Ocwen Financial Corporation NEW

Good day and welcome to the Aquin Financial Corporation third quarter earnings and business update conference call. Throughout today's recorded presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. If you would like to ask a question please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. At this time, I would like to turn the conference over to Dico Axaralian, Senior Vice President, Corporate Communications. Please go ahead.

Good morning, and thank you for joining us for Aachen's third quarter earnings call. Please note that our earnings release and slide presentation are available on our website, Speaking on the call will be Akron's Chief Executive Officer, Glenn Messina, and Chief Financial Officer, Sean O'Neill. 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 or 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, because they are measures that management uses to assess the financial performance of our operations and allocate resources. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures, as well as additional information regarding why management believes these measures may be useful to investors, may be found in the press release and the appendix in 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. Today, we'll review a few highlights for the third quarter, take you through our actions to address the market environment, and discuss why we believe our balanced and diversified business model can deliver long-term value. Now, please turn to slide three. As you all know, with rising interest rates, the servicing environment has improved substantially, while the originations environment is quite challenging. Our balanced and diversified business model is working well, and we've made great progress in the third quarter. We're delivering focused, prudent growth, driving enterprise-wide cost reduction, and optimizing liquidity, and allocating capital to deliver value to shareholders. We deliver strong net income, ROE, book value appreciation, and our adjusted pre-tax loss was substantially reduced versus the second quarter. MSR values increased during the quarter and our origination segment has returned to profitability. Our servicing portfolio is growing with total servicing and subservicing UPB both up versus the third quarter of last year. We're reducing our cost structure enterprise-wide and expect to exceed our cost reduction target with over $70 million in annualized cost reduction in the fourth quarter versus our second quarter 22 baseline. Regarding our capital structure, our share repurchase program is nearly complete. We completed the MAV upsize, and we signed two additional Capitalite MSR partnership transactions outside of MAV. Many thanks to Oak Tree for their continued support of our business, and many thanks to our two new MSR funding partners for putting their trust in us as an asset sourcing and management partner. As we look forward, I believe we are positioned very well to address the challenges and opportunities ahead. In originations, our priority is reducing cost, expanding higher margin products, and growing our client base. In servicing, our priority is driving growth through subservicing across all product types, forward, reverse, small balance commercial, and special or non-performing loan servicing. Expense management is more important than ever. We'll maintain our continuous cost improvement discipline and adjust expenses and capacity to match the market environment. We are prioritizing our relationship with Mav and Oaktree and other MSR funding partnerships to support capital efficient growth. As we're nearing completion of our current share repurchase authorization, we are evaluating further debt or equity repurchases considering market conditions, our leverage, our share float, and maintaining flexibility for opportunistic high-yield investments. We expect to deliver profitable adjusted pre-tax income in the fourth quarter as we complete our cost reduction actions and other key business initiatives. As in the past, GAAP earnings will be influenced by market interest rate levels. Overall, I'm pleased with our results in navigating this business cycle. We believe our balanced and diversified business model is performing well and remain confident in our ability to execute those items that are in our control. Let's turn to slide four to discuss the environment and our value creation plan. We're focused on executing a value creation plan that's aligned to the environment. The environment and servicing is more favorable than it's been in years, and servicing is a core strength of our business model. MSR values are rising and profitability is improving, driven by slower prepayments, lower prepayment related expenses, higher escrow earnings, and stable delinquencies. We are seeing increased MSR investment opportunities with attractive returns, and we expect continued elevated bulk volume as originators continue to be under profitability and cash flow pressure. Regarding subservicing, the opportunity remains strong, client delays are easing, and our opportunity pipeline is robust. We are seeing increased interest in the mortgage sector from asset investment capital providers who are looking for partners to source and service MSRs, whole loans, and non-performing loans. The Fed actions to raise interest rates is driving an increased probability of a recession, and this plays to our core competency in special servicing. We believe a recession may present new growth opportunities for us, as it did during the financial crisis. Moving to originations, The market has turned down hard and fast, and we don't see relief in