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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. And welcome to the Mr. Cooper's Q3 2019 Earnings Conference Call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker, Mr. Ken Posner. Please go ahead, sir.
Good morning and welcome to Mr. Cooper Group’s third quarter earnings call. My name is Ken Posner, and I am SVP of strategic planning and investor relations. With me today is Jay Bray, Chairman and CEO; and Chris Marshall, Vice Chairman and CFO. As a quick remainder we’ll be referring to slides that can be accessed in our Investor Relations webpage at investor.mrcoopergroup.com. This call is being recorded.
During the call we may refer to non-GAAP measures which are reconciled to GAAP results in the appendix to the slide deck. And finally, during the call we may make forward-looking statements and you should understand that these statements could be affected by risk factors that we have identified in our 10-K and other SEC filings. Further, we are not undertaking any commitment to update these statements if conditions change.
I’ll now turn the call over to Jay.
Thanks, Ken and good morning everyone and welcome to our call. I'm going to start by reviewing the highlights of the quarter on Slide 6. We reported net income of 83 million or $0.90 per share, which was reduced by a mark-to-market of 83 million and very strong pre-tax operating income of 171 million.
The key thing for us this quarter was the continued strong performance of our origination segment, which generated 178 million in pre-tax earnings on a record 11.9 billion in funding. We benefited from favorable market conditions, which you can see in our gain on sale margins, as well as the fact that locks we're still running ahead of fundings. But at the same time, these results reflect extremely strong execution.
In the last two quarters, we scaled up faster than the rest of the industry, and we produced stronger margins too. Strong execution is the result of investments we've made in the last few years, ranging from the creation of a home advisor team to the acquisition of Pacific Union. Stronger origination capabilities make our overall business model more balanced and more profitable than it was in the past.
Of course, we all know the refinance conditions depend on the interest rate environment, which is why we're very focused on driving further progress in servicing them. The servicing portfolio was stable during the third quarter, which was very much in line with our guidance. And you'll know we were able to replenish the UPB this quarter solely from originations, flow relationships, and sub servicing without having to make bulk MSR acquisitions, which is an important milestone for us.
As you would expect higher prepayment speeds impacted the servicing margin, which averaged 6.2 basis points for the quarter, excluding the mark and tightened spending. I'm very pleased with our execution of Xome, which afforded pre-tax operating income of 13 million, up from 10 million last quarter. As we commented back in September, Assurant crossed the breakeven point in July, and is now making money.
Late last year, we made the decision to slow down the integration of Assurant to make sure that we deliver a smooth transition to our third party clients. And while this decision was painful in the short-term, it was absolutely the right call. And today Xome is back on track with our original expectations. For this quarter, I would highlight strong results in the title unit, which is benefiting from refinance conditions. And I am very encouraged by continued third party client wins at the auction exchange.
Our cash flow was very strong during the quarter, and as a result, the ratio of debt to EBITDA dropped to 4.1 times, which is below the target of five times we established earlier this year. Additionally, as we communicated recently, the company called 100 million in senior notes, which settled in early October, which was another step in the direction of strengthening our balance sheet. While we feel confident in servicing our debt, we also believe that further deleveraging will drive stronger profitability and stronger cash flow and provide greater financial flexibility.
Finally, on Slide 6, I wanted to make sure that you saw that Mr. Cooper Group was certified as a great place to work. And I'd also like to share with you that this quarter we reported the lowest number of customer complaints in the company's history. I firmly believe that our culture, which extends to how we treat teammates, customers and other stakeholders, will be a key determinant of our long-term success. And I'm really pleased with these two accomplishments.
If you'll turn to Slide 7, I'd like to talk about this quarter in the broader context of our strategic priorities. As you recall, in our fourth quarter call last year, we told you 2019 would be a year during which we take a pause from growth to focus on integration, deleveraging and improving profitability. Since then, we've completed the integrations of Seterus and Pacific Union and those acquisitions are delivering the results we anticipated.
With respect to Assurant, we've integrated the field services and title units and the back office. And we will complete integration of evaluations unit in the first quarter of next year. Turning to profitability Titan is on schedule, the investment spending should be minimal after next quarter, and the projects are starting to deliver benefits. We're also moving forward with a series of corporate actions designed to take 50 million out of the expense run rate.
