Ocwen Financial Corporation NEW

Welcome to the Aquin Financial Corporation Second Quarter Earnings and Business Update Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question and answer session. I will now turn the call over to your host, Deco Axarelian, Senior Vice President, Corporate Communications. Mr. Axarelian, you may begin.

Good morning, and thank you for joining us for Aquin's Second Quarter 2023 Earnings Call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call of the Occam's Chair and 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, which speak only as of the date they are made, involve assumptions, risks, and uncertainties, including the risks and uncertainties described in our SEC filings. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. In addition, the presentation or comments contain references to non-GAAP financial measures, such as adjusted pre-tax income, 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 GAAP results. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures, as well as management's view on why these measures may be useful to investors, may be found in the press release in the appendix in the investor presentation. Now, I will turn the call over to Glenn Messina.

Thank you, Dico. Good morning, everyone, and thanks for joining our call. Today, we'll review a few highlights for the second quarter, take you through our action to address the market environment, and discuss why we believe our balanced and diversified business can deliver long-term value. Please turn to slide three. I'm pleased to report our second quarter results, which reflect the strength of our balanced and diversified business and continued progress against our key initiatives. Adjusted pre-tax income of $23 million for the second quarter has materially improved versus the first quarter, largely driven by reverse servicing. Profitability and originations and forward servicing improved slightly versus the first quarter as well. We reported net income of $15 million, or $2.02 per share, which includes $6 million of pre-tax loss relating to notable items. Notable items primarily include an unfavorable MSR fair value change due to interest rate assumptions, offset in part by a favorable adjustment to our legal and regulatory reserves for various matters, including the CFPB litigation. I am also pleased to report the CFPB did not appeal the District Court's May 2023 ruling in our favor. As a result, that ruling is now final and the case will remain closed. We look forward to normalizing our relationship with the CFPB. We're excited to put this legacy matter behind us, the last of the matters filed against the company in 2017. We believe this removes what may be a perceived uncertainty in the eyes of potential counterparties. Total servicing UPB was down slightly at the end of the second quarter versus the first quarter, reflecting our continued discipline in purchasing MSRs, a sale by Mav of $5 billion of MSR UPB to optimize portfolio returns, and consistent with expectations, we had nominal subservicing boardings in the second quarter. With both short-term and mortgage interest rates at the highest levels in 20 years, we're reducing our MSR interest rate risk exposure with higher hedge coverage and utilizing synthetic subservicing conversions and excess servicing spread financing. Our hedge coverage in the second quarter was roughly 92%. We added another new MSR investor and converted $7 billion of owned MSR to synthetic subservicing. We've delivered over $100 million in annualized cost reduction since 2Q last year, and our expense management actions throughout the company are on track. We nearly achieved our year-end expense ratio target by the end of the second quarter. Total liquidity of $233 million is consistent with first quarter levels despite the higher liquidity demands of our increased hedge coverage. We're very pleased with our results this quarter. The business is performing consistent with our expectations and we believe we're on track to achieve our adjusted pre-tax income and return objectives for the remainder of the year. Now let's turn to slide four to discuss the environment and our value creation plan. Market conditions in the second quarter were generally consistent with expectations. We continued to see slow MSR runoff, higher float earnings, and low delinquencies. During the second quarter, MSR trading volumes in the bulk market remained elevated, and I think it's fair to say it was largely a buyer's market. While this represents a potential investment opportunity, at the same time, it can put downward pressure on MSR values, all other valuation factors being equal. Potential client interest in subservicing remains stronger than ever, and our opportunity pipeline continues to grow. However, we continue to see clients extending RFP processes and decision-making due to market factors and conflicting priorities. Opportunistic asset purchase transactions are beginning to appear, as is interest from investors who are seeking partners to source and service MSRs, whole loans, and non-performing loans. Moving to originations, we expect market conditions to continue to be reflective of interest rates being higher and for longer than expected at the beginning of 2023. This is impacting both forward and reverse origination volume opportunity. As a result, competition remains intense, but conditions are improving versus the first quarter. Consistent with