Ocwen Financial Corporation (NYSE:OCN) Q2 2023 Earnings Call Transcript

Ocwen Financial Corporation (NYSE:OCN) Q2 2023 Earnings Call Transcript August 3, 2023

Ocwen Financial Corporation beats earnings expectations. Reported EPS is $1.95, expectations were $0.17.

Operator: Welcome to the Ocwen 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, Dico Akseraylian, Senior Vice President, Corporate Communications. Mr. Akseraylian, you may begin.

Dico Akseraylian: Good morning and thank you for joining us for Ocwen’s second quarter 2023 earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen’s Chair and Chief Executive Officer, Glen Messina; and Chief Financial Officer, Sean O’Neil. As a reminder, the presentation and our 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 at different degrees uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements.

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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 and our comments contain reference 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 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 and the appendix of the investor presentation. Now, I will turn the call over to Glen Messina.

Glen 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 actions to address the market environment, and discuss why we believe our balance 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 balance 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 synthetics of servicing. 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, 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 continue 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, 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’ve said before, the Board and management are committed to evaluating all options to maximize value 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. Over the past several quarters, while originations 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 in 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 1st 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 breakeven 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 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 forwarded reverse of servicing. We believe our emphasis on growing subservicing and GSE owned MSRs also helps mitigate our exposure to liquidity demands due to advance 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, capital-light 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 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 haul loans and REO previously repurchased from Hackman 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 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. the last 24 months, we’ve added $118 billion in new loan onboardings. As expected, sub servicing 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 billion 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 billion to $315 billion. Please turn to slide seven for an update on our expense management actions. We remain committed to achieving and maintaining an industry leading servicing cost structure while at the same time improving customer experience and maintaining an appropriate risk and compliance framework. In the second quarter, servicing operating expenses as a percent of UPB declined by 1.8 basis points or roughly 15% versus the second quarter last year, with comparable UPB levels.

We’ve made solid progress towards achieving our year end servicing operating expense efficiency objective. The year-over-year improvement in its operating expense ratio with servicing UPB roughly flat demonstrates we’re getting true unit cost productivity through execution of our technology roadmap, process reengineering, and improving utilization of our global platform. Where we’re driving improved efficiency, we’re also improving the borrower and subservicing client experience with net promoter scores up 11, 12 percentage points respectively over last year. With the improvements in our cost structure, we believe scaling up our subservicing portfolio with capital-light subservicing can add between 2.5 to 3 basis points in pre-tax income per $ 1 billion of UPB added.

We would expect the profit contribution from government, reverse, commercial, and special servicing additions to have more favorable pre-tax income contribution. Please turn to slide eight for an update on our operating performance. We continue to maintain industry leading operational performance, improved service delivery to customers, clients and investors, and sustain a prudent risk and compliance framework. Our breadth of capabilities is unmatched in the industry. We service forward, reverse, and small balance commercial loan portfolios covering GSE, Ginnie Mae, Federal Home Loan Bank, and private label products. We’ve been recognized by Fannie Mae, Freddie Mac, and HUD for delivering industry leading operating performance for investors.

Over the last several years, while we have been driving productivity improvements, we’ve continued to invest in the client and bar facing technology and robotic process automation to improve customer experience. The execution of our technology roadmap has enabled reduced cycle time, enhanced access to information and 21/7 assistance through multiple digital interface channels. For example, our artificial intelligence powered borrower chatbot has hosted 600,000 sessions with an 80% success rate, giving customers improved responsiveness, and minimizing calls to our call center. Our mobile app and lost mitigation bots are also aimed at increasing responsiveness to borrowers to improve their experience. We believe our investments in technology will allow us to further improve productivity without adversely impacting Bar experience as we scale up our platform.

We continue to demonstrate proven leadership and special servicing in both forward and reverse. Last quarter, we spoke about the significant performance improvements in customer experience we delivered for one of our key subservicing clients, our ability to cure 60 plus delinquencies and our SuperiorHub claims assignment performance. As you can see, on the right, we also demonstrate strong performance in maximizing REO sales price versus appraised value while selling within the timeframes allowed by HUD which maximizes our claim recovery. These performance elements were key drivers that enabled the financial outcome of our opportunistic reverse haul loan purchase in the second quarter. Now please turn to slide nine. We continue to focus on expanding our capital partner relationships to support our growth objectives on a capital-light basis.

