New Residential Investment Corp

LSE:0K76

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the New Residential First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Kaitlyn Mauritz, Head of Investor Relations. Please go ahead.

[Kaitlyn Mauritz, executive]

Great. Thank you, Paul, and good morning, everyone. I'd like to thank you for joining us today for the New Residential First Quarter 2021 Earnings Call. Joining me here today are Michael Nierenberg, our Chairman, CEO and President; Nick Santoro, our Chief Financial Officer; Bruce Williams, CEO of NewRez; and Baron Silverstein, President of NewRez.

Throughout the call this morning, we are going to reference the earnings supplement that was posted to the New Residential website this morning. If you have not already done so, I'd encourage you to download the presentation now.

Before I turn the call over to Michael, I'd like to point out that certain statements today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I'd encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC.

In addition, we'll be discussing some non-GAAP financial measures during today's call. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings supplement.

And with that, I will turn the call over to Michael.

[Michael Nierenberg, executive]

Thanks, Kaitlyn. Good morning, everyone, and thanks for joining us. As I look back and we look back, what a year it's been. I am super excited, and we're super excited for our future and what lies ahead.

One year ago, our stock was trading with a 6 handle, in and around $6.50. We're raising a pool of capital, 11%, and the world continued to feel uncertain. Today, we have more vaccines in demand. The U.S. is healing and NRZ just announced an acquisition of Caliber at $1.675 billion. What a difference 1 year has been.

Our investment business and operating business lines had good quarters. Looking ahead, we feel that we are poised to grow earnings and create a world-class financial services company with Caliber. As the competitive landscape gets more difficult on the operating side, the environment will play into our strength with our capital base, balance sheet and great leadership team. The combination of the Caliber and NewRez teams, with the great talent in both organizations, will create a company to be reckoned with. The possibilities for us are endless.

We will be focused on rolling out other products to our homeowners and build on the great retail presence that Caliber has created. With refinancing volumes significantly lower and the purchase market for housing expected to remain robust, there is nobody that will be better positioned to take advantage of this scenario than us.

As we look ahead, our investment business is well positioned to take advantage of higher rates with MSRs leading the way. It will go up as rates rise, leading to more cash flow and higher earnings. The addition of Caliber and the great strides we have made around recapture at NewRez will offset the lower expected earnings we will see in the origination business as gain on sale margins continue to shrink.

The potential for higher capital charges will lead to more consolidation in the mortgage industry and more MSR sales. With the GSE footprint shrinking in certain segments, we will benefit as the non-GSE mortgage market grows again. The call business saw the largest single quarter since pre-COVID, called over $600 million in deals. The EBO business continues to grow.

We have turned non-QM back on. And with a great sales organization at both Caliber and NewRez, we're excited for the volumes that we will continue and hope to see. One thing that is really important to us and our culture is the need to help others. We will be working on lending programs to help all communities around the U.S. We look forward to rolling those out soon.

On the capital front, we are better equitized than at any point in our company history. As we go forward, we will retain higher levels of liquidity to take advantage of any of the opportunities that we see ahead.

I'll now refer to the supplement which has been posted online. I'm going to begin on Page 2. So when you think about NRZ over -- since we rolled out the company in 2013, we paid $3.6 billion in dividends. Our equity today is $5.5 billion. Our total shareholder return has been 101%. And today, our market cap is in and around $4.7 billion.

From a balance sheet perspective, $24.5 billion of assets on our balance sheet, and we are the largest non-bank owner of mortgage servicing rights. Again, one of the few assets that will go up as interest rates rise.

On the origination side, first quarter volume, $27.2 billion for NewRez. Pretax income, $191.2 million, and we are a top 10 non-bank originator.

On the servicing side, the servicing portfolio, $304.6 billion UPB at the end of Q1; pretax income, $31.6 million; and again, a top 10 non-bank mortgage servicer.

Page 3, the earnings and company highlights. GAAP net income, $277.6 million or $0.65 per diluted share. Pretax income, $222.8 million from our origination and servicing segments. Core earnings, $144.8 million or $0.34 per diluted share. Dividend remained the same at $0.20. Dividend yield at the end of March, 7.1%; Q1 shareholder return, 15.2%.

At the end of March, cash on hand, a little over $1 billion; net equity, $5.5 billion; and our book value, $11.35. Book value gain from the end of Q4, 4.4%; and total economic return during Q1, 6.3%. And then as all of you know, we raised $522 million when we announced the Caliber transaction.

Page 4 is really -- is our book value walk. I'm not going to spend a lot of time on this. Again, book value $11.35, that's up from $10.87.

As we look at Page 5, Q1 and beyond highlights. When we talk about what we did in the quarter and a little bit past the quarter, obviously, we announced Caliber. We're super excited about that transaction. We'll talk a little bit more about that as we go forward.

When you look at our capital, referring back to my earlier comments, we've never been more equitized in our company history. We have $2.3 billion of unencumbered assets, of which $1 billion is cash. When we look at our origination business, $27.2 billion in the first quarter. That is a record for us.

Call rights, again, turned back on highest quarterly number since the end of Q4 of 2019. We called $636 million in deals. On our EBO strategy, we bought out a cumulative amount of $1.1 billion of EBOs. We're starting to redeliver those, and we look forward to continuing to grow that business as we go forward. And again, our shareholder values, when we talked about book value, grew 4.4% in the quarter, and our economic return went up by -- economic return was 6.3%.

