Rithm Capital Corp (RITM) 2016 Q2 法說會逐字稿

Good morning, my name is Kim and I will be your conference operator today. At this time I would like to welcome everyone to the New Residential second quarter 2016 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mandy Cheuk, Investor Relations, you may begin your conference.

Thank you, Kimberly, and good morning everyone. I would like to welcome you today to New Residential second quarter 2016 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 to the earning 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 earnings supplement regarding forward-looking statements and to review the Risk Factors contained in our annual and quarterly reports filed with the SEC.

In addition, we'll be discussing some non-GAAP financial measures during the call today and the reconciliation of these measures to the most directly comparable GAAP measures which can be found in the earnings supplement.

And now, I would like to turn the call over to Michael.

Thanks, Mandy. Good morning everybody and thanks for joining our second quarter earnings call. You know, for the quarter, I think we had a terrific quarter, and we continue to do all we can to deliver consistent earnings while maintaining and hopefully growing our dividend overtime. And despite all the volatility that we saw in the market and the uncertainty following Brexit, again, we're very proud of our results.

For the quarter, we saw our global bond yields plummet following Brexit and yields in all fixed income assets had it lower. We saw its spreads on mortgage assets tightened as fixed income investors search for yields.

Just to give you a sense on some yields, on a year-over-year comparison in June of 2015, the 10-year treasury rate was 2.35%. One year later, at the end of June in 2016, it was 1.47%. So obviously, we saw a very big rally in the treasury market.

The 30-year mortgage rate for comparison at the end of June in 2015 was 4.02%. And at the end of Q2 in 2016, it was 3.48%. So again, a very big rally in mortgage rates.

For us, our quarter investment strategy performed very well despite the challenging markets. During the quarter, we invested $233 million of capital, with most of that targeting the non-agency mortgage market. We bought non-agency mortgage securities in which we only associated call rights.

For the quarter, our non-agency business did extremely well. We have a non-realized gain of approximately $68 million which increased our book value by $0.30 per share. Our advance business continues to perform like we thought it would. Advance balance continued to come down as delinquency trend lower. For the year, advance balances are lower by 13% since January 1.

In our MSR segment, despite seeing the lowest mortgage rates we've seen since late of 2013, our portfolio outperformed the market as we own various seasons and more credit-impaired MSRs in the broader market. Our recapture agreements with our servicing partners also provide insurance for our portfolio.

On the consumer front, our consumer loan portfolio's been terrific outperforming underwriting as charge offs and delinquencies are much lower than our initial underwriting. To give you a sense, when we initially purchased the consumer portfolio in May of 2013, charge offs were approximately 12%. Today, they are between 5% and 6%. So overall, that portfolio's performed extremely well.

So now, I'm going to refer to the supplement which has been posted online. And then after that, we'll open it up for some questions.

Currently, New Residential trades approximately at 13% -- I'm on page two. On page two, our dividend yield is approximately 13%. Our market capital is $3.2 billion.

As I've been pretty well for the weeks, set out on a mission to become licensed to own MSRs in all states. We're currently licensed in 49 states. We're also licensed to own Fannie Mae MSRs. We also have approval from FHA that owned FHA MSRs.

Our excess MSR portfolio is $371 billion. And we own associated call rights from the non-agency mortgage market of approximately $175 billion.

Our GAAP income for the quarter was $68.7 million or $0.30 per diluted share. Our core earnings were $119.6 million or $0.52 per diluted share. We paid a quarterly dividend of $0.46 per common share.

On page four, our New Residential today -- if you take a look to the right side of the page, our excess MSR portfolio net of financing is currently $1.358 billion or including financing is about $1.65 billion.

Our servicer advance portfolio is $205 million. Our residential securities in where we own the associated call rights is approximately $792 million. Our consumer loan portfolio and residential loan portfolio is $311 million, so we have cash at the end of Q2 of $234 million.

For the quarter, in our non-agency business, we executed clean up call rights on 12-season non-agency deals totaling $291 million. We then completed our seventh non-agency securitization totaling $306 million in May.

We increased our -- as I pointed out earlier, we increased our non-agency RMBS position, growing our net equity from $374 million at the end of the year to $715 million as of the end of Q2. And then the valuation of our non-agency securities increased by $68 million during the quarter from market to market gains. And again, that increased our book value by $0.30 per share.

