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Mr Cooper Group Inc
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Ladies and gentlemen, thank you for standing by. And welcome to the Mr. Cooper Group's Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today to Ken Posner, Senior Vice President of Strategic Planning and Investor Relations. Thank you. Please go ahead, sir.
Good morning and welcome to Mr. Cooper Group’s fourth quarter earnings call. My name is Ken Posner, and I am Senior Vice President of Strategic Planning and Investor Relations.
With me today is Jay Bray, Chairman and CEO; and Chris Marshall, Vice Chairman and CFO. As a quick remainder, we’ll be referring to slides that can be accessed in our Investor Relations webpage at investor.mrcoopergroup.com. Also this call is being recorded.
During the call we may refer to non-GAAP measures which are reconciled to GAAP results in the appendix to the slide deck. And finally, during the call, we may make forward-looking statements. You should understand that these statements could be affected by risk factors that we have identified in our 10-K and other SEC filings. Further, we are not undertaking any commitment to update these statements if conditions change.
I’ll now turn the call over to Jay.
Thanks, Ken and good morning everyone and welcome to our call. I'm going to start by reviewing the highlights of the quarter on slide six. We reported net income of $461 million or $4.95 per share. These results included a $285 million benefit from leasing the valuation allowance against the deferred tax asset, a mark-to-market gain of $102 million and very strong pretax operating income of $125 million equivalent to a 21.1% ROTCE.
Once again the Origination segment produced excellent results, with $138 million in pretax earnings, on a record $12.6 billion in funded loans and a margin of 1.1%, which was right in line with the update we provided in December.
The Servicing portfolio was stable during the fourth quarter, which demonstrated our ability to replenish the portfolio with Originations, as there were no bulk acquisitions in the quarter. In fact, there haven't been any bulk acquisitions since the first quarter.
Xome reported another solid quarter, with pretax operating income increasing to $14 million, thanks to strong momentum in the title unit which is benefiting from refinances.
Finally, subsequent to quarter-end, we called another $100 million of senior notes and issued $600 million in new seven-year notes, which allowed us to refinance the remaining maturities in 2021 and 2022. We were extremely happy with the market reception to this transaction.
We had 100% subscription rate falling the non-deal road show. The deal ended up being six times oversubscribed, and the notes were priced at record tight spreads for a Single B rated financial services issuer.
Since the WMIH bond issuance in 2018, our spreads have come in by roughly 200 basis points, which we take as positive feedback from the market on our progress executing against our strategic goals.
If you'll turn to slide seven, I'd like to talk more about the company's strategic direction. As you recall in our fourth quarter call last year, we told you we were going to take a pause from growth to focus on integration, deleveraging and improving profitability, and that's exactly what we've done. During 2019, we completed the integration of our three acquisitions, achieved our initial deleveraging target, and significantly improved the company's overall profitability.
Now, the question in your mind is what's next? And the answer is more the same. As the management team and board of directors have reflected on our market position and competitive strength, we've developed a series of strategic pillars that will guide the next chapter in Mr. Cooper story. The overarching goal is to drive the stock up to tangible book value or higher, and we'll do this by positioning the company for sustainable long-term growth and by generating consistent return on equity at or above our target of 12%.
The first priority under these strategic pillars is strengthening the balance sheet to ensure Mr. Cooper continues to serve as a source of strength for the U.S. housing and mortgage markets, even at the economic environment turns adverse.
In this regard, we're planning over the next two to three years for the ratio of tangible net worth assets to increase to 15% or higher. We expect to grow into this ratio by prioritizing the use of cash flow to retire senior notes on an opportunistic basis.
A strong balance sheet also means robust liquidity. The $600 million refinance transaction cleared out our maturities through July 2023, which leaves us with a liquidity runway of three and one half years, which is a great position to be in should the environment deteriorate.
Now, let's turn to slide number eight and talk about the second major pillar of our strategic plan, which is to drive continuous improvement in our cost structure. Put simply, as we think about Mr. Cooper's business model, we believe that the key to profitability is continued improvement in productivity. We regard this pillar as essential to sustaining ROTCE in the face of headwinds, such as the normalization of origination margins once capacity finally returns to the market.
You've heard us talk about Project Titan, which was an initiative designed to improve the customer experience and drive meaningful cost savings, as well as how the home advisor team boost recapture rates and improves profitability.