I want to spend a minute and talk about our investment business. When we think about the go-forward for us, I think that this plays extremely well into our strengths. We do believe that the private label market will start to grow again as the GSE landscape pulls back in certain areas. So when you think about us as a REIT and you think about the talent on our investment portfolio side, we're very excited about that, and we think that will be accretive as we go forward.

Call activity, again, $636 million in the first quarter. The call business is back. And when we think about it from a profitability standpoint, we're super excited about that as well. MSR asset sales are likely to rise as gain on sale margins continue to contract. Originators are going to need more liquidity. And if you think back to our history, we're poised to take advantage of MSR sales in the marketplace.

On the non-QM front, I mentioned earlier, we started rolling out non-QM on the origination side. The combination of NewRez and Caliber should make us one of the largest non-QM originators in the marketplace. And when you think again about our securitization business, our investment portfolio, we're very excited about what's to come.

On the single-family rental side, I haven't spoken about this in the past. We have a pipeline of about 1,100 homes, about 50% to 60% of those are already funded, and we look forward to continuing to grow that business. And then again, on the EBO front, that's a business line that we expect to continue to grow.

On Page 8, just looking at our investment portfolio. During the quarter, we purchased $1.6 billion of agency securities, $333 million of GNMA EBOs. During the quarter, we sold $750 million of residential loans and $186 million of legacy non-agency securities, mostly down in the capital stack from a credit perspective as dollar prices have rebounded and even surpassed the highs that we saw in the first quarter of 2020.

Post Q1, we grew our SFR portfolio, as I mentioned, and we've already, in this quarter, called $100 million of non-agency deals. The bottom part of the page, you could have a look and just see from our investment portfolios that should give you a sense of how we think about our business on a go-forward basis.

Page 9, on the MSR front. Just a couple of things to point out here. One is while we saw MSR values rise in the first quarter, we do believe there's a lot more to come there. We have not seen the massive slowdown that we expect going forward from a speed perspective, which will lead to lower amortization and more cash flow. First quarter was still fairly robust on the amortization front.

When you look at our financing business around the MSR portfolio, continue to move our MSR financing business from bank balance sheets into the capital markets, and that will be a common theme as we go forward once everything is transferred, our bank balance sheets into the capital markets.

When we look at our mortgage rates for the quarter, 2.79% versus 2.86% in the fourth quarter. And on the servicing side, we increased NewRez and SMS servicing to 53% of our overall portfolio, which is up from 50% at the end of Q4.

On the recapture front, I mentioned, we continue to grow our recapture rates. The group has done a great job there. If you think about where we are in the low 20s, Caliber is north of 50%. And you think about the $515 billion portfolio of MSRs we have at the end of Q1, again, we think that as we get better and better and the refinancing markets continue to contract, you're going to see a lot more cash flow and higher earnings for the company as we go forward.

Page 10. As we think about rates in the first quarter, again, NRZ, our MSR portfolio has benefited from higher rates. Referring back to my earlier comments, MSRs are one of the few assets that will go up as rates rise. You can see some sensitivity tables at the bottom part of the page on the left side, changes in recapture rates, what that will do to our market values. And then overall multiples on the bottom right side of the page, what that will do to implied book values as we go forward. So again, $11.35 book value at the end of Q1. As we go forward and as rates rise, we think that book values will continue to increase.

Call rights business, again, not to beat a dead horse, $636 million of collateral called in the first quarter. We have already called $100 million this quarter. We did some loan sales, and we expect to continue to increase our call business as we go forward.

Page 12, I'm not going to spend a lot of time on it. There's no real material change from our balance sheet as we think about the loan business or the non-agency legacy business, still relatively small as we look back in the company history. Again, during that COVID period, if you recall back to March of last year, we sold $6 billion of non-agency legacy securities. Today, our total balance sheet around that is about $1.3 billion, of which 52% are risk retention bonds that we have to hold for Dodd-Frank.

On the servicer advance side, Page 13, not a lot really to talk about. Actual advances went down quarter-over-quarter. We have a ton of capacity and, again, to the extent that advances increase down the road, we're well positioned to, say, handle anything that comes our way.

I'll now start talking a little bit about the operating business. I'll turn over a chunk of this section to Baron, who's sitting to my left. Starting on Page 15, the acquisition of Caliber, again, super excited. I think the combination of NewRez and Caliber will put us in a position to compete against anybody in the industry. We have a lot of, what I would call, high aspirations.

Just a couple of highlights on this. One is we hope to close this in the third quarter. I know a number of you are thinking about that as you model up earnings in the balance sheet. From a purchase price standpoint, roughly 1x book. We had $140 billion of MSRs. This is currently recapture rates on the Caliber front, north of 50%, industry-leading there.

When we think about the retail footprint, we have -- when we think about Merrill and their retail network, and they're referred to as the Thundering Herd. I'd like to think about our retail and the Caliber retail folks as -- like a Thundering Herd. As I pointed out, rates are up a fair amount from the fourth quarter, refinancing markets have come off a fair amount in the first quarter. So what does this mean? You're going to continue to see a much larger purchase market. And again, there's very few companies that I think are as well positioned as we are once this deal closes with the great retail network on the Caliber side to take advantage of that.

When we think about asset generation, there's roughly 380 branches on the Caliber side. We are going to be rolling out more and more products to that system. I could imagine down the road at some point, we have a consumer business and leverage off the retail network. If you think about some of our history here at Fortress with OneMain and some of the -- and SpringCastle early on, I think that, again, our possibilities are endless in what we could do with this company.