After growing the portfolio at a 40% compounded annual growth rate over the last decade. These corporate actions are designed to proactively identify opportunities to realize efficiencies. And we are now moving forward aggressively in areas like technology, use of consultants and overall staffing. And then as I just mentioned, we're making progress on the deleveraging plan, taking advantage of strong cash flows to retire debt ahead of schedule.
Earlier this year, we shared with you a target of producing consistent and sustainable returns on equity of 12% or higher. This quarter, we significantly exceeded that goal on both an operating and GAAP basis, but we know that refinance conditions won't persist. As we look ahead some of the key things for 2020 are likely include strengthening the balance sheet, driving further improvement in the cost structure, a thoughtful approach to growth and improving the customer experience.
And on that note, I'll turn the call over to Chris.
Thanks, Jay. Good morning, everyone. I'm going to start with a high level review of our results on Slide 8. On a GAAP basis, we reported net income of $83 million or $0.90 per share, which reflects pre-tax income of 107 million, a mark-to-market of 83 million, an intangible amortization of 12 million and the intangible book value increased from 15.95 to 16.88 per share at quarter end.
Pre-tax operating income was very strong at 171 million. And consistent with prior disclosures, we calculated operating income by taking out the interest rate related mark in our MSR believing in that portion of the mark attributable to amortizing the excess of fair value over cost. That difference was $32 million in the third quarter. We also added back intangible amortization. And finally, we took out adjustments totaling a million dollars, which included a $4 million gain from re-measuring the contingent consideration associated with the Assurant acquisition.
You may recall we had a similar view in the first quarter. This liability is now zero, so you won't see any further adjustments here. The other adjustment was a $5 million charge in the corporate segment for severance, which relates to the corporate actions we mentioned on our call last quarter. You should expect additional charges related to our corporate actions of approximately $10 million in the fourth quarter.
Now, I want to comment on two other items, which were not trading as adjustments, but I'd like to call them - so it doesn’t cause you any confusion as you go through our results. During the quarter, we collapsed a securitization trust and sold off the related loans, which we'd carried in our corporate segment as a legacy portfolio dating back to 2009, which produced a $21 million benefit.
We allocated 10 million of that benefit to the corporate segment, which is where those loans were carried as non-core assets and $11 million to the servicing segment, which has had the responsibility for ongoing management of those loans since 2009. And which performed all the work related to the collapse of the securitization. In the corporate segment, there was also a $10 million reserve associated with the legacy business unit that's in the process of being shut down.
Now let's turn to Slide 9 and discuss the mark and the carrying value of our MSR portfolio. During the quarter we had a total mark of 83 million which reflected the impact on our MSR of the 12 basis point decline in the mortgage rates during the quarter which you'll see in the 10-Q as an increase in a lifetime CPR assumption, which moved from 13.7% to 13.9%. Offsetting the mark on the MSR was the mark on the excess spread liability, where we increased the discount rate to reflect recent comparable valuations, we're seeing the marketplace right now.
We commented last quarter on the opportunity to help our customers save money through refinancing their mortgages and with the additional reduction in rates since then, we estimate that as of quarter end 1 million or fully one quarter of our customers would save on average $220 a month by refinancing. That suggests that there's still a huge opportunity for direct to consumer channel, even after two quarters of extremely strong funding volumes.
Now, let's turn to Slide 10 to talk about originations, which once again contributed record results. In fact, EBT was 178 million up from 118 million in the second quarter on record funded volume of 11.9 billion. Funded volume was up 19% sequentially, and in line with the market, but since the refinance boom began, we've dramatically outperformed with our volumes up to 131% year-over-year, compared to 30% for the market.
The margin was very strong and hundred and 30 basis points, which was up from 90 basis points last quarter. This is partly a reflection of the refinance environment, which you can see in our gain on sale margins, which expanded by nearly 30 basis points sequentially, and partly a reflection of strong expense leverage, especially in the direct to consumer channel, where the origination margin remains above 200 basis points.
I want to comment on our recapture ratio, which you may have noticed on Slide 5 declined to 38% in the quarter. The reason for this decline is that we're being very disciplined in how we add capacity. And during the last refinance boom in 2016, our recapture rate was at a similar level of approximately 40%. We'd expect the recapture rate to increase when refinance volumes begin to slow down. Now, looking ahead, based on our pipeline and the current interest rate outlook, we're expecting strong fundings to continue into the fourth quarter.
