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Rithm Capital Corp
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Good day, and welcome to the New Residential First Quarter 2020 Earnings Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Kaitlyn Mauritz with Investor Relations. Please go ahead, ma'am.
Thank you, Rocco, and good morning, everyone. I'd like to welcome you today to New Residential's First Quarter 2020 Earnings Call, and thank you for joining us. Joining me here today are Michael Nierenberg, our Chairman, CEO and President; Nick Santoro, our Chief Financial Officer; and Jack Navarro, President and CEO of the Servicing division of NewRez. Throughout the call this morning, we are going to reference the earnings supplement that was posted to the New Residential website this morning. If you have not already done so, I'd encourage you to download the presentation now.
Before I turn the call over to Michael, I'd like to point out that certain statements today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I encourage you to review the disclaimers and our press release and earnings supplement, regarding forward-looking statements and review of risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we'll be discussing some non-GAAP financial measures during today's call. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings supplement.
And with that, I'll turn the call over to Michael.
Thanks, Kait. Thanks to everyone, for joining us this morning. Our earnings today are truly a tale of 2 quarters. As we entered March, we were on target for a great quarter, core earnings were slated to be $0.65. Book value was modestly lower despite the fall we saw in rates and overall liquidity for the company was in very good shape. Then came COVID-19. The past 6 to 8 weeks have been some of the toughest markets many of us have seen in our careers. I mean, it's been very challenging, as everybody knows.
For our own portfolio, just to give you a little bit of a refresher, we were always long MSRs. We owned MSRs. We had non-agency bonds and loans against that as a hedge as well as some agency securities. What happened was the correlated hedging strategies after the world shut down, broke down on everything. We saw all asset classes fall in price. And what happened is this created liquidity issues, not only for mortgage REITs, quite frankly, but even long-only investors as falling prices caused redemptions, which put extreme pressure on the system.
So what did we do? We went out and said, okay, we got to take action. We sold $27.9 billion of assets. We raised liquidity. We paid down debt, and we extended our lending facilities while we're reducing our overall short-term repo agreements. Overall leverage got reduced to 1.5x to 1.7x. We reduced our bond positions by 85%. We reduced our loan positions by 45%. And today, our loan and bond positions are at the lowest levels we've had in years. From a balance sheet perspective, we reduced our overall balance sheet by over 60% since the end of 2019.
We increased liquidity. And today, our cash position is significantly higher, while our balance sheet is a fraction of what it was. Our cash position as of 4/30 was $517 million with unencumbered assets just under $400 million. Our mortgage company, which continue -- and which continued and still continues to support homeowners through this difficult period, work with borrowers on forbearance programs and agreements to help alleviate the hardship caused by COVID-19. We're really proud of the hard work that the company has done in light of these difficult circumstances.
In our origination business, as prices fell on non-QM and prime jumbo loans, we stopped originating all non-agency products. Our focus today and going forward in the near-term will be on Fannie Mae, Freddie Mac and Ginnie Mae loans. We will continue to provide credit to homeowners and focus on supporting our customers while increasing our borrower retention efforts. On the ancillary business side, Covius, Avenue 365, eStreet and Guardian continue to support our origination and servicing business. We expect to see growth in those divisions as we enter into a more normalized state as we go forward.
Our advance business. We've increased our advance capacity and commitments by $1.8 billion, raising our total financing lines to $5.25 billion, which we believe gives us plenty of capacity to fund advances as we go forward. Keep in mind, in 2015, we had over $11 billion of advance capacity. And at that time, we were funding $8 billion of advances. Our team has a ton of experience in this business, and we're highly confident in our ability to deal with higher advances. In some of the government programs that have been rolled out, the Ginnie Mae PTAP program helps to support the mortgage servicing community by providing financing up to 100% for principal and interest. That is a good thing for mortgage servicers to the extent that you wanted to use it. FHFA recently announced that servicer obligations will be capped at 4 months during the forbearance period for P&I, again, another positive development. As we go forward, we'll maintain discipline, focus on assets which are low leveraged, term financed as well as serviced by our NewRez and Shellpoint Partners. We'll maintain higher levels of liquidity than you've seen in the past, while focused on our operating business and opportunistic investments that we see. We look forward to growing our book value once again and providing terrific investment returns for our shareholders.
Finally, I want to wish everybody well and a big thanks to our team for all their hard work during these difficult times. Because I will tell you that we've been working 24/7 to do all we can to get back to where we believe we should be.
With that, I'm going to refer to the supplement, which has been posted online, and I will begin with Page 4, actually. We're going to go right to our company 2Q -- Q1 company and financial highlights. For the quarter, we had a GAAP net loss of $1.6 billion or $3.86 per diluted share. This includes mark-to-market an impairment of $2.24 and realized losses of $1.92. Our core earnings were $198.4 million or $0.48 per diluted share. First quarter common stock dividend of $0.05 per common share, which correlated to a 4% dividend yield as of March 31, 2020. Cash on hand as of March 31 was $360 million. I just alluded to the fact that today -- or as of 4/30, we had $517 million of cash, again, building up our liquidity positions. Unencumbered assets we're $390 million. Our net equity as of 3/31 is $5.2 billion. Book value -- book value per common share as of 3/31 was $10.71. Our book value during the quarter decreased by about 34% from $16.21 to, again, $10.71 from December to the end of March.
Page 5. Going back to my earlier comments, this really was a tale of 2 quarters for us. Prior to the 13th of March, we were on track for a great quarter. Core earnings were slated to be $0.65. Our book value is between $15.72 and $15.89. Our mortgage company was going to make between $125 million and $150 million. Origination volumes, $12 billion, and our overall leverage was 3.5x. As we fast forward, and you can see the impact, what -- as a result of COVID, we lost $0.17 in core earnings. Our book value went down by $5 as we had some large sales of assets, our origination and servicing income went down by $67 million and our origination volumes tailed off a drop as we pulled in the reins. Overall reduction in leverage, 1.7x as a total company through 3/31.
Page 6. As we put this slide in last time, and I just want to illustrate what we think a theoretical book value could be for us as we think about the growth in our operating business, and if you go to the left side of the page, if our operating businesses make -- and let's take the low end $300 million, and we say those companies traded a 5 P/E, that would create enterprise value of $1.5 billion. Our current book equity on our operating businesses are about $400 million, off-balance sheet value of $1.1 billion, which would create an extra $2.73 per diluted share or an implied book value of $13.44.
So if you look to the right side of the page, you could see on balance sheet value, $4.5 billion, and the total would be something around, give or take, $6 billion. So again, I just want to illustrate what we think the value of our operating companies could be as we go forward.