Over the past two years, we have grown servicing UPB supported by capital partners to $79 billion using a variety of subservicing, synthetic subservicing, which includes MAV and ESS transaction structures. In the last 12 months, we have grown our UPB funded with capital partners by over 75% and we now have active relationships with four capital partners. With multiple investors, we have the capacity to fund MSRs purchased through our originations channels and bulk transactions, which meet investor requirements further enhancing our ability to generate capital light growth as we manage our exposure to MSR valuation changes due to interest rates. Looking ahead, we’re focused on developing additional investor relationships to support our growth objectives across multiple asset types.

We’re evaluating a diverse range of potential structures with several potential investors to satisfy their unique needs and further diversify our structural alternatives. We believe the development of investor relationships will further help us achieve our servicing scale objectives In addition, our investor-driven approach to MSR purchases introduces an added level of price I want to thank our business partners at Oaktree and our new MSR investor partners for the trust and confidence they’ve placed in our team to help them achieve their growth and profitability objectives. Now, I’ll turn it over to Sean to discuss our results for the second quarter and outlook for 2023.

Sean O’Neil: Thank you, Glen. Please turn to slide 10 for our financial highlights. I’m very pleased with the performance in the second quarter, especially the material improvement in adjusted pre-tax income from last quarter. Our results represent the hard work and resilience of our dedicated employees. Going to the blue column, in the second quarter, we recognized GAAP net income of $15 million due primarily to strong adjusted pre-tax net income of $23 million add to that a net notable and income tax result of a negative $6 million to result in earnings per share of $2.02 book value per share of $57. Finishing off the table to the left, I would note liquidity was stable quarter-over-quarter at about $230 million and expected to be well within excess of the new FHFA Ginnie Mae liquidity requirements starting this September.

With respect to liquidity, in addition to our reverse securitization transaction we conducted this quarter, other drivers have been our strong track record in obtaining extending, renewing, and rebalancing various asset-backed financing facilities throughout the quarter to support our growth and reduce our cost of debt. On the right side of the page, first I’ll note that quarter-over-quarter, our GAAP net income improved by about $56 million. This was driven by a $15 million gain from the opportunistic whole loan and REO purchase in the reverse space which was then subsequently securitized in the same quarter. This securitization was our first private label securitization, as Glen mentioned, and was quite successful in terms of generating liquidity and migrating our assets to a more stable and safe financing structure, which includes being of non-mark-to-market and non-recourse.

In addition, we saw about $7 million from improved operations across our businesses, $28 million due to significant legal and regulatory settlements during the quarter and improvement in the MSR valuation quarter-over-quarter of $6 million. With the positive GAAP net income result, you can see that our effective tax rate is only about 5% due to our existing portfolio of tax net operating loss carry forwards. The tax impact we did record was due to our Asia-Pacific operations. Adjusted pre-tax income showed a strong improvement quarter-over-quarter, up $17 million with the same business driver shown in GAAP net income, but it excludes as always the MSR valuation adjustments and other notables. Finally, at the bottom of the page, I would mention we expect our third quarter adjusted pre-tax income to be closer to our first quarter levels.

This is due to seasonally higher run off in the third quarter, slightly lower pre-tax income due to the migration of $15 billion AUM to a sub-service status and lack of another opportunistic reverse transaction in the third quarter. I’d like to recap the notable items for the quarter that connect adjusted pre-tax income to GAAP net income. We provide adjusted pre-tax income as a supplemental measure for greater investor transparency, and it is a metric we use in managing the business. Second quarter notables, which are detailed in the appendix, are comprised primarily of two items; a $33 million decline in MSR valuation adjustments net of hedge. This is due primarily to changes in the valuation model assumptions made by our third-party valuation agent in response to market indications and this includes two significant MSR transactions we recently initiated.

The other driver is a $27 million gain in notables. This is a positive $28 million impact due to legal and regulatory settlements and minor offsets across severance and facility consolidation. In terms of adjusting guidance for 2023, the only change we’re making at this point is reduction in our sub-servicing segment forecast for a slightly lower growth ranging of $15 billion to $25 billion UPB and gross adds for the next three quarters. This will have no significant impact to our outlook on servicing income as we adjust our variable cost to mirror lower volumes. For a more detailed view of the quarter-over-quarter changes in adjusted pre-tax income, please turn to page 11. This page breaks out our typical income bridge with a view of all segments and then servicing and origination separately.