When we think about talent, scale and our capacity, the mortgage industry over the past couple of years has suffered from a lack of available talent. The combination of these 2 organizations give us all we need to support growth and grow in a meaningful way as we go forward.

On the technology front, the combined company spend well north of $300 million. I look forward, and we -- I think all of us look forward to game-changing mortgage technology. When you look at the valuations on some of these mortgage companies that are theoretically mortgage technology companies, on the origination side, quite frankly, in my mind, there's a lot of bells and whistles around that. There is no reason that we can't be the same or better as we think about that and think about our technology investment. So we're very, very excited about that.

And then overall, when we think about the transaction, it's going to be very accretive for our company, our employees and our shareholders. So very excited there.

Page 16. This is really just a snapshot of Caliber. Pretax income, and this goes back to 2020, $891 million in 2020; 25% CAGR; 54% retention rates; 5th largest non-bank originator by purchase volume, again, a very, very important stat as you think about the refinancing markets kind of rolling off; roughly 380 retail locations; and the 6th largest non-bank retail lender and 630,000 customers on a scaled platform.

So overall, again, super excited about the transaction, the complementary business models, and I think where we go from here. I'll now turn over the presentation to Baron. So Baron?

[Baron Silverstein, executive]

All right. Thanks, Mike. Good morning, everyone. Turning on Slide 17 and just to echo Mike's sentiment, we're also really excited about the opportunity to combine the NewRez and Caliber platforms. And while we're in the early stages of our integration discussions, we believe the 2 companies will have significant upside that's going to accelerate our objective goals for the origination and servicing efforts.

As this slide show, we feel the combination of the platforms will provide a strong alignment in both our business models and long-term strategies. Whether that's in direct-to-consumer by increasing our recapture rates, over 50%; leveraging Caliber's distributed retail channels to improve our JV franchise; or in wholesale, further penetration in the direct-to-broker channel while expanding our non-QM platform; growing our client footprint; expanding our servicing franchise in both our customer for life and special servicing strategies; and, as Michael also just talked about, talent, scale, capacity to support our growth, along with our transformational mortgage technology. Transaction is going to be great for both companies, and we're looking forward to providing more details in the months to follow.

So turning to Slide 18, give a little bit of color on the NewRez operating results. First quarter of '21 was a great quarter for our origination platform. Including record quarterly fundings and record quarterly pull-through adjusted lock volumes. For the division, we ended the first quarter with $191 million of pretax income, a 23% decline quarter-over-quarter. Primary reason for the decline is peak margin compression, as we saw margins compress along with the rate move in February. However, in April, we've seen a stabilization of margins in all channels other than wholesale, which has remained under competitive pressure due to some of the moves from the larger players in the sector.

When I look at the performance of each channel during the quarter, we made progress on many of the key goals and initiatives that we talked about on our last earnings call. Direct-to-consumer remains a huge focus for NewRez and NRZ and a continued long-term opportunity for our company. We've continued to grow this channel 30% every quarter. And in March, we had our largest funding month closing $2.3 billion in loans. This is something we're really excited about as our added capacity is starting to meet our demand and the prior changes in sales and operational efficiencies are taking hold.

In the JV business, the first quarter is typically slower than the rest of the year given the seasonal lock volume slowdown in December and January. Our JV channel has also been historically purchase driven, and we're seeing more purchase volume as refinances slow down.

Regarding our wholesale channel, we continue to grow our platform by adding new customers, new broker relationships, building our branches. And while margins have compressed, the relaunch of our non-QM channels began to pick up steam. We're now out with all of our product offerings. Sales teams have picked up momentum. We saw locks of $35 million in April with the goal to get back to our pre-COVID levels of $125 million per month.

In our correspondent channel, we had another record quarter purchasing 17 -- over $17 billion in mortgage loans with March being our largest funding month ever at over $6.5 billion. And we'll continue to evaluate the market dynamics of our correspondent channel, opportunistically buying MSRs and adding to our customer base. So when I think about our performance for the first quarter, both in terms of funded units and other metrics we use to evaluate our performance, we saw great progress.

Turning to Slide 19. We showed this slide last quarter as well, but I do want to highlight the market share growth as that continues to be agnostic to market conditions as all mortgage companies have grown origination production and profitability in 2020, meaning rising tide lifts all boats. However, we've demonstrated our ability to successfully grow not only our origination volumes but also our market share, and our focus is to continue capturing more market share. We believe we can do that across our platform and across our channels. At the end of the first quarter, our market share has grown 2.5%, which is 30% growth quarter-over-quarter. Small market changes -- small changes in market share can have a big impact on our overall profitability, and that's what we're planning for.

We also have one of the largest servicing portfolios with over 1.7 million homeowners that we want to retain as customers of NewRez. And as we continue to build out our brand and get better at recapture, the plan is to execute on that goal. The right side of the page reflects our recapture performance in the first quarter. I mentioned earlier on some of our process changes have taken hold, and that can be seen in the quarterly refinance recapture statistics with a 27% increase quarter-over-quarter. And this proves out the importance of our brand awareness and recognition to further build customer loyalty. The message being, as we get better connecting to our consumers, our direct-to-consumer platform will only continue to grow.

Moving to Slide 20. I already highlighted the performance of our direct-to-consumer channel in my earlier comments. However, just to reiterate that we've done a great job growing this channel, and you can see that in the top left chart. Decreased volume in quarterly fundings up to $5.7 billion, pull-through adjusted lock volume is $6.4 billion, which in turn drives our recapture performance.