Page 7. As we adapted to COVID and the macro environment, we sold $27.9 billion of assets through the end of April, reducing our investment portfolio to $12.7 billion. We reduced our mark-to-market exposure dramatically. We reduced our total leverage in our investment portfolio to 1.5x and that's down from 3.5x. When you look to the right side of this slide, we executed on our liquidity plan. Cash on hand now, again, $517 million and as we pointed out earlier, we added financing capacity of $1.8 billion in our advance business.
Page 8. As we reposition the company today and we think about the go forward, again, we sold $27.9 billion of securities that includes non-agency securities, agency securities and loans. Our mark-to-market, once again, has been decreased dramatically. We reduced our repo exposure, and even in the height of the crisis, we priced a $450 million seasoned non-agency deal.
If you look to the right side of the page, our go-forward, we expect by the end of May, that 75% of our non-agency loans and securities will be more term financed with limited or no mark-to-market exposure. Our investment strategies going forward will be driven by term financing solutions and focus on assets which are truly complementary to our origination and servicing businesses. And 85% -- today, 85% of our loans and securities are currently serviced by either NewRez or Shellpoint.
Page 9 is our typical call rights slide. I'm not going to spend a lot of time on this. Today, we continue to control $80 billion of call rights. If we recall, we announced during Q1 that we made a large sale of non-agency securities included in that were roughly $17 billion of call rights, and we'll continue to work with our partners on not only the $80 billion, but also the $17 billion that was sold during the quarter.
Servicer advances, Page 10. Our team has an unparalleled experience in managing large portfolios of advance balances. Advances are one of the highest quality assets you can get in the mortgage market. They are at the top of the waterfall. Since 2015, we have recovered 100% of the advances on our portfolio. Following the acquisition of HLSS in 2015, we had peak advance balances of $8.7 billion, and that was funded with over $11 billion of debt. Since then, we have successfully managed these balances down through servicing and term financing. We've completed 15 advance securitizations for $6.1 billion, and we believe by working with our servicers not only Shellpoint and NewRez, but other servicers, Cooper and Ocwen and others, we'll continue to manage these balances down. And as you can see on the bottom part of this slide, you can see the $8.7 billion going to $3.5 billion today.
Page 11. We brought the slide back out. Servicer advance balances today are $3.5 billion, that's down from $3.8 billion in -- at the end of 2019 that's financed with $3 billion of debt, $1.9 billion of which is in the capital markets. The LTV of 86% includes a no advancing on -- or no advance facilities on Ginnie Mae's at this time, but we expect that to come online, and I'll talk to that in a little bit. Our advance balances as of March 2020 are 11% Fannie and Freddie, 3% Ginnie and 86% PLS. Again, the Ginnie advances are not financed on any lines. After March 31, I pointed out earlier, we increased our advance capacity by $1.8 billion, and we've extended some of our maturities deal.
Page 12. Total advance capacity, $5.25 billion. A couple of things to point out on this slide. We're currently working with Ginnie Mae on some advance financing, which will result in an extra $75 million to $100 million of additional liquidity. And in the stress case, that would create an extra $300 million to $350 million. We expect this advance financing to come online, hopefully, in the next 30 to 60 days. Today, based on the new Ginnie programs, as I pointed out earlier, Ginnie provides 100% financing on P&I for loans in forbearance. And on FHA, they announced last week that they're going to limit servicer obligations to advance P&I to 4 months while the loans are in forbearance.
A couple of things to point out here that I think are very important. In a base case scenario, we project that we will only need an extra $120 million in equity to fund servicer advances. In a stress case scenario that goes out many, many months, we believe that the amount could increase to $390 million.
Page 13, our MSR business. MSR is one of the few fixed income assets that will rise in value when interest rates rise. To talk to that, when you look at -- when you think about yesterday's announcement from the Fed and treasury that they're going to issue $3 trillion of debt this quarter. We do believe with rates at historical lows, that it is a great time to think about MSR investments. We have -- obviously, we have a large portfolio there. We took a reasonably large size markdown in the quarter as a result of our faster long-term speed projections and wider discount rates as well as some higher delinquencies. On the right, when we think about our MSR strategy, we continue to work on recapture. That is a very, very big thing. We're working on recapture with Cooper. We're working on recapture with NewRez, and we have some subservicing agreements where we are the -- where we are going to be lead generators and work on recapture with them. We have a lot of upside there from current levels. As you think about the current market, roughly 70% of the market today is a refi market. Our recapture percentages on refi should be significantly higher than that on a new purchase loan in the market.
Page 14, why are we different? On the left side of the page, a couple of things to point out. One, on our MSR financing. 50% of our MSR financing is in capital markets term notes, limited mark-to-market exposure. The other 47% is on bank -- with banks and variable funding notes with, again, limited mark-to-market exposure. So really nice term structures. We continue to work with our banks on extending some of those facilities. The bottom part of the page, I think, really what differentiates our MSRs from the industry. Our average loan size is $140,000 versus an industry of $212,000. We have very seasoned loans and more credit impaired loans in the industry, 81-month season versus 39. Our FICOs are 719 versus 748, and the refinancing population, we think, is, give or take, about 30%. One other thing to point out today is when you think about the credit box with virtually no non-QM origination today, the jumbo market pulling back, banks-- a couple of the large money center banks announcing that they're getting out of the origination business around HELOCs. I do think the credit box is tightening. What does that mean? Obviously, we'll be there to provide credit for our customers. But what I do believe it's going to mean at slower speeds as we go forward.
Page 15, our mortgage origination and servicing business that is under the brand of NewRez as well as Shellpoint. The origination business today is well capitalized, and the margins in the origination business are some of the widest margins we've seen in years. As I pointed out, we shifted our production to just Fannie, Freddie and Ginnie loans. We've exited non agency and non-QM, and our multichannel approach provides flexibility so we can take advantage of various rate environments. Most importantly, we continue to focus on helping homeowners navigate through this crisis.
We -- our experience in special servicing, I believe, is second to none. We continue to work with homeowners. We continue to implement new forbearance programs, and we continue to work on creating digital functionality in our online portals to educate and help homeowners. Finally, during the quarter, we had a very good profit, as I pointed, of $90 million. That is down from $150 million. We think that the run rate there will be significantly higher. Today, 95% of our employees are working from home and doing a great job. And we're currently in the process of adding another 500 jobs as we navigate through this crisis.
Page 16, just a couple of quick things here. One is we estimate production to be something between $40 billion and $50 billion for 2020. And as I pointed out earlier, a gain on sale margins are at some of the recent wides that we've seen in a long time.
