Nationstar Mortgage Holdings' (NSM) CEO Jay Bray on Q2 2016 Results - Earnings Call Transcript

| About: Nationstar Mortgage (NSM)

Nationstar Mortgage Holdings Incorporated (NYSE:NSM)

Q2 2016 Earnings Conference Call

August 03, 2016 09:00 AM ET

Executives

Robert Stiles - EVP & CFO

Jay Bray - President & CEO

Analysts

Doug Harter - Credit Suisse

Bose George - Keefe, Bruyette & Woods

Jessica Ribner - FBR Capital Markets

Jeremy Campbell - Barclays Capital

Vik Agrawal - Wells Fargo Securities

Mark Hammond - Bank of America/Merrill Lynch

Michael Kaye - Citigroup

Fred Small - Compass Point Research

Operator

Good day, ladies and gentlemen, and welcome to the Nationstar Mortgage Holdings Incorporated Q2 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Robert Stiles, CFO. Sir, you may begin.

Robert Stiles

Thank you, Operator. Good morning, everyone, and welcome to the second quarter earnings call for Nationstar Mortgage. Before we get started I would like to remind you that second-quarter earnings release and quarterly supplement are available from the Shareholder Relations section of our Web site, www.nationstarmtg.com.

In addition, we will make forward-looking statements during today's call that are subject to risk and uncertainty. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings release and quarterly supplement.

Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings, in the earnings release and in the quarterly supplement available in the Shareholder Relations section of our Web site.

I now have the pleasure of turning the call over to our Chairman and CEO, Jay Bray.

Jay Bray

Thank you, Robert. Good morning, everyone. There can be no doubt that from a financial, strategic and capital perspective we are the leader in our space. Financially we posted strong quarterly results of $0.52 adjusted earnings per share that demonstrate the earnings potential of our platform even in market conditions that continue to be volatile. These financial results were driven by significant increases in all three segments which we will detail in just a moment. From a strategic perspective we continue to believe that significant market opportunities exist to grow our servicing book both through MSR acquisitions as well as additional sub servicing opportunities. We are very proud that USAA and Seneca selected us as their servicer. But make no mistake, this was not by accident.

Their selection reflects our commitment to continually invest in the customer and member experience, in compliance and employee engagement. Strategically we are one of the few partners that can offer a complete solution given our integrated origination and residential services platforms which helps to drive value in any servicing portfolio. We ended the quarter with $624 million in liquidity and surplus capital to support our growth initiatives. More importantly we expect to board $130 billion between now and year end with minimal use of capital and limited additional headcount further scaling our existing operations.

Now let's dig into our operating results and turn to Slide 4 for servicing. Our servicing business remains the top rated servicer and continues to drive enhancements and customer experience and improved portfolio performance. From a financial perspective, servicing achieved 6.8 basis points of profitability in the quarter despite an increase of $13 million in amortizations as compared to the first quarter. This strong financial improvement was driven by a continued focus on operations, lower delinquency and $17 million of profitability associated with the cleanup call in our reverse business. Even without the impact of the cleanup call servicing profitability was 5.1 basis points. We have several initiatives launching over the coming months that will continue to enhance the customer experience, enabling our customers to be more self-sufficient and ultimately drive operation results. Let me take a moment just to talk about a few of those.

We have spent significant time and energy working with our customers to design a new easy to navigate customer Web site. In redesigning the Web site we went beyond just assisting a customer in managing their mortgage, instead we are utilizing the services, data and technology across all of our businesses to make the customer a smarter home owner. The Web site will launch in September and we will continue to add functionality and features over the coming months.

Building off of the Web site we also will launch mobile apps in the fourth quarter that will deliver a great customer experience. Sign on functionality that simplifies the authentication process, more useful notifications, calendaring payment reminders and camera functionality are just a few of the potential enhancements that will come with the launch of our integrated mobile app. Overall servicing posted the best second quarter in years and is off to a great start having achieved 5.9 basis points of profitability year to date. Although market conditions remain challenging and we have doubled the amount of sub servicing we expect to board in the current year, we intend to achieve profitability greater than 5 basis points for the full year.

