Mr Cooper Group Inc

NASDAQ:COOP

Earnings Call Transcript 2020-Q1

[Ken Posner]

Good morning and welcome to Mr. Cooper Group's First Quarter Earnings Call. My name is Ken Posner, and I'm Senior Vice President of Strategic Planning and Investor Relations. With me today is Jay Bray, Chairman and CEO; and Chris Marshall, Vice Chairman and CFO.

As a quick reminder, this call is being recorded and you can find the slides on our Investor Relations webpage at investors.mrcoopergroup.com. Additionally, during the call we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck.

Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change.

I'll now turn the call over to Jay.

[Jay Bray, Chairman and CEO]

Thanks, Ken and good morning everyone, and welcome to our call. Turning to slide six. Before we take you through the quarter, let me start by saying our thoughts are with the people and their families who've been impacted by the virus and the economic slowdown. We were also mindful of the heroic work being performed by the nation's healthcare workers.

I'd also like to give a big shout out of appreciation to all our teammates at Mr. Cooper. I'm so proud of how you've all risen to the occasion. Culturally, our company has shown a lot of perseverance and grit over the years. During the last downturn, we took on trouble portfolios with high delinquency rates, financed billions of dollars advances, worked hard to keep a lot of people in their homes and saved investors from hundreds of millions of dollars in losses.

We're very proud of this track record, which has propelled us over the years into our current position as a leading non-bank servicer, and we are committed to our role as the customer's advocate.

That grit was very evident in our IT staff who moved nearly 9,000 people to work from home status in five days. Although, it's been difficult, we've been able to operate our company remotely without impacting productivity.

In terms of our results, I'd like to first highlight our unrestricted cash, which increased by 75% sequentially to $579 million. Another positive since quarter in, we've expanded our committed borrowing capacity by $850 million. While we don't know the full economic impact of the virus yet, this additional capacity leaves us feeling well-positioned to manage a sizable increase in customers on forbearance.

On a GAAP basis, we reported a net loss of $171 million or $1.84 per share. And given the nature of our business model and accounting rules, this reflects the familiar combination of two different stories. First, as you would expect from the decline in interest rates, we had a non-cash mark-to-market on our MSR portfolio of $383 million.

And second, we had an incredibly strong operating result even after reacting to the events of late March, excluding the mark pretax operating income totaled $127 million, which was the equivalent to an ROTCE of almost 20%. We've come a long way on our journey since the WMIH merger, which is when we started pivoting the company from the historic focus on asset growth to emphasizing profitability, cash flow, and return on equity.

The Originations segment had another big quarter with $158 million in pretax profits. Once the crisis hit the capital markets, our leaders reacted at lightning speed to de-risk the pipeline and repositioned the business, and thanks to their agile response we've seen terrific volumes and margins in April and are expecting a very robust second quarter.

The Servicing margin was weak at 3.9 basis points due to high amortization and some purchases accounting pressure for the reserve -- reverse portfolio. The big story in Servicing, of course, is how we'll manage costs as customers going forbearance, which I'll take you through in a moment.

Xome hit our expectations for pretax income, but what's really exciting is that the team has started to book some huge wins with third-party calling. In the short term, profitability will be impacted by foreclosure moratoriums, but once they're lifted we expect Xome to be going gangbusters across all of its verticals.

Now moving to slide seven. Let's give you an update on how the pandemic is impacting our customers. We strongly supported the forbearance program included in the CARES Act, which we believe will make it possible for services like Mr. Cooper to keep mirroring millions of people in their homes until the economy recovers from the shock.

If you'll turn to slide seven, you'll see that we've helped a total of 194,000 customers initiate forbearance plan so far, which amounts to 5.6% of our total customer base. The blue line is the path we're projecting to a total take-up rate of almost 20% by the end of June.

This path assumes an economic shock with unemployment peaking in the second quarter, followed by protractive recessionary conditions and a slow recovery. This is a scenario we are using for capacity, logistics and liquidity planning and it's one that we feel well-positioned to manage. As you can see so far the data is coming in below these projections, obviously, this is a very fluid environment and we would expect take-up to come in waves as more people face employment issues.

Our forbearance strategy emphasizes customer education and digital delivery. We started by standing up virtual training classes for our entire customer facing teams. Then we rolled out a digital self service tool, program consistent omni-channel messaging and created a pandemic resource center on the web, which includes a video I recorded explaining the key points on forbearance, including the fact that it's not the same as forgiveness.

Now, let's turn to slide eight, and talk about our strategy for this environment. Last quarter, we talked about some of the pillars of our strategic plan. For any mortgage firm a strong balance sheet is non-negotiable. With this thinking drove our decision back in January to refinance the 2021 and 2022 maturities and create a three-year liquidity runway, as well as build up cash and expand capacity once the crisis hit. Chris will take you through more details on our liquidity, while I'll focus my comments on managing costs.

Thanks to digital delivery, forbearance is a relatively efficient process for us. After forbearance, many customers will go through modifications. The good news for us is that we've already made significant investments to automate the modification process as part of our project Titan's initiative.

Some of you may recall the government's HAMP and HARP programs from a few years back. We learned a lot from those programs, including the fact that modifications can be stressful for the homeowner. So, we started by re-engineering the customer experience. For example, by creating a dashboard with a simple piece of tracker that shows where you are in the process and what you need to do next.

