest in the company, and look forward to talking to you next quarter. Thank you.
spk02: Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation.
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