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Mr Cooper Group Inc
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Good morning. And welcome to Mr. Cooper Group’s second-quarter earnings call. My name is Ken Posner, and I am SVP of strategic planning and investor relations. With me today is Jay Bray, chairman and CEO; and Chris Marshall, vice chairman and CFO. Let me start by reminding you of a few things. We’ll be referring to slides that can be accessed in our Investor Relations webpage at investor.mrcoopergroup.com. This call is being recorded.
During the call we may refer to non-GAAP measures which are reconciled to GAAP results in the appendix to the slide deck. And finally, during the call we may make forward-looking statements. You should understand that these statements could be affected by risk factors that we have identified in our 10-K and other SEC filings. Further, we are not undertaking any commitment to update these statements if conditions change.
I’ll now turn the call over to Jay.
Thanks, Ken. And good morning everyone and welcome to our call. I am going to start by reviewing the highlights of the quarter on Slide six. We reported a net loss of $87 million or $0.96 per share, which reflects a $231 million mark-to-market on the servicing asset and very strong pre-tax operating income of $118 million.
I am very pleased to report all segments performed extremely well. Originations hit record profits, Xome returned to a profit and servicing hit 6.7 basis points profitability, excluding Titan expenses. Now let’s dive into all the segments. The key thing for the quarter was the significant improvement in operating earnings in all of our businesses, especially in originations, where pre-tax income more than doubled sequentially to a record $118 million on a record $10 billion in funded volume.
What you are seeing in these results is not only the impact of lower rates but over three years of investment in our origination platform culminating with the acquisition of Pacific Union. This work positioned us to scale up quickly and maximize results when rates began to decline earlier this year. I want to pause for a moment and emphasize how important these results are strategically for our company. First, the origination segment is now a much stronger macro hedge for us which should give you confidence that we can produce more sustainable results over the long term.
Second, a strong origination platform will help make Mr. Cooper overall a more profitable company and as such is one of the key drivers of sustaining higher returns on equity over time. And third, we have enough origination capacity now to sustain the portfolio on a net basis, which means we are no longer reliant on bulk MSR acquisitions. A final comment on origination before moving on.
You are familiar with how we have made strategic technology investments to continuously improve efficiency and the customer experience, and as a result we have built the leading non-bank servicing platform. We’ve taken the same approach to our origination business, and you are now beginning to see the results. We’ve talked a lot about our Titan initiative, which is the umbrella project for digitizing many of the key processes of our business. In originations that means building the home advisor platform, which I mentioned on the last call and which made a major contribution in this quarter. The Pacific Union acquisition brought us other capabilities. And I am pleased to report that the integration is now complete.
Turning to servicing, the portfolio was up 2% sequentially, consistent with our guidance that this would be a year for focus on integration, cost savings and deleveraging. And we have made a lot of progress on those fronts which I’ll turn to in a moment.
Otherwise the margin was in line with our expectations although as you would expect higher pre-payments are leading to increased amortization. Xome had a much stronger quarter with pre-tax income increasing to $10 million. We made a lot of progress at Assurant and we’re now expecting to cross the breakeven point in the third quarter. Additionally, we are seeing some momentum with the auction exchange which is starting to grow the third party business and our title unit produced strong results.
If you’ll turn to Slide seven, I will wrap up by putting this quarter into some context of where the company is heading. As you know, we recently established a goal of producing consistent and sustainable returns on equity of 12% or higher which we would like to achieve by 2021. In fact, our results were so good this quarter that absent the mark we would have beaten that goal by a significant margin. However it’s one thing to report one strong quarter, it’s another to sustain returns over time, and that is what we are working to do.
So let me give you a summary on our key initiatives. Starting with integration, we’ve made lot of progress. We have fully completed the integration of both Pacific Union and Seterus. Additionally, in July we successfully migrated the back office for AMS. And we are on schedule to complete most of the remaining integration by the end of the year.
Now let’s talk about investment and cost savings. Titan is now in full swing and, as Chris will mention in a moment, we’re starting to see some early benefits. Additionally, we recently kicked off a set of corporate actions that should result in $50 million in additional savings above and beyond Titan.
