Good day, and welcome to Ocwen Financial Corporation third quarter earnings and business update conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. At this time, I would like to turn the conference over to Dico Akseraylian, Senior Vice President, Corporate Communications. Please go ahead.
Good morning, and thank you for joining us for Ocwen third quarter earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chief Executive Officer, Glen Messina, and Chief Financial Officer, Sean O'Neil. As a reminder, the presentation or comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are, to different degrees, uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements.
Forward-looking statements involve assumptions, risks, and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2021, and our current and quarterly reports since such date. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. In addition, the presentation or our comments contain references to non-GAAP financial measures such as adjusted pre-tax income and adjusted expenses, among others.
We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the financial performance of our operations and allocate resources. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the company's reported results under accounting principles generally accepted in the United States. The reconciliation of the non-GAAP measures using this presentation to their most directly comparable GAAP measures, as well as additional information regarding why management believes these measures may be useful to investors, may be found in the press release in the appendix in the investor presentation. Now, I will turn the call over to Glen Messina.
Thanks, Dico. Good morning, everyone, and thanks for joining us. We're looking forward to sharing our progress with you this morning. Today, we'll review a few highlights for the third quarter, take you through our actions to address the market environment, and discuss why we believe our balanced and diversified business model can deliver long-term value. Now, please turn to slide three. As you all know, with rising interest rates, the servicing environment has improved substantially while the originations environment is quite challenging. Our balanced and diversified business model is working well, and we've made great progress in the third quarter. We're delivering focused, prudent growth, driving enterprise-wide cost reduction, and optimizing liquidity and allocating capital to deliver value to shareholders. We delivered strong net income, ROE, book value appreciation, and our adjusted pre-tax loss was substantially reduced versus the second quarter.
MSR values increased during the quarter, and our origination segment has returned to profitability. Our servicing portfolio is growing, with total servicing and subservicing UPB both up versus the third quarter of last year. We're reducing our cost structure enterprise-wide and expect to exceed our cost reduction target with over $70 million in annualized cost reduction in the fourth quarter versus our second quarter 2022 baseline. Regarding our capital structure, our share repurchase program is nearly complete. We completed the MAV upsize, and we signed 2 additional capital-light MSR partnership transactions outside of MAV. Many thanks to Oaktree for their continued support of our business, and many thanks to our two new MSR funding partners for putting their trust in us as an asset sourcing and management partner. As we look forward, I believe we are positioned very well to address the challenges and opportunities ahead.
In originations, our priority is reducing costs, expanding higher-margin products, and growing our client base. In servicing, our priority is driving growth through subservicing across all product types, forward, reverse, small balance commercial, and special or non-performing loan servicing. Expense management is more important than ever. We'll maintain our continuous cost improvement discipline and adjust expenses and capacity to match the market environment. We are prioritizing our relationship with MAV and Oaktree and other MSR funding partnerships to support capital-efficient growth. As we're nearing completion of our current share repurchase authorization, we are evaluating further debt or equity repurchases considering market conditions, our leverage, our share float, and maintaining flexibility for opportunistic high-yield investments. We expect to deliver profitable adjusted pre-tax income in the fourth quarter as we complete our cost reduction actions and other key business initiatives.
As in the past, GAAP earnings will be influenced by market interest rate levels. Overall, I'm pleased with our results in navigating this business cycle. We believe our balanced and diversified business model is performing well and remain confident in our ability to execute those items that are in our control. Let's turn to slide four to discuss the environment and our value creation plan. We're focused on executing a value creation plan that's aligned to the environment. The environment in servicing is more favorable than it's been in years, and servicing is a core strength of our business model. MSR values are rising and profitability is improving, driven by slower prepayments, lower prepayment related expenses, higher escrow earnings, and stable delinquencies. We are seeing increased MSR investment opportunities with attractive returns, and we expect continued elevated bulk volume as originators continue to be under profitability and cash flow pressure.
Regarding subservicing, the opportunity remains strong, client delays are easing, and our opportunity pipeline is robust. We are seeing increased interest in the mortgage sector from asset investment capital providers who are looking for partners to source and service MSRs, whole loans, and non-performing loans. The Fed actions to raise interest rates is driving an increased probability of a recession, and this plays to our core competency in special servicing. We believe a recession may present new growth opportunities for us as it did during the financial crisis. Moving to originations, the market has turned down hard and fast, and we don't see relief in the foreseeable future. The GSE and MBA industry volume forecast for 2022 and 2023 continue to be revised lower. Fannie Mae is now forecasting industry originations volume of $1.7 trillion for 2023, and frankly, that may be optimistic.