We continue to see margin compression quarter-over-quarter. The DTC margins increased slightly in April. So expectations are that margins may flatten for the remainder of the quarter. We had our largest funding month again in 2020 -- 2021 -- in March of 2021 and did so for each month in the quarter. And as I mentioned, changes to our tech and processing structure to improve efficiencies. We've also entered the new customer acquisition business and expect that expansion will offset some of the reduction in refinance volumes in the months to come.

Turning to Slide 21. For the servicing division, we ended the first quarter with $31.6 million of pretax income, a 34% decline. The primary of the decline in PTI is related in large part to both seasonal adjustments to accruals, accruals that were released at the end of last year and a reduction in expenses. For context, our third quarter 2020 PTI was $30 million and more in line to normalization of our servicing P&L.

We ended the first quarter with an aggregate servicing portfolio of approximately $305 billion UPB and approximately 1.7 million customers, which represents modest growth quarter-over-quarter. And on the bottom right, you'll see a slight tick up quarter-over-quarter in terms of cost per loan to service, which is due to the efforts we employ to help COVID impacted homeowners achieve a loss mitigation solution and retain their home. We expect these costs to continue through the end of the foreclosure moratorium.

On Slide 22. We continue to provide this summary as it's important to me, it's important to our business to showcase the strength of our best-in-class special servicer and our special servicing team. Jack Navarro and our special Shellpoint mortgage servicing team do an outstanding job and are well recognized in the industry as one of the best special servicers in the business. The recognition from both Moody's and Fitch to upgrade our platform after the significant growth and the challenges from COVID are a further testament to our strength in special servicing.

On this last slide, Slide 23. I think it's just worth highlighting the continued progress we see in terms of borrowers on forbearance. Since the CARES Act was first announced, we've helped over 234,000 homeowners navigate the COVID pandemic. 142,000 resolved their forbearance, 40,000 homeowners have resolved their forbearance and since refinanced or paid their loans in full. Our numbers are in line with the industry, and good work so far, but more to do to help out homeowners.

Now with that, I'll turn it back over to Mike.

[Michael Nierenberg, executive]

Operator, why don't -- we'll turn it back over to you and open up the lines for Q&A.

[Operator]

[Operator Instructions] Our first question today will come from Kenneth Lee with RBC Capital Markets.

[Kenneth Lee, analyst]

Just one on the funded origination volumes. Wondering if you could just provide a bit more color around what you saw in the quarter? And perhaps, wonder if you could just share some of the key factors that's driving the expected origination volumes in the second quarter?

[Baron Silverstein, executive]

So -- I mean just keep in mind in the context of our funded volumes, right? There is a lag in the context of from lock to closing, and that depends on the channel originations, say, between 30 or 60 days or more in certain channels. I think what we've seen is, and Michael briefly talked about this, we have seen a decline in our overall refinance volume as rates have risen. Our refinance numbers are down probably close to about 20% or 25%. And we are starting to see a little bit of a stabilization, as I mentioned before, in the context of the month of April, where we've kind of leveled into what I would say, perhaps, depending on what happens on the interest rate environment, hopefully, a more normalized market. And I say that in terms of margins and funded volume.

[Kenneth Lee, analyst]

Great. Very helpful. And just 1 follow-up, if I may. Just around the call rights. Wondering if you could just talk about some of the key factors driving the favorable environment right now?

[Michael Nierenberg, executive]

So in the call rights business, I mean a lot of it has to do with spread and where assets are trading, quite frankly. When you look at the loan markets, you look at the non-agency bond markets, we've been pretty clear, we're not putting out a lot of capital for non-agency mortgage securities here as we think the risk returns for us are not great. As we look at the call business, however, and you look at, again, asset pricing, you look at what's happened with forbearance rates, we expect our call business having $70 billion to $80 billion of call rights to remain robust as we go forward from here on. And that's really what the drivers have been.

[Operator]

And our next question will come from Trevor Cranston with JMP Securities.

[Trevor Cranston, analyst]

Right. You guys mentioned normalization of gain on sale margins a couple of times. I was wondering if you could dig into that a little bit more and maybe provide some context for where you're seeing margins today versus where they were in the first quarter or just generally what you guys would think of as a normalized overall margin for the origination business?

[Baron Silverstein, executive]

It really depends on the channels and we look at each of the channels on a different framework. I would tell you that the direct-to-consumer channel, we're seeing margins in the low to mid 300s. The JV channels or our retail channels, we're seeing our margins coming in, say, the mid-400s. TPO has been, as I talked about, somewhat volatile in the context as margins continue to compress given the competitive pressures that we've seen.

And we are now basically sub-100 and then we've seen declines month-over-month. There's been a very, very, very steep decline in margins overall within the wholesale channel, and that's why it's so important for us to focus on alternative products, and Michael continues to talk about our non-QM franchise. And really, for us, it's a big push to make sure that we get that rolled out between us and as well as the partnership on the Caliber side.

On the correspondent side, we have definitively seen kind of what we're hoping for, is a little bit more of a flattening of where we are with margins, and I would tell you that they probably range around 35 basis points, and it just really comes down to how your splits are and how you attach to the channel overall. But I would tell you that they've also flattened out around that 35 basis point range.

[Michael Nierenberg, executive]

Just one further comment on that. I mean you would expect, as we go forward, margins to normalize back to probably 2019 kind of levels, I think, for the industry. And when you think about where we are and Baron always refers to the so-called channels, with the combination of Caliber and NewRez, thinking about retail and the refinancing markets coming off, the retail channels or the retail network is so important to us. The direct-to-consumer channel is very important to us. And then we think about our JV channel. It doesn't mean we're getting out of any channel. But I'm just saying when you think about from a profitability standpoint, a lot of those -- those 3 areas are very sticky in nature when you think about it from a profitability standpoint.