As we turn to Slide 5 I want to take a moment to talk about the value of our MSR assets. There is no doubt that movement in interest rates, the regulatory environment and the status of other market participants, among other things, has created significant overhang on both our share price as well as the value of our most important asset, the MSR portfolio. We continue to believe this presents a significant opportunity for investors. First, let's address how successful we have been to date in our purchase of MSRs. One simple way to measure this is by comparing our cost basis in the fair value portfolio to the value expected to be derived from future cash flows.

Our cost basis for the entire portfolio is currently 71 basis points compared against the calculated MSR value of 88 basis points. This represents a 24% increase in cash flows or over 510 million and excludes the value of recapture in Xome. If we include the recapture in Xome cash flows driven by the servicing portfolio, this adds an additional 500 million in cash flows or over 1 billion over our initial investments.

So let's turn to Slide 6 and discuss the upcoming boardings and current market opportunities. We expect to board 130 billion over the remainder of the year with almost no use of capital contributing in excess of $0.45 of incremental earnings per share on an annualized basis. And this excludes ongoing flow servicing from our USAA and Seneca partners. In addition, we expect to leverage mostly existing infrastructure including human capital. This represents the emergence of sub servicing including private label servicing as a powerful growth vehicle for Nationstar as well as our dominant market position as the preferred industry player. We expect to achieve up to 4 basis points in sub servicing profitability.

It is also worth noting that since our first-quarter call we have been awarded 100 billion of the 130 billion pipeline we previously announced. Included in this is the Seneca partnership and their highly regarded team in Buffalo, New York. We want to take a moment to welcome them to our Nationstar family. In addition, we can finally announce that the partnership that dates back to October last year is USAA, which we began boarding on July 1. USAA is the leader in customer service and we have already learned a lot from this partnership. In addition, there is no doubt that assisting their members is a great honor and truly rewarding. We look forward to a long successful partnership with both Seneca and USAA, two industry leaders in their own right.

From a pipeline perspective we currently have 55 billion already slated to board in 2017 and it is only August. In addition, we are engaged in discussions with multiple parties regarding the potential to either purchase additional MSRs or enter into sub servicing agreements. Our current focus though is on welcoming the almost 500,000 customers to our platform.

Next let me take a moment to talk about the current market dynamics. We have noted for over a year now that the increased cost of compliance and technologies could lead to industry consolidation. Seneca and USAA are both examples of this. As noted on this slide, there is $1.7 trillion of MSRs held by servicers with portfolios between $15 billion and $100 billion per inside mortgage finance. Approximately 45% of that is held by non-bank servicers. We view this as a significant opportunity. With our expansion into private label sub servicing we can now address effectively this entire market. Furthermore, we continue to engage in discussions with multiple parties regarding the potential to either purchase additional mortgage rights or enter into sub servicing agreements. And we continue to work closely with our strategic partners such as New Residential and Seneca and others as they explore growth opportunities.

Now let's turn to Slide 7 and talk about originations. Our origination segment is on track to have its best year since 2012. With reduced mortgage rates, the refinance market -- mortgage market continues to be strong. Originations posted $54 million of pretax earnings during the quarter, that is up 35% quarter over quarter. During the quarter our direct-to-consumer business drove the increase in funded volume at very attractive margins. In total the origination business funded $5.2 billion for our servicing platform without utilizing any overall capital. Our origination strategy is to retain our customers. The recapture rate remains strong and 29% we are confident that we can further drive customer retention through focused product offerings, targeted marketing campaigns and operational execution. And we also plan to utilize automation and process enhancements to reduce the fulfillment cost per loan, thereby continuing to make us more competitive. In summary, originations is well positioned in the current interest rate environment to continue to deliver solid operational results and continue to replenish our servicing portfolio at attractive rates.

Now let's talk about Xome on Slide 8. Our Xome segment delivered impressive results in the second quarter driven by strong property sales. We also expanded our third-party revenue to 37% driven principally by our title and close business as well as our focus on technology offerings. Some additional highlights this quarter include the migration of all assets to our Xome platform which leverages our proprietary auction technology. The platform consolidation reduces external vendor cost by approximately $4 million annually and the Web site continues to increase transparency, reduce fraud risk and provide better execution for property sales as evidenced by higher sales price and lower average days to sell compared to traditional sales. Finally, we continue to see a huge opportunity with respect to Xome in the technology space. We have developed proprietary mobile apps, auction platform, valuation platform and work flow technology to name a few. Over time we intend to make these and other new technologies available to the market driving high margin revenues into the existing services.

