Onity Group - Earnings Call - Q3 2020

Transcript

Speaker 0

Hello, and welcome to the Ocwen Financial Corporation preliminary third quarter earnings and business update conference call. At this time, all participants are in a listen only mode. Please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, Diko Akzorilian. Please go ahead, sir.

Speaker 1

Good morning, and thank you for joining us for Ocwen's preliminary third quarter twenty twenty earnings and business update call. Please note that our preliminary third quarter twenty twenty earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chief Executive Officer, Glenn Messina and Chief Financial Officer, Gene Campbell. As a reminder, the presentation and our comments today may contain forward looking statements made pursuant to the safe harbor provisions of the federal securities laws. These forward looking statements may be identified by reference to a future period or by use of forward looking terminology and address matters that are to different degrees uncertain.

You should bear this uncertainty in mind when considering such statements and should not place undue reliance on such statements. Forward looking statements involve assumptions, risks and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10 ks for the year ended December 3139, and our current and quarterly reports since such date. In the past, actual results have differed materially from those suggested by forward looking statements, and this may happen again. Our forward looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward looking statements whether as a result of new information, future events or otherwise. In addition, the presentation and our comments contain references to non GAAP financial measures such as adjusted pretax income, adjusted pretax income excluding amortization of NRZ lump sum payments and adjusted expenses among others.

We believe these non GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition and an alternate way to view certain aspects of our business that is instructive. Non GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in The United States. A reconciliation of the non GAAP measures used in this presentation to their most directly comparable GAAP measures may be found in the press release in the appendix to the investor presentation available on our website. For an elaboration of the factors I just discussed, please refer to our presentation and this morning's preliminary earnings release as well as the company's filings with the SEC. Finally, this presentation and our comments refer to our preliminary third quarter financial results.

These statements are based on currently available information and reflect our current estimates and assessments. The company has not finished its third quarter financial closing procedures. There can be no assurance that actual results will not differ from our current estimates and assessments, including as a result of third quarter financial closing procedures, and any such differences could be material. The company expects to release final third quarter twenty twenty results in early November. Now, I will turn the call over to Glenn Messina.

Speaker 2

Great. Thanks, Diko, and good morning, everyone. Thanks for joining our business update call today. I'm gonna get started on slide three. You know, we we continue to make great progress here, I'm really excited to share our preliminary third quarter results with you today.

You know, we've got a great team here. Everybody's working with a lot of passion and energy to deliver results for our consumers and investors. I really am just so proud of what they've been able to accomplish. Today, we're a stronger, more efficient, more diversified business, and we're delivering on what we committed to do. Profitability is improving.

Originations volume continues to grow. We've got a competitive cost structure. We've built a diverse servicing portfolio that we believe can perform through the cycles. We're resolving our legacy regulatory matters. And we believe our capabilities line up really well with market trends and opportunities.

We are focused on executing a straightforward strategy. It's all about balance, diversification, cost leadership and operational excellence. And look, we believe continued execution of this strategy will enable long term growth, profitability, and will create value for our shareholders. Let's turn to Slide four, just for a couple of words on, you know, today's Ocwen. You know, we are a leading leading mortgage special servicer and originator who is focused on creating positive outcomes for homeowners, communities, and investors.

We've got two principal business units, servicing and originations. Yeah. We serve over 1,000,000 borrowers, thousands of investors, and hundreds of clients with various mortgage products. We've got proven capabilities in creating nonproposure outcomes for borrowers and industry leading performance against a number of independent benchmarks and operations and efficiency. Yet we've also built a diverse multichannel origination platform in both forward and reverse mortgages that's grown total volume by 115% over the past year.

And, we we think we've got room for product, channel, and client base expansion in originations. There are several industry trends and tailwinds that we believe we're well positioned to benefit from in both performing and reverse originations as well as special servicing. And these trends are really driven by interest rates, favorable first time home buyer and retiree demographics, and expiring COVID plans. You know, our proven team has demonstrated the ability to deliver de novo growth, acquire and integrate, drive efficiency, and drive operational effectiveness. And we've built a low cost, technology enabled, controlled, scalable platform that we believe positions us really well to deliver profitability and capture growth opportunities in the current industry environment.

Turning to Slide five, David, a couple of highlights on the quarter. We've continued to execute really well here in the third quarter. We delivered adjusted pretax earnings of $14,000,000 our fourth consecutive quarter of profitability as measured by adjusted pretax earnings. When you look at adjusted pretax profitability before the amortization of NRZ lump sum payments, we've improved that metric by more than $375,000,000 since the second quarter twenty eighteen baseline for Ocwen and PHH combined. That's just a remarkable performance.

Here, originations volume continues to grow. MSR and subservicing volume was up four times and 24%, respectively, over the last year. This is balancing the COVID and prepayment impact on our servicing platform. You know, we are now including our interim subservicing additions and originations volume. This has been part of our business model for quite some time and, is part of our portfolio replenishment.

