Ocwen Financial Corporation (OCN) CEO Glen Messina on Q1 2022 Results - Earnings Call Transcript

May 05, 2022 12:28 PM ETOcwen Financial Corporation (OCN)
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Ocwen Financial Corporation (NYSE:OCN) Q1 2022 Earnings Conference Call May 5, 2022 8:30 AM ET

Company Participants

Glen Messina – President & Chief Executive Officer

June Campbell – Executive Vice President, Chief Financial Officer

Dico Akseraylian – Senior Vice President, Corporate Communications

Conference Call Participants

Eric Hagen – BTIG

Matthew Howlett – B. Riley

Preston Graham – Stonegate

Drew Mackintosh – Mackintosh Investor Relations

Operator

Good day. And welcome to the Ocwen Financial Corporation First Quarter Earnings and Business Update Conference Call. For your information today's call is being recorded. I would now like to turn the call over to Mr. Dico Akseraylian, Senior Vice President, Corporate Communications. Please go ahead, sir.

Dico Akseraylian

Morning. And thank you for joining us for Ocwen's First Quarter Earnings Call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chief Executive Officer, Glen Messina and Chief Financial Officer June Campbell. As a reminder, the presentation or comments today may contain forward-looking statements made pursuant to the safe harbor provisions with Federal Securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are to different degrees uncertain.

You should bear this uncertainty in mind and should not place undue reliance on such statements. Forward-looking statements involve assumptions, risks, and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2021, and our current and quarterly reports since such date in the past, actual results have differed materially from those suggested by forward-looking statements. And this may happen again, our forward-looking statements speak only as of the date they are made and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

In addition, the presentation on our comments contain references to non-GAAP financial measures, such as adjusted pre-tax income and adjusted expenses among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. And then an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States. The reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures may be found in the press release and the appendix to the investor presentation. Now, I will turn the call over to Glen Messina.

Glen Messina

Thanks, Dico. Good morning, everyone. And thanks for joining us. We're looking forward to sharing our progress with you this morning and our plans for the balance of the year. Let's get started with Slide 4 to review a few highlights for the first quarter. We believe our actions to build a balanced and diversified business have positioned us well to navigate the current mortgage cycle. And our first-quarter results are consistent with our expectations. We delivered net income of $58 million dollars strong annualized ROE in the quarter, and a 14% appreciation and book value per share from year-end 2021, we are taking a cautious and prudent approach to investing and managing our liquidity position, which has improved from year-end.

Consistent with our previous guidance in the first quarter, we opportunistically sold select MSRs at what we believe our robust valuation levels to harvest value appreciation and mitigate asymmetric hedge risk in our MSR portfolio. Our servicing platform is performing well operationally, our servicing financial performance is improving with rising interest rates. MSRs are appreciating in value. Runoff is declining. We continue to improve our cost structure and our portfolio is growing. Yesterday, we announced our sub servicing agreement with NRC was renewed into year-end 2023 with annual extension options thereafter.

We thank NRC for their confidence at us, we appreciate their business, and we are looking forward to continuing to serve them and their borrowers. Forward originations faced a challenging environment in the first quarter, while total servicing additions of $20 billion is up about 46% year-over-year driven by subservicing additions. Origination volume was down 13% year-over-year and margins were below expectations. We are taking our necessary actions in forward originations to reduce our operating expenses and shift our product mix and service mix to restore profitability. Our reverse business is performing very well both on originations and subservicing.

Origination volume is more than doubled year-over-year. Margins are holding flat relative to Q4 and [Indiscernible] market is growing. Reverse sub-servicing is performing ahead of expectations and we're building a strong opportunity pipeline to support future growth. Let's turn to Slide 5 to discuss the environment at our market positioning. Interest rates have risen higher and faster in the first quarter that industry forecast suggested just a few short months ago, and they continue to increase. In the current environment we see 3 main drivers of our profitability going forward. First, with the core strength in servicing and an expectation for even higher interest rates, we expect our servicing business will be an important driver of our future earnings.

Our balanced business model is working, servicing pre -tax income in the first quarter is up significantly versus the first quarter of last year due to MSR value appreciation, lower payout volume, expense productivity, and portfolio growth. The profitability, improvement and servicing and MSR value gains more than offset the decline in profitability and forward originations as volume and margins contract. Forward originations will be a less important driver of earnings in this market cycle, but a critical element to replenish and grow our servicing portfolio. Second driver is sub-servicing. We made great progress in growing our forward sub-servicing business supported by our global technology-enabled, scalable platform.

