Onity Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 7 speakers on the call.

Operator

Please note this call is being recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Dikko Asgharillian, Senior Vice President, Corporate Communications.

Speaker 1

Good morning, and thank you for joining us for Ocwen's Q1 2024 earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Aukman'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 the federal securities laws. These statements may be identified by reference to a future period or use of forward looking terminology and address matters that are uncertain.

Speaker 1

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 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 or comments contain references to non GAAP financial measures such as adjusted pretax income. We believe these non GAAP financial measures provide a useful supplement to discussions and analysis of our financial conditions because they are measures that management uses to assess the performance of our operations and allocate resources.

Speaker 1

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 Glenn Messina.

Speaker 2

Thanks, Tiko. Good morning, everyone, and thanks for joining our call. Today, we'll share our results for the Q1 and take you through our progress in executing our strategy and financial objectives to deliver long term value for our shareholders. Please turn to Slide 3. We're excited about the progress we made in the Q1 and pleased to report improved performance on many of our key financial metrics.

Speaker 2

We reported adjusted pretax income of $14,000,000 which results in an annualized adjusted return on equity of 13.8%. Both metrics have improved on a sequential quarter and year over year basis. We reported GAAP net income of $30,000,000 or diluted earnings per share of $3.74 the highest level in 6 quarters. Our results were driven by improved performance in servicing and originations as well as favorable MSR fair value change net of hedge. Book value per share also improved to $56 We continue to grow subservicing with $19,000,000,000 of subservicing additions for the quarter.

Speaker 2

Average servicing UPB for the first quarter was below prior year due to the timing of additions and runoff. Quarter end sub servicing UPB was up 4% versus prior year. We exceeded our deleveraging objectives for the Q1 with corporate debt repurchases of $47,000,000 Total liquidity at quarter end was $219,000,000 below year end 2023's level reflecting our capital allocation to debt retirement. We intend to continue to pay down debt in 2024 as excess liquidity permits. As we look ahead, 3rd party estimates for industry volume have been revised lower, reflecting the expectation that interest rates will remain high for longer.

Speaker 2

We continue to believe our balanced business positions us well in any interest rate environment. Please turn to Slide 4. Guided by our strategy, we've transformed Ocwen into a balanced mortgage originator and servicer with the capabilities to create positive outcomes for clients, homeowners and investors. 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 mortgages. We've added multi channel origination capabilities to replenish and grow our servicing portfolio and provide earnings balance through interest rate cycles.

Speaker 2

We've invested in technology to re platform the entire business in the cloud, modernize and expand digital interface channels and implement various automation tools to enable low cost, high performance and improve the customer experience. We focus on growing total servicing portfolios through capitalized sub servicing with MSR Capital Partners and industry clients to reduce capital demands and in straight risk exposure. And to enhance returns, we continue to focus on asset management transactions that leverage our core competency in special 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're a top 10 correspondent lender and a top 5 reverse lender by volume and endorsements respectively, and we're continuously improving our portfolio recapture capability.

Speaker 2

Our technology enabled global operating platform is scalable with a highly competitive cost structure, which we believe will deliver improved profitability as we increase our total servicing UPB. Our servicing portfolio is 56% subservicing with over 100 subservicing clients and multiple MSR Capital Partners, which we believe will enable total servicing portfolio growth without additional MSR investment, support our deleveraging objectives and enhance return on equity. And we're executing asset management transactions including cleanup calls, claims processing, asset recovery to drive incremental income and liquidity. We've meaningfully improved business performance, capabilities and potential for growth and we believe the continued execution of our strategy will deliver long term value for our shareholders. Now please turn to Slide 5.

Speaker 2

We're excited about our recently announced plans to rebrand Ocwen to Onity Group, reflecting the evolution of our culture and transformation of our company into one of the strongest operators in the industry. Rebranding to Onity signifies the confidence we have in our business, our capabilities and our team. Our new brand Onati was derived from the phrase on it and conveys action and our dedication to dependability, performance and supporting consumers, clients and investors. It reflects our hard working culture and our focus on delivering on our commitments to achieve positive outcomes. We expect to formally change our name and begin operating as audited group next month subject to shareholder approval.