Finally, let’s talk about deleveraging. While we’re certainly comfortable serving our debt in the current environment, we have laid out a goal of giving debt to EBITDA below five times in order to drive stronger profitability by reducing interest expense and also to give us greater financial flexibility. During the second quarter, the ratio actually fell to 5.2 times thanks to very strong EBITDA. Now that the acquisition of Seterus and Pacific Union are behind us we’re in a position to accumulate cash in order to opportunistically retire some of our senior nodes. We enjoyed strong cash flow in the second quarter and continue to feel very good about the cash and liquidity outlook for the rest of the year.
On that note I’ll turn the call over to Chris.
Thanks, Jay. Good morning, everyone. I’m going to start with a high level review of results on Slide eight. As you can see on a GAAP basis we reported a net loss of $87 million or $0.96 a share, driven by strong pre-tax operating income of $118 million, offset by a non-cash mark-to-market charge of $231 million.
On an operating basis we were extremely pleased with the quarter thanks to very strong results in the origination segment, steady performance out of servicing and noticeable progress at Xome. As a reminder, in calculating operating income we take a relatively conservative approach. We take out the interest rate-related mark on our MSR but leave in the $26 million associated with the difference in amortization between fair value and cost which makes our operating results more comparable to peers. We also exclude the merger and integration charges related to the Pacific Union and Seterus acquisitions.
And by the way, as you can see, those charges totaled $17 million in the quarter, but as Jay mentioned, those integrations are now complete and you will see no further charges in future quarters. And then finally, we add back intangible amortization consistent with how tangible book value would grow over time in the absence of marks. These results can be expressed in several ways which we show you on the right side of Slide eight. I would point you to the fully taxed operating return on tangible common equity of 23.8% which we regard as the most accurate measure of capital generation from operations in the absence of interest rate fluctuations.
We also show you the cash tax affected ROTCE which gives credit to the benefit of the deferred tax asset although these tax benefits will show up in cash flow, not earnings. Our cash flow was quite strong in the quarter with discretionary steady-state cash flow of $93 million, nearly doubled the first-quarter level thanks to strong profit margins in the origination segment. As Jay mentioned, our goal is to get the company in position by 2021 to produce the minimum sustainable ROTCE of 12% or higher. Absent the mark, we would’ve surpassed that goal this quarter.
And if interest rates don’t change we expect very strong results in the third quarter as well. Stronger origination profitability is part of how we will achieve and sustain that 12% target. But obviously, we’re not going to assume that the origination environment remains this favorable indefinitely. And that’s why we’re working so hard on Titan, the corporate actions, the deleveraging plan and the other initiatives designed to improve profitability and cash flow.
In the quarter, tangible book value per share fell from $16.91 to $15.95. And I will just comment that the marks we take in the book value represent an estimate of the present value of long-term cash flows associated with the servicing portfolio. But course the origination results show up one quarter at a time. Now before I get into the segment results let’s spend a moment on MSR valuation.
Turning to Slide nine. You can see that during the quarter we marked down our MSR from 115 basis points to 111 basis points, consistent with a 30-basis-point decline in mortgage rates. This mark was driven by an increase in our lifetime CPR projection, which grew from 13% to 13.7%, as well as the estimated impact on deposit revenues from lower interest rates. We also made some changes to other assumptions as we do each quarter as part of our process of validating the MSR value with independent third parties.
And this quarter, we adjusted the discount rate for certain segments of our portfolio after observing market participants having lower discount rates over the last six months. While we’re on the subject of the MSR value, I’d like to remind everyone that the MSR does not include the value of recapture. However, due to different accounting guidance applied to excess spread liabilities, we do include the estimated lifetime cost of sharing recaptured loans with our excess spread partners. At quarter end that liability was $145 million, which amounts to a discount of $1.21 per share in tangible book value.
And of course, if you were to take the present value of lifetime recapture associated with our MSR, it would be significantly higher, especially given our industry-leading performance. One final comment on the portfolio. We estimate that at quarter end roughly 1 million of our customers were 30% of the portfolio, which save on average $225 per month by refinancing, which suggests that there’s still an enormous opportunity for our direct-to-consumer channel to produce strong results for many quarters to come.