These are both examples of our focus on unit costs. The two charts on this page show you that we've made progress here in recent years, but not enough, moving forward, each of our business segments has a mandate to drive down unit costs by 5% per year, year-in and year-out. Unit Cost numbers may move around from quarter-to-quarter due to mix changes or volumes and market conditions, but you should expect us to show progress here over time. You've also heard us talk about corporate actions, which represent various opportunities to streamline overhead costs. These kinds of initiatives will be ongoing.
Finally, I'll comment on the three other pillars which relate to our customers and our talent. These pillars don't link exactly to ROTCE or balance sheet metrics, but they are absolutely critical to all aspects of our business and we will update you from time-to-time when there are accomplishments or issues of note.
And on that note, I'll turn the call over to Chris.
Thanks, Jay. Good morning everyone. I'm going to start with a high level review of our results on slide nine.
As you've seen, we reported net income of $461 million on a GAAP basis, which is equal to $4.95 per share. These results included the release of the valuation allowance against our deferred tax asset which totaled $285 million.
As you know, we assumed $6 billion of net operating losses in connection with the WMIH merger and based on our projections at the time we established a DTA of $1.2 billion, with the allowance meant to cover a portion of the NOLs, which we estimated would expire unutilized. And conducting our 2019 year-end review of the DTA, we concluded that the allowance has no longer appropriate to the company's improved profitability and the implementation of a prudent tax planning strategy.
Based on the DTA carrying value at year-end, we expect to save $1.3 billion in federal tax payments over time, which means more cash for deleveraging, building liquidity, or investing in growth.
Our GAAP results also benefited from a mark-to-market of $102 million, which I'll discuss in just a minute. But first, let's focus on pretax operating income, which was a healthy $125 million in the quarter, down from the record $171 million in the prior quarter as Originations margins normalized. On a fully tax basis, this was equivalent to a 21.1% return on tangible common equity, which is well above our long-term target of 12%.
In terms of adjustments, we excluded $6 million in severance charges, which were split evenly between Xome and Corporate. And we expect to see a similar level of severance expense this quarter.
There were some other notable items in the quarter, which I'd like to point out. Servicing benefited from a $19 million recovery, which shows up as a reduction in expenses. Also, the corporate line included $7 million in costs associated with shutting down certain facilities and activities that are no longer core. This cost and the severance charges are part of the corporate initiatives we discussed with you the last quarter, which were intended to streamline our operations and improve efficiency.
Let's turn to slide 10 and discuss the carrying value of our MSR portfolio and $102 million mark-to-market gain booked in the quarter. The mark-to-market primarily reflected the 10 basis point increase in mortgage rates during the fourth quarter. And the implications were slightly slower prepayment speeds, which you'll see in a 10-K is a decrease in the lifetime CPR assumption from 13.9% to 13.1%. Also the moving the short end of the curve help implying a stronger outlook for net interest income.
As a result of these changes, the value of the MSR portfolio increased from 109 basis points to 118 basis points, which was similar to the change we've seen reported by others in the marketplace.
The current level of interest rates results in higher amortization expense in our servicing portfolio, but at the same time creates very favorable conditions for a DTC channel which focuses on helping our existing customers' refinance.
Taking a look at our portfolio, we estimate that 1.1 million of our customers or 28% of the total are in position to save roughly $200 per month if they refinanced right now, which we estimate is the equivalent of a two-year payback, which for most people is a pretty good deal.
The sensitivity table shows you that absent a major rate move, we’d expect volume in our DTC channel to remain strong for the foreseeable future.
So, let's turn to slide 11 and talk about Originations, which once again contributed excellent results, with pretax earnings of $138 million in the fourth quarter, on record fundings of $12.6 billion. These results, obviously, reflect favorable market conditions, but they also point to the investments we've made in recent years, including the creation of our home advisor unit, the acquisition of Pacific Union, as well as important, but intangible factors, like the culture of our people who are disciplined operators and extremely innovative. As a result of this progress in Originations, our overall business model is more balanced and more profitable than it was in past cycles.
The margin remained strong and 110 basis points which is right in line with the update we provided in December. As you know, we book revenues when the loan is locked and recognize expenses when the loan is funded. The third quarter margin of 132 basis points was unusually high, because locks outpaced fundings, whereas in the fourth quarter locks and fundings are right in line with each other, which is why the margin dropped to a more normalized level.
