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spk02: 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.
spk05: 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.
spk03: 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.
spk00: Thank you, Glenn. Please turn to slide 12. In the fourth quarter, we reported $10 million in adjusted pre-tax income. This is our ninth consecutive quarter of positive adjusted pre-tax. You can see on the top right of the slide a quarter of a quarter walk. Our fourth quarter results were largely consistent with the third quarter, excluding call right gains and costs associated with building out our RMS subservicing platform, which did impact our reverse servicing business, and I'll talk more about RMS in a few slides. Net income in the quarter was a $2 million loss, including $14 million of mostly RMS integration and employee incentive plan notables. We achieved a 12% annualized after-tax ROE, excluding notable items. On the bottom right bar chart, you can see that we're delivering on our growth objectives and cost leadership. Revenue increased 26% year-over-year, largely due to higher servicing fees and an additional $79 billion in UPB. And we continue to demonstrate exceptional cost discipline. Our earnings per share was $1.56, which exceeded analyst consensus, and book value per share increased $1 to $52 per share. Please turn to slide 13. This slide demonstrates that our balanced business model is operating as expected and will serve us well in a volatile market. On the left side of the slide, you can see that adjusted pre-tax income year-over-year was impacted by lower revaluation gains on MSR cash window and flow purchases and lower originations margins. As Glenn mentioned, we're expecting a mixed shift to higher margin products and segments, which we believe will help offset margin pressure as industry volume levels contract. Our enterprise sales approach, focusing on subservicing and the strategic acquisitions we made last year, have positioned us well to maximize performance. On the right side of the slide, you can see the results of our servicing segment. Servicing adjusted pre-tax income of $10 million was largely driven by higher servicing fees from the $79 billion in higher UPB year over year, and operating costs being down as you saw in the prior slide. Keep in mind that the servicing segment results included a $4 million loss in our reverse servicing business, related to the RMS platform acquisition, which I'll talk about on the next slide. Going forward, we're expecting slower prepayments, lower MSR amortization, and higher MSR fair value gains. Please turn to slide 14. We're excited about our reverse subservicing platform. It uniquely positions our reverse servicing business for accelerated growth this year. You can see on the left side of the slide, we expect $11 million in higher reverse mortgage revenue from boarded and committed volume this year. $25 billion of the $27 billion in UPB are under a five-year subservicing agreement. With scale and optimized cost structure, we expect the acquisition to be accretive to our reverse servicing business in the second half of the year, achieving $5 million in adjusted pre-tax income by the fourth quarter. Some key metrics in the bottom of the slide show you the estimated growth trajectory of the platform. Please turn to slide 15. This is our operating framework for 2022, assuming a stable interest rate environment for the balance of the year and no adverse changes in market conditions or the legal or regulatory environment. The page is broken down by our operating objectives and the origination, servicing, and corporate segments. We expect the first half earnings to be driven by MSR fair value adjustments offsetting origination market headwinds and the reverse servicing platform build-out. We're targeting low double-digit to mid-teen after-tax ROE before notable items in the second half of the year. In originations, we expect a mixed shift to higher margin products and segments from 11% to 20-plus percent, as Glenn mentioned. Servicing, we plan to continue to grow performing subservicing through MAV, the reverse servicing business, and adding new clients. We expect EBO and other revenue diversification in the range of $8 to $10 million. And as usual, we expect all segments to continue to achieve productivity targets. Now I'll turn it back over to Glenn.
spk03: Thanks, June. And if you could now please turn to slide 16. 2021 was our first full year of GAAP profitability since 2013 and our ninth consecutive quarter of positive adjusted pre-tax income. The investments we've made in corporate culture, employee engagement, diversity and inclusiveness have enabled the team to thrive in a largely remote work model. And as a result, we met or exceeded all our operating targets for 2021. 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. We remain focused on delivering prudent growth by continuing to expand our client base and increasing our presence in higher margin channels, products and services, and driving continuous cost improvement. Our servicing platform delivers industry-leading performance of multiple loan types a highly competitive cost structure and is relentless in its pursuit of delivering on commitments. We're investing to support customer commitments in forward and reverse for an additional $35 billion in subservicing additions and have a subservicing opportunity pipeline of over $300 billion. We're investing in enabling technology with proprietary COEs driving automation and lean process reengineering. Our balanced business model is working. Our MSR evaluation is up and CPRs are declining, which should help improve profitability and servicing. And lastly, I am proud of how our team is executing. 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 will be unwavering in this focus. We're operating in a volatile and uncertain environment, We're actively monitoring the financial markets, economic environment, and industry conditions closely. We are dynamically managing our operations, plans, and targets, and will adjust as necessary to address emerging market risks. I'd like to thank and recognize our board of directors and the global business team here at Aquin for their hard work and commitment to our success. I'm thankful for their hard work and proud of what our team has accomplished in 2021. And with that, Peter, let's open up the call for questions.
