Nationstar Mortgage Holdings Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Nationstar Mortgage (NSM)

Nationstar Mortgage Holdings (NYSE:NSM)

Q2 2013 Earnings Call

August 06, 2013 10:00 am ET

Executives

Elizabeth Giddens

Jay Bray - Chief Executive Officer and Director

David C. Hisey - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Douglas Harter - Crédit Suisse AG, Research Division

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Nationstar Mortgage Holdings Inc. Conference Call. My name is Gwen, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Ms. Elizabeth Giddens, Deputy General Counsel. Please proceed.

Elizabeth Giddens

Good morning, everyone. Please note that this call and accompanying slide presentation are being webcast from the Investor Relations section of our corporate website, www.nationstarholdings.com. Please refer to that website for important information, including the second quarter 2013 earnings press release. A replay of this call will be available on the website within a few hours. Today's slide presentation is also currently available for download.

Financial results in today's press release are unaudited, and the matters we will be discussing today include forward-looking statements, and as such as, are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically, the most recent report on Form 10-K, which identifies important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. The financial results in today's press release and the matters we will be discussing today include non-GAAP measures used by Nationstar. GAAP to non-GAAP reconciliation information is appended to our press release and investor presentation and is available on our website. I would now like to turn the call over to Jay Bray, Nationstar's CEO.

Jay Bray

Thank you, Elizabeth, and thanks, everyone, for joining us. I'm very pleased to report Nationstar delivered another record quarter, with GAAP earnings per share of $1.37 and pro forma earnings per share of $1.50, which excludes Bank of America ramp and other one-time expenses. Our second quarter earnings per share increased 96% compared to the first quarter and almost 235% compared to the second quarter of 2012. We continue to capitalize on the market opportunities through growth in our core segments. Our pro forma servicing portfolio stands at $435 billion and our bulk acquisition and flow pipelines grew to the $400 billion level during the quarter and remain very robust. A number of large financial institutions announced on their recent earnings calls that they intend to explore the sale of additional servicing assets. This bodes well for Nationstar and will undoubtedly allow us to continue to grow the platform. From an operating standpoint, our servicing profitability initiatives and targets are on track as we drive down cost per loan, delinquencies and advance expenses.

Our origination segment continues to generate larger volumes, which creates attractive long-term servicing assets. We originated $7.1 billion in the second quarter, an increase of 109% over the first quarter volume. The second quarter volume was almost as much as our entire volume for 2012. We remain focused on the higher-margin channels, and I'm happy to report a record recapture rate of 48% for the quarter. Our channel margins and profitability remains strong, and we were able to offset any reduced market pricing with operational efficiencies and productivity gains. Looking forward, we are very excited about the opportunities ahead of us and remain confident that our platform is positioned to perform in all rate cycles. Overall, the economy is improving and we are well positioned to benefit.

Let's look at Slide 3 on how we're positioned for an improving economy. As the economy improves and rates rise, prepayments will slow, which extends the cash flow of our servicing assets. We acquired a large amount of mortgaged assets over the last 3 years at very low acquisition multiples. Consistent with our investment thesis, we expect the value of these assets to appreciate as the economy improves. Lower unemployment will mean that more borrowers will be able to pay their mortgage, thus leading to a reduction in portfolio delinquencies, servicing costs and advance balances. Current loans are significantly less costly to service than delinquent loans. In an improving economy, we expect the profitability of our servicing segment to improve, while also providing a higher contribution to our bottom line. An improving housing market means borrowers will have more equity in their housing, providing more opportunities for refinance and purchase money originations. We have a number of purchase money strategic initiatives in process and our servicing book still remains well in the money, providing a multiyear pipeline of refinance opportunities.

Let's turn to Slide 4, where I will introduce additional opportunities that will provide further growth for Nationstar. As evidenced by our growing servicing pipeline and originations business, we have significant growth opportunities in our core business. In addition to expanding those core platforms, we are evaluating other attractive fee-based service businesses that will allow us to leverage our core competency of credit risk management and provide high-quality services to our 2.5 million customers. We believe the meaningful return of the non-agency market will materialize in the near future. Over time, the government's role in the residential sector will stream [ph] and private capital will play a more meaningful role. Nationstar is well positioned for this transformation. We see many opportunities to leverage our heritage as a non-agency servicer to this developing market. The mortgage industry is evolving and consolidating, as financial institutions continue to revamp their mortgage businesses. This provides an opportunity for Nationstar to become the partner of choice by offering a wide variety of mortgage-related services, i.e., the "mortgage services factory", to these institutions. We are focused on becoming the premier real estate services and solution provider to consumers and financial institutions. We will provide more detail on these growth initiatives in the upcoming quarters.