Since year-end, mortgage rates have declined by approximately 20 basis points, and as a result, we have seen another surge in locked volumes. During January, total funded volume was 4 billion, while locks were starting to inch ahead at 4.1 billion. If this trend continues, then we would expect to see the margin to see some expansion.
Now, let's turn to slide 12 and review the servicing portfolio. Total UPB ended the quarter at $643 billion, which is flat with the third quarter level and consistent with our guidance. Looking at the components of the portfolio, reverse and private label mortgages continue to runoff, while sub servicing grew nicely and the owned portfolio was largely flat.
Despite elevated prepayments, we estimate our net replenishment rate held in right around 100%, which indicates that originations are, broadly speaking, sufficient to sustain a portfolio net to runoff attributable to co-investment partners without us having to pursue bulk MSR acquisitions.
As Jay pointed out, that's pretty much what you've seen in 2019 since we haven't made any bulk acquisitions since closing this Seterus deal in the first quarter.
As we entered 2020, we're planning for the total servicing UPB to be roughly flat. And whether we grow a little or shrink a little will probably depend on the performance of our sub-servicing partners.
And let's turn to slide 13 and review the servicing margin, which will discuss excluding the full mark. On this basis, the servicing margin was 5.5 basis points, down from 5.8 basis points in the third quarter due to higher CPRs, which peaked at 19.1% during the quarter and which translated into much higher amortization. This pressure was offset by a $19 million recovery for a prior servicer associated with a portfolio we acquired several years ago. This benefit flows through as the reduction of foreclosure and other liquidation related expenses, which you can see in the appendix to the deck.
The reverse portfolio is in runoff and not a material driver of results, but it does introduce some variability into the margin due to the timing of recoveries and the impact of interest rates on the accounting treatment of financing costs. As you can see from the chart, reverse contributed 0.3 basis points this quarter, down from one basis point in the third quarter.
Finally, I comment that the delinquency trend remains very favorable, with 60 day delinquencies dropping to 2%.
Now, turning the Xome on slide 14. We were pleased with another solid quarter outperformance with pretax operating income rising sequentially from $13 million to $14 million. The highlight of the quarter at Xome was strong refinance through the order flow in our title unit.
As we've commented previously, Assurant is now fully integrated, except for efforts related to on-boarding some customers to a new platforms, that efforts on track and is being very carefully managed and feedback has been very positive.
You will notice that the proportion of third-party revenues dip slightly from 53% to 51% in the fourth quarter. This reflects the typical seasonal slowdown in field services and should start moving up again later in the spring.
We announced in January that Mike Rawls has taken over as CEO Xome. Mike is a highly respected member of our executive team, a 20-year veteran of the company, and for the last five years, he's led the Servicing operation. Mike brings vast experience and credibility to Xome and will play an instrumental role in revenue generation as we compete to win new clients and cross sell multiple services to existing clients.
We remain confident in the $50 million guidance in pretax operating income for 2020 that we've already shared with you. However, first quarter is typically a seasonal low point, so you'll likely see a dip in earnings next quarter.
Now, let's wrap up on slide 15 with a review of liquidity and capital. We ended the year with very strong liquidity, which allowed us to paydown operating lines by $90 million. And as some of you notice, the FHFA recently came out with proposed new requirements for non-bank mortgage servicers. We are comfortably in compliance with these proposals and if they're implemented, we don't expect any impact to our business.
Earlier this year, we shared with you an illustrious metric called steady state discretionary cash flow, which is the amount of cash available once we sustain the MSR asset at its current level, net of access spread. For the fourth quarter, steady state cash flow was $129 million.
I'll reiterate Jays comments on how pleased we were with the market reception to our senior notes issuance in January. As he pointed out, this transaction clears out our maturities through July 2023, providing us with a three and a half year liquidity runway, which is a very good position to be in. As you'd expect, we're monitoring the market closely as we analyze alternatives for the 2023 maturities, which we become callable in July of this year, the 2026 maturities, which become callable next year.
Tangible net worth assets was 11% at year-end. As Jay mentioned, we're managing the company toward a 15% or higher target. That's not a magic number, but rather reflects the capital planning process we've undertaken recently, which considered our current balance sheet and the results of our internal simulation and stress test models.
Until we get closer to that range, we will continue to prioritize retiring our senior notes and building liquidity over acquisitions. We believe that putting the strongest operating platform in the industry, on top of a very strong balance sheet is a good strategy that will result in a sustainable 12% or higher return on equity and a stock price at or above tangible book value.
