Onity Group Inc. (NYSE:ONIT) Q4 2024 Earnings Call Transcript

Onity Group Inc. (NYSE:ONIT) Q4 2024 Earnings Call Transcript February 13, 2025

Onity Group Inc. misses on earnings expectations. Reported EPS is $-3.61 EPS, expectations were $2.34.

Operator: Good day, everyone and welcome to this Onity Group’s Fourth Quarter Earnings and Business Update Conference Call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, today’s call will be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn today’s conference over to Valerie Haertel, Vice President, Investor Relations. Please go ahead, ma’am.

Valerie Haertel: Thank you, Katie. Good morning and welcome to Onity Group’s fourth quarter and full year 2024 earnings call. Please note that our earnings release and presentation are available on our website at onitygroup.com. Speaking on the call will be Chair, President, and Chief Executive Officer; Glen Messina, and Chief Financial Officer, Sean O’Neil. As a reminder, our comments today may contain forward-looking statements made pursuant to the Safe Harbor provisions of the federal securities laws. These statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are uncertain. Forward-looking statements speak only as of the date they are made and involve assumptions, risks, and uncertainties, including those 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 references to non-GAAP financial measures, such as adjusted pre-tax income. We believe these non-GAAP measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the performance of our operations and allocate resources. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company’s reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures and management’s view on why these measures may be useful to investors may be found in the press release and the appendix to the investor presentation.

Now I will turn the call over to Glen Messina.

Glen Messina: Thanks, Valerie. Good morning and thanks for joining our call. We are looking forward to sharing a few highlights for the fourth quarter and full year as well as review our strategy and financial objectives to deliver long-term value for our shareholders. Let’s get started on Slide 3. 2024 was an incredible year for the Onity team and our shareholders. We started the year with an ambitious plan to improve our business across several dimensions and I’m pleased to report that we delivered on our objectives. For the full year, we delivered adjusted ROE of 20% and the highest net income since 2013, including previously disclosed debt restructuring costs. With our corporate debt restructuring, we reduced both the level and average effective cost of our corporate debt, extended the maturity and simplified the structure.

We maintained our targeted 90% to 110% hedge coverage ratio and reported a favorable MSR valuation adjustment net of hedging. We continue to invest in talent and advanced technologies to enhance performance, productivity and capabilities. Our recapture improvement actions resulted in refinance recapture performance at levels equal to or better than several of our larger and more mature peers. We increased total servicing additions by 70% over 2023 and grew our portfolio to over $300 billion including the sale of $15 billion of MSRs servicing released above book value. And finally, we rebranded to Onity to signify the company transformation. With our significant accomplishments in 2024, we’re increasing our adjusted ROE guidance for 2025 and believe we’ve created a clear path to sustained profitability and value creation for our shareholders.

Let’s move to Slide 4 to briefly discuss our fourth quarter and full year performance. We delivered fourth quarter and full year results consistent with the guidance we provided during our third quarter earnings call. Adjusted pretax income of $11 million in the quarter represents our ninth consecutive profitable quarter. Our results reflect expected increases in MSR runoff and client porting expenses, increased investment in recapture as well as differences in loan valuation adjustments versus the third quarter. Our fourth quarter GAAP net loss reflects the previously disclosed charge to earnings of $41 million for the restructuring of our corporate debt net of the MAV sale gain. The originations team executed well in the fourth quarter delivering total servicing additions of $25 billion the highest since second quarter of 2022.

For the full year, adjusted pretax income of $90 million was up 84% versus 23% generating a 20% adjusted ROE well above our guidance of 12% plus. GAAP net income attributable to common stockholders of $33 million was the highest since 2013 and again included a $41 million net charge for our debt restructuring. Let’s turn to Slide 5 to see how our servicing and origination platforms drive performance through interest rate cycles. You can see even with the sharp increase in interest rates from 2021, our total business is delivering improved performance driven by our servicing platform. Adjusted pretax income for originations and servicing in the fourth quarter of $40 million combined is consistent with our estimate presented during the third quarter earnings call resulting in $200 million in combined servicing and origination adjusted pretax income for the full year.