Page 17. When we think about the direct-to-consumer origination business, this is where we're going to be spending a lot of time and continue to add resources. We need to be better at recapture. We think we will be better at recapture. This channel is going to help us do that. And we're very excited to see the growth here. If you look at the end of Q3, we had $1.2 billion of quarterly funding. We expect by the end of Q3, we're going to be at $4.6 billion. A lot of that is going to be around our recapture business.
Page 18. I do think we have a best-in-class servicing operation. We have Jack Navarro, who runs that business. Who's on the phone. Him and his team do a fabulous job. Keep in mind, again, 95% of our employees are working from home and -- in this very difficult environment and doing a great job working with homeowners to provide comfort and get them through these difficult times. Our pretax net income for the quarter was $30 million, and we estimate our servicing portfolio to be something between $300 billion and $300 (sic) [ $330 billion ] at year-end. On the special servicing side, this is something we're very proud of. We have 40 different -- over 40 different institutional clients. This includes the GSEs. This includes the money center banks. This includes whole loan investors. Jack and his team are very well-regarded in the industry. Again, they do a great job. As delinquencies rise, SMS is well positioned to work with customers through its special servicing expertise. We work closely with FHFA, Ginnie Mae and other regulators to provide positive outcomes for borrowers that have been affected by COVID-19 and quite frankly, even before COVID-19. We've implemented online digital tools to support our forbearance requests, and we continue to expand capacity as we manage post forbearance solutions.
Couple of more slides. On Page 20, just a quick update on COVID and how we think about forbearance. As of April 30, 2020, 200,000 borrowers in our portfolios have been granted forbearance. Of those 200,000 borrowers, 60% that were current in March have made their April payment and are still current. And of all the loans, 7% of all the borrowers in our portfolio were granted forbearance through April, 2020.
On the ancillary service business, I alluded to this before. I'm not going to spend a lot of time on it. As you may recall from prior earnings calls, we have an investment in Covius. That's run by Rob Clements and John Surface. And basically, it's an origination and servicing solution company that provides all kinds of different services to our mortgage company as well as third-party mortgage companies. We have a title and appraisal business. And then we own a company called Guardian, which does field services and provides property press and REO management services to banks and servicers.
Finally, Page 22, our focus. I think the one thing to take out of this is we want to get back to where we were before. We want to grow -- get our book value back to our $16 or $17. I gave you an illustration before why we think that our book value is understated we'll continue to do anything and all we can to protect and grow book value. A couple of other things. The bond portfolio, the loan portfolio in this environment will remain much smaller. We're going to be opportunistic where we can, and risk management remains job number one. With that, I'll turn it back to the operator, and we could open up the line for questions.
[Operator Instructions]
Today's first question comes from Tim Hayes with B. Riley FBR.
My first question, before the pandemic hit, you were already in the process of transitioning to more of an operating company versus a REIT portfolio. And you highlighted the ancillary services on Page 21 there, and most of them are performing better in this type of environment. Just given the disruption in the portfolio transformation that went through in the first quarter, does this maybe accelerate your time line or increase your interest to maybe internalize some of these companies? And further bolster kind of the operating platform at NRZ?
Yes. We've been pretty vocal the past couple of quarters of how important the operating business is to our company, not only to grow the operating business, but really to support the portfolio. The retention part of our portfolio is something that's very important to us when you think about the mortgage servicing and origination business. And if you recall, when we first acquired Shellpoint or New Penn back in -- back last year, that was a pretty strategic acquisition for a number of reasons. One is obviously, to grow earnings but two is to make sure that we continue to increase our portfolio retention capabilities. Then the other thing, quite frankly, in the operating business will trade higher than just atypical asset value. So I think -- I don't know if it's going to accelerate. Clearly, the 2 weeks in March were absolutely horrific for us. We needed to access. The team did a good job. I hate to lose money. We hate to lose money, but we thought it was something that we needed to do at that point to create more liquidity for our company. So I think the go-forward is going to be continued focus on operating business. There will be opportunistic investments. I don't know what the next 6 or 12 months are going to bring for us. I will tell you that we'll have more liquidity, maintain a smaller investment portfolio. And again, I do think we're going to have some good results in our operating business. The long-winded answer is probably yes.
Got it. Okay. And then just kind of piggybacking on that. You've done a lot clearly to deleverage at this point and have a lot more liquidity on hand relative to the size of your portfolio than you generally do. So just curious how you prioritize maintaining liquidity here versus putting capital to work or further deleveraging and/or buybacks at current levels?
I would say buybacks, I can't really comment. That's kind of a board decision just like the dividend stuff will be board decision as we go forward. I think having more capital today is essential. We're not just going to go out and go back and reinvest in any kind of non-agency bonds, even though our leverage, as we pointed out, was extremely modest. You can see what happens when the markets get into this free fall and it just crushed us. So we're going to have more liquidity than we probably ever had before. We want to navigate through this. We do think that, again, there'll be opportunities. I think our history has demonstrated our ability to be opportunistic in nature. And we're going to grow and get back to where we belong and hopefully grow book value and create great returns for shareholders.
And I guess just maybe specifying that a little bit more. Do you feel that you need to further deleverage at this point? Or is that a top priority? Or do you feel that the balance sheet is at a good spot right now, and you'd rather kind of just hoard cash rather than deleverage given where your multiples are at now.
Yes. I think what you'll see in our kind of our short-term financing books, those books will be probably give or take, $1 billion to $1.5 billion by the end of May, maybe into early June. When you think about just real repo exposure, that is down significantly. From a deleveraging standpoint, our portfolios continue to get smaller and the team, even today and every day, we're working on terming out as much of our financing as we possibly can. In doing that, obviously, you have limited to no mark-to-market exposure. So from a leveraging standpoint, when I point out our leverage at 1.5x, I don't know that there's any other companies or very few companies that have leverage like we do. And if we can continue to generate good operating earnings, I think we'll be back to where we belong in the near future.
Got it. That's helpful. And then my last question, just if you could provide a little bit more context around the capital needs that you highlighted in your base and stress scenario of like $120 million to $390 million. Does that -- for the advances, does that assume that or does that have any implied assumption that you're able to securitize your agency advances? Or does that assume you can't do that? And this is just based on your available capacity on facilities? And is there any implied assumption that you'd be capping the PTAP facility or that you do secure the Ginnie facility you talked about? Just any more context around that would be helpful.