Now let’s turn to Slide 10 and talk about originations, which contributed record results in the quarter. In fact, pre-tax income was up almost three times first-quarter results. As Jay mentioned, this reflects a lot of hard work over several years in both the correspondent and DTC channels. Total volumes were up 76% sequentially, which was stronger than the market. And so far through the end of July volumes are trending up about 10% higher than the second quarter.
DTC originated $3.5 billion, 62% more than the first quarter. While correspondent volumes were up 85% sequentially, reflecting the first full quarter contribution of Pacific Union. For us correspondent is a great channel for acquiring new customers, as it’s typically less costly than acquiring assets through bulk MSR deals. We were very pleased that even in the current environment our correspondent production is running almost 80% purchase, which makes it a relatively stable channel for us.
The Pacific Union acquisition turned out to be very well timed, and not only did it double our correspondent volumes but it also brought us new capabilities. For example, more sophisticated approaches to pricing loans, which has helped us widen margins. The overall origination margin was 90 basis points in the quarter, up almost double from a low point of 50 basis points in the fourth quarter of last year. Correspondent margins were quite good, but the real story in the quarter was DTC whose top 200 basis points.
As a result, the Union was strongly cash flow positive. Because DTC operates out of a call center environment, a lot of its costs are fixed. And so you’d expect margins to improve with volume. But also, as Jay alluded to, you’re seeing the results of significant investments over the last few years.
One of our important Titan investments was the creation of our new home advisor sales and service platform, and home advisor has turned out to be a huge home run with a greater than seven times lifting conversion rates in this unit relative to the rest of the call center. Home advisor contributed materially to origination EBT in the second quarter, and it’s only 30% rolled out. So we still have more to come.
Now let’s turn to the servicing portfolio on Slide 11, which ended the quarter at $644 billion, up 2% sequentially and up 18% year to date. And consistent with our guidance, that would be largely flat following the first quarter as we focused on integration, efficiency and deleveraging.
To start with, CPR is obviously a headwind in this environment, rising from 8% last quarter to 13% for the portfolio overall. But after netting out a portion of runoff attributed to excess spread transactions, the replenishment rate was 105%, indicating that originations capacity is now more than sufficient to sustain the net MSR, which is a new milestone for Mr. Cooper, almost double the ratio of the year before and a major driver of improved profitability and cash flow. Finally, the reverse portfolio continues to shrink at a rapid pace. In fact, it was down 21% year-over-year and now accounts for only 4% of the portfolio. As a reminder, the portfolio is in runoff and it should continue to shrink at a double-digit pace.
Now, let’s turn to the servicing margin, which we’ve historically discussed, excluding the full mark and Titan expenses, and on that basis, it was 6.7 basis points in the quarter. With CPRs higher in the quarter we obviously had a bigger amortization number impacting the margin. And amortization is likely to remain at elevated levels through the end of the year. Given the trend and early payoff requests, we’d expect CPRs to rise to around 15% – 14% to 15% in the third quarter, which will likely lead to $15 million to $20 million of increased amortization net of excess spread accretion, after which you should see some seasonal slowdown in prepayment speeds in the fourth quarter. Let me give you an update on Project Titan.
Titan’s spending in the quarter was $11 million, in line with our plans. And we remain on schedule to complete these investments by the end of the year. What’s new is that we’re starting to see some benefits flow through from some of the investments earlier than anticipated. I call out roughly $5 million in benefits this quarter coming from several projects, including revenues and cost savings from automating our loan modification process and our process for analyzing some older mortgage files and identify opportunities to optimize fees.
And of course, we’re seeing substantial benefits from home advisor. We’ll update you as more savings become visible this year and in 2020 when the project will be complete. Finally, I’ll note that delinquencies continue to be a good story. They were down from 2.4% to 2.3% in the quarter.
Now turning the Xome on Slide 13. You can see we saw excellent progress with pre-tax operating income up sharply to $10 million from breakeven the quarter before, which is a nice validation of the unit’s profitability, but well short of its potential. Xome’s contribution is important for our ROTCE target, because it doesn’t require any significant capital. The $10 million contribution reflects a lot of progress in integrating AMS where results improved by $5 million sequentially.
