Rithm Capital Corp (RITM) 2015 Q3 法說會逐字稿

Good morning. My name is Candace and I will be your conference operator today. At this time I would like to welcome everyone to the 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions). Mandy Cheuk, you may begin your conference.

Thank you, Candace, and good morning, everyone. I would like to welcome you today to New Residential's third-quarter 2015 earnings call. Joining me here today are Michael Nierenberg, our CEO; Nick Santoro, our CFO; and Jonathan Brown, our CAO. Throughout the call we are going to reference the earnings supplement that was posted to the New Residential website this morning. If you have not already done so, I would suggest that you download it now.

Before I turn the call over to Michael, I would like to point out that certain statements made today will be forward-looking statements. These statements by their nature are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and investor presentation regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC.

Now I would like to turn the call over to Michael.

Good morning, everybody. Thanks Mandy. Thanks for joining our third-quarter earnings call.

For the quarter, we had a very busy quarter and our underlying business continues to produce terrific results. While both the equity and debt markets were extremely volatile in the quarter, our investments continued to perform well despite the volatility that we have seen. Our business should do well in all interest rate environments and we have a couple of slides in our presentation that should be helpful in how to think about that.

In the quarter, we were very active in our Servicer Advance business. We generated liquidity of approximately $300 million by paying off HSART notes and doing some new financings. On our call business, we continue to work on strategies to accelerate timelines to be able to call deals in a quicker fashion. We are working with our servicer partners as well as outside counsel to be able to do that.

Our nonagency portfolio grew by 25% during the quarter and as far as earnings we announced record core earnings, record dividends and we will continue to do all we can to create value for our shareholders. We believe our current investment portfolio will continue to deliver excellent results as we look forward.

I will now refer to our supplement which has been posted online. So we will begin on page 2.

I thought it would be helpful to start with a quick recap of who we are. We are an asset manager who deploys capital in three core strategies across the mortgage universe which is a $10 trillion market. We are not an operating business.

Since our spin in 2013, we have generated a 20% total return life to date. Our dividends we paid $593 million of dividends. Today our current dividend yield is 15% and while that is a lot higher quite frankly than where we would like to be trading we think there is lots of room for upside. Keep in mind in a more normalized market we have seen companies such as HLSS trade at a dividend yield of 7%.

For the quarter, we had record core earnings of $113 million or $0.49 per diluted share. Our GAAP income was $55 million or $0.24 per diluted share. In the quarter we increased our dividend to $0.46 or $106 million and on a year-over-year basis, that is up 31%. Overall I think our results have been terrific. We had a good quarter. If you look back to Q4 of 2013, we have grown core earnings from $0.28 to where they are today at $0.49.

Now if you will flip to page 4. I want to point out why we think we are different than some of our peers in the marketplace. Quite frankly you simply can't recreate our investment portfolio. We have critical mass in MSRs, servicer advances and when you think about our MSRs and there is a couple of good pages in the presentation which I will take you through, we own legacy MSRs which should realistically be pretty much agnostic in all interest rate environments.

As you look at our liquidity, we have the ability to access up to $1 billion of liquidity. We have call rights on approximately $200 billion of the nonagency market which is about 30% to 35% on the market and as you can see by the right side of our slide, we continue to try to grow our dividends from Q4 2013, we were at $0.35 to today where we are at $0.46.

On page 5, we believe that we are currently undervalued by the market. While our performance on a relative basis is good, we cannot take that for granted as the overall market has truly been punished and quite frankly we are disappointed where our stock price is. Currently we are covered by 10 firms, all of whom have a buy rating or overweight or outperform rating on our stock price today.

On page 6, I want to take you through the quarter and some of the things that we did and again a very, very active quarter particularly in our Servicer Advance business.

We issued the first Servicer Advance deal in 18 months. The effect of that reduced interest-rate risk, lowered our cost of funds and lengthened the term of our financing. We paid off $2.5 billion of HSART notes which were issued by HLSS and those notes for paid off at par. By doing this we increased our Advanced rates by 6% and created an additional $200 million of liquidity.

On October 14, there was a court ruling and as expected, the court ruled there was no EOD under the HSART indenture. The trustee who was holding $92 million of our money in escrow released the money to us so again another positive liquidity event for the Company.

