Mr. Cooper Group Inc. (COOP) Q3 2023 Earnings Call Transcript

Mr. Cooper Group Inc. (NASDAQ:COOP) Q3 2023 Earnings Conference Call October 25, 2023 10:00 AM ET

Company Participants

Ken Posner – Senior Vice President of Strategic Planning and Investor Relations

Jay Bray – Chairman and Chief Executive Officer

Christopher Marshall – Vice Chairman and President

Kurt Johnson – Executive Vice President and Chief Financial Officer

Conference Call Participants

Kevin Barker – Piper Sandler

Bose George – KBW

Eric Hagen – BTIG

Giuliano Bologna – Compass Point

Kyle Joseph – Jefferies

Operator

Hello and welcome to Mr. Cooper’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to begin.

Ken Posner

Good morning and welcome to Mr. Cooper Group’s Third 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 and President; and Kurt Johnson, Executive Vice President and CFO.

As a quick reminder, this call is being recorded and you can find the slides on our Investor Relations webpage at investors.mrcoopergroup.com. During this 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.

I’ll now turn the call over to Jay.

Jay Bray

Thanks Ken, and good morning everyone, and welcome to our call. Let’s start then with a review of our quarterly highlights on Slide 3. Starting with the financial performance, we were delighted with operating ROTCE of 13.8% which is back within our target range. And at this point in the cycle double digit return on equity is a powerful validation of our balanced business model and a major differentiator from our peers, whose results are much less consistent.

Tangible book value was up nicely in the quarter to $62.78 and there is a lot of good news here. You’re seeing the benefit of continued strong operating results, the gain from the trust collapse we mentioned last quarter and the accretion from closing the Home Point acquisition which came in consistent with our guidance.

Now turning to operations, the portfolio reached $937 billion and based on what we’ve seen from the disclosures it appears that Mr. Cooper is now the number one servicer in the country. This is an amazing accomplishment for the company, especially as I think back to our humble beginning in the 1990s. And I want to pause for a second and say thank you to our investors, our partners, clients and all of our other stakeholders for placing your trust in us. And especially to my fellow Coopers for your tireless work on behalf of our customers.

Servicing generated $301 million in pretax income although bear in mind the gain from the trust collapse contributed $67 million and there were some other one-time items in there as well which Chris will elaborate on. Originations reported EBT of $29 million which is excellent performance considering the rate environment, and Xome, saw strong sales momentum and generated a small profit this quarter as we guided you expect. Third quarter was a very busy period for us. In addition to Home Point, we closed the acquisition of Roosevelt Management, which provides us the professional team in the RA infrastructure for our asset management strategy. And I’m pleased to report we’ve already kicked off the capital raising process for our first MSR fund.

Turning to Capital Management, we repurchased 1 million for $58 million and since the WMIH merger established Mr. Cooper as a fully independent public company, our stock price has tripled. But we still trade at a persistent discount to tangible book, which looks to us like a major disconnect given our consistent growth and our double digit ROTCE.

Despite growth and return of capital, we reported record liquidity and very strong capital ratios. This was partially due to the self-funding nature of the Home Point acquisition which we pointed out when we announced the deal and primarily due to our sound practices around capital and liquidity planning. As the markets lean servicer with 4.3 million customers, balance sheet strength is the foundation for all our strategic initiatives.

Finally, I’d like to mention the well-deserved recognition we received from Fortune and A Great Place to Work Foundation, who ranked Mr. Cooper as one of the best workplaces in financial services and insurance. This is a positive reflection on our people and on the purposeful, inclusive work environment that we have created for them.

Now let’s shift to Slide 4 and talk about a very important theme in the mortgage industry, namely the ongoing retreat of banks from the sector, which is creating a major growth opportunity for us. As most of you are aware, banks used to dominate the mortgage industry with close to 100% market share in both originations and servicing. Today, however, that share has fallen to around 40%. One of the drivers was the Basel III capital regime rolled out in the aftermath of the global financial crisis, which introduced higher capital standards for mortgages and MSRs. These standards came on top of severe operational challenges.