Speaker 2

Concurrent with our name change, we will begin trading on the New York Stock Exchange under the new symbol ONIT, O N IT. Our primary operating brands PHH Mortgage and Liberty Reverse Mortgage will retain their names at this time. We expect to rebrand PHH and Liberty to Onity Mortgage later this year. We're excited about this new chapter for the company and we look forward to operating under the Onity brand. Let's turn to Slide 6 to discuss our financial objectives.

Speaker 2

Our Q1 financial results demonstrated another sequential quarter improvement in adjusted pretax income, adjusted ROE, reflecting the continued execution of our strategy and financial objectives. Our financial objectives start with sustaining the performance improvements we achieved during 2023 through disciplined MSR investing with optimized hedge coverage, continued cost improvement and maintaining a prudent risk and compliance management approach. Next, we're focused on improving return on equity and capital ratios by growing subservicing while maintaining our target MSR investment level, deleveraging as excess liquidity permits and improving the profitability of our legacy owned MSRs. Lastly, we're focused on capitalizing on market cycle opportunities. In this regard, we believe our originations platform has the agility to adapt to any interest rate environment and fulfill its objective to replenish and grow our servicing portfolio.

Speaker 2

We continue to focus on asset management opportunities and closed another asset recovery transaction in the Q1, which we expect will be accretive to income over the next several quarters. We also continue to dynamically manage our owned MSR portfolio to capitalize on differing views of market values amongst market participants. 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 so far and are committed to executing our financial objectives to further deliver value for our shareholders. Please turn to Slide 7.

Speaker 2

We have balanced and diversified our business to operate profitably in both high and low interest rate environments. Our servicing business positions us to deliver strong earnings and cash flow performance in the current high interest rate environment. 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 originations and servicing create multiple opportunities to generate earnings growth and returns. We have a top 10 or better market position in both originations and servicing, multiple volume acquisition channels and diverse capabilities, which have enabled multiple asset recovery transactions and growth in performing and delinquent small balance commercial loan servicing.

Speaker 2

We're excited about the potential opportunities in these high margin areas. Lastly, we've substantially improved our portfolio mix over the past several years, decreasing client concentration and reducing liquidity demands with over 85% of our servicing portfolio in subservicing and GSE owned MSRs where we have materially lower exposure to advances. Please turn to Slide 8. We've continued to make good progress executing on our capital light growth strategy. Subservicing additions of $19,000,000,000 in the Q1 was equal to subservicing additions for the entire second half of twenty twenty three and subservicing continues to represent most of our total servicing additions.

Speaker 2

Subservicing UPB with capital partners continues to grow as well. Our efforts to diversify these types of relationships are evident with roughly 46% of our total capital partner subservicing UPB comprised of non MAV partners. Our capital partner relationships also create the opportunity for subservicing growth by way of MSRs acquired by them in the open market, which comprises roughly 39% of our capital partners subservicing at the end of the quarter. 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 subservicing growth with mortgage banking clients and MSR Capital Partners continues to offset the runoff in the Rhythm subservicing portfolio.

Speaker 2

Our average subservicing UPB excluding Rhythm is up 4% versus 2023 and up 38% over the last 2 years. We've boarded over $100,000,000,000 in subservicing additions in the last 24 months and have planned commitments to board $29,000,000,000 in subservicing UPB in the first half of twenty twenty four. We continue to target $69,000,000,000 in subservicing additions from all sources for the full year. Our investor driven approach to MSR purchases results in a capital efficient growth, helps manage our exposure to MSR valuation changes due to interest rates and introduces an added level of price discipline for the originations business. Please turn to slide 9.

