Mr. Cooper Group Inc. (NASDAQ:COOP) Q4 2022 Earnings Call Transcript

Mr. Cooper Group Inc. (NASDAQ:COOP) Q4 2022 Earnings Call Transcript February 10, 2023

Operator: Good day and thank you for standing by. Welcome to the Mr. Cooper Group Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Ken Posner.

Ken Posner: Good morning, and welcome to Mr. Cooper Group’s fourth 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; Chris Marshall, Vice Chairman and President; and Jaime Gow, Executive Vice President and CFO. As a quick reminder, this call is being recorded. Also, 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’ve identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change. With that, I’ll now turn the call over to Jay.

Jay Bray: Thanks, Ken, and good morning, everyone. And welcome to our call. I’ll start with the quarterly highlights, as we always do. But first, I want to comment on Mr. Cooper’s performance during 2022, which was obviously a very challenging year for the industry due to one of the biggest rate increases on record. Nonetheless, Mr. Cooper was able to deliver exceptional results, which I would summarize by focusing you on exactly two key metrics. We grew our customer portfolio by 23% and tangible book value per share by 29%. Relative to our peers, this is outstanding performance which validates our balanced strategy as well as the technology investments we’ve made in our platform and the skills, the commitment, and the hard work of our team members.

And I will add that 2023 is shaping up to be a year of meaningful opportunity for Mr. Cooper. By executing on the strategy we’ve consistently shared with you and making the right tactical decisions, we stand to grow our customer base even further, plus put the company on the path to rising returns. Now, let’s turn to slide three and review the fourth quarter highlights. In terms of financial metrics, I would point to a 200 basis point lift in operating ROTCE as servicing income nearly doubled in the quarter. And bear in mind, our current return on equity is impacted by a very robust capital base which you can see in the 31% ratio of tangible net worth to assets. Turning to operations, the servicing portfolio reached $870 billion or 4.1 million customers which, as I just mentioned, is up 23% year-over-year.

And this growth plus rising rates helped push Servicing income to a record high $159 million in the fourth quarter that exceeded our November guidance of $140 million as CPR speed surprised to the downside. In Originations, as you know, we took rapid and decisive action last quarter to reduce capacity. And as a result, we were roughly breakeven in the fourth quarter, and are now on track for positive results which will be in line with what we guided you to expect. Shifting gears to capital management, we repurchased 1.3 million shares for $54 million as we continue to allocate capital, both to growing our portfolio and to stock repurchase, with the goal of maximizing investor returns. Finally, I want to mention that we’ve entered into a definitive agreement to acquire a registered investment advisor, called Roosevelt Management Company, and its sister company, Rushmore Loan Services, which is a highly regarded special servicer.

This acquisition will provide us with an asset management platform to raise third-party capital on an ongoing basis from institutional investors who seek exposure to MSRs and other mortgage assets. We expect closing to occur at midyear following regulatory approval. And we plan to go to market in the second-half. We haven’t disclosed the financial terms due to an NDA with the seller, but the cash outlay is not material. Now let’s turn to slide four. I’d like to spend a moment on developments in the servicing industry and, in particular, what we see as an unprecedented volume of MSRs coming to market. The chart on this page shows you our internal analysis on the size of this opportunity. In summary, we’re estimating that nearly $4 trillion will trade over the next three years, which on an annual basis is nearly double the historical run rate.

Now bear in mind, this surge in volume is taking place in the context of a concentrated market with a limited number of buyers. And as a result, we expect pools will trade at very attractive yields. And in fact, we’re already seeing some of the highest yields since the Great Recession. Let’s talk about what’s driving the market as I’d point you to two industry trends. First, during the pandemic, we saw a very noticeable change in originations behavior. Simply put, they chose to retain a much higher volume of MSRs than their historical practice for the obvious reason that they were awash in cash and they could afford to retain the servicing rights. Today, however, originators are facing the worst margins in years. In fact, we’re expecting for the first time ever to see three consecutive quarters of losses in the MBA quarterly origination performance survey.

And this also means, for many operators, that liquidity is becoming a pressing need. Based on data from nearly 500 originators, we estimate there is a backlog of as much as $1.5 trillion in UPB which needs to be sold. The second trend is consolidation. You’ve read public statements from industry leaders who decided to shrink their servicing portfolio. And I will tell you that there are other large operators who’ve quietly made the decision to exit. There’s no mystery about the reason for consolidation pressure. It’s the critical need for scale, technology, operational skills, and efficiency, just like in most other sectors in the financial services industry. Among a handful of large servicers, we believe Mr. Cooper is in the best position of any buyer to capitalize on this opportunity.