We believe our success here reflects our proven industry-leading operating performance that has been recognized by Fannie Mae, Freddie Mac, and HUD with top honors in their respective servicing performance recognition programs. We continue to be a leader in special servicing, supporting borrowers and investors and outperforming MBA Moody's industry operations benchmarks. We worked hard every day to earn our clients trust and this has been rewarded with meaningful subservicing additions and potential opportunities. We've added $64 billion in subservicing UPB in the last 12 months, we have $28 billion in scheduled to subservicing additions in the next six months.

And our forward subservicing opportunity pipeline of roughly $280 billion in potential additions. In addition to the NRC renewal, we are at advanced discussions with Matt to potentially double our investment capacity. Third driver is our reverse business. We are the only large-scale, full-service, end-to-end reverse mortgage provider in the industry. Industry opportunity is growing, our originations volume and market share continues to improve and origination profitability is stable. Our reverse originations, our reverse subservicing business is gaining scale, profitability improving, and we have an opportunity pipeline of roughly $55 billion.

Overall, we're really excited about the potential for reverse business and our overall business and do not believe our recent share price is reflective of our financial position, earnings power, or the strength of our business. With industry volume shrinking, we continue to look at potential M&A opportunities that can expand scale and capabilities or otherwise create value for shareholders. Let's turn to Slide 6 for some servicing highlights. In servicing, MSR value net of hedges increased by $56 million in the First Quarter. So far through April, MSR value net of hedges has increased by roughly $36 million. Based on our MSR sensitivity profile, we estimate an immediate 25 basis points, parallel increase in interest rates would increase our earnings per share about roughly $2.70, which translates into a DBO1 of roughly $1 million.

Servicing income excluding MSR gains has increased by $23 million year-over-year, despite lower EBO gains industry driven fair value losses on repurchase loans held for sale. Our diversified growth strategy executed by our enterprise sales team has resulted in meaningful servicing portfolio growth year-over-year, up over 50%. All segments of our portfolio owned servicing, subservicing. Forward, reverse, and small balance commercial are growing. We're targeting forward servicing and subservicing UPB of roughly $290 billion by year-end. The extension of our current subservicing agreement within our Z which covers approximately $54 billion in UPB at the end of the Q1 had been set to expire in July.

And the agreements have been extended until year-end 2023, with annual extension options thereafter. As part of the renewal, we agreed to share a portion of some ancillary revenues and simplify the future process for extensions at the end of each term. As we've said in the past, this contract has a thin-margin, but considering the significant cost reductions we've achieved in our servicing platform, we believe the renewal is a good outcome for both companies. Moreover, we appreciate NRC is a business partner and their confidence in our servicing capability reflected in the renewal. Through the combination of scale, portfolio composition, technology, investment, and process re-engineering, we've reduced our servicing cost structure in basis points of UPB by over 30% or almost 4 basis points in the last year.

Through continued digitization and process improvement, we are targeting further reductions to 7 basis points of UPB by year-end. Higher interest rates are driving lower pre -payments and related expenses. We believe runoff may slow further to between 13.5 and 14% as short-term interest rates increase, we expect higher revenue from our $2.4 billion of escrow balances. This should help offset higher interest costs on our $1.2 billion of fluid and right debt. We are actively managing our portfolio as is evidenced by our sale in the First Quarter.

And we are executing several sale transactions to reduce our severely aged Ginnie Mae loan population. We believe the sale will improve the quality of earnings going forward through lower unreimbursed claims expense and at derisks our portfolio. We did experience a loss of MSR value for these loans in the first quarter, and we'll recognize a loss on sale in the second quarter upon completion of the sale. We believe we have tremendous leverage in our servicing platform and we're excited about the growth opportunity for servicing, particularly in subservicing. Let's turn to Slide 7 to review forward originations. I believe it's generally understood that the environment for forward originations is tough and likely to get tougher. We are taking actions in response.

Our origination team delivered $20 billion in total servicing additions up 46% year-over-year, largely driven by sub-servicing additions. But on a sequential quarter basis, total origination volume was down 23%. We experienced a pre -tax loss and forward origination driven by lower lock volume, lower margins, and volatility related hedge in effectiveness. During February, through mid-March, we saw a wide range of MSR values between the primary origination market, evaluation experts, and bulk sales transactions at sub coupon levels of variation was more than 15 basis points. During this time frame, we made the prudent decision to intentionally constrained volume and correspondent lending by copying new origination MSR prices.