Speaker 2

Our enterprise sales team delivered solid performance in the Q1. Origination volume was up 3% and total servicing additions up 32% versus prior year. It continues to be a highly competitive market so far in 2024. Market leaders in the correspondent and co issue channels continue to have what we believe an aggressive view of MSR values. We have remained disciplined in originating MSRs consistent with our yield objectives, which is reflected in the 10 percentage point increase in mix and total additions from higher margin channels and products versus prior year.

Speaker 2

We're dynamically managing our owned MSR portfolio in a range of $115,000,000,000 to $135,000,000,000 using strategies of both buying and selling MSRs and using excess spread transactions as we have done for the past 3 years. This helps us optimize MSR returns, manage interest rate risk and supports our objective of repurchasing debt as excess liquidity permits. Consistent with the strategy, we have entered into letters of intent to sell up to $6,000,000,000 of select MSRs above our book value, taking advantage of different views of MSR values. NAV has also entered into letters of intent to sell up to $10,000,000,000 in MSRs where market pricing exceeds its view of long term value. While this may temporarily suppress total servicing growth, we believe it's overall accretive for our shareholders and our enterprise sales team can replenish old MSRs over the next 6 months.

Speaker 2

Please turn to slide 10. 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 has been recognized by Fannie Mae, Freddie Mac and HUD with top tier industry performance awards for several years. We continue to achieve lower delinquency levels compared to the industry average as reported by Inside Mortgage Finance and since the Q4 of 2020, more of our borrowers have exited forbearance either as current, paid in full or with an active loss mitigation plan than industry average as reported by the NBA. To complement our operating capability, our focus on continuous cost improvement has positioned us with a highly competitive servicing cost structure.

Speaker 2

Based on the results of the MBA's annual operating servicing operating study for 2022, Our fully loaded residential forward servicing cost and basis points of UPB and cost per loan are favorable to our large bank and independent mortgage bank peers, which have an average forward residential servicing UPB more than twice our size. Our cost competitiveness comes from a relentless focus on continuous process improvement, global operating capability and strategic investments in technology. Our enterprise wide technology platform is multi cloud based and leverages optical character recognition, robotic process automation and AI and over 100 processes to facilitate transaction processing, customer engagement, information extraction and document management and not just in servicing, but in originations, HR, IT, finance and compliance. With roughly 35% of our servicing cost structure fixed or semi variable and our culture of operational excellence and continuous cost improvement, we believe we can further improve our efficiency as we grow total servicing UPB. Now, I'll turn it over to Sean to discuss our results for the Q4 Q1, sorry.

Speaker 3

Thank you, Glenn. Please turn to Slide 11 for the Q1 financial highlights. Overall, this was a strong quarter for financial results, both GAAP and adjusted pre tax income, and I remain excited about our financial outlook for 2024 regardless of the interest rate environment due to our balanced business model and capital led approach. The headline is both our servicing and originations businesses continued their profitable trend and demonstrated yet another quarter of improving positive adjusted pretax income as well as positive GAAP net income and growth in book value per share. Starting with the blue column to the right, our material improvement in GAAP net income to $30,000,000 versus the prior quarter's loss of negative $47,000,000 dollars was driven by 2 main items.

Speaker 3

1st, an MSR valuation adjustment net of hedge due to higher rates as well as directly in our adjusted pre tax income, which is up to $14,000,000 for the quarter, driven primarily by servicing with a small contribution from originations. This resulted in an adjusted pre tax ROE of almost 14% and we are maintaining our guidance for 2024 of 12 plus percent. GAAP net income also continued to benefit from utilization of our NOL deferred tax assets reflected in the previously disclosed tax adjusted DTA for the U. S. Subsidiary of over $180,000,000 at the end of the year 2023, currently fully offset by evaluation allowance as shown in our 2023 10 ks.

