Onity Group Inc (ONIT) 2022 Q4 法說會逐字稿

Greetings and welcome to the Ocwen Financial Corporation Fourth Quarter Earnings and Business Update Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce one of your hosts, Mr. Dico Akseraylian, Senior Vice-President of Corporate Communications. Please go ahead, sir.

Good morning and thank you for joining us for Ocwen's Full-Year and Fourth Quarter 2022 earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chair and Chief Executive Officer, Glen Messina and Chief Financial Officer, Sean O'Neil. 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 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-K for the year ended December 31st, 2021 and when available for the year ended December 31st, 2022. 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 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 adjusted pretax income and adjusted expenses among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition, because they are measures that management uses to assess the financial performance of our operations out and allocate resources.

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, as well as additional information regarding why management believes these measures may be useful to investors may be found in the press release and the appendix to the investor presentation.

Now, I will turn the call over to Glen Messina.

Good morning, everyone and thanks for joining our call. We're looking forward to sharing our progress with you this morning. Today, we will review a few highlights for the full-year and fourth quarter, take you through our actions to address the market environment and discuss why we believe our balanced and diversified model can deliver long-term value.

Please turn to Slide Three. I'm proud of the results we delivered in 2022. Our balanced and diversified business model is working well. As you all know, with rising interest rates, the servicing environment improved substantially, while the originations environment remains quite challenging. We delivered full-year net income of $26 million and earnings per share of $2.97, up 42% and 49% respectively versus 2021. Book value per share of $61 is up 17% versus prior year end.

In the fourth quarter, we reported a net loss of $80 million, which included $75 million in pretax notable items. This was largely driven by MSR valuation changes, due to lower interest rates and assumption updates to reflect lower observe trading values in the bulk market and increase future losses for Ginnie Mae borrowers. Sean will talk more about this later.

Similarly, our MSR values for new originations were below levels we observed from market leaders in correspondent and the co-issue channels, driving margin and volume pressure in the quarter. We reported fourth quarter adjusted pretax loss of $3 million, a 57% improvement from the third quarter as our cost actions and servicing segment earnings offset the impact of volume and margin pressures in correspondent and co-issue.

Despite a significantly smaller originations market, we grew our servicing portfolio 8%. We focused on growing capital-light subservicing, which was up 18% over prior year end. Our subservicing opportunity pipeline remained strong, up 4% over prior year end levels.

Regarding our cost structure, I'm proud of the work done by our global team who delivered $100 million in annualized cost-reduction versus the second quarter 2022, much better than our initial target. Expense efficiency in both originations and servicing improved materially versus 2021. Lastly, total liquidity of $219 million is up 13% versus year end 2021. Last year, we completed $50 million in share repurchases, retiring 1.75 million shares at an average price of $28.53 and repurchased $25 million of our PHH notes.

Going-forward, we are preserving capital and liquidity to enable opportunistic investments, given our expectations for potential investment returns in 2023, as well as for interest rate and economic volatility. Overall, I'm pleased with our results in navigating this business cycle. We believe our balanced and diversified business model is performing well and we remain confident in our ability to execute on those items that are within our control.

Now let's turn to Slide Four, to discuss the environment and our value creation plan. The conditions in servicing are more favorable than they've been in years and servicing is a core strength of our business model. MSR values have risen materially since 2021 and servicing profitability is improving. We are seeing increased investment opportunities in distressed assets and certain MSRs with attractive returns and we expect elevated bulk volume to persist.

Potential client interest in subservicing remained strong, client delays are easing and our opportunity pipeline is robust. We are seeing increased interest in the mortgage sector from investors who are seeking partners to source and service MSRs for loans and non-performing loans.

Moving to originations, we expect market conditions will continue to be challenging. Fannie Mae is forecasting industry origination volumes of 1.7 trillion for 2023, that's down 29% from 2022. We expect nominal refinance activity in the near-term, even if the 30-year fixed mortgage rate were to decline to 4%, roughly 12% of outstanding mortgages have a refinance incentive.

GSE actions to support enterprise goals are driving pricing and margin volatility, competition is intense and we are seeing several market participants with a substantially more aggressive view of new origination MSR values relative to bulk market levels versus our own. We are seeing heightened M&A opportunities and expect consolidation in both origination and servicing. As we've said before, the Board and management are committed to evaluating all options to maximize value for our shareholders.

In this environment, we believe our core strength in servicing is the right foundation. Our value creation plan built on this core strength has five key elements; leverage our balanced and diversified business model; prudent growth adapted for the environment and industry-leading servicing cost structure; top-tier operational performance and unmatched breadth of capabilities and capital partner relationships to support our growth objectives.

Let's turn to Slide Five to discuss the benefits of our balanced and diversified business model. Our balanced business and key operating actions have driven consistent net income improvement since 2019. Over the last three years, servicing and originations have demonstrated a complementary financial performance with servicing GAAP pretax income improving to offset declining profitability and originations. As Sean will discuss, this is true for both forward and reverse.

