Rithm Capital Corp (RITM) 2017 Q2 法說會逐字稿

Good day. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Residential Second Quarter 2017 Earnings Call. (Operator Instructions) Thank you. Mandy Cheuk, Investor Relations, you may begin your conference.

Thank you, Jack, and good morning, everyone. I would like to welcome you today to New Residential's Second Quarter 2017 Earnings Call. Joining me here today are: Michael Nierenberg, our CEO; Nick Santoro, our CFO; and Jonathan Brown, our CAO. Throughout the call, we're 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 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 today's call. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings supplement.

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

Thanks, Mandy. Good morning, everyone, happy summer. So I'm going to give a few opening remarks, and then I'll refer to the supplement, which has been posted online.

So there's obviously plenty to discuss from our recent Ocwen announcement to the trustee holdbacks and more broadly the ever-changing macro environment. Our second quarter results were terrific as our core business lines continued to perform well. Our acquisition of the full MSR from Ocwen and the subsequent servicing agreement with Ocwen is very good for both companies. The results of this transaction is one which is accretive to our earnings, protects our servicing assets, helps us de-risk, and continues to solidify our role as one of the leading capital providers to the servicing industry.

Our call business and the acceleration of our calls has been terrific. Our bond portfolio has an unrealized gain of greater than $300 million as of the end of 6/30. In the MSR space, valuations continued to increase and our investments made earlier in the year have been good ones. While housing numbers have been very strong, our MSR portfolio has performed better than the broader industry as both the composition of our portfolio and the recapture agreements we have in place with our servicers have led to slower speeds and better performance. In the opportunistic sector of our investment portfolio, the consumer deal that we've done with Prosper has been a very good one. The SpringCastle transaction continues to perform much better than our initial underwriting.

I'll now refer to the supplement, and I look forward to giving you more details on our business. So if everybody could flip to Page 2, that would be great. Page 2 is really just an overview of our business. We've changed the slide a little bit from our last quarter. And if you take a look to the left, what we want to do is just highlight a couple of obviously our very large investments in our business.

One is we now own $553 billion of either excess MSRs or full MSRs. We have call rights on approximately $160 billion of the legacy mortgage market, which is 30% to 35% of the outstanding balance of that sector. We continue to target mid-teens returns. When we think about our portfolio and we think about the interest rate environment we're currently in, we have protected our funding risk with hedges in the front end in short-dated swaps. And when you think if rates go up, our MSR portfolios will continue to increase in value. If rates fall, our call business will continue to bear fruit for investors.

As we think about dividends and how we size our dividend for investors, this is the second consecutive quarter of a dividend increase for investors. We increased our dividend from $0.48 to $0.50. In our life-to-date, we've paid out over $1.4 billion of dividends. As you think about the housing market, it's currently $24 trillion. We bring up that number because we believe there's always -- there will always be strategic investments that we could make on behalf of our investors.

As you flip to Page 3, obviously we've had a very strong quarter. Our GAAP net income of $322 million for the quarter or $1.04 per diluted share. Core earnings, $318 million or $1.03 per diluted share. And again, we increased our dividend from $0.48 to $0.50, and paid out $154 million in dividends for the quarter. Our shares outstanding stays the same from Q1 of 307 million shares.

Page 4 is just a slide on our dividend, how we continue to show the increase in dividends from when the company first went public in Q2 of 2013 to today. Again, we've paid out $1.4 billion of dividends.

Page 5. I want to spend a minute and just talk about our investment portfolio. If you take a look to the right side of the page, our excess MSR and MSR investment from an equity perspective is approximately $1.7 billion. If you recall going back to a couple of quarters prior to that, we had begun putting some debt on our MSR investments, so our total investment in the asset class is approximately $3.5 billion. And we continue to target lifetime net yields of between 12% and 18%.

This quarter, you'll notice an advance in our servicer advances from an equity standpoint. This is not due to advance balances going up. In fact, advance balances went down. This has to do with the recent announcement of the Ocwen transaction. So our equity went from $96 million to $202 million as of the end of 6/30. On our residential securities and call rights business, you could see a large increase in the amount of equity we continue to deploy year-over-year into that sector. We currently have $1.5 billion of equity in the non-agency sector. As I pointed out earlier, our non-agency bond portfolio has an unrealized gain of greater than $300 million.

