Ocwen Financial Corporation (NYSE:OCN) Q4 2022 Earnings Call Transcript

Ocwen Financial Corporation (NYSE:OCN) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Greetings, and welcome to the Ocwen Financial Corporation Fourth Quarter Earnings and Business Update Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce one of your hosts, Mr. Dico Akseraylian, Senior Vice President of Corporate Communications. Please go ahead, sir.

Dico Akseraylian: Good morning and thank you for joining us for Ocwen’s full year and fourth quarter 2022 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 or comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are to different degrees uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements.

Forward-looking statements involve assumptions, risks and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2021 and when available for year ended December 31, 2022. In the past, actual results have deferred materially from those suggested by forward-looking statements, and this may happen again. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, the presentation or comments contain references to non-GAAP financial measures, such as adjusted pre-tax income and adjusted expenses, among others.

We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition, because they are measures that management uses to assess the financial performance of our operations and allocate resources. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company’s reported results under accounting principles generally accepted in the United States. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures as well as additional information regarding why management believes these measures may be useful to investors may be found in the press release in the appendix to the investor presentation. Now I will turn the call over to Glen Messina.

Glen Messina: Good morning, everyone, and thanks for joining our call. We’re looking forward to sharing our progress with you this morning. Today, we’ll review a few highlights for the full year and fourth quarter, take you through our actions to address the market environment and discuss why we believe our balance and diversified model can deliver long-term value. Please turn to Slide 3. I’m proud of the results we delivered in 2022. Our balance and diversified business model is working well. As you all know, with rising interest rates, the servicing environment improves substantially while the originations environment remains quite challenging. We delivered full year net income of $26 million and earnings per share of $2.97, up 42% and 49% respectively versus 2021.

Book value per share of $61 is up 17% versus prior year end. In the fourth quarter, we reported a net loss of $80 million, which included $75 million in pre-tax notable items. This was largely driven by MSR valuation changes due to lower interest rates and assumption updates to reflect lower observed trading values in the bulk market and increased future losses for Ginnie Mae borrowers. Sean will talk more about this later. Similarly, our MSR values for new originations were below levels we observed from market leaders in correspondent and the co-issue channels driving margin and volume pressure in the quarter. We reported fourth quarter adjusted pre-tax loss of $3 million, a 57% improvement from the third quarter as our cost actions and servicing segment earnings offset the impact of volume and margin pressures in correspondent and co-issue.

Despite a significantly smaller originations market, we grew our servicing portfolio 8%. We focused on growing capital-light sub-servicing, which was up 18% over prior year-end. Our sub-servicing opportunity pipeline remained strong, up 4% over prior year-end levels. Regarding our cost structure, I’m proud of the work done by our global team who delivered $100 million in annualized cost reduction versus the second quarter 2022, much better than our initial target. Expense efficiency in both originations and servicing improved materially versus 2021. Lastly, total liquidity of $219 million is up 13% versus year-end 2021. Last year, we completed $50 million in share repurchases, retiring 1.75 million shares at an average price of $28.53 and repurchased $25 million of our PHH notes.

Going forward, we are preserving capital and liquidity to enable opportunistic investments given our expectations for potential investment returns in 2023 as well as for interest rate and economic volatility. Overall, I’m pleased with our results in navigating this business cycle. We believe our balance and diversified business model is performing well and remain confident in our ability to execute on those items that are within our control. Now, let’s turn to Slide 4 to discuss the environment and our value creation plan. The conditions in servicing are more favorable than they’ve been in years and servicing is a core strength of our business model. MSR values have risen materially since 2021 and servicing profitability is improving. We are seeing increased investment opportunities in distressed assets and certain MSRs with attractive returns and we expect elevated bulk volume to persist.

Potential client interest in sub-servicing remains strong. Client delays are easing and our opportunity pipeline is robust. We are seeing increased interest in the mortgage sector from investors who are seeking partners to source and service MSRs, whole loans and non-performing loans. Moving to originations, we expect market conditions will continue to be challenging. Fannie Mae is forecasting industry originations volumes of 1.7 trillion for 2023. That’s down 29% from 2022. We expect nominal refinance activity in the near-term, even if the 30-year fixed mortgage rate were to decline to 4%, roughly 12% of outstanding mortgages have a refinance incentive. GSE actions to support enterprise goals are driving pricing and margin volatility. Competition is intense and we are seeing several market participants with a substantially more aggressive view of new origination MSR values relative to both market levels versus our own.

We are seeing heightened M&A opportunities and expect consolidation in both origination and servicing. As we’ve said before, the Board of Management are committed to evaluating all options to maximize value for our shareholders. In this environment, we believe our core strength in servicing is the right foundation. Our value creation plan built on this core strength has five key elements: leverage our balance and diversified business model; prudent growth adapted for the environment and industry leading servicing cost structure; top tier operational performance and unmatched breadth of capabilities and capital partner relationships to support our growth objectives. Let’s turn to Slide 5 to discuss the benefits of our balanced and diversified business model.

