Mr. Cooper Group Inc. (NASDAQ:COOP) Q3 2024 Earnings Call Transcript

Mr. Cooper Group Inc. (NASDAQ:COOP) Q3 2024 Earnings Call Transcript October 23, 2024

Mr. Cooper Group Inc. misses on earnings expectations. Reported EPS is $1.22 EPS, expectations were $2.54.

Operator: Good day and thank you for standing by. Welcome to the Mr. Cooper Group Q3 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker at Mr. Cooper Group. Please go ahead.

Ken Posner: Good morning and welcome to Mr. Cooper Group’s third quarter earnings call. My name is Ken Posner, and I’m SVP of Strategic Planning and Investor Relations. With me today are Jay Bray, Chairman and CEO; Mike Weinbach, President; and Kurt Johnson, Executive Vice President and CFO. As a reminder, this call is being recorded. You can find the slides on our Investor Relations webpage at investors.mrcoopergroup.com. During the call, we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we have identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change. I’ll now turn the call over to Jay.

Jay Bray: Good morning, everyone and thank you for joining our call. Let’s dive into the quarterly highlights, starting on Slide 3. In summary, we produced a very solid quarter with pre-tax operating income of $246 million and operating ROTCE of 16.8%, which is at the upper end of our guidance. Tangible book value grew 11% year-over-year to $69.93 per share. And our balance sheet remains in strong shape, with a capital ratio of 27.9% and liquidity at a record high of $4.1 billion. Turning to operations. We grew the servicing portfolio to $1.2 trillion, which represents 5.4 million customers and generated $305 million in pre-tax servicing income, thanks to continued strong operating leverage. Our Originations segment generated $69 million of pre-tax income, which significantly exceeded our guidance.

This was, of course, due in part to the drop in mortgage rates in the quarter. However, we also benefited from investments we’ve been making in both our direct-to-consumer and correspondent platforms, which together out-indexed the market with 80% sequential growth in fundings. I am also very pleased to report that Mr. Cooper was certified once again as a Great Place to Work, which now makes 6 consecutive years that we’ve received this special recognition. We have put a lot of care into creating a purposeful and welcoming environment for our team members. And I am delighted with this independent validation of our culture and our people. Finally, I’ll mention that the Flagstar acquisition remains on schedule to close in the fourth quarter.

We have been spending a lot of time getting to know the very talented team members in Flagstar’s mortgage operations and we are excited to welcome them to the Cooper family. If you’ll turn to Slide 4, I’ll just share some thoughts about our competitive position as we look ahead into 2025 and beyond. As you know, we are very proud of our 20-year track record of portfolio growth, which has culminated in $1.2 trillion in outstandings. However, a different way to think of scale is that we now have 5.4 million customers, which will rise to over 6 million when Flagstar closes. This makes us the single largest customer franchise in the mortgage industry. Now our mission is to help every single customer achieve their dream of home ownership. And we are constantly working with them through a variety of channels, answering questions, suggesting opportunities to save money or providing assistance when they face challenges.

As of today, we are running at 152 million customer interactions per year. As a result, we have amassed an enormous amount of information about how best to serve mortgage customers. In fact, our data lake now contains 16 petabytes. In a world of digital technology and especially AI, this data gives us a real advantage when it comes to understanding customers’ needs and how to create value for them. Our goal is to become increasingly more proactive at anticipating their needs and faster at solving them. So if you’ll turn to Slide 5, I’ll summarize the investment plans we’ve put in place to implement this vision, which we are now in the process of finalizing for our 2025 budget. To start with, we are investing in multiple areas to continue improving the customer experience.

One such area is AI in the call center, where earlier this month, we began piloting Agent IQ. This app is a state-of-the-art AI-driven coaching platform, which listens to calls in real-time, assesses sentiment, and prompts our team members on how best to help the customer. We are also continuing to invest in our digital-first platform, which consists of self-serve channels like web, mobile and IVR, where customers can access information at their fingertips. Our second focus area is originations where we believe we can sustainably gain market share in both our DTC and correspondent channels. We are working on enhancements for customers, including a faster and easier application process. And we are continuing to componentize and automate our workflows with the goal of driving lower unit cost savings in faster cycle times.