In the residential sector and consumer loan sector, our equity increases as we continue with the velocity of our call business. Currently, we have $595 million of equity between residential loans and our consumer loan business. Just to give you a quick breakout, it's approximately $450 million on the residential side. And on the consumer side, it's about $150 million between Prosper and the SpringCastle equity that we currently hold. As of the end of 6/30, we had a cash balance of $560 million. A large amount of that was attributable both to the funding of PHH, which we did in the first week of July.

I'm now on Page 6. As we talk about Q2 and subsequent highlights, in the quarter, we acquired or agreed to acquire $115 billion UPB of mortgage servicing rights. $110 billion of that was the announcement of the Ocwen transaction, which I'll spend a few minutes on shortly. And then we purchased another $5 billion from a couple different counterparties. During the quarter, we executed cleanup calls on 52 seasoned non-agency deals totaling $1.4 billion. We completed 3 non-agency securitizations totaling $1.9 billion during the quarter, generating $26 million in gains. We also purchased $1.5 billion face amount of non-agency RMBS, which increased our net equity by $170 million during the quarter.

On the servicer advance segment, quite frankly fairly quiet, but the one thing I want to highlight here is advance balances continued to decline. So from Q1, our advance balances were $5.2 billion. Q2, they declined to $4.8 billion. This is the largest quarterly decrease in advance balances we've seen since we made investments in this asset class. We expect future upside as advance balances continue to decline, the portfolio seasons, and delinquencies decline on the overall portfolio. On the residential loan business, we completed our first re-performing loan securitization totaling $228 million. We also acquired $650 million of high coupon performing loans that we expect to generate an IRR well north of 15%. And again, on our dividend, we increased our dividend from $0.48 to $0.50.

On Page 7, we want to spend a little bit of time talking about our call business. And then in some of the ensuing slides, we'll talk about the trustee holdbacks. On the left side of the page, you'll see we have access to $160 billion of mortgage loans. This is done via our ability to call transactions. When we think about this, we continue to work with mortgage servicers, trustees, and other bondholders to try to clean up the legacy mortgage market. Our call strategy provides us with access to long-term pipeline of residential mortgage assets. And quite frankly, we probably control more collateral than any other industry participant in the marketplace.

Around our call strategy, call volumes are up 126% year-over-year. Our execution continues to be very good. We've seen mortgage spreads tighten. Overall economics continue to be, for the most part, in the 2 to 3 point range as we think about our call business. Over the first 6 months of 2017, again our call volumes are up 126% compared to 2016. To date, NRZ has executed clean-up calls across 260 different mortgage-backed deals with an aggregate UPB of $6.5 billion. On the bond portfolio, we've grown that 107% year-over-year. We continue to invest in securities that are accretive to our deal collapses. As I pointed out, our non-agency equity has increased to approximately $1.5 billion. And our quarterly increase in book value or unrealized gains in that business is $156 million quarter-over-quarter.

As we think about our loan business, our loan business again will continue to grow for the most part, driven by our call strategies. From time to time, we'll make opportunistic investments in large pools of legacy mortgage loans. But for the most part, it will be driven around our call business. We continue to work aggressively with special servicers to offer mortgage homeowners loan modifications and solutions, which hopefully help the homeowner as well as shorten timelines and help us optimize our results through shorter liquidation timelines.

Page 8. Again, we talk about our bond portfolio quarter-over-quarter, again mark-to-market increase of $156 million. This is driven by continued improvements in quite frankly in fixed income assets across the board. I pointed out earlier, we purchased $1.5 billion face of non-agency securities at an average price of $0.67 on the dollar. And then if you look to the bottom right side of the page, it gives you a snapshot of other unrealized gains or carrying values. And then on the left side of the page, it shows by vintage the assets that we own.

Page 9. We talk about our call business. Year-to-date, we called 97 different non-agency mortgage deals with an aggregate UPB of $2.7 billion. Our call -- and as we think about how we're going to proceed on a forward basis, as the portfolio seasons, delinquencies continue to decline, advance balances decrease, we expect to continue to increase the velocity of that business. To give you a sense, delinquencies have declined 5% over the past 2 years from 21% to 16%. And then in the third quarter of '17, we expect to execute on $1 billion to $2 billion of call deals and other securitizations.

Page 10. We've gotten a number of questions over the course of the past couple of weeks on trustee holdbacks. And I thought it would be a good idea to spend a few minutes on this. Just to be clear, NRZ has no obligation to call legacy transactions. We own bonds. We continue to accrue interest income on the bond portfolios. However, if the economics do not work from a call strategy, we will not execute a call strategy. So what happened in June of '17, we executed a number of calls, where Wells Fargo was the trustee. Wells Fargo held back $94 million in reserves associated with 20 deals that we called that were legacy mortgage-backed deals.