As expected, servicing was still the earnings engine with originations earnings improving versus prior year. We believe having scale operations and originations and servicing provides the balance necessary to deliver strong financial performance through interest rate cycles. Given the current outlook for interest rates, we expect servicing will continue to be the predominant earnings contributor for 2025 and industry originations volumes are projected to increase modestly. Please turn to Slide 6 and we can talk more about our growth strategy. In 2024, we delivered a 70% increase in total servicing additions versus 2023 with more than 50% of total servicing additions in subservicing consistent with our capital light growth strategy. Origination volume was up 33% in 2024 versus 2023, which is quite favorable as compared to total industry origination volume, which increased 17% for the same period.

During 2024, we added a record level of 16 new subservicing clients with $30 billion of subservicing additions. In addition, in 2024, we were selected as the sole subservicer for the Veterans Administration, VASP program. Since year end 2020, we delivered about 75% growth in our subservicing and ESS portfolio, while growing our total servicing portfolio by over 60%. Bear in mind, our year end servicing portfolio level and growth metrics are muted by the $15 billion of servicing released MSR sales to capitalize on favorable bulk market pricing and support our corporate debt reduction and refinancing objectives. Please turn to Slide 7, so we could discuss the progress we made in our recapture platform. Our investments in Consumer Direct have resulted in continuous improvement in platform performance across multiple dimensions.

As you can see on the left, refinance volume in our Consumer Direct platform was up 2.5x in 2024 versus 2023 as compared to roughly 2x for the industry overall. In the fourth quarter, funded volume increased 64%, while lock volume declined 6% due to rising interest rates. Based on our refinance recapture benchmarking for full year reported results, excluding home equity products, we believe our platform is performing better than several of our large peers and the ICE reported averages through year-to-date Q3. Looking at refinance recapture performance in the fourth quarter represented by the line on the chart, we’ve narrowed the gap to industry best practice to 11 percentage points. We believe there’s upside opportunity to achieve industry best practice performance and we are continuing to invest in our platform to capture that opportunity.

Our investments in Consumer Direct are generally concentrated in three key areas. First is technology to further streamline and simplify our processes and enhance the digital experience for our customers. Second is leveraging the power of predictive analytics. We are constantly expanding our universe of data and enhancing our proprietary models to improve our lead generation, value proposition and conversion rate. Finally, we’re working to expand our product offering with an improved home equity product set, a proprietary reverse mortgage product and enhanced home purchase value proposition to broaden the range of options we can offer customers to meet their financial and homeownership goals. Now let’s move to Slide 8 to review some highlights about our servicing platform.

We’ve built a strong and highly capable servicing platform that delivers industry leading performance. We’re winning new clients and have added $47 billion of new subservicing UPB this year from both new and existing clients. We service or subservice 1.4 million loans with a total UPB of over $300 billion on behalf of more than 4,000 investors and 125 subservicing clients. We service forward, reverse and business purpose residential mortgages and our clients and loan investors include some of the largest financial institutions in the U.S. We’ve been recognized by Fannie Mae, Freddie Mac and HUD for industry leading servicing performance for the past several years. In 2024, we were again recognized by Freddie Mac as a top tier subservicer and achieved HUD Tier one status.

Our Automation Center of Excellence has been recognized as best in class by SSON in 2024 and we were named as one of the National Association of Mortgage Brokers Affiliate Companies of the Year for the past two years. Our investments in technology and global proprietary infrastructure enables a scaled platform with a highly competitive cost structure. As we grow our total servicing UPB and continue to invest in technology and optimize our global work distribution, we believe our cost structure will continue to deliver increased profitability. Our investment in people, process and technology has also allowed us to continue improving our Net Promoter Score rating, which is our internal measure of customer satisfaction. Our servicing performance has been a fundamental reason why we’ve been able to grow our portfolio largely through organic growth.

Let’s turn to Slide 9 to discuss our investments in artificial intelligence. For the past several years, we’ve been making focused and disciplined investments across the full spectrum of artificial intelligence applications to improve business performance, capabilities and the customer experience. These investments fall into four categories: robotics, vision or optical character recognition, natural language processing like voice and chat bots and machine learning, which includes predictive analytics and generative AI. We’ve developed over 30 bots across 150 business processes that are saving over 50,000 hours per month of manual effort. We’re using optical character recognition and neural network enabled data extraction to index documents and populate information into our operating systems and databases.