Speaker 3

Key shareholder metrics would be the $3.23 increase in book value per share to approximately $56 and diluted earnings per share of $3.74 both metrics up from prior and year over year quarter. For a more detailed view of our progress on deleveraging, please turn to Page 12. During the Q1, we repurchased in the open market at a discount and then subsequently retired approximately $47,000,000 of our PMC senior secured notes. This exceeded the initial plan we discussed last quarter. We were able to do this while maintaining appropriate liquidity by leveraging assets, reducing legacy servicing advances and executing another successful securitization.

Speaker 3

The securitization was preceded by an opportunistic whole loan purchase, which was driven by a combination of our servicing and origination expertise, another indicator of the strength of our balanced business model. We still target a debt to equity ratio below 3.9 by year end and we believe this will facilitate future transactions to refinance, extend or replace our PMC and potentially the OFC senior secured notes. To do so, we will evaluate all options which could include new debt, junior securities or other structures. We may pursue any transaction in anticipation of the maturity of our PMC notes, which include market considerations among other factors. Before I leave this page, I would point out that Moody's ratings upgraded our corporate family rating in April to B3 and left our debt rating intact at B2.

Speaker 3

This is in recognition of improving profitability, focused deleveraging efforts and capable liquidity management among other things. Please turn to page 13 for an overview of our servicing segment, which covers both forward and reverse servicing. Servicing yet again improved its contribution to adjusted pre tax income for the quarter. You can see this in the upper left graph. This was driven by higher revenues that overcame seasonally lower float income due to tax and insurance disbursements and higher operating expenses which we typically see in the Q1.

Speaker 3

Reverse servicing increased its profitable contribution with higher gains on loans held for sale even as volume contracted. Finally, a reminder that our small but very profitable commercial loan servicing results sit within the forward servicing data on this page and commercial requires substantially less UPB growth to drive good results. Our average subservicing volumes declined slightly in the quarter as Glenn mentioned. However, we added substantial new volume late in the quarter. So our quarter end UPB metric improved, but not the average UPB.

Speaker 3

In addition to routine runoff, the average balance decline was impacted by subservicing clients selling into a strong MSR market. Our capital partner relationships remain highly effective and we anticipate an additional $9,000,000,000 of UPB to board in the 2nd quarter. Underlying the strong results is the ongoing effort on continued cost improvements driven by technology as Glenn previously mentioned and traditional process improvements across both forward and reverse servicing as well as lower advances on our legacy book which have decreased 14% year over year. Please turn to Page 14 for an overview of our origination segment, both forward and reverse originations. Despite rising rates further depressing seasonally low origination volume, we are pleased to say all of our channels returned to profitability in the quarter.

Speaker 3

Higher margins on lower volumes drove the profitability with reverse origination seeing the largest improvement. Lower profits in Correspondent were offset by gains in Reverse and bringing Consumer Direct back to breakeven. We continue to see improvements in our cost per loan metric. Consumer Direct is seeing solid improvements in recapture, which help both revenue and cost per loan. Thus, we continue to operate an originations business that is agile, profitable and should be effective even if rates are higher for longer as current market expectations indicate.

Speaker 3

I would like to point out to investors a few key data points in our appendix. We provide data on fully diluted shares and equity on Page 27. We have valuation metrics for the MSR on Page 28. These are designed to be transparent and can be used versus peer data and surveys where we show many valuation parameters across the major investor types. More detailed balance sheet data on Page 19 shows you the assets that require matching asset and liability gross ups under GAAP treatment, usually driven by 3 different buckets.

Speaker 3

Our Mab and MSR partner capital assets are 1, reverse HECM assets are 2, and the Ginnie Mae MSRs that are eligible for an early buyout are the 3rd. ESS assets sit within the all other bucket on the far right of that page. Back to you, Glenn.