We also re-engineered the experience for our customer service agents by developing workflow management tools for the critical toll gates, mainly applications, underwriting and fulfillment. The key for us and other major servicers is to quickly move thousands of customers once they're ready to exit forbearance into newly modified loans. The servicers that do this efficiently will report appropriate positive margins. And by helping our customers get back on their feet, we'll also help the agencies keep their credit losses as low as possible.

And on that note, I'll turn the call over to Chris.

[Chris Marshall, Vice Chairman and CFO]

Thanks Jay. Good morning everyone. I'm going to start with a high level review of our results on slide nine. As Jay mentioned, we reported a net loss of $171 million or $1.84 share. The biggest driver was the non-cash mark-to-market on the MSR, which is due to the decline in rates, while operating results were rocks out. In fact, they were even higher than in the fourth quarter.

So, let me start by taking you through the adjustments we customarily make to calculate operating earnings and point out some other notable items you may want to consider. Adjustments included $4 million in severance charges in the Servicing segment as we closed the facility we acquired as part of the Seterus acquisition early last year. Now this is an example of the many corporate actions we've been taking to standardize our operations or achieve efficiencies throughout the organization.

In addition, Servicing results include a $15 million loss associated with reverse. This was largely driven by the impact of sharply lower interest rates on the amortization purchase accounting marks for this portfolio.

Originations included two separate charges, which reversed some of the revenues we booked on our pipeline during the quarter. We took out $21 million in revenues to reflect lower gain on sale margins for certain products and we also reversed $13 million in revenues for loans were issues with the borrowers’ employment could possibly pose a risk to closing.

And then finally, the Corporate segment included an $8 million charge associated with the shutdown of an ancillary business unit that wasn't profitable. And that's just another example of a corporate action, which has focused on improving our efficiency.

To sum up, there were approximately $60 million in one time items that impacted our income. Absent those charges, our pretax operating income would have been close to $200 million and our fully taxed ROTCE would have been approximately a 30%, which demonstrates the enormous for the Mr. Cooper business model when you combine a customer focused culture, world-class operational skills and financial discipline.

Now, let's turn to slide 10 and discuss the $383 million mark-to-market that we booked in the quarter, which reduced the value of MSR portfolio by 10% from 118 basis points a UPB to 107. The mark as you would probably have expected was driven by the significant decline in interest rates in the quarter.

As you know, mortgage rates were extremely volatile, ending down 24 basis points, which led us to raise the lifetime CPR assumption from 13.1% to 13.4%. Short term rates declined by over a 100 basis points, which negatively impacted the outlook for net interest income. Otherwise, we didn't make any major changes to our model on the quarter.

We've updated our table on the refinancing side, and as you wouldn't be surprised, you'll see that at current rates, a large portion of the portfolio is refinanciable [ph] and despite all of the distractions our customers are dealing with, we continue to see very strong refi application volumes, which are right in line with the volumes we saw prior to the crisis.

And as a reminder, I point out that while we recognize the mark-to-market on our MSR portfolio immediately the incremental profits from our origination business will flow in over time.

Now on that note, let's turn to slide 11. We'll talk a little bit more about the Origination segment, which produced really strong results in the quarter. We funded $12.4 billion and earned the margin 1.2%, and that was despite the $34 million in revenue reversals I commented on earlier, otherwise the margin would have been approximately 150 basis points.

The Originations steam did an outstanding job navigating the market disruptions. As Jay mentioned, we quickly moved our teammates to work from home status and after just a few days of adjustment, our productivity is returned to normal levels and, in fact, if anything it's even a little bit higher. And this includes the Home Advisor teams which continued to deliver excellent results.

By the way, we're continuing to grow our Home Advisor unit and it's up from 180 team members at year-end to 286 as of now, and we continue to recruit and hire to add to that team. At the same time, we made the decision to shutdown the wholesale channel, which was quite small and allocate those resources to the DTC channel in order to maximize our profitability. With April nearly complete, we're estimating total fundings for the month at around $3.5 billion and a margin above 150 basis points, with mortgage rates having fallen another 20 basis points so far this quarter. We'd expect to have very robust profits in the second quarter.

As a company whose originations business is focused on helping existing customers refinance and save money and its platform is highly efficient and extremely profitable, we believe we're as well-positioned as anybody in the industry to deal with this current environment.

Now, let's turn to slide 12 and review the Servicing portfolio. All UPB ended the quarter at $629 billion, which was down slightly from the fourth quarter, primarily due to sale of MSRs which was finalized in the fourth quarter, but which the board did in the first. The composition of the portfolio hasn't changed materially, and as you know in recent years the company's focused on growing sub-servicing in order to economize on capital and liquidity. And in hindsight that was a very good decision as our sub-servicing contracts provide us with healthy incentives to manage trouble loans and we get reimburse promptly for advances.

Our replenishment rate remained roughly a 100% in the quarter. On a gross basis, UPB is down slightly, but our excess spread pools also declined, so on a net basis the portfolio remained essentially static. Now in the short term, lower portfolio grow slightly, shrink slightly, was flat that's really not our prime consideration. Rather, we want to be in position to take advantage of accretive opportunities should they emerge, which we'd measure in terms of earnings, cash flow and return on equity.

