Mr Cooper Group Inc

NASDAQ:COOP

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Mr. Cooper Group Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program may be recorded.

I would now like to introduce your host for today's program, Mr. Ken Posner, Senior Vice President of Strategic Planning and Investor Relations. Please go ahead.

[Ken Posner]

Good morning, and welcome to Mr. Cooper Group's second quarter earnings call. My name is Ken Posner, and I'm SVP of Strategic Planning and Investor Relations. With me today are 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. During the call, we may refer to non-GAAP measures, which are reconciled into 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 & Chief Executive Officer]

Thanks, Ken, and good morning, everyone. Let's start, as we normally do by reviewing the quarterly highlights on Page 6.

We reported GAAP net income of $73 million or $0.77 per share. GAAP income was driven by a record $350 million in pre-tax operating income, which would be equivalent to an ROTCE of 55%. Operating income was partially offset by a non-cash mark on the MSR portfolio of $261 million. This mark reflects faster prepay assumptions and a conservative, higher estimate for cost of service based on market participant opinions. Cash flow and liquidity were extremely robust in the quarter and this drove unrestricted cash to $1 billion, actually $1.041 billion to be precise, which was up almost $500 million sequentially. Based on this liquidity and the progress we've made in improving profitability, the board has authorized a $100 million share repurchase program, which we expect to complete over the next 12 months.

Record operating results were driven by the originations segment, which contributed over $400 million in pre-tax earnings on record margins. At the moment, the entire industry is enjoying a huge tailwind, but our direct-to-consumer team's execution has been flawless. Volumes and margins have remained quite strong so far in July, and we are optimistic that originations will turn in another excellent performance in the third quarter. The servicing margin declined to 0.7 basis points, which was in line with what we guided you to expect. This is obviously a thin margin, but you should think of it, nothing more or less than the mathematical consequences of low interest rates, which impact us in terms of higher amortization and lower interest income. Low servicing margins go hand-in-hand with outperformance in originations. And taken together, our overall results speak to the balance we've achieved in the Mr. Cooper business model.

I'm very pleased with the operating story in servicing and especially our continued progress in driving efficiencies, as well as, the decline in forbearance, which I'll comment on more in a second. Finally, zone results were frankly better than we expected on a very strong contribution from title. To summarize, this was a great quarter for Mr. Cooper, and I feel very optimistic about the outlook for the second half and 2021. To be sure, there's still enormous uncertainty concerning the pandemic and the economy, and we think a conservative mindset remains absolutely necessary.

As far as business planning, our base case assumes a very slow recovery with unemployment hovering close to 10% throughout 2021. But within this context, the housing market is a bright spot. Primary residences have long been the most important asset for consumers and this seems to be even more of the case during the pandemic. When many of them sheltering in place are working and schooling from home. And of course, low interest rate support housing demand. We also believe we're well-positioned within the mortgage industry, which has been consolidating for several years into the hands of a small number of operators. Among this group, we enjoy the benefits of scale.

We have excellent liquidity. We've built a proprietary automated, low-cost digital platform, and most important, we have a team of tremendously talented and passionate associates who believe deeply in our role as advocates for the customer.

Now, let's turn to Slide 7 and review the latest date on forbearance, which I know is top of mind for all of us. The good news is that the numbers are declining. As of July 27, 5.9% of our customers were still on a forbearance plan, down from a peak of 7.1% at the end of June. The first co -- cohort of borrowers is rolling off of 90-day plans, either because they remain current all the way through, or because they no longer felt the need to defer payments and elected to come off forbearance. Additionally, new forbearance take-up has slowed a great deal and is now under 1,000 customers per day. Taking care of customers is our first priority and we'll always do what it takes.

When the pandemic hit, there was tremendous support within the industry for the forbearance plans, but we and others question the implications for liquidity. Since then, Fannie, Freddie, and Ginnie have come out with a series of policy updates, which we've summarized for you in the table to the right. In our view, this is really a very positive outcome, which provides us with the right tools to assist customers while preserving liquidity. One program in the table I'd highlight, which was announced fairly recently is FHA's streamlined modification program. This is an option for customers who've been impacted by the pandemic and are unable to make their regular payments. Under this program, we can lower the interest rate for these customers without going through the time-consuming and costly underwriting process required in traditional modifications. We can help these customers get back on their feet with a lower rate. And then, when they are in the position -- and we're then in the position to deliver the loan back into a Ginnie Mae security.

Going forward, we're expecting a large volume of customers will be coming off of forbearance in the second half. But as I pointed out last quarter, we made significant investments in automating the modification process as part of Project Titan. And since then, we've rolled out additional digital tools. We expect to provide a positive experience for those customers ready to resume payments. And of course, our teammates will be focused on those customers who need extra help. If you'll turn the page to Slide 8, I want to hammer on the theme of balance between servicing and originations. Because I think this is really important to understanding our earnings going forward and the potential we see in the stock price.

