Rithm Capital Corp (RITM) 2017 Q3 法說會逐字稿

Good morning. My name is Matthew, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the New Residential Third Quarter 2017 Earnings Call. (Operator Instructions) Thank you. Mandy Cheuk, you may begin your conference.

Thank you, Matthew, and good morning, everyone. I would like to welcome you today to New Residential's Third 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 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 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 will 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, and thanks for joining our third quarter earnings call. As you can see by the numbers, we had a terrific quarter. All of our business lines continue to perform very well. I'll break out by segments, and then when I'm done with my opening comments, I'll refer to the supplement, which has been posted online.

In our MSR segment, we announced the acquisition of the full MSR from Ocwen, agreeing to purchase approximately $100 billion of a full MSR. While we continue to work with Ocwen, the trustees, rating agencies and others to transfer the MSR into our name, we're taking all measures to try to expedite that process. Since we announced the transaction, we've currently transferred about $16 billion out of the $100 billion of full MSRs from Ocwen into our name.

As you think about the MSR asset in the portfolio, based on where we are in this current rate environment, the portfolio should do great as we look forward. Our bond portfolio had an excellent quarter as all fixed income assets are seeing very good demand. For the quarter, our portfolio had an unrealized gain of approximately $70 million, and our life-to-date unrealized gains in the portfolio are about $380 million. The velocity around our call business should continue to prove over time, as advance balances and delinquencies trend lower.

In the quarter, we did 2 nonagency deals, one which closed in Q3 and the other one which closed in early Q4. Total collateral securitized was $1.1 billion between both deals. Our consumer segment had a very good quarter as well, and we did one securitization on our Prosper loans. We have purchased $1.7 billion of loans from Prosper with our partners, and this is part of a $5 billion commitment we made last year.

In the advance segment, advance balances, as I pointed out earlier, continued to decline and totaled $4.3 billion. And just to give you -- put that in perspective, when we initially acquired all the advances from both Nationstar and Ocwen, the total was approximately $8 billion. So that's down very significantly. As we all know with the Fed in play in December, we feel our business is positioned extremely well for current times, and I'll now refer to the supplement, which has been posted online.

So I'm going to begin on Page 2. From a portfolio perspective, we have $533 billion UPB of MSRs. That's broken out between full MSRs and excess MSRs. Our excess MSR portfolio is approximately $190 billion and our full MSR portfolio is about $340 billion.

We have call rights on the legacy nonagency mortgage market of $155 billion. The legacy nonagency mortgage market today is a little bit greater than $500 billion, just to give you -- put that in perspective. We control more mortgage collateral, I think, than anybody in the marketplace today. And again, as delinquencies trend lower and advance balances trend lower, I think you could see acceleration of that pipeline and the cleanup of the legacy mortgage market continue.

As you know, our portfolio, overall, we target -- we try to target mid-teen-type returns, not very easy in this current market as I pointed out. Demand for fixed income assets is very strong right now. When we look across the portfolio and size our portfolio -- in various interest-rate environments, our MSR portfolio should continue to perform extremely well in a higher rate environment. And as we look at our bond portfolio, over 90% of our existing bond portfolio is floating rate.

Returns for the year on an annual basis are approximately 19%. We've had 2 dividend increases during the year. When you think about the pipeline and the large addressable market of whether it be mortgage collateral, consumer collateral or really assets and businesses that we invest in, the U.S. housing market is about $25 trillion and the consumer market is about $2.5 trillion.

As we look at Page 3, earnings for the quarter, GAAP net income, $226 million or $0.73 per diluted share. Core earnings, $199 million or $0.64 per diluted share. And we pay a dividend of $0.50 or $154 million.

Page 4 is a snapshot of our portfolio. What we did this quarter is we combined our MSR portfolio to show you the total amount of net investment on our MSR portfolio between excess and full MSR is $2.2 billion. The other part of that is financed. Currently, the MSR market is flush with cash from a financing perspective. So as you know, when we look at the MSR asset, there's times we'll fund it fully and there's other times that we'll fund it with financing from our -- whether it be our repo counterparties or do securitization in the market around the asset class.

