Onity Group Inc (ONIT) 2019 Q4 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to Ocwen Financial Corporation's Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Hugo Arias, Senior Vice President, Treasurer and Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for Ocwen's Fourth Quarter 2019 Earnings Call. Please note that our fourth quarter 2019 earnings release and slide presentation have been provided and are available on our website. Speaking on the call will be Ocwen's Chief Executive Officer, Glen Messina; and Chief Financial Officer, June 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. Forward-looking statements, by their nature, address matters that are, to different degrees, uncertain. Our business has been undergoing substantial change, which has magnified such uncertainties. You should bear these facts in mind when considering such statements and should not place undue reliance on such statements.

Forward-looking statements involve several assumptions, risks and uncertainties that could cause actual results to differ materially. In the past, actual results have differed 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 statement 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 expenses, excluding MSR valuation adjustments net and expense notables and pretax loss excluding income statement notables and amortization of NRZ lump-sum cash payments, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. We also believe these non-GAAP financial measures provide 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.

For an elaboration of the factors I just discussed, please refer to our presentation and today's earnings release as well as the company's filings with the Securities and Exchange Commission, including, once filed, Ocwen's 2019 Form 10-K.

Now I will turn the call over to Glen Messina.

Thanks, Hugo. Good morning, everyone. Thanks for joining us. Let's start on Slide 4. In 2019, we delivered strong performance on our value creation strategy of improving financial performance, building a sustainable business model and reducing enterprise risks unique to Ocwen. With respect to improving financial performance, in the fourth quarter, we achieved net income of $35 million, and we ended 2019 with a book value per share of slightly over $3. We also achieved pretax income before notable items of $12 million, which exceeds our prior guidance. We've improved our annualized pretax income before notable items and amortization of NRZ lump-sum payments by over $265 million since the second quarter 2018. This was enabled by completing the PHH integration on time, growing owned MSR UPB originations from all sources and realizing significant cost reengineering savings.

With respect to creating a sustainable business model, we established multiple origination sources that are generating volume at a run rate to deliver between $15 billion to $20 billion this year, excluding bulk purchases. To support our growth objectives, we established secured MSR financing for agency Ginnie Mae and PLS servicing, improved our servicing advanced facility terms and funding costs, and restructured our mortgage warehouse funding facilities to support our lending growth. To reduce risks unique to Ocwen, we extended the SSTL maturity to May 2022, resolved multiple legacy litigation matters favorably, and we believe we've met all requirements to date of the NYDFS' conditional approval to the PHH acquisition. We've also completed the second of 3 data integrity audits for Massachusetts, thereby lifting our MSR acquisition constraints in that state.

With respect to the CFPB and Florida AG matters, we received favorable court rulings in September last year. We continue to believe we have meritorious factual and legal defenses to the CFPB and Florida AG claims and are vigorously defending our position. We are taking all reasonable and prudent actions to resolve these matters in a timely fashion that results in an acceptable financial outcome for our shareholders.

With respect to our client concentration risk with NRZ, we are cooperating with them to support the termination of the legacy PHH subservicing. We estimate the portfolio is unprofitable after all operating and allocated expenses. We'll talk more about our perspective on the overall NRZ relationship later. We believe we remain on track to achieve pretax profitability, excluding income statement notables and amortization of NRZ lump-sum payments in the third quarter of 2020. In addition, we expect that pretax earnings, excluding income statement notables, will be positive for the full year 2020. While pretax earnings expectations assume a mortgage market environment consistent with the MBA and GSE forecast as of January 2020, we achieve our objectives, and there are no adverse changes to market, business or industry or legal and regulatory matters. We are evaluating the impact of the recent drop in the 10-year treasury rate on our 2020 outlook. We expect a positive impact on our lending volumes and margins, but an unfavorable impact to servicing runoff and MSR values.

We believe successful execution of our strategy will result in a more attractive business with improved flexibility to consider a variety of alternatives to maximize value for shareholders. We continue to have confidence in our plans and our execution, and we believe there's been a disconnect between our share price and the fundamentals of our business. In response, our Board has authorized an open market share repurchase program of up to $5 million. The timing and execution of any share repurchases will be subject to market conditions, among other factors.