The chart on the left shows you the pre-tax contribution from servicing, origination, and zone over the last five quart -- quarters. This chart drives home the point that if servicing earnings have come under pressure, originations has filled the gap and then some. The second chart shows you the trend in our cash flow defined using the steady-state discretionary cash metric we shared with you since early last year. Thanks to the strong results in our origination segment, both earnings and cash flow have accelerated. Finally, the chart on the right shows you the trend in tangible book value, which includes both operating results and the marks we take on the MSR. As you can see, we've grown tangible book value by more than 30% over the last five quarters.

Now, let me be clear about something. We are certainly not taking a victory lap this morning because tangible book value is still 1% below the level we reported in the third quarter of '18 when we closed the WMIH merger. However, please bear in mind, since the WMIH merger closed, we've weathered a series of extremely adverse shocks from the point of view of a large servicer, with mortgage rates down 160 basis points and LIBOR down over 200 basis points. To have sustained tangible book value against this backdrop should give you a lot of confidence in the resilience of the Mr. Cooper business model, as well as, our team's careful approach to managing risk. Now we're expecting to sustain tangible book value growth through the remainder of this year and 2021 and for years to come. Let's turn to Slide 9.

I'm going to wrap up my comments by talking about our priorities for allocation of cash, which is a top focus for the board and the management team and a frequent question we hear from both our equity and debt investors. Our first priority is liquidity. You should expect us to proceed at a cautious and deliberate rate before returning liquidity to pre-crisis levels. While recent forbearance trends are encouraging, the path of the COVID pandemic is unknown, and the economic outlook is highly uncertain. We take our role as a leading institution in the mortgage market very seriously, and we don't want any of our stakeholders to worry about Mr. Cooper's ability to take care of our customers, even in an extreme adverse scenario. Our second priority is deleveraging, which we may -- which we remain committed to.

Strengthening our balance sheet is a key pillar of our strategic thinking and a key driver of higher returns on equity. In talking about deleveraging, we've always emphasized that it would take place opportunistically rather than at a constant cadence. Over the last year, we've paid down $200 million of our senior notes. And then in January, we refinanced $600 million in a transaction that was 6 times oversubscribed. And as a result, we now have an attractive liquidity runway with no maturities until 2023. Today, we are monitoring the debt markets on a daily basis. And if the opportunity presents itself, we're prepared to retire a portion of our 2023 maturities and refinance the remainder, provided we can do so at an attractive cost.

Now, let's talk about portfolio growth. As you will recall, over the last 18 months, we told you that growth was not a priority because we needed to focus on integration and efficiency. Well, today, all the integrations are complete and we've made substantial progress on profitability and efficiency. What's also changed is that we're seeing more attractive margins in the correspondent and flow channels. And as a result, we've resumed deploying cash there. Depending on how things shake out, it's possible we may see acquisition opportunities at distressed prices, although so far, we do not have much to report.

Finally, let's talk about the stock repurchase authorization. Speaking on behalf of the board, we feel the company has made a lot of progress since the WMIH merger. And while we have much work still to do, the progress so far does not appear to be reflected in the stock price. Now let me be very clear because I don't want to send mixed signals. Liquidity and deleveraging are non-negotiable. Share repurchase will be a second priority and something we'll undertake on an opportunistic basis, depending on the stock price, opportunities for portfolio growth, and the broader economic context.

And with that, I'd like to turn the call over to Chris.

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Thanks, Jay. Good morning, everyone.

I'm going to start on Page 10, which lays out a summary review of our second quarter results. And to briefly recap, net income was $0.77 a share. Pre-tax operating income was $350 million. Discretionary steady-state cash flow was $368 million. Fully taxed ROTCE was 55%, and a tangible book value increased to $21.42 a share. In terms of adjustments, we had $1 million in severance, which was related to closing down the wholesale channel, which was a decision we made before the pandemic.

Now, if you refer to the balance sheet in our earnings release published this morning, you'll see the DTA decreased by $20 million in the quarter. I know some of you may be starting to think about different election scenarios in November. And I'd like to point out, as I'm sure you're aware that our DTA could increase and value significantly if the corporate tax rate were raised after November.

As we look out to 2021, we feel very optimistic about the outlook for earnings, cash flow, and growth in tangible book value. To start with, at current interest rates, we'd expect to see strong origination market conditions persisting well into next year. In addition, we're looking at several strategies to enhance earnings growth independent of originations, which include lowering our cost of debt from deleveraging and refinancing, growing the servicing portfolio at attractive margins, and taking zones contribution up to the next level.

Additionally, we're continuing to scrutinize costs throughout the organization and implemented a zero-based budgeting approach as we plan for 2021.