Our balanced business and key operating actions have driven consistent net income improvements since 2019. Over the last three years, servicing and originations have demonstrated complimentary financial performance with servicing GAAP, pre-tax income improving to offset declining profitability and originations. As Sean will discuss, this is true for both forward and reverse. Based on the Fannie Mae forecast for interest rates and industry volume and our productivity and portfolio growth initiatives, we expect servicing adjusted pre-tax income to improve further in 2023 and expect origination adjusted pre-tax income to remain depressed. Our focus on diversification is evident when looking at our portfolio composition. Our operating performance has supported material growth in forward and reverse sub-servicing.

We believe our emphasis on growing sub-servicing and GSE-owned MSRs, which are now 54% and 34% of our portfolio respectively, also help mitigate potential portfolio related risk in the event of a recession. In sub-servicing, we have no exposure to advances, we earn high revenues if bars are delinquent. In GSE servicing, the credit quality is high. P&I advances are capped at four months and in the case of Fannie Mae, we recover our servicing advances monthly. The segments of our portfolio where we have more significant responsibility for advancing payments, loan repurchases as well as revenue risk with bar delinquency are PLS and Ginnie Mae-owned MSRs. However, these segments combined only comprised 12% of our portfolio. While our deliberate strategy to diversify our portfolio reduces our risk exposure in the event of a recession, we expect to have capacity to support special sub-servicing should market conditions drive increased demand.

Let’s turn to Slide 6 to discuss our growth focus in the current environment. Our growth strategy is focused on driving capital-light sub-servicing and higher margin origination products and channels. Our originations team performed well in 2022 with MSR originations excluding bulk transactions, down 27% versus prior year while the total market was down 48%. In contrast, sub-servicing additions were roughly flat to prior year at $55 billion. Throughout 2022, the originations team continuously adjusted to market conditions addressing our cost structure, integrating the forward and reverse originations platforms where possible, growing our total client base by 21% and growing high margin product clients by 41%. The impact of our enterprise sales team is evident in the growth of our total servicing portfolio, which is up 8% versus prior year and 53% over the last two years.

Our sub-servicing portfolio is up 18% versus prior year and 70% over the last two years. We delivered on our objective increasing our mix of higher margin origination products, up seven percentage points versus prior year, and we’ve nearly doubled the mix percentage over the last two years. We believe our enterprise sales approach and multi-channel strategy will continue to drive portfolio growth in 2023. Now, please turn to Slide 7 for an update on our expense management actions. We remain committed to achieving and maintaining an industry-leading servicing cost structure. Our team has made great progress in 2022 managing our operating costs to realize $100 million in annualized expense reduction versus the second quarter of 2022. Our continuous cost improvement actions are focused on driving sustainable cost reduction, supporting the most essential activities while maintaining a prudent risk and compliance management framework.

Our cost structure measured in basis points is down 27% and 41% from the fourth quarter 2022 versus 4Q 2021 and full year 2020 respectively. Our goal is to further reduce our servicing operating cost structure in 2023 in basis points of UPB by roughly another 10%. Last year, we achieved double-digit improvement in our variable operating costs for all major portfolio segments and we’re targeting to deliver meaningful improvements again this year. We’re driving automation, digital migration, and other systemic process enhancements consistent with our technology roadmap and focus on continuous process improvement. And we continue to leverage our proprietary global operating platform, which has been in place for over 20 years and supports all business activities.

Notwithstanding our focus on productivity, we continue to maintain industry-leading operational performance and improve service delivery to customers, clients, and investors. We believe the improvements we’ve made to our cost structure can enable meaningful profit improvement as we grow our servicing portfolio. Assuming a standard GSE sub-servicing revenue profile without any further improvement in our cost structure, we can add between two and a half to three basis points in pre-tax income for $1 billion of UPB added. We would expect the profit contribution from government, reverse, commercial and special servicing additions to have a more significant pre-tax income contribution for $1 billion of UPB added. This year, we’re targeting to increase our servicing portfolio, our sub-servicing portfolio by $85 billion, reflecting a mixture of GSE, reverse, commercial and special sub-servicing additions as well as achieve further cost productivity.

Please turn to Slide 8 for an update on our operational performance. Our focus on driving industry-leading operating performance and our breadth of operating capabilities is the foundation supporting the growth in our sub-servicing portfolio. We have again been recognized as an industry top servicer with our third consecutive SHARP award from Freddie Mac, our second consecutive STAR award from Fannie Mae and second consecutive Tier 1 rating from HUD. Through our investment in technology and global operating capability, we’ve built an efficient and mature platform with capacity for growth that drives improved financial outcomes for clients. We have consistently invested in our servicing platform capabilities and we believe our core strength in servicing positions us well to navigate the market ahead.

Our breadth of capabilities is unmatched to the industry. We service forward, reverse and small balanced commercial loan portfolios covering GSE, Ginnie Mae, Federal Home Loan Bank and PLS products. We’re one of the industry’s largest PLS servicers with a proven expertise servicing distressed assets and creating positive outcomes for homeowners, clients and investors. We are the industry’s only integrated reverse issuer and servicer and one of two sub-servicing providers for reverse mortgages. We’ve earned the trust of clients and partners as evidenced by over $100 billion in sub-servicing additions in the last 24 months and a potential opportunity pipeline of over $300 billion. We’re excited about the growing investment opportunities that are emerging in the market that we believe we and our capital partners could benefit from.