We recently completed the back office migration with Assurant, which should set us up to cross the breakeven point during the third quarter. There’s still a lot of work remaining, but we expect 14 out of 15 systems to be completely integrated by year-end and the final system conversion completed in the first quarter of next year. I’d also like to highlight some momentum with the auction exchange where Xome is starting to win some new third-party clients. And this has the potential to drive profit growth even in the face of declining delinquencies which obviously remain a headwind.
Title and close also did very well in the second quarter, thanks to refinance-related volumes and field services finally achieved profitability. Based on the current outlook for interest rates and delinquencies, we’re forecasting Xome at a $50 million annual run rate in pre-tax operating income for 2020. And progress in this direction should be visible in the second half of this year. If you’ll turn to Slide 14 I’ll wrap up my comments by addressing leverage and liquidity.
As we discussed, we feel comfortable servicing our debt in the current environment, but we also believe that lower leverage would provide greater financial flexibility and stronger profitability. Last quarter we shared with you a target of bringing debt-to-EBITDA down to five times over low. During the second quarter our EBITDA was very strong, thanks to originations. And as a result the debt-to-EBITDA ratio fell to 5.2 times, which is close to that target.
However, that doesn’t change our intention to begin retiring some of our senior notes on an opportunistic basis. Last quarter, we shared with you a metric called steady state discretionary cash flow, which is the amount of cash available once we sustain the MSR portfolio at its current level net of excess spread. On this basis, steady state cash flow was $93 million in the second quarter, thanks to the strong contribution from originations. As a reminder, this is an illustrative metric because in the second quarter we did use cash to expand the MSR portfolio with the boarding of the $23 billion Seterus MSR.
Liquidity was a good story in the second quarter. We increased our warehouse lines by $485 million to accommodate the surge in originations. We were also able to obtain $150 million in additional capacity on our MSR lines which we use for working capital. While the surge in originations did use cash this quarter, the servicing segment contributed working capital benefits from advanced recoveries, claims filings and a reversed securitization. So with that I’ll turn it back to Ken to wrap things up.
Thanks, Chris. I’m going to ask our operator to start the Q&A session.
[Operator instructions] Our first question comes from the line of Doug Harter with Credit Suisse. Your line is open.
This is actually Josh on for Doug. You highlighted that the portfolio is now no longer relying on bulk acquisitions. So just in that context now that Seterus and Pacific Union are fully integrated, how should we think about your appetite going forward for bulk purchases? Thanks.
Well, I think the appetite is going to depend on the market, but we’ve been very clear, Josh, that this year we were focused on – we were not focused on doing large bulk acquisitions. We’re going to use the year to focus on completing Titan, getting some efficiencies out. And that’s exactly we’re doing. I’d say we look at virtually every deal that comes to market.
And when the terms are right we’re prepared to buy, but we’re – I think the important message here is we’re no longer relying on bulk acquisitions. And I think that’s an important distinction to make. So hopefully that answers your question.
Yes, definitely. And I appreciate the commentary there. And then, you mentioned originations up 10% in July, I believe. Can you comment how gain on sale margins are holding up thus far in the third quarter? Thanks.
Yes. No origination – we’re saying the pipeline looks like it’s about 10% higher. And so far originations margins really haven’t changed materially.
Great. Thanks for the color, guys.
Thank you. And our next question comes from the line of Bose George with KBW. Your line is open.
Hey, good morning. Just wanted to ask first about the Project Titan. What do you have left in expenses there?
We – I think, as we’ve said all year, we expect the spend roughly $10 million a quarter, and that’s in line with our forecast for the next two quarters. And then spending will drop off materially. We won’t talk about Titan anymore after that. The bulk of the projects will be completed at year end.
I think the way to think about Titan was is it’s – it’s become a way of life within the company, right. It’s really built into our DNA now to use that process to continue to find efficiencies, continue to improve the customer experience. So I think the official kind of spin is Titan will be done at year end, but we’ll continue to see benefits rolling into 2020 and beyond. That discipline that we have in looking at those projects is quite good. And we feel good about more opportunity going forward.