the first quarter, we continue to observe market leaders having an aggressive view of new MSR values relative to both market levels. We are seeing heightened M&A opportunities in both originations and servicing. However, seller price expectations may restrict opportunity. As we said before, the board and management are committed to evaluating all options to maximize value for shareholders. Overall, we believe the environment continues to favor our core strength in servicing and remain focused on leveraging our balanced and diversified business, prudent growth adapted for the environment, industry-leading servicing cost structure, top-tier operational performance and unmatched breadth of capabilities, and capital partner relationships to support our growth. We believe we have a strong foundation to create value for shareholders in the current environment. Let's turn to slide five to discuss our balanced and diversified business. Over the past several quarters, while Origination's adjusted PTI has been depressed due to rising interest rates and declining industry volume levels, Higher interest rates are helping to drive improvement in servicing adjusted pre-tax income. In addition, in the second quarter, we also took advantage of a unique special servicing opportunity that further contributed to servicing adjusted pre-tax income. We'll talk more about this in a moment. Based on projected seasonality and home purchase activity, we do expect to see seasonal changes in origination volume, portfolio prepayments, and MSR runoff. Similarly, trends in property tax remittances and escalating insurance costs and their effect on escrow balances will also drive seasonal changes in MSR runoff. As in the past, changes in interest rates and bulk market trading prices of MSRs do impact the value of our MSRs and can drive quarterly volatility in our GAAP net income. Market conditions in forward-originations are beginning to improve. We remain laser-focused on yields versus volume, and increasing our mix of higher margin channels and products. Total originations volume is up 6% versus the first quarter and margins in forward are up as well. After our decisive cost actions, originations returned to profitability in May and June and was roughly break even for the quarter. We continue to closely manage reverse originations where industry volume levels remain depressed and we have been impacted by spread volatility in the second quarter. Despite current market conditions, our origination business serves well its purpose to replenish our MSR portfolio. Our focus on diversification is evident when looking at our portfolio composition. Our operating performance and proven capabilities have supported material growth in forward and reverse subservicing. We believe our emphasis on growing subservicing and GSC-owned MSRs also helps mitigate our exposure to liquidity demands due to advancing requirements in the event of a recession. Let's turn to slide six to discuss our growth focus in the current environment. In this environment, we're focused on growing our higher margin origination channels and products, capitalized subservicing, and leveraging our unique special servicing skills to capitalize on high return investment opportunities. As I just mentioned, our originations team delivered 6% growth in total originations volume quarter over quarter, and correspondent was up 8% versus the first quarter. Our mix of higher margin channels and products increased by 11 percentage points versus the first quarter, and 22 percentage points over the second quarter of last year. As mentioned earlier, opportunistic asset purchase transactions are emerging. We did execute on one such opportunity in the second quarter, which was enabled by our superior performance in special servicing. We purchased a $133 million portfolio of reverse whole loans and REO previously repurchased from Heckman Securities. We combined these assets with roughly 167 million of our own existing buyouts and successfully financed the pool in the new non-recourse, non-mark-to-market securitization. This securitization allowed us to diversify our sources of funding and reduce our potential exposure to mark to market volatility. The combined transactions generated approximately $15 million in adjusted pre-tax income, was favorable for liquidity, and provided a stable financing source for future transactions. This is a terrific example of how our superior operating capabilities and diversified business allows us to capitalize on unique opportunities that are emerging in this environment. We continue to evaluate other similar opportunities However, the timing and the profitability of any such transaction cannot be estimated at this time. Regarding subservicing, demand remains stronger than ever, and our total opportunity pipeline continues to grow. In the last 24 months, we've added $118 billion in new loan onboardings. As expected, subservicing additions were roughly $3 billion in the quarter, as we're seeing clients extend RFP processes and decision-making due to market factors and conflicting priorities. With the delays we're seeing, we're now expecting roughly $15 to $25 billion in new subservicing additions through the first quarter 2024, down from roughly $30 billion through the end of Q4. With those additions, we expect our mix of subservicing to increase to approximately 60% over the next three quarters and total servicing UPB of roughly $305 to $315 billion.