the foreseeable future. The GSE and MBA industry volume forecast for 2022 and 2023 continue to be revised lower. Fannie Mae is now forecasting industry originations volume of 1.7 trillion for 2023, and frankly, that may be optimistic. Additionally, we don't believe lower rates will drive a substantial surge in refinancing activity. Even if rates were to decline 300 basis points from today, only 12% of outstanding mortgages have a refinance incentive. The near-term challenge is finding bottom. Origination volume levels continue to fall in the fourth quarter. As a result, the strategy in originations will continue to be cost reduction, margin management, and new client additions for the foreseeable future. In this environment, we believe our core strength in servicing is the right foundation. Our value creation plan, built on this core strength, has four key elements. Leveraging the strength of our balanced and diversified business model, driving prudent growth adapted to the environment, reducing our cost structure across the organization, and optimizing liquidity, diversifying funding sources, and allocating capital to maximize value for shareholders. Let's turn to slide five to discuss the benefits of our balanced and diversified business model. Our balanced and diversified business model is a core strength for us, particularly in this environment. Servicing gap pre-tax income in the quarter is up significantly versus third quarter last year due to MSR value appreciation, which more than offsets decline in profitability and originations. Year to date, we've delivered over $100 million net income despite the originations environment. Our focus on driving industry leading operating performance is supporting strong growth in our subservicing portfolio. We are a top-rated servicer by Fannie Mae, Freddie Mac, and HUD, and Fitch has upgraded our servicer ratings due to our strong post-pandemic performance. Through our investment in technology and global operating capability, we've built an efficient and mature platform with capacity for growth that drives improved financial outcomes for clients. We've earned the trust of clients and partners as evidenced by $69 billion in subservicing UPB added in the last 12 months, strong scheduled subservicing boardings, and a potential opportunity pipeline of $350 billion. We have consistently invested in our servicing platform capabilities, and we believe our core strength in servicing positions us well to navigate the market ahead. We have broad and deep domain expertise with industry-leading capability in forward, reverse, small-balance commercial, and special servicing. We're the only large-scale, full-service, end-to-end reverse mortgage provider in the industry, and we continue to be a leader in special servicing, supporting borrowers and investors, and outperforming MBA and Moody's industry operations benchmarks. With more than half our total servicing portfolio and subservicing, our potential exposure in a recession to elevated advances and higher servicing costs without corresponding revenue is limited. We have a continuous cost improvement mindset throughout the company. We continue to demonstrate the ability to reduce our cost structure while maintaining strong operations execution. We believe having an industry-leading cost structure is an advantage in any environment. Lastly, the development of capital partners to co-invest in MSRs and create synthetic subservicing helps us grow our servicing and originations on a capital-efficient basis. We believe our expanded capacity in MAV and development of additional capital partners positions us well to increase our managed asset base while creating optionality and flexibility in our capital allocation process. Overall, we're excited about the potential for our business and do not believe our recent share price is reflective of our financial position, our earnings power, or the strength of our business. Let's turn to slide six to discuss our growth focus in the current environment. Our growth strategy is focused on driving higher margin products, client-based expansion, and subservicing additions. Our originations team is performing well under the current market conditions with MSR originations excluding bulk transactions down about 4% versus the second quarter and down roughly 33% versus last year. Industry volume projections for 2023 seem to get revised lower each month, and we are expecting lower origination volume and margins in the fourth quarter. In the third quarter, we took the opportunity to purchase bulk MSRs from one of our subservicing clients who was selling. This enabled our client to avoid deboarding costs and allowed us to acquire MSRs at attractive returns, highlighting a key value element of our enterprise sales approach. Subservicing additions were comparatively light in the third quarter compared to prior periods, as current and prospective clients were largely focused on addressing market conditions. We're seeing these delays moderate, and currently have $28 billion in subservicing additions scheduled over the next six months. Consistent with our growth focus, our mix of higher margin origination products was roughly flat with the second quarter and up five percentage points versus third quarter of last year. Similarly, our focus on growing subservicing is evident with subservicing you could be up 46% versus the third quarter of last year. The shift to subservicing and our focus on diversification is evident when looking at our portfolio composition. We believe our emphasis on growing subservicing and GSE-owned MSRs, which are now 54% and 34% of our portfolio respectively, will be beneficial