However, we expect to see rate locks decline, as we have the typical seasonal slowdown in the fourth quarter with the holidays and the slower purchase market and pay off requests are already starting to slow down. As a reminder, rate locks drive revenues while fundings drive expenses, and therefore we expect the overall margin of contract in the fourth quarter. As we think about 2020, I comment that we're now seeing industry capacity start to build back up again. And accordingly we're planning for more normal market conditions next year.
Now let's turn to Slide 11 and review portfolio growth. Total UPB ended the quarter at 641 billion, which is consistent with our prior guidance that we would take a pause from growth this year, as we focused on integration, profitability and deleveraging. On a positive note, despite CPRs at 17.5%, we're still able to sustain the portfolio without any bulk acquisitions, thanks to extremely strong originations, as well as flow relationships and growth in sub servicing.
Netting out the portion of runoff economically attributable to excess spread co-investors, we estimate the replenishment rate in the forward owned MSR at 99%, which is consistent with last quarter and almost double the level of a year ago. Finally, the reverse portfolio continues to run off. It was down 22% year-over-year and now it accounts for less than 4% of the portfolio.
Now let's turn to the servicing margin on Slide 12, which we've historically discussed, excluding the full mark and Titan expenses. And on that basis, it was 6.2 basis points in the third quarter, down from 6.7 basis points in second quarter, which should not be a surprise given the impact of higher CPR on amortization.
I want to give you an update on project Titan, which is a major investment project designed to drive improved profitability, and a better customer experience. Titan spending in the quarter was $7 million down from $11 million last quarter and we remain on schedule to complete most of the remaining spend by the end of the year. In terms of benefits, I call out roughly $5 million this quarter, coming from several different projects including instant payoff quotes, productivity tools for the modifications team and fee optimization projects involving legacy mortgage swaps [ph].
As we roll into 2020, we'll wrap up Titan, but there'll be other investment projects with similar goals including profitability and further enhancements to the customer experience, which we regard as critical to our long-term success. Instead of breaking out the spend we'll manage total servicing expenses as part of our plan to achieve and consistently sustain the 12% ROTC target for the company as a whole.
It's still premature to offer guidance on 2020. But what I emphasize is that while originations and servicing segment earnings can experience volatility, when interest rates change. When you look at them together, much of that volatility is offsetting. So we're confident that the two segments together will generate a relatively steady and stable base of earnings and cash flow in the fourth quarter and into next year.
Now turning the Xome, which you'll see on Slide 13, we saw excellent progress this quarter with pre-tax operating income up sequentially from 10 million to 13 million. Highlights of the quarter at Xome include getting Assurant from losing money to contributing positive results. Strong refinance driven order flow in the title unit and traction at the auction exchange with new third party clients which is helping offset the drag from the low delinquency environment.
Over the next few months, will be working on integrating the valuations unit, which is the last remaining integration from Assurant, as well as improving execution in each of the business units and going after more market share. What's exciting about Xome is the opportunity to win new clients, cross sell multiple services to existing clients and grow wallet share by out executing the competition. We're very confident in the $50 million guidance in pre-tax operating income for 2020 that we've already shared with you. And as a reminder, those earnings don't require capital, so they're very accretive to ROTC.
So let's wrap up on Slide 14 with a review of leverage and liquidity. As you recall earlier this year, we shared with you a target of bringing debt to adjusted EBITDA down to five times or below with a review that a lower level of leverage will improve our profitability and financial flexibility. During the third quarter, our EBITDA was very strong, thanks to the profitability in the origination segment. And as a result, the debt to EBITDA ratio fell to 4.1 times, which achieved that goal.
During September, we announced the retirement of $100 million in senior notes due in 2021, which settled in early October. We expect to continue retiring senior notes, although as we pointed out previously, we plan to do so on an opportunistic basis rather than at a steady cadence and during certain periods, we may choose to build liquidity. Earlier this year, we shared with you a metric called steady state discretionary cash flow, which is the amount of cash available once we sustain the MSR at its current level net of excess spread.
On that basis, steady state cash flow increased from 93 million in the second quarter to 170 million in third quarter, which reflects the strong performance in our origination segment, as well as the contribution of the trust collapse. As a reminder, steady state is an illustrative metric and it doesn't include impact of marks or any working capital fluctuations. During the third quarter our cash balances increased, while at the same time, we paid down roughly $50 million in operating lines on a discretionary basis.