Now let's turn to Slide 9. We ended the quarter with $624 million in actual cash and were substantially above regulatory capital requirements. We are confident that we have surplus capital and liquidity to execute on our growth plans and take advantage of current market conditions. As a reminder, we have discussed for years our intent to pursue a more capital light strategy. This includes multiple steps including sale advances, use of excess financing and sale of loans with servicing retained, to name a few. In addition, the significant expansion into sub servicing also serves to further our capital light strategy by adding high margin servicing with limited capital.

Basically the combination of sub servicing as well as the continued improvement in portfolio performance is expected to raise our return on equity and assets and deliver strong improving cash flows that can be used to delever where appropriate or return value to shareholders. With respect to our share repurchase program, we have repurchased 125 million shares to date at an average price of $10.95. This was over a 12% discount to our current trading price. As stated previously, there is no doubt that our share price is understated and we will continue to support our share price where it makes sense through share repurchases.

Turning to our most important asset, our customers, let's spend a moment on Slide 10. We are on a journey to become the benchmark for customer service in the industry. To that end we continue to see an impressive decline in customer complaints. We are the first to admit that we are not perfect and we have got a long way to go, but we continue to make progress on our journey to deliver radical services to our customers. Let's remember that these investments make financial sense as well, improving the customer experience and investing in technologies that facilitate our customers managing their home ownership, reduce cost in many areas from complaint monitoring to call center operations. In addition, it improves our ability to retain customers and there is no doubt that it is much more economical to retain customers than to acquire. In summary, we continue to make significant progress which has facilitated new sub servicing relationships. However, we still are very excited about the improvements yet to come.

Let's conclude on Slide 11. In closing, I want to wrap up the call the way I began. There is no doubt that from a financial, strategic and capital perspective we are the leader. Our leadership position translates into significant market opportunities to not only expand our leadership position, but partnering with others who are growing their book and to partnering with additional financing providers when acquisitions make sense. We continue to believe there is a significant opportunity to deliver shareholder value given the strong cash flows generated across our portfolio, the increase on our sub servicing portfolio and the undervaluation of our existing assets and integrated platform.

I will now hand it over to the operator to open it up for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Doug Harter from Credit Suisse. Your line is now open.

Doug Harter

In the servicing profitability I was hoping you could talk about the deal collapse fees you got this quarter and help us think about what could be a more normalized run rate over the course of a year as NRZ looks to continue to collapse deals.

Robert Stiles

So the deal, Doug, this is Robert, the deal collapse was actually a reverse call that we owned, it was not owned by New Resi. And there is two additional ones out there on the portfolio that we will probably execute next year, some chance that it could be executed, one could be executed at the end of this year. We provided that at 17 million in the current quarter of 1.7 bps, both in the earnings release and the deck. So that is the way to think about it. It was a reverse cleanup call that we acquired with one of the reverse portfolios, there is three out there total that we can do, two more pending and will probably occur in 2017.

Doug Harter

Okay. And then just looking at the profitability of servicing going forward, I guess as you think, obviously the 1.7 bps probably doesn't recur. But I guess how should we think about the other gives and takes on servicing profitability in the back half of the year?

Jay Bray

I mean I think, Doug, it is important to note that in the second quarter we achieved the 5.1 bps even with a $13 million increase in amortization, so quarter over quarter. So I think that is kind of pretty powerful when you think about the results of the second quarter. I think for third and fourth, or the remainder of the year, we are committed to achieving the five basis points that we have talked about for the year. I think one of the things it will depend on obviously prepayments, amortization. But from a core operation standpoint I think you will continue to see steady improvement there. And we feel good about it. And the sub servicing, just from an overall basis point standpoint, I think you understand that. I mean that will be probably closer to four, four-plus basis points. But for the year we are committed to exceeding five.

Doug Harter

And just on payoff requests. Can you talk about what you have seen in July as far as payoff requests?

