Onity Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Ocwen Financial Corporation 4th Quarter Earnings and Business Update Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Tuesday, February 27, 2020 4. I would now like to turn the conference over to Dikko Akceyarelian, Senior Vice President, Corporate Communications.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining us for Ocwen's Q4 and full year 2023 earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chair and Chief Executive Officer, Glenn Messina and Chief Financial Officer, Sean O'Neill. As a reminder, the presentation or comments today may contain forward looking statements made pursuant to the Safe Harbor provisions of

Speaker 2

the federal securities laws.

Speaker 1

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 speak only as of the date they are made and involve 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 pretax income, among others.

Speaker 1

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 GAAP results. A reconciliation of non GAAP measures used in this presentation 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 Glenn Messina.

Speaker 3

Thanks, Tiko. Good morning, and thanks for joining our call. Today, we'll review a few highlights for the Q4 and the full year and take you through our actions to address the market environment and deliver long term value for our shareholders. Please turn to Slide 3. Oppen has undergone a significant transformation since 2019.

Speaker 3

Guided by our strategy, we've transformed the company into a well balanced mortgage originator and servicer that creates positive outcomes for clients, homeowners, investors and communities. We've built up from our foundation in special residential and small balance commercial loan servicing with the PHH and RMS acquisitions to include performing agency and reverse mortgage servicing. Today, we're a top 10 non bank servicer by UPB with broad capabilities and multiple industry awards for delivering top tier industry performance for customers and investors. We've added multi channel originations capabilities to replenish and grow our servicing portfolio and provide earnings balance through interest rate cycles. Our originations platform ranks as the top 10 correspondent lender and top 5 reverse lender by volume and endorsements respectively.

Speaker 3

And we've substantially improved our portfolio recapture capabilities over the past 4 years. We believe our originations platform is positioned to grow volume and earnings should the forecast for lower interest rates in the second half of twenty twenty four materialize. We've invested in technology to enable low cost, high performance and improve the customer experience. We re platformed the entire business, invested in multiple digital interface channels such as our AI enabled chatbots and mobile app and enabling technologies like robotic process automation. Our technology enabled global operating platform is scalable with a highly competitive cost structure and we believe we will deliver further profitability improvement as we increase our total servicing UPB.

Speaker 3

Servicing is a capital intensive business, so we focused on driving prudent capital light growth to reduce capital demands. We have 113 subservicing clients and building from our successful MAP joint venture with Oaktree, we now have 5 capital partners, which we believe will support our growth by converting new originations to subservicing and growing servicing UPB without traditional or additional MSR investment. To enhance returns, we continue to focus on asset management transactions that leverage our core competency and special servicing. These transactions, including cleanup calls, claims processing and asset recovery, delivered $15,000,000 in pretax income in the Q2 of 20 23, and we expect more transactions in 2024. We've meaningfully improved business performance, capabilities and the potential for growth and value creation.

Speaker 3

We believe the continued execution of our strategy of balance and diversification, capital light growth, low cost, top tier operating performance and dynamic asset management will deliver long term value for shareholders. Now please turn to Slide 4. Despite the challenging environment for originations, we continue to improve adjusted pretax income in the 4th quarter and throughout 2023. We reported 4th quarter adjusted pretax income of $11,000,000 an improvement on both the sequential quarter and year over year basis. Adjusted pretax income for the quarter for the year of $49,000,000 is up $118,000,000 over last year.

Speaker 3

Adjusted ROE is in our target range for both the Q4 and full year. We reported a $47,000,000 loss in the 4th quarter and a $64,000,000 net loss for the full year. The net loss for both the quarter and full year was largely driven by MSR fair value changes net of hedging. Our 4th quarter unfavorable MSR fair value change was driven by an 82 basis point reduction in key interest rates offset by a hedge coverage of 69%, which was aligned with our average target for the quarter. In December, we increased our hedge coverage ratio target to 100% to protect book value should rates fall in 2024 as anticipated.

Speaker 3

The full year unfavorable MSR fair value change reflects the impact of high hedge costs due to the inverted yield curve and rate volatility and a 5 basis points reduction in our own portfolio value versus prior year end to align with both market value levels. In servicing, we continue to grow average servicing UPP in the 4th quarter and have entered 2024 with subservicing boarding commitments roughly 1.5 times our total additions in 2023. Also in 2023, we made great progress on enterprise wide continuous cost improvement. Full year operating costs were down 19% versus last year excluding expense notables further improving our cost competitiveness as we enter 2024. Year end liquidity of $242,000,000 is up versus both the Q3 and the prior year, due in part to support our higher hedge coverage ratio and higher seasonal disbursements in the Q1.