So with that, I'll turn it back to Ken to wrap things up.
Thanks, Chris. I'm going to ask our operator to start the Q&A session.
Thank you. [Operator Instructions] Our first question comes from Doug Harter with Credit Suisse.
Thanks. Can you talk about –
Good morning Doug.
Good morning. Can you talk about your plans for cash flow in fourth quarter 2020? Now that you've kind of integrated the servicing acquisitions and brought leverage down kind of below your targets, just how you're prioritizing cash flow now?
Well, I think if I'm hearing your question correctly is, we're prioritizing to do with our cash flow and that still is to delever. We've talked about paying back the debt that is due in 2021 as our highest priority use for cash flow and that hasn't changed.
Got it and I guess, how do your growth opportunities kind of in the current context along with that repayment of the 2021?
Well, I think as we make more progress on the 2021, we think it's a certain point next year, we will have done - we will be a little more active in the acquisition market. But I think if you look at what we've done this year, even though we've taken a pause from any large bulk acquisitions our UPB is up significantly. And that's the benefits of our slow arrangements and our growth and servicing. And that will continue. But if you're asking specifically about buying pools, I think as we get into 2020, and make more progress on deleveraging that will become, more important part of our go forward plan.
Yeah, I think the - this is Jay. Obviously, we're in a really good spot if you look at the replenishment rate, right. It is a great level today from an economic standpoint. We're still replenishing close to 100% of the runoff. I think there's - we've had some recent wins in the sub servicing area, where folks I think, are really starting to see the benefit of our recapture capability. And so you have some financial buyers that are moving portfolios to us because of our recapture capability. So I think you'll see a lot of opportunity in sub servicing and then from an acquisition standpoint, look I think in GSC land, Fannie, Freddie, I don't think the returns are necessarily where we would want to invest capital today anyway, to Chris's point and the rest of 2020 and look for opportunities, but I like where we're at today. I'd like - the origination platform is kind of hitting on all cylinders, corresponding channels are actually performing quite well, and has a good mix of purchasing re-fi and, our platform can grow further. At the end of the day, we can continue to expand that. Look at some of the investments we're making within the origination platform. We're driving efficiencies and we're driving more leads and more submissions. And home advisor as we've talked about before, is just the home owned. It's up 115% quarter-over-quarter. So we feel really good about our organic capability.
Great, thank you.
Thank you. Our next question comes from Bose George with KBW.
Yes, good morning. Actually first just wanted to go back to the point Chris made this time that the 21 million benefit. Can you just go over that again, is that going through the OpEx in servicing and corporate?
The 21 million benefit from the trust collapse?
Yeah, from the trust collapse, yeah.
Yes, that was allocated. This is - I'm not sure what we actually included in our release. But this was a trust collapse and re-securitization of a non-core pool that had been sort of parked at corporate, but has always been serviced by servicing. And so the $21 million gain was allocated between those two segments. And the way we traditionally do that is we first recapture any cost or overhead that have been allocated, basically cover any loss that's been recorded. And then the rest of the revenue is allocated to servicing. So I think it was 10 million in corporate and 11 million in servicing
Yeah and this was 2009 - goes all the way back in time pose to a portfolio that we had back in 2009, that we actually securitized at that point in time and then eventually hit a cleanup call point where we could clean it up and did so accordingly.
Okay. And then the 10 million that you and Chris referred to as well, could you just go over that again?
The 10 million, I'm sorry, the 10 million that was the accrual?
At corporate?
Yeah.
Yeah, that was a general legal accrual associated with a small unit that we are in the process of discontinuing and some of it is for some current litigation and some of it is for some anticipated additional legal costs.
Okay, so that 10 million kind of offset the other 10 the benefit.
It did.
Yeah. Okay.
That's right. Yeah, corporate was better. Outside of those two things corporate was right in line with our guidance from last quarter.
Okay. And then in terms of the cleanup call opportunity is there more of this stuff that we could see periodically kind of benefiting in earnings?
Actually, yes, we have two. A couple of other cleanups, unfortunately, they don't have $21 million gains with them. I think they'll be small amounts of money. They will contribute cash, but they're not huge numbers. So we will do these at time to time and there are occasions when they generate a little bit more P&L benefit. I think we had one earlier in the second quarter. But that was in I think, the high single digit millions. So this was a fairly robust pool benefit.
