Mr Cooper Group Inc

NASDAQ:COOP

Earnings Call Analysis

Mr. Cooper Achieves No.1 Servicer Status Amid Growth

Mr. Cooper becomes the top servicer in the U.S. with a portfolio reaching $937 billion. The company reported an operating ROTCE of 13.8%, tangible book value increased to $62.78, and a pre-tax income of $301 million from servicing, although boosted by one-time items. Originations yielded $29 million EBT in a challenging rate environment, and Xome, while still not at full potential, saw sales grow 17% and earned a $2 million profit, with flat results expected next quarter. The capital ratio climbed to 31% with a new target set between 20% and 25%. Management anticipates exceeding a $1 trillion servicing target ahead of schedule and is preparing for further strategic updates to continue growth and retain high ROTCE. The liquidity remains strong at over $1 billion, aligning with a yearly revenue projection between $1.7 and $1.9 billion.

Incremental Improvement in Profitability Projected for 2024

As investors look toward profitability, consistent incremental improvement is anticipated throughout 2024, driven by scale and efficiency gains within the company. Investors should not expect dramatic leaps but rather a steady trek upward in profitability.

Target Return on Equity Within Reach

The company is optimistic about achieving a mid-teens run rate on return on equity by the middle of the following year. While they refrained from providing specific guidance, the executive team signaled expectations to stay firmly within their 12% to 20% target range for returns, hinting at growth potential as the year progresses.

Delinquency Rates and Market Trends

There's been an observable increase in delinquencies across consumer product portfolios, particularly in auto loans and credit cards. Despite this, the company expects only a slight uptick in mortgage delinquencies, citing historical prioritization of mortgage payments by consumers. The company's low loan-to-value ratio and record-low delinquency rates provide comfort amidst these trends.

Capitalizing on Retained Interest and Future Transactions

The company is retaining a larger strip of interest on their securities, contributing to their profitability. They are eyeing the possibility of engaging in significant transactions akin to those executed in previous quarters, which could lend impetus to their growth story in the upcoming quarters.

Strategic Financial Planning

The management is contemplating strategic financial moves, such as addressing high-yield investor interests and paying down mortgage servicing rights (MSR) lines, potentially in the coming quarters, which could solidify their financial stature and enhance their market position.

Preparation for Large-Scale Market Opportunities

The company's appetite for very large deals is robust, positioning them as a top player capable of operationalizing significant transactions. With liquidity and fundraising endeavors underway to leverage market opportunities, they are positioning themselves to capitalize on large pools expected to enter the market, a move facilitated by their industry-leading capabilities in handling transaction volumes.

Launch and Growth of a $1 Billion Fund

The company has set ambitious plans for a $1 billion fund, with the closing target by the end of the first quarter of next year and the intent to invest actively from the second quarter onwards. However, management is cautious, indicating the fundraising process is in its initial stages and that more details will be shared as the process unfolds.

Competitive Dynamics and Focus on High-Return Markets

Rising interest rates and a decrease in loan volume are causing margin compression across the lending industry. Despite the pressure, the company is selectively deploying capital towards markets with higher returns, specifically bulk markets, where they are experiencing strong unlevered returns and anticipate continued success.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to Mr. Cooper's Third Quarter 2023 Earnings Conference Call. At this time, all participants on a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. I would now like to hand the conference over-- to begin...

[Kenneth Posner, executive]

Good morning, and welcome to Mr. Cooper Group's third 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; Chris Marshall, Vice Chairman and President; and Kurt Johnson, Executive Vice President 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 to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change. I'll now turn the call over to Jay.

[Jay Bray, executive]