On the excess MSR front, as I pointed out earlier, we're now eligible to own MSRs in 49 states. That is up from 46 states in Q1. And we're also licensed -- we have Fannie Mae approvals to own MSRs as well as FHA approvals to own MSRs. We expect to be licensed in the other states most likely over the course of the next 30 days. And now, we can discuss that a little bit later.

On our portfolio, we've been very vocal about our investment strategy of owning legacy credit-impaired seasoned mortgages. So as a result, when you look at our net CPRs on the quarter, we increased -- our net CPRs increased by 1.8% compared to an average industry average of 4.8%. We also in the quarter, we secured two new financing facilities -- one for $300 million and one for $225 million.

On the servicer advance front as I pointed out earlier, our servicer advance balances are down 13% year-to-date. We started the year at $7.6 billion. We are now at $6.6 billion as of the end of Q2.

Also, our advance to UPB ratio declined from 3.4% in Q4 of 2015 to 3.2% at the end of Q2. And then we continue to do all we can to improve our advance rates, lower our cost of funds and increase financing capacity around our servicer advance business.

I'm now going to take you through our portfolio update which I'll begin with on page seven. On our excess MSRs, what sets us apart from the rest. Our total portfolio is $371 billion.

And a couple of things I'd like to point out to you on this page. If you take a look, our portfolio is very seasoned. Our weighted average is sizzling at 115 months or a little bit more than ten-year seasoned on our portfolio.

Our current LTV is 83%. Our current FICO is 662. And our delinquency portfolio -- our delinquency ratio is 14%.

As you take a look to the right side of the page, our average loan size is smaller than the industry average. We have 155,000 average loan size versus 197. And if you look at the other metrics on the right, FICO, as I pointed out, 662 versus 731. And again, our LTV is 83 versus 78. All of these things explain why our speeds are going to be much slower than the industry average.

As you take a look at page eight, I pointed out earlier, the mortgage rate at the end of June was 3.48% versus 4.02%. If you take a look at year-over-year, our net CPR is almost identical to roughly 13%. So again, the seasoned -- the nature of our portfolio being very seasoned, credit-impaired, typically higher LTV is going to protect us during periods of time when the treasury market rallies like we have seen and mortgage rates rally like we have seen. The other thing to note is again, on almost all of our MSRs, we have recaptured provisions in place with our different servicers.

On page nine, our servicer advance portfolio, that will continue to come down overtime as these loans continue to season and the delinquency profile of the portfolio cleans up. I pointed out earlier, $6.6 billion is our total advanced portfolio versus $7.6 billion at the end of year. Total equity is $204 million.

You may ask why did that go up in the quarter. What we did is we had excess to liquidity in our portfolio, so we paid down some of our advanced financing. And as a result, that increased the amount of equity that we had in our advance business.

Life-to-date IRR of 25%, and we believe that should continue to perform extremely well again as delinquencies come down and the portfolio continues to season further.

On page ten, this is our typical illustration where we talk about how our deal collapse opportunity works and what the associated P&L is as a result of this. Again, it is an illustrative transaction, $565 million repurchased underlying bonds at a discount. We then execute the call rights where we buy the collateral and the associated advances at par. We then sell or resecure ties to performing loans at a premium. And then we retain the distressed loans and modify or liquidate those over time.

Typically, our P&L has been something around two points on each transaction we've done. While saying that, there's no guarantee what that will be going forward. But we're very optimistic on that business.

On page 11, again, this is our slide where we talk about what the pipeline looks like -- what are some of the key drivers -- and how we're going to accelerate our call pipelines. Currently, we own call rights and approximately 175 billion UPB of the non-agency mortgage market. That is a very, very significant amount of the legacy non-agency mortgage market.

Over the course of the past two years, we've seen delinquencies decline by about 4% from 22% to 18%. We do expect this to continue overtime. That will help us accelerate timelines and improve our ability to call non-agency deals, not necessarily one by one in a quarter, but hopefully, do some significant size. Currently, our callable pipeline is about $30 billion. And again, over time, we will do all we can to try to figure out a way to accelerate that.