Just to talk about our exposure to Wells for a second. On the left side of the page you'll see, we own $400 million market value of securities, where Wells Fargo was the trustee. Of those, we have 100 -- on those bonds that we own, we have call rights on 100% of those bonds. Currently today, none of those deals are economically viable to call. So what will happen is we will not call the deals. We'll continue to earn interest income on those bonds. Hopefully, they continue to perform. And it's our belief that Wells, like other trustees, will continue to compensate themselves at a normal course way for expenses associated with the way they run their business as a trustee.

So just to be clear, we don't have to call deals in which -- in where we own the bonds and we have the call rights. We'll call them only if the economics work for us. And one other point I want to make regarding that, overall bond prices continue to be extremely well bid or kind of unchanged from the end of Q2. On the right side of the page, you'll see our call right pipeline, $160 billion. What we try to do is break it out by different trustees. Just to be clear on that, different trustees hold back different amounts each time we call a deal. Our current reserves on trustee holdbacks as of 6/30 is $4.9 million in total.

If you go back to the prior slide, I believe we've called roughly $2.7 billion of mortgage loans so far in 2017. So overall, our strategy will remain the same. We'll continue to work with trustees as we call different deals. We'll make sure when we call deals that the economics work for our shareholders. And while this is -- and hopefully over time, we'll see that the noise around trustee holdbacks will abate in the markets themselves.

Now I want to flip to Page 11 and talk a little bit about the Ocwen deal. As we mentioned, I believe it was in May, that we had an agreement in principle with Ocwen to acquire the full MSR, purchase equity, and work with Ocwen as a subservicer on a go-forward basis. On July 23, NRZ and Ocwen signed a definitive agreement for the transfer of MSRs and subservicing related to approximately $110 billion UPB of non-agency MSRs. Once the MSR is transferred to NRZ, the subservicing agreement will replace existing agreements that are outstanding between NRZ and Ocwen.

For us, we believe the transaction is a very good transaction and investment opportunity for New Residential. One, we grow our full servicing portfolio and add $110 billion of MSRs. Now keep in mind, we already own the excess of this, so it's really the difference between the full MSR and the excess that we currently owned. Two, it eliminates market uncertainties. It helps de-risk our company. We believe it helps solidify and stabilize our relationship with Ocwen and helps Ocwen. And overall, we think it's very good for the marketplace. And then finally, it creates very good shareholder value as we expect the MSR purchase and the new subservicing agreements to be accretive to NRZ's future earnings.

On the bottom, we just list a couple quick terms. One, again we acquire $110 billion of the full MSR for approximately $400 million. That $400 million will get paid out over time as the PSAs or the MSRs transfer in name from Ocwen to NRZ. There will be no equity raised in conjunction with the $400 million as this funds over time. The $400 million payment will be financed via our existing MSR financing agreements with our bank counterparties as well as with the capital markets. We've also entered into a 5-year subservicing agreement with Ocwen. Effectively, the subservicing agreement goes where we're paying -- where the subservicing fee goes from approximately 26 basis points to 13 basis points. And then finally, we made a $13.9 million equity investment in conjunction with the announced transaction, where we're purchasing roughly 4.9% of Ocwen's common equity at a dollar price of $2.29 per share.

Now I want to talk about our MSR portfolio. Again, I pointed out earlier, our total portfolio is $553 billion. This includes both our full MSRs as well as our excess MSRs. We've listed on the top part of the page some of our recent agreements or announcements to acquire these MSRs. As we think about these MSR acquisitions, on the full MSR side, they've been very good ones. Clearly, we made investments when rates were lower, so the overall valuation of these MSRs are higher in price. And then when you think about our excess MSR and our full MSR, it's very difficult for someone to go out today and replace the $553 billion portfolio. On the bottom left, our excess MSRs continue to be the same portfolio of credit-impaired legacy non-agency MSRs, agency MSRs, and then again Ginnie Mae MSRs. On the right side of the page, on the full MSR side, we own Fannie Mae, Freddie Mac non-agency MSRs. Most of the recent purchases away from the Ocwen MSR had been on the agency side and they've been Fannie Mae and Freddie Mac MSRs.