Thanks, Ken, and good morning, everyone, and welcome to our call. Let's dive in with a review of our quarterly highlights on Slide 3.Starting with financial performance, we were delighted with operating ROTCE of 13.8%, which is back within our target range. And at this point in the cycle, double-digit return on equity is a powerful validation of our balanced business model and a major differentiator from our peers whose results are much less consistent. Tangible book value was up nicely in the quarter to $62.78 and there's a lot of good news here. You're seeing the benefit of continued strong operating results, the gain from the trust collapse we mentioned last quarter, and the accretion from closing the Home Point acquisition, which came in consistent with our guidance. Now turning to operations. The portfolio reached $937 billion. And based on what we've seen from public disclosures, it appears that Mr. Cooper is now the #1 servicer in the country. This is an amazing accomplishment for the company, especially as I think back to our humble beginnings in the 1990s, and I want to pause for a second and say thank you to our investors, our partners, clients, and all our other stakeholders for placing your trust in us and especially to my fellow Coopers for your tireless work on behalf of our customers. Servicing generated $301 million in pretax income, although bear in mind, the gain from the trust collapse contributed $67 million, and there were some other onetime items in there as well, which Chris will elaborate on. Originations reported EBT of $29 million, which is excellent performance considering the rate environment and zones saw strong sales momentum and generated a small profit this quarter as we guided you to expect.Third quarter was a very busy period for us. In addition to Home Point, we closed the acquisition of Roosevelt Management, which provides us the professional team and the array infrastructure for our asset management strategy. And I'm pleased to report we've already kicked off the capital raising process for our first MSR fund.Turning to capital management. We repurchased 1 million shares for $58 million. And since the WMIH merger, established Mr. Cooper as a fully independent public company, our stock price has tripled, but we still trade at a persistent discount to tangible book, which looks to us like a major disconnect given our consistent growth in our double-digit ROTCE. Despite growth in return of capital, we reported record liquidity and very strong capital ratios. This was partially due to the self-funding nature of the Home Point acquisition, which we pointed out when we announced the deal and primarily due to our sound practices around capital and liquidity planning. As the market's leading servicer with 4.3 million customers, balance sheet strength is the foundation for all our strategic initiatives. Finally, I'd like to mention the well-deserved recognition we received from Fortune and the Great Place to Work Foundation, who ranked Mr. Cooper as one of the best workplaces in financial services and insurance. This is a positive reflection on our people and on the purposeful inclusive work environment that we have created for them.Now let's shift to Slide 4 and talk about a very important theme in the mortgage industry namely the ongoing retreat of banks from the sector, which is creating a major growth opportunity for us. As most of you are aware, banks used to dominate the mortgage industry with close to 100% market share in both originations and servicing. Today, however, that share has fallen to around 40%. One of the drivers was the Basel III capital regime rolled out in the aftermath of the global financial crisis, which introduced higher capital standards for mortgages and MSRs. These standards came on top of severe operational challenges. As some of you will recall, Mr. Cooper's growth began to take off at this point when we acquired $200 billion-plus portfolio from Bank of America. Fast forward to today and a new set of regulations is on the horizon called Basel III "Endgame". These regulations once again include tighter requirements for mortgages and MSRs at the same time that rising rates are pressuring profitability and operations. We expect to see banks see more share in the mortgage sector, creating attractive growth opportunities for best-in-class operators like Mr. Cooper. Moving to Slide 5. While banks were dialing back, Mr. Cooper made a commitment to serving mortgage borrowers and to continue making the necessary technology investments to do so efficiently. And the result, as I mentioned already, is we are now the industry's largest servicer. We're also the most efficient. The annual MBA benchmarking survey is the authoritative study of mortgage industry performance. And as you can see, we've steadily brought down our servicing costs over the last few years to the point where we are now 33% more efficient than the large banks in the survey and nearly 50% more efficient than midsized banks. If you consider our scale, cost advantage, industry-leading retention, and the depth of our expertise, there's really no one in the industry who can compete with us in servicing. Now let's move to Slide 6 and talk about where we're going from here. Given the attractive yields available in the bulk market as well as new subservicing agreements in place, we will exceed our $1 trillion strategic target in the first quarter of next year, at which point we'll return to update you with a new set of strategic targets and a comprehensive plan to achieve them. For now, I'd remind you that we have several strategic initiatives underway, many of which are focused on technology investment and cost leadership, both in servicing and originations as well as winning new subservicing clients. In closing, I'd like to highlight once again, the disconnect between a dominant platform of strong growth prospects and double-digit returns and a stock that trades at a discount. If we continue to execute, there should be meaningful upside in both our stock and our high-yield notes. And before I turn it over to Chris, let me address something that you no doubt noticed in the press release. Chris has shared with us his intention to retire by year-end 2024. Chris joined us in January 2019 as Vice Chairman and CFO, and quickly enhance the financial functions, implementing bank-like processes as well as pushing for efficiency gains and deleveraging. This served us extremely well in the pandemic hit year layer being well prepared for adverse scenarios, we were able to substantially expand our liquidity. In 2021, we promoted Chris the President and gave him a mandate to oversee operations, where he took our process discipline to the next level, leading to higher profitability across the enterprise and improvements to the customer experience as well as architecting some new directions within our technology strategy, including the investment in Sagent. In his remaining time with us, Chris will continue to lead operations with a goal of driving continued strong portfolio growth and return on equity in addition to overseeing the capital raise for our first MSR fund. As I look back on these 5 years, Chris has brought to Mr. Cooper a special count of energy, an intense focus on the needs of our customers, our team members, and investors, and a real sense of urgency to deliver results. Chris, the improvements you made at Mr. Cooper will endure, and we know you will continue to make a big impact on the company ahead of your retirement. I'll add that we put in place a process to identify a successor and while no one can replace Chris, the initial feedback indicates a very high level of interest from some exceptionally talented candidates, which shouldn't be a surprise given how well the company is performing. So more on this in due course. Chris?