As I pointed out in our earlier earnings calls, I do believe this is going to be not NRZ specific, but it's going to be a broader industry effort to be able to do that. And we look forward to working with our partners in the industry to accelerate those timelines and clean up the legacy non-agency mortgage market.

On page 12, we talk about our consumer loan portfolio. Just some highlights. In April of 2013, we invested $241 million to purchase a 30% interest in a $3.9 billion UPB consumer loan portfolio. To date, we've gotten back a little bit over $550 million on that investment.

If you recall back in March of 2016, we purchased -- we increased our position in that SpringCastle JV from 30% to 54% by investing roughly another $55 million of capital there. The life-to-date IRR is 90%. Obviously, we'd like to find more of those for you guys, but they're few and far between.

And as I pointed out earlier, charge offs are running much lower than our initial underwriting. Currently at the end of June, they were 5.2%. If you look at acquisition, I pointed out earlier, they were 12%. So overall, we're very excited about that portfolio, and we believe we should see continued excellent performance from that business and portfolio.

On page 13, we discussed our funding platform. We will continue to do all we can to increase liquidity in and around our business. We currently have over 21 different financing counterparties. We have facilities from repo facilities to bank facilities to variable funding notes around our advance business. And we also have term debt where we issue securities for term securities.

You know, during the quarter, I pointed out we did two financing facilities around excess MSRs. One is for $300 million on non-agency MSRs and the other is for $225 million around agency MSRs. I do want to point out on the $300 million facility. I think we've drawn about roughly $100 million of liquidity on that facility, so we still have plenty of liquidity left in that facility as well as in our business.

Page 14, we discussed where we are from a state perspective. I think this is pretty clear. You know, there's one remaining state that we expect to get approval from -- that's California.

We hope to obtain that approval over the course of the next 30 days. We're currently licensed by Fannie Mae and FHA. We're working with Freddie Mac and Ginnie Mae. And the real thesis of what we're doing here is we want to -- one, maintain flexibility in our business -- two, protect our interests in every MSR that we own -- and three, have the ability to acquire MSRs and diversify our servicing partners over time.

On page 15, we talk about the second half of 2016. As you take a look, one of the things that we are extremely vigilant in doing, every day we come in and try to make sure we do all we can to maintain and grow our dividends in our business. As you take a look over the past four quarters, we continue to pay $0.46. We'll do all we can to continue to do that over time.

The core business is going to remain the same. We will be licensed we believe in all 50 states shortly. We're going to try to increase our non-agency call rights execution and accelerate those timelines. As I point out, I do think it's a bigger effort than just NRZ at this point.

The MSR pipeline is extremely robust and significant more so now than we've seen in over the course of the past couple of years. There's been a lot of chatter and there's been a lot of -- some of our non-bank servicers who have announced strategic decisions to actually sell MSRs. We're in the middle of a lot of different things and hopefully we can execute on the MSR pipelines. We're going to diversify and increase our funding vehicles and our funding partners, and then we'll continue to explore what I would call opportunistic investments in the marketplace.

So with that, we'll turn it back to the operator and open it up for questions.

(Operator Instructions).

And your first question comes from the line of Jeremy Campbell with Barclays. Your line is open.

You guys see here on the last slide the size of the MSR pipeline is about $500 billion. But when you think about the pipeline of seasoned and credit-impaired MSRs which is your main target, what does that look like?

I would say that out of the $500 billion, it's probably closer to $350 billion to $400 billion. It's probably the amount. We use $500 billion a little bit as a rough number. I do think the actual amount of MSRs that could come to the market could be even more than that.

The other thing I do want to point out with the 10-year treasury rate this morning at 155, if we're ever going to take a look at different MSRs, I think it'd probably be a reasonable time to do so. So yes, the legacy MSR pipeline looks very robust, but I would also say the MSR pipeline broadly looks extremely robust.

Got it. And the seasoned credit-impaired mean really mostly non-agencies or do some agencies fit that bill as well?