But, you know, we used to report this in our roll forward of our servicing portfolio in the October. So, we'll be showing it here in our originations volume going forward to make it easier for investors to see. Now we continue to make positive progress, as you can see, in our continuous cost improvement. Over the past two years, we've reduced our adjusted operating expenses by 43%, which is now up about two percentage points since last quarter. Continuous cost improvement is a key element of our go forward strategy, and we do believe we've got room for continued improvement.

We made great progress, on our legacy legal and regulatory matters in the third quarter. As previously announced, we settled our legacy matter with Florida prior to mediation. You know, with the Florida resolution, you know, we've now resolved all, state actions from 2017. You know, the settlement with Florida includes a combined total payment of $5,200,000. In addition, 1,000,000 is payable in two years in the event specific loan modification objectives are not met, and we've agreed to waive, $5,500,000 in late fees assessed to borrower accounts but not yet collected or recognized into income.

You know, in connection with settling this matter, during the third quarter, we did book an incremental reserve of $2,700,000. You know, on the, other matters here, you know, in addition, we have completed the post loan boarding data integrity audit as required by New York, and the final escrow review report has been issued to the participating state. While we're not, at liberty to discuss the results in detail, you know, the results for these both these items were favorable to the company. And lastly, on legacy matters, we are scheduled to commence the mediation with the CFPB on October 23. You know, while settling the Florida matter has no direct impact on the CFPB matter, we do remain hopeful that our settlement with the state of Florida may offer a potential path forward.

Our goal remains to resolve, the CFPB matter in the shortest time frame possible. That results in an acceptable outcome for our stakeholders. Again, just wrapping up here overall, we believe it was another strong quarter. We continue to execute well on our key priorities for 2020, and our performance progressing, right on track with our expectations. You know, turning to slide six.

You know, look. Our multichannel origination platform and enterprise sales team, are are making great progress. Total volume, including subservicing additions, is up 32% over the second quarter and up a 115% over the third quarter of last year. We did see margins contract, quite a bit in the third quarter versus the second quarter, largely in the correspondent and flow channels. So this was expected as industry volume as the industry builds capacity to address the industry volumes and MSR buyers reenter the market after the initial COVID shock in the second quarter, as well as our changing mix with continued growth and flow in correspondent volume.

Again, we our expectation here is margins would contract. That said, volume growth has largely offset the margin contraction, and June will talk about that in a moment. Yeah. Our correspondent volume was up almost, three times from the second quarter. We added 24 new sellers to our correspondent base.

The the team there is performing very well. Flow volume was up roughly 48% over We added about 14 new sellers to the S and P coissue partner program. Again, enterprise sales team there, doing well in terms of new sellers and, coissue partners. Yeah.

Recapture platform continues to grow. Funding was up roughly or total fundings were up roughly 16% in

Speaker 3

the quarter.

Speaker 2

Your recapture rates, for the quarter averaged 18%, and this was largely limited by staffing levels. You know, funded volume is running about three times what it was, at this time last year. Now we are seeing increased activity in the subservicing space. We issued 12 proposals during the court, and we're in late stage discussions on about $15,000,000,000 in subservicing opportunities. MSR cash yields continued to be relatively high.

Expected cash IRRs and MSRs originated in the third quarter blended across all our channels. So it's roughly a 17% IRR. So very good, very strong compared to historical levels. And lastly, we continue to make great progress here in replenishment rate. It continues to improve despite record prepayment levels that we saw in the third quarter.

Our replenishment rate, excluding the terminated NRZ subservicing, was 104%, which is up from only 34% last year. So again, a really strong quarter for the originations organization with every channel delivering year over year and sequential quarter growth. Turning to slide seven. Again, our enterprise sales strategy is working and working well for us. We think we've just scratched the potential here for our enterprise sales approach.

You know, our our enterprise sales team offers a full portfolio of our existing product suite to potential new clients and our existing clients. We launched our marketing blitz in late third quarter, and our enterprise sales pipeline continues to grow. Our top 10, opportunities represent a $125,000,000,000 in subservicing, flow MSR purchase and recapture services opportunities. Over the next twenty four months, we are targeting to grow our correspondent and flow, seller base to over 250, by year end, 2020 and over 400 by year end 2021. So, again, great progress there.

You know, even with anticipated market contraction, yeah, that growth in our seller base, should allow us to deliver about 1 and a half to $2,000,000,000, per month in correspondent flow volume. You know, to date, a nominal amount of our volume has been Ginnie Mae. You know, roughly 29% of the industry volume, originations volume overall is in the Ginnie Mae space. And we expect to begin participation in the Ginnie Mae Coissue Program in the 2021 and look forward to Ginnie Mae products being a slightly greater share of our originations going forward. Yeah.