The servicing graph on the upper right shows the impact of the whole loan purchase plus an additional $1 million profit improvement from forward servicing. More detail will follow on page 13. The origination graph on the lower right has a slight improvement to a $1 million loss. Non-cash — here the much stronger May and June results in origination that we anticipate will continue to improve in the near-term. On page 12, I will describe our hedging approach and the impact of our capital-light strategy on interest rate risk. The graph on the left shows the difference between what appears on our balance sheet for MSR assets about $2.7 billion of fair market value versus the amount of our net exposure that we actually hedge, which is about $1.7 billion of fair market value.

The difference is primarily the transactions that don’t achieve true sale, like the MAV or Rhythm assets for which we do not assume any interest rate risks, thus the hedge for interest rate impact focused on the smaller amount on the right of that graph. Furthermore, that $1.7 billion includes assets like the Excess Servicing Spread or ESS transaction. Here, we only hedge a fraction of the total net exposure of the $259 million to match the economics that we retain. In addition, we also have the PLS MSR book or non-agency MSR book, which is primarily hedged only on a float component given that they had very low interest rate sensitivity. Our hedge coverage ratio for the quarter was in the low 90% range, a very high hedge coverage ratio will diminish the impacts on the P&L of either interest rate increases or decreases.

On the right, this graph shows the rapid growth of our Exceeds Servicing Spread structures over the last few quarters. More detail on ESS can also be found in our Q, which we released at the end of business day today. Since we retain title to these ESS MSRs, they remain on our balance sheet, cannot be sold, or have the servicing transferred unlike a standard subservicing contract. In addition to the ESS and MAV structure, we have other synthetic servicing transactions where we sell the MSR title and the bulk of the economics to a third-party in return for liquidity and retained servicing rights. Often, we have very high termination fees in the first few years to discourage the contract from being moved early in the lift of the MSSR. In conclusion, we’ve leveraged synthetic servicing, including MAV and ESS transactions, which translates to less capital on the hedge and less risk in a declining interest rate scenario.

Now, we’ll go into more detail on the segment information on page 13. We’ll start with servicing where we show adjusted pre-tax income in the upper left chart. In addition to the previously mentioned reverse transaction, servicing saw improved flow income due to both higher balances, which are seasonal and higher rates, and of course, lower expenses. Subservicing volumes saw gross adds of about $3 billion, offset by run off in both forward and reverse. The reverse runoff was primarily due to higher assignment volume, which helps the MSR owner maximize returns by delivering the loan back to Ginnie Mae faster, but lowers the balance serviced. As a recap, the annual cost reduction year over year ended the second quarter was $45 million for the servicing segment.

Please turn to page 14 for an overview of our origination segment, both forward and reverse. The origination forward business is starting to normal with correspondent lending and flow, that’s CL on the upper left chart, experiencing much better margins and slightly higher volumes than in the first quarter, mainly due to continued focus on high margin products such as best effort in Ginnie Mae Loans. You can see here the margin improvement in the upper right graph, product growth in the lower left, client growth in the lower right. This returned the correspondent channel back to a positive adjusted pre-tax income this quarter. We believe we are on a good trajectory for the rest of the year and we will continue to price this product for an appropriate yield linked to our corporate cost of capital.

Consumer direct continues to have improved volumes, albeit off a small first quarter base as well as better margins and is tracking towards profitability. This channel has shifted to a purchase cash out focus versus refinancing. Reverse has stronger origination volume, but experienced spread widening in the quarter, similar to the third quarter of last year. This was mostly driven by the regional bank crisis and inflationary pressures. We continue to ensure that the origination segment is sized appropriately the prevailing market volumes in 2023. Please turn to page 15 for a view on our stock price. Using the same starting point, which is year-end 2020 that we have used in prior years, our stock continues to outperform not just for Russell Twenty but also a basket of our peers, which we list in our proxy and also show in the endnotes.

We believe this performance is due to the strength of our balanced business, industry leading cost structure, top tier operational performance, and prudent capital-light growth, as well as our agility and broad expertise to execute on accretive opportunities such as the reverse whole loan and REO transaction and other opportunities going forward. While we are pleased with our performance versus our peers at the end of July 2023, our stock was trading at about 60% of current book. This is an improvement over most of the 2023 trading range, but we think this discount is still not representative of the value we are creating or the strength of our current balance sheet. Before I turn the mic back to Glen, I want to point out to investors a few additional data points in our appendix.

