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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to Mr. Cooper's Fourth Quarter Earnings Call. My name is Ken Posner and I'm the SVP of Strategic Planning and Investor Relations. With me today is Jay Bray, Chairman and CEO; Chris Marshall, Vice Chairman; and Amar Patel, Interim CFO.
Let me start by reminding you of a few things. We'll be referring to slides that can be accessed on our Investor Relations webpage at investors.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. 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. The purpose of this morning's call is to review fourth quarter results. However, if you let me have a minute or two, I'd like to start with an update on Mr. Cooper's strategy for those of you who are new to the story.
Starting with Slide 3, following the financial crisis, the servicing market shifted to non-banks. And the agencies and large banks recognized the importance of servicers with specialized expertise and working with customers with credit issues.
From a start of $21 million in 2008, we've grown our portfolio to $546 billion making us the clear leader among the non-bank servicers. It's been a remarkable journey and Slide 4 provides you with data on some of the things we've done really well.
First, much of this growth reflects the trust of investors in our capability to work out troubled loans. The chart shows you we've returned on average 26% of delinquent loans to performing status which is more than double the industry average. Put simply, we kept a lot of people in their homes and significantly reduced losses for our government partners and other investors.
Second, we built a very efficient operating platform with direct servicing costs well below peers. Third, we've established a true customer-centric culture which includes rebranding the company as Mr. Cooper. This culture is transforming the experience for both team members and customers resulting in the highest retention and satisfaction rate in the company's history.
Finally, we've built a number of service offerings for our customers through Xome and recapture creating a clear competitive advantage.
Now, let's talk about where we're going from here on Slide 5. As the market continues to evolve, some of the success factors for mortgage servicers are changing. Historically, we differentiated ourselves by our loss mitigation performance.
But at this point of the cycle, delinquencies are falling to very low levels. That means that customers and team member experience an overall low-cost leadership will be key, which is one reason we are investing so much effort in project Titan our servicing transformation initiative.
Titan consists of several technology investments that are designed to further automate and reduce the cost of our servicing processes and position our team members to deliver an improved and differentiated experience for our customers.
Another important theme as the market continues to evolve with non-bank servicers now accounting for half the market, it will be absolutely critical for us to maintain our leadership advantage and continue to be recognized as one of the most trusted counterparties by the government agencies and other institutions.
Institutional risk management is more important than ever before. For Mr. Cooper, these market shifts implied some very clear near-term priorities. In addition to moving forward with project Titan, we've recently closed three acquisitions ensuring that everyone is boarded on our system flawlessly and every customer welcome to Mr. Cooper has our complete attention.
I'd like to recognize our new team members from Pacific Union and Seterus and welcome each of you to the Mr. Cooper family. Because of our size and track record, we have the opportunity to look at virtually every transaction that occurs in our space. But we don't feel that we're missing any strategically important capabilities and additional acquisitions are not a priority for us right now.
In addition to executing on Titan and integrating the acquisitions we will focus on prudently deleveraging our balance sheet. You can expect to hear more about that later in the year.
Thanks for listening to this quick review of our strategy. Now, I'm super excited to welcome Chris Marshall, Vice Chairman of the company. Chris has extensive leadership experience with major financial institutions and a track record of generating value for investors. He is the right person to help us move forward and to the next phase of our evolution.
Before I turn the call over to Chris, I'd like to express my sincere thanks to Amar Patel who has made an enormous contribution to Mr. Cooper since joining us in 2006 and especially, over the last two years, where he stepped into the role of CFO. Chris?
Thank you Jay and good morning everyone. I'm going to start by saying how excited I am to have joined Mr. Cooper. I was attracted to the company because of its remarkable track record of growth, its excellent operations and a strong leadership position, and its unwavering commitment to its customers. I think this company has a great future and I'm very glad to have a clear mandate from Jay and the Board to focus on efficiency, deleveraging, and most importantly creating shareholder value.
So, let's turn to Slide six and review some of the highlights for the quarter. Fourth quarter wrapped up a very busy year that included not only the WMIH merger and our name change to Mr. Cooper Group, but also three acquisitions, the last of which was announced just at the year-end.
And clearly successfully integrating these acquisitions as well as executing project Titan will be key areas of focus for us throughout 2019. At the same time, our existing business has continued to produce strong results, highlighted by excellent growth and improved margins and servicing excluding marks.
