Good day, and welcome to the Ocwen Financial Group Inc. Q1 Earnings and Business Update Conference Call. For information, today's call is being recorded. I'd now like to turn the call over to Mr. Dico Akseraylian, Senior VP of Corporate Communications. Please go ahead, sir.
Morning, and thank you for joining us for Ocwen Group's Q1 earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen Group's CEO , Glen Messina, and CFO , June Campbell. 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 31 December 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 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 and an alternate way to view certain aspects of our business that is constructive.
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 U.S. . The reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures may be found in the press release in the appendix to 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 and our plans for the balance of the year. Let's get started with slide four to review a few highlights for the Q1 . We believe our actions to build a balanced and diversified business have positioned us well to navigate the current mortgage cycle, and our Q1 results are consistent with our expectations. We delivered net income of $58 million, strong annualized ROE in the quarter, and a 14% appreciation in book value per share from year-end 2021. We are taking a cautious and prudent approach to investing and managing our liquidity position, which has improved from year-end.
Consistent with our previous guidance in the Q1 , we opportunistically sold select MSRs at what we believe are robust valuation levels to harvest value appreciation and mitigate asymmetric hedge risk in our MSR portfolio. Our servicing platform is performing well operationally. Our servicing financial performance is improving with rising interest rates. MSRs are appreciating in value. Run off is declining. We continue to improve our cost structure, and our portfolio is growing. Yesterday, we announced our subservicing agreement with NRZ was renewed until year-end 2023, with annual extension options thereafter. We thank NRZ for their confidence in us. We appreciate their business, and we are looking forward to continuing to serve them and their borrowers. Forward originations faced a challenging environment in the Q1 .
While whole servicing additions of $20 billion is up about 46% YoY, driven by subservicing additions, origination volume was down 13% YoY and margins were below expectations. We are taking the necessary actions in forward originations to reduce our operating expenses and shift our product mix and service mix to restore profitability. Our reverse business is performing very well, both in originations and subservicing. Origination volume is more than doubled YoY. Margins are holding flat relative to Q4, and the origination market is growing. Reverse subservicing is performing ahead of expectations, and we're building a strong opportunity pipeline to support future growth. Let's turn to slide five to discuss the environment and our market positioning. Interest rates have risen higher and faster in the Q1 than industry forecasts suggested just a few short months ago, and they continue to increase.
In the current environment, we see three main drivers of our profitability going forward. First, with a core strength in servicing and an expectation of even higher interest rates, we expect our servicing business will be an important driver of our future earnings. Our balanced business model is working. Servicing pre-tax income in the Q1 is up significantly versus the Q1 of last year due to MSR value appreciation, lower payoff volume, expense productivity, and portfolio growth. The profitability improvement in servicing and MSR value gains more than offset the decline in profitability in forward originations as volume and margins contract. Forward originations will be a less important driver of earnings in this market cycle, but a critical element to replenish and grow our servicing portfolio. Second driver is subservicing. We made great progress in growing our forward subservicing business, supported by our global technology-enabled scalable platform.
We believe our success here reflects our proven industry-leading operating performance that has been recognized by Fannie Mae, Freddie Mac, and HUD with top honors in their respective servicing performance recognition programs. We continue to be a leader in special servicing, supporting borrowers and investors, and outperforming MBA and Moody's industry operations benchmarks. We work hard every day to earn our clients' trust, and this has been rewarded with meaningful subservicing additions and potential opportunities. We've added $64 billion in subservicing UPB in the last 12 months. We have $28 billion in scheduled subservicing additions in the next six months, and our forward subservicing opportunity pipeline of roughly $280 billion in potential additions. In addition to the NRZ renewal, we are in advanced discussions with MAV to potentially double our investment capacity. Third driver is our reverse business.
We are the only large scale, full service, end-to-end reverse mortgage provider in the industry. The industry opportunity is growing. Our originations volume and market share continues to improve, and origination profitability is stable. Our reverse originations, our reverse subservicing business is gaining scale, profitability is improving, and we have an opportunity pipeline of roughly $55 billion. Overall, we're really excited about the potential for our reverse business and our overall business and do not believe our recent share price is reflective of our financial position, earnings power, or the strength of our business. With industry volume shrinking, we continue to look at potential M&A opportunities that can expand scale and capabilities or otherwise create value for shareholders. Let's turn to slide six for some servicing highlights. In servicing, MSR value net of hedges increased by $56 million in the Q1 .