We continue to provide data on fully diluted shares and equity on page 27. Our MSR valuation assumptions on page 28 show many valuation parameters across the three major investor types. With respect to our balance sheet, we provide a more granular view on page 20, which delineates assets that require matching asset and liability gross ups under DAP treatment. These are primarily due to an inability to achieve accounting through sale, These balance sheet impacts fall into three categories; the MAV Rhythm assets that I referred to earlier: Reverse Heckham Assets and Ginnie Mae MSRs that are eligible for an early buyout. As a reminder, the Excess Servicing Spread assets sit within the all other MSR category on the far right of this stage. Back to you, Glen.

Glen Messina: Thanks Sean. I’d ask you to please turn to slide 16 for a few wrap-up comments before we go to Q&A. I’m proud of how our team is executing and the strong results we’ve delivered in the second quarter. We’ve made solid progress towards achieving our financial objectives. I’d like to thank and recognize our global business team for the hard work and commitment to our success. As we continue to execute our business strategy, we believe we’re well positioned to navigate the market environment ahead and deliver long-term value for our shareholders. Our balanced and diversified business supports our ability to perform across multiple cycles. We’re executing a focused growth strategy, leveraging our superior operating capabilities to grow subservicing across multiple investor and product types.

Our subservicing opportunity pipeline is robust and we are positioned to deliver value to clients, investors and consumers in any economic environment, pipeline is robust and we are positioned to deliver value to clients, investors, and consumers in any economic environment. We remain steadfast in our pursuit of industry servicing cost leadership by driving continuous cost and process improvement and will continue to optimize expenses further during 2023. We remain equally determined to maintain our industry-leading operational performance. We have delivered measurable performance improvements for our clients, borrowers, and investors and provide an unmatched breadth of capabilities. Through our investment in technology and global operating capability, we’ve built an efficient and mature platform with capacity for growth that delivers industry-leading performance and improved financial outcomes for clients.

We continue to expand our capital partner relationships. We are prudently managing capital and liquidity for economic and interest rate volatility as well as the market risks and opportunities. Lastly, we’re excited to put the legacy CFPB 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. Overall, we’re excited about the potential for our business and do not believe our recent share price is reflective of our financial position, growth opportunities, or strength of our business. With that, Jen, let’s open up the call for questions.

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Q&A Session

Q – Eric Hagen: Hey, good morning. Hope you guys are well. A couple of questions here. I mean, at this point, do you think you’d support a stronger ROE if mortgage rates were higher or lower than where they are today? Like how much upside do you feel like there is in MSRs if rates go higher? How are you thinking about the impacts of hedging and what you could potentially recapture, and maybe just the overall growth rate for the market if rates were to come down? And then as a follow-up to that, when you sort of guide to get into $300 plus billion of servicing into early next year like you do on I think it’s slide 6, do you have an estimate for how much incremental capital you are using to get there, or even how much you might even free up with the portfolio that size?

Glen Messina: Sure. Good morning, Eric. Look, I think in the industry, if you look overall, it’s fair to say that a rich nations in a stable environment or certainly in a downward rate environment generates a substantially higher return on equity than servicing does. I think that’s just the dynamics of our industry. So, look, I think with an embedded base of very low coupon MSRs, I think further upside value appreciation in MSRs as interest rates rise is going to be limited and not consistent with historical MSR value increases we’ve seen, the S curve effect of prepayment speed, so to speak. So from a return on equity perspective, and I’ll call it an adjusted pre-tax ROE, I think the adjusted pre-tax ROEs would be probably better with rates trending down because it creates refi opportunity, which again creates, and originations uses less capital.

So the refi margins typically expand in a downward rate environment. As I think about the growth in our portfolio, Eric, look, our strategy is capital like growth. So as we’re growing our portfolio forward, we don’t expect to deploy incremental capital to do that with the exception of the opportunistic transactions like we executed in the second quarter for special servicing opportunities. Those always require a little bit of capital, but have very high returns as we demonstrated in the second quarter. So the growth that we’re expecting in the portfolio is really going to come from, growth in our subservicing book, both with, new third-party subservicing relationships and growth in our capital partner book.

Eric Hagen: Okay. Okay, that’s a helpful direction. On slide 10, you show the same liquidity quarter over quarter. Even though the book value went up, normally, maybe wouldn’t you have more liquidity if your capital position is improving? And would you say that there’s a threshold for liquidity if it even strengthened enough where you might look to repurchase some stock?