I'd like to share more details on what we're building here at Ocwen and our plans for 2020 and beyond. Turning to Slide 5. Through our integration and reengineering actions, we are aiming to create a sustainable business model powered by multiple sources of portfolio replenishment and growth. We've developed a comprehensive suite of products and services offered as bundled or stand-alone solutions, and our enterprise-wide sales organization is building a growing opportunity pipeline. Our originations platform is expected to generate enough volume to grow our owned MSR portfolio in 2020 as well as grow and diversify our subservicing. We are targeting 13% or higher pretax ROEs on all forward MSRs and 12% on our reverse MSRs that we originate. Over time, we're targeting to grow our owned servicing and subservice portfolios to at least $100 billion in UPB each. The growth in our subservicing portfolio will be driven by 3 activities: first, the origination of new subservicing agreements with MSR investors; second, the creation of synthetic subservicing arrangements through bulk and flow MSR sales to capital partners with servicing retained; and third, the implementation of an MSR capital vehicle.

During 2019, we spent a considerable amount of time understanding the risks, growth potential and financial performance of our servicing portfolio. Through this process, we have concluded that our legacy subservicing for NRZ has an increasingly unattractive risk and financial performance profile and cannot be replenished with comparable assets. We expect this portfolio will run off over time. And we'll focus on growing other more profitable segments of our servicing portfolio.

Turning to Slide 6. I'd like to discuss our 2020 initiatives to further our progress on our value-creation strategy. Our objective is to deliver adequate long-term returns for our shareholders, driven by multiple origination sources, strong operational execution and a highly competitive cost structure and a risk profile aligned to the overall industry. For 2020, our focus will be achieving significant originations growth and diversifying our servicing portfolio mix, executing against our continuous cost reengineering framework, optimizing sources of capital, including greater balance sheet efficiency and continuing to reduce enterprise risks unique to Ocwen. We believe the successful execution of these initiatives will support both our near-term profitability goals and the longer-term objective of achieving a low to mid-teen pretax ROE by 2021. This assumes there are no adverse changes to current market, business or industry conditions or legal and regulatory matters.

Based on the assumptions we reflected on the slide, the improvements in annualized pretax earnings, excluding income statement notables and amortization of NRZ lump-sum payments is expected to be driven by: revenue growth, excluding NRZ, from higher lending volumes and a greater mix of owned servicing; incremental cost reengineering actions to fund volume-driven expenses and lending; and lower interest expense related to corporate debt repayment and repurchase actions.

We also believe our targeted long-term business profile has the potential to generate cash flow to enable investment in owned servicing at replenishment levels or greater. Any originations above our reinvestment capacity would provide opportunity to replenish our subservicing portfolio with the support of capital partners and provide ongoing benefits to our scale and margins.

Moving to Slide 7. We've made substantial improvements in our lending and flow channels over the past 12 months. In our portfolio recapture channel, we have improved recapture rates from single-digit levels in early 2019 to over 20% in January. This business has been positively impacted by catalyst improvements across the platform, including a human capital transformation, improvements to end-to-end processes and implementation of technology enhancements. Some of these actions will continue in 2020. We are looking to double our 2019 recapture volume in 2020 and achieve a 30% recapture rate by year-end.

Our reverse mortgage lending business is now ranked as the #3 lender by volume, and we have been named as one of the best mortgage companies to work for by National Mortgage News for the second year in a row. In 2019, our reverse lending business delivered 23% year-over-year volume growth, and we're targeting approximately 25% volume growth in 2020.

In our correspondent forward-lending channel, we are currently purchasing volume from over 50 counterparties and have an additional 77 in the pipeline. We are targeting 2020 volume of approximately $6 billion to $9 billion. We've built an efficient operation with a cost structure that is expected to be competitive at the scale projected for 2020.

In our flow channels, we are targeting to grow our volume from agency purchase, co-issue and direct customer flow MSR purchase arrangements to approximately $6 billion to $9 billion in 2020. Currently, our top 5 prospects for flow MSR arrangements represent $28 billion in annual volume. Although we have experienced and continued to drive a significant ramp-up in volume, we continue to maintain high standards for counterparty risk tolerance and collateral quality. In addition, we continue to evaluate M&A opportunities to further expand our lending and portfolio replenishment capability.