[Christopher Marshall, executive]

Thanks, Jay. I appreciate those comments. And before I start, I'm going to take just a second to share with my teammates how much I appreciate your commitment and your hard work over the past 5 years. I really couldn't be any more proud of what we've done together for our customers and for the excellent financial results we produced for our investors. You all know Mr. Cooper has been and continues to be a very special experience for me and the capstone to a long career. But I'm not done quite yet so you should all expect me to continue pushing us to do more and to do it faster until I am done.So with that, let's talk about what we all care about -- which is the company's outstanding third quarter results. I'm going to start on Slide 7 and talk about servicing, where we generated a record $301 million in pretax operating income this quarter. Now as Jay just mentioned, this included the onetime $67 million from the trust collapse and I'd also call out $13 million in deboarding fees from a subservicing client that took their portfolio in-house, which we called out last quarter. And as you look ahead to the fourth quarter, I remind you that there is some seasonality in net interest income so I project servicing EBT to be roughly flat quarter-over-quarter at $210 million to $220 million, after which we should expect to see excellent growth in 2024. We're to put this in terms of our prior guidance of $700 million in servicing EBT for full year 2023, which as a reminder, does not include the gain from the trust collapse. It looks like we'll close out the year with at least $775 million. Now as you know, service fee income is affected by interest rates, and we're in the camp of expecting rates to stay higher for longer, which is an ideal environment for servicing, but that's not how we run the company. We're completely agnostic about rates since they're not in our control. And instead, we focus on those things we can control, namely process improvement, cost leadership, and operating leverage.We've talked in prior quarters about some of our current efficiency projects, which include driving down call volumes through chat technology, digital tools, enhancements to our IVR, as well as implementing AI for the call center, all of which provide a much better experience for our customers as well as lower cost for us, and we're making outstanding progress with these initiatives. In fact, we've been able to add nearly 140,000 customers year-to-date without increasing headcount, which I hope you all agree, is a very impressive example of positive operating leverage, and you're going to see a lot more of that in 2024.On a separate note, I'll add that we're very pleased with our progress in special servicing. The combination of Rushmore plus RightPath, which was our existing platform, generated EBT of nearly $20 million in the quarter. And if the credit cycle were to turn more adverse, special servicing could become a very meaningful contributor to our bottom line.Now let's turn to Slide 8 and talk about portfolio growth, which was very strong this quarter, thanks to the Home Point acquisition and the other poles we acquired, which more than offset the boarding of the subservicing client I mentioned. At quarter end, the portfolio reached $937 billion, up 10% year-over-year, which is a very comfortable growth rate for us to manage operationally. And it's a pretty safe bet will grow at least that fast in 2024, given that we already have well over $100 billion of deals scheduled to close and onboard well into the first quarter. We continue to see very attractive returns in the bulk market. This reflects the backlog of MSRs retained by originators during the refi boom, which they're now under pressure to sell due to very tight margins and limited liquidity. Also, we're starting to see banks bringing MSR pools to market as they prepare for the Basel III endgame regulations with a limited set of buyers, this supply is creating very attractive conditions for the growth. At the same time, we also see great opportunities in subservicing. If you stack us up against the competition, there's really no comparison. We're the clear scale leader, and not only do we offer excellent customer service and industry-leading recapture we're also a blue-chip counterparty with a very strong balance sheet and an extremely strong compliance function, which is very important for clients seeking to partner with a stable, reliable institution. No one matches our depth and capabilities, and quite frankly, no one even comes close. By the way, on this point, I'm delighted to share that we've just signed a new subservicing client and will begin onboarding their $80 billion portfolio in the first quarter. Later in 2024, our MSR funds should become a source of additional subservicing growth. We're talking with institutional investors about opportunities to achieve double-digit returns from an uncorrelated strategy with very limited exposure to interest rates or macro shocks. And while we're still very early in the process, so far, the feedback we've received is very encouraging.Now let's shift gears to Slide 9 and talk about originations where we turned in another outstanding quarter with $29 million in EBT, which is at the high end of our guidance. Our recapture performance remains best-in-class with refinance recapture reaching 83% in the quarter, which is nearly 4x the industry average. We've also been able to drive and sustain higher purchase recapture following a series of operational enhancements and new marketing campaigns. Now looking ahead, as you know, fourth quarter is the seasonally weakest quarter of the year with a shorter day count and other distractions of the holidays. And with mortgage rates well above 7%, our customers are more likely to take advantage of second lien products, which is the right solution for them, but it's a smaller margin product. Also, we're seeing pricing pressure return in the correspondent channel due to higher mortgage rates pressuring and originations volumes. So as such, we guide you to a range of $10 million to $20 million for fourth quarter.Now if you turn to Slide 10, I'll provide an update on Xome, which continues to do an excellent job executing and gaining market share. Sales grew 17% sequentially and the unit generated a profit of roughly $2 million, which is in line with our guidance and a step in the right direction, although nowhere close to Xome's ultimate potential.Looking ahead, we guide you to flat results in the fourth quarter as we'll begin to incur some expenses associated with continued investment in the platform. As you know, the FHA foreclosure market remains well below what we consider a normal level. And we can't give you an estimate as to precisely when activity will normalize. Nonetheless, we're investing now because we intend for Xome to be the dominant competitor in this space whenever the market normalizes, at which point you'll see its full earnings and monetization potential. On that point, let me take a step back and comment on the company's overall performance. At this moment, servicing is producing terrific results, thanks in large part to the investment we made over many years to perfect the platform with innovative technology and a strong process discipline. In contrast, originations and Xome are operating well below potential due to where we are in their respective cycles. But you know how well they performed in the past. And right now, we're investing in these platforms too, just like we did in servicing. When originations and credit cycles turn, I'm confident it will generate spectacular results. So with that, I'll now turn it over to Kurt.