As some of you will recall, Mr. Cooper’s growth began to take off at this point when we acquired $200 billion plus portfolio from Bank of America. Fast forward to today and a new set of regulations is on the horizon called Basel III endgame. These regulations once again include tighter requirements for mortgages and MSRs at the same time that rising rates are pressuring profitability and operations. We expect to see banks see more share in the mortgage sector creating attractive growth opportunities for best in class operators like Mr. Cooper.

Moving to Slide 5, while banks were dialing back, Mr. Cooper made a commitment to serving mortgage borrowers and to continue making the necessary technology investments to do so efficiently. And the result as I mentioned already is we are now the industry’s largest servicer. We’re also the most efficient. The annual MBA benchmarking survey is the authoritative study of mortgage industry performance and as you can see, we’ve steadily brought down our servicing costs over the last few years to the point where we are now 33% more efficient than the large banks in the survey and nearly 50% more efficient than midsized banks. If you consider our scale, cost advantage, industry-leading retention and the depth of our expertise, there’s really no one in the industry who can compete with us in servicing.

Now let’s move to Slide 6 and talk about where we’re going from here. Given the attractive yields available in the bulk market, as well as new subservicing agreements in place, we will exceed our $1 trillion strategic target in the first quarter of next year, at which point we’ll return to update to you with a new set of strategic targets and a comprehensive plan to achieve them.

For now, I’d remind you that we have several strategic initiatives underway, many of which are focused on technology investment and cost leadership, both in servicing and originations as well as winning new subservicing clients.

In closing, I’d like to highlight once again the disconnect between a dominant platform of strong growth prospects and double digit returns and a stock that trades at a discount. If we continue to execute, there should be meaningful upside in both our stock and our high yield notes.

And before I turn it over to Chris, let me address something that you no doubt noticed in the press release. Chris has shared with us his intention to retire by year end 2024. Chris joined us in January 2019 as Vice Chairman and CFO and quickly enhanced the finance function implementing bank like processes as well as pushing for efficiency gains and deleveraging. This served us extremely well when the pandemic hit a year later, being well prepared for adverse scenarios, we were able to substantially expand our liquidity.

In 2021, we promoted Chris to President and gave him a mandate to oversee operations where he took our process discipline to the next level, leading to higher profitability across the enterprise and improvements to the customer experience as well as architecting some new directions within our technology strategy, including the investment in [indiscernible]. In his remaining time with us, Chris will continue to lead operations with the goal of driving continued strong portfolio growth and return on equity in addition to overseeing the capital raise for our first MSR fund.

As I look back on these five years, Chris has brought to Mr. Cooper a special kind of energy and intense focus on the needs of our customers, our team members and investors and a real sense of urgency to deliver results. Chris, the improvements you made at Mr. Cooper will endure and we know you will continue to make a big impact on the company ahead of your retirement.

I’ll add that we put in place a process to identify a successor and while no one can replace Chris, the initial feedback indicates a very high level interest from some exceptionally talented candidates, which shouldn’t be a surprise given how well the company is performing. So more on this in due course. Chris?

Christopher Marshall

Thanks, Jay. I appreciate those comments. And before I start, I’m going to take just a second to share with my teammates how much I appreciate your commitment and your hard work over the past five years. I really couldn’t be any more proud of what we’ve done together for our customers and for the excellent financial results we’ve produced for our investors.

You all know Mr. Cooper has been and continues to be a very special experience for me and the capstone to a long career, but I’m not done quite yet, so you should all expect me to continue pushing us to do more and to do it faster until I am done.

So with that, let’s talk about what we all care about, which is the company’s outstanding third quarter results. I’m going to start on Slide 7 and talk about servicing where we generated a record $301 million in pretax operating income this quarter. Now as Jay just mentioned, this included the one-time $67 million from the trust collapse and I’d also call out $13 million in deboarding fees from a subservicing client that took their portfolio in-house which we called out last quarter.

And as you look ahead to the fourth quarter, I remind you that there is some seasonality in net interest income. So I project servicing EBT to be roughly flat quarter-over-quarter at $210 million to $220 million after which we should expect to see excellent growth in 2024. We put this in terms of our prior guidance of $700 million in servicing EBT for full year 2023, which as a reminder does not include the gain from the trust collapse. It looks like we’ll close out the year with at least $775 million.

