Mr Cooper Group Inc
NASDAQ:COOP
Earnings Call Analysis
Q4-2023 Analysis
Mr Cooper Group Inc
In a significant announcement, the company introduced Mike Weinbach as its new President, whose exceptional track record at renowned financial institutions signals a promising future for the company. In the same vein, the impressive escalation in the servicing portfolio—a 14% increase year-over-year reaching $992 billion—exceeded benchmarks and anticipations. The swift achievement of the $1 trillion target exhibited the highly disciplined and collaborative ethos of the team. Moreover, management foresees continued growth, with projections of surpassing $1.1 trillion in the upcoming quarter, positioning the company well in the face of a fertile market landscape characterized by rich margin deals and strategic capital raised.
The company has capitalized on pervasive market conditions, with a notable supply-demand imbalance in mortgage servicing rights (MSRs). This imbalance stems from high retentions by originators during the refinance boom and the banks' gradual withdrawal from the mortgage sector. Through strategic moves, such as the raising of $1 billion in high-yield debt, the company aims to exploit such opportunities given their cost and informational superiority. They're enthusiastically deploying resources into subservicing, expecting to convert a substantial pipeline, including a $90 billion portfolio from a significant new client, and have begun discussions with major investors for their inaugural MSR fund, reflecting their stature as a market leader. The company anticipates navigating potential 2024 headwinds with continued innovation in their operations, such as their 'no-touch' environment, significantly reducing customer call volumes without compromising on service, hinting at further operating leverage to follow.
Despite a tumultuous environment underscored by a cyber event in November, the originations segment outperformed with $10 million in Earnings Before Taxes (EBT), surpassing the high end of projected guidance. The Direct-to-Consumer (DTC) team particularly demonstrated flexibility and responsiveness to a late-quarter rally in mortgage rates. Substantial efforts have been directed towards diversification within the origination segment, further enhancing the breadth of offerings from rate and term to cash-out refinance, second liens, and purchase recaptures. The synergy of strategic endeavours and technological advancements, like Project Flash, has resulted in a lucrative DTC platform, hinting at a forecast for the first quarter between $20 million and $30 million in operating EBT, contingent on market conditions.
The Xome platform has made commendable strides in market presence and improved its offerings amid trying circumstances, with sales escalating by 75% year-over-year in the fourth quarter. Nevertheless, the platform continues to tread at breakeven due to the stagnant foreclosure market, cushioned by appreciating home values and supportive government interventions. The company remains attentive to the evolving market situation with planned updates on the way.
The financial summary highlighted adjustments owing to a cyber incident and deal costs, among other expenses. Notably, the servicer marked down MSRs due to an environment of lower interest rates and elevated Conditional Prepayment Rates (CPRs), although this was substantially counterbalanced by hedge gains. After issuing $1 billion in senior notes, the company projects an incremental increase in corporate interest expenses. Meanwhile, the Return on Tangible Common Equity (ROTCE) is projected to improve in the next couple of years, reaching mid- to upper teens by 2025.
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Good day, and thank you for standing by. Welcome to the Mr. Cooper Group's Fourth Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session question session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today. Please go ahead.
Good morning, and welcome to Mr. Cooper Group's fourth quarter earnings call. My name is Ken Posner, and I'm SVP of Strategic Planning and Investor Relations. With me today are Jay Bray, Chairman and CEO; Chris Marshall, Vice Chairman; Mike Weinbach, President; and Kurt Johnson, Executive Vice President and CFO. As a reminder, this call is being recorded. You can find the slides on our Investor Relations web page at investors.mrcoopergroup.com. During the call, we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change. And with that, I'll now turn the call over to Jay.
Thanks, Ken, and good morning, everyone, and welcome to our call. Typically, we start by reviewing the quarterly highlights, but I assume you saw our pre-release -- so instead, I'll make some brief comments on full year results, talking about our $1 trillion target and then share some thoughts on where we're going from here. Turning to Slide 3. Let's talk about 2023. For the full year, ROTCE was 12.5%, which was back within our target range. Pre-tax operating earnings totaled $660 million, thanks largely to servicing, while originations made a smaller contribution given where we are in the cycle. Tangible book value ended the year at $63.67 up 12%. The servicing portfolio grew 14% to $992 billion at year-end, which we believe establishes us as the industry's #1 servicer. As we commented last quarter, we expect to achieve our $1 trillion target during the first quarter once pending transactions have completed boarding. Contributing to portfolio growth year-on-year we acquired Home Point and its $83 billion portfolio in a transaction, which was accretive to tangible book value and which was essentially self-funded through the assumption of $500 million in senior notes. Additionally, the acquisitions of Rushmore Servicing and Rosebel management added another $32 billion and brought us best-in-class special servicing capabilities in the infrastructure to launch our first MSR fund. A key theme for 2023 was operating leverage. We grew the portfolio at a double-digit pace during the year, while at the same time, cutting costs company-wide by 8%. These results showcased our highly efficient digital platform, the benefits of incremental scale and our agile management of originations capacity. Finally, stock repurchase totaled $276 million for the year at an average price of $49.53, and given the current stock price, we're obviously quite pleased. With that, let's get ahead to Slide 5 and spend a moment on our $1 trillion target because this milestone represents the culmination of a multiyear journey, one that's taken us from very humble beginnings to our current position as industry leader. We're extremely proud of our track record. Very few companies can boast a 30% growth compounded over 15 years. We did this by relentlessly focusing on our platform, investing in the right technology and building a people-first culture. If you go back to the WM merger in 2018, which is when we became a fully independent public company, our first priority was deleveraging, which we accomplished by refinancing our senior notes and extending our liquidity runway. At the same time, we were rolling out Project Titan, which was a series of technology investments designed to ready our platform for the next leg of growth. These investments paid huge dividends during the pandemic, when we helped over 500,000 customers enter and exit forbearance plans, while at the same time, driving lower unit cost and servicing. In fact, since 2018, we've cut servicing costs by 30%, leaving us now 38% below industry peers based on the most recent Mortgage Bankers Association benchmark study. Our investments also paid big dividends when we sold our cloud-native servicing technology to Sagent, which allowed us to focus our IT resources on the customer experience and the latest developments in generative AI. We told you we would monetize them. And while we still have work to do with the auction exchange, we generated $528 million in gains in 2021 by selling title, valuation and field services with extremely opportune timing. We've distinguished ourselves with industry-leading customer retention, which is currently near 80% or almost 4x the industry average. And as you recall, during the refi boom of 2020, we generated in excess of $1 billion in profits from originations. The WMIH merger brought us $1 billion in deferred tax assets. At the time, there was skepticism about their value. Today, we have realized 63% of that balance in the form of incremental cash flow, which has helped us exceed expectations in terms of both growth and stock repurchase. So where are we going from here? We're now seeing some of the best growth opportunities in the company's history, and we will continue to grow our servicing portfolio as we have for the past 15 years. But our strategic focus is now squarely on return on equity, which shouldn't surprise you since we've been commenting on ROTCE on every quarterly call. If you'll turn to Slide 6, let me share some updated guidance with you. From 2019 to 2021, the entire mortgage industry enjoyed outsized returns, thanks to the massive refinance wave that generated what will probably turn out to be once in a lifetime margins. During 2022, we passed through an inflection point as the market struggled with the sharpest mortgage rate increases in recent memory, which impacted originations immediately while they took servicing a few quarters to ramp up. During 2023, we crossed back into our target range of 12% to 20%. And today, as we look out over the next few years, we would expect to drive these returns to a higher level. Specifically, we're forecasting ROTCE to steadily increase, reaching the mid to upper teens by the end of 2025, which is a level that we believe we can sustain thereafter. Now bear in mind, as is always the case, we faced some headwinds. The market expects somewhat lower rates in 2024, which could create some margin pressure for servicing in terms of higher amortization expense and lower levels of interest income, although these would likely be offset by a pickup in originations. But the story for Mr. Cooper isn't about interest rates. The real story is the strategic initiatives we're working on that will lift ROTCE to a sustained higher level. Let me highlight 4 broad categories. First, we're making terrific progress with servicing costs. For example, by driving lower call volumes with better digital solutions for our customers. Plus, we think there's enormous potential from rolling out the latest generation of AI. I'd remind you that Mr. Cooper is already a leader in AI with our mortgage-centric pyro technology, which we developed in partnership with Google in 2021, in which today, we're using internally and marketing to third parties. In 2024, you should expect further positive operating leverage and servicing and across the company. Second, we believe there's enormous opportunity for ROTCE accretion in our asset-light strategies, including subservicing and our MSR fund since they don't take up any of our liquidity. Third, we are re-engineering our DTC platform to drive higher volumes and wider margins in all environments. And finally, the strength of our balance sheet and risk management gives us confidence we can hit these higher returns even in the face of market volatility or less favorable macro conditions. In summary, let me share our vision for where the company is going over the next few years. We envision Mr. Cooper is playing a leadership role in the mortgage industry with a platform that's scalable and offers best-in-class efficiency. For our customers, we'll offer an experience that is frictionless and personalized and as a result, will retain our customers for life. For our stakeholders, Mr. Cooper will work tirelessly to retain their trust. And for our investors, we're optimistic that the company's stock price will over time, receive a premium multiple, reflecting the outlook for return on equity, our track record and the quality of our balance sheet. Obviously, we did not control valuation. That's up to you. But we will work diligently to compound tangible book value at a double-digit pace, which for us is an exciting prospect. And now, I'll turn the call over to Chris to take you through more details on our operational performance.
Thanks, Jay. And on that point, it's nice to see our stock finally trading over tangible book. I couldn't help but remember when I first got here in 2019, and our stock dropped to 1 point to as low as half tangible book before the market understood the resilience of our balanced business model. But I don't think net tangible book is the end of our story, not by a long shot, certainly not for a company with such a successful track record and now such an impressive leadership position. By the way, this will be my last call as a speaker. Next quarter, you'll hear from Mike Weinbach, Mr. Cooper's new President, who brings exceptional leadership experience at some of the most respected financial institutions in the country. Welcome, Mike. I can't imagine anyone better qualified than you to lead Mr. Cooper forward on our path to further growth and higher returns. So with that being said, I'll start this morning on Slide 7 and discuss servicing portfolio growth, which was very strong this quarter as we ended the year at $992 billion, up 14% year-over-year. As Jay mentioned, you should look for the portfolio to exceed $1.1 trillion by the end of the first quarter. As you recall, we announced the $1 trillion target in July of 2021 when the portfolio was only $650 billion. It's taken an enormous amount of energy, discipline and effort on the part of our entire workforce, and it's really very gratifying to be reaching the target so much faster than most people believe possible. And now we're already exceeding it. So I really need to share my heartfelt thanks to every single member of the Mr. Cooper team for your amazing work. I couldn't be more proud of all of you. Now looking ahead, growth conditions remain extraordinarily attractive. We're seeing a very significant pipeline of deals coming in the market with rich margins. Consider this. We recently raised $1 billion in high-yield debt at a cost of 7%. And we're seeing bulk deals come to market with yields of plus or minus 13% for conventional and even higher returns for Ginnie loans. That's a spread of roughly 6 percentage points, whereas 3 years ago, we were funding a plus or minus 6 and investing at around 9. But that's not even the whole story because the pools today are highly seasoned with note rates well out of the money and very significant equity cushions. On a risk-adjusted basis, spreads today are second only to what we saw in the aftermath of the global financial crisis. And you can see this in option adjusted spreads for bulk MSR deals, which have more than doubled in the last 3 years. What's driving these returns is a huge supply-demand imbalance, which reflects the large volumes of MSRs retained by originators during the refinance boom as well as the ongoing retreat of the banks from the mortgage sector. Mr. Cooper is extremely well positioned to exploit this opportunity because of our ever-widening cost advantage, which means that we enjoy materially higher cash flow yields than our competitors. Also, we have an information advantage consisting of a decade's worth of data on collateral performance on the part of literally thousands of sellers. This information allows us to generate alpha by outperforming market returns. Subservicing is also a great opportunity for us. As you know, we're currently boarding a $90 billion portfolio for a very important new client, and we're optimistic about additional wins in 2024. We're in the process of raising capital for our first MSR fund, which will also be a source of subservicing volumes. Currently, we're in discussions with several institutional investors as well as pension plans, sovereign wealth funds, asset managers and family offices. We've also received reverse inquiries from some very large and sophisticated investors, interested in separately managed accounts. Investors are focused on the secular opportunity resulting from the pullback of banks, which is a recurring theme in the private credit sector, and they find the return profile of MSRs extremely attractive given the potential for fully hedged double-digit returns, which are uncorrelated to systemic risk factors. And investors clearly understand the strengths we bring to this strategy as the market's leading platform with significant scale driven operational and informational advantages. Now, let's turn to Slide 8 and talk about pretax servicing income, which totaled $229 million in the quarter, which was just slightly ahead of our revised guidance. As Jay mentioned, there could potentially be some headwinds in 2024, so we guide you to model servicing income climbing steadily, but at a pace below our portfolio growth. Specifically, based on the forward curve, we're planning for slightly lower interest rates, which, of course, will benefit our origination segment, but could drive CPRs and amortization to higher levels and put some pressure on net interest income. Having said that, we're at a point where many of our strategic initiatives are paying off. And as a result, we're extremely confident in our ability to deliver additional operating leverage in 2024. One of the key initiatives we've commented on recently is our no-touch environment. The goal of which is to drive lower call volumes and not by cutting back on customer service, but by providing more information to our customers and easy to access digital tools. Through fourth quarter, you can see that calls per loan continue to fall. During 2023, we spent a lot of time focused on calls related to payments. And by reworking our processes, we were able to eliminate as much as 90% of calls in that category. But this is only the tip of the iceberg. We're now using generative AI to predict the intent of customer calls so we can route those calls to the right team members and to prompt our team members with the right information to answer questions on the fly and then to summarize call logs and transcripts so we can identify opportunities to further refine our processes. Jay mentioned our pyro mortgage-centric AI platform, which we rolled out 3 years ago. Pyro gives us a decisive advantage in terms of onboarding portfolios because the system identifies missing documents, signatures and stamps and it does this with extremely high levels of accuracy without humans in the loop. Last year alone, we scanned extracted and classified millions of documents comprising 676 million pages of data. This contributes to our advantage in the bulk servicing market where prior servicing documentation is critical in understanding the profile of the loans being boarded. Now let's turn to Slide 9 and talk about originations, where we generated $10 million in EBT, which was above the high end of our updated guidance range as our DTC team was very nimble in taking advantage of the late quarter rally in mortgage rates, and we also enjoyed wider gain on sale margins from improved capital markets execution. Bear in mind, these numbers were impacted by the cyber event in November. Excluding that impact, we estimate EBT would have been double this level. For similar reasons, refi recaptures dipped slightly during the quarter, but it's now back up over 80%. Clearly, this remains a difficult environment for originations, but I'd highlight the tremendous progress we've made expanding the scope of DTC. During the refi-boom, DTC focused on rate and term refinances period. As rates began to rise, they did a fantastic job pivoting to cash-out refinances. Since then, we've rolled out second liens and are now making great progress with purchase recapture, which together make up more than 1/3 of our total volumes. Our DTC platform is extremely profitable and maximizing DTC's contribution is a strategic priority for us. In fact, it's one of the key initiatives that will help us lift the company's overall returns. We're continuing to invest in the platform to drive lower costs, faster turn times and a more personalized customer experience. These investments include Project Flash, which is our approach to digitizing and automating workflow, which helped drive down unit costs by 22% in 2023. Looking ahead, we guide you to expect $20 million to $30 million in operating EBT in the first quarter. Bear in mind, this guidance is based on current market conditions and both volumes and margins could change if interest rates surprise in either direction. Okay. If we can move to Slide #10, I'd like to finish with an update on Zone. Our team made a lot of progress during the year, enhancing our platform, winning market share and performing admirably in very difficult conditions. Sales were up 75% year-over-year in the fourth quarter, and inventories continued to grow, but the foreclosure market remains dormant, thanks to home price gains and generous government programs. And as a result, Xome continues to operate at roughly breakeven, but we'll update you further on conditions as the year progresses. And with that, I'll turn the call over to Kurt.
Thanks, Chris. Good morning, everyone. I'll start on Page 11, which provides you a summary of the financials. I'll start by taking you through the adjustments, which consisted of $27 million in costs related to the cyber incident, as we previously disclosed, $8 million in deal costs associated with the Rosebel and Home Point transactions, $2 million in severance and a $2 million share in losses at [indiscernible]. During the quarter, we marked down the MSRs by $217 million due to lower interest rates and higher expected CPRs, leading to a quarter end valuation of 155 basis points of UPB or 5.2 multiple of the base servicing fee strip. Now this was offset by $176 million hedge gain, which equates to 81% coverage. That's well within policy tolerance as we continue to target a hedge ratio of 75%. Subsequent to quarter end, we issued $1 billion in senior notes with a coupon of 7 priced to a 7.25% yield maturity. As a result, you should model in an incremental $12 million in corporate interest expense in the first quarter and $18 million in each quarter thereafter. This expense will be offset by lower MSR line interest expense in the servicing segment. Finally, I'd like to add some additional color on the ROTCE outlook. As Jay mentioned, we expect ROTCE to rise over the next 2 years into the mid- to upper teen levels in 2025. Now this forecast assumes slightly lower rates in line with the current yield curve and modest economic growth. Based on consensus estimate for Mr. Cooper, tangible book should exceed $70 per share a year in 2024. On this basis, it would be reasonable to look for $10 or more per share in operating EPS in 2025. I would echo Jay's comments. If we deliver on higher returns and demonstrate the continued sustainability of our business model, it's not hard to imagine that our stock might trade at a higher multiple of earnings and book, implying significant potential upside. Now obviously, we've got a lot of work to do to produce these results. And of course, we don't control the valuation. But we do look forward to continuing our growth story as the market leader in servicing. Now if you'll turn to Slide #12, let's give you an update on asset quality. I'll be brief because concerns about recession have diminished in the last few months. But even so, we want you to know that we're positioning the company to weather a future turn in the cycle, whenever that may occur. And in this regard, it was nice to see delinquencies fall another notch to 1.3%. That's the lowest level in Mr. Cooper's history as a public company. Turning to Slide #13, let's review liquidity. We used the $1 billion proceeds from the high-yield offering to pay down MSR lines. And as a result, on a pro forma basis, our liquidity totaled $3.4 billion at year-end, consisting of cash and immediately available capacity on our MSR lines. New bonds aren't due until 2032, which leaves us with a very strong liquidity runway for the next 8 years. Finally, I'll comment briefly on advances, which declined 2% year-over-year despite growth in the portfolio. Now that's consistent with the favorable delinquencies trends I just mentioned. To summarize, our balance sheet has never been in stronger shape. If you'll turn to Slide #14, I'd like to wrap up by putting our high-yield offering in some historical context. As Jay mentioned, when the WMIH merger closed in 2018, our first priority was deleveraging, and the reason for that was our core philosophy, the balance sheet strength is nonnegotiable for market leadership. I think it's fair to say that our approach to balance sheet management has been favorably received by the marketplace, where you can see our spreads have compressed by almost half over the last 3 years. During the fourth quarter, [indiscernible] coverage on us with a BB rating. And subsequent to quarter end, Moody's upgraded our corporate credit rating to BA3 at quarter end, our capital ratio as measured by tangible net worth assets of 29.3%. While this was down slightly quarter-over-quarter on a continued asset growth, still well above our target range of 20% to 25%. With that, I'd like to thank you for listening to our presentation. And now I'll turn the call back to Ken for Q&A.
And at this time, we will conduct the question-and-answer session. [Operator Instructions]. Our first question will come from the line of Giuliano Bologna one from Compass Point.
Let me just start off by saying a great quarter. And Chris, you'll be missed, nothing on the conference calls going forward. I remember way back when you first started, and I think share prices in the single digits, and we're both trying to get the message out there back then. So congrats on that. If I shift a little bit, you obviously did a large bond deal. You have a lot of capital and liquidity, and you have a lot of MSRs announced for the first quarter in the pipeline. How should we think about your ability to onboard or the pace of onboarding of new MSRs over the next few quarters? Can you do $50 billion a quarter? Or is it -- can you do $100 billion a quarter? I'm just curious about kind of what the structural limitations are from a platform perspective because the opportunity is obviously large out there.
Giuliano, first of all, thank you very much. I remember our very first roadshow, and I appreciate you showing us a little love early on. So thank you. Look, there's obviously some physical limitation, but it's kind of theoretical. I mean we're onboarding somewhere around 400,000 loans as we speak. So our ability to ingest large pools is pretty significant. We have talked to you about some of our tools in the past, the technology we've developed, probably the most noteworthy project pyro, which -- or the tool pyro, which allows us to ingest 4 or 5x the amount of data and reconciling invoices really in real time. So we made a lot of advances there. I wouldn't think of the technology or the process of being any kind of limitation.
If you look back even a decade ago, when we bought the BofA portfolio, it was $200 billion, and we boarded it in 9 months. And to Chris' point, the level of sophistication of the day level of investment we've made, obviously, we're much more capable today. So I think we can handle pretty much any size and without any issues is the way I think about it. That's great. And to Chris's point, fortunately, my projections out there, but for you guys came in above and beyond consistently. So that made me look at along the way. The next question that I wanted to ask was related to the originations platform. You're obviously bringing on a lot of new MSRs, that should see a substantial increase in recapture opportunity. I'm curious how you think about kind of the evolution of getting new MSRs on board versus the delay of potentially being able to pivot recapture onto the Mr. Cooper origination platform.
Well, remember, we're buying pools of all different types. A lot of the pools we're buying are well out of the money. Some of them are -- I mean, everything is priced differently. But in our -- the time lapse between us boarding a proposal and evaluating it for a recapture potential that may be a couple of days. I mean, we rescore our entire portfolio every night. So polls are loaded on a Monday, it may take to Wednesday, but it's very, very quick.
That's very helpful. I will jump back in the queue.
Thank you, Giuliano.
One moment for our next question. And our next question will come from the line of Kevin Barker from Piper Sandler.
I echo Julian's comments, Chris, you will be missed on these calls. I just wanted to follow up on the guidance for the ROE 14% to 18%. Could you lay out the different scenarios where you think you would come in the lower end versus the higher end? What type of macro scenarios should we consider? Or what type of shifts in the market may cause you to go at the lower end or the upper end that viewpoint?
Kevin, it's Kurt. So I think realistically, the way that we've modeled everything going forward is based on the forward yield curve today. And that doesn't show a whole lot of change in the 10-year or in fact in mortgage rates over the next couple of years. I think realistically, what we've also said is we've got an equity to asset ratio range of 20% to 25%, and we are and have been consistently above that amount. We're trending closer to 30% at this point in time. I think we did $1 billion of debt. I think that gives us a lot of ability as we're seeing MSRs with really attractive returns to invest in those MSRs and to boost the earnings. And I think that's what you'll see going forward. Obviously, if we get into an environment where there's good refinance and recapturability we can go up to the top end of the range. But I think we're comfortable in a forward yield curve within that range as we reported.
And our next question will come from the line of Bose George from KBW.
Actually one follow-up on the guidance on the ROTCE. So you guys noted next year, you expect to reach the high end of the range. For full year 2024, do you think you'll be above the low end of the range of 14% plus for the full year '24?
Bose, look, I don't think we are giving specific guidance nor have we -- historically, right? I think -- but I think, again, if we're able to execute on our plan, we're able to acquire servicing continued attractive yields, we've indicated where we're comfortable. And to your point, I think guiding to 2025, we've said mid- to high teens, and I think we're comfortable with that as well.
Okay. Great. And then actually one on the MSR hedge. You guys were right at 80% this quarter. Any thoughts about increasing that? Or do you just feel like the remainder is kind of covered by your macro hedge and sort of keep it at that level?
Yes. I think that we're planning on keeping it at that level. I think we have probably what I'd say has outperformed in both directions over the last quarter when the portfolio was going up, we had a little bit less than 75% coverage, which was great, which means that we didn't lose as much on the hedge. And when the market was going down, we did better. So we gained a little bit more on the hedge. So I think our hedge effectiveness over the last couple of quarters has been really good, but we're still targeting that 75%. And I think as we continue to acquire a new current coupon portfolio, we've got a little bit of kind of loans that are going to be in the money if we see a rate rally, and we think that, that can really give us sort of the upside potential against the remaining 25%.
One moment for our next question. And our next question will come from the line of Terry Ma from Barclays.
I just had a follow-up on the ROE range of 14% to 18%. If I look at Slide 8 on the 2024 outlook, is it possible to maybe dimensionalize some of those drivers of portfolio growth, operating leverage and BTC, how much they contribute towards that ROE range?
Terry, we wouldn't break it down in those pieces. We -- I think we're giving you guidance that we expect a certain amount of operating leverage. We've been generating it for the last 3 years consistently. So if you're asking for a specific percentage for each? No. I'd say on balance, we're very comfortable with the range and I think we just leave it at that point. I would say on originations, it won't take much in terms of rates to move to see originations produce more meaningful levels. Obviously, in the quarter, we had that rate rally right at the end of the quarter, and our team turned on a dime and started producing much higher volume of fundings, and that was really maybe 10 to 15 days of activity. So if rates do start to move down as many people expect them to this year, I would expect originations to play a bigger role.
Got it. That's helpful. So if I look at the fourth quarter ROE of 11%, is it possible to, I guess, quantify what the -- have the adjusted ROE for the disruption like what it would have been?
Yes. If not for the disruption in the fourth quarter, we would have doubled that operating income. Originations originate from a
Pro forma perspective.
I'm sorry, I was just talking about originations...
From a pro forma perspective, it would have been about a 12.5% ROTCE for the fourth quarter.
Servicing business was back up. Just to remind everyone, our servicing business, although the event was disruptive, our servicing business is back up and running in 4 days. So there was an interruption, but it was not very significant.
Right. Although we did have, call it, $7 million to $8 million because we waived late fees for the month. And again, doing the right thing for the customer is something we're always going to do and it did have a slight impact. So if you add kind of Chris' doubling of originations plus the servicing waiving of late fees, I think you'll get kind of that -- you can back into that same 12.5% number.
One moment for our next question. Once again, one women for our next question. Our next question will come from the line of Doug Harter from UBS.
Can you talk about the outlook for regulation for yourself in light of some of the Treasury Secretary, Yellen's, comments yesterday.
I think if you're talking about regulation in terms of size growth, I'm not -- I think you really have to look at our portfolio as in 2 pieces. While the overall portfolio has grown considerably, and we expect it to grow by another 25% this year, only half of it is owned MSR. The other half is subserviced for a number of clients. So I don't think if there are any limitations on concentration, I think it would be focused more on people owned MSR. So I think we have quite a bit of room for us to grow before that becomes a concern to anybody.
Yes. And if you look in total, I mean, we're still in kind of a single-digit market share. And so, I think there's plenty of room to grow from there. And if you look at other sectors in financial services, payments, processing, other processing businesses, you certainly see consolidation to a few players. And so, I think that makes sense for the servicing business as well. I mean it's a scale business, you have to be able to invest in the technology, et cetera. And so, we don't have any concerns about continuing to grow the platform. And the key for us is sustainability, right? We've invested heavily in technology and compliance and risk. And so, those are real key strengths of the company, and we'll continue to focus on those. So -- we feel good about future growth prospects.
And the risk, obviously, you're well above your own sort of target capital ratios, but if they were to apply more stringent capital rules to kind of how do you think capital renewals, how do you think you fare if it went to kind of more of a bank like capital standards.
Well, the targets -- the equity targets that we put out a range of 20 to 25 is so far ahead of what is required to banks that I don't think that's any type of concern for us. I can't even imagine it becoming anything of a conversation. Again, we're talking about a range of 20 to 25 or about 29 today. I'm not sure what the average bank is, but maybe it's half that level. So I think you should think of us as having a rock-solid balance sheet.
Thank you. One moment for our next question. And our next question will come from the line of Michael Kay. Michael Kaye from Wells Fargo
You've grown your servicing portfolio very fast and the outlook for further acquisitions seems very favorable. But bringing on so much business, how do you think ahead and avoid on melting ice cube effect for the servicing portfolio when the acquisition opportunity eventually slows down even now with the very low runoff of the portfolio, your originations are nowhere near able to offset that?
Well, in actuality, they are with an 80% recapture rate, the concept of a melting ice cube doesn't really apply to us. We're growing the portfolio. CPRs are very, very low at the same time, and we're growing it both through acquisitions and through subservicing growth. So I think if you look at the mortgage industry as a whole, historically, that melting ice cube description did apply. But when you have a recapture as high as we do as well as a correspondent channel, co-issue channel, replenishment has not been a problem for us at all. And I can't imagine even if acquisitions were to slow down to half the levels they've been. And if you look back to, say, 2019 through 2020, that's -- that was the situation, and we are still growing at a very, very strong clip.
Yes, Michael, to be specific, if you look at our co-issue correspondent DTC business, where we can maintain the portfolio and grow it slightly. So we have a sustainable model without any bulk acquisitions. But I mean, look at our track record over the last 25 years from a bulk acquisition standpoint, and I think it speaks for itself. There's always going to be portfolios in the market. And as you've seen us execute the last few years, when we will get our fair share of those. So I think from a growth standpoint, we feel very good about our existing kind of origination channels in the co-issue channel, and the bulk opportunities are going to be there. And so, I think we feel really good about it.
Thank you. [Operator Instructions]. And I'm not measuring further questions in the queue. I'd like to turn the call back over -- actually, I have a question from Derek Sommers from Jefferies.
On the $1.1 trillion guide for servicing book at the end of 1Q. Is there -- what should we anticipate for the mix between forward MSR and subservicing -- and then if you could talk about kind of your pipeline expectations for subservicing moving forward, that would be great as well. It's a great question. I think in the first quarter, it's about 1/3 subservicing No, no. It's about 2/3 subservicing, 1/3 owned. So a lot of these deals were deals we closed in the fourth quarter, and they're just boarding now. Over the course of the year, we'd like to see a little bit more subservicing because traditionally, as we've told you, we like to have a 50-50 mix, and we're a little bit higher. I think we ended the year more like 60-40 or roughly. So we'd like to board some large subservicing, but a little too early to tell, and that will play out depending on what market opportunities presented.
Got it. And then on your comments about originations, EBT being doubled to warrant for the cybersecurity incident. Is the assumption on that double that the incremental volume would have come majority from the DTC channel?
Yes. Yes, exactly. And just the timing of the event, it happened really as there was that mini rate rally. So we did lose some key days in the quarter.
Okay. Got it. And then if we were to see any pickup in originations volume looking forward, would that assumption still hold that the mix would shift towards the DTC channel as well?
Yes, of course. I mean, the correspondent co-issue are pretty steady producers. DTC, obviously, is going to flex up and down depending on rates. We don't expect rates to go much higher. But as they do come down, that should immediately generate more activity in DTC.
I'm not showing any further questions in the queue. I'd like to turn the call back over to Jay for any closing remarks.
Thanks, everybody, for joining us, and we look forward to further conversations. Thank you.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.