Now let's turn to Slide 5 and look at some servicing highlights. We continue to make progress toward increasing servicing profitability for 2013. In the second quarter, our servicing segment generated 5 basis points of operating profitability. We successfully boarded the agency and Ginnie Mae Bank of America portfolios in the second quarter. This represents the largest amount of servicing that we have boarded in any single quarter in the history of the company, and I would like to extend a big thank you to our acquisitions team within servicing. We closed on the first tranche of the Bank of America PLS portfolio in July and expect to close and board the remaining portfolios in 2013. We are evaluating a bulk acquisition pipeline in excess of $400 billion. This represents an increase of over $100 billion from the first quarter. Several large banks announced on recent earnings calls that they were evaluating additional servicing sales. Due to these market trends, and still a limited number of competitors, we expect the number of significant bulk acquisition opportunities to materialize in the upcoming quarters. The timing of these potential opportunities is ideal, given that we will complete the boarding and integration of the BofA PLS portfolios during the second half of '13. We continue to make progress on our flow servicing initiatives and have executed flow agreements that are expected to produce over $20 billion annually. Our flow pipeline is over $55 billion, with 40 different counterparties. Our portfolio prepayment speeds were 18% in the second quarter, which is relatively consistent with prior periods. Our record origination volume and recapture rate and our flow and correspondent programs help replenish our servicing portfolios as loans prepay.

Let's move to Slide 6. Our 5 and 10-basis-point servicing profitability initiatives in 2013 and '14 are coming from 3 areas: Reducing cost per loan, lowering delinquencies and reducing advance balances and associated cost. First, cost per loan. Through strategic sourcing, automation and workforce management, we expect to reduce our average cost per loan by 30% in 2013. Since the beginning of the year, we reduced cost by 12% and the pace of reductions will increase in the second half of the year. Second, delinquencies. We are targeting to lower our 60-plus day delinquency rate to 10%. In the second quarter, we reduced delinquencies by 200 basis points to 11.8%. We have a long track record of reducing delinquencies, as evidenced by our 45% reduction since 2009, while the portfolio grew by more than 7x over during that same time period. Another benefit of lower delinquencies is reduced advance balances and associated interest expense. In the second quarter, we securitized $1 billion of non-agency advances. This securitization lowered our cost of funding by 175 basis points. Also, as we work our advance balances and borrowings down, our cash flows will materially benefit. We recovered over $500 million of advances from our Aurora portfolio in the first half of the year and expect to accelerate that pace in the upcoming quarters. Executing on our profitability initiatives translates into earnings and value for our shareholders, as evidenced by our guidance.

Now let's turn to Slide 7 for an example on the ability to organically replace and grow our servicing portfolio. As you see on Slide 7, our integrated servicing and origination platform is now at the scale where we can organically grow our servicing portfolio. A $435 billion servicing portfolio with a 12% to 15% annualized prepayment rate will incur between $50 billion and $65 billion in annual prepayments. Of course, in a rising rate environment, prepay speeds may decline further, resulting in even lower annual runoff. Assuming origination volume of $35 billion, plus $55 billion from flow and correspondent programs, we expect to originate or acquire over $90 billion of servicing assets organically on an annual basis. Based on second quarter run rates, we are already in a position to originate and acquire over $60 billion on an annual basis. And these volumes continue to increase, so clearly, we can organically grow our servicing book. If you add in our bulk pipeline of over $400 billion, of which we have historically been able to acquire a meaningful amount, the growth potential is significant. This growth will continue to provide long-term revenues and earnings for our investors.