Speaker 2

Thanks, Sean. Now please turn to Slide 15 for a few wrap up comments before we go to Q and A. I'm excited about how we started 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 2

We've expanded our client base, grown our originations volume mix from higher margin channels and products and continued to improve recapture performance. We believe our originations platform is positioned to operate effectively in any industry environment. 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 and results in measurable improvements for clients, borrowers and investors. Through our investment in technology, global operating capability and process improvement, we built a scalable servicing platform with a best practice cost structure and capacity for growth that delivers improved borrower and client satisfaction.

Speaker 2

Lastly, we're prudently managing capital 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 related risks. 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. With that, Natalie, let's open up the call for questions. Thank

Operator

Our first question will come from George Bose with KBW. Please go ahead.

Speaker 4

Hey, everyone. Good morning. This is Bose. Actually, I wanted to ask first on hedging. On the Q4 call, you guys noted that your hedge ratio was up to 100%, but then obviously you've had a pretty nice mark on the MSR here.

Speaker 4

Can you just walk through where your MSR hedge is? And also with the move up in rates now in the Q2, could we see more positive marks on the asset? John?

Speaker 3

Hey, Bose. Good morning. We continue to maintain a relatively high ratio for our hedge coverage ratio. So we're operating in the 90% to 110% range as of the end of April and maintained similar ranges throughout the quarter. What that will do in the long run is it will mitigate both upward and downward impacts of interest rate moves.

Speaker 3

And some of the gains that you're seeing in the MSR fair value net of hedge were driven primarily due to the very strong market that we're seeing with, I would say, very strong demand as well. And so that results in our external valuation experts taking a slightly higher view of the valuation of both Ginnie Mae and the GSE MSRs.

Speaker 4

Okay, great. That's very helpful. Thanks. And then in terms of capital allocation, you guys noted that a lot of the growth now is on the subservicing side. In terms of capital use, could we see more of the earnings go towards debt repurchase and then sort of the earnings growth being fueled more efficiently just through sub servicing?

Speaker 2

Yes, Bose, that is exactly our plan. So we are intending to grow our subservicing portfolio holding our total owned MSR UPB in that $115,000,000,000 to $135,000,000,000 range with excess liquidity from operating activities being used to deleverage the balance sheet and de risk our balance sheet. That is the point.

Speaker 4

Okay, great. Thanks.

Operator

Our next question will come from the line of Matthew Howlett with B. Riley. Please go ahead.

Speaker 5

Hey, thanks for taking my question. First, congratulations on the debt repurchases. It's really nice to see. I want to go to Slide 12 when you look at the target under 3.9 times. Can you kind of break that down?

Speaker 5

I mean your equity is going to grow with the ROE guidance you're giving. How much can we expect in terms of knocking down that PHH note by the end of the year?

Speaker 2

Hey, Matt. How are you? So look, we want to get down to that 3.9 to 1 or lower level. And look, as we continue to work with our financial advisors and get more informed about where we think we could refinance our corporate debt. That will drive how much we intend to pay down on our total corporate debt stack.

Speaker 2

So right now, our primary objective is to first break through that the stated barrier of of 3.9 to 1. And then as we get closer and closer to executing refinancing and get feedback from the markets and from our financial advisors, we'll be able to 0 in on the exact amount of capital we need to allocate to that reduction.

Speaker 5

In terms of the before I asked about the refinancing, let me ask you this, the $6,000,000,000 that you're going to sell above book, how much cash is that going to free up for potential debt pay downs after you pay off the credit facility?

Speaker 3

Hey, Matt, it's Sean. So I don't think we disclosed specific trades, but typically, Ginnys and GSEs can generate different cash amounts. And then whether you sell an asset servicing released will typically generate more cash than servicing retained. But if you sell servicing retained, you maintain the scale on your servicing platform. So we'll probably in the future give more details on transactions as they close.

Speaker 3

Some of these only have binding and revised at this point. But they do provide cash that is available for deleveraging the debt. And to Glenn's earlier point, part of this will be driven by viewpoints of current and potential high yield investors in terms of what the relevant targets to attain are.