MSR value net of hedges has increased by roughly $36 million. Based on our MSR sensitivity profile, we estimate an immediate 25 basic points parallel increase in interest rates would increase our earnings per share by roughly $2.70, which translates into a DV01 of roughly $1 million. Servicing income excluding MSR gains has increased by $23 million YoY, despite lower EBO gains and interest rate-driven fair value losses on repurchase loans held for sale. Our diversified growth strategy, executed by our enterprise sales team, has resulted in meaningful servicing portfolio growth YoY , up over 50%. All segments of our portfolio, home servicing, subservicing, forward, reverse, and small balance commercial are growing. We're targeting forward servicing and subservicing UPB of roughly $290 billion by year-end.
The extension of our current subservicing agreement with NRZ, which covers approximately $54 billion in UPB at the end of Q1, had been set to expire in July. The agreements have been extended until year-end 2023, with annual extension options thereafter. As part of the renewal, we agreed to share a portion of some ancillary revenues and simplify the future process for extensions at the end of each term. As we've said in the past, this contract has a thin margin, but considering the significant cost reductions we've achieved in our servicing platform, we believe the renewal is a good outcome for both companies. Moreover, we appreciate NRZ as a business partner and their confidence in our servicing capability reflected in their renewal.
Through the combination of scale, portfolio composition, technology investment, and process reengineering, we've reduced our servicing cost structure in basis points of UPB by over 30% or almost 4 basic points in the last year. Through continued digitization and process improvement, we are targeting further reductions to 7 basic points of UPB by year-end. Higher interest rates are driving lower prepayments and related expenses. We believe runoff may slow further to between 13.5% and 14%. As short-term interest rates increase, we expect higher revenue from our $2.4 billion of escrow balances. This should help offset higher interest costs on our $1.2 billion of floating rate debt. We are actively managing our portfolio, as is evidenced by our sale in the Q1 , and we are executing several sale transactions to reduce our severely aged Ginnie Mae loan population.
We believe the sale will improve the quality of earnings going forward through lower unreimbursed claims expense and it de-risks our portfolio. We did experience a loss on MSR value for these loans in the Q1 and will recognize a loss on sale in the Q2 upon completion of the sale. We believe we have tremendous leverage in our servicing platform, and we're excited about the growth opportunity for servicing, particularly in subservicing. Let's turn to slide seven to review forward originations. I believe it's generally understood that the environment for forward originations is tough and likely to get tougher. We are taking actions in response. Our originations team delivered $20 billion in total servicing additions, up 46% YoY, largely driven by subservicing additions. On a sequential quarter basis, total origination volume was down 23%.
We experienced a pre-tax loss in forward originations driven by lower lock volume, lower margins, and volatility-related hedge ineffectiveness. During February through mid-March, we saw a wide range of MSR values between the primary originations market, our valuation experts, and bulk sales transactions. At some coupon levels, the variation was more than 15 basic points . During this time frame, we made the prudent decision to intentionally constrain volume and correspondent lending by capping new origination MSR prices while we validated MSR values through our valuation experts and our own bulk sales transaction. Capping new origination MSR prices drove margin compression and volume reduction beyond competitive influences, as well as drove hedge ineffectiveness. Since mid-March, we've seen a much tighter range of MSR values. We have since lifted the pricing caps, and correspondent lock volume, margins, and hedge performance have improved.
We continued to focus on growing our client base, leveraging our multi-channel capability. Our total client count is up over 2.5 times in the Q1 of last year, and it continues to grow. We're growing higher margin Ginnie Mae in non-agency products and best efforts in non-delegated deliveries. Volume here is double YoY, and April volumes have exceeded Q1 levels. Our refinance recapture rate continues to improve. We achieved 39% during the Q1 , with March's level at 41%. We estimate annual forward consumer direct volume for 2022 will be roughly half of 2021 levels. Portfolio growth, improved recapture rate, and cash out refinancings, which are now 72% of our business, is offsetting in part the significant decline in rate and term refi opportunity.
