Rithm Capital Corp

NYSE:RITM

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Residential Fourth Quarter and Full Year 2018 Earnings Call. [Operator Instructions] Thank you. Austin Sandler, you may begin your conference.

[Austin Sandler, executive]

Thank you, Krista, and good morning, everyone. And welcome to New Residential's Fourth Quarter and Full Year 2018 Earnings Call.

Joining me here today are Michael Nierenberg, our Chief Executive Officer; and Nick Santoro, our Chief Financial Officer. We posted an investor presentation on the New Residential website this morning, which we encourage you to download if you have not already done so.

Certain statements made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. In addition, we'll be discussing some non-GAAP financial measures. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the investor presentation. We encourage you to review the disclaimers on our press release and investor presentation and to review the risk factors contained in our annual and quarterly reports filed with the SEC.

Now I'll turn the call over to Michael Nierenberg.

[Michael Nierenberg, executive]

Good morning, everyone, and thanks for joining our fourth quarter and full year earnings call. I'll give you some brief remarks, and then I'm going to refer to the supplement, which has been posted online.

For fiscal year 2018, we had a very good year, deploying capital in our core asset classes and maintaining the discipline needed when markets become difficult. Year-over-year book value was up 6%. For most of the year, we saw assets trade extremely well, with lots of capital being deployed into the fixed-income sector. Asset prices went up. Interest rates rose until the turning point in November where we saw rates peak on November 8. From that point on through the end of 2018, the bond market rallied, spreads widened creating a very difficult fourth quarter. As we enter 2019, the markets have settled down, and the spread widening we saw at the end of the year reversed itself, and the mortgage and secured -- the mortgage and securitization markets have stabilized.

What does this all mean? What does this all mean for NRZ? On the portfolio side of our business, continued focus on MSR acquisitions, our cleanup call business and making opportunistic investments where appropriate. More back to the basics of business as usual.

When you think about the housing market, it's a large one. It's a $27 trillion market. There's always something to do. Of the $27 trillion, $16 billion of that is in equity, $11 billion of that is in debt. That's 11% higher than the peak in 2006.

On the operating side of our business, our goal is to protect our shareholders and continue to focus on counterparty risk. We want to figure out ways to create more revenue for shareholders away from our portfolio investments. We want to increase our ancillary revenue on our mortgage asset. We want to increase our recapture and get more value out of our MSR portfolio.

As we think about the markets and going forward in 2019, we believe this plays extremely well into our strengths. We want to take advantage of market dislocations to the extent that happens. We want to focus and continue to focus on opportunistic investments.

We believe there'll be plenty of activity as more non-bank financial services opportunities rear their head and come to market. The bottom line is, we feel like 2019 should be a good year for our company and our shareholders. I will now refer to the supplement, which has been posted online.

Page 2 is our summary page that we put in every earnings deck, and just to take you through it real quick. Once again, book value year-on-year has increased by 6%, although it was lower by 3.7% in the fourth quarter. When we think about the business, we'll continue to focus on our mortgage servicing right portfolio, which is $539 billion as of the end of 2018; our call right business, which is now at $126 billion; and then on our term notes. As we think about the financing of our MSRs last year, we issued $2.1 billion of term notes and more to come, which I'll discuss later in the presentation.

Financial performance for 2018: GAAP net income of $964 million or $2.81 per diluted share; our core earnings in 2018, $815 million or $2.38 per diluted share; and our dividend is $2 per common share. Total dividends paid in 2018 was $693 million to shareholders.

Our fourth quarter results, GAAP net income, pretty much flat. The reason for that, which I'll get into in a little bit, some MSR revaluations, some hedge losses. But in general, we feel like where we are now, our goal is to continue to try to stabilize our book value and stabilize our GAAP net income. Core earnings, $208 million or $0.58 per diluted share. And the dividend paid in the quarter was $185 million or $0.50 per diluted share.

On Page 4, we get a snapshot similar to the earlier page. The mortgage servicing right business, $539 billion UPB. The pipeline remains very strong there. Our servicer advance portfolio, if you take a look at that, the amount of capital there is really -- is very small at this point as the mortgage universe continues to clean up from the crisis. You're seeing delinquencies decline and advance recoveries increased. Our call business, $126 billion. We continue to work very hard to accelerate our call right business. And associated with that, we have $10 billion current face or a little under $2 billion in our Non-Agency bond portfolio. On the legacy side of that portfolio, 95% of that is floating rate at this point.

When we think about opportunistic investments, we've grown the company over the course of the past number of years through some, what we would call, strategic investments going back to 2013 when we acquired the SpringCastle portfolios; 2015, when we did the HLSS deal, which grew our servicer advance portfolio and our MSR portfolio; and this year, closing on Shellpoint Partners in July, which helped add in-house servicing, mortgage origination and the ability to recapture more customers and MSRs in the event that we see a refinancing boom.

Page 5, this shows our trajectory going back again to 2013. Company was created out of Newcastle at roughly $1 billion market cap. We've grown that since to where we are today is about a $6 billion market cap. Book value at $16.25, and book value has grown year-over-year despite the fact we're paying most of our earnings to shareholders.

