Mr Cooper Group Inc (COOP) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Mr. Cooper Group Second Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, today's program may be recorded.

I would now like to introduce your host for today's program, Mr. Ken Posner, Senior Vice President of Strategic Planning and Investor Relations. Please go ahead.

Good morning, and welcome to Mr. Cooper Group's Second Quarter Earnings Call. My name is Ken Posner and I'm SVP of Strategic Planning and Investor Relations. With me today are Jay Bray, Chairman and CEO; and Chris Marshall, Vice Chairman and CFO.

As a quick reminder, this call is being recorded, and you can find the slides on our Investor Relations webpage at investors.mrcoopergroup.com.

During the call, we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risers that we've identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change.

I'll now turn the call over to Jay.

Thanks, Ken, and good morning, everyone. Let's start, as we normally do, by reviewing the quarterly highlights on Page 6. We reported GAAP net income of $73 million or $0.77 per share. GAAP income was driven by a record $350 million in pretax operating income, which would be equivalent to an ROTCE of 55%. Operating income was partially offset by a noncash mark on the MSR portfolio of $261 million. This mark reflects faster prepay assumptions and a conservative, higher estimate for cost of service based on market participant opinions.

Cash flow and liquidity were extremely robust in the quarter, and this drove unrestricted cash to $1 billion, actually $1.041 billion to be precise, which was up almost $500 million sequentially. Based on this liquidity and the progress we've made in improving profitability, the Board has authorized $100 million share repurchase program, which we expect to complete over the next 12 months.

Record operating results were driven by the Originations segment, which contributed over $400 million in pretax earnings on record margins. At the moment, the entire industry is enjoying a huge tailwind but our direct-to-consumer team's execution has been flawless. Volumes and margins have remained quite strong so far in July, and we are optimistic that Originations will turn in another excellent performance in the third quarter.

The Servicing margin declined to 0.7 basis points, which was in line with what we guided you to expect. This is obviously a thin margin, but you should think of it nothing more or less than the mathematical consequences of low interest rates, which impact us in terms of higher amortization and lower interest income. Low Servicing margins go hand-in-hand with outperformance in Originations. And taken together, our overall results speak to the balance we've achieved in the Mr. Cooper business model. I'm very pleased with the operating story in Servicing, and especially our continued progress in driving efficiencies as well as the decline in forbearance, which I'll comment on more in a second.

Finally, Xome results were frankly better than we expected on a very strong contribution from title.

To summarize, this was a great quarter for Mr. Cooper, and I feel very optimistic about the outlook for the second half and 2021. To be sure, there's still enormous uncertainty concerning the pandemic and the economy, and we think a conservative mindset remains absolutely necessary. As far as business planning, our base case assumes a very slow recovery, with unemployment hovering close to 10% throughout 2021. But within this context, the housing market is a bright spot. Primary residences have long been the most important asset for consumers and this seems to be even more of the case during the pandemic, when many of them sheltering in place are working and schooling from home. And of course, low interest rate support housing demand.

We also believe we're well positioned within the mortgage industry, which has been consolidating for several years into the hands of a small number of operators. Among this group, we enjoy the benefits of scale, we have excellent liquidity, we've built a proprietary automated low-cost digital platform and most important, we have a team of tremendously talented and passionate associates, who believe deeply in our role as advocates for the customer.

Now let's turn to Slide 7 and review the latest data on forbearance, which I know is top of mind for all of us. The good news is that the numbers are declining. As of July 27, 5.9% of our customers were still on a forbearance plan, down from the peak of 7.1% at the end of June. The first cohort of borrowers is rolling off of 90-day plans, either because they remain current all the way through or because they no longer felt the need to defer payments and elected to come off forbearance.

Additionally, new forbearance take-up has slowed a great deal and is now under 1,000 customers per day. Taking care of customers is our first priority, and we'll always do what it takes. When the pandemic hit, there was tremendous support within the industry for the forbearance plans, but we and others question the implications for liquidity. Since then, Fannie, Freddie and Ginnie have come out with a series of policy updates, which we've summarized for you in the table to the right. In our view, this is really a very positive outcome, which provides us with the right tools to assist customers while preserving liquidity.

One program in the table I'd highlight, which was announced fairly recently is FHA's streamline modification program. This is an option for customers who have been impacted by the pandemic and are unable to make their regular payments. Under this program, we can lower the interest rate for these customers without going through the time-consuming and costly underwriting process required in traditional modifications. We can help these customers get back on their feet with a lower rate, and then when they're in position -- and when we then are in the position to deliver the loan back into a Ginnie Mae security.