We continue to improve and grow our retention platform. As I said before, hiring there is our biggest challenge, and I think it's a challenge across the industry. Yeah. We are targeting to increase our capacity by another 25%, by the by the end of the year. And, again, that's really driven through a combination of, staffing, technology, and process driven productivity enhancements in leveraging our global operations footprint.

We've done these actions so far this year, they've helped us double our recapture rates in the 2019 to the 18% level where we are today. And we're still targeting recapture goal of about 30%. However, you know, due to the hiring challenges, that we're seeing in the marketplace, we've now, we expect to get there by mid twenty twenty one. It's gonna take a while to to staff up the platform. Yeah.

Our current originations run rate is over $40,000,000,000 in annualized volume. Again, just remarkable progress since where we were a year ago. And growing off this base, you know, considering the the growth in our our seller base as well as the the opportunities we're seeing in the subservicing arena, you know, we're now targeting over $60,000,000,000 in volume for 2021 with roughly a forty sixty mix of owned servicing and subservicing. Again, really, really proud of what our enterprise sales team here is is driving for and accomplishing. Yeah.

Turning to slide eight. Our servicing platform continues to perform really well. So servicing faced a number of expected headwinds this quarter with record prepayments driving, over a 40% increase in MSR amortization versus the second quarter as well as higher lien release expenses and reduced ancillary income. Some of this anticipated in in this type of environment. You know, despite these headwinds, our team reduced adjusted pretax loss before amortization of NRZ lump sum payment by roughly two thirds, to nearly breakeven for the quarter.

And June will share those results with us in a moment. Yeah. We continue to operate, largely remotely. Employees remain engaged, productive, and committed to assisting our our customers, clients, and investors. Yeah.

On the left hand side of the page, here you can see, several of the key metrics that impact investors and clients, namely delinquency cycle times and claim effectiveness, which continue to perform well. Our cost per loan remains favorable to MBA benchmarks and, again, performing well for both performing and nonperforming loans. And as I said earlier, we believe our continuous cost improvement actions, global operations, and enabling technologies, you know, will help us maintain or should help us maintain a highly competitive, direct servicing cost structure. You know, the strong performance on the metrics here on the left side of the page, you know, result in a lower total cost and higher realized cash flow for our investors and MSR owners, including ourselves. On the right hand side of the page, we continue to focus on performing for our customers.

Our call center continues to outperform the industry on hold times and abandonment rate versus the weekly survey data that we're seeing from the NBA, notwithstanding the increase in assistance for borrowers as they're coming off forbearance. Customer satisfaction scores have continued to trend positively. We remain committed to enhancing the experience for both consumers and clients, And we're investing in a lot of technologies to help us do that. So technologies like robotic process automation, OCR, optical character recognition technology, advanced decisioning analytics, online agent appointment models, all with a goal to simplify customer and client access, to their data and to us. You know, these investments also help us reduce cycle times in our operation.

Helps us improve accuracy, and ultimately can help eliminate rework to the extent rework is necessary. Our servicing platform has a long track record of helping homeowners who are facing challenging times, and we continue to be laser focused on supporting our customers, especially those who've been, harmed by the COVID nineteen pandemic. And again, when you look at this page in totality, we think, you know, these, servicing metrics are a picture that clearly indicates we we have a really strong platform here that continues to deliver well for for consumers and and investors. You know, turning to slide nine, gave you an update here on our COVID nineteen forbearance situation. So look, our exposure to loans on forbearance continues to diminish.

You can see in the upper left that the total number of forbearance plans and the forbearance plans where we ultimately have the responsibility to advance continue to decline. As the chart reflects, there's a pretty big difference between total forbearance plans and the plans where we have the ultimate responsibility to advance. That's a function of and a benefit from, frankly, our strategy to maintain a mix of owned servicing and subservicing. You know, our owned servicing portfolio, again, where where you have the responsibility to advance, is performing consistent with other nonbank servicers in terms of, percentage of loans on forbearance. If you adjust for mix differences between our portfolio and the industry average shown here in the MBA stats.

Our percentage of forbearance, loans on forbearance as a percent of total would be roughly 7.1% versus the industry of 6.8. So, again, very consistent performance. Yeah. We are seeing roughly 40% of our borrowers on forbearance plans maturing, reinstate. About 41% are extending.

So roughly about 5% have progressed to loss mitigation, and we're awaiting direction from the borrower on roughly about 14% of plans that have matured, and we'll continue to work with them to see what makes the most sense for them. You know, we are seeing about 30% of borrowers on forbearance continue to make payments. Our expectation is roughly 75% of those borrowers on forbearance will reinstate, and roughly 25% will need some form of loss mitigation assistance. We believe consumers who have Ginnie Mae and PLS loans are likely to need the most assistance when they run out of forbearance options. We stand ready to assist these consumers, and we'll continue to focus on what we do best, and that's creating positive outcomes for homeowners and investors, again, within the permissions of our investor servicing guidelines.