We have unmatched operational capacity to onboard large portfolios. We have industry-leading recapture, strong relationships, ample capital liquidity, and a sizable scale advantage. Now, let’s turn to slide five and talk about key investment themes for Mr. Cooper in 2023, starting with this MSR growth opportunity which will include both acquisitions for our own account and our sub-servicing business as we partner with investors. Additionally, when we closed the acquisition of Roosevelt and Rushmore, our asset management platform will generate sub-servicing plus investment management revenues from investors who seek exposure to MSR economics but don’t have the infrastructure or licenses necessary for direct ownership. Let’s talk about the second theme, which is earnings visibility.

We’ve benefited from a very strong ramp in servicing, and we have clear line of sight into continued profitability. Specifically, we’re now projecting more than $600 million in servicing EBT this year. And I’d emphasize, with the vast majority of mortgage customers well out of their money, this income stream will persist for years to come absent a major rate move. At the same time, we’re laser-focused on driving operating leverage, as Chris will comment on in a moment. Now let’s talk about our Originations segment. As we all know, the refi market is limited right now, with most customers well out of the money. Nonetheless, our platform is profitable and extremely scalable, as you know from watching us in 2019 and 2020. And I’d add that we’re continuing to invest in automation and other enhancements which will put us in position for the next turn in the cycle, whenever that may occur.

Finally for Xome, following a slow fourth quarter, we’re now seeing stronger activity, including record net inflows and higher pull through rates, which suggest we may finally be passing through an inflection point. Based on our latest data, we’re projecting a visible ramp in the second-half of the year, which should drive progress in our monetization strategy. To summarize, we’re really excited about the opportunities in 2023. And we couldn’t be more pleased with how we’re positioned. I want to close by thanking every single member of our team for your commitment to Mr. Cooper’s customers, your tireless work, and your enthusiasm. And now, I’ll turn the call over to Chris who will take you through more of the operations.

Chris Marshall: Thanks, Jay. Good morning, everyone. I’m going to start on slide six and talk a little bit about the Servicing portfolio, where you can see we really had a fantastic quarter. Total UPB was up 23% year-over-year to $870 billion, which represents the mortgages of 4.1 million customers. During the quarter, we purchased MSRs with $23 billion in UPB at excellent prices, demonstrating that we continue to maintain a very disciplined bidding strategy focused on portfolios with quality collateral and attractive yields that we’re confident will help us drive higher return on equity. With our scale, we see virtually every deal in the marketplace. And more often than not, we’re the seller’s first call. And because of our long history as an acquirer we have vast amounts of data on how different types of seller portfolios have behaved, allowing us to form extremely accurate assumptions about credit and recapture performance.

Now let me share a little more context on our acquisition process. In our most recent backtest, we reviewed the nearly 300 deals we were offered over the last two years. And over those deals, we elected to analyze about two-thirds, and then chose to bid on a little under half. We ended up winning 23% of what we bid on or 11% of the total deal flow. And going forward, we’d expect those ratios to remain relatively constant. We have a very good feel for what will come to market, and an even better feel for how those portfolios will perform, which is critical to earning our target returns. And I’d also point out that our backtest validated the accuracy of our underwriting, with 85% of our acquired pools modestly outperforming our deal models, and only 15% are delivering less return but only by a very, very small amount.

Now turning to sub-servicing, we grew the portfolio sequentially, despite the de-boarding of $20 billion of UPB from a single client, which we mentioned to you last quarter, but at the same time we won two new clients. Having said that, some volatility in sub-servicing balances should be expected over time, we’re privileged to service portfolios for some of the most successful companies in the industry. And we’re committed to delight each one of them. But we also know our strategies won’t always be perfectly aligned. In the long-term, we see significant growth opportunity in sub-servicing and to help maximize that potential, we’ve recently appointed one of our most experienced executives, Bryan Budd to Head our entire Sub-Servicing business, Bryan’s charges to grow our portfolio with the best clients and to do that by ensuring that our best-in-class service gets even better.