Okay, great. And actually, just one more, this might be the size of the DTA valuation allowance. And just obviously, you've had a few profitable quarters, when do the accountant's kind of revisit the potential reversal of that valuation allowance?
We do it in the fourth quarter. We would traditionally do that it's also only complete our tax return. And this year is really the first year we're employing some tax planning strategies and so we'll have a lot to talk about only announce the fourth quarter. But I do think our improved profitability, the combination of that and our tax planning strategy says we have some opportunity to potentially reduce the valuation allowance, which I'd remind you is roughly $300 million. The overall balance, I don't have it right in front of me, but it's roughly a billion dollars.
Okay, great. Thank you.
Thank you. Our next question comes from Mark Hammond with Bank of America.
Thanks. Hi, Jay, Chris and Ken. On your debt, thinking about next year, so for the year 2021, if the 21s came out on today's LTM EBITDA it you'd be a turn lower 3.1 times and that's pretty well below the target. So you hit your target and you surpassed it now and then maybe even further. So then after that the question comes up in my mind is like, what's the right level after you hit the target?
Well, I don't want to anyway, take away from what was a great quarter across the board, but we're also very aware that we're enjoying the benefits of a very significant refinance boom. And we want to hit a target and sustain that target. So I think we'll think more about that as we get to maybe the midpoint of next year and see how we continue to do. We have a big backlog of customers that will benefit from refinancing. So as long as rates don't move materially, we should continue to see very strong and stable profitability through next year. But I don't think it's likely we're going to pivot away from our plan to reduce that total, the $592 million in debt do we pay down 100 million. I think you should expect us to continue to pay that down as we've said. However, we'll look at various opportunities to take out that amount of senior debt. I could change in time, change if we see big opportunities, but right now we think it's not just a matter of hitting the target, it's providing us greater financial flexibility to a number of things and we would love like to operate with that flexibility as much as just with a lower debt level.
And I think we said previously that one of our goals is to get to the pre-merger kind of debt level. So if you think about it over the next - between 2021 you'd like to get back to where we're at pre-merger standpoint, which would effectively if you take out 600, we'll be at that level. So I don't know if you were asking more of a longer term question or not.
And I'll just add, the other part of it is, our debts expensive and so by taking it out, we think will be much better positioned to restructure some of the remaining debt at much more attractive prices. And that's important to us long-term.
Got it, that makes sense. Pivoting more to an industry question, just wondering if you could share your thoughts on the recent news that HUD and the Department of Justice signed a Memorandum of Understanding around the False Claims Act that's supposed to encourage banks to re-enter the FHA space, I guess, what do you think of that?
Yeah, I think it's - look, I think we're great partners with HUD and Jamie, obviously, we're, big fans of their programs and their products and I think the announcement is great. I think it's a good first step, I think how do we think about the banks' long-term? It's still when you look at the customer profile certainly some of the mix within Jamie probably doesn't fit within the bank. The banks' target customer base, it depends on the bank and does it to necessarily in your footprint. So I don't know that we see the banks rushing back in, but I think it's a great first step right. And I think it's - I welcome it. And I think the industry welcomes it. And we're excited about it. Whether it drives a lot more bank participation, I think we'll just have to kind of wait and see on that.
Got it, thanks. That's all I've got Jay, Chris and Ken. Thanks.
Thank you.
Thank you, Mark.
Thank you. Our next question comes from Giuliano Bologna with BTIG.
Good morning and congratulations on a great quarter.
Thank you, Giuliano. Good morning.
So one of the things I just want to touch on - it's a little bit more of a cleanup question, there is a fairly large change of working capital during the quarter is the way to think about that. I think you mentioned paying down some of the lines, but is there anything else that kind of flowed into that number?
I think it's the higher originations and the usual warehouse lines during the quarter is the biggest item. That's the only single big change quarter-over-quarter.
That makes sense. And again in the past, there's been a couple mentions of potential opportunities to release some working capital from a few other initiatives. Has anything progressed on that front or is anything flowing in from that side?
I don't think there's any big development there. We have been paying down lines a little bit less this quarter than last quarter. But I think you'll see us paying down our MSR lines, but certainly making greater use of our warehouse facilities. Net-net I'm not sure it'll net out to a big change. But the cost is different between those two types of facilities. So we're saving into interest expense as we go.