Page 6, on our MSR slide. Throughout the course of '18, mortgage rates rose 56 basis points. What we saw there is the mortgage servicing right asset increase in value. As rates rise, prepayments slow down, the value of the asset goes up. And what we cite here is what we call as MSR multiples. And if you take a look at the footnote on the bottom of the page, the way that we think about that is if you have a mortgage servicing right strip of, for example, 25 basis points and is valued at a 4 multiple, that is a point on the notional amount of that mortgage servicing right. So mortgage servicing rights went up quite a bit. The share of the mortgage universe eligible for refinancing dropped from 29% to 9%. In our portfolio, it's even lower than that because we have some credit-impaired assets on our balance sheet.

Mortgage rates as at the end of 2017 were 3.99%, at the end of December 2018 were 4.55%, so obviously rates went up, give or take about 55 basis points. Today, when we look at mortgage rates, I believe we're in the 4.30% range.

NRZ's mortgage servicing right portfolio is less sensitive due to the season and credit-impaired nature of a number of our assets. We have 100% recapture agreements on every MSR asset we have on our balance sheet. That helps to protect the asset. Think of it like an insurance policy, recapture mitigate prepayment risk for the mortgage asset. And when prepayment speeds dropped from a peak in December of 2016 where there were 15 CPR to 8 CPR in 2018, and we'll see how that goes as we go forward into -- throughout 2019.

On Page 7, we talk about our overview and pipeline. In 2018, there were $600 billion of UPB of mortgage servicing rights sold. Just to give you -- for example, when you think about a 4 multiple, that would be about $6 billion of capital. When we look at what we did in -- throughout 2018, we acquired about 20% of that population or $114 billion. And we continue to expect mid-teens-type levered returns.

Of the $114 billion, we acquired from 15 different counterparties, and we acquired $19 billion of mortgage servicing rights in the fourth quarter alone. I think the population in the fourth quarter that we actually looked at was somewhere between $150 billion to $175 billion, just to give you for reference.

2019, we expect the supply, the MSR pipeline to be extremely robust. Right now, we see a pipeline of, give or take, about $350 billion. We do expect more consolidation in the mortgage origination and servicing business throughout the course of '19. And we believe that we're perfectly situated to take advantage of that. Some of that is due to the nature of -- on the origination side, the lack of gain on sale. So mortgage bankers are going to need to raise some capital. Therefore, there'll be more assets for sale.

Bottom part of the page, you can see just the composition of our mortgage of our MSR portfolio. Both on the left side of the page is our excess portfolio, and then the right side is our full portfolio. I'm not going to take you through those numbers. You can have a look.

On Page 8, our MSR financing. Over the course of the past couple of years, we truly opened up what I would call a market that was untapped. We created more term financing around the MSR assets. In 2018, we issued $2.1 billion of fixed-rate assets, term fixed-rate assets. What that does is it effectively gives you term financing on your MSR asset. It locks in fixed rates and it makes the certainty of cash flow as it relates to your financing side of that more certain. We expect by the end of -- probably by the end of the first quarter to issue -- to do more issuance around another population of MSRs we have in our balance sheet, which will take our existing debt structure of 73%, which is greater than 1 year, towards 90%. So we look forward to doing that, thus, taking away the so-called mark-to-market nature of our financing and extending maturities.

Page 9 is a new slide for us, which we haven't put out in our deck before. But effectively, what we're really focused on is how do we capture the full value of a mortgage asset? How do we capture the full value of a mortgage customer? I keep referring to the $539 billion number. That $539 billion of MSRs equals about 3 million mortgage customers. How do we capture the full pie? And down -- you can see the bottom-right side of the page, there's a number of services that we currently don't capture for the most part in our portfolio. We do capture some of these services through some of our subsidiaries on the Shellpoint side, for example, some title and some appraisal work. But we think there's a lot more work to do, and we think the population or the pie there could be extremely meaningful to the company from a revenue standpoint and from an earnings standpoint as we go further. So have a good look at that slide because I think that will be an important part of our business as we go forward.

Page 10, our call right business, again $126 billion of call rights. That is 37% of the Non-Agency market. How to think about that? We control $126 billion of mortgage collateral. That's quite a bit. Of that, $47 billion is currently callable. You may ask, why didn't we call it yet? The reason being we need delinquencies to come down and advance balances to continue to trend lower. We continue to work with different industry participants to try to figure out a way to accelerate that or have a hard look to revamp the legacy mortgage market, and there's a lot of work to be done there.

On the left side of the page, when you have a look at the -- at our loan portfolio, year-over-year, our call strategy continues to provide us a lot of optionality. We have access to a lot -- a long and extensive pipeline of mortgage collateral. We buy a lot of bonds that are associated with our call rights, which helps us -- which are accretive to deal collapses. And it helps us, obviously, generate earnings and revenue for our shareholders.