Page 13, which is our usual slide, which says what sets us apart from the rest. I pointed out earlier, one, when you think about our MSR portfolio, every MSR transaction we enter into with a servicing counterparty we have what we call is a recapture agreement. To the extent that a homeowner pays off their mortgage or wants to refinance their mortgage, we try to recapture that MSR, one. Two, our average loan size is smaller than the industry standard. So when you think about our average loan size, it's $145,000 versus an average loan size in the industry of $185,000. Our FICO scores are lower than the industry average, and then we have more seasoned loans. So when you look to the right side of the page, for the quarter, the industry speeds were 18%. Our gross speed on the NRZ side was 15%. And our net CPR was 14%.

On Page 14, just talking -- 14 and 15, just talking about our consumer investments for a second. Again, these are investments that we will make when we believe that we could earn returns well north of 15%. So if you recall late last year and into the first quarter this year, we, NRZ, along with a 4-member consortium, which includes Jefferies, Third Point, and Soros, entered into an agreement where we're going to acquire up to $5 billion of consumer loans from Prosper over a 2-year time period. In conjunction with that $5 billion investment over time, we also get warrants, penny warrants in the company for approximately 35% of the company.

When we think about that, we continue to target again well north of 15% returns. The initial investment so far in the Prosper loans, both with the consortium and some loans that we acquired prior to the formation of the consortium, had been greater than 20%. The overall financing markets, we continue to do term securitizations in conjunction with the 4-member team. And then the overall financing markets, quite frankly even away from that, are wide open. And I think that overall rates will continue to trend lower on some of our financings. On the bottom part of the page, you could just have a quick snapshot of the amount of equity we have. In the Prosper portfolio, you could see on the -- for us, we have a total amount of equity of $26 million in our existing portfolio, and then another $45 million with the consortium.

Page 15. I'm not going to spend a lot of time. But we just want to keep everybody updated on our SpringCastle investment, a fantastic investment, lifetime IRR of greater than 90%. We've received $612 million of distributions versus a $230 million asset value, our overall equity investment of $330 million. And then our total life-to-date-profit is $512 million.

On the servicer advance portfolio, not a lot of activity. As I pointed out on the prior earnings call, we -- most of our financing activity we locked in longer-term fixed-rate financing with the expectation that the Fed was going to raise rates. So I'm not going to spend a lot of time on this slide. But overall, again we've extended maturities. 71% of our advance, that has maturities greater than 2 years. 90% of our advance that is fixed rate.

On the resi loan portfolio, currently we have $2.3 billion of loans, $462 million of equity. Our seasoned performing loan now is almost 50% of our overall balance compared to 28% in the first quarter. I pointed out earlier in June, we acquired a $650 million portfolio of high coupon performing loans. And the return on that investment should be terrific.

Page 18. We just talk about how we are positioned for various interest rate environments. Again, spending just a minute on this, our excess MSRs and MSR investment will increase in value as interest rates go up. As we think about lower interest rates, we should be fairly neutral as our recapture agreements in place with our existing servicers should help protect the portfolio. And again, the smaller balance and the seasoned nature of our overall portfolio should continue to outperform the market.

Non-agency securities with higher interest rates, most of our debt is floating rate, so those will continue to go up in value. Lower interest rates, as we issue fixed-rate debt, overall yields will be lower, our cost of financing will be lower. Servicer advance, as I pointed out, we locked in most of our servicer advance financing to fixed-rate longer term. Then on the consumer loan portfolio, the SpringCastle portfolio has been outstanding for quite some time. That will continue to perform well. And then on the Prosper loan, so far again, initial returns have been well north of 20%.

Finally, on 2017. The one thing I want to point out as we think about our MSR investments, we've made quite a few, where our MSR investment now is $553 billion portfolio or about $3.5 billion gross investment value, including our financing. We don't buy every MSR that's ever sold. During the quarter, I think we passed on about $80 billion of MSRs that were shown to us. So we're very thoughtful on how we deploy capital. We're very thoughtful on how we think about raising capital. Going forward, we'll raise capital when we have something that we think we need to raise capital for. Currently, the portfolio kicks off about $90 million once we fund all the Ocwen MSRs. So it will kick off $90 million a quarter in free cash flow. So overall, we think that we're in a very good position barring some unforeseen investment to continue to operate our company in the same way that we've been throughout the quarter.

So overall, again I think a very good quarter for us, quite frankly a little bit of noise around the trustee holdbacks. Getting the Ocwen deal was a terrific effort quite frankly by our team and the Ocwen team. There's always negotiations that go on, on these things. And we continue to solidify our relationship with Ocwen around subservicing agreements and hopefully doing future business together.