Going forward, we're expecting a large volume of customers will be coming off of forbearance in the second half. But as I pointed out last quarter, we made significant investments in automating the modification process as part of Project Titan. And since then, we've rolled out additional digital tools. We expect to provide a positive experience for those customers ready to resume payments. And of course, our teammates will be focused on those customers who need extra help.

If you'll turn the page to Slide 8, I want to hammer on the theme of balance between Servicing and Originations because I think this is really important to understanding our earnings going forward and the potential we see in the stock price. The chart on the left shows you the pretax contribution from Servicing, Origination and Xome over the last 5 quarters. This chart drives home the point that if Servicing earnings have come under pressure, Originations has filled the gap and then Xome.

The second chart shows you the trend in our cash flow defined using the steady state discretionary cash metric we've shared with you since early last year. Thanks to the strong results in our Originations segment, both earnings and cash flow have accelerated. Finally, the chart on the right shows you the trend in tangible book value, which includes both operating results and the marks we take on the MSR. As you can see, we've grown tangible book value by more than 30% over the last 5 quarters.

Now let me be clear about something. We are certainly not taking a victory lap this morning because tangible book value is still 1% below the level we reported in the third quarter of '18 when we closed the WMIH merger. However, please bear in mind, since the WMIH merger closed, we've weathered a series of extremely adverse shocks from the point of view of a large servicer, with mortgage rates down 160 basis points and LIBOR down over 200 basis points. To have sustained tangible book value against this backdrop should give you a lot of confidence in the resilience of the Mr. Cooper business model as well as our team's careful approach to managing risk. Now we're expecting to sustain tangible book value growth through the remainder of this year and 2021 and for years to come.

Let's turn to Slide 9. I'm going to wrap up my comments by talking about our priorities for allocation of cash, which is a top focus for the Board and the management team, and a frequent question we hear from both our equity and debt investors. Our first priority is liquidity. You should expect us to proceed at a cautious and deliberate rate before returning liquidity to precrisis levels. While recent forbearance trends are encouraging, the path of the COVID pandemic is unknown, and the economic outlook is highly uncertain. We take our role as a leading institution in the mortgage market very seriously, and we don't want any of our stakeholders to worry about Mr. Cooper's ability to take care of our customers, even in an extreme adverse scenario.

Our second priority is deleveraging, which we remain committed to. Strengthening our balance sheet is a key pillar of our strategic thinking and a key driver of higher returns on equity. In talking about deleveraging, we've always emphasized that it would take place opportunistically rather than at a constant cadence. Over the last year, we've paid down $200 million of our senior notes, and then in January, we refinanced $600 million in a transaction that was 6x oversubscribed. And as a result, we now have an attractive liquidity runway with no maturities until 2023. Today, we are monitoring the debt markets on a daily basis. And if the opportunity presents itself, we're prepared to retire a portion of our 2023 maturities and refinance the remainder, provided we can do so at an attractive cost.

Now let's talk about portfolio growth. As you will recall, over the last 18 months, we told you that growth was not a priority because we needed to focus on integration and efficiency. Well, today, all the integrations are complete. And we've made substantial progress on profitability and efficiency. What's also changed is that we're seeing more attractive margins in the correspondent and flow channels and as a result, we've resumed deploying cash there. Depending on how things shake out, it's possible we may see acquisition opportunities at distressed prices, although so far, we do not have much to report.

Finally, let's talk about the stock repurchase authorization. Speaking on behalf of the Board, we feel the company has made a lot of progress since the WMIH merger. And while we have much work still to do, the progress so far does not appear to be reflecting on the stock price. Now let me be very clear because I don't want to send mixed signals. Liquidity and deleveraging are nonnegotiable. Share repurchase will be a second priority and something we'll undertake on an opportunistic basis, depending on the stock price, opportunities for portfolio growth and the broader economic context.

And with that, I'd like to turn the call over to Chris.

Thanks, Jay. Good morning, everyone. I'm going to start on Page 10, which lays out a summary review of our second quarter results. And to briefly recap, net income was $0.77 a share. Pretax operating income was $350 million. Discretionary steady state cash flow was $368 million. Fully taxed ROTCE was 55%, and our tangible book value increased to $21.42 a share. In terms of adjustments, we had $1 million in severance, which was related to closing down the wholesale channel, which was a decision we made before the pandemic.