The origination segment produced strong volumes, although margins came under pressure as a result of the sharp movements in rates. But we took actions to right-size the platform in the quarter and as a result, we expect margins to be much stronger in the first quarter.
Thanks to the Assurant acquisition, Xome's revenue mix is now 57% third-party which is an important part of our long-term strategy. However, we're in the process of integration and as a result, Xome's profits were impacted in the quarter which I'll cover in more detail shortly.
Now turning to Slide 7, I'll start with an overview of the GAAP financial results which for mortgage servicers like us show the immediate impact to rate movements. But which were nonetheless critical to measuring changes in tangible book value which is a key valuation metric for many investors and it's certainly an important metric for us.
On a GAAP basis, the company reported a loss of $136 million or $1.50 per share and a decline in TBV which fell from $21.29 to $19.89, primarily due to $188 million fair value mark on our MSRs.
Now, the mark reflects the decline in interest rates we saw in the fourth quarter which translated into somewhat higher expectations for prepay speeds and somewhat lower expectations for custodial deposit revenues.
In addition to the fair value mark, we had goodwill re-measurements associated with the WMIH merger and the Assurant acquisition which are broken out in the table on this page.
Historically, Mr. Cooper chose not to employ derivative hedges for the MSR, but rather than manage interest rate risk by selling excess spread to capital partners, investing in our operational recapture capabilities, and emphasizing growth in the subservicing portfolio.
And in recent years, this was exactly the right strategies that positioned us to benefit from rising rates. Now, we'll revisit that strategy this year and share any changes with you if and when we make any.
Now, turning to the right-hand side of Slide 7, I'd like to make sure the underlying earnings power of the company is very clear. Not only were results impacted by the mark and other transaction charges related intangible amortization, but also you're seeing significant investment spending on project Titan and the drag from integrating the Assurant mortgage services.
If you exclude these costs from our pretax income and then apply to our marginal tax rate, you'd come up a number of $0.55 which is broadly in line with expectations. Now, we provide this analysis so that you can distinguish between our underlying profitability and discretionary investments.
I guide you to think of 2019 as a year of investment and integration which will strengthen our platform and position us for continued growth and higher returns in 2020 and beyond.
Now, let's turn to the servicing portfolio on page 8 and talk about growth, which is a very good story in 2018. In the fourth quarter, the total servicing portfolio grew 7% and was up 8% year-over-year thanks in part to ongoing expansion in subservicing, which was up 17% year-over-year. Also contributing to strong fourth quarter growth were low CPRs and a strong overall recapture rate of 26%.
I want to highlight subservicing as an important part of our strategy to produce higher and more consistent returns, because subservicing requires minimal capital, shields us from fair value marks and provides more attractive economics for credit stress portfolios. You can see how the company has been moving in this direction for several years with subservicing growing from 5% of the total portfolio in 2014 to 41% today.
Last quarter, we told you the servicing portfolio would grow by at least 7% in 2019 and thanks to the acquisition of Pacific Union and Seterus, we've already exceeded that goal. And to anticipate the question, we entered March with a total portfolio just over $600 billion. This strong growth momentum reflects our competitive advantages as the leading non-bank servicer as well as some of this stress is impacting other players in the market.
However, I want to be very clear that at this point, the priority shifts from growth to profitability and deleveraging. Whether or not, we choose to expand the portfolio further in 2019 will depend on a number of factors. For example, we've been going through a review of the entire portfolio and taking a hard look at risk-adjusted returns. And this review led us to sell approximately $20 billion in MSRs on a servicing-retained basis.
So you should expect us to sell MSRs from time to time when this would improve our overall profitability or risk profile. Nonetheless, we continue to expect mid single-digit portfolio growth over time. But as you're seeing this year, it may not be in straight line every quarter.
Now turning to servicing margins on slide 9. This was also a very good story in the fourth quarter. As I said, the servicing margin was 6.7 basis points in the quarter, which is the third sequential quarter of improvement thanks in part to lower CPR rates, offset partially by growing share of subservicing, which has excellent profitability, but lower revenues relative to UPB.
Also contributing to the fourth quarter as I mentioned earlier was strong performance in the reverse portfolio, where we saw an opportunity in the inventory of loans pending assignment and made a call to allocate additional resources in order to accelerate submissions to HUD. And this resulted in $15 million of income during the quarter. And we were extremely pleased with this execution. But I caution you, not to expect the same results each quarter, because the reverse portfolio was in run-off mode, which means this income will disappear relatively quickly.