Now, moving on to slide seven, I’d like to highlight servicing earnings, which were very strong in the quarter, nearly doubling $259 million as a result of higher balances, lower costs and lower pre-payments. As Jay mentioned, CPR’s surprises to the downside, averaging 5.3% for the quarter, and even dropping below 5% in December, which is something we’ve never seen before. For 2023, we expect to generate more than $600 million in EBT and I comment that we have very clear visibility into these numbers. If you remember our guidance, at the end of Q2, we told you to expect servicing earnings to double in Q3 and that double again in Q4. And that’s almost exactly what happened. Just like those last two forecasts, our projections for 2023 are based on nothing more than the forward curve, which assumes the Fed funds rate reaches nearly 5%, mortgage rates settle in around 6% and CPR speeds average slightly under 6% for the year.

Additionally, we have several initiatives underway that promise to reduce costs, while significantly improving our customer experience. And if you turn to slide eight, you’ll see a chart with a multi-year perspective on our servicing efficiency ratio expressed in terms of basis points of the portfolio, you can see a very impressive trend with this ratio down 44% over the last five years. And just in the last year alone, our portfolio growth of 23% significantly outpaced expense growth of 13%, helping to shave another basis point off the ratio. Our strategy is to proactively drive down costs, so that we can realize positive operating leverage as we grow the portfolio while deepening the competitive moat between us and peers, to the point that no one will be able to compete with us.

In pursuit of efficiency, we’ve developed innovative technology applications, and we obsess over process improvement. I personally spend at least 50% of my time every week evaluating process improvement opportunities. And I’d add that over the last two years, we’ve identified close to 100 separate processes with gaps or excessive variability, where improvements will drive down both lower expenses for us and better experiences for our customers. Just in 2022 alone, we drove a 16% reduction in inbound calls, a 31% reduction in customer issues. And by the way, a 75% improvement in compliments, all while growing the portfolio by over 20%. This slide lays out some of the many projects currently underway. For example, we have an initiative in place to drive down call volumes through for the implementation of AI, which will predict which customers will call us and why so that we can send them information proactively.

We’re also working to encourage better utilization of our state-of-the-art IVR as well as web tools and chat functionality. Payments and escrows remain focus areas where we believe we can further simplify the customer experience with easy to understand that more timely information, which will lower costs and delight our customers with a personalized friction free process. Now many of you have asked about the risk of a credit cycle change impacting returns and our response would be first that we purposely carry excess operating capacity to absorb higher levels of loss mitigation activity. And second, we would look at a higher delinquency environment as an opportunity to grow our Right Path special servicing business. As you may recall from our comments last quarter, we’re very selective in the pools we acquire, focusing on those with very strong defensive quality.

And for now, I have observed there are delinquencies barely moved in the fourth quarter, increasing sequentially by only 3 basis points. Now, let’s turn to Slide 9 and discuss the origination segment which is a critical component of our balanced business model. Last October as mortgage rates were trending higher, we took additional action to realign capacity to a much smaller market which included taking the difficult but necessary decision to eliminate over a 1000 positions. Most of which were in originations. Thanks to this decision, we were roughly breakeven in the fourth quarter. And are now on target to earn approximately $10 million in EBIT for the first quarter, which is consistent with the guidance we gave you last fall. And we feel good about driving these numbers higher if mortgage rates settle in at meaningfully lower levels or if MBS pricing improves.

As for now, it’s a relatively small market as you know with very few customers in the money for rate and term refinance. We fine-tuned our marketing campaigns to focus on that subset of our customers who can benefit from Refi products including cash out. And at the same time, we are finding ways to drive incremental efficiencies which will pay very significant dividend when the market eventually recovers. I would add that that thanks to the company’s overall profitability and cash flow, we are able to continue investing in our originations platform. As you recall, Flash is our project to digitize our originations workflow. And I am pleased to report that in the fourth quarter we achieved our goal of extending Flash processing to 70% of our refinanced volumes.

And now, we are working on it driving implementation to 100% which would also include purchase recapture which is an area of strategic focus for us. Flash is one of many innovative applications developed by the company in recent years, including the X1 title underwriting engine which we monetized in our sales of the title unit two years ago, our Pyro document processing engine, which gives us a huge advantage in rapidly due diligence and on-boarding large portfolios and which we are focused on licensing right now, and our native cloud-based servicing application suite which we sold to Sagent last year. And by the way, I should mention that Sagent just completed an agreement to integrate the FINSEC core that Pfizer just paid a billion dollars for.