Servicer advances, as I pointed out, continue to trend lower. Currently, we have $164 million of net investment in the asset class. As you go down, residential securities and call rights, we have a little over $5 billion of assets. 90% of those are floating rate, greater than 90%; and our net investment there is $1.4 billion.

On consumer loans, between resi and consumer, just to give you a break out there, $475 million of equity in the residential loan market. Most of that is due to our call business. We are opportunistic at times. We are not out in the market buying large portfolios of nonperforming loans or reperforming loans. Typically, we'll try to source one-off high coupon-type loan portfolios. And over the course of the past quarter, we've been able to do that with returns greater than 20%. And then cash as of the end of 9/30/17 was $280 million, and I'll talk to that in a little bit as well.

Page 5. For the quarter, quite frankly, the business performed like we believe it should have. Not eventful, continued to execute around our call rights, MSR portfolios continue to do well and the consumer segment, which became a little bit bigger as part of our business, continues to do well also.

So for the quarter, real quickly, we agreed to acquire, as I pointed out earlier, roughly $100 billion of nonagency MSRs from Ocwen, purchase price about $400 million. We also agreed to acquire $3 billion of flow MSRs during the quarter. We executed cleanup calls on 43 season nonagency deals with around $1 billion of collateral. And then during and subsequent to the end of the third quarter, we completed 2 nonagency securitizations of $1.1 billion.

During the quarter, we purchased $435 million of nonagency mortgage securities, bringing our net equity to about $1.4 billion as of the end of Q3. In servicer advances, advance balance continued to decline meaningfully. I pointed that out before, down 32% year-over-year to $4.3 billion as of the end of the quarter, that's down from $6.3 billion, to give you a sense, as of the end of 3Q in 2016.

Total outstanding advance balances versus UPB are about 2.6%. So that's some of the lower numbers that we've seen in years. On the consumer loan side, Prosper, I pointed out earlier, we did the securitization with the consortium group. And then we have a small amount of our own Prosper loans, net-net, life-to-date IRRs are greater than 20%, and then the SpringCastle securitization which continues to perform extremely well.

On Page 6, just taking you through the call rights. $155 billion of call rights on a legacy mortgage market of about -- little greater than $500 million. Story is the same. Work with servicers, trustees and bondholders to clean up the legacy mortgage market. We buy bonds that are associated with our call rights.

As I pointed out earlier, again, asset prices and yields on bonds are not very attractive right now. However, to the extent that we could acquire assets where we have the call rights, we'll continue to do that, thus the investment in the third quarter of about $400 million of bonds.

And then as you look at the strategy, we call the deals, we liquidate the nonperforming loans in the REO and mark those to market, and then we come out into the market with a securitization. Again, very straightforward, we continue to -- the business lines, overall, nothing really that different from last quarter.

On Page 7, our nonagency security and bond portfolio, as I pointed out, third quarter mark-to-market increase of about $70 million. Purchased $435 million at an average price of $0.59. I think the average price of the book is, give or take, $0.70 right now. Quarter-over-quarter, the value net-net of paydowns increased by $58 million. And again, roughly 90% of the nonagency bond portfolio or greater than 90% of the nonagency bond portfolio is floating rate. So as rates go higher, particularly in the front-end and you see LIBOR go higher, we're going to earn more net interest income on our bond portfolio. So very happy with that.

Call business, I pointed out, we did -- on Page 8. We did 2 deals in the quarter, $1.1 billion, 1 settled in Q4, 1 settled in Q3. We'll continue to hopefully accelerate our call business over time. I would anticipate us doing one deal in the fourth quarter, and again, the drivers are lower delinquencies, lower advances, and then from a bond standpoint, more discount bonds and seeing bond -- overall, loan prices go higher.

Page 9. Our MSR portfolio, again, $533 billion. I think this is a fantastic portfolio. Based on what we're seeing in the market and some of the Fed chatter, I think we'll continue to grow around some of our newer production MSRs and to the extent that we could source some legacy MSRs, we'll do that. Full MSR portfolio $343 billion, excess $190 billion during the quarter. Very quiet, we've actually passed in a couple of portfolios because we didn't think that it met our investment parameters. I point that out because we are not going to go out and buy every asset that we see in the marketplace.