I note that the servicing margin also included $12 million in expenses associated with Project Titan. Now we are highlighting these expenses, because we're expecting them to continue at similar levels probably peaking in the second half of 2019 and then ramping down significantly in 2020.
Project Titan consists of a number of interrelated technology investments that will automate and streamline many of the critical stages of the servicing work stream. We expect Project Titan to begin contributing the results this year, but we will see much more noticeable efficiency benefits in 2020. Equally important and as Jay mentioned, Project Titan will also help us better understand our customers needs and provide them more closely tailored individual solutions.
Now in recent years, the servicing industry has not really benefited from new technology deployment like other sectors in the financial services industry and we expect Project Titan to be a significant operational differentiator for us in the future. We're very excited about the results we expect to see over time.
Now, let's switch gears and talk about originations on slide 10. In total, origination volume was strong at $5.4 billion, which is up sequentially by 5%, thanks to steady correspondent production offset by decline in volumes and the direct-to-consumer channel. As you know, our DTC channel is mainly focused on helping our existing customers with refinancing. The channel is very efficient and very profitable. But volumes were pressured during the quarter, because of the run-up of rates in the fall.
As that outlook became clear, we quickly implemented contingency actions to right size the platform. And as a result, we're seeing healthy margins so far in Q1. We closed the PacU acquisition on February 1. That integration was well planned by both companies, which is evident. And our new teammates don't seem to have missed a beat which has been extremely impressive.
Customer retention has been excellent and production volumes and margins are running in line with our plan. This acquisition is strategically important to Mr. Cooper, because stronger origination capacity reduces the need for bulk purchases and will improve our overall profitability.
Now turning to slide 11, you'll see Xome's results which reflect the full quarter of the impact from AMS. Now AMS is another strategically important acquisition from Mr. Cooper as it bring Xome to scale in several businesses including title, valuation and field services. And it positions us for growth in third-party claims across all of these verticals.
As we've commented previously, AMS was subscale and unprofitable, which is why its former parent decided to divest the unit. During the third quarter, we incurred a $5 million impact from AMS and with the fourth quarter being the first full quarter the impact was $7 million, which is totally in line with our expectations. The integration of AMS will continue through the first half of 2019 and remains on schedule with system's conversions scheduled to begin in the second quarter.
But while AMS provides us an excellent opportunity to cross-sell their existing customers, the business was losing money and completely turning that around will take some time. We are working towards the goal of AMS breaking even toward the end of the year and expect strong results out of Xome once that occurs.
Excluding the impact of AMS, Xome's pretax income declined by $2 million sequentially, largely reflecting the continued decline in delinquencies and low levels of REO in the market, which are headwinds for the auction exchange, which is Xome's most profitable business. And we are extremely well positioned, if the credit cycle turns. But in the meantime, Xome is working to grow third-party share to offset the general market weakness.
I'll wrap up now with a quick comment on capital liquidity, which ended the year at very strong levels. Those levels will decline in the first half as we fund the acquisitions of Seterus and Pacific Union, but we'll remain comfortably above all of our requirements at all times. Post the closing of these deals, we expect strong cash flow from operations to continue through the end of the year.
So that concludes our prepared remarks and I'll now turn the call back over to Ken for Q&A.
Thanks, Chris. I'm going to ask Sheri to start the Q&A session. And I'll just mention that the IR team is standing by after the call for anyone who has follow-up questions or feedback for us.
Thank you. [Operator Instructions] Our first question comes from Doug Harter with Credit Suisse.
Thanks.
Good morning, Doug.
Good morning. Around the commentary about future portfolio acquisitions, I guess, can you talk about, if you're kind of distinguishing in that between potential subservicing additions and MSR purchases and kind of how you would view the bar for each of those to consider --- adding to the portfolio at this point?
I think I'll start by saying most importantly -- this is Chris, that the company given its most recent acquisitions is at a point where we really don't see anything in the market that brings additional capabilities to us. But we look at virtually every transaction that occurs in the market. We'll continue to buy MSRs on a flow basis to supplement our originations, to maintain our size and scale. And we'll always be in the market to do that. But you should assume that we're going to look at every deal that comes through just given the size of the company and the history we've had.