spk02: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from the line of both George with KBW. Please go ahead.
spk04: Everyone, good morning. Actually, I wanted to ask just about gain on sale trends that you're seeing now versus what you saw in the last quarter, both on the forward but also on just the reverse. Is the reverse a little more sort of agnostic to some of the issues that are going on in terms of rates?
spk03: Yeah, Bose, thanks for the question. You know, we are seeing gain on sale margins in all channels. Yeah, we do expect them to contract in 2022. I think it's going to be a tough environment in originations with rates up and a shrinking mortgage market. That said, you know, we don't expect to see the same pressure in reverse. Actually, we expect reverse margins to be flat and maybe even up a little bit during the course of 2022. You know, for us to combat the margin compression we expect to see across the forward business, it is all about mix shift. We have a very small presence in consumer direct, in best efforts, and non-delegated. And again, a small shift in mix, again, going from 11% of our total business to 23% of our total business, which, as you know, is relatively small compared to some of our peers. It does provide a pretty big lift in average margins for the originations channel. Certainly, the reverse business, again, is a good portion of our gain-on-sale margins. We think that opportunity in reverse to continue to grow that business, it's a growing market. 12,000 new people turn age 65 every day. And that group has about $10 trillion in home equity. In addition, continued home price appreciation, as well as the increase in the maximum claim amount to over $970,000, I think will help fuel growth in the reverse mortgage market despite higher interest rates. So we're very optimistic about the reverse business, and we see that as being a key part of our margin expansion initiatives in 2022. Okay, great.
spk04: Thanks. And then just in terms of returns on MSRs, can you just talk about, you know, where unlevered returns are currently? And also, how does the return differ from, you know, the forward MSR versus, you know, the reverse MSR?
spk03: Boze, you know, look, we're seeing returns in MSRs, again, for the pre-leveraged returns in MSRs for the forward business. I would say this is really GSE in the, you know, call it eight-ish range, eight to eight and a half range. You know, GINIs are in the, you know, certainly north of eight and a half, call it eight and a half to nine and a half. It has gotten more competitive. You know, as I mentioned before, there's, you know, we are seeing a bit of price discovery going on. There's a fairly wide range of values on MSRs. Certainly, you know, as rates spiked up quite a bit during January and February timeframe. We are seeing the price curve on MSRs slow down. And as well, mortgage rates are not really tracking with treasuries. We're seeing some disconnect there. So mortgage to treasury spreads have widened, and mortgage rates have just not responded lower with treasuries since they've sold off a bit. On the reverse side, our all-in returns on reverse MSRs are higher than even Ginny's, right? So we're talking in the 10% to 11% range. So again, the reverse business has just very attractive attributes from both an originations perspective and a servicing perspective. And now with us being positioned as the only end-to-end provider in a reverse mortgage business, we've got a great opportunity to grow the subservicing side of that business, which again is more profitable than forward subservicing.
spk04: Okay, that's helpful. Thanks. And then actually just one follow-up. The advance rates on levering reverse MSR, are they pretty similar to forward MSR?
spk03: Actually, no. Reverse MSRs, that market has not matured to the sophisticated type of advancing we see for the forward market. So advance rates for financing reverse MSRs is not as well developed or as high. So there's a natural reason as to why the returns are higher.
spk04: Yeah, yeah. Okay, great. Thanks a lot.
spk03: Thank you.
spk02: Thank you. Our next question is from Matthew Howlett with BYD. Please go ahead.
spk06: Oh, hi, Glenn and Jim. Thanks for taking my question. Just first on MAP, on a UPB basis, where does this stand now Glenn, you talked about upsizing it potentially. What would that look like? Would Aquin contribute another 15% if it was upsized?