There's both, actually. If you take a look at our portfolio, roughly 70% of our equity capital is in the non-agency legacy MSR business. So as a result, you know, seeing mortgage rates, for example, at the end of June at 3.48%, yes, that get as nervous, but the flip side of that is when you take a look at the nature of the portfolio, it has performed extremely well particularly around the non-agency stuff and we like that very, very much. There are legacy credit-impaired agency MSRs, we look for seasoned MSRs as well, but I wouldn't limit it to one versus the other at this point.

Got it. And then consumer loan charge offs remain at all-time lows similar to other consumer credit classes. And you also mentioned that future clean up call deals require delinquencies in advance as they continue to decrease from here. So while we remain in a pretty benign credit environment for the consumer, how do you think about the risk to enter these earnings if the economy does start to deteriorate and delinquent season charge offs, do start to rise?

It's a good question. I think just to be clear on the consumer portfolio, our carrying value is approximately $145 million. So when you think about a company that has equity capital a little bit shy of $2.7 billion in a market cap of $3.2 billion, while we're always concerned about everything, I think it's not as significant of a concern if we were quite frankly a pure consumer company. That's one.

Two, on a non-agency side of the business, these loans are very, very seasoned. I mean, when you look at the average age of 115 months, I just think over time, we're going to continue to clean up the delinquency pipelines. Yes, if delinquencies go up, our advance balances could go up a little bit. But I think in general where we are in the cycle and the seasoned nature of this portfolio, I feel like we have less risk around that than if they were not as seasoned and haven't been in these pipelines for so long.

Great. Thanks so much.

And your next question comes from the line of Doug Harter with Credit Suisse. Your line is open.

Do you have a sense as to whether -- when you get the final approvals, is that something that kind of opens doors for MSR acquisitions kind of immediately or is that still kind of a longer-term opportunity?

Doug, I think it's kind of immediate. Now while saying that, we still have a little bit of work to do. But we set out to do this for a reason -- one is so we could operate our company and diverse it for our servicing partners -- two is to protect the interest of our company. But I think the bigger opportunity as we look at the pipeline of MSRs that potentially could be for sale is more of an immediate opportunity than it is something that we would speculate into the future.

Great. And then looking at the non-agency MBS opportunity, how -- you obviously made -- were able to make a big investment there this quarter, how much -- how easy is it for you to source bonds where you have the call rights right now at the prices that you find attractive?

You know, I would say we've deployed a fair amount of capital in non-agencies. We'll continue to do so. I will tell you it's not as interesting today because spreads on non-agency mortgage securities are trading towards the kind of the recent types we've seen over the course of the past couple of years. While saying that, the average price on our portfolio is approximately $0.67.

So we think that from an accretion standpoint over time, we have some reasonable runway which is going to help us accelerate the timelines on some of the calls. But the broader market as of today is not as interesting on seasoned legacy non-agency mortgage securities -- spreads are tighter -- there is a ton of capital being deployed in the sector. I think the technicals are such that likely if rates remain around these levels, we'll probably continue to perform extremely well.

Great. Thank you.

And your next question comes from the line of Bose George with KBW. Your line is open.

Good morning. I just want to start with one on the mark on the servicing advances. Can you remind us what drives that -- there was a negative mark last quarter. It was pretty positive this quarter.

Yes, so the servicing advance business is marked off the forward curve. So what happens is as forward rates trend lower, you're going to have a -- assuming everything else is equal, for example, if your discount rate is equal, you're going to have a lower mark in a quarter in which forward rates are lower. This quarter, the discount rate tightened. The forward rates were lower.

And as a result, the discount rate outweighed the forward rates as it relates from a P&L perspective. So I think the number was approximately the gain from the discount rate was about $25 million to $30 million. And I think the loss due to forwards was about $15 million to $17 million so net-net. There was a positive mark on the advance business.

Okay. That's helpful, thanks. And the discount rate, is that driven by market rates as well for you guys?

Yes.

Okay. Great. Thanks.

And then actually switching to the -- just on Ocwen's call, they noted that their higher interest expense to you guys will end at the end of this quarter. When we think about your economics there, is there an offset or any comment there?

You know, the companies and the way we look at earnings today and the way we look at forward earnings, obviously, we take into account everything including incentive payments from Ocwen or anybody else. So as we look at Q3 earnings and Q4 earnings, if there is no incent and payment from one of our servicing partners, that is factored into how we look at the go-forward business.