But I think what we're telling you is that this is a period where we are going to focus on digesting our most recent acquisitions and focus on executing Project Titan, which is a transformational set of technology initiatives. And that's our priority. That does not mean, we're not going to look at things. But we want to make it really clear, our priorities are digesting our recent acquisitions and executing project Titan.
And then on project Titan, you mentioned that 2019 is a year of investment. I guess, how do you think about what is the return on that investment? And when do we start seeing that return on investment?
So first of all, the company has commented in the past about the goal of project Titan. But we haven't disclosed a specific IRR if that's what you're asking. The returns we will start to see the benefit of project Titan at the end of this year. And again we'll see more noticeable improvements in 2020. We've talked in the past of a long-term aspirational goal of seeing project Titan reduce overall expenses by as much as $100 million.
Our near-term line of sight is more to roughly a $30 million run rate -- annual run rate, which we think we will begin to see towards the end of this year. Having said that there are a number of these initiatives that have impacts across the servicing work stream. And the efficiency that we're going to get we think will be far beyond that $30 million over time. And I would just leave it at that.
All right. Thank you, Chris.
Thank you. Our next question comes from Bose George with KBW.
Yeah, good morning. Just a follow-up on project Titan. The expenses that you highlighted will they be fully done at the end of 2019?
I think what we said is they're going to ramp down significantly in 2020. And that's just a little bit of conservatism, because technology initiatives in my long career tend to occasionally have some schedule slippage. But the projects that we have underway have schedules where virtually all of the expense should be completed by 2019. I would conservatively say we'll see some of it slip into the beginning of 2020.
But sharing that is a nonmaterial event, so I wouldn't be concerned with that. The bulk of the expenses you'll see in 2019 now clearly there were some capitalized costs that go along with us that will be with us for several years. But the direct expenses should be largely completed in 2019.
I would add to that -- this is Jay that we're seeing early progress. I mean, when you look at some of the initiatives that we've rolled out related to helping customers get a payoff statement in a more efficient manner or helping customers convert to each statements those are proven to be very fruitful.
And what I'm mostly encouraged about is its really becoming part of the DNA of the servicing team members. And so we're in a -- I think we're in a really good place with the program itself and we've got the infrastructure build, we've got everyone in the company behind it, and we’re starting to see a lot of customer engagement. Our e-statement success, we're converting more customers to e-statements than we have ever in the past. So really positive.
Okay, great. That's helpful, thanks. And then you, I guess might have said this about the AMS impact. Does that end in end of 2019 as well? Is that the expectation is breakeven after that?
Yes.
Okay, great. Thanks. And then the $25 billion of MSR that you referenced, I guess that you sold. I mean, is that based on the characteristics of that MSR like prepayment risk, or just any color on that would be helpful.
It's actually $20 billion. And I'd say the overall profitability of the -- of that pool was really what drove this out on a servicing retained basis I'd say. Overall economics were better.
Okay. And then just one last one on the profitability. So this quarter you guys hit 7.6 basis points if excluding the project Titan costs. So when we think about that number going forward as a project those expenses fade. I mean, is that number going to be flat to -- and I guess up as the project Titan benefits kick in next year?
Yeah, I wouldn't expect the 7.6 basis points if that -- if I understood your question correctly.
Yeah, you think that as the baseline because after pulling out the project Titan expenses that was the baseline at this quarter, right?
Yeah, we also -- there are two things that happened this quarter. We had the expenses from project Titan. We also had the contribution of $15 million of income from reverse, which we don't expect to continue anywhere close to that. So the guidance we've given for servicing is -- remains in place.
And, of course, we'll have some quarters where it's a little bit higher and a little bit lower, especially as the subservicing mix may change. So we feel that our prior guidance is still in place.
Okay. Okay, great. Thanks.
And Bose, this is Amar. We also had seasonal funds with the fourth quarter being the very low prepay quarter as well that benefited the profitability.
Okay, great. Thanks.
Thank you. Our next question comes from Mark DeVries with Barclays.
Yeah, thanks. Wanted to get a better sense of your expectations here for the origination margin going forward. I mean, I heard the comments that you were able to right size the cost side after you saw volumes fall in the quarter. Were -- are you also seeing some pressures just from mix? It looks like correspond was up a bit. And just how should we think about that margin as we go into the end of 2019?
So, we did see mix shift during the fourth quarter and that did affect our margins. In terms of giving you specific guidance, we really are going to pass on giving you specific margin guidance other than to say, we feel very good about where things are in Q1.
