Redwood Trust Inc (RWT) 2014 Q4 法說會逐字稿

Good afternoon, and welcome to the Redwood Trust Inc. fourth-quarter 2014 conference call.

(Operator Instructions)

Management has requested that I remind you that certain information presented and certain statements made during Management's presentation with respect to future, financial or business performance, strategies or expectations, may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts, and assumptions that involve risks and uncertainties that could cause actual results to differ materially. Management encourages you to read the Company's most recent annual report on Form 10-K filed with the SEC. Which provides a description of some of the factors that could have a material impact on the Company's performance, and could cause actual results to differ from those that may be expressed in forward-looking statements.

I have also been asked to note that the content of this conference will contain time sensitive information that is accurate only as of today, Monday, February 23, 2015. The Company does not intend and undertakes no duty to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded, and access to the recording of the call will be available on the Company's website at www.redwoodtrust.com later today.

For opening remarks and introductions, I would now like to the turn the call over to Marty Hughes, Redwood's Chief Executive Officer. Please go ahead, Mr. Hughes.

Good afternoon, everyone. Thank you for participating in Redwood's fourth-quarter 2014 earnings call. Joining me on the call are Brett Nicholas, Redwood's President; and Chris Abate, Redwood's CFO.

2014 proved to be a challenging yet highly productive year toward further developing and positioning our Residential and Commercial loan businesses. As we start 2015, we are well-positioned to grow income through the generation of fees from loan sales, and interest income from the creation of proprietary investments for our investment portfolio. Brett and Chris will go through the metrics for the quarter shortly.

As we close out 2014 and look to 2015, the most important takeaway is that we have now put in place and we're executing on all major pieces of our business model. For the Residential and Commercial platforms, our focus is now more on tuning rather than building. Such as continuing to add products, sellers, and distribution capability, while at the same time improving our operating efficiencies and capital deployment to improve profitability.

The fourth quarter was a bit noisy from an accounting standpoint, as the sharp decline in US benchmark interest rates during the fourth quarter caused a $15 million negative mark-to-market valuation adjustment against the carrying value of our servicing portfolio. Chris will fill in the accounting specifics, but from a high level, we take an enterprise view towards financial risk management. This means we don't look at our business risk in isolation, but instead manage our risks across our portfolios and business lines as a whole.

From a tactical standpoint, our approach is to first look at our balance sheet investments, which can move in opposite directions as interest rates change and act as natural hedges. For example, our securities typically increase in value as benchmark rates decline, and act as a natural hedge against MSRs that decline in value when rates drop. We also look to derivatives to fill in any gaps, or to hedge other risks for which there are no natural offsets.

This approach to financial risk management does not protect us from occasional periods of GAAP earnings volatility. As the price movements of some of our hedges impact earnings and book value, while others impact book value only. That's why we typically communicate our cumulative hedge results through their input impact on book value. To me, the most important takeaway is that we managed our economic interest rate exposure appropriately during the fourth quarter.

Let's move on to a discussion of our membership in the Federal Home Loan Bank of Chicago, our well-capitalized captive insurance subsidiary became a member in mid 2014. Our goals are consistent with the mission of the Federal Home Loan Bank system, which is to provide liquidity for the mortgage market. Our subsidiary's ability to access the system for advances broadens our distribution capability. As our subsidiary has the ability to hold loans for investment, and we expect to have approximately $1 billion of loans held for investment by mid-year. This is in addition to our ability to access the securitization market, access whole loan sales, and sell conforming loans to Fannie Mae and Freddie Mac.

As many of you know, the FHFA has proposed rules, among other things, that would eliminate captive insurance companies from membership. There were numerous comment letters filed by industry groups in opposition to the proposed rule changes. We too filed a comment letter that in summary said, the one-size-fits-all approach of the proposed rules change was unwarranted, and that the captive insurance subsidiaries could be structured and capitalized in ways that minimized or even reduced risk to the Federal Home Loan bank system. The FHFA is currently reviewing the comment letters, and is expected to issue a final rule later this year. It seems to us that in a worst case scenario, if the captives are excluded, our subsidiary would remain a member for five years during the phase-out phase.

Finally, we'd like to share our Residential and Commercial acquisition and origination goals for 2015. For Residential, our expectation is to acquire $8 billion of conforming loans and $7 billion of jumbo loans in 2015, for a total of $15 billion or a 67% increase from the $9 billion we acquired in 2014. However, our primary focus will be to achieve our maximum purchase volume potential, while maintaining loan sale profit margins within our long-term range of 25 to 50 basis points.