The bulk market remains robust. We believe opportunities can emerge from the stress in the reverse mortgage market and we are one of a limited number of non-banks approved as a Federal Home Loan Bank sub-servicer and servicing buyer. Now please turn to Slide 9. We continue to focus on expanding our capital partner relationships to support our growth objectives on a capital-light basis. Last year, we opportunistically and prudently sold as well as invested in MSRs, keeping our MSR UPB flat at roughly $135 billion, while growing our total servicing portfolio through sub-servicing additions. The cornerstone of our capital management over the past two years has been MAV since completing the upsize in mid fourth quarter. MAV is issued or has purchased $15 billion in MSR UPB at attractive pricing levels.

During the fourth quarter, we close trades with two new capital providers, utilizing an excess servicing fee financing structure. These transactions provide additional funding diversification as well as mitigate a meaningful portion of our prepayment risk exposure. With these new capital partners, we’ve implemented an MSR best execution structure for flow sales of MSRs purchased through our originations channels, further enhancing our ability to grow our servicing portfolio on a capital-light basis. Looking ahead, we’re focused on developing additional investor relationships to support our growth objectives across multiple asset types. We are evaluating a diverse range of potential structures across six potential capital partners to satisfy the unique needs of each investor and further diversify our structural alternatives.

Our investor-driven approach to MSR purchases introduces an added level of price discipline to our independent valuation expert benchmarking process. Throughout 2022, we’re able to monetize MSRs at levels at or above our acquisition cost. We believe the development of investor relationships will help us achieve our servicing scale objectives, while allowing us to manage our owned MSR portfolio to between $115 billion and $135 billion. Again, I want to thank our business partners at Oak Tree and our new MSR investor partners for the trust and confidence they have placed in our team to help them achieve their growth and profitability objectives. We take this responsibility seriously and we will deliver on our commitments. Now, I’ll turn it over to Sean to discuss our results for the fourth quarter and outlook for 2023.

Investments, Finance

Sean O’Neil: Thank you, Glen. Please turn to Slide 10 for our financial highlights. Starting in the right data column for full year 2022, we recognized GAAP net income of $26 million for a full year earnings per share amount of $2.97, which led to book value per share of $61 or an increase of 17% year-over-year. In the fourth quarter, we realized a loss in GAAP net income of $80 million with a corresponding decline in Q4 for earnings per share in book value. The decline in GAAP net income was driven primarily by MSR valuation, which I will discuss in more detail on the next page. We also show earnings per share as both current and diluted for comparison purposes. I’ll move now to the walk on the right side, which has the main drivers of improvement from the third quarter adjusted pre-tax income result of an $8 million loss to the fourth quarter result of a $3 million loss and as a reminder, adjusted pre-tax income is a non-GAAP metric.

Servicing had a strong fourth quarter and generated an $18 million adjusted pre-tax income, which was an $11 million improvement over the prior quarter. Cost reductions played a big part across the company as Glen has previously mentioned, with reductions here captured in both servicing and origination data, as well as a $5 million improvement over the prior quarter in the corporate overhead areas. Across the company, we will continue to see positive impacts on cost reduction in the first quarter due to actions taken during Q4 that don’t show a full quarter impact as of yet. Origination had a more challenging quarter as it dropped to a breakeven adjusted pre-tax income, which was a decline of $11 million from the prior quarter, primarily due to lower volumes in compressed margins.

This drop exceeded our prior anticipated drop of a negative $5 million as discussed on our third quarter call due to an even more challenging originations market. For the company as a whole, the last two quarters show market improvements from the second quarter as measured by adjusted pre-tax income and I will provide full year 2023 guidance at the end of the presentation. I’d like to recap the notable items for the quarter to connect adjusted pre-tax income back to GAAP net income. We provide adjusted pre-tax income for greater investor transparency and it is a metric we use in managing the business. The fourth quarter notables, which are detailed in the appendix consist primarily of a $61 million decline in MSR fair value adjustments net of hedge and a $14 million loss in other notables, primarily $6 million due to severance and $6 million impact on the long-term incentive plan, which creates more cost on a cash settled basis as our stock price rises.

Despite the notable reductions in the fourth quarter, we still generated a better ROE in full year 2022 than the prior year coming in at 6% and we believe we remain on track to achieve GAAP and adjusted pre-tax income profitability in the first half of 2023, assuming no adverse changes to our business or the industry. For more information on our MSR valuation, please turn to Page 11. This page focuses solely on our forward MSR valuation, which was a net decline of $65 million for the quarter. The appendix will show you that the reverse MSRs gained $4 million in the quarter as a reverse MSR as a natural hedge to afford MSR. Of the decline in value for the forward MSR is roughly 70% in the fourth quarter is attributed to changes in modeling assumptions.

The biggest assumption changes were increasing the discount rate on our GSE, which is Fannie Mae and Freddie Mac book this is about 75% of our own portfolio and we took the discount rate from 9% to 9.5%. We did this during the quarters we saw market valuations in the bulk market reflect lower multiples than prior quarters. Part of this may have been driven by a supply to demand mismatch, which drove the bulk market to lower valuations than an MSR created via the origination market. The other significant assumption change was increasing our claim loss expectations for Ginnie Mae MSRs in the event that a recession might occur in 2023 with commensurate impacts on the borrower’s ability to stay current on their mortgage. Moving over to the graphs.

