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spk02: Good day and welcome to the Auckland Financial Corporation First Quarter Earnings and Business Update Conference Call. For information, today's call is being recorded. I'd now like to turn the call over to Mr. Deco Axralian, Senior Vice President, Corporate Communications. Please go ahead, sir.
spk00: Good morning, and thank you for joining us for Auckland's First Quarter Earnings Call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ockman'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 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 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 31st, 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 and our 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 in the appendix to the investor presentation. Now, I will turn the call over to Glenn Messina.
spk07: Thanks, Tico. Good morning, everyone, and thanks for joining us. We're looking forward to sharing our progress with you this morning and our plans for the balance of the year. Let's get started with slide four to review a few highlights for the first quarter. We believe our actions to build a balanced and diversified business have positioned us well to navigate the current mortgage cycle, and our first quarter results are consistent with our expectations. We delivered net income of $58 million, strong annualized ROE in the quarter, and a 14% appreciation in book value per share from year-end 2021. We are taking a cautious and prudent approach to investing and managing our liquidity position, which has improved from year-end. Consistent with our previous guidance in the first quarter, we opportunistically sold select MSRs at what we believe are robust valuation levels to harvest value appreciation and mitigate asymmetric hedge risk in our MSR portfolio. Our servicing platform is performing well operationally. Our servicing financial performance is improving with rising interest rates. MSRs are appreciating in value. Runoff is declining. We continue to improve our cost structure and our portfolio is growing. Yesterday, we announced our subservicing agreement with NRZ was renewed until year end 2023 with annual extension options thereafter. We thank NRZ for their confidence in us. We appreciate their business and we are looking forward to continuing to serve them and their borrowers. Forward Originations faced a challenging environment in the first quarter while total servicing Additions of $20 billion is up about 46% year-over-year, driven by subservicing additions. Origination volume was down 13% year-over-year and margins were below expectations. We are taking the necessary actions in forward originations to reduce our operating expenses and shift our product mix and service mix to restore profitability. Our reverse business is performing very well, both in originations and subservicing. Origination volume is more than doubled year-over-year, margins are holding flat relative to Q4, and the origination market is growing. Reverse subservicing is performing ahead of expectations, and we're building a strong opportunity pipeline to support future growth. Let's turn to slide five to discuss the environment and our market positioning. Interest rates have risen higher and faster in the first quarter than industry forecast suggested just a few short months ago, and they continue to increase. In the current environment, we see three main drivers of our profitability going forward. First, with a core strength in servicing and an expectation of even higher interest rates, we expect our servicing business will be an important driver of our future earnings. Our balanced business model is working. Servicing pre-tax income in the first quarter is up significantly versus the first quarter of last year due to MSR value appreciation, lower payoff volume, expense productivity, and portfolio growth. The profitability improvement in servicing and MSR value gains more than offset the decline in profitability and forward originations as volume and margins contract. Forward originations will be a less important driver of earnings in this market cycle, but a critical element to replenish and grow our servicing portfolio. Second driver is subservicing. We made great progress in growing our forward subservicing business supported by our global technology-enabled scalable platform. We believe our success here reflects our proven industry-leading operating performance that has been recognized by Fannie Mae, Freddie Mac, and HUD with top honors in their respective servicing performance recognition programs. We continue to be a leader in special servicing, supporting borrowers and investors, and outperforming MBA Moody's industry operations benchmarks. We work hard every day to earn our clients' trust, and this has been rewarded with meaningful subservicing additions and potential opportunities. We've added $64 billion in subservicing to UPB in the last 12 months, We have $28 billion in scheduled subservicing additions in the next six months, and our forward subservicing opportunity pipeline of roughly $280 billion in potential additions. In addition to the NRC renewal, we are in advanced discussions with MAF to potentially double our investment capacity. Third driver is our reverse business. We are the only large-scale, full-service, end-to-end reverse mortgage provider in the industry. Industry opportunity is growing, our originations volume and market share continues to improve, and origination profitability is stable. Our reverse originations, our reverse subservicing business is gaining scale, profitability is improving, and we have an opportunity pipeline of roughly $55 billion. Overall, we're really excited about the potential for our reverse business and our overall business and do not believe our recent share price is reflective of