While we validated MSR values through our valuation experts and our own bulk sales transactions. Copy new origination MSR prices drove margin compression and volume reduction beyond competitive influences, as well as drove hedge and effectiveness. Since mid-March, we've seen a much tighter range of MSR values. We have since lifted the pricing caps and correspondent lock volume margins and hedge performance have improved. We continue to focus on growing our client base, leveraging our multichannel capability. Our total client count is up over 2.5 times in the first quarter last year, and it continues to grow. We're growing higher-margin Ginnie Mae pit and non-agency products and best efforts in non-delegated deliveries.

Volume here is doubled year-over-year, and April volumes have exceeded the first-quarter levels. Our refinance recapture rate continues to improve. We achieved 39% during the first quarter with marches level at 41%. We estimate annual forward consumer direct volume for 2022 will be roughly half of 2021 levels. Portfolio growth, improved recapture rate, and cash-out refinancings which are now 72% of our business, is offsetting in part to significant decline in rate interim refi opportunity. Under current market conditions, we must adjust our capacity and cost structure to match a smaller originations market. In March, we executed actions to reduce our forward origination staffing by 21% including contractors.

Further reductions are expected to occur during the second quarter. We are targeting to reduce our cost structure and basis points of volume by roughly 45% by the fourth quarter versus the first quarter of this year. For the full-year, we're targeting about $75 billion in total towards servicing additions. This includes $45 billion in subservicing additions, including MAV and about $30 billion of forward originations. Let's turn to Slide 8 to discuss our reverse business. We're very excited about the opportunity in reverse mortgage market. Increases in home price appreciation.

The increase in the maximum claim amount to roughly $970,000 in combination continued to fuel new loan production and is helping to offset the impact of higher interest rates. Demographics here are favorable with 12,000 people turning age 65 each day and home equity held by this group now tops $10 trillion. There is also a growing amount of research and positive news articles supporting the consideration of reverse mortgage as retirement tool. Origination performance has been quite strong and is another successful example of our balanced and diversified business model. We continue growing market share, which is up 1.5 percentage points over Q1 versus the same quarter of last year.

Origination volume is more than doubled year-over-year. We're seeing growth in all channels; direct-to-consumer, retail, wholesale, Encore's about lending direct-to-consumer retail is our fastest-growing channel. As June will share in a moment, revenue margins have drifted down over the past year. However, margins by channel have been stable for the past several quarters. We are positioned as the only large reverse mortgage market participant that can offer end-to-end capabilities across originations and servicing. The integration of the RMS platform is going well, loan boardings are ahead of schedule, and we're slightly ahead of our financial expectations as result.

Our subservicing opportunity pipeline has grown at $55 billion, and interest in our platform has been quite strong. We expect the subservicing platform to be profitable by Q2 and thereafter, after we complete the integration and achieve our initial scale objectives. We believe we're uniquely positioned in reverse mortgage market and a diversification this business provides, helps mitigate our reliance on the forward mortgage origination market. Now I'll turn it over to June to go through our financial performance in more detail.

June Campbell

Thank you, Glen. Please turn to Slide 9. In the first quarter, we reported $11 million in adjusted pre -tax loss. You can see in the top right of the Slide year-over-year walk. Our originations segment reported a $40 million reduction in adjusted pre-tax income from reduced industry volume and lower margins. While our servicing segment reported a $30 million improvement in adjusted pre-tax income from higher UPB due to growers -- growing subservicing, slowing prepayments and operational efficiency. I'll talk more about the segment results in the next few slides. Net income in the quarter was $58 million up from $9 million year-over-year. Consistent with our first half 2022 guidance, strong net income which resulted $56 million in MSR fair value adjustments, net of hedges, which included $13 million of evaluation assumption loss on delinquent Ginnie Mae loans scheduled for sale in the second quarter.

Other notables included legal settlement recoveries, and a favorable long-term incentive adjustment from the decrease in our stock price. We ended the quarter with strong liquidity, $269 million in cash and $45 million in available borrowing. Earnings per share increased to $6.30, and book value per share increased to $58. On the bottom right bar chart revenue held year-over-year as higher servicing and sub-servicing fees from higher UPB in both servicing and sub-servicing was offset by lower origination volume and margins.