Now let's move to originations and turn to Slide 8. Nationstar's originations segment had another very successful quarter and generated record results. We generated $121 million of pretax income, representing a 78% increase over the first quarter. Our 48% recapture rate for the quarter was up from 45% in the first quarter. I continue to put a heavy emphasis on our recapture initiatives and challenge our operations teams to exceed 50% recapture across the entire portfolio. Our various channels continue to scale, which help produce record volume of over $7 billion in fundings, of which 38% were from HARP originations. Excluding correspondent, our fundings grew at 81% quarter-over-quarter to $5.6 billion. Despite the increase in rates during the period, we experienced strong growth in our application and locked pipelines. Our application pipeline at the end of the quarter was $12.2 billion and our locked pipeline was $8.6 billion. Due to the rising rates, we expect our pipeline to have a higher pull-through success rate than in periods when rates are declining. We remain on track to hit our previous origination volume guidance of $23 billion in 2013 and $31 billion in 2014, excluding the correspondent channel. We closed the Greenlight acquisition in late May and started originating our first loans in June. I'd like to extend a warm welcome to our new Greenlight employees, thank them for providing such a smooth integration and appreciate their enthusiasm towards being part of the Nationstar family.

Let's turn to Slide 9, where I'll provide future details on origination opportunities. Nationstar's origination strategy focuses on recapture and other value-added channels that produce higher margins. With the recent rise in interest rates, we've seen some pressure on market pricing, mainly in the premiums on HARP originations. However, we've also seen the investments that we've made in our origination business pay off through significantly increased operating leverage. Our second quarter pretax income remained strong at 219 basis points, down only 4 basis points from the first quarter. We expect to see further gains in operating leverage and productivity in future periods. Our servicing portfolio remains rich, with over $45 billion of refinance opportunities. Even if rates rise 100 basis points from here, over $34 billion in refinance opportunities exist. Outside of our servicing portfolio, we are capitalizing on organic growth opportunities in our other channels, including Greenlight and wholesale. We continue to make progress on deploying purchase money strategies through our direct and biller channels, and expect to announce some very exciting new developments in the upcoming months.

Now, let's turn to Slide 10, where I can provide an update on Solutionstar. Solutionstar, our fee-based service business, continues to grow. We generated over $38 million of revenue in the second quarter, a 15% increase from the first quarter. In May, we launched HomeSearch.com, which provides an online real estate marketplace for homebuyers, sellers and investors to connect and conveniently complete sales transactions. During the quarter, we sold more than 2,400 REO properties, slightly up from the first quarter. We expect to expand our REO management business as property sale opportunities will significantly increase with the boarding of the BofA PLS portfolios. We completed the integration of the former operations of Equifax Settlement Services and have maintained a significant portion of the third-party business. Also, we have made significant inroads in establishing new client relationships. We plan to grow Solutionstar into the premier provider of real estate and settlement solutions in the industry by delivering superior customer results via operational practices and technology. We believe we have the people and products to execute on the strategy and are opportunistically evaluating additional verticals that will expand our service offerings and continue to diversify the client base. With that, I'd now like to turn the call over to our Chief Financial Officer, Dave Hisey, to discuss our company's financial results for the quarter. Dave?

David C. Hisey

Thanks, Jay. Let's turn to Slide 11. The execution of our strategic plan produced another quarter of strong earnings and sequential improvement across all of our key metrics. Revenue increased 40%. Our pretax income was approximately $207 million, which included $19 million of ramp and other one-time expenses. Pro forma without these expenses, pretax income increased more than 70% to $226 million. We delivered earnings per share of $1.37 or $1.50 excluding the previously mentioned ramp and one-time costs. Our earnings per share increased by 96% over the first quarter. We had strong GAAP earnings this quarter and also generated strong operating results of $1.09, excluding the net servicing fair value changes due to market assumptions and ramp expenses. We continue to generate healthy margins, with pretax income of 34%, as we balance investments with profitability. Our success would not be possible without the support of our employees and business partners. I'd like to thank each of them for all of their contributions, which led to another quarter of record earnings.