This is the final step in the launching a completely modern cloud-based platform that is decades ahead of the technology available in today’s market. Now at some point in the future, refinance volumes will return. And in that environment, you know we can scale and at extremely rapid pace and produce terrific margins. Now if you turn to Slide 10, I would like to share an update on Xome. In summary, while the fourth quarter was slow we are now seeing a measurable pickup in activity which leads us to project a substantial ramp in earnings in the second-half. To start with, we are seeing much stronger inflows from servicers as they are finally getting comfortable with the state and federal rules and investor guidelines issued during the pandemic.

This drove stronger net inflows in January. In fact, net inflows reached the highest level we’ve seen since before the pandemic. And I would add that February is looking even stronger which bodes well for the pace of sales. And as you can see, sales were a little slow in the fourth quarter due to the further pressure on the pull-through rate which we commented on last quarter. But the good news is that so far this year, we have seen that rate begin to rise. We are also seeing stronger bidding activity, higher web traffic, and faster growth in new account registrations which together makes it feel like we are finally passing through an inflection point now that we have been through six straight months of home price declines. So, I would guide you to look for stronger sales in the first quarter and modestly positive EBT in the second quarter with a more significant ramp in EBT occurring in the second-half.

Meanwhile, we continue to engage in discussions with perspective investors which we think will move forward in the productive fashion as Xome’s earnings potential becomes more visible. So, with that, I’ll now turn it over to Jaime who will take you through the financials.

Jaime Gow: Thanks, Chris, and good morning, everyone. Let’s turn to Slide 11 and review the fourth quarter results. To summarize the quarter, net income came in at $1 million. At $82 in pre-tax operating income was offset by a negative MSR mark of $58 million and adjustments totaling $33 million. Adjustments included $23 million from severance and property consolidations that we mentioned last quarter and related to the right sizing of our origination business. And $10 million associated with equity investments which represents interest we took and the sale of our Xome businesses. As Jay mentioned, we bought back $54 million in shares this quarter. That drove our weighted average diluted share count from 72.9 million to 71.6 million shares, and ended the quarter at 69.3 million outstanding.

Between operating income and the reduction in our share count, we saw a strong growth in tangible book value for share this year which increased by 29% since last year reaching $56.72 per share. We are obviously very pleased with these performances. And once again, validate our balanced business model. Now let’s turn to slide 12, and review our mortgage servicing rights. During the quarter, mortgage rates decreased by 29 basis points while swap rates increased by 16 basis points leading to a negative mark of $58 million which resulted in our MSR being flat at a 162 basis points. Now the servicing fee multiple which in our view is better high level comparison was at a multiple 5.1 times the underlying servicing strip in the fourth quarter. Slightly below the 5.2 times we saw in the third quarter.

As you know, we have a very disciplined valuation process which includes marks from multiple independent valuation experts. We additionally benchmark our valuation metrics against the public disclosures of banks and mortgage companies. And generally find that our multiple lies right in the middle of the pack which we feel is consistent with having an accurate methodology. And it should give you confidence in our balance sheet and in our tangible book value. Now turning to Slide 13, let’s review the company’s liquidity position. At quarter end, total available liquidity remained robust at $1.9 billion, down from the record level in the third quarter, but still quite ample. $527 million of the liquidity was unrestricted cash with the remaining $1.3 billion being collateralized and available immediately.

And as a reminder, the majority of our MSR line does not mature until 2024. Now during the quarter, we drew down an additional $370 million for MSR purchases bringing our total draw to $1.4 billion. This accounts for 33% of our debt which is somewhat higher than our historical ratio. Given our excess capital position, we are quite comfortable with it. In the near term, we may further tap this liquidity for value added opportunities as we continue to evaluate our overall capital mix. From a cash flow perspective, our advances remain a good story, down 17% year-over-year with over a billion in financing capacity for advances including facilities earmarked for Ginnie Mae advances. We believe that we are well prepared for credit normalization although Chris has mentioned we are not seeing meaningful pressures on our customers at this time.

Our cash flow during the quarter benefited from the steady ramping and servicing interest income. And we expect servicing cash flow to remain robust in 2023. Now I am going to wrap up my comments on Slide 14 by talking about our capital position. Our capital ratio at quarter end as measured by tangible net worth assets was 31.1%, down slightly from 31.3% last quarter. Jay and Chris had commented on the massive opportunity in servicing market. And while there is no change to our disciplined and patient approach which remains appropriate in the current environment, we are now seeing a substantial rise in acquisition opportunities ranging from small pools to major transactions. As such, I would guide you to expect deployment of at least some capital in 2023 into portfolios for the right mix of collateral and yield.