Middle part of the page, we did $2.8 billion of securitizations in 2018. We called $2.7 billion of collateral. That's 88 different deals. In the fourth quarter alone, we called 14 deals. And we expect it to be extremely active there. Year-to-date, so far in 2019, we've issued 2 different Non-Agency securitizations, and we'll be in the market with more throughout the rest of the year and including this quarter.

On Page 11 is our call right portfolio. Again, I'm not going to harp on this but the big -- what I would focus on, on this page, still $126 billion of call rights. What you could see is the trend of 60-plus-day delinquencies on the right side of the page continue to decline. As that declines again and advance balances continue to decline, overall, we expect to call more deals, and we think that will be a good thing for our shareholders.

Page 12, the Non-Agency bond portfolio. As of the end of fiscal year 2018, our bond portfolio is $10 billion in face value with an average dollar price of $0.80. Year-over-year, our net equity in that portfolio increased by $300 million. Most of that is associated with our call rights with owning collateral or a bond portfolio at, give or take, $0.80 or a 20 point discount before it gives us the ability to call more collateral. That's where you create a lot of value. Delinquencies continue to trend lower, as I pointed out. Advance balances continue to trend lower. And overall, we think the mortgage market continues to clean up. In 2018, we acquired $4.2 billion face amount of Non-Agency securities at a dollar price of $0.85. Overall performance year-over-year, bond prices were up, whereas, spreads tightened about 25 basis points on the year.

On the loan business, our home loan portfolio, the returns on that business continue to be very good. We generated roughly a 20% ROE for 2018. Our current portfolio is $4.2 billion, which represents $763 million of equity.

Just to give you a sense of the magnitude of what we saw in the marketplace last year. There's about $75 billion in third-party sales just on reperforming loans and nonperforming loans. Our third-party purchases were about, give or take, about $3 billion, including $1.5 billion acquisition that was made in the fourth quarter on a pool of reperforming loans from Fannie Mae. But what we've tried to do is migrate more of our loan portfolio into cash flowing loans. And what you could see here, when you have a look at the left side of the page, $3.1 billion out of our $4.2 billion are cash flowing loans today.

Page 14 is really just tombstones on our securitization platform. We continue to be active there. As I pointed out earlier, we will be in the market with more deals throughout the course of the year. We'll be in the market with a term financing on our MSR business. And we've recently completed our first non-QM securitization in the fourth quarter, and we'll continue to do so as we go forward. We even did one in early the first quarter as well.

Servicer advance portfolio continues to decline a little bit over, I believe, $100 million in capital in total. And as the mortgage universe and the legacy market continues to clean up, those balances will continue to decline. The flip side of that is, should you have an economy that starts sliding into a recession, you could see advance balances increase.

The consumer loan portfolio, I'm not going to spend a lot of time on as well, very little capital. The SpringCastle is the legacy investment. That's been a home run for shareholders in the company. The Prosper investment, that's coming to an end. And just to give you a quick snapshot, there are $50 million in total equity. Returns are, give or take, 20%. And once this -- once the warrants are fully vested, we'll own about somewhere between 6% and 7.5% of Prosper, and those warrants will value something close to 0.

Shellpoint, Page 18, just to give you a quick snapshot here. We're very excited about this acquisition. Shellpoint had a good year last year. Their third-party servicing business continues to grow. They currently have over 30 third-party clients, including New Residential. We are viewed as a third-party client and not just a captive. When we think about NewRez, which was formally known as New Penn Financial, the origination arm, there's been a big push to increase the amount of professionals that are focused on our recapture business on our portfolios. I brought up before, a big part of our 2019 push is to capture the entire part of the pie. So not only are we doing that, we're trying to increase our recapture capacity. And as more and more MSRs are transferred into the name of New Residential or NewRez, we believe that should help with the performance of our mortgage servicing rights even in a declining rate environment, and help us recapture that mortgage servicing right.

Mortgage origination in 2017 for New Penn or NewRez was $6.4 billion. 2018, it's $7.2 billion. I expect that number to be, quite frankly, something in and around $15 billion as we look at 2019. A lot of that has to do with our own recapture and some growth around some different divisions at the origination business.

Non-QM origination increased from $20 million in the first quarter 2018 to $380 million in Q4. We continue to be very excited about that business, and you'll see more and more issuance from us as we go forward.

What does all this mean for our company? I'm on Page 19. The economy, I think, in general, is actually pretty healthy. There are obviously a lot of crosscurrents between some of the geopolitical events that are going on in the world.

Couple of thoughts I have. We do believe the fed at this point is on hold until a later date. While we do believe the economy is strong, the one thing I would say about that is the government still needs to fund something close to -- there'll be net supply in the treasury and mortgage market of something close to $1.5 trillion. That has to be absorbed. So even if the fed is on hold, there is a belief -- -- or our belief is that rates could trend a little bit higher. I don't think they go materially higher, and I don't think they go materially lower. But the net of it is when you think about the amount of supply coming to market, there's a fair amount that needs to get digested throughout the course of '19.