On Slide 8, I'd like to talk about our capital allocation framework. As we've discussed, growing our originations activities and servicing portfolio are major drivers of our path to profitability. To support our growth objectives, we think of our available capital as part of 3 distinct baskets: first, to maintain adequate liquidity to operate our business and mitigate risk; second, for investment in the business to drive profitable growth; and third, if available, excess for opportunistic deployment in share and second lien bond repurchases.

We believe that prioritizing capital in the first 2 uses at current market return levels will result in the best long-term value creation for our investors. When making our investment decisions, we prioritize our lending channels as they tend to provide the highest returns and support a sustainable business model. To the extent investment opportunities are not available at our targeted ROE requirements, we might consider stock and second lien debt repurchases, subject to existing debt agreement restrictions. This would be a more attractive option to the extent we believe there's a disconnect between our current or expected performance and the price of our securities.

We are targeting owned MSR UPB of approximately $90 billion at the end of 2020 based on our 2019 year-end liquidity position and the potential for incremental liquidity from balance sheet efficiency initiatives. Assuming a cash target of approximately $200 million, no additional internal sources of capital from balance sheet optimization actions and after adjusting for the SSTL paydown, we believe we have the capital to invest in up to $20 billion in owned MSR UPB. To improve balance sheet efficiency, we are focused on increasing leverage on servicing advanced receivables, improved asset turn times and potential sales of noncore or underperforming assets. To the extent achieving our own MSR UPB target becomes challenging due to capital constraints or other reasons, we intend to rely upon greater subservicing growth to increase margins and meet our profitability objectives.

On Slide 9, we show the excellent progress we've made on our cost reengineering initiative. We've reduced our adjusted annualized expenses by over 40% compared to a reduction in the number of loans serviced by approximately 18%. This is a meaningful improvement in our cost structure, and we believe we have additional productivity opportunities available to us. We are using disciplined and formalized processes to drive continuous cost improvement through lean process design, automation, global operations, optimization and strategic sourcing.

In 2020, we've added centers of excellence for similar activities to better perform throughout the business. Continuous cost reengineering is a critical element of our business transformation. Our cost structure today reflects the current portfolio composition, which is approximately 56% PLS and pre-2016 forward Ginnie Mae. Our PLS portfolio is the costliest to service due to several attributes, including high delinquency, high percentage of modified loans in the portfolio and the high-touch nature of the borrowers, even if they are current.

Our pre-2016 forward Ginnie Mae portfolio is the next costliest due to its high delinquency profile and approximately $40 million in unreimbursed servicer expenses in 2019. Our GSE and post-2016 Ginnie Mae portfolios are the least costly to service. We believe the expense reductions we have achieved in the fourth quarter have positioned us with the top quartile servicing cost per loan for Ginnie Mae and GSE loans based on the industry data that's available to us. Over time, our goal is to manage our cost structure through our continuous cost improvement actions to reduce the high cost structure associated with our legacy portfolios and maintain a competitive cost to service for the recent vintage GSE and Ginnie Mae loans.

Moving on to our relationship with NRZ on Slide 10. I believe our client concentration with NRZ is one of the key risks that must be addressed in our value-creation road map. We are cooperating with NRZ to terminate the legacy PHH subservicing. As of 12/31, this portfolio was approximately $42 billion of UPB and approximately 310,000 loans. And we recorded net retained servicing fees of approximately $29 million for the full year. We estimate this portfolio generated a pretax loss of $3 million or $12 million annualized after direct servicing expenses and overhead allocations for the fourth quarter 2019. We intend to reduce expenses to align with our smaller subservicing portfolio and anticipate the loan deboarding fees will offset a significant portion of our transition and restructuring costs. We expect approximately 25% of the portfolio will transfer before June 30 and the remainder shortly thereafter, subject to discussions with NRZ and other stakeholders.