Speaker 3

We intend to continue to opportunistically repurchase corporate debt in 2024 as excess liquidity permits. As we look ahead, 3rd party estimates project industry volume remaining low in the Q1 of 2024 before moving into the spring and summer home buying season. Declining interest rates for the second half of the year are expected to help drive $2,000,000,000,000 of total industry originations for the full year. I'm excited about how we're positioned to entering 2024. We believe our balanced business model positions us well if interest rates remain steady or decline as projected.

Speaker 3

Now please turn to Slide 5. The execution of our strategy has helped us to continuously improve adjusted pretax income over the past 6 quarters and deliver financial performance in line with our adjusted return on equity guidance. For 2024, our financial objectives start with sustaining the performance improvements we've achieved to date. This will require a continued focus on cost improvement, disciplined MSR investing with optimized hedge coverage and maintaining a prudent risk and compliance management approach. Next, we're focused on improving return on equity and capital ratios and have 3 levers to do this.

Speaker 3

First, by growing our subservicing portfolio, while we hold our owned MSR UPB in the $115,000,000,000 to $135,000,000 range. 2nd, as our excess liquidity permits, we expect to continue to delever the business through opportunistic debt repurchases, which we believe will also help reduce enterprise risk and earnings volatility. 3rd, by improving the profitability of our legacy owned MSRs. Roughly 11% of this $18,000,000,000 portfolio is over 60 days delinquent and it carries $458,000,000 in advances, which is dilutive to earnings and returns. Lastly, we're focused on capitalizing on market cycle opportunities.

Speaker 3

We believe our originations platform is positioned to take advantage of a lower interest rate environment. Roughly 17% of our own portfolio would be refinance eligible if the 30 year fixed rate mortgage drops to 5.5%. We continue to execute accretive special servicing and subservicing transactions, executed 4 transactions in the past 5 quarters and continue to scale the market for opportunities. As always, we remain flexible and committed to considering all options in this dynamic market to maximize value for shareholders. We're pleased with the performance improvements we've driven and are committed to executing our financial objectives to further deliver value to shareholders.

Speaker 3

Now please turn to Slide 6. Our balanced and diversified business offers several benefits in the current market cycle. We are 1st and foremost a servicer and our servicing business enables us to navigate current market conditions delivering strong earnings and cash flow performance. While originations today is not a material earnings contributor, as you can see in 2021 when interest rates were lower, originations delivered more substantial earnings. Our diverse capabilities in both origination and servicing create opportunities and give us multiple avenues to generate earnings growth and returns.

Speaker 3

We have a top tenor better market position in both originations and servicing, multiple volume acquisition channels, diverse capabilities spanning small balance commercial and reverse servicing and strong default management and loss mitigation capability. In addition to growing our agency forward servicing UPB, we've executed multiple transactions enabled by our special servicing skills and are growing performing and delinquent small balance commercial loan servicing. We're excited about the potential growth in these higher margin areas. Lastly, we believe our diversified servicing portfolio with the growing mix of subservicing helps mitigate business risk. We've substantially improved our portfolio mix over the past several years, decreased client concentration risk and reduced liquidity demands with over 85 percent of our servicing portfolio in subservicing and GSE owned MSRs, where we have materially lower exposure to advances.

Speaker 3

Now please turn to Slide 7. We remain focused on capital light growth and have built a strong foundation with a diverse investor base to support our growth objectives. Total servicing additions were down 31% in 2023, in line with the 32% reduction in overall industry origination volume. We increased the mix of subservicing additions by 15% and doubled the volume of MSR UPB sold to Capital Partners consistent with our goal of driving capital light growth. In 2023, we grew our average servicing UPB supported by capital partners by over 70% and established 2 new MSR capital partner relationships and closed the year with 5 capital partners in total.

Speaker 3

We're targeting to add 2 more by mid-twenty 24. The most successful of these relationships is our joint venture with Oaktree and MAF with an investment position for an investment period that runs through May of 2025 and capacity to support $20,000,000,000 to $25,000,000 in additional servicing acquisitions. Nearly all our capital partners have individually equal to or more investment capacity than math. I want to thank Oaktree and our other MSR Capital Partners for the trust and confidence they have placed in our team to help them achieve their growth and profitability objectives. Our self servicing growth with mortgage banking clients and MSR Capital Partners has allowed us to more than offset runoff in the Rhythm subservicing portfolio.