Sean O’Neil: Hey, Eric, it’s Sean. Good morning. So what we do is we sometimes de-lever assets as needed because we don’t want to have excess cash since it’s a pretty low returning asset. With respect to having excess liquidity in our options, that pretty much remains the same as recent quarters, where we would consider debt repurchase and stock buyback. Currently, we’re probably leaning more into a debt repurchase mode, given our high degree of leverage on the company. And then, having cash for either opportunistic asset purchases or for M&A transactions is also the other variable that we’re considering.

Eric Hagen: Okay. Thank you guys very much.

Sean O’Neil: Thank you.

Glen Messina: Thanks, Eric.

Operator: And our next question will come from Matt Howlett with B. Riley Securities.

Mike Schafer: Good morning, everyone. This is Mike Schaefer on for Matt. So, I was wondering if you could give some commentary on the overall reverse space in the context of interest rate volatility that we’re seeing and kind of how you’d expect that outlook to adapt as the Fed roadmap develops.

Glen Messina: Hey, Mike. Thanks for your question. Look, in a reverse space, look, it’s no surprise reverse originations, the reverse originations market opportunity has declined substantially, probably more than 50% with the rise in interest rates. Heck of mortgages are a variable rate; short end of the curve is very high. So, again, the amount of, even though there’s been home price appreciation, because interest rates have gone up quite a bit, the amount of equity that people could tap in their house with the reverse mortgage is limited by the level of interest rates. So we have seen a rich nations volume come down. That said, I think it’s fair to say that, we are, if you look at the league tables on HECM issuance, we’re still either number three or number four in the league tables.

And, year over year, our share is going up. What we’ve seen during the course of 2023 has been a fair amount of volatility in what’s called the discount margin or spread. Essentially that reverse mortgage backed securities get priced off of, or HECM securities get priced off of. So that spread volatility has impacted our originations business, and frankly has impacted the valuation of our MSR portfolio. As market conditions continue to normalize, we would expect to see those spreads stabilize and approach longer term averages. And I would say over right now, HECM spreads are probably a good 20, 30 basis points at a minimum above the long-term average, maybe even more. In the servicing space, the servicing side of the business continues to perform very well for us.

The platform we acquired from, RMS, reverse mortgage servicing, the, , MAM waterfall had previously owned, performing well, we’ve driven a lot of cost productivity. And, as we discussed, the special servicing side of that business performs extremely well, and has given us the opportunity to take advantage of opportunistic assets purchases and generate decent returns for the company. So I think the reverse space is still one we like. I still think the demographics of the US population support long-term, stable, consistent growth and reverse mortgage originations, but it’s been a choppy market and that’s been, it’s affected the industry and I think it’s us and others. But again, we think there’s a long-term opportunity in both the origination and the servicing side.

Mike Schafer: Sure, thank you. So as far as the opportunistic side of the reverse segment, I see on the deck that you’re not expecting any whole loan purchases in Q3, but I was curious if you could quantify what you might think that would look like for the next year?

Glen Messina: So because these are opportunistic asset purchases, it’s really hard to quantify. And I think I said on the call that, look, it’s right now trying, while we are working on a couple of things, both on the forward and reverse side, it’s really hard to dimension it. Yes, they could be small opportunities, could be large opportunities. So unfortunately right now, I just can’t, I really can’t dimension it, other than to say that, we are seeing an increased number of opportunities pop up in the market. But here, obviously, you’ve got to buy the assets right, you’ve got to price them right, but I’m convinced that the assets come to market and we can acquire them at a fair price. That makes sense for us. We certainly have the servicing skills to address it and generate nice returns.

Mike Schafer: All right. Sounds good. I appreciate it, thank you.

Glen Messina : Thank you, Mike.

Operator: [Operator Instructions] And our next question will come from Derek Sommers with Jefferies.

Derek Sommers : Hey, good morning, everyone. Just given the increased capital requirements for mortgage activities at banks and the correspondent volume trend at Wells Fargo, I was wondering if you all could provide kind of an update on how things are shaking out among the correspondent sellers. Has that market share been reallocated? Is the wallet share still shifting or things stabilized? Thanks.

Glen Messina : Good morning, Derek. Thanks for your question. So, we are seeing, look, we saw the correspondent market conditions improve in the second quarter. We still, like I said on the call, we still believe there are certain market leaders whose view of MSR values is not necessarily reflective of what we’re seeing in the bulk market. That aside, our volume went up and our margins went up as well too. So I think the market’s beginning to improve. I’d say the capacity that existed or that shifted from Wells Fargo is kind of balanced around. I think there’s always an opportunity for performance relationship, an opportunity to expand our customer base. As Sean talked about, our correspondent customer base continued to grow in the second quarter, and the team is continuing to look to add new sellers for the balance of the year.