Page 10 talks a little bit about why our MSR portfolio and why our bond bit -- why our portfolio is a little bit different. Average loan size smaller, FICO lower, very, very seasoned. When you look at our speeds, industry average, 17%, NRZs with 13% gross or 12% net. So our portfolios continue to outperform the market, that's due to the nature of the portfolios as well as having recapture agreements on our entire portfolio.

On Page 11, this just talks to the Prosper investment. We are part of a 4-group or 4-firm commitment to purchase $5 billion of loans from Prosper. It's us, Third Point, Jefferies and Soros. As I pointed out earlier, we purchased a little over $1.5 billion; as part of the investment we got warrants in the company. As we fund the consumer loans over time, we'll earn those warrants. So far, as I pointed out, life-to-date returns are greater than 20%. While it is early, we expect that investment to be a very, very good one.

Page 12 is just our SpringCastle investment. I'm not really going to spend time on that. I'll spend 2 seconds. Life-to-date IRR greater than 90%. We received a life-to-date profit of greater than $500 million. We continue to monitor that portfolio as it pays down. At some point, we may look to refinance it, but we're very happy with our current cost of funds.

Page 13 just talks -- shows the slide of our servicer advance portfolio. As we pointed out, it continues to pay down and go lower, currently $4.3 billion of advances funded with $4 billion of debt, roughly 93 LTV. If you recall, going back to last year, we actually termed down most of our servicer advance portfolio into fixed financing because we were concerned about where the short end of the curve would go, as it related to rates. And that -- quite frankly, that was a good decision or it's a good decision today as we look back in time. I think our next expected maturity on that portfolio where we have to roll that is 2018.

On Page 14, that is our residential loan portfolio, currently $2.6 billion. Roughly $1.4 billion of the portfolio is performing. Again, returns on that portfolio continue to be very good between 15% and 20%, and we would expect that to continue. Philosophy there, once again, we're not out -- unless it's an opportunistic investment, buying large portfolios and loans unless we think the return hurdles meet our 15% to 20% returns. Most of the stuff we're seeing in the marketplace do not.

On Page 15 this talks about our portfolio. In higher and lower interest rates, MSRs are going to do great as rates continue to rise. Our nonagency portfolio should continue to do well because over 90% of those are floating rates. Servicer advances will become less relevant as the legacy mortgage market cleans up. And then on the consumer loan portfolio, the coupons are high enough. So that portfolio should continue to do well.

As we look forward, quite frankly, I think it is going to be more of the same. We're not going to deploy tons of capital in lower yielding assets in this rate environment. I think our pace of investment, if you look back to the third quarter, has absolutely slowed down because, quite frankly, we are cautious. Little bit of concern about the markets and where the equity markets are and where we think the rate markets are headed.

We have plenty of capital right now. And we look forward to opportunistic investments and other potential opportunities in the marketplace as we go forward. The MSR pipelines, we're working on a few different scenarios or transactions that we hope we can get done over the course of the next quarter. So stay tuned.

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

(Operator Instructions) Your first question comes from the line of Jessica Levi-Ribner with FBR.

What -- in terms of the call rights, what have you been -- what are the discussions around the legal reserves with the trustees? And how can we think about that in the next quarter or so?

Just to give you a sense, yesterday, we settled on 11 different deals that we called for the month of October. To the extent that we have to take reserves, we -- or the trustees require reserves, we do that. If you think about the amount of deals that we've done, life to date, our current total holdback by trustees is $6.3 million in total. So to the extent that the trustees are holding back capital, we'll take the appropriate reserves on our balance sheet.

But so far, it's been a, I would call, a small amount on a relative basis as it relates to our existing business. While saying that, we continue to work with the trustees and figure out solutions for the overall market. We work with trustees, bondholders, rating agencies, et cetera. So overall, again, $6.3 million on a total call population that we've done so far of, I think, north of $2.5 billion-plus.

Okay. As it relates just to the MSR pipeline that you talked about, are you looking more at nonprime or legacy MSRs or new issuance? What does the market look like for both today?

There's a couple nonprime portfolios that we're working on. Whether that happens -- it's not happening today. But whether it happens in the fourth quarter or the first quarter, I think there's stuff to do there.