our financial position, earnings power, or the strength of our business. With industry volume shrinking, we continue to look at potential M&A opportunities that can expand scale and capabilities or otherwise create value for shareholders. Let's turn to slide six for some servicing highlights. In servicing, MSR value net of hedges increased by $56 million in the first quarter so far through April. MSR value net of hedges has increased by roughly $36 million. Based on our MSR sensitivity profile, we estimate an immediate 25 basis points parallel increase in interest rates would increase our earnings per share by roughly $2.70, which translates into a DVO1 of roughly $1 million. Servicing income excluding MSR gains has increased by $23 million year over year, despite lower EBO gains and interest-rate-driven fair value losses on repurchase loans held for sale. Our diversified growth strategy, executed by our enterprise sales team, has resulted in meaningful servicing portfolio growth year-over-year, up over 50%. All segments of our portfolio, own servicing, subservicing, forward, reverse, and small-balance commercial, are growing. we're targeting forward servicing and subservicing UPB of roughly $290 billion by year-end. The extension of our current subservicing agreement with NRZ, which covers approximately $54 billion in UPB at the end of Q1, had been set to expire in July. The agreements have been extended until year-end 2023 with annual extension options thereafter. As part of the renewal, we agreed to share a portion of some ancillary revenues and simplify the future process for extensions at the end of each term. As we've said in the past, this contract has a thin margin, but considering the significant cost reductions we've achieved in our servicing platform, we believe the renewal is a good outcome for both companies. Moreover, we appreciate NRZ as a business partner and their confidence in our servicing capability reflected in their renewal. Through the combination of scale, portfolio composition, technology investment, and process re-engineering, we've reduced our servicing cost structure in base points of UPB by over 30%, or almost four basis points in the last year. Through continued digitization and process improvement, we are targeting further reductions to seven basis points of UPB by year end. Higher interest rates are driving lower prepayments and related expenses, We believe runoff may slow further to between 13.5% and 14%. As short-term interest rates increase, we expect higher revenue from our $2.4 billion of escrow balances. This should help offset higher interest costs on our $1.2 billion of floating rate debt. We are actively managing our portfolio, as is evidenced by our sale in the first quarter, and we are executing several sale transactions to reduce our severely aged GMA loan population. We believe the sale will improve the quality of earnings going forward through lower unreimbursed claims expense, and it de-risks our portfolio. We did experience a loss on MSR value for these loans in the first quarter, and we'll recognize a loss on sale in the second quarter upon completion of the sale. We believe we have tremendous leverage in our servicing platform, and we're excited about the growth opportunity for servicing, particularly in subservicing. Let's turn to slide seven to review forward originations. I believe it's generally understood that the environment for forward originations is tough and likely to get tougher. We are taking actions in response. Our originations team delivered $20 billion in total servicing additions, up 46% year over year, largely driven by subservicing additions. But on a sequential quarter basis, total origination volume was down 23%. We experienced a pre-tax loss in forward originations driven by lower lock volume, lower margins, and volatility-related hedge ineffectiveness. During February through mid-March, we saw a wide range of MSR values between the primary originations market, our valuation experts, and bulk sales transactions. At some coupon levels, the variation was more than 15 basis points. During this timeframe, we made the prudent decision to intentionally constrain volume in correspondent lending by capping new origination MSR prices, while we validated MSR values through our valuation experts and our own bulk sales transaction. Capping new origination MSR prices drove margin compression and volume reduction beyond competitive influences, as well as drove hedge ineffectiveness. Since mid-March, we've seen a much tighter range of MSR values. We have since lifted the pricing caps, and correspondent lock volume margins and hedge performance have improved. We continue to focus on growing our client base, leveraging our multi-channel capability. Our total client count is up over two and a half times from the first quarter last year, and it continues to grow. We're growing higher margin GDMA and non-agency products, and best efforts in non-delegated deliveries. Volume here is double year over year, and April volumes have exceeded the first quarter levels. Our refinance recapture rate continues to improve. We achieved 39% during the first quarter, with March's level at 41%. We estimate annual forward consumer direct volume for 2022 will be roughly half of 2021 levels. Portfolio growth, improved recapture rate, and cash out refinancings, which are now 72% of our business, is offsetting in part the significant decline in rate and term refi opportunity. Under current market conditions, we must adjust our capacity and cost structure to match a smaller originations market. In March, we executed actions to reduce our forward origination staffing by 21%, including contractors. Further reductions are expected to occur during the second quarter. We are targeting to reduce our cost structure and basis points of volume by roughly 45% by the fourth