Our third focus area is loss mitigation, which may surprise you since delinquencies are so low today. But we know the cycle will eventually turn. We are working on innovative technologies, which will increase our capacity to help customers in what might be more difficult environments in the future. Finally, to support all these initiatives, we are constantly strengthening the core. Last week, we announced the promotion of Sridhar Sharma to Chief Innovation and Digital Officer, and the hiring of Jeff Carroll as Chief Technology Officer. Jeff’s mission is to ensure our cloud-native tech stack is ready for the next leg of customer growth. These investments will benefit our customers, clients and investors and they will drive long-term productivity gains for the company.

We can afford to make these investments, because the company is generating consistent, strong profitability and cash flow. In fact, I would say, based on my 25 years of experience here that there is as much excitement in the company and energy among our people as I’ve ever seen. In the last few years, we’ve hit important strategic milestones. We’ve emerged as the scale leader in our industry and we are gratified to see market recognition of this in a rising stock price, which recently hit a record high, yet the stock valuation is still quite modest in our view, at only 8x consensus 2025 earnings despite a significant runway for growth and rising return on equity. We think there is still a meaningful opportunity for investors to join us on this journey and we continue to view stock repurchase as a smart way to invest the company’s own capital.

And with that, I’ll turn the call over to our President, Mike Weinbach, to take you through our operational results in more detail.

Mike Weinbach: Thanks, Jay and good morning, everyone. I’d like to start by reviewing the Servicing segment, where we reported pre-tax income of $305 million, which is up 38% year-over-year, thanks to strong portfolio growth of 32% year-over-year and positive operating leverage. Let me start by commenting on macro factors, specifically interest rates. As you can see in the chart on the upper right, CPRs rose sequentially from 5.5% to 6.2%, which contributed to somewhat higher amortization in the quarter. We expect CPRs to continue rising in fourth quarter and throughout 2025. So higher amortization will be a theme for Servicing as well as some pressure on net interest income due to the custodial deposits we manage, which are sensitive to the Fed Funds rate.

However, we expect the impact of interest rates on servicing to be offset by gains in originations, which is the nature of our balanced business model. And meanwhile, we continue to deliver very strong operating leverage. So, let’s turn to Slide 7 and drill down on this topic. Due to strong portfolio growth, Servicing revenues increased by 38% year-over-year. At the same time, as you can see from the chart on the left, servicing FTEs actually decreased by 8%. This is the result of a large number of process improvements, including our digital-first strategy, which makes more information available to customers and the channels they prefer which are typically self-served channels rather than phone calls. The chart on the right shows you the continued decline we’re seeing in calls per loan, while utilization of other channels, including chat, IVR, mobile and web is rising.

Now, phone calls will remain a critical channel for many customers and we are committed to making this an excellent experience for them. If you’ll turn to Slide 8, I’ll give you a quick preview of our latest innovation, which Jay referenced, our Pyro Agent IQ, AI-driven coaching platform. This slide shows you the display that comes up on our team members’ screens when they are taking a call. If the AI listens in real time, you can see a sentiment indicator towards the top as well as information about the customer’s question to the right, while on the bottom of the screen are suggested actions. This platform is one example of how we leverage those 16 petabytes of data. As it listens to the conversation, the AI system is reviewing a huge number of call logs to understand the most likely issues on the customer’s mind and how our team members have most efficiently solved these problems for other customers.

The system then prompts the agent with suggestions on how to proceed with the conversation or what kind of information the customer maybe looking for. The goal of Agent IQ is to make our people extremely productive by helping them learn from best practices across our call center. Also, by saving them the chore of manually looking up files, the system lets our team members focus empathetically on the customer and their needs. We started piloting Agent IQ earlier this quarter and expected to rollout in both servicing and originations in 2025. To wrap up on Servicing, considering the impact of interest rates, our continued success in driving efficiencies and the closing of Flagstar acquisition, we’d guide you to a range of $285 million to $305 million in pre-tax servicing income for the fourth quarter.

So, now let’s move on to talk about the Origination segment where we significantly outperformed our $35 million to $45 million guidance with pre-tax income hitting $69 million. I’ll start on Slide 9 by double clicking on DTC, where we funded $2.3 billion, up 35% from second quarter. Clearly, our DTC team did an excellent job with execution this quarter, taking advantage of the rate drop in September to help customers save money and access equity. I’ll also share that they responded very effectively to some market pressure in the quarter through innovative marketing and competitive pricing, which helped us sustain our recapture rate of nearly 70% despite higher volumes. The strong performance also reflected several initiatives that came together during the quarter.