Now, let's start our attention to the Servicing margin on slide 13. Excluding the full mark, the Servicing margin was 3.9 basis points, down from 5.5 in the fourth quarter. There were two drivers of that compression. First, there were no special one-time revenue items this quarter, whereas the fourth quarter included in $19 million recovery.

And second, as previously mentioned, the margin was impacted by a $15 million loss in the reverse portfolio, which you'll notice in the appendix as a reduction in revenue mortgage interest income in which relates to the impact of lower interest rates on the amortization of purchase accounting marks. Going forward, we expect reverse to continue add some variability to our results, but on average you should expect it to be relatively neutral to earnings and cash flow.

Now, looking ahead, I want to highlight the potential for some temporary compression in the margins starting in the second quarter after which we should see a strong rebound later in the year. The biggest driver will be a sharp decline in net interest income, which is where you see the credits we earned for custodial deposits, which will be impacted by the decline in rates and with $10 billion in deposits, that's a quarterly hit, close to $40 million.

So far in April, CPR rates are continuing to run at elevated levels, just like we saw in March, and that suggested amortization will rise slightly in the second quarter. Ancillary income may also be pressured as we'd expect to accrue a fewer late fees in the quarter.

Now finally to address the modifications surge, we're adding thoughtfully to capacity and we have plans to hire 200 people to supplement our contact centers and back office, and that should translate into roughly $2 million to $3 million in quarterly incremental expenses. While the second quarter margin may be close to breakeven, the price facts for the second half are much brighter ones we start to accrue modification fees.

Now, turning to Xome on slide 14. We were very pleased with another quarter of strong performance, with pretax operating income of $13 million and an uptick in third-party revenues from 51% to 55%.

The Xome team has won several new contracts from third-party clients and title and exchange and we're very excited about. You can see a pipeline of REO properties has nearly tripled over the last six months from an average of 6,000 in the third quarter to an average of almost 18,000 for the first quarter of this year. Now bear in mind it takes a few quarters for properties to move through the pipeline and turn it into sales and that's -- because that's where we earn commissions.

Having said that, the foreclosure process has gone on hold for the moment with moratoriums in place across the nation. Accordingly, we guide you to expect Xome to be running at plus or minus breakeven in the short term because the REO change is the single biggest contributor to the bottom line.

Once the moratoriums are lifted, the outlook for Xome is very bright. If economic recovery is slow and there's widespread deterioration and borrower performance, then the default related services, including the exchange and field services should enjoy elevated profitability. At the same time, Xome is doing extremely well with title and valuation services, which are more linked to the Originations market, with low interest rates and a strong refi market these units have a lot of room to grow.

Now, I'll wrap up and talk a little bit about liquidity on slide 15. I'm going to focus my comments on our strategy for funding advances. As Jay mentioned, our current planning model is based on an economic shock where forbearance take-up reaches 20% of our portfolio and we feel we're very well-positioned for that scenario.

As you know, we have extensive experience financing advances as well as longstanding relationships with the major banks that are active in the market, and then in the last downturn we financed billions of dollars advances through bank lines and securitizations. Since then, our advances have been steadily declining, and in fact, they were down nearly 30% year-over-year to $812 million as of March 31, in line with a steady decline in our delinquencies. Not only have our customers benefited from strong economic growth in the last few years, but we've managed asset quality through strict underwriting controls and portfolio management.

Now turning into the composition of advances, you'll notice our P&I advances were quite small, that's because prepayment speeds are running at elevated levels. When payoffs are high, we benefit from those unscheduled payments, providing a short term float from which to remit scheduled payments.

On March 31 advances for Fannie and Freddie totaled $213 million. And then subsequent to quarter end, we expanded our committed capacity to -- in a new facility of $875 million, which we regard as very robust and more than sufficient for the advances that we expect. At quarter end, advances for Ginnie Mae totaled $186 million. Now, Ginnie advances are more difficult to finance because historically Ginnie has not allowed the advances to be bifurcated or financed separately from the MSR. Now, Ginnie has started to change these rules, and we're exploring whether we can structure a line or securitization facility on that new basis.

However, for now we expect the finance Ginnie Mae advances with existing MSR lines and corporate cash flow along with Ginnie's pass through assistance program as a backup. You'll notice that we had $277 million in debt in advances in our private label portfolio. This is a highly seasoned pool of collateral which dates back to our experience in the prior downturn.

We get reimbursed for advances and POS relatively quickly and that should limit growth and balances even with higher forbearance take-up rates. Subsequent to quarter end, we expanded our committed capacity in POS to a total of $425 million and we believe that will be more than sufficient for our expected needs.

Additionally, you may have noticed in our filings that we financed some of our private label advances through a structured transaction. There are approximately $400 million in advances, which has been sold to a special purpose entity, which are not shown on our balance sheet. But that special purpose facility has its own financing, and we also believe that to be more than sufficient for any increase in advances that is consistent with our forecast.

So, with that, I'll stop and turn it back to Ken for some Q&A.

[Ken Posner]

Thanks Chris. I'm going to ask our operator to start the Q&A session.