Additionally, we don't believe lower rates will drive a substantial surge in refinancing activity. Even if rates were to decline 300 basis points from today, only 12% of outstanding mortgages have a refinance incentive. The near-term challenge is finding bottom. Origination volume levels continued to fall in the fourth quarter. As a result, the strategy in originations will continue to be cost reduction, margin management, and new client additions for the foreseeable future. In this environment, we believe our core strength in servicing is the right foundation. Our value creation plan built on this core strength has four key elements, leveraging the strength of our balanced and diversified business model, driving prudent growth adapted to the environment, reducing our cost structure across the organization, and optimizing liquidity, diversifying funding sources, and allocating capital to maximize value for shareholders.
Let's turn to slide 5 to discuss the benefits of our balanced and diversified business model. Our balanced and diversified business model is a core strength for us, particularly in this environment. Servicing GAAP pre-tax income in the quarter is up significantly versus third quarter last year due to MSR value appreciation, which more than offsets decline in profitability in originations. Year- to- date, we've delivered over $100 million in net income despite the originations environment. Our focus on driving industry-leading operating performance is supporting strong growth in our subservicing portfolio. We are a top-rated servicer by Fannie Mae, Freddie Mac, and HUD, and Fitch has upgraded our servicer ratings due to our strong post-pandemic performance. Through our investment in technology and global operating capability, we've built an efficient and mature platform with capacity for growth that drives improved financial outcomes for clients.
We've earned the trust of clients and partners, as evidenced by $69 billion in subservicing UPB added in the last 12 months, strong scheduled subservicing boardings, and a potential opportunity pipeline of $350 billion. We have consistently invested in our servicing platform capabilities, and we believe our core strength in servicing positions us well to navigate the market ahead. We have broad and deep domain expertise with industry-leading capability in forward, reverse, small balance commercial, and special servicing. We're the only large-scale, full-service, end-to-end reverse mortgage provider in the industry, and we continue to be a leader in special servicing, supporting borrowers and investors, and outperforming MBA and Moody's industry operations benchmarks. With more than half our total servicing portfolio in subservicing, our potential exposure in a recession to elevated advances and higher servicing costs without corresponding revenue is limited.
We have a continuous cost improvement mindset throughout the company. We continue to demonstrate the ability to reduce our cost structure while maintaining strong operations execution. We believe having an industry-leading cost structure is an advantage in any environment. Lastly, the development of capital partners to co-invest in MSRs and create synthetic subservicing helps us grow our servicing and originations on a capital-efficient basis. We believe our expanded capacity in MAV and development of additional capital partners positions us well to increase our managed asset base while creating optionality and flexibility in our capital allocation process. Overall, we're excited about the potential for our business and do not believe our recent share price is reflective of our financial position, our earnings power, or the strength of our business. Let's turn to slide six to discuss our growth focus in the current environment.
Our growth strategy is focused on driving higher margin products, client base expansion, and subservicing additions. Our originations team is performing well under the current market conditions, with MSR originations, excluding bulk transactions, down about 4% versus the second quarter and down roughly 33% versus last year. Industry volume projections for 2023 seem to get revised lower each month, and we are expecting lower origination volume and margins in the fourth quarter. In the third quarter, we took the opportunity to purchase bulk MSRs from one of our sub-servicing clients who was selling. This enabled our client to avoid deboarding costs and allowed us to acquire MSRs at attractive returns, highlighting a key value element of our enterprise sales approach. Sub-servicing additions were comparatively light in the third quarter compared to prior periods, as current and prospective clients were largely focused on addressing market conditions.
We're seeing these delays moderate and currently have $28 billion in sub-servicing additions scheduled over the next six months. Consistent with our growth focus, our mix of higher-margin origination products was roughly flat with the second quarter and up 5 percentage points versus third quarter of last year. Similarly, our focus on growing sub-servicing is evident, with sub-servicing UPB up 46% versus the third quarter of last year. The shift to sub-servicing and our focus on diversification is evident when looking at our portfolio composition. We believe our emphasis on growing sub-servicing and GSE-owned MSRs, which are now 54% and 34% of our portfolio respectively, will be beneficial in the event of a recession. In sub-servicing, we have no exposure to advances, and we earn revenues even if borrowers are delinquent.
In GSE servicing, the credit quality is high, principal and interest advances are capped at four months, and in the case of Fannie Mae, we recover our servicing advances monthly. The segments of our portfolio where we have more significant advancing responsibility, as well as revenue risk with borrower delinquency and relatively lower credit quality, are PLS and Ginnie Mae forward-owned MSRs. However, these segments combined only comprise 10% of our portfolio. Our deliberate strategy to diversify our servicing portfolio reduces our risk exposure in the event of a recession, and we expect to have adequate capacity to support special sub-servicing for others should market conditions drive increased demand. Now please turn to slide seven for an update on our expense management actions.