Now, let's turn to Slide 11 to discuss the $261 million mark-to-market we booked in the quarter, which reduced the value of the MSR by 7% from 107 basis points of UPB to 99. The mark is primarily driven by interest rates, with mortgage rates down 37 basis points in the quarter, swap -- swap rates down 20, which led us to raise the lifetime CPR to 14.2%. The $64 million of our mark related to higher cost to serve assumptions. For our current population of delinquent loans, we project a cumulative default rate of 19% and apply cost of service of approximately $600 per defaulted loan.

Now, bear in mind, these are market participant assumptions, which were required to use under GAAP, and they don't reflect the unique benefits of our low-cost platform or our track record of superior loss mitigation. In case you're wondering, we continue to manage the portfolio on an unhedged basis. We do have an in-house team that oversees interest rate risk and hedging, and we're constantly evaluating the optimal strategy for the MSR. However, at this time, we have not implemented an MSR hedge, with rates so low and prepayment speed so high. The downside risk seems much more limited to us today compared to what we've already experienced over the last two years.

To be specific, as of June 30, we estimate that a 25-basis point rate shop will result in a mark-to-market loss of $93 million, which we've earned back through incremental DTC profits in a relatively short period of time. As you saw in the second quarter, we did just that, we recovered the mark and then some within the same quarter. If you look at the table we provide on the re-financeability of our portfolio, you won't be surprised to see we have a huge opportunity. So unless there is a sudden change, we'd expect to be busy helping customers save money with rate and term refinances throughout 2020 and well into 2021.

On that note, let's turn to Slide 12 and talk about the origination segment, which produced record results with pre-tax income of $434 million, up nearly threefold from $158 million in the first quarter. As you will recall at the KBW Mortgage Finance Conference, we provided the intra quarter update with an estimate of $10 billion in fundings and a margin of approximately 3%, and that's pretty much where we came in with $10.7 billion in fundings and an overall margin of 3.29%. And I'd point out, that $8.6 billion of those fundings came from our highly profitable DTC channel that's been growing significantly over the past few years.

Now, as we mentioned in our first quarter call, we temporarily suspended the corresponding channel as a precautionary step with the national emergency, which first declared and disruptions hit the capital markets. Now, that call was straight out of our risk management playbook, and it was the responsible thing to do, and you saw similar decisions at many of the banks. And once we had taken stock of the new environment and ensured our liquidity was water tight, we turn our corresponding channel back on. And correspondent is important to us because it's our primary channel for acquiring new customers. We're seeing very good margins right now, but we do expect them to normalize quickly as capacity is returning to the market.

I'll mention that we're working on some very important efficiency plans, which should position us to significantly grow correspondent as we enter 2021. But for now, we guide you to look for volumes returning to pre-crisis levels. The DTC channel executed flawlessly in the quarter, scaling up in response to huge customer demand and producing excellent margins. You'll note that our recapture rate declined to 31% in the quarter from 38% in the first quarter. But as we pointed out before, this is the normal pattern for us during refinance booms. It reflects the fact that we add capacity at a deliberate pace with an eye on the long-term. And additionally, when the crisis hit and we shifted to work-from-home status, that slowed our hiring and our onboarding. However, we're now back to growing our teams, including our home advisors, and we should see a progress in the third quarter.

We're also investing in new automation designed to speed up certain workflows and support faster turn times, lower costs, and produce higher volumes. And the project is referred to as Project Flash. We look forward to telling you more about this initiative as the results become more visible in our numbers. Looking ahead and based on July results and assuming no further change in interest rates, we're expecting fundings of roughly $14 billion in the third quarter. While margins may drop back below 3% and that's just going to be reflecting a more typical balance between DTC and corresponding. And we assume locks and fundings will be running closer in line in the quarter.

Now, let's turn to Slide 13 and review the servicing portfolio. Total UPB ended the quarter at $596 billion, down from $629 billion in the first quarter on elevated runoff in both the MSR and the subservicing portfolios, as well as, our decision to temporarily suspend the correspondent channel. As you can see, it was a pretty dramatic spike in CPR to 26%. In 2019, we told you we're going to take a pause from growth to focus on integration, deleveraging, and profitability. And that's exactly what we did. At the same time, returns in the market were compressing to unattractive levels. So, we didn't really miss a lot of opportunity to create shareholder value but today, the market's shifted.

We're seeing excellent margins in originations and co-issuance. We're also seeing some interesting opportunities in the bulk market, although, not yet anything I'd characterized as really distressed. We're currently reviewing several deals, although, you should expect us to remain extremely disciplined. Bear in mind, we often get two bites at the apples. If we're not the winning buyer. We might still be the operator that financial investors turn to for subservicing and that was exactly the case earlier this month when we were selected to subservice the $20 billion pool that was purchased by a highly respected asset manager. Now, subject to final contract negotiations, we're hopeful that this transaction will grow into a large, long-term, and mutually beneficial relationship.