But as we saw in the fourth quarter we expected -- our expectations were for a downturn. The downturn was worse than we anticipated. Fortunately we were able to act quickly and right size the platform. So we feel good about where we are. But as you know originations volumes and margin are going to be dictated by the market. And so we don't want to tell you anything more on that topic other than we feel good about our ability to manage our margins within a relative quick period of time as we did in the fourth quarter.
Okay.
And I would add to that. On the correspondent channel, we -- our discipline there maintain our margins. I think the addition of the PacU team and the PacU customers, the methodology will be the same. I mean, we historically have not chased volume just to chase volume. We stayed consistent with the return targets that we have in that business. I think PacU has had a good history of doing that as well. And when we bought them they had strong margins and we expect that to continue.
So to Chris' point I think to the extent -- we can't manage all the market movements that we certainly have I think a very disciplined process in place in the correspondent channel. And I think when you look at the direct consumer business now; we've spent a lot of time with those guys. They did a really strong job of moving from the right-term refinance world to the cash-out world and they're now the big percentage of that volume.
And they are again -- I mean, they are very disciplined in managing their margins. When we did see the slowdown in fourth quarter quickly right sized and lowered expenses immediately. So I think you'll continue to see the same discipline. And hopefully the market will not cause as much pain. But if it does we'll react.
Okay, got it. And then just turning to the profitability of Xome. It sounds like you're hopeful as you get through some of the efforts turning around AMS that that could become a bit of a tailwind as you get into 2020. How do you think that's going to play against the -- maybe the pressure you've got on margins in that business as the exchange listed properties decline in volume assuming that's a pretty healthy contributor to profitability in Xome?
Well, our view is that while there are tailwinds with the Mr. Cooper portfolio, a lot of that volume is being offset with third-party volume. So while delinquencies are overall coming down most of the inventory levels are being offset with new third-party business. So our plan is to replace that volume with third-party as well as grow wallet share with our existing clients across the lines not only with exchange, but with title and close and so forth. And that will lend itself to incremental product – revenue growth.
I mean, I think simply if you think about Assurant and that integration you see what the revenue power of that could be. Unfortunately, when we bought it, it's losing money. And so the number one goal is to get the margin and that revenue to an acceptable level. I think that's what we're trying to do via the integration. And as far as – so to your point, I think going into the latter part of the year in 2020 that will be tailwinds for the business and it will be productive. I think on the core Xome business, Amar said it correctly, we have to continue to gain third-party client. I think we have – we keep adding clients. We got a decent pipeline there. We've got a couple I think meaningful opportunities that could – that can really impact that in a positive way. But you have to close those and those takes time. So I think that's really the way to think about Xome.
I'm happy with the core business. I mean, we’ve – if you look at our appraisal business our valuation business, we've improved margins there. When you look at the exchange business at least from a property in flow standpoint, we've added a lot of third parties, so the inflow is keeping up in that – to a large degree with the shrinking of Mr. Cooper's portfolio. And then the title business has done well given the overall market. And so I think the core is good. It's got the integration. It's just got to get behind us.
Okay. Great. Thank you.
Thank you. Our next question comes from Mark Hammond with Bank of America.
Thanks. Good morning, Jay, Chris, Amar and Ken. I had a question on the balance sheet and the comment made during the prepared remarks about de-levering and talking about it later this year. So, wondering if you could preview the later this year and put any finer points that you can on how you're looking at de-levering in 2019 and beyond?
Well, when we said later this year, we didn't mean five minutes later. But – so we can't really preview much, Mark. But – and not because we don't want to share information when it's ready, but we're still developing plans. It's an important thing that we do correctly. It won't be done overnight. And so we're going through that process now. When we've completed it, when we've fully vetted it with our board, we'll begin rolling out communications. And we'll keep you fully informed. I think the most important point we can make in today's call was that the shift from growth to profitability and deleveraging and those – we chose those words very carefully, to make sure you understand that is where we're focused.
So we put on a lot of expensive debt to facilitate an important transaction. And we feel great about that. We feel very comfortable about operating the company with current levels. But as you've seen us do in the past, when we've had to lever up for a transaction, we've been very disciplined about them paying down that debt. And you should expect us to do the same thing. But with regard to specific targets or timing that's going to have to wait till some point in the second quarter.
Okay. Thanks, Chris.