The chart on the bottom right of this slide demonstrates continued, successful execution of our continuous cost improvement discipline. Please turn to Slide 10. Forward originations adjusted pre -tax income declined to a $13 million loss. As discussed, forward originations profitability was impacted by reduced industry volume and margins. Our volumes were also impacted by our intentional strategy correspondent, to restrict volume as interest rates rapidly increased. And we saw a wide range of MSR values amongst the primary origination market, broker values and bulk market values. In addition, consistent with the second quarter of last year, we transferred SMP and flow volume to math, consistent. What the terms of our agreement with math.

You can see on the top right, the decline in revenue margins experienced in the consumer direct in correspondent channels. The margin decline is a function of intensified competition. Our decision to limit new origination MSR values, and resulting hedge in effectiveness. We're taking actions to return the origination segment, profitability, reducing costs and rightsizing segment operations, as well as the Corporate function supporting the segment by approximately half continuing to grow volume in higher-margin corresponded products and delivery options. This volumes approximately doubled year-over-year.

And as you saw in Earlier Slide, we're continuing to improve recapture rates, which were up ten points from fourth quarter of 21 to 41% in March of this year. Please turn to Slide 11, the market opportunity continues to be strong in reverse originations, with continued home price appreciation resulting in increased customer borrowing capacity. Adjusted pre -tax income held at $10 million in the first quarter, consistent with the first-quarter last year. Origination volume was up $284 million year-over-year, led by the consumer direct channel, which has the highest channel margins. The growth in origination volume offset lower margins versus the first quarter last year. Margins by channel, while all were down from the first quarter last year, have been relatively stable in each channels since the third quarter of 2021.

We remain optimistic on the growth opportunity in reverse originations, and we continue to invest in resources and marketing to grow the higher-margin consumer direct channel. Please turn to Slide 12. Profitability in the servicing segment has improved as expected, with higher interest rates, our actions to build scale, deliver cost improvement, slowed prepayments, and integrate our reverse subservicing platform ahead of plan. On the left side of the Slide, adjusted pre -tax income is up $23 million year-over-year to $60 million driven by UPB increase to $275 billion as well as cost reduction of approximately four basis points of UPB. Prepayment rates were ten percentage points lower versus the first quarter of 2021 due to higher interest rates.

Unfortunately, higher interest rates also drove $7 million lower end gain on sale due to asset revaluation. Mainly on our Ginnie Mae portfolio. On the right side of the slide, we show reverse sub-servicing results. We generated a small positive adjusted pre-tax income in Q1 by accelerating boarding loans and achieving planned operating expense reduction, driving improved operating efficiency. We believe we are on track to achieve the $5 million in adjusted pre -tax income by the fourth quarter of 2022. Per guidance provided on our earnings call in February. Please turn to Slide 13.

This is our road map from actual adjusted pre -tax income in the first quarter to the projected fourth quarter of 2022, assuming a stable interest rate environment and no adverse changes in market conditions or the legal and regulatory environment. The road map is broken down by key actions to deliver our targeted returns. We expect between 9 and $10 million improvement from productivity and rightsizing actions. As I mentioned, originations is targeting reducing costs by approximately half delivering annualized expense savings of roughly $30 million. We expect between 10, $11 million improvement from growing higher-margin originations, products, and delivery options of correspondent.

And between 5, $6 million improvements from sub servicing growth and reduced front off, approximately $28 billion in sub - servicing is currently scheduled for boarding, and we have a strong sub-servicing opportunity pipeline in forward and reverse. Our projected adjusted pre-tax income in fourth-quarters, approximately $15 million up from the $11 million loss this quarter. We're targeting between 9, 15% after-tax roe before notables in the second half of this year. Were slightly reduced, lower end of our guidance since last quarter, given a severe impact of the current market environment on forward originations, our target return levels our consistent with our major competitors. We continue to guide to first half earnings being driven by MSR fair value gains, offsetting origination market headwinds. Finally, consistent with our expectation for lower origination volume levels in a more competitive market for MSRs. We're evaluating all our capital allocation options, including to support that and share repurchases. Now I will turn it back over to Glen.

Glen Messina

Thanks, June. Let's turn to Slide 14. We believe our balanced, diversified business, exemplary servicing performance, proven cost management, and track record of execution position us well to navigate the market environment ahead. Our first-quarter results are consistent with our expectations. And we delivered strong net income and book value per share appreciation. Liquidity has improved mirror end. And we're taking a cautious and prudent approach to investing, managing our liquidity position and capital allocation. Servicing financial performance is improving with rising interest rates. And we expect servicing will be an important driver of financial performance going forward. MSRs or appreciating in value, runoff is declining. We continue to improve our cost structure.