Okay. When we sort of think about modeling that basically that whatever -- that payment to you is no longer part of the earnings trend.

Correct.

Okay. Great.

And just one more. Can you just comment on the excess liquidity that you had? You noted you paid down some of the servicing advances. Can you quantify how much excess capacity you guys have?

Yes. Including all of our -- when we quote excess liquidity, we like to think about our ability to finance certain assets on our balance sheets. You know, we've been pretty vocal that we have an excess liquidity of coming into the quarter between $750 million and $800 million. Currently, we think we have excess liquidity of something around $500 million assuming that we did certain financings around some of our assets. Current cash on our balance sheet at the end of Q2 was $234 million.

Okay. Great. Thanks.

And your next question comes from the line of Jessica Ribner with FBR Capital Markets. Your line is open.

Hey, good morning. Thanks for taking my question. Two, they're just quick questions here. What can we consider kind of the real economics so to speak on the called loan securitization this quarter? Did you get those two points or are you seeing any benefits in the market from lower rates?

Jessica, it's a little bit of both. We did the $306 million deal in May. And including bonds accretion, it was at least two points quite frankly. And we expect the same going forward.

Obviously, we can't give forward-looking statements from a profitability standpoint. But based on past history and the way that we think about the business, we feel like we should be in a similar range as we go forward.

Okay. And then switching gears to the servicing expense, it ticked up this quarter pretty meaningfully from last quarter. How can we think about that on a go-forward?

On the servicing expense on -- are they consumer loans?

Yes, it's a loan servicing expense item.

Jessica, the increase is due to the consolidation of SpringCastle this quarter. This is the fourth quarter in which we're consolidating the results.

Got it.

So it's around the consumer portfolio, Jess.

Okay. I appreciate that. That's it for me. Thank you.

Thank you.

Your next question comes from the line of Michael Kaye with Citigroup. Your line is open.

Hi, good morning. So give me -- give us some clear progress this quarter on MSR licensing front, I mean -- but could the company really compete with some of the larger banks on more plain vanilla non-credit impaired agency MSRs?

Could we? The answer is absolutely yes. It comes down to price and whether it works for the company though. To be honest, I mean, we have -- in the past, we have not set out to buy a ton of clean new production agency MSRs.

Could that change with a 150 10-year treasury note? Absolutely. But while saying that, it got to work for us. Obviously the banks have a lower cost of capital than we do, but I'm not sure net-net. I would say we could compete whether it works for us or not, I'm not -- it depends on the portfolio. It depends on the seller. There's obviously a couple of different variables.

Okay. Fair enough.

You talked about the large $500 billion MSR acquisition pipeline. You talked about that last quarter on a three to six month horizon. I mean, what kind of hurdles or roadblocks are you seeing from getting deals actually done? Is it just buy and sell a fund in the right price? Is it right going toward hurdles or is it financing? Is there going to be like a specific catalyst to getting something done like someone going into some sort of significant financial distress?

I don't think there's any one thing that's preventing whether a seller or a buyer to consuming these transactions. I would say that obviously we're in the middle of a lot of this stuff. Our core business is to invest in MSRs. And I would expect us to be successful as we set out that timeframe of whatever -- three months or six months or -- one of the reasons to get licensed is to give us that flexibility to be able to acquire MSRs. So I think we're there.

Great. Thank you very much.

Thank you.

Your next question comes from Trevor Cranston from JMP Securities. Your line is open.

All right. Thanks.

A follow-up on your comment that non-agency securities are a little less attractive now because spreads are at relatively tight levels, can you just say what you think the expected returns are on the securities you were able to add in the quarter? And then second part to the question, are you guys expecting any change in the repo terms available on non-agencies with the money market fund reform coming up soon? Thanks.

So I had to relate to the -- our targeted yields still are -- what I would call 12% to 15% on the non-agency side and that is on a leveraged basis. That also -- when you think about what the true return is when we call those transactions, it is significantly higher than that. What we're seeing overall spread-wise is that for those of you that are bond folks, you're seeing senior security now trades roughly 250 over or 200 over, so the real leveraged yields on things like that are probably more in the upper single digits. So we have tended not to acquire those assets.