Let's discuss our earnings guidance as shown on Page 12. While we cannot control or predict market changes which can impact our results, we remain very focused on executing the strategic and profitability initiatives Jay outlined. We believe the execution of these initiatives will allow us to hit our target guidance and produce value for our shareholders. To reiterate, we forecast 2013 adjusted EBITDA per share range of $10.10 to $11.75, and earnings per share range of $4.05 to $4.75. We forecast 2014 adjusted EBITDA per share range of $14.70 to $17.10 and earnings per share range of $6.45 to $7.50. Adjusted EBITDA can be helpful in estimating our cash flows by deducting corporate debt interest, taxes, capitalized servicing and adding in recovery of advance equity. On this basis, we expect to produce over $600 million of investable cash flow in 2014. This cash flow could be used to invest in new opportunities that exceed our investment return thresholds, to pay down our corporate debt balances that carry higher interest rates, or return capital to our shareholders.

And with that, I'd like to turn the call back over to Jay for some closing remarks. Jay?

Jay Bray

Thank you, David. In summary, Nationstar delivered another very strong quarter of results. We believe our strategic initiatives will continue to fuel growth and produce strong earnings in future periods. We've designed our business to offer products and services that are viable in all economic cycles. Over the past few quarters, we've been able to acquire assets at very low multiples and we expect our investment in these assets to appreciate significantly as the economy continues to improve. The current market dynamics continue to be in our favor. We see growth opportunities for our servicing segment, both organically and through bulk acquisitions, as financial institutions continue to refocus on their core businesses. We expect to capitalize on our large refinance opportunities and the return of the purchase money market. Also, Solutionstar continues to scale its business and is diversifying its revenue streams. Finally, we expect to generate significant cash flow in future periods that will provide nice optionality for capital management. We have the right team and the capabilities in place to make our vision happen, and we cannot be more excited about where we are today. The future is bright as we seek to profitably grow our business and deliver exceptional value to our shareholders. And with that, I'd like to open the call up for question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Douglas Harter with Crédit Suisse.

Douglas Harter - Crédit Suisse AG, Research Division

I was wondering if you could, on the origination side, if you could give us a little more clarity as to how much more expenses could come out over the coming quarters.

Jay Bray

Yes. I think the -- I mean, the way we're thinking about it is, I think you could see another 15% to 20% come out in the third quarter and as much as 15% to 20% more in the fourth. I mean, we -- and as we've expressed to you guys, we've invested a lot in the platform to scale it. And the team is really -- we're really starting to see the benefit of that. Our loan officers, for example, I think they were doing close to 9 loans in the first quarter per loan officer. Now it's closer to 20. And so we're just really starting to see the impact of some of the investments we've made earlier in the year.

Douglas Harter - Crédit Suisse AG, Research Division

And can you talk -- does Greenlight help that -- is there anything that you can -- best practices you can take from Greenlight to make sort of legacy Nationstar originations more efficient?

Jay Bray

Yes, I think so. I mean, I think Greenlight has done an excellent job of really targeting higher FICO, higher credit borrowers. They have a very valuable proposition, closing loans with those borrowers in 20 days or less. And I think they can continue to do that as we expand that channel nationally, not just, really, in California and neighboring states, but I think they can also help us on recapture. I mean, when you think about certain segments of our portfolio, I think they'll really be helpful and we can learn from them in attracting those really high credit borrowers. So I think that's how we're thinking about it.

Douglas Harter - Crédit Suisse AG, Research Division

Great. And then, David, on the MSR writeup, was any of that from the lower delinquencies? Or was that solely attributed to the higher rates?

David C. Hisey

Well, the $60 billion or so of adjustment for market assumptions was primarily due to extended lives, but -- I mean, we do pick up some benefit as delinquencies come down.

Operator

Our next question comes from the line of Vic Agarwal with Wells Fargo Securities.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

On your $400 billion new pipeline, and you mentioned some potential large opportunities from banks, is there -- how much of that $400 billion has that type of concentration? Or is there a type of concentration in that pipeline?

Jay Bray

From large financial institutions or...?

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Right. Because I think the last time when you had -- when you raised it from $300 billion, it was mostly smaller size.

Jay Bray

Yes. I think the increase is driven by some of the large financial institutions. I mean, we still have -- what we have been talking about consistently is a number of counter parties, some small, some medium, but some of the growth is definitely attributable to the large financial institutions. And I can just tell you, I mean, as we sit here today, I'm very, very excited about the pipeline and very excited about the kind of the growth we've seen in the pipeline and what the opportunities are in the second half of the year. So -- but to answer your question specifically, some of the increase in the pipeline is definitely attributable to some large financial institutions.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Okay. And then secondly, how much of your back office is now offshore? Because I know that you're in the process of doing that.