Jay Bray

Yes, they were down in July, I think they are down 6% or 7%. And the first couple of days in August is obviously not a trend. But we are seeing the -- same lower than they were in July, so -- and originations in the quarter or at the start of the quarter fantastic -- we had an awesome July. And so I think we are shaping up pretty well.

Operator

Thank you. Our next question comes from Bose George from KBW. Your line is now open.

Bose George

Just in terms of the profitability on the new the sub servicing business that you are putting on. Your guidance looks like it works out to around five basis points. Is that right? And also can you just talk about the pretax margin, how we should just think about the top line of that business?

Robert Stiles

So on the sub servicing profitability, Bose, the guidance was closer to four, but there is a -- it is just not all sub servicing boarding in there, there is an additional $25 billion-$30 billion boarding this year plus an additional $20 billion plus boarding very early in 2017. That is MSR acquisitions and other platforms to have higher. So that is why you go from the $0.40 EPS to $0.45. So that is really what is driving that. As far as from a margin perspective, what we have always said on sub servicing is it is a lower bp product but it is a higher margin product. So it exceeds 30 -- it is between -- it is mid 30%s margin really is what we would expect to see on that sub servicing business and can be higher depending on the mix and corporate cost and some other aspects.

Bose George

So the average servicing fee that you guys get on that is kind of a low-double-digit number just back of the envelope?

Jay Bray

Yes, that is right.

Bose George

And then in terms of the pipeline, is it now more weighted towards sub servicing versus owned servicing, or is it just that these deals happen to happen now but it remains pretty balanced?

Jay Bray

I think it remains pretty balanced. There is clearly some transformational opportunities out there, right. There is some large platforms that we are working with our partners on and that would be mostly acquired servicing, not sub servicing. So, if you exclude those then it is probably 50-50 sub servicing and acquisition opportunities. But I will tell you, I don't think we have seen as strong a pipeline that we have now in years, probably at least a couple years. So there is plenty of opportunities.

Bose George

And then just one more. On the NRZ deal collapses, you guys also get a fee on that. Does that just offset sort of an MSR reduction or is that sort of incremental value you can get if the collapse of the NRZ pickup momentum?

Jay Bray

It is definitely incremental value; we earn a fee for that. I don't know, Robert, do you want to add anything to that?

Robert Stiles

Yes, most of the collapses they have done to date have actually been related to their acquisition of HLSS more than it has been our portfolio, Bose. So we assist with that and earn a fee for helping them through that process as well, but there has not been a huge impact on our portfolio yet related to their calls.

Operator

Thank you. Our next question comes from Jessica Ribner from FBR Company. Your line is now open.

Jessica Ribner

Just one question in terms of the pipeline, what is your capacity and do you see the same kind of $500 billion overall MSR pipeline that NRZ has been citing?

Jay Bray

Yes, I think we do. I think it is 500 billion makes sense and that is how we are thinking about it as well. From a capacity standpoint the way we have always approached these is we maintain within our platform existing capacity for call it 50 billion. And obviously that capacity could fluctuate depending on the delinquency level of the portfolio. But when we think about the pipeline and the 500 billion, similar to what we did with Seneca, I mean there we basically took some of their people and we now have more capacity there in Buffalo as well. So if we did a larger acquisition within that 500 billion we would either take some of the existing people that are part of that platform or we have proven time and time again that we can organically grow our talent and hire as well. If you look back, what we did with BofA, we boarded 200 million over the span of a year and we hired all those people into the Nationstar platform. So, we think we are the best frankly from a boarding standpoint, building capacity. And so, that is how we would think about those opportunities.

Robert Stiles

Jessica, I would just add, I mean it really comes down to technology, facilities and people, they cover the people. Technology we can go up to 6 million loans so we have plenty of room there. And facilities, we have expansion rights in certain facilities that allows us to hire up, so it is really, to Jay's point, we just need to hire the right number of people as these opportunities come up, so plenty of opportunity for us to take on these additional portfolios.

Operator

Thank you. Our next question comes from Jeremy Campbell from Barclays. Your line is now open.

Jeremy Campbell

Just want to clarify something. When you enter into sub servicing contracts do you guys price those to like a pretax margin on a basis point perspective? Or is it more like your NRZ relationships where your partner gets a fixed return and your profitability could oscillate a bit?