[Kurt Johnson, executive]

Thanks, Chris. Good morning. I'll start on Slide 11, which gives you a summary of the financials. I'd like to highlight 4 items. First, let me give you some color on the adjustments. In the Home Point transaction, we recorded a bargain purchase gain of $96 million and incurred $5 million in deal costs, which together added $1.47 to tangible book value. Obviously, this was stronger than our guidance of dollar in accretion and reflects very favorably on the performance of the MSRs we acquired as well as limited exposure to contingent liabilities after extensive diligence. Other adjustments included $8 million in deal costs associated with the Roosevelt acquisition and a $39 million loss from equity investments, largely tied to retained interest in Title 365, which, as you may recall, we sold to Blend Labs in 2021 for $450 million in cash and a $50 million retained interest in the title company. With this adjustment, that retained interest is now marked down to $3 million on our balance sheet. Second, I comment that with the acquisition of Roosevelt, you should expect corporate expenses to be roughly $2 million higher per quarter, which reflects the cost of our asset management strategy and the team which will be overseeing the MSR fund. That expense will be more than offset by increased revenue once the fund is raised and starts acquiring MSRs. Third, we marked up the MSR on our balance sheet by $254 million, reflecting higher interest rates and lower CPRs, leading to a quarter end valuation of 161 basis points of UPB or 5.3 multiple of the base servicing fee strip. This markup was offset by hedge losses of $192 million, which equates to coverage of 76%, completely consistent with our target ratio, which remains at 75%.Finally, I'd like to update you on our deferred tax asset, which declined by $158 million this quarter and now totals $499 million. The significant decline reflects deferred tax liabilities assumed as part of the Home Point transaction as well as strong operating results. When we merged with WMIH in 2018, the DTA totaled $1 billion and the fact that we've been able to significantly reduce this asset speaks to our thoughtful approach to tax planning, but particularly the company's strong profitability. We estimate the remaining balance will continue to limit our federal cash tax liabilities for at least the next 3 years, continuing to maximize the cash generated by the company.Now let's turn to Slide 12. I'd like to comment further on our balanced business model because it's a term that many of our peers use despite reporting much less stable results than us. This slide provides you with our view on the relatively narrow range of returns on equity that we would have generated using 3 key results as a baseline, even if mortgage rates have been 100 basis points higher or lower than what actually occurred. Starting in the center of the table, we anchored the analysis on actual third quarter results, where mortgage rates averaged 7.2% and our CPR speeds were 5.6%. The left-hand side shows a hypothetical scenario with mortgage rates 100 basis points lower and CPRs 90 basis points higher. In this scenario, servicing suffers from higher amortization expense. However, this pressure is mostly offset by originations, resulting in overall ROTCE of 13.2%, slightly lower than what we actually reported in the quarter, but still quite healthy and within our target range. Conversely, if rates had risen 100 basis points, we estimate CPRs would have only been down 30 BEPS, leading to stronger servicing income and additional compression in originations profits, resulting in overall ROTCE of 13.0%. The simple high-level example shows how originations and servicing naturally offset each other, leading to relatively stable results for companies that have the right balance between the two.Now if you'll turn to Slide 13, let's talk about another aspect of our balanced business model, namely the company's resilience to adverse credit environments. We've carefully constructed our MSR portfolio. You can see this quality in our 60-day delinquencies, which continued to decline during the third quarter on an overall basis and in each loan category with our MSR portfolio showing the lowest delinquency levels in our history as a public company. I would also point you the weighted average FICO scores, which have been rising nearly every