New Residential Investment Corp

LSE:0K76

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, and welcome to the New Residential Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note 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, Elissa, and good morning, everyone. I'd like to welcome you today to New Residential's third quarter 2020 earnings, and thank you all for joining us. Joining me here today are Michael Nierenberg, our Chairman, CEO and President; and Nick Santoro, our Chief Financial Officer. In addition, we have members from the NewRez management team, including Bruce Williams, CEO of NewRez; Baron Silverstein, President of NewRez; Cathy Dondzila, CFO of NewRez; and Jack Navarro, President and CEO of the Servicing division 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 also be found in our earnings supplement.

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

[Michael Nierenberg, executive]

Thanks, Kate. Good morning, everyone, and thanks for joining our Q3 earnings call today. As we look at the uncertainty in the world and the overall investing environment, our focus continues to be to fortify our balance sheet, lower our cost of funds in all of our financings and take advantage of the great opportunities we are seeing in our operating business.

We do not see great opportunities on the portfolio side today, and we'll maintain higher levels of cash and liquidity while being patient and being opportunistic. The earnings power of our company today between the investment portfolio and the operating business is extremely powerful. To illustrate, core earnings before amortization for the quarter are $1.52 per diluted share. Of course, you can't look at this in isolation, however, a slowdown in amortization and a pickup in market share in certain origination channels should lead to higher core earnings. The quarter was a good one on many fronts, as we did 8 securitizations, lowering our cost of funds on advances and loans and refinance the term loan we did in May, lowering our cost of funds by 475 basis points as we issued our first unsecured debt deal.

These financings will add $50 million of savings per year, or if you think of it this way, an incremental $50 million of earnings per year. With interest rates and mortgage rates at historically low levels, you couldn't ask for a better origination market, and our operating business continues to get better by the day.

Our focus on helping borrowers through hard times is one of the core values of our company, and I'm proud to say that our team does great work there. While we had a great quarter in our mortgage company, I feel we have just begun, and I'm hopeful that our market share will continue to grow even into a higher interest rate environment. I say this as we are still relatively new in the operating business and have plenty of room to improve. It is our belief that as we grow our DTC channel, we will pick up market share, slow down our amortization on our MSR portfolio and drive book value significantly higher. This will help our MSR portfolio as recapture rates will rise and, again, drive higher earnings for the company.

On the portfolio side, we're back in the call business. We have issued call notices for the month of November on up to $400 million of different non-agency deals. If you recall, we haven't done any call since the early days of COVID, and this is the first time that we've issued some call notices.

On the investment activity front, we were fairly muted during the quarter, away from our financing activity. The non-agency loan positions are essentially all, for the most part, non-mark-to-market at this point relatively small as we don't -- as we see the risk-reward being very low in this current interest rate environment.

During the quarter, we sold about $600 million in non-agency bonds and a little under $300 million of loans, and we purchased an agency MBS to offset our MSR portfolio.

Before I turn to the supplement, I'd like to leave you with a few thoughts. We are committed to maintaining a disciplined approach during these uncertain times and will maintain higher levels of cash and liquidity. I remain confident in our ability to drive book value higher as we grow core earnings, we look forward to growing our dividend.

With many mortgage companies going public today and over the past few weeks, we'll continue to drive towards unlocking value in our operating business and seeing our equity trade where it should.

I'll now refer to the supplement, which has been posted online, and I'm going to start with Page 2. As you look at this slide, what we try to do here is highlight our operating business and, obviously, our investment portfolio. Since inception, we paid $3.4 billion in dividends. We have a book equity of $5.3 billion. Our total shareholder return has been 40% and our market cap at the end of 9/30 was $3.3 billion.

When you look at assets as of 9/30, $20.2 billion in assets. We have an MSR portfolio a little bit under $600 billion which we believe will offer great returns for shareholders when and if interest rates rise. As we think about the origination and servicing sectors, this year, we project to do approximately $60 billion of origination. Our year-to-date pretax income so far is $554 million, and our year-to-date ROE is 189%. When you look at the servicing division, $310 billion UPB as it relates to the servicing portfolio. Pretax income year-to-date, $85 million and an ROE of 54%.

For the quarter, GAAP net income, $77.9 million or $0.19 per diluted share, core earnings of $131.6 million or $0.31 per diluted share. For origination and servicing division, $342.6 million of pretax income. Quarter-over-quarter, that's up 67%. Our common stock dividend of $0.15 per common share. We increased our dividend by $0.50, dividend yield 7.6% at the end of September. Cash on hand at the end of September, $841 million. Today, we have a little bit under $1 billion of cash and liquidity.

Net equity, again, $5.3 billion. When you look at book value before the write-down -- not the write-down, before the write-off of the discount on the term loan that we refinanced, book value was $11.01, taking into account the write-off of the term loan discount that knocked us down by $0.15 to $10.86 per -- from a book value perspective.

Total economic return, 2.2% during the quarter and again, representing a $0.09 increase in book value per common share and, again, reflecting a $0.15 dividend.

Page 4. Just to take you through a quick book value summary. I'm not going to spend a lot of time on here. The one thing I do want to point out or 2 things, one is, again, the 11 -- you can see on the bottom of the page, the $11.01 book value before we wrote down the -- wrote off the term loan discount of $0.15, big number here. Have a look at the MSR amortization, that costs us $1.23 in the quarter.

Obviously, the origination business is doing extremely well. The offset to that is we have higher levels of amortization. When and if that does revert, it's -- and I'll get into this later in the presentation, we believe that we're going to be able to capture more market share in our origination business, MSR amortization will slow down, and the ending results should be higher core earnings for our business.