Speaker 3

Our average servicing UPB excluding Rhythm is up 13% in 2022 or versus 2022 and up 3x over the last 2 years. We have boarded over $100,000,000,000 in subservicing additions in the last 24 months and have client commitments to board $29,000,000,000 in servicing UPB in the first half of twenty twenty four. We're targeting $69,000,000,000 in subservicing additions from all sources in 2024. Our investor driven approach to MSR purchases results in capital efficient growth, helps manage our exposure to MSR valuation change due to interest rates and introduces an added level of price discipline for the originations business. And please turn to Slide 8.

Speaker 3

In 2023, we remain dedicated to disciplined MSR investing. Our enterprise sales team delivered solid performance in 2023. Our origination volume was down roughly 27% versus down 32% for total industry origination volumes. Consistent with our strategy to drive capital light growth, you can see the significant increase in MSR originations funded with Capital Partners. It was a highly competitive market in 2023 and that's unchanged so far in 2024.

Speaker 3

Market leaders in correspondent and co issued channels due to have what we believe is an aggressive view of MSR values. Notwithstanding, we remain disciplined in originating MSRs that meet or exceed our yield objectives, which resulted in an 18 percentage point increase in mix in total additions from higher margin channels and products versus 2022. We remain committed to managing our own MSR portfolio in a range of $115,000,000,000 as we have done in the last 3 years. This helps us manage interest rate risk and supports our objective of opportunistically repurchasing debt as excess liquidity permits. We're also using excess servicing spread transactions to further mitigate interest rate risk as well as reduce exposure to high hedge costs and performance variation when interest rates in the financial markets are volatile.

Speaker 3

We continue to grow our subservicing UPB with the success of our enterprise sales team and intend to accelerate growth with our MSR Capital Partners in 2024. Now please turn to Slide 9. We have been relentlessly focused on building one of the best performing servicing platforms in the industry while maintaining a highly competitive cost structure. Our platform delivered superior performance versus other servicers across numerous servicing performance metrics and our capabilities have been recognized by Fannie Mae, Freddie Mac and HUD with Top Tier Industry Performance Awards for several years. In previous quarters, spoke about the improvement in customer experience we've delivered for clients, our ability to secure 60 plus day delinquencies, our superior HUD claims assignment performance and our ability to maximize REO sales price versus appraised value while selling within the timeframe allowed by HUD.

Speaker 3

Here again, you can see we also consistently achieved lower delinquency levels compared to the industry average as reported by Inside Mortgage Finance. In addition, since the Q4 of 2020, more of our borrowers have exited forbearance either as current or paid in full with an active loss mitigation plan than the industry average as reported by the NBA. Our focus on continuous cost improvement has positioned us with a highly competitive cost structure. Based on the results of the MBA's annual servicing operation study for 2022, our fully loaded forward residential servicing costs in basis points of UPB are 27% lower than our large bank peers and are favorable to our large independent mortgage banking peer group that has its average forward residential servicing UPB more than twice our size. Moreover, our servicing costs and basis points of UPB are inflated compared to large servicer peers due to our relative high concentration of POS servicing.

Speaker 3

If we compare cost per loan for performing and non performing loans versus this group, were materially lower in every comparison. Our cost competitiveness comes from continuous process improvement, strategic investments in technology and our global operating capability. With roughly 35% of our servicing cost structure fixed or semi variable, we believe we can further improve our efficiency as we grow total servicing UPB. I believe this, along with the other metrics I discussed, demonstrate that we are one of the strongest operators in the industry. Now I'll turn it over to Sean to discuss our results for the Q4.

Speaker 4

Thank you, Glenn. Please turn to Slide 10 for our financial highlights. I'm going to cover both Q4 and full year 2023 results. Overall, I'm proud of our positive progress and results for both the quarter the year and excited about our financial outlook for 2024. For the quarter, the headline is both our servicing and origination businesses continued their profitable trend and collectively demonstrated yet another quarter of improving positive adjusted pretax income.

