Ocwen Financial Corporation NEW

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.

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.

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.