Turning to slide 10, I'd like to share with you how we think about our servicing portfolio. You know, our goal is to build a servicing portfolio that can perform well through business changing business cycles and changing interest rates. We are targeting both diversification and balance based on four macro characteristics. Those are owned servicing, subservicing, performing servicing, and special servicing. The objective here is to pivot our emphasis on each one of those, quadrants or dynamics based on market return, market returns and the economic cycle.

You know, maybe a couple of characteristics here. Own servicing, while capital intensive, has profitability dynamics that are countercyclical to origination, so it does balance our originations business. You know, owned servicing offers higher net income per loan than subservicing, but, you know, profitability does deteriorate when prepayments accelerate and delinquencies rise. Performing servicing generally has lower relative returns with higher prepayment volatility but reduced credit related return volatility. Special servicing generally has higher relative returns than performing servicing, but lower prepayment volatility, but higher credit related return volatility.

So our goal here through our new originations is to, improve our vintage and increase average loan balance, both of which are key factors to our profitability improvement plan. We also expect to replace our legacy subprime, servicing portfolio runoff with Ginnie Mae product. Yeah. Over the next twelve months, we are targeting to grow our own servicing to about $90,000,000,000. This is a bit below our previous target, but that's really due to increase the increased prepayment environment and, quite frankly, the progress we're making in our continuous cost improvement, which actually lowers our optimum scale point.

You know, on the right hand side of the page, maybe a little bit about subservicing. You know, subservicing provides fee based income with limited capital commitment. If structured with a cost per loan framework, profitability is generally unaffected by prepayment acceleration, assuming you replenish the portfolio. And profitability is maintained or can improve when delinquencies increase. We continue to get paid when a loan is delinquent in subservicing as compared to on servicing where our revenue stops when a loan goes delinquent.

You know, performing subservicing is less resource intensive and provides a good base to absorb fixed cost. Special subservicing is more resource intensive but offers higher margins, and fewer subservicers are proficient in this type of servicing, and and we have a core competency here. You know, the next ten I should say next twelve months, we are targeting to maintain our subservicing at a level of at least a $100,000,000,000. Replenishment and growth here will be driven by existing client adds, new client adds, synthetic subservicing through our MSR asset vehicle, and obviously performing recapture services. Yeah.

Moving on to Slide 11. Here you could see we closed the quarter with a strong liquidity position. Unrestricted cash was $320,000,000 plus an additional $91,000,000 in borrowing capacity that could have been drawn but went unused, giving us a total liquidity position of $411,000,000 which is up quite a bit from the second quarter. Servicing advances closed the quarter roughly 27% below our forecast at the beginning of the crisis. We fully realized our balance sheet optimization actions for the third quarter, and our planned actions for the rest of the year do remain on track.

Team's doing a great job there. In this margin environment, origination cash consumption continues to be low relative to the pre COVID environment. As well, higher prepayments, can help fund P and I advances, and, you know, wider originations margins does translate to a lower cash cost for MSR acquisitions and originations. The combination of these dynamics allow us to replenish the portfolio and fund, forbearance related advances while consuming less cash. We are using available cash to reduce debt where we can to minimize interest expense.

We do believe it has been prudent to keep higher than usual cash reserves given our growth objectives and uncertainties the economic environment. But we believe we can run the business with less cash going forward as the environment stabilizes. Based on our assumption that margins will return to normal levels, we do expect originations will be more cash consumptive going forward. On the other hand, available funding alternatives are improving. So we believe we can continue to fund our growth going forward.

Our capital allocation framework right now continues to prioritize investing in growth and replenishment to support our long term profitability objectives, and that's where we're allocating our capital. We do believe our cash and liquidity position will permit us to fund our operating needs and support our targeted MSR investment objectives for the balance of the year and for 2021. As previously discussed, we've been working on an MSR asset vehicle or MAV to accelerate our growth and support the creation of synthetic subservicing. We continue to make, sound progress here on approvals for MAV, and we're in advanced discussions now with investors to provide funding in MAV for up to $55,000,000,000 of MSR UPB that we would subservice and provide recapture services for. So we're really excited about this.

And maybe we can turn to page 12, and I can share with you some highlights about our continued progress on Mav. So, again, Mav is an MSR investment vehicle that we created from one of the excess, licensed legal entities, from the PHH integration. You know, the way Mav works is an investor would invest equity capital into Mav for roughly 85% of the amount of MSRs to be purchased. Ocwen would invest remaining 15%. This investment would be leveraged up with roughly an equal amount of debt to purchase MSRs.