Our portfolio is growing, and we have $2.4 billion in Escrow balances which should generate increased revenues as short-term interest rates increase. We have a strong value proposition as demonstrated by our backlog of scheduled sub-servicing boarding, the NRC renewal, and a robust sub-servicing opportunity pipeline. Total originations is facing a challenging environment and we're taking necessary actions to reduce our infrastructure, operating expenses, and shift our product and service mix to restore profitability. We believe we're uniquely positioned in the reverse mortgage market and a reverse business is performing very well, both on originations and sub-servicing. Favorable demographics and home price appreciation are expected to drive further market growth. We are focused on delivering prudent growth and capital management, and we're evaluating all capital allocation options, including share in debt repurchases to maximize value for shareholders. We expect first half 2022 earnings will be driven by mSR fair value adjustments, offsetting origination headwinds, and the build-out of our reverse sub-servicing platform. We are targeting after-tax ROE before notable items in the second half of 9% to 15% with the expected benefits of successfully executing our business initiatives. I am proud of how our team is executing an unprecedented market conditions.

Our management team has a track record of successfully navigating multiple mortgage cycles with a focus on prudent growth, cost management, operational excellence, and customer experience. We will be unwavering in this focus. We're operating in a volatile and uncertain environment. We're closely monitoring the financial markets, economic environment, and industry conditions closely. We're dynamically managing our operations, plans and targets and will adjust as necessary to address emerging opportunities and risks. I'd like to thank and recognize our Board of Directors and global business team for their hard work and commitment to our success. With that, George, let's open up the call for questions.

Question-and-Answer Session

Operator

Thanks so much, sir. Ladies and gentlemen, [Operator Instructions] so, once again, [Operator Instructions] Today's first question is going to be coming from Mr. Eric Hagen, calling in for BTIG. Please go ahead your line is open.

Eric Hagen

Hey, thanks. Good morning. Hope you guys are well. A couple for myself. Did you say that you expect to sell something at a loss in the second quarter? I may have just missed what it was and also the amount of what it was. Maybe you can re-highlight that. And then I think you noted some hedging effectiveness for more volatile interest rates that can you talk about any developments of hedging the MSR, the pipeline, and how you see that evolving with higher interest rates?

Glen Messina

Sure. So I will take those two separately, Eric, we are looking at selling some severely age Ginnie Mae loans in our servicing portfolio. We had taken an an MSR mark in the first quarter June, I think there was 13?

June Campbell

13, yes that's correct.

Glen Messina

And once we buy those loans out of the respective pools and sell them, there will be an additional loss on sale. We didn't really disclose how much loss on sale is, but you get a sense of what we've done from MSR market perspective. In terms of hedging and effectiveness. Number one. Interest rate volatility during the quarter did give rise to some of the hedge volatility we saw in the mortgage pipeline. Less so o the MSR hedge and the actions we took to quite frankly step on MSR prices just given the wide range of values we were seeing in the first quarter, also contributed to some of the hedge and effectiveness because you're artificially constraining essentially the value of MSRs and a pipeline. We've since seen MSR values narrow. We've obviously confirm values with our servicing brokers and our own books of transactions and we've lifted the constraints on pricing.

We're seeing better hedge performance during the, I would say the latter half of March and into April, and margins as well have improved because we're not artificially constraining MSR values. On the servicing hedge, again, with interest rates rising, we have repositioned our hedge. So obviously, we've switched to a more option-based strategy as -- which I think is prudent as rates are moving up. We've rolled up the strikes in our TBAs and we've taken off swap coverage. That also helps preserve liquidity as rates are going up. You're not burning cash in terms of having to put post margin, so to speak. We have as well modified or adapted our hedging policy -- of as our hedging policy for this environment. We are focused now on rate protection down 25, down 50, and targeting 40 basis points, hedge coverage ratio for the down rates scenarios.

Eric Hagen

Okay, that's helpful. Maybe just a couple of more on the servicing. Do you think you guys would ever looked to sell MSRs as a form of liquidity and capital management, especially if MSR values stay relatively strong and then can you also just quickly share how the profitability between the NRC portfolio compares with just say, agency sub-servicing? Once you consider the G&A? That goes with it, thanks.

Glen Messina

Yeah. Sure. So in terms of selling MSRs, look, I think what we've shown over the last 12 or 14 months, we are dynamically manage our MSR portfolio. We are always looking at a couple of things. One is views. Starts with view of value, right? Do we have a viewer value when I'm MSR that defer some market participants. And if we think that our view of value is on under where market participants are, we would choose to sell MSR some harvest that value. Obviously within traits going UPB and certain segments of our portfolio showing a lack of better term refinancing ban out our prepayment speeds slowing to a very large degree. Create asymmetric hedge risk in your MSR portfolio.