Net-net, given continuing high levels of prepayment speeds and the timing of boarding this new relationship, you may see another decline in the portfolio in the third quarter, although, that would probably be of a much smaller magnitude. Now by year-end, we'd expect UPB to be growing again, at least at a moderate pace.

Now, let's turn our attention to the servicing margin on Slide 14. Excluding the full mark, the servicing margin was 0.7 basis points, down from 3.9 basis points in the first quarter, which was in line with our guidance of plus or minus breakeven. As Jay mentioned, servicing margin reflects nothing more than the math of low interest rates. As you can see in the chart on the right, over the last year, amortization has roughly doubled while the interest income we earn on custodial deposits has declined significantly. Over the last year, these two factors taken together have accounted for 6 basis points in margin compression.

As Jay pointed out, the right way to look at our business is to combine servicing and originations together. The servicing margin lost to low interest rates has been recovered and then some by the excellent recapture economics in DTC. In fact, this quarter, not only did the contribution from originations offset the decline in servicing. It also paid for the mark, resulting in positive GAAP results despite the unprecedented environment. If you want to consider an alternative metric for evaluating the business, then, combining servicing, DTC, and the interest rate component of the mark would be equivalent to an all-in margin of 15.4 basis points of UPB.

Now, looking past interest rates. This is a really good story in servicing. Total expenses are down $67 million Year-over-year, reflecting the benefits of both Project Titan and our corporate actions. You'll see the same trend and the latest addition of the Benchmark study published by the Mortgage Bankers Association, which once again showed us with lower direct costs and peers and with the gap actually widening in our favor Year-over-year. Foreclosure expense is also down significantly Year-over-year, which reflects progress for rationalizing the reverse portfolio and ongoing recoveries from prior services.

Looking ahead, we expect the servicing margin to be flattish in the third quarter, and that began to recover in the fourth quarter as higher incentive fees should become more visible as we help a growing number of customers exit forbearance. At the same time, unless interest rates fall further, amortization should level off and begin to decline.

Now, turning to Xome on Slide 15. Pre-tax operating income was $13 million this quarter, flat to the first quarter, which was quite a bit better than we expected. As you'll recall, we caution you that nationwide foreclosure moratoriums would put our very profitable REO exchange on whole and those revenues largely disappeared in the quarter. However, our title unit outperformed our expectations, aided by further declines in interest rates and the resulting surge in refinance volumes. We expect strong results in the third quarter, although, likely moderating somewhat from the second quarter levels. Now once the moratoriums are lifted and the exchange comes back online, Xome should make a significant contribution to our overall results. However, I don't want you to think we're sitting around waiting for this to happen.

Expenses are down $6 million its own Year-over-year, reflecting the benefit of corporate actions we've taken to streamline costs and more efficiency plans are in the works. In the short-term, while the REO exchange is idle, we've redeployed team members to originations and servicing. As a reminder, zone doesn't require capital or contribute much of anything to TBV. So you should keep that in mind when you value our stock or evaluate our leverage ratio. Now I'm going to wrap up my prepared remarks this morning by commenting on the balance sheet.

Slide 16 gives you an update on our advances and financing lines. You can see that advances were flat quarter over quarter at $812 million. High prepayment speeds gave us extra float this quarter, which more than offset the impact of forbearance. During the quarter, unrestricted cash grew by $462 million to just over $1 billion. The most important source of cash was our operating performance. We estimate discretionary steady-state cash flow was $368 million in the quarter, which is net of the investment required to sustain the MSR. Also helping cash balances, we drew down $150 million on our MSR lines to ensure we were prepared for an extremely adverse environment, which so far hasn't materialized. So since quarter end, we've begun paying those lines back down.

Now offsetting these inflows with some short-term swings in working capital. Last quarter, we disclosed an $850 million increase in committed facilities for financing GSE and private label advances, which we said then and continue to believe are more than adequate for an extremely adverse scenario. We also said that we plan to finance Ginnie advances with corporate cash flow. Today, we're close to finalizing a new significantly expanded Ginnie Mae facility with a premier bank to finance both MSR and advances. Pending final approvals, this facility should close at some point in the third quarter. And this is a very important development for us. And what it means is that even in a more adverse environment, the only drain on our corporate cash flow would be the haircut on advanced facilities, which will be a manageable amount of cash in any scenario we can imagine.