Ocwen will assist MAV in purchasing, MSRs and provide certain other administrative services to MAP. Ocwen will subservice the portfolio and perform portfolio recapture services. We believe we are on track for GSE approvals. And, we're seeing high investor interest here, and we're in advanced discussion with investors. Operationalizing that would give us the capacity to fund volume in excess of our estimates, all of which would be categorized as subservicing.

And as such, it would alter our anticipated mix of owned servicing and subservicing originations. Now we are targeting to operationalize NAV in 2021, and we intend to revisit our volume estimates and mix of owned and subsurface volumes. We have greater clarity on exactly when when Mav can be operationalized. Turning to slide 13. Yeah.

Maybe a little bit about, you know, how we see the market unfolding for us here in the future. And we do believe the current market dynamics present potential near term and long term opportunities that we're pretty well positioned for. In the near term, GSEs are protecting, interest rate levels will drive industry originations volumes to 3,800,000,000,000.0 for 2020 and about 2,600,000,000,000.0 for 2021. You know, look. 2021 industry volume projections are still relatively high to historical levels and demonstrate strength in both the purchase and refinancing markets.

Black Knight estimates that there are still, 19,300,000 high quality refinance homeowners as well as 6 and a half trillion dollars of untapped, home equity. And as well, based on, Zillow's analysis of US census data, you know, they're projecting 44,900,000 people over the next decade will turn age 34, which is, you know, the median age of first time homebuyers. So when you look at these factors combined with the of Feds who's targeting to keep interest rates near historic lows suggests that, look. It's gonna be a relatively strong home purchase market for the foreseeable future. Longer term, as, loans come off forbearance, unfortunately, not all MSR owners, and if they do not directly service their subservicers, are well equipped to deal with the loss mitigation volumes that will emerge, from the current forbearance levels.

We expect opportunities in nonperforming assets will emerge, likely centered around Ginnie Mae and PLS or NonQM, where pools are experiencing forbearance rates of 10% and sometimes as high as 20%. Yeah. This this opportunity, we think, we estimate, equals roughly 1,900,000 homeowners. Roughly 40% of these borrowers are extending their forbearance plans. And, again, we expect about 25% will need loss mitigation assistance.

You know, we do believe our industry leading operational cost performance will drive better outcomes for MSR owners, mortgage investors, consumers here, and we are positioned, I think, very well to take advantage of this opportunity. You know, a little bit maybe about the reverse mortgage opportunity. You know, we we do expect, you know, the maturing baby boomer generation will create potential growth opportunities for our very profitable reverse mortgage business. You have the National Reverse Mortgage Lenders Association reports that seniors, have $7,700,000,000,000 of untapped home equity, to support their retirement needs. And, unfortunately, many of these seniors do not have sufficient savings and cash flow for their retirement.

We do have the necessary skills, in general that align to all these opportunities. And as I've said before, our primary growth limitation will be our access to available capital. As we've noted in this regard, we are exploring, all strategic options to lever leverage our proven operating capability in this environment to realize the full potential, value potential of our platform. And we are working with our advisers, Barclays and Credit Suisse, to evaluate a broad range of options and alternatives to maximize value of our platform. So, you know, let me stop here and turn it over to June, who will cover the financials for the quarter and our road map and time line to achieve our profitability objectives.

Speaker 3

Thank you, Glenn. Please turn to Slide 15. This is our fourth consecutive quarter of adjusted pretax income. Revenue increased quarter over quarter driven primarily by volume growth across all originations channels. Operating expense improvement is from leveraging technology and productivity actions as we continue to invest in our originations platform.

MSR adjustment increase is driven by higher runoff from prior vintages. We continue to grow our MSR originations to offset higher runoff. Adjusted pretax income is $14,000,000 $5,000,000 higher than prior quarter as higher revenue and lower expenses offset higher runoff. You can see that we had income tax favorability during the quarter driven primarily by CARES Act net tax benefit partly offset by offshore tax expenses. Please turn to Slide 16.

Our balanced business model is operating well. Originations growth and profitability is replenishing the servicing portfolio and offsetting runoff. On the left side of the slide, you can see that our multichannel platform is fueling strong originations volume with growth up 32% quarter over quarter. Originated volume for the quarter is up 67% quarter over quarter, driving strong replenishment of 104%. Adjusted pretax income is $35,000,000 8% lower than the prior quarter as higher volume was offset by expected margin normalization and investment in our platform.

On the right side of our slide, servicing segment is demonstrating strong performance through the refinance cycle, delivering improved results quarter over quarter in spite of increased MSR runoff. Productivity savings and leveraging technology is improving efficiency and driving down operating costs. UPB runoff is being replenished through newly originated servicing and subservicing. We have a strong subservicing pipeline with our top 10 prospects at $125,000,000,000 with additional opportunities from Mav. Please turn to slide 17.