[Baron Silverstein, executive]

I just think the channels can actually perform differently depending on the market. So having the multiple channel -- multichannel strategy can be beneficial, right? So even if 1 is underperforming, you can actually outperform in the other market.

[Trevor Cranston, analyst]

Sure. Okay. And then last quarter, you guys published a table that showed the earnings benefit from rates increasing. And obviously, there's 2 big moving parts there. One was less amortization on MSRs and then the offset was lower income from the origination business.

I'm just curious, as we've actually seen interest rates rise about the level of magnitude that you had in that chart, is there anything that you feel like has changed versus those numbers, which I think showed an overall $0.18 core earnings benefit on either the MSR side or the origination side?

[Michael Nierenberg, executive]

We haven't seen the benefit from an amortization standpoint in the first quarter. While we've seen gain on sale margins come in and overall origination profitability will be lower as we go forward, at least that's our guesstimation right now. The MSR assets should go up and you will get more cash flow. Because when you look at the refinancing markets, they're probably off 30-plus percent. I know Baron gave a number, we're down 20% or 25%. But I think from an industry standpoint, and this has been published by a number of our friends and peers out there as they've reported, there is going to be less refinancing activity, which will lead to higher valuations on MSRs.

The one difference, I think, where we are today versus if you roll back the clock a few years ago, where we didn't have as many agency securities, in the first quarter, agencies widened a little bit, then came back. While rates are up, the absolute value of that mortgage asset on the agency side is a little bit lower. So that impacted, from us, overall book value a little bit. But -- and we have hedges against some of our agency securities as well. But as you go forward, I think you're going to see that real lift when amortization slows down. And I think from an industry standpoint, we expect amortization to slow down by about 30% as we go forward.

[Operator]

Our next question will come from Henry Coffey with Wedbush.

[Henry Coffey, analyst]

Just to continue with what Trevor was asking about. In terms of really watching where your amortization rates are going, is it as easy as just kind of checking the pool factors every month and seeing where agency speeds are? Or are there other issues that we should be looking at?

[Baron Silverstein, executive]

We have been pretty vocal over the -- in the past about our credit impaired portfolio. We still think that the amount of -- we have a $515 billion portfolio of MSRs. We think that the eligible population of that is about 30% for refinancing right now. We're in the money. The government came out with some new programs where they're going to try to increase the origination to folks that haven't been able to refinance in the past. We'll see how that is and really the impact on our portfolios. We don't think it's material. So I think part of it, Henry, is the factor. The other part is I would just say 30% right now and as we go forward, monitoring REITs and mortgage rates. And we'll try to get a little bit more refined on that.

The other part about that is with the NewRez team increasing their recapture percentages probably more into -- I guess, into the mid-20s now from when we were in the teens, you look at the job that Sanjiv and his team have done at Caliber on a recapture -- from a recapture percentage in north of 50 on a number of their channels, we do think amortization will slow down, and we look forward to a much higher marks on our MSR portfolios, higher book values and higher earnings as we go forward towards the latter part of '21.

[Henry Coffey, analyst]

And you are, in many respects, hedging the MSRs with agencies. So is the real contribution going to -- I mean not on a one-to-one basis, but there's some of that there. Is the real contribution from the MSRs going to be related to amortization and sort of total yields? Or how should we be thinking about it?

[Michael Nierenberg, executive]

Well, it's kind of both. We have a, give or take, $14 million or $15 billion agency mortgage position. Some of that has to do with compliance from a REIT perspective and '40 Act compliance. Against that, we have a material amount of swaps where we have payers on against that, meaning that we're effectively hedging out our agency book. So net-net, we're short.

So an increase in rates will lead to higher MSR values, obviously. It will lead to a P&L -- positive P&L on a swap book and a lower P&L on our specified book. And you saw a little bit of that play out in the first quarter. When you looked at swap P&L up, agency mortgage P&L down and then the MSR P&L up.

[Henry Coffey, analyst]

And then finally, you haven't been excited about investment opportunities in a long time. I mean we -- I think the bargains were back in March, which didn't really matter to anybody as we all kind of tried to rectify books. How much the recently raised capital is going to go into the new investment opportunities like single-family rental? And how much is going to be just retained for ultimately going into the Caliber transaction?

[Michael Nierenberg, executive]

I think the way that all of us or the way that we think about the world, we will have higher amounts of capital on our balance sheet at all times. The -- to your point, Henry, we've been pretty vocal that the investment opportunities have not been great. They're not great right now by any means. When I think about the engine that we have here, again, with the Caliber folks, we could produce a lot of product. The product with the GSE footprint pulling back a little bit, that's going to create some really interesting opportunities for us. We're already seeing that now. Obviously, the EBO stuff has been pretty fruitful.

We have never been an extremely large Ginnie player, however. So some of our -- again, some of our friends and peers out there have had better results in that space. But we're going to be patient. We're going to have plenty of capital on hand at all times to take advantage of what we think is going to be a higher rate environment, and at some point, give us the opportunity to deploy capital away from our operating business.

And then thinking about the MSR business, for example, there will be higher capital requirements put on all, I think, mortgage originators as we go forward. So what's the result of that? If gain on sale margins continue to contract, which is very possible, there will be sales of MSRs. And we think that the REIT itself is poised to benefit from that as we think about higher rates, higher capital needs and lower gain on sale.