Now, let's finish up with some comments on capital and leverage on Slide 17. As you know, strengthening the balance sheet is a key pillar in our strategic thinking. In our fourth quarter call, we laid out a capital target of 15% or higher intangible net worth to tangible assets. That target was based on feedback from investors, together with a thoughtful assessment of our current business model, taking into account risk-based capital calculations, as well as, the results of our stress test model and the analysis of our peers. And we ended second quarter at 11.5%, which was up from 10.8% in the first quarter. Based on our current outlook, we'd expect further expansion in this ratio in the third quarter and we're optimistic about achieving our target during 2021. In addition to progress on the ratio, I'd also point out that the composition of the balance sheet has changed significantly over the last year, which further bolsters our credit profile.

Year-over-year, cash has gone from 1% to 6% of total assets, reflecting robust liquidity. The MSR asset, which is our primary risk exposure has declined from 19% of total assets to 16%. At the same time, we demonstrated that the origination segment is a very powerful natural hedge. In fact, as I mentioned earlier, in this quarter, DTC recovered the mark entirely within the quarter. Mortgage loans held for sale have remained relatively flat. And considering the extreme capital markets volatility in the quarter, I think it's fair to say, we've demonstrated strong competency in our pipeline hedging and liquidity management. The reverse portfolio, which we're running off, has been shrinking in line with our guidance. As a reminder, reverse mortgages make up almost half of our total assets, but they are low risk, government-guaranteed asset, which are consolidated for accounting purposes. You might find it interesting to note that reverse mortgages are excluded from our Ginnie Mae capital requirements. So, please consider this when you evaluate our balance sheet.

And finally, the DTA increased from a year ago, but that's primarily due to the release of the valuation allowance, which reflects the company's improved profitability. Now when we look at the stock price, we concluded that the market is too conservative about the rate at which we'll utilize the DTA, or it's not assigning enough value to zone, or doesn't believe we've achieved a sustainable balance between servicing originations. But we're confident that the stock is undervalued and it's going to appreciate significantly over time.

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

[Ken Posner]

Thank you, Chris. I'll now ask our operator to start the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of Bose George from KBW. Your question, please.

[Bose George, KBW]

Hey guys, good morning. You said the expectation for volumes in the third quarter is going to be -- is $14 million. Can you give us a mix of retail versus correspondent? And then, just talk about gain on sale margin trends so far in July.

[Chris Marshall, Vice Chairman & Chief Financial Officer]

That was $14 billion.

[Bose George, KBW]

Yes, sorry, $14 billion.

[Chris Marshall, Vice Chairman & Chief Financial Officer]

$14 billion not $14 million. Yes, we -- we'll see growth in DTC. I'd say that'll be $9 billion-ish, maybe slightly higher than that and that the balance would be corresponding.

[Bose George, KBW]

Okay. And then again, on sale margin trends, are they pretty -- remain pretty high?

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Yes. The market seems pretty strong. We don't expect overall margin to change much, but of course, they will be more balanced in the channels. And so, that's the only reason we're saying the overall margin may slip below 3%.

[Bose George, KBW]

Okay, that makes sense. And then just you noted the MSR mark on the 25 basis point adverse shock would be $93 million. When you look at that, is that based on the primary mortgage rate? So is that what we should be looking at?

[Chris Marshall, Vice Chairman & Chief Financial Officer]

This primary mortgage rate and swap rates, both of those drive the impact.

[Bose George, KBW]

Okay. So quarter-to-date right now it's -- the move seems pretty minimal, at least on the primary rate. Is that fair?

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Yes, there has been some deterioration in the first months in rates, but at a much more modest -- it's been a much more modest decline than it was this time last quarter.

[Bose George, KBW]

Okay. And then, actually just one on the Ginnie Mae loans. It -- when does it make sense for you to buy those loans out of the pool? Is there, you know -- are the economics there something that could make sense anytime for use capital for that purpose?

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Yes. We think there'd be a big opportunity as people come off of forbearance. And I think Ginnie Mae and FHA have been extremely customer-friendly in designing a program that's perfect for the current economic environment. So it's going to be much less burdensome on the customer and we should be able to help them modify their loan or -- or refinance their loan very efficiently.

[Jay Bray, Chairman & Chief Executive Officer]

Yes. And I think those, you know -- this is Jay. You know about the streamline my program that FHA came out with, which to Chris' point, I think is very customer-friendly and really eliminates a lot of friction between us and the borrower and should be a really good customer experience. And I think if the borrower needs that modification help, obviously, we'll be able to redeliver that, and it should be meaningful from a profitability standpoint.

[Bose George, KBW]

Okay, great. Good quarter, guys.

[Jay Bray, Chairman & Chief Executive Officer]

Thank you.

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Thanks, Chris.

[Operator]

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

[Doug Harter, Credit Suisse]

Thanks. You guys talked about kind of deleveraging. You know, just any sense as to kind of sizing that deleveraging that you'd be looking to do today versus how much of it occurs in the future?