Now, as you know, servicing income is affected by interest rates and we’re in the camp of expecting rates to stay higher for longer, which is an ideal environment for servicing. But that’s not how we run the company. We’re completely agnostic about rates since they’re not in our control and instead we focus on those things we can control, namely process improvement, cost leadership and operating leverage.

We’ve talked in prior quarters about some of our current efficiency projects, which include driving down call volumes through chat technology, digital tools, enhancements to our IVR, as well as implementing AI for the call center, all of which provide a much better experience for our customers as well as lower costs for us and we’re making outstanding progress with these initiatives. In fact, we’ve been able to add nearly 140,000 customers year-to-date without increasing headcount, which I hope you all agree is a very impressive example of positive operating leverage and you’re going to see a lot more of that in 2024.

On a separate note, I’ll add that we’re very pleased with our progress in special servicing. The combination of Rushmore plus RightPath, which was our existing platform generated EBT of nearly $20 million in the quarter. And if the credit cycle were to turn more adverse, special servicing could become a very meaningful contributor to our bottom line.

Now let’s turn to Slide 8 and talk about portfolio growth, which was very strong this quarter, thanks to the Home Point acquisition and the other polls we acquired which more than offset deboarding the subservicing client I mentioned. At quarter end, the portfolio reached $937 billion up 10% year-over-year which is a very comfortable growth rate for us to manage operationally. And it is a pretty safe bet we’ll grow at least that fast in 2024 given that we already have well over $100 billion of deals scheduled to close and onboard well into the first quarter.

We continue to see very attractive returns in the bulk market. This reflects the backlog of MSRs retained by originators during the refi boom, which they’re now under pressure to sell due to very tight margins and limited liquidity. Also, we’re starting to see banks bringing MSR pools to market as they prepare for the Basel III endgame regulations. With a limited set of buyers, this supply is creating very attractive conditions for the growth.

At the same time, we also see great opportunities in subservicing. If you stack us up against the competition, there’s really no comparison. Were the clear scale leader and not only do we offer excellent customer service and industry-leading recapture, we’re also a blue chip counterparty with a very strong balance sheet and an extremely strong compliance function, which is very important for clients seeking to partner with a stable, reliable institution. No one matches our depth of capabilities and quite frankly, no one even comes close.

By the way, on this point, I’m delighted to share that we’ve just signed a new subservicing client and we’ll begin onboarding their $80 billion portfolio in the first quarter. Later in 2024, our MSR funds should become a source of additional subservicing growth. We’re talking with institutional investors about opportunities to achieve double digit returns from an uncorrelated strategy with very limited exposure to interest rates or macro shocks. And while we’re still very early in the process, so far the feedback we’ve received is very encouraging.

Now let’s shift gears to Slide 9 and talk about originations, where we turned in another outstanding quarter with $29 million in EBT which is at the high end of our guidance. Our recapture performance remains best in class with refinance recapture reaching 83% in the quarter, which is nearly four times the industry average. We’ve also been able to drive and sustain higher purchase recapture following a series of operational enhancements and new marketing campaigns.

Now looking ahead, as you know, fourth quarter is the seasonally weakest quarter of the year with a shorter day count and other distractions of the holidays and with mortgage rates well above 7% our customers are more likely to take advantage of second lien products, which is the right solution for them, but it’s a smaller margin product. Also we’re seeing pricing pressure return in the correspondent channel due to higher mortgage rates pressuring originations volumes. So as such we guide you to a range of $10 million to $20 million for fourth quarter.

Now if you turn to Slide 10, I’ll provide an update on Xome, which continues to do an excellent job executing and gaining market share. Sales grew 17% sequentially and the unit generated a profit of roughly $2 million, which is in line with our guidance and a step in the right direction, although nowhere close to Xomes ultimate potential. Looking ahead, we guide you to flat results in the fourth quarter as we’ll begin to incur some expenses associated with continued investment in the platform.

As you know, the FHA foreclosure market remains well below what we consider a normal level and we can’t give you an estimate as to precisely when activity will normalize. Nonetheless, we’re investing now because we intend for Xome to be the dominant competitor in this space whenever the market normalizes, at which point you’ll see its full earnings and monetization potential.

On that point, let me take a step back and comment on the company’s overall performance. At this moment, servicing is producing terrific results, thanks in large part to the investment we made over many years to perfect the platform with innovative technology and a strong process discipline.