So, with that, I'll turn it back to Ken for Q&A.
Thanks, Chris. I'm going to ask our operator to start the Q&A session.
Thank you, sir. [Operator Instructions]
Our first question comes from Bose George from KBW. Please go ahead.
Yeah. Good morning. So let me just start with one on servicing expenses. So, even if we add back that $19 million that today's called it looks like the run rate or [technical difficulty] would be $164 million, which is still down quite a bit from the third quarter. So, is that a good run rate number even you noted the servicing portfolio likely to stay flat in the 2020? If that’s the case [technical difficulty] …
I'm sorry, interrupt you Bose. We're having a hard time hearing you. Could you …
Sorry. Is that better?
Yes, it is.
Okay. Great. Yeah, I wanted to start with a question on servicing expenses, looking if you add back the $19 million that you called out, the run rate for that line item would be $154 million, which is still down from the third quarter. So, it's just -- wanted to get some color on how we should think about that line item going into next -- we've had a pretty good run rate.
I think you should think of the run rate for servicing to be at or about five basis points at a core. And it's going to vary off of that, depending on one-time items, which happens quite frequently. And amortization, which is really peaked last quarter. So, absent the one-time item, yeah, the number would have been down by a modest amount, because CPRs peaked over 19%.
And a more normal if you are looking at our servicing margin, over the last -- I don't know, eight quarters and excluded both the -- and I think we have a chart in the deck that we could go through with -- you if you were to exclude one-time items, and more -- and applied more normalized amortization, I think you'd see the number hanging in pretty steadily at about five basis points. So, I think that's a pretty good outlook.
Now we do have a number of one-time items that we're always working on. And that vary -- they very well could occur this quarter and for that matter every quarter this year, but I wouldn't -- I wouldn't want you to forecast them because the timing of them is very hard to estimate. Just like last quarter, we concluded a negotiation with a prior servicer for a portfolio he bought several years ago, and we've been working on that settlement for probably two years. So, the timing of when these things come to closure, and we booked the results, very hard to predict.
So, again, I go back to assume five basis points. And that number will vary depending on amortization. And those one-time items.
Yeah. And I think, Bose, if you look quarter-over-quarter amortization was a big part of the story. I think it was up $11 million or $12 million from third to fourth quarter. So, I think that would explain a big piece of that. And to Chris's point, five is a reasonable number. I think, we will have some one-time items. And candidly, from an operational standpoint, we're always looking for improvements as well, which could help that. And I think we've identified some that'll flow in throughout the year. So, I think that's how you should think about it.
Yeah. Okay. Great. Thanks. And then -- and so just on the reverse segment, what normalized expectation from there because that’s obviously seems to bounce around a little bit as well.
Yeah. I don't think we expect to see any contributions from reverse over the course of the year. The businesses are runoff. And in fact, it may be slightly negative as we are continuing to try to right size the overhead with the dwindling asset base. The variability that we mentioned is just -- that's just related to the purchase accounting that occurred when we did the WMIH merger. And as we mark the bonds, those marks accelerate or slowdown depending on interest rates.
So, you'll see a little bit of variability. But you should think of that as a business at all breakeven or maybe be slightly negative, possibly slightly positive. But as it's in runoff, I don't think that's going to change much for the next couple of years.
Okay. That helps. Thanks. And then one last one. Historically, you guys obviously were, I guess, negatively impacted by lower rates. Now you've grown with the mortgage bank quite a bit. How would you characterize your position? Are you -- would you say you're neutral to raise -- and just what are your thoughts there just given the rally we have seen rates?
I would say -- I'm not sure I can give you an exact answer there. Going forward, I'd say, if you look at what we did in -- over the last year, we weren't neutral in that -- our marks were higher than the operating profit that we generated out of our Origination segment. But that's really timing driven. Over the long haul, we expect our Origination segment to benefit from lower rates and to recover those marks and then some, but I'm not sure if -- I give you a definitive position on whether on for neutral or not, because I think you’re asking that within a very specific time period.
Yeah, I think, Bose, the way we think about it is, the mark is going to happen. If you have MSR mark, depending on where rates are at, it's going to happen at one point in time. And then the Origination business, obviously, is going to benefit from that for multiple quarters. And as Chris alluded, I mean, we're seeing an incredibly strong January and -- any origination business and we expect that to continue.
