Ocwen Financial Corporation NEW

greetings and welcome to Auckland Financial Corporation's full year and fourth quarter earnings and business update conference call at this time all participants are in a listen-only mode a question-and-answer session will follow the formal presentation if anyone should require operator assistance during the conference please press star 0 on your telephone keypad as a reminder This conference is being recorded. I would now like to turn the conference over to your host, Mr. Deco Axaralian, SVP, Corporate Communications.

Good morning, and thank you for joining us for Aachen's full year and fourth quarter 2021 earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Aachen's Chief Executive Officer, Glenn Messina, and Chief Financial Officer, June Campbell. As a reminder, the presentation or comments today may contain forward-looking statements made pursuant to the safe harbor provisions of 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 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 when filed, our Form 10-K for the year ended December 31, 2021, 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. The reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures may be found in the press release and the appendix to the investor presentation. Now, I will turn the call over to Glenn Messina.

Thanks, Dico. Good morning, everyone, and thanks for joining us. We're excited to share our progress with you this morning, so let's start with slide four, and we'll review a few highlights for the full year and the fourth quarter. We delivered full year gap net income of $18 million and adjusted pre-tax income of $59 million. 2021 was our first full year of positive gap net income since 2013. Fourth quarter adjusted pre-tax income of $10 million is consistent with our third quarter performance, excluding the call rights transaction. And our fourth quarter net loss of $2 million includes $14 million in pre-tax notable items. Excluding these notables, we delivered an annualized adjusted ROE of 12% in the fourth quarter, and that's consistent with our targeted return objectives. In the fourth quarter, I'm really proud of the team. We delivered record total servicing additions, double-digit growth in our highest margin channels, solid operational execution. We achieved our recapture rate objectives in consumer direct, and cost reduction in servicing was ahead of target. Our servicing team was recognized for their superior operating performance and operating execution. By both GSEs, we received the Freddie Mac Sharp Gold Award as their best performing servicer in their top tier servicing group. And we also received the Fannie Mae Star Award for excellence in all three categories of performance, and those include general servicing, solution delivery, and timeline management. So congratulations and many thanks to all of our servicing associates. In October, we closed our acquisition of the RMS reverse mortgage servicing platform. Consistent with prior disclosures, we expected the RMS acquisition to initially be dilutive. Fourth quarter adjusted pre-tax income includes a $4 million pre-tax loss in reverse servicing. And this is largely related to staffing actions to support adding 60,000 loans by the end of the third quarter of 2022. This will roughly double our reverse subservicing portfolio. Assuming the current loan boarding schedule and subject to investor approval, we project run rate adjusted pre-tax income for reverse servicing will improve by roughly $7 million by the third quarter of 2022 versus the fourth quarter of 2021. Looking ahead, Interest rates have risen higher and faster than what industry forecasts suggested just a few short months ago. As a result, we expect a smaller, more competitive, and generally more challenging originations market. That said, rising MSR values and lower prepayments are also expected with rising interest rates. Our balanced business model is working. We are seeing lower volume in January, but that is offset by MSR fair value gains and lower MSR amortization. In response to market conditions, we continue to focus on expanding our client base and higher margin products and services. We're intensifying our focus in reverse and consumer direct and driving continuous cost improvement. We are taking the opportunity to selectively harvest MSR gains at robust valuation levels to mitigate asymmetric risk in our MSR portfolio. And we believe our balanced business model, exemplary servicing performance, proven cost management, and track record of execution are key advantages in navigating the market environment ahead. Let's turn to slide five for some highlights on originations. Our originations team again delivered solid results against our operating objectives for the full year of 2021. Total servicing additions of $152 billion is up 166% from 2020 levels. In the fourth quarter, we closed $43 billion in total servicing additions, and that's up 63% over the third quarter. Total servicing additions includes $33 billion in subservicing additions and $11 billion in MSR additions, which were down 5% from the third quarter level. Our enterprise sales approach and TCB acquisition have allowed us to grow our seller base to over three times versus year-end 2020 levels, and we're continuing to grow. And our fourth quarter recapture rate of 31% slightly exceeded our target for the fourth quarter. We continue to grow in higher margin channels consistent with our strategy. Fourth quarter consumer direct volume was up over 20% from the third quarter, and we've roughly doubled consumer direct volume year over year. Best efforts in non-delegated deliveries more than doubled in the fourth quarter versus the third quarter, and reverse originations were up over 16% in Q4 versus Q3, and up 60% year over year. In Q4, according to reverse market insights, we increased our market share in reverse by three points to 9.4%. And now with the RMS acquisition, we are the only end-to-end service provider in a reverse industry. Overall, our Rich Nations team made terrific progress against their objectives for 2021. Let's turn to slide six for a progress update on servicing. Servicing as well made great progress in 2021, driving lower cost, maintaining strong operation execution, and improving the customer experience. We've made substantial investments in