The top left graph shows the last four quarters of impact on MSR valuation. The light blue bars indicate the rate move impacts and then the dark blue boxes indicate a consistent prudent trend on assessing our valuation model inputs. Finally, the lower graph shows the impact of the MSR value changes for Ocwen versus eight or nine comparable companies that are both bank and non-bank over the last four quarters. As you can see, we continue to maintain a fairly prudent approach to marking our MSRs, which we believe gives us a lower risk of mark-to-market margin calls from our lenders and the event that the MSR valuation declines, as well as providing us flexibility to dynamically manage our portfolio. Finally for reference, we also show the approximate fair value impact if we had moved the mark to an average, which is about a 0.2x change.

Now let’s turn to Page 12 where we will cover more detailed segment information. We’ll start with servicing. Adjusted pre-tax income is shown on the upper left chart. The servicing business continued a trend of increasing profitability in the both forward and reverse servicing areas, driven by float improvements, lower runoff, better delinquencies and therefore, lower advances and increased scale due to higher UPB as well as the cost reductions. This is offset with a higher cost of debt due to rise in short-term rates, and the total result was a positive $18 million adjusted pre-tax income or an increase of $11 million from last quarter. The strongest improvement was in the reverse servicing area where we grew profits from $1 million to $6 million for the quarter.

This was a function of the continued integration in the reverse space, which allows us a lower cost to serve as well as an improvement in performance based fee income and incremental float improvements as we leverage various banking relationships to optimize our return on deposits. We continue to add to the reverse sub servicing book 2023 with our world-class service offering. As a reminder, this result exceeded the guidance that we provided a year ago as we began the integration of RMS, the reverse servicer acquired in the second half of 2021. Moving to the right, sub servicing growth improved in Q4 and posted a strong year-over-year growth trend of 18%. As expected, improvements in float income continued on our roughly $1.5 billion of custodial balances as well as a better return on our operating cash accounts.

Finally, like any successful servicer, we have focused on maximizing the aspects we can control continuously improving our cost structure, while keeping quality and customer service at the forefront. You can see in the lower right graph that improving trend. Some of this improvement reflects the integration of reverse with forward activities and the additional use of our Asia-Pacific operations in selected areas. Please turn to Page 13 for an overview of our reverse business, both servicing and origination. Here we have a combined look at reverse origination and reverse servicing. We run each respective business as a component of the broader origination or servicing operating units and report the results as part of those businesses on other pages.

Here we wanted to remind investors of some of the unique facets of our reverse activities that distinguish us from competitors and help create sustainable value. The year-over-year comparison shows how reverse is a reflection of our broader balanced business model. The origination profits while still strong in 2022 came down from prior years as we saw lower volumes in margins than we have seen previously. The improvements on the servicing side were driven primarily due to the reverse servicing acquisition previously mentioned. The upper right graph demonstrates our growth in reverse sub servicing, which is a very high ROE, low liquidity demand business, same as forward allows us to generate recurring revenue without the liquidity risk of owning servicing advances, or handling buyouts at the 98% maximum claim amount.

The lower left graph shows how we are highly indexed to the Ginnie Mae HECM product versus the private label or proprietary product that some other competitors have used in the origination space. The private-label product is more dependent on the volatile securitization market for an exit strategy and create the risk of holding too much product at any point in time if that market seizes up. Also, the Ginnie Mae HECM product we do hold is primarily a newer vintage post-market reform, which comes with stronger borrower guardrails to avoid certain types of delinquencies or foreclosure scenarios. Finally, I would point out that we don’t leverage our reverse MSRs as that market is not yet fully developed and on the buyout side, we do have committed financing that we view as more than sufficient for our current buyout projections, thus both in reverse origination and reverse servicing, we are pursuing a prudent profitable approach to be successful in this market and we believe our results reflect that.

Please turn to Page 14 for details on the Origination segment. The origination business had a more challenging fourth quarter versus the third quarter due to continued declines in total market volume, seasonal contraction and lower margins, partly attributed to the disconnect previously mentioned between MSR values and the bulk market versus the origination market. Specifically, correspondent and flow lending contributed a fairly smaller profit as we were not chasing margins but rather pricing for an appropriate return. The correspondent business continues to have a focus on higher margin products, which help alleviate some of the mandatory lower volumes. As we anticipated in this difficult originations market, consumer direct volume again declined quarter-over-quarter, but we were able to offset most of that income decline with cost reductions.

On the next page, we recap the current state of our origination business on Page 17. We think at this point we have right sized all of our origination channel costs and the business is appropriately scaled for the smaller operating environment that we face in 2023. First of all, origination exceeded our internal cost reduction goals and is delivered an annualized improvement of over $50 million on expenses as you can see from comparing Q2 to Q4 results and Q4 doesn’t show the full quarter impact of all the actions. We are continuing to expand our institutional client space in the flow and correspondent channels, again with a focus on clients who participate in higher margin products such as best efforts and non-delegated, which plays well into our full service operational base.