quarter versus the first quarter of this year. For the full year, we're targeting about $75 billion in total forward servicing additions. This includes $45 billion in subservicing additions, including MAV, and about $30 billion of forward originations. Let's turn to slide eight to discuss a reverse business. We're very excited about the opportunity in the reverse mortgage market. Increases in home price appreciation, the increase in the maximum claim amount to roughly $970,000 in combination continue to fuel new loan production and is helping to offset the impact of higher interest rates. Demographics here are favorable, with 12,000 people turning age 65 each day, and home equity held by this group now tops $10 trillion. There is also a growing amount of research and positive news articles supporting the consideration of reverse mortgage as a retirement tool. Our origination performance has been quite strong and is another successful example of our balanced and diversified business model. We continue growing market share, which is up 1.5 percentage points over Q1 versus the same quarter of last year. Origination volume is more than doubled year-over-year. We're seeing growth in all channels, direct-to-consumer retail, wholesale, and correspondent lending. Direct-to-consumer retail is our fastest-growing channel. As June will share in a moment, revenue margins have drifted down over the past year. However, margins by channel have been stable for the past several quarters. We are positioned as the only large reverse mortgage market participant that can offer end-to-end capabilities across originations and servicing. The integration of the RMS platform is going well. Loan boardings are ahead of schedule, and we are slightly ahead of our financial expectations as a result. Our subservicing opportunity pipeline has grown to $55 billion, and interest in our platform has been quite strong. We expect the subservicing platform to be profitable by Q2 and thereafter after we complete the integration and achieve our initial scale objectives. We believe we're uniquely positioned in a reverse mortgage market, and the diversification this business provides helps mitigate our reliance on the forward mortgage origination market. Now I'll turn it over to June to go through our financial performance in more detail.
spk09: Thank you, Glenn. Please turn to slide nine. In the first quarter, we reported $11 million in adjusted pre-tax loss. You can see on the top right of the slide a year-over-year walk. Our origination segment reported a $40 million reduction in adjusted pre-tax income from reduced industry volume and lower margins, while our servicing segment reported a $30 million improvement in adjusted pre-tax income from higher UPB due to growing subservicing, slowing prepayments, and operational efficiency. I'll talk more about the segment results in the next few slides. Net income in the quarter was $58 million, up from $9 million year-over-year. Consistent with our first half 2022 guidance, strong net income was a result of $56 million in MSR fair value adjustments, net of hedges, which included $13 million of evaluation assumption loss on delinquent G&E loans scheduled for sale in the second quarter. Other notables included legal settlement recoveries and a favorable long-term incentive adjustment from the decrease in our stock price. We ended the quarter with strong liquidity, $269 million in cash and $45 million in available borrowing. Earnings per share increased to $6.30 and book value per share increased to $58. On the bottom right bar chart, revenue held year over year as higher servicing and subservicing fees from higher UPB in both servicing and subservicing increased was offset by lower origination volume and margins. The chart on the bottom right of this slide demonstrates continued successful execution of our continuous cost improvement discipline. Please turn to slide 10. Forward originations adjusted pre-tax income declined to a $13 million loss. As discussed, forward originations profitability was impacted by reduced industry volume and margins. Our volumes were also impacted by our intentional strategy and correspondent to restrict volume as interest rates rapidly increased, and we saw a wide range of MSR values amongst the primary origination market, broker values, and bulk market values. In addition, consistent with the second quarter of last year, we transferred S&P and flow volume to MAF, consistent with the terms of our agreement with MAF. You can see on the top right the decline in revenue margins experienced in the consumer direct and correspondent channels. The margin decline is a function of intensified competition, our decision to limit new origination MSR values, and resulting hedge ineffectiveness. We're taking actions to return the origination segment to profitability, reducing costs and right-sizing segment operations, as well as the corporate functions supporting the segment by approximately half, continuing to grow volume in higher margin correspondent products and delivery options. This volume's approximately doubled year over year. And as you saw in an earlier slide, we're continuing to improve recapture rates, which were up 10 points from fourth quarter of 21 to 41% in March of this year. Please turn to slide 11. The market opportunity continues to be strong in reverse originations, with continued home price appreciation resulting in increased customer borrowing capacity. Adjusted pre-tax income held at $10 million in the first quarter, consistent with the first quarter last year. Origination volume was up $284 million year-over-year, led by the consumer direct channel, which has the highest channel margins. The growth in origination volume offset lower margins versus the first quarter last year. Margins by channel, while all were down from the first quarter last