I think Mark we – just to reiterate Chris said it. But we've in the past been heart-attack serious about de-levering and then in the last two years pre-merger paid down over $700 million in debt. And so it is a focus of the company. And when we can share more information we will. But we are very united on this front and we'll make it happen.
Understood. And then switching to the recent acquisitions. On Pacific Union, are these expectations that you laid out at the beginning about retaining, if the overlap or retaining customer relationships with the correspondents that were incremental to the relationships you had still and more or less in place and haven't changed?
That's right. Yeah. I'll tell you that the Pacific Union integration went better than expected. I think the team integration went great. I was just at kind of a kick-off meeting where we had both the Mr. Cooper team as well as the PacU team. We now are wanting – we now are organized as appropriately and really not missed a beat. Clients have stayed in place. Again, I'm not going to be very clear that we're going to maintain the margins in this business that we feel like are appropriate. But we haven't missed a beat with the clients. We haven't missed a beat with the team members. And I think they are extremely excited to be part of the Mr. Cooper family and we expect good things from them.
Great. Thank you. That's all I've got for today.
Thank you.
Thank you. Our next question comes from Henry Coffey with Wedbush Securities.
Yes. Good morning, everyone. And thanks for taking my call. Chris welcome.
Thank you.
So if we were talking last year about Xome, I think the big focus was on the eventual kick-in of the field services business, which is essentially just going back to your own customers and doing the work that you're been giving out to everybody else. So that was a pretty dramatic source of future contribution with the AMS acquisition that was kind of put off. But I guess the question is, is XOME going to be dominated by losses at AMS for the entire year? I know most of us thought of it as more of a breakeven business. And is the field services opportunity simply yesterday's news? Or is it something that will show up in later like 2020 or maybe you can put some dates on it for me?
I don't know, if it will be dominated. I'm not sure I would choose those words. But we do expect the turnaround to take some time. And with regard to Mr. Cooper's business that will migrate to AMS over time. I mean, the focus right now is integrating the systems quite honestly. So there is a process that's going to take most of this year. The integration will get completed in the second quarter the transition of customers. And maybe more importantly than that is our cross-selling. The third-party customers that are coming to Mr. Cooper through the AMS acquisition that's really the long-term value of that we want to capture. And that takes time too. So I'm not sure exactly, which prior communication from last year, but this should be clear to you today that we expect the drag to continue from AMS. And we are working towards a goal of breaking even by the end of the year. We think we can do that. But some of the other things like cross-selling those customers will take time to fully realize.
Okay. No, that's helpful. And I think you're right. You don't want to turn the box on when it's not working. So that seems –
Yeah. And I think – I think Henry the field services we're behind there. I mean, when you look at the integration, if you go back in time we were pretty sure we are going to kind of build that De Novo, we stopped that. We then moved to all right let's utilize the Assurant field services platform. But to Chris' point, we are not going to do that until it's ready and until we're highly confident that that platform can handle the volume and do it in a correct manner. So that's going to take a little bit of time.
And then on the hedging front? Chris, does that represent a new strategy from the way you think about it? I know you had a background with among other areas with running a bank. Is that more of a bank-like mentality towards how to manage MSR risk? Or is it something that change in outlook? Or how should we think about that? And when will we likely to see the impact of that strategy?
I don't think you should think of it as a change in strategy at all. But you should think of it as, there's a new CFO here. He's kind of looking at all of the existing strategies, financial strategies certainly and really just taking a fresh look. And I think this pause in rate hikes is a great time to do that.
So I'm not saying, we are going to change and use derivatives to fully hedge the MSR. I'm saying, we're going to evaluate that, I'm going to evaluate that. And if we do make a change, then clearly that will be something very important that we will share with you, not just that we've made a change, but why we're making a change.
But don't read more into it than that. Clearly, in a quarter where we've got a big fair value mark, it would be illogical for us not to say we're thinking about it. But with my arriving 60 days ago, it's just not something we've gotten to yet. But it's something we will look at in the near term. And again, if there are any changes of any kind, you should expect us to have a full communication with you on it.
And I think this is…
And, Henry, it's something that -- it's the natural evolution, something that Chris and I talked about earlier on, because if you look at the portfolio today, right? We – historically, we had a more credit-sensitive portfolio, honestly, than a prepaid-sensitive portfolio. If you look at where we're at today, delinquencies are much lower. The credit sensitive piece of the book is much lower. And so, I think it's kind of a natural evolution. And that's why, I think, I want Chris and Ken and others to dig in and look at this and evaluate it.
