Ocwen Financial Corporation NEW

Welcome to the Aquin Financial Corporation Second Quarter Earnings and Business Update Conference Call. Our host for today's call is Deco Axralian, Senior Vice President, Corporate Communications. At this time, all participants will be in a listen-only mode. I would now like to turn the call over to your host. Deco, you may begin.

Good morning, and thank you for joining us for the Second Quarter 2021 Earnings and Business Update Call. Please note that our second quarter earnings release and slide presentation are available on our website. Speaking on the call will be Auckland's Chief Executive Officer, Glenn Messina, and Chief Financial Officer, June Campbell. As a reminder, the presentation and our comments today may contain forward-looking 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, 2020, and our current and quarterly reports since such date. 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 or comments contain references to non-GAAP financial measures, such as adjusted pre-tax income 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. Now, I will turn the call over to Glenn Messina.

Thanks, Dico. Good morning, everyone, and thanks for joining us. If you can please turn to slide five, we'll cover some highlights for the second quarter. I'm really proud of what our team accomplished in the second quarter and appreciate all their hard work. Adjusted pre-tax income was consistent with our expectations and with the past two quarters despite continued margin compression in the quarter. And more importantly, adjusted pre-tax income for the month of June reflects substantially improved earnings performance. With annualized adjusted pre-tax order, we have 34%. And June Campbell, our CFO, will cover that in more detail a little bit later. We accomplished a lot in the quarter. Record servicing additions in seller growth, improved scale in servicing and originations, cost reduction, strong operating performance. execution, growth in higher margin channels, services and products, all of this is giving us really strong momentum. We believe the month of June was a pivot point for us and our accomplishments and our planned call rights transactions are a catalyst for a step change in second half adjusted pre-tax income. The previously announced RMS platform acquisition will help us expand our presence in reverse mortgages and And we believe uniquely positions us as the only full service provider in this space, creating another new growth opportunity for us. And finally, we continue to navigate a volatile and unpredictable environment. And let's turn to slide six for a bit more about the environment. Industry volume levels continue to be robust versus historical levels, so both forward and reverse. The average of the Fannie Mae, Freddie Mac, and MBA forecasts for industry volume remains constant or consistent with levels projected at the start of the year. Reverse mortgage endorsement volume increased 21% for the first half of 2021 versus the same period in the prior year, and we are certainly a beneficiary of this growth. We're dealing with incredible interest rate volatility. This time last year, the 10-year treasury rate peaked at roughly 56 basis points. It peaked at about 174 basis points, and Q1 announced it's at roughly 118 basis points. So as expected, interest rates are influencing volume, margins, and MSR values. Origination margin compression progressed as expected in the second quarter. Margins seem to have stabilized during June in the channels that we're participating in. And we're seeing strong bulk volume and the pace of subservicing RFPs are accelerating. MSR values are up versus last year, but down quarter over quarter. June originations generated MSRs with projected lifetime all-in cash yields ranging between 9% to 13% before secured leverage or over a 20% return after secured financing. There were several changes in the GSE programs. We expect the changes involving limits to their whole loan acquisition channel and explicit additions to third-party originations, loan level price adjustments will shift volume to aggregators and direct co-issue structures, and we participate in these channels. Lastly, regulatory focus is intensifying. I think that's as expected. And the focus seems to be around convenience fees, capital requirements, forbearance compliance, and foreclosure moratoria, which has been extended through year-end with certain exceptions. Let's turn to slide seven for some highlights on our 2021 objectives. We continue to make good progress on our key objectives for 2021. Again, I'm proud of how our team is executing. We're generally on track or in some cases ahead of our targeted objectives. We've closed more than half our servicing additions target for the year. Recapture rate continues to improve, customer satisfaction is improving, and we're successfully executing our revenue diversification plans. Assuming interest rates are consistent with July month end levels, industry volume is consistent with the industry forecast, and we successfully execute our plans, And there's no material change in the legal and regulatory environment. We believe we are on track to deliver a low double-digit to mid-teen after-tax ROEs mid-2021 and positive gap income for the full year. Please turn to slide