Yes. These are just equity numbers. As I pointed out earlier, we have $5.25 billion of total debt available to us on the advance lines. This is just an equity component to the extent that we're able to improve financing rates or -- and do more term, which will happen over time, right? When we get back into the capital markets, I did point out in the height of all this, we did a $450 million non-agency securitization. So I would expect the advance markets for securitization to come back over time. But these are just equity numbers in a downside scenario as we go forward. And the question is, I think, for all of us, quite frankly, how long we stay in this state where people are not working and you see more and more jobless claims. So we are expecting the worst over time. And I think the numbers to the extent that they get better, I think it's only going to be a positive from a capital perspective from where we are.
And our next question today comes from Bose George of KBW.
First, I wanted to just ask about the credit cost -- the credit assets. Would you continue to sell that [ proportion ] if you're able to? And just can you comment on that, sort of the outlook for doing that?
Yes. I think the loan -- and first of all, on the credit book, we have a lot of investment-grade securities left there. It's relatively small. It's -- I think it's, give or take, a couple of billion dollars. As we go forward, I think we feel very comfortable with where we are on that book. It's down dramatically from where it was. And keep in mind, our strategy of having non-agency bonds where we own call rights that was hedging or MSRs. Again, going back to my earlier remarks that broke down. In that week in March, agency mortgages got crushed. Bonds got crushed, loans got crushed, MSRs got crushed. All that created liquidity needs for us and, I think, the broader market, quite frankly. We're not going to get back into a position where we're buying a lot of bonds with repo. We just can't do it. I think we're comfortable with the size of that book. There's some AAA IOs, for example, there. I do think, as I pointed out with the Fed announcing -- the government announcing that they're going to issue $3 trillion of government bonds. There'll be huge needs for the government to issue debt in these markets. And I think for us, as a result, I like the way that we're positioned. I think the bond book is small. On the loan side, again, that book will be something, give or take, $2 billion-ish. And I think both of those could come down over time. The one thing to point out there is our realized loss for the quarter in selling assets, I think, was $1.92. There's a bunch of -- a large number away from that, in that $3.86 number were truly mark-to-market. To the extent the markets recover, I do believe we can see that come back because when you look at marks and you look at where our asset yields are today, they're, give or take, 6% to 8% unlevered in a COVID scenario. When I think about that, the asset returns are very attractive. While saying that, they need to be term financed. So we don't get into a mark-to-market issue as we go forward. So I think we're comfortable overall with the size of the portfolio.
Okay. Great. That's helpful. And then actually switching to the servicer advance. The slide you showed where you showed the stress days delinquencies that you could get to. Is that sort of assumed either forbearances or delinquencies? And is that across all the 3, the Fannie, Ginnie, PLS buckets?
Yes. Well, the second part of your question is across all of our buckets. The stress scenario, we run this out six-plus months, and I think the delinquency numbers or the forbearance numbers go to like 30 -- the delinquency numbers go to like 30%, 30 days or something like that. So the numbers go up substantially. And I think in those stress case scenario that's why we wanted to illustrate the amount of potential equity that we would need to do that. And again, we feel that's extremely manageable for our company.
Okay. Yes, that makes sense. And actually, a lot of the -- are prepayments playing a big part as well in terms of offsetting the advanced needs during those periods, just given that prepays are high right now?
Yes. I mean, we're running -- we do think over time, obviously, as delinquencies tick up, I do think with the credit box, tighter that you're going to see slower speeds. And I think -- and to the extent that you don't, and we're good at our direct-to-consumer vertical and originations remain robust. We think that we're going to be in a very good place. Should speeds get fast, as you pointed out, Bose, that creates less needs on the advance side as you get more principal back in. So we'll have -- it's like a catch-22. If speeds are fast, you have more money to fund your advances. If speeds are slow, the value of our assets go up pretty dramatically. So that's a good point.
Yes. That makes sense. And then just one last one. Since quarter end, has there been much change in the book value?
No. No. I mean, I would argue that prices, in general, are much more stable. We've had a number of our REITs and other folks that got liquidated during the quarter. Today, I do think that asset prices are more stable than where they've been in a long time, if not higher. And our book value is, I think, it's something consistent with where we were.
And our next question today comes from Giuliano Bologna with BTIG.
And well, I guess, well, it's unfortunate that the book value is down. It's great to see some performance on the operating business side. I guess expanding a little bit more on the operating side, you guys put out the $45 billion origination volume estimate. Is there a good way to think about what kind of margin you can generate? Obviously, you're at 120 bps in April, which is great. Is there any visibility kind of going forward on the margin side there?
Margins today, I'm trying to find one of my sheets, are as wide as we've seen in a long, long time. And I think as we go forward, I do think they'll compress, quite frankly, but I think for right now, the gain on sale margins in all channels are extremely robust, and we'll continue to focus on that. I can't -- I'd love to tell you where I think they're going to go. I think if we get into a normalized state and people are back at work, I think margins could come in quite a bit. But for now, the gain on sale margins are extremely attractive.
That makes a lot of sense. And kind of a little bit 2-part follow-up. When I was thinking about the servicing side of the business, you obviously have a Shellpoint, which has -- probably has an enormous opportunity going forward on the specialty subservicing side of the world. And you also have a fair amount of loans that are serviced internally. I guess, is there any sense of what kind of operating earnings or benefit you can generate with Shellpoint? And then, I guess, the part 2 would be, is there a sense of how many or what number of loans that are in forbearance you're currently servicing and have an opportunity to generate some performance fees from modifying or doing things of that nature going forward?
Well, why don't I have -- hey, Jack, you want to jump in on this?
Sure, I'd be happy to. So a couple of different questions you asked. First of all, great to be with you guys this morning. On the forbearance side, Fannie and Freddie are currently planning for a program where we would get paid a $500 incentive fee for forbearances. So that will certainly benefit us as we work through the long-term solutions with these forbearances. But it will also have significant increased costs. So while I think it's a positive, it's -- the jury is out on exactly how much of a positive on our -- in our -- inside our self-service platform today, we've done 140,000 forbearances. So it's pretty easy to do the math. Although it's important to note that 60% of those people paid in April and about -- so far that trend is continuing for May. So again, if you're doing the math on the potential incentive fees, you need to sort of look at the number of people that are paying. What was the other question you asked about the servicer?
The other one was more so on the specialty side with Shellpoint. Is there an opportunity to expand that business in the near term? Obviously, as things are getting a little bit more volatile in the market. And is there anything that you can do in terms of earnings or generate more on that part of the business.