year, have been relatively stable in each channel since the third quarter of 2021. We remain optimistic on the growth opportunity and reverse originations, and we continue to invest in resources and marketing to grow the higher margin consumer direct channel. Please turn to slide 12. Profitability in the servicing segment has improved as expected, with higher interest rates, our actions to build scale, deliver cost improvement, slower prepayments, and integrate our reverse subservicing platform ahead of plan. On the left side of the slide, adjusted pre-tax income is up $23 million a year to $16 million, driven by UPV increase to $275 billion, as well as cost reduction of approximately four basis points of UPV. Prepayment rates were 10 percentage points lower versus the first quarter of 2021 due to higher interest rates. Unfortunately, higher interest rates also drove $7 million lower in gain on sale due to asset revaluations. mainly on our Ginnie Mae portfolio. On the right side of the slide, we show reverse subservicing results. We generated a small positive adjusted pre-tax income in Q1 by accelerating boarding loans and achieving planned operating expense reduction, driving improved operating efficiency. We believe we are on track to achieve the $5 million in adjusted pre-tax income by the fourth quarter of 2022 per guidance provided on our earnings call in February. Please turn to slide 13. This is our roadmap from actual adjusted pre-tax income in the first quarter to the projected fourth quarter of 2022, assuming a stable interest rate environment and no adverse changes in market conditions or the legal and regulatory environment. The roadmap is broken down by key actions to deliver our targeted returns. We expect between $9 and $10 million improvement from productivity and rightsizing actions, As I mentioned, Originations is targeting reducing costs by approximately half, delivering annualized expense savings of roughly $30 million. We expect between $10 and $11 million improvement from growing higher-margin Originations products and delivery options and correspondent, and between $5 and $6 million improvements from subservicing growth and reduced runoff. Approximately $28 billion in subservicing is currently scheduled for boarding, and we have a strong subservicing opportunity pipeline in forward and reverse. Our projected adjusted pre-tax income in fourth quarter is approximately $15 million, up from the $11 million loss this quarter. We're targeting between 9% and 15% after-tax ROE before notables in the second half of this year. We're slightly reduced lower end of our guidance since the last quarter given the severe impact of the current market environment on forward originations. Our target return levels are consistent with our major competitors. We continue to guide to first-half earnings being driven by MSR fair value gains, offsetting origination market headwinds. Finally, consistent with our expectation for lower origination volume levels in a more competitive market for MSRs, we're evaluating all our capital allocation options including to support debt and share repurchases. Now I'll turn it back over to Glenn.
spk07: Thanks, June. Let's turn to slide 14. We believe our balanced and diversified business, exemplary servicing performance, proven cost management, and track record of execution position us well to navigate the market environment ahead. Our first quarter results are consistent with our expectations, and we delivered strong net income and book value per share appreciation. Liquidity has improved from year end, and we're taking a cautious and prudent approach to investing, managing our liquidity position, and capital allocation. Servicing financial performance is improving with rising interest rates, and we expect servicing will be an important driver of financial performance going forward. MSRs are appreciating in value. Runoff is declining. We continue to improve our cost structure. Our portfolio is growing. and we have $2.4 billion in escrow balances which should generate increased revenues as short-term interest rates increase. We have a strong value proposition as demonstrated by our backlog of scheduled subservicing boardings, the NRC renewal, and a robust subservicing opportunity pipeline. Forward Originations is facing a challenging environment and we're taking necessary actions to reduce our infrastructure, operating expenses, and shift our product and service mix to restore profitability. We believe we're uniquely positioned in a reverse mortgage market and a reverse business is performing very well, both in originations and subservicing. Favorable demographics and home price appreciation are expected to drive further market growth. We are focused on delivering prudent growth and capital management, and we're evaluating all capital allocation options, including share and debt repurchases, to maximize value for shareholders. We expect first half 2022 earnings will be driven by MSR fair value adjustments, offsetting Rich Nation's headwinds and the build out of our reverse subservicing platform. We are targeting after-tax ROEs before notable items in the second half of 9% to 15% with the expected benefits of successfully executing our business initiatives. I'm proud of how our team is executing in unprecedented market conditions. 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 are operating in a volatile and uncertain environment. We're closely monitoring the financial markets, economic environment, and industry conditions closely. We're dynamically managing our operations, plans, and targets, and we'll adjust as necessary to address emerging opportunities and risks. I'd like to thank and recognize our board of directors and global business team for their hard work and commitment to our success. With that, George, let's open up the call for questions.