eight, and we'll cover some of the highlights on our key Originations objectives. Originations is delivering really solid progress again in the second quarter. We closed $69 billion in total servicing additions. And every channel is delivering really strong double-digit growth year over year. $51 billion of bulk purchases were closed in June or funded in June. The servicing transfers on August 1st for our TCB transaction and September 1st for the AmeriHome transaction. Unfortunately, until these portfolios board, we are incurring the internal staffing costs as well as interim subservicing fees. But obviously, that will stop. The interim subservicing fees will stop once we transfer it onto our platform. We will start marketing for reCAPTCHA when these portfolios board. Excluding bulk, we had $17 billion of flow channel volume and subservicing additions. That's up 21% over last quarter and almost double year over year. As I mentioned earlier, subservicing activity is robust. We were awarded roughly $14 billion in new subservicing opportunities, including RMS. And our top 10 enterprise sales prospects represent $76 billion in additional potential business. Consistent with our plans going forward, bulk and flow will be redirected to MAF in Q3 per agreement again, which will help us grow our subservicing and portfolio recapture services. Seller growth was really strong during the quarter. Our seller base was up 69% quarter-over-quarter, up 156% year-over-year due to organic seller additions and the TCB seller integration, which finished in June. Best efforts and GDMA Pit were launched in the second quarter, as we had expected, and we're on track to launch our non-delegated services in Q4. We continue to make good progress on our recapture objective. Recapture rate is up four points quarter over quarter and 10 points year over year. And probably more importantly, in the second quarter, we exceeded our 30% recapture objective on our government servicing, reverse servicing, and PLS portfolios. And we continue to make really strong progress in GSE recapture. Again, here our Rich Nations team is making terrific progress against their objectives, and I'm really proud of what they're delivering for us. Let's turn to slide nine and we can cover some of what we're doing in margin expansion. In consumer direct where pre-tax profitability is a big multiple, 21 times that of correspondent, volume has more than doubled year over year. As we grow our servicing portfolio, the marketing eligible population for recapture opportunity continues to grow as well. This population grew 49% year over year, and we expect it to increase another roughly 85% after all our bulk additions boards. This gives us a very robust population of potential consumers to solicit for recapture services to fuel growth in our consumer direct channel. Reverse volume is up 47% year over year. Pre-tax income in reverse originations is on average about six times that of forward. And in addition to growing overall reverse volume, we are focused on driving retail originations, which are the highest margin in reverse. Retail reverse volume is up 150% year over year in the first half as compared to the same time last year. We're also focused, as we mentioned earlier, on growing Ginnie Mae and our best efforts, which again have higher margins than correspondent lending mandatory and GSE MSR flow delivery channels. Again, good progress here by the Rich Nations team. Excited about what they're doing and excited about the potential for our margin expansion objectives. Let's turn to slide 10 to cover some highlights on our servicing business. Continuing to improve servicing cost and customer experience are key objectives for us, and the team is performing well. To achieve these objectives, we are focused on moving the needle in four key areas, that being technology, process simplification, scale, and portfolio composition. The results have been very good so far. Overall servicing operating costs are down 8% quarter over quarter, and we've already achieved our full year target for servicing costs as a percent of UPB for 2021. Technology is a big driver for us, and our technology agenda has a three-part focus, reducing cost, improving execution, and improving the customer experience. We believe our actions to improve client, borrower, and investor experience are critical elements to support our growth and recapture rate objectives over the long run. And with technology as the enabler, we can reduce cost and improve execution at the same time. In terms of scale, we've increased our total servicing UPB 15% in the quarter, and I'm sorry, UPB to better distribute our fixed costs. And in terms of portfolio composition, increasing the percentage of agency loans is helping to increase average loan balance and decrease delinquencies. And both those trends will improve our ratio of operating expenses as a percent of servicing fees. So let's turn to slide 11 to review our servicing operating execution. Servicing operating performance continues to exceed industry benchmarks in several areas. Average speed of answer and call abandonment rate continue to outperform the industry, average as reported by the MBA. We are laser focused on supporting borrowers who are exiting forbearance and helping them understand their options. We do