Speaker 5

So you may be selling this to one of your MAB or one of your managed funds. Is that what I'm hearing you say potentially?

Speaker 3

Well, no, you can do a servicing retained transaction to any buyer. It just means you stay on as their subservicer and then a servicing release buyer could be literally anyone. A MAB transaction would be a servicing retained transaction. You're correct there, but we didn't indicate where we were sending the assets.

Speaker 2

Yes. Sean and Matt, I think it's fair to say that as we sell these MSR sales will at a minimum reduce the amount of MSR debt associated with them, right? So you can when our K comes out, which should be later on this afternoon or this evening, you can go through the math that shows how much of our MSRs are financed with debt. And generally, I'd say between 50% to 75%, and that would reduce MSR debt at a minimum.

Speaker 5

Right. It should generate. Go ahead. Go ahead.

Speaker 2

No, no. That was it, Matt.

Speaker 5

Okay. Great. Well, I mean, it could be somewhere I calculate $50,000,000 but I'll get back to you on that. So Glenn, bigger picture is this, I mean, the PHH bonds stepped down to par it, I think, January 1 of 'twenty five and you have the OFCs aborted notes, they stepped down on January 1, 'twenty six. Can you just give us what the cadence is you want to to I think the PHA notes are yielding about like 10%.

Speaker 5

Do you feel like you're going to do a global refinancing where at some point you're going to just refinance both of those maturities? You want to do one before the other because given that the sub notes going to step down at a later date? Walk me through what you think you can do, you can do it in just one shot. The PHH note carries a huge yield. That seems like that's not going to be an issue to take care of.

Speaker 5

So just walk us walk me through how you want to get this refinancing done and what your financial advisors are telling you in terms of pricing and how much you can do and so forth?

Speaker 2

Yes, Matt. Look, our primary objective, I think as we said in the last quarter was to address the nearest maturities first, right? So our primary focus is addressing the PHH corporate debt, which matures first in the capital structure. And we'd like to have that addressed before it goes current, right? So within 1 year of its maturity.

Speaker 2

That said, in working with our advisors, I'd say, look, all options are on the table. If there's an opportunity that's accretive for our shareholders that addresses both portions of our debt stack, we certainly would give it due consideration. So look, I think we're still early in the process. I think it's premature to say exactly this is what we're going to do. I think there's a lot of options open to us and we're exploring those with our advisors.

Speaker 3

And that, Matt, the debt gets current in March of 20 5 for the PMC notes in March of 2026 for the OSC notes, not January.

Speaker 5

Okay. So you can call them at par at both those dates?

Speaker 3

From the point where they go current until the debt matures, you can call it a part of that is correct. And then prior to that, I believe it's at about 102.

Speaker 5

And that falls in got you. I mean that falls into my next question. I mean, obviously that's going to alleviate significant pressure on the equity. I mean, Glenn, how I mean you talk with the Board about allocating capital towards share repurchases, I look at your stock trading somewhere between 40% 50% of forward fully diluted book. Again, there's that DTA that could come on at some point that's worth that could be extremely valuable.

Speaker 5

What's the appetite when you get this refinancing or your capital stack figured out to go buy back shares here at this discount?

Speaker 2

Look, Matt, once we accomplish our capital structure objectives and refinance the corporate debt, then I think the door is open for the Board to consider a lot of options for capital allocation and to allocate capital in a way that produces the most value for shareholders. So yes, right now, our priority is the corporate debt stack. And after that, we have a lot more flexibility.

Speaker 5

Yes. Look, and I should have congratulated with the ROE and the guidance, I mean, you're punching above your weight class, you're in line with the peers, which trade way above book as we're all well we're up. So certainly we would encourage that and I appreciate the progress with the debt pay downs. Thank you very much.

Speaker 2

Thanks,

Operator

Matt. We will take our next question from Eric Hagen with BTIG. Please go ahead.