For one, Project Flash is producing efficiency gains in faster cycle times. Additionally, this year, we kicked off another project, which we call front office modernization, which includes improvements to the customer experience, such as new self-serve options and this is starting to drive higher sales team productivity as well as higher customer satisfaction scores. Also contributing to strong results this quarter, we have been adding capacity. So far this year, our amazing talent acquisition team has brought in over 300 new team members, giving us the capacity to move quickly when rates are favorable as we just demonstrated. We have also been working to shorten the time it takes to hire, onboard and train new team members. Overall, we are in a great position to take advantage of lower rates, whether their sustained or current intermittent rallies has happened in September.

As a reminder, our customer base has been gradually shifting with approximately 20% of our customers now having rates of 6% or higher. If you are interested, you can find a chart with a full rate stack for our MSR portfolio in the appendix. Turning to Slide 10. Our correspondent team produced truly extraordinary results, more than doubling volumes from second quarter. And I would add that this was without sacrificing margin. Now, let me remind you that over the last 2 years, we stepped back from correspondent to some degree, because we correctly anticipated a dislocation in the bulk market. And we allocated most of our capital to that opportunity, where option-adjusted spreads for seasoned pools were historically attractive. However, at the same time, we were launching initiatives to level up our correspondent platform since we knew the cycle would eventually turn.

Much of our work focused on developing more granular pricing models, allowing us to win the right loans at the right prices. Additionally, we went through an exhaustive review of our client relationships and found ways to deepen penetration. We made several process improvements to speed up cycle times. We rolled out a new client portal and we also took specific steps to improve capital markets execution. At the same time, we have remained disciplined with respect to credit risk and manufacturing quality and we have no plans to loosen standards. Looking ahead, we see an opportunity to grow significantly in correspondent. Given our cost leadership as a scaled servicer and our industry-leading recapture, we should be the best buyer of MSRs, not only in the bulk market, but in all markets.

To sum up, third quarter should give you a strong hint as to the potential we have in originations. And as we look ahead to 2025, we expect originations to make a much larger contribution to the company’s overall financial returns. Having said that, as you know, there is a timing difference between revenue and expense recognition and the funding cost associated with strong rate locks in the third quarter will be recognized in the fourth quarter. Additionally, mortgage rates have backed up since September, reducing some of the opportunity to help customers with rate and term refinances. As such, we’d guide you for now to a more normalized level of profitability in fourth quarter with pre-tax originations income in a range of $45 million to $65 million.

With that, I’ll hand it over to Kurt.

Kurt Johnson: Thanks, Mike and good morning everyone. I’ll start on Slide 11 with a brief recap of our financials. To summarize, net income was $80 million, which included $246 million in pre-tax operating earnings, offset by $126 million negative MSR mark net of hedges and adjustment of $6 million, which consisted of $4 million in transaction costs related to the final onboarding of customers from the Home Point acquisition and a $2 million loss associated with equity investments. I would point out that corporate debt interest expense increased from $67 million to $75 million sequentially, reflecting 2 months of interest expense from the senior notes issued in August. Starting in the fourth quarter, you should model $79 million in quarterly corporate net interest expense to account for the full impact of the new issuance.

During the quarter, we marked down the MSR by $415 million due to lower interest rates and expectations for higher CPRs, leading to a quarter end valuation of 148 basis points of UPB or a 5.1% multiple of the base servicing strip. This was offset by $289 million in hedge gains, which equates to 70% coverage, which was within range of our 75% target ratio. Now, if you’ll turn to Slide 12, I’ll comment on credit quality, which has been focused recently for certain consumer lenders. But you will see our high-quality mortgage portfolio is performing very consistently with MSR delinquencies up slightly by about 8 basis points to 1.1%. That’s extremely strong performance. The slight increase is being driven by FHA and VA collateral, which is something we have been expecting and planning for and which is why we have limited the FHA and VA to only 18% of our MSR portfolio.

Also, we have chosen very high-quality collateral, where customers have low note rates and large equity cushions. And the result of our selectiveness is evident in the chart on the lower left, where you can see our Ginnie portfolio is outperforming the industry by a considerable margin. While we don’t try to forecast overall consumer credit cycles, we have deep experience managing delinquent books. And if the environment were to turn more adverse, we believe Mr. Cooper and our investors would be extremely well protected. Lastly, turning to Slide 13, I’ll update you on our key balance sheet metrics. We ended the fourth quarter with record liquidity of $4.1 billion, up from $3.2 billion in the second quarter, driven by the issuance of $750 million in senior notes as well as $750 million of incremental MSR financing capacity.