spk03: Yeah, so, you know, look, MAV, you know, right now has, we've deployed roughly, you know, 60-ish percent, 58, 60% of our total committed capital in MAV. That's, you know, UPB balancing around the $30 billion range. But again, we're seeing continued opportunities to purchase in the market going forward. So we're having preliminary discussions with Oaktree about the merits of increasing that. Look, I don't think we're at a point where we can discuss terms and conditions just yet. But certainly, given it's a material transaction, if something happens there, we'll be sure to update the market.
spk06: Sounds like you're ahead of schedule on growing math with that. Would the upsize of that be a second half 22 conversation?
spk03: We are ahead of schedule. We deployed, you know, we had structured MAV with an initial term of about three years to ramp up our investment there. And again, we've put in about 60% of our investment in the first, you know, first year of operation of MAV. So it is tracking ahead of schedule. So yeah, I mean, if there is an upsize in place, it probably would be something that would be a second half initiative.
spk06: Great, thanks. And talk about the dynamic on selling some MSRs and then still being really active in the bulk market. I mean, what are you seeing? Just there's some pockets of your portfolio that are just overpriced or a bid, but you're still seeing generally opportunities to acquire bulk?
spk03: Yeah, we're seeing... Look, I think there's... Just generally stepping back, I think in the mortgage business, just generally... You need to be willing to be a buyer and a seller as price and market conditions dictate. We've built a diversified origination capability, so we have the ability to replenish assets into our servicing portfolio. But look, rates ran up very high, very fast. And that created what we saw was a fairly wide view of values of MSRs. And particularly for lower coupon servicing, what we believed was asymmetric risk. So a value of an MSR can only appreciate so much because prepayment speeds can only slow so much. And once you reach the top of that prepayment S curve, the value for MSR is pretty much at the max where it's going to be. And there's probably more downside than there is upside in values. You know, look, we took the opportunity to test the market. And, you know, look, we think there's opportunistically when prices are high and higher than our view of value and Mav's view of value, especially if you want to minimize the asymmetric risk in your portfolio, you're probably going to look to take some risk off the table, take some money off the table and redeploy it into MSRs that are closer to market pricing. where you have symmetrical risk exposure up and down. It's easier to hedge and obviously creates refinancing incentives if rates go down, but obviously value appreciation if rates go up. So look, I think in this transitioning mortgage market, you have to be dynamic, and that's just prudent business management in my view.
spk06: And you mentioned 18 million net of hedges in January for the portfolio total?
spk03: Yes, sir.
spk06: Okay, last question on just general capital needs. You look at your retaining capital, clearly you're seeing opportunities. You might free up some capital, some sales. Generally, Glenn, when you look at, you're very busy with integration, but when you look at capital needs for Aquin, opportunities out there in the bulk market, growing map, maybe other platforms, clearly you've taken the lead in reverse. What can you tell us in terms of
spk03: capital needs and what the capital outlay plan now is this year yeah so you know I think you know in June's you know June's presentation she had the you know kind of the roadmap for the business in terms of where we're expecting financial results so yeah look we are expecting to originate a hundred billion dollars of business total servicing additions next year We are planning to be active in all our channels and grow our higher margin business. We believe we have access to the capital resources to support our business going forward. We've had preliminary discussions with MAV around upsizing MAV. They've been busy. Generally, we saw close to $90 billion of UPB trade in the bulk markets in the month of January and February so far. You know, Mav, based on its strike zone, so to speak, its appetite, you know, they bid at about $20 billion in UPB and won $9 billion in January. So we are out there with Mav actively bidding in the bulk market and, you know, for deals that fit our investment criteria and Mav's investment criteria. And we're going to continue to, you know, drive, you know, expansion of our correspondent seller base and grow reversed. So, yeah, I think we're positioned with the capital we need to operate our plan and achieve our commitments.
spk06: And I'll just sneak one in, if you don't mind. Just on technology, one of your peers had a partnership with a cloud tech provider. Awkward has always been a leader in technology. You always highlight it every quarter, Glenn. Just anything to talk about there, well-positioned in this new environment?