Speaker 4

Let's start with the Q4 first, the gray column in the middle of the page. The decline in GAAP net income negative $47,000,000 versus prior quarter's positive $8,000,000 was driven by interest rate impacts on our MSR net of hedge due to about an 80 basis point decline in rates. The adjusted pre tax income is up from Q3 to $11,000,000 for the quarter driven by servicing with a small contribution from originations. This resulted in an adjusted pre tax ROE in line with our prior guidance of 9.4%. 4th quarter was also up year over year by $7,000,000 due to both higher revenue and lower costs.

Speaker 4

For the full year 2023, please go to the far right to the blue column, where we recognized GAAP net income loss of $64,000,000 primarily driven by MSR fair value changes and hedging performance. Our full year adjusted pre tax income of $49,000,000 illustrates the strength of our year, bringing our adjusted ROE back to low double digits at 10.1%. Finishing off the table to the left, I'd note liquidity ended the 4th quarter higher than normal due to cash inflows from the MSR hedges and seasonally lower origination volumes. Our portfolio of tax net operating loss carry forwards continued to have a positive effect as the NOL saved us over $3,000,000 in cash by mitigating our 2023 tax expense. Our expectation of an adjusted pretax income ROE of 12 plus percent in 2024 builds on the 10 plus percent we delivered in 2023.

Speaker 4

There will be more guidance for 2024 in a few pages. For a more detailed view of the interest rate impacts on the MSR valuation, please turn to Page 11. The chart on the left shows the movement in our owned MSR portfolio from year end 2022 to year end 2023. As a reminder, we obtain our MSR marks from independent valuation experts and benchmark the experts mark against other outside marks, external surveys and our own market observations. Over the year, the fair value declined by 5 basis points, 136 down to 131 basis points.

Speaker 4

This reflected market pricing. In addition to market pricing, the calibration of the book was impacted by the increasing note rate of the portfolio, which grew by 50 basis points as we added new origination at higher current rates and also sold MSRs with relatively lower note rates to MSR Capital Partners. Typically, higher note rate MSRs are more susceptible to prepayment risk as rates decline and all else being equal, this can lower the value of a higher note rate MSR compared to a lower note rate MSR. The right chart shows the impact of interest rate on our owned MSR book for all 4 quarters in 2023 along with the hedge offset and the net result. As you can see, Q1 and Q4 were both quarters where interest rates declined, driving down MSR values as they're more likely to prepay.

Speaker 4

Interest rates are shown by the solid line showing the 10 year swap. Thus Q1 and Q4 resulted in declines in the MSR value, that's the gray bar, offsetting improvements in the hedge, which is the light blue and a resulting net loss or gain. The magnitude of the hedge offset is driven by our hedge coverage ratio, which is shown here as both the target and an actual result in the table below the graph. Even a 100% hedge coverage ratio that is perfectly efficient, meaning no basis difference between the asset and the hedge, we'll still have other offsets such as negative carry or option volatility in pricing. Most firms refer to this collectively as hedge costs.

Speaker 4

So the end result for the year is the combination of asset movement, hedge offset and hedge costs. As you can see, we have been increasing our hedge coverage ratio throughout the year and most recently have adopted a hedge coverage ratio of 100% as of December 2023. We expect this to reduce the volatility of our MSR value in both up and down rate markets, but it comes at a higher cost overall than a lower HCR hedge approach. Page 12 gives some perspective on our desire to deploy excess liquidity to continue to deleverage company. Starting with the top graph, this shows liquidity growing year over year.

Speaker 4

And from the Q3, some of this liquidity is reserved for the higher hedge coverage ratio than prior quarters as well as higher seasonal disbursements in the Q1. We executed a repurchase plan to retire debt in Q4 and early Q1. But since we had to set the debt price in advance of execution, the improvement in our debt price kept our planned bid outside the range where sellers were active and no debt was active and no debt was retired. We are currently approved to retire up to $40,000,000 of debt by our Board and intend to execute another plan shortly and to remain committed to using excess liquidity to retire debt. The lower graph shows our current debt to equity ratio and where we intend to target a lower ratio by the end of the year through a combination of better earnings and debt retirement.

Speaker 4

We believe this will facilitate any future transactions to refinance our remaining corporate debt with an objective to execute on that refi sometime in the next five quarters. We also plan to opportunistically pursue subservicing retained MSR sale opportunities where appropriate as this will reduce MSR hedging and valuation exposure as well as provide immediate liquidity. Finally, we have begun plans to launch a separate legal entity to hold our Ginnie Mae forward assets to meet the new Ginnie Mae risk based capital ratio requirements and have had preliminary discussions with Ginnie Mae to vet this approach. Please turn to Page 13 for an overview of our servicing segment, both forward and reverse. Servicing continued to improve its contribution to net income for both year over year and trailing quarters.