Finally, we have not lost sight and recaptured despite record low market volumes and our second half recapture was over 60% demonstrating our ability to add value to both our owned book and sub servicing, getting borrowers to refinance with our team. We will continue to focus on serving our correspondent direct retail customers as well as maintaining a high standard for at obtaining strong compliance and risk parameters. On Page 16, we have a view of our stock price relative to both index performance and book value per share. We continue to deliver sustained growth in book value per share with year-end 2022 book value up 17%. In addition, we have grown earnings per share in 2022 with an increase of almost 50% compared to last year. At the end of the year, our stock was trading at 50% of current book.

We think this discount is not representative of the value we are creating nor of our current balance sheet, but it is a strong improvement from the third quarter. In conclusion, let’s turn to Page 17 for some guidance on adjusted pre-tax income for 2023. For ease of comparison, we’ve retained the guidance we’ve provided in last quarter earnings release, so you can compare that to our current view for 2023, and I’m not going to go through all the data, but we have various metrics provided here for both servicing and the origination business, as well as OpEx guidance for the corporate overhead group. Absent significant changes in MSR values and other notables such as legal settlements or severance, we forecast GAAP pre-tax income to roughly mirror adjusted pre-tax income as our forecast as a flat interest rate view with respect to MSR valuation float income and interest expense.

Before I turn the mic back to Glen, I wanted to point out to investors a few additional data points that we’ve included in our appendix of this earnings deck. First, we have data on fully diluted shares in equity. This information allows for the most conservative view if all of the Oak Tree warrants were executed on an all cash settled basis. We also footnote the impact of a cashless scenario, assuming an exercise at our stock price at the end of January of 2023. As a reminder, OAK TREE warrants are described in full detail in our 10-K, either in the 2021 version or the 2022 version coming out later today. On our MSR Valuation Assumption page, we have added data on the valuation multiple and showed the trailing quarter for ease of reference.

With respect to our balance sheet, we provide a more granular view. This is the slide titled Condensed Balance Sheet Breakdown. This delineates assets that require matching asset and liability gross ups under GAAP treatment. This is primarily due to an inability to achieve accounting true sale, and these balance sheets impacts fall into one of three categories. The first one being the assets being subserviced for MAV or Rithm, the second being reverse HECM assets, and the third being Ginnie Mae MSRs that are eligible for an early buyout or an EBO. Back to you, Glen.

Glen Messina: Thanks, Sean. Please turn to Slide 18 for a few wrap up comments before we go to Q&A. I’m proud of how our team is executing and the results we delivered in 2022. Double digit growth in earnings and book value per share, capital efficient portfolio growth, prudent MSR valuation, reduced enterprise-wide operating cost and we improved our liquidity position. We believe our balanced and diversified business, exemplary servicing performance, proven cost management and track record of execution position us well to navigate the market environment ahead. We’re executing a focus growth strategy leveraging our superior operating capabilities to grow sub servicing across multiple investor and product types. Our sub servicing opportunity pipeline is over $300 billion and we are positioned to deliver value to clients, investors and consumers in an economic downturn.

We remain steadfast in our pursuit of industry leading servicing cost structure by driving continuous cost and process improvement and will continue to optimize expenses further during 2023. We remain equally steadfast in maintaining industry leading operating performance, customer and client satisfaction, and providing an unmatched breadth of capabilities. Finally, we continue to expand our capital partner relationships and we are prudently managing capital and liquidity for economic and volatility and opportunistic investments as strong returns in that dynamic market. We believe with the successful execution of our business initiatives and a stable originations market, we can deliver positive adjusted pre-tax income and we believe we’re taking the actions necessary to operate at our targeted ROE range before notable items.

Overall, we’re excited about the potential of our business and do not believe our recent share price is reflective of our financial position, our earnings power or the strength of our business. And with that Vernon, let’s open up the call for questions.

See also 12 Most Promising Low Cost Stocks and 12 Most Promising Medical Stocks.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. Our first question comes from Bose George with KBW. Please go ahead.

Bose George: Hey guys. Good morning. First, just I wanted to find out what are the unlevered yields that you guys are seeing on MSRs in the market, both on Ginnie Mae and GSE? And then just in terms of deployable capital, you noted that $219 million of liquidity. Now, how much of that would you characterize as kind of deployable?

Glen Messina: Hey, Bose in terms of market yields for MSRs, frankly, we’re seeing a pretty wide range. For GSE MSRs, I’d say, 9-ish to 11-ish-percent returns, probably 10% to 12% or 10% to 14% returns on Ginnie Mae’s. Reverse is probably consistent with the Ginnie Mae MSR yields as well too, and these are unlevered yields. So again, our view is yields have come up, which is consistent with rising interest rates and reflected that by increasing the discount rate on our MSRs during the course of the fourth quarter. Regarding liquidity, look, our $219 million of liquidity in terms of deployable capital, we think that liquidity position is adequate enough for us to execute the plan that we laid out here. As we said, we’re maintaining a liquidity cushion for interest rate volatility, economic volatility.

We’ve seen fairly dramatic movements in interest rates during the course of the fourth quarter and even during the first part of 2023. So right now, we’re maintaining a €“ I’ll just call it a patient approach to managing liquidity and capital in the context of a volatile market and what we think are going to be some pretty interesting opportunities for asset investments at very attractive returns in 2023.