That sounds good and the only other question is on the leverage side of the platform, obviously, you're getting the benefit of originations right now. But would there be any opportunities down the line to look at refinancing some of the structure? And I appreciate that the call dates are a little bit further out and are expensive. But would there be an opportunity down the line to kind of [indiscernible] or re-fi?
I definitely think that would that is very much in our plans as to pay down the 2021s. And then look at what opportunities we have to restructure, extend the maturities and bring the overall cost down. Again, the 2021s are at 608 and 23s and 24s are at 808 and 908. So it's pretty expensive debt. And we think looking at levels today, if we were to restructure today, we could bring that down considerably. So that is very much what we're planning to do. But of course, lot can change between now and that point maybe at the end of next year.
Yeah, I'd say it's something we are having an active dialogue around quite frequently. And we would intend to do that to Chris's point, depending on market conditions and performance going forward. But it makes a ton of sense to relook at that stack and drive cost down and get the maturities to the levels that we want to them at.
That makes a lot of sense. That was all for me for now, and I really appreciate the time.
Thank you, Giuliano.
Thank you. Our next question comes from Henry Coffey with Wedbush.
Good morning, everyone. And let me add my congratulations. It's been an amazing amount of work that's going on this year. I was wondering if you can expand on the $83 million MSR mark. I know you said you had the basic mark against the MSR and then you had some changes related to the charges on the discount, I mean, the charges on the financing. So could you kind of expand on the details behind that?
Yeah. Well, actually, I think the discount rates changed across the board, but just they were much more significant on –
And then what rate and what is the rate?
Henry there are different rates for each product type and so they'll be in the queue, which will follow the mile, so happy to go through them offline.
No, I can get it that's easy. That would be easy for you.
But there are more - there's more of a change in the ESL. And I think that was driven by the more significant volatility in rates this quarter, and what we saw in market comparables. We use a third party to dilute that. And so I think quarter-to-quarter we look at the market. If there aren't significant changes, we'll stick with our discount rate. I think this quarter was much more of a significant swing. Be happy to go through that with you - tomorrow after where you release.
The $83 million, the major components of that were the MSR mark and the ESL Mark, can you can you give those numbers?
The ESL mark offsets the MSR mark. And then within the 83 million, there was 51 million due to interest rates. The balance was due to the difference of fair value to cost. Is that what you're asking me?
No. Yeah, what was the MSR mark and what was the ESL offsetting number. I mean I know it's in the queue, I was just trying to get it.
Yeah.
I can get it later. Don't worry.
We can - if you want to call us later.
No, I'll call later on. Don't worry. And then in terms of your MSR, obviously the - I'm sorry, your origination margins. Obviously, corresponding is a great way to build servicing a very, very low cost of origination. And that's why I kind of liked the fact that you're guiding towards that combined margin, but what do gain on sale and the two product barriers look like?
I have overall gain on sale. I don't know if we have –
What was that number?
Yeah, it's over 200 basis points decrease. His specific question was gain on sale. Henry let's give you those numbers right after the call.
Super. And then finally just - it seems like all your cash flow is going to be dedicated to paying down debt over the next couple of years. In your discussions with the GSEs and the FHFA and I know you're much more involved in the dialogue and the MBA conferences going on in Austin as we speak. There's been a lot of chatter coming out of the FHFA about bringing new parties in, increasing credit risk transfer, et cetera, et cetera. In your conversations with both Washington and the Street, are there any concrete efforts? Is there anyone out there saying, I'm going to put up capital and this is what it's going to look like? Have you heard anything of substance besides all the political wins back and forth?
No, I think and even I think it's some of the meetings at the NBA, the independent Mortgage Bankers meeting, executive meetings, I think there was discussion with respect to Jeannie, and I think they're gathering information, right and they've done a lot of work around that with different issuers. But publicly they said, these are just more information gathering exercises and more kind of drills to consider but there's nothing absolute hindering that. I think they really decided on or nothing, that no action that they're going to take with respect to that process. I think it's more - and I think this is a good thing. It's more keeping them informed of the different types of issuers, the different types of - different capital, warehouse lines, all the different aspects of what makes up the different issuers, but there's nothing absolute that's come out from any of the agencies that we've seen.
Have you ever thought of issuing your own CRT bonds given that you've got a good servicer, you're a good originator, you probably know your own product better than the next guy?