[Operator]

Thank you. [Operator Instructions]

Our first question comes from the line of Doug Harter of Credit Suisse. Your question please.

[Doug Harter, Credit Suisse]

Thanks. I'm sticking on the servicing advances. I guess, can you talk a little bit about the cost of those facilities, the advance rate on those facilities and to the extent that you needed to add more kind of how readily available kind of financing is, especially on the GSE collateral right now.

[Chris Marshall, Vice Chairman and CFO]

Good morning, Doug. It’s Chris. I think -- first of all, I think it's readily available. I think people view GSE advances as is very strong collateral. Advance rates tend to be in the range of 90% to 95% and the cost of those facilities -- and as I think we mentioned on the call, we just entered into a new facility of $875 million, the cost of that facility is LIBOR plus $875 million. So, again, I think, there's availability of financing for GSE advances. We've never had an issue with that in the past.

And I think more importantly though, looking out over our projections and, and looking at what eventual take-up rates can be, so far, our sizing has proved to be very conservative. The facility we just entered into will be more than sufficient to handle our peak needs.

[Doug Harter, Credit Suisse]

Thank you for that, Chris. I guess, along those lines and since prepays kind of factor into kind of the advanced needs, I guess, how were you thinking about kind of what the pacing of refinances are in the portfolio, kind of in the coming months, kind of given the -- kind of given the forbearance challenges, but combined with low rates. So, I mean, how are you thinking about that, or what's going on?

[Chris Marshall, Vice Chairman and CFO]

I mean, that's a $64,000 question. There's been some debate …

[Doug Harter, Credit Suisse]

That’s why I asked it.

[Chris Marshall, Vice Chairman and CFO]

Yeah, yeah. There was some question about what CPRs are going to be, clearly that factors not just in the prepayments but all -- and advances, but also into on the MSR mark. We think CPRs will remain high at least through the second quarter we're expecting them to. And clearly our originations activity is at record levels. So, we expect people to take advantage of the low rate environment. And we hope that continues through the year.

We -- right now we expect CPRs to modestly trail off in the back half of the year. And we're still expecting for forbearance -- I don't want to say expecting it -- we're planning for forbearance at a higher levels eventually. Now, clearly that's something we have to plan for, but it's going to turn on the length of the pandemic, the success of reopening the country, what the shape of the recovery looks like, things that are well outside of our ability to forecast. So, we're planning for higher levels and if that happens, that certainly will have an impact on CPR over the balance of the year. But right now, we're expecting CPR to remain high through the quarter and then drop-off moderately over the back half of the year in some way reflecting the seasonality.

[Doug Harter, Credit Suisse]

Great. Thank you Chris.

[Chris Marshall, Vice Chairman and CFO]

Thank you.

[Operator]

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

[Jay Bray, Chairman and CEO]

Good morning, Bose.

[Operator]

Make sure your line is muted.

[Bose George, KBW]

Sorry. Good morning guys. Hope everyone's safe. The guidance you gave on the -- on earnings for the Servicing, you said roughly breakeven in the second quarter and Xome roughly breaking as well. Is that correct?

[Chris Marshall, Vice Chairman and CFO]

Yeah. In the second quarter you should expect two things. First of all, we're expecting short term rates to stay very low through the quarter and that has a very large impact on our Servicing margin. The other thing you should expect that you see is we'll begin adding more, more expense in anticipation of the modification surge. So, second quarter is going to be a little unusual, given just the timing of adding expense before we start to actually book modifications and record the income. So, second quarter we'll be down. Third and fourth quarter you should see a nice rebound.

[Bose George, KBW]

But you're still -- the 12% target ROTCE, it's still good. It's just -- where history just given what's happening second quarter.

[Chris Marshall, Vice Chairman and CFO]

Yeah, I feel very good about our results. I think, overall, this is probably the best time to step back and look at the company really on a blended basis. So, going back to the question from Doug, CPRs are incredibly high and that is really pressuring the servicing margin in addition to the very low short term rates. But at the same time, our Originations segment is producing incredible value at very strong margins. So, overall, we expect the company to perform very well during this period.

Clearly, it's an unusual period and there are questions about forbearance and CPR and advances, but we don't see a scenario where we're going to have any liquidity issue. And we don't see any scenario where our ability to operate profitably and to hit those ROTCE goals is going to be affected in any way.

[Bose George, KBW]

And then switching to the MSR mark, as you noted rates continue to go down in the second quarter. And also just mortgage rates remain obviously pretty high relative to treasury. If those spreads convergence and primary mortgage rates start heading down, will we be seeing more meaningful marks on your MSR?

[Chris Marshall, Vice Chairman and CFO]

We'll see marks, but they wouldn't be more meaningful. I think the mark we took in the quarter was quite large. If we were to mark our book today for the rates in the quarter it wouldn't be anywhere close to what we experienced last quarter. I'm guessing it'd be -- not guessing if I look at our rate mark through yesterday, it'd be less than half of what we saw, significant less than half. So, there will be marks if rate -- if mortgage rates continue to come down, then clearly we'll see the effect of that.