This capital deployment should help us generate higher returns on our equity over time. With that, I would like to thank you for listening to our presentation. And now, I’ll turn the call back over to Ken for Q&A.

Ken Posner: Thanks, Jamie. And Liz, we’d now like to start the Q&A please.

Q&A Session

Operator: Our first question comes from the line of Kevin Barker with Piper Sandler.

Kevin Barker: Good morning. Thanks for all the detail regarding the pipeline on the MSR portfolios out there. Could you provide us a framework or how to think about your decision-making on whether to deploy capital into MSR portfolios, is there certain hurdle rates that you lay out there, whether it’s gross yield on the MSR or total return on investment? And then could you also help us think about do you include some level of refinance opportunity when making those decisions or maybe looking at external capital partners in order to finance those?

Chris Marshall: Good morning, Kevin. It’s Chris. That’s a great question. And since we’re in the midst of bidding competitively on a lot of things I’ll answer it, but I’ll do it generally. Yes, of course we look at everything you just said, MSR yields and total returns are essentially the same thing for us right now. We do consider recapture, refinance expectations, but of course for most of the pools that are coming to market right now those levels would be quite modest. But, of course, we look at them. One of the things, as we just mentioned, is we’ve got experience buying pools from virtually every seller in the market multiple times. So, we have a good idea how those pools will behave, even in an environment like this. So, I think we look at everything.

And, of course, we do look at financial partners. We’ve been planning for this environment, as I think you well know, for two years. And so, we spent a lot of time building much stronger liquidity working with our bank partners to be prepared to take advantage of this opportunity because yields are very, very attractive. But, of course, our capital is finite, so should we be lucky to use our liquidity to its maximum then we’re — we will partner with other players, which we’ve done over the past couple of years very successfully. So, we see this as a great opportunity. We want to be able to take advantage of it to its fullest extent, but of course yields and target returns have got to fit our model. So, don’t expect us to buy every pool that comes to market.

We’ll buy those that hit our hurdles that we know we can service very efficiently. And you shouldn’t expect us to deviate from that at all.

Jay Bray: Yes. And I think, Kevin, the — if you think about it from a return profile, again we’re active as we speak, but I mean we’re looking at mid-teen kind of unlevered, and in some cases higher returns. So, I think that’s how we’re thinking about this opportunity. Obviously that can change, but we — to Chris’ point, we see it as a massive opportunity. And we want to be patient because we do think there’s going to be a lot coming to market.

Kevin Barker: Okay. And then, on the flipside, I mean, I guess, you mentioned that if it’s competitively bid or I mean, obviously, you’re — there’s other bidders out there for these types of portfolios. But could you help us understand how deep the buyer pool may be in the current environment relative to what you’ve seen in the past? What I mean by that is like when you think about when you look at the tens of billions or hundreds of billions of potential servicing that could transact, how many bidders do you expect to be for those bigger portfolios or at least as a percentage relative to what you’ve seen, say, in ’21 or 2019 or previous years?

Jay Bray: Kevin, I think the number of buyers is somewhat limited, especially as you get into the larger portfolios. So, I think you’d probably put them into three camps. You’d have the financial buyers, so there’ll be handful of those, I think, that will participate. You’ll have probably a few , like us, that would participate. And then, the banks, potentially, but again I think the banks are pretty selective and are not a consistent participant in the market. So, as we step back and look at it I think we’re best positioned. I mean if you look at the number of transfers that we’ve done, I don’t think anybody’s done as many or nobody’s done the size and complexity of transfers that we’ve done. And I think that’s a key ingredient because I think these counterparties, they really want a good customer experience.

They want to make sure they can get approval from the other stakeholders, whether it Fannie, Freddie, FHFA, Ginnie, et cetera. And so, I think it’s a very kind of limited population at the end of the day. The other thing I would say is, particularly in the Ginnie Mae side, like if you were to look at Ginnie Mae versus conventional; I think the population strength’s considerably for the Ginnie Mae collateral for a variety of reasons. And that’s — we’ve seen that historically as well.

Kevin Barker: Okay, thank you, Jay. Thank you, Chris.

Operator: Our next question comes from the line of Eric Hagen with BTIG. Eric, your line is now open.