Yes. Yes, there definitely is. If you were to look at our margins today that are published for the first quarter and for the end of last year, you would see that our margins are higher than a typical servicer, somewhere in the 20-plus percent range, up to 30%. I think we'll see a little downturn in that -- in the second quarter, just as the nature of the increased volume and the increased cost. And I think you'll see us sort of return to those margins in the third and fourth. And maybe even a little bit better. I think the issue for us right now is 100% focused on the homeowner and the existing clients. And how can we help these homeowners through their sort of difficult times. We know at the end of the day that's the key. So when we service for the GSEs, which we do directly on the special servicing side, they're looking for us to make sure we take care of those homeowners, which is our first priority. In terms of the expansion of the business, there's definitely an opportunity. Our first priority is the existing portfolio. Second is the needs of the existing clients. But we've had a lot of inquiries, both from the existing clients as well as new clients for how much capacity do we have and how much we could do. We're going to be really -- again, we're going to prioritize the existing clients, and we're going to be really thoughtful about the expansion of the business, but there's definitely an opportunity to expand.
And our next question today comes from Stephen Laws with Raymond James.
Mike, a couple of follow-ups and a couple of other questions. So first, I want to follow-up on the balance sheet. I think it's down 61% end of April versus year-end. So that puts at about $6.50 billion to $7 billion of sales or decrease in April. Do you think that's where it needs to be? Do you expect more of a decline in May? Kind of where do you expect the trough or bottom to be from a portfolio size? Or maybe the other way is, just do you feel comfortable with the current size? Or do you feel like you need to keep getting smaller?
Our goal and what I tried to convey earlier is to make sure that we term or extend maturities on our financing lines as much as possible. So while you may pay a little bit more from a term financing perspective, it eliminates or reduces your mark-to-market exposure. Our overall leverage, again, is 1.5x, 1.5x to 1.7x. If you include the mortgage company, we will continue to run a very, very low leveraged business. I think we're comfortable with our portfolio size now. I did point out that we did have a realized loss of $1.92 I think the number was, per diluted share. And I think our ability to get back some of the money that we lost in mark-to-market could be pretty significant. So if you think about it, if we lost, give or take, I'll use a round number $4 per diluted share and half of that, let's say, was from actual sales. If we term out our assets and they're yielding 6% to 8% in a COVID scenario, I could see, based on a 0% interest rate, which is kind of where we are in the marketplace that we could see a recovery of -- I don't know if we're going to see recovery of $2, but 8 weeks ago, that $2 was in book value. So overall portfolio size, we're comfortable with. Term financing continues with the hard work that's going on with our team and our counterparties, whether it be the banks or insurance companies we're working with. So we're comfortable where we are.
Great. To touch on the origination, $45 billion was mentioned as the new goal. And I think the layout of Page 13 has changed slightly. So the -- I haven't looked in the Q yet, I apologize, but agency and government. Can you reference that government category? I think in the new deck, you talked about continuing to do agencies but not non-QM and nonagency. Government loans, which side does that fall in? Does that fall into the agency bucket? Or how do we think about that looking at your historical origination by product over time charts?
Yes. We are a Fannie, Freddie, Ginnie originator right now. What we saw in the -- as a result of the downward pressure on asset prices, we saw non-QM loans go down 10 to 15 points, and you can't originate a loan at par and sell it at $90. That math doesn't work. So we are out of that space at this point. So you'll see Fannie, Freddie and Ginnie origination. As Jack pointed out, we'll focus on our existing portfolios. We're focused on recapture, and that's where we're going to -- and the direct-to-consumer channel. And that's where we think we're going to get some lift. Be a great service provider to customers. And hopefully, if origination margins remain where they are, we should have a good quarter and see further growth in our operating business.
Yes. And to follow-up on that, and I don't need specifics, but maybe general commentary on the assumptions behind that forecast. I know some entities, the MBA (sic) [ MBS ] for one, is their forecast includes unemployment staying in single digits and the treasury mortgage -- mortgage treasury spread back to February levels by the third quarter, which certainly could be optimistic. What type of assumptions are underlying this $45 billion? I was a little surprised that guidance wasn't down from $50 billion by more than it was. I know you mentioned a range, I think, of $40 billion to $50 billion. So $45 billion is a midpoint. But can you give us a little bit of the assumptions you have for the agency mortgage market that underlie that forecast?
I think as we turn back on certain channels, wholesale, we grow our direct-to-consumer possibly doing a little bit more in correspondence as long as margins are there. That's why we feel pretty confident in our ability to do $45 billion. It's a projection, though. I mean, just to be honest, I mean, could it be $60 billion? Could it be $35 billion or $40 billion? It's -- to me, it's not about the number. It's not about the absolute number, it's about making money for shareholders and supporting the homeowner. So I do feel pretty good about the $45 billion. But again, it is a projection. That projection comes from our mortgage company. Our mortgage company currently has, give or take, 4,200 people. As I pointed out earlier, we are hiring another 500 people right now. So we feel good about it. But again, it's -- and Stephen, it's just purely a projection.
Sure. And along with that, can you talk about approval times? I mean, one -- from hearing a lot of commentary, I know we saw some extensions in loans during the COVID. But going forward, a lot of agency applications, especially refi are largely automated. Can you talk about what the pipeline or the -- how much it's going to linked in if a borrower that used to be kind of instant auto approval now had to go on unemployment for 6 weeks due to COVID or has some COVID impact that was very unique and short-term and they go back, but now they've got a blip in their credit history. Does that get kicked out of your system? If so, how will those types of applications be handled? And what type of lengthening should we expect to see in closing of a loan?
Bruce Williams is on as well. Bruce, I don't know if you have an answer to that or if we want to come back to that.
No, Mike, thank you. Good morning, everyone. Yes. Basically, there has been a whole set of, what I'll call them, redo of all the process. So really, what we're originating now, very close to closing we have a process in place that basically people attest to that they are not thinking about going to go into forbearance. So the quality, as Michael indicated, of the loan origination process has improved dramatically and you're right that basically, if we -- we're multichannel, each of the channels are different. But effectively, with kind of the online ability, retention, and all of that, we don't expect time lines to increase dramatically. Things are turning. It's surprising, but things are turning over relatively quickly.
Right. I appreciate that color. And lastly for me, Michael, the operating businesses, it's a lot of different ancillary services that are provided across your suite of investment companies, I guess, or across your platform. Which of those currently are the most impacted? I mean, have you been able to move inspections and things of that to virtual? Do you have issues with title verification or any type of access to government buildings where employees still may not be back at work? How do we think about the different pieces of those -- the different services that are being dramatically impacted and kind of how the time line of when those may get back to normal, which branded maybe a county by county situation?