You will notice that our unrestricted cash balance has been gradually rising consistent with our internal policy, which sets our liquidity target at a sizable multiple to all regulatory requirements. Other positive liquidity metrics include the fact that nearly all our MSR and advanced lines are now turned out to 2026 and two-thirds of them are fully committed. Our capital ratio, as measured by tangible net worth to assets ended the quarter at 27.9%, down about 50 basis points from last quarter, but still above our target range of 20% to 25%. The gradual pace at which we’ve deployed our excess capital over the last year speaks to our discipline and stewards of investor capital, as we seek the highest returns available to us in the bulk and correspondent channels, while continuing to repurchase shares as well.

Now, let me remind you that the reason we set a range for our target capital ratio is that the mix of assets on our balance sheet shifts depending on the environment. If we grow our originations business in 2025, as we expect, you will see a higher mix of loans held for sale on the balance sheet. And accordingly, our capital ratio might well move into the middle of our range or even towards the low end. This is because we set higher capital levels for MSRs than we do for loans. Regardless of the ratio, unsecured note holders, rating agencies and other stakeholders will continue to benefit from a solid balance sheet, robust cash flows, a disciplined enterprise risk management framework and our industry leadership position. I’ll wrap up now by commenting on the outlook.

Clearly, this was an exceptional quarter with 16.8% ROTCE. As Mike pointed out, in the fourth quarter, we do expect a slightly lower level of earnings in both servicing and originations, but we continue to anticipate 2025 ROTCE at the midpoint of our 14% to 18% guidance range based on the growing contribution from originations, further operating leverage and servicing and the accretion from the Flagstar Mortgage Banking acquisition. With that, I’d like to thank you for joining us on today’s call and for your interest in Mr. Cooper. I’d now like to turn the call back over to Ken for Q&A.

Ken Posner: Thanks, Kurt. And Didi, if you could now start the Q&A session, please.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from Terry Ma of Barclays. Your line is open.

Terry Ma: Hi, thank you. Good morning. I think you mentioned the $45 million to $65 million pre-tax guide for originations in the fourth quarter was kind of the new normalized run-rate? And is that right, can you maybe just talk about the drivers there?

Mike Weinbach: Yes. Thanks, Terry. It’s Mike. So that’s right, $45 million to $65 million guide. And this has been a challenging quarter to guide for, because as recently as the middle of September, we had mortgage rates below 6% and now they are running over 6.5%. And so as we look ahead, we still see a lot of momentum in our direct-to-consumer business driven by some of the enhancements that we’ve made. We still see a lot of opportunity if rates are higher and there is less opportunity for rate term refinances for cash out and home equity. And just to share with you over 80% of our customers have more than $50,000 of tappable equity in their homes and more than 60% have $100,000 plus. So we see a lot of opportunity regardless of environment. And the guide for this quarter is heavily dependent on what happens with rates, but we feel good about the progress we are making in the business regardless.

Jay Bray: And if you think about it, and we’ve talked about it a lot, I mean the impact of our balanced business model will certainly kick in, right. If we do see rates stay at this level, obviously, servicing will benefit significantly. And so that’s how we think about it. I mean, it’s purely a function of what our prepay is going to look like, what’s the opportunity set and – which is why we’re guiding to that level. But servicing, again, given the balanced business model would certainly benefit if rates stay at this level.

Terry Ma: Got it. That’s helpful. And I guess is there any color you can provide on what you saw in the quarter within the DTC channel versus maybe expectations? I would have thought in terms of volume increases in the third quarter, DTC might have come in a bit stronger and correspondent a little less strong. Any color you can provide there?

Mike Weinbach: Yes, sure. I’ll start and then Jan and Kurt can add on. And it was an interesting quarter. It was almost like two halves, beginning the middle of August when rates started to drop. We saw a significant shift towards rate term refinances. And to put that in context, it’s what we were seeing in terms of locks was probably 70% to 80% higher than what we were seeing in the period before that, again, with rate term refinance. Purchase held steady, grew slightly. Home equity stated relatively consistent through it. Cash out refinance stayed relatively consistent to slightly up. Within the correspondent business, it was – it probably had less to do with the rate and more to do with some of the changes we’ve been making across the business.

We feel really good about the growth opportunities we have in the correspondent business as the most efficient and best servicer and being one of the top players in the industry in terms of recapture. We don’t see any reason why we shouldn’t be a much more significant player in the correspondent business. We’ve made changes to our pricing models. We have doubled down on our client relationships. We’ve made changes to our capital markets execution. And I think you saw that in the quarter, and I think you should expect to see that continue.