Speaker 4

You can see this in the upper left graph that shows adjusted pretax income improvement. This was driven by higher revenues and lower operating expenses in the forward servicing space. The reverse space remained strongly profitable, but declined slightly quarter over quarter due to declining reverse portfolio balances. Continuing a capital light approach, we grew subservicing volumes by 6% year over year measured in UPB due to transactions with existing and new capital partners as well as winning new clients. Already in 2024, we have signed contracts with counterparties to board over $29,000,000,000 of UPB in the 1st 6 months of the year.

Speaker 4

This amount is 1.5 times the entire full year 2023 subservicing volume adds. So we're off to a good start. The other driver was continued cost improvements with technology, continued migration away from paper and other process improvements. Please turn to Page 14 for a snapshot of profit and liquidity drivers enabled by special and reverse servicing skill sets. We lowered advances on our legacy asset book year over year by 14% as we reduced the UPB of these assets by 10%.

Speaker 4

This improvement results in lower borrowing costs on servicing advances, which helps our net income and allows us to divert liquidity to other areas. Whether it is our own book that we are servicing or a client's book, our goal is to improve returns via better performance of the assets. Each vessel servicing portfolio is unique and we have a broad range of skills and expertise to manage different legacy pools. On the reverse side, our existing reverse servicing insight and valuation expertise helped us to execute a transaction in the Q2 of 2023 that generated significant excess liquidity and pre tax income and we're expecting to leverage this expertise for more transactions in 2024. Please turn to page 15 for an overview of the originations segment both forward and reverse.

Speaker 4

In originations, we continue to maintain profitability despite seasonally slower 4th quarter volume. The main driver was again our correspondent and co issued channels, which overcame small losses in the reverse and consumer direct channels. While volumes were lower quarter over quarter in all three channels, the right graphs demonstrate robust margin management and focus on MSR cash yields to maintain margins in correspondent and reverse and only suffered a slight deterioration in the CD channel. Although we remain a top 10 correspondent lender and a top 5 reverse lender, we are committed to profitable growth versus rankings. Page 16 gives a view on our stock price, which is now performing in line with the Russell 2,000, but slightly underperforming a group of our peers.

Speaker 4

The discount to book just prior to this earnings release was around 55%. And as a reminder, while we may trade in line with some originators, we are primarily a servicer and the bulk of our profits and book value improvement have come from the servicing business for the last 7 quarters. The discount to book in the lower graph is measured as the share price following our earnings release versus our quarter end book value, with the exception of the 4th quarter bar on the right. We continue to believe our positive growth trends and adjusted pretax income, the growth in our servicing book, our ability to run originations at a profit during a difficult market period, as well as our ability and willingness to reduce our senior secured debt all support a stronger share price than we currently have. There is a road map on Page 17 that gives guidance to profitability targets in 2024.

Speaker 4

I won't go through the details other than reaffirm our target of 12 plus percent adjusted ROE for the full year. Before I turn the mic back to Glenn, I wanted to point out to investors a few additional data points in our appendix. We continue to provide data on fully diluted shares in equity. We have a page on MSR valuation assumptions that is incredibly transparent and can be used versus pure data and surveys where we show many valuation parameters. With respect to our balance sheet, we provide a more granular view titled condensed balance sheet breakdown, which delineates assets that require matching asset and liability gross ups under GAAP treatment.

Speaker 4

I invite you to look at these and other pages in the appendix to help you with your analysis. Back to you, Glenn.

Speaker 3

Thanks, Sean. Please turn to Slide 18 for a few wrap up comments before we go to Q and A. I'm excited about how we're entering 2024 and believe we are well positioned to navigate the market environment ahead and deliver long term value for our shareholders. Our balanced and diversified business creates opportunities, mitigates risk and supports our ability to perform across multiple business cycles. We're executing a focused, prudent capitalized growth strategy, leveraging our superior operating capabilities to grow subservicing across multiple investor and product types.