But with the course of our business partnership, we've had an ongoing dialogue with NRZ about how best to evolve the relationship to our mutual benefit. We remain in discussions with NRZ regarding a broad range of options, and it's impossible to speculate as to what may evolve. While the total NRZ portfolio accounts for roughly 56% of our service in UPB as of December 31, it also accounts for approximately 74% of our delinquent loans. Because of the high delinquency, this portfolio has an inherently high level of potential operational and compliance risk and requires substantial direct and oversight staffing levels. In addition, we received no recapture benefits, and there are certain provisions in our agreements with NRZ that could restrict our ability to consider certain strategic options.

Based on revised cost allocations to better align with the NRZ portfolio characteristics, we have increased our estimate of total fourth quarter NRZ-related losses from $8 million to $10 million or approximately $40 million on an annualized basis. These losses are estimated on a fully allocated cost basis and exclude any positive benefit from the amortization of NRZ lump-sum payment, which ends in April.

Going forward, we intend to contain ongoing losses through cost reengineering, volume-driven expense reductions and growth in lending and other servicing. Alternatively, if NRZ would exercise the right to terminate the entire relationship for convenience, if we assume the termination occurs on February 28 and a 1-year transition, we estimate that our transition and restructuring costs net of termination fees would be approximately $20 million to $30 million. A termination of the remaining NRZ subservicing would eliminate our highest risk and most costly assets to service. We believe this would enable a step change in our operation and support requirements, allowing us to eliminate a substantial portion of our fixed and variable costs associated with this portfolio. After rightsizing of our operations, we believe there's a potential to improve annual profitability by up to an additional $25 million to $30 million over the long term. So while it will be disruptive in the near term, we believe the opportunity to shed this portfolio would, over time, result in a more efficient and better balanced business model with materially lower operating and client concentration risk and a more solid foundation for sustainable profitability and improved strategic flexibility.

Now I'll turn it over to June, who will discuss the results for the quarter.

Thank you, Glen. My comments today will focus on our fourth quarter results as compared to the prior quarter. As previously noted, our fourth quarter investor presentation includes more details on our results and is available on our website.

Please turn to Slide 12. Our fourth quarter 2019 reported net income of $35 million includes $28 million of interest rate and assumption-driven favorable net valuation impacts, $15 million of recovery from a mortgage insurer and a service provider of expenses recognized in the prior period and $14 million of upfront and engineering costs, among other items. The positive pretax earnings impact from the amortization of the lump-sum cash payments received from NRZ in 2017 and 2018 was $26 million in the fourth quarter and $24 million in the prior quarter. The amortization of these lump-sum cash payments will have a $35 million positive impact to our pretax income over future periods through April 30, 2020.

Revenue of $262 million decreased by $22 million from the prior quarter, primarily driven by servicing runoff, lower gross float earnings and $6 million of unfavorable interest rate and assumption-driven net fair value changes in the reverse portfolio. Operating expenses of $139 million were $40 million lower than the prior quarter due to continued progress in our cost reengineering actions, which remain ahead of our expectations and the previously mentioned expense recovery.

The favorable MSR valuation adjustment of $1 million in the fourth quarter is primarily due to $64 million of favorable adjustment in our agency portfolio due to a 33 basis points increase in the 10-year swap rate offset by a $63 million reduction in MSR value due to portfolio runoff. The favorable MSR valuation adjustment in the quarter were offset by $30 million of unfavorable NRZ financing and other related liability valuation changes, which were recorded in other income expense. We have provided additional information related to the MSR valuation impacts on Slide 26.

I would now like to provide comments on our Servicing and Lending segment results. As outlined on Slide 13, our Servicing segment reported $59 million pretax income compared to $13 million loss in the prior quarter. This was largely due to interest rate and assumption-driven net fair value changes, which were $31 million favorable compared to $9 million unfavorable in the third quarter, $10 million lower claim losses and other cost savings. The servicing business remains focused on providing sustainable loan modification solutions to qualifying borrowers in need. We completed over 5,900 modifications in the quarter, 13% of which resulted in some type of debt forgiveness, totaling $30 million.

As of December 31, the total UPB of our servicing portfolio stood at $212 billion, which is down from $217 billion at September 30, largely driven by portfolio runoff of $10 billion, offset by $6 billion of net additions, primarily from MSR originations and purchases. Owned MSR UPB, excluding subservicing and NRZ of $77 billion was in line with prior quarter.