There's a lot of question right now regarding the cost of service delinquent accounts and clearly we're going to see high delinquency rates in historical terms ignoring the fact that loans on forbearance maybe categorize differently. But I think the industry has done a lot to automate some of those costs and clearly the loans that go on forbearance will be different than typical delinquencies. That hasn't all been sorted through, but I don't expect to see marks on the order of what we just saw in the quarter, Bose …

[Bose George, KBW]

Okay.

[Chris Marshall, Vice Chairman and CFO]

… scenario there.

[Bose George, KBW]

Okay. Great. Just one follow-up on the point you made on forbearance earlier. Slide seven where you have that the business planning scenario. Could you say that kind of plays out the existing servicing advanced funding you guys have is sufficient to meet the needs for forbearance take-up reaches those levels.

[Chris Marshall, Vice Chairman and CFO]

Yes, absolutely. If there's one message I want to get across because of the -- we've gotten a lot of questions from investors up until now. We spent a lot of time over the last month working with our bank partners, and we think we put in place facilities that won't handle scenarios that have proven to be too conservative. So, we think that plus the combination of our cash balances, which are up, up from even where we ended the quarter, I think we have more than enough capacity to handle forbearance within the scenarios that we've planned for. And again, those scenarios are proving to be significantly higher and significantly faster than what our experience has been.

[Bose George, KBW]

Okay. Great. Thanks a lot.

[Operator]

Thank you. Our next question comes from Kevin Barker of Piper Sandler. Your line is open.

[Kevin Barker, Piper Sandler]

Thank you. Good morning.

[Jay Bray, Chairman and CEO]

Hey. Good morning, Kevin.

[Kevin Barker, Piper Sandler]

So, in regards to the guidance around breakeven, you mentioned there was $40 million hit to interest income from lower rates on custodial deposits. Is that $40 million -- was that $40 million hit from the fourth quarter or were some of that already embedded in the first quarter? And how should we think about the puts and takes to get to that, that breakeven rate, give or take in the second quarter?

[Chris Marshall, Vice Chairman and CFO]

So that would be -- that would be a continuation of what we saw in the first quarter, some of it. So, in terms of rates, that $40 million, if we went back to the beginning of the year and looked at where say the five-year swap rate is down a 100 basis points, that's a good proxy for the interest income we would earn.

In addition to that, our normal ancillary fees would be about $15 million a quarter, most of which are late fees. We wouldn't experience any of those in the quarter. There's some impact from forbearance just the amount of servicing fees that we want to experience. And there's added expense in the quarter. So, it's the totality of those things, Kevin, that I think are going to point us towards a breakeven quarter with the variable B, how much expense we add, how quickly we're going to do that in a thoughtful way. But we clearly want to be completely staffed and trained to handle any modification volumes that, that we have to deal with.

[Kevin Barker, Piper Sandler]

Okay. So, just coming through some of those, it seems like you're going to have the operating expense from the forbearance programs and staffing up and then the ancillary fees will eventually come through in the second half. But if interest rates stay low, we'll continue to see headwinds from lower interest income on custodial deposits. Is that -- is that a good way to think about it?

[Chris Marshall, Vice Chairman and CFO]

Yes, that's exactly right.

[Kevin Barker, Piper Sandler]

Okay. And then, in regards to your comments about profitability in the Originations segment in April, what sort of magnitude can we expect, given what you've seen so far this -- in the second quarter for origination gain on sale and just overall profitability within the Origination segment?

[Chris Marshall, Vice Chairman and CFO]

Well, I can't amplify too much on what we have in the charts here. But if you look at the fourth quarter and the first quarter, you should expect our originations business to continue to perform as you seen it. And maybe even a little bit better as I said it, it really is remarkable that the efficiency of the business, productivity of the business is actually a little bit higher than it was before we started working from home. So, what that says about team, they just performing incredibly well.

But we expect originations volume to be somewhere approaching 3.5 billion in the quarter, could be slightly higher, slightly lower than that, but the margin hanging in it 1.5% or even higher. But that's what we see right now in the month. I hate giving too much guidance, because things can change quickly in Originations, but right now, we don't see any reason why that will continue through the end of the quarter and we're expecting it to.

[Kevin Barker, Piper Sandler]

Okay. And then when you think about what the mix will look like, how much would you expect direct-to-consumer to be of the total mix and the retail opportunity?

[Chris Marshall, Vice Chairman and CFO]

Direct-to-consumer will be more than it has been historically, because like a lot of people -- a lot of -- a lot of our competitors, we've been a little more disciplined about what we're doing in the correspondent channel. If you go back to the beginning of the pandemic when there was extreme volatility in the TBA market, that was a time when we were reassessing what we should be locking, what kind of changes are going to be in terms of agency and government rules for things like appraisals and notaries. And so, we turned down our correspondent business fairly significantly and then turn it back on. But we're not doing as much business we would do -- I'd say it's a much more disciplined business. And so that's probably the wrong word to use. It's a narrower business, right? We're buying an narrow -- an hour stream of product. And so for that reason alone, you should expect that DTC to make up more of our overall mix.

[Kevin Barker, Piper Sandler]

Okay. Thank you for taking my question.

[Jay Bray, Chairman and CEO]

And as you know, Kevin, the margin on the DTC businesses quite large and so, I think while Chris is right to say that what we've suggested in a presentation is appropriate. The margins in DTC are much stronger than that, much stronger than that right now.