Based on the Fannie Mae forecast for interest rates and industry volume and our productivity and portfolio growth initiatives, we expect servicing adjusted pretax income to improve further in 2023 and expect origination adjusted pretax income to remain depressed.

Our focus on diversification is evident when looking at our portfolio composition. Our operating performance has supported material growth in forward and reverse subservicing. We believe our emphasis on growing subservicing and GSE owned MSRs which are now 54% and 34% of our portfolio respectively, also help mitigate potential portfolio related risk in the event of a recession.

In subservicing, we have no exposure to advances, we are in high revenues of borrowers who are delinquent. In GSE servicing the credit quality is high, P&I Advances are capped at four months and in the case of Fannie Mae, we recover servicing advances monthly. The segments of our portfolio where we have more significant responsibility for advancing payments, loan repurchases, as well as revenue risk with par delinquency or PLS and Ginnie Mae owned MSRs. However, these segments combined only comprise 12% of our portfolio. While our deliberate strategy to diversify our portfolio reduces our risk exposure in the event of a recession, we expect to have capacity to support special subservicing should market conditions drive increased demand.

Let's turn to Slide Six to discuss our growth focus in the current environment. Our growth strategy is focused on driving capital light subservicing and higher-margin origination products and channels. Our originations team performed well in 2022 with MSR originations, excluding bulk transactions, down 27% versus prior year, while the total market was down 48%.

In contrast, subservicing additions were roughly flat to prior year at $55 billion. Throughout 2022, the originations team continuously adjusted to market conditions, addressing our cost structure, integrating the forward and reverse originations platforms where possible, growing our total client base by 21% and growing high-margin product clients by 41%.

The impact of our enterprise sales team is evident in the growth of our total servicing portfolio, which is up 8% versus prior year and 53% over the last two years. Our subservicing portfolio was up 18% versus prior year and 70% over the last two years.

We delivered on our objective increasing our mix of higher-margin origination products up 7 percentage points versus prior year and we nearly doubled the mix percentage over the last two years. We believe our enterprise sales approach and multichannel strategy will continue to drive portfolio growth in 2023.

Now please turn to Slide Seven for an update on our expense management actions. We remain committed to achieving and maintaining an industry-leading servicing cost structure. Our team has made great progress in 2022, managing our operating cost to realize $100 million in annualized expense reduction versus the second quarter of 2022. Our continuous cost-improvement actions are focused on driving sustainable cost reduction, supporting the most essential activities, while maintaining a prudent risk and compliance management framework.

Our cost structure measured in basis points is down 27% and 41% from the fourth quarter 2022 versus 4Q 2021 and full-year 2020 respectively. Our goal is to further reduce our servicing operating cost structure in 2023 in basis points of UPB by roughly another 10%. Last year, we achieved double-digit improvement in our variable operating costs for all major portfolio segments and we're targeting to deliver meaningful improvements again this year.

We're driving automation, digital migration and other systemic process enhancements, consistent with our technology roadmap and focus on continuous process improvement. And we continue to leverage our proprietary global operating platform, which has been in place for over 20 years and supports all business activities.

Notwithstanding our focus on productivity, we continue to maintain industry leading operational performance and improve service delivery for customers, clients and investors. We believe the improvements we've made to our cost structure can enable meaningful profit improvement, as we grow our servicing portfolio. Assuming a standard GSE subservicing revenue profile without any further improvement in our cost structure, we can add between 2.5 to 3 basis points in pre-tax income per $1 billion of UPB added.

We would expect the profit contribution from government, reverse, commercial and special servicing additions to have a more significant pretax income contribution per $1 billion UPB added. This year, we're targeting to increase our servicing portfolio, our subservicing portfolio by $85 billion, reflecting a mixture of GSE, reverse, commercial and special subservicing additions, as well as achieve further cost productivity.

Please turn to Slide Eight for an update on our operational performance. Our focus on driving industry-leading operating performance and our breadth of operating capabilities is the foundation supporting the growth in our subservicing portfolio. We have again been recognized as an industry top servicer with our third consecutive Sharp Award from Freddie Mac, our second consecutive STAR Award from Fannie Mae and second consecutive Tier-1 rating from HUD.

Through our investment in technology and global operating capability, we've built an efficient and mature platform with capacity for growth that drives improved financial outcomes for clients. We have consistently invested in our servicing platform capabilities and we believe our core strength in servicing positions us well to navigate the market ahead.

Our breadth of capabilities is unmatched in the industry. We service forward, reverse and small balance commercial loan portfolios, covering GSE, Ginnie Mae, Federal Home Loan Bank and PLS products. We are one of the industry's largest PLS servicers with a proven expertise servicing distressed asset and creating positive outcomes for homeowners, clients and investors.