[Chris Marshall, Vice Chairman & Chief Financial Officer]

I think, overall, our approach to deleveraging hasn't changed, Doug. We said we wanted to bring the company back down to pre-merger debt levels and between the debt that's callable now and the debt that will be callable next year, we think we'd get to that level. I think how much we do today versus a year from now is going to be market dependent and -- but we are -- I mean, I want to make sure everybody hears and heard Jay very, very clearly. Our priority is liquidity, number one. We are awash [ph] in liquidity and feel great about all of the facilities we've been able to put in place and the cash we're generating. But the crisis isn't over. So we're going to remain conservative there and we are going to deleverage. So I don't want to commit to a number today, but our overall plan has not changed.

[Doug Harter, Credit Suisse]

Got it. And then, just on that kind of maintaining liquidity. Can you just talk a little bit more about kind of -- you mentioned a little detail, but what exactly you're planning on in terms of forbearance and you know, kind of how much cushion you're kind of building in on that end relative to kind of where we are today, kind of given the continued uncertainty?

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Well, you know, the honest answer is there's still some unknowns about what forbearance will be. But I think we've taken a very conservative approach. In fact, our forbearance levels are less than half of what we originally projected. And the requests we're getting continue to decline and that's been consistent for the last four to six weeks. The other thing I'd point out is that one of the big assumptions we had in our forbearance projections was the rate at which people would exit. And that was a pure unknown, but in fact, we estimated 20% of our customers would exit forbearance after the first 90 days. And in fact, we had more than 20% exit. I'd also say, in terms of the customers that are on forbearance, 29% of them are still not 30 days delinquent, 17% of them have made their payments consistently, another 12% have yet to miss payment or they're less than 30 days delinquent.

So, we look at them in two separate buckets because that's 29% of the population. And so, we feel very good about continuing on the path that we're on, the one unknown is what happens when forbearance is over. We have relatively conservative estimates of the number of customers that are going to redefault. You know, 19% of the total population that's not current on their loans. And the cost that we are assuming, again, that's a market participant cost. That is not a cost that reflects our internal efficiencies. So I can't tell you we have a hundred percent accuracy on forbearance because of the unknown. But so far, everything we've done has been conservative.

We've lined up facilities that are more than adequate for any scenario we can imagine. And so, we think we're in a very good place, but we're going to remain extremely cautious and conservative.

[Jay Bray, Chairman & Chief Executive Officer]

Yes. And the only thing I would add to that is, if you look at our overall forecasting methodology, we're using Moody's kind of baseline scenarios and stress scenarios, which would assume unemployment, as I mentioned in the script, remains in the double digits throughout 2021. And the overall forbearance levels, frankly, new forbearance continue to come down even below the 1,000 that I mentioned in -- on the -- earlier on the call.

[Doug Harter, Credit Suisse]

Great. Thank you, both.

[Operator]

Thank you. Our next question comes from the line of Mark Hammond from Bank of America. Your question, please.

[Mark Hammond, Bank of America]

Hi, Jay, Chris, and Ken. Regarding the possible partial refi of the 2023s, is that contemplated in your comments about working to get back to the tangible net worth 15%?

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Yes. We're forecasting a certain amount of deleveraging, we're forecasting a conservative execution of a buyback program. And we're -- the most important thing we're forecasting is -- and Mark, I hope you can appreciate that we have been very conservative about giving guidance on originations, and we've shied away from giving future guidance on what the market was going to do. But at this point, we don't see anything changing, strong, strong originations performance through well into 2021. So the profitability from that and the cash flow that's generating is really the biggest driver in us getting to that 15%.

[Mark Hammond, Bank of America]

Got it, Chris. And you led me to my follow-up, which is just what is it going to take for the industry origination margins to normalize? Is there some sort of burnout or…

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Yes, I'm sure, at some point in time, there will be a burnout. In the meantime, we have to be awash with tens of thousands of new loan officers and processors. It's -- we're in this perfect situation where you got to have trained people online and all of the large origination as mortgage companies are adding people to the platform as are we. I think we had 300 new hires last week. So, we are moving very aggressively to do that, but in a measured way, and we've got trained people on our systems. And yet, even at those levels, it's hard to keep up with the massive amount of our customers that would benefit materially by refinancing. Rates are so low. It's going to take a while to catch up to that. So absent rates turning around and rising quickly, which nobody is going to forecast. Companies with strong, efficient origination platforms should do very, very well for the foreseeable future.

[Jay Bray, Chairman & Chief Executive Officer]

And really, it's a capacity play at this point. I mean, we could do significantly more locks per day. And even if we had more capacity, and that's to Chris' point, we're building that capacity. And you know, there's -- and within our portfolio, obviously, we mentioned it, but well over 1 million customers that we think we can help and we want to help, and we plan to help. So long, long runway there. And we expect significant profitability to come from that originations business and significant cash flow to come from that business. So I'm really bullish on it.