[Henry Coffey, analyst]

So we have the last question. Can you tell us capital -- sorry, can you tell me something about the single-family rental business? Is that an operating business? Or how is that going to work?

[Michael Nierenberg, executive]

Yes. It's small for us now. We have about 1,100 homes. A lot of that is funded. We work with a third party, who's really our operator. We're in certain markets. We're currently in 15 markets. The current -- the top markets for us are Atlanta, Houston, Florida. We're doing some stuff in Mississippi. So it's small now. We'll monitor home prices, quite frankly. This is not just buy homes -- to buy homes. I think our early acquisitions in this business have been good. Our performance has been good. Right now, I think our average cap rate on this stuff, unlevered, is about 5.5%. We have good financing on it.

So we'll see how it goes, but we expect it to be a real business as we go forward. We think the shift in the United States with home prices continuing to rise in certain markets, very good on the rental side, we're pretty excited about that. We have a good team that's really allocated to working on that business.

[Operator]

And our next question will come from Bose George with KBW.

[Bose George, analyst]

Actually, I wanted to go back to the questions on the gain on sale margin. I think, Baron, you noted that the TPO margin is now sub-100 basis points. Where was that like last quarter and in the fourth quarter?

[Baron Silverstein, executive]

Last quarter, we ended -- it was basically double that into the end of last quarter, close to 200. And then I would tell you, basically, at the end of the third quarter, you're almost another 100 basis points above that. So you really dropped in about 100 basis points per quarter.

[Bose George, analyst]

Okay. Great. And then what's -- can I get an update just on the book value quarter-to-date? And then just a related question. On the MSR mark, we did see, like some other companies take some pretty big MSR mark. So I was wondering, like if I look at your MSR portfolio versus the others, does the lack of or the lower prepayability for part of it sort of make the market a little more subdued versus the peers?

[Michael Nierenberg, executive]

Yes. Let me start with the mark. We expect to see marks increase on that portfolio fairly dramatically as we go forward. When we saw the high levels of amortization, I think March even came in a little bit higher than people expected. Prepayments in March were about 18% faster than what people thought. I think part of that is a day count thing. But overall, as we see speeds come off, and again, we do think they'll be 30% slower as we go forward, this is really going to be a big deal for us because this is what's going to lead to higher core earnings as we go forward.

So marks will go up, and that will help our book value, obviously. But I think really, as we think about getting back to much higher core earnings on a go-forward basis, that will start to kick in we hope in the third quarter -- third to fourth quarter of '21.

Regarding book value, Nick is here. Nick, why don't you just walk through some of the adjustments in book value?

[Nicola Santoro, executive]

Sure. So Bose, from quarter end, from a performance standpoint, book value is relatively unchanged. The one thing you need to factor in is the additional share issuance. So that will bring our book value down by approximately $0.15.

[Operator]

And our next question will come from Eric Hagen with BTIG.

[Eric Hagen, analyst]

Maybe another one on the MSR and just the framework for how to think about that valuation. When we look at the MSR value, at the end of 2018, is maybe 1 good proxy for when speeds were basically at their lows. I think the MSR was carried at a multiple of around 4, and so when we think about the sensitivity going forward and sort of the overall upside that I think you noted in the presentation, is it right to think that you guys can get back near that valuation more quickly or even exceed that value from 2018, that 4x kind of area, because you have a more robust recapture framework now? Or is there something else that could drive that?

[Michael Nierenberg, executive]

It's a really good question. I think if you go back to '18, the product mix we had on our balance sheet at that time is very, very different than where we are now. So when you think about -- if you're originating, I think our gross rate in the first quarter was 2.79 or something like that. That's a newer production MSR. If you think about that MSR today, it's probably a 4.25, 4.5 multiple. If you think to the old days going back to '18, we had this legacy -- we probably had more legacy MSRs, so had a 4 multiple.

So I think the way to think of us going forward as is more production in these lower rate mortgages that were originated going back to the fourth quarter and the first quarter of, respectively, '20 and '21, those will go up a fair amount more than that 4 multiple. The legacy stuff will go up, but not as much just because you have more seasoning on it. So getting back to that 4 multiple, is that doable? Absolutely. Do I think it happens today? No. Will it happen over the course of the year? I think it's very likely.

[Eric Hagen, analyst]

Good stuff. That's helpful. I think NewRez issued some securitized warehouse funding last week. Can you talk through some of the deal economics there and how it compares to bank warehouse funding right now? And separately, did you guys say how much origination volume Caliber did last quarter?

[Michael Nierenberg, executive]

So on the Caliber front, we did not, but I think the way to -- I spoke to Sanjiv, obviously, we talk all the time. On the Caliber side, I would expect their origination volumes for the year to be something comparable to what they were in '20. So when you look at that page, it's give or take about probably $70 billion to $80 billion, something in that range. In 2020, it was $80 billion. So that's on the Caliber side.

On the warehouse side, and I'll let Baron talk to some of the math around it. Our goal, and this will continue to be as a company, will be to limit the amount of real exposure we have to any one counterparty as we think about our business going forward. So the more stuff that we put out in the capital markets, the better our business becomes.

We -- I think in a couple of the prior quarters, we were extremely vocal about getting away from real mark-to-market. This does have mark-to-market provisions. The mark-to-market provisions on this stuff are better, but the cost of funds and the advance rates are actually better versus bank funding. So Baron, I don't know if you want to add anything here.