So, the way we think about it is, the mark is a -- it's kind of a one-time event and then over the coming quarters, you're going to recover that through the Origination business. It is $1 for $1, obviously, time will tell and timing associated with that. But that's how we're thinking about it.
I think long-term, if you look at the 1.1 million customers that are in the money, so to speak, if race stabilized clearly they're down this quarter. But if they were stable, and we had 1.1 million customers that we could refinance, we'd certainly make a lot of money for the foreseeable future.
Okay. That makes sense. And then my question was really the longer term, because I understand the timing difference. But, clearly, it looks like at what position to benefit longer term from the move …
Bose, I am sorry. We're having trouble hearing you again.
Okay. Sorry. My question was really the longer term benefit, because I understand the timing difference. But it does look like the rally rate should help you longer term, so that was the question. Thanks very much.
Yes. Yes. That's accurate.
Absolutely.
Thank you. Our next question comes from Doug Harter from Credit Suisse. Please go ahead.
Thanks. Just thinking about your tangible net worth to assets test, how do you think about the reverse business in that context? Kind of given that gross is up, the balance sheet, but now not really a recourse asset. I guess, how do you think about adjusting for that?
Well, we think you can adjust for it, we haven't. But we agree with you that that's a very, very low risk item, and probably needs less capital allocated against it. But we're setting this as long-term target as the reverse book runs off, that will help contribute to getting that target.
And I guess …
We agree with what your general premise, Doug.
Yeah, I think, Doug, we've always thought of that as kind of non-recourse should -- could be excluded. Our target is going to be total assets. But clearly, I think you're thinking about it correctly.
Right. Because obviously, if you exclude those assets today, you're already well above the fifth. So, I mean, I guess how quickly to those assets run off? And I guess, how should we -- how should we, I guess, think about that runoff and relief from that?
They were running off about 20% a year.
Yeah.
We expect that to continue.
Got it. And then, cash flow, you indicated that, that 23 notes are callable in July. I guess, how should we think about -- your thoughts on cash flow in the first half of the year until you have that callable event.
I think cash flow is stable and solid. I think, some of that will depend on what happens with rates and our origination channel between now and the middle of the year. But we feel very good about our opportunity to refinance the 23s at a very good rates.
Great. Thank you.
Thank you. Our next question comes from Mark Hammond from Bank of America. Please go ahead.
Thanks. Hi, Jay, Chris, and Ken. On slide eight, you have that -- it's helpful, the servicing cost per loan of $195 in 2019. If delinquencies doubled, what could that number be per loan?
I think I'd want to think about that rather than give you a number of top my head, Mark. But I don't have something right in front of me.
No problem. I can follow-up on that. And then, could you go into a bit more detail about why the 15% is the right number for tangible net worth to tangible assets as far as like -- what the stress test you did, implied and how you arrived at 15%?
I appreciate the question and our comments did say that that was result of our stress test. Our stress test really said we were in pretty good shape and that we would certainly survive a recession. But I think the -- the bigger picture is as the largest non-bank servicer and really trusted counterparty to Fannie and Freddie and to the government, we just feel holding more capital is prudent. And as a market leader, again, I think, it sound -- this may sound a little trite, but we feel we have the best operating platform in the industry, and putting that on an even stronger balance sheet, I think will signal to people this is really a strong company that can generate sustainable returns into the future. And at the end of the day, that is what's going to drive improvement in our stock prices. So, that's really the basis for us setting that target.
Got it. And then the last one. Just putting two and two [ph] together, so the discretionary steady state cash flow, which is helpful and great. If we put that together with your tangible net worth goal, you could paydown the 23s in two years with cash flow roughly, if continuing at that state and get to your 15% goal, at the base case, or as a refi or partial refi with a high yield issuance, more likely?
Well, because we've got the 23s and then the 26s is behind them, I think we look at them both as an opportunity. We do intend to continue to paydown debt. But if the market provides us an opportunity to smooth out on maturities and refinance that on an attractive rate, then we would take that. And we'll have more to say about that in the next couple of months.
Sure. Got it. Thanks, Jay, Chris, and Ken.
Thank you. Our next question comes from Kevin Barker from Piper Sandler. Please go ahead.
Good morning.
Good morning, Kevin.