spk03: Yeah, you know, we took the time, you know, through the integration to replatform our the technology in our business front to back. So new origination system, new telephony system, new websites and portals, new servicing system, new capital market system, new general ledger, new HR system. The amount of change in the technology arena during the integration process was profound. But I believe we've got a great set of foundational technology in the business. It's modern, it's cloud-based, it's up-to-date. Also, during that integration process, even though we were cutting costs and we reduced our cost structure from the pre-acquisition, TUKU 2018 pre-acquisition baseline by about 40%, we did set aside money. We invested and built our own robotics and automation center of excellence and lean process center of excellence. And we've been investing in robotic process automation. Again, customer self-service technology, video tutorials for our consumers. We've been investing in mobile app. As a matter of fact, our servicing mobile app is probably one of the highest rated ones in the Apple App Store. And we're now venturing into optical character recognition, cognitive AI, and conversational AI. So I feel great about the strides we've made in technology. That said... It's an ever-changing environment. You can never rest on your laurels as it relates to technology, so we're continuing to invest. And as I said, we've got 27 projects to drive automation across the servicing platform, which is going to touch over 500 discrete elements across our business. So it's a place we're excited about. We love how technology enables low cost, enables customer experience, and enables operational effectiveness.
spk06: Thanks a lot, Glenn. Thanks, Jim.
spk03: Thank you, Matt.
spk00: Thank you.
spk02: Thank you. Our next question is from Marco Rodriguez with Stonegate Capital. Please go ahead.
spk07: Good morning. Thank you for taking my questions. I was wondering if maybe you could talk a little bit about how you see your business position to succeed in what could be a pretty volatile mortgage market, Ed.
spk03: Yeah, Marco, look, it all starts, I think, with people. Look, I'm really proud of what our team has been able to execute here. I think we've got one of the best management teams in the business, and having a highly engaged workforce, strong culture, and a management team with a track record of navigating multiple mortgage cycles, it is essential to the environment we're going to go through. Second to that, we've spent a lot of time building a balanced and diversified business model here at Aquin. It's been something we've been driving for the past two and a half, three years. And to me, having that balanced and diversified business model is an absolute essential element to be able to navigate the transitional mortgage market we're going into. Look, we've demonstrated the ability to manage our cost structure. We've demonstrated the ability to grow in higher margin products and services and channels where we still have a very small share today. So, again, our plan is, I think, obviously aggressive and responsive to the market. We believe we can, given our low position in higher margin channels, we can shift our mix. from 11% of total servicing additions or total originations to 23% of total originations. Our servicing platform has been recognized by the GSEs as being, quite frankly, the best servicing platform from an investor perspective in the industry, period, full stop. We're growing in reverse. We've got a strong position there, a 9% market share in a market that's growing. So look, I think we've got a lot of attributes about our business that have demonstrated resiliency. We've demonstrated the ability to navigate the pandemic. The mortgage industry is volatile. It goes up and down. And we've built our business model assuming that that's in place. And that's going to happen. And that's what we're seeing today. So I think our team, our technology, our platform, and our strategy of driving growth in higher margin channels reducing cost, focusing on operational excellence, and continue to provide a service experience that delivers on our commitments to consumers is the right one for this environment.
spk07: Got it. And then kind of a follow-up in regard to that, maybe if you could talk a little bit about how you sort of expect the overall business to perform if we entered into a recession.
spk03: You know, Aquin, historically, recessions have been good for Aquin. We are still one of the leading default servicers in the industry. In general, our superior default servicing capabilities, I think, set us up well to perform in a recession relative to peers with less experience in servicing defaulted loans. As we've demonstrated with helping borrowers emerge from forbearance, We've had more, a greater percentage of our borrowers emerge from forbearance, agency borrowers that is, emerge from forbearance with a loss mitigation solution or reinstatement plan in place. Those borrowers who are on forbearance, a greater percentage of ours are paying current. So look, this is our strength. This is the core DNA of Aquin. We did not lose that during the course of the integration. And look, while advances tend to increase during a recession, we have found funding and availability and pricing to remain solid on advances, even in times of stress. And the balance in our servicing portfolio of having own servicing and subservicing, and right now a greater portion of our servicing portfolio is in subservicing, that revenues in that business will tend to increase as delinquencies increase, so we get paid for the additional cost. So, you know, we think we have the resiliency and operating capability to navigate fairly well through a recession.
spk07: And last one for me, maybe if you can talk a little bit about the growth you're seeing in subservicing, how is that kind of progressing to your targets, your expectations? Thanks.