In contrast, originations and Xome are operating well below potential due to where we are in their respective cycles. But you know how well they performed in the past and right now we’re investing in these platforms too, just like we did in servicing. When originations and credit cycles turn, I’m confident they’ll generate spectacular results.

So with that, I’ll now turn it over to Kurt.

Kurt Johnson

Thanks, Chris. Good morning. I’ll start on Slide 11, which gives you a summary of the financials. I’d like to highlight four items. First, let me give you some color on the adjustments. On the Home Point transaction, we recorded a bargain purchase gain of $96 million and incurred $5 million in deal costs, which together added $1.47 to tangible book value. Obviously this was stronger than our guidance dollar and accretion reflects very favorably on the performance of the MSRs we acquired as well as limited exposure to contingent liabilities after extensive diligence.

Other adjustments included $8 million in deal costs associated with the Roosevelt acquisition and a $39 million loss from equity investments largely tied to retained interest in Title 365, which as you may recall we sold to Blend Labs in 2021 for $450 million in cash and a $50 million retained interest in the title company. With this adjustment that retained interest is now marked down to $3 million on our balance sheet.

Second, I comment that with the acquisition of Roosevelt, you should expect corporate expenses to be roughly $2 million higher per quarter, which reflects the cost of our asset management strategy and the team which will be overseeing the MSR fund. That expense will be more than offset by increased revenue once the fund is raised and starts acquiring MSRs.

Third we marked up the MSR annual balance sheet by $254 million, reflecting higher interest rates and lower CPRs, leading to a quarter end valuation of 161 basis points of UPB or 5.3 multiple of the base servicing fee strip. This markup was offset by hedge losses of $192 million, which equates to coverage of 76%, completely consistent with our target ratio which remains at 75%.

Finally, I’d like to update you on our deferred tax asset, which declined by $158 million this quarter and now totals $499 million. The significant decline reflects deferred tax liabilities assumed as part of the Home Point transaction as well as strong operating results. When we merged with WMIH in 2018, the DTA totaled $1 billion dollars and the fact that we’ve been able to significantly reduce this asset speaks to our thoughtful approach to tax planning, but particularly the company’s strong profitability. We estimate the remaining balance will continue to limit our federal cash tax liabilities for at least the next three years, continuing to maximize the cash generated by the company.

Now let’s turn to Slide 12. I’d like to comment further on our balanced business model because it’s a term that many of our peers use despite reporting much less stable results than us. This slide provides you with our view on the relatively narrow range of returns on equity that we would have generated using three key results as a baseline, even if mortgage rates have been 100 basis points higher or lower than what actually occurred.

Starting in the center of the table, we anchored the analysis on actual third quarter results where mortgage rates averaged 7.2% and our CPR speeds were 5.6%. The left hand side shows a hypothetical scenario with mortgage rates 100 basis points lower and CPRs 90 basis points higher. In this scenario, servicing suffers from higher amortization expense. However, this pressure is mostly offset by originations resulting in overall ROTC of 13.2%, slightly lower than what we actually reported in the quarter, but still quite healthy and within our target range.

Conversely, if rates had risen 100 basis points, we estimate CPRs would have only been down 30 bps, leading to stronger servicing income and additional compression in originations profits resulting in overall ROTCE of 13.0%. This simple high level example shows how originations and servicing naturally offset each other, leading to relatively stable results for companies that have the right balance between the two.

Now if you’ll turn to Slide 13, let’s talk about another aspect of our balanced business model, namely the company’s resilience to adverse credit environments. We’ve carefully constructed our MSR portfolio. You can see this quality in our 60-day delinquencies which continued to decline during the third quarter on an overall basis and in each loan category with our MSR portfolio showing the lowest delinquency levels in our history as a public company.

I would also point you to weighted average FICO scores, which have been rising nearly every quarter for the past three years and to our loan to value ratio, which remained 54% in the third quarter. This speaks to the very substantial equity of our customers. Not only is our portfolio quite solid, we’re also well positioned for more adverse environments by virtue of Rushmore, our special servicing operation, which as Chris said is already generating nearly $20 million per quarter in EBT. Now in a stressed environment, Rushmore would play a very important role, working with troubled borrowers to help them stay in their homes. Needless to say, this would also be a huge service to our clients and there could be substantial upside in Rushmore’s volumes, not to mention a larger contribution from Xome.