Speaker 6

Hi, thanks. Good morning. Hope you guys are good. I think you noted $6,000,000,000 of MSR sales that you've done in the Q2 taking place above book value. Are those wholly owned or are they owned with MAV?

Speaker 6

Just any kind of detail that you have in terms of just kind of what we should expect as a realized gain from that sale? Thanks guys.

Speaker 2

Yes. So it's up to $6,000,000,000 and those were PHA, Ocwen owned MSRs not by NAV. So the 100 percent of the economics would come to us. I did separately mention that NAV selling up to $10,000,000,000 And again, 15% of those economics come to us. And look, I'm sorry, Eric, we just don't disclose the trading prices of our MSRs.

Speaker 2

So they were done above book. We're excited about that. We believe that certainly demonstrates the accuracy and validity of our MSR mark, but we don't disclose specific trades detail.

Speaker 6

What would you say is driving the sales to take place right now? Is it just a really good bid that you guys are seeing? Or is it some intention to free up more liquidity to buy back debt or like what's the intention?

Speaker 2

Yes. 1st and foremost, it comes down to economics, Eric, look, the bids that we and Mav received were far in excess of what we could model from long term economic value on these MSRs. So we've said before that market leaders have an aggressive view of MSR realize that economic value long term. And obviously, we took the opportunity to take advantage of that, particularly if we don't see our way to realize that economic value long term. And obviously, it does create capital liquidity to support our debt refinancing.

Speaker 2

But 1st and foremost, the math's got to work. And in this case, it more than did.

Speaker 6

Yes. Okay. That's helpful. On the mark for the MSR itself, I mean, does the cost efficiencies that you guys are discussing factor into the fair value mark at all? Or how should we think about some of the tangible benefits that you might call it, reap, and the cost of service and how that's maybe showing up on the balance sheet or the mark itself?

Speaker 2

Yes. So Eric, the we use market based assumptions, or I should say, our valuation expert uses market based assumptions to value the MSR. So our specific cost to serve and any I think we certainly look for reasonableness on individual assumptions, but we don't necessarily price to our specific assumptions. Where that would come through the P and L effectively is day to day operations, right? So as we continue to operate and service loans, if we can service them for a cost per loan that's lower than what the vendor's model has baked into it, then we get accretive operating earnings to the business about what would have been modeled.

Speaker 6

Okay. I had just one more on the modeling. I mean looking at the servicing, so servicing fees $205,000,000 in the quarter. I mean looking year over year what may have driven that decrease? Is there a breakout for how much came from subservicing?

Speaker 6

Thank you guys again. Appreciate it.

Speaker 2

Yes. So there is one big thing that would have driven the decrease. So we did, at the end of last year, deconsolidate a portion of the Rhythm subservicing, which I should say, not deconsolidate, but derecognize, right? Sean, that's the appropriate terminology. We used to prior this quarter last year, we used to recognize the full subservicing fee through revenues as if it was an owned MSR and then there was a contra expense, which was the amount of servicing fees paid out to Rhythm.

Speaker 2

Now that transaction is just reported as a traditional subservicing deal. When our Q comes out, you'll see the details in it. And if we chat later on today or in the next couple of days, Sean and Francois could take you through the numbers and how to reconcile.

Speaker 6

Right. Is there a number for how much came from subservicing within that 205? Thank you, guys.

Speaker 3

I'm going to have to check on that, Eric. I don't think we split it out on a revenue line item that way.

Speaker 2

Okay.

Speaker 6

All right. Appreciate you guys. Thank you.

Speaker 2

Thank you.

Operator

And it appears that we have no further questions at this time. I will now turn our program back over to the presenters for any additional or closing remarks.

Speaker 2

Thanks, Natalie. I want to thank all of our shareholders and our key business partners for their support of 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. I look forward to updating everyone on our progress on our next quarter earnings call. Thank you so much.

Operator

And this does conclude today's program, ladies and gentlemen. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
Onity Group Q1 2024
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