[Baron Silverstein, executive]

Yes. I think the real key here for us is that we're able to obtain a 3-year committed warehouse financing, right, at a very cost-effective rate cheaper than what we get from the banks, right? And that, I would tell you, especially with my prior background, is very, very attractive and accretive for our platform. And in the context of doing capital markets transactions, as Michael talked about, there are -- it's a little bit more favorable than how we benchmark our bank financing. We are always still going to have bank financing, those are important partners to us. But to the extent that we can diversify and obtain 3-year committed financing, we're going to look to try to do that.

[Operator]

And our next question will come from Kevin Barker with Piper Sandler.

[Kevin Barker, analyst]

You mentioned your funded volume is going to be down slightly quarter-over-quarter in '20 and in the second quarter, partly due to direct-to-consumer -- the decline in refinance demand for direct-to-consumer. What other channels are you seeing a little bit of pressure there on volume, recognizing that pull-through adjusted locks were only up 4% quarter-over-quarter?

[Baron Silverstein, executive]

Yes. I mean, look, we're -- our -- we look at each channel from an overall return perspective as opposed to necessarily focusing on volume. On our direct-to-consumer, we're very much focused on recapture right now. And we still have a significant number of consumers that are in the money. I think that, as Michael, I think in prior quarters, talked about the end of money calculation of consumers that can save $100 a month, we still have approximately 1 million consumers in the money for us today at today's interest rates. So we do look at the context of our direct-to-consumer franchise having continued upside and growth as we expand into that new customer acquisition.

Our JVs are definitively going to see refinances slow down. And we've seen that already, as I've talked about, but that's a purchase business with our partnerships with realtors across the U.S. So it's really just more of a matter as to how we're maximizing our ROE through our third-party channels, including wholesale and correspondent. And at this point, we still believe the correspondent business is accretive to our franchise. And we look opportunistically in TPO, and we talked about non-QM.

[Michael Nierenberg, executive]

The other thing, Kevin, on that front is, from a volume perspective, and I know everybody was talked about volumes. We care about making money. And so if we do less volume and we make more money, that's really where we're going to shake out. The other thing is when you think about the spread compression you're seeing in the correspondent business, which is you go back to the old days, that's a good MSR creation vehicle for us if we believe rates are going to go up. So when we think about the amount of volume we do there, it's essentially, you're buying a closed loan. So that's something that we'll continue to monitor, one, from a P&L standpoint, but two, from a market direction standpoint, as we think about the overall REIT market.

[Kevin Barker, analyst]

All right. And then several of your competitive non-bank competitors have continued to build capacity and look to continue to take market share as we move through this year. But -- and it seems like we're definitely seeing lower demand. What gives you confidence that the direct-to-consumer channel can maintain gain on sale margins at 2019 levels with that type of dynamic where capacity is still building and 2019 was a relatively good year when we look at post-crisis mortgage origination profitability?

[Baron Silverstein, executive]

So one of the reasons we did the caliber transaction. One is it's a great company; two, they have obviously a great leadership team and what I would refer to the so-called Thundering Herd. So that purchase market is going to be something that's really important to us. It's not -- when we think about real volumes and we think about real P&L, you're going to see a lot more efficiencies, I think, around the technology side. We have a lot of initiatives that we're currently working on. Getting loans closed quicker.

And when you talk about sheer scale, I do think the mortgage business is here to stay. It doesn't mean people are going to do anywhere near the same volumes as we go forward because if refinancing volumes continue to go down by 30%, at some point -- and at some point if the housing market rolls over a little bit, volumes are going to come off pretty dramatically, and I do think you see margin squeeze.

Think about our business. We have $500-plus billion of MSRs. We are so perfectly situated to actually take advantage of virtually a very low velocity origination market as we go forward. That, coupled with, I think, the recapture rates that we have both on the NewRez side, which are growing and what Caliber has done on their side, you'll see lower volumes. I do think the mortgage business is here to stay.

I think the valuations of the mortgage companies, whether it be us or -- we always think we're undervalued, honestly. But when we think about other peers out there, whether it be Jay and Cooper and David and his business, it's here to stay. And we all know that the mortgage business is episodic as it relates to P&L and flows. But it's a real product. It's a huge market. It's a multitrillion dollar market. And so volumes may come off, P&L may come off, but long term, it's here to stay. And I think everybody having capacity is going to matter.

[Operator]

And our next question will come from Giuliano Bologna with Compass Point.

[Giuliano Anderes-Bologna, analyst]

I guess from a little of a starting point, one of the areas where I was curious to get your input was when we look at the Caliber transaction, I think they had a little bit over $1.4 billion of MSRs towards the end of February. It was a little bit over $1.1 billion at December 31. I was curious kind of about 2 different things there. One, do you know if those numbers include any kind of recapture assumptions or if those are pre-recapture?

And then the second part of that is kind of twofold, but when you bring on -- if you were to merge the 2 entities, Caliber's recapture performance is pretty impressive, and that could obviously lift your recapture performance over time, may not be immediate, but that could push your recapture assumptions higher over time for your core portfolio, which could be accretive. And also the Caliber portfolio itself may also get some embedded recapture benefits when -- in a -- assuming the transaction closes and the transaction happens.

The way that I calculate that is that there could be $150 million plus of additional upside, if not more, for the Caliber portfolio before any kind of tack on benefits to your core portfolio? And that could more than offset all the dilution from the secondary. Is that a good way of thinking of it? And am I going off in the wrong direction there?