We are the industry's only integrated reverse issue and servicer and one of two subservicing providers for reverse mortgages. We've earned the trust of clients and partners as evidenced by over $100 billion in subservicing additions in the last 24 months and a potential opportunity pipeline of over $300 billion. We're excited about the growing investment opportunities that are emerging in the market that we believe we and our capital partners could benefit from. The bulk market remains robust. We believe opportunities can emerge from the stress in the reverse mortgage market and we are one of a limited number of non-banks approved as a Federal Home Loan Bank subservicer and servicing buyer.

Now please turn to Slide nine. We continue to focus on expanding our capital partner relationships to support our growth objectives on a capital-light basis. Last year, we opportunistically and prudently sold, as well as invested in MSRs, keeping our MSR UPB flat at roughly $135 billion, while growing our total servicing portfolio through subservicing additions.

The cornerstone of our capital management over the past two years has been MAV, since completing the upsize in mid fourth quarter, MAV is issued or has purchased $15 billion in MSR UPB at attractive pricing levels. During the fourth quarter, we closed trades with two new capital providers, utilizing an extra servicing fee financing structure. These transaction provide additional funding diversification, as well as mitigate a meaningful portion of our prepayment risk exposure.

With these new capital partners, we've implemented an MSR best execution structure for flow sales of MSRs purchased through our origination channels, further enhancing our ability to grow our servicing portfolio on a capital-light basis. Looking ahead, we're focused on developing additional investor relationships to support our growth objectives across multiple asset types. We are evaluating a diverse range of potential structures across six potential capital partners to satisfy the unique need of each investor and further diversify our structural alternatives.

Our investor driven approach to MSR purchases introduces an added level of price discipline to our independent valuation expert benchmarking process. Throughout 2022, we're able to monetize MSRs at levels at or above our acquisition cost. We believe the development of Investor Relationships will help us achieve our servicing scalable objectives, while allowing us to manage our owned MSR portfolio to between USD115 billion and USD135 billion.

Again, I want to thank our business partners at Oaktree and our new MSR investor partners for the trust and confidence they have placed in our team to help them achieve their growth and profitability objectives. We take this responsibility seriously and we will deliver on our commitments.

Now, I will turn it over to Sean to discuss our results for the fourth quarter and outlook for 2023.

Thank you, Glen. Please turn to Slide 10, for our financial highlights. Starting in the right data column, for full-year 2022, we recognized GAAP net income of $26 million for full-year earnings per share amount of $2.97, which led to book value per share of $61 or an increase of 17% year-over-year. In the fourth quarter, we realized a loss in GAAP net income of $18 million with a corresponding decline in Q4 for earnings per share and book value. The decline in GAAP net income was driven primarily by MSR valuation, which I will discuss in more detail on the next page.

We also show earnings per share is both current and diluted for comparison purposes. I'll move now to the walk on the right side, which has the main drivers of improvement from the third quarter adjusted pretax income result of an $8 million loss to the fourth quarter result of a $3 million loss and as a reminder, adjusted pretax income is a non-GAAP metric.

Servicing at a strong fourth quarter and generated an $18 million adjusted pretax income, which was an $11 million improvement over the prior quarter. Cost reductions played a big part across the company as Glen has previously mentioned, with reductions here captured in both servicing and origination data, as well as a $5 million improvement over the prior quarter and the corporate overhead areas.

Across the company, we will continue to see positive impacts on cost-reduction in the first quarter due to actions taken during Q4, that don't show a full-quarter impact as of yet. Origination had a more challenging quarter, is it dropped to a breakeven adjusted pretax income, which was a decline of $11 million from the prior quarter, primarily due to lower volumes and compressed margins. This drop exceeded our prior anticipated drop of the negative $5 million as discussed on our third quarter call, due to an even more challenging originations market.

For the company as a whole, the last two quarters show market improvements from the second quarter as measured by adjusted pretax income and I will provide full-year 2023 guidance at the end of the presentation. I'd like to recap the notable items for the quarter that connect adjusted pretax income back to GAAP net income. We provide adjusted pretax income for greater investor transparency and it is a metric we use in managing the business.

The fourth quarter notables which are detailed in the appendix consist primarily of a $61 million decline in MSR fair value adjustments, net of hedge and a $14 million loss in other notables primarily $6 million due to severance and $6 million impact on the long-term incentive plan, which creates more cost on a cash settle basis as our stock price rises.

Despite the notable reductions in the fourth quarter, we still generated a better ROE in full-year 2022 than the prior year, coming in at 6% and we believe we remain on track to achieve GAAP and adjusted pretax income profitability in the first half of 2023, assuming no adverse changes to our business or the industry.

For more information on our MSR valuation, please turn to Page 11. This page focuses solely on our forward MSR valuation, which was a net decline of $65 million for the quarter. The appendix will show you that the reverse MSRs gained $4 million in the quarter as reverse MSR is a natural hedge to forward MSR. Of the decline in value for the forward MSRs, roughly 70% in the fourth quarter is attributed to changes in modeling assumptions. The biggest assumption changes were increasing the discount rate on our GSE which is Fannie Mae and Freddie Mac Book. This is about 75% of our owned portfolio and we took the discount rate from 9% to 9.5%.