We remain committed to reducing costs to align to market demand and support business needs in this part of the industry cycle while continuing to deliver on our commitment to customers, clients, and investors. Our team has made great progress against our cost reduction target. We're on track to exceed $70 million in annualized expense reduction by the fourth quarter versus the second quarter baseline of this year. We're focused on driving sustainable cost reduction, supporting the most essential activities, and maintaining a prudent risk and compliance management framework. We've largely adjusted staffing levels across the organization, but most significantly focused in originations and in our consumer direct and reverse retail platforms. Our cost structure, measured in basis points, is down 35% and 21% from the fourth quarter of 2021 in originations and servicing respectively.
We continue to leverage our seasoned and mature global operating capabilities. Our proprietary global operating platform has been in place for the last 20 years and supports all business activities. We continue to drive automation, digital migration, and other systemic process enhancements consistent with our technology roadmap and focus on continuing process improvement. As noted earlier, we are expecting lower originations volume in the fourth quarter and are committed to adjusting capacity and expenses further as necessary going forward. In addition, we're consolidating our forward and reverse operating platforms in both originations and servicing. We're focused on leveraging a single backbone platform and processes for activities that are common across both forward and reverse. This will result in scale benefits for both forward and reverse, and we're one of the few competitors in the reverse space who has the capability to execute this strategy.
The initial results are promising, and we expect further benefits going forward into 2023 as we continue to refine and optimize our approach. Now please turn to slide 8 for an update on our capital management actions. As we discussed last quarter, we're optimizing liquidity, funding sources, and custodial arrangements to support the needs of our business during this part of the market cycle. The cornerstone of our capital management plan, both last year and this year, has been MAV. We're excited to announce we've completed the MAV upsize with incremental contributed capital of up to $250 million. With leverage from MSR secured financing, we expect this is sufficient to support an incremental $60 billion in synthetic sub-servicing UPB at current MSR prices. We've realized strong double-digit returns on our $21 million in net capital contributed to MAV.
Our current investment balance stands at $39 million, including cumulative earnings and dividends. We're also excited to announce the signing of 2 additional MSR funding partnership transactions. We closed 1 transaction in the third quarter and expect to close the second in the fourth quarter. We are driving growth with a bias towards capital-light subservicing. We expect to fund a portion of flow origination volume with our new partners in the fourth quarter, consistent with this approach. This year, we've opportunistically and prudently sold as well as invested in MSRs, keeping our MSR UPB roughly between $115 billion-$130 billion, while growing our total servicing portfolio through subservicing additions. I think it goes without saying that our investor-driven approach to MSR purchases introduces an added level of price discipline to our independent broker mark process.
Throughout the year, we've been able to monetize MSRs at levels at or above our acquisition cost. Looking ahead, we believe our asset sourcing, product distribution, and unique servicing capabilities can give rise to additional partnership opportunities in reverse, distressed or high-risk assets, and small balance commercial subservicing. We are dedicating business development resources to build relationships with investors and clients across each of these asset classes to fully leverage our servicing capabilities. We believe the development of investor relationships to support capital-efficient growth will support achieving our servicing scale objectives and enables further capital allocation flexibility to maximize returns for shareholders. Again, I want to thank our business partners at Oaktree and our new MSR investor partners for their trust and confidence they have placed in our team to help them achieve their growth and profitability objectives. We take this responsibility seriously, and we will deliver on our commitments.
Now, I'll turn it over to Sean to discuss our results for the third quarter and outlook for the fourth quarter.
Thank you, Glen. Please turn to slide 9 for our financial highlights. In the third quarter, we realized GAAP net income of $37 million, or $4.33 earnings per share. Book value per share rose to $69, which was an increase of $18 year-over-year or 35%. In addition to what we show here, we have also provided information regarding our fully diluted shares in equity for book value calculations in the appendix. This information allows for the most conservative view if all of the Oaktree warrants were executed on a cash-settled basis. In addition, we show earnings per share as both current and diluted for comparison purposes. Similar to the second quarter, we again saw higher rates positively impact MSR appreciation in our own servicing book.
Also, in a repeat of the second quarter, we again saw strong performance in our correspondent and flow lending origination business. For adjusted pre-tax income, which is a non-GAAP metric, we had strong improvements quarter- over- quarter for both origination and servicing. The graph shows a quarter two to quarter three walk for this metric. The third quarter result was an $8 million loss, but that was a significant improvement from the $26 million loss in the second quarter. This was due to several drivers. The cost reductions previously mentioned by Glen that were implemented and partially recognized in the third quarter resulted in a $14 million improvement in our expense line.