Yeah, we're actually spending time on that now. It's something that historically we've thought about it, now we're actually doing quite a bit of work on it. And it's something we're considering.
Could you issue those bonds –
Henry just to come back –
Yeah, I'm sorry.
I'm sorry. I thought you were done. I was going to come back to MSR. The MSR mark was 195 and was offset by $112 million improvement in the ESL.
Great, thank you very much. Jay, one last question on the CRT bonds, could you sort of issue create your own and then transfer them to a REIT, some other REIT–
Yes.
I don't know call it NRZ or some other REIT, Two Harbors, so you kind of create the bond, but you wouldn't have to hold the bond. And then you could move it to somebody else.
Yeah, I think that's right.
Okay, thank you.
Yeah. And then on the originations Henry, I don't know if you were asking specifically gain on sale or pre-tax margin and we tend to look at margin, but the overall pre-tax margin for origination, which is in the presentation was 132 basis points, and which was a quite a bit from the second quarter, and I think the direct consumer channel was over two. So I don't know if that answers your questions around the margin [indiscernible].
No, it helped. Thank you. Thank you.
Sure.
Thank you. Our next question comes from Kevin Barker with Piper Jaffray.
Good morning.
Good morning Kevin.
In the servicing segment, where do you think you could sustain pre-tax earnings per UPB once amortization compound and some of the one timers start to settle out and not come through mostly?
Well, we've said in the past that we think core profitability in the servicing platform is somewhere five basis points or below five. But that's really a hard number to nail down. First of all, when you say the one timers calmed down or stop coming through. We've had them every quarter, this quarter and last year. So and we have a number of items that are slated to occur next year, just the timing of them are difficult to predict. So I think it would be a little misleading for me to say that we expect servicing profitability to drop to five basis points when CPRs calm down and of course that depends where these CPRs end up? I mean, right now, they're double from where they were a year - even than the first quarter, I think. No, more than double.
So if they return to eight or nine, our profitability is going to be better. If they stabilize that 12 or 13, it's going to be a little worse. So it's a difficult number to give you a real clear guidance on when we would hit that, but I don't think it's a low probability that we may have a quarter from time to time where we don't have something come through and see our profitability fall into the fives, especially with CPRs at such elevated rates. At the end of the day though, I think we feel very confident that we've got the lowest cost platform with lots of ability to leverage it. And that combined with the investments we're making and automation of the servicing work stream says that hopefully over time, we'll be able to reduce costs there in advance of some of those one-time things running out. So we feel good about the profitability of the servicing platform over the long-term.
Okay, and then I know REO expense [ph] dropped considerably from about 25 million below the quarterly average over the last several quarters. Was there anything in particular that caused the foreclosure expense to drop?
There are really two things there. One is the book that is the reverse book is running down really is curtailment losses coming down. We have a new leader and an outstanding leader who's joined us and is running reverse for us now Jay Jones and he has had a laser like focus on improving our forecasting curtailment losses. So he's seeing the benefit of that flow through. Actually overall servicing expenses are down in the quarter. And the big drivers were reduction in contaminate expenses. And of course, you're seeing project Titan flow through on the servicing side.
Yeah, so the 21 million drop, quarter-over-quarter and foreclosure was all due to project Titan and some of the changes that are going on from the –
Improvements in the reverse book.
Okay. And then also on the ancillary revenue that picked up to 48 million, was that all due to the trust collapse or did that come somewhere else? And then also the servicing interest income was also very high at around 15 million to 20 million above the typical run rate. Was there something else that came through there as well?
First of all, less than trust collapses [ph] contributed –
It was a 16 million contribution from the trust collapse in revenue and now it was offset by a $5 million expense.
And I don't know of any other noteworthy.
I mean, I think when you look at the ancillary so they were up overall –
Yeah, prepays - we had more prepays to gather more ancillary.
Yeah. And so, I think just a function of capturing those feeds from the additional prepayments, and then just general late fees, et cetera, were up quarter-over-quarter.
Got it and then net interest income will come through so would the trust collapse come through interest income?
Revenues.
Did you hear that Kevin?
Yeah, okay. That's all I have. Thank you.
Thank you, Kevin.
Thank you, Kevin.
Speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to you for any closing remarks.
Great, really appreciate everybody joining this morning and we'll be available for questions after. Thank you. Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.