As it relates to the new production stuff, I did point out that we passed on a couple large portfolios during the quarter. I think part of -- I think where we are from a company perspective, we do have the view that the Fed is going to continue with rate hikes. We do have the view that interest rates are likely headed higher. As a result, we think the MSR asset is a great asset. So we'll continue to look at all types, quite frankly. And I think as we look at our pipeline, there's a couple of things that are visible, but I think we'll have the opportunity to source more over time.

Okay. And just one last one, in terms of the FHA comments from -- that came out of the MBA conference, do you think there's opportunity there for you, especially if they kind of remove the threat of the False Claims Act on lenders? And how that could fit with your overall business model?

Yes. I think the mortgage market or what's going to happen from a regulatory standpoint will continue to evolve. I think some parts of that are extremely good for us. And I think other parts, quite frankly, you're going to see the banks become more active. And we've seen that in acquiring certain types of assets, particularly on the clean MSR front. As it relates to the FHA stuff, I think that it will create opportunity for us as we go down the road. So yes, I think there should be some good opportunities for us.

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

First, just can you give us the contribution from the cleanup calls? And whether that was through gain on sale or interest income or how that came through?

The total amount for the quarter was approximately $0.05.

And does the breakout of how that -- the line items, where that came through?

For core, it would come through on the interest income line.

Okay. And then just in terms of the returns for the quarter, I don't know if you have it handy, but is there kind of a way to break out your returns, just between the buckets like what the MSRs did, the consumer loans did, the other sort of areas that you are driving capital from?

Yes, listen, we could approximate. If you think about the MSR asset itself, we're marked, I think, give or take, between 8% and 10% on an unlevered-yield basis. If you think about it, we have $2.2 billion of equity committed on roughly a $3.5 billion investment. So with some leverage, you could assume that the returns overall will continue to be in and around the mid-teens.

I think on the consumer stuff, it's going to be, again, between 15% and 20%. So far, early returns are north of 20%. Bonds are just -- the bond portfolios are not that interesting, quite frankly. We'll see better numbers as we continue to call those, and I think that's where you see the $0.05 that Nick just alluded to. And then on our loan portfolio, the existing loan portfolio, it's about 15% -- 15% to 20% on a levered basis.

And on the loan side, how much capital is in the Prosper investment so far?

It's pretty negligible. In the $1.7 billion that we issued -- or the $1.7 billion that we acquired, we continue to do securitizations for the amount of capital on those. With the 4-person consortium including ourselves is very low. Total equity for the consortium, just so you know, is $46 million. So if you break that down, it's next to nothing. On our own portfolio, we have about $100 million of legacy Prosper loans. And I think the amount of equity on that is between $15 million and $20 million total.

Okay. Great. I have just one more on the agreement with Altisource during the quarter. Is the benefit from that going to come through just in future earnings? Or was there any sort of mark related to that?

For core purposes, it will come through in future earnings. For GAAP purposes, you will see a mark as we onboard the Ocwen transaction.

Okay. So -- but that mark will happen over time since it will -- I guess you did $16 billion, but it'll be over the -- whatever, 2 or 3 quarters that it comes on?

That's correct.

Your next question comes from the line of Jason Weaver with Wedbush.

So on the advance balance, the UPB ratio of 2.6%, I'm pretty surprised at how fast that's come down. Can you gauge historically as to where we are and where that could possibly go? I mean, I thought we'd be close to a floor, but apparently it's coming down.

I think as the -- Jason, I think as the consumer heals, you're going to see less advance balances because delinquencies will continue to trend lower. The consumers will do -- the consumer will do better. And whether you have loan mods or you have just a healing consumer, those advance balances will continue to trend lower.

Now to the point of the question, where can we see this go? It's really hard to tell. If you think about it from a servicer perspective between both Ocwen and Nationstar, it's really a cost of capital for them. So as we clean up the legacy mortgage market and -- that is truly a goal. And I've been talking about this quarter after quarter, and that's got to happen with all of us, meaning bondholders, trustees, et cetera. I think you'll continue to see those go lower. I just don't know what the floor will be. But most of the collateral was issued anytime between '03 and '07. So you're 10 to 15 years into this -- into that mortgage. So I would expect it to continue to go lower.