Here's the way I would think about it. Covius is, as I pointed out earlier, we have an investment in Covius. They are truly a third-party to us and everybody else. Yes, everybody has limitations on their business right now as everybody is still working from home or wherever everybody is. When you think about title and appraisal, I don't think there's issues around title. I think the appraisal stuff is something when intuitively, if you take a step back, are people going into other folks' homes to appraise something? And I think the answer is probably not. So I think all these businesses are impacted. I think as a result, you will see until we get back to a quasinormal state, I think all these business lines will be impacted. The one thing I do want to emphasize is the actual contribution from these businesses to our overall earnings is very, very small at this point. Covius is a sealed box. Those earnings stay in that system. So it's just really the value of that asset. Title and appraisal as we do loans, it's good to have a captive title and appraisal company. And on the field services side, the preservation of properties, keeping people in their homes. I think that business will continue to grow, and the folks at Guardian do a great job there.
And our next question today comes from Trevor Cranston with JMP Securities.
A couple of more questions on the servicer advances. I guess the first one, can you help us think about how you guys are sort of forming your expectations around what the time line is going to be in terms of when you might ultimately recover advances after the forbearance period ends? And then second question on the financing you have in place. So I was curious, particularly like on the capacity you've added since the end of March, are there any material differences in terms of the terms of the financing you've been able to add in the sense of LTV or for the cost of the financing?
Sure. Andrew, you want to take this one?
Sure. This is Andrew. Nice to speak with you. So the first question regarding when we're able to recover the servicing advances after the deferment. We've been in dialogue with the GSEs, and there is some discussion about putting into place deferment program, which would enable us to recover our advances shortly or immediately after the forbearance program ends. So our expectation is that across the vast majority of our portfolio, we should be able to pretty quickly recover the outstanding advances and have that balance normalize as borrowers come off the forbearance programs. In terms of the cost of the servicing advance financing, yes, there has been an incremental increase in the cost of servicing -- this additional servicing advance financing. But we think that it's prudent and a worthwhile expense to put that in place so that we have more than sufficient advanced capacity across a range of scenarios.
And then, I guess, just a follow-up on that. Advance rates are, give or take, 90% to 95% and the cost of funds is I believe it's about LIBOR plus 2.75%. Is that right, Andrew?
Yes, that's correct.
Yes.
Okay. Great. That's helpful. And then in terms of servicing expense, I think you mentioned that it's reasonable to expect that the costs are going to go up to service near-term in light of everything you're dealing within the MSR portfolio. Can you just help us think about what to expect in terms of the servicing expense line item for the next couple of quarters? And how much it might increase versus the first quarter?
Jack?
Yes. The easiest way to think about servicing expenses is really in 2 ways. One is mix. So how many more delinquent loans do we have, and those are obviously more expensive to service. And so we think them just as a result of forbearances and natural increases in delinquency, we're going to see the mix change. We've had a really terrific track record inside this -- the owned servicing business at reducing costs by about 37% year-over-year in the -- as of the first quarter of this year. So we're down to direct cost of service on a current loan below $6, which is really -- has been a feat of technology and people, and really thanks to the team. The other factor is how much cost goes into servicing each loan. And the mix is an issue. The cost of servicing each loan is really all about the fact that on the performing side, we've got to talk to more borrowers. We've got to interact with more borrowers. And on the delinquent side, we've got to talk to more borrowers and interact with more borrowers.
Certainly, the first 2 to 4 weeks of this whole event was a very difficult time for the servicer and the call centers. And that was partially driven by the fact that many of these forbearance situations were from new borrowers to the delinquent process. So borrowers who have been current all of their lives and expected to be current all their lives were faced with this crisis. And we really had people who wanted to write us, e-mail us, call us and it kind of overwhelm the call centers in the short term. We mostly corrected that. We still have some high call rates in -- on the loss mid side, but most of the customer service side is sort of back to normal.
And so those are simply going to increase costs. So that's really what's going to happen in the second quarter. We'll still be profitable. We'll still have decent margins, but we'll see both mix increase a little bit and cost to service in each category increase a little bit. We may -- I'll just make one last comment on this and then happy to answer any of the questions. But we -- we've also been really good at being able to bring our proprietary default technology to bear. So we -- within 24 hours, had a system to allow the borrowers to identify that they were COVID affected and in about another 24 hours we had a way that they could -- their forbearance could be finalized online in cooperation with the GSEs. And we expect to use the same approach when we get to resolving those forbearances through the deferment program that we hope Fannie and Freddie will offer. And we're hoping to do a lot through automation rather than a normal sort of a long-term, a very interactive modification sort of approach. We'll still have -- borrowers will have to deal with that one, but the technology will definitely help save us significantly. And I think that's sort of the cost of service picture.
I was just hoping if you could give us any update or color on kind of how the early days of may have gone in terms of forbearance and whether we've seen the daily count of forbearance increase as the next payments too?
Jack, you probably want that one. I think the actual trends have gone down, I believe, right, Jack?
Yes. Yes. The trends have been pretty clear with forbearances. In the early days, we were at as many as 5,000 to 10,000 forbearances across the day. In the late days of March and early days of April, we're down inside owned servicing business at around 2,000 additions a day and for the entire enterprise, we're probably double that. But definitely, the trend of forbearance requests had been a steady decline.
And if you could just sort of contrast that with kind of the base case and the stress case scenarios you laid out on that slide and kind of what you're assuming and how you would say things are trending versus those expectations?
Michael, you want me to answer to that?
Yes, sure. Doug, you're referring to our advances, right?
Yes.
Yes. Okay.
Yes. From an overall delinquency standpoint, maybe I'll comment on that, and Andrew can comment on advances. But we are basically where we had sort of planned to be from an overall forbearance request standpoint. The thing that's changing that is the number of people that are on forbearances and are paying. It's very clear that a certain number of borrowers are using this program as more of an insurance policy. And so the percentage of borrowers that are on forbearances but paying is coloring the data a little bit in terms of while forbearance requests are consistent with what we had forecasted, the number of people who are paying is more than forecasted. So the overall impact is less.
Our next question today comes from Kevin Barker at Piper Sandler.
Michael, I don't know what happened there, but -- so on tangible book value, we saw significant spread tightening in April. I know you made some comments about not realized versus realized. But could you estimate where tangible book value is today off of what you've seen in the market?
Yes. I think we think -- I think someone else asked a question earlier. We believe it's pretty close to where we were at the end of Q1.
Okay. Sorry I missed that. And then given the disruption that we've seen in the origination market there in late March with the Fed buying assets and then where you see it going forward. Could you help us think about where the margins are on correspondent versus retail? And what the major drivers are of the increase in margins on originations thus far in April?