Our continued investment in technology has resulted in 88% of customer increase being resolved through digital solutions in the fourth quarter. We’re using decision models and predictive analytics to enhance our efficiency, productivity and effectiveness enterprise wide. And we’ve recently announced the release of our new generative AI assisted subservicing client support feature called LASI within our loan span client portal. These are just some of the accomplishments of our award-winning automation center of excellence. Now let’s turn to Slide 10 to discuss our operating priorities for 2025 and the continued focus on leveraging the power of technology. Our operating priorities for 2025 are aligned with the key elements of our strategy, which remain unchanged and are focused on three areas: accelerating organic growth, differentiating operating performance and elevating the customer experience.

To accelerate organic growth, we intend to retain more MSRs than we did in 2024, targeting a 50-50 mix of owned servicing and subservicing to optimize earnings growth and returns. This will result in us holding over $135 billion of owned MSRs including ESS as we grow our total servicing portfolio. With limited refinancing opportunity, we intend to expand our product breadth in home equity and proprietary reverse to grow our addressable market. This also helps maintain operating capacity in Consumer Direct to better support refinancing opportunity should rates fall. As we intend to expand our asset management activities with additional whole loan purchases and securitization activity, as well as taking advantage of opportunities created by the expected implementation of the new HMBS 2.0 rules.

In the area of operating performance, our goal is to strengthen alignment of operating outcomes with client and borrower needs to further enhance our value delivery model relative to our competition. In the area of customer experience, our goal is to elevate the experience with enhanced engagement and personalization. A common theme across all three priority areas is continued utilization of technology and the range of AI applications discussed on the prior page as a key enabler of performance. We intend to continue the deployment of automation, machine learning and predictive analytics to increase recapture and win rate, drive focused operating improvements and productivity, enable our call center agents and loan officers to deliver efficient high-tech service and minimize customer effort.

Technology, AI and digital solutions are often referenced by us and several of our competitors. This is the new norm for our industry and we consider it a baseline requirement to remain competitive. Now I’ll turn it over to Sean to cover our fourth quarter and full year performance in more details as well as our guidance for 2025.

Sean O’Neil: Thanks, Glen. Let’s turn to Slide 11 for financial performance. Let me start by reminding listeners that 2024 was one of our strongest years for financial performance results in over a decade. The fourth quarter finished in line with guidance provided on the prior earnings call with a net loss of $29 million driven by the $41 million of corporate debt restructuring costs taken in the quarter. The bulk of this was about $37 million of accelerated unamortized original issued discount or OID debt issuance costs from the prior notes. This acceleration of costs will improve our ability to generate earnings in the future as it is only bringing forward a cost we would have incurred anyway over the next three years and thus eliminate this expense in 2025 and beyond.

For the quarter, this resulted in an ROE of negative 25% and an adjusted pretax ROE of positive 10%. For the full year, ROE was a positive 8% and on an adjusted basis, 20% in excess of our prior guidance. We also grew our book value per share from $52 to $56 in 2024. The fourth quarter adjusted pretax income was $11 million driven by both our servicing and originations business. Overall, we had a strong quarter. We added scale to our servicing platform. We grew our owned MSR book by $18 billion of UPB through both originations and bulk purchases. In addition, we boarded $7 billion of subservicing portfolios, bringing us to $25 billion of gross additions in the quarter, up from the $18 billion we added in the third quarter. Other full year results include 2024 net income of $33 million which was $4.13 of diluted earnings per share contribution.

This is our best net income result in over a decade. With respect to adjusted pretax income, we earned $90 million for the year and an adjusted ROE of 20%, both of which are the highest since the 2018 PHH acquisition. Let’s move to Slide 12 to recap the various transactions, which we last mentioned on the earnings call and have all closed in the fourth quarter. We completed the debt issuance in October, including releasing the funds from escrow, which was contingent on the mass sale closing that took place in late November. The new debt along with other liquidity available allowed us to reduce our debt load by about 22% from year end 2023 to October. The early paydown of the two older debt stacks allowed us to bring forward to the fourth quarter the OID and debt costs previously mentioned, thus relieving future periods from an annualized interest expense of approximately $14 million in 2025 and frees up $10 million to direct other uses.