Now let’s turn to Slide 14 and review liquidity. As you know, balance sheet strength is a cornerstone of our strategy, which incorporates capital and liquidity planning, asset quality, compliance and enterprise risk management. So let’s dive into equity where we had a record level of $2.7 billion at quarter end comprised of $553 million in cash with the remainder in MSR line capacity, which is fully collateralized and immediately available.

The Home Point acquisition brought a $700 million of additional capacity secured by Home Point’s MSR of which we drew down $385 million to fund the acquisition. Since last quarter, we have renegotiated our existing MSR lines, pushing out substantially all maturities to 2025. Finally, I’ll comment briefly on advances, which declined 8% year-over-year despite growth in the portfolio. Now that’s consistent with the excellent delinquency trends I just mentioned and strong performance from our servicing group.

I’ll wrap up my comments on Slide 15 with a few thoughts on our strong capital position. Our capital ratio increased to 31% as measured by tangible net worth asset, thanks to strong operating results and the accretion from the Home Point transaction. We have commented previously that we intended to deploy some of this capital into asset growth. To provide you with more clarity around the goal posts, we’re disclosing a new target capital ratio of 20% to 25%. We think that range is appropriate because our balance sheet position changes somewhat with interest rates. So right now our assets are more heavily weighted to MSRs whereas if rates were to rally, we would expect a higher balance of loans held for sale.

Looking ahead into 2024, we feel that the company is in great shape to grow the portfolio and at the same time drive and sustain higher levels of return on equity. We intend to pursue growth through asset light strategies also which emphasize subservicing as well as prudent balance sheet growth consistent with our capital and liquidity targets. We are also monitoring spreads on high yield debt issuance. We’ve started receiving inquiries about potential issuance of high yield bonds and we’re definitely considering the option, but only if spreads fairly reflect our strong credit profile.

In recent conversations with rating agencies and high yield investors, we’re getting significant recognition for the company’s progress since we became fully independent in 2018. These discussions center around strong capital liquidity, excellent asset quality, rising profitability, our 75% hedge ratio and of course, our long-term track record of growth, which not only validates the competitive advantage of our business model, but leaves us today as the markets #1 servicer.

With that, I’d like to thank you for listening to our call and I’ll turn the call back over to Ken for Q&A.

Ken Posner

Thanks, Kurt. And Towanda, if you could start the Q&A session please?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Kevin Barker with Piper Sandler. Your line is open.

Kevin Barker

Good morning. Thanks for taking my questions. First off, I would like to say congrats to Chris and wish you the best in retirement. You will be missed. And then just to follow up on — just a follow up on the servicing earnings, there’s quite a bit of momentum, particularly on the top line. Just given you have a shift into more servicing owned versus subservicing, do you expect the pretax income per UPB remain relatively stable or even increasing as we go into the first half of 24? It does present quite a bit of tailwind to return on tangible equity, which seems like it can drift higher. So any color you can provide on the trajectory of servicing pretax margins? Thanks.

Christopher Marshall

Hey, Kevin, it’s Chris. First of all, thank you for the comments. But yes, you should expect our overall profitability to trend marginally higher consistently throughout 2024 based on the scale we’re adding, the efficiencies we’re generating, that you know those are going to continue. So there’s not going to be a giant step up, you should just expect consistent improvement in profitability throughout the year.

Kevin Barker

Okay. And then just given the acquisitions you’ve made and your targeted capital ratios, do you feel that mid-teens run rate on return on equity is achievable by middle of next year just given the capital you’ve deployed or capital you’re planning to deploy over the next couple of quarters?

Christopher Marshall

Well, Ken is going to kick me under the table if I give you specific guidance right now, but you should expect ROTCE to improve along the same lines. I have to point you back to a comment with just one example of being able to add $140,000 customers without any additional labor expense. I mean that kind of operating efficiency is going to continue through the year, but I don’t think we’re prepared to give specific guidance other than we expect to remain well within our 12% to 20% target for returns, recognizing that there is some seasonality in the fourth quarter and the first, but as we get through the middle of the year, you should see that continue to grow.