Page 5, an important one, Sum of the Parts: Greater than the Whole, if you look to the upper-left side of the page, we believe our implied book value today is $16 to $19 per share.

A walk on the right side, which will get you there, and essentially, what this shows is if we -- if and when we unlock value in our mortgage company with mortgage companies trading roughly at 5x EBITDA, that's going to be worth anywhere from 5 to -- give or take, $5.50 to $7.50 per share, based on it, give or take, an $11 book value, that should get you somewhere between $16 and $19 per share from a book value perspective.

I mentioned earlier in my opening remarks, liquidity, we are going to carry higher levels of liquidity today, as we don't know what the world is going to bring us as we look forward.

Couple of things to point out here, core earnings $0.31 per diluted share. We are holding at the end of September, $841 million of cash and liquidity. If that was deployed, you'd see an incremental $0.03 to $0.04 per common share or get you to the $0.34 to $0.35.

The other thing to note, the term loan, which we took out in May, which was 11%, and we refinanced it to 6.25%, that closed at the end of Q3. If, in fact, we did that earlier in the quarter, that was worth an extra $0.02 per share.

Page 7, talking about leverage. I mentioned again in our opening remarks to fortify our balance sheet. If you have a look here, a couple of things. One is we did 8 securitizations in the quarter, they ranged anywhere from MSR notes to nonperforming loan deals to advance deals and, again, refinancing the secured term loan into our first unsecured term loan.

We refinanced our SpringCastle deal, which is our consumer deal, and we also closed on a new Ginnie Mae MSR and advanced facility.

So overall, great work by the team, reducing our cost of funds, reducing our leverage, locking down longer-term financing and essentially driving extra revenue to the bottom line or extra earnings.

Page 8, Delivering Results. Q3 Accomplishments. One, we want to navigate from a position of financial strength. What does that mean? We have $1.9 billion of unencumbered assets on our balance sheet, of which $841 million of that is cash and liquidity. And again, that was as of 9/30. Today, we hover around $1 billion.

We want to continue to grow our origination platform, scale and profitability, increased funded origination volume up 118%, pretax income up 72% quarter-over-quarter. As I pointed out, one of our key missions is to continue to help homeowners. The percentage of homeowners or borrowers in forbearance has decreased to 5.5% in October from 7.8% in July.

We want to continue to lower our overall leverage and risk profile. We reduced our daily mark-to-market exposure to just 3% of the total investment portfolio. The areas where we do have mark-to-market exposure, our LTVs on those facilities are typically around 50%. So very, very low leverage overall in our business and much more longer-term financing.

When we think about our additional term financing, again, we priced 8 securitizations, and we're going to save $50 million a quarter.

Finally, we want to generate attractive risk returns for our shareholders, we raised our common dividend by $0.50 in the quarter.

On the investment portfolio side, on Page 9, our increase in investments was driven by the purchase of agency securities. We purchased an extra -- or we purchased about $5-ish billion of specified pools in Agency MBS to hedge out our MSR portfolio. When you look at the loan and residential security portfolio, again, we sold a little under $300 million of residential loans. We sold about $600 million of residential non-agency securities.

How do we think about that, we just see the risk-return as being very low right now. We want to continue to button-down our balance sheet and levels themselves are back towards pre-COVID levels around many of the credit assets that we sold.

When we think about additional opportunities as we look forward, I pointed out, we're turning back on our call business. We're going to continue to add agency MBS as needed to hedge out our MSR portfolio, depending upon our view of interest rates. We've begun purchasing out FHA EBOs that are in forbearance, and then we'll continue to grow our MSR portfolio through our origination and servicing business.

Page 10. When we think about our MSR business. To frame for all of you, over the past year to -- 1 to 2 years, we've written down our MSR portfolio about $1 billion. We do think MSR valuations are at historical lows. Obviously, they've been lower, but we're towards the lows. As interest rates rise, MSRs will increase in value.

To give you a sense, when we think about -- the way that we quote MSRs, if you think about a servicing strip of 25 basis points, a 3 multiple would equate to 75 basis points in price or 0.75 point. If, in fact, and we saw this probably -- even less than a year ago, if MSR multiples went up 1 turn or went from a 3 multiple to 4 times that 25 basis points that would be an increase in value on our MSR portfolio of $3.60 per diluted share.

Again, I point this out because at some point, we do think origination volumes will come off. And as a result, we think our MSR portfolio, which we'll continue to add to, will provide great returns for shareholders and again, help drive a higher book value.

On Page 12, on the MSR side, again, I'm not going to spend a ton of time on this, a couple of things I want to point out. When we think about the percentage of our portfolio that's refinanceable, I think past quarters, we hope at around 30%, now we believe it's around 40% for the industry. We believe it to be something around 75-ish percent.

So what differentiates us from the industry when we think about our MSR book, one is the seasoned nature of our portfolio, our portfolio seasoned at approximately 91 months or a little bit under 8 years, that is a big deal. The credit impaired portfolio and the combination of the credit impaired portfolio and the seasoned portfolio should lead to higher valuations and slower speeds as we go forward as we get out of this refi wave down the road.

If you look at Page 13, a couple of things to point out here, which I think are important. One is on the loan side, when you look to the left, essentially, the entire business is non -- no daily mark-to-market. Total equity in the loan book today is $798 million. When you look at the bond book on the right, $663 million of total equity. We point out 85% of that is no daily mark-to-market. As I mentioned earlier, the other 15% are really limited to what I would call some IOs, non-agency IOs and other things, which have something around a 50 LTV.