The sale of our 15% ownership in our JV with Oaktree called MAV was completed in November. This monetized a valuable investment that helped us grow and achieve scale. We remain partners with Oaktree and locked in a MAV subservicing contract for five years and obtained some sale restrictions on MSRs for the next few years. In addition, we acquired reverse assets from Waterfall. This was funded with preferred equity at an attractive rate. As part of the post-closing process with Waterfall, we are discussing a potential adjustment relating to $14 million UPB of assets. We have not yet determined with Waterfall the amount or form of additional consideration, if any, with respect to those assets. In totality, this collection of transactions resulted in a stronger balance sheet, lower leverage, increased debt tenure, all while maintaining liquidity and help us increase book value to $56 per share.

Please turn to slide 13 for forward and reverse servicing performance. Servicing segment remained a strong contributor to adjusted PTI maintaining a consistent year-over-year performance. Sequentially as anticipated, there was a seasonal decline in the fourth quarter compared to the third quarter. On the lower half of the page, we discuss the sequential quarter comparison for forward servicing, driven mostly by higher runoff due to the Q3 rate decline with accompanying payoff expenses as well as a reserve release that took place in the third quarter and slightly higher boarding costs and staffing due to large new subservicing client additions. For the reverse business, we had a $9 million quarter-over-quarter drop due to several items. This includes a third quarter gain related to our asset management activities and lower marks on the buyout loans due to model and assumption changes.

Full year forward servicing had impressive growth over a strong 2023 result, mostly driven by higher revenues and flow due to more volume, strong collections and continued efficiency efforts. This was slightly offset by higher portfolio runoff due to rates. Full year reverse truck servicing was strong, but lower than the prior year due to a substantial 2023 gain on an asset transaction as well as higher runoff and lower revenue as the UPB declined. As an added benefit, the reverse assets are an effective natural hedge to the forward MSR assets. We have more detail on how our servicing portfolio diversifies risk between owned and subservice plus details on the various investor types in the appendix. Now let’s turn to Slide 14 for the results of our origination segment.

Originations both forward and reverse had another strong quarter across all segments and matched the third quarter results of $10 million of adjusted PTI. This is despite the fourth quarter typically being a seasonally weaker period. The strength was primarily driven by strong volumes in our B2B business, which led to higher income. In addition, recapture improved in the Consumer Direct and drove very high funded volume improvements due to the increased pipeline from the September mortgage rate decline. One observation on Consumer Direct is our higher volumes are helping to support the recent hirings of loan originators. Reverse also had volume and margin gains in the quarter and you can see the volume and margin details on the next page. Originations has posted significantly larger adjusted pretax income numbers in 2024 than 2023, which you can see on the upper half of the slide and is experiencing volume gains in all of our segments.

Overall, we continue to operate an originations business that is profitable with a wide range of services and we believe we are able to adapt to any interest rate environment. We are launching new products as Glen mentioned and we continue to be laser focused on enhancing our already strong recapture capabilities. Page 15 shows you more details on the volume and revenue margin in our origination segments. B2B, which is correspondent and the co-issue business combined continues to drive the bulk of our origination volume and it replenishes our owned MSR book following our opportunistic bulk sales in the second and third quarter of last year. The higher margin segments of Consumer Direct in reverse also continue to demonstrate both year-over-year and quarter-over-quarter growth.

Finally, turn to Page 16 for guidance for 2025. Moving left to right, we recap first our strategy and then our financial objectives. These remain largely unchanged from earlier presentations. For 2025, we expect a strong adjusted ROE in the range of 16% to 18%. We expect continued growth in our servicing book in both subservicing and MSR volume and we are targeting over 10% year-over-year growth. We do not anticipate changing our hedge ratio from our current 90% to 110% target and we also expect to maintain a consistent efficiency ratio as we add revenue commensurate with new costs. In summary, we had a great year. We believe we accomplished everything we set out to do and are entering 2025 in a strong position poised for accelerated growth regardless of the interest rate environment.

Back to you, Glen.

Glen Messina: Thanks, Sean. Please turn to Slide 17. I’m proud of the enormous progress our team has made. I believe we are well positioned to navigate the market environment ahead and deliver long-term value for our shareholders. We’ve delivered a robust increase in profitability and returns in 2024 and made meaningful progress against our strategic and financial objectives. Our performance is the result of our balanced business, focused on prudent capital like growth, demonstrated operational excellence and investment in technology to improve operating outcomes and the customer experience. Our execution is driven by our experienced business team, who are relentlessly focused on delivering on our commitments. This all comes together to suggest a share price that we believe has excellent upside and we intend to continue to take the necessary actions to extend the outreach to harvest that value for the benefit of all shareholders.