When we look at asset classes, mortgage servicing rights, these are just kind of how to think about our business. In a rising rate environment, they do extremely well. If the economy is stronger, we'll have lower delinquencies, you'll get more cash flow. Our -- if rates rise, we have fixed-rate MSR financing in place. And the big thing here is what I refer to as our insurance policies around recapture. It protects us in a robust housing market at a lower rate environment from higher prepay speeds.

Non-Agency, as I pointed out earlier, 95% of our legacy portfolio is floating rate. We get higher interest rates -- or higher interest income as rates rise. Declining delinquencies will help us increase our call strategy. On the loan side, consumer stuff is not that relevant now, although I do think there's going to be some opportunities potentially on the corporate side as we look throughout 2019 to acquire some assets there. But I don't -- it's more forward-looking. But I do think that the migration of our -- to more cash flowing loans will help us with that net interest income and earnings for the company. And then servicer advances, as I pointed out, is not meaningful.

I'm not going to go through the highlight reel on Page 20, on the left side. But I do think it's worth talking about the right side for a second. Again, housing market, $27 trillion. That is massive. That's, as I pointed out earlier, that's higher than the peak in 2006. $11 trillion of debt is a lot of debt, and there's plenty to do there. I do think the world is changing. GSE reform, I'm not sure exactly what comes out of that. But to the extent there is GSE reform and more capital needed from the private sector, that plays extremely well for our company.

I pointed out earlier, again, mortgage origination and non-bank servicers will continue to consolidate, and we're well positioned to take advantage of that. A big part of our theme in 2019 is to make sure that we work with our counterparties and stabilize counterparty risk and finally, focus on the entire pie. There's 8 slices in the pie. We want to eat them all.

So with that, I'll turn it back to the operator for some more -- for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Tim Hayes from B. Riley FBR.

[Timothy Hayes, analyst]

First question and a couple of questions around this, just the termination of the Ditech subservicing agreement. Can you maybe just comment on the timing, why terminate the agreement when you did versus a few months ago before even longer than that? And then maybe just expand on the reasons and maybe how that fits into that new slide you put in there about kind of capturing the full value of the mortgaging -- the mortgage asset?

[Michael Nierenberg, executive]

Sure. So I mean, just to be clear, when we think about the mortgage market, when we think about our business, it is far larger than just NRZ or Fortress, so I want to be really clear about that. We've been very supportive of all of our counterparties in the marketplace. And this goes back to even Ocwen and some of the things that we worked with Ocwen on to help stabilize them. And that goes back to even during the HLSS acquisition. So we -- the way that we think about this is we want to work closely with our counterparties. We work closely with our friends in DC. And we're extremely transparent on, I believe, to the market on what we're trying to accomplish.

As we think about Ditech and playing back to the fourth quarter, if you looked at the -- we have worked closely with Ditech for the better part of the past couple of years, including acquisitions and subservicing back with them. If you looked into the fourth quarter, and we've been trying to work closely with them throughout the course of, what I would say 2018, fourth quarter, our equity price took a hit. We fielded a lot of calls from investors regarding our counterparty risk. And it was a apparent at some point that we needed to take action to stabilize our counterparty risk and stabilize our portfolio, and it's nothing more than that.

[Timothy Hayes, analyst]

Okay. Understood. And then could you maybe talk about where you intend to move that servicing to? How quickly can it be moved? How much you've moved so far? Any comments around that?

[Michael Nierenberg, executive]

Sure. So we're working closely with FHFA, Fannie, Freddie around the transfer of those units. We have a servicing plan in place. And it's going to go to either 2 or 3 different subservicers. And rather than -- I don't know that I can go into more detail than that at this moment.

[Timothy Hayes, analyst]

Okay. And then what functions, if any at all, was Ditech performing that you maybe intend to take in-house now? And are there any material cost saves or any other benefits there that are worth mentioning?

[Michael Nierenberg, executive]

Yes. It's a great question. On the -- one of the things when we look at our relationships with our subservicers, we have, obviously, the servicing fees that -- subservicing fees that we pay them. Where our initial contracts were executed with Ditech and where our future subservicing -- what our future subservicing fees are going to be will be accretive to GAAP earnings, core earnings and book value over time. So what I would say is, again, without going into too much details, servicing will move to a number of different counterparties. Subservicing fees will come down. You'll see higher core earnings. You'll see higher GAAP earnings and higher book value as a result of that transaction. When I think about -- or when we think about capturing the entire pie, there are a ton of services that servicers do around a mortgage asset. So if you refer to Slide 9, there's a number of these things that we currently don't do. Some of them, quite frankly, we're not able to do. We expect to be able to do them shortly. But there's a fair amount of revenue that's associated with the mortgage asset that we want to capture for our shareholders.

[Timothy Hayes, analyst]

Got it. Understood. And then just switching gears a little bit. On Slide 20, you just highlighted that there is potential opportunity with GSE reform. And I know you don't have a crystal ball. None of us do. But just wondering if you could expand maybe on some of those opportunities or maybe how you see that playing out?