Jay Bray: Yes. I mean I think a simple way to think about it is when you look at recapture, we are close to 70%, right, which is awesome. And so I think the direct-to-consumer team did a great job, came in kind of in line with where we would expect. And again, as I said earlier, if rates go in a different direction and move down, they will kill it. And so recapture is core to who we are. We have been doing it for decades and we would expect great things from that channel. And to Mike’s point, on correspondent, look, at the end of the day, we are, we think, the lowest cost servicer. We think, as I mentioned, we have the best recapture. And so we should be the best buyer of MSRs. So, there is massive opportunity in the correspondent channel and we will take advantage of that. And I don’t know, Kurt, did you want to add anything or?

Kurt Johnson: I mean I would just add on Mike’s comment for correspondent and it’s true for DTC as well in terms of execution on the capital market side. Jay mentioned in our excellent recapture and we do and – but we look also at speeds and investors and we look holistically at execution and we need to be cognizant of the speeds that we are generating, particularly around Ginnie Mae securities to maximize our ongoing opportunities there.

Jay Bray: It’s a great point.

Terry Ma: Got it. That’s helpful. Thank you.

Operator: Thank you. And our next question comes from Mark DeVries of Deutsche Bank. Your line is open.

Mark DeVries: Yes, thanks. I was hoping you could discuss kind of the latest state of the pipeline for bulk servicing acquisitions. There is still anything out there that could really move the needle for you guys? And also, just discuss flexibility you have to do more deals kind of post Flagstar. It looks like you added significant capacity in unused lines during the quarter. So liquidity really shouldn’t – or should remain strong after the deal and your tangible net worth to assets should still be kind of at the high end of your target range. So just could you just discuss opportunity and flexibility in that market?

Jay Bray: Yes, great question, Mark. I think, look, we announced Flagstar. We feel like we are in a great place. That will close in the fourth quarter, which is obviously a significant bulk acquisition. When you look at the landscape now, I mean, a couple of years ago, we anticipated a disruption. We acted on that and we’ve grown our portfolio almost 75%. So I think the track record kind of speaks for itself. As you think about the landscape today, clearly, as we pointed to in the last call, it has slowed down. I think some of that is just seasonality. We have acquired a couple of small pools, kind of slightly less than $10 billion recently. So there’s still activity. We are going to participate in that activity and we would expect it to pick up in the first half of next year.

And the bulk market is always going to be there, right. And we are the best buyer of bulk. And so I think we’ll be opportunistic and when the returns make sense, we will play there appropriately. From a capacity standpoint, you hit the nail in the hand and we have plenty of capacity. We’ve been very intentional about increasing our lines, very intentional about having dry powder to act when appropriate. And so we feel great about that. And when you look at our tangible net worth asset ratio, plenty of room there that will come down slightly, I think, in the fourth quarter because of Flagstar, but still plenty of room to move and plenty of room to act. The other thing I would say is when you think about sub-servicing, we think we are – there is going to be some wins there as well.

And so we are continuing to be excited about that channel. We’ve partnered with strong financial buyers and strong originators. So that flow will continue, but we expect new clients there, too. So a lot of good things to come, I think, on both fronts.

Mark DeVries: Okay, great. And when I think about kind of your past approach to the correspondent I described it as being a little bit more opportunistic. But am I right in kind of interpreting your comments today, is it seeming like you now feel like you have a real reason to win and maybe a more committed kind of participant in that channel and look to take share longer term?

Jay Bray: 100%. I really believe – I mean look, we are always going to be very, very good stewards of deploying capital. And so we are going to look at what are the best opportunities in the marketplace. But as we look at our position, again, from a cost of service standpoint, from a retention standpoint, we should be, and I think are the best buyer of MSRs in any channel and corresponding it presents – we have been in it for years, and we think we can definitely take more share there. We will take more share there, and we think there is opportunities to grow it in a significant way.

Mark DeVries: Great. Thank you.

Operator: Thank you. [Operator Instructions] And that will come from the line of Eric Hagen with BTIG. Your line is open.

Eric Hagen: Hey. Thanks. Good morning. When we compare the adjusted EBITDA and the sources and uses of cash flow on the last two slides of the deck, what are the key differences maybe between those figures? And which do you feel like is a better reflection of the cash flow that you guys manage the business to? Thank you, guys.