Now if you'll refer to the balance sheet in our earnings release published this morning, you'll see the DTA decreased by $20 million in the quarter. I know some of you may be starting to think about different election scenarios in November. And I'd like to point out, as I'm sure you're aware, that our DTA could increase in value significantly if the corporate tax rate were raised after November.

Now as we look out to 2021, we feel very optimistic about the outlook for earnings, cash flow and growth in tangible book value. To start with, at current interest rates, we'd expect to see strong origination market conditions persisting well into next year. In addition, we're looking at several strategies to enhance earnings growth independent of originations, which includes lowering our cost of debt from deleveraging and refinancing, growing the servicing portfolio at attractive margins and taking Xome's contribution up to the next level. Additionally, we're continuing to scrutinize costs throughout the organization and have implemented a zero-based budgeting approach as we plan for 2021.

Now let's turn to Slide 11 to discuss the $261 million mark-to-market we booked in the quarter, which reduced the value of the MSR by 7% from 107 basis points of UPB to 99. The mark was primarily driven by interest rates, with mortgage rates down 37 basis points in the quarter, swap rates down 20 basis points, which led us to raise the lifetime CPR to 14.2%. Now $64 million of our mark related to higher cost to serve assumptions. For our current population of delinquent loans, we project a cumulative default rate of 19% and apply a cost to service of approximately $600 per defaulted loan. Now bear in mind, these are market participant assumptions, which we're required to use under GAAP, and they don't reflect the unique benefits of our low-cost platform or our track record of superior loss mitigation.

In case you're wondering, we continue to manage the portfolio on an unhedged basis. We do have an in-house team that oversees interest rate risk and hedging, and we're constantly evaluating the optimal strategy for the MSR. However, at this time, we have not implemented an MSR hedge. With rates so low and prepayment speeds so high, the downside risk seems much more limited to us today compared to what we've already experienced over the last few years. To be specific, as of June 30, we estimate that a 25 basis point rate shock will result in a mark-to-market loss of $93 million, which we have earned back through incremental DTC profits in a relatively short period of time. As you saw in the second quarter, we did just that. We recovered the mark and then some within the same quarter. If you look at the table, we provide on the refinanceability of our portfolio, you won't be surprised to see we have a huge opportunity. So unless there is a sudden change, we'd expect to be busy helping customers save money with rate and term refinances throughout 2020 and well into 2021.

On that note, let's turn to Slide 12 and talk about the Origination segment, which produced record results with pretax income of $434 million, up nearly threefold from $158 million in the first quarter. As you will recall at the KBW Mortgage Finance conference, we provided an intra-quarter update with an estimate of $10 billion in fundings and a margin of approximately 3%, and that's pretty much where we came in with $10.7 billion in fundings and an overall margin of 3.29%. And I'd point out that $8.6 billion of those fundings came from our highly profitable DTC channel that's been growing significantly over the past few years.

Now as we mentioned in our first quarter call, we temporarily suspended the correspondent channel as a precautionary step for the national emergency, which first declared and disruptions hit the capital markets. Now that call was straight out of our risk management playbook, and it was the responsible thing to do, and you saw similar decisions at many of the banks. Once we had taken stock of the new environment and ensured that our liquidity was water tight, we turned the correspondent channel back on. And correspondent is important to us because it's our primary channel for acquiring new customers. We're seeing very good margins right now. But we do expect them to normalize quickly as capacity is returning to the market. I'll mention that we're working on some very important efficiency plans, which should position us to significantly grow correspondent as we enter 2021. But for now, we guide you to look for volumes returning to precrisis levels.

The DTC channel executed flawlessly in the quarter, scaling up in response to huge customer demand and producing excellent margins. You'll note that our recapture rate declined to 31% in the quarter from 38% in the first quarter. But as we've pointed out before, this is the normal pattern for us during refinance booms. It reflects the fact that we add capacity at a deliberate pace with an eye on the long term. And additionally, when the crisis hit and we shifted to work-from-home status, that slowed our hiring and our onboarding. However, we're now back to growing our teams, including our home advisers, and we should see a progress in the third quarter.

We're also investing in new automation designed to speed up certain workflows and support faster turn times, lower costs and produce higher volumes. And the project is referred to as Project Flash. We look forward to telling you more about this initiative as the results become more visible in our numbers. Looking ahead and based on July results and assuming no further change in interest rates, we're expecting fundings of roughly $14 billion in the third quarter. Now margins may drop back below 3%, and that's just going to be reflecting a more typical balance between DTC and correspondent. And we assume locks and fundings will be running closer in line in the quarter.