We will acquire them over time. Again, if the market gives us the ability, we think they add value to our call strategy. As it relates to the funding, I don't see any change. I think the banks are truly flushed with cash making essentially a secured loan against a non-agency security where we have called it -- 25% of equity -- in that security. I think it's something that the banks will continue to lend to us on.

We're also working with other types of funds to try to increase and broaden the types of financing arrangements we have. So i don't see any change right now.

Okay. Got it. Thanks for the color.

Your next question comes from the line of Jason Deleeuw from Piper Jaffray. Your line is open.

Thanks and good morning. And it's good to see the portfolio performing so well especially with the declining rates, and you guys did $0.52 of core EPS this quarter -- $0.49 last quarter -- $0.52 in the fourth quarter. So I'm just kind of -- and you've been building the non-agency call rights securitizations, I'm just trying to get a sense in your view, Mike, has the sustainable earnings power of the portfolio increased?

Yes. And the one thing I would point out, Jason, we come in every day saying how are we going to make money for investors and how are we going to maintain and grow our dividend? So in doing that, we try to stay obviously within our core asset groups. I do think that sustainability and the earnings power of the portfolio is extremely powerful. I also think that if we are able to do some of the things we want to do around some new potential acquisitions of MSRs and other things, that will only add to the sustainability and the earnings power of the portfolio.

It is a mortgage, so obviously they do amortize, so we have to continue to replace assets. But the net of it is the portfolio as it continues to grow will continue to kick off a lot of cash flow, and the sustainability I think is extremely powerful.

And is there any way to quantify how much of the core EPS is coming from the non-agency call rights securitizations at this point?

The core EPS for the quarter that's coming through is approximately $0.08.

Okay. And is there any way you can kind of give us a sense since the beginning of the year or maybe just a couple of quarters ago like how much is that increase? Just so I just think it would be helpful if investors could try and get a sense for how this asset class of non-agency call rights is actually contributing to the quarterly core EPS.

Yes. You know, Jason, let us go through some numbers. And then obviously in one of the follow-up calls, we can give you some of those numbers.

Clearly, as we accelerate the timelines of this, it's going to be a significant driver of earnings as we look forward. Clearly, we've been talking about this for a couple of years. I do think we're closer now than we've been in some time as these portfolios season more and advance balances come down.

But again, I think there is a broader market fix to get rid of or clean up what i would say some of these legacy loans that have been sitting in the pipeline for years, which will help us accelerate the timelines around the call rights. And it will be very good for quite frankly homeowners, for servicers, for anybody that owns bonds.

So it is a bigger fix but it is not something that -- it is something that we're ultra-focused on. And hopefully at some point in the near future, we're able to figure this out and it will be a bigger driver of earnings as we go forward.

Okay. That's great.

And then just the last question on the servicer advances and how you've been working with your servicer partners to bring those down, can you just help us kind of understand what you're doing exactly with your servicer partners to bring those advances down? And then just kind of give us a sense for how that benefits your P&L, I mean, my sense is lower interest expense on funding the servicer advances. But is it just that or are there other aspects on the P&L that benefit?

Yes, I think just to comment on the servicer advances, while we work with our servicers, obviously the servicers do what they have to in accordance with the underlying, pulling and and servicing agreements and how they need to service them. So I think that is truly on the servicer themselves.

Keep in mind, in advance is a cost to a servicer. And what we do is we provide equity capital to our servicer to the servicers -- to our servicing partners.

So they are incented to bring down advance balances as their interest costs go down significantly. As these portfolios season and as the servicers go through and say -- Okay, maybe that advance shouldn't have been made, -- or, -- Maybe we have the ability to call it back. -- That is work that I believe will continue to happen at our servicing partners, but we don't control that as it is a basic servicing function.

As it relates to the financing and what we do, I would say that there is a tremendous amount of financing available to us in the servicing advance business. That could be done via bank balance sheet, and then a lot of the larger banks that we all deal with are very much involved in that business. We are seeing some interest from insurance companies that are involved now in the business.

And then the third part of that is we could issue term notes and as -- if you think about it with fixed income assets from a yield standpoint, trending lower and spreads tighter, it does give us the ability to issue more term-like securities in the marketplace today than we have been able to do in some time.