For Commercial, our expectation is to originate $1.5 billion of loans in 2015, up from $1 billion in 2014 at margins averaging 150 basis points. We do not expect a linear ramp in originations, however, given the historical experience and the seasonal factors that generally negative impact the pace of originations especially in the first quarter.

Now I'd like to turn the call over to Brett Nicholas, Redwood's President.

Thank you, Marty. As Marty noted, we had a highly productive 2014 in light of a challenging operating environment for the Residential Mortgage Banking segments, and a tough fourth quarter for the CMBS market. Let me run through some key operating metrics, and then I will comment on our business operations.

In the fourth quarter of 2014, our Residential loan acquisition volume was $2.8 billion. We issued one Residential jumbo securitization in the fourth quarter. Had $776 million of jumbo whole loan sales, and $1.4 billion of conforming loan sales. Our investment in mortgage servicing rights increased to $139 million. We executed our first loss risk sharing transaction with Fannie Mae. And lastly, we originated $326 million of senior commercial loans and $22 million of mezzanine loans.

I will first comment on our Residential businesses. Our Residential Mortgage business had a productive 2014, despite industry volume declining 39% from 2013 levels. We acquired $5 billion of residential jumbo loans in 2014, a decline of 29% from 2013. We attribute this drop to the industry-wide drop in refinance volume as result of higher rates in 2014, and a modest increase in competition from other non-bank aggregators. However, the biggest competition for jumbo loans came from money center bank retail channels. Who, during certain periods of 2014, priced jumbo loans of lower coupons then conforming loans to borrowers.

We completed four private Residential Mortgage securitizations during the current year. Bringing our total completed securitization since 2010 to 25 transactions, which represents a market-leading 36% market share. Our goal is to attract more AAA investors, many of whom remain on the sidelines for structural reasons. We continue to work with investors and other industry participants to make improvements to our deal structures and other RMBS 3.0 initiatives. We published a white paper last August, which includes our ideas on structured improvements to revive private-label securitization. This paper can be found on our website.

Throughout 2014, whole loan buyers provided better pricing and execution for our jumbo whole loan sales versus securitization. We sold $2.4 billion of jumbo whole loans to numerous buyers in 2014. This was approximately 54% more than what we did in 2013. We believe that over time, there should be more equilibrium between private-label AAA and whole loan pricing levels. However, we expect strong demand for whole loans in the first part of 2015, which should produce healthy margins for our jumbo product line.

In addition to securitization and whole loan sales, our subsidiary continues to invest in jumbo whole loans that are financed with the Federal Home Loan Bank. We increased our residential loans held for investment to $582 million at the end of 2014. We completed the first year of our conforming Residential business with acquisition volume of $4 billion for the year. We are quite pleased with our accomplishments building out this the de novo product line during 2014. We established Redwood's conforming market presence, a broad seller network and efficient and scalable operations.

Margins on conforming loans remain under pressure, as there is still excess capacity in conforming loan correspondent lending. Some of this margin pressure has been driven by aggressive bank and non-bank servicing buyers pricing mortgage servicing rights at low yields throughout most of 2014. We believe there is a possibility that 2015 brings us a different market.

Servicing values dropped roughly 10%-plus in the fourth quarter, which could have an impact on additional capital formation in the space. Furthermore, given the pressure on margins in the conforming business, we expect further consolidation in the mortgage industry. Our investment in Mortgage servicing rights grew to $139 million at the end of 2014. We look at servicing as a financial investment. We will invest and grow the portfolio to the extent we believe the asset is fairly priced. Additionally, as Marty mentioned, we do hedge the assets with a combination of balance sheet assets and derivatives.

We continue to actively work with both Fannie Mae and Freddie Mac on different potential risk sharing structures. As stated previously, we completed a transaction with Fannie Mae in the fourth quarter. This year, both GSEs have FHFA risk sharing scorecard goals, and continue to evolve their programs. We expect to complete other transactions with the GSEs during 2015.

Our Residential correspondent seller network continues to grow. At year end, we had 169 sellers, which is up from 118 at the end of 2013. Our operational focus is on lowering our acquisition cost per loan, increasing our market penetration by growing our seller network, and improving overall profitability. I will now move onto our Commercial business.

Looking at the entire year, our Commercial business had a solid 2014. We originated and distributed close to $1 billion of senior loans, and originated $50 million of mezzanine and subordinate investments. We grew the team, adding experienced originators in New York and Los Angeles. During the first three quarters of 2014, the market environment and CMBS lending was robust, with strong investor participation for both senior and subordinate securities.