spk02: Thank you very much, sir. Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. Please just ensure that your mute function is not activated and that you stay with your equipment. So once again, please press star 1. Today's first question is going to be coming from Mr. Eric Hagen, calling in from BTIG. Please go ahead. Your line is open.
spk01: Hey, thanks. Good morning. Hope you guys are well. A couple for myself. Did you say that you expect to sell something at a loss in the second quarter? I may have just missed what it was and also the amount of what it was. Maybe you can re-highlight that. And then I think you noted some hedging effectiveness from more volatile interest rates. Can you talk about any developments of hedging the MSR or the pipeline and how you see that evolving with higher interest rates?
spk07: Sure. So I'll take those two separately, Eric. We are looking at selling some severely aged Ginnie Mae loans in our servicing portfolio. We had taken an MSR mark in the first quarter. June, I think that was 13?
spk09: 13, yes, that's correct.
spk07: And once we buy those loans out of the respective pools and sell them, there'll be an additional loss on sale. We didn't really disclose how much the loss on sale is, but you get a sense of what we've done from an MSR market perspective. In terms of hedging and effectiveness, number one, interest rate volatility during the quarter did give rise to some of the hedge volatility we saw in the mortgage pipeline, less so on the MSR hedge. And the actions we took to quite frankly, step on MSR prices, just given the wide range of values we were seeing in the first quarter, also contributed to some of the hedging effectiveness, because you're artificially constraining, essentially, the value of MSRs in the pipeline. We've since seen MSR values narrow. We've obviously confirmed values with our servicing brokers and our own bulk sale transaction. And, you know, we've lifted the constraints on pricing. We're seeing better hedge performance during the, you know, I would say the latter half of March and into April. And margins as well, you know, have improved because we're not artificially constraining MSR values. You know, on the servicing hedge, again, with interest rates rising, you know, we have repositioned our hedge. So obviously we've, you know, we've switched to a more option-based strategy which I think is prudent as rates are moving up. We've rolled up the strikes in our TBAs and we've taken off swap coverage. That also helps preserve liquidity as rates are going up. You're not burning cash in terms of having to put post-margin, so to speak. We have as well modified or adapted our hedging policy for this environment we are focused now on rate protection down 25, down 50, and targeting 40 basis points hedge coverage ratio for the down rate scenarios.
spk01: Okay, that's helpful. Maybe just a couple more on the servicing. Do you think you guys would ever look to sell MSRs as a form of liquidity and capital management, especially if MSR values stay relatively strong? And then can you also just quickly share how the profitability between the NRZ portfolio compares with, just say, agency subservicing once you consider the G&A that goes with it? Thanks.
spk07: Yeah, sure. So in terms of selling MSRs, look, I think what we've shown over the last 12 or 14 months, we dynamically manage our MSR portfolio. we are always looking at, you know, a couple of things. One is, you know, views, starts with view of value, right? So, you know, do we have a view of value in MSRs that differs from market participants? And if we think that our view of value is, you know, under where market participants are, you know, we would choose to sell MSRs and harvest that value. Obviously, with interest rates going up and, you know, certain segments of our portfolio, you know, showing lack of better term refinancing burnout or prepayment speed slowing to a very large degree, you know, it creates asymmetric hedge risk in your MSR portfolio. So that's essentially what we did in the first quarter is we sold off those assets and mitigated that risk and harvested the capital appreciation or value appreciation in those assets. You know, as June and I mentioned on the call, look, we recognize look, we are operating in a volatile environment. We are constantly evaluating our capital allocation strategy, and we'll look at opportunities to manage our MSR portfolio and generate liquidity in ways that can best maximize value for shareholders.
spk01: That's really helpful. How about the profitability between the NRZ portfolio relative to agency subservicing in this environment once you consider the G&A expense? Appreciate it.