Speaker 3

We've expanded our client base, grown our originations volume mix from higher margin channels and products and continue to improve recapture performance and believe our originations platform is positioned to take advantage of declining interest rates. We have a strong pipeline of subservicing boarding commitments and we've expanded our MSR capital partner relationships to accelerate subservicing growth. Our servicing platform delivers top tier operational performance levels, resulting in measurable improvements for clients, borrowers and investors. Through our investment in technology, global operating capability and process improvement, we've built a scalable servicing platform with the best practice cost structure and capacity for growth that delivers improved borrower and client satisfaction. Lastly, we're prudently managing capital and liquidity for economic and interest rate volatility and deleveraging our balance sheet as excess liquidity permits to further improve financial performance and mitigate capital structure risks.

Speaker 3

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

Operator

Thank Your first question comes from Bose George with KBW. Please go ahead.

Speaker 5

Hey, everyone. Good morning. I wanted to ask just on the new the 100 percent hedge ratio, does that also hedge the escrow income component? So like if the curve if the Fed cuts and the curve steepens with long rates remaining somewhat so somewhat elevated, how does that look in terms of the hedge effectiveness?

Speaker 3

Yes. Good morning, Bose. And the short answer is yes. We're hedging all components of MSR fair value change. I think as you may know as well, there's two ways in which the escrow can impact the P and L.

Speaker 3

There's the initial day 1 mark to market as interest rates change. And that's covered in our hedge coverage ratio, the 100 percent hedge coverage ratio target. But on an ongoing basis, obviously, if interest rate the short end of the curve drops, we'd have less float earnings that on an ongoing basis accrete into our P and L. And that's really hedged on an ongoing basis with our floating rate debt, right? So if short end of the curve comes down, our floating rate interest expense would come down with it as well, too.

Speaker 3

So we've got both components effectively hedged.

Speaker 5

Okay, great. And then actually switching over to the debt repurchases. Can you you've got the PMC and you've got the 2 senior debts, which ones are you repurchasing? And when you talk about the refinancing, is that the 2026 that you're focused on, I assume?

Speaker 4

Hey, Bose, it's Sean here. We can actually repurchase either debt. Currently we've been repurchasing the PHH debt. And that's because we can buy that at a discount and generate a gain as well as that it's maturing a year earlier than the OFC debt. And yes, when I referred to a debt refinance, I was referring to the earlier maturity, which is $360,000,000 of principal balance, which matures in 3 of 20 26.

Speaker 5

Okay. Okay, great. Thanks a lot.

Operator

Your next question comes from Derek Summers with Jefferies. Please go ahead.

Speaker 1

Hi, good morning. I was

Speaker 6

wondering if you could walk through the puts and takes of better industry participation in the reverse market. On one hand, there would be obviously more competition, but on the other, there might be increased customer awareness of the reverse product and better secondary market liquidity. Just want to get your thoughts on that.

Speaker 3

Yes. Good morning, Derek. So look, I mean, one of the our firm view has been the reverse mortgage product has really suffered from a lack of distribution. It has been a small niche based industry on players who focus principally on reverse products. And we think that's limited the growth potential of the product in our view.

Speaker 3

So we were named as one of the partners of the year on the National Association of Mortgage Brokers for our efforts to educate the broker community on reverse mortgages. And we're supporting a number of our clients correspondent clients in the forward space in their distribution of your reverse mortgage product. Look, because we participate in all segments of the reverse industry from an originations perspective, direct to consumer, wholesale and correspondent. Look, we tend to we would expect to benefit the most in our correspondent channel by growing or seeing a growth in forward originators moving into the reverse product space. And then obviously, as one of the only originators who services and sub services reverse MSRs as well as originate, that creates additional growth opportunity for us on the servicing and owned MSR portfolio.

Speaker 3

So look, we're excited about forward players getting into this industry. We think it there's a large untapped potential out there that needs distribution.

Speaker 6

Got it. Thank you. And then just looking at slide 17 with your 2024 guidance, can you talk about what kind of interest rate environment is embedded into that guidance?

Speaker 3

Yes, Tom?

Speaker 4

Hey, Derek. Yes, we forecast our volumes and most specifically origination activity on a flat non flexing interest rate view. So if interest rates decline from where they finished the year that will help this forecast if they increase it could slow it down on the origination side with inverse effects on the servicing.

Speaker 6

Got it. Thank you. Very helpful. That's all from me.

Operator

Your next question comes from Matthew Howlett with B. Riley. Please go ahead.

Speaker 7

Hey, good morning. Thanks. And I love the guidance and congratulations. I just want to circle back to the 26. I think, Ghislain, you said next 5 quarters, you think you could look at the term market here.