When I say partially recognized, it is because any saves on our compensation and benefits line only saw partial impact as they occur throughout the quarter and will have incremental fourth quarter lift as they achieve full run rate. In addition, we continue to enact more cost reduction steps that will appear in the fourth quarter and into 2023. Both of our forward originations and forward servicing businesses improved their adjusted pre-tax income quarter-over-quarter with a small offset from a lower profit in reverse servicing and a small loss on reverse origination. I will cover this in the next few pages. I'd like to recap the notable items that connect our adjusted pre-tax income back to our GAAP net income. We provide adjusted pre-tax income for greater investor transparency, and it is a metric we use in managing the business.
Notables, which are listed in the appendix, are comprised primarily of the $53 million improvement in MSR fair value adjustments, net of hedge. This is due to changes in both interest rates and assumption valuation inputs, offset by a $12 million loss in other notables, primarily from severance costs, one-time lease termination costs on our PHH Mount Laurel facility, and a small negative net income impact of legacy and regulatory settlement spend or reserves. This was offset by some litigation reserve release due to favorable outcomes. Finally, before I leave the stage, I want to reiterate our year-to-date ROE of 27% on an annualized basis, as well as remind listeners of the $105 million of net income that has been generated year- to- date, which is driving almost $12 of earnings per share through the first three quarters.
For more detailed segment information, please turn to page 10, where we will start with forward servicing. In the upper left chart, you see the adjusted pre-tax income. As the bulk of one-time asset sale and mark-to-market impacts from the second quarter did not reoccur, the result was a positive $5 million. The $6 million of servicing income was down from the prior quarter due to higher MSR runoff, driven by higher own UPB quarter-over-quarter, and lower ancillary fees in the quarter, as well as some isolated rep and warrant expenses due to a few specific loans. Moving to the right, forward subservicing growth continues a strong year-over-year growth trend of 23%. This number is slightly different than what Glen quoted because this is just the forward sub-servicing book versus the entire book.
Improvements in float income continue on the roughly $2 billion of custodial balances we hold, as well as on our own operating cash. This is expected to continue to increase in the fourth quarter as we seek out higher deposit rate banks. Finally, we have one of the most controllable aspects for any successful servicer, continuously improving our cost structure regardless of the interest rate environment. Our servicing team is always seeking improvements. I would add here our cost structure includes all foreclosure and other liquidation expenses, which some other servicers may exclude. Keep that in mind if you're making a direct comparison. Please turn to page 11 for forward origination segment details. On this page, you can see that forward origination had strong improvement in both absolute numbers and relative to the second quarter.
Adjusted pre-tax income for the third quarter is up significantly due to both cost control and strong correspondent and flow lending performance. Again, these numbers differ slightly from what the GAAP numbers Glen showed you due primarily to severance impact. Similar to last quarter, correspondent and flow lending is the largest contributor with a strong income growth of $11 million from last quarter. This was driven by both higher funded volume and better margins. This is driven by our efforts to continue active clients being added in high margin areas such as best efforts, non-delegated, and Ginnie Mae products. As you would expect in this difficult originations market, the consumer direct volume again declined quarter-over-quarter, but we were able to offset most of that income decline with cost reductions.
We anticipate the total forward origination costs will continue to improve significantly into the fourth quarter as we right-size this business for the current environment while keeping a strong focus on both servicing our correspondent and direct retail customers and maintaining a high standard for risk and compliance. Please turn to page 12 for segment details on both of our reverse businesses. Here we look at reverse origination and reverse servicing. While the long-term reverse mortgage opportunity remains attractive, primarily due to borrower demographics as well as the behavior of a reverse MSR being countercyclical when home prices turn down, there continue to be the same near-term headwinds that we introduced last quarter. First, mortgage rates continue to increase. This reduces HECM refinance opportunities. As rates increase, the amount of cash that a reverse borrower can take out of a property declines.
For example, on a $450,000 appraised house from January to October, the amount that a HECM borrower could take out has been reduced by $60,000 or 22% decline. Private label or non-Ginnie Mae HECM products are becoming less interesting to investors in the current risk off environment. While this has some impact on our business, we are over-indexed to Ginnie Mae HECM products. Even that product is reflected in HMBS issuer data, continues to show declining volume and may continue to drop in the fourth quarter. All of these headwinds are reflected in a slight adjusted pre-tax income loss in the third quarter, as well as a quarter-over-quarter decline.
Over in the reverse servicing business, we continue to show a profit, but smaller than the second quarter as we have incurred some costs as we integrate the business into our forward servicing business. Volumes in the reverse servicing business were relatively flat quarter-over-quarter, but there is strong growth indicated for the first quarter of 2023 based on our pipeline today. Going forward, we will be integrating both the reverse origination and the reverse servicing businesses into our respective forward businesses to ensure we maximize productivity. Now please turn to page 13 for an update on our prior announcements on the new FHFA and Ginnie Mae ratios that were issued in August.