spk07: Yeah. Yeah. So, look, the NRC portfolio, as we said, yeah, at one point in time, you know, it was unprofitable on a fully allocated basis. But we've, you know, since done a lot of work on our cost structure and have radically reduced our cost structure, particularly in servicing. You know, in basis points of UPB, look, NRC is, you know, now what our cost structure is different, you know, And with some of the modifications we've made in the contract, look, the energy is not really that different than agency subservicing and margin. Now, as a percent of revenue, it's lower as the costs are much higher given the delinquency, so the optics of it may be a little bit different. But net-net, we've managed our cost structure to the point where we believe that portfolio is generating profitability consistent with our agency subservicing.
spk06: That's good, Collier. Thank you guys very much.
spk02: Thank you, Mr. Hagen. Ladies and gentlemen, once again, if you have any questions, please press star 1. And if you find that your question has been answered, you may remove yourself from the queue by pressing star 2. Would I go to Matthew Howlett, colleague from B. Reilly? Please go ahead.
spk04: Good morning, and thanks for taking my question. Glenn and June, just first on the April update, the estimate is $36 million up on the MSR value. So we, to presume the book, current book now is you know, over 60? Just give us an update on, you know, where we are on a book value basis.
spk07: Yeah, you know, we didn't, you know, there's lots of other puts and takes. We didn't really disclose book value per share. You know, I'll leave it to you guys to run through the math. Obviously, there's other things that go through our P&L that we've got to be, you know, we've got to be conscious of. And, you know, quite frankly, the books aren't closed for April. So I really can't give you a you know, an updated book value per share number. But, you know, MSR values continue to appreciate, you know, even since April, interest rates are higher now than they were at the end of April. So, you know, MSRs work in investment these days.
spk04: Absolutely. I guess where I'm going with this is with the stock here now at, you know, 0.3, you know, or below that of potentially current book. When you prioritize, Glenn, capital management, you mentioned stock buybacks, you mentioned debt, you know, possibly debt repurchases, upsizing M&A, additional M&A. Can you just sort of go through those and sort of what are the priorities and how you expect to execute this year?
spk07: Yeah, look, the priority for board of management is very simply maximizing value for shareholders, right? And we're evaluating all our capital allocation options to include share and debt repurchases to allocate our capital in a way that best makes sense for shareholders. Look, we're frustrated that the strength of our business model and our business performance is not being recognized in share price. And I think it's prudent and appropriate for us that we consider our capital allocation alternatives if there's a way to better allocate capital to create value for shareholders. So, yeah, I mean, to the extent we are going to, we would choose to move forward with debt or equity repurchases. I mean, I am conscious of the leverage, the financial leverage that's on the business. So as we think about it, you know, one of the things we think about is how much we allocate to debt versus equity and making sure we don't, you know, end up in an over leveraged situation for the company. So, again, all options are being considered. You've hit the nail on the head. in terms of what we're thinking through. And again, our focus here is maximizing value for shareholders.
spk04: Gotcha. Well, I certainly recognize you have to be cognizant of the leverage, but it seems like the liquidity position is improving, and you can certainly take advantage of some of the discounted debt and equity prices in the market. I mean, you mentioned M&A. I mean, what would you need? What are you looking for to add to the business? Just curious what would be something that you'd look to grow in.
spk06: Yeah, you know, as we think about M&A opportunities, you know, they fall into a couple of different baskets.
spk07: I would say, you know, one is increasing scale of our business platforms, right? So if there's an opportunity to, you know, increase scale of servicing, clearly we'd look at it, particularly from a subservicing perspective because it's not capital intensive. And then as well, increasing capabilities. So you know, as the GSEs have put in place more punitive measures against third-party originations, more punitive pricing against third-party originations, which, you know, affects all aggregators with correspondent lending platforms, including ourselves and all our competitors. You know, we've got to think about how much of our business flows through our correspondent channel and where we can add value there, which is best efforts delivery, non-delegated delivery, non-agency products. So expanding our capabilities in those areas is very important to us as well, too. And look, we evaluate all M&A options with the consideration of, is it going to be value-accretive for our shareholders? So look, TCB and RMS are examples of accretive deals, right? TCB was largely an MSR buy with a platform made enormous sense for us to do and has been hugely accretive to our business, RMS as well, too. We've built now a very powerful reverse mortgage business. So that's the type of things that we're thinking about.