So, this is a follow-up on Bose’s question about the run rate on the servicing expenses, it looks like the REO expenses a negative $20 million this quarter versus at positive $11 million and run rate of roughly $23 million year-to-date. Specifically around REO, what was -- what else impacted that besides the $19 million recovery and what's your expectation for the REO expense on a go-forward basis?
I'm not sure I can give you a forecast or reconciliation of that on the spot, Kevin. And 2019 was the biggest driver in that number, but it's okay with you -- follow-up with you offline and give you a full reconciliation of it.
Or should REO expense …?
And beyond that, I expect the line to be stable just because of credit trends are very muted. In fact, there are delinquencies are down so -- but I expect them -- that line to be stable for the rest of the year.
So you expect -- said that would be negative and negative …
Absent the recovery that we had in the quarter. But we will give you a reconciliation following the call.
Okay. And then, was there any trust collapses, like you've had in previous quarters coming through this quarter, as well?
We did not have a trust collapse.
Okay. And then your MSR mark was in line with most of the industry this quarter, nine basis points, give or take. And -- but the markdown throughout the year was less severe. It -- was there anything in particular within the portfolio that shifted throughout this year that would call it the MSR marks throughout the year to be less severe compared to most of the industry?
No. I think the answer would be, no.
Okay. And then regarding the FHFA’s new liquidity and capital requirements, do you expect any impact on how you manage the balance sheet whether it's additional lines of credit or sources of liquidity, or just in particular around the FHA which seemed a little bit more severe. Doesn't seem like there's anything in particular that stands out, just given your balance sheet. But …
No, I don't think there's anything particular. I’d say we -- long before these requirements came out in starting at the beginning of the year, we significantly expanded our EBO program. And I think you should expect that we'll be more active in buying out loans to manage -- just have a better financing answer to certain delinquent loans, but beyond that, there's no change.
And with regard to the FHA requirements, I think it's interesting they came out with them, but our own internal policies are actually requires to hold liquidity and cash at higher levels. So, there's no impact to our business. But I think it's an interesting announcement and be interesting to see if anything else follows that.
Okay. And then, on your UPB roll forward in the servicing portfolio from page 23 of the presentation, get a transfer to sub-servicing. Did you receive compensation for the move to sub-servicing? Or was that just part of some of the portfolios that you bought?
A transfer to sub-servicing -- I'm sorry -- would you …
$9.5 billion dollars worth of UPB, that was in that Ford owned servicing that was transferred to sub-servicing.
Yes. We sold a pool and our sub serving -- sub-servicing until the actual transfer.
Okay. Okay. Thank you taking the question.
Thank you. Our next question comes from Henry Coffey from Wedbush. Please go ahead.
Yes. Good morning. You gave us some sense of January and made some positive comments on unlikely margins. I'm assuming you've had a decent sense of what February is all about, as well. With the coronavirus, with the distraction from the election in the south and the Super Tuesday States, sort of et cetera. What does the housing mortgage equation look like from your perspective? Is it still as strong as it was before everyone started talking about coronas or --?
Yeah. No, I think we haven't seen any impact. Certainly, we're aware of everybody else's and watching the headlines and watching the market yesterday, but in terms of refinance activity, our pipelines remain very, very strong. Margin is very solid. And with the right move yesterday, we'll see what how that plays out in mortgage rates. So, it's too early to tell, but I think prior to that, we're already expecting the quarter to be very strong.
Yeah. You look Henry, lot -- even prior to yesterday, we were having locks at all times highs. I mean, we continue to have very, very strong days from our standpoint.
So the trend in February was quote, as good as January's, some version thereof.
Yes, yes.
And then in terms of where your customers are thinking, I mean, is it refinance, and there are people living -- breathing people out there that haven't figured out they can refinance their mortgage. Is it improving credit, where the people are finally able to take advantage of the rate? Is it purchase money? What's really driving the equation?
It's a combination, right? I think, it's still majority is rate term refinance here. There's people that are coming back again, there's people that never have refinance, there's some of its creditors. And we've always had a strong capability in cash out kind of debt consolidation piece as well, but that's probably 20% -- 30% of what we're doing today. So, it's a cross section of what's going on in the market.
I mean, as you know, appreciation has been very strong. So, you still are seeing a reasonable amount, called a third, that are doing the debt consolidation, cash out product. But the remainder is rate term. And those are folks that have never done a refinance in the past or coming back again.