believe the best path for homeowners, communities, and investors is to find what works with an investor guidelines to keep a homeowner in their home. We continue to outperform the industry as reported by the MBA relating to the percentage of borrowers with an agency loan who exit forbearance with a reinstatement or loss mitigation solution in place. Between September 2020 and June 2021, roughly 93% of our borrowers who exited forbearance had a reinstatement or loss mitigation plan in place versus 83% for the industry. That means if you look at the inverse, only about 8% of our borrowers on forbearance have exited forbearance without a reinstatement plan or loss mitigation solution versus over 17% for the industry. Based on this very same MBA data, we're delivering about 20% more loss mitigation solutions for our customers versus our peers. And again, I think this demonstrates how our servicing capabilities deliver superior performance for homeowners, communities, and investors. Lastly, net promoter score is up 13 points from the second quarter of 2020, down a little bit versus first quarter due to an increase in the volume of new loan boardings and seasonality. Let's turn to slide 12 and cover some highlights on our servicing revenue diversification initiatives. The focus here has been largely on harvesting modification gains on Ginnie Mae early pool buyout opportunities and call rights on PLS loan pools that we service. We did sell our first call rights transaction in July. We expect settlement in September with servicing transfer in November. The combination of low interest rates, tight credit spreads, and home price appreciation are creating a really strong environment for call rights. We're now conducting diligence for our fourth quarter transactions, and we're looking at several potential opportunities to execute in 2022. Considering our third quarter transaction, we believe we can realize over $20 million in call rate gains this year versus the original estimate of $4 to $8 million, so that's up nicely from our prior estimate. Regarding GDMA buyouts, since we do not enjoy bank or bank-like funding costs, we do not buy all delinquent GDMA loans out of pools. We buy them out based on the expectation of a successful loan modification. Our GDMA buyout program has been limited this year due to the continued extension of forbearance relief and foreclosure moratoria. Year-to-date second quarter, we have realized $8 million in EBO gains. And we now estimate roughly $15 to $20 million total for the year versus the $22 to $32 million previously estimated. That said, when you look in total between call rights and the EBO gains, we're at least on track, maybe a little bit better than what we had originally anticipated. You know, we see the realization of the EBO modification and repooling gains while lower this year. It's really just a delay and a timing issue. And our expectation is we believe the opportunity will roll over into 2022 as well. You know, as well related to revenue diversification for servicing, let's turn to slide 13 and we could talk about the RMS acquisition. As part of our efforts to diversify servicing revenue sources during the second quarter, we execute an agreement with Reverse Mortgage Solutions and their parent company, Mortgage Asset Management, or MAM, to acquire the reverse servicing platform in real estate-owned businesses. Upon closing, we'll become the subservicer for RMS and MAM under a five-year subservicing agreement, which would roughly double our reverse servicing portfolio. The RMS platform provides high-quality reverse servicing capabilities with experienced people and customized technology. And the five-year servicing agreement enables an expanded partnership with Waterfall Investments, the parent company of MAM, and potential opportunities for additional growth. The transaction supports our strategy to stand up an in-house reverse servicing capability and to expand our subservicing product offering to include forward servicing, small balance commercial, and reverse mortgages. We do expect the acquisition to be mildly diluted for 2021, largely due to integration and restructuring costs. But we do believe it will be core pre-tax income accretive beginning in 2022 with starting in the second half 2022 pre-tax income margins of about 14% and over 20% after tax ROE. And this is before the insourcing of servicing on a reverse portfolio and any incremental growth opportunities. With the closing of this transaction, we will be the only reverse mortgage company that originates, securitizes, and directly services our reverse mortgages, providing our customers and partners with an end-to-end solution. We believe this enables significant growth potential and further solidifies our position as a premier provider in the reverse mortgage space with a differentiated model. The transaction is expected to close in the fourth quarter this year, obviously subject to regulatory approval and other customary closing conditions. To wrap up here, look, we're excited to partner with Mortgage Asset Management and Waterfall Investments in the reverse mortgage market, which we believe is a long-term growth opportunity for us. And with that, I'll turn it over to June Campbell, our CFO, to discuss in more detail our financial results for the quarter.