[Kevin Barker, Piper Sandler]

Yeah. I'm just thinking you would lean in much harder on direct-to-consumer, just given the profit margins that could be created there, given the refinance opportunity and then decreased correspondent just because it's the cash intensive business -- a capital and cash intensive business.

[Jay Bray, Chairman and CEO]

That's -- that's exactly -- that's exactly what we're doing. I mean, I think you could see DTC being 80% of the volume in the second quarter. Depending on what we ultimately -- we continue to evaluate correspondent business. As you know, we like that business and we've grown it considerably. But to Chris's point, we tap the brakes a bit on certain products and in some different places. So, right now DTC is frankly the majority of the volume and profits.

[Kevin Barker, Piper Sandler]

Okay. Thank you very much.

[Operator]

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

[Mark Hammond, Bank of America]

Thank you. Hi, Jay, Chris and Ken.

[Jay Bray, Chairman and CEO]

Good morning, Mark.

[Chris Marshall, Vice Chairman and CFO]

Hey, Mark.

[Mark Hammond, Bank of America]

I appreciate all of the data on forbearance and advance capacity that you have. Just putting those two together. So the forbearance, the business planning scenario where you have forbearance peeking around 19%, at least going to 19%. And then combining that with the financing capacity for advances that you have in place as -- after the quarter. So, how much confidence in covering advances under that business planning scenario rely on any sort of prepayment -- prepayments in Ginnie and Fannie advances, or Ginnie and Fannie servicing to kind of cover some of those advances for forbearance?

[Chris Marshall, Vice Chairman and CFO]

Well, I guess, I'd answer that question two ways. First, we have complete confidence that we have the facilities and cash and resources need the forbearance levels that we planned for. Clearly, they could be higher than that, but to date, our experiences that are actual forbearances well below what we've planned for and I emphasize it's well below. So, again, we have complete confidence that we have the necessary resources to meet those needs.

With regard to prepayments, we forecast prepayments along with our CPR constantly. And I don't know if I would say there's a dependence on prepayment. We factor in certain levels of prepayment when we forecast our remittances. I don't see any -- anything unusual on how we do that or any reason why a scenario where prepayments may drop-off would indicate we wouldn't have capacity to handle advances. If that's what you were suggesting in your question, I just don't see any scenario like that, that more pose an issue to us.

[Mark Hammond, Bank of America]

Got it. Yeah. I was trying to get a sense for, I guess, how much liquidity currently you're getting for payoffs and using that float to cover advances now rather than your own corporate liquidity.

[Chris Marshall, Vice Chairman and CFO]

Yeah. Well, right now, given prepayments are quite high, there is quite a bit of that. So -- and I think you see that across the industry. I don't think we're any -- we're not unique in any way. I think you will see advances, the take-up occur later than people might have originally expected, because prepayments and CPR have remained so high. But beyond that, I don't see any -- anything unusual on how we're forecasting that.

[Mark Hammond, Bank of America]

Gotcha. And is there a gap to have offhand $1 amount that you have basically been able to use prepayments to fund what is currently advanced that we don't see on slide 15? Since it's out of the float rather than your -- your own money.

[Chris Marshall, Vice Chairman and CFO]

I don't have that number off -- readily available, but we could follow-up with you, Mark.

[Mark Hammond, Bank of America]

Okay. Cool. And my last one is just on the Fannie and Freddie servicing rate where you have the obligation now for four months. When will that come back to you after those four months? Is there any sense on timing?

[Jay Bray, Chairman and CEO]

There is. And I think, we'll wait for Fannie and Freddie to formally announce what their -- what the rules will be there. We've been in dialogue with them, very close dialogue for the last month and I think our forecast are all consistent with what they are going to announce, but there is a -- I'll just leave it as, there was a slight difference between the two agencies. And we're forecasting in line with the discussions we've had up until now, but there hasn't been a formal announcement and I expect that it'll happen in the next week or two.

[Mark Hammond, Bank of America]

Okay. I will be looking up [ph]. Well, Jay, Chris and Ken, thank you so much.

[Jay Bray, Chairman and CEO]

Thank you.

[Operator]

Thank you. Our next question comes from Henry Coffey of Wedbush. Your line is open.

[Henry Coffey, Wedbush]

Good morning and thanks for taking my call. Slide 15 is really helpful considering what we're going through here. Can you help us understand how the equation works a little bit? With GSE advances after four payments, you're not on the hook for P&I, but are you still having to advance on the taxes and insurance component of that.

[Jay Bray, Chairman and CEO]

There are different rules for how Fannie and Freddie handle that and some of that is still being finalized, Henry. So I will -- I will go back to what I just said. We expect that to be formally announced and the -- there are some -- there are some precedence for being able to claim P&I advances early in the process. But rather than go through it in detail here, I'll wait till the agencies make their formal announcements.

[Henry Coffey, Wedbush]

So, it's still a little murky. There's no simple formula we can apply.

[Jay Bray, Chairman and CEO]

On that I'm going to go through on the call. But there is -- there has been discussion about how that will be handled and we factor that into our forecast. And I'm very confident that we have done that accurately. But I just don't want to jump ahead of our investors with them announced.