All right. And also, when -- I know, historically, I think your target for gain on sale on resecuritization of the called loans was 200 basis points. Any change to that given the tightness in the market here? And could that be higher?

I think there's 2 parts to that, right? Obviously, when we call these deals, we issue fixed rate debt. The short end, you've got a 161 or 162 2-year note this morning. So rates are up. That could eat into a little bit of that. The flip side of that is you have tighter spreads.

In general, we did $1.1 billion, I think the gain, it was, give or take, about $20 million or so on that $1.1 million -- $1.1 billion. And that doesn't include the future gains that we're going to see on the loan portfolio as we mark those to market when we take those in. So far, I think the numbers have been very consistent with what we've been advertising. But as you know, there's no guarantee whether we're going to be able to do more or less, and each deal is going to be different.

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

Mike, in regards to the consumer lending -- possibility for you to invest in consumer lending, can you talk about the potential pipeline for other investments outside of MSRs?

Sure. On the consumer side, again, we view that as a more opportunistic investment. We're not going to do -- listen, if there is another SpringCastle out there, obviously we'd love to do something like that; I would not count on that. There are some other consumer things that we are working on that could return something north of 20%. But in general, I think the core focus is going to continue to be on the same things that we've done life-to-date unless there's some outlier that kind of comes across our view.

There's not that -- again, the markets themselves are very, very efficient. When you look at spreads and where everything is, and the amount of capital that's sitting out there for fixed income assets, there's no giveaways. So we have to be smart with our capital, not get caught up in saying we have to buy every asset that we see. It's going to be a game of patience, and hopefully, we could acquire a couple different portfolios. But there's nothing that's that obvious other than a couple things that we're working on that may or may not materialize.

So if we start to see a drawing of the investment opportunities, especially as we see a search for yield in the market and a lot of the nonagency portfolios continue to run off in regards to looking at MSRs, is it possible we could see the balance sheet shrink at one point?

If there's no great investment that we think makes sense for shareholders, it could get smaller. I think our track record has generally been that we are very good in thinking about ways to deploy capital that are opportunistic. But again, I don't want to tell you that we're going to go out and buy the next $5 billion of nonagency bonds that are yielding 3% unless there is a strategic reason to do that.

Our cash balances, just to give you a sense, when you look back quarter-over-quarter, we showed a smaller cash balance at the end of this quarter of $280 million. There's a couple things that we will need to fund over time. And one of the things -- for example, on the Ocwen MSRs, we've transferred $16 billion into our name. One of the things we are going to do, until we get everything vetted out with the trustees and get all the appropriate approvals, we're likely going to enter into an excess MSR transaction with Ocwen where we'll be able to deploy the capital sooner. And then over time, that will unwind as the MSR is transferred into our name.

However, the flip side to that is, we have enough MSR financing to do that without hitting the equity markets. So we're running with a fair amount of cash. We think we've got plenty of cash to fund our balance sheet. And again, there's no guarantee how we're going to have -- what we're going to deploy our capital in right now because nothing is that interesting.

Okay. And there's been a lot of talk of M&A within the servicing market. Are you seeing a lot of consolidation or the potential for a lot of consolidation here in the next year or 2?

Yes. I think, for us -- again, we'll be opportunistic around this space. Obviously, we have a vested interest in our servicing partners. They do hold a fair amount of assets. So to the extent that there's something that's -- comes across that we think makes sense, we'll try to do that. We are very supportive of our servicing partners. So hopefully, there is something that comes our way.

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

A couple questions. What's your estimate or what were cash earnings for the quarter?

Cash earnings came in at approximately -- it was close to the GAAP numbers. So you figure, it was approximately $0.73 for the quarter.

Okay. Great. And what makes up the majority of the difference between that on a cash basis versus the core number?

The cash basis versus the core number?

Yes.

I could break that down for you separately.

Okay. And then as the advance balances come down, the capital or the equity that's supporting the advances, where does that come through? Does that come through the P&L anywhere? Is that just cash coming back onto the balance sheet?

That would be cash coming back onto the balance sheet.

Okay. And how much, I guess, in the quarter, just based on how much the advance balances came down? How much cash came back from that?

I don't have that broken out separately right now, Fred.