No, that's what I was thinking when I was listening to Chris' comments. The business -- the MSR hasn't really changed on you. The last question and some of this might be more on the integration acquisition area. Owned MSRs start with a fee of 25 basis points and then there's hedging in capital cost. And then, there's -- and other -- there's a lot of cost that don't come with subservicing.
But they start at 25 basis points and probably as in your case, generate a total return of probably around 7 basis points. Subservicing, nobody likes to quote the numbers and when they do, they do it in terms of loan -- per loan, but most of us think of subservicing as a gross fee of around 5 or 6 basis points. So what are your thoughts about future -- servicing profitability as you sort of blend those two together?
Yes. Henry, you're right. I mean, for subservicing the fees do range 5, 6, depending on the delinquency profile. It could be higher than that, obviously, because as you mentioned it is on a per loan metric based on the delinquency status. But when you have a 25 basis points MSR there's also a purchase price related to that and there's the amortization component, that takes that net-net.
Right, right, right.
And so, from our standpoint, we're going to look at the outlay of capital, along with the margin that we can earn on subservicing and maintain a healthy balance there. To the extent we can use capital efficiently, we'll deal with that, to the extent we can maintain margins or earn margin on the subservicing, we'll do that.
Right now, we have a roughly 60-40 split between MSRs and subservicing. There was a little bit more subservicing added over the course of 2018, which we've shown. But we'll see how the opportunities kind of present themselves. Currently, with what we've got on tap with the Pacific Union acquisition and Seterus acquisition that range is going to be at that same level, 60-40.
So this is a good time to ask this...
I think, Henry, it's a -- if you look at what we've done in subservicing historically, we've gone out and been able to find great partners, right, like USAA like NRZ, Two Harbors and others. And I think, we're very comfortable with those relationships and like those relationships. And in a lot of cases, not only do they move existing portfolio, but there's ongoing flow.
I think, my view of world is with Titan and with the capabilities that we're building in the servicing platform, we're going to further differentiate ourselves from the market right? We're going to further differentiate by continuing to drive efficiencies and costs and we're going to further differentiate by delivering a better customer experience.
And so, when the time is right and it's certainly not now, because we're focused on integration as we mentioned of the three acquisitions and we're focused on delevering. But I think when the time is right, we're going to be able to be a pretty fierce competitor in subservicing space. And if we want to grow it, I think, we will be able to do that. And I think we'll do it because we're the best. And so, I think, that's one of the things that you're going to see naturally come out of Titan. I really believe that.
No, I mean, all of this makes perfect sense and you've set these goals before and gotten there and will do it again. If we were looking at one metric, whether its GAAP EPS, adjusted EPS, ROE, we can go down the list. What ultimately -- I know that I've got all four of you on the phone, what ultimately is the most important thing we should be focused on when it comes to Mr. Cooper?
I think, long-term, return on tangible common equity is a metric that I focus on. And over a long period of time, if you're not generating acceptable return on equity, it's hard to argue that you're really generating any shareholder value. So you will see us emphasize.
And that is sort of an underlying theme in the script is another -- that change with transition for us is to really emphasize GAAP financials more. And we'll talk a little bit more about that over the year. And you'll see, maybe, us expanding our presentation a little bit. It's not that we don't want to show you the underlying earnings power of the company. And that's what we've done and that's sort of the convention in this industry.
But we think we should also be emphasizing GAAP financial results and you should be able to see those two numbers converging over time. So giving you line of sight and an appropriate goal for us to drive towards, is something that you should also expect us to communicate at some point this year.
Great. Thank you very much.
Thank you. Our next question comes from Giuliano Bologna.
Hi. Thanks for taking my question. I think, you guys…
Yes. Right. Thank you.
So, I guess, so it's kind of following up on a couple of questions that were asked earlier. Looking on the servicing margin side, there's kind of two parts to this. If you look at excluding the Titan expenses, but then you also have the benefit of about $15 million on the reverse side in the fourth quarter, it looks like you still kind of ended up in the, call it, mid-6 basis points range in terms of profitability, which includes a seasonally weak and a seasonally strong quarter.
Is that an unreasonable place to kind of look forward from? And then, with that, you did mention that Titan cost will rise in the back half of 2019. Should we expect them to be relatively stable to where they were in the fourth quarter for the first half? And how should we think about that?