Please turn to Slide 14. The Lending segment reported pretax income of $4 million, $5 million unfavorable to the prior quarter. Forward lending reported pretax loss of $1 million, in line with the prior quarter. Revenue of $10 million with $2 million favorable, primarily due to higher volumes and margins in recapture, and expenses were higher as we continue to invest in closing the business. We successfully ramped up our relaunched correspondent channel to $398 million of funded volume in the quarter. Reverse lending business reported pretax income of $4 million compared to $9 million in the prior quarter, largely driven by $6 million of unfavorable net fair value change compared to the third quarter. Reverse lending revenue of $15 million was $6 million lower than prior quarter. Excluding the unfavorable net fair value change, revenue for the fourth quarter was flat to the third quarter.

As you can see on Slide 15, we ended the quarter with $428 million of unrestricted cash. At quarter end, we were fully funded on our service in advance and committed warehouse facilities based on available collateral. We used $126 million of unrestricted cash to pay down the SSTL balance during January. Our liquidity was $82 million higher than prior quarter, driven by $172 million of cash from the new MSR financing structures, offset by $25 million repayment of debt, including scheduled amortization of the SSTL, $12 million interest payments on second lien notes and other intra-quarter cash uses.

Our working capital needs will continue to change as we support the growth of our originations platforms. We continue to closely monitor our balance sheet changes and look for opportunities to improve working capital as part of our liquidity management and balance sheet optimization initiatives. We ended the year with corporate debt outstanding of $639 million following the repayment of $98 million of PHH bonds and repurchases of $39 million of senior secured notes and a corporate debt-to-equity ratio of 1.6x. We ended the year with shareholders' equity of $412 million or a book value per share of $3.06. We realized a $47 million favorable impact to our shareholders' equity in the first quarter 2020 from the adoption of CECL accounting standard, which recognizes the future value of tail draws from reverse mortgages originated prior to January 1, 2019.

In the fourth quarter, we incurred the remaining $14 million of our initial $65 million of upfront cost reengineering expense. In addition, we've completed our initial assessment of certain cost reduction and process improvement projects related to our current cost reengineering target and a pipeline of additional initiatives. Based on this review, we've estimated an additional upfront cost reengineering expense of up to $40 million for 2020.

I'll now turn it back over to Glen.

Thanks, June. Now let's turn to Slide 16. For 2020, we're focused on originations growth and diversifying our servicing portfolio mix, executing our continuous cost reengineering framework, optimizing sources of capital and continuing to reduce enterprise risks. We believe we have built a multi-channel mortgage platform that positions us to take advantage of growth opportunities, supported by our internal capital initiatives and external capital partners. We continue to make progress on our cost reengineering initiatives to enable a competitive industry cost structure and support our long-term profitability objectives. We're reducing funding cost by expanding our structured finance funding platforms, optimizing our existing funding sources and paying down high-cost corporate debt.

We believe our actions will drive greater balance and scale across our core servicing and originations channels, and we expect to reduce client concentration risk over time. And we are continuing to proactively engage our regulators and track our progress as it relates to our regulatory commitments. We're excited about the opportunities available to us. We believe successful execution of our strategy will result in a more attractive business with improved flexibility to consider a variety of alternatives to maximize value for shareholders.

I want to thank our management team, Board of Directors and employees for their commitment during last year's integration efforts, and as we take the next steps forward towards further improving our long-term competitiveness and financial performance.

And with that, we're ready to take questions. Operator?

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

Actually, first, just wanted to ask on your comments about NRZ and the incentive over the benefit essentially that you would get it but that contract was terminated. Can you just talk about the likelihood that it does get terminated? Is there a capacity out there for NRZ to move that to other -- to others? Just thoughts on how that could potentially play out.

It's disclosed in the contract that we filed publicly with NRZ, if there is a termination of the PLS-related assets to legacy Ocwen subservicing, there is a termination penalty that is a discounted percentage of the future servicing fees. So it's a material percentage. As we talked about in the script, we have an ongoing and active dialogue with NRZ over the course of our relationship to try to understand ways in which we can take our relationship forward in a way that solves both of our business needs and maximizes value for both of us. I can't speculate on what NRZ is thinking or what they're intending to do. They issued their own press release today. They said they're not taking action on the remaining portfolio.