Eric Hagen: Hey, thanks. Good morning. I’ve got a few questions here. The first one, does the value of the capitalized servicing retain the 212 basis points on slide 25, does that include the $23 billion of servicing that you bought in the quarter, like are there some low-coupon MSRs which get included in that or are they all current coupon MSRs? And then if you were to isolate the sub-servicing business and think about the earnings being generated there, what would you say is a good run rate or way to think about that, including the amount of operating leverage you have, like for every billion dollars of sub-servicing is there an approximate kind of pickup in earnings that you think you could get from that? And then I think Rushmore was in talks, maybe last fall, to be acquired by a different special sub-servicer. Can you talk about what transpired, what maybe led you to them, or them to you? Thanks.

Chris Marshall: Let’s see. Could you restate that question on Rushmore?

Eric Hagen: I think they were in talks to be acquired by a different special sub-servicer at some point last year. Hoping you can give some detail on that?

Jay Bray: Yes, we —

Chris Marshall: Yes, we wouldn’t —

Jay Bray: We can’t really comment on that. And I think, just to be clear, we’re buying really the entity. And so, I don’t think we can really comment the other process.

Chris Marshall: But with regard to sub-servicing, I think your question was the pace of growth or profitability around sub-servicing. We think sub-servicing is a compliment to our own portfolio. We think we can continue to grow it in line with our own portfolio, as Jay just mentioned. Some of these large portfolios are going to trade through financial buyers that will seek us out as a sub-servicer because we consider our platform to be absolutely best-in-class. And in terms of profitability, we have a range of different services we offer our clients. Some I would characterize as basic and standard, some that are extremely sophisticated white label. I think we’re the only sub-servicer that can provide differentiated service levels for sub-servicing clients.

So, there isn’t a single answer on profitability other than our sub-servicing clients are profitable. And, of course, you look at them differently because there is no real investment other than the pro rata share of investment we make in the platform. So, returns on investment are quite attractive, but obviously they’re much more modest than those that we get when we buy the full strip.

Eric Hagen: Yes, that’s helpful. And then, I was looking at the 212 basis points of capitalized servicing retained, on slide 25, does that include the $22 billion or $23 billion of servicing you bought in the quarter, like what’s the composition of that 212? Thank you.

Ken Posner: Hey, Eric, it’s Ken. That’s — that disclosure is for the capitalized originated MSR. So, no, it does not include acquired MSRs.

Eric Hagen: Okay.

Ken Posner: And bear in mind, we have another disclosure there; the value of the originated servicing rights at lock based on the base servicing strip was 156.

Eric Hagen: Yes. All right, that’s it for me. Thank you.

Chris Marshall: Thank you.

Operator: Our next question comes from the line of Giuliano Bologna with Compass Point.

Giuliano Bologna: Good morning, and congrats on a continued great execution. One thing I’d be curious about when you — when you’re thinking about the MSR funds or investment vehicles, I’d be curious if you’re thinking about simply just managing third-party capital in the fund vehicles, or would you be willing to invest in those vehicles? And what I mean by that or what I’m kind of getting at is, would you be willing to put kind of a pro rata share of everything you buy into funds? Or would you be looking to acquire separate pools that would go into those fund vehicles?

Chris Marshall: Giuliano, our intent is to use this to manage third-party capital. And we think there are opportunities for large institutional investors that have major exposure to MBS that would find MSR investments attractive. But obviously, you can’t buy MSR unless you’re a servicer. So, we’ll seek to almost exclusively manage third-party capital. I don’t want to rule anything out. There could be unique situations where we would certainly want to invest alongside those third-party investors if it made sense, but that’s not the primary focus. And then, the second part of your question was —

Giuliano Bologna: I think that actually answered my question. I’ll jump over to my next question, which is a bit more on the originations side of the platform. You have the note about roughly $10 million of EBT in the first quarter of ’23. I’d be curious how you think about potential for that to step-up throughout the year just in terms of thinking about the primary drivers, it’s primarily volume or where that would come from? And then somewhat related, obviously, corresponding volumes have come down significantly. I’d be curious from your perspective, is there a much greater incentive to buy both pools, if you can get more driver pricing on the bulk side and keep the correspondent business running at much lower volumes and probably higher margins from that perspective, some kind of interplay between those two different pieces.