So overall, once again, fortifying our balance sheet, locking down our financing, maintaining higher levels of liquidity should lead us to great results as we go forward.

Page 14, servicer advances. Quite frankly, not a ton to talk about. Servicer advances are kind of where they were pre COVID, to be frank.

During that March period where things were extremely uncertain, we expected much higher levels of advanced balances.

We took out excess capacity from some of our bank friends. There's been no need for any additional financing around the servicer advances. As we -- on Page 15, the improvement in servicer advances, the delinquencies came in much better than our original projections. We have a much more positive outlook driven by the limited number of new forbearance requests and higher forbearance resolutions. And during the quarter, we've recovered $141 million of advanced equity during Q3.

Page 16. COVID related forbearance balances or percentages have continued to decline. We're down to 5.5% from a peak of 8.4%.

Now I'm going to turn it over to our -- I'm going to go through our operating business, and then we'll open up for some Q&A.

When we think about our operating business, NRZ and NewRez, which is formerly known as Shellpoint Partners came together in July of 2018.

In my earlier opening remarks, when I say we're kind of new in the operating business, the management team, and when you look at Jack and you look at Bruce have been around for many years and done a great job building out different origination and servicing businesses. When we purchased the company in 2018 at the end of the year, origination volumes were about $10 billion, servicing at the time of acquisition in that July period was about $30 billion.

If you think about it today, it's 60 -- we'll be between $55 billion and $60 billion of origination, and on the servicing side, we'll be north of $300 billion in servicing. So tremendous growth, but measured growth. There are a lot of things we could -- all of us can do to improve, and we continue to work towards that.

When you think about our platform, it's a differentiated platform. We have multichannel -- we have 4 different channels that we operate across, some will benefit in different environments. Again, the big focus continues to be around the direct-to-consumer channels.

When you look at our origination and servicing strategies, we have the ability to scale originations across all 4 of these channels. The direct-to-consumer channel, as that grows, it's going to help with recapture. It's going to help with retention on our MSR portfolio and gain on sale in the direct-to-consumer channels remain robust, while they are coming in a little bit here.

Our third-party servicing platform, I do believe, is one of the best in the industry. That's under the Shellpoint brand. And we have well north of 50 different customers on that platform, and that will continue to grow. As we think about our potential to capture additional value, we're working on brands, the 4 channels. So we have a huge commitment to this business not only to originate loans in, what I would call, the best origination market any of us have ever seen, but also to really grow and have a full rounded mortgage company.

Financial performance. 2020 pretax income, $639 million is up 470%. Our target this for the year is going to be something close to $900 million of pretax income. Year-to-date ROE, 142%, and when we think about revenue, year-to-date, it's $1.2 billion or up 190%. So tremendous growth, measured growth, but a lot more work to do.

When you look at Page 19, and we talk about the growth, which I just alluded to, pretax income up 22 to 24x.

Servicing portfolio, 6x increase in the servicing portfolio, and then origination and gain on sale margins continue to be extremely robust, and that division continues to perform very well.

Page 20. When we think about the multichannel platform, again, I don't -- I can't harp on the direct-to-consumer stuff enough, that is a big part of our business. Again, retaining our MSR clients and lowering our amortization is going to be a huge win for our company, and there's a ton of focus there. The offsets to that, again, is great origination gains, if you look at the 4 different channels we're in, again, direct-to-consumer, JV, retail, wholesale and correspondent.

Page 21, origination activity and business highlights. Record profitability for the quarter, $312 million or up 72% on the originations segment, annualized ROE of 291%. When you look at Q3 lock volume, up -- it's $21.8 billion or up 122%. And then again, our year-end estimate is something between $55 billion and $60 billion of origination.

Page 22. I'm not going to harp on this because I've spoken about it 50 times already. Significant increase in lock volume on the direct-to-consumer channels. This is what we are extremely focused on our entire management team, all of us to get better there. And again, it's not only to get better there around the origination gain side, but it's also to protect our -- what we think is our industry-leading MSR portfolio.

On Page 23, servicing activity and highlights, $30 million for the quarter, up 24%, annualized ROE, 54%. The portfolio has increased 56% year-over-year, and we estimate to close the year at about $300-ish billion of assets.

Page 24, I mentioned one of our core values in our company is helping people, helping homeowners during COVID, helping homeowners, quite frankly, any time. So when you look at the statistics, 18,000 new forbearance requests in the quarter, down from 174,000 in Q2. Active forbearances are now just 36% of the population, impacted by COVID.

And then 50% of the overall forbearances, which is over 100,000 homeowners have been resolved. So great work by the servicing team during these hard times.

Finally, wrapping up Page 25, then we'll open up to Q&A. Obviously, our operating partners are here today. So one is, we do believe in our ability to drive attractive risk-adjusted returns. Clearly, we got kicked in the teeth in March. I think we've rebounded extremely well. I think our book value is extremely understated. I think the value of our equity is extremely understated, and we are going to do anything and everything we can to get back to those pre-COVID levels on the equity price and hopefully down the road on our dividend.

MSR is historically low valuations, a lot of room to improve. We have a ton of cash and liquidity on our balance sheet. We'll continue to maintain that through this tough period. Our management team, when we talk about experience, and we look at the -- on the operating side, a ton of experience.

Bruce has been doing this for 30-plus years. Jack is 30-plus years, I'm 30 years. Baron is here for 25 years and Cathy is probably 25 years as well. So you got a nice old team here.

With that, I'm going to turn it back to the operator, and we'll open it up for questions.