Okay. Thanks. And then actually on Xome, you said $50 million pre-tax expected next year, you’re at $10 million this quarter. Is the trend, is that kind of moved up toward the annualized $50 million by the end of the year?
Yes. You should see continued improvement as we really wrap up Assurant and take that cost out. As we said, we expect now – we had been expecting to get to breakeven on Assurant in the fourth quarter. We now feel confident we’ll do it in the third quarter. And so as that drag falls off, you should see Xome’s profitability improve quarter over quarter.
Okay, great. Thanks. And then actually the operating expenses in the corporate segment was up, was that Pacific Union or is there something else driving that?
No. There were few things incorporated. There was some spending on expanded security program, we had some severance, we had a few other things, but view that as a onetime increase that should flatten back out in the third quarter.
Okay. So we should really look at kind of the first quarter as a better run rate for that?
Yeah, Yeah.
Okay. Great. Thanks a lot.
Thank you. And our next question is from Mark Hammond with Bank of America. Your line is open.
Thanks. Hi, Jay, Chris and Ken. I had a question on the broader industry with Ginnie Mae and their focus around stress testing issuers. They’ve made a comment about an – making an acknowledgement agreement to allow easier financing of advances on the Ginnie Mae side. And I’m wondering from your standpoint as a big player in the mortgage market if that’s any meaningful help to increase liquidity? Or what you guys are thinking around that, if it will have a meaningful impact for liquidity of the issuers?
Yes. I think we’ve had some very constructive meetings with Ginnie Mae. I think it is completely the right thing to do for the industry. If you look at the GSE versus Ginnie and the acknowledgement agreement, clearly there is a difference there.
And the fact that Ginnie is working on the acknowledgement agreement, have acknowledged that they would like to provide more liquidity to the industry is completely the right thing to do because Ginnie has grown a lot, right. If you look at the overall issuance and you look at the homeowners that they’re serving, those are important people in the United States that need financing. And so I think the fact that they’re addressing it, we’ll have a constructive dialog with them, what their other issues are as well. I think it’s a very, very positive thing.
I mean from our vantage point it’s not something that we necessarily need or are counting on, but I do think it is a very positive step and I think it will help the industry overall and provide a lot of liquidity to a number of issuers once they complete that project. And as I mentioned, we’re working with them on that.
Great, thanks. And then turning to the quarter, on Slide 24, the mark-to-market on locks and commitments was a bigger than I expected contributor to your gain on sale in the origination segment. Is that line item going to be elevated I guess this quarter too just because of the activity around originations?
It probably should be, it probably will be elevated because we expect volumes to be pretty much in line. But...
Yes. I mean the way to think about that right obviously our locks were up I think what 87% quarter over quarter. I think I can’t say enough good things about the origination guys, really taking advantage of the market that presented itself. And the investments we made allowed us to have the capacity to do that.
So I think you’ll continue to see that to be strong. Or as locks continue to win, like Chris mentioned earlier we are seeing extremely positive results going into the third quarter as well.
Great, thanks. And then last one really quickly. On Slide 29, the cash flow side, the line item at MSR purchases and excess spread financing. The excess spread financing piece, is that associated with the purchases or is that just general repayment of the excess spread financing? Just trying to get a handle on the interplay between those two items in that line.
I think that’s a function of the Seterus. I think it’s a function of the Seterus.
Yes. Hey, Mark, it’s Ken. And we can follow up with you on this offline. This is just a reformatting of our actual cash flow statement. And what you’ll see with excess spread, it was utilized as part of the financing strategy for the Seterus MSR. And we show you also the cash flows. We net out the cash flows out of the servicing segment and then show you the proceeds in terms of funding acquisitions down below and the uses of cash.
Got it. Thanks. That’s all I’ve got. Thank you Jay, Chris and Ken.
Sure.
Thank you.
Thank you. And our next question is from Henry Coffey with Wedbush. Your line is open.
Yes, Good morning. I’m looking more at the balance sheet, but you did see some small tweaks, some growth in cash and net mortgage assets. So first, what is the ability for you guys to start reducing corporate debt? I know it’s somewhat callable next year, but what are your thoughts about exactly how you’d want to proceed there?