Robert Stiles

It is more the former, Jeremy, it is that our returns are more fixed than the partner. So we are pricing it for margin and for an -- achieve a bps rating.

Jeremy Campbell

And then secondly, how much do you think the regulators will allow you guys to grow in the servicing book on a quarterly or annual pace just given their historic preference to keep it pretty measured?

Jay Bray

Well, I think, look, we've obviously worked with the regulators in the last I mean we boarded 95 billion last year we'll board 130 billion this year. And every step of the way we work with our regulators. And we provide them with our capacity plans, we can provide them with customer experience plans. And I think they are comfortable -- obviously they have been comfortable to date improving these opportunities. And so I feel like they would be comfortable moving forward as well. And we work really hard to have good relationships with them to be transparent. So we never think of frankly any kind of cap on growth, we think about how are we going to take care of these customers and what is the best way to do it. And I think we have proven time and time again we can do that. So that is how we think about it.

Operator

Thank you. Our next question comes from Vik Agrawal from Wells Fargo. Your line is now open.

Vik Agrawal

On the sub servicing contracts can we -- I just want to touch base or try to get a better understanding of the expenses. I think you said you are looking for four basis points pretax. Is that -- should I think it as four to five bps on expenses and is that direct cost?

Robert Stiles

It is going to depend on the deal, Vik. So not all -- as we have talked about before, what we try and do with these sub servicing deals is at the end of the day price them to earn the four bps margin. But that pricing depends on several factors including how origination fees work, how -- what the portfolio mix is, how -- whether you get the ancillary fees, things of that nature. So, not trying to avoid the question, but on an overall basis, yes, I think you could look at it that way. But it really depends. Each one of these deals are slightly different.

Vik Agrawal

[Multiple Speakers] no, I appreciate that, go ahead.

Jay Bray

The majority of these loans, Vik, are current right, these are very clean portfolios. So I think the way you are thinking about it is right. I mean the cost will be pretty low and in that range.

Vik Agrawal

Yes, I was just trying to reconcile the direct costs versus what I think could be potentially on a fully loaded basis. That is what I was just trying to understand, the differential.

Jay Bray

Yes, I mean fully loaded, if you think about it, we don't need, I mean, additional corporate frankly. I mean we are -- we have already got a large infrastructure if you will and legal, compliance risk, etc. So I would think about it as this is just direct cost, primarily.

Vik Agrawal

And then I think you said you are looking to board $130 billion. How is that going to add, I mean how should I think about that in regard to I think your earlier comment about limited capacity currently. So, are you going to add capacity by the end of the year? And you said limited costs. So I think wouldn't there be costs associated with it?

Robert Stiles

No, I think we said limited capital needs, not capacity. We have plenty of capacity. So basically what we are saying is we are boarding all of this with almost no use of capital.

Vik Agrawal

And then the length of the sub servicing contracts?

Robert Stiles

Typical length is five years subject to normal renewals.

Vik Agrawal

And then on the MSR mark, I think it was roughly 7% of the MSR value this quarter. It was slightly higher -- it was higher than what I would have thought. Were there some unique items that occurred in the quarter to cause that? And are you going to potentially look to hedge the MSR at this point?

Robert Stiles

So, as far as unique items, no, what does happen though, as we talked about before, is that the amortization that we show on -- in our 10-Q and in our filings and all is on the historical cost basis. And so, there is always an additional amortization that goes through that fair value mark. That is really the difference. If you take the movement in interest rates and you go period over period you add that, that is what gets you to the mark effectively. As far as hedging, we continue to evaluate that is the short answer. If you wanted to hedge the whole mark you would have to hedge prepayment speed and forward curves on escrow. So it's a pretty complex thing at the end of the day. But we are taking a very strong look at hedging particularly prepayment on certain aspects of the portfolio like certain pieces of Fannie, Freddie and Ginnie.

Jay Bray

Keep in mind that still a third of the portfolio is credit sensitive. And so consistent with what you saw if you listened to the NRZ call, we saw very stable prepayments there, no volatility frankly in the prior year I mean since the prior year. So it is the rate sensitive stuff that we continue to look at hard. Recapture has provided a nice hedge to that, if you will. But like Robert said, it is something we will continue to look at. And the fact of the matter is, and we added something at the end of the presentation in the appendix. I mean when you look at really fundamentally the results of our investments, I mean they are, we are still consistent with our original underwriting. And when you look at the nominal value of the expected future cash flow, it is significant. You are looking at a book value of 2.8 billion expected future cash flow is 4.5 billion. So even though the accounting piece introduces volatility ultimately the results have been consistent with how we underwrote the deals and performing well.