So it's a combination of everything. I will say kudos to our team that works on the servicing advance business. And they've done a great job working with the banks and different servicing partners to get the lowest cost of funds as well as increase our advance rates on these different facilities.

Great. Thank you very much.

Thank you.

And your next question comes from the line of Fred Small from Compass Point. Your line is open.

Hey, good morning. Thanks for taking my questions. On the -- just one more on the call rights, guys, so you said -- did I hear you, right? You said $0.08 from the call rights strategy this quarter?

That's correct.

It seems like that the last time you disclosed the GAAP in core earnings from the call right strategy, which I think was in the preannouncement to the fourth quarter, and it seemed like the economics have improved just because you did less this quarter and made more from it. Can you explain sort of what's changed there?

Yes, I mean, Fred, we can get into more detail, but keep in mind, the more bonds we own at a discount, I pointed out earlier that our portfolio -- the weighted average market is about approximately $0.67 -- between $0.66 and $0.67, I believe. As you have more bonds, per deal, when you call them, it just helps from an accretion perspective, and that's going to add to our core earnings. And that's the way that I would think about that. And should you want to get into further detail, we could -- we're obviously happy to do that with you as well.

So you own -- when you put out, but not like the 291 I guess, that's just a gross number, not sort of the percentage of bonds that you own varies between the total numbers that you report. Is that what you're saying?

No. What is the 291, Fred?

Sorry. I thought that was the number in the release.

Oh, got it. Yes, it depends on the amount of bonds you own per kind of collapse or per securitization, I should say.

Okay. All right. Thanks.

Thank you.

And then your expectation -- what's your expectation on the annualized servicing expense from the consumer portfolio?

We expect that to be approximately $45 million.

Got it. And is it fair to take that as sort of a rate that annualizes as the consumer portfolio amortizes?

It will decline but it's a fair assumption.

Okay. Got it.

And you talked about the advance rates coming down. Is there -- do you have sort of an estimate of how much cash you've received from the reduction in advances or the reduction of the advances to UPB year-to-date or in the second quarter?

So the advance balances have declined approximately $1 billion since year end. If you think about it that our LTVs on those advances are in the low 90s, well then the return of equity is going to be approximately 8% on that reduction in advance loans because we have approximately 92% LTV. So $1 billion reduction in advance loans is going to be $80 million of return of equity.

Okay. Awesome. That's really helpful.

Two other questions though. One on the -- when you say you need help from other partners to clean up the non-agency market, can you give any more detail on sort of what you mean there?

Yes, I mean, I've been doing this a long time. I think that when you look back to -- the loans are created from 2003 to 2007, if you think about it. A lot of these loans are just sitting in these mortgage trusts. They're very stale.

I do think it's in the best interest of the industry to clean up a lot of this legacy -- these legacy assets that are sitting -- or these legacy loans that are sitting in there. And if you think about it from a benefit standpoint, it would benefit everybody from the bondholders, right, because you'll have some accretion on your underlying bonds that you'll own from a servicing perspective. The servicers would have much lower interest costs as a result of advanced balances going away.

I do think it potentially clears up some of the litigation -- this legacy litigation from the trustee standpoint and the rating agencies. So while we will embark and do all we can, I think a broader solution -- an industry solution will be more beneficial to the entire -- quite frankly the entire business -- not just NRZ but the broader mortgage market. So that's kind of how I think about it.

And do I think that there will be broad-based support for it? I would hope so because I think it would benefit everybody and homeowners as well.

Okay. Awesome.

Last one. Does the capability to own MSRs in all 50 states or service in all 50 states, does that sort of weigh on the decision at all whether or not you want to move Ocwen's servicing assuming that they don't get an S&P upgrade?

No. Listen, I think we've been pretty clear. We're doing this to give us more flexibility to acquire MSRs and work with different subservicers. And I think that is really the premise as far as why we're doing this. As you think about protecting our company, I think it also is an added layer of protection and I think it's as simple as that.

Great. Thanks a lot.

Thank you.

There are no further questions at this time. I would now like to turn the call back to Michael Nierenberg for closing remarks.

Well, happy summer, everybody. We appreciate all of your support and look forward to updating you on Q3 in October. So enjoy the rest of the summer. Thank you. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.