[Operator]

[Operator Instructions] The first question today comes from Doug Harter of Crédit Suisse.

[Douglas Harter, analyst]

Can you just talk a little bit about your expectations, kind of as you head into '21 for the origination business? I think that while the profitability was great, it looked like the direct-to-consumer volume was a little lower than what you had talked about last quarter and just kind of how you're seeing the attractiveness of the various channels?

[Michael Nierenberg, executive]

Yes, why don't I let Baron answer that one.

[Baron Silverstein, executive]

So our volumes were down from what we talked about last quarter in terms of funded balances. We've been able to pick up our lock volume. And you can see that on one of the slides in the context that we did $4.9 billion in locks and only $3.4 billion in fundings.

Part of that is just really due to the landscape for trying to hire new staff. We have actually improved our hiring by bringing in approximately 500 people for the last 2 months in a row. To continue to try to build out our fulfillment framework. We think we're going to continue to grow out our funding capacity as we continue to bring in new employees.

I would also say, and Michael talked a lot about it, is our view on growth in the context of how we believe each of our channels will perform in differing interest rate environments, we do believe that our JV retail channels will continue to be somewhat sticky and then not be as sensitive to the interest rate environment.

Our direct-to-consumer channel has a lot of headroom in it, just given the size of our MSR portfolio. We did pause, and we -- and Michael talked about that in the second quarter, our TPO business as well as our correspondent business, we're able to continue to grow and take market shares in both of those channels. So we're very, very much optimistic about what our 2021 would look like, and we're seeing that momentum for the fourth quarter as well.

[Michael Nierenberg, executive]

Doug, one other thing to add, when you think about percentages as the -- as all of the channels grow, it's harder to -- obviously, the corresponding side is a little bit easier to grow than the direct-to-consumer side. So the overall percentage, while it may be constant quarter-over-quarter, you're seeing higher lock volumes today in our direct-to-consumer channel.

And when you think about the profitability in those channels, that's really where we're focused. And again, it parts about the profitability, but the other part is slowing down the amortization that we're seeing in our MSR portfolio.

[Douglas Harter, analyst]

Got it. And then, Michael, you mentioned kind of doing anything to kind of increase book value and the stock price. Just can you give us your updated thoughts on attractiveness of share repurchase?

[Michael Nierenberg, executive]

We think our shares are cheap. I mean, the one thing is if we think that we can make a difference in buying back stock, would we consider it? The answer is yes. I think the opportunity to grow because once you get back the capital, sometimes it's harder to get it back, the opportunity to grow, I think, and think about being opportunistic during these uncertain times makes us feel like we want to continue to have more cash today than we have in the past.

And I think we're going to continue down that path. I'm not -- we're not ruling that out at this point. Really, our focus is how do we unlock value when we think about really what we believe our true book value is, how do we unlock value for shareholders.

And that's really what we're focused on.

[Operator]

Next question comes from Kevin Barker of Piper Sandler.

[Kevin Barker, analyst]

In reference to Page 5, where the valuation of the originator servicer, you have at $5.58 to $7.66, which was an increase from a little over $4 per share last quarter, and I believe most of that was due to an increase in the multiple, say 5 to 6x earnings from roughly 3x earnings, can you explain why you think that valuation makes sense? And do you expect this level of earnings in 2020 to be sustainable into 2021 and 2022?

[Michael Nierenberg, executive]

So as it relates to the multiple and how we derived it, there's been, I think 5 to 7 mortgage companies that have gone public in the past 4 weeks or so. When we look at where those are trading, I'm not going to compare us to Rocket, which trades at anywhere from 12 to 16x EBITDA. But when we look at where we -- if I think about where this company could trade as a stand-alone company in the public markets, the comps are anywhere from 5 to 6x.

So that's why we put that number in there. If you go back to last quarter, there weren't really a lot of new mortgage companies coming public. Today, if we put ourselves from a comp perspective of 5 to 6x, that's how you get that number.

As it relates to -- Cathy, maybe you want to talk a little bit about how we think about 2021 earnings and what we're kind of projecting on the mortgage company side?

[Cathy Dondzila;CFO of NewRez, executive]

Yes. So for 2021, look, we still believe, as Michael mentioned, we are a newly sort of growing organization, and we think the market is fragmented enough that we still got runway to take market share.

We think that across the 4 channels, even in an upgrade environment, we've still got runway in terms of volume. And we also, I think, while we believe that margins will come down over the course of -- and get back to sort of more normalized levels, we're expecting margins to stay higher, certainly through the fourth quarter and then to the beginning of next year.

So look, in certain upgrade environments, we do think that our overall profitability will trend down. But we think the MSR is going to offset that MSR value because we'll see the prepayments slow, and we've got a lot of upside there.

So again, that natural hedge is going to sort of kick in as we move into 2021.

[Kevin Barker, analyst]

Okay. So when you look at the earnings base, you're basing it on 2020. And I believe a lot of the comps at 5 to 6x earnings were based on 2021 earnings, not 2020. And so I guess what you're saying is that there's market share gains that can continue within that channel in order to sustain earnings. Am I right in thinking that? Or would you expect some contraction into '21 just given increasing competition in various channels?

[Michael Nierenberg, executive]

Kevin, I think what you're going to see is us pick up market share. We do think that you're going to see contraction in origination gains. And when you think about the overall company, the combination of contraction in -- what you're going to see in the origination market as you have lower volumes, you're going to see higher valuations in our MSR portfolio and increased values in that -- on that side.