Speaker 7

And my first question is, 1, where are the bonds trading? Where do you think you can buy back the bonds today in terms of what implied yielded? I mean, you had a nice write up from S and P. Where do you think you could enter the market for, I mean, 5 year, 10 year debt? We've obviously seen Cooper do deals at 70%.

Speaker 7

I mean,

Speaker 2

I don't think you're down

Speaker 7

there yet, but just talk a little bit about market color, where your bonds are trading, so forth.

Speaker 4

Sure. Good morning, Matt. So right now, our bonds, the high yield bonds, the $360,000,000 balance I mentioned a minute ago to Bose is trading somewhere between 91% 92%. So that's a rough yield to maturity of call it 12.5%. We think that as the bonds shorten in tenor and get closer to maturity typically in the high yield market that drives up the yield to maturity.

Speaker 4

In addition, if we continue to demonstrate the ability to pay down the existing debt that improves our leverage ratios, which should also improve the coupon at which we can refinance these. So, I think we'll be competitive for say 5 to 7 year non call 2 type high yield product when it comes time to refinance. But I think we also need to demonstrate to the debt investors and ability to reduce the existing leverage prior to that transaction.

Speaker 7

Is there a ratio you could get to where you could get possibly upgraded or I read the S and P report, so it sort of outlined a few metrics where you could get upgraded?

Speaker 4

Yes. So that report specifically referenced debt to EBITDA. We think will be inside or lower than their projected target for the end of year 2024. And then we do show that our we intend that our debt to equity ratio measured just on kind of pure GAAP balance sheet metrics is going to continue to improve throughout 2024. So it should come in better the debt to equity come in better than the 3.9 that we have as kind of high watermark there.

Speaker 7

So that would be terrific. And then just moving to Glenn, I missed the comments on selling the owned MSR book. I see the guidance between 1 $15,000,000 to $135,000,000 I'm assuming the low end of that guidance assumes you'll sell some owned MSRs. But what's the case for against selling today more owned MSRs to what are your managed funds and deleveraging that way? Would that improve your credit profile?

Speaker 7

I mean, obviously, you're going to lose some of the earnings from the end of the start, but just walk me through why wouldn't you start in that immediately? What's holding you back? And a little bit why couldn't you even go lower than $115,000,000 on the owned MSRs?

Speaker 3

Yes. I mean, I'll start here and then, Sean, you can jump in. So look, one of the things that Sean talked about was maintaining the flexibility to if market conditions are appropriate, opportunistically sell MSRs with 1 of our capital partners, to one of our capital partners partners and convert it to subservicing so we could we pay down additional debt. In those type of transactions, because we are bifurcating the MSR into an owned MSR and subservicing, we have to make sure there's no value leakage in the transaction. So that is it is going to be opportunity dependent.

Speaker 3

And look, we are keeping that as a lack of a better term, an arrow in our quiver to accelerate debt reduction if possible if opportunities permit. Sean, anything you want to add?

Speaker 4

Yes. Matt, I'd just restate that broadly speaking, as you noted, owned MSRs generate better cash flow and better earnings. And so we do a lot of analysis to look at our own book and ensure that the kind of bottom range that we provide adequately covers not just our debt service coverage ratios, but also ensures we have excess operating cash to run the company, comfortably hedge and be prepared for kind of extreme swings in interest rates.

Speaker 7

Yes. Look, I totally understand you have to evaluate all these factors. I guess where I'm going with this is you're growing the subservicing. I mean, you're over half. I mean, it's tremendous.

Speaker 7

You're keeping margins. You're efficient. You've guided to $75,000,000,000 $80,000,000,000 dollars I mean, you think you said $24,000,000,000 in the Q1 alone. I'm assuming you're being conservative for the ads for the $24,000,000 guidance. I guess my bigger question is, I mean, do you think Ocwen eventually would just be a subservicing business and own any MSR, just be capital light completely subservicing?

Speaker 7

And just give me some color where the wind is coming from. I know you have these capital partners, but are you also doing it on behalf of other people? Just walk me through directionally where subsurface is going to go long term for the company? Why you're being conservative in the guidance in terms of the ads in 2024 and where the wins are coming from?

Speaker 3

Yes, Matt. There's 2 primary sources for our subservicing. So one is with our capital partners. And obviously, that could be either that could be newly originated MSRs that we fund with them at the time of origination. That's historically what we've called MSRx.