So the essential that we did in the first quarter as we sold off vast, and mitigate that risk and harvested the capital appreciation, our value appreciation in those assets. It was June, and I mentioned on the call, look, we recognize -- look, we are operating in a volatile environment. We are constantly evaluating our capital allocation strategies. And we'll look at opportunities to manage our MSR portfolio and generate liquidity in ways that can best maximize value for shareholders.

Eric Hagen

That's really helpful. How about the profitability between the NRZ portfolio relative to agency sub-servicing in this environment, once you consider the G&A expense? Appreciate it.

Glen Messina

Yes. So look, the energy portfolio as we've said, at one point in time, it was unprofitable on a fully allocated basis, but we've since done a lot of work on our cost structure and have radically reduced our cost structure, particularly in servicing. In basis points of UPB, look, NRC is now with our cost structure is different. And with some of the modifications we've made in the contracts. The energy is not really that different than agency sub-servicing and margin. Now as a percent of revenue with, its lower as the cost are much higher given the delinquency. So the optics of it maybe a little bit different, but net-net we've managed our cost structure is the point where we believe that portfolio is generating profitability consistent with our agency subservicing.

Eric Hagen

Looks good color. Thank you guys very much.

Glen Messina

Thank you Hagen.

Operator

Ladies and gentlemen, once again, if you've any questions [Operator Instructions]. We'll now go to Matthew Howlett calling from B. Riley. Please go ahead.

Matthew Howlett

Good morning and thanks for taking my question. Glen and June just first on the the April update, the estimate sturdy $6 million up on the MSR base. So we to presume the book, current book now is over 60. Just give us an update on where we are in a book value basis.

Glen Messina

Yeah. We didn't meet -- yeah there's lots of other puts and takes. We didn't really disclose book value per share. Leave it to you guys to run through the math. Obviously, there's other things that go through our P and L that we've got to be conscious of. And quite frankly, the books aren't closed for April, so I really can't give you an updated book value per share number, but MSR values continue to appreciate even since April, interest rates are higher now than they were at the end of April. So MSRs working investment these days.

Matthew Howlett

Absolutely. I guess where I'm going with this at the stock here now, 0.3 yield for below that of current of potentially book. When you prioritize Glen capital management, you mentioned stock buybacks, you mentioned debt, possibly debt repurchases, upsizing them as additional M&A. Could you just go through those and look at the priorities and how you expect to execute in this year.

Glen Messina

Look the priority for Board of Management is very simply maximizing value for shareholders, right? And we're evaluating all our capital allocation options. And is to include share in debt repurchases, to allocate good our capital in a way that best makes sense for shareholders. Look, we're frustrated that the strength of our business model and our business performance is not being recognized in share price. And I think it's prudent and appropriate for us that we consider our capital allocation alternatives if there's a way to better allocate capital to create value for shareholders.

So, I mean, to extent -- we are going to -- we want would choose to move forward with debt or equity repurchases. Mean I am conscious of the leverage, the financial leverage that's out in the business. So as we think about it, one of the things we think about it how much we allocate to debt versus equity, and making sure we don't end up at an overleverage situation for the company. So again, all options are being considered. You've, you've hit the nail on the head in terms of what we're thinking through. And again, our focus here is maximizing value for shareholders.

Matthew Howlett

Got you. I certainly recognize you to be cognizant of the leverage, but it seems like liquidity positions improving and you should probably take advantage of some of the discounted debt and equity prices in the market. I mean, you mentioned M&A. I mean, what would you need? What are you looking for to add to the business? Just curious what what would be something that you'd look to growing?

Glen Messina

As we think about M&A opportunities, they fall into a couple of different baskets. I would say one is increasing scale of our business platforms. So if there's an opportunity to increase scale of servicing, clearly we'd look at it, specifically from a sub-servicing perspective because it's not effective. And then as well increasing capabilities. So as the GSEs has -- your put in place more punitive measures against third-party originations or a punitive pricing against third-party originations, which effects all aggregators with correspondent lending platforms, including ourselves and all our competitors.