Jay Bray

Yes, I think it's 20%-ish today. And -- I mean, we're taking a very measured approach there. And -- I mean, the way we think about it is, some of what I would call the non-core functions, if you will, not loss mitigation, not collections, et cetera, are the areas where we're moving primarily now. And it's going great, I mean, we have a really good partner and I'm very pleased with the service levels, very pleased with their performance, but that's the level where it's at today.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Okay. And then finally, I think you had about $4.5 billion HARP production in the first, second quarter. Are you still targeting roughly 50% of the $23 billion attributable to HARP for originations for '13?

Jay Bray

Yes. And we have a lot of visibility right into the pipeline. As we mentioned, the pipeline has grown to $12 billion, and we know how -- what really the pipeline consists of today. So yes, I think that's a reasonable number for the rest of the year.

Operator

Our next question comes from the line of Paul Miller with FBR.

Paul J. Miller - FBR Capital Markets & Co., Research Division

On the servicing side, I believe after the MSR adjustments, that you would -- you got to the 5 basis points, which is in line with your expectations of getting to 10 basis points next year. Is that -- are you getting the efficiencies much quicker than you originally thought? It sure looks like it.

Jay Bray

I mean, we are having a lot of success, Paul. I mean, and I would think -- I think the answer is yes. We are getting there quicker than we originally thought. But there's always -- I mean, we still have quite a few improvements that we have to accomplish for the remainder of the year, but we remain highly confident in the numbers that we've outlined. So I'm very pleased with what the servicing guys have done, and gals, and we are ahead of schedule there.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And then with respect to Solutionstar, which looks like it's also doing very well, can you talk about the relationship between the earnings that you get on the servicing and the earnings from Solutionstar? Are they intermingled? Are they separate? I mean, how do you account for them?

Jay Bray

They're combined. So the Solutionstar results, for the most part, show up in the servicing segment, today. And Solutionstar is ramping as well, right? I mean, we would expect them to do significantly better in the second half of the year, candidly. I mean, we've invested in that franchise. We've built the HomeSearch site, we've integrated Equifax, and they're now slowly starting to recapture -- or capture, I'm sorry, a lot of the Nationstar business. So you're going to see a pretty big ramp on revenues from -- and now that we have the BofA PLS boarded, I mean, you'll see some meaningful increase there, in both revenues and profits, from Solutionstar the last half of the year.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And what are the -- I know you talked about Solutionstar going outside of the portfolio, not just servicing Nationstar -- not just working with Nationstar, but with other portfolios, I mean, where are we on, how far are we along on that aspect?

Jay Bray

Well, the great news on the origination side of the Solutionstar business, about 30%, 35% of the revenue today is coming from third parties. Actually, maybe even a little higher. What is it, Dave? Is it...

David C. Hisey

Well, I'd say the majority on the origination side, the majority and that's from coming from the Equifax Settlement Services acquisition. And I think the opportunity there is to do some of that business for our portfolio.

Jay Bray

Yes, so I mean, when we bought them, 100% of their business, obviously, was with large financial institutions, regional institutions, et cetera. We've been able to maintain that third-party business. And now they're capturing the Nationstar appraisal title closings as well. So it's a pretty meaningful amount on the Equifax side. And we're working with some, on what I would call the REO business and short sales, et cetera. I mean, we're working with some pretty large players now, to try to deliver that service to them. So I would hope, again, in the third and fourth quarter, you'll see more third parties come into the REO business as well.

Paul J. Miller - FBR Capital Markets & Co., Research Division

Have you broke in, with the REO business, with Fannie and Freddie at this point? Or are they still doing it themselves?

Jay Bray

They're still doing it themselves. I mean, I think we see opportunities there. And not only in REO, I think short sales and some other different strategies. I definitely see opportunity there.

David C. Hisey

Paul, they use a combination of internal and external providers, so the opportunity there is to become one of the external providers.

Paul J. Miller - FBR Capital Markets & Co., Research Division

That's what I thought. So how difficult -- have you applied to become an external provider? Are you -- how far along the path are you to get approval to do that?