Vik Agrawal

Okay. And then finally, are you looking to repurchase the shares roughly for the remainder of the year similar to first- and second-quarter levels?

Robert Stiles

It's all going to depend on share price, Vik.

Operator

Thank you. Our next question comes from Mark Hammond from Bank of America. Your line is now open.

Mark Hammond

I had a question on the debt side, just how do you see your debt capital structure playing out for the rest of the year with respect to the unsecured bonds given the strong pipeline you are seeing?

Jay Bray

I think it will be consistent with what we said on prior calls. I mean we don't have any immediate plans to delever, to your point, given the strong pipeline. I mean there is plenty of investment opportunities, I think the good news is the market, at least on the legacy portfolios that we are looking at, we feel like returns are at very respectable levels where we can invest. And so, I don't think there is any immediate plans to delever. Now, depending on how the pipeline unfolds, depending on how we're partnering with NRZ and others on those investments, you could see us delever some. But there is no immediate plans.

Operator

Thank you. Our next question comes from Michael Kaye from Citigroup. Your line is now open.

Michael Kaye

Just a quick clarification on that 5 basis points servicing profitability target, are you saying you can hit that 5 basis points for Q3 and Q4 this year? Or you're just really saying more on average for the full year since you are already at 5.9 that you are going to get to 5 basis points because you have a lot of sub servicing boarding this quarter?

Robert Stiles

We have always said, Michael, that it is on average and you picked up on a good point. So we have twice the sub servicing now that we -- versus what we expected at the beginning of the year. There will be noise, a little bit noise in Q3 around both the boardings and also interest rates. Obviously coming off Q2, although we talked about payoffs possibly being lower, but then you also get improvement in seasonality towards the latter half of the year. So there is some positives that are coming into play. But the comment has always been on the average over the full year.

Michael Kaye

I mean do you think you could hit 5 basis points just given the headwind of so much sub servicing coming in or you just won't say?

Jay Bray

Well, I would never use the word headwind with respect to sub servicing. I mean let's keep this in perspective. We just announced USAA which is probably if not the best among the best financial institutions in the world. And so, we are super excited about that and it is going to result in strong profit, frankly with no capital. So that's the way we think and -- Seneca as well. And both those entities are going to continue to originate and acquire. And so they are the gift that keeps on giving which I think is something we are extremely pumped about. I think from a -- the five basis points, look, I think we think we can hit five basis points in the third and fourth quarter, but the sub servicing is going to not be five, it will be closer to five. And it will depend on the prepayments. But if you just look at the core operation, I mean it is -- even with $13 million more of amortization in the second quarter it hit five basis points. So I think that is pretty remarkable and I am really proud of that team and I think that is the goal to continue to hit the five in the third and fourth.

Michael Kaye

Just switching gears, we didn't talk a lot about Xome this quarter. But any updates on this CEO search? Any updates on how you are thinking about it strategically in form of potential some separation or minority investment at some point?

Jay Bray

Yes, I think, look, I am actually super pleased with the quarterly results. I mean if you look at -- I think this is the most profitable quarter we have had since second quarter of last year. And we have done what we said we were going to do. We took a step back, kind of fixed the operations, get it back to the profitability levels that we knew were possible. We have made some leadership changes in the title business which I think will continue to show improvement there. From an overall CEO, I think I am comfortable with these businesses reporting to me. And I think the results have kind of proven that that works pretty effectively. We are looking for a technology executive still and I think we are probably -- that will happen by the fourth quarter. When you think about the assets within Xome that are the technology assets, I mean we don't talk a lot about it, but we have seen the revenue double there year-over-year. And I think that is potentially a crown jewel that will deliver a lot of value.