Kevin Barker

Great. Thanks for taking my questions.

Christopher Marshall

Thank you, Kevin.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Bose George with KBW. Your line is open.

Bose George

Hey everyone, good morning. I wanted to ask just about the target ratio on capita, thanks for that. So just back of the envelope would that suggest that there’s investable capital of something in the range of sort of $700 million on your balance sheet? Is that a reasonable way of looking at it?

Kurt Johnson

Yes, I mean, Kevin, sorry Bose, it’s Kurt. I think that’s an okay way of looking at it, but we do need to save some room if rates rally and originations grow right? And if that’s the case then our assets will grow. But yes, I think we have excess liquidity and we can grow our asset base. We’d be comfortable deploying that growing, maybe not the full $700 million, but a fraction of that and we do think that we’ve got some deals lined up that we’ll utilize that capital into the first quarter. But we do want to save, we want to save some dry powder for if rates do rally.

Jay Bray

Yes, I’d just add that we’ve had a good strong year-to-date ear to date in terms of acquisitions. But between now and the end of the first quarter we’re going to board another $125 billion worth of loans. So we have some deals we have already committed to, which will eat up some of that liquidity. That’s right.

Christopher Marshall

Okay that’s like the other good news. The other good news both on the acquisition front is, we’ve had a lot of consistency with sellers and we’ve been able to because of the boarding process, because of our scale, because of all the operational capability, we’ve had sellers that have come back to us repeatedly this year and we would expect that to continue. So we’ve got a lot of opportunity ahead of us.

Bose George

OK, great. And Chris the $125 billion you referred to, so that’s $80 billion of the subservicing you mentioned and then is the rest is, is that the rest owned servicing that you’re — that you’ll be board acquiring?

Christopher Marshall

Yes. So those are, yes those are deals we’ve already signed, but will board some of it in the fourth quarter, a lot of it in the first quarter, in the first quarter.

Bose George

Okay great. And then just in terms of the seasonality of servicing income in the fourth quarter, is that mainly the float income just as the taxes and insurance get paid or are there other seasonal sort of components as well?

Christopher Marshall

No, you’re exactly right. That’s exactly why we see seasonality.

Bose George

Okay. Let me ask just one more. On Home Point acquisition now that the MSR is on and I guess some of the boardings are still not done yet, as that happens, is it just the sort of the benefit of your servicing versus the cost of using a subservicer or is that sort of the incremental piece from Home Point that’s left?

Christopher Marshall

Yes, the incremental piece from Home Point right, the benefits are kind of our cost. You’re right that will probably — the remainder will probably board in the first quarter, but then the other aspect of that right is that as those board our originations will have additional opportunities that they haven’t right now because we will start to know those customers. We’ll be able to start to solicit those customers a little bit more. So you can see origination start to trend up a little bit in 2Q and 3Q as a result of that.

Bose George

Okay, great. Thanks a lot.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Eric Hagen – BTIG. Your line is open.

Eric Hagen

Hey, thanks. How are you doing? Good morning. A quick one here. I mean are you projecting any increase in delinquency rates as a result of higher interest rates and mortgage rates? And are there any kind of assumptions around the credit environment which you know appear in the earnings sensitivity that you have on, I think it’s Slide 12?

Kurt Johnson

Hey, Eric, it’s Kurt. So we are projecting a slight increase in delinquencies from here. We’re starting to see not just in our portfolio but portfolios overall a pickup in delinquencies in other consumer products. So primarily auto, but credit cards are ticking up as well. So we do anticipate a small increase. However our market LTB is 54% and it’s pretty clear that this time around consumers are definitely prioritizing their mortgages. So we’ve indicated that the 2% delinquency rate that we saw at the end of the quarter was about what was the lowest that we’ve ever seen in our portfolio. So while, yes, it will take up slightly and we anticipate to tick up slightly, it probably won’t be a material adverse environment for us in 2024.

Eric Hagen

Yes, got it. That’s helpful. You know from a modeling standpoint, what are the kind of like drivers or conditions you might look at for selling or financing, the excess spread, maybe how to think about that benefit to the bottom line and even your cash flow and your leverage into next year?