[Mark Hammond, Bank of America]

All right. Thank you all.

[Operator]

Thank you. Our next question comes from the line of Kevin Barker from Piper Sandler. Your question, please.

[Kevin Barker, Piper Sandler]

Hey, good morning. I'd just like to reference the modification programs that you laid out. Were those programs officially announced by Freddie and Fannie? And then, would those just -- would the potential fees that you could retain on the mods be purely on the loans that have gone through forbearance? Or is this an all defaulted loans that go through a modification?

[Jay Bray, Chairman & Chief Executive Officer]

Go ahead, Chris.

[Chris Marshall, Vice Chairman & Chief Financial Officer]

I'll answer your question in sequence. Yes, on the agency side, the plans have been announced. There may be a few nuances that continue to come out. And then on the FHA side, things are not completely final, but I think we have a good idea as to where they're heading. I would say, again, that the agencies, the FHFA, you know, Dr. Calabria, the FHA, Brian Montgomery, and Ginnie Mae. All of the agencies have worked to make the modification process, very, very customer friendly. And of course, we're benefiting tremendously because of the investment we made in our automated claims process last year.

[Jay Bray, Chairman & Chief Executive Officer]

And then, yes, I would add to that, Kevin. I would think of it as in two buckets. One, on the forbearance plans, yes, the GSEs have come out with their deferral plan. They come out with how that works, as well as, the fees we're going to earn on that. And so, I think that's -- that's crystal clear. I would not lump that in with a traditional modification, right? If the customer cannot -- you know, he doesn't -- can't qualify, if you will, or the deferral doesn't work for them. Then, there are other modification programs that are the more traditional Fannie, Freddie modification programs, and we would get paid a fee for that as well. So I would think of it that way. Deferral will be kind of second in the waterfall, if the customer can't make all the payments that they were forborne on. And then, the second piece will be the traditional mods.

On the FHA, the streamlined mod has been announced, the partial claim has been announced. And on the streamline mod, as we talked about earlier, I can't -- You know, I think FHA has been a real leader here in rolling that out. And to our point earlier, once we mod that loan for a customer that does need payment assistance, we're going to redeliver that and earn anywhere from five to six points. So it's a very meaningful P&L impact. And I think, it's a great solution for the customer because it reduces their rate, frankly, to a market rate. That's assuming that, again, they can't continue with their current rate and resume their payments. So -- so that's the way to think about it, if that makes sense.

[Kevin Barker, Piper Sandler]

Okay. And then, when we think about the population of potential borrowers that could go through a modification or a refinance or what have you. Do we look at the 5.9% forbearance outstanding that you disclosed on Slide 7, and then, apply that to the entire servicing portfolio? Or should we just look at the servicing portfolio that's owned versus subserviced?

[Jay Bray, Chairman & Chief Executive Officer]

It would be the entire.

[Kevin Barker, Piper Sandler]

Okay. And then, you made a reference to a 3% gain on sale -- sub-3% gain on sale margin in the [indiscernible] channel. Did you mean gain on sale margin? Or do you mean pre-tax margin per UPB?

[Jay Bray, Chairman & Chief Executive Officer]

Pre-tax margin per UPB.

[Kevin Barker, Piper Sandler]

Okay. Thanks for clarifying that. Bye.

[Operator]

Thank you. Our next question comes from the line of Giuliano Bologna from BTIG. Your question, please.

[Giuliano Bologna, BTIG]

Good morning and congratulations on a great quarter.

[Jay Bray, Chairman & Chief Executive Officer]

Thank you.

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Thank you, Giuliano.

[Giuliano Bologna, BTIG]

I guess, starting off, one of the things I'm a little curious about is -- and thinking about the loans that are coming off of forbearance, is there a sense of the mix of how they're coming off in the sense are they using the payment deferral program? Are they using modifications or are they reperforming? I'm just curious if there's a sense of what the mix is for loans coming off forbearance?

[Jay Bray, Chairman & Chief Executive Officer]

Yes. If you look at kind of the first cohort, and I may not get these exactly right, but effectively, a 30% came off and of that 30%, about 80% of that 30% just came off via resuming their normal payments. So some of those were already making their payment -- payments even though they were on the forbearance plan. And so, they just came off the plan and continue to make the payments. Others, you know, came off by catching up on the payments and resuming the normal payments. And then, a small percentage came off via some type of modification type solution. So we're very -- I mean, honestly, to Chris' point, we're extremely pleased with two things. One, the overall level of forbearance has been much lower than we had forecasted and much lower than we sized our financing capacity, too.