We're driving growth, balance, and diversification in our segments and cost leadership and operational excellence to create long term value. We told you in our q two business update that we expect to generate positive adjusted pretax income for 2020, positive GAAP earnings in 2021 with low to mid teen after tax ROE by mid twenty twenty one. This page is a road map to achieving these results. The key drivers to our business are market dynamics, originations growth, balance and diversification, and cost leadership and operational excellence. We show on the page how we see these key drivers impact performance in our originations, servicing, and corporate segments from now to the December 2021.

I won't go through the details on the call here today, but please let me know if you'd like to review it another time, and I would be happy to, to walk you through it. With that, I'll turn it back over to Glenn.

Speaker 2

Great, June. Thanks. And and let's, turn to slide 18 to wrap up and and move into q and a. So again, we've built a great team who are working together with passion and energy to deliver results for our consumers and investors. And I really couldn't be prouder of what they've accomplished.

Today, we're a stronger, more efficient, diversified business, and we're delivering on what we committed to do. Profitability is improving. Originations volume is growing. We've got a competitive cost structure. We've built a diverse servicing portfolio that we believe can perform through the cycles.

We're resolving our legacy regulatory matters, and we believe our capabilities line up very well with market trends and opportunities. We are laser focused on executing a straightforward strategy of balance, diversification, cost leadership, and operational excellence. And we believe continued execution of this strategy will enable long term growth, profitability, and value creation for our shareholders. And with that, I'll turn it over to the operator to address any questions. Kevin?

Speaker 0

We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to move your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment please while we poll for questions. Our first question today is coming from Bose George from KBW. Your line is now live.

Speaker 4

Glenn, how are you? Good morning. I had a couple of things. The first, actually, the origination, the 11,400,000,000.0 that you guys gave on slide six of originations that you break it out into servicing and subservicing ads, I just wanted to make sure I understood that. Is that because normally, I do that as as, like, whatever, you know, correspondent flow.

Is is some of that flow or just yeah. Can you just sort of break that out into, you know, the how that works?

Speaker 2

Yeah, Bose. So good morning. The the, servicing additions is really coming from correspondent flow and portfolio retention, and the details of that by channel will come out with our queue. So that will be, you know, following shortly. And, you know, with our subservicing additions, those are really from, new portfolio ads with existing subservicing clients who continue to flow business to us on a on a monthly basis under interim subservicing arrangements.

Speaker 4

So so when I think of that 11,400,000,000, you know, are those should I think of those as sort of originations where you book a gain on sale, or are some of them fall into that category, but some of them are also flow loans that go into the servicing portfolio, but they'll go through income on, the income statement.

Speaker 2

Yeah. Those for the four point you know, for third quarter, the 4.7 in subservicing additions, there's no gain on sale for that. Right? That just flows into the portfolio. For the 6,700,000.0 in servicing additions, you know, there's a gain on sale or a positive, MSR fair value adjustment associated with those with those loans.

Speaker 4

Okay. Good. And then, yeah, you noticed you noted that the normalization of margins on the corresponding side, can you just talk about the recapture, how margins did there versus last quarter?

Speaker 2

Yeah. Sure. So recapture margins are actually holding in there fairly well. Yes, I don't think we're the only ones who are facing hiring challenges in the industry. Retail generally, I think, is probably the most capacity constrained.

So while there's been some level of contraction in margins there, not nearly to the degree of what we see in correspondent and flow, which are coming you know, correspondent and flow margins are are are very close to, I would say, historical levels. But, you know, in recapture again, margins are still historically, very strong.

Speaker 4

Okay. Great. Thanks. And then in terms of your growth expectations, the, you know, the 250 correspondents by, you know, year end, 400 by next year, Can you just characterize the competitive landscape on that side? It seems like there are obviously a lot of companies now coming public, etcetera.

Is there focus more on retail and wholesale versus corresponding? Can you just give us a lay of the land there?

Speaker 2

Sure. You know, the competitive landscape, in in correspondent and flow on the SMP program and the agency cash window, look, I'd say the competitive environment is, you know, probably less competitive than it was immediately prior to the COVID crisis. You know, there are there are probably fewer players, in that segment right now. Not to say it's, you know, it's not competitive. Correspondent flow has always been competitive.

But, you know, a lot of you know, there had been a number of historic, MSR originators in correspondent flow who who are not there now. You know, on the retail side, as you've seen from, you know, Rocket, United Wholesale, a number of others, right, there continues to be a lot of people in the retail segment, with big platforms growing aggressively. But, yeah, our portfolio retention platform continues to perform well. So, yeah, encouraged by the competitive environment.

Speaker 4

Okay. Great. That's all I had. Thanks a lot.

Speaker 2

Thanks, Bose.

Speaker 0

Our next question today is coming from Lee Cooperman from Omega Family Office. Your line is now live.

Speaker 5

Yeah. Hi. Thanks. I appreciate it. I guess on July 17, you publicly stated that Aqua was exploring strategic alternatives.