Kurt Johnson

Yes and so if you look at kind of the supplement, you’ll see that the retained was a 225 basis points and that’s not because we’re paying a big multiple for that, it’s because we are actually retaining a bigger strip. So we’re looking probably in 2Q or 3Q to be able to do another access transaction like we did in 2Q of this year.

Eric Hagen

Got it, okay. And then just following up on the conversation around capital, I mean it sounds like you guys kind of alluded to it, but you mentioned you’re looking at the high yield market. It sounds like maybe you’d tap that market just to be opportunistic and kind of keep a cushion of cash. Is that — am I — are we reading that correctly? And just kind of what you might access for the high yield market for just being clear about that? Thank you.

Kurt Johnson

Yes, I mean I think exactly that. We’re certainly looking at kind of where we’re trading right now. We’re talking to the agencies. We’re engaging the interests of high yield investors. But we think doing that and paying down some of our MSR lines is sort of a, it’s something we think about pursuing maybe not this quarter because we’re going into the holidays, but maybe in the first quarter of next year.

Eric Hagen

Got it. That’s helpful. Thank you, guys.

Kurt Johnson

Thanks Eric.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Giuliano Bologna with Compass Point. Your line is open.

Giuliano Bologna

Good morning and congratulations on another great quarter here, and Chris so great working with you. I’m looking forward to working with you for the next year and good luck when you move on from, at the end of next year. The one thing I was curious about was when I look at the deals you’ve done, you’ve obviously made a lot of acquisitions, imported a ton of lines in the past couple of quarters and you still have a strong pipeline going into 1Q. I’m curious about your appetite for doing larger deals in the high 10s or you know $100 billion plus range and is that something that we should think would happen a little later in the 2Q or 3Q range obviously depends on what are the conditions. Is that a good way to think about how you try and scale things or is there any limitations to how much you can board in a two or three quarter range?

Kurt Johnson

You know, there’s Giuliano, first of all, thank you for the comment and I’ll just remind you, 15 months is a long time. So you’ll hear a lot from me between now and then. But that aside, we have a very large appetite for very large deals and we’re the buyer of choice in the industry. We’re one of only a few buyers that could even operationally take on those large pools. And so we’ve been preparing for this for a couple of years and now with Basel II endgame in place, we think a number of larger banks, regional banks will begin bringing some large pools to market. So we’re expecting to see that happen. We’re prepared for it. We have the liquidity lined up. We’re going to be raising a fund to take advantage of those returns as well. So I think you should assume our appetite is very strong and probably the strongest in the industry, but we’re well prepared for it. And we have the capability obviously you’ve seen consistently we’re buying $5 billion to $20 billion pools as we speak.

Obviously Home Point was you know 80 billion. The subservicing we announced that we just won is $80 billion. And to Chris’ point we’re starting to have strategic conversations with some large entities that could really result in significant size and fully prepared to take those on. And then to Chris’ point also we’re probably the only counterparty that can really move that kind of size. And your question about operational limitations, yes, there are some, but we’ve got an outstanding platform. Jay Jones who’s our leader over there has been running servicing has onboarded some massive amount of loans in the last two years. So I think we’ve proven we can do it. We’ve developed a lot of proprietary technology that allows us to do that much more seamlessly than anyone was able to do in the past. So there is a limitation, but we space out certain boardings to avoid ever tripping that and I think we can buy lots of volume next year without in any way cause, coming even close to what our limitations are.

Giuliano Bologna

That’s great. Thanks for that. The next thing that I’m serious about just taking on for a second was, well, when I think about the originations side of the platform, you’re obviously bringing on a lot more [indiscernible] and that should translate into more opportunities to originate. Yes, it seems like there’s going to be a quarter or two delay to jump Home Point up and running. But is that is that a good way to think of it? And then I realize we’re probably, if we’re not at the draw for probably close to the truth somewhere, volumes, origination volumes will probably go. So we think about that in more linear way as you could grows over the next few quarters in terms of that where origination could go or is there any other optionality there?