I still think there’s an opportunity to grow in the correspondence base for the balance of the year. Correspondent, we’re getting very attractive. We call it cash on cash yields, which includes the quote origination margin. So we’re essentially buying the MSR at a price lower than its fair value. So we feel good about our position in Correspondent. I think our team there is executing really well. I think the returns we’re seeing are attractive and we’re approaching the market with a very disciplined and thoughtful approach, making sure we price consistent with our cost of capital and where our MSR investors are looking to, the returns they’re looking to get. So, I think with the new bank capital standards, it’s going to create more opportunity for those who aren’t affected by those capital standards.

Our focus on growing our portfolio on a capital-like basis with MSR investor partners, we’ve got four now, we’re looking to expand that. And I think the more capital partners we have in the portfolio within reason, gives us multiple investors with different buy box appetites, so to speak, which will allow us to take advantage of the growth opportunity should volume shift into the correspondent sector and the bulk markets as a result of banks perhaps exiting or not being as aggressive in the MSR space as they have been historically. So, I think it’s an exciting time for us and others in this industry.

Derek Sommers : Got it. Thank you. That’s a helpful commentary. And then just one more, just on the guidance, it seems consistent quarter to quarter and previously the 9% free tax ROE was contingent upon the origination segment normalizing. With this quarter’s improvement in gain on sale margin, do you view the normalization as primarily missing volume or further increases in margins? Or what’s the missing piece for that segment to normalize?

Glen Messina : Yes, I mean, for us, I think it’d be a little bit more volume. As you think is fairly widely known, look, the home sales transactions are just not robust, right, for all the reasons that people talk about. People have golden handcuffs with low mortgage rates and all kinds of good stuff, right? So I would love to see a little bit more volume activity in the marketplace. I think that would be good and healthy for the industry and certainly good and healthy for the home buyer, home builder segment as well too. So I think it is a volume issue at this stage of the game. Again, I think conditions are improving. We did see volume go up in the second quarter, and right now, I’d say the early read on the third quarter from, what we saw in the press is, home sales were up for June, which, and there were home purchase applications were up in June, so that would bode well for, July and August, in the summer buying season.

But it’s just not as robust as we’d like to see it.

Derek Sommers : Got it. Thank you. That’s all for me.

Glen Messina : Great. Thanks, Derek.

Operator: Our next question today will come from Howard Amster with Ramat Securities.

Howard Amster: Hi, Glen. Just wondered why the employee costs went up like $28 million for the quarter and also from the previous year?

Glen Messina : And Howard, good morning, by the way. Thank you for your question. It’s great to hear from you.

Sean O’Neil : Good morning, Howard. So our staffing was flat quarter-over-quarter. We did pay higher incentive comp in some of the businesses like correspondent and CD, given the much higher volumes we experienced in some of those channels. So that was the primary driver of that, as well as merit raises came through, which during a period of high inflation, that’s one of the things we have to do to make sure we’re taking care of our employees to grant merit. So confident Fannie went up, staffing stayed low.

Howard Amster: I see. Was any of that due to severance? I mean, $28 million on a $56 million base seemed really high, just maybe above like merit increases.

Glen Messina : I’m looking at the three months ended page 21 of our appendix. three months ended June 22, comp and [indiscernible] was $84 million. Three months ended June 30th, 2023 was $58 million. So I’m seeing a reduction and, it looks like it’s relatively flat to the first quarter as well. Sean, am I reading it right? I maybe I misunderstood.

Sean O’Neil : Yes, Howard you may be looking at the June 30, it starts June 30, 2022, and then it jumps end of Q1 to end of Q2 and Q1 to Q2 on page 21 is flat at 58.

Howard Amster: Got you. Okay, I must have read it wrong. Thank you very much. Thank you.

Glen Messina : No worries, sir. All good. Yes.

Sean O’Neil : Okay, good.

Operator: And this concludes our question-and-answer session. I’d like to turn the call back to Glenn Messina for any additional or closing remarks.

Glen Messina : Thank you, Jen. Look, I’d like to thank our shareholders and key business partners for their unyielding support of our business. And I’d also like to thank and recognize our Board of Directors and global business team for their continued hard work and commitment to our business. I’m excited about the results we delivered for the quarter and I look forward to updating you on our progress at our next earnings call. Thank you.

Operator: And this concludes today’s conference. Thank you all for attending. Have a pleasant day.