Okay. On the -- will NRZ see any impact from the Walter restructuring? I know that there were a lot of sort of covenants or termination clauses in the subservicing agreement there, but is the plan there to waive all of those and continue on with Walter as it restructures? Is there any chance to get better terms?

Yes. I don't -- from our perspective, obviously, the deal was announced. We're not part of that deal. As we think about our portfolio, we want to make sure that we're getting optimal performance around that. We've been very supportive of Walter to date, but there's no -- I'm not going to sit on this call and tell you which way we're going to go with this because I just don't know at this point, quite frankly.

I think the servicing industry is -- going back to Kevin's question, I think the servicing industry is going to change a lot over the course of the next 1 to 2 years. As I do think we'll see some consolidation because it's going to be harder for folks to grow in a higher rate environment. So we'll continue to work with all of our subservicers and servicers, but I can't tell you that we're going to leave everything exactly the same.

Okay. Got it. Yes, I mean, you say you're not party to the restructuring deal, but you do have -- I mean it looks like just based on the subservicing agreement, I mean, some of what's going on, if they file a prepackaged bankruptcy, it would give you the right to terminate them as a subservicer. Is that right?

That is correct.

Okay. And then just a last one on the -- well, two -- on Ocwen. What's the timeline you expect for the full transfer of those PSAs?

I'm hoping that we get it done by the first quarter. As I pointed out earlier, what we're going to do to try to get these -- to deploy our capital, get the same economics and get the capital over to Ocwen, is to enter into an excess MSR structure, which would essentially mimic the transfer of the MSR into our name. So the capital gets deployed, that will be funded on our -- with our existing MSR advance -- or our MSR financing. So we wouldn't have to come out of pocket on that. But our hope is that we get that capital deployed within the next month.

Okay. Great. And I mean, currently, you account everything from the old HLSS deals accounted for as an excess for NRZ, right?

It's accounted for as both an excess and an advance instrument. So you'll see it in 2 places on our balance sheet.

Right, right, but if you do this structure where you have -- you cut a new -- or you cut an excess deal with Ocwen based on the new economics...

It'll be excess.

It will continue to be excess.

And advances?

Correct.

That's correct.

(Operator Instructions) And your next question comes from the line of Trevor Cranston from JMP Securities.

Just one more question on the new investment opportunities and the returns being marginally less attractive or harder to find today. The nonagency securities portfolio had some new investment this quarter. Given where spreads sit today, is it reasonable for us to expect the pace of acquisitions of the nonagency securities to start slowing down from here? Or are you continuing to find bonds that make sense to buy in light of your ability to collapse the deals?

Yes, sure. I think it's more of the latter. I mean as we -- there's a fair amount of bonds that trade in the marketplace on a weekly basis. There's a lot of demand for these assets. For us, to the extent that it makes sense that -- as part of our call business, we'll continue to deploy capital.

I think my broader comments are the investment-grade index trades 54 basis -- at 54 basis points. You look at the high-yield index, it's, give or take, 350 and a 320. All these different fixed income assets are extremely well bid. I like where we sit, but I'm not -- again, I don't -- we don't want to be forced into deploying capital into something that we don't think makes a lot of sense for us. But we will continue to acquire assets that are associated with our call rights, without a doubt.

And your next question comes from the line of Sam Martini from Omega.

Mostly just housekeeping, but I wanted just to get an update on -- as you go into sort of bad REIT assets, I wanted just to understand the tax situation. What we should expect for tax rates? What's cash? What's noncash going forward is sort of question 1?

Question 2, Mike, would be, if you could just kind of give us your views on the MSR financing market? It's similar to the question someone asked earlier on the advance balance to UPB. And I'm not asking you to give us any guarantees, but just compare kind of where we are today in MSR funding markets versus maybe a year ago? And if you see any opportunities looking forward to tighten those financing markets, where would they be? Would they be on advanced rate? Would they be on cost? Would they be on some other covenants that you're hoping to get removed?

And then finally, I'm sure everyone else on the call understands this, but I don't. I'm just trying to understand on the supplement, making sure I understand the 3 different buckets. So you've got excess MSRs, excess MSRs equity method and then mortgage servicing rights financing receivables. They all sort of move around a little bit differently, and I was hoping you could help me just put those either to the summary of MSRs on Page 9 or just give me like a high-level view of what's in each bucket.