As far as a separation there is no immediate plans, but it is something that we continue to look at. I really believe that some of the technologies that we have built could be sold to third parties. And frankly is better, in my opinion, than what is out there in the marketplace today. So that is what we are looking for is a real technology leader that can take this and drive it and sell third-party products and continue to deliver kind of that real estate value proposition that we have talked about. So I'm please, I really am pleased with the positive financial results there. And there is still a ton of optionality on those assets and the value that they have.

Michael Kaye

Just building on that. I just was seeing the property inventory pipeline, I mean it was down pretty significantly quarter on quarter if we cut in a quarter. Like how should we think about at least the back half of this year, the profitability just given a steep reduction in the property inventory?

Jay Bray

I think the third quarter will be lower than the second for Xome just because what you just noted, the property. But that is a function of a couple things. One, I mean the overall -- our overall portfolio of delinquency has come down. But we continue to make progress with third parties in the REO business. I think what you will see offsetting some of the REO decline will be some of the technology things that we are talking about as well as title business, valuation business, I mean those things are hitting their stride and they continue to add a lot of third-party clients and clients that are real leaders in the mortgage business. So, I think you should still see low to mid 20s in those businesses for third and fourth and which will be great. I mean it will be stronger than we have seen last year, for sure. So you will still see strong results there.

Operator

Thank you. Our next question comes from Fred Small from Compass Point. Your line is now open.

Fred Small

Just following up on Xome, I guess when I look at the properties sold there that is 100% REO or substantially all REO, right?

Jay Bray

Predominately, there is some short sales I think in there and some other things.

Robert Stiles

There is a couple hundred retail assets as well. Plus don't forget that we are doing the pilot for one of the GSEs as well. And that we are anticipating a decent bump in assets for that towards the latter half of this quarter or latter part of this quarter. So, it is predominately REO assets, but there is a couple hundred REO -- sorry, couple hundred retail and then GSE expansion.

Fred Small

And that is a little shift in the mix versus Q1?

Robert Stiles

Yes, the retail assets continue to grow nicely quarter over quarter, but it is off a small base. But that is continuing to grow. And then the GSE, we have been in pilot, we were in a phase 1 pilot for six months probably, maybe even a little longer than that, performed very well in that pilot. And we are just waiting to see what the new allocation of assets are beginning probably in September.

Fred Small

Free okay, great. And then looking out longer-term I guess, if you were to think about -- and I know that the REO inventory, you are selling it and it is replenishing. There is that play. But just the duration of that cash flow that you expect from the REO business until it sort of normalizes.

Robert Stiles

Well, so I guess the way to think about it is we are selling between 1,300 and 1,500 assets a month call it roughly and we are replenishing just out of our book 1,000 assets. So what we are working on doing is between retail and the GSEs and other third parties that we are in discussions with is trying to sell 1,500 assets a month and replenish 1,500 assets a month is really what -- and we have got a little ways to go and some work to do there, but that is kind of how we think about it back of the envelope.

Jay Bray

And I would say that the one thing that clearly is not in the numbers is any of these acquisitions that we talked about previously. I mean if you -- if we end up working with NRZ and others on some of these large opportunities we would expect that would feed into that pipeline. So clearly that is not in any of the current run rates. But I think that will happen.

Fred Small

Okay, got it. And just before I follow up on that -- in terms of that sub servicing that you have boarded, is there much opportunity for Xome there? Or is there a way to frame that in the context of Xome's pretax basis points on UPB for sub surfacing versus the owned servicing?

Robert Stiles

There is some opportunity there. So for example, with Seneca one of the reasons they chose us was because of our ability to retain platforms and retain customers and -- retain the MSRs and keep the customers. And through that that is obviously utilizing our originations platform and through that there is some opportunity, as we have talked about before, with appraisals and with title. It is not a huge opportunity and, as far as also with USAA and others, we continue to be in discussions with them as far as being able to utilize those services as well. I think Jay hinted at it one thing I think that was missed previous quarters we talked about title boarding, to large customers are in the process of boarding those two, they have three more coming on board. So, there is some really good work in both the title and appraisal side just in general boarding third-party customers. I mean think about it this way, second quarter was driven by REO but yet our third-party revenues continue to increase which is driven by title and technology. And that was a pretty impressive result actually for Xome to achieve that in the second quarter.