But overall, whether we do -- I mean and the mortgage business is very hard to gauge, so whether you do 850 or 900 in pretax versus 700 million or 750 or whatever that number ends up being, we wanted to use this as an illustrated purposes as we think about unlocking value in our company, in our investment vehicle.

If you think about our company, it's an investment vehicle that makes investments. We have a good investment portfolio, and then we have the operating business.

Now where we go with the operating business and unlocking value, whether you traded at 6x '21 and if '21 was 500, for example, that would give you a $3 billion number.

So whether you're $5, $7, $10 or $3, the one thing we know, or we believe, is that the sum of our parts is greater than the whole, and we think that the value of the operating business is not captured in our equity price.

[Kevin Barker, analyst]

Yes. If that was realized, it would be a tremendous amount of upside to the value.

[Michael Nierenberg, executive]

Yes.

[Kevin Barker, analyst]

Yes. And then just a quick follow-up on the MSR in your point. You've also been increasing your portfolio at the same time, which traditionally was a hedge against the MSR. How do you think about the play between the value of the agency -- securities portfolio against the value of the MSR? If multiples were to change or the rates were to back up?

[Michael Nierenberg, executive]

So great question. I think on the -- my own personal belief is that long rates will rise over time. The mortgage basis on the other side has been pretty resilient.

You are seeing lower prices in mortgages. We have a total, I believe, of $9 billion of specified pools against our MSR portfolio as well as that we need to have for '40 Act compliance. We want to be nimble here.

And for example, I think we're going to maintain a shorter bias in the long run then a longer bias. And we had some interest rate swaps, for example, that were offsetting where we were receiving on interest rate swaps. We have some -- on the other side, payers, which means we're either long or short.

So we're getting shorter there as well. And we're using that to essentially hedge out what we think the interest rate risk will be against the agency side. So we want to be able to capture the upside in the MSR portfolio when rates rise.

We're not here to -- I don't want to get to a place where we're long $20 billion of agency mortgages, and we have no rate risk hedge on the other side other than the MSR. So point noted. But for us, we're still extremely under hedged as it relates to our MSR portfolio and the amount of pass-throughs that we think we would need to be fully hedged in this environment.

[Operator]

Next question comes from Stephen Laws with Raymond James.

[Stephen Laws, analyst]

My question has a number of moving parts. The adverse market refinance fee that goes into December 1, given your blocking loans now that I assume you sell after funded, which would be after that goes into effect, have you changed prices on loans? Or are you leaving ] it where it is on lock loans and you'll take a compression on the gain on sale?

And as you think about the impacts of that through the business, how much of your origination volume currently refi versus purchase? And then how do we think about the impact on MSRs as well as the market from a different mortgage rate, possibly on refis for the Agency CMBs you just purchased?

[Michael Nierenberg, executive]

Why don't I let Baron or Cathy take the first question, as you think about the delivery of a fee.

[Baron Silverstein, executive]

Right. So the market fee doesn't go into effect until 12/1. But from the time we are locking to the time we're otherwise delivering them to securities, there is -- that period of time is really kind of when that market fee would come into effect for us.

At this time, we have completely put in the market fee in our daily pricing. And our understanding is the market as well as put in the adverse fee into that pricing, it's hard to tell how people are otherwise incorporating it as a cost to the borrower or if they're squeezing it for margins.

My gut tells me that it's somewhere around middle -- in the middle of the pack there, partially being passed down to the borrower and partially being from squeezing to the consumer. But with capacity continuing to be constrained in the ability and just the amount of demand for consumers looking to refinance, my -- I do think that margins will remain elevated as long as the dynamics in our industry are there.

And to the extent that even rates continue to rise, I think that you'll see rates fall soon.

[Michael Nierenberg, executive]

And Stephen, your second question was about refi and MSRs. Is that what that was?

[Stephen Laws, analyst]

Yes. I mean if that -- if partial of that fee is passed on to the bar, you have a higher mortgage rate, then certainly I would think that, that slows prepayments and would be a benefit to your MSR valuation but maybe a headwind to the agency book values because they would be marked down.

And am I thinking about that right as I try and flow all of this through the different business segments when that fee goes into effect?

[Baron Silverstein, executive]

You are, but the fee is 50 basis points. So approximately it would be a little over 12.5 basis points in rate or even 15 basis points in rate.

So in my -- my assumption is, if it's going to be 50-50, you'd be talking about maybe 7, 8 basis points on either side.

So from an impact perspective, given the -- where interest rates, just the aggregate amount of -- the absolute amount of where interest rates are, we don't really think it has any material impact in today's market for the amount of refinance volume.

[Michael Nierenberg, executive]

And Stephen, to that point, when you think about our ability to recapture on the MSR side with our servicer on all refinances, we're recapturing approximately 20% to 25% -- 20% to 30% of all borrowers that are refinancing, and this is on the NewRez side.

To give you a framework, every 2% increase in recapture rate adds about $0.33 per share to our overall earnings or $135 million. So real -- when we harp on the direct-to-consumer side and recapture, while -- you have this increase and theoretically, you're going to see that whether it's passed to the borrower or it's eaten by one of the mortgage companies, that's going to lead, at some point, we believe, to higher rates.

As we do better on the recapture side, that 2% is going to be $135 million per -- in earnings or $0.33 per share. So we think there's a ton of upside in the MSR side.

Origination volumes will get pinched at some point. I don't think this is sustainable forever. But the way that our company is set up with this large MSR portfolio, which will offset that, a ton of cash, the growth in our operating business, I think we're in a great place.