As we publicly stated, we believe that PHH Mortgage Corporation will comfortably exceed all of the net worth, capital, and liquidity ratios that the FHFA and Ginnie Mae have put out for adoption next year, with the sole exception being the Ginnie Mae Risk-based Capital Ratio, which is the focus of this page. On the Risk-based Capital Ratio, the numerator takes the company's net worth and subtracts from it any excess MSR value or the amount of MSRs that exceed your net worth. In our case, PHH has a net worth of about $680 million and a known MSR book of roughly $1.7 billion. Therefore, that numerator is a negative number. While we greatly appreciate the Ginnie Mae partnership on the forward servicing side of our business, it is a relatively small contributor to our P&L.
Ginnie Mae represents 10% of our owned assets and 4% of our total servicing UPB book of $283 billion. This was the graphic that Glen showed you back on page 6. The right side of the page shows some of the options we are considering to address this issue, which becomes relevant at the end of 2024, which is when Ginnie Mae will implement that specific metric. Option 1 is for PHH to self-fund a separate legal entity, which would hold only the Ginnie Mae servicing assets. We believe we could do this with our existing liquidity and capital structure. However, we would generate a lower ROE on the same assets as the capital required under the new metric is greater than the equity we currently have deployed against the Ginnie Mae assets.
If we choose to pursue this model, we believe we can do it without raising any additional equity or generating any additional liquidity to support it. Both options 2 and 3 entail working with outside capital providers similar to the models that Glen has previously described. We could do something such as a Ginnie Mae targeted MSR acquisition vehicle that would be a Ginnie Mae version of MAV or synthetic or true subservicing relationships. The final option is to exit the forward Ginnie Mae owned servicing asset business altogether and replace those with other non-Ginnie Mae assets, such as GSE or private label MSRs. In this option, we could continue to subservice Ginnie Mae MSRs for other owners, and our HECM or reverse business would not be affected. We continue to evaluate all these options.
Please turn to page 14 for a view on our stock price relative to both index performance and book value per share. Ocwen continues to deliver sustained growth in book value per share. Our current third quarter book value of $69 indicates a compound annual growth rate of 46%. In addition to book value, we have grown earnings per share year- to- date in 2022 by almost $12. This compares to $2 of earnings per share growth in the full year of 2021. At the end of the third quarter, based on 9/30 data, our stock was trading at 34% of book. We think this discount is not representative of the value we are creating nor of our current balance sheet.
As Glen indicated earlier, the stock repurchase program that we launched in the second quarter is almost completed as we had board approval for $50 million of repurchase, and at the end of October, we were slightly over $48 million. When we consider the best use of any excess liquidity, we are cognizant that our options for high-yielding investments have increased significantly since the second quarter, with either distressed assets or entire companies coming to market, as well as the ability to generate higher returns on buying back either our stock or our corporate debt being among some of our considerations. We will continue to evaluate both our liquidity needs and these options as we move forward. Now please turn to page 15 for an updated path to our projected fourth quarter results.
Here we're going to walk you from the second quarter adjusted pre-tax income of negative $26 million into the third quarter and then to an expected fourth quarter. The third quarter improvement of approximately $18 million was previously discussed on page 9 and is driven by cost reduction actions and margin enhancements, primarily in the origination business. As we project out the fourth quarter on an adjusted pre-tax basis, we anticipate additional gains from cost reductions, growth in our subservicing business, and improved float income. This will be partly offset by lower results due to a challenging origination market. We have lowered our view slightly from the last quarter due to the prolonged deterioration of the origination market, but we expect these collective corporate-wide efforts will propel Ocwen into a strong fourth quarter and a positive result for both GAAP and adjusted pre-tax income.
This will further increase the already strong year-to-date earnings per share impact, as well as improve our year-to-date annualized ROE of 27%. Back to you, Bud.
Thanks, Sean. Now, if we could please turn to slide 16 for a few wrap-up comments before we go to Q&A. We believe our balanced and diversified business, exemplary servicing performance, proven cost management, and track record of execution position us well to navigate the market environment ahead. We're executing a focused, prudent growth strategy. We're leveraging our superior operating capabilities to grow subservicing across multiple investor and product types, and we are positioned to deliver value to clients, investors, and consumers in an economic downturn. We remain steadfast in our pursuit of industry cost leadership by driving continuous cost and process improvement. We're on track to exceed our expense reduction target, and we'll continue to optimize expenses during 2023. Finally, we are prudently managing capital and liquidity to maximize shareholder value.
We've repurchased roughly $75 million in debt and shares, improved liquidity versus year-end 2021, upsized MAV, and delivered on our commitment to expand asset investor partnerships to enhance our capital allocation flexibility. Year- to- date, our balanced and diversified business model has delivered over $100 million in net income, strong book value appreciation, and an annualized GAAP return on equity of 27%. We believe with the successful execution of our business initiatives, we can deliver positive adjusted pre-tax income in the fourth quarter, and we believe we're taking the actions necessary to operate at our targeted ROE range before notable items once origination stabilized. I'm proud of how our team is executing. We have an experienced global operating team with an established track record of successfully navigating multiple mortgage cycles with a focus on prudent growth, cost management, operational excellence, and customer experience.