Christopher Marshall

That, you’re looking at exactly right. A lot of the portfolios, I’d say probably half of them have not really been solicited in the last couple of years. So we would expect to have marginally higher opportunity there. Of course rates are higher. We’re at the trough for originations, but with more portfolio we have more at bat, so you should see originations do a little bit better. The second thing I mentioned on originations, we’re making some very large investments in originations right now, even though we are at the trough, we are preparing to be much more efficient and to be able to ramp much more quickly when the cycle does turn the other way, just like we did with servicing back in 2019 and 2020. So we’re seeing the benefit of that now. We’ll eventually see the benefit later. But in the near-term, we should see incrementally higher opportunity in originations.

Giuliano Bologna

That’s great. Thank you so much. And Chris, you’re right, I’m looking to working with you for the next 15 months. So you’ll have a good runway there.

Christopher Marshall

Likewise, thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Kyle Joseph with Jefferies. Your line is open.

Kyle Joseph

Hey, good morning. Thanks for taking my questions. I just wanted to touch on the MSR fund. Any idea for the sense of target assets under management and the fee structure and then how that will flow through the P&L once it’s up and running?

Christopher Marshall

I appreciate the call Kyle. We have high hopes for our first fund. We’re targeting $1 billion fund, but and we’ve gotten some very positive feedback, but we are in the very, we’re in the first inning. So we hope to close that first fund by the end of the first quarter. And then start to put that money to work in second quarter probably really hit our stride in the third, but as you know and as you I’m sure you know and as I’ve experienced many, many times in the past, things seem great, you get out and start making calls and it’s a long process. So I’d rather as we’ll tell you a little bit more specifically in terms of details and timelines as we progress through the fourth quarter, maybe the beginning of the first quarter, but that’s our target.

Kyle Joseph

Got it. That’s totally fair. And then just one followup from me. I think you mentioned you’re seeing some margin compression in the correspondent channel, that’s just a function of rate movements or just give us an update on the competitive dynamics in that Channel?

Christopher Marshall

I think they’re both linked. There is — higher rates means lower volume across the country and you’ve got all the correspondent focused companies competing for that smaller amount of volume. So it’s actually going to be more pricing pressure and I think you’ll see that as long as rates stay high and volume are low. But that’s the only reason that we see causing the compression.

Kurt Johnson

And the only thing I’d add to that is, I won’t say we’re indifferent to it, but as we’ve told you guys many times, you know we deploy our capital where the highest returns are and clearly right now we’re seeing the highest returns in the bulk market. We’re achieving 15 unlevered returns in that market. We think that’s going to continue. We also play in the co-issue market, we see similar returns there. And so while the margins have compressed, we’ll continue to be a player, but we’re going to allocate our capital where the highest returns are and we’re extremely bullish on the bulk market.

Kyle Joseph

Got it. Thanks very much for answering my questions. Thank you.

Kurt Johnson

Thank you, Kyle.

Operator

Thank you. [Operator Instructions] Next question comes from the line of Bryant [indiscernible] with Wedbush Securities. Your line is open.

Unidentified Analyst

Hey, thanks for taking my question. Congrats on a good quarter. Just one quick one from me related to the earlier quote credit question, strong delinquency performance so far, but there was a sequential increase in modifications and workouts. I was just wondering is that related to Home Point and Roosevelt coming on or is there some other sort of increase in the organic portfolio, any commentary there and I guess how do you see those trending you know in the near-term?

Kurt Johnson

Yes, it’s Kurt. Thanks for the question. We’re actually not really seeing it from Home Point. Where we’re seeing it is in our Ginnie Mae portfolio and particularly our FHA portfolio. FHA rolled out a not a new program but an expansion of eligibility in the early part of the year and it was really well received by our customers and we were able as a result of that to take the delinquencies down from FHA. It also drove part of our ancillary income increase as well as FHA pays the success fee for those modifications. But you can see I think on page 17 [ph] of the presentation, our FHA delinquencies, how much they’ve come down and they’ve in fact crossed over via USDA [ph] and are lower than the VA USDA portfolio, but that’s primarily where the delinquencies come down.

Christopher Marshall

Just really just due to the new program, right, guys? It’s really the new program, yes.

Unidentified Analyst

Okay, great. Thank you.

Operator

Thank you. I’m showing no further questions in the queue. I would now like to turn the call back over to Jay for closing remarks.

Jay Bray

Thank you everybody for joining us and we look forward to continued conversation. Have a great day. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.