We did this during the quarter as we saw market valuations in the bulk market reflect lower multiples than prior quarters. Part of this may have been driven by a supply to demand mismatch, which drove the bulk market to lower valuations than an MSR created via the origination market.

The other significant assumption change was increasing our claim loss expectations for Ginnie Mae MSRs in the event that a recession might occur in 2023, with commensurate impacts on the borrower's ability to stay current on their mortgage.

Moving over to the graphs, the top-left graph shows the last four quarters of impact on MSR valuation. The light-blue bars indicate the rate move impacts and then the dark-blue boxes indicate a consistent, prudent trend on assessing our valuation model inputs. Finally, the lower graph shows the impact of the MSR value changes for Ocwen versus eight or nine comparable companies that are both bank and non-banks over the last four quarters.

As you can see, we continue to maintain a fairly prudent approach to marking our MSRs which we believe gives us a lower-risk of mark-to-market margin call from our lenders in the event that the MSR valuation declines, as well as providing us flexibility to dynamically manage our portfolio. Finally, for reference, we also show the approximate fair-value impact if we move the mark to an average, which is about a 0.2 change.

Now let's turn to Page 12, where we will cover more detailed segment information, we'll start with servicing. Adjusted pretax income shown on the upper left chart, the servicing business continued to trend of increasing profitability in the both forward and reverse servicing areas, driven by float improvements, lower run-off, better delinquencies and therefore lower advances and increased scale due to higher UPB, as well as the cost reductions. This is offset with a higher-cost of debt due to rise in short-term rates and the total result was a positive $18 million adjusted pretax income or an increase of $11 million from last quarter.

The strongest improvement was in the reverse servicing area where we grew profits from $1 million to $6 million for the quarter. This was a function of the continued integration in the reverse space, which allows us a lower cost to serve as well as an improvement in performance-based fee income and incremental float improvements as we leverage various banking relationships to optimize our return on deposits.

We continue to add to the reverse subservicing book 2023 with our world-class service offering. As a reminder, this result exceeded the guidance that we provided a year-ago as we began the integration of RMS, the reverse servicer acquired in the second half of 2021.

Moving to the right, subservicing growth improved in Q4 and posted a strong year-over-year growth trend of 18%. As expected, improvements in float income continued upon our roughly $1.5 billion of custodial balances, as well as a better return on our operating cash accounts.

Finally, like any successful servicer, we have focused on maximizing the aspects we can control, continuously improving our cost structure, while keeping quality and customer service at the forefront. You can see in the lower-right graph that improving trend, some of this improvement reflects the integration of reverse with forward activities and the additional use of our Asia-Pacific operations in selected areas.

Please turn to Page 13 for an overview of our reverse business, both servicing and origination. Here, we have a combined look at reverse origination and reverse servicing, we run each respective business as a component of the broader, origination or servicing operating units and report the results as part of those businesses on other pages. Here we wanted to remind investors of some of the unique facets of our reverse activities that distinguish us from competitors and help create sustainable value.

The year-over-year comparison shows how reverse is reflection of our broader balanced business model, the origination profits, while still strong in 2022 came down from prior years as we saw lower volumes in margins than we have seen previously. The improvements on the servicing side were driven primarily due to the reverse servicing acquisition previously mentioned.

The upper-right graph demonstrates our growth in reverse subservicing, which is a very-high ROE, low liquidity demand business, same as forward allows us to generate recurring revenue without the liquidity risk of owning servicing advances or handling buyouts at the 98% maximum claim amount. The lower-left graph shows how we are highly indexed to the Ginnie Mae's HECM product versus the private label or proprietary product that some other competitors have used in the origination space.

The private-label product is more dependent on the volatile securitization market for an exit strategy and create the risk of holding too much product at any point in time if that market seizes up. Also the Ginnie Mae HECM product we do hold is primarily a newer vintage post-market reform which comes with stronger borrower guard rails to avoid certain types of delinquencies or foreclosure scenarios.

Finally, I would point out that we don't leverage our reverse MSRs as that market is not yet fully developed and on the buyout side, we do have committed financing that we view is more than sufficient for our current buyout projections. Thus both in reverse origination and reverse servicing, we are pursuing a prudent, profitable approach to be successful in this market and we believe our results reflect that.

Please turn to Page 14 for details on the origination segment. The origination business had a more challenging fourth quarter versus the third quarter due to continued declines in total market volume, seasonal contraction and lower margins partly attributed to the disconnect previously mentioned between MSR values in the bulk market versus the origination market.