Now let's turn to Slide 13 and review the Servicing portfolio. Total UPB ended the quarter at $596 billion, down from $629 billion in the first quarter on elevated runoff in both the MSR and the subservicing portfolios as well as our decision to temporarily suspend the correspondent channel. As you can see, it was a pretty dramatic spike in CPR to 26%. In 2019, we told you we were going to take a pause from growth to focus on integration, deleveraging and profitability. And that's exactly what we did. At the same time, returns in the market were compressing to unattractive levels so we didn't really miss a lot of opportunity to create shareholder value.

But today, the market shifted. We're seeing excellent margins in Originations and co-issuance. We're also seeing some interesting opportunities in the bulk market, although not yet anything I'd characterize as really distressed. We're currently reviewing several deals although you should expect us to remain extremely disciplined. Bear in mind, we often get 2 bites at the apple. So if we're not the winning buyer, we might still be the operator that financial investors turn to for subservicing, and that was exactly the case earlier this month when we were selected to subservice a $20 billion pool that was purchased by a highly respected asset manager. Now subject to final contract negotiations, we're hopeful that this transaction will grow into a large, long term and mutually beneficial relationship. Net-net, given continuing high levels of prepayment speeds and the timing of boarding this new relationship, you may see another decline in the portfolio in the third quarter, although that would probably be of a much smaller magnitude. Now by year-end, we'd expect UPB to be growing again at least at a moderate pace.

Now let's turn our attention to the Servicing margin on Slide 14. Excluding the full mark, the Servicing margin was 0.7 basis points, down from 3.9 basis points in the first quarter, which was in line with our guidance of plus or minus breakeven. As Jay mentioned, the Servicing margin reflects nothing more than the math of low interest rates. As you can see in the chart on the right, over the last year, amortization has roughly doubled while the interest income we earn on custodial deposits has declined significantly. Over the last year, these 2 factors taken together have accounted for 6 basis points in margin compression.

As Jay pointed out, the right way to look at our business is to combine Servicing and Originations together. The servicing margin loss to low interest rates has been recovered and then some by the excellent recapture economics in DTC. In fact, this quarter, not only did the contribution from Originations offset the decline in Servicing, it also paid for the mark, resulting in positive GAAP results despite the unprecedented environment. If you want to consider an alternative metric for evaluating the business, then combining Servicing, DTC and the interest rate component of the mark would be equivalent to an all-in margin of 15.4 basis points of UPB.

Now looking past interest rates, there's a really good story in servicing. Total expenses are down $67 million year-over-year reflecting the benefits of both Project Titan and our corporate actions. You'll see the same trend in the latest addition of the benchmark study published by the Mortgage Bankers Association, which once again showed us with lower direct costs than peers and with the gap actually widening in our favor year-over-year.

Foreclosure expenses also down significantly year-over-year, which reflects progress for rationalizing the reverse portfolio and ongoing recoveries from prior services. Looking ahead, we expect the Servicing margin to be flattish in the third quarter, and then began to recover in the fourth quarter as higher incentive fees should become more visible as we help a growing number of customers exit forbearance. At the same time, unless interest rates fall further, amortization should level off and begin to decline.

Now turning to Xome on Slide 15. Pretax operating income was $13 million this quarter, flat to the first quarter, which is quite a bit better than we expected. As you'll recall, we cautioned you that nationwide foreclosure moratoriums would put our very profitable REO exchange on hold, and those revenues largely disappeared in the quarter. However, our title unit outperformed our expectations, aided by further declines in interest rates and the resulting surge in refinance volumes. We expect strong results in the third quarter, although likely moderating somewhat from the second quarter levels.

Now once the moratoriums are lifted and the exchange comes back online, Xome should make a significant contribution to our overall results. However, I don't want you to think we're sitting around waiting for this to happen. Expenses are down $6 million at Xome year-over-year, reflecting the benefit of corporate actions we've taken to streamline costs, and more efficiency plans are in the works. In the short term, while the REO exchange is idle, we've redeployed team members to Originations and Servicing. As a reminder, Xome doesn't require capital or contributing much of anything to TBV. So you should keep that in mind when you value our stock or evaluate our leverage ratio.