Bose George: Okay, good. Makes sense. Thanks. And then in terms of that $85 billion of growth in sub servicing that you projected is there a kind of a breakout of how much of that is through MAV versus other?

Glen Messina: We don’t disclose that. We haven’t disclosed that yet in our public documents, nor does it appear anywhere in our K. Look, we’re looking to manage it opportunistically. So we’ve got a very strong and robust pipeline of sub servicing €“ potential sub servicing clients. We’re looking to close transactions out of that pipeline that includes both forward and reverse clients, and then as well leverage MAV and our other capital partners. So we’re not approaching the year with the prescribed mix per se. But just given the opportunities that’s what we think we can add.

Bose George: Okay, great. And actually just one more. There was obviously this bankruptcy recently in the reverse space. Is that MSR going to be sort of auctioned in the market? Is that an opportunity for you guys?

Glen Messina: Yes, I think as you and others may know, the MSRs were taken over by Ginnie Mae, so Ginnie Mae owns those MSRs now. I don’t think Ginnie Mae’s long-term goal, and again, this is my own assessment, not theirs, is to be an MSR owner. I don’t think that’s why they were €“ their focus is. So ultimately I think those MSRs may go to market, again, depending upon the return we can get. We would look at those MSRs to purchase them. But also, if somebody else wants to purchase them, we could sub-service as well too. We’re one of two sub-services in the industry, and frankly, from an alignment with our business model sub servicing MSRs is probably a more attractive opportunity than purchasing them outright.

Bose George: Okay. Makes sense. Great. Thank you.

Operator: Our next question comes from Lee Cooperman with Omega Family Office.

Lee Cooperman: Thank you. Three questions actually. What are your capital management intentions in 2023? Do you expect to reannounce a buyback or are you going to stay where you are?

Glen Messina: Right now, Lee €“ yes, right now Lee, from a capital management perspective, we’re not €“ we’ve not announced a buyback for this quarter. We’ll continuously reevaluate our liquidity position and market opportunities. But for right now, we’re holding capital and liquidity for volatility and opportunistic investment.

Lee Cooperman: If I recall correctly, earlier last year, you were talking about earning a double digit ROE for the company. You’ve now earned about 4.9% return on equity. What went wrong? And do you have a view €“ you get at many numbers, but what do you think the sustainable return equity for this business is the way you expect to run it?

Glen Messina: Yes, Lee, consistent with what we said before we think the potential for the business is high single digit to low double digit to mid-teen return on equity before notable items. That does take a stable originations market to deliver those kind of returns. And we’ve not seen a stable originations market during the course of 2023. We saw a dramatic increase in interest rates, dramatic compression in margins, and significant over capacity in our originations platform for us and many across the industry. So, market conditions and originations were probably the worst they could have been in years during 2022. For 2023, as Sean said, we’re continuing to chip away at the cost structure of the business growing scale in our business. And we believe if we achieve our scale and our growth objectives and have the stable originations market, we can operate within our return targets.

Lee Cooperman: We return target for this year with a 9% pre-tax return on equity, which is not particularly attractive. And what is your marginal tax rate going to be? So what is the tax return equity on that 9% pre-tax?

Glen Messina: The reality Lee is we pay very little in taxes and we’ve got substantial NOLs that are fully reserved on our balance sheet. So we wouldn’t expect to be a meaningful taxpayer for the foreseeable future.

Lee Cooperman: Got you. So basically 9% applied to the $61 book value, that’s kind of what you expect the weigh earnings in the current year?

Glen Messina: Assuming our assumptions for the environment paying out, that’s correct.

Lee Cooperman: Do you consider ourselves a viable entity as an independent company? Or do you think given our cost of capital, et cetera, that we’re better off merging with somebody? And if we’re so good, why has nobody bid for us to come after us given the substantial discount to book value that we sell at?

Glen Messina: So Lee, I absolutely think we’re a viable entity. We’ve been delivering double digit growth in our earnings granted we started at a loss position, but we have moved the business to a profitability position on a GAAP earnings basis. We are growing our portfolio, clients are choosing us over our competitors in the sub servicing space. So yes, I believe we’re a viable business. As far as anybody bidding for us, I can’t speak for other people. I think our business is attractive. I don’t think the value of our business is recognized and appreciated by the market. And we’re going to continue to operate our business to achieve our return objectives.

Lee Cooperman: All right. Talk later. Thank you.

Glen Messina: Yes, sir.

Operator: Our next question comes from Kyle Joseph with Jefferies.

Kyle Joseph: Good morning guys. Thanks for taking my questions. Just on that 9% ROE assuming origination stabilized, where are we in the market, obviously rates of impacted demand supplies been chasing demand down. Is it just a function of if we get rate stability at this point, has there been enough demand removed from the market that that would be enough to lead to stabilization? Just in your opinion? Kind of a crystal ball question, I apologize.

Glen Messina: Yes. Look, as we think about the originations market, I think a couple of things have to happen. Number one, relatively stable rate environment, we’ve not seen anything like that. So, we’ve seen rates drop materially and then come back up even during the course of the first quarter so far in 2023, probably close to a 50 to 70 basis point movement in the 30 year fixed rate mortgage rate. So rate stability is number one. And look, I still think there’s excess capacity in the origination space in a material way, I do think capacity’s got to come out of the system. And right now we are seeing people, frankly, from our perspective, probably approaching the market with pricing levels to fill operational capacity versus taking capacity out.