[Baron Silverstein, executive]

I can't ask you to repeat that question. But -- so why don't we start with the Caliber portfolio? The Caliber portfolio, when we quote the $140 billion, that's as of the end of 12/31. So the way the transaction works, it's a closed box. So once it closes, we get all the so-called assets. And on -- from a balance sheet perspective, the $140 billion, there's no formula that's put into that recapture percentage as it relates to that $140 billion, just so we have that.

As you think about Caliber and if Caliber does, call it, $75 billion to $85 billion of production, and you have to assume some kind of amortization rate and recapture rate, the net of that will be -- that's what our MSR portfolio will be. We think as we integrate and bring both companies together and the transaction closes, the lift that our overall business will get from, quite frankly, both sides and the recapture percentage is going up, are going to be significant from an income standpoint on our overall earnings for our company profile.

I don't know exactly what that is. I think when we did the -- when we announced the Caliber transaction, our goal is obviously to make as much money for our shareholders as possible. It is highly accretive, we believe, this transaction. But I don't want to short a specific number. I may have done that in the past, if you go back and listen to some of our other calls, but I see no reason why we won't get back to a much higher earnings stream.

[Giuliano Anderes-Bologna, analyst]

That makes sense. And I realize my question was pretty convoluted. What I was curious about, which maybe a little bit of different direction, was the book value impacts. And if -- post merger, if there are any benefits of adding higher recapture assumptions into your MSR fair value analysis, that could push your MSR values up? And also similarly for the MSRs that would be coming over on the Caliber side [indiscernible] consider those assets moving higher?

[Michael Nierenberg, executive]

Yes. We haven't changed any of our book value assumptions related to any lift we're going to get on any recapture from the Caliber franchise at all. One thing and Nick pointed out, and just when you think about book value today and as we think about the second quarter, so everybody can model this correctly, why don't you just share the $0.03 thought?

[Nicola Santoro, executive]

Sure. So as I mentioned to Bose earlier, the expectation is there's an approximately $0.15 dilution on book value related to the share issuance. In addition, the impact on core earnings is going to be a dilution of $0.03. And as Michael mentioned earlier, in terms of book or anticipated book, we haven't factored in any lift from factoring in recapture into the Caliber mark.

[Operator]

And our next question will come from Mark DeVries with Barclays.

[Mark DeVries, analyst]

Yes. You highlighted the opportunity in non-QM originations. That market has been really slow to develop ever since kind of the whole QM framework was created. Can you just talk about what's limited the growth of that market? What do you think may be changing to make it a bigger opportunity? How big you think it could be for you? And then finally, kind of how the returns for that may stack up to originating QM loans, particularly kind of in light of the fact you just don't have the same kind of legal safe harbors?

[Michael Nierenberg, executive]

Yes. I mean just the reason it hasn't started up is the industry is short, quite frankly, capacity. The combination of the 2 companies will give us the capacity we need. The other thing is when you think about the nature of the origination market in 2020 with so much production on the agency side, there was not enough folks, quite frankly, to process non-QM loans. As you think about refinancing volumes coming off and the need for what I would call non-QM products and nongovernment-guaranteed products, we expect it to be a pretty significant part of our business. Caliber has been there before. We've been there before, and Baron, I think, alluded to $125 million a month. I'm looking at him and thinking like that's very low. So we will try to grow prudently around that space, but it's really the governor has been the ability to process loans and capacity.

From a profitability standpoint, it's a pretty profitable business. I mean we -- I think in our deck, we alluded to an asset sale of $750 million of loans. We've called some deals where we issued in the past and dollar prices on those assets have been 106, 107, something around that range. And if you go back to the COVID crisis, those couple of tough weeks for us and others in March, those loans were trading, give or take, $0.90.

So you've seen, obviously, a dramatic recovery in pricing. That will help drive, I think, more production for us, us having the capacity, the great so-called retail network on Caliber as well as us. We want to get these products out as soon as possible, and I think it's really going to be a good profitable business for us.

[Mark DeVries, analyst]

Okay. Got it. And do you see that as also being an opportunity to create some credit assets for the REIT to hold?

[Michael Nierenberg, executive]

Absolutely. I mean -- one of the things, if you think about even Sanjiv and his management team, they come from a consumer banking background. There is no reason why we shouldn't be able to think about and we're working on this now, a 1 main type business. Obviously, credit profiles, we'll be evaluating different credit profiles. But there's no reason why we shouldn't be able to roll out different products into the marketplace through the Caliber retail network as well as on the NewRez side. We have a great sales force on the NewRez side.

[Mark DeVries, analyst]

Okay. Got it. And then just 1 last for me. As you think about the opportunity to do more bulk MSR acquisitions coming back as originated again and sell margins compress, what kind of returns do you think you'll be targeting for those acquisitions?

[Michael Nierenberg, executive]

We have to be thoughtful. Obviously, we have a huge production machine when the 2 companies come together. So we're mindful of that. We've always been out there saying, give or take, 8% unlevered. And I think we'll probably stay with those kind of numbers. With proper financing, you're in the double digits. So that's part of it. The other part to think about is we are in the middle of an acquisition, and we have to think about balance sheet and governors and our friends in D.C. and how we think about the capital. So there's some things to think about there, but we want to be in a position to be supportive of, one, the industry; but two, obviously, taking advantage of any opportunities that come our way around MSR sales.

[Operator]

And this will conclude our question-and-answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks.

[Michael Nierenberg, executive]

That's all I have. We appreciate everybody's time this morning on the call and questions. Any follow-up, give us a holler. And look forward to producing good results for our shareholders as we go forward. Stay well. Have a great spring, and we'll talk to you soon. Thanks.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.