We will be unrelenting in this focus. With that, Elaine, let's open up the call for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Derek Sommers from Jefferies. Please go ahead.
Hi, good morning, guys. Could you describe the activity you're seeing in the bulk MSR market, volume of deals, pricing, depth of bids, you know, characteristics like that? Thanks.
Yeah, sure. Bulk market is active. There's a lot of transactions that we've seen this year, and it continues to be an active market. You know, look, MSR prices are up. That's not a surprise to anybody 'cause interest rates are up. We are seeing returns improve, so yields are improving. You know, I would say for both, you know, GSE as well as, Ginnie Mae bulk packages, you know, for, I would say, you know, unlevered yields. You know, look, everybody's got their own valuation model, so I'll give you what, you know, kind of what our models would say, but other people's models may produce a different result. Look, we're seeing, you know, high single digit, low double digit, you know, pre-leverage return on asset levels.
Obviously, you put leverage against it's a much better return. You know, in terms of, you know, who is selling, it's largely who you'd think. It's independent mortgage bankers, you know, primarily focused people with origination-centric or origination-focused models, who over the last couple of years have been holding on to MSRs. You know, in this part of the cycle, you know, given where the originations market is, they, you know, need to sell to, you know, create cash flow to support their operations. Overall, again, we expect the market to be robust for the foreseeable future with very attractive returns.
Great. Very helpful. Thank you.
We will now move to Bose George from KBW. Please go ahead.
Hey, everyone. Good morning. Actually just to follow up on the bulk MSR market. I mean, you noted the low single or high single, low double-digit yields. Can you just break that out a little more just on Ginnie Mae versus GSE?
Yeah, I'd say Ginnie Maes are running higher, right? Just generally speaking, you know, I'd say, you know, probably 200-ish basis points higher, round numbers. Which is pretty typical. I mean, obviously the risk profile in Ginnie Maes is, you know, higher than the GSE production as, you know, noted in my comments, and I think is generally understood across the industry. You know, Ginnie Maes do command a bit of a premium from a return perspective. That, as well as there's fewer buyers for Ginnie Maes.
Yep. Okay, great. Thanks. Actually I was just on your book value growth this quarter, so it's up $10. I was just trying to do the roll forward, like the GAAP earnings looks like it was up, you know, $4 and change. I was just trying to figure out the difference there.
Sean?
Sorry, are you talking about the difference between EPS and book value?
Just book value per share change quarter-over-quarter. The two large factors you'd have to consider. One is, you know, operating or net income. The other one is the reduction in share count 'cause we have been repurchasing shares. You know, maybe Sean, you can work with Bose offline.
Yeah. Okay. That would be great. Yeah.
Sorry about that.
Yeah. It looks like.
Yeah.
Yeah, BPS was 4, and the other was 10. Yeah, that would be helpful. Thanks.
Mm-hmm.
Yeah, actually, yeah. That's all I had. Thanks very much.
Great. Thanks, Bose.
We will take our next question from Matthew Howlett from B. Riley. Please go ahead.
Oh, hey, guys. Just a question on, you know, the upsizing of MAV and those two other capital-like vehicles. I mean, when you did the first round of MAV, you gave some numbers in terms of, you know, potential accretion. It was pretty significant. I think it was $40 million, you know, at the time. I'm just curious how we should think about returns on the upsizing. Can you go over what return's like on those two other capital-like vehicles?
I'll start with MAV. You know, MAV has had. You know, we've had really strong returns in MAV. You know, again, I think, Sean, you had outlined you know, double-digit returns. We've received some returns of capital or distributions of earnings and profits. You know, obviously the returns in MAV will be a function of interest rate levels and where assets are being acquired. Look, you know, we're excited about the you know, the results we've had year to date with MAV. Oaktree is really excited about the results year to date we've had with MAV, and you know, we're excited to put more capital behind it.
In England, that's the capital requirement will be 15% or so, you know, just so I understand that correctly.
Yeah. Yeah, Matt, it's the capital ratios between the partners has not changed, right? It's 85, 15. 85% Oaktree, 15% Ocwen.
On those two other vehicles, will you put up any capital on those, or are those just gonna be straight just subservicing vehicles?
No, those two other relationships are different than MAV, right? You know, where our goal was to try to diversify investors because each investor has a different appetite for assets, right? You wanna make sure you can get broad market coverage with broad investor appetite, so you bring in different investors. The structures are different as well too. In the two other, you know, partnership transactions, we do not have a retained equity ownership percentage. We are purely just the sub-servicer for the assets and a portfolio recapture services provider.