I think that's roughly what we laid out, is that we expect them to be at similar levels. Again, peaking at some point in the second quarter will be a run down in the fourth quarter and will drop off more significantly in 2020. And certainly, if the development schedules slip a little bit, some of those costs may slip into 2019, as we commented on previously.
With regard to long-term goals for servicing profitability, we're really not going to share any new guidance there, because there are a number of moving pieces. And again, a year from now our subservicing mix, as Jay said, may change. There are other things that may change. So we feel good about the profitability of our platform, very good right now in our ability to sustain at these levels. So, I think, we just leave it there.
That makes sense. And then just one clarifying point on servicing. You mentioned $600 billion of UPB in March. Does that include the $20 billion that -- or does that -- the $20 billion of sales happened after?
Well, the $20 billion, as we mentioned, is subservicing retained. So while it's the sale of the MSR, it's still within our subservicing portfolio because it just moved to subservicing.
That works. That sounds good. Then switching over to AMS, as we kind of think about the year and going through 2019, is there a contribution from the field services orders coming on to the platform? Because scaling that business is important.
And if you get to profitability exiting 2019 and you have the ability to continue at a significant amount of revenue, which will most likely come on higher margins, so how should we think about the contribution from those -- from the internal field service orders in 2019?
I would say that we're going to...
I think you're going to -- yes sorry Chris. Go ahead.
Go ahead Jay. I was going to say again...
I think it's a -- go ahead Chris sorry.
I keep stepping on my boss here that's -- I apologize for that. Contribution from internal orders is going to transition over time and that will be part of the path to get to breakeven. I mean clearly the business was losing money and so contributing to Mr. Cooper volume is part and parcel of getting to breakeven. But we're going do that in a methodical way, so I would just leave it at that. We're not committing total conversion of Mr. Cooper, but just following a very logical path to transition that as we're ready. The team is doing an incredible job working on the integration. This is a very, very difficult task changing systems on the fly. And we feel good about where they are, but we wouldn't say any more than this is a year of transition and we'll get to breakeven towards the end of the year.
Yes and I agree with all of that. And I was just going to add I think look there are existing third-party customers, right, on that Assurant platform and they're our highest priority. I want to make sure that we take care of them and that that process keeps running. And I think the worst thing we could do is to overload it with Mr. Cooper product. And so it's going to take a couple of quarters at least to get that to where we're comfortable there that it kind of handle the Mr. Cooper volume. So that's how I'm thinking about it.
That makes sense. That’s very helpful. I really appreciate the time and thanks for answering my questions.
Thank you. And our next question comes from Kevin Barker with Piper Jaffray.
Hi good morning.
Good morning Kevin.
I was wondering if you could provide how much amortization expense related to the marked up portion of the MSR came through the $188 million of market-to-market adjustments. I believe last quarter you disclosed $42 million.
Yes, it was $35 million, Kevin.
Okay, great. And then as a follow-up, can you provide that number for 1Q and 2Q of 2018?
We can. We'll just follow -- if you don't mind, we'll follow up with you after the call. We're happy to do that.
Sure. And then what was the motivation for breaking out the intangible amortization expense this quarter? And how much of this expense is going to run off in 2019 per quarter?
We'll give you the runoff after the call because I don't have it in front of me. But the motivation is really to try to -- again we're going to emphasize GAAP financials more than we have in the past on these calls. And we think it's important to do that and hopefully, you agree with that. But at the same time, we want to make sure; we continue to show you the drivers of the business and bridge to the guidance we've given you in the past. And so that's why again on page seven of our presentation, you see that walk from pretax income to the $0.55 which we think is broadly in line with what your expectations were. We're just showing you the individual items and I think breaking them out this way is a clear way to look at them. No motivation other than that.
That's right. And then we saw that here in this quarter because post merger. When we did complete the merger on July 31, we had to do an assessment of our intangibles which created the balance there. And then we're calling that out because that is going to be running off over the future.
Okay, great. That makes sense. Then I guess just lastly, I was wondering if you guys could provide the amortized cost of the MSR.
Yes sure. Ken, will follow up with you after the call Kevin.
All right, great, thanks guys.
Thank you.
Thank you. Ladies and gentlemen, thank you for participating in today's question-and-answer session. I would now like to turn the call back over to management for any closing remarks.
Thank you guys for joining us this morning and we look forward to reporting our results to you throughout 2019. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.