Henry, we haven’t laid out a quarter-by-quarter program, but obviously we feel good about our cash flow, and we expect it to be even stronger in the back half of the year. So in terms of our ability to pay it down, I think we will begin to do that toward the end of the year, but we’ll do it opportunistically. We don’t – we haven’t committed to a specific schedule, if that’s what you’re asking. But in terms of our comfort with our existing cash flow, we feel very comfortable retiring the 2021 ahead of schedule.
Are those callable right now? Or do you have to wait till next year?
They are callable now.
And then, when we look at the balance sheet over the next few quarters, lots of cash flow, but that should translate into the balance sheet. And what is your thoughts exactly on how you’d want that to play out? Are you going to just build cash? Or are you going to use cash to hold mortgages in the held-for-sale bucket or use cash to lower borrowing facilities against for the net mortgage assets? I mean, are you going to setup accumulate cash going into 2020 by either building it up on the balance sheet or reducing – in essence funding some of your own mortgages or exactly how do you think that plays out?
Well, I’ll tell you what we did this quarter is we used the excess cash to sort of discretionarily pay down certain working lines. And we’ll do that, we’ll try to optimize our interest expense along the way. And as we – I think we said last quarter you’ll probably see us hold cash for a while before we begin to pay down the high yield debt. And in fact we did that this quarter. What we do next quarter will depend, but we’ll obviously look to optimize that, using that cash in the short term. We’ve got, as you know, many different lines and lots of opportunity to save interest expense before we make big pay-downs on the corporate debt.
What I’m looking at is...
I think in January it’s not necessarily inconsistent with how you and I have talked about in the past and how we thought about it. I mean, at the end of the day it doesn’t make sense to just to allow cash to build on the balance sheet when we can pay down operating debt and obviously save some interest expense.
So I think we’re going to continue to exercise that strategy just like we did in the second quarter by using some of the excess cash just to pay down that operating debt. And then I think to your point, on a thoughtful basis, we’re going to pay down the unsecureds as well. But the overall cash flow optimization I think will definitely pay down some operating debt each quarter just to save ourselves some interest expense.
Well, I’m just looking at the net – your net mortgage assets, which is my own little calculation, up $45 million, the cash balances were up $64 million, so obviously a positive trend there. And the GAAP loss, because of the strength of the mortgage company was significantly less than we thought. And hopefully we’ll see more of that going forward. But lots of great work. Good quarter. Thank you for your efforts.
And I think on the mortgage loans held for sale, Henry, that’s just the function of the volume that’s going up, right. And that – clearly that turns pretty quickly as you know. So I think you will see that continue to go up giving the trends we’re seeing in originations but thank you for the comment.
Would you ever do the opposite and just lever up against your mortgages held-for-sale and then use the cash that comes out of that to go after corporate debt or?
No, I don’t think so. I mean, I think our view of the world is we prefer permanent capital to pay down unsecureds or – and call it permanent debt, permanent debt or permanent capital. So I don’t think we’re just going to lever up the mortgage loans held-for-sale operating line to pay down corporate debt. That’s not the intent
No. Just to go back to your question. You did see $64 million increase in cash, but we also pay down $70 million on our – one of our MSR lines. So again, you’ll see us do that going forward more often than not.
That seems like the optimal approach. Thank you.
[Operator instructions] Our next question is from the line of Kevin Barker with Piper Jaffray. Your line is open.
Good morning. Just wanted to address some of the stuff on Slide 21. There is a few moving parts on the reverse mortgage interest and mortgage interest expense. I was just trying to understand the drop in the reverse mortgage interest expense this quarter. Was there something that came through there that may have impacted this quarter?
Yeah, there were three things there, Kevin. Overall, I think the reduction is $26 million. There are three pieces. One is we’ve – as you’ve seen a continued runoff, which has been concentrated in fixed rate mortgages. And so we’ve got the overall interest reduction in balances. Evidently you’ve got the lower rates and both of those combined to lower interest expense.
And then separately, we’ve got a true-up of the bond premium and that was established when we did the WMIH merger. And that just had the effect of accelerated accretion just as a result of the significant drop in the forward curve. Those numbers are a little complicated to follow, but we’d be happy to go through that with you after the call.