transformational technology to reduce cost, improve execution, and improve the bar experience. We've automated over 140 processes in 2021 to drive automation. and improve customer connectivity and more self-service options for customers. We expect these investments will continue in 2022 as we believe our actions to improve client, borrower, and investor experience are critical elements to support our growth objectives over the long run. Overall, servicing operating costs are down over four basis points year over year, and we've exceeded our year-end cost reduction objective. In terms of scale, we've increased our total servicing UPB by over 41% year over year, and our percentage of private servicing has grown to 68% of total servicing UPB. In terms of portfolio composition, increasing the percentage of agency loans is helping to increase average loan balance and decrease delinquencies, and both these trends will help improve our ratio of operating expenses as a percent of UPB. We believe we have tremendous operating leverage in our servicing platform and we're excited about the growth opportunity for servicing, particularly in subservicing, which I'll cover in a few moments. Let's turn to slide seven to review our servicing operating execution. In 2021, our servicing platform received the Freddie Mac Sharp Gold Award as their best performing servicer in their top tier servicing group. And we're also one of two servicers to receive the Fannie Mae Star Award for excellence in all three categories of performance management, general servicing, solution delivery, and timeline management. These awards are a testament to the dedication and commitment of our team, the high levels of customer service they deliver, and the overall strength and quality of our servicing capabilities. Our servicing operations continue to perform well in several areas as compared to MBA reported metrics for the industry. Average speed of answer was better than the MBA average, and our abandonment rate as well was less than half the MBA average. We continue to be laser focused on supporting borrowers who are exiting forbearance and helping them understand their options. We do believe the best path for homeowners and investors is to find what works within investor guidelines to keep a consumer in their home. As you can see, we outperform the industry as reported by the MBA relating to the percentage of borrowers with an agency loan who exit forbearance with the reinstatement or loss mitigation solution in place. Additionally, the percentage of GSE borrowers on forbearance plans paying current is six points higher in our portfolio than the MBA average. You know, with our servicing performance and recognition by the GSEs, there should be no doubt that our platform is delivering best practice levels of performance for investors and homeowners. Many, many thanks to our servicing team who continue to deliver great performance for homeowners, communities, and investors. Let's turn to slide eight to discuss our progress in driving an improved customer experience. Consistent with our strategy to provide a service experience that delivers on our commitments, we've put significant efforts towards improving our Net Promoter Score, or NPS. Our servicing NPS is up 12 points, even with numerous bulk MSR purchases and subservicing boardings in 2021, as well as a very focused effort to help borrowers emerge from forbearance. Consumer direct NPS scores are up 56 points, And that was while we doubled volume in 2021 in that channel. Even in reverse, in their wholesale channel where we have an incredibly high score of 91, we've improved by three points as well. NPS is a key part of the performance management as well as reward and recognition systems at Aquin. NPS is measured for every function and department regardless if they serve internal or external customers. We do provide continuous training, monitoring, coaching, and empowerment to our teams to enable them to drive our CARE, that's C-A-R-E, service philosophy and standards. The acronym CARE stands for caring, accurate, responsive, and empowered. Technology and process simplification, increased self-service options have also been a key part of our customer experience improvement journey. We've made numerous enhancements to our web portal and mobile app, including video-based instructional resources to further enable consumer self-service. For 2022, we have a roadmap of 27 projects, which cover over 500 individual changes in our operations to further improve customer experience, cost structure, and operating execution. Now let's turn to slide nine to discuss our approach to subservicing. We believe we've built a best-in-class servicing platform for both performing and special servicing with the capacity for growth that can offer a compelling value proposition for new and prospective clients. With the closing of the RMS reverse servicing platform acquisition, we are now positioned to compete in both reverse and forward subservicing. The investments we've made in our platform are being recognized with over $56 billion in subservicing additions in 2021. and our subservicing pipeline has never been more robust. We're focused on delivering best practice levels of performance for clients across the six Cs of what we call key servicing deliverables. These include competency, putting the client first, customer centricity, technology enabled capabilities, a well staffed bank grade risk and compliance model, and a strong value-based culture that underpins everything we do. We continue to evolve and refine borrower and client-facing technology to address the needs of clients and consumers, to streamline our business, and improve the ability for customer and client self-service. We can offer swift onboarding, responsive service to our clients and consumers, and as we covered on pages six and seven, we do believe we deliver industry-leading operating performance that's been recognized by our investors. We are entering 2022 with customer commitments in forward and reverse subservicing for over $35 billion in UPB additions, and that is subject to investor approval. We have $76 billion in potential opportunity with our top 10 prospects and a total prospect pipeline of over $240 billion in the forward business. And since the first of the year, we've also built a prospect pipeline of over $57 billion