[Stephen Laws, analyst]

Great. And then one last question, kind of shifting on the origination side. As you -- up until COVID, you guys looked at nonconforming loans, any thought of revisiting those originations? Or what's your outlook on the origination mix for 2021?

Or just simply you continue to be conforming with refi, eventually running off depending on rates and what's refi eligible, or do you look at nonconforming originations as something to start back up as an opportunity for next year?

[Michael Nierenberg, executive]

Yes. We're doing a small amount of jumbo today that gets flowed into some of the -- some of our bank friends. Non-QM is -- we're getting ready to start non-QM. Again, the one thing that we want to be mindful of is that we need all the capacity we can to grow our direct-to-consumer channels in the agency space.

While saying that, being that the credit markets have, quite frankly, come rolling back, we are going to be turning on our non-QM origination segment here shortly.

[Operator]

Your next question comes from Bose George of KBW.

[Bose George, analyst]

First, I just wanted to ask where is the recapture rate. I don't see if you guys gave that number. And where do you think it could go? And just to confirm, is all the direct-to-consumer recaptured? Or is there another piece to that as well?

[Michael Nierenberg, executive]

Our recapture rates are, give or take, around 20% right now, which if you think about historically, even going back to the early Cooper days, we were hovering around 35%. Depending upon the product type, it was between 25% and 35%.

So right now, I would assume, give or take, about 20% recapture rates. We need to -- I mean we -- when I talk about areas to improve, this is obviously one of the bigger things for our company, growing our recapture, which will lead to earnings slowdown amortization and give us -- and drive core significantly higher.

[Bose George, analyst]

And some -- there's obviously a range of recapture rates as some companies have given and some are very high, what have been the 70s. I mean what's sort of a reasonable way to think about where you guys could go in the next couple of years.

[Michael Nierenberg, executive]

I go back to -- one is it depends on volumes. Obviously, the higher the volumes, it's harder to recapture because the industry is struggling with capacity. So there's really the -- there's the pros and the cons, right? So if you think about higher recapture, what does that mean? That means you have slower speeds, that means potentially that rates are higher, that means you may have lower origination.

So one of the reasons why we love where we sit right now is when you think about the MSR in conjunction with that origination business, it's a fantastic place to be. I think that we'll get back to the mid-20s into -- on conventional product. I think we will be in the 30s, and we probably are in certain segments on the FHA and Ginnie Mae products.

So -- and again, when you think about that in the context of every 2% is worth $135 million or $0.33 per share, that's really what we're planning for right now.

[Bose George, analyst]

Okay. That makes sense. And then just in terms of the business as a whole, how do you think about the normalized, like where should the normalized ROEs be for you? And what do you need to get there? Because the -- you noted slower prepays will help, but at that time, the origination is probably slow a little bit. And also from a capital deployment standpoint, you have obviously fair amount of cash. Like how much is that reducing sort of the run rate ROE at the moment?

[Michael Nierenberg, executive]

So let me take the latter part. The amount of cash we have is reducing our core earnings by probably -- you couple that with the term loan, it's probably $0.03 to $0.05 per quarter in core.

So when you think about -- we reported 31 in sitting on cash, the term loan got refinanced in September. That's probably a steady run rate of $0.35-ish from a core standpoint right now. As we think about ROEs and going forward, we could go out and buy non-agency securities. As I mentioned earlier in the comments that we sold $600 million in non-agency bonds, which are more credit related, that have recovered from the early days of COVID.

We did that, quite frankly, to reduce risk and create some cash, and we think a -- buying an agency mortgage, quite frankly, on a levered basis is going to produce better results for our shareholders than having a mid-single-digit levered credit piece at this point.

The world changed dramatically, obviously, 8 months ago. Where do we go on a -- once we get a vaccine or a cure, which we're all rooting for, obviously, do I think rates normalize a little bit and head higher and you start seeing hiring, et cetera, I do. And that may open up a different investment possibilities.

My point earlier is from a fiduciary perspective, retaining cash, not just to deploy it to drive earnings because we think we need to, I think, is fiscal year responsible. I think retaining cash to do opportunistic things and drive core earnings higher down the road is something that's extremely important.

So when we talk ROEs, I think our ROE, we looked at some numbers since inception have been in the mid-teens, something around that, including through the COVID period. Up to COVID, it was probably something close to 20%. So I like where we stand. I don't think the investing environment is that attractive to buy non-agency bonds or loans.

And there are some loans that continue to come out, and they're trading at kind of pre-COVID levels as well. So when you think about it with financing, you're in the single digits, and that just doesn't work for our cost of capital right now.

On to about when you look at MSR values, and we're creating a new production at, give or take, anywhere from 3 to 3.5x multiple, 3.5x on conventional product, we think that has a lot of upside. And when you think about that on a levered return or unlevered return, that is going to be the best use of our capital right now because at some point, when rates do rise, that -- they are going to go up and you're going to have a lot more income from your MSR portfolio.

[Bose George, analyst]

Okay. That makes sense. And just one last one. Just going back to Slide 5, just on the valuation differential. One thought is that clearly, the companies that are typical mortgage banks have less of a balance sheet than you guys have. And to the extent the market doesn't sort of give you the value over time, could you think about the structures like a PennyMac structure where you just separate the REIT and the mortgage bank? And is that a potential way to realize this value over time?

[Michael Nierenberg, executive]

Yes. What I said in the -- I think what I closed in my opening remarks is we continue to evaluate a way to drive our equity price higher for our shareholders and create value.

So I would say everything is on the table.

[Operator]

Next question comes from Henry Coffey of Wedbush Securities.