The -- and actually, just to clarify, the numbers that you gave, the -- whatever, roughly $20-odd million costs for the savings of whatever, $25 million, $30 million. The penalty is sort of -- is separate from that?

The $20 million to $30 million of upfront cost of affecting a transition and restructuring of the business was net of any expected termination fees that we would receive. But again, because of the confidentiality provisions in agreement, we're not at liberty to disclose exactly what that number is at this point in time.

Okay, great. And then you said that you think that you can get low to mid-teens ROEs, I think, in 2021. And I don't recall the guidance of that nature before. Just curious what's changed to give you more comfort now that you can get there on ROEs next year.

In terms of our discussions of targeting low to mid-teen ROEs for the business, I think that's been a fairly constant theme in our profitability road map and how we're directing the business. We've made terrific progress in building a sustainable business model for the business. At least, we believe, we've made terrific progress in building a sustainable business model. We've got multiple sources of portfolio replenishment to feed our servicing portfolio. We're building a growing list of potential capital partners to support our growth in subservicing. We've got objectives to grow our owned servicing. And as we discussed, we're going to continue to reengineer our business to adapt our cost structure to the evolving nature of our portfolio. We think it's appropriate and prudent for us to provide an appropriate return on capital for our shareholders, and that's the objectives of our plan.

Okay. And then the -- on the NRZ payment, the amortization of debt, that $35 million, does that flow through -- just through the first 4 months of April -- of this year through April? And then after that, how should we think about the run rate earnings? I mean, essentially, should we sort of think about that $35 million of earnings being sort of lower than that run rate going forward?

The 30 -- the amortization of the NRZ lump-sum payment will continue through our P&L through April as we provided in our guidance, subject to any adjustments that may be necessary due to changes in interest rates or changes in business conditions. We are expecting that the company will be profitable, excluding the amortization of the NRZ lump-sum payment and notable items in the third quarter of 2020. So our objective is to -- our objective all along since we started this profitability road map was to recognize that amortization is going away and we've got to build a business enterprise that's profitable without that amortization. And I think as we discussed on the call, you could see the legacy subservicing we have with NRZ, the PLS portfolio is unprofitable without that amortization of the NRZ lump-sum payment. So our objectives all along have been to build a growing and sustainable business enterprise, a profitable business enterprise that doesn't include the benefit of that lump-sum amortization.

Okay. And then actually, on the adjustment, the CECL whatever impact and the moot change that had to the tail. Sort of going forward, does that mean the sort of essentially the earnings on those tails have like an offsetting amortization that flows through the P&L?

So yes, to the extent those tails are recorded on the balance sheet. There -- in theory, if you were to think about it as an MSR value, there would be an ongoing amortization of that amount through the P&L. We have, obviously, taken that into consideration as we put forth our affirmation of returning to profitability by the third quarter of 2020, excluding NRZ amortization and notable items.

Okay. And then just one last one from me. You noted in terms of the earnings this year, it would be up sort of excluding some notable items. Or did you -- I forget, did you call out any of them yet? Or just could you give us a sort of an update on what we could expect there?

In terms of notable items, yes, they are hard to predict. We did indicate on Slide 9 that we are expecting $40 million of incremental upfront cost associated with continuing reengineering in 2020. You are targeting reengineering savings of $35 million to $45 million for the year. So that's about a 1-year payback.

Our next question comes from Giuliano Bologna of BTIG.

Congrats on the continued progress of turning the business around. It's interesting to get a little bit of your perspective around kind of capital allocation. Obviously, as you ramp up to a $20 billion or up to $20 billion in originations volumes and as you kind of look at the numbers that you quoted around being able to purchase about $20 billion of MSR UPB, are those both possible at the same time? And then the question is, if you don't -- if you didn't scale one or the other, all the way, would you kind of consider using the excess for capital return?