Sean O’Neil: Kyle, it’s Sean, it’s a lagging indicator, but if you look at a lot of our public peers that have already announced many companies are struggling to generate what I’d call positive adjusted pre-tax income in the origination space. That to me is at least a lagging indicator that there’s still excess capacity in the market. We see some of the other big originator pure plays announced in the coming week, and that’ll continue to inform that.

Kyle Joseph: Yep. Got it. Helpful. And then just on that what are your expectations for reverse originations in 2023 versus 2022? Obviously that mark is not immune to rate movements, but probably has impacted marginally differently than the forward side, but just kind of how you’re thinking about originations for that product?

Glen Messina: Yes. Kyle, look, there’s no equivalent, Fannie Mae, Freddie Mac, MBA forecast for the reverse market. So, look our assumption right now is, the market is going to shrink probably at least on a comparable basis to the forward market. Reverse originations are largely influenced by short-term interest rates. And with short-term rates going from sub 1% to the 5-ish percent level in over a two year period, that’ll take a €“ it really limits the amount of equity a borrower can take out of their home in the form of a reverse mortgage. So even though, home values, even if they’re stable, the amount of cash out you can get has come down and that takes some €“ put some buyers and some reverse mortgage customers on the sidelines. So we do expect to see a fairly sizable reduction comparable to what we see in the forward side impact reverse as well until short-term rates can come back to a more reasonable level.

Kyle Joseph: Got it. Very helpful. Thanks for answering my questions.

Glen Messina: Yes, sir.

Operator: Our next question comes from Matthew Howlett with B. Riley.

Matthew Howlett: Hey, thanks for taking my question. Good morning. Glen, just getting back to the MSR mark, I mean, look, I appreciate the conservatism you outlined, the yields, the , the yield discount rate moving higher. We’ve seen obviously a big moving rate since year-end. My question to you is, how willing are you to sell some more whole MSRs, if there is a bid out there and delever, just blew away from sort of this mark-to-market volatility, paid on your lines to focus on sub-servicing?

Glen Messina: Yes, so look, we are in the market pretty much on a quarterly basis, both buying and selling MSRs. As you know, we work with MSR investment partners to fund a portion of our origination. So we evaluate on a fairly continuous basis, does it makes more sense to hold MSRs versus sell MSRs. As you know, we also have a fair amount of corporate debt on our balance sheet about $500 million of corporate debt between the Oaktree notes and the PHH OpCo notes, those notes are not prepayable without penalty. So, if we’re thinking about selling MSRs in addition to paying down the variable debt, the variable interest rate debt, the secured MSR financing that we have, you’d want to use the proceeds to pay down some of the corporate leverage as well too.

And unfortunately, right now where we are with our corporate debt, the prepayment penalties would be fairly high unless we tender in the open market, which is something we did during 2022. Look, we’ll €“ in small bite size pieces, it is feasible at the right returns and the right economics to take some value off the table and sell some MSRs and redeploy the capital in the business elsewhere and arguably to reduce that. Sean, any thoughts?

Sean O’Neil: Yes, Matt, the one thing I’d add is, there’s a nuance as we have engaged in different sales transactions over the last two quarters, so in Q3 and Q4, we pursued some excess servicing strip transactions, and you’ll see the details of that broken out in our K as that requires slightly different counting. But the interesting thing about an ESS transaction is you are retaining the sub-servicing rights. So to your original question, as Glen pointed out, we actively are in the market and are looking for opportunities to €“ we view it as managing our portfolio in a dynamic fashion where we can sell an existing MSR at a good return and then in turn as we originate some higher coupon MSRs will replace that and slowly increase the whack of the book.

But the ESS transactions allow us to retain the scale on the servicing side and still generate cash. So it’s kind of an interesting transaction for us in that respect. And we did I believe at least three of those in the last two quarters.

Matthew Howlett: And that’s where I’m going with it. I mean, to me, you’ve been successful buying back debt. I think the senior debt trades below 90 and obviously that’s accretive to continue buying that back and I don’t know, what does it get for shareholders being the most conservative guy out there with MSR marks is great, but I don’t know what it get shareholders, your stock already trades at a huge discount to reported book. If the book is understated, I’m not sure what that does. And to me, it would make a lot of sense. Is there an update on MSR has moved up in value with the 4% yield since year-end. Could you give us a little snapshot on what’s happened to MSR marks post quarter-end?

Sean O’Neil: Yes, we are seeing stronger bids or higher marks on predominantly at least the GSE MSRs that we see in the market. So we actively track kind of all bids that we’re aware of that hit the market and obviously participate where we’re interested and we are through the month of February seeing definitely higher marks versus the fourth quarter, probably due to maybe more investors showing up because the supply continues to be really robust. And so it’s an interesting scenario where there’s very strong amounts hitting the market, but slightly improved valuations on those.

Matthew Howlett: Great. Look, you have a great platform. Just in the mark-to-market volatility sometime difficult to model. On that note, just give me the number again on the improvement in every, you said billion of UPB you add, you see two and a half to three bps of margin. Just give me those numbers again, Glen and Sean?