[Henry Coffey, analyst]

No, this information is very helpful as we all kind of pick into this. But everybody on the call knows the mortgage business. And probably a lot of your investors, at least the institutional investors understand the business really well. If you split the mortgage company from the investment portfolio, like Bose suggested, looking at the PennyMac model, what would be the role of the REIT in the equation? How would that would -- would that be the company that held the MSRs? How would that play out in your view or haven't you really thought about it yet?

[Michael Nierenberg, executive]

No. I believe we've started about it quite a bit, and we continue to work on that all the time. Listen, we have a great investment business. We have calls for up to $70 billion of the non-agency market. Our MSR portfolio currently sits at $600 billion -- give or take, $600 billion of MSRs today.

We do have some bonds, and we do have loans. As we go down the road, one of the things, if you think about the split of the 2 companies, how big does your operating business get, how big is your operating business from a balance sheet standpoint, and what's left on the -- what I would say is think about Opco and think about the investment portfolio. So we are playing around with those numbers.

The investment portfolio is a very, very important part to our future as we go forward because I do think on the investment portfolio side, there'll be significant MSR holdings. So the idea is maybe there's a way to unlock value. You're seeing it in some of our peers that are out there going public at 5 to 6x.

That's why on Page 5, we use this as an illustration to show where -- how we could unlock book value -- how we can unlock book value and hopefully drive our equity price to a higher level.

So it remains -- we continue to work on this night and day. And hopefully, we get to a good result that -- where our share price rises, and we get closer to what we think the implied book value is. That would be a huge win for us.

[Henry Coffey, analyst]

I mean obviously, holding on to cash is a smart thing right now because it is hard to get too excited over the kind of investment opportunities you have. This is just a stupid technical question. On Page 31, where does the add-back for the write-off of your term note discount? Where is that?

I'm looking through the numbers and trying to -- I just can't find it. Where did you report that?

[Baron Silverstein, executive]

That would come through in gain/loss on settlement of investments. There's approximately a $60 million charge in there related to the write-off of the discount.

[Operator]

The next question comes from Trevor Cranston of JMP Securities.

[Trevor Cranston, analyst]

Most of my questions have been answered. But I was curious, you mentioned earlier in your remarks about doing some opportunistic early buyouts in the Ginnie space. Can you maybe comment on how much ability you have to do that in terms of the scale of loans that are eligible for buyout right now? And how attractive you see that opportunity is placed to utilize some of your capital?

[Michael Nierenberg, executive]

So the opportunity, we think, is -- it's a good one. The one thing I'd caution on the other side is we don't -- we're not the largest Ginnie Mae MSR or servicer in the business. So we don't have a ton -- we have exposure, I would see it to Ginnie Mae or FHA, but we're not the largest there.

So we see it as an opportunity. As our MSR portfolio on the Ginnie side grows, you potentially could see a larger opportunity. Clearly, we're not rooting for that because we're rooting for homeowners all the time. And it's an opportunity today, but we'll see how it plays out. We'll see what happens with delinquency trends as we go forward.

Because if you think about it, you're buying out a borrower that's delinquent, you're giving them the mod. And we want everybody to be able to perform and obviously get the lowest cost of funds around the mortgage.

So it remains to be seen, but I think the shorter answer is, we're not the largest unique player there. It is an opportunity for us, though.

[Trevor Cranston, analyst]

Okay. Got it. And then in terms of gain on sale margin, obviously, there was some compression during the third quarter. Can you comment on sort of how that's continued to trend into 4Q? I know you've said you expect it to remain somewhat elevated in the near term, but has that number continued to compress further into the fourth quarter versus where we saw it in 3Q?

[Baron Silverstein, executive]

So margins obviously depend upon the channel of origination, but just due to the demand, we continue to see margins remaining elevated through the fourth quarter.

And I would say that, that would be for 3 of the channels. On the correspondent channel, as competition continues to build up, and then you have the embedded floor, which would be the agency cash windows, but we've seen margins remain steady there as well.

And that's the expectation going into the fourth quarter. I don't think that you're going to see meaningful change in margins unless the amount of consumer demand changes materially, which will either be based upon capacity or just the aggregate level of interest rates.

[Trevor Cranston, analyst]

Okay. Got it. And then last one, can you say what percentage of your total origination volume in 3Q was purchased versus refi across all the channels?

[Baron Silverstein, executive]

Across all the channels, we're about -- in the third quarter, we're about 67% refi and 33% purchase.

[Operator]

Next question comes from Mike Smyth of B. Riley Securities.

[Michael Smyth, analyst]

Mike, just a quick one for me. Could you provide a quarter-to-date book value performance and just give any commentary on performance during the month of October?

[Michael Nierenberg, executive]

It's early, Mike. I would say we're essentially, give or take, unchanged at this point. So something between I guess, our net reported number of $10.86 and $11. So probably in that range.

[Operator]

Next question is from Giuliano Bologna of Compass Point.

[Giuliano Anderes-Bologna, analyst]

I guess kind of like going back to some of the DTC discussion. You obviously increased DTC volumes in the third quarter. And last quarter, there was some discussion about getting, I guess, third quarter to about $4.6 billion and fourth quarter to around $6 billion. I'm sure there were different assumptions about prepayment speeds in that.

But what I was trying to figure out was kind of what the runway looks like given the environment going into the fourth quarter. Obviously, you gave some monthly trends last quarter. But then beyond that, the next part of that question is really, what kind of volumes are you really trying to target in that -- on the DTC side?