Chris Marshall: Well, as you know, we’ve got three channels that we acquire MSR and corresponded through our co-issue channel and then bulk acquisitions. Right now, our yields on bulk acquisitions, for the reasons Jay pointed out, there are limited buyers, and there was a lot of assets coming to market. Yields are more attractive there. But we pivot constantly. And we do have some expectation that corresponding yields will begin to pick up this year, and we’ve got a great team in place. But that’s a fluid decision. It’s literally in every Thursday meeting where we are reviewing our strategies. But I would suspect that bulk pools will deliver the best returns for most of this year. Now with regard to profitability in originations, our outlook is still pretty much where we guided you to expect things to be this quarter when we spoke last Fall.

But there is some sign that rates may begin to stabilize. And I think that’s the first part, right? Clients are still getting used to the volatility in rates. So, if they stabilize that, that will be one leg of things moving up. If MBS prices return to normal spreads, that’s another factor. And of course, if rates settle in at lower levels, meaningful lower levels, then we could see much more material improvement. But for now, we’d rather guide you to where we have clear line of sight, there’s upside, but we don’t want to over-promise at this point.

Jay Bray: Yes. And I would add, Giuliano, that if you look at our platform and the investments we’ve made in Flash, the ability to scale up, it will be night and day versus what you saw in 2020. I mean we can scale our platform in a significant way and in a very efficient way, if so needed. So, the investments we’ve made have really put us kind of in a different category as we think about needing to scale up again. So, that, I think, we’re really excited about. And the Originations team has done an amazing job there. But we really transformed the platform to be able to adapt quickly if needed to a more attractive environment.

Giuliano Bologna: Thanks for all of that and I’ll jump back in the queue.

Chris Marshall: Thank you.

Operator: Our next question comes from the line of Doug Harter with Credit Suisse.

Douglas Harter: Thanks. Can you talk about, in your guidance for the $600 million of Servicing profitability, what that assumes for additions kind of given the pipeline that you see?

Chris Marshall: Sure, Doug. We’ve got modest growth in that number, growth that we know we can achieve just based on performance over the last few years, the amount of capital we have. It doesn’t anticipate the large bulk purchases that are potential. So, we’re not committing to a number that requires us to go out and win $100 billion UPB, but — so that’s upside. I’d say the $600 million is a conservative number for the year if we have just modest growth. And I’d also point out that, as you probably know, the first quarter is seasonally low for the year. So, we’ll see the fourth quarter results come down probably 10% or so just due to lower custodial balances and then return to slightly higher levels. But $600 million is a number we have a lot of confidence in. And again, with some success in acquiring some of the assets coming to market, we could see that number improve.

Douglas Harter: And then on the opportunity for MSR, I guess, how are you thinking about the opportunity of kind of just buying bulk MSR versus possibly buying whole companies that has MSR that might also have some origination capabilities and how you would weigh those opportunities?

Jay Bray: Yes. I think, look, our preference would be our bias, I guess, is to buy portfolios. And if you look at our track record, we’ve consistently bought a significant number of portfolios over the years. We have bought a couple of platforms, and we will look at the platforms. But what comes with the platforms obviously is people, culture, technology, et cetera. And so, we approach that in a very cautious manner. So, I think our strong bias will be we continue to focus on portfolios.

Douglas Harter: Great, thank you.

Operator: Our next question comes from the line of Bose George with KBW.

Mike Smith: Hey guys, this is actually Mike Smith on for Bose. Maybe just another one on the capital deployment front, it sounds like you guys are pretty bullish obviously, on the opportunity with MSR. I’m just wondering how you’re thinking about kind of balancing that with potentially buying back more stock just given the discount to book?

Chris Marshall: Bose, you should expect us to continue what we’ve done in the past. We have plenty of liquidity. We think our stock is extremely cheap, and we’ve been consistently in the market, buying shares back at a measured pace. And unless things change, hopefully, our stock closes the gap to tangible book very quickly. But if it doesn’t, you should expect us to continue to buy back shares. I think we’re fortunate to have enough capital and liquidity to continue to do both. And you shouldn’t expect any change there.

Mike Smith: Great, thank you. And then, maybe just one more on the Originations business, you guys have done a good job taking down expenses. Just kind of wondering how far do you think the industry is in terms of just pulling out broader capacity and kind of what inning you think we’re in there for the industry? Thanks.

Jay Bray: Yes. I think, look, we were very proactive there, and we took out, as you know, significant capacity. But again, we also made investments where we do think we can ramp, if necessary, quickly. I think from an industry standpoint, we’re probably, I don’t know in the late innings. I think people have made adjustments and recalibrations. But I think there’s still more to go. But I would say we were in the late innings of taking capacity out.