Now I'm going to wrap up my prepared remarks this morning by commenting on the balance sheet. Slide 16 gives you an update on our advances and financing lines. You can see that advances were flat quarter-over-quarter at $812 million. High prepayment speeds gave us extra float this quarter, which more than offset the impact of forbearance. During the quarter, unrestricted cash grew by $462 million to just over $1 billion. The most important source of cash was our operating performance. We estimate discretionary steady state cash flow was $368 million in the quarter, which is net of the investment required to sustain the MSR. Also helping cash balances, we drew down $150 million on our MSR lines to ensure we were prepared for an extremely adverse environment, which so far hasn't materialized. So since quarter end, we've begun paying those lines back down.

Now offsetting these inflows were some short-term swings in working capital. Last quarter, we disclosed an $850 million increase in committed facilities for financing GSE and private label advances, which we said then and continue to believe are more than adequate for an extremely adverse scenario. We also said that we plan to finance Ginnie advances with corporate cash flow. Today, we're close to finalizing a new significantly expanded Ginnie Mae facility with a premier bank to finance both MSR and advances. Pending final approvals, this facility should close some point in the third quarter. And this is a very important development for us. And what it means is that even in a more adverse environment, the only drain on our corporate cash flow would be the haircut on advanced facilities, which would be a manageable amount of cash in any scenario we can imagine.

Now let's finish up with some comments on capital and leverage on Slide 17. As you know, strengthening the balance sheet is a key pillar in our strategic thinking. In our fourth quarter call, we laid out a capital target of 15% or higher intangible net worth to tangible assets. That target was based on feedback from investors, together with a thoughtful assessment of our current business model, taking into account risk-based capital calculations as well as the results of our stress test model and an analysis of our peers. Now we ended second quarter at 11.5%, which was up from 10.8% in the first quarter. Based on our current outlook, we'd expect further expansion in this ratio in the third quarter and we're optimistic about achieving our target during 2021.

In addition to progress on the ratio, I'd also point out that the composition of the balance sheet has changed significantly over the last year, which further bolsters our credit profile. Year-over-year, cash has gone from 1% to 6% of total assets, reflecting robust liquidity. The MSR asset, which is our primary risk exposure, has declined from 19% of total assets to 16%. At the same time, we've demonstrated that the origination segment is a very powerful natural hedge. In fact, as I mentioned earlier, in this quarter, DTC recovered the mark entirely within the quarter. Mortgage loans held for sale have remained relatively flat. And considering the extreme capital markets volatility in the quarter, I think it's fair to say we've demonstrated strong competency in our pipeline hedging and liquidity management.

The reverse portfolio, which we're running off, has been shrinking in line with our guidance. As a reminder, reverse mortgages make up almost half of our total assets, but there are low-risk government-guaranteed asset, which are consolidated for accounting purchase. You might find it interesting to note that reverse mortgages are excluded from our Ginnie Mae capital requirements. So please consider this when you evaluate our balance sheet.

And finally, the DTA increased from a year ago, but that's primarily due to the release of the valuation allowance, which reflects the company's improved profitability. Now when we look at the stock price, we conclude that the market's too conservative about the rate at which we'll utilize the DTA or it's not assigning enough value to Xome or it doesn't believe we've achieved a sustainable balance between Servicing and Originations, but we're confident that the stock is undervalued, and it's going to appreciate significantly over time.

So with that, I'll turn it back to Ken for Q&A.

Thank you, Chris. I'll now ask our operator to start the Q&A session.

(Operator Instructions) Our first question comes from the line of Bose George from KBW.

So you said the expectation for volumes in the third quarter is going to be -- is $14 million. Can you give us the mix of retail versus correspondent? And then just talk about gain on sale margin trends so far in July.

That was $14 billion, Bose.

Sorry, $14 billion, yes.

$14 billion, not $14 million. Yes, we will see growth in DTC. I did say that will be $9 billion-ish, maybe slightly higher than that, and then the balance would be correspondent.

Okay. And then the gain on sale margin trends, are they pretty -- remain pretty high?

Yes. The market seems pretty strong. We don't expect overall margin to change much, but of course, there'll be more balance in the channels. And so that's the only reason we're saying the overall margin may slip below 3%.

Okay. That makes sense. And then just you noted the MSR mark on the 25 basis point adverse shock would be $93 million. When you look at that, is that based on the primary mortgage rate? So is that what we should be looking at?

These primary mortgage rate and swap rates, both of those drive the impact.

Okay. So quarter-to-date, now, it's -- the move is -- seems pretty minimal, at least on the primary rate. Is that fair?