We've got to think about how much of our business flows through, our correspondent channel and where we can add value there, which is best efforts delivery, non-delegated delivery, non-agency products. So expanding our capabilities knows areas very important to us as well too. And look, we are -- we evaluate all M&A options with the consideration of; are they going to creep? Is it going to be value accretive for our shareholders? So look, TCB and RMS are examples of accretive deals, right? TCB was largely an MSR by with a platform made enormous sense for us to do. It has been hugely accretive to our business. RMS as well to we've built now. A very powerful reverse mortgage business. So that's the type of things that we're thinking about.

Matthew Howlett

Glen, just last question. I mean -- what are the conversations like with Oak tree? Do they sound -- clearly they're happy with the fresh [Indiscernible] madly base stocks, secular and it is there anything does it go beyond that? Would they look to restructure some of the sub-notes? Just what are the sort of can you just give us the updates on the conversations with them? Thank you.

Glen Messina

Yes. Look, first and foremost, Oak tree has just and awesome partner really love to support we get from the Oak tree team. Every member is looking to certainly create value MAV and create value in the company. They are, they've been hugely supportive and we are just very appreciative of everything I've done for our business and continue to do for our business. Our discussions really have remained focused on MAV. MAV has been very successful for both of us. It's enabled us to grow sub-servicing Quite a lot. And certainly MAV is -- the investments they made in MSRs have appreciated quite nicely. So generating great financial returns for MAV of which we're an investor and we get a portion of that. And as we think about upsizing MAV, we really think about a couple of things.

So as we mentioned, we're in advanced discussions there, but with the rapid slowdown in originations market, we've got to think about, look how big do we really need MAV to be. Bigger is always better to some degree, but, bvoiously, we want to size it appropriately for our business. As I mentioned, as well, second book, there's been changes in the originations market. So you'll look the -- we're, we have a benefit in that we have a multichannel origination platform, so we participated in all the spaces and correspondent mandatory best efforts, non-delegated plus we participate in the flow delivery channels. So the 6Cs, Freddie Mac CRX channel, and Fannie Mae SMP channels. So we could take delivery.

However, our customer wants to deliver it. And as we think about how the GSEs are incentivising sellers to move between correspondent and CRX, we have to make sure that that's reflected appropriately from an operational mechanics perspective in our agreements with MABS. So there's a lot of devil in the details and that's what we're currently sorting through. And then lastly, as we always think about building diversification in our business and a lot of change in the past year. And there's a lot of people who are investing in MSRs and we certainly are first preferences always to work with MAV, but there are other players out there. And do we want to have a multi-sourced platform versus the single-source platform? So a lot of things to talk about, the mostly discussions really been focused on MAV. But again, Oaktree, great partner, love working with them, they've been terrific.

Matthew Howlett

Thank you.

Operator

Thanks much, sir. We'll now go to Mr. Marco Rodriguez calling you from Stonegate Capital Markets. Please go ahead, sir.

Preston Graham

Good morning. This is Prestone sitting in for Marco. Thanks for taking my questions.

Glen Messina

Hey Preston

Preston Graham

Good morning. You mentioned you're really optimistic about the growth opportunity in reverse originations that you're going to keep investing resources and marketing to grow the consumer direct channel because it's the highest margin. Could you just expand on that growth opportunity and what you think is possible there.

Glen Messina

Yeah. You bet. Look, we -- that's because we just loved the reverse business. We look at -- if you look at the mortgage landscape today, it's one of the few areas where our opportunity continues to grow. Demographics are favorable and it's a product that this day and age with home price appreciation and higher -- the higher total claims amount from Ginnie Mae, which is roughly $970,800. Look, this product make a lot of sense for, consumers. And as you know, there's a fair amount that goes up front in terms of consulting with consumers to make sure the product is right for them. But look, it's business where we continue to demonstrate really strong momentum.

It's profitable origination side continues to grow sub-servicing has growing, we're more specifically on the investments in growing direct-to-consumer retail that has been our fastest-growing channel. And as you probably saw in June's pages, has the highest revenue margin, obviously, higher cost structure as well too, but it's been a good business. So look, we are investing approximately 2 to 2.5 million in additional marketing spend it, sales resources throughout the course of the year to drive additional retreat production, which we've seen some of it in the first quarter, but really towards the second and really more sort of towards the back half of the year. We expect the payback on that investment again, assuming we execute and achieve our planned return, we contribute about $6 million to $7 million of incremental revenue to the channel through higher retail volumes. So the net contribution for the $4.5 million. We think it's a great payback on investments and it's something want to continue to allocate capital towards.

Preston Graham

Got it. Makes sense. Thank you. And then you've discussed in a few of the questions this MSR values, I think it's at 36 million in April. How much room do you think is left for additional MSR valuation increases? Obviously, there's a lot of factors outside your control, but if there's a way to quantify that.