Mike Smith: Great, thanks for taking the questions.

Operator: Our next question comes from the line of Kevin Barker with Piper Sandler.

Kevin Barker: Thanks. So, you had one portfolio running off in the sub-servicing and you had two new wins. Should we expect a decline here in the first quarter on the total servicing portfolio just because of that runoff? Or is that going to be held up fairly well just given near-term acquisitions?

Chris Marshall: I think in the first quarter — I don’t expect a big change in the first quarter. It’s hard to tell over time. That first — a client that had a $20 billion runoff has additional UPB on our platform, and it will run-off as they are able to manage it, and we’ll work with them to do that in a way that is smooth. But I think there’s some fluidity to that schedule. And we’ll give you guidance as that happens. But Kevin, we’ve been very successful in attracting other people to the platform. So, we don’t expect any big change in the quarter. There could be some volatility either way. But long-term, we don’t think that’s an issue.

Kevin Barker: So when we think about potential portfolio growth you have, what, roughly $60 billion — $50 billion to $60 billion of sub-servicing rolling off and then other client wins that are going to come in that probably supplement that maybe over the next few quarters. Is that fair to say?

Chris Marshall: That’s right. That’s exactly right.

Jay Bray: And I think the $50 million to $60 million, Kevin, is moving out a bit. I don’t think it’s certainly not a first quarter.

Chris Marshall: Yes. No, no, that was always going to be spaced out over the year. But I do think it’s been extended a little bit. That could change, but I wouldn’t consider that a big factor.

Kevin Barker: Okay. And then, you made some comments about Sagent implementing some technology. It went pretty quick. I didn’t quite get that. Could you give us a little more depth on what has been implemented there? And how that could potentially support your business or the potential return on investment on other MSRs, just given the technology advantage that you may have?

Chris Marshall: Well, our application suite, as you know, we sold this agent, and that is a very modern native cloud set of applications that are, for a lot of reasons, way ahead of the competition. The one thing that was missing was a core. We ran on — there’s something referred to as . It’s a 50-year-old score. And by the way, every other platform out there is 50 years old. We had the only modern native application suite. Now Sagent has just signed an agreement with Fiserv to license their Finxact core. Finxact is a company we’ve been working with for the last two years. We were going to integrate it ourselves. And I don’t want to get too far off, but Finxact is a company started by absolutely the most successful iconic software developer in financial services in the last 40 years.

Frank Sanchez sold Finxact to Fiserv. Fiserv is going to replace the core in every application they have with this new core. Well, Sagent is going to use it. And so, that completes the platform. And I think it’s going to be a massive differentiator because it’s not — the term cloud native doesn’t mean that much to everyone, but having a modern application suite provides tremendous efficiencies for a servicer. Tasks that you had to do manually suddenly are done, is done faster. So, I won’t spend a lot more time and steal Sagent’s thunder, but we’re very, very bullish that now that they’ve — they will now be integrating Finxact into the Application Suite. It will be a massive differentiator.

Kevin Barker: Okay. And will that potentially add further efficiencies to the Cooper platform as well?

Chris Marshall: Absolutely, absolutely.

Kevin Barker: All right, great.

Jay Bray: And you should really think of it, Kevin, it’s going to be a game changer from both a team member standpoint. So, our actual servicing team members and also the customers. I mean to Chris’ point, it’s going to make it a much more efficient, automated, self-serve environment that will bring, I think significant efficiencies.

Kevin Barker: Any way to quantify those efficiencies, I know it hasn’t been implemented yet. But when you think about the stack of expenses associated, especially with labor or servicing being a fairly labor-intensive business, any way to like quantify that?

Chris Marshall: I wouldn’t quantify it. But the analogy I’d give you is, if you take the latest Mac and look at the power books that was out in 1990 and think about doing your work on one versus the other, and of course, it’s a sea change. And it’s that dramatic. So, I don’t want to cite a number here. But when you think about the combination of our application in Finxact versus technology that everyone is out there trying to sell that’s 50 years old, there’s obviously going to be a major change in efficiency.

Kevin Barker: Great, all right, well, thank you for the comments.

Chris Marshall: Thank you, Kevin.

Operator: That concludes today’s question-and-answer session. I’d like to turn the call back to Jay Bray for closing remarks.

Jay Bray: Thank you, everybody, for joining the call, and we’ll be available for fall. Thank you.

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