Thanks for the congratulations. Yes, we -- our capital allocation methodology, first and foremost, we want to make sure we've got an appropriate working capital and reserve for potential risk and liquidity earmarks that we have in the business. Second goes to investment in the business. And our goal here is to build a profitable, sustainable enterprise that is growing and delivering an appropriate return on capital. Obviously, investing in MSRs to continue to grow our servicing portfolio is a priority in that regard. We said we have -- based on the December 31, 2019, cash balance after adjusting for the paydown on the term on the SSTL, we have the ability to invest up to $20 billion in MSR UPB. And then we're looking to execute a number of balance sheet efficiency initiatives to clean up our balance sheet fundamentally and have more effective use of capital on our balance sheet to fund the additional MSR growth. So right now, our expectation is, with the exception of the previously authorized Board share repurchase program for up to $5 million in shares that would be purchased in the open market, that the balance of our capital will be going to fund growth in our owned MSR portfolio. And then we'll be using some capital initiatives to continue to grow our subservicing portfolio. As you may be aware, we've got a $10 million total limitation under the senior secured term loan for what are called restricted payments, which includes share repurchases or second lien bond repurchases.

Okay. That makes a lot of sense, and that's helpful. I guess, the only other question I have going forward. As you think about the mix of the portfolio, obviously, as you build the originations platform, you're probably going to be building out more GSE and Ginnie product. Do you have any sense of where you want the product mix to go? Or do you have any preference in terms of where that goes?

So look, we -- ultimately, we would expect assuming our risk appetite equals the market risk appetite, right, that over time, our portfolio composition would approach that of what the general market is, right? So we are not -- other than return requirements and our specific view of risk in certain Ginnie Mae products, we've talked before about, we're just not -- based on our own portfolio experience, we're not comfortable. We're certain industry players are pricing risk in those products. So we are looking to win both GSE business and Ginnie Mae business. I think we've been reasonably successful as of late in being competitive in both arenas, again, subject to our risk appetite. So -- and eventually, quite frankly, I -- as we think about GSE reform going forward and the potential for there to be limitations on GSE products, we would have to, I think, expand our product set to include non-agency product or non-QM product.

Okay. That makes a lot of sense. And then you made a comment about your servicing costs being in kind of the lowest quartile. Do you have a sense of where that was before? And is there additional opportunity to continue to drive that cost per -- to service loans even lower?

Yes. Giuliano, look, if I go back to the chart we reflected on Page 9 of our investor supplement, you can see in 2Q 2018, we had a $916 million annualized adjusted cost structure. That cost structure was uncompetitive in just about any product you could mention. We have done a lot of work. We've taken out over 40% of our cost structure through the integration process. We're now down to $531 million on an annualized basis. Different aspects of our portfolio have different cost structures. I think that's best shown on Slide 25 of the investor supplement, where we show the market cost to serve for the variety of different assets that we service in the portfolio. I believe right now, we are very competitive in our cost to serve for GSE and Ginnie Mae product. And we are continuing to execute on cost reengineering initiatives going forward to make ourselves more competitive. I think -- look, in this business, generally, you're a price taker, not a price maker. So having always striving for the most effective cost structure you could possibly have is a competitive advantage. And we think -- and now that we're on MSP and with our global operations capability and the advancements we're making in application of lean, automation and optimizing our global offshore platform, I think we can maintain a highly competitive cost structure going forward.

(Operator Instructions) Our next question comes from Lee Cooperman of Omega Family Office.

I apologize if you addressed some of these questions, but I was on a TV program this morning, and I got on to the call a little bit later than usual. But I have about 4 questions. Maybe I could put them out there and you can answer them in the order that you choose. You gave a lot of numbers, which are good. But the bottom line is given the way you intend to run the business, what do you think the sustainable ROE is after-tax return on equity on that $3 book value number? And how long you think it will take you to achieve that? So sustainable ROE and the timetable to get there. Second, I've been very surprised personally that with the stock's depressed price versus our underlying asset value and potential earning power that nobody has made a pass to this. And I could assume that the poison pill, so to speak, is the Florida Attorney General, the CFPB are kind of poison pills. How long will it take for you to resolve these issues and get them off the table? Given the fact that we're a Florida corporation, we think the Florida AG would be more cooperative. Second or third question, I guess, is the publicly traded bonds sold at a higher yield than we're earning in our business. They have an attractive change of controls put feature. Why aren't we more aggressive in retiring them given the liquidity of our balance sheet? And third, do you think your shareholders would be better served if we sought proactively a private market solution? You're doing a very fine job working very hard to fix it. But is the shareholders better off maybe being derisked by a transaction with a larger profitable entity? And those will be my principal questions. I assume the size of the buyback is limited by your bank agreements because $5 million really -- it's a nice gesture, but it really means nothing compared to the size of the company. But any help you could be in these questions would be appreciated.