This all changed during the fourth quarter as CMBS spreads widened, and there was a significant reduction in the number of CMBS [BPs] buyers. The result was negative, not only for Redwood, but for the entire CMBS origination market. CMBS BPs buyers wind their prices and clamped down on underwriting. This resulted in loans they would not accept in CMBS transactions, which led to numerous kick out -- loan kickouts and pricing adjustments.

While we have now distributed all of our available inventory we originated in the fourth quarter, we were not immune and were negatively impacted by wider CMBS spreads and a pricing adjustment. We expect lower volumes in the first quarter, which is typical of the seasonal nature of CMBS lending. Looking at all of 2015, we remain bullish. Market participants are expecting as much as $120 billion of new CMBS in 2015. Furthermore, we expect a supply demand imbalance with CMBS BPs buyers to solve itself during 2015, as this dynamic will draw capital and new entrants to the space.

I will now hand it over to Chris Abate, our CFO, to run through the numbers.

Thank you, Brad, and good afternoon, everyone.

Fourth-quarter earnings per share were $0.31, down from $0.50 in the third quarter. Net interest income continued to grow in the fourth quarter, and both our jumbo and conforming Residential Mortgage Banking margins improve. However, overall net income declined due to lower Commercial Mortgage Banking income, lower MSR evaluations, fewer realized gains from sales of securities, and year-end corporate expense adjustments.

Before I speak further about the quarter, there are a few important things I want to note on our accounting results. First, we did not have any material accounting timing differences related to our jumbo mortgage pipeline. Such as those we experienced in the third quarter, where we had approximately $7 million of favorable timing differences. If you recall, these differences occurred as a result of mark-to-market increases on jumbo loans in our pipeline that we had not yet purchased. Based on our accounting, those gains have typically showed up a quarter removed from any associated hedging expenses. Creating comparability issues when attempting to analyze the periodic income we earned from Mortgage Banking activities.

Since the end of the fourth quarter, we have amended substantially all of our purchase agreements with our loan sellers. Such that we should be able to recognize jumbo purchase commitment derivatives for accounting purposes going forward. This would effectively align our accounting for jumbo purchase commitments with our accounting for conforming purchase commitments. Assuming this occurs, the types of timing differences we've experienced on our jumbo loan pipeline should more or less go away beginning with the first quarter of 2015.

Another source of earnings volatility that I want to address relates to the financial risk management discussion Marty mentioned in his opening remarks, and something we wrote about in this Redwood Review that was published today. We continue to have mark-to-market items associated with interest-rate volatility that flow-through our income statement. Whereas, in certain cases, there are economic offsets in place that only flow through our balance sheet.

A good example is our MSR portfolio, where we took a $15 million mark-to-market write down during the fourth quarter as a result of declining interest rates. The portfolio offsets we use to manage interest-rate volatility inherent in our MSRs often reference the same loan collateral, and have proven to be fairly reliable economic hedges. The challenge has been that this offset has only showing up in our balance sheet and not our income statement. So in addition to the enhancements we are already making to reduce accounting timing differences, we are currently looking for ways to better align the accounting between our MSR investments and other interest-rate sensitive securities over the coming quarters.

Getting back to our fourth-quarter results. Net interest income was $41 million in the fourth quarter, an increase of $1 million from the third quarter. Driven by $159 million of capital deployed, as well as interest earned on our Residential and Commercial loan inventory awaiting sale. Consistent with past quarters, our investment portfolio continued to generate a high level of cash flow. Which more than covered our cost to run our operations, service our debt, and pay our quarterly dividend. Income from Mortgage Banking activities was $11 million for the fourth quarter, versus $18 million for the third quarter.

Residential Mortgage Banking income was modestly down on lower seasonal volume, tempered by higher margins. Most of the overall quarterly decline was related to lower Commercial Mortgage Banking income. And has Brett mentioned, CMBS marketing conditions became more challenging in the fourth-quarter, prompted by a smaller buyer base for subordinate CMBS securities and overall credit spread widening.

Average margins for the quarter were particularly affected by a few senior loan transactions, where we were required to retain the larger mezzanine positions than we originally anticipated. Our GAAP book value per share was $15.05 at December 31, a decrease of $0.16 per share from September 30. The fourth quarter decrease largely reflects the change in value of hedges associated with long-term debt, as our net income covered the quarterly dividend we paid to shareholders in the fourth quarter.