Yes, there has been some deterioration in the first month in lease, but at a much more modest -- it's been a much more modest decline than it was this time last quarter.

Okay. And then actually, just one on the Ginnie Mae loans. When does it make sense for you to buy those loans out of the pool? Is there -- are the economics there something that could make sense anytime for use of capital for that purpose?

Yes, we think there'd be a big opportunity as people come off of forbearance. And I think Ginnie Mae and FHA have been extremely customer-friendly in designing a program that's perfect for the current economic environment. So it's going to be much less burdensome on the customer, and we should be able to help them modify their loan or refinance their loan very efficiently.

Yes. And I think Bose -- this is Jay. You know about the streamline mod program that FHA came out with, which -- to Chris' point, I think, is very customer-friendly. And really eliminates a lot of friction between us and the borrower and should be a really good customer experience. And I think if the borrower needs that modification help, obviously, we'll be able to redeliver that. And it should be meaningful from a profitability standpoint.

Okay. Great. Good quarter, guys.

Our next question comes from the line of Doug Harter from Credit Suisse.

You guys talked about kind of deleveraging. Just any sense as to kind of sizing that deleveraging that you'd be looking to do today versus how much of it occurs in the future?

I think, overall, our approach to deleveraging hasn't changed, Doug. We said we wanted to bring the company back down to premerger debt levels. And between the debt that's callable now and the debt that will be callable next year, we think we'd get to that level. I think how much we do today versus a year from now is going to be market dependent. But we are -- I mean I want to make sure everybody here has heard Jay very, very clearly, our priority is liquidity, number one. We are awash in liquidity and feel great about all of the facilities we've been able to put in place and the cash we're generating. But the crisis isn't over. So we're going to remain conservative there. And we are going to deleverage. So I don't want to commit to a number today, but our overall plan has not changed.

Got it. And then just on that kind of maintaining liquidity, can you just talk a little bit more about kind of -- you mentioned a little detail, but what exactly you're planning on in terms of forbearance? And kind of how much cushion you're kind of building in on that end relative to kind of where we are today kind of given the continued uncertainty?

Well, the honest answer is there's still some unknowns about what forbearance will be. But I think we've taken a very conservative approach. In fact, our forbearance levels are less than half of what we originally projected it. And the requests we're getting continue to decline, and that's been consistent for the last 4, 6 weeks.

The other thing I'd point out is that one of the big assumptions we had in our forbearance projections was the rate at which people would exit. And that was a pure unknown but, in fact, we estimated 20% of our customers would exit forbearance at the first 90 days. And in fact, we had more than 20% exit. I'd also say in terms of the customers that are on forbearance, about 29% of them are still not 30 days delinquent. 17% of them have made their payments consistently. Another 12% have yet to their miss payment, they're less than 30 days delinquent. So we look at them in 2 separate buckets, but that's 29% of the population. And so we feel very good about continuing on the path that we're on.

The one unknown is what happens when forbearance is over. We have relatively conservative estimates of the number of customers that are going to re-default, 19% of the total population that's not current on their loans. And the cost that we are assuming, again, that's a market participant cost. That is not a cost that reflects our internal efficiencies. So I can't tell you we have 100% accuracy on forbearance because of the unknown. But so far, everything we've done has been conservative. We've lined up facilities that are more than adequate for any scenario we can imagine. And so we think we're in a very good place, but we're going to remain extremely cautious and conservative.

Yes. The only thing I would add to that is if you look at our overall forecasting methodology, we're using Moody's kind of baseline scenarios and stress scenarios, which would assume unemployment, as I mentioned in the script, remains in the double digits throughout 2021. And the overall forbearance levels, frankly, new forbearance continue to come down even below the 1,000 that I mentioned on the -- earlier on the call.

Our next question comes from the line of Mark Hammond from Bank of America.

Regarding the possible partial refi of the 2023s, is that contemplated in your comments about working to get back to the tangible net worth at 15%?

Yes. We're forecasting a certain amount of deleveraging. We're forecasting a conservative execution of a buyback program. And we're -- the most important thing we're forecasting is, and Mark, I hope you can appreciate that we have been very conservative about giving guidance on Originations. We've shied away from giving future guidance on what the market was going to do. But at this point, we don't see anything changing. Strong, strong Originations performance through well into 2021. So the profitability from that and the cash flow that's generating is really the biggest driver in us getting to that 15%.