Yes, sure. I'll take them, Lee, in the order that you put them out there. So in terms of an ROE target for the business, we are targeting low to mid-teen pretax ROEs by 2021. I think that is based on the market dynamics that we see today, that is a sustainable ROE for this business. There are others in this industry who are earning those returns. PennyMac is earning those returns and maybe more. NRZ is earning those returns as well. And I think our business model is more closely related to PennyMac than it is to NRZ. So I think that is a sustainable return level, at least as we see the market today. We do have a sizable amount of NOLs, so we don't expect to be a cash taxpayer other than the BEAT and GILTI tax, which we paid today. But in terms of an ordinary income taxpayer, that's -- I don't think we're going to be a taxpayer for quite some time. So I think in the foreseeable future, pretax does kind of equal after-tax on a cash basis.

In terms of our price versus asset values and the discount. Look, I think I said before, we don't think it's warranted. That's why we put the share repurchase program in place. It is limited to your point by the terms of the SSTL. And as we talked about our value-creation road map or value-creation strategy for the company there are a number of risks that are unique to Ocwen. And you mentioned the Florida AG CFPB matter, that is a unique risk to Ocwen that's still hanging out there. I do think our customer concentration risk with NRZ is a risk that's unique to us. And another risk that's unique to us is the PLS servicing, that's legacy subprime servicing with highly delinquent borrowers. I think we do a good job at it. We help keep borrowers in homes, do a lot of good modifications for borrowers, but it's still an asset that's not a common asset that you see in the mortgage banking market today. Our Board is open to considering any and all opportunities to maximize value for shareholders. I've been public about that before. We believe as we continue to move forward and execute our strategy and we continue to deal with some of these enterprise risks that are unique to Ocwen, it creates more flexibility for the company to consider a variety of alternatives to maximize value for our shareholders.

In terms of the high-yield bonds, again, that is limited by our -- this $10 million basket as well. But, Lee, as I put forth, we think a profitable business is as valuable business under almost any set of circumstances. So we are giving a priority in our allocation of capital to those actions that will drive the business to profitability and help us achieve our long-term return. And that is getting -- growing our servicing book, growing our subservicing book, growing our lending platforms and creating a sustainable business model. So right now, other than what we've put forth in our share repurchase program, right now, we're earmarking capital for -- all of our capital really to support the growth and future development of our business model.

In terms of seeking private market solutions, again, I'll go back to the Board is open to any and all opportunities to increase value for shareholders. We've been public about it. We're looking at a number of different M&A opportunities. And again, the Board is open to all possible options that can fair value for shareholders -- maximize the value for shareholders.

When you talk in terms of like low to mid-teens pretax ROE, so let's say, you're talking 12%, 13%, 14%, what would the normal tax rate be for the company? 20%?

Normal tax rate, from -- about 25%. I think it's 21%...

So you're talking about 9% to 10% after-tax return on equity as an objective where we -- somewhere in the hereafter we get to be a profitable company. So I'm trying to say I would think to justify a value, a book value today, you probably have to earn 12%, 13% after-tax on book. So we're not quite there where there pretax is objective. I'm just talking to myself now, but I appreciate your responses.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Messina for any closing remarks.

Thanks, Ara. Appreciate it. Again, look, I'm really proud of the team here for the job they've done to bring Ocwen to a place where we have generated positive net income. We've built a sustainable business model. And we've got a clear and actual road map ahead to deliver -- continue to deliver value for our shareholders through building a profitable and sustainable business enterprise. We look forward to updating you on our progress on our next earnings call, and thank you for your continued interest in Ocwen.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.