Sean O’Neil: Yes, for sub-servicing additions, we said for every billion dollars of UPB added, it’s between two and a half to three basis points of profitability.

Matthew Howlett: And that’s you effectively put up no capital for it for that.

Sean O’Neil: That’s GSE sub-servicing. That’s correct.

Matthew Howlett: Well, that’s an incredible return. Last question, we’ll wait for the €“ could you give us the DTA €“ reserve against the DTA at year-end?

Glen Messina: I don’t have that handy. That’s actually going to be in the K, which is released later today. So that’ll be accessible at that point.

Matthew Howlett: Got you. And it’s €“ the timeframe is sort of three years till profitability, so you can start to release some of that, is that sort of the timing with the shock clock if you will?

Glen Messina: It’s €“ unfortunately like everything to do in the world of taxes. It’s not that cut and dried. There’s not an incredible bright line, and so we have to continuously consult with our outside tax council and auditors, we actually think it’s a sustained view of probably less than three years, but in excess of one year of sustained profitability on a GAAP basis, which allows you to drop the valuation allowance and recognize the NOL.

Matthew Howlett: Great. No, I just think there’s a lot of value, potentially in that shareholders will give you credit for it and it’d be nice to see that come on the balance sheet, at some point down the road. I appreciate taking the questions. Thanks guys.

Glen Messina: Thank you, Matt.

Sean O’Neil: Thank you.

Operator: Our next question comes from Eric Hagen with BTIG.

Eric Hagen: Hey, good morning, guys. Hope all’s going well. Just got a couple here. I mean, how much liquidity or room on funding lines do you have to buy MSRs for yourselves away from MAV and maybe how you’d characterize the market for MSR financing, especially advanced funding right now? And even the quality of financing that you guys can get with the leverage in the overall business right now. And then maybe as just kind of a little follow up to that, what is the difference in ROE when MSR are financed through MAV versus financed on your own balance sheet? Thank you, guys.

Sean O’Neil: Sure. Thanks Eric. It’s Sean, I’ll take that. So you talked about what I view as two very different financing facilities or two distinct facilities. So there’s MSR financing and then servicing advanced facilities. And we typically, like a lot of our competitors structure those separately. The exception being a Ginnie Mae book where you have to typically combine them due to the acknowledgement agreement at Ginnie Mae, which forces you to use a common lender in a therefore a common facility. On the MSR side, both in the Ginnie Mae and the GSE space. Still pretty robust opportunities to finance MSRs. So we have multiple lines. We have one line for our Ginnie’s and we have several lines for our GSEs. One or two lenders have moved in or out of this space.

But predominantly speaking, we’re still seeing broad-based interest. It’s a fairly well understood asset. It’s fairly €“ I don’t want to say predictable, but there’s extensive modeling. So a lot of the banks that have mortgage debts of their own have high confidence in understanding what GSE and Ginnie Mae MSRs do, and so that allows them to stay in that market. Similarly on the servicing advances, that’s actually even a little bit deeper between the regional and the large banks. There’s some mega €“ some of the four mega banks don’t actively participate in direct MSR financing, but almost all of them are pretty active in the servicing advanced space as well as other investment bank and mid to large size regional banks. So very active interest there.

Terms have been €“ in terms of advanced rate and spread terms have been stable to improving over the last eight quarters. You’ll typically see anywhere between 60% to 70% advanced rates on the GSEs and probably a five point reduction for Ginnie Maes, they suffer a slightly lower but still generous enough advance rate. And the spreads have been pretty stable as well. And then you want to repeat your last question with respect to MAV and ROE?

Eric Hagen: Yes. The difference, thanks. Yes. I’m just trying to tease apart the difference in ROE between MSR getting financed and MAV versus on your own balance sheet. And maybe you can talk about the liquidity to buy MSRs through MAV versus on your own balance sheet.

Glen Messina: Sure. So MAV definitely generates a high ROE for us because we commit less equity. So we’re a 15% owner of MAV. MAV, separate legal entity. We’re a minority owner, and MAV has access to a committed 250 million of additional capital provided by both us and Oaktree at that 85/15 split, 15 for us, 85 for Oaktree. And we think that’s more than adequate to support kind of MAVs near-term intentions. MAV financing is separate from ours but we’re very aware of their financing and so that kind of informs some of my earlier comments in terms of their ability to generate returns and obtain financing. They focus just on the GSEs currently. They don’t buy Ginnie Maes or PLS. But I would view them as a similar and still opportunistic buyer, but separate from Ocwen of course.

Eric Hagen: Got it. Thank you guys very much. I appreciate it.

Glen Messina: Thanks, Eric.

Operator: Thank you. There are no further questions at this time. I would now like to turn the floor back over to Glen Messina for closing comments.

Glen Messina: Thanks, Vernon. I’d like to thank our shareholders and key business partners for supporting our business. I’d also like to thank and recognize our board of directors and global business team for the hard work and commitment to our success. I look forward to updating everyone on our progress at our next quarter’s earnings call. Thank you.

Operator: This concludes today’s audio conference. You may disconnect your lines at this time. Thank you for participation and have a great day.