in the event of a recession. In subservicing, we have no exposure to advances and we earn revenues even if borrowers are delinquent. In GSE servicing, the credit quality is high Principal and interest advances are capped at four months, and in the case of Fannie Mae, we recover our servicing advances monthly. The segments of our portfolio where we have more significant advancing responsibility, as well as revenue risk with borrowed delinquency and relatively lower credit quality, are PLS and Ginnie Mae forward-owned MSRs. However, these segments combined only comprise 10% of our portfolio. Our deliberate strategy to diversify our servicing portfolio reduces our risk exposure in the event of a recession, and we expect to have adequate capacity to support special subservicing for others should market conditions drive increased demand. Now please turn to slide seven for an update on our expense management actions. We remain committed to reducing costs to align to market demand and support business needs in this part of the industry cycle while continuing to deliver on our commitment to customers, clients, and investors. Our team has made great progress against our cost reduction target. We're on track to exceed $70 million in analyzed expense reduction by the fourth quarter versus the second quarter baseline of this year. We're maintaining or we're focused on driving sustainable cost reduction, supporting the most essential activities and maintaining a prudent risk and compliance management framework. We've largely adjusted staffing levels across the organization, but most significantly focused in originations and in our consumer direct and reverse retail platforms. Our cost structure measured in basis points is down 35% and 21% from the fourth quarter 2021 in originations and servicing respectively. We continue to leverage our seasoned and mature global operating capabilities Our proprietary global operating platform has been in place for the last 20 years and supports all business activities. We continue to drive automation, digital migration, and other systemic process enhancements consistent with our technology roadmap and focus on continuing process improvement. As noted earlier, we are expecting lower originations volume in the fourth quarter and are committed to adjusting capacity and expenses further as necessary going forward. In addition, we're consolidating our forward and reverse operating platforms in both originations and servicing. We're focused on leveraging a single backbone platform and processes for activities that are common across both forward and reverse. This will result in scale benefits for both forward and reverse, and we're one of the few competitors in the reverse space who has the capability to execute this strategy. The initial results are promising, and we expect further benefits going forward into 2023 as we continue to refine and optimize our approach. Now, please turn to slide eight for an update on our capital management actions. As we discussed last quarter, we're optimizing liquidity, funding sources, and custodial arrangements to support the needs of our business during this part of the market cycle. The cornerstone of our capital management plan, both last year and this year, has been math. We're excited to announce we've completed the Mav upsize with incremental contributed capital of up to $250 million. With leverage from MSR secured financing, we expect this is sufficient to support incremental $60 billion in synthetic subservicing, UPB, at current MSR prices. We've realized strong double-digit returns on our $21 million in net capital contributed to Mav. Our current investment balance stands at $39 million, including cumulative earnings and dividends. We're also excited to announce the signing of two additional MSR funding partnership transactions. We closed one transaction in the third quarter and expect to close the second in the fourth quarter. We are driving growth with a bias towards capital light subservicing. We expect to fund a portion of flow origination volume with our new partners in the fourth quarter consistent with this approach. This year, we've opportunistically and prudently sold as well as invested in MSRs, keeping our MSR UPB roughly between $115 to $130 billion, while growing our total servicing portfolio through subservicing additions. I think it goes without saying that our investor-driven approach to MSR purchases introduces an added level of price discipline to our independent broker mark process. Throughout the year, we've been able to monetize MSRs at levels at or above our acquisition cost. Looking ahead, we believe our asset sourcing, product distribution, and unique servicing capabilities can give rise to additional partnership opportunities in reverse, distressed or high-risk assets, and small-balance commercial subservicing. We are dedicating business development resources to build relationships with investors and clients across each of these asset classes to fully leverage our servicing capabilities. We believe the development of investor relationships to support capital efficient growth will support achieving our servicing scale objectives and enables further capital allocation flexibility to maximize returns for shareholders. Again, I want to thank our business partners at Oaktree and our new MSR investor partners for their trust and confidence they have placed in our team. to help them achieve their growth and profitability objectives. We take this responsibility seriously and we will deliver on our commitments. Now, I'll turn it over to Sean to discuss our results for the third quarter and outlook for the fourth quarter.