Overall, we could not be more optimistic about the potential for our business. With that, Katie, let’s open up the call for questions.

Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question will come from Bose George with KBW. Your line is now open.

Bose George: Hey, everyone, good morning. So first just on the restructuring, I guess you guys noted the $14 million benefit. So I guess the back of the envelope math is that adds kind of a couple of points to your ROE going forward. Does that seem right?

Sean O’Neil: Yes, that $14 million is for this year 2025 Bose. And you’re correct that allows us to redeploy capital that we normally would have spent on more debt.

Bose George: Okay, great. And then actually on the gain on sale margin, I was trying to what you provide in the income statement that $59 million of gain for the full year. If I just use that on the quarterly number it seems to work out something like $6 million down from last quarter, but the PTI that you showed is roughly flat. So just wondering what else is going through that gain on sale line item that you guys show in the release?

Sean O’Neil: Sorry, you’re back in the appendix on the income statement?

Bose George: Actually, just in the press release on the income statement, it shows that $59 million gain on sale for 2024. And it doesn’t show the quarter, so we just use that, what you showed for the last quarter and it looks like that number would work out to something like $6 million for 4Q, down from last quarter versus a roughly flat in the slide. So I was just trying to net that out or I mean we can do it separately if that’s easier.

Sean O’Neil: Yeah. We’ll come back to you on that, Bose. It may be driven by no issue, which shows up in our origination volumes, but doesn’t reflect loan gain on sale because that’s direct purchase of MSRs.

Bose George: Okay, that sounds good. I can check with you guys after that. And then just the share count, the dilution going away, is that with the transaction as well with the warrants being removed?

Sean O’Neil: The share count in the appendix should show the warrants based on the new language that shows a net settlement on the warrants.

Bose George: Okay. So that’s what effectively I guess removes the dilution and so it’s because the basic shares now look like they’re in the same as the — or the diluted shares look like it’s same as the basic. Is that right?

Sean O’Neil: No. There’s still going to be some dilution when the warrants are exercised. It’s just a more definable number.

Bose George: Okay. Actually, I’ll check with you guys on that as well because I thought in the release the basic and the diluted now is both the $7.9 million, but yes, but thanks. I’ll follow-up with you guys on that as well.

Sean O’Neil: Thanks, Bose.

Operator: Thank you. Our next question will come from Eric Hagen with BTIG. Your line is open.

Eric Hagen: Hey, thanks. Good morning, guys. All right. So looking through some of the expense line items and you guys talked about this in your opening remarks about technology and stuff, but you spent $50 million a year on tech and communications. Can you maybe like provide any guidance on the item for the year and what the nature of the expenses are and maybe how you benchmark the success of those expenses?

Glen Messina: Sure. So Eric, we don’t necessarily provide specific guidance on what our tech spend is going to be in every year. We’re focused on obviously managing the overall expense ratios and expense productivity for the company. And to the extent that we spend more from a technology perspective, the expectation is and part of our business processes, there has to be a business case around that technology spend and that technology spend has to produce a payback and a return on investment within our investment criteria. So we typically unless we’re dealing with something that has to do with regulatory compliance where you just have to make a change to a business or have to make a change in technology to comply. We really as we make our technology investments, maybe we may run smaller pilots to do a proof of concept to make sure it’s going to have the expected benefit we want.

But we are fairly disciplined in running a investment process that requires each one of our investments to produce a return on investment and a payback.

Eric Hagen: Okay. All right. Thanks for sharing that. Switching over to subservicing, I mean, is there a way to quantify the operating leverage that you have in subservicing at this point? Like right now, if we say that you add $1 billion of incremental subservicing UPB, the expenses go up by some certain amount and the next $1 billion that you add is another certain amount. I mean, is there a way to drill down and quantify some of this?

Glen Messina: Our platform is very scalable. And Sean, if I think back to prior earnings discussions, I think in 2023, beginning in 2024, we did have a page in our earnings presentation that showed if you add $50 billion, $75 billion, $100 billion of new subservicing, what the incremental contribution margin would be for that subservicing. It was in a range of two-ish basis points on average across those three columns of incremental, again, contribution margin. We didn’t break it out between here’s the revenue, here’s the expenses and here’s the contribution margin. That may give people some insights into our pricing approach. So this is something we wouldn’t want to do in a public forum. But we generally look at it as subservicing generally delivers anywhere from one to three basis points of incremental contribution margin. And on average, we typically look at it as about two.

Eric Hagen: Great color. Okay. That’s helpful, especially as you guys lean in there. Last one from me. I mean, you guys mentioned the HMBS 2.0 structure going into effect. I mean, how exactly do you see that contributing to tighter risk management or an opportunity to grow in this segment of the market? Or let me just flesh out kind of what it means for you guys as that structure goes into effect? Thank you.

Glen Messina: Yes, Eric, it’s a bit of both. So the HMBS 2.0 structure does a couple of things. So generally, it creates more liquidity for issuers or participants in the reverse mortgage space. So dealing with things like tails, buyout loans and whatnot, there were more options to monetize those loans and create liquidity faster, which should reduce risk for the business and in some of those some elements of the HMBS 2.0 funding mechanisms, you can actually deflect interest rate risk if you so choose. We’ll think about how much of that we want to do. As you know, we use our reverse mortgage assets to hedge the forward mortgage assets. So mitigating interest rate risk there may or may not make sense for us depending upon how much of reverse mortgages we want to hedge against our forward MSR.

But we think the incremental liquidity provided by — or I should say liquidity sources provided by the new HMBS 2.0 regs creates more options for us to work opportunistically within the reverse space for both new MSRs and whole loans.

Eric Hagen: Great stuff. We appreciate you guys. Thank you.

Glen Messina: Appreciate you.

Operator: Thank you. Our next question comes from Randy Binner with B. Riley. Your line is open.

Randy Binner: Hey, thanks for taking the question. I have a more of a like a products question in that with the new home equity and then prop reverse products, what are the different features and I guess really the consumer value proposition that you think makes these products attractive to consumers in a higher interest rate environment?

Glen Messina: So we do today offer a closed end second product and a HELOC product. Unfortunately — and we did throughout the course of 2024. We did take the opportunity to get a fair amount of customer feedback on how they perceive the products, what was the ease of process for them, did the products really satisfy their needs, were they able to get the amount of equity out of their home that they wanted to get. It is all about getting voice of the customer. And there were a number of opportunities for us to improve or tweak that product offering to better match the needs of the consumer. Some of those are actually product features in terms of either pricing and or the amount of equity they could get out of their home. Others were related to the process and how the approval process was and how the consumer felt during the approval process.

And yes, there were clearly opportunities to simplify. So we are working with our investors, kind of tweak the operational requirements around the product, tweak the pricing, tweak the features to produce a product and deliver product to consumers that’s easier for them, delivers a better customer experience and helps them better accomplish their financial objectives. I thinking it’s in the home equity related products, clearly with the expectation that the 10-year treasury and the 30-year mortgage rate is probably going to be north of 6% for quite some time, there’s a large population of consumers, which have mortgage rates that are below 6% and aren’t really interested in refinancing, but still have need to either redeploy capital by cashing equity out of their home or doing debt consolidation, things of that nature.

So the home equity product is a great product, we believe, for consumers to allow them to tap that equity and preserve the very low interest rate first mortgage they have on their home. That’s the value proposition. For proprietary reverse, pivoting to that product, the HECM mortgage product has a fair amount of limitations around age, maximum amount you can borrow from home equity and cost. And just like there are, for example, a jumbo mortgage on the forward side, the proprietary reverse product, you could think of it almost as like the jumbo mortgage of the reverse side. And it allows consumers to tap more of their equity because it will it can accommodate total bought or total advance amount that’s greater than what you can have under the HECM product.

So it expands the addressable market that we could go after as a fair amount of seniors are, quite frankly, wanting to age out in their primary residence and not really move or downsize. So it’s a great cash flow and estate planning tool for people, we think.

Randy Binner: That’s super helpful. And then just on the HECM, is it is that still following kind of a demographic growth curve? I think it’s been a little while since I’ve looked at that product, but is that you still view that as kind of a baby boomer growth area demographically?

Glen Messina: Yes. We look at the reverse mortgage product. Again, reverse mortgage is a niche business for us. It’s a fraction of the size of our forward business. It’s a great option on the aging baby boomer population to have a product that serves their needs. But it is a product that has — whose attractiveness is very tied to the level of interest rates. So when interest rates are higher like they are now, consumers generally can’t get as much equity out of their homes as they can when interest rates are lower. So, yes, we tend to see origination volumes increase as rates go down just like refinancing volume increases on the forward mortgage side. And again, as a hedge to the forward business, reverse MSRs tend to appreciate in value as rates go down versus depreciate when rates go up. So yes, it serves it’s a multipurpose tool for us. It’s a hedge to the forward business and an option on the aging population.

Randy Binner: Okay. Thank you.

Operator: Thank you. Our next question will come from Derek Sommers with Jefferies. Your line is open.

Derek Sommers: Hi, good morning, everyone. I’m looking at Slide 23 in the presentation and noticed you guys raised the range on owned MSR. What’s driving that? Is that the kind of improved balance sheet positioning opportunities you’re seeing in the market, a little bit of both?

Glen Messina: Yes. Hey, Derek, little bit of both. So look, during 2023 and 2024 as we’re coming up on our corporate debt maturities, we’re very conscious of the need to maintain our own MSRs in a very tight range in that $115 million to $135 million range, and that is excluding ESS. And we were excluding ESS. And we were very open about our asset management around the MSR and monetizing MSRs to generate capital to pay down our corporate debt. We still have the objective to want to deleverage the company. As we look forward, maintaining that 50-50 balance between owned servicing and sub servicing for us, we think is the sweet spot that allows us to grow earnings as well as achieve the return targets of 16% to 18% that Sean talked about, the adjusted pretax return targets of 16% to 18%.

So it allows us to grow earnings, which increases our book value, which reduces our leverage. And again with that 50-50 split of own servicing and sub servicing, it allows us to zero in on that return target objective that we have.

Derek Sommers: Got it. And apologies if I missed this in the prepared remarks, but did you all provide an update on your subservicing pipeline or any outlook for near term additions for subservicing?

Glen Messina: We didn’t put an update on the pipeline. It is dynamic. We’re constantly cycling through the pipeline. I’ll say, Derek, look, 2024 was just a terrific year for organic growth for us in the subservicing space. So we added 16 new clients during the course of the year. That’s more than a new client per month. The subservicing business development team did just an awesome job last year. And it’s really enabled by the quality of our servicing platform and our operating performance there. We are able to demonstrate improved performance versus for our clients versus our customers. We’re continuing to invest in that in our subservicing product breadth, expanding into business purpose residential in a very thoughtful and methodical way.

As we talked about, we just introduced our new AI customer agent assist for our loan span platform, which allows our subservicing clients to ask reform questions into loan span about their portfolio and LASI will go retrieve that data and bring it back for them. So look, it’s all about delivering value that matters to your subservicing client. They’re all a bit different. They all have a different hot button. So really taking the time to understand your clients’ financial objectives, their business objectives, zero in on those and make sure you put together a business framework that drives the performance that matters to your client. So looking forward to — we are excited about the opportunities for us in subservicing on a go forward basis.

And hopefully, we can have another record year.

Sean O’Neil: Derek, the guidance we gave was 10% plus growth total UPB and that includes both subservicing and owned MSR growth. So as Glen pointed out, we’re enhancing and increasing our focus on landing new subservicing clients and that continues to be a critical part of our business for capital light growth. But in prior years, we found ourselves quite often selling MSRs to create liquidity to pay down debt. Now we may have the opportunity to grow the owned MSR book, hence what you picked up on page 23. And so therefore that UPB growth just reflects growth across both sides of the servicing book owned and sub service.

Derek Sommers: Got it. That’s helpful color. Thanks for taking my questions.

Operator: [Operator Instructions].

Operator: It appears we have no further questions at this time. I’ll now turn the program back over to our presenters for any additional or closing remarks.

A – Glen Messina: Thanks, Katie. And again, I’d like to thank everybody for joining the call today and certainly thank our shareholders and our key business partners for supporting our business. I also want to thank and recognize our Board of Directors and global business team for their hard work and commitment to our success. And with that, we’ll conclude the call. I look forward to speaking with everyone on our first quarter earnings call. Thank you so much.

Operator: [Operator Closing Remarks].