[Henry Coffey, Wedbush]

Also as part of that would they be likely to come out and explain how forbearance -- what the catch-ups going to look like if there's going to be a specific program that everyone's expected to follow. And I know when you read the press -- individual consumers are calling up and getting different messages. And obviously people like to shout about whatever sounds like the least fair. But -- and then I've seen some of your own comments, but is there likely to be a formal plan as to if you fought -- if you give up -- if you're not paying your mortgage for three months, you roll it onto the back end of the mortgage, or you reset the M schedule or something like that.

[Jay Bray, Chairman and CEO]

I think that's -- that'll be part of their -- that'll be part of the announcement as well. They'll come out with what are the options at the end. And I think, today it is confusing for customers, but if you look at our scripts, you looked at our portal of what's online, look at our blog. I mean, we're trying to over-educate and over-communicate that the customer does have options, which include even today some type of modification to put the payments on the end. But we fully expect to Chris's point that, within a week or two they're going to come out with some formal guidance, which will include what happens at the end of the forbearance period.

[Henry Coffey, Wedbush]

If -- we have all these different metrics we look at to kind of understand what's going on with the mortgage market every week, every month. And those kind of went out the window in March. Is it fair to say when we're thinking about gain on sale margin, it's okay to start looking at primary, secondary spreads. Again, when we think about volumes, we can start looking at things like the MBA index for guidance or, maybe look at CPRs and the month monthly remittance reports. That whole bag of tricks we've always falling back on. Is it fair to say the market's kind of working more normally again?

[Jay Bray, Chairman and CEO]

I think so. I mean, if you look at kind of the level of volume that we're seeing in the direct-to-consumer channel, as Chris pointed out, it's really high. We're seeing a ton of customers, a ton of locks and submissions every day higher than we had expected. And so -- and if you look at payoff request kind of month over month for us, it's pretty flat, which tells you that there's still -- CPRs are going to stay kind of at these current levels for at least the upcoming months.

And when you look at the overall MBS market, the volatility certainly has gone down considerably. And so, I think, it's fair to say it's returned more to normal. The ultimate question will be in the forbearance plans what happens and there we're not seeing -- we had originally forecasted to hit the levels that we shared in early -- earlier in the year. We just don't see that happening now. We think it's going to take longer.

So, I don't know, Chris, if you want to add anything to that.

[Chris Marshall, Vice Chairman and CFO]

Yeah, I think it's a good question, Henry. When we started the year, the MBA and other sources all sort of converged around the scenario that said this year we're going to see very strong purchase, and we're going to see a decline in refi. If you look at the estimates today, they'd say purchases really been impacted and refi is booming. It's double what the forecast was. And we certainly -- that resonates with us.

If you step back and look at our company, who I think among the non-banks did by far and away more modifications than anyone in the industry, and we've pretty damn good at it. And then we've invested a ton of money last year and tightened to fully automate the modification process. You couple that with doubling of the estimates for refinance and our ability to refinance very efficiently, I think we're well-positioned as anybody in the industry to thrive in this environment.

There's still some things that are unknown. So, going back to your question about the metrics, some of these things are going to emerge over the next weeks or months, but the -- going back and looking at that data that you're -- you referenced, I think that's exactly right. And I think all that data would point to the fact that we're very well-positioned to do very well and produce very strong results through the remainder of the year.

[Henry Coffey, Wedbush]

As Ken could tell you both.

[Chris Marshall, Vice Chairman and CFO]

I think, one thing, Henry, sorry, I'd add is. I think this is going to be a little different. The forbearance and then coming out of the forbearance. When you look at the forbearance plans that we have put in place today, over half of those have come through our digital channel. And so, they're not even engaged with customer service. They're able to basically get a forbearance plan via the portal. And we're working very closely with Fannie and Freddie who've been -- and FHA, Franklin, they've all been fantastic partners.

And I think when you come out of the back end of this, I think it's going to be -- when you come out of the forbearance plan, I think it's going to be a kind of friction free process as well. I don't think it'll be like you saw hap in some of those other programs. And we've already started -- we've got our digital plan put in place, we presented it to Fannie and Freddie, FHA and again, we're waiting on the final rules there, but I think it's going to be a less intensive process than you've seen in the past. That's probably one of the big differences that people should consider as you think about coming out of these plans.

[Henry Coffey, Wedbush]

No, that's really notable. And that's something we've been talking a lot about. If you had -- if Ken has been sharing with you, most of my calls to him have been fairly frantic about liquidity and questions about cash balances, et cetera, et cetera. And now it sounds like you actually -- given the fact that most of the negative charges in your servicing business are non-cash, the mortgage business is going to generate the ton of earnings. Is it fair to expect that cash balances continue to increase and that you may actually be able to decrease your leverage more over the next six to nine months than any -- than frankly, I would have expected. But what are your thoughts on that?

[Jay Bray, Chairman and CEO]

Well, I think you're correct in saying origination should generate a lot of cash and we don't see a lot of unusual needs for cash this year. Our plan to delever is on hold because we see a very strong scenario for the back half of the year. But as you expect, we'll let that play out before we make any statements or take any action to continue to paydown debt. Our overall strategy hasn't changed, but there are still some unknowns here and maybe more around the timing than anything else. So we'll see how the year develops. And as you said cash -- cash flow should be strong from our operations, deleveraging away and as we prove that out and then we'll talk about what we're going to do next.