So would you expect your other income and expense on a net basis to remain in your current levels? Or...
No, I think the true-up would – is unlikely to recur. I think there’s probably – of that $26 million, there’s probably $10 million of it that’s a continuing run rate just given the drop in balances. And they have consistently been concentrated in fixed rate loans. So for now I’d say probably $10 million is a good number going forward.
And I think Kevin, as you’ve seen, quarter after quarter there’s usually other events that are – and we look at kind of third and fourth quarter, we continue to have things that you wouldn’t call them necessarily recurring, but they’re certainly going to be positive to the overall P&L. And it’s consistent with the last eight quarters, it seems we continue to have positive items flow through the P&L and we expect that to continue.
Did you have any cleanup calls like you did last quarter come through as well?
We did not.
Okay. And then...
So we do – yes, we do expect some of that in the latter half of the year obviously.
Okay. And then last quarter, you mentioned a guidance in the servicing portfolio for six basis points pre-tax margin per UPB. Are you keeping that guidance, given where you’ve come in, in the first half of the year...
Yeah. I think the six basis points was for second, third and fourth quarter. Obviously we’re a little bit higher this quarter. We may be a little bit lower given elevated CPRs, but I think six basis points for the remainder of the year is still a good number to expect.
Okay. And then the amortization expense that came through mark to market of $26 million, was there any other accounting adjustments that came through like there was last quarter? This seems awfully low given prepay speeds increased almost 60% this quarter.
Yeah. No, there were no accounting adjustments.
Okay. And then finally...
Are you talking about the fair value amortization?
Yeah, yeah, that’s $26 million. I think the combination of – it was – obviously we had higher prepay speeds, but the overall difference between fair value and cost has also been coming down. But there were no accounting adjustments that affected that.
Okay. And then have you changed any of your plans regarding hedging the MSR? And if so could you quantify what that expense would be if were to hedge it?
We haven’t changed any plans with regard to hedging, although we continue to look at hedging. We’re really focused on getting efficiencies out of the business right now and controlling what we can. But we if we do make any change with regard to hedging we’d certainly, that would certainly be something that we disclose to all of you.
And I think, Kevin, as you know I mean there is – we view there is marco – couple of pieces of macro hedge on the portfolio. One is obviously the excess spread that we have. Two is our recapture capabilities which clearly demonstrated themselves in the second quarter. I mean if you look at the second quarter alone, the $118 million in originations made up more than 50% of the investment mark.
If you look at kind of of our pipeline you would expect in third quarter we would make up the entire mark. So I think that piece of the macro hedge is actually working quite well. But Chris was buoyant despite our confidence in that and it is working effectively. We are continuing to evaluate it, working with a couple of firms and we’ll update you along the way.
Yes, speaking of the marco hedge. I mean I’d go back and point out that – the statistic, I think it was on Page 8, Page 8 or 9, we’ve got more than one million customers right now with the dropping rates more than 1 million customers that would benefit from refinancing and generate a benefit of more than $200 a month with a payback of eight months or so. So we have a huge pipeline for originations. And while the marks are painful to take them in the current quarter, we are setup to produce very strong originations results for a very long time.
Okay. Thank you for taking my questions.
Thank you. And our next question comes from the line of Giuliano Bologna with BTIG. Your line is open.
Yeah, good morning and great quarter. Just jumping into a couple of higher level questions. Is there an update related to your progress in achieving or identifying the $50 million of corporate actions or the expense savings there?
In terms of an update, I’m not sure there is anything we’re going to share on this call. We are working through plans. And you should expect to see us make progress on that toward the end of the year. Obviously, we’ll have some offsetting costs to achieve the run rate. But our goal is to end the year and start 2020 with those reductions in place.
And I think we’ve – Chris has done a good job I think of laying out a format and a path to get there. And some of it frankly is just what investments are we really going to make in 2020 and be more disciplined in that fashion because with Titan we had a lot – we made a lot of investments. We actually are starting to see the fruit from that labor. And as we approach 2020 we are just going to be spending less because we’re going to focus on the most impactful projects. And I think we’ve made a lot of progress in that discipline. So we feel good about it.