And what is the growth potential there? Because obviously, that's a huge factor in terms of stabilizing the portfolio because you have significant amortization expense flowing through at the moment.

[Baron Silverstein, executive]

So our -- the biggest issue we've had is really just capacity to be able to fund loans. And that is just a market dynamic across the entire industry and the entire sector on either from a technological perspective to be able to put loans through the system as well as just having enough people to put loans through the system.

And what we realized is that we just were not able to bring in enough people fast enough. We've made moves in the third quarter to get ourselves to a better place. And I talked a little bit about that before, where we're hiring north of 500 people a month at this particular point in time in order to meet that capacity.

We have a view as to how much we should be able to close for the month. If you look at on Slide 22, we talk about that we took in $4.9 million of locks, which we believe we should be able to catch up to that capacity going into the fourth quarter.

We -- given thoughts on where we think the market is going to come into 2021, just given the size of our origination business versus the size of the MSR portfolio, and Michael talks about incremental changes in -- if we can improve our recapture rate and have that continue to go up, we do believe that there is a lot of headroom given the size of our MSR portfolio to take advantage of the current opportunity.

Does that mean that we can get ourselves to 40% recapture or 35% recapture, a lot is going to be driven by the amount of refinance activity on a go-forward basis going into '21?

[Michael Nierenberg, executive]

And Giuliano, just when you think about what is the amount that we want to do in that channel? And quite frankly, it's as much as we possibly can that we think that we can handle. And that is -- that's kind of where we want to head with this.

And again, the growth of the company has been tremendous. The amount of resources we have continues to grow. The equity investments we're making in branding and marketing and technology is something that will continue as we build this company for the long run.

[Giuliano Anderes-Bologna, analyst]

That makes a lot of sense. And what I was kind of trying to get in the sense was also thinking about the kind of forward interplay between DTC and originations and amortization. I'm curious, like, as a first part of this question, if you have any sense of how amortization is shaping up early in the fourth quarter?

And then the second part of that is kind of getting back to the 2 question, I think it was a brought up many different times and answered that you've addressed in a few different ways on the call, but you keep referring to unlocking value from the operating businesses, what I think is really interesting -- what I'm kind of curious about is like what would you consider there if you can't get the value in the shares? Would you consider spreading the businesses?

And then the question that kind of -- that goes along with that would be, would you keep the servicing and originations in the sense to keep the actual assets of the MSRs with the originations platform in that type of a transition of the business? Or how would you think about where the pieces would fall?

[Michael Nierenberg, executive]

We -- I think I pointed out either to Kevin or somebody, we are working on all kinds of different iterations on how we think about the operating business versus the investment portfolio and the interplay between both. And that will continue until I think we get to the right result for our shareholders, which is a higher stock price.

[Operator]

The next question is from Jason Stewart with JonesTrading.

[Jason Stewart, analyst]

Obviously, we had a large population of customers that took forbearance back in April, May, and we're hitting the 6-month mark. You've given us some good disclosure, 50% roughly of ended forbearance. Does that mean that population is current? Can you give us some more color around that? And then active loss mit, does that mean you're in contact? Just looking for some more context around those 2 buckets.

[Michael Nierenberg, executive]

Sure. Jack, you want to take that?

[Jack Navarro, executive]

Sure, Michael. Good morning, everybody. Happy to take that. I would refer you to chart -- the chart on Page 24. I think the most interesting statistic is one that Michael already stated, and I just would like to repeat, and that's the fact that only 18,000 a new forbearance requests in the third quarter versus 174,000 in the second quarter, pretty dramatic.

So in addition to that, we've seen a transition between those people who have requested forbearances into active forbearances. So that's that number that you see, it's about 75,000-ish in a second set of bars, the active forbearances. Of those forbearances, a higher percentage of those are delinquent than from the original number. And a good portion of the people who have transitioned into resolution have transitioned because they were paying current customers and now have just said they no longer need the forbearance protection.

And so a high percentage of those, about 80% of those active forbearances are, in fact, delinquent. And then in terms of active loss mitigation, that just means that we're in discussions with them to either defer or modify or in some cases, reinstate. And so those people are in active discussions today.

[Operator]

Next question is a follow-up from Kevin Barker of Piper Sandler.

[Kevin Barker, analyst]

I just wanted to follow-up on the comments about correspondent margins. Have the correspondent margins come down to pre-COVID levels in the third quarter and hence, your comments about steady margins in the fourth quarter? Or are they still elevated from where you saw that -- elevated compared to pre-COVID levels?

[Baron Silverstein, executive]

Right. They're definitely elevated versus pre-COVID levels. I would say that there are a few different ways to purchase correspondent. So really depending upon what the mix is in correspondent, whether you're buying Ginnie Maes, whether you're buying agencies and then also whether or not you're buying mandatory or best efforts locks or even nondelegated lock, so that impacts what margins are across the board. So we are still seeing correspondent margins elevated versus pre-COVID. And we're around 50 basis points all in on a pretax basis on correspondent margins.

[Kevin Barker, analyst]

So the competition still is not as strong as some others have said? Or you're just saying there are certain channels that continue to...

[Baron Silverstein, executive]

I think there are certain channels within correspondent that can continue to elevate margins. There is no cash window, for example, on Ginnie Mae, so to the extent that you're able to continue -- or you have an interest in continuing to buy Ginnie Mae that can help out your margins. It really depends on the channel mix within that -- with the product mix within that channel.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks.

[Michael Nierenberg, executive]

Well, thanks for the call this morning and your support. We look forward to updating you throughout the quarter and into Q4. Have a great day and a great week. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.