[Henry Coffey, Wedbush]

Great. Thank you very much.

[Operator]

Thank you. Our next question comes from Giuliano Bologna of BTIG. Your line is open.

[Giuliano Bologna, BTIG]

Good morning and congratulations on another great quarter of an operating performance. Jumping into kind of a slight different question, when I think about a lot of the loans in forbearance, there is obviously a large opportunity on the modification side. Is there any perspective around what the take-up rate of modifications have been in kind of other natural disasters, even if they're not necessarily comparable to what's going on today? So just to get -- did you get a sense of what the opportunity usually looks like on the modification side.

[Jay Bray, Chairman and CEO]

I'm not sure I'm following the question, Giuliano, when you say form of disasters, the opportunity for modification, are you saying?

[Giuliano Bologna, BTIG]

More so the take-up rate of -- for -- of modifications on the back of other natural disasters where there's been forbearance and other payment deferral type scenarios.

[Chris Marshall, Vice Chairman and CFO]

I mean, I think, because those are so isolated, if you will, to one market. Generally, it's not a great comparison. I think, because you're going to see -- I mean, obviously this is the entire portfolio that's being impacted. So, we can definitely go back and get some historical numbers on what has happened in some of the disasters. But frankly this is different because it's just the broad nature of it and the entire portfolio. But we can follow-up on that.

[Giuliano Bologna, BTIG]

That sounds good. Yeah. And I think what will probably happen is that also the duration of this might be longer in some cases. So, to take-up rate will be higher. It's harder to catch up.

I guess, switching to a little bit of a different topic. It's great to get all the commentary about liquidity and where you guys are positioned versus your forecast, which I think is extremely helpful for the market at this point. Taking that a little bit a step further, there are a lot of smaller services out there and there's a lot of discussions about service or selling. MSRs are at deeply just kind of values. Are there any opportunities to buy MSRs at this kind of values or are you seeing opportunities out there? It would -- just be good to get a sense of how the opportunities that could be lining up.

[Jay Bray, Chairman and CEO]

I think it's too early to tell. I don't see a whole lot of volume coming to market for sale. I think there have been selected customers that needed to raise cash quickly and it sold some assets, but not necessarily -- they're not necessarily big pools of MSRs that have come to market. I think everyone is taking a quite a view. Clearly, prices are way down. So, there could be opportunities, but they haven't really -- I don't see a big flow right now.

[Giuliano Bologna, BTIG]

And then …

[Jay Bray, Chairman and CEO]

Yeah, I think it’s a little -- I think it's a little early in the cycle and I think people are still waiting on what are all the rules of the road going to be frankly if -- from the enterprises, FHA, et cetera. I think once you get all that brought to a conclusion, then you'll probably see more activity. I will say that we have -- I mean, we've switched our mindset to more often. I think we plan to be active. I think we will be active, and I think we may be called upon to help in certain situations like we have in the past. And so as we've kind of locked down our liquidity and our forecast and feel very confident about it, I think our mindset has shifted more to hang on, how can we play off in this environment. I think …

[Giuliano Bologna, BTIG]

Go ahead sorry.

[Jay Bray, Chairman and CEO]

I was just going to add to that. Say that was our -- our focus early on was to get our liquidity issues addressed right away, because not just for the obvious reasons, but to make sure we run the proper position, should the agencies or Ginnie Mae need our help. We wanted to certainly be able to demonstrate that we were highly liquid in and able to want to take on additional volumes and then hopefully that's where -- how they view us today.

[Giuliano Bologna, BTIG]

That makes a lot of sense. And then the only -- last one, it might be a bit quicker. In the past you guys have done a lot of securitizations for advances and obviously there isn't as much now because there isn't as much outstanding currently. Is there something -- how much time it would take to put together a securitization transaction or the amount of advances that you might need to bring a deal to market?

[Jay Bray, Chairman and CEO]

There's not a magic number there. I think you can do a securitization, a $100 million, but the -- we have to wait and see what the market looks like. It does take a little bit of time. Although, you should assume that we would be doing the pre-work necessary to have all of our documents pulled together. We're not -- we don't see any need to jump into the securitization market, but we are going to follow closely with some of our peers do. And if we think the market is robust there then we'll take advantage of it. But we are not in any way dependent on the securitization markets -- I emphasized absolutely no dependence on that. If it does prove to be very strong, then we'll take advantage of it as we have in the past.

[Giuliano Bologna, BTIG]

That's great. Thanks for taking my questions. I appreciate it.

[Jay Bray, Chairman and CEO]

Thank you, Giuliano. I hope you're …

[Chris Marshall, Vice Chairman and CFO]

Thank you.

[Jay Bray, Chairman and CEO]

… pursuing your family safe.

[Operator]

Thank you. At this time, I'd like to turn the call back over to Jay Bray for any closing remarks. Sir?

[Jay Bray, Chairman and CEO]

Thank you. Well, thanks -- thanks everyone for participating in the call, and stay safe and healthy. And we are around for follow-ups. Appreciate it very much.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.