That makes sense. And then Chris, you mentioned an estimate of $1.21 impact from the inclusion of the recapture assumptions on the excess spread liability. Are you assuming a 24% tax rate in that?
Yes, we are.
And the main reason why I ask that, do you know how different the portfolio is from the side that you have excess spread on versus the side that you do not have excess spread on because that implies about a 12.5% premium above the core excess spread liability. And if you apply that to the asset side are about 12.1%. You would be having a benefit of $422 million in taxes. I think that would be about $3.52 per share. Is there a big difference that we should be considering in looking at the portion of the book that does not have excess spread on the asset side?
No, I don’t think there’s anything significant. And I think generally, although I would have to check those numbers exactly, but we look at it the same way, Giuliano, and I think we’d agree that the number is sort of in that general range.
Yeah, we’ve done some calculation. It’s north of $400 million capex. I think your math is quite good. Courtesy of [indiscernible].
And only one other quick one. It looks like your capex spend went up in the quarter to about $17 million versus historically kind of run in the $10 million context. Is there a good run rate that we should be thinking about on a go-forward basis?
You know what, I think the capex may move around a little bit this year just because of the timing of some Titan Projects. but I think I’d rather not give you an indication there because we are going though, as Jay said, and looking at our investment levels for next year and that is certainly going to affect capital. So I will give you a little bit better guidance on that as our plans become more specific and we’re talking about them in more specific ways.
That makes sense. So thank you for taking my questions, and congratulations on a great quarter.
And we have a follow-up from Kevin Barker with Piper Jaffray. Your line is open.
Hey, I just wanted to follow up. Hey. On the MSR, what was the change in the discount rate that you outlined earlier in your prepared remarks?
It actually changed, we had a different discount change for POS versus agency versus Ginnie Mae. And I wouldn’t want to quote it off the top of my head because I’m not sure I remember all three numbers specifically. But what we changed was really to be more in line with what we saw most of the industry participants doing over the last six months as well as the third parties that we compare our numbers with. So I think we might have been a little bit late catching up with everybody else.
Is the discount rate related to just overall interest rates or your – what is your expectation is for profitability within the MSR?
I think it is more a reflection of the drop in interest rates. But again we’re reacting to what we see from other market participants. And so I’m not sure why – how everyone arrives at that reduction. But it’s pretty consistent. At least half of the industry participants we look at have lowered their discount rates and the two major firms that we use did as well. So it seemed to be an appropriate change to make.
And clearly was a reaction to overall rates and what we had seen other market participants do. To Chris’s point, we saw several people move in the first quarter. So as we worked with our third-party participants, that’s where we ended up.
Okay. And then you mentioned that margins in the pipeline for originations are fairly strong on the second quarter – I mean in the third quarter. And margins are roughly in-line. Are you seeing any differences in the margin between the correspondent channel and retail? And then also what was your gain on sale margins in the correspondent channel in the second quarter?
I’d say with regard to your first question, we don’t see any significant change. Now the quarter is early, but we feel very bullish about originations going into the third quarter. And with regard to your second question I think we break those numbers out, so I don’t have them handy for you.
Thank you. And I’m not showing any further questions. So I’ll now turn the call back over to Mr. Jay Bray for closing remarks.
Great, thank you. And thanks everybody for joining us. In conclusion, I just like to emphasize three points for you to take away before you move on to your next call. First, what you’re seeing in the origination segment is the same approach to operations and technology that you are seeing on the servicing side.
The investments we’ve made there in the past couple of years are paying tremendous dividends and allowing us to take advantage of this opportunity that’s in the marketplace. Second, the management team’s number one focus is on improving the profitability across the enterprise. I think this quarter demonstrates that.
We’ll continue to focus on that. And third, you should look at your board and management team as fellow shareholders who are committed to allocating our cash and capital in a manner that will best drive long-term shareholder value. We remain very focused on that. And we look forward to reporting our results to you throughout the rest of 2019. So thanks for joining us and have a great day.
Ladies and gentlemen, this does conclude the program. You may now disconnect.