Glen Messina

So as we mentioned in our in earlier comments, look, our current DBO1 is about a million dollars, but that DBO1 does -- or we've seen it declined certainly during the course of the first quarter. And that's because of convexity, and its our portfolio, right? So it doesn't really move in a linear fashion because pre -payments tend to slow and there's a flow. There's like so low prepayments can go unscheduled prepareness. In the first quarter as rates went up, we saw the DBO1 decline in absolute value, went from roughly $2.6 million at the start of the year to about $1.5 million by quarter-end. And as we said, looking at our rate shock at quarter-end, it was about a million dollars. And look, from a model perspective, a lot of that's driven by flooring out of prepayment speeds.

But again, as rates go up, there's Escrow and float balances that are modeled in MSR valuations, and as some traits rise, those are worth more money. So the value will continue to appreciate from a model to perspective as rates go up. Ultimately, the whole look, it's really a question about market value, and what kind of buyers out our out there, buying MSRs, and what limits maybe impose MSR values or appreciation they may see in MSR value, so it is a market-based asset. We are seeing today multiples in the mid-fives, quite frankly, which is from historic purposes, really pretty high. Could they go to six? Maybe. Right now, it's certainly with a number of us in our business have experienced for quite a few years in the industry.

Six themes unheard of. But we are operating in an unprecedented times for sure. So look, it's clues the rate of MSR appreciation is declining. I think that's a given with how low rates are. One of the things that we're doing Prestone to manage our portfolios is as I said before, is managing this asymmetric risk. At some point in time MSR values become really hard to hedge because there's more downside to up them upside, you end up spending a lot of million options to hedge that. So we're being attentive to that. We're watching our portfolio and we'll be making adjustments to our portfolio to make sure that we're not building unnecessary risk and asymmetric risk in our business that's expensive to manage.

Preston Graham

Got it. That's helpful. Thank you. Congrats on extending the energy agreement. I was going to ask for an update on the MAV upside, But I think you sort of already coverage your discussions with Oak tree, but that is all I have told you back in the queue. Thank you.

Glen Messina

Great. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, once again, if you have any questions or follow-up questions, [Operator Instructions] We'll now go to Drew Mackintosh calling for Mackintosh Investor Relations, please go ahead, sir.

Drew Mackintosh

Hey, good morning. Regarding the possibility of debt and share repurchases, has your board approved any buyback programs?

Glen Messina

Hey, Drew. So no, our Board is not yet authorized a debt or stock buyback program, but we are, as I said, evaluating all capital allocation options, including share debt repurchases to maximize value for shareholders, year to extend our board authorizes such program, obviously, we would disclose it with any corporate timeframe after the board authorization.

Drew Mackintosh

Got it. Can you quantify the amount of excess capital that could currently be deployed, whether it's to MSR purchases or buybacks?

Glen Messina

As you know, true, we certainly have improved our liquidity position since year-end. Yeah, it's been very magic liquidity in these volatile uncertain times is really very important we believe. And we're taking a cautious and prudent approach to it. We are working through with the board right now, how much excess capital we believe we have for discretionary deployment. Lot of factors go into that to include our view of risks from the business, our view of risks in the environment. The capacity we have with MAV. Any other synthetic subservicing arrangement we may put together. I have [Indiscernible] business and how much capital it actually need to support it. Still a lot of details to walk through and I don't have any guidance on that, but you're rest assured it's something that's top-of-mind and we are having the appropriate level of focus to it.

Preston Graham

Got it. Thank you.

Operator

Thanks so much, sir. As we have no further questions at this time, we turn the call back over to Glen for any additional closing remarks. Thank you.

Glen Messina

Great, George. Thank you and thanks everyone for your questions and for joining the call. Again, we believe our balanced and diversified business exemplary servicing, performance, proven cost management track record of execution, all position us well to navigate the environment ahead. As we mentioned, look, we're operating in a volatile and uncertain environment. We're actively monitoring the financial markets, economic environment, industry conditions closely. Look, I think we've got a lot of value drivers here in the business. I don't think it's being appropriately reflected in the value of the company, but we remain encouraged and excited about the opportunities in the business and our capabilities to navigate the market ahead. And look forward to talking to you next quarter. At our next business Update. Thank you, everyone.

Operator

Thank you so much sir. Ladies and gentlemen, this concludes today's call thank you for your participation. You may now disconnect. Have a good day and goodbye.

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