Got you. No, that's certainly interesting. I look forward to, you know, hearing more, hopefully some guidance entries on the potential accretion from all three. Last question. Glen, I mean, on the share repurchases, I mean, just 34% of book, I mean, it'd be clearly highly accretive. Doesn't sound like you did any debt repurchases quarter, but I'm assuming those would be accretive as well. I mean, I think you're up to the authorization limit. What's the appetite, do you use liquidity to, you know, continue to repurchase stock and debt?
Yeah, look, the board and management are evaluating, you know, our capital allocation process. As I mentioned, look, I think there's a number of things we wanna consider here. You know, obviously, you know, there's debt, there's equity, there's, you know, a ton of high yield investing opportunities that we're seeing come into the market, and I think the yields are only gonna improve as time goes on. We obviously gotta consider, you know, our share floats, our debt covenants, restricted payments baskets, all those kinds of things, right? There's a ton of things we've gotta consider. Obviously, capital allocation is front and center for the board and management, and we'll update the market on our thinking as we move forward.
Thank you.
We will take our next question from Eric Hagen from BTIG. Please go ahead.
Hey, thanks. Good morning. Hope you guys are good. Another one on MAV. With the increased capacity that you have at MAV, do you have the flexibility to effectively sell MSRs that you currently own outright into the MAV structure as a form of capital relief, if you will? How you guys think about exploring that optionality and, especially with respect to your liquidity. Thanks.
Yep. Hey, you know, look, yes, we do have the optionality to sell MSRs off our books into MAV. We actually, you know, could do that with our other MSR investment partners as well too. You know, I think as we've talked about historically, look, we do have a certain amount of corporate debt on the books, and we need earning assets to pay the interest expense on that corporate debt, right? That's why we're trying to target between $100 billion-$130 billion of MSR UPB, which we think is the right level to, you know, earn off that, you know, provide earnings to recoup that corporate debt.
Now to the extent that we, you know, take action to lower the corporate debt, then, you know, the requirement to hold MSRs, you know, could go down as well. You know, as you noted, Matt, and I think as Sean has said. I'm sorry, Eric. As Sean has said, we, you know, we have a number of different options as we think even about the Ginnie Mae risk-based capital requirements. One of them is reducing MSRs through a capital vehicle and, you know, getting MSRs off our books is one of the ways we could do that.
Got it. Got it. That's helpful. I'm also wondering, in the case where you split the economics with MAV, can you pledge the MSRs that you keep as financing? Or do you have that, do you not have that flexibility because you only own a fraction of the assets? Then maybe just one more, if I can. The consolidation of the forward and reverse that you guys are talking about on the same platform, what are you saying will be the financial impact of that change? Thank you.
Yep. The MSRs when they're transferred to MAV are owned by MAV, right? We can't, you know, independently put secured financing against those assets, right? But in theory, I guess our investment in MAV is leveraged, you know, consistent with the Ocwen total overall corporate leverage, right? There is some leverage against that investment. We can't separately put or haven't looked to put, you know, secured financing up against those assets. It's all done within the joint venture, within MAV itself. You know, look, regarding the impact of, you know, integrating forward and reverse, you know, the initial cost reduction that we did receive is part of the $70 million. We did not break that out separately, and we're probably not going to.
I actually think there's two benefits associated with, you know, integrating those platforms, particularly on the origination side of the business. You know, in originations, I would say one of the challenges the reverse industry has always faced was product distribution. By integrating the forward platform, and in particular the sales teams that we have supporting the, you know, correspondent and wholesale channels, you know, we get, I think, tremendous distribution leverage by, you know, distributing that product across all of our forward clients who are interested in selling the product as well as our existing reverse clients. You know, I could tell you from, you know, coming back from the MBA conference we were just at two weeks ago, a lot of interest on the part of our forward clients about the reverse product.
You know, we have a group called Liberty Academy, which trains people on how to sell the reverse product. Again, you know, having the capability to buy the asset as well as service it or sub-service it as the case may be, really allows us to be in a position of providing an end-to-end solution to those forward providers who are looking to get into the reverse space. We're excited about the cost reduction opportunity. More work to do there. We're just at the early stages of the integration and really excited about the go-to-market impact of that integration, which, you know, has been well received by our existing forward clients.
Got it. Thank you both so much. Appreciate it.
Once again, if you would like to ask a question, please press star one. If you're using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. We will take our next question from Lee Cooperman from Omega Family Office. Please go ahead.
Congratulations on a nice quarter. I'm trying to figure out, you know, there's so many moving parts. Do you have a view of your normalized earnings and normalized ROE over a cycle the way you wanna run the business?