[Michael Nierenberg, executive]

Yes. I mean, my own personal view is that what happens now in the mortgage market works extremely well with the GSEs. When you think about where the market was and where the market is today, the job that FHFA, Fannie and Freddie have done around syndicating credit risk for their portfolio has been fantastic. Those deals are large. There's a large amount of participants in the market that acquire those assets, and it's worth the amount of money that the company has been making for the government. It's been pretty large.

While saying that, there's obviously this big push to potentially privatize the market. I don't know how well that plays out between the Democrats and the Republicans, so I think that remains to be seen. But there seems to be a push to do something. I don't know what format it will be. But if in fact something happens, I do think there'll be a need for more private capital, whether it be on the insurance side or actually just supporting the underlying assets that will play extremely well for us.

[Operator]

Your next question comes from the line of Douglas Harter from Crédit Suisse.

[Douglas Harter, analyst]

Mike, you talked about an active potential pipeline for MSRs. Was wondering if you could just characterize that as kind of large, chunky deals, a bunch of kind of small or midsize deals, kind of how you would break down that pipeline.

[Michael Nierenberg, executive]

I think it's a -- it is a combination of both. I alluded to the fourth quarter where the pipeline of assets that we actually looked at or bid on was about 100 and -- give or take $175 billion. I think we bought between $15 billion and $20 billion of those assets. There's a fair amount of supply. The mortgage banking industry is a bit challenged because there's very little gain on sale right now in -- for the mortgage originators. So as a result, you're going to see more and more need for capital to either acquire those companies or acquire the assets on those companies' balance sheet. So as a result, you're going to see plenty of that. And I do think there's some large, chunky transactions that could come from banks and non-banks that we're going to see in 2019.

[Douglas Harter, analyst]

Got it. And then on the mortgage banker comment. I guess, how comfortable are you kind of adding additional origination capabilities, kind of given what you said is a challenging profitability? And that $10 billion to $15 billion of origination guidance, does that assume any acquisitions? Or is that kind of organic growth that you see visibility towards?

[Michael Nierenberg, executive]

The big push for our portfolios have been to create what I would call -- is to sustain our MSR portfolio. What I mean by that is to have somebody be able to call a mortgage customer and offer a suite of services under the so-called NewRez name. To the extent that, that happens, the way that I -- one of the things we've been discussing is when you think about where we are, we have a very large balance sheet. We have a number of different folks working on different parts of that pie, whether it be the MSR portfolio and the net interest income generated from that, the ancillary services side, the origination side and/or the servicing side from a revenue stream that way. Creating value with one P&L I think is something that is extremely important to us in the way that we're thinking about that. So for example, if you took 1 unit and we recaptured that 1 unit, and as a result, the MSR portfolio continues to perform extremely well and better, yet the origination gain may be next to nothing, that's a huge win for our company. Then if you take that and you say on the servicing side, the servicing side is making some money, that's a huge win for our company. Than if you take the 8 slices in the pie and you say, "I'm going to get -- I'm going to be able to eat 4 of those slices," I don't want everybody getting hungry. If you're able to eat some of those slices, that's a huge win for our company. So it's not only isolated, what I would say to the origination gain, there's a big part of this so-called pie that we want to continue to capture. And each part of that does not have to be a huge revenue contributor, but it's more for the entire company. So we're thinking more holistic rather than individual around each asset.

[Operator]

Your next question comes from the line of Bose George from KBW.

[Bose George, analyst]

I want to just follow up on the Ditech questions. The -- first, in terms of the book value gain that you mentioned, is that -- so when this transaction closes, does the present value of that register as sort of a gain that flows into your book value at that point?

[Michael Nierenberg, executive]

So as each tranche of servicing transfers, that will flow into your book value gains. So it's likely going to be a second -- for the most part, it'd be a second quarter event, maybe a little bit in the first quarter.

[Bose George, analyst]

Okay. And then in terms of sort of quantifying that, should we maybe look back to what -- when you have the Ocwen contract transferred and kind of think about that as kind of a way to size what the gain could be?

[Michael Nierenberg, executive]

Yes. I think, yes, it's a little bit tricky depending upon when everything transfers and what the final numbers actually look like. It's not a $1 billion thing, if that's what -- it's probably something in -- and I hate shorting numbers, but it's probably in the vicinity of something between $0.20 and $0.30 on this portfolio alone from a book value perspective. The bigger thing to think about is that's part of it, then you have the ancillary stuff, which is not captured in some of those numbers. And then the other side is when we think about other subservicing contracts or counterparties, we're very focused on rightsizing what we think the appropriate subservicing fee should be at this point, so there could be some incremental revenue that gets generated for the company and shareholders. Is that clear?

[Bose George, analyst]

Yes. That's helpful. And then just with the Ditech filing yesterday, the -- I guess, there's the other $100 billion issued MSR that you don't subservice. I mean, so presumably that stuff is potentially in the market as well. And any thoughts there on whether you could play any role there?