Yes. I think the latter part of your question, I think, is due to, quite frankly, the markets being -- people working from home, more limited capacity, ability to get things through the pipes, the banks pulling back in general, right? When you think -- and if you really think about the credit box, so I think all of those contribute to the margins. When you look at the correspondent, we haven't done a lot of corresponding, quite frankly, yet. In a normalized market, I think the gross numbers could be anywhere from 50 to 60 basis points. Today, I think that margins could be double that. But it remains to be seen as we really turn on our origination machine. But I do think the gain on sale margins are actually very attractive right now.
So are you assuming that correspondent remains subdued for a foreseeable future?
No. We're actually going to start doing more. As I pointed out earlier, our main focus is really the direct-to-consumer channel. Because that's where we feel like we're going to get the most lift out of our existing customers and our existing portfolio. And the gain on sale there is obviously very good because it's a retention tool for us. The correspondent stuff, wholesale, third party origination, we're turning that on more and more. Quite frankly, in the middle of March, we pulled back on everything as we were seeing, as the markets were extremely difficult and not just, quite frankly, the non-agency market, I mean, the agency mortgage market until the Fed came in, it was trading in a 5-point range. I mean, it was crazy. So as we go forward, I think you'll see these different channels turn on, and we'll evaluate the profitability of each one.
So I'm assuming that turning on the correspondent channel is a big portion of the guidance for $40 billion to $50 billion of originations this year.
Yes. I think it's a mix of everything. But yes, it's bad. It's wholesale, again, growing DTC. I put in -- we put a slide showing from the third quarter in '19, which was $1 billion and changed to the third quarter, I think in '20 where we had that going up 3x. So I think all of these are going to contribute. And again, to me, it's not about the sheer volume, the $40 billion, the $45 billion, the $50 billion or whatever the number it is. It's about how do we create value for customers and make money for shareholders, obviously.
Okay. And then according to your balance sheet, you have $10.8 billion of repurchase agreements remaining on the balance sheet or liabilities against your asset base, which is equal to a little over 70% of your investment -- $15.2 billion investment portfolio, which is slightly lower than what it was in the third quarter. Where do you see that the repurchase amount versus your total asset base as we look out the next 1 or 2 quarters as you start to reposition? What the balance sheet looks like and the financing structure?
I think you'll see total repo on bonds and loans that will be -- I pointed that out earlier about, give or take, about $1.5 billion depending upon what we do in agencies and things like that. I think away from that, everything will be either termed or limited mark-to-market around our exposure on repo. Today, when you look at the bond and loan books, there, give or take, about $2 billion each. Or actually, the bond book could even be smaller than that. But by the end of May and no later than June, I think most of the portfolios, both bonds and loans will be termed out.
Okay. So when you envision that scenario and you see the term, which is obviously a little bit more expensive than repo or what it was in the past. And you think about the pro forma balance sheet as you make these restructurings, where do you think your return on equity could be or where the normalized return on equity could be just given the disruption in the market?
I think it will be significant because as the operating companies continue to do better, the return on equity in those businesses as capital turnover quicker will be -- I'm hopeful, well north of 20%.
So you're saying that you think you can get 20% return on equity on a pro forma basis following the whole restructuring and looking at...
Yes. The portfolio is going to be small, right? I mean, the way that we think about it, as I pointed out, we took -- we've had realized losses of, whatever, $1.92 per share. As you think about the marks we took, which were pretty significant, if those come back in a reasonable period of time, that return on equity or that gain really comes out to a very large return on equity. When you think about the actual size of that portfolio, it's going to be much, much smaller on the bond and loan side. So it's not going to be that material. I think the operating businesses are where you're going to get lift. And if gain on sale margins stay where they are, the return on equity is going to be great.
Now do you see that as normal? Or is that something that's just a near-term...
The United States -- the world is shut down. That's not normal. So I can't tell you what's normal anymore, right? But I do think in the near term, I think our operating businesses are going to hopefully make a lot of money. And whether that continues to the third quarter. I'm not sure what those margins are going to look like because I can't predict that until we know what's going to happen with labor and people going back to work. And as I pointed out, we're hiring 500 people right now. It's hard to tell. But I do think, overall, our return on equity should be good. And our track record has been very good. I mean, quite frankly, we all and every one of us at the company take it to heart where our stock price is and what's happened. Unfortunately, we couldn't control those 1 or 2 weeks, as much as we would have liked to. But I think we did what we needed to do to get to the other side. And now it's -- we're back in a place where liquidity is terrific. The operating businesses are continuing to do extremely well. The portfolio is much, much smaller. Our repo and mark-to-market exposure is very, very low, and that will continue to get smaller. And I'm looking forward to actually growing book value back to where we get to $14, $15, $16 a share. So...
Okay. And then one last one. The RMBS portfolio was a major portion of your hedging for the MSR portfolio. And you had to sell that down significantly. How are you hedging the MSR now, given that the agency RMBS portfolio is a small fraction of what it was previously?
Right now, we're a little bit biased, I think, to the short side because of when I think about the state of where we are. At some point, we will add agency mortgages, but if and when they cheapen up or we did add some swaps and we got longer that way through the crisis or through those last couple of weeks in March. And we'll continue to evaluate all hedges, whether it be in swaps, swaptions, options as well as agency MBS. So we continue to monitor that. I mean, agency MBS is where it is because the Feds bought a ton of them. So we continue to monitor that. And earlier this week, they came out and said they'll buy as needed. So I think you should see that soften up a little bit. And I think with $3 trillion of issuance, I think you could see rates go up and the value of our MSRs go up.
Our next question today comes from Matthew Howlett with Nomura.
Mike, just a big picture question. We're hearing a lot of reports with the state of the non-banking industry, the origination servicing, the FHFA has been vocal about pulling servicing from people. Can you just give us the top-down view? What are your conversations like with regulators? Where do you see the industry headed?
I think the team has a lot of -- our team has a lot of dialogue, whether it be with FHFA, Ginnie, Fannie and Freddie. We have wonderful relationships with everybody. The Ginnie Mae program will help servicers, the FHFA announcement recently about the 4 month limitation on P&I advances on loans and forbearance should help. I think overall, I mean, I pointed out, we have more liquidity today than we've had in a long time, and I think maintaining higher levels of liquidity is essential right now. I do think the nonbanks, when you think about the amount of whether it be origination and servicing that the nonbanks do, it's greater than 50% of the overall market are really, really important to the overall housing market and the system and the homeowner community. And our hope, as we go forward is there's continued support of the nonbanks. I think for us, personally, we'll continue to maintain whatever levels of liquidity that we need to in this environment as we go forward to take care of our customers, to make money in the origination and servicing business. But I think there's a lot of good constructive dialogue. I think a lot depends on what happens as you go forward and think about the state of the economy and people get them back to work and what happens with forbearance claims and everybody has models and things that delinquencies are going to do this or forbearance numbers are going to do that. And I think until we actually see the real numbers, that's why we're going to continue to build liquidity when we think we need to. But I think hopefully, they'd support. I think the folks at the agencies get it.