spk04: Great, Glenn. Just last question. I mean, what are the conversations like with Oak Tree? I mean, do they sound, you know, clearly they're happy with the first round of MAV, advanced talks in the second round. Is there anything, does it go beyond that? Would they look to restructure some of the subnotes? Just what are the sort of can just give us the updates on the conversations with them. Thank you.
spk07: Yeah. Well, first and foremost, you know, Oaktree has just been an awesome partner. Really love the support we get from the Oaktree team. You know, every member is looking to certainly create value in Mav and create value in the company. They are, you know, they have been hugely supportive and we are just very appreciative of everything they've done for our business and continue to do for our business. You know, our discussions really have remained focused on Mav. Mav has been very successful for both of us. It's enabled us to grow subservicing quite a lot. And, you know, certainly Mav is, you know, the investments they've made in MSRs have appreciated quite nicely. So, you know, generating great financial returns for Mav, of which we're an investor and we get a portion of that. And as we think about upsizing Mav, you know, we really think about a couple of things. So As we mentioned, we're in advanced discussions there, but with the rapid slowdown in originations market, we've got to think about, look, how big do we really need math to be? Bigger is always better to some degree, but obviously we want to size it appropriately for our business. As I mentioned as well, second, look, there's been changes in the originations market. So, you know, look, we have a benefit in that we have a multi-channel origination platform, so we participate in, you know, all the spaces and correspondence, mandatory best efforts, non-delegated, plus we participate in the flow delivery channel, so the CRX, you know, Freddie Mac CRX channel and Fannie Mae S&P channel. So we could take delivery however our customer wants to deliver it. And as we think about how the GSEs are – incentivizing sellers to move between correspondent and CRX, we have to make sure that that's reflected appropriately from an operational mechanics perspective in our agreements with Mavs. So there's a lot of devil in the details, and that's what we're currently sorting through. And then lastly, as we always think about building diversification in our business, and a lot has changed in the past year, and there's a lot of people who are investing in MSRs and You know, we certainly, you know, our first preference is always to work with Mav. But, you know, there are other players out there. And do we want to, you know, have a multi-source platform versus a single-source platform? So a lot of things to talk about. But most of the discussion has really been focused on Mav. But, again, Oaktree, great partner. Love working with them.
spk06: They've been terrific. Thank you. Thanks much, sir.
spk02: We'll now go to Mr. Marco Rodriguez calling you from Stolengate Capital Markets. Please go ahead, sir.
spk03: Good morning. This is Preston sitting in for Marco. Thanks for taking my questions. Hey, Preston. Hey, good morning. So you mentioned you're really optimistic about the growth opportunity and reverse originations that you're going to keep investing resources in marketing to sort of grow the consumer direct channel because it's the highest margin. Could you just sort of expand on that growth opportunity and what you think is possible there?
spk06: Yeah, you bet.
spk07: Look, Preston, we just love the reverse business. If you look at the mortgage landscape today, it's one of the few areas where opportunity continues to grow. Demographics are favorable. And it's a product that this day and age, with home price appreciation and higher rates The higher total claims amount from Ginnie Mae, which is roughly $970,800. Look, this product can make a lot of sense for consumers. And as you know, there's a fair amount that goes up front in terms of consulting with consumers to make sure the product is right for them. But look, it's a business where we continue to demonstrate really strong momentum. It's profitable. The origination side continues to grow. Subservicing is growing. You know, more specifically on the investments in growing direct-to-consumer retail, you know, that has been our fastest-growing channel. And as you probably saw on June's pages, has the highest revenue margin, obviously higher cost structure as well, too. But, you know, it's been a good business. We are investing approximately $2 to $2.5 million in additional marketing spend and sales resources throughout the course of the year to drive additional production, which we've seen some of it in the first quarter, but really towards the second and really more so towards the back half of the year. We expect the payback on that investment, again, assuming we execute and achieve our planned return, We contribute about $6 to $7 million of incremental revenue to the channel through higher retail volumes. So net contribution, $4 to $4.5 million. We think it's a great payback on investments, and it's something we want to continue to allocate capital towards.
spk03: Got it. Makes sense. Thank you. And then you've discussed in a few of the questions this MSR values. I think it was up $36 million in April. How much room do you think is left for additional MSR evaluation increases? Obviously, there's a lot of factors outside your control, but if there's a way to quantify that.