Got it, Chris. And you led me to my follow-up, which is just what is it going to take for the industry Origination margins to normalize? Is there some sort of burnout or...

Yes, I'm sure at some point in time, there'll be a burnout. In the meantime, we have to be awash with tens of thousands of new loan officers and processors. It's -- we're in this perfect situation where you got to have trained people online and all of the large origination mortgage companies are adding people to the platform as are we. I think we had 300 new hires last week.

So we are moving very aggressively to do that, but in a measured way, and we've got to train people on our systems. And yet, even at those levels, it's hard to keep up with the massive amount of our customers that would benefit materially by refinancing. Rates are so low. It's going to take a while to catch up to that. So absent rates turning around and rising quickly, which nobody is going to forecast. Companies with strong efficient origination platforms should do very, very well for the foreseeable future.

And really, it's a capacity play at this point. I mean we could do significantly more locks per day and if we had more capacity -- and to Chris' point, we're building that capacity. And there's -- and within our portfolio, obviously, we mentioned it, but well over 1 million customers that we think we can help and we want to help, and we plan to help. So long, long runway there, and we expect significant profitability to come from that Originations business and significant cash flow to come from that business. So I'm really bullish on it.

Our next question comes from the line of Kevin Barker from Piper Sandler.

I'd just like to reference the modification programs that you laid out. Were those programs officially announced by Freddie and Fannie? And then would those just -- would the potential fees that you could retain on the mods be purely on the loans that have gone through forbearance? Or is this on all defaulted loans that go through a modification?

Yes, go ahead, Chris.

I'll answer your question in sequence. Yes, on the agency side, the plans have been announced. There may be a few nuances that continue to come out. And then on the FHA side, things are not completely final, but I think we have a good idea as to where they're heading. I would say again that the agencies, the FHFA, Dr. Calabria; the FHA, Brian Montgomery and Ginnie Mae, all of the agencies have worked to make the modification process very, very customer-friendly. And of course, we're benefiting tremendously because of the investment we made in our automated claims process last year. And then...

Yes, I would add to that, Kevin. I would think of it as in 2 buckets. One, on the forbearance plans, yes, the GSEs have come out with their deferral plan. They've come out with how that works as well as the fees we're going to earn on that. And so I think that's crystal clear. I would not lump that in with a traditional modification, right? If the customer cannot -- doesn't -- can't qualify, if you will, or deferral doesn't work for them, then there are other modification programs that are the more traditional Fannie, Freddie modification programs, and we would get paid a fee for that as well. So like, I would think of it that way. Deferral will be kind of second in the waterfall if the customer can't make all the payments that they were forborne on. And then the second piece will be the traditional mods.

On the FHA, the streamline mod has been announced, the partial claim has been announced. And on the streamline mod, as we talked about earlier, I can't -- I think FHA has been a real leader here in rolling that out. And to our point earlier, once we mod that loan for a customer that does need payment assistance, we're going to redeliver that and earn anywhere from 5 to 6 points. So it's a very meaningful P&L impact and I think it's a great solution for the customer because it reduces their rate, frankly, to a market rate. That's assuming that, again, they can't continue with their current rate and resume their payments. So that's the way to think about it, if that makes sense.

Okay. And then when we think about the population of potential borrowers that could go through a modification or a refinance or what have you, do we look at the 5.9% forbearance outstanding that you disclosed on Slide 7 and then apply that to the entire Servicing portfolio? Or should we just look at the Servicing portfolio that's owned versus subserviced?

It would be the entire.

Okay. And then you made a reference to a 3% gain on sale -- sub-3% gain on sale margin in the Originations channel. Did you mean gain on sale margin? Or did you mean pretax margin per UPB?

Pretax margin per UPB.

Our next question comes from the line of Giuliano Bologna from BTIG.

Congratulations on a great quarter. I guess starting off, one of the things I'm a little curious about is, in thinking about the loans that are coming off of forbearance, is there a sense of the mix of how they're coming off in the sense are they using the payment deferral program, are they using modifications or are they reperforming? I'm just curious if there's a sense of what the mix is for loans coming off forbearance?

Yes. If you look at kind of the first cohort, and I may not get these exactly right, but effectively, 30% came off. And of that 30%, about 80% of that 30% just came off via resuming their normal payments. So some of those were already making their payments even though they were on the forbearance plan. And so they just came off the plan and continue to make their payments. Others came off by catching up on the payments and resuming the normal payments. And then a small percentage came off via some type of modification-type solution.