quarter for the past 3 years and to our loan-to-value ratio, which remained 54% in the third quarter.This speaks to the very substantial equity of our customers. Not only is our portfolio quite solid, we're also well positioned for more adverse environments by virtue of Rushmore, our special servicing operation, which, as Chris said, is already generating nearly $20 million per quarter in EBT. Now in a stressed environment, Rushmore would play a very important role, working with troubled borrowers to help them stay in their homes. Needless to say, this would also be a huge service to our clients, and there could be substantial upside in Rushmore's volumes, not to mention a larger contribution from Xome.Now let's turn to Slide 14 and review liquidity. As you know, balance sheet strength is a cornerstone of our strategy, which incorporates capital and liquidity planning, asset quality, compliance and enterprise risk management. So let's dive into liquidity, where we had a record level of $2.7 billion at quarter end, comprised of $553 million in cash, with the remainder in MSR line capacity, which is fully collateralized and immediately available. The Home Point acquisition brought a $700 million of additional capacity secured by Home Point's MSR, of which we drew down $385 million to fund the acquisition. Since last quarter, we have renegotiated our existing MSR lines, pushing out substantially all maturities to 2025. Finally, I'll comment briefly on advances, which declined 8% year-over-year despite growth in the portfolio. And that's consistent with the excellent delinquency trends I just mentioned and strong performance from our servicing group.I'll wrap up my comments on Slide 15 with a few thoughts on our strong capital position. Our capital ratio increased to 31% as measured by tangible net worth to asset, thanks to strong operating results and the accretion from the Home Point transaction. We've commented previously that we intend to deploy some of this capital into asset growth. To provide you with more clarity around the goalposts, we're disclosing a new target capital ratio of 20% to 25%. We think that range is appropriate because our balance sheet position changes somewhat with interest rates. So right now, our assets are more heavily weighted to MSRs whereas rates were to rally, we would expect a higher balance of loans held for sale. Looking ahead into 2024, we feel that the company is in great shape to grow the portfolio and at the same time, drive and sustain higher levels of return on equity. We intend to pursue growth through asset-light strategies also which emphasize subservicing as well as prudent balance sheet growth consistent with our capital and liquidity targets. We are also monitoring spreads on high-yield debt issuance. We started receiving inquiries about potential issuance of high-yield bonds, and we're definitely considering the option, but only if spreads fairly reflect our strong credit profile. In recent conversations with rating agencies and high-yield investors were getting significant recognition for the company's progress since we became fully independent in 2018. These discussions center around strong capital liquidity, excellent asset quality, rising profitability, our 75% hedge ratio and of course, our long-term track record of growth, which not only validates the competitive advantage of our business model that leaves us today as the market's #1 servicer. With that, I'd like to thank you for listening to our call, and I'll turn the call back over to Ken for Q&A.

[Kenneth Posner, executive]

Thanks, Kurt. And operator, if you could start the Q&A session, please…

[Operator]

Ladies and gentlemen, as [Operator Instructions] -- our first question comes from the line of Kevin Barker with Pico Sandler.

[Kevin Barker, analyst]

First off, let's say congrats to Chris and wish you the best in retirement. You will be missed. And then just a follow-up on the servicing earnings. There's quite a bit of momentum, particularly on the top line, just given years a shift into more servicing-owned versus subservicing. Do you expect the pretax income per UPB to remain relatively stable or even increasing as we go into the first half of '24? It does present quite a bit of tailwind to return on tangible equity, which seems like it can drift higher. So any color you can provide on the trajectory of servicing pretax margins?