spk03: Yeah, the growth in subservicing, we're really excited about it. And I think there's really two key elements that's driving our growth in subservicing. First is our enterprise sales approach. And second is just our servicing performance. So the enterprise sales model that we have leverages our capabilities across all of our originations. So the ability to do Fannie Mae SMP originations originate through Ginnie Mae Pitt, originate through the Freddie Mac co-issue cash exchange, correspondent mandatory, best efforts, non-delegate, and the ability to offer forward, reverse, and subservicing is just a very comprehensive sales tool. And we found that that's been one of the greatest differentiators we have vis-a-vis selling against traditional subservicing providers. In addition, we can offer portfolio recapture services that some of those folks cannot offer. So look, our enterprise sales approach is, I think, a key differentiator on the front end. And more importantly, on the servicing execution side, I believe we've got a terrific value proposition with our servicing platform. Again, our subservicing clients are recognizing our performance. That's been recognized by Fannie Mae and Freddie Mac. So we're doing quite well. I feel good about the growth in the subservicing business. Our pipeline has never been higher. Again, subservicing is a capital-light growth vehicle for the company. And again, we were rewarded with over $50 billion of total subservicing additions in 2021. We've got $35 billion in committed backlog subject to investor approval for 2022 with a very robust pipeline behind us. I'm really excited about the subservicing business, and I think our team there is executing quite well.
spk07: Thank you. I appreciate your time.
spk03: Yes, sir.
spk02: Thank you. Our next question is from Drew McIntosh, an investor. Please go ahead, sir.
spk01: Hi. Thanks, and good morning. My question is on the reverse servicing business, specifically on the competitive landscape. You guys mentioned you don't think you'll see margin compression in that area, but just wanted to get a little more color on that with the possibility of more new entrants into that market.
spk03: Sure. Drew, look, number one, If it's not coming through on the call, we love the reverse business. It is a great business for us. Look, the industry is coming off a record year, which was assisted by refinancing activities. Endorsements grew 18% year over year. HECM MBS issuance grew to $13 billion, which was a 23% increase over 2020, and actually a 21% increase off the previous record year of 2010. So, look, while, you know, rates may be going up and competition may be coming into the market, you know, we do believe that the market will continue to grow in 2022. You know, HPA, home price appreciation, and the increase in the maximum claim amount, as I said before, to $970,800, we expect will continue to fuel new production and is helping to offset the impact of higher rates. And again, from a demographic perspective, 12,000 people are turning age 65 every day in this country. And the equity in home equity held by this group of people over age 65 now tops $10 trillion. So look, I think there is the potential for new entrants to come into the marketplace. But again, I think we are positioned well from a competitive perspective. We are You're the only player or participant in the reverse industry who can originate an issue and be a direct servicer. I think this provides us with a unique position vis-a-vis our competition. The reverse mortgage industry is really dominated by five primary HECM issuers, including Aquin, accounting for about 93% of all issuance. Again, our market share has been growing. We're up to slightly over 9% as of the fourth quarter of 2021. And the top 10 originators make up about 80%. So look, as the top five companies remain largely unchanged, I think, look, this is a very specialized area of mortgage lending. It is not a quick, fast transaction. It's not going in and doing a quick refi. There's a borrower counseling period you have to go through, a borrower qualification period you have to go through. And the product has a number of unique attributes and elements. So look, I think the market growth is there to support the competition that we expect to see in the environment with margins holding relatively stable. That said, we are, I would say, have some level of concern that irrational competition coming in, while they may not necessarily damage margins all that much, could they cause additional reputational risk because they're not trained well or not trained enough or not trained at all and potentially give the space a bad name? But that said, I think it's a great product. I think it's a space where we intend to continue to grow, share, and grow our presence.
spk08: Great. Thanks a lot.
spk02: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Mr. Glenn Messina for closing remarks.
spk03: Thanks, Peter. And to close, I just want to thank all of our investors and our employees and our board of directors for your continued commitment to Aquin. I believe the investments we've made in culture, employee engagement, diversity and inclusiveness have enabled the team to really thrive in 2021. And I believe our balanced business model, exemplary servicing performance, proven cost management, and track record of execution are key advantages for us in navigating the transitional and difficult mortgage market environment ahead. Thank you all, and look forward to speaking to you next quarter.
spk02: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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