Turning to our cash position and our capital. At December 31, our unrestricted cash was $270 million. And our current investment capacity, which we define as the approximate amount of capital we have readily available to make long-term investments was $198 million. As we mentioned last quarter, our increased rate of capital deployment in the second half of 2014 required us to source additional capital to support our investment opportunities. In the second half of 2014, we deployed over $300 million of capital as compared to $51 million in the first half of 2014. As a result, we raised $205 million of capital through the issuance of exchangeable debt through our taxable subsidiaries so that we could continue to deploy capital and grow our portfolio. Our rate of capital deployment remains elevated, and in the first quarter through February 17, we have invested $53 million of additional capital.

That concludes my prepared remarks for financial results. With that, we're ready for Q&A.

Vivek Agrawal, Wells Fargo Securities.

Good afternoon. Thanks for taking my question. So on the issue of capital, you said you at roughly $200 million of capital at the end of the quarter, and deployed roughly $53 million post quarter. And I think you mentioned that you at elevated capital needs, so how do you see your capital requirements to execute your 2015 your plan at this point?

Hey, Vic, it's Chris. At this point, we feel like we've got enough capital to operate the business in accordance with our internal projections for the next few quarters. We have, in addition to permanent capital, we obviously have other sources of capital. Whether short-term debt or things we're doing with the Federal Home Loan Bank of Chicago, fairly good for the next few quarters.

Okay. And then on the conforming risksharing opportunities, I think you mentioned that you're expecting to look at more of those transactions in 2015. Can you give us more color on that and then what do you expect for 2015?

Yes, this is Brett. I think both GSEs are evaluating the types of structures that they want to pursue. They both have their own capital market transactions.

They have a transactions with reinsurance companies, and they're also looking at numerous options for point of sale types of transactions, which very familiar with the transaction we did in the fourth quarter. Beyond that, I can't get into any more details because these are all private conversations between us and the GSEs on that part.

Okay. And then finally, given the rate decline, you were -- I think you mentioned that the MSRs were a more attractive place to deploy capital. So are you also considering purchasing MSRs in conjunction with the ones that you create through your Mortgage Banking activities?

Actually the point of my remarks were that actually, a lot of the margin pressure in the conforming loan business is actually is created actually by non-mortgage companies buying servicing at what we think are pretty low yields. And the comment was that through the fourth quarter with rates declining, a lot of those buyers may have -- they see some poor financial results.

We, through our correspondent lending business, we acquire servicing at levels we find attractive. And that's our focus is to buy by whole loans released through our operations, deliver them to Fannie Mae and Freddie Mac, and retain servicing. To the extent that we saw an opportunity where our servicing values widen significantly, we may look to do other -- make other investments outside of our normal correspondent lending operation.

Okay, that makes sense. Thanks for the clarification, Brett, and thanks for answering my questions.

Thank you.

Steve DeLaney, JMP Securities.

Thanks. Good afternoon, everyone, and thanks for taking the question.

Brett, I believe you mentioned the $500 million and some of held for investment loans that you now have as a new part of your investment portfolio. You've mentioned that in conjunction with the FHLB. So we should assume these are loans that you are putting on balance sheet in funding with Federal Home Loan Bank advances, is that correct?

That is correct.

Okay. Can you talk about what type of loans -- you see a lot of loans come that through the conduit. Are there certain characteristics that you're looking for for the loans that you hold on balance sheet versus what you would sell either as whole loans or securitized?

I think currently it's really a combination of everything that's coming through our jumbo origination channels. I think over time, we would like to utilize those lines for the purposes of developing other prime quality non-QM products that we can incubate and create a securitization market for.

But I think for the time being, it's very accretive for us to utilize that line, put more capital to work. It's a fairly high ROE. And I think what you'll see, and as Marty said, you'll see us grow that portfolio and put some capital to work, and then look to the whole loan and securitization markets for other jumbo products.

Thanks. And I read the review quickly, but I believe I saw in there a figure of $1 billion. And was that the target utilization of advances that would be used to acquire these types of loans?

Yes, that's correct.

Okay, great. Chris, this is just a housekeeping thing.

But the first Fannie Mae CRT deal that you did, I believe you showed that the third quarter an $11 million investment against that $1.1 billion. Can you just tell me where you're running the revenue associated with that? Where's that coming through on the income statement?

It actually goes through other income. So it just hasn't reached the material point to breakout. And I believe the investment turned out to be $10 million, I think we delivered $1 billion instead of $1.1 billion.

Got it. $10 million versus $11 million. O kay, thanks for clarifying that. Appreciate it.