[Christopher Marshall, executive]

Kevin, it's Chris. First of all, thank you for the comments. But yes, you should expect our overall profitability to trend marginally higher consistently throughout '24 based on the scale we're adding, the efficiencies we're generating, those are going to continue. So there's not a -- is that going to be a giant step up, you should just expect consistent improvement in profitability throughout the year.

[Kevin Barker, analyst]

And then just given the acquisitions you've made and your targeted capital ratios, do you feel that a mid-teens run rate on return on equity is achievable by middle of next year, just given the capital you've deployed or capital you're planning to deploy over the next couple of quarters?

[Christopher Marshall, executive]

Well, Ken is going to kick me under the table if I give you specific guidance right now. But you should expect our ROTCE to improve along the same lines. I mean I'd point you back to a comment with just one example of being able to add 140,000 customers without any additional labor expense. I mean, that kind of operating efficiency is going to continue through the year. But I don't think we're prepared to give specific guidance other than we expect to remain well within our 12% to 20% target for returns, recognizing that there's some seasonality in the fourth quarter and the first. But as we get through the middle of the year, you should see that continue to grow.

[Operator]

Our next question comes from the line of Bose George with KBW.

[Bose George, analyst]

I wanted to ask just about the target ratio and capital. So just back of the envelope, does that suggest that there's investable capital of something in the range of sort of $700 million on your balance sheet. Is that a reasonable way of looking at it?

[Kurt Johnson, executive]

Yes. I mean, Kevin, it's -- sorry, Bose, its Kurt. I think -- I think that's an okay way of looking at it. Look, we do need to save some room if rates rally and originations grow, right? And if that's the case, then our assets will grow. But yes, I think we have excess liquidities and we can grow our asset base. We'd be comfortable deploying that growing, maybe not the full $700 million, but a fraction of that and we do think that we've got some deals lined up that will utilize that capital into the first quarter. But we do want to save some dry powder for rates to rally.

[Christopher Marshall, executive]

I'd just add that we've had a good strong year-to-date in terms of acquisitions. But between now and the end of the first quarter, we're going to board another $125 billion worth of loans. So we have some deals that we've already committed to, which will eat up some of that liquidity.

[Kurt Johnson, executive]

Other good news both on the acquisition front is we've had a lot of consistency with sellers. I mean we've been able to -- because of the boarding process, because of our scale, because of all the operational capability, we've had sellers that have come back to us repeatedly this year, and we would expect that to continue. So we've got a lot of opportunity ahead of us.

[Bose George, analyst]

Okay. Great. And Chris, the $125 billion you referred to, so that's $80 billion of the subservicing you mentioned? And then the rest is that the rest owned servicing that you'll be acquiring?

[Christopher Marshall, executive]

Yes, those are deals we already signed, but we'll board some of it in the fourth quarter, a lot of it in the first quarter…

[Kurt Johnson, executive]

First quarter...

[Bose George, analyst]

Great. And then just in terms of the seasonality of servicing income in the fourth quarter, is that mainly the float income just as the taxes and insurance gets paid? Or are there other seasonal sort of components as well?

[Christopher Marshall, executive]

No, you're exactly right. That's exactly why we see seasonality.

[Bose George, analyst]

Okay. Actually, let me ask just one more. On the Home Point acquisition, now that the MSR is on as -- and I guess some of the boarding's are still not done yet. As that happens, is it just the sort of the benefit of your servicing versus the cost of using a subservice -- or is that sort of the incremental piece from Home Point that's left?

[Christopher Marshall, executive]

Yes, the incremental piece from Home Point, right? The benefits are kind of our cost. You're right, that will probably -- the remainder will probably bore the first quarter. But then the other aspect of that, right, is that as those boards are originations, we'll have additional opportunities that they haven't right now because we will start to know those customers. We'll be able to start to solicit those customers a little bit more. So you can see origination starts to trend up a little bit in 2Q and 3Q as a result of that.

[Operator]

Our next question comes from the line of Eric Hagen with BTIG.

[Eric Hagen, analyst]

Quick one here. Are you projecting any increase in delinquency rates as a result of higher interest rates and mortgage rates? And are there any kind of assumptions around the credit environment, which appear in the earnings sensitivity that you have on, I think, it's Slide 12.