[Michael Nierenberg, executive]

Yes. I mean, again, I -- we are extremely supportive of our counterparties. We do have to protect our shareholders. However, to the extent that Ditech, as they announced, they'll be soliciting bids for any or parts or the whole company. It's hopeful that we'll be part of that, quite frankly. We know each other well, and -- but we'll see -- it's going to -- it's really -- I think for the most part, it's out of our control at this point.

[Bose George, analyst]

Okay, great. That's helpful. And then, actually, just switching over -- since quarter end, you've just given the stabilization of the market, et cetera. Can you just update us on what trends in book value? And also, just in terms of hedging your MSR going forward, any thoughts there on potentially hedging it or changing how you look at it?

[Michael Nierenberg, executive]

Yes. Great question. The one area I just want to point out for the call, when you look at the mark we took on our MSR asset, the big part of that mark was due to our escrow balances. So for example, associated with the mortgage servicing right, we have $5-plus billion of escrows. The way it gets valued, there's interest income that get generated from those escrow balances. As the bond market rallied in the forward curve, as rates went down, the effect of that was forward or future interest income off the escrow balance is actually lower. So that's why you had the hit on the MSR asset. The MSR asset itself performed extremely well in the quarter.

The general view -- or our general view at this point, we are monitoring rates. I pointed out earlier in the call that $1 trillion to $1.5 trillion of net supply for the fixed income market seems like quite a bit. So whether the fed raises rates or not, I think if the fed doesn't raise rates, which is, I think, everybody's belief right now, I do think the long end could hang around these levels or trend even a little bit higher. As it relates to book value, treasury rates now are give or take, about in and around the same level today, this morning, as they were at the end of 12/31. So book value is generally the same-ish, I would say, maybe a little bit better. But in general, our assets, when you look at our GAAP earnings or book value, down 3.7% for the fourth quarter, some of that is related to hedges that are associated with our fixed-rate assets. The $150-ish million around the MSR asset was really due to the escrow -- for the most part, around the escrow side. And then that bond portfolio performed extremely well because of our call rights, and it was small there, so you get back a little bit. But in general, your book value is going to be something in and around where it is now. And then the incremental lift will get, as we go forward throughout '19, will be around some of the other stuff we're going to do around subservicing fees and capturing the whole pie.

[Operator]

Your next question comes from the line of Kevin Barker from Piper Jaffray.

[Kevin Barker, analyst]

So in regards to capturing the whole pie and some of the things that you're talking about there, are there other partnerships you're looking to do? Or are you looking to also bring other stuff in-house as well? It seems like...

[Michael Nierenberg, executive]

Both.

[Kevin Barker, analyst]

Both, okay.

[Michael Nierenberg, executive]

Yes.

[Kevin Barker, analyst]

Is there stuff you're looking at to expand, particularly around Shellpoint? Or is it something where you could bring in a larger counterparty to do a lot of those services for you?

[Michael Nierenberg, executive]

It's -- here's the way I -- to think about Shellpoint. Shellpoint is doing a great job growing their third-party business. We like to encourage them to continue to do that, Jack Navarro and his team doing a great job around special servicing. That will likely grow. They continue to increase capacity in and around that part. So for example, if we buy a portfolio of nonperforming loans or reperforming loans, they do a great job for us on that side of it. When we think about the origination side, I pointed out a big part of that is going to be focused on the recapture side of our portfolio.

On the ancillary side or the full pie, we'll continue to work with others as well as try to create some in-house capacity to do that. I pointed out earlier, they currently do that around the title business, the appraisal business, et cetera. But we think there's a lot more to do there, and that will be a combination of both internal and external.

[Kevin Barker, analyst]

Okay. When you think about that potential opportunity, typically, title and others and other ancillary services or appraisals tend to be lower-margin business.

[Michael Nierenberg, executive]

That's right.

[Kevin Barker, analyst]

Where do you see, like, the best opportunity within these ancillary businesses to really make the full suite generate better fee revenue?

[Michael Nierenberg, executive]

We think that there's property preservation, for example. When you look at some of our portfolios, we have $126 billion in call rights. Of that, let's say, for example, 15% of that is delinquent. So there's always work to do around property appraisal. Title doesn't make a ton of money. There's other products, such as field services, tax. There's all types of different things. We think the value of that could be meaningful if you look at what some of our other servicing partners have done, what Jay and his team have done in and around [ zone ] and some of the other folks have done at Altisource. I think there's a fair amount of money that's out there at stake that we're going to try to figure out a way to capture. There's also the insurance business. So we focused on everything. We're focused on the third-party side of it. If this is -- we're at a point in our career or in our life cycle as a company that we want to capture more of that for our shareholders, rather than give it away.

[Kevin Barker, analyst]

Do you see it as offsetting some of the runoff in the consumer portfolio, which has been a very good investment for you or even more accretive than that?