And two, you know, the first group of customers that have come off of forbearance plans have exceeded our expectations as well about how many are resuming their normal payments. So I think the early percent -- I mean, the early results are really fantastic. And then, from a -- you know, we don't talk enough about this, but when you look at the tools we've rolled out for our customers, we rolled out some digital tools for both going on the forbearance plans, and then, customers that are coming off the forbearance plans. And really, the ones that are going on, we're seeing 70%-plus are using our digital tools and not really requiring discussion with our customer service reps, which is a great experience for the customer. And obviously, from an expense standpoint, it's good for us. And for those that are coming off, we're actually seeing a lot of those are using digital tools as well. I think it's close to a third. And so, we're seeing great progress there.

So, I think -- look, at the end of the day, it's a -- I would -- the way -- if I haven't lived through the last crisis, this is uh -- we are well ahead of anything we can conceive of, and especially, compared to the last crisis. They're better tools for the customers. From a technology standpoint, we have significantly better technology, both on the back end for our team members, but especially on the front end as well for our customers. And so, you know, I think it's just -- so far, it's been a very positive experience for all our stakeholders. And I think, we'll see what happens in the latter half of the year. Obviously, we're going to remain cautious and conservative. But so far, it's been -- it significantly exceeded our expectations in a positive way.

[Giuliano Bologna, BTIG]

That's great. And I guess, kind of join down a little bit more on the -- since a lot -- since a large portion reperformed by making their payments or kind of continuing. I think Fannie and Freddie have a reperformance fee if you reperform within a certain number -- for a certain number of payments. That's -- I just want to make sure I'm correct on that. And the second part of that is, when we think about the FHA streamline product, because you're able to repool those loans, you should be able to get some sort of a gain on the repooling. I would assume and it's interesting to get a sense of what kind of gains you're able to get on pooling those modified Ginnie loans into, yes, new pools? And then, where will that profitability flow-through from a more [indiscernible] geography perspective?

[Jay Bray, Chairman & Chief Executive Officer]

Yes. I think on the repooling question, it's probably comparable to what we talked about previously. It's -- it's in and in today's market, it's in the five to six-point range. So it's other UPB -- so, it's a very meaningful amount of revenue and that will flow through the servicing segment.

[Giuliano Bologna, BTIG]

That's great. I guess, that kind of covers my questions for now, and I'll jump back in the queue. I really appreciate the time. Thank you very much.

[Jay Bray, Chairman & Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Mark [ph] from Barclays. Your question, please.

[Unidentified Analyst]

Yes. Thank you. Just wanted to clarify some of the comments around the correspondent business. Chris, I think you indicated that you expect for the balance of the year for volumes to kind of revert back to kind of pre-COVID levels. But that -- you were looking to make some changes for 2021 where you could really step that volume up. Is -- did I hear you correctly? And if so, can you give us any color on how much we should expect share and correspondent to kind of increase in 2021?

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Yes, Mark. I appreciate the question. Because they didn't want to touch on that, but we're not going to give you guidance today. I would say we are building out some technology and we're not going to carve out technology investments like we've done in the best because it's just so much part of the company now. But the Project Flash, which I hope you love that name, is really a broad-based set of investments in New York originations business to employ robotics and automation in a lot of the underwriting and quality control parts of the business. And I think that's going to help us move much more quickly. We're not going to set a market share goal today, but our -- overall, we like the idea of having a balance between DTC and correspondent. Today, DTC, which is incredibly profitable, has grown so fast. It's essentially doubled in the last year and continues to grow. So we've got plenty of room for correspondent to catch up.

[Unidentified Analyst]

Okay, got it. And I was just hoping you could help us think through the moving pieces on the servicing margin and what's going to help kind of contribute to, I guess, starting 4Q a recovery in that margin?

[Chris Marshall, Vice Chairman & Chief Financial Officer]

Well, in 4Q, we do expect CPRs to slow down a little bit. That's just the historical -- the historical cycle. And actually, I wouldn't feel that if they didn't because it just means we're going to be originating more loans, and that trade is more profitable. But we do expect them to moderate a little bit, and then, we should see a little bit more of the modification fees start to show up that we just discussed. But again, I would encourage you to look at both businesses together. The reality is 6 basis points of compression comes straight for amortization doubling in the last year and LIBOR completely collapsing. So eventually, amortization will stabilize and start to decline, when LIBOR comes back is anybody's guess. So, I would expect the whole industry servicing margins to be impacted for a while. But make no mistake about it, that amortization is feeding our originations engine. And so, look at separately. It's one story. Look that together, it's a very strong story.

[Unidentified Analyst]

Yes, understood. All right. Thank you.

[Operator]

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jay Bray, Chairman and CEO for any further remarks.

[Jay Bray, Chairman & Chief Executive Officer]

Yes, thank you. Thanks, everyone, for joining. We appreciate your time and we'll be available for follow-up questions. Have a great day. Thank you.

[Operator]

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect.