Ocwen Financial Corporation (NYSE:OCN) Q2 2022 Earnings Conference Call August 4, 2022 8:30 AM ET
Company Participants
Dico Akseraylian – SVP, Corporate Communications
Glen Messina – President & CEO
Sean O’Neil – EVP & Chief Financial Officer
Conference Call Participants
Eric Hagen – BTIG
Matthew Howlett – B. Riley
Thomas McJoynt – KBW
Preston Graham – Stonegate Capital
Operator
Operator (Operator)
Good morning, and welcome to the Ocwen Financial Corporation Second Quarter Earnings and Business Update Conference Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Dico Akseraylian, Senior Vice President, Corporate Communications.
Dico Akseraylian
Good morning, and thank you for joining us for Ocwen’s second quarter earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen’s Chief Executive Officer, Glen Messina; and Chief Financial Officer, Sean O’Neil.
As a reminder, the presentation or comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are to different degrees, uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements.
Forward-looking statements involve assumptions, risks and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2021, and our current and quarterly reports since such date.
In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
In addition, the presentation and our comments contain references to non-GAAP financial measures, such as adjusted pre-tax income and adjusted expenses, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the financial performance of our operations and allocate resources.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company’s reported results under accounting principles generally accepted in the United States. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures as well as additional information regarding why management believes these measures may be useful to investors may be found in the press release in the appendix to the investor presentation.
Now I will turn the call over to Glen Messina.
Glen Messina
Thanks, Dico. Good morning, everyone, and thanks for joining us. We’re looking forward to sharing our progress with you today. I’d like to start by reviewing a few highlights for the second quarter and take you through our actions to address the challenging and dynamic mortgage market.
Please turn to Slide 3. We believe our balanced business model is working as intended, as expected for the first half of this year, servicing appreciation and profit improvement is offsetting originations decline. Our second quarter results reflect the impact of continued rising rates, widening spreads and previously disclosed strategic asset sales as well as the benefits from our actions to address the market environment.
MSR values increased and we improved profitability and forward originations versus the first quarter. This was partially offset by losses and transaction costs of the EBO and MSR sales we discussed last quarter as well as the market value decline of servicing assets other than MSRs.
Our origination team drove meaningful profit improvement in forward originations, while reverse origination profitability was impacted by a steep increase in interest rates and severe spread widening.
We improved our mix of higher-margin products and services. We had strong subservicing additions and a growing potential opportunity pipeline.
We’re reducing our cost structure enterprise-wide and targeting roughly $60 million in annualized run rate expense reduction by the fourth quarter of this year versus the second quarter. We’ve executed our identified actions to achieve at least 90% of that target, and we expect to complete all actions in the third quarter and realize the full run rate benefit of cost reduction actions in the fourth quarter.
We closed the second quarter with $266 million in total liquidity. This is a result of dynamically managing our owned MSR portfolio, driving growth in subservicing over owned MSRs, optimizing MSR, warehouse, advanced financing facilities and our custodial arrangements.
To support our capital-efficient growth strategy, we’re making progress in expanding our relationship with MAV and other MSR funding partnerships.
Our prudent liquidity management supports our objective to allocate capital to share repurchases, debt repurchases and opportunistic MSR investments to deliver value for shareholders. Consistent with the surge in bulk MSR trading activity we’re seeing, we believe there will be an increase in M&A activity within the industry, and we’re maintaining flexibility to consider all value-creating alternatives.
As we look forward to the second half of the year, our focus will be continuing to leverage our balanced and diversified business model. We expect the third quarter will continue to be a transitional period as we complete our cost reduction actions and other key business initiatives.
We are assuming reverse origination margins remain tight and volumes depressed and nominal reduction in forward servicing prepayments. With successful execution of our key initiatives and assuming no further adverse market developments, we expect to deliver after-tax ROE before notable items at or above our minimum target of 9% by the fourth quarter.
I believe we’re well positioned for the risk of a recession in the near term. We’ve taken decisive action to derisk our Ginnie Mae portfolio, particularly with our EBO and sale of our most severely delinquent loans.
Additionally, more than 50% of our portfolio is subservicing with reduced exposure to advances and we’re a proven industry leader in special servicing as well as the Ginnie Mae Tier I servicer. I’m pleased with the results in navigating this business cycle and remain confident in our ability to execute those items that are in our control.
Let’s turn to Slide 4 to discuss the environment and our key initiatives to address the market conditions. Continued rising rates and rate volatility in the second quarter drove further deterioration of industry forward originations.
The MBA industry forecast for 2022 was revised down again in July. We continue to see competitive pressure in forward originations and the volume and margin environment is impacting our subservicing clients as well. We expect the timing of servicing additions to be delayed as potential clients deal with origination challenges and/or monetize their MSRs.
As we and the industry reduced origination capacity, the competitive pressures may subside, though we’re not expecting that to be meaningfully this year. A recent reversal in interest rates suggest rates may have peaked. However, the probability of a recession has also increased. With the heightened probability of a recession in the near term, we believe our special servicing skills will be increasingly valuable and may present new growth opportunities for us.
The reverse market has been adversely impacted by the interest rate environment as well. Reverse mortgage interest rates are up over 125 basis points in the second quarter after increasing about 25 basis points in the first quarter. And in the second quarter, reverse spreads widened to roughly 4x our observed levels in 2021. This has adversely impacted refinance opportunity in the reverse mortgage industry and the industry overall is pivoting to new customer acquisition.
Regarding reverse subservicing, we believe prospective clients are excited about our entry into the market, our end-to-end capabilities and proven servicing skills. Long term, we still like the reverse market. Demographic trends remain favorable with 12,000 people turning age 65 every day.
Senior home equity is at record levels with over $11 trillion at the end of the first quarter, an increase of over $500 billion versus the fourth quarter of 2021. We believe the legacy stigma is diminishing around reverse mortgages and is becoming more accepted as a retirement planning tool.
In this business environment, we’re focused on a deliberate strategy comprised of 5 initiatives to drive business performance and deliver value for our shareholders. We’re leveraging the strength of our balanced and diversified business model, we’re driving prudent growth adapted for the environment, reducing our cost structure across the organization, optimizing liquidity, diversifying financing sources and repositioning for higher rates and allocating capital to maximize value for shareholders.
Now please turn to Slide 5. We believe there are 3 main profitability drivers for us in this environment. First, our balanced business model is working. Servicing GAAP pretax income in the quarter is up significantly versus the second quarter last year due to MSR value appreciation, slower amortization, expense productivity and portfolio growth.
The improvement in servicing profitability and MSR value gains more than offsets the decline in profitability and forward originations as well as the impact of our strategic asset sales to derisk the servicing portfolio and harvest MSR value appreciation.
In this part of the market cycle, originations will be a less important driver of earnings, but is a critical element of our business to replenish and grow our servicing portfolio.
The second driver is subservicing. We’ve made great progress in growing our forward servicing business supported by our global technology-enabled scalable platform. Our success here reflects our proven industry-leading operating performance that has been recognized by Fannie Mae, Freddie Mac and HUD with top honors in their respective servicing performance recognition programs.
We continue to be a leader in special servicing, supporting borrowers and investors and outperforming MBA and Moody’s industry operations’ benchmarks. We have earned our client’s trust as is evidenced by meaningful subservicing additions, renewal of our contract with Rithm, formerly NRZ, and other potential new opportunities.
We’ve added $79 billion in subservicing UPB in the last 12 months. We have $14 billion in scheduled subservicing additions in the next 6 months, and our opportunity pipeline for forward and reverse is over $400 billion in potential additions.
Our recognized special servicing skills position us to deliver value to clients, investors and consumers in an economic downturn. And with over 50% of our servicing portfolio comprised of subservicing, our exposure to higher costs and advances in a recession is reduced versus a 100% owned servicing portfolio.
The third driver is our reverse business. We are the only large-scale, full-service end-to-end reverse mortgage provider in the industry. While origination volume and margins have been adversely impacted by record spread widening and rate increases, we continue to believe the long-term industry opportunity is attractive.
Margins have been and continue to be superior to the forward originations market, and we are taking actions to adjust our cost structure to address recent margin compression.
Our reverse subservicing business is gaining scale, profitability is improving, and we have a robust potential opportunity pipeline. Overall, we’re excited about the potential for our business and do not believe the recent share price is reflective of our financial position, our earnings power or the strength of our business.
Now let’s turn to Slide 6. Our growth strategy has evolved for the current environment. The last — this time last year, we were focused on driving MSR additions at attractive multiples. However, this year, we opportunistically sold the MSRs as well at attractive levels, and we’ve been prudent in selectively investing in new MSRs in the first half of the year.
Our focus has been driving growth in subservicing additions through new clients, MAV and other MSR investment partners. We believe the emphasis on subservicing versus owned servicing in this part of the cycle supports our capital allocation flexibility and helps manage the risk of increased servicing advances and servicing profitability deterioration with increased delinquencies.
We’re growing in higher-margin products and services and forward originations, including Ginnie Mae, Best Efforts and non-delegated deliveries and direct-to-consumer in both forward and reverse. We’ve increased the percentage mix of these products and services by 6 percentage points this year, year-over-year, driven in large part to continued growth in our client base.
In forward consumer direct, we continue to shift to cash out and our refinance recapture rate continues to improve, achieving a record level for us at 51% during the second quarter. More recently, we have begun to focus on purchase originations in consumer direct — forward consumer direct that is. But we are really in the very early stages of building our capabilities here.
In reverse, we also continue to grow direct-to-consumer retail originations, which have the highest revenue margins. With increased competition expected in reverse from legacy forward originators as well as traditional reverse originators, the market transition to customer acquisition and the larger correspondent clients who may be shifting to direct HMBS issuance, growing reverse direct-to-consumer retail is a critical component of our growth strategy.
Notwithstanding the unfortunate but necessary downsizing we initiated, we’re pleased with our team’s progress to reposition us to optimize performance for the current market environment.
Now please turn to Slide 7. Mortgage application volume recently dropped to levels not seen in 20 years. In this part of the mortgage industry cycle, any industry participant who has exposure to mortgage originations needs to make the difficult choice to aggressively reduce expenses to maintain profitability.
We’ve demonstrated our ability to reduce costs materially during the PHH integration, cost optimization, productivity enhancement and continuous improvements are all part of our core DNA. We’re committed to reduce costs to support market demand and business needs in this part of the industry cycle, while continuing to deliver on our commitments to customers, clients and investors.
We’re targeting annualized cost reduction of over $60 million across originations, servicing and overhead functions, and that’s as measured by the fourth quarter over the second quarter of this year.
We’ve executed our identified actions to achieve 90% of our annualized targets and expect to complete the remaining actions in Q3, so we are well underway here. We expect to realize the full impact of our cost reduction actions in the fourth quarter, and our focus is to drive sustainable cost reduction, driving demand management, supporting the most essential activities and maintaining a prudent risk and compliance management framework.
The key actions include rationalizing staff levels, vendor and contract costs. As well, we continue to leverage our season to mature global operating capabilities. Our proprietary global operating platform has been in place for the last 20 years and provide services to support all aspects of our business.
Lastly, we continue to drive automation, digital migration and other systemic process improvements consistent with our technology road map and focus on continuous process improvement.
Please turn to Slide 8. We’re optimizing liquidity, financing sources and custodial arrangements to support the needs of our business during this part of the market cycle. Total liquidity has improved since year-end 2021. This is a function of capital-efficient growth and liability management actions.
As we mentioned earlier, we’re actively managing our growth with a bias to capital light subservicing. We are dynamically managing our own MSR portfolio to selectively harvest value appreciation. We expect we will continue this approach going forward, and we’re focused on all of our asset-based financing arrangements to ensure we have the optimum capacity, aligning indices and improved spreads on warehouse borrowings.
We expanded our MSR financing facilities, improved spreads, advanced rates and aligned interest rate indices to match custodial arrangements. Similarly, in our warehouse lines, they’ve been right-sized, mitigating rate increases through optimized utilization and we’ve negotiated better terms.
We’ve also restructured advanced lines to duration match interest indices to align with our custodian arrangements. Improved — we’ve improved our custodial earnings rate by nearly 75 basis points with more expected in the third quarter, and we’re tying our accounts to SOFR going forward.
We’re making progress negotiating our MAV upsize. We’re targeting an incremental $250 million in equity capacity and targeting to complete that upsize in Q3. In addition, we’re in discussions with 2 potential MSR funding partners and are targeting to complete at least one transaction with these potential partners in the second half of this year.
Please turn to Slide 9. As we said last quarter, given the current share price, we are optimizing our capital allocation to deliver value for shareholders. In the second quarter, we opportunistically purchased $25 million of PHH notes at 94.5% at par. This delivered onetime earnings of almost $1 million and has a positive effect on our leverage ratios.
Under our authorization for up to $50 million in share repurchases, we’ve purchased $17 million through July 31 at an average price of just under $30 per share, which translates to roughly 574,000 shares retired.
We continue to repurchase stock as laid out in our repurchase plan. We do not believe our recent share price is reflective of our financial position, our earnings power or the strength of our business. And with the book value per share of roughly $59, we believe repurchasing our shares at a substantial discount to book is a prudent value-added investment. We expect the authorization to remain in place until completion or expiration in November of 2022, subject to market and business conditions.
Recently, we have reengaged in the bulk MSR market opportunistically, given improved pricing that we’re seeing. We are pursuing a current opportunity pipeline of roughly $15 billion of potential deals at various stages of evaluation. We would expect to fund potential bulk MSR purchases largely through MAV, though we also expect some may be funded by PHH directly.
In addition to a robust bulk market, we believe the market headwinds may drive increased M&A opportunities. As we have said before, management and the Board remain flexible to consider all actionable and value-creating alternatives.
Now I’d like to introduce Sean O’Neill, who recently joined Ocwen as our Chief Financial Officer. Sean, welcome to your first Ocwen earnings call. I will pass the mic to you to discuss our results for the quarter.
Sean O’Neil
Thank you, Glen. Please turn to Slide 10 for our financial highlights. In the second quarter, we realized GAAP net income of $10 million for $1.12 earnings per share outcome and a 22% year-over-year increase in book value per share to $59.
We saw higher rates positively impact MSR appreciation in our own servicing book as well as strong performance in our correspondent origination business which offset the 2 negative drivers that I will now describe in the walk on the right side of the page.
This graph shows a quarter 1 to quarter 2 walk for adjusted pretax income, which is a non-GAAP measure. The second quarter result was a $26 million loss and the change from the $11 million loss in the first quarter was due to 3 primary items.
First, a strong income improvement in forward origination of $11 million over the first quarter due primarily to higher volume and margins in correspondent lending. Second, spread widening and reverse origination drove the bulk of a $9 million quarter-over-quarter reduction as well as lower volume due to rising rates. So while still a positive income contributor, it was down from the first quarter, more on these items in the segment portion after this slide.
The final driver were impacts from strategic asset sales and mark-to-market items. Collectively, these factors caused a $17 million income drop quarter-over-quarter primarily due to a previously disclosed sale of the delinquent EBOs bought out of Ginnie Mae securitizations.
The second quarter sale posted a $9 million loss, but derisked the portfolio by avoiding claim losses and servicing advances going forward.
The other items of the net impact of transaction costs and foregone pretax income from the MSR sale discussed in the first quarter, which reduces servicing revenues in the second quarter plus some adverse onetime marks on loans held for sale. These 3 items collectively bridge the decline from first to second quarter income.
I’d like to recap the notable items that connect our adjusted pretax income to GAAP net income. We provide adjusted pretax income for greater investor transparency, and it is a metric we use in managing the business.
Notables are composed primarily of $34 million of MSR fair value adjustments net of hedge. This is due to changes in interest rate or valuation inputs. $2 million in other notables mostly from positive impact in litigation reserve release due to favorable outcomes and a negative impact of severance and other items in the quarter.
For more detailed segment information, please turn to Page 11, where we will start with forward servicing. Let’s begin with adjusted pretax income in the upper left chart. Excluding the asset sale and mark-to-market impacts previously mentioned, the income was a positive $13 million. Of the remaining negative $14 million servicing income in Q2, the majority of that is nonrecurring.
And as previously mentioned, the asset sales either reduce future risk or provide liquidity to support debt and equity repurchases in the quarter as well as support new originations and MSR acquisitions. Moving to the right, subservicing growth in our forward business has been strong year-over-year and quarter-over-quarter driven both by MAV and other subservicing accounts.
Speeds continue to come down as rates rise, thus lowering runoff and creating less drag on servicing revenue quarter-over-quarter as well as preserving more custodial deposits for float income. As Glen mentioned, we’ve begun to see improvements in float income in the second quarter and anticipate more increases as we aggressively migrate balances to what I call best dex banks who desire deposits as well as the impacts from the forward curve.
Finally, in the bottom right, we have one of the most controllable functions for any successful servicer, continuously improving our cost structure. Regardless of the interest rate environment, our servicing team is always seeking out improvements via automation, shift to paperless and other process improvements.
You can see in the lower right graph that improving trend with a target to lower cost by the fourth quarter. I would add here, our cost structure includes all foreclosure and other liquidation expenses, which other servicers may exclude. So keep that in mind if you’re making direct comparisons.
Please turn to Page 12 for forward origination segment details. Forward origination had a slight loss in adjusted pretax income for the second quarter and shows improvement due to both cost control and strong correspondent performance.
Correspondent lending is the big story this quarter with a strong income growth of $10 million from last quarter, driven by both higher funded volume and better margins. This is from adding active clients in high-margin areas such as Best Efforts, non-delegated, Ginnie Mae and DTC.
As an example, in Best Efforts, active clients increased by 72% from the first quarter. The consumer direct volume declined quarter-over-quarter, but was able to offset most of that income decline with cost reductions. And these efforts will be more apparent in the third quarter using headcount as a leading indicator. Consumer direct headcount was down 58% from end of year to the end of this quarter.
We anticipate total forward origination costs will continue to improve significantly into the fourth quarter even as we are keeping a strong focus on both serving our correspondent and direct retail customers and maintaining a high standard for compliance and risk.
Please turn to Page 13 for segment details on the reverse business. On this page, we look at both reverse origination and reverse servicing. While the long-term reverse mortgage opportunity remains attractive due to borrower demographics and the reverse MSR countercyclical behavior during a home price downturn, there are near-term headwinds in this business.
First, mortgage rate increases reduced existing HECM refinance opportunities. Secondly, the spreads on HEC MBS or HMBS have widened rapidly in the last quarter as discount margins went from 70 to 105. This impacts gain on sale and overall margins in that business. Rate driven volume declines are further compounded by large correspondent sellers who transition to direct HMBS issuance.
All of these headwinds are reflected in the drop in second quarter income relative to the first quarter and the accompanying margin decline. It is still a profitable business, but a smaller income contribution this quarter. Over in reverse servicing, this is an income growth story as subservicing balance have increased. The contribution to income is growing and a strong pipeline of servicing additions is evident for the rest of 2022, along with the same laser focus on controlling costs as well as integrating the RMS team from our recent 2021 transaction.
Please turn to Page 14 for an updated path to our targeted returns by the fourth quarter. Here, we would like to walk you from the second quarter adjusted pretax income results of negative $26 million to a projected fourth quarter pretax income that we expect will deliver a 9% ROE before notable items.
The first improvement of approximately $13 million is driven by nonrecurring items linked to the prior strategic asset sales and mark-to-market impacts that we just discussed.
Second, we move to our productivity and rightsizing actions, which impact all of our business segments and corporate functions that Glen discussed on Page 7. Combined, these first 2 actions will move us to a positive pretax income. We then anticipate a return to profitability for origination, primarily due to the shift to higher-margin products.
Finally, our other net income contribution from servicing will increase due to higher volumes, especially in subservicing such as via MAV, reduced runoff as speeds decline and a focus on cost control and improved processes. Collectively, these corporate-wide efforts will propel Ocwen to a strong fourth quarter. Back to you, Glen.
Glen Messina
Thanks, Sean. Now if you could please turn to Slide 15. We believe our balanced and diversified business, exemplary servicing performance, proven cost management and track record of execution position us well to navigate the market environment ahead. Consistent with our expectations, first half 2022 earnings were driven by MSR fair value adjustments offsetting origination headwinds and the build-out of our reverse servicing platform.
We delivered positive net income, book value per share appreciation and improved liquidity despite the impact of continued rising rates and spread widening and the adverse impact of our planned strategic asset sales. Given the current market conditions, we’re focused on a deliberate strategy comprised of 5 initiatives that permeate everything we do to drive business performance and shareholder value.
First, we’re leveraging our balanced and diversified business. As we said, servicing profitability improved with higher rates, and we have a strong value proposition as demonstrated by our subservicing boardings and robust subservicing opportunity pipeline.
Our recognized special servicing skills position us to deliver value to clients, investors and consumers in an economic downturn, and we have derisked our portfolio. We believe we are uniquely positioned in the reverse mortgage market with end-to-end capabilities and the opportunity for favorable demographics and home price appreciation to drive future growth within the market.
Second, we’re focused on delivering prudent growth through capital efficient servicing additions and expansion in higher-margin products, channels and services. Third, we’re reducing our cost structure to match market demand and improve profitability.
Fourth, we’re optimizing liquidity, diversifying financing sources and positioning for higher rates. And finally, we’re allocating capital to maximize value for shareholders.
Despite the recent headwinds in reverse originations, we believe with the benefits of successful execution of our business initiatives, we can deliver after-tax ROEs before notable items in the fourth quarter at or above our minimum target of 9%. I’m proud of how our team is executing in unprecedented market conditions.
We have an established track record of successfully navigating multiple mortgage cycles with a focus on prudent growth, cost management, operational excellence and customer experience. We will be unrelenting in this focus. And with that, Danielle, let’s open up the call for questions.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Eric Hagen of BTIG. Please go ahead.
Eric Hagen
Maybe a couple on liquidity here. You mentioned harvesting gains in MSR as a driver of earnings. Can you give more detail around, kind of, what you mean by that and how to think about that relative to the amount of liquidity that you do carry? And maybe more specifically, how you’re thinking about repurchasing more stock and debt in light of being able to monetize MSRs at their current value?
Glen Messina
Eric, thanks for joining us today. So Eric, the — yes, we’ve been — look, I’d call it dynamically managing our MSR book. So last year, if you look at — we focused a lot of our growth on MSR acquisitions last year through correspondent or bulk transactions. Last year, I think it’s generally known that MSR multiples were probably in the mid-4s lower than where they are today.
In the first quarter of the year, as we discussed in our last quarter earnings call with MSR values appreciating and multiples getting up into the 5s. We did take the opportunity to harvest value appreciation in our MSR portfolio. So we got a very strong bid, strong price for MSRs in the first quarter. It helped us validate where the market bid was for MSRs — and again, that’s proven to be, I think, a good trade since MSR multiples quite frankly, have come down a bit since then. So I think we timed that one pretty well.
You know what — our strategy has evolved. We now have — we have MAV as one of our key MSR funding partners, which allows us to grow on a capital-light basis. Additionally, we’re working on developing new MSR funding partnerships. We’ve talked about 2 new providers we’re in discussions with. And I think that gives us the flexibility to dynamically manage our portfolio to optimize profitability as well as optimize our liquidity position for other investments could be M&A, it could be share repurchase, debt repurchases, it gives us flexibility.
Eric Hagen
Got it. That’s helpful. Maybe just one follow-up. I mean is there a minimum level of liquidity that you aim to run the portfolio with over the, kind of, near term versus maybe the medium to longer term?
Glen Messina
Yes. So look, here in the near term, look, we want to make sure we have sufficient liquidity to support all the initiatives that we have in the business. We want to grow our servicing portfolio and then complete our share repurchase program as well. I think as I’ve mentioned before, our liquidity varies greatly — or I should say, cash balances vary greatly throughout the month as service as our custodial balances change, payments come in, payments go out.
Look, we — as you look at the fourth quarter of last year, we closed with roughly $196 million in cash on the balance sheet and a little bit more with unused lines. Our focus really right now is we think at the — our current cash levels, we have enough of cash and liquidity to support the initiatives of the business.
Longer term, I think as you know, all of us in the industry will have to meet increased FHFA capital and liquidity guidelines. We are expecting them to be put in place towards the end of this year. And based on our initial work, we think we’re in compliance with those capital guidelines. We believe we can meet them. So that is one of the things we take into consideration, too.
Eric Hagen
Got it. If I could sneak in one more. If we were to think about the net equity in the company and how it’s allocated, how much equity do you think you have behind the MSR, the forward origination business and the reverse origination business? And how easily would you say you can move capital back and forth between those segments of the business?
Glen Messina
Yes. We don’t publicly disclose a specific capital allocation framework, but as a rough rule of thumb, look, our — the capital behind our — where our originations businesses is basically the equity haircut on our warehouse lines, right? So that is the fundamental equity invested in our businesses. And when our — when our Q comes out, Eric, we can work with you to sort through that and see if there’s a way we can navigate there through the Q.
And then for the MSR portfolio, it’s our — the book value of our MSR is minus our MSR liability and then our secured borrowings against the MSR. And then I’d say our corporate debt stock is allocated just ratably across. Look, by definition, our servicing business carries, I would say, carries the majority of our equity versus our origination businesses, especially now as origination volumes are coming down and warehouse balances are declining.
Operator
The next question comes from Matthew Howlett of B. Riley. Please go ahead.
Matthew Howlett
Glen, you first — I got to commend you for the repurchases. I think it’s driving — it’s going to drive significant shareholder value and both the debt and the equity. And when you talk about — so I just want to go over capital allocation going forward. How much — I mean for the MAV upsizing and these other possible deals, I mean, how much capital are we talking about potentially going into these sidecars?
Glen Messina
Yes. So for MAV, we are targeting to increase the equity capacity in total by $250 million assuming our current ownership structure of 85% owned by Oaktree and 15% owned by Ocwen. That would be $37.5 million of equity if it was fully funded. And obviously, if we chose to put the equity in.
And then in the other vehicles, Matt, I’m not — we’re not far enough along in the discussions to really talk about exact sizing on those facilities, but I would say stay tuned. There is, I think, a robust appetite for MSRs out there in the market. And I think we, again, offer a compelling value proposition to MSR investors and our ability to service.
So yes, more to come on that. So right now, you can assume for the MAV side card vehicle, 250, if assuming we get it closed and signed and all that good stuff, $250 million of incremental — of equity investment capacity, of which our share would be $37.5 million.
Matthew Howlett
Got you. Okay. That makes sense that sort of what it looked like the first round. But when you look at the — you’re going through the share repurchase, very quickly, you could be done here in a couple of months. And then, of course, you’re sort of doing one-for-one on that debt reduction.
One, how inclined are you in the Board to re-up this when it’s through, the $50 million? And then the guidance, I look at the walk here and does it include — I mean, this path to 9-plus percent, 11%. I mean how much does that include the interest cost reduction? How much does it include ROE in terms of if you do retire another 1 million shares.
And then — and then how — sort of surprised you didn’t see sort of like an improvement in servicing margin from lower — in lower prepays and higher escrow balance, I mean is that all in there?
Glen Messina
Yes. So let me unpack that, Matt. You got quite a bit there. So yes, yes, yes. So in terms of the share repurchase program, look, as I said on the call, we think our share price doesn’t reflect the potential of our business, our earnings capability or the value we can deliver to clients. And given where our current book value per share is, we think it’s a prudent buying back our stock it is a prudent investment.
The Board and management continuously review our allocation of capital. Obviously, we stand behind the equity of the company. Management has bought. The Board has bought, shares the company is buying back shares. — we’ll — once we get close to the expiration of the program as part of our capital allocation framework, we’ll take a look at what our investment opportunities are and decide then.
As you know, it’s always subject to market conditions at that time, right? So — but look, we’ve demonstrated our willingness to step behind the stock of the company and demonstrate our confidence in our plan.
As it relates to the forward look, as I said before, we’re not assuming any recovery in margins in reverse at all. We’re assuming that origination volumes remain depressed in the near term. We’re also not really assuming any further prepayment reduction on the forward side of the business. You might say that that’s conservative, given what some other people out there are saying. But look, we think prepayments have gone down to historical lows and we’ll have to wait and see if they get any better than this.
So I think the business is — and if you look at what we have to do to deliver on the forward — our forward projection for the fourth quarter, 2 of the biggest blocks in [ storm’s ] walk is, one, the nonrecurring losses from the asset sales and mark-to-market that we did in the second quarter and as well as our execution on cost reduction, which, again, 90% of the actions have either taken place or expect to be completed with that by the end of the third quarter.
In terms of the servicing profitability first quarter versus second quarter, again, we — the biggest hit to the servicing P&L this quarter, MSR fair value change was a good guy. On the bad guy side, it was $17 million in charges from our strategic asset sales and other unfavorable mark-to-market adjustments.
If you were to look at probably average UPB in the servicing portfolio, roughly flat quarter-over-quarter, we did sell a big chunk of MSRs in the first quarter, harvest value appreciation. So net-net, again, no material change, slight reduction in servicing amortization. But yes. And on a go-forward basis, when you look at the walk, we’re not assuming major improvements in servicing earnings in Sean’s walk. Just as we see it.
Yes. Look, we’ve got floating rate debt, which is — the interest cost on that will go up. Interest earnings on escrows will go up. So the assumption there is that those 2 generally offset each other. And again, because we’re not assuming speed slow any further than where we are, and we’re modestly growing the UPB balances for the back half of the year. That’s where we come out. And look, if we’re wrong and prepayment speeds slow further than where they are today, that’s a good thing for us and everybody else in the industry.
Matthew Howlett
Yes. Certainly looks conservative to the — some of the other guidance we’ve heard from the servicers. Last question, Glen, how much is left on that reserve litigation? You noted that you released something? And then how much is the DTA? How much is the reserve against the DTA? I’m assuming it’s still forward reserve. Could you give me those 2 numbers?
Glen Messina
Yes. The legal reserves will be in our Q when we release it this afternoon. So we can share that right after the Q is release. In terms of DTAs, again at the — I’ll talk — because our Q is not out, at the end of the first quarter, 100% of our DTAs were reserved, and we can chat what that position looks like at the end of the — second quarter. Yes. I think as — I’m sorry, long-term guidance?
Matthew Howlett
Well, just in terms of the company has guided to be profitable going forward, we should investors, you encourage investors to start to look at that DTA as having value.
Glen Messina
Yes. Look, it’s — again, when the Q comes out, we can talk about the DTA. I think, as you know, the accounting rules around that is, as the company returns to profitability. We’ve got to demonstrate, Sean, what is it?
Sean O’Neil
Three years.
Glen Messina
Yes, 3 years of profitability before you can start releasing the DTA reserve. So we’ve not included any of that in any of our thinking around returns for the business going forward, quite frankly.
Operator
The next question comes from Tommy McJoynt of KBW. Please go ahead.
Thomas McJoynt
So just given the move down in rates, kind of, in July. Can you talk about the magnitude of any downward pressure on the MSR mark? Or how most of that population is still out of the money through finance you wouldn’t expect much remark.
Glen Messina
Yes. So Tommy, look, it’s — the 10-year treasury has been massively volatile. As you know, it’s been up or down, probably over 80 basis points in the last 60 days. Our Q when it comes out, will have a — the typical rate shock table in the back of the Q, it’s plus or minus 25 basis points.
Just generally speaking, our portfolio has a — has a lot of low coupon product in it. There’s not a lot of high coupon product in it. And as we talked about at the end of — during our earnings call last quarter, the DV01 or the dollar value change for 1 basis point change in interest rates has been compressing as rates have gone up because of prepayment speed burn out.
So again, when the Q comes out, we can give you some further guidance on what the DV01 is as model, and we can share that with you later on this afternoon. But again, as you can see, first quarter big MSR value improvement, second quarter smaller MSR value improvement as you walk back down the curve, that general pattern tends to follow. So based on the S-curve of prepayments in our portfolio.
Thomas McJoynt
Okay. Yes, we’ll keep our eye out for that. There was some discussion on, kind of, the capital allocation, I am just thinking about. Is there anything on the M&A side that might make sense? Are there any areas that you feel like having more scale would be very beneficial?
Glen Messina
Yes, Tommy. Look, scale in this business is good, right? So it’s servicing originations — servicing and originations have relatively high fixed cost structure, particularly servicing. So we constantly have our eye out for potential acquisitions that would give us scale or enhance our capabilities. We demonstrated our willingness to do that.
Certainly, last year as we were big buyers of MSRs last year. And we also did the TCB transaction last year. We did the reverse subservicing business last year to expand capabilities. So look, we have our eyes open and ear to the ground — we obviously can’t talk about anything specifically. But as we think through our capital allocation model, looking at acquisitions is something we always want to have some optionality to retain dry powder for.
Thomas McJoynt
That makes sense — excellent.
Operator
[Operator Instructions] The next question comes from Preston Graham of Stonegate Capital. Please go ahead.
Preston Graham
The FHFA guidelines you mentioned during Eric’s question. I guess any additional detail there on, sort of, how you’re positioned, how that’s affected you would be great.
Glen Messina
Yes. So look, we’ve run through our modeling based on the FHFA capital guidelines. Sean, I don’t know if our footnotes in the financial statements talk specifically about how much capacity we have vis-a-vis the new potential guidelines.
But what I could say, Preston is, look, we’ve looked at that. We think we’ve got adequate capital and liquidity to navigate those new guidelines. I could tell you from a day-to-day operating perspective in the business, when we look at our business operating reviews, our key risk metric dashboard, we’re tracking to both the old and new capital guidelines to make sure that when implemented, we’ll be in a position to be in compliance.
As you know, those capital guidelines are probably more punitive on Ginnie Mae assets than they are on GSE assets. Compared to others in the industry, we have a smaller Ginnie Mae book. It doesn’t quite match the overall industry composition of Ginnie Mae originations. So we are somewhat benefited by that. But we are looking to grow our Ginnie Mae business.
But right now, I’d say we’re only modestly growing in that space. But look, I feel good right now based on what we know the capital guidelines and how we’re positioned to address them upon implementation at the balance of this year. And again, that’s always subject to any changes or amendments that may be made by when they were finally implemented.
Preston Graham
Got it. Okay. That’s helpful. And then you touched on it in the prepared remarks, but sort of maybe just some general commentary on how you think the business would perform in a recession, would be helpful.
Glen Messina
Yes. So Preston look, in a recession, there are obviously pluses and deltas — minuses that happen in the business. So during a recession, obviously, from a servicing perspective, for owned servicing. And again, that’s less than — slightly less than 50% of our portfolio today, you would expect in a recession that delinquencies would rise and with rising delinquencies, our cost to service loans would go up, servicing delinquent loans is more expensive than servicing performing loans.
Also, you don’t recognize revenue when loans go delinquent, and you have to make servicer advances. In the case of GSE loans, there’s a stop advance after a couple of months, a couple of 4 months. In the case of Ginnie Mae loans, you’ve got advanced P&I and T&I forever until they get through foreclosure. So there is a profitability compression that happens in owned servicing as delinquencies rise, that would also adversely impact the MSR fair value.
On the subservicing side of our business, which again is slightly more than 50% of our business, we’re fairly insulated from what happens with rising delinquencies, most of our contracts do include provisions, I’ll call it, revenue enhancement provisions, revenue escalation provisions. As our cost to serve goes up, we get incentives for servicing delinquent loans. And there’s also in some of our contracts performance incentives as well as we mitigate delinquencies, compress total delinquency cycle time and those types of things.
And then we don’t have in subservicing, there is no MSR, so there’s no adverse impact to our balance sheet and for no advancing requirements, either we don’t advance. We’re not providing service advances when we — subservice. So again, downside in owned servicing, I would say, neutral to upside and subservicing. Given our legacy as a special servicer, and again, we’re a top-ranked special servicer with near-perfect performance on Ginnie Mae delinquency milestone time lines as well as being a top-rated servicer by Fannie, Freddie and HUD.
Look, we think there’d be additional opportunity for us to add value to clients, investors and homeowners through delinquent servicing, and we think it would give rise to either opportunities to purchase delinquent servicing or to engage in delinquent subservicing. So we think that’s a net benefit to the business.
And then on the origination side, again, if you believe in a recession authorizing delinquencies, the Fed would be accommodative in lower interest rates, well, then you’ll see what happened in the pandemic right, so rates come down, refinancing incentive goes up, margins widen, volume goes up. So it would be potentially a boost for the origination side of the business. And frankly, that’s what happened in the — great Recession as well, too, back in post 2008 financial environment. So big refi wave in 2011, ’12, ’13.
Operator
Seeing that there are no further questions. I would like to turn the conference back over to Glen Messina for closing remarks.
Glen Messina
Thanks, Danielle. Everyone, look, we are operating in a volatile and uncertain environment, certainly as it relates to mortgage banking. We’ve active — we’re actively monitoring the financial markets, the economic environment and industry conditions closely.
We’re dynamically managing our operations, our plans and targets and will adjust as necessary to address emerging opportunities and risks. We have a deliberate strategy to address the choppy waters and tough environment that we’re operating in, and I’m very pleased with the performance of the business.
I’d like to thank and recognize our Board of Directors and our global business team for their hard work and commitment to our success. And I look forward to updating you on our progress on our next earnings call. Thank you all very much.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Be the first to comment