Jay Bray

And I think there are some strategic things we can do with USAA, Seneca with the Xome platform. But I think Robert said it well. I mean there definitely will be some origination opportunities. These portfolios are pretty clean so you are not going to see a ton of stuff flowing through to REO. But there definitely will be opportunity on the origination side.

Fred Small

And just on the -- if I think about the $28 million of adjusted pretax in the quarter, how much of that was from REO sales?

Robert Stiles

We will break out the numbers in the Q tomorrow more specifically. But I would say the growth quarter over quarter was largely driven by REO, there was improvement in title, there was improvement in appraisal and valuation. But it's fair to say the growth quarter over quarter was REO. And part of it was the work we've been doing on the pipeline. Also remember, second quarter from a seasonal perspective is also a very strong quarter for home sales in general including REO and property sales. So, that was absolutely the primary driver. But we intend to file our 10-Q most likely tomorrow and it will have all that detail in it.

Fred Small

Well, just on the -- do you break out the profitability there on the -- I don't know, I can't remember if you break out the margin on REO sales. I think you break out the revenue splits.

Robert Stiles

We do break out pretax income, we don't break -- which obviously allows you to do the margin.

Fred Small

Okay and then on the…

Jay Bray

But I think of the $28 million it is going to be 70% plus of it would be my guess. And then the -- but the good news I think, as I mentioned with Michael's question, is that I mean we are comfortable. I think Xome is going to continue to produce kind of low to mid 20 profitability in kind of third and fourth quarter, at least that is based on what we see now. So, I think this quarter clearly was a great quarter and, like I said, got us back to where we frankly should be from a profitability standpoint. But I think you are not going to see a dramatic fall off there in the third quarter based on what we are seeing now.

Fred Small

And I think it response to maybe the question on the capital structure, you talked about legacy portfolios that you are looking at. Do you have a sense of what size legacy portfolio you could sort of board in one fell swoop or the regulators might be okay with now?

Jay Bray

Well, as you know, it is never one swoop, it is a plan. And so, I think we are highly comfortable that we could board 100 billion to 200 billion over six months to a year. Now that will depend on the delinquency level, etc. And I think with the regulators, again, it is all about the plan. And who better than us, frankly, to walk through that plan and talk -- we have learned a lot of lessons and we haven't done everything right. We have done over 4,000 boardings, like nobody else has done that. And so, we think we have a great plan for those type of acquisitions, we would lay that out. And I think that size would take six months to a year, depending on the counterparty, the complexity, etc. But we feel very comfortable that we can do that and frankly feel comfortable we can get it approved.

Fred Small

And sorry, last one, just on the recent news about the probe into the reverse mortgage business. Is that something that you think is going to -- is that something that could drag out or is that something that you think gets sort of -- we have seen various efforts from the NYDFS, do you think that that is something that gets wrapped up quickly?

Jay Bray

Well, I think -- I would put that in the camp of kind of business as usual. I mean The Post ran an article about some customer that unfortunately had a bad origination experience, then cited other servicers like us, RMS, etc. Then NYDFS in its letter a day or two later -- and the letter primarily focused on origination and then some servicing questions. We have never originated a loan -- a reverse loan in New York. In fact, we only -- when we bought Greenlight, I don't know, four years ago they were in the reverse origination business and after we bought them we shut it down. And so, we don't originate today, we have never originated any except for our brief couple months with Greenlight. And we have never originated a reverse loan in New York, so just to kind of set the stage and get the facts right.

And so, I think this is the kind of stuff that we would expect to get from regulators frankly. I mean there is always going to be questions, there is a was going to be requests for information, it is kind of the world we live in. And so, we will answer the questions and work with those guys and we have a good relationship with them and we will address it. But if you look at the servicing business, I mean we are the largest reverse servicer. And so, clearly we are going to get questions about reverse servicing. I also think we are the best reverse servicer. I think our partners would tell you that; whether it was Fannie or others, I think they would tell you that. So, I mean that is a long answer to your question. But I don't see it as something that is going to drag out forever. I mean we will answer the questions and kind of go through it.

Operator

Thank you. And I would now like to turn the conference over to Jay Bray for any closing remarks.

Jay Bray

I would just say thank you to everybody. We really appreciate your participation and we will be having called for the rest of the day with a bunch of investors and analysts. So appreciate it. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.

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