Lee, the way we wanna run the business, you know, again, I think Sean covered this in his topics. Look, we still are, you know, in that, you know, low double-digit to mid-teen return on equity range. Again, that will vary across the cycle. As you noted, there are peaks and valleys. You know, we do believe our actions that we're taking to adjust our cost structure, our growth strategy, and again, you know, our capital allocation plans, you know, should enable us to achieve that target. I mean, look, GAAP ROE is right now off the charts, as you would expect with, you know, MSR valuation appreciation, which is part of the economic model. We are, you know, based on our actions, expecting to turn the corner to adjusted pre-tax profitability in the fourth quarter.
We're excited about being able to make that change.
Yeah. Well, if I take, say, a 14% return on book, that would give you normalized earnings. That's about $10 a share. Your stock is, like, 3x normal earnings. Why do you think your sales are such a low multiple? And is there anything. You know, we talk about an asset-light model. I'm just wondering whether I'd rather be in Oaktree's position. You know, they have 1 million warrants. I don't know, what's the strike price in their warrants? I mean, do we have a very high cost to capital as a business, and I'm just wondering whether do I wanna be in Oaktree's position or our position?
You know, frankly, I think both positions are good. Oaktree obviously is, you know, has made substantial investments in the business. They've got debt, equity, and they're, you know, committing more capital to, MAV. They, you know, obviously are in support of the business, and they've been a great partner. Look, Lee, I think we're doing all the right things for this part of the market cycle. I love how our business model is positioned for the cycle. I think our balance, our diversity and our, you know, our roots, you know, to our core really as a servicing-centric business model, and we're playing into that part of the cycle. You know, we'll continue to evaluate capital allocation.
You know, look, to the extent that there's an opportunity to further drive, you know, a capital-light model at our business, we certainly do favor that outcome. Look, we are frustrated with where our share price is. We don't think the strength of our business is being recognized. You know, we have been putting our money where our mouth is in terms of share repurchases and debt repurchases. And again, I just reemphasize, like our position for the cycle. But I do think, you know, unfortunately for the sector, there is a lot of uncertainty around mortgages these days.
Just two last questions. Just one is housekeeping. What was the price you paid for the $48 million worth of stock you bought back? What average price did you pay?
Sean, average is roughly 28-ish, 29-ish.
Gotcha. Okay. Is the book value a real number? In other words, can you liquidate the company for anything approaching book value?
Look, I think the biggest acid test for us is, you know, how we've been managing MSRs, right? We've been an MSR buyer and seller throughout the course of the year, and as I said on the call, you know, that provides an added level of discipline to our MSR valuation process. As we've sold MSRs, we've not sold MSRs below our acquisition price. You know, we use third-party broker marks. We've got confidence in the process we use to mark our MSRs. We think it's reflective of market value. I think we've demonstrated the ability to, you know, in a controlled and disciplined fashion, to monetize our MSRs for our book value.
Well, okay. I would just say this, just as one person's opinion. Typically, what a book value is worth in the market is a function of what the book value earns. In other words, a company with book value earning 2% on book, that book is not worth what it's stated at. With a 14% ROE, your book is real. I would say that if you can buy your stock back at 3x earnings and less than half of book value, that would be the best use of your capital, and that would be my vote. Rather than getting involved in things where you're taking risk, you know, the business you're buying back in the market is a business you know.
that seems to me to be the best use of capital at the current time. Just one person's view. Good luck, and you're doing a good job. Thank you.
Thank you, Lee. Appreciate it. That means a lot.
Lee, we confirmed it. The average stock price buyback so far is $28.59 through the end of October.
I didn't anticipate asking this question. How much excess capital do you have on the books today? Do you have any excess capital? Are you capital constrained?
You know, Lee, we don't really have a concept of excess capital in the business. We tend to manage our asset investment levels, you know, leveraging MAV and others to create excess capital as needed.
We have pretty strong liquidity.
Yeah
This quarter relative to where we've been.
Well, my hero in life was Dr. Henry Singleton, who did eight self-tender offers, and he didn't buy his stock back as cheaply as you have the chance to buy your stock back. I would say the measure of the confidence you have in your book value should be a function of the aggressiveness which you approach the repurchase issue. You understand those issues, and I won't take any more of your time 'cause I know we have another call later today. Thank you.
Thank you, sir. Appreciate it.
As there are no further questions, I would now like to turn the call back over to Glen Messina for any additional or closing remarks.
Thanks, Elaine. Look, thanks, everybody for joining the call today. Really appreciate it. You know, again, our balanced and diversified business model is working as intended, and we believe we're well positioned to perform in this environment to deliver long-term value. I'd like to thank and recognize our board of directors and global business team for their hard work and commitment to our success, and I look forward to updating you on our progress on our next quarter's earnings calls. Thank you much.
This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.