And I guess just looking at the volume, really appreciate the guidance across all three products. That will be very helpful to our modeling.

I'm just curious though, when you set this the pretty aggressive $15 billion up 67%. Should we assume that there's a interest rate assumption embedded in that that the tenure will stay within a certain level.

And I guess just with the Feds looking to raise rates maybe mid year, how do you guys feel about the stability of your business? Whether short rates or long rates bounce around?

I think our expectation is more in line with the MBA projections, so somewhere around $1.2 billion -- $1.2 trillion, $1.3 trillion for 2015. So we don't have any -- in ours, there's no implicit big rate move down, and then a big refi boom, and it does not -- or the other way that there's going to be a really sharp increase in interest rates that would really pull back on purchase volume.

Steve, a lot of it too, we had 169 sellers and we've got the platform in a position at this point to add a lot of loans. And from a market share standpoint, we're still at very small percentage. So we think we can grow in this market, irrespective of where rates are going.

Bose George, KBW.

Hey, guys, good afternoon. Actually, I don't know if Chris mentioned this when he mentioned the on balance sheet MSR hedge offset. But is there a number that we can think about in terms of how much of an offset there was to that MSR market, just went through the balance sheet?

We haven't disclosed a specific formula, per se, Bose. But substantially all of it was offset in the balance sheet. If you back out the hedge on our Tru ups long-term debt, we have a specific cash flow hedge there, book value was relatively unchanged. And without getting into the specifics, I think that's a good way to look at the effectiveness of the Q4 hedging.

So the $4 billion -- the $4 million on balance sheet hedge and then the remainder essentially was $4 million through the income statement and the rest was through balance sheet?

That's correct. And as I stated in my opening remarks, we're looking for ways to better match those. So whether it's more of the hedges go through the income statement or less of the NSR goes through the income statement, we're trying to match those up more effectively going forward.

Great, that's helpful. Thanks.

And then actually just switching to the commercial gain on sale, can you just talk about the outlook? You noted in the review to expect improvements, just where you think that number goes over the course of 2015?

Bose, we expect, as I say we expect CMBS markets to normalize. First quarter is historically seasonally slow. As Marty mentioned, our outlook is around $1.5 billion and around 150 basis points, which we would expect to earn this year.

Paul Miller, FBR Capital Markets.

Thank you very much. Hey, guys, I know we've see lot of interest rate volatility. But I do know -- can you remind us again how the credit spreads?

If credit spreads on the resi market tighten up, would that give you a better opportunity for securitizations of the jumbos? Or is it just the aggressiveness of some of these bigger banks than jumbo markets making it very difficult to do those securitizations in a more profitable manner?

Paul, it's Brett. The -- actually, credit spreads don't' drive a lot of the economics, it's really all embedded in the AAA spreads and how they price back of comparable agency securities. They widen -- they were pretty wide through most of 2014, and into this year.

And it's really a function of the economics. We look at these transactions as though we sell all the assets, it's just we'd retain certain assets at market value. That versus the economics with whole loan sales.

And then also -- obviously, the retail banks love jumbo customers. And sometimes they can just price to a point where it really is completely decoupled from the capital markets. And then in that case, we will -- listen, we just have to sit on the sidelines for a while if they're going to be that aggressive. But that's really what drives it, it's the AAA spreads.

So it's the AAA's spreads. And we know every bank out there is trying to grow assets, and they can't do commercials as much as they -- so they're all jumping on this jumbo market. Just going back, do you have to hold a better bigger mezz piece you said on that commercial -- on some of those commercial securities in fourth quarter.

Can you just go into that a little more? Is it -- does that benefit you in the long run, or just that eats up too much capital?

Well, -- go for it, Chris.

We're very happy to hold the mezz. So from an investment standpoint, these are exactly the type of mezzanine loans we like to create. In that particular instance, I think we had anticipated creating a larger senior piece.

And just based on liquidity in the market, we retained more than we anticipated. So from a senior loan sale margin perspective, it had a negative impact to Mortgage Banking revenue. Certainly, though, from an investment standpoint, we think that's a good investment that we made, and we're happy to hold it.

Brock Vandervliet, Nomura Securities.

Thanks for taking my question. I stepped off the call briefly, but is there any further color on the MPF direct business? I know the first quarter now is the first quarter when we'd actually see some originations, but I wondered if you had any tidbits from the last couple months? Thanks.

Hey, Brock. Not a whole lot.