spk07: Yeah, so as we mentioned in our earlier comments, look, our current DV01 is about a million dollars, but that DV01 does, or we've seen it decline certainly during the course of the first quarter. And that's because of convexity in the MSR portfolio, right? So it doesn't really move in a linear fashion because prepayments tend to slow, and there's a floor, right? There's only so low prepayments can go, unscheduled prepayments. So in the first quarter, as rates went up, we saw the DVO1 decline in absolute value. It went from roughly $2.6 million to at the start of the year to about $1.5 million by quarter end. And as we said, looking at our rate shock at quarter end, it was about $1 million. And look, from a model perspective, a lot of that's driven by flooring out of prepayment speeds. But again, as interest rates go up, there's escrow and float balances that are modeled in MSR valuations. And as interest rates rise, those are worth more money, so the value will continue to appreciate from a model perspective as rates go up. Ultimately, though, look, it's really a question about market value and what kind of buyers are out there buying MSRs and what limits may they impose on MSR values or appreciation they may see in MSR values. You know, it is a market-based asset. You know, we are seeing, you know, today multiples in the mid fives, you know, quite frankly, which is, you know, from historic purposes, really pretty high. Could they go to six? Maybe. You know, right now it's, you know, certainly with a number of us in our business have experienced for quite a few years in the industry, six seems kind of unheard of. but we are operating in unprecedented times for sure. So look, it's, you know, clearly the rate of MSR appreciation is declining. I think that's a given with how low rates are. One of the things that we're doing, Preston, to manage our portfolios, as I said before, is managing this asymmetric risk. At some point in time, MSR MSR values become really hard to hedge because there's more downside than upside. You end up spending a lot of money on options to hedge that. So we're being attentive to that. We're watching our portfolio and we'll be making adjustments to our portfolio to make sure that we're not building unnecessary risk and asymmetric risk in our business that's expensive to manage.
spk03: Got it. That's helpful. Thank you. Congrats on extending the NRZ agreement. I was going to ask for an update on the MAV upside, but I think you sort of already covered your discussions with Oak Tree. But that is all I have, so I'll jump back in the queue. Thank you.
spk07: Great. Thank you.
spk02: Thank you, sir. Ladies and gentlemen, once again, if you have any questions or follow-up questions, please press star 1. We'll now go to Mr. Drew McIntosh, calling from McIntosh Investment Relations. Please go ahead, sir.
spk05: Hey, good morning. Regarding the possibility of debt and share repurchases, has your board approved any buyback programs? Hey, Drew.
spk07: So, no, our board has not yet authorized a debt or stock buyback program, but we are, as I said, evaluating all capital allocation options, including share and debt repurchases, to maximize value for shareholders. To the extent our board authorizes such a program, obviously we would disclose it within the appropriate time frame after the board authorization.
spk05: Got it. Can you quantify the amount of excess capital that could currently be deployed, whether it's to MSR purchases or buybacks?
spk07: Yeah, you know, as you know, Drew, we certainly have improved our liquidity position since year end. You know, it's been very, you know, managing liquidity in these volatile and uncertain times is really very important, we believe, and we're taking a cautious and prudent approach to it. We are working through with the board right now how much excess capital we believe we have for discretionary deployment. A lot of factors go into that to include, you know, our view of risks in the business. our view of risks in the environment, the capacity we have with MAV, any other, you know, synthetic subservicing arrangements we may put together, and, you know, our outlook for the originations business and how much capital we actually need to support it. So still a lot of details to walk through, and I don't have any guidance on that, but, you know, rest assured, it's something that's top of mind, and we are having the appropriate level of focus to it.
spk05: Got it. Thank you.
spk02: Thank you, Mr. As we have no further questions at this time, I'll turn the call back over to Glenn for any additional closing remarks. Thank you.
spk07: Great, George. Thank you. And thanks, everyone, for your questions and for joining the call. Again, we believe our balanced and diversified business, exemplary servicing performance, proven cost management, track record of execution all position us well to navigate the environment ahead. As we mentioned, look, we're operating in a volatile and uncertain environment. We're actively monitoring the financial markets, economic environment, industry conditions closely. Look, I think we've got a lot of value drivers here in the business. I don't think it's being appropriately reflected in the value of the company, but we remain encouraged and excited about the opportunities in the business and our capabilities to navigate the market ahead and look forward to talking to you next quarter at our next business update. Thank you, everyone.
spk02: Thank you much, sir. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect. Have a good day and goodbye.
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