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

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

Very good quarter, but I just wanted some help in sort of mapping the beat versus the last quarter, just some of the pieces. Can you just start with just the clean-up call benefit? I think you said it was $0.09 last quarter. How does that compare to what you guys did this quarter?

Yes. On the clean-up call, clean-up call has added about $0.06 for the quarter versus $0.09 last quarter. Now one of the things I want to point about that is on our last batch of calls that we did around the Wells transactions, we did those in conjunction with another counterparty. So the overall economics, rather than be -- when we think about economics being something in the 2 to 3 point range, I believe the economics on that deal were approximately 1 point for us.

Okay, great. And then I mean, there's obviously a big increase in interest income. Just in terms of the difference between last quarter, can you sort of walk through some of the drivers of that?

Yes. The biggest part of that, Bose, is on the Ocwen side. Overall, if you take Ocwen out of the numbers, the core business and core earnings were, give or take, around $0.50 to $0.51. The addition of the Ocwen agreement, as we thought about it for Q2 earnings, the way the company was modeled on a go-forward basis, our initial subservicing fee that we were paying was 26 basis points. In Q2, in June, we had multiple quotes that gave us subservicing quotes of 13 basis points. So there was a change in assumption in the model, which is a retro adjustment. And overall, that ended up adding something around $0.50, low 50s. So that's how you go from the low 50s to $1.03 or $1.04 for the quarter in Q2.

Okay, great, that's helpful. And then just in terms of when the lower fee goes into effect, is that in 2020, when the initial subservicing agreement expires, and then the new fee kicks in? Or how does that work?

It will go into effect as we fund the initial -- as we fund the full MSR. So as the PSAs transfer into our name, the full effect of that will go from 26 basis points to 13 basis points. So once we give Ocwen the money and we get approvals from the various trustees, rating agencies, et cetera, your subservicing cost or your servicing cost will go from 26 to 13 basis points.

Your next question comes from the line of Jessica Levi-Ribner with FBR.

A couple of follow-on questions from Bose. And then now with this adjustment from Ocwen, how can we think about the dividend policy and kind of core earnings on a go-forward?

I think -- or I think we size our dividend based on the way that we see our future earnings on a go-forward basis. While we don't give earnings guidance, we wouldn't raise our dividend unless we thought we could support it. As we think about this on a go-forward basis, I would assume for now that the dividend policy will remain in effect and we will continue to pay $0.50 on a go-forward basis.

So you don't see core kind of matching this quarter's number in the third quarter?

Of $1.04?

Yes.

No, the third quarter will be probably a little bit higher as well as the PSAs, again as we transfer the PSAs into our name. But overall, again we'll continue to pay $0.50, we believe, in our dividend. And that will correlate to what we think core earnings will be hopefully in the north of $0.50.

Okay. In terms of the advance balances, what drove the decline this quarter?

I think the seasoning of the portfolio, some more callbacks from the various servicers. As delinquencies trend lower, you'll have less advances outstanding. And that's really it.

And then on the current cash balance, how do we think about that pro forma for the PHH funding?

Well, PHH is already funded. Currently, as of today, we have north of $200 million in cash. When you guys think about our cash balances, we keep various reserves. One, for mark-to-market, we have a couple of different requirements with FHFA around reserves under MSR portfolios. But today, we have north of $200 million in cash before all our different reserves.

Okay. One last one for me, just in conversations with the trustees, you mentioned they're expecting to call another $1 billion to $2 billion this quarter of bonds. In conversations with the trustees of those bonds, do you have any indication of how they're going to reserve or if they're going to reserve at all?

We're assuming that it will be normal course business, the way they have been reserving. Just to be clear, trustees continue to -- trustees take cash flow from the waterfall every month on outstanding non-agency mortgage bond deals that are in the marketplace. I think as it relates to the Wells deal, being that we called all these deals -- and again I'm not going to speak for Wells or speak to the litigation around that. But being that there's no more cash flow that's going back, we called the deal, we reissued securitizations. I believe what Wells did say, being that these deals no longer exists, we're going to take x amount of dollars per loan. And that's what Wells did. Just to be clear on that deal, for NRZ, we owned 1 mortgage bond that was associated with that deal. So even though we own Wells deals, there could be times where we call -- we'll call the way a Wells calls. We will call legacy non-agency deals if we feel the overall economics work. So it's our anticipation during the quarter and going forward that we'll continue to be very active around our call business. There will be some nominal amount of holdbacks that the trustees will do to compensate themselves. And hopefully, it's business as usual.

Your next question comes from the line of Kevin Barker with Piper Jaffray.