You mentioned you've engaged an investment banker. Have we received any credible approaches at this point in time? Anything you could talk about that? That's I have several questions.

Speaker 2

Sure, Lee. Good morning. Yeah. Liam, I'm not gonna speculate good morning. I don't think it's yeah.

I'm not really gonna speculate on, you know, the all of the options and alternatives that, you know, that we've been looking at. But, you know, we have we we are working with our bankers on a number of different things, a broad range of options as as we've talked about before, and we continue to make progress there. So, nothing to update as as of this time.

Speaker 5

Well, I wasn't actually speculated. It's just that you have any credible approaches. That's not speculating. They're saying yes or no.

Speaker 2

Oh, we're we're we're looking at

Speaker 1

a number of different approaches that

Speaker 2

we think can, you know, create value for shareholders.

Speaker 5

Right. Also, you know, given the way you wanna run the business, this is second question, what is a credible return on the shareholders' investment that you expect to achieve, and what is your timetable to get there?

Speaker 4

With our book value

Speaker 5

is $49, and we're reporting nominal earnings. What what do you what do you think a reasonable return on our shareholders' investment would be, and how long do you think it'll take you to get there?

Speaker 2

Yeah, Lee. So consistent with what, you know, June talked about earlier, we are, you know, expecting, positive, GAAP earnings and positive adjusted earnings in 2021 with low double digit to mid teen after tax ROEs by mid twenty twenty one.

Speaker 5

Oh, okay. I I missed that. Okay. Thank you. Okay.

Well, we'll talk later. Thank you very much. Congratulations on your improvement. My only observation would be we should be more aggressive in cutting costs, but I'll leave that up to you.

Speaker 2

Great, Lee. Thank you very much. Look forward to speaking later.

Speaker 0

Thank you. Our next question is coming from Marco Rodriguez from Stonegate Capital Markets. Your line is now live.

Speaker 6

Good morning. Thank you for taking my questions. Was wondering if maybe you could talk a little bit more just from a higher level. You had a very nice presentation on a slide excuse me, slide presentation of particular opportunities near term and long term for Ocwen. It perhaps maybe you can drill down a little bit more just from the next twelve months, if you could just talk about the biggest opportunities you see for Ocwen.

And then also on the flip side, just what are the

Speaker 1

biggest risks you're focused on?

Speaker 2

Yes, Marco. How are you? Good morning. Yeah. Look.

I think there's as we talked about, you know, the the opportunities here for us in the near term, you know, really focus around, let's say, maturing our originations platform. So expanding that seller base in both correspondent and flow sellers as well as, you know, executing on conversion of our enterprise sales pipeline. Right? So we've got a a very robust pipeline there. We've built $125,000,000 of combined subservicing and flow opportunity and portfolio recapture services.

So, again, near term opportunity, we we do believe, is in that performing originations and and subservicing space. And, you know, historically, we've not really originated a lot of Ginnie Mae product. And as we expand into the Ginnie Mae, flow program in in the first quarter of, of 2021, again, I think we can we we can fuel continued growth of our business despite an an overall shrinking market. You know, longer term, I I I do think there's, you know, two dynamics that this position we're positioned very well for. So one is in the special servicing arena.

You know, look. I it it is a very tough time for, you know, pockets of consumer segments out there. There's you know, it's particularly when you look at Ginnie Mae loans and PLS loans or non q m. You know, millions of borrowers who are on forbearance plans who are going to need help. We're seeing these borrowers extend their forbearance plans.

And, unfortunately, you know, the the hotel sector, transportation, travel, you you know, those sectors, restaurant industry being adversely impacted, and you just got a feel for these consumers. And they're gonna need help. And, look, I I think given our proven capabilities in creating non foreclosure outcomes for consumers, we can help. We can help consumers. We can help investors, and we can do that either through subservicing, portfolios of people where they have concentrations like this or, you know, like we did, following the financial crisis.

To the extent that people don't wanna own these assets, we can buy them and service them profitably, assuming, obviously, we we buy them at the right price. And then last you know, third, I'd say on the long term side, you know, the whole demographics around the aging population in The United States. We've got a a great little reverse mortgage business. We're one of the top originators, and servicers in the reverse mortgage space. You know, Liberty Reverse Mortgage is our our brand.

We go to market with there. Again, that's an area where there's, you know, lots of untapped equity, in in in in seniors' homes. And, you know, unfortunately, for a lot of seniors, their cash flow, doesn't really match their expenditures in retirement. So a reverse mortgage is a good product to help there. So that's how I see the environment going forward.

Again, I think it's balanced, both near term and long term.

Speaker 6

Very helpful. And last question, just circling back on the enterprise sales force. Just kind of wondering if maybe you can help us understand and frame that opportunity there. In the last few calls, you've you've mentioned the fact that that, you're just sort of scratching the surface, to use the phrase that, you've you've had there. So can you help us maybe understand and and frame out maybe a time line wise when it's no longer just scratching the surface and and then sort of what it's gonna take to kinda get there, if you will?