Specifically, correspondent and flow lending contributed a fairly smaller profit as we were not chasing margins, but rather pricing for an appropriate return. The correspondent business continues to have a focus on higher-margin products, which helped alleviate some of the mandatory lower volumes. As we anticipated in this difficult originations market, consumer direct volume again declined quarter-over-quarter, but we were able to offset most of that income decline with cost reductions.

On the next page, we recap the current state of our origination business on Page 17. We think at this point we have rightsized all of our origination channel costs and the business is appropriately scaled for the smaller operating environment that we faced in 2023. First of all, origination exceeded our internal cost reduction goals and has delivered an annualized improvement of over $50 million on expenses, as you can see from comparing Q2 to Q4 results and Q4 doesn't show the full quarter impact of all the actions.

We are continuing to expand our institutional client space in the flow in correspondent channels, again with a focus on clients who participate in higher-margin products such as best efforts and non-delegated, which plays well into our full-service operational base. Finally, we have not lost sight of recapture despite record low market volumes and our second half recapture was over 60%, demonstrating our ability to add value to both our owned book and subservicing by getting borrowers to refinance with our team.

We will continue to focus on serving our correspondent direct retail customers, as well as maintaining a high standard pertaining strong compliance and risk parameters.

On Page 16, we have a view of our stock price relative to both index performance and book value per share. We continue to deliver sustained growth in book value per share with year-end 2022 book value up 17%. In addition, we have grown earnings per share in 2022 with an increase of almost 50% compared to last year. At the end of the year, our stock was trading at 50% of current book. We think this discount is not representative of the value we are creating nor of our current balance sheet, but it is a strong improvement from the third quarter.

In conclusion, let's turn to Page 17 for some guidance on adjusted pretax income for 2023. For ease of comparison, we've retained the guidance we provided in last quarter earnings release, so you can compare that to our current view for 2023 and I'm not going to go through all the data, but we have various metrics provided here for both servicing and the origination business, as well as OpEx guidance for the corporate overhead group.

Absent significant changes in MSR values and other notables such as legal settlements or severance, we forecast GAAP pretax income to roughly mirror adjusted pretax income, as our forecast is a flat interest rate view with respect to MSR valuation, float income and interest expense.

Before I turn the mic back to Glen, I wanted to point out to investors a few additional data points that we've included in our appendix of this earnings deck. First, we have data on fully diluted shares in equity. This information allows for the most conservative view if all of the Oaktree warrants were executed on an all cash settle basis. We also footnote the impact of a cashless scenario, assuming an exercise at our stock price at the end of January 2023. As a reminder, Oaktree warrants are described in full detail in our 10-K either in the 2021 version or the '22 version coming out later today.

On our MSR valuation assumption page, we have added data on the valuation multiple and showed the trailing quarter for ease of reference. With respect to our balance sheet, we provide a more granular view. This is the slide titled, condensed balance sheet breakdown. This delineates assets that require matching asset and liability gross ups under GAAP treatment. This is primarily due to an inability to achieve accounting through sale and these balance sheet impacts fall into one of three categories, the first one being the assets being subserviced for MAV or rhythm, the second being reverse HECM assets and the third being Ginnie Mae MSRs that are eligible for an early buyout or an EVO.

Back to you, Glen.

Thanks, Sean. Please turn to Slide 18 for a few wrap-up comments before we go to Q&A. I'm proud of how our team is executing and the results we delivered in 2022, double-digit growth in earnings in book value per share, capital-efficient portfolio growth, prudent MSR valuation, reduced enterprise-wide operating cost and we improved our liquidity position. We believe our balanced and diversified business, exemplary servicing performance, proven cost management and track record of execution position us well to navigate the market environment ahead. We're executing a focused growth strategy, leveraging our superior operating capabilities to grow subservicing across multiple investor and product types. Our subservicing opportunity pipeline is over $300 billion and we are positioned to deliver value to clients, investors and consumers in an economic downturn.

We remain steadfast in our pursuit of industry-leading servicing cost structure by driving continuous cost and process improvement and will continue to optimize expenses further during 2023. We remain equally steadfast in maintaining industry-leading operating performance, customer and client satisfaction and providing an unmatched breadth of capabilities. Finally, we continue to expand our capital partner relationships and we are prudently managing capital and liquidity for economic and interest rate volatility and opportunistic investments as strong returns in the dynamic market.

We believe with the successful execution of our business initiatives and the stable originations market, we can deliver positive adjusted pretax income and we believe we're taking the actions necessary to operate at our targeted ROE range before notable items. Overall, we're excited about the potential of our business and do not believe our recent share price is reflective of our financial position, our earnings power or the strength of our business.

And with that, Rona, let's open up the call for questions.

Thank you. (Operator Instructions) Our first question comes from Bose George with KBW.

First, just I wanted to find out what are the unlevered yields that you guys are seeing on MSRs in the market, both on Ginnie Mae and GSE? And then just in terms of deployable capital, you noted that $219 million of liquidity, how much of that would you characterize as kind of deployable?

Hey, Bose, in terms of market yields for MSRs, frankly, we're seeing a pretty wide range for GSE MSRs I'd say, 9-ish to 11-ish percent returns, probably 10% to 12% or 10% to 14% returns on Ginnie Mae's, reverse is probably consistent with the Ginnie Mae MSR yields as well too and these are unlevered yields. So again, our view is yields have come up, which is consistent with rising interest rates and we reflected that by increasing the discount rate on our MSRs during the course of the fourth quarter.

Regarding liquidity, look, our $219 million of liquidity in terms of deployable capital, we think that liquidity position is adequate enough for us to execute the plan that we laid out here. As we said, we're maintaining a liquidity cushion for interest rate volatility, economic volatility. We've seen fairly dramatic movements in interest rates during the course of the fourth quarter and even during the first part of 2023.

So right now, we're maintaining a, I'll just call it, a patient approach to managing liquidity and capital in the context of a volatile market and what we think are going to be some pretty interesting opportunities for asset investments at very attractive returns in 2023.

And then in terms of that $85 billion of growth in subservicing that you projected, is there kind of a breakout of how much of that is through MAB versus other?

We don't disclose that, we haven't disclosed that yet in our public documents nor does it appear anywhere in our K. Look, we're looking to manage it opportunistically. So we've got a very strong and robust pipeline of subservicing -- potential subservicing clients. We're looking to close transactions out of that pipeline that includes both forward and reverse clients. And then as well, leverage MAV and our other capital partners. So we're not approaching the year with a prescribed mix per se, but just given the opportunities, that's what we think we can add.

And actually, just one more. There was obviously, this bankruptcy recently in the reverse space. Is that MSR going to be sort of auctioned in the market? Is that an opportunity for you guys?

Yeah, I think as you and others may know, the MSRs were taken over by Ginnie Mae, so Ginnie Mae owns those MSRs now. I don't think Ginnie Mae's long-term goal and again, this is my own assessment, not their's is to be an MSR owner, I don't think that's why they were -- their focus is. So ultimately, I think those MSRs may go to market. Again, depending upon the return we can get, we would look at those MSRs to purchase them. But also if somebody else wants to purchase them, we could subservice as well, too. We're one of two subservicers in the industry. And frankly, from alignment with our business model, subservicing MSRs is probably a more attractive opportunity than purchasing MAV rate.

Our next question comes from Lee Cooperman with Omega Family Office.

Three questions actually. What are your capital management intentions in 2023? Do you expect to reannounce a buyback? Or are you going to stay where you are?

Right now, Lee, yeah, right now, Lee, from a capital management perspective, we're not -- we've not announced a buyback for this quarter. We'll continuously reevaluate our liquidity position and market opportunities. But for right now, we're holding capital and liquidity for volatility and opportunistic investment.

If I recall correctly earlier last year, you were talking about earning a double-digit ROE for the company, now earned about 4.9% return on equity. What went wrong and do you have a view -- you gave out many numbers, but what do you think is a sustainable return equity for this business is the way you expect to run it?

Yeah, Lee, consistent with what we said before, we think the potential for the business is high single digit to low double digit to mid-teen return on equity before notable items. That does take a stable originations market to deliver those kind of returns. And we've not seen a stable originations market during the course of 2023. We saw a dramatic increase in interest rates, dramatic compression in margins and significant overcapacity in our originations platform for us and many across the industry. So market conditions and originations were probably the worst they could have been in years during 2022.

For 2023, as Sean said, we're continuing to chip away at the cost structure of the business, growing scale in our business. And we believe if we achieve our scale and our growth objectives and have the stable originations market, we can operate within our return targets.

Will you return target for this year with a 9% pretax return on equity, which is not particularly attractive. What is your marginal tax rate going to be? So what is the after-tax return on equity on that 9% pretax?

The reality, Lee, is we pay very little in taxes and we've got substantial NOLs that are fully reserved on our balance sheet. So we wouldn't expect to be a meaningful taxpayer for the foreseeable future.

So basically 9% applied to the $61 book value that's current what you expect to waive earnings of the current year?

Assuming our -- our assumptions for the environment pan out, that's correct.

Do you consider ourselves a viable entity as a independent company? Do you think given our cost of capital, et cetera, that we're better off merging with somebody? And if we saw a good way and nobody bid for us to come in to us given the substantial book value that we still have.

So Lee, I absolutely think we're a viable entity. We've been delivering double-digit growth both in our earnings granted, we started at a loss position, but we have moved the business to a profitability position on a GAAP earnings basis. We are growing our portfolio. Clients are choosing us over our competitors in the subservicing space. So yes, I believe we're a viable business.

As far as anybody bidding for us, I can't speak for other people. I think our business is attractive. I don't think the value of our business is recognized and appreciated by the market. And we're going to continue to operate our business to achieve our return objectives.

Our next question comes from Kyle Joseph with Jefferies.

Just on that 9% ROE, assuming origination stabilize, where are we in the market? Obviously, rates have impacted demand, supply has been chasing demand down? Is it just a function of if we get rate stability at this point, has there been enough demand removed from the market that, that would be enough to lead to stabilization, just in your opinion, kind of a crystal ball question, I apologize.

Yeah, yeah, look, as we think about the originations market, I think a couple of things have to happen. Number one, relatively stable rate environment. We've not seen anything like that. So we've seen rates drop materially and then come back up even during the course of the first quarter so far in 2023, probably close to a 50 to 70 basis point movement in the 30-year fixed rate mortgage rate. So rate stability is #1. And look, I still think there is excess capacity in the origination space in a material way. I do think capacity has got to come out of the system. And right now, we are seeing people, frankly, from our perspective, probably approaching the market with pricing levels to fill operational capacity versus taking capacity out.

Kyle, it's Sean. It's a lagging indicator, but if you look at a lot of our public peers that have already announced, many companies are struggling to generate what I'd call positive adjusted pretax income in the origination space. That to me is at least a lagging indicator that there's still excess capacity in the market. We see some of the other big originator pure-plays announced in the coming week and that will continue to inform that.

And then just on that, what are your expectations for reverse originations in '23 versus '22? Obviously, that market is not immune to rate movements, but probably it's impacted marginally differently than the forward side, but just kind of how you're thinking about originations for that product?

Yeah, Kyle. Look, there's no equivalent Fannie Mae, Freddie Mac MBA forecast for the reverse market. So look, our assumption right now is the market is going to shrink probably at least on a comparable basis to the forward market. Reverse originations are largely influenced by short-term interest rates and with short-term rates going from sub 1% to the 5-ish percent level in over a two-year period, that will take -- it really limits the amount of equity can take out of their home in the form of a reverse mortgage.

So even though home values, even if they're stable, the amount of cash out you can get has come down and that takes some -- put some buyers and some reverse mortgage customers on the sidelines. So we do expect to see a fairly sizable reduction comparable to what we see in the forward side, impact reverse as well, until short-term rates can come back to a more reasonable level.

(Operator Instructions) Our next question comes from Matthew Howlett with B. Riley.

Glenn, just getting back to the MSR mark. I mean, look, I appreciate your conservatism, you outlined the yields, the bid as widening, the yield discount rate moving higher. We've seen obviously a big move in rates since year-end. My question too is, how willing are you to sell some more whole MSRs if there is a bid out there and delever just move away from sort of this mark-to-market volatility paying on your lines, focus on subservicing?

Yeah, so look, we are in a market pretty much on a quarterly basis, both buying and selling MSRs. As you know, we work with MSR investment partners to fund a portion of our origination. So we evaluate on a fairly continuous basis, does it makes more sense to hold MSRs versus sell MSRs. As you know, we also have a fair amount of corporate debt on our balance sheet, about $500 million of corporate debt between the Oaktree notes and the PHH OpCo notes. Those notes are not prepayable without penalty. So if we're thinking about selling MSRs in addition to paying down the variable debt, the variable interest rate debt, the secured MSR financing that we have, you'd want to use the proceeds to pay down some of the corporate leverage as well too.

And unfortunately, right now, where we are with our corporate debt, the prepayment penalties would be fairly high, unless we tender in the open market, which is something we did during 2022. But look, we'll -- in small bite-size pieces, it is feasible at the right returns and the right economics to take some value off the table and sell some MSRs and redeploy the capital in the business elsewhere and arguably to reduce debt.

Sean, any thoughts?

Yeah, Matt, the one thing I'd add is, there's a nuance as we have engaged in different sales transactions over the last two quarters. So Q3 and Q4, we pursued some excess servicing strip transactions. And you'll see the details of that broken out in our K as that requires slightly different accounting. But the interesting thing about an ESS transaction is your retaining the subservicing right.

So to your original question, as Glen pointed out, we actively are in the market and are looking for opportunities to -- we view it is managing our portfolio in a dynamic fashion where we can sell an existing MSR to good return. And then in turn, as we originate some higher coupon MSRs, we'll replace that and slowly increase the WACC of the book. But the ESS transactions allow us to retain the scale on the servicing side and still generate cash. So it's kind of an interesting transaction for us in that respect. And we did, I believe, at least three of those in the last two quarters.

And that's where I'm going with it, I mean to me, you've been successful buying back debt, I think the senior debt is below 90, obviously, that's accretive to continue buying that back. And I don't know what does it get to our shareholder being the most conservative guy out there with MSR marks is great, but I don't know what it get shareholders, your stock already trades at a huge discount to reported book that the book is understated, I'm not sure what that does. And to me, you'll make a lot of sense, is there an update as MSRs moved up in value with a 4% yield since year-end, could you give us a little snapshot on what's happened to MSR marks post quarter end?

Yeah, we are seeing stronger bids or higher molds on predominantly, at least the GSE MSRs that we see in the market. So we actively track kind of all bids that we're aware of that hit the market and obviously participate where we're interested. And we are through the month of February, seeing definitely higher molds versus the fourth quarter, probably due to maybe more investors showing up because the supply continues to be really robust. And so it's an interesting scenario where there's very strong amounts hitting the market, but slightly improved valuations on those.

Great, you have a great platform, I just see the mark-to-market volatility is sometimes difficult to model. On that note, just give me the number again on the improvement in every -- you said $1 billion of UPB you add, you see 2.5 to 3 bps of margin. Just to me those numbers again there?

Yeah, for subservicing additions, we said for every $1 billion of UPB added, it's between 2.5 to 3 basis points of profitability.

And that's -- you effectively put no capital for that?

That's GSE subservicing, that's correct.

Well, it's an incredible return. Last question, we'll wait for the K, could you just give us the DTA, the reserve against the DTA at year-end?

I don't have that handy, that's actually going to be in the K, which is released later today. So that will be accessible at that point.

Got you. And it's still three -- the time frame is sort of three years to profitability, so you can start to release some of that, is that sort of the timing with the [shop clock] if you will?

It's -- unfortunately, like everything to do in the world of taxes, it's not that cut and dry. There's not an incredible bright line. And so we have to continuously consult with our outside tax council and auditors. We actually think it's a sustained view of probably less than three years, but in excess of one year sustained profitability on a GAAP basis, which allows you to drop the valuation allowance and recognize the NOL.

Great. No, I just think there's a lot of value and potentially an age shareholder will give you credit for it and it'd be nice to see that come on the balance sheet at some point.

Our next question comes from Eric Hagen with BTIG.

Just got a couple here. I mean, how much liquidity or room on funding lines do you have to buy MSRs for yourselves away from MAV and maybe how you'd characterize the market for MSR financing, especially advanced funding right now? And even the quality of financing that you guys can get with the leverage in the overall business right now? And then maybe as just kind of a little follow-up to that, what is the difference in ROE when MSRs are financed through MAB versus financed on your own balance sheet?

Sure. Thanks, Eric. It's Sean, I'll take that. So you talked about what I view as two very different financing facilities or two distinct facilities. So there's MSR financing and then servicing advance facilities. And we typically like a lot of our competitors, structure those separately, the exception being a Ginnie Mae book where you have to typically combine them due to the acknowledgment agreement at Ginnie Mae, which forces you to use a common lender and therefore a common facility.

On the MSR side, both in the Ginnie Mae and the GSE space, still pretty robust opportunities to finance MSRs. So we have multiple lines. We have one line for our Ginnie's and we have several lines for our GSE's, one or two lenders have moved in or out of the space, but predominantly speaking, we're still seeing broad-based interest. It's a fairly well-understood asset. It's fairly -- I don't want to say predictable, but there's extensive modeling. So a lot of the banks that have mortgage depths of their own have high confidence in understanding what GSE and Ginnie Mae MSRs do and so that allows them to stay in that market.

Similar on the servicing advances, that's actually even a little bit deeper between the regional and the large banks. There's some mega -- some of the four mega banks don't actively participate in direct MSR financing, but almost all of them are pretty active in the servicing advanced space, as well as other investment bank and mid to large-sized regional banks. So very active interest there. Terms have been -- in terms of advance rate and spread terms have been stable to improving over the last eight quarters.

You'll typically see anywhere between 60% to 70% advance rates on the GSEs and probably a five point reduction for Ginnie Mae's, they suffer a slightly lower but still generous enough advance rate. And the spreads have been pretty stable as well.

And then you want to repeat your last question with respect to MAV and ROE?

Yeah, the difference, thanks, yeah, I'm just trying to tease apart the difference in ROE between MSRs getting financed and MAV versus on your own balance sheet. And maybe you can talk about the liquidity to buy MSRs through MAV versus on your own balance sheet?

Sure. So MAV definitely generates a high ROE for us because we commit less equity. So we're 15% owner of MAV. MAV, separate legal entity, we're a minority owner and MAV has access to a committed $250 million of additional capital provided by both us and Oaktree if that 85:15 split, 15 for us, 85 for Oaktree. And we think that's more than adequate to support kind of MAV's near-term intentions.

MAV financing is separate from ours, but we're very aware of their financing and so that kind of inform some of my earlier comments in terms of their ability to generate returns and obtain financing. They focus just on the GSEs currently. They don't buy Ginnie Mae's or PLS. But I would view them as a similar and still opportunistic buyer, but separate from Ocwen, of course.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Glen Messina for closing comments.

Thanks, Vernon. I'd like to thank our shareholders and key business partners for supporting our business. I'd also like to thank and recognize our Board of Directors and global business team for their hard work and commitment to our success. I look forward to updating everyone on our progress at our next quarter's earnings call. Thank you.

This concludes today's audio conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.