Kurt Johnson: Hey Eric, it’s Kurt. I mean I think that the answer is the sources and uses of cash flow are how we manage our acquisition strategy and share repurchase on a go-forward basis. So, the last chart really shows kind of what we are looking at from a true free cash flow perspective after you talk about kind of the recapture and what’s available for whether it would be correspondent or other acquisitions, bulk acquisitions or share repurchases.

Eric Hagen: Okay. Got it. That’s helpful. One more on cash here, I mean it looks like the cash flow amortization was $234 million in the quarter. Do you have an estimate for what that number is following the onboarding of Flagstar? Would you say it’s like proportional? And is there a good way to benchmark that figure going forward for changes in mortgage rates?

Kurt Johnson: Yes. I mean, we don’t give guidance for that, Eric. But yes, I mean I think proportionately, right, the Flagstar acquisition will probably add, call it, between $50 billion and $70 billion of MSRs against our existing $600-plus billion. And the stratification of the portfolio is about the same as our existing MSR portfolio, so kind of that’s pro rata…

Eric Hagen: Okay. Great. Thank you, guys very much.

Kurt Johnson: Thanks Eric.

Operator: Thank you. [Operator Instructions] And that will come from the line of Giuliano Bologna with Compass Point. Your line is open.

Giuliano Bologna: Good morning. Congratulations on the continued strong performance. As the first question that I am curious about is you had some pretty incredible operating leverage on the servicing side. Sellers will just benefit from some of the other ones are effectively flat year-over-year while UPBs are 30%. Going forward, I am curious how much more operating leverage you think you have and how much slower your operating expense base should probably grow versus year-to-date going forward.

Jay Bray: Yes. Thanks Giuliano. The short answer is we think we have a lot of continued opportunity. So, this isn’t a one-time event. It’s a result of a continuous strategy of investing and perfecting the platform. And we believe we have really built a scalable servicing platform. And the things that we showed you like Agent IQ and some of the other investments we are making, we think are going to allow us to continue to be more efficient, and we expect to continue to grow, but to be able to continue to manage expenses as we do it. And so we really see the scale benefits as we are getting larger, our cost per loan to service has been coming down, and we expect that trend to continue.

Kurt Johnson: And if you think about it, I mean all the investments that we talked about are, we are maniacally focused on the customer experience and certainly focused on driving that cost per loan down. I think Mike had said this on the previous call, but if you reduce your handle time by 10 seconds, that’s over $1.3 million in savings. If you reduce your calls by 10% because you are delivering such a great digital experience to the customer, that’s over $10 million in savings. And so I think we are in the early innings of this. And Jay Jones, who runs servicing, his team are excellent and identifying opportunities. And so I think, Giuliano, we have got a long ways to go, and we will continue to drive cost per loan down with a great customer experience.

Mike Weinbach: And just to connect the final dot on what Jay said. So, what we are showing with the way we are deploying AI technology in servicing and frankly, we plan to do the same thing in our originations business. But for the servicing example, when our customer service team is taking a call, you can see how the AI is now pulling information forward that they would otherwise have to go look for. And if an average call is 10 minutes, we think there is probably two minutes to three minutes that are spent looking for information to be able to help deliver a great experience to the customer. We think we are going to be able to deliver a better experience by having it faster, but just to connect the dots to what Jay said in terms of what 10 seconds of time saved on a call is in terms of dollars, and if you can save two minutes to three minutes, it really starts to make an impact.

Giuliano Bologna: That’s very helpful. I appreciate that. And then thinking about on the origination side, maybe a bit more focused on DTC. But from a processing perspective, most of in process the same amount of seconds versus cash-out refis in any given period. I am curious if how impactful it is to switch volume from second liens that might have this higher gain on sale ratio, but switching that volume to more cash-out refi or rate-term refi where the dollar balance is probably 4x the size, how much incremental value that can help you back up or earnings are that can help to pick up over the next few quarters?

Jay Bray: Yes. I mean I think you hit the nail on the head, right. Our rate-term refi margins are a little bit lower than our cash-out refi margins. And certainly, our second lien margins are pretty tremendous. And I think Mike can speak to it, but the team does a really tremendous job from a marketing perspective. Obviously, any customer that calls us, we are going to do their loan, right. But from a marketing perspective, being able to pivot on a dime based on where rates are to really drive kind of the volumes that we want to see between those three different products, depending on where the rates are. And Mike talked about the number of customers who are – who have $50,000, $100,000 plus of capital equity. Rates have backed up 60 basis points since the end of the quarter. And with that, our strategy is pivoted and our rate locks volume remains really, really strong.

Mike Weinbach: Yes. And I will just add, if you think about – when we talk to a customer, we are just trying to help them find the best product to meet their needs. Sometimes that’s a rate-term refinance, sometimes it’s a cash-out refi, sometimes it’s a second. And so we are going to do whatever is best for the customer, and that will change depending on the interest rate environment. The thing that I think is exciting about our direct-to-consumer business is during this very difficult last couple of years for the industry where it was very difficult to be profitable in the business, we were still profitable. We continually have been investing in the platform. And those – that combined with more and more of the originations being done at higher rates, and we have shown 20% of our customers are 6% plus has created a bit of a coiling spring in the DTC business.

And what we saw for a brief period in the third quarter, when rates came down is that we are able to react very quickly and it had a very meaningful impact on our profitability. And rates are back up a little bit right now. And so we might see more cash-out in seconds than rate-term. And so we are guiding a little bit lower for this quarter, but still higher than what we were earning at the last time we were at those levels. We have more portfolio growth that’s coming, particularly when we closed Flagstar acquisition. And we have been steadily building capacity throughout the year in anticipation of this. So I think what the third quarter showed is we can move really quickly and it’s very profitable when we do so. And as we look to next year, we are not making predictions on rates, I think other than that, it will fluctuate.

And we will be prepared regardless of what happens with rates to make sure we are doing the right things for our customers. and our balanced business model and make sure that we are delivering good returns for our shareholders.

Giuliano Bologna: That’s very helpful. And then hopefully, a much quicker and simpler question because I thought the color a little bit on my side, when you talk about the guidance numbers for servicing originations, do those include any impact from Flagstar? And then as a little bit of a follow-up, I am curious to know is there any – if you have the expectations, closing later or sooner in the fourth quarter for the Flagstar transaction.

Kurt Johnson: So, Julian, great question. Yes, thanks. The guidance does include the impact of Flagstar and we do anticipate that it will close earlier in the fourth quarter than later. But obviously, we are just guiding to the fourth quarter close.

Giuliano Bologna: That’s very helpful. I appreciate it and I will jump back in the queue.

Operator: Thank you. [Operator Instructions] And that will come from the line of Bose George with KBW. Your line is open.

Bose George: Okay. Good morning. Just wanted to go back to the correspondent versus bulk discussion. I mean in terms of your market share in correspondent, is it fair to say it’s likely to remain at the levels you do this quarter or even potentially improve as the bulk opportunity has largely played out, I guess is that what you are suggesting?

Jay Bray: No, I don’t think the bulk opportunity has played out, Bose. I think you have been doing this a long time, and we have too. So, we – I think there will be plenty of opportunities to participate in the bulk market going forward. But that will have a play as we have seen over the past. I think on the correspondent, I think we will be able to grow that beyond what you saw in this past quarter, and that would be our intention. I mean again, when you look at it, I would say, number one, the capital deployment, we are always going to be very disciplined. So, we will look at where the best opportunity is. But we believe the correspondent franchise that we have built is very strong. We like the returns in that channel. And we would expect to grow it beyond what you saw in this previous quarter. And so we are very bullish on the opportunity there. So, we think that we will grow it significantly beyond where it was in this past quarter.

Bose George: Okay. Great. Thanks. And then actually, just a little question on the corporate expense line item. But I couldn’t recall was there some one-time last quarter and this is the $72 million this quarter more of a normalized run rate?

Kurt Johnson: Bose, it’s Kurt. So, I think it’s $53 million, not $72 million versus $39 million last quarter. And yes, you are correct. Some one-time – there was a little bit of one-time benefit last quarter, call it, to the tune of $2 million or $3 million, but we do anticipate that in Q4, it will go down back to sort of the $40 million level in run rate that it had been before. There were a few one-time costs that came through this quarter as well.

Bose George: Okay. Perfect. Thank you.

Operator: Thank you. [Operator Instructions] And that will come from the line of Eric Hagen with BTIG. Your line is now open.

Eric Hagen: Hey. Thanks for taking my follow-up. I actually want to ask about the Ginnie Mae capital rules. How you see the market responding when those take effect? I mean I imagine you guys are well capitalized relative to the standards, but do you think the implementation of those rules could catalyze bulk servicing trades or MSR valuations to be disrupted anyway?

Kurt Johnson: Hey Eric, it’s Kurt. It’s a good question. Yes, I mean the Ginnie Mae risk-based capital rules came out almost 2 years ago now. And yes, we have been following and monitoring closely. We are extremely well capitalized based on kind of all the guidance and we stay sort of closely in tune with Ginnie in terms of any kind of changes that they plan on making to those guidelines, will be a catalyst for more MSR sales look potentially. I mean I think that Ginnie themselves said that there were two or three based on their calculations that were undercapitalized two to three servicers. I think we have seen one public that had indicated that they were as well. So, yes, maybe we will drive some Ginnie Mae bulk sales, and we actually have seen Ginnie Mae activity, which has been really, really modest actually in terms of bulk sales. We have seen a little bit more activity in the Ginnie space as the year has progressed.

Eric Hagen: Great. Thank you, guys.

Operator: Thank you. [Operator Instructions] And that will come from the line of Crispin Love with Piper Sandler. Your line is open.

Crispin Love: Good morning everyone. Just with your 14% to 18% ROTCE target for 2025, can you just speak to some of your assumptions what could get you to the higher end of that range? In the prepared remarks, you mentioned the origination segment making a bigger impact in 2025. Servicing has been in that 80%-plus range of pretax and is expected to be in the fourth quarter as well. So, just curious what kind of level would you expect that to be in 2025 to get to the higher end of that range or even above that as originations makes the bigger impact?

Kurt Johnson: Yes, good question. I think that the answer is we have said we are very comfortable in the middle of the range already. And so I think going up into the higher end of that range, there are a lot of things that could catalyze that. I think originations and kind of periodic episodes like we had in August and September where originations volumes go up because their borrowers that are in the money, I think could help drive that. I think that more – sorry, more subservicing volumes, which Jay talked about earlier, we have got a healthy pipeline of subservicing. And keep in mind, subservicing does not deploy any capital for us. So, it’s true fee-based income. I think that could catalyze and drive earnings up into the higher end of the range.

And then candidly, if rates stay high and speeds come down and the Fed is not as aggressive as maybe a lot of people think they are going to be, and we don’t have the six rate cuts, that could drive us into the higher end of the range. So, we think that there are a lot of opportunities to drive us into the higher end of the range and really not much that would drive us down in the lower end of the range.

Mike Weinbach: And I would just add – sorry, I agree with everything Kurt said. And just to remind everybody, we came into the year introducing this 14% to 18% range through this year, we will probably operate at the 15% level. And we have seen momentum. We have like a little bit the wind at the back of our balanced business model with everything that we have done this year. And so, this quarter ended up a little bit higher because the size of the originations market and the fact that we recognize revenue at the point of lock. But again, like I think if you take a step back, we feel comfortable that regardless of where the rate environment is, our balanced business model is going to allow us to operate in the middle point of that range.

And given where we trade as a multiple of book and a multiple of earnings, generating mid-teens ROE off of the balance sheet parts of our business. As Kurt mentioned, we have a number of capital-light fee based revenue streams from subservicing, special servicing and some of our other businesses and the opportunity that’s there on the origination business. We are excited as we look ahead into next year.

Crispin Love: Great. Thank you. I appreciate all that color. Definitely makes sense. And then just digging a little bit deeper on recapture, can you discuss your positioning in this cycle compared to prior cycles. You mentioned technology, AI and other areas? And do you expect these areas to drive higher or maintain your current recapture rates that you are seeing in that already? Just a little more color on what you are doing on the tech side for a recapture would be great. Thank you.

Jay Bray: Yes. I think look, we are 100%. I think that we are going to do better. I mean when you look at the investments we have made from a process standpoint, it’s delivering a better customer experience. We are confident in our cycle times. We are carrying additional capacity now kind of as we speak and continue – and plan to continue to do that. I think that’s going to contribute to consistent if not higher recapture. Then, candidly when you look at our analytical capability, the marketing capability, the models that we have built around propensity, I mean all of those have just gotten better over time. We have got a super talented team there. And so – when we look – and we are looking at this at a customer level in scoring at a customer level, and so we feel very good and very confident that we will be able to maintain and grow recapture in really any cycle.

And it’s going to be dependent on what the customer ultimately. What’s the best thing for the customer, but the investments we have made are definitely going to drive better results.

Crispin Love: Thank you. I appreciate you taking my questions.

Operator: Thank you. I am showing no further questions in the queue at this time. I would now like to turn the call over to Mr. Jay Bray for any closing remarks.

Jay Bray: We really appreciate everybody joining us and look forward to further conversations. Thank you.

Operator: This concludes today’s program. Thank you all for participating. You may now disconnect.