[Kurt Johnson, executive]

Eric, its Kurt. So we are projecting a slight increase in delinquencies from here. We're starting to see not just in our portfolio, but portfolios overall, a tick up in delinquencies in other consumer products, so primarily auto, but student -- but credit cards are ticking up as well. So we do anticipate a small increase. However, our market LTV is 54% and it's pretty clear that this time around consumers are definitely prioritizing their mortgages. So we indicated that the 2% delinquency rate that we saw at the end of the quarter was about -- was the lowest that we've ever seen in our portfolio. So while yes, it will tick-up slightly and we anticipate to tick up slightly, it probably won't be a material adverse environment for us in 2024.

[Eric Hagen, analyst]

Yes. Got it. That's helpful. From a modeling standpoint, what are the kind of like drivers or conditions you might look at for selling or financing the excess spread, maybe how to think about that benefit to the bottom line and even your cash flow and your leverage into next year?

[Kurt Johnson, executive]

Yes. So if you look at kind of the supplement, you see that we -- the retained was a 225 basis points, and that's not because we're paying a big multiple for that. It's because we are actually retaining a bigger strip. So we're looking probably in 2Q or 3Q to be able to do another excess transaction like we did in 2Q of this year.

[Eric Hagen, analyst]

Got it. Okay. And then just following up on the conversation around capital. I mean it sounds like you guys kind of alluded to it, but you mentioned you're looking at the high-yield market. It sounds like maybe you tap that market just to be opportunistic and kind of keep a cushion of cash. Is that -- are we reading that correctly? And just kind of what you might access the high-yield market for just being clear about that.

[Kurt Johnson, executive]

Yes. I mean I think exactly that. We're certainly looking at kind of where we're trading right now. We're talking to the agencies. We're engaging the inter high-yield investors. But we think doing that and paying down some of our MSR lines is sort of a -- it's something we think about pursuing maybe not this quarter, but as we're going into the holidays, but maybe in the first quarter of next year.

[Operator]

Our next question comes from the line of Giuliano Bologna with Compass Point.

[Giuliano Anderes-Bologna, analyst]

Congratulations on another great quarter here. And Chris, a great work with you and I'm looking forward to working with you for the next year and good luck in the long -- at the end of next year. The one thing I was curious about was when I look at the deals you've done, you've obviously made a lot of acquisitions imported a ton of loans in the past couple of quarters and you still have a strong pipeline going into 1Q. I'm curious about your appetite for doing larger deals in the high tens or $100 billion plus range. And is that something that we should think would happen a little later in the 2Q, 3Q range? Obviously, it depends on market conditions. Is that a good way to think about how you try and scale things? Or is there any limitations to how much you can board in a 2 or 3 quarter range?

[Christopher Marshall, executive]

There's -- Giuliano, first of all, thank you for the comment. And I'll just remind you, 15 months is a long time so you'll hear a lot from me between now and then. But that aside, we have a very large appetite for very large deals. And we're the buyer of choice in the industry. We're one of only a few buyers that could even operationally take on those large pools and so we've been preparing for this for a couple of years. And now with Basel III "endgame" in place, we think a number of larger banks, regional banks will begin bringing some large pools to market. So we're -- we're expecting to see that happen. We're prepared for it. We have the liquidity lined up. We're going to be raising a fund to take advantage of those returns as well. So I think you should assume our appetite is very strong and probably the strongest in the industry, but we're well prepared for it.

[Kurt Johnson, executive]

And we have the capability. Obviously, you've seen consistently, we're buying 5 to $20 billion pools as we speak. Obviously, Home Point was $80 billion, the subservicing we announced that we just won is $80 billion. And to Chris' point, we're starting to have strategic conversations with some large entities that could really result in significant size and fully prepared to take those on. To Chris' point, also, we're probably the only counterparty that can really move that kind of size.

[Christopher Marshall, executive]

And your question about operational limitations. Yes, there are some, but we've got an outstanding platform. Jay Jones, who's our leader over there, running servicing has onboarded some -- a massive amount of loans in the last 2 years. So I think we've proven we can do it. We've developed a lot of proprietary technology that allows us to do that much more seamlessly than anyone was able to do in the past. So there is a limitation, but we space out certain boardings to avoid ever tripping that. And I think we can buy lots of volume next year without in any way cause -- coming even close to what our limitations are.

[Giuliano Anderes-Bologna, analyst]

That's great. The next thing that I was just picking on for a second, I think, was when I think about the originations side of the platform, you're obviously bringing on a lot more in actual trends, I think more opportunities to originate -- it seems like there's going to be a quarter or 2 delayed kind of Home Point up and running. But is that a good way to think of it? And then I realize we're probably -- if we're not at the trough or probably close to the trough from where volumes -- origination volumes will probably go. So we think about that in more of a linear way as you cross over the next 2 quarters in terms of where originations could go? Or is there any other optionality there?