Speaker 3

There are portfolio sales transactions that we've executed in the past where we've sold existing MSRs or seasoned MSRs to them. And then our capital partners go out and buy bulk transactions and we get that as well too. Matt is in the bulk market all the time and they win deals as are some of our other capital partners and we get the benefit of adding that to our subservicing portfolio. The second group of clients is traditional, independent and small regional community bank mortgage clients. So that is guerrilla warfare.

Speaker 3

That's hand to hand combat with all the competitors in the subservicing marketplace. And as they their subservicing contracts come up for bid or they're dissatisfied with their current provider, we participate in our pre's. We solicit them. Some of these potential subservicing clients or even our correspondent clients in some cases, and we win business from them as well, In terms of guidance being conservative and aggressive, look, we're focused on we've got $29,000,000,000 of commitments from clients to forward subservicing with us in the first half of the year. Last year, we did see a number of clients because of the difficult originations market really tapped the brakes on converting switching subservicing providers largely because they had bigger virus to deal with on the origination side of their business.

Speaker 3

And in some cases, they actually sold MSRs, right? And while they had an opportunity, they needed to raise cash and they sold MSRs completely. So I think as we look forward into 2024, we're excited that we've got a robust pipeline of committed boardings with us. It's 1.5 times the IMV boardings we had in 2023. But we have to see how the environment unfolds and whether or not there's going to be more IMV selling MSRs.

Speaker 3

Make no mistake about it. It's a priority for the business and we want to grow it and grow it aggressively. And we certainly believe on an apples to apples comparison, we as a service provider in the subservicing space compare very, very well to any of our competitors.

Speaker 7

Yes, I would absolutely agree. Appreciate it, Glenn and Sean.

Speaker 3

Thank you.

Operator

Your next question comes from Eric Hagen with BTIG. Please go ahead.

Speaker 2

Hey, thanks. Good morning. Hey, you guys talked about the MSR advances dragging on earnings. Can you say how dilutive to earnings it was last quarter last year? And it feels like the credit environment is kind priced to perfection to a degree.

Speaker 2

I mean, where do you feel like we could see improvement from that portfolio from this point forward?

Speaker 3

Yes. So for servicing advances, the math is actually pretty simple. We've got $458,000,000 of advances. Sean, I don't know if we disclosed publicly what the average advance rate is for servicing advances that's going to be in the K, right? If you look at one of the tables in the K, you can calculate the advance rate.

Speaker 3

And actually, the weighted average cost is going to be in there as well too. So if we can go through the extended math and calculate that, it's if you assume an 8% borrowing cost and some advance rate times the balance, that's just what the carrying cost is, right? So at $458,000,000 it's a pretty meaningful number. So everything we do to leverage our special servicing skills to drop that balance and we're proud of the progress we've made, we've got to continue that momentum and build that flywheel effect and continue to drive that balance down.

Speaker 2

Yes. Okay, thanks. How do you feel like shorter term volatility in the MSR portfolio could change the way you think about buying back the debt? I mean, would a big swing going the other way, like would that trigger you guys being in the market more frequently buying back your own debt?

Speaker 4

So Eric, are you saying if MSR, if interest rates drop precipitously and we lose value, will that alter our thought process on buying back the debt? I'm not sure I'm tracking the question.

Speaker 2

Yes, that is the question. And then also going the other way, like if the mark were to improve, would that also change?

Speaker 4

I wouldn't say broadly speaking, no, which is why we like to hedge the MSR and are even moving up from a 70% to closer to 100% hedge coverage ratio. And the objective there is to make us less concerned on a day to day basis with the interest rate and ensure that you have an offset with the hedge to cover swings to the pro or the con. Obviously, with a very high hedge coverage ratio, if rates go up, you don't realize as much of the gains you would if you had an unhedged MSR and same math conversely in the other direction. But I would say our efforts to repurchase the debt are contingent on liquidity, but we also hold excess liquidity for larger interest rate moves.

Speaker 2

Okay. All right. Thank you, guys.

Speaker 1

Thank you. Thanks, Eric.

Operator

There are no further questions at this time. I will now turn the conference over to Glenn Messina. Please go ahead.

Speaker 3

Thanks, Joelle. For everyone to join, look, I want 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 their hard work and commitment to our success. I look forward to updating all of you on our progress over our next quarter earnings call. Thank you.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Earnings Conference Call
Onity Group Q4 2023
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