During and subsequent to Q3, we purchased $300 million of Servicer Advance AAA debt with IRRs targeted in the midteens. We think the asset class is obviously a very good asset class for us and will continue to generate outsized returns in the marketplace and if you look at the marketplace today on Servicer Advance, is it has become a lot more active since we issued our first deal last month.

For our own Servicer Advance financings, we expect to be in the market in the next two weeks with an advanced deal as well of about $800 million.

In our call business, we called seven nonagency deals in the third quarter totaling $216 million and subsequent to Q3 we called another 14 deals in the amount of $360 million. We expect to be in the market early next week with a $500 million securitization. Again, we have a good slide in our presentation which will illustrate the economics and how to think about that deal.

In excess MSRs, we funded $19 billion of previously committed MSRs than and we announced last quarter. As we think about our excess MSR business and from a licensing perspective, we are currently working on getting licensed to be an owner of MSRs in all 50 states. Today we are licensed in 30 states and we chose this route as we feel it is a much more prudent route relative to going out and buying a mortgage company as we think we should be able to be licensed in all 50 states by the end of -- hopefully by the end of the first quarter of 2016.

As you flip to page 7, take a look at New Residential today. Again, we have critical mass in our three core investment areas. Excess MSR is $1.6 billion of market value, Servicer Advances of $666 million of market value and you can see in the quarter despite uncertain Servicer Advances paying down, we continue to increase our investment in that sector.

On a residential securities and call rights, we grew our portfolio approximately 25% so now capital deployed there is $434 million as of the end of Q3. Again, that is very consistent with our desire to try to continue with our call right strategy and to the extent that we can accelerate timelines continue to do so.

On opportunistic investments, that is really our consumer loan portfolio as well as some loans that we continue to acquire as a result of our call strategy and cash at the end of the quarter was $348 million and I will talk to that a little bit later.

On page 8 and 9, this talks a little bit about our excess MSR portfolio. I think this story here is a great one. When you think about our excess MSRs, they are not new production MSRs. What does that mean? What it means is that you can have much more stable prepayments. You will have less volatility as the MSRs are backed by borrowers who have been in their homes for approximately 10 years. They have seen the low-end rates, they have lower credit scores and higher LTVs.

We have stayed very true to our investment thesis and stayed away from newer production MSRs as the volatility on a quarterly basis as rates rally could be a little bit much.

If you flip to page 9, I want to highlight a couple of things, why we are different again and the excess MSR portfolio. Our net speeds are 38% slower than the industry when incorporating recapture and again that is coupon to coupon. 100% of our MSRs have recapture provisions whether the service by Nationstar Mortgage or by Ocwen.

If you look to the bottom left part of our page, our average loan size of $157,000 versus industry loan size of $198,000, a lower FICO score of 660 versus 731 and our higher LTV of 87% versus 79%. All that means is we are going to have much more stable cash flows as you think about our business whether rates are higher or whether rates are lower.

On page 10, I want to talk a minute about our Servicer Advance business. Currently our Servicer Advance portfolio totals $7.6 billion. The advances are funded with $7.1 billion of debt for a 91% advance rate and a 2.3% cost of funds. Our life to date investment on the portfolio has been 30%.

As you look to the right side of the page you can see that we had a very active quarter in the business. Again, we issued a $1.5 billion Servicer Advance securitization, the first one in 18 months. On that deal we increased our advance rates from 87% to 93%. We lowered our cost of funds from 3.1% to 2.8% and we extended the maturity of our borrowings for up to three years.

We also paid off as I mentioned earlier $2.5 million of term notes. The reason that we were able to do this is Ocwen's Master Servicer rating triggered an HSART event of default which made us again pay off the $2.5 billion of term notes. If you recall back to April when we acquired HLSS, we took out extra financing just to prepare in the event that there were any additional downgrades and we had extra capacity of approximately $4 billion and we used $2.5 billion to pay for this debt.

The effect again of paying off the $2.5 billion of term notes created $200 million of additional liquidity.

On page 11, I want to talk a little bit about this deal, our call rights and if you take a look, what I want to do is walk you through for a second. This is a live deal. Again, we expect to be in the market with this deal next week and the way that this deal works is -- and I will start with bullet point two or I will start with bullet point one -- we are able to call a deal when the current balance is equal to 10% or lower of the original balance of the mortgage pool that was issued. In this case we purchased 15 million bonds of nonagency securities at $0.66 on the dollar for a discount of approximately $10 million to par.