We've been in the pilot phase working specifically with the Chicago district. We have essentially started locking and pricing loans, but it's an ongoing process to rollout the program. So again, unfortunately, we should probably have a better update in the next few quarters.

Got it. Okay, thank you.

Matthew Howlett, UBS.

Hey, thanks, guys. I'm just trying to get to a trip on the true gain on sale margins, specifically for the jumble sales. I know it's a mixture between the securitization and whole loan sales.

But do I look at it as, what's the true mortgage banking number? Is it $19 million, then I split them out and get to a point on the jumbo and 15 bips on the agency? Is there any way you just could help us true up on what the true economics of the jumbo sales and the $1.5 billion that were in the quarter?

Again, this is going to be I think much more transparent as we move towards a locked commitment model, which we have on the conforming side. At a high level, we don't -- we haven't disclosed them separately, but we're right in between the 25% to 50% on a blended basis on our long-term target. So I'd say we're in the mid 30%s.

Got you.

So you're looking at jumbo spreads that continue to be -- jumbo margins continuing to be outsized relative to history and conforming has been more challenging.

Got you. And then any change potentially in the mix shift in jumbos, whole loans versus jumbo sales this year?

And on that note, I guess the question I have is on that prime residential prime subordinated portfolio, clearly, that's been growing. But we're not seeing as much growth in the true subordinate, I guess the fist, second, third loss piece as much as we were to expect it. Is that just going to be a function of just more securitizations coming down the pike versus whole loan sales?

It's really a function of our best execution. We're going to continue to issue transactions throughout 2015, and I'm talking about private label securitizations through Sequoia.

However, we cannot ignore the fact that we have a lot of bank and insurance company buyers that are willing to pay significantly more than the economics of the securitization. So unless AAA spreads tighten significantly, you're going to see us, and that was part of my comments, continue to sell into the home loan market to generate earnings.

Okay. And we haven't seen -- when you say significantly, is it 50, 100 basis -- we haven't -- have we seen progress towards that with the treasury now getting involved? Has there been -- there's been more dealer shelves coming off here early in the year. Are there any signs that that's going in that direction?

Our last transaction, we sold all of our securities. It's just that it's a function of pricing, and that there's a lot of initiatives by the treasury and others, but is it to date not impacted the spread that AAA private label trades back of the agencies.

Right, got you. And just one last follow-up on that. On the non-QM, are you rolling out program? Is there anything to talk about on that front this year?

We currently have a non-QM program which just sit just outside of the QM box. It's mainly for very high quality borrowers with slightly higher DTI ratios. We currently originate those through all of our seller network.

Many of those loans get securitized in Sequoia. We continue to add non-QM loans. Some of those loans will finance through our subsidiary with the Federal Home Loan Bank. And then we continue to work in a product development mode to continue to look for other ways to finance prime borrowers who are underserved out there.

Okay. So there's been -- and I know there's been a lot of talk on this market getting a lot bigger. It just seems like it's moving slowly, but you guys do have a program out there and --

We have a current program. And our focus is not on going down to subprime borrowers or charging 7% coupons, we're looking for prime borrowers who are typically had lots of options to borrow. And are currently basically locked out of the market.

We're talking about self-employed borrowers, people with volatile income histories, and that's the area we'd like to serve. And we think that's a pretty big market that's currently underserved, but there's still a lot of work to do and there's a lot of guidance from the CFPB that needs to be sorted through.

Matt, it really gets around being able to document and substantiate the borrower's ability to pay. With the self-employed borrower, their incomes -- personal income's and business incomes are often intertwined, which makes it very difficult to make a hard fast DTI test. So we're exploring ways of trying to make sure we are comfortable on how we would document that.

Got you. Are you seeing much help from Washington or the rating agencies, or is it a lot of stuff that needs to get figured out on that front?

I think with some of it could be industry standards develop. For instance, one of the things to the extent that you can not get a straight DTI, can you use bank statements or other ways to look at the cash flows of a borrower to get comfortable with their ability to pay.

Obviously, we would also talk to people in Washington to look for more guidance. Because I think it'd be very helpful to the extent that there is a need for more liquidity in this area. I think there's a need for acquirers of loans like us that we have some more clarity around the guidance under the ability to repay.

That does conclude our question-and-answer session. I'd like to turn the call back over to our speakers for any closing comments.

Thank you, everyone, for joining us on the fourth-quarter earnings call. This is Mike McMahon speaking, and I'll be available to anyone with questions for the next few hours, as well as the rest of the week. Thank you very much.

Once again, that does conclude today's call. We appreciate your participation.