Speaker 2

Yeah. So I think, you you know, we will have a matured origination platform probably by the 2021. Again, I think we have a lot more room to grow our seller base. We've laid out those objectives there. So it's you know, in terms of the details, it gets and in portfolio retention as well too, our goal is to get to a 30% recapture rate.

So I think the objectives there are seller based growth, and that's how we're going to measure ourselves going forward in addition to volume, how we're growing our seller base. Second is capacity expansion in our retention services platforms. As we continue to expand operating capacity and continue to increase closed loans and drive higher recapture rate. Those would be the key metrics there. And then conversion of our subservicing pipeline or enterprise sales pipeline.

I think that's those are the metrics that we'll look at and continue to talk about through the balance of 2021.

Speaker 1

Got it. Very helpful. Thank you, I really appreciate your time.

Speaker 2

Oh, thank you, Marco. Appreciate it.

Speaker 0

Thank you. Our next question today is coming from Jonathan Winick from Clark Street Capital. Your line is now live.

Speaker 7

Good progress this quarter. I did see that last week we had another record low rate of the thirty year fixed rate. I believe it was 2.81. How long do you see this mortgage origination boom lasting? And how does Ocwen sees more of this opportunity without adding a lot of costs that won't be needed when the mortgage rates slow?

Speaker 2

Hey, good morning, John. Thanks for your question. I covered on Slide 13, there's the data from Black Knight that said there's 19,300,000 high quality refinance eligible borrowers with about $6,500,000,000,000 of untapped home equity. That is a massive opportunity that, obviously, the entire industry is going after. So far, volumes this quarter are not backing off.

We're not seeing a reduction in volume. The MBA and Fannie Mae are expecting to see originations tail off in 2020 and 2021. So right now, John, I don't have any better information than the MBA and Fannie Mae forecast. But I have to say when I look at the the Fannie Mae forecast and the Black Knight data, the Black Knight data would suggest, you know, the robust originations market probably has more runway than what I see in the in the Fannie Mae forecast. And in terms of the second part of your question, how do we go after that without adding a lot of cost?

I do think our strategy of growing our correspondent platform and our flow seller base, through our enterprise sales approach is a very efficient way, to grow our originations and portfolio replenishment. Our cost structure there, we June, one of the things you may want to think about is the differential in cost structure between correspondent and retail, for example. You if you just go to general industry statistics, they're drastically different cost structures between a correspondent and flow platform and a retail platform. Your retail cost per loan is $7,000 to $8,000 per loan, where on correspondent and flow, your industry average cost structure is probably less than $1,000 a loan. So you know, growing outside of our business makes sense from an efficiency standpoint.

It's the way to replenish the portfolio the fastest, with the least amount of investment in infrastructure. But, obviously, it's a balancing game because retail margins are very, very strong, a lot higher than you see in correspondent inflow. And the more you can build that direct relationship with the consumer, the better off you are for long term portfolio retention. So it is a balancing act. But again, a lot of our portfolio replenishment is coming from correspondent where it's very efficient.

Speaker 7

Can you comment on the I know you've talked about the MSR historic opportunity in the past. Obviously, you're launching this vehicle early next year. Can you comment on what you're seeing in the market for MSRs? Are you seeing more opportunities? Or is there still a gap between buyers and sellers?

Speaker 2

I think it varies, John, by product type. So in the agency market, Fannie, Freddie, for example, yes, I think there's value alignment between buyers and sellers. Generally speaking, it is a robust market. We're seeing, again, a lot of volume being delivered through the flow channels, the Fannie Mae S and P program, Freddie the Mac co issue exchange program. You know, there's lots of bulk packages that are, you know, going around in the marketplace.

You know, the place where we've not seen a lot of bulk transactions get done is in the Ginnie Mae space. I do think there's still some bid ask spread difference there. But a lot of the Ginnie Mae volume today is being done in in their co issue program, which is something we wanna participate in in the first quarter of next year. MSR volume continues to be robust, particularly on the GSE side, and the agency side in the G and A space. I think a lot of, independent mortgage banks are holding that product, and I would expect to see more volume coming to market, in the next six months.

Speaker 7

Thanks, Glenn. Thanks, June.

Speaker 3

Thanks, Rob. Thank you.

Speaker 0

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Glenn for any further or closing comments.

Speaker 2

Everyone who joined the call today, yeah, thank you for your continued interest in Ocwen. We appreciate your support. Here, we we are, again, we're with passion and energy to deliver results for our consumers and investors. We're delivering on what we committed to do. Performance trends in the business are looking great, and we're very excited about the opportunities for the future.

So thank you for your, interest in the company. I look forward to talking to you next quarter.

Speaker 3

Thank you.

Speaker 0

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.