Jay Bray

We're talking to them as we speak, right? I mean, we're constantly -- we view them as a great partner and are always looking for ways to save the taxpayers' money. And we think some of our REO strategies and short sale strategies can really help, not only the loans that we're servicing for them, but others. So we're actively looking at that opportunity.

Operator

Our next question comes from the line of Henry Coffey with Sterne Agee.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

A couple of things. First on your origination volumes, I know you said that 78% of your $7 billion was direct channels, and then HARP was "half of that." Is that how we should think about those numbers? Or was is it HARP half of the $7 billion?

Jay Bray

I think it was around 37%. The HARP was 37%.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Of the total $7 billion?

Jay Bray

Yes. Exactly.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

And then in terms of looking at the servicing business, when you simply look at the net income line and divide it by your $385 billion of average servicing, that's closer to 7 or 8 basis points. What adjustments are you making to that number to get you down to the 5 basis points?

Jay Bray

I mean, the way we think about it is really the mark we exclude, so the MSR mark. When we quote the 5, we're really talking about core operations, right, which is what we're focused on and what we have our operators focused on. So the big difference there would be the mark and then the one-time adjustment.

David C. Hisey

The ramp. And I think you also should also look at the average balance. I think we were using about $315 billion.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

And then finally, just looking at your core number, which was, if you take out the MSR mark, was arguably about $1.10-ish of -- if you annualized that, we're already well into the upper side of your guidance. Should we expect a continued lift on that side during the rest of the year?

Jay Bray

I mean, we continue to focus on core operations, right? And the way that I think about the guidance and the way I think about the objectives we've outlined is to focus on core operations. Clearly, there's a lot of market factors that are happening and we'll see how that ultimately shakes out. If we knew where rates were going, we wouldn't be doing this, probably. But, so we'll see how that evolves. But we're focused, Henry, on delivering that guidance and focused on the core operations.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

And then finally, you talked a little bit about expanding your loan program. As you start to look kind of into 2014, do you see a framework for you starting to do credit-impaired loans, either within the QM, QRM box, or outside of it?

Jay Bray

Well, I think our first area of focus is going to be servicing, right? I mean, given our heritage and our capability, I don't think there's anybody better than us to take advantage of the non-agency servicing opportunities. On the origination side, I mean, that is something that we'll probably watch and see. I mean, clearly, there are going to be opportunities there. There's 68 million consumers that are underbanked. There's a large population that frankly needs products. But we would approach that in a measured way and we would approach that with -- to make sure we had plenty of capital partners and the right thoughts around credit risk, is the way I'm thinking about it.

Operator

Our next question comes from the line of Kevin Barker with Compass Point.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

You increased your estimated amount of potential HARP originations from roughly $30 billion to $40 billion to $45 billion. Could you help us understand the change in potential HARP volumes, given we have higher rates, from last quarter?

Jay Bray

Well, it's not just HARP, Kevin. It's kind of what is eligible to refinance. And the reason it increased is the boarding of the PLS portfolio from BofA. So we are -- we have loan level information on every loan that hits the system, obviously. And we look at what's the current rate of those existing customers and then what would be the benefit for them to refinance. So the increase is driven by the additional PLS portfolio, and the $45 billion is not only HARP, but it's what's eligible in the entire portfolio to refinance that would be a significant benefit to that consumer.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

So if you were to look at the $45 billion and how would you look at that in relation to your $31 billion estimate? How much of that would be refi versus purchase volume in 2014?

Jay Bray

I still think you're going to see, call it, 55%, 60% refi. Again, we have quite a bit of visibility into the pipeline and it's -- so you kind of know what's going to happen in the next couple of quarters. And as that evolves and grows, we'll see what's going to happen in the early half of '14. So I still think you'll see a reasonable amount of refinance in '14. And again, I mean, we don't know where rates are going, but again, even if rates rise 100 basis points from here, we still have significant opportunity. And we're getting better, right? I mean, at the end of the day, we're only at a 48% recapture. Of course, my origination folks would be kicking me for saying that, but I mean, I think we can significantly increase that number and that's the goal. So it's actually not that difficult, from a mathematical standpoint, to see how -- look at your payoffs next year, increase the recapture, and you've got a meaningful amount of refinance volume in that alone. So that's how I think about it.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Right. Could you give us some details on the origination volume from Greenlight during the past 2 months? How much of that was refi versus purchase?