[Michael Nierenberg, executive]

Yes, I think it could be even more accretive than that. Our goal, and I've been pretty vocal about this in -- our core earnings is a big part of -- we're focused every day on how do we create earnings for our shareholders and maintain our dividend. And that is something that is extremely important, right. As we think about going forward, if we could grow core earnings and grow our business, we'll do that. We think there's enough stuff we have on our plate right now in our core portfolio that'll continue to pay dividends for shareholders and maintain that dividend. All this other stuff that we keep talking about should, hopefully, be in addition to what our current business actually does. So the portfolio, as I pointed out I think in my opening remarks, business as usual for the most part. We can carry the fed on hold. We'll be very good. The front is anchored, give or take, around 2.5% right now of funds around those kind of levels. That will be good for our business. And then all this other stuff should hopefully be gravy and help us continue to grow earnings going forward.

[Operator]

Your next question comes from the line of Henry Coffey from Wedbush.

[Henry Coffey, analyst]

So as you look at Shellpoint and NewRez, and -- I mean, are you growing -- ultimately growing a fully active originator inside this business? For example, correspondent, designated correspondent are all great ways to pick up servicing assets, as you pointed out. Do you have thoughts about making larger investments into this part of the business? Is there new technology that's needed? How expansive could this whole program ultimately be?

[Michael Nierenberg, executive]

So let's start with the new technology needed. The answer is yes. The mortgage industry still suffers from the horse and buggy of origination. And I think there's a lot of buzz out there on who's doing what on the technology side, but there's a huge need for that. Our big thing, and I just -- I want to emphasize this, we have 3 million customers whether we own the full MSR or the excess MSR. Our goal is to keep that cash flow going for as long as possible and try to maintain 15% to 20% ROEs on that MSR asset. The more recapture we do around that asset, the better it's going to be for our company and our shareholders. That is the primary focus. I will tell you, doing this -- being in the mortgage world or fixed income world for a long, long time, mortgage origination is really difficult. It's a very difficult business. When housing slows down or there's less production, the mortgage banking community tends to -- I'm not going to say slit each other's throat, but everybody's extremely competitive and offering lower and lower rates, and the gain on sale goes away. Earlier comments I made, if we think about our business as one P&L, that would be really, really meaningful for our shareholders and for our revenue stream.

Could it grow? The answer is, yes. I mean, if we think we can make a ton of money there, that is our job. But Shellpoint itself as a business, at this point, is not going to be a $50 billion originator, I don't think. But our main focus is our own portfolio and creating a longer sustainable cash flow for shareholders. That is really the goal around the origination business.

[Henry Coffey, analyst]

On the subject of mortgage technology, it's now 100% of everyone I asked the question to. They don't like what's there. Can you point to what the next solution looks like? Or who it is? Or what -- you've got 2 entrenched providers, Ellie Mae and Black Knight. Is there a third solution coming up? Or is it just going to be a very, very slow evolution towards a new product?

[Michael Nierenberg, executive]

Henry, I'd love to have a crystal ball. There's a number of folks, whether it be out in the Valley and elsewhere, working on having better mortgage technology. Even our own technology spend will likely continue to be more efficient and potentially increase. I don't have the answer. I mean, Quicken has their app, and Rickie Fowler does great commercials. I just don't know, to tell you the truth. It's a very difficult product. We'd like to automate that. We've been working on our website design. We've been working on our own apps as well, but it's difficult. Someone will come up with it will be the winners. But -- and I'd love for it to be us. I just don't know at this point.

[Henry Coffey, analyst]

And the focus is to optimize the recapture business right now.

[Michael Nierenberg, executive]

Yes, for us, absolutely, and get at the whole pie.

[Henry Coffey, analyst]

And then non-QM, big opportunity, small opportunity.

[Michael Nierenberg, executive]

We're currently doing, I pointed out, I think it's about $125 million-ish a month. So we'll be doing quarterly deals. I think it's going to continue to grow as mortgage credit becomes available to the homeowner. Aside from making money, obviously, for shareholders, I think a big part of our duty and obligation is to service homeowners and offer solutions. To the extent -- to that extent, around non-QM, credit becomes a little bit easier. The one thing the industry, and especially us, need to be really careful of is performance. We want to make sure that our non-QM programs perform as expected. And that's something that we are extremely vigilant about right now. And we'll continue to monitor as the program grows. So I think it grows, but we've got to really monitor credit performance as we go forward.

[Operator]

Your next question comes from the line of Kenneth Bruce from Bank of America Merrill Lynch.

[Kenneth Bruce, analyst]

Yes. Well, it's -- as I've kind of have watched your business evolve over the many years, it has always been a financial sponsor. Now you're moving into these operating businesses that I think, obviously, introduce a whole set of opportunities as well as risk. And I guess I'm always interested in a company that does this transformation if it is -- can it withstand, can it tolerate some of the ups and downs associated with operating businesses, especially on the mortgage side. I mean, as you point out, this can be a very difficult business at the best of times, and it introduces a lot of volatility. And I'm just -- I guess, I'm keen to understand how you think about and how much you're willing to tolerate some of those ups and downs.

[Michael Nierenberg, executive]

So good question. I think let's focus on -- let's talk about the operating side. So on the origination side, just to be clear, we don't think there's a ton of money to be made on just plain origination. On a correspondent business, people don't make a ton of money there. For us, the origination business is really focused around our recapture, just to be clear. We'll offer solutions to homeowners everywhere, but it's really focused on recapture. So if the P&L there is flat and we, again, we elongate that MSR cash flow, that's a win for the house.

On the servicing side, 30 different third-party customers. It will not -- Shellpoint will not be a $500 billion servicer, just to be clear. They're currently at $100 billion-ish. I do think the special servicing side of their business will grow. It will grow, hopefully, with third parties. But that's really going to be the focus. They have some incremental clean servicing on the NRZ side. We're not licensed by Ginnie Mae. Shellpoint, from time to time, acquires Ginnie Mae MSRs. But in general, it's really for them third-party business, which is a profitable business. And they've done a great job, I think, overall as a company making money. And the origination stuff will be linked to our recapture business. Away from that, that's where we see it today.

And then you have this ancillary business, and I think Kevin asked -- Kevin Barker asked a question about, is it internal, is it external? And I think it's going to be a little bit of both, quite frankly. We want to make investments in operating businesses that I think are going to be accretive for earnings, day one, maybe not. But net-net, creating a long-term, sustainable company that continues to pay a robust dividend is something that we're extremely focused on. So I think on the operating side, the long answer -- the short answer to my long-winded answer to you is that origination equals recapture. Shellpoint servicing is really third-party servicing. And then the pie is a combination of both.

[Kenneth Bruce, analyst]

Okay. And then maybe just the last question. And it's been a long call. But do you anticipate this being smooth just in terms of the earnings generated from these businesses? I mean, there's a lot of various moving pieces. And I guess, to some degree, interested in knowing if you think this is going to be a straight line. Or if it's going to move around quite a bit?

[Michael Nierenberg, executive]

It's hard to tell. I mean, we're -- I pointed out earlier, we're focused on -- obviously, there's the Ditech situation that's out there. We have subservicing contracts with a number of different counterparties. We want to be supportive to all of our counterparties. While saying that, we want to be able to generate more revenue for our shareholders.

On the ancillary stuff, it's hard to tell at this point. But I do think it could be more meaningful, maybe bumpy upfront as we grow it. Origination could help grow it as well. So it remains to be seen. It's not something -- the company itself exists the way it is because we have this robust balance sheet and these great assets. That will continue to perform and pay dividend for shareholders. The other stuff, I'm hopeful, is just gravy that helps us continue to grow.

[Operator]

[Operator Instructions] Your next question comes from the line of Trevor Cranston from JMP Securities.

[Trevor Cranston, analyst]

Just one question on the call rights. Looking at Slide 11, it seems like all the trends are generally moving in the right direction with delinquencies and advances coming down, callable populations obviously going up. But looking at the calls executed, 2018 obviously dipped a little bit from '17. I was wondering if you could provide a little bit of additional color as to what drove that. And if there was -- how much of it was related to just the level of rates? And then maybe comment on sort of what a reasonable expectation is looking at 2019 as things stand today.

[Michael Nierenberg, executive]

Sure. So as the evolution of collateral migrates from early 2003, '04, '05 on the call right business to 2006 and '07, you're going to see more delinquent collateral, stuff that's already been already modified, et cetera. While saying that, the securitization markets in the fourth quarter were shut down. We made the decision not to issue any deals. That's why we came out of the gates, we've already priced 2 deals, I think, in January: One was a non-QM deal; one was a call deal. We have a number of calls in process for this month. And I was -- I'm hopeful that we're going to see issuance back towards 2017 levels.

The big part of this, and I've spoken about this repeatedly, is how do we fix the legacy mortgage market? That's a big deal. So if you could really modify the legacy market, collapse these deals, reissue deals, it would help everybody, quite frankly, from servicers to people at home bonds, other than the litigants that are in the marketplace that are looking for loopholes. So I'm going to say that I'm hopeful we get back to 2017 levels. Profitability remains pretty strong in and around this. I pointed out earlier, we got our bond portfolios at, give or take, weighted average market about $0.80. So that should help us with our calls. And as we acquire more collateral, it's going to help us more call more deals.

[Operator]

Your next question comes from the line of Bose George from KBW.

[Bose George, analyst]

And I had a couple of follow-up questions. Actually, first, on the contributions from the cleanup calls to earnings, can you give us that number?

[Nicola Santoro, executive]

Sure. The contribution for the quarter was $0.05.

[Bose George, analyst]

Okay. Great. And then just -- I think I've asked this on many calls, but any update on the Altisource contract renegotiation?

[Michael Nierenberg, executive]

Yes. I think, yes, we continue to work with them and try to figure out solutions that work for everybody, is what I would say.

[Bose George, analyst]

Okay. So still ongoing.

[Michael Nierenberg, executive]

Yes.

[Operator]

And we have no further questions in the queue at this time. I will turn the call back over to the presenters for closing remarks.

[Michael Nierenberg, executive]

Well, thanks for your support, and hopefully, this call was informative. It was a long one, and happy to answer any follow-up questions. Have a great day. Thanks.

[Operator]

This concludes today's conference call. Thank you for your participation, and you may now disconnect. Have a good day.