In regard to the Ocwen deal, could you talk about the potential accretion of that deal once all the mark-to-market adjustments on the model have been completed post third quarter and where -- what the expected accretion will be ex other investments that you're doing?

Yes. So are you asking for forward guidance, Kevin?

Not forward guidance, but what your expectation is for incremental investment income off of the Ocwen deal.

I think it's kind of -- again, I don't think it's any different than what I tried to articulate with Jess. We size our dividend at $0.50 because we believe we could pay that for several quarters as we go forward. Clearly, the deal itself is accretive to how we run our business. Without getting too specific because I don't want to get specific, and then all of a sudden, next quarter, you say, "Well, you said this," and this is what we delivered, we believe based on our current business model and the investments both in Ocwen and everything else that we'll be able to sustain a $0.50 dividend as we look forward. And I think that's kind of without getting too specific around it.

Okay. Well, back of the envelope, just looking at the investment, it appears that off the servicing fees are -- incremental servicing fees that are being generated off the deal, you should be able to attain a ROE above 20% off of that deal versus your current run rate on a core basis closer to 15%. Is it fair to say that the incremental ROE will be well north of 20% on the equity that's allocated to the Ocwen deal?

Yes. Well, here's the thing, right, we're actually paying -- think about it this way for a second. We're paying $400 million for a pool of $110 billion of MSRs. It's not being funded with equity, it's being funded with debt. So the overall cost of debt, when you think about MSR financing, and we have plenty of that, is, give or take, about LIBOR plus 350 to 400 right now. So with LIBOR being roughly 120, you're thinking -- you look at a cost of funds of something between 4.5% and 5%. So then if you take your 26 basis points, we go from 26 to 13, so your overall return on equity should be north of 20%.

Okay, that's helpful. And then could you speak to further details around how much UPB could be impacted from the Wells Fargo trustee holdbacks and the potential impact for the overall non-agency MBS market in your view?

Well, talking about it from our perspective, we own $400 million market value of Wells bonds. Currently, none of those are in the money, so we're likely not going to execute any clean-up calls on that. We have clean-up calls in about $18 billion of Wells outstanding legacy non-agency mortgage securitizations. Of that $18 billion, I believe we acquired with a partner $5 billion of those call rights, where there's no obligation, we didn't pay for them, but there's no obligation for us to call those deals. So as I think about Wells, it's in fact the deals are in the money, and we can make it work in light of -- depending upon what Wells' strategy on a go-forward basis is on holdbacks, we'll accelerate some of those calls. I do think if we all take a step back and think about the legacy non-agency mortgage market, this stuff has been outstanding for better than greater than 10 years. It would be in the industry's best interest if everybody got together to figure out a way to collapse all these deals in conjunction with the trustees, the banks, and bondholders, because bondholders would have some good accretion, other than probably some of the lowest-rated holders of notes. And that could be a very good thing going forward. I wouldn't be surprised if we see some momentum towards that as we go forward. I've been very vocal on prior earnings calls, to clean up the legacy non-agency mortgage market is not just a New Residential thing, I think it's an industry thing. Obviously, in light of when Wells did the $94 million holdback, there was additional litigation that was filed against Wells by a large market participant. So I just think that the net of all this stuff that would be very -- it would help the market if everybody could get on the same page and figure out a way to kind of clean up these deals, lower advance balances, get servicers in the right place, help homeowners. And I think the result would be very good for, quite frankly, everybody.

Do you see the market being receptive to going along and doing something like that? Or do you feel like it's a -- there's a lot that needs to be done to get there?

Yes. No, I think -- listen, I think there's a lot that needs to be done. Do I think market participants for the most part would be receptive? I do. But it's a big effort. Everybody has got their own interest. The bottom line is if you call the legacy non-agency mortgage bond market, it will be very good for bondholders, trustees, mortgage servicers, homeowners, everybody. So hopefully, we get to a place where that happens. In the meantime, we'll continue to operate our business the way that we do. And I think -- and hopefully generate good-sized returns, good outsized returns for shareholders.

Your next question comes from the line of Fred Small with Compass Point.

On the, I guess, the accounting change in the quarter related to Ocwen, can you say what the actual dollar figure that flowed into interest income from that was?

Fred, it was $158 million, and then a change in assumption.

Okay. And is there an offset on that somewhere on the expenses? I think subservicing expense or loan servicing expense moved up a bunch. Is that related to the same adjustment? Or is that different?