Jay Bray

I think the -- I mean, keep in mind June was a bit of a transition, we had to get them licensed, convert the license to Nationstar. I think they'll originate close to $0.5 billion in July. I think they did close to that in June as well. And it's still -- the preponderance of it is refi. I mean, you're still looking at 90%-ish is refi. I mean, the good news is that I think they do have some viable purchase programs. We put some incentives, if you will, around that, where I think we'll drive more purchase money there. We're driving more purchase money in our wholesale channel. We're driving more purchase money in the correspondence channel, but that answers your question, I think, on Greenlight.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Okay. And then finally, could you help us understand where the delinquency rate will stand at the end of the third quarter, with the private label Bank of America portfolio coming on board, and how that relates to your guidance concerning a lower delinquency rate in 2014?

Jay Bray

Well, it's going to go up, right? I think the delinquency overall will go up, because the PLS was more delinquent. And so you're probably looking at close to 15% delinquency with the PLS increase -- I'm sorry, with the PLS boarding. But I mean, we tend to look at -- the way I think about it is static pool. We obviously have forecasted the PLS in our guidance and it hasn't deteriorated significantly from when we announced the deal in the early part of the year. But I still think on the existing portfolio, you will continue to see improvement. So, it's -- I mean, the simple answer is, that's all factored in the guidance. We're very comfortable with what we're getting from BofA and considered that in the process.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Now correct me if I'm wrong, but in your guidance, you're assuming a 150-basis-point decline in delinquency rates on a static pool basis, right?

Jay Bray

That sounds right. I'll double check that, but I think that sounds right, which I mean, we're obviously hitting that.

Operator

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

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

To go back to your earlier comments on the flow business. Is the $20 billion run rate where you're running currently, and also, for the flow business, do you get the MSRs on most of those deals?

Jay Bray

Yes and yes. I mean, the current run rate is actually a little higher now, probably closer to the mid-20s. And then the -- we're acquiring MSR in all the flow. I mean, I would say 90% of the flow. I mean, the subservicing -- there is some subservicing happening in the market, but what we've seen is financial institutions have to do a significant amount of work to enter into a subservicing relationship. They get no capital relief. They really get little operational relief, so you certainly have seen more movement towards selling the MSRs on the flow basis. And so that -- it's, majority of it is purchased MSRs and I think our current rate is $25 billion to $26 billion now.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then I just wanted to switch to Solutionstar. I mean, in terms of potential acquisitions, can you just discuss like what sort of things you could do to complement the growth there through acquisitions? And also, how large would it have to be -- would Solutionstar have to be on revenues before you start thinking about other options, such as a potential spinout?

Jay Bray

Well, I think as far as potential acquisitions, I mean, you should just really think about kind of the mortgage value chain. I mean, when you look at property preservation, you look at property inspections, you look at some data analytics, you look at some of the digital companies out there today that are providing services to realtors, et cetera. I mean, those could all be meaningful opportunities, I think, for Solutionstar. And as far as revenue, I mean, it's big enough today, right? We could certainly do certain things with Solutionstar. But we're -- we continue -- we don't have a crystal ball. I mean we're continuing to evaluate it, continue to spend time discussing on what is the right structure. But clearly, it's of the size today that you could do that, but we're continuing to discuss it internally.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then actually one last thing, can you give me just the correspondent gain on sale margin this quarter?

Jay Bray

Give me a second. Yes, let me circle back. But I think -- I mean, the way we think about the correspondent channel is we're creating servicing for free, right? I mean -- so you're able to basically acquire servicing -- I'm sorry, you're acquiring servicing in that -- a 2 multiple, if you will. So it's actually, from an IRR standpoint, continues to be quite attractive. But we'll get back to you with the exact numbers.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Yes, that would be great. It's just really for tracking the market, but definitely agree with you guys.

Jay Bray

Sure.

Operator

I would now like to turn the call back over to Jay Bray, CEO.

Jay Bray

Thanks, everyone. Really appreciate your participation, and we look forward to discussing the quarter further. Thank you.

Operator

Ladies and gentlemen, that concludes today's presentation. Thank you for your participation. You may now disconnect. Have a wonderful day.

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