in reverse subservicing opportunities. Again, really proud of what our team has been able to build here and accomplish, and in particular, our enterprise sales team for building such a robust pipeline. And while subservicing has a long sales cycle, we are nonetheless very excited about the opportunity we have here to grow subservicing. Now, let's turn to slide 10 to discuss our thoughts on the operating environment for 2022. The average of the January and February origination forecast from the GSEs and the MBAs project total origination volume of decline over 30% for 2022. Interest rates are up sharply to start the year with both the 10-year treasury rate and the 30-year mortgage rate up higher and faster than the industry consensus forecast last quarter and probably more closely matching the expectations at year-end per that prior quarter forecast. Yeah, we do believe the rapid run-up in rates and long-term outlook for even higher rates will drive a highly competitive environment and originations. We believe margin pressures in forward will persist until excess capacity can be eliminated. However, higher interest rates are good for servicing values. So far this year, MSR values are up significantly, prepayments have slowed, and we believe, you know, if interest rates hold and go even higher, prepayments can slow even further. We are seeing a wide view of MSR values in the market, and various trade journals have commented on increasing bulk MSR sales and the potential for increased M&A activity. Lastly, we are seeing the agency's buy box shift with higher loan limits, you know, support for first-time and low- to moderate-income homebuyers, restrictions on vacation and rental properties, and a dissipated pricing for third-party originations. However, we believe our strategy of balance, diversification, strong operating execution, and a focus on low cost is the right strategy for this market environment. Our management team has a track record of successfully navigating multiple mortgage cycles with a focus on prudent growth, cost management, operational excellence, and customer experience. We intend to be disciplined in originations and we'll continue to focus on expanding our client base and addressable markets where we can grow higher margin products and services. Obviously we'll continue to drive cost optimization, which is part of our DNA to enhance our competitiveness. And with respect to servicing, the rapid rise in values creates a bit of asymmetric risk and low coupon MSRs with more downside than upside. And with the right range of perspectives on MSR values, we expect to selectively harvest MSR gains, where market view of value exceeds ours, and MAVs, while continuing to invest in new MSRs. As we saw on the previous page, we've got a very robust subservicing pipeline, so we intend to aggressively pursue our subservicing opportunities, including reverse subservicing. And lastly, we expect to prudently approach bulk purchases with MAV, and as well evaluate M&A opportunities to enhance scaling capabilities. As it relates to math, we had a very successful 2021, and we are working with Oak Tree to potentially upsize the capital commitment to math. Now, let's turn to slide 11 to discuss our operating objectives for 2022. In 2022, we're targeting roughly $100 billion in total servicing additions. This is down roughly one-third from 2021 levels. We are taking several actions to offset in part the decline in industry volume and margins. Overall, we're starting to grow our mix of consumer direct, reverse, best efforts, and non-delegated. This is what we call our higher margin products, services, and channels from roughly 11% of total volume in 2021 to 23% of total volume in 2022. In correspondent lending, where our client base is still roughly half of other competitors with more mature platforms, we are targeting to add another 150 to 200 new sellers with a continued focus on growing best efforts, non-delegate deliveries, as well as Ginnie Mae and non-agency products, where we have grown in 2021 but still have a very small presence today. In consumer direct, we're starting to maintain recapture rates at over 30% with the long-term objective of industry best practice levels by investor type. In consumer direct, we have been transitioning to cash out mortgage products, which in the fourth quarter accounted for over 65% of our consumer direct funded volume. And we expect that percentage will continue to increase in 2022. We're focused on improving overall conversion in consumer direct, conversion of leads to funded volume through technology, data analytics, improved processes and training. And in reverse, we're targeting over 30% growth overall, including 30% growth in retail volume, which was up 38% in 2021 from 2020 levels. Continuous cost improvement is part of our DNA. As I said before, we're targeting another one basis point decrease in servicing and overhead OPEX from fourth quarter 2021 levels. We're also targeting to drive roughly 20% operating productivity in our originations channels to help offset margin pressure. Industry leading operating execution and delivering on our commitments to clients and borrowers is a critical component of our value proposition that will continue to be an emphasis for our business in 2022 and beyond. In servicing, our balanced business model is working. Our MSR evaluation was up $18 million net of hedges in January. We also saw CPR declines, and we do believe CPR will decline from 21% in 2021 to 13% in 2022, which can also help improve servicing profitability. Considering our opportunity pipeline and subservicing and our relationship with MAV, we are targeting to roughly double our subservicing portfolio, excluding the NRC subservicing. And lastly, with the rapid increase in interest rate levels, we are expecting 2022 EBO and call rights income will be down roughly 75% from 2021 levels. Considering the transitioning mortgage market, we expect first half 2022 earnings will be driven by MSR fair value adjustments offsetting origination headwinds and the build-out of our servicing platform. We are targeting low double-digit to mid-teen after-tax ROEs before notable items in the second half with the expected benefits of successfully executing our business initiatives. And now I'll turn it over to June to discuss our financial performance in more detail.