So we're very -- I mean, honestly, to Chris' point, we're extremely pleased with 2 things. One, the overall level of forbearance has been much lower than we had forecasted and much lower than we sized our financing capacity to; and two, the first group of customers that have come off of forbearance plans have exceeded our expectations as well about how many are resuming their normal payments. So I think the early percent -- I mean the early results are really fantastic.

And then from a -- we don't talk enough about this, but when you look at the tools we rolled out for our customers, we rolled out some digital tools for both going on the forbearance plans and then customers that are coming off the forbearance plans. And really, the ones that are going on, we're seeing 70% plus are using our digital tools and not really requiring discussion with our customer service reps, which is a great experience for the customer, and obviously, from an expense standpoint, is good for us. And for those that are coming off, we're actually seeing a lot of those are using digital tools as well. I think it's close to 1/3. And so we're seeing great progress there.

So I think, look, at the end of the day, it's -- the way I -- if I haven't lived through the last crisis, this is -- we are well ahead of anything we can conceive of, especially compared to the last crisis. There are better tools for the customers. From a technology standpoint, we have significantly better technology, both on the back end for our team members, but especially on the front end as well for our customers. And so I think it's just -- so far, it's been a very positive experience for all of our stakeholders. And I think we'll see what happens in the latter half of the year. Obviously, we're going to remain cautious and conservative. But so far, it's been -- it's significantly exceeded our expectations in a positive way.

That's great. And I guess kind of drawing down a little bit more on that, since a large portion reperformed by making their payments or kind of continuing, I think Fannie and Freddie have a reperformance fee if you reperform within a certain number of -- for a certain number of payments that's payable. I just want to make sure I'm correct on that.

And the second part of that is, when we think about the FHA streamline product because you're able to repool those loans, you should be able to get some sort of a gain on the repooling, I would assume. And it'd be interesting to get a sense of what kind of gains you're able to get on pooling those modified Ginnie loans into new pools? And then where will that profitability flow-through from a -- yes, more so from a P&L geography perspective?

Yes. I think on the repooling question, it's probably comparable to what we talked about previously. It's in -- in today's market, it's in the 5- to 6-point range. So it's -- of the UPB. So it's a very meaningful amount of revenue, and that will flow through the Servicing segment.

Our next question comes from the line of Mark DeVries from Barclays.

Just wanted to clarify some of the comments around the correspondent business. Chris, I think you indicated that you expect for the balance of the year for volumes to kind of revert back to kind of pre-COVID levels. But that you were looking to make some changes for 2021 where you could really step that volume up. Is -- did I hear you correctly? And if so, can you give us any color on how much you've -- we should expect share in correspondent to kind of increase in 2021?

Mark, I appreciate the question because I didn't want to touch on that. But we're not going to give you guidance today. I would say we are building out some technology, and we're not going to carve out technology investments like we've done in the past because it's just so much part of the company now. But the Project Flash, which I hope you love that name, is really a broad-based set of investments in the Originations business to employ robotics and automation in a lot of the underwriting quality control parts of the business. And I think that's going to help us move much more quickly. We're not going to set a market share goal today, but our -- overall, we like the idea of having a balance between DTC and correspondent today. DTC, which is incredibly profitable, has grown so fast. It essentially doubled in the last year and continues to grow. So we've got plenty of room for correspondent to catch up.

Okay. Got it. And was just hoping you could help us think through the moving pieces on the Servicing margin, and what's going to help kind of contribute to, I guess, starting 4Q a recovery in that margin?

Well, 4Q -- in 4Q, we do expect CPRs to slow down a little bit. That's just the historic cycle. And actually, I wouldn't feel bad if they didn't because it just means we're going to be originating more loans and that trade is more profitable. But we do expect them to moderate a little bit, and then we should see a little bit more of the modification fees start to show up that we just discussed. But again, I would encourage you to look at both businesses together.

The reality is the 6 basis points of compression comes straight for amortization doubling in the last year and LIBOR completely collapsing. So eventually, amortization will stabilize and start to decline. When LIBOR comes back is anybody's guess. So I would expect the whole industry servicing margins to be impacted for a while. But make no mistake about it, that amortization is feeding our originations engine. And so look that separately, it's one story. Look that together, it's a very strong story.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jay Bray, Chairman and CEO, for any further remarks.

Yes. Thank you. Thanks, everyone, for joining. We appreciate your time, and we'll be available for follow-up questions. Have a great day. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.