[Christopher Marshall, executive]

You're looking at it exactly right. A lot of the portfolios, I'd say probably half of them have not really been solicited in the last couple of years. So we would expect to have marginally higher opportunity there. Of course, rates are higher. We're at the trough for originations but with more portfolio, we have more at that so you should see originations do a little bit better. The second thing I mentioned on originations, we're making some very large investments in originations right now, even though we are at the trough, we are preparing to be much more efficient and to be able to ramp much more quickly when the cycle does turn the other way, just like we did with servicing back in 2019 and 2020. So we're seeing the benefit of that now. We'll eventually see the benefit later. But in the near term, we should see incrementally higher opportunity in originations.

[Giuliano Anderes-Bologna, analyst]

That's great. And Chris, you're right. I look forward to working with you for the next 15 months.

[Christopher Marshall, executive]

Thank you.

[Operator]

Our next question comes from the line of Kyle Joseph with Jefferies.

[Kyle Joseph, analyst]

Just wanted to touch on the MSR fund. Any idea for the sense of target assets under management and the fee structure and then how that will flow through the P&L once it's up and running.

[Christopher Marshall, executive]

I appreciate the call, Kyle. We have high hopes for our first fund. We're targeting $1 billion fund, but -- and we've gotten some very positive feedback, but we are in the very -- we're in the first inning. So we hope to close that first fund by the end of the first quarter and then start to put that money to work in second quarter and probably really hit our stride in the third. But as you know and as I'm sure you know, and as I've experienced many, many times in the past, things seem great. You get out and start making calls and it's a long process. So I'd rather us tell you a little bit more specifically in terms of details and timelines as we progress through the fourth quarter or maybe the beginning of the first quarter, but that's our target.

[Kyle Joseph, analyst]

Got it. That's totally fair. And then just one follow-up for me. I think you mentioned you're seeing some margin compression in the correspondent channel. Is that just a function of rate movements? Or just give us an update on the competitive dynamics in that channel?

[Christopher Marshall, executive]

I think they're both linked. There's higher rates means lower volume across the country, and you've got all the correspondent focused companies competing for that smaller amount of volume. So there's actually going to be more pricing pressure. And I think you'll see that as long as rates stay high and volumes are low. But that's the only reason that we see, causing the compression.

[Kurt Johnson, executive]

And the only thing I'd add to that is, I won't say we're indifferent to it. But as we've told you guys many times, we deploy our capital where the highest returns are. And clearly, right now, we're seeing the highest returns in the bulk market. We're achieving mid-teen unlevered returns in that market. We think that's going to continue. We also play in the co-issue market. We see similar returns there. And so while the margins have compressed, we'll continue to be a player, but we're going to allocate our capital where the highest returns are. And we're extremely bullish on the bulk market.

[Operator]

[Operator Instructions]. Next question comes from the line of Ryan Violin with Wedbush Securities.

[James McCanless, analyst]

Just one quick one for me related to the earlier credit question. Strong delinquency performance so far, but there was a sequential increase in modifications and workout. So I was just wondering, is that related to Home Point and Roosevelt coming on? Or is there some other sort of increase in the organic portfolio? Any commentary there? And I guess, how do you see those trending in the near term?

[Kurt Johnson, executive]

Yes, it's Kurt. Thanks for the question. We're actually not really seeing it from Home Point. Where we're seeing it is in our Ginnie Mae portfolio and particularly our FHA portfolio. FHA rolled out a -- not a new program but an expansion of eligibility in the early part of the year. And it was really well received by our customers, and we were able, as a result of that to take the delinquencies down from FHA. It also drove part of our ancillary income increase as well as FHA pays a success fee for those modifications. But you can see, I think, on page, I want to say 15 of the presentation, our FHA delinquencies how much they come down and they've, in fact, crossed over via USDA and are lower than the VA USDA portfolio. But that's primarily where the delinquencies come down.

[James McCanless, analyst]

It's really just due to the new program, right?

[Kurt Johnson, executive]

Yes. It's really the new program.

[Operator]

I'm showing no further questions in the queue. I would now like to turn the call back over to Jay for closing remarks.

[Jay Bray, executive]

Thank you, everybody, for joining us, and we look forward to continued conversation. Have a great day. Thank you.

[Operator]

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