We then announced that we were going to call the deal so we paid $565 million which is 100 cents on the dollar versus the UPB of the mortgage loans which is $565 million and then you have additional expenses. What are those additional expenses? You have advanced balances or advances that you have to pay off. In this case it is approximately $8 million. We have partner payments to both Ocwen and Nationstar so each time we call a deal we do pay Ocwen and Nationstar a fee to call those deals and then we have expenses which could be legal and rating agency expenses. So all in, that is $580 million.

When you look, as the accretion of the bonds that we purchased at $0.66 will then get paid off at par so that is $15 million of the difference between $0.66 and par.

We then turn around and we do a securitization in the marketplace so we will take the pool of mortgage loans, we will work with the rating agencies and our underwriters and we will create a capital structure where we will issue AAA down to non-rated securities and the effect of that will generate proceeds of approximately $545 million.

And then the delinquent loans that we acquire as a result of our call rights, we will keep on our balance sheet and we will work to modify the loans or liquidate the loans over time.

The total profit in this transaction is expected to be something between $10 million and $15 million. I thought this would be a good way to walk you through and illustrate how the call rights work and how this deal hopefully will look in the marketplace as we go forward.

Again, there is no guarantees on the execution of this but this is what we expect as we come to market over the next week or so.

On page 12, one of the questions we get pretty frequently is how to think about our nonagency type line. What we thought we would do is we would put in a couple of bullets and really what are the drivers to enable us to accelerate our deal pipeline?

So looking to the bottom part, again today we own approximately -- we own call rights on approximately $200 billion plus of outstanding nonagency mortgages. We believe over time all of these deals will be called and the projected balance of the loans at the time of call will be something around $100 billion.

To the right you can see the factors which drive the call ability of these deals -- delinquencies, Servicer Advances, the loan to value on the underlying mortgage loans and the bonds that we could acquire at discounts in the marketplace.

So we gave a couple of illustrations as far as what would help accelerate the pipeline. For example, if delinquencies declined by 10%, we think that we should be able to call another additional $3 billion to $5 billion of deals.

If Servicer Advances dropped by an additional 2%, we think the effect of that will be to call an extra $1 billion to $2 billion of deals. If the loan to value on the underlying loans goes up by 1 point we think we should be able to call $1 billion to $2 billion in deals. And then the more bonds we acquire a discount, the more deals we should be able to call.

Again, all of these numbers are approximate but we wanted to get you grounded and try to give you a sense as far as how think about the call ability of these pipelines.

As you can see at the left side of the page, currently $31 billion are callable. We are doing a $500 million deal next week. We expect to do another deal hopefully in the month of December depending upon market conditions and timing but overall, we continue to work as I pointed out earlier in our presentation, we continue to work with our servicers as well as outside counsel to figure out a way to try to clean up the legacy mortgage market.

Keep in mind most of these loans that are in these pipelines were issued anywhere from 2003 to 2007, so a lot of these loans are up to 10 plus year season.

Now if you will flip to page 13, this goes back to some comments I made earlier about our desire to become a fully licensed or to have licenses in all 50 states and effectively what this would do is it would give us the ability to own MSRs, continue to work with our servicing partners to the extent that we wanted to diversify we could do that as well. So overall we think by the end of hopefully by the end of Q1 we should be licensed in almost all 50 states. And again there is no guarantees on that, we are currently licensed in 30 states. We still need to work with the agencies to get approvals with Fannie, Freddie and Ginnie which we hope to be able to do that over the course of the next kind of three to six months. But we think it is a good -- we think it is prudent and it will give us a little bit more flexibility in our business.

On page 14, I mentioned earlier how we think about our business and why we try to be as agnostic as we can to movements in interest rates. And just to take you through a few bullets here on interest rates excess MSRs are one of the few fixed income assets that should increase in value as interest rates rise. The underlying mortgages are less likely to be refinanced as interest rates rise thus extending the life of this servicing fee stream.

Should interest rates fall, we have recapture provisions with Ocwen and Nationstar which will help mitigate any increase in voluntary prepayments.

On Servicer Advances, we have agreements with our servicing partners to protect us in the event that interest rates or interest rates increase on our Servicer Advances. To the extent that rates drop, our financing costs should decline so again that would be a benefit.

And then on the nonagency securities, almost all of our securities are floating rates so should rates rise, we will get higher coupons and theoretically that will minimize the impact of a rising interest rate. Should interest rates drop, the value of our call rights should increase.

As we look to page 15 and think about the 2015 and looking ahead, the year has been a really good one for us despite where our current stock price is. We have reached record core earnings of $0.49 a share in 2015. Rolling back to April, we acquired HLSS four $1.4 billion, we increased our dividend in both 2Q 2015 and 3Q 2015. We've achieved significant growth across all three core segments. We've deployed over $2 billion to new investments in the year.

And as you look forward a couple of things that we are working on I mentioned the MSR licensing, we are currently working on our applications to become a member of the Home Loan Bank System. The effect of that will give us more liquidity, should lower our cost of financing in certain segments of our business and overall we think it is prudent again to always have the maximum amount of liquidity as possible.

Pipelines still remain robust as we look forward, the excess MSR pipeline is pretty robust. I would tell you it is not as interesting quite frankly today on the new production stuff. We do think there is going to be more legacy stuff that'll come out of the large money center banks and I'm sure I will get a couple of questions on that.

On Servicer Advances, we continue to deploy more capital there. We love that asset. It generates returns of midteens and upwards of 20s. And then on the nonagency business, we continue to deploy more capital on the nonagency business.

And then behind that is our portfolio update which I am not going to go through at this point.

And with that, I will turn it over to the operator for any questions.

(Operator Instructions). Bose George, KBW.

Good morning. Just first, on the MSR, the servicing licenses that you are getting, when you think about once that is done can you just sort of characterize the potential opportunities away from Nationstar and Ocwen and could that become a pretty meaningful part of your business?

Yes, I think it is less about moving any business from Ocwen and Nationstar quite frankly. It is more just to give us flexibility in the event for example that Nationstar and/or Ocwen could be in the middle of a servicing acquisition where they are boarding new loans. And in one of the money center banks for example comes to the market and says I want to sell X billions of dollars of servicing, we need to have the flexibility to be able to participate in a transaction like that.

So it is not again to move stuff away but it is just to be able to give us more flexibility in our business.

I understand, but in terms of -- is it can be sort of see a scenario down the road where there is a meaningful amount of servicing from other sources as well that you guys end up funding?

If you think about, it we have had our partner in Nationstar which we have continued to work on pools of the MSRs. So for example if Nationstar did not want to participate on an MSR transaction or we did not -- that could go the other way, if Nationstar did not and we wanted to, we could then acquire the MSR and have it subserviced at Ocwen, Nationstar or any other servicer. That is the way we are thinking about it.

It is not to get in the operating business, it is just to give us a little bit more flexibility around our business.

Okay, that makes sense. And then one question on the GAAP versus core reconciliation, the non-capitalized transaction related expenses, what are those driven by?

I will turn that over to Nick.

Sure. One of the items we had during the quarter was a $9 million expense we incurred related to the HR term notes so that is the largest item in the quarter.

Okay, great. That is it. Thanks a lot. That is it for me.

Doug Harter, Credit Suisse.

Thanks. Mike, just wanted to confirm that the $500 million on the call rights, that is in addition to the $360 million you did in October of (inaudible)?

No. What happened is we called the loans in September, we called $200 million or seven deals in September. We called an additional $360 million in October. We haven't issued that securitization yet and we are going to do that over the course of the next week.

Got it. So this is basically okay, is that where the profitability, is that sort of where you generate the profit on the securitization or on the call? I just want to understand the economics.

You will realize the economics when you do these securitization. Obviously if you keep the loans on your balance sheet you will realize interest income but the so-called arbitrage, the difference between your par pricing and your securitization will occur when you price the deal and execute the securitization.

Got it. So that should show up in the fourth quarter then?

Correct.

And you said you were hopeful to do another securitization in December or another collapse in December?

Both. We are hopeful that we are going to call another pool of loans and then issue another securitization in December.

Got it. And then obviously it is market dependent based on those factors you laid out in the slide. But I guess as you look out into the early part of 2016, how do you see the pacing of both collapses and securitizations?

I think we are doing everything we can to accelerate timelines on the securitizations and call rights. I mentioned earlier in my comments we have engaged outside counsel, we are working with bondholders, we are working with servicers. The feeling is if we could clean up the legacy mortgage market of which we own a significant amount of calls related to that business, it should bear great fruit quite frankly for our Company and our shareholders.

It is also very good quite frankly for the servicers as servicing delinquent loans is not a profitable business as we know. And it would be very good for bondholders and we are bondholders as the discount to par would get accelerated.

So we think it would be a win for the entire market and that is something that we are working very aggressively on. Now there is no guarantees that we are going to be able to do certain things but we are doing all we can to do so.

Great, thank you.

Jessica Levi-Ribner, FBR Capital.

Good morning. How are you? Just kind of one question around the acquisition pipeline. Does it change significantly because you are getting the MSR licenses or are you kind of still looking at the same PLS deals and how can we think about that on the MSR side?

I don't want anybody to really over think the licensing thing. It is something that we have been talking about I think quarter after quarter. I discussed on previous calls whether or not we are going to acquire mortgage companies so we have a little bit more flexibility. So they licensing is again not to get in the operating business because to the extent that we acquired a pool of MSRs, we would likely go to our servicing partners to have them service to the extent that they weren't in the middle of a transfer and they would get approved by their various regulatory bodies.

So the licensing thing just gives us a little bit more flexibility. Again if Nationstar did not want to participate or another partner did not want to participate in the acquisition of an MSR, we just have a little bit more flexibility.

The pipelines are still the same. The legacy $75 billion that we have spoken about on previous calls is still out there, they are still quite frankly working through the legal side of the bank and we are hopeful that will come to fruition at some point. It is obviously a lot slower than we thought.

On future acquisitions, we are likely not going to embark on an aggressive program to acquire new production MSRs as we don't think one, it is very hard to recapture those borrowers. And two, it is not consistent with our investment strategy. And three is, we have $1.6 billion of capital already deployed in the MSR business.

While saying that, the banks are going to continue to come I think with a lot of Ginnie Mae product so we should be able to acquire more Ginnie May products if it comes at the right levels. So pipelines are still robust. We will still continue to focus on legacy stuff. The pipelines on nonagency legacy MSRs are -- you are getting towards the -- you are in the eighth inning of being able to acquire the legacy nonagency stuff. But it is still out there and we will continue to do what we can to acquire them.

So I don't think anything has really changed and the licensing just gives us a little bit more flexibility to do what potentially we will need to do.

And just kind of a follow-up to that, do you have any appetite for acquiring whole loans either reperformers or in the early stages of let's say that step ups or anything like that?

I mean yesterday Fannie Mae auctioned off a pool of $1.3 billion of loans. There is a bank that is selling I think $800 million of loans tomorrow. We are taking a very hard look at that and the returns.

If you go back a few quarters, our success in the loan business was pretty significant. I think we generated north of a 30% IRR on our loan business and then we sold some of those loans to help with the proceeds for the HLSS acquisition. So it is something that we are looking hard at. If the returns are there, I think we potentially will deploy some capital in the loan business to generate returns for our shareholders.

Great. Thank you so much.

Jeremy Campbell, Barclays.

Thanks, guys. I just wanted to follow up on that last question. So if you guys think you are in the eighth inning of acquiring nonagency MSRs, what is really the strategy going forward and how long is this really going to be part of the core thesis for NRZ?

We have $1.6 billion-ish of capital deployed in MSRs. The Ginnie Mae business you will see plenty of MSRs continuing to come out of the banks as it relates more probably on the Ginnie side. On the nonagency legacy side again we own north of $200 million of MSRs linked to the nonagency business. The outstanding nonagency legacy market is probably about $650 billion today. We own a pretty significant amount of that. There will still be stuff that will come out.

The other thing you should really think about is we have recapture provisions. 100% of our MSRs have recapture provisions with our two servicers, Nationstar and Ocwen. So to the extent particularly on the legacy stuff that somebody does go to refi, we have the ability to recapture that. Recapture rates currently on the agency business are 30% to 35% on the conventional side and 20% to 25% on the Ginnie side. On the nonagency side, they just don't prepay that frequently because the LTVs are typically higher, the FICO scores are lower but the recapture rates on that have been creeping up as well.

So it is a very, very sustainable business. We think this cash flow stream will be out there for many, many years. It is still a core part of our business.

And if Nationstar and Ocwen continue to grow as lenders like they continue to posit to the market, why shy away from new production? If they grow as lenders, your inherit recapture rate on new production should theoretically be higher, correct?

Newer production loans typically to borrowers have a lot more optionality than a legacy borrower with a low FICO and a high LTV. So recapturing that borrower -- the new production borrower -- is a much more difficult task than on the legacy side.

Also, if you look at bank earnings for the quarter, there was lot of P&L volatility around bank earnings as it relates to new production MSRs and that MSR stream. So it is much more linked to interest rates. And as I pointed out earlier in our presentation, we try to be as agnostic or as market neutral as we possibly can.

And then as we think ahead here, you had some bleed off in your book value from the MSRs and advances coming down. What is your outlook on being able to acquire MSRs or advances going forward to at least maintain kind of book value stability as we look ahead?

I think it is pretty significant. We deployed more capital in the quarter in Servicer Advances. We are going for example, Ocwen is in the market now with a Servicer Advance deal rated AAA debt. We are taking a hard look at that. So we think we are going to be able to deploy more capital in Servicer Advances.

MSRs again is a core part of our business. We are not going to buy -- I think our shareholders hopefully will reward us for not spending every dollar the second it sits in our pocket quite frankly. So we are going to be very strategic on how we deploy capital in MSRs. We do have interest rates -- it was very volatile quarter for rates.

If you look back to where we ended Q3 versus where we are now, the 10-year note is back to kind of 218 so we just want to make sure that we are careful not to deploy capital too quickly on asset classes that are going to go down a lot in value.

And then just finally, is there any appetite between you or Nationstar as far as acquiring MSRs off their balance sheet once you get full licensure?

Again, MSRs are a core part of our business, there is always that appetite to acquire more MSRs.

Great. Thanks.

Jason Deleeuw, Piper Jaffray.

Thanks and good morning. A question on the call rights and the securitization. I just want to understand the cash flows from securitization. So the upfront gain I guess it would be, would that be a net cash positive from a cash flow standpoint? And then is there going to be an ongoing cash stream from owning the NPLs on the securitization? Is that the right way to think about it?

It is. It is yes and yes. So you will have a net gain on your call strategy and then have your NPLs and as we liquidate or modify those loans, those will flow through our income statement and be accretive to earnings.

So from a dividend standpoint in terms of the cash that is going to be generated, would there be like a special dividend if the cash gain is big enough on the securitization? And then can we think about the ongoing NPL investments as kind of being supportive of a run rate go forward dividend?

We did -- if you go back I guess about a year or year and a half ago, we did have a special dividend. Quite frankly I am not sure that we got rewarded for it so I think likely our strategy would be to continue to grow our earnings and grow our dividends, not just our special dividends and that is kind of the way that we are thinking about it rather than just pay out a special.

Got it. And in terms of the size of the cash flows from a call right securitization, what would be the bigger -- just directionally, what would be the bigger cash flow? Is it the gain on the securitization or is it kind of the ongoing stream?

I think it depends on the size of the deal. It depends on how many NPLs you are keeping and it depends quite frankly on the profitability of the securitization, whether you are making 1 point, 3 points or whatever that number ends up being, I think it all depends on those factors. So again, it is the size of your loans that you are taking back, the size of the deal and again the discount you have on the underlying bonds.

Got it. And then on the Ginnie Mae legacy MSRs, I believe the return profile on those are a little bit less than what you guys have right now for your MSRs. But you are still under levered and you can still put capital to work. So can we think of as investors can we think about when you are adding future Ginnie Mae legacy MSRs, can that be dividend accretive, dividend per share accretive over time, is that the right way to think about that?

Absolutely. If you look at the Ginnie business, when Ginnie Mae lowered the mortgage insurance premiums you saw speeds pick up pretty dramatically on the Ginnie Mae cohort. They good news for us if we are very light in the Ginnie Mae investment so even on some of the legacy stuff you saw some fast speeds going back to Q2.

We are starting to see speeds come off on all parts of MSRs again you are in a little bit of a higher rate environment today not necessarily throughout the entire quarter but you are also coming into a time when seasonals are going to come into play. So we think speeds will continue to drop.

A good chunk of our Ginnie Mae MSRs we bought $20 billion for example in May and those boarded in May. So overall, we have tended to, we haven't had a lot of Ginnie Mae exposure. I do know that the banks will continue to sell more Ginnie Mae product. If the numbers work, Jason, we will continue to deploy more capital there is the way to think about it.

Got it. And then on the Federal Home Loan Bank membership, can you help us understand what assets you can fund with the FHLB financing and just what size can you get and kind of cost of fund savings you think you can get with that funding?

The way it works is we are currently setting up a captive insurance business in Tennessee. From there you work with the Home Loan Bank and we are working with a Home Loan Bank of Cincinnati that we went to see a number of months ago. Typically they will finance agency stuff. We are working with them on -- they will finance agencies, they will finance loans. And once we are a member, we will work with them quite frankly in every part of our business. Because again, we are one of the largest providers of capital to the servicing industry and I think it would be a great thing if for example if we could finance advances there. I don't know that we can but we will work with them on every asset class that we are involved in.

Thanks. The last question is on the litigation, the escrow release. So is this HR litigation with the release of the escrow, is that litigation now, is that done now or is there still something left there?

No, it is done. It is over. We are happy with the result, we are happy to get our money back. It was a very good liquidity event for us. I think it cleaned up a lot of noise in the market and we look forward to deploying that capital in a meaningful way.

Good. Thanks and good work.

(Operator Instructions). Michael Kaye, Citigroup.

Good morning. Given some of the volatility in the capital markets, can you talk about how that impacts the 2 to 3 points you typically quote on the call right gains? What is the volatility kind of making things better or worse?

Obviously as spreads widen or assets could become cheaper, you won't make as much money. I think in our deal that we are coming to market with over the course of the next week, it is currently sized based on what we believe are current market conditions and the economics are hopefully reflective of where we think we are going to be able to execute in the marketplace. We feel pretty good about where we are.

You can think about it two ways. We are issuing a $500 million securitization now hopefully another one in December. The flipside of that is we have plenty of capital to deploy and should assets get much cheaper, we will be able to deploy capital in these same asset classes in a way that becomes very accretive for our business.

So I think there's two ways to think about it but the current deal that we are in the marketplace with or will be in the marketplace with over the course of the next week, the economics are size based on the way that we anticipate the execution will occur.

Great. I am just looking ahead on the drag from the cash balances this quarter. Sometimes you have an impact per share how much that hurt and then you add a bunch of stuff that closed also in Q4. Any way think about it?

Just a quick walk as of 9-30, I think our cash balances were about $350 million. If you take a step back, we have a dividend payment of $106 million so we always want to make sure we have enough money to pay your shareholders. Then we also had fundings of previously committed MSRs of about $120 million so while there is a cash drag we need to have cash on our balance sheet to kind of pay for things.

One of the things that I think the team has done a great job in doing is clearly we have a lot of capital deployed in the Servicer Advance business so one of the things that we have done over the course of the past month is worked with our lenders to be able to pay down Servicer Advances and redraw that capital within a 48-hour period of time.

So the effect of that you will see on a go forward basis is if we don't find an investment that we believe we want to deploy capital in at that time, we will be able to pay down some of our Servicer Advance debt which will reduce our interest costs but in the same token should we want to get that capital back, we could do that with 48 hours notice. So that is I think a terrific cash management tool for our Company.

Great. And you did 49% dividends, $0.46 and you have a bunch of stuff going on in Q4. Anything you could say in terms of the outlook for the dividend from here?

You know, the answer is no. Everybody always wants forward guidance, we can't give forward guidance. The one thing I can tell you on behalf of me and our team is we are doing everything we can to execute in our core business. We think our underlying results have been terrific, our stock price does not reflect. I think a lot of that has to do with the current environment in the marketplace not only us but a lot of our peers I think are trading at very attractive values quite frankly.

But going forward we will continue to do the same thing, have good quality earnings which will hopefully lead to higher dividends for our shareholders.

Okay, thank you.

Matthew Howlett, UBS.

Thanks for taking my question. Just going back to the excess capital position, what do you define -- what can we define as excess capital? I say that because you have that $75 billion J.P. Morgan deal out there and I think there is a perception out there that the Company is always willing to raise equity. It is above reported book. Most of your peers are at -- to drive additional acquisitions for your pipeline?

Here is what I would tell you on liquidity. We have the ability we believe to draw on approximately $1 billion. I don't anticipate and I don't think anybody here anticipates us raising equity anytime soon and there is no reason quite frankly to raise any equity so I think we were very clear in our last earnings call we have no desire to raise equity for the Company.

I think when you think about us here quite frankly, I have a lot of my own personal net worth invested in this Company and I think all of our interest aligns whether it be myself or anybody here at Fortress to see our stock price do better. There is no desire to raise equity, we don't need any equity and I think anything we will do in the market we will try to do off our own balance sheet.

So I want to dispel that notion about us getting out there to raise equity. We are not raising equity. I can't be any clearer on that. We were clear last quarter and I'm going to be clear now. We have plenty of capital, plenty of liquidity, plenty of ability to draw on liquidity so we feel like we are in a great place.

I appreciate that, that is helpful because certainly there is a perception out there whether it is from your predecessors of from some of the mortgage REITs of just serially issuing equity. But maybe help me understand when I look at your cash flows over half of your excess MSR cash flows, half are coming from HLSS which used to trade at a significantly lower equity cost of capital.

What are we missing here? Is NRC, is there too many things going on inside of it where people can't really harvest or appreciate the steadiness and the cash flows coming from the MSR portfolio?

I think what we have done over the course of the past couple of years is really try to dummy down the business. I think getting people grounded on the call right strategy is something that we do -- we try to do quarter after quarter. I would love to get specific and tell you that we are going to be able to call $3 billion a quarter or $5 billion a quarter or $10 billion a quarter whatever that number is. We just can't do that.

I think part of it is the market where we currently are and again I don't want to lump ourself in with everybody else and our peers are quite frankly they are close friends. But I think the sector as a whole has taken a pretty good hit overall.

The only thing we can do is continue to try to generate good quality earnings and hopefully that will have the stock right itself. We currently trade at roughly a 15% dividend yield. I pointed out earlier if you go back in a normalized environment whether that is 7%, 8%, 9% or 10% dividend yield, we think that our valuation is very low and very cheap. However, we have to continue to execute in our business so I don't know what else to tell you about that.

Obviously we think it is going to happen. It might take a while but glad you guys are focused on it.

Just on the excess MSRs, you mentioned the J.P. Morgan deal is being hung up. I mean pricing -- there has got to be pricing has to be attractive at sort of the dented stuff. I mean are there any really buyers out there that -- it certainly doesn't appear like there once was with all of the servicers down. Is pricing still attractive to the extent that some of the stuff still comes out you still can do some of the -- match some of IRRs that you have done on prior acquisitions?

I think the best investments in MSRs are the early ones obviously. Saying that, I think there will still be stuff to do. It is going to be a little bit more episodic. Working closely with our servicing partners, not everybody can service a delinquent loan. We know that Nationstar can service a delinquent loan. We know that Ocwen can service a delinquent loans.

So I would say that while it will be episodic, we have very good relationships with the banks. We have been doing this a long, long time. I think we have some good credibility with the banks and hopefully we continue to execute on that strategy. It is just going to be a little bit more episodic than it was going back a couple of years ago.

Thanks, Mike, thanks for taking my questions.

Jason Weaver, Sterne, Agee.

Good morning. Thanks for taking my question. Most of them have been answered but I was wondering if you could just comment on the specific execution parameters of the Servicer Advance securitization?

Sure. I mean typically when we do these Servicer Advance securitizations, our advance rates are anywhere from call it 91% to 93% and our cost of funds are approximately 2.5%-ish. As you think about that, we have a number of facilities with our bank partners, some of the stuff that is on bank lines we are able to actually reduce our cost of funds when we come to the public markets. At times extend terms as well meaning the term in the financing so the next advance deal will likely be a 92%-ish advance rate with hopefully something in the 2.5% to 2.75% cost of funds.

Fair enough. Congratulations on the quarter and thanks again.

Thank you.

This concludes our question-and-answer session. I turn the call back over to Michael Nierenberg, CEO.

Thanks everybody for dialing in. We appreciate all your support and we will continue to do all we can to help create value for you and our shareholders.

This concludes today's conference call. You may now disconnect.