Thanks, Dan. Hold on, let me just think about everything you just asked.

And that was 1 question in 3 parts.

I love it. Let me -- I'll talk to the MSR financing. Nick will talk to some of the other stuff. Here's on the MSR stuff. I do think there's a pipeline for us that's visible where we're going to be able to deploy capital. As we think about financing, our current unused pipeline -- just to give you a sense today of MSR financing available to us -- is $311 million, that's as of now.

So to the -- so I bring that up because there's plenty of capital for us or plenty of folks out there that want to lend to us on the asset class. What we've seen over the course of the past year, you've seen a couple of MSR deals be done by a couple of different, what I call, mortgage originators. We've seen, for us, from a spread standpoint or overall cost of funds standpoint, I think we called -- we had a term note that we'd issued a couple of years ago that was associated with PLS. The coupon rate on that was 5.72% or something approximate around there. We're currently seeing rates for financing around MSRs at around LIBOR plus 350. So if you think about where LIBOR is, add 350, you're a 4-handle.

I do think that's going to get better, as there's more and more banks that are looking to finance this. The other thing that we continue to do is work with the folks in D.C. as well as with our -- with investors in the capital markets to be able to issue term-like financing around the asset class, and I would expect it to only get better. So my belief is, plenty of capital, plenty of capital available for MSR financing. We have it currently. If we need more, I believe we can get more. Spreads have come in, and the cost of funds will likely head lower...

And Mike, is that 5.72% to LIBOR plus 350? Is that sort of like-for-like advanced rates on the MSR?

Yes, that was a fixed rate coupon on some PLS stuff that we did. I think it was in '16. On advance rates, I do believe we can see higher advance rates. One of the things we're going to be doing in the marketplace around financing this MSR asset, we're going to come out with a term securitization that's going to be rated by Morningstar, where they'll be AAA rated MSR notes. That will be the first one that's done like that in a long, long, long time.

So stuffs -- I believe, again, financing rates are only going to head lower and advance rates could head higher. The one thing I want to be cautious about is we don't want to just over lever our balance sheet.

Right. Okay. What about taxes -- the tax situation?

In terms of taxes, we spend a lot of time focusing on taxes, given now that we're dealing with full MSRs. And -- but for tax purposes, the full MSR is broken into a base and an excess. And our expectation is that most of the profitability comes from the excess. So we don't expect taxes to be material, given the split of base and excess going forward.

Okay. So when I see the tax expense on the income statement kind of moving all over the place, what should I -- how should I sort of sift that through to get to a normalized or predictive level?

The tax expense that you saw, both in the second quarter as well as the third quarter, is primarily driven by the transformation of the old HLSS asset to a full MSR and the accounting for that. And you'll see on our balance sheet that our deferred tax balance decreased significantly. So on a go-forward basis, that noise won't -- it won't repeat itself.

Okay. And then just the last piece, Nick, is those 3 lines on the supplement. What's the sort of just a high-level way to think about what's in each bucket?

Sure. So our excess MSR line item on our balance sheet as well as our advanced line on our balance sheet, those contain our legacy HLSS transaction as well as our advanced purchase transaction. The full MSRs are accounted for in mortgage servicing rights on our balance sheet and there's 2 lines. It's either a mortgage-servicing right or a mortgage servicing rights receivable.

Okay. And then the equity method?

The equity method investee, that's simply our interest in excess MSRs. And when we publish the Q, you could -- we detail both our excess servicing rights that we own directly as well as the ones that are owned through equity method investees.

There are no further questions in queue. I'll turn the call back over to Michael Nierenberg.

Thank you. So I want to leave you with the following thoughts. For our business, we have plenty of capital available to us from a financing perspective. We ended the quarter with $280 million in cash. So to the extent that there is investments that we believe are attractive to us, we will continue to deploy capital.

We are going to be more patient, we have been more patient. But I do think the opportunities to invest capital will rear their head, and we'll continue to do the same thing. The business is performing extremely well. I think we're positioned extremely well for the current rate environment. We look forward to generating good returns for our shareholders and all of you. And we'll see you at the end of the fourth quarter. So have a great weekend, and thanks for dialing in.

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