It may surprise you that people haven't taken advantage of that opportunity yet. But again, we have 1.1 million customers, nearly 30% of our customer base could refinance today and save $200 a month. And that's not taking into account, people that could save even more through debt consolidation. So, there are still huge opportunity for people to cash in on this refi boom.
And was really –
I mean, origination theme [ph] is just farming, right? We made the investments. We didn't talk about that as much like last year, because we focused on tightened a lot in servicing, but we've made investments in the origination business, through the home advisor program that we've talked about, through our sales desk, which is a tool that allows all of our loan officers and home advisors to really work with the customer in a very efficient manner to give them in the right product. It gives them all the options they need, really at their fingertips. So, we're seeing -- that's resulted in really two things. One, it's reduced our cost originate by over $1,000 last year, and it also has resulted in just a more efficient, better customer experience. And frankly, we don't have to hire as many folks, because we just got the right tools.
Thank you very much. Good quarter.
Thank you.
Thank you, Henry.
Thank you. Our next question comes from Mark DeVries from Barclays. Please go ahead
Yeah. Thanks. I think, as you mentioned, your -- again, some margins are benefiting from capacity constraint across the industry. Can you just talk about what you're seeing from competitors in terms of adding capacity? Is everyone remaining relatively disciplined here? And just thoughts for implications in the intermediate term for the margin?
Well, we need you to go back to what we told you last quarter, it remains the same, that we expect the margin to normalize over the course of the year. We do see people adding capacity, and we expect them to continue to add capacity. So, eventually -- and sales margins will come in. It's just a matter of when, so we expected the margin to normalize more in the first quarter, and we haven't seen that.
So, we're not hoping for it. We are not. But we expect it. And beyond that, I wouldn't give you any more specific forecast. We actually expected to see normalization occur in the fourth quarter and it didn't happen.
It feels to me -- like I was with a few of our peers CEOs last week at a conference, and it does appear to me, at least on the non-bank side, I don't really have a great view into the banks, but there is more discipline this time around. I mean, folks are adding capacity. I mean, we're still adding capacity, but it's not -- it's not significant. And so it feels to me that to Chris's point, at some point, I'm sure there will be more capacity in place, but I do think people are definitely being more disciplined than we've seen in the past.
Okay. That's helpful. And it sounds like these new FHFA requirements for non-bank servicers isn't really going to impact you materially. But any thoughts on whether it could impact other non-banks servicers and, if so, could that create some opportunity for you guys to get active again, doing some bulk acquisitions?
I think it will impact some. And I think they run some analysis and across their servicing population, so they know the folks that it will impact. I don't think it's a significant number. But clearly, there's going to be a category that will be impacted. And will that present opportunity? I think our focus is -- like we've been saying, focus on the core. We think we've got the best operating platform out there. I think we've got a lot of momentum in the origination business. Lot of momentum in servicing business. We know we're going to take out -- we're still I think early to middle innings are taking cost out. So it's -- I want to focus, focus, focus on the core.
And if you think about what would be available in the marketplace, I don't know that -- it would have to be something pretty special, right? Some capability that we do not have. And I just don't know what that would be at this moment in time.
We got a long runway of opportunity and long runway on this -- on these strategic pillars. So, I'm pretty happy about where we're at and continuing to grow the profitability of the business and the return on the business.
Okay. Thank you.
Thank you. Our next question comes from Kevin Barker from Piper Sandler. Please go ahead.
Yeah. I just wanted to get an update so far this quarter on where your prepay speeds are coming in, given the moving rates. I know it's been pretty volatile here recently. But just trying to get a feel for prepay speeds versus the 18%, that was running in the fourth quarter.
We expected them to be modestly down this quarter, and they are modestly down. But they're still elevated. I don't have the exact number through the quarter, but I'll just leave it at that they're down modestly from where they were in the fourth quarter.
Okay. So, what the lock volume that you're projecting in January featured and mislead by correspondent or would that be due to consumer direct volumes driving just today, increasing volume.
It's -- that was quite a consumer direct -- very focused on the consumer direct piece. So, lock increases all consumer direct that I'm speaking …
Primarily.
Yeah.
Okay. Thank you.
Thank you. I'm showing no further questions in the queue. At this time, I would now like to turn the call over to Jay Bray, Chairman and CEO for closing remarks. Please go ahead.
Thank you. And thanks, guys for joining us, and we'll be available for questions later. Have a great day. Appreciate it.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.