Is there appetite to take on subservicing from let's say if there are transfers that GSEs do? Is there appetite for a big bulk MSR package if it comes out?
Listen, everything is about balance right now. Just to be clear, we're not going to go out and step up and do something unless we think it makes tremendous sense for shareholders. The cost of capital right now, as we pointed out, even on certain things, it's a little bit higher. So I think retaining that capital is important unless you think your return on equity, to some of Kevin's questions, are going to be 15%, 20%, 25%.
Got it. And then just 2 quick questions. Just the securitization. You said you did an NPL negotiation. What's the state of that? And then the call rights, are you still retaining the -- what's the outlook in that business you still have $80 billion -- you still -- you didn't sell away all your call optionality, right? Just 2 of those questions.
No. So the securitization we did was a seasoned ARM deal that we had called. Clearly, the overall proceeds were lower than where we would have been if we were in a normalized state. Those markets will come back at some point. We have to be prudent about how we think about our call business. As we go forward. Another example is we don't have enough balances now to do securitizations on advances. As we go forward and those balances build, if, in fact, they do, then we'll look to do securitizations in the advance market. As we go forward on the call business, we retain $80 billion of call rights that we currently own. In the large sale that we did, the $6.1 billion that we did in March, we gave up $17 billion of call rights, but we'll work with our partners there on potentially executing those call rights. So we still control a lot of collateral. We're going to be smart, though, how we deploy capital and how we add to our balance sheet [ yield ].
And the securitization in advance, that would be cheaper than what you're getting on the bank line? So...
It depends where you're going to execute and where rating agencies come out. That market has been extremely efficient over the years when you think about advance rates and the AAA nature of those assets. So I would expect us to get back in a more normalized state, and I think that will happen at some point.
Our next question is a follow-up from Bose George at KBW.
I wanted to go back to the comment that someone made, I think it was Kevin, about the $500 forbearance fee that the GSEs might start offering. I was just curious what the timing for that was? And also, are they contemplating any other changes in terms of their modification programs? Any other fees that could help as this process continues?
Jack, it's all you.
Yes. I was the one that mentioned it, it's a $500 deferment fee. They've basically put a draft out to the various advisory boards we participate in, and we've been able to review. It's not supposed to be up and running until July 1. But again, let's just -- I just want to be clear, it has not been announced yet. We thought we might hear about it last week. They're now saying maybe this week. So I think they've got to get it through their final approval traps. Both Fannie and Freddie are working on it together. And it's -- I don't know exactly where it stands between them and FHFA. But that is the program. Basically, the idea would be to allow borrowers to very quickly go from the forbearance process to a current loan with payments deferred to the end of the mortgage, minimize disruption, maximize the speed to process. And so that's the idea of the program. They are also acknowledging that a certain number of the borrowers are going to need full modifications where they can't pay the existing payment because in that scenario, they would basically be on the -- basically, the loan would just be brought current, and the payments would be rolled to the end of the mortgage, and there will really be no impact in terms of the loan to be same payments income. But certain borrowers are going to need a full modification. So they're also talking about what they might do or facilitate in that process. But without, again, any specific direction. So that's where we stand today.
Okay. Great. That's helpful. And then actually, I wanted to also ask the comments you made about a percentage of borrowers who are going into forbearance, but continuing to pay. Are they making partial payments and keeping that as kind of optionality if they need it? And how big is that percentage?
Yes. There's a statement in the document that for the enterprise as of April 30 -- I'm sorry, as of the end of the first quarter, that it was 60%. I just want to get a copy of that. And so that was -- those were the numbers as of most recently. As of April 30, it was 60% had paid their payment. So far, in the month of May, we have a continuation of borrowers paying their payment. It's certainly not 60% yet. We're very early in the month. So it's hard to predict exactly where that's going to go. And I'd be reluctant to leave anybody with the impression that there's a guarantee there. There are some partial payments being made. We're encouraging borrowers to both pay any payment amount as well as their full payment amount. But I think it's a very fluid situation. The trends are what exists today, and it's a little hard to predict what exactly is going to happen going forward.
And our next question today is a follow-up from Tim Hayes with B. Riley FBR.
Mike, just one quick follow-up. I know right now, liquidity is top of mind. But just based off of the earnings power from the origination platform, it seems like, I guess, I'm just wondering how you think about the level where the dividend is set? And if you see it kind of staying at a lower level than maybe core earnings could support at this point, given kind of the preference for liquidity? Or at what point do you start seeing that scale up and kind of that dividend coverage or the payout ratio increase a bit?
Tim, that will be obviously up to the Board. The largest companies in the world have cut dividends or will continue to cut dividends. I think our focus -- obviously, we'd like to pay a bigger dividend. My -- our main thing coming off probably the most horrific markets that, quite frankly, I've dealt with, and I've been doing this for a long, long time is such that we'll continue to evaluate the earnings power of the company, our dividend policy. But clearly, if we could get our book value back to a more normalized state with where we've been, there's the balance, right, and how we think about it. So it will be a board decision, but I think for now, there's not much more I can say about that.
And our next question comes from Kevin Barker with Piper Sandler.
In regards to the consumer loans, I noticed they were change from equity method to hold for investment. Was there a change -- did you take on the consumer loans on your balance sheet? Or are these continue to be equity method?
No. The change, Kevin, has to do with the adoption of CECL. So we brought them on as fair value.
And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to Mr. Nierenberg for any closing remarks.
Thanks, operator. To all of you, thanks for your support. I take our -- and we all do, like I mentioned earlier, stock price to heart. We want to perform for all of our shareholders and the work that's been done, I think, on our team, I opened up and said, thank you, has been something that's second to none and something that I haven't seen in a long, long time. So thanks to the team. And to all of you that are shareholders and all the analysts and our banking partners. I -- we really appreciate it. Look forward to growing our book value, getting back to where I think we belong. And hopefully updating you on more positive results as we get through the quarter and get into next quarter. With that, be safe, and hopefully, we get to a normalized state sometime soon. Thanks, everyone.
And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.