No, in terms of subservicing expense, that's just resulting from our increase in our MSR book.

Okay, got it. So there's no offsetting adjustment in the expenses on the accounting change with the Ocwen assets?

On a core basis, no. There is some noise in tax on a GAAP basis.

Okay, got it. And then maybe can you just explain what the accounting change was exactly? I mean, I understand what the deal is going forward. And so it was just you had to retrospectively look back and change numbers on the assets you're going to acquire? Or what's the right way to think about it?

Prior to 6/30, we were assuming that post 2020, the servicing fee of 26 basis points would continue for the life of the asset. At 6/30, that assumption was decreased to 13 basis points. And because of the retrospective accounting, you essentially have to look back and adjust earnings through interest income, which generated $158 million increase.

Okay, got it. And then just on a -- do you have an estimate of, I guess, what cash earnings were, what cash earnings were in the quarter?

Cash earnings after our dividend ran about $60 million.

On Slide 10, where you said that 0% of the deals where you own the Wells bonds, 0% of the deals are economically viable to call. Is that assuming that Wells takes significant reserves when you call the deals? Or is that just that you've executed all the Wells deals that are -- the clean-up calls related to Wells deals that you felt were accretive in the first place?

Yes, it's the latter, Fred. Overall, forget about Wells holdbacks. If you look at the economics between advance balances and delinquencies, it currently does not work for us to call those deals today. As we go forward, we'll see what happens. But for now, it pays -- they're not callable.

Okay, got it. And I guess then just a big-picture portion of this, when I look at sort of the -- I mean, you've diversified counterparties in terms of servicers or subservicers that you're working with over the past year. But it seems like a lot of those counterparties are struggling. How do you think about that market and how it evolves over time? Do you think that we need to see additional consolidation there? And just given sort of the amount of assets that are out there, how many nonbank servicers do you think there can be sort of viable out there in the market?

Yes, I think it's a good question, Fred. I think that -- a couple of things. One is obviously we have exposure to a number of these different folks. Some have announced changes in their business model as it relates to our relationship with Ocwen. We think the deal with Ocwen is very good for both of us. Ocwen gets a lot of cash. I know Ron and his team are working really hard to -- with the different folks to get themselves sorted in the right way. Nationstar is clearly, those guys have done -- Jay and his team have done a very good job. PHH has announced a different strategy on a go-forward basis. And then Walter is dealing with obviously their own issues at this time. Do I think there will be more consolidation? I do. As we think about NRZ, which is what we need to think about, the one thing I want to be really clear on, and I pointed this out before, we are not going to buy every asset that's for sale just because we own a lot of MSRs. The other thing that we are extremely focused on is performance. So when you think about our MSR asset, how do we get performance out of our MSR asset? One is you've got roughly a 2.30% 10-year Treasury, which is kind of, give or take, unchanged quarter-over-quarter. I do think underwriting guidelines will get easier from a macro perspective as we look forward. So I think you could see a fair amount of originations. So what do we need to do? We need to work with the best possible servicers and originators to figure out a way to recapture every MSR that we possibly can so we mitigate prepayment risk for the portfolio. So I do think you'll see some consolidation going forward. Yes, we have exposure to a number of different counterparties. We're hopeful, quite frankly, that a number of them gets sorted out. And we know, based on conversation, and we have very good relationships with all of them, that everybody's working hard to get to the right place. So we'll see what happens. But it's our hope that everybody gets sorted out. But we need to protect our portfolio.

Okay, got it. And then maybe just one last accounting one, on the change in AOCI in the quarter, how much of that was related to -- I mean, was that largely driven just by writeups of non-agency book? Or is there anything else in there?

That's correct. It's the $150 million of writeups on non-agency.

Your next question comes from the line of Trevor Cranston with JMP Securities.

One more question on the trustee holdbacks -- and thank you for all the information on Slide 10, that's very useful. So when we look at the table on the right that shows the $52 billion of deals that are in trustee litigation and have 0 to 15% factors, can you say how much of your existing bond portfolio are securities that are related to that $52.4 billion?

In our bond portfolios, keep in mind, there's not 20 trustees. So it is a reasonable assumption to assume that we have exposure to all the trustees as the way that we show it here. While saying that, we continue to exercise clean-up calls with all of these trustees, including Wells, on a monthly basis. I pointed out where we expect to do another $1 billion to $2 billion of deals this quarter, we have some more calls that we're doing, that we did in July. We'll have more calls that we're likely going to do in August. We just priced a non-agency deal backed by some Wells collateral on Friday. So business continues. We're mindful of holdbacks. I pointed out earlier that we have reserves of $4.9 billion -- $4.9 million in total of holdbacks related to trustee litigation or trustee holdbacks, I should say. So we'll continue to execute our business in and around these. But I don't see anything that's going to change dramatically as we go forward.

Your next question comes from the line of Bose George with KBW.

Just to follow up on the Ocwen and the accounting. Earlier, you noted that the adjustment was related to sort of a look-back on the Ocwen portfolio. As the new pieces come in, what's the accounting adjustment that needs to be made related to the new pieces? And so just wondering if it's going to be not as meaningful just because the retroactive piece was a bigger component.

The accounting adjustment, Bose, came through in 2 pieces this quarter. There was the $150 million that came through on interest income. And you'll see that there's also roughly $56 million mark that came through on our GAAP. And that GAAP mark will eventually come through interest income over time.

And the $56 million mark, was that on the piece of the Ocwen that was already -- is already going to be funded or that's been funded in the third quarter?

No, what's going on for the second quarter is the cost of servicing post 2020, subservicing fee expense. And as once we convert to a full MSR, there will be an additional adjustment that will come through to mark.

And just to make sure I understand, the $150 million and the -- through interest income and the $56 million that's separate, are they being driven by the same thing and just coming through 2 different places?

Yes, they are driven by the same thing.

Your next question comes from the line of the Kevin Barker with Piper Jaffray.

In regards to the Ocwen deal, could you speak to some of the -- whether you still have rights to the downstream services regarding anything -- any of the servicing counterparties that Ocwen has?

Yes. So just to be clear on that, Ocwen has an agreement with Altisource for downstream services. When we entered the transaction -- when we did this transaction with Ocwen, it was always our intention to try to do the cleanest transaction and the best economic deal for NRZ possible. We continue to be clear we're hopeful that we will have an agreement with Altisource in the near future. There could be -- there's no guarantee, but I would tell you that we feel, and I believe Altisource would tell you the same thing, that they feel that we are very close on agreement. These things take time. There's a lot of negotiations that go back and forth. But that would be our expectation. Again, no guarantees, but that would be our expectation on a go-forward basis that, that agreement stays in place.

Okay. And then on another topic, in regards to future investments, you've obviously built up your MSR portfolio and your non-agency securities portfolio and executing on the call rights. It has been a massive investment over the last year. As you go forward, it seems like the amount of opportunities in non-agency MSRs is limited. Where do you see 6 to 12 months from now where your incremental investment dollar will be put? And where are the best opportunities will be to be able to generate 15% or more ROEs?

Yes, I think our call business is something that will continue to do extremely well. While saying that, if we take a step back and think about the landscape, non-agency mortgage bonds are trading at the tightest yields that we've seen in years. So we'll be strategic around investing capital there if we believe that the economics make sense. On the MSR front, I pointed out earlier that we have not bought every MSR shown to us and I don't expect that we will. I think the cleaner MSRs, you're starting to see a bit from the banks for cleaner MSRs. For us, we need to be mindful of again how we deploy the capital. I think we have a large strategic investment in MSRs today. And we'll continue to be active around the MSR investment. But we want to get performance out of our existing portfolio. The consumer space, I think, has been pretty interesting to us. We made a couple of strategic investments in the Prosper deal or the -- and like, we think, are still pretty interesting. There's a lot of noise around the consumer space in the subprime borrower, et cetera, so we'll continue to pay attention there. But I think the bigger thing to point out, Kevin, is that the housing market is $24 trillion. There's always something to do. And we want to be patient around our capital. I mean, we haven't gone out again. And one of the things that we hear, we just want to buy assets. But we have to take a step back and think about investment dollars. And I pointed out earlier, the portfolio will generate about $90 million a quarter free cash flow once we board the Ocwen deal. So we'll be patient. I think things change. All fixed income assets are trading extremely well. So to step in here and say we're going to buy something now is probably not the right idea.

I would now like to turn the call back over to CEO, Michael Nierenberg, for closing remarks.

Well, thanks for all the questions and the support. Clearly, a very good quarter, obviously noisy and trying to explain certain things, but we feel very, very good about our business. Again, just to echo what I just said, we're going to be very patient around capital, and how we deploy our capital. We're really seeking to get performance out of our existing investments, which will hopefully bear fruit for shareholders going forward. So look forward to speaking soon. Have a great day, and enjoy the rest of the summer. Thank you.

This concludes today's conference call. All participants may now disconnect.