Under current market conditions, we must adjust our capacity and cost structure to match a smaller originations market. In March, we executed actions to reduce our forward origination staffing by 21%, including contractors. Further reductions are expected to occur during the Q2 . We are targeting to reduce our cost structure in basis points of volume by roughly 45% by the Q4 versus the Q1 of this year. For the full year, we're targeting about $75 billion in total forward servicing additions. This includes $45 billion in subservicing additions, including MAV, and about $30 billion of forward originations. Let's turn to slide eight to discuss our reverse business. We're very excited about the opportunity in the reverse mortgage market.
Increases in home price appreciation, the increase in the maximum claim amount to roughly $970,000 in combination continued to fuel new loan production and is helping to offset the impact of higher interest rates. Demographics here are favorable, with 12,000 people turning age 65 each day, and home equity held by this group now tops $10 trillion. There is also a growing amount of research and positive news articles supporting the consideration of reverse mortgage as a retirement tool. Our origination performance has been quite strong and is another successful example of our balanced and diversified business model. We continue growing market share, which is up 1.5 percentage points over Q1, versus the same quarter of last year. Origination volume is more than double YoY.
We're seeing growth in all channels, direct to consumer retail, wholesale, and correspondent lending. Direct to consumer retail is our fastest-growing channel. As June will share in a moment, revenue margins have drifted down over the past year. However, margins by channel have been stable for the past several quarters. We are positioned as the only large reverse mortgage market participant that can offer end-to-end capabilities across originations and servicing. The integration of the RMS platform is going well. Loan boardings are ahead of schedule, and we are slightly ahead of our financial expectations as a result. Our subservicing opportunity pipeline has grown to $55 billion, and interest in our platform has been quite strong. We expect the subservicing platform to be profitable by Q2 and thereafter, after we complete the integration and achieve our initial scale objectives.
We believe we're uniquely positioned in the reverse mortgage market, and the diversification this business provides helps mitigate our reliance on the forward mortgage origination market. Now I'll turn it over to June to go through our financial performance in more detail.
Thank you, Glenn. Please turn to slide nine. In the Q1 , we reported $11 million in adjusted pre-tax loss. You can see in the top right of the slide a YoY walk. Our origination segment reported a $40 million reduction in adjusted pre-tax income from reduced industry volume and lower margins, while our servicing segment reported a $30 million improvement in adjusted pre-tax income from higher UPB due to growing subservicing, slowing prepayments, and operational efficiency. I'll talk more about the segment results in the next few slides. Net income in the quarter was $58 million, up from $9 million YoY.
Consistent with our first half 2022 guidance, strong net income was a result of $56 million in MSR fair value adjustments, net of hedges, which included $13 million of evaluation assumption loss on delinquent Ginnie Mae loans scheduled for sale in the Q2 . Other notables included legal settlement recoveries and a favorable long-term incentive adjustment from the decrease in our stock price. We ended the quarter with strong liquidity, $269 million in cash and $45 million in available borrowing. Earnings per share increased to $6.30, and book value per share increased to $58. On the bottom right bar chart, revenue held YoY as higher servicing and subservicing fees from higher UPB in both servicing and subservicing was offset by lower origination volume and margins.
The chart on the bottom right of this slide demonstrates continued successful execution of our continuous cost improvement discipline. Please turn to slide 10. Forward originations adjusted pre-tax income declined to a $13 million loss. As discussed, forward originations profitability was impacted by reduced industry volume and margins. Our volumes were also impacted by our intentional strategy in correspondent to restrict volume as interest rates rapidly increased, and we saw a wide range of MSR values among the primary origination market, broker values, and bulk market values. In addition, consistent with the Q2 of last year, we transferred MSR and full volume to MAV, consistent with the terms of our agreement with MAV. You can see on the top right the decline in revenue margins experienced in the consumer direct and correspondent channels.
The margin decline is a function of intensified competition, our decision to limit new origination MSR values, and resulting hedge ineffectiveness. We're taking actions to return the origination segment to profitability, reducing costs and rightsizing segment operations as well as the corporate function supporting the segment by approximately half, continuing to grow volume in higher margin correspondent products and delivery options. This volume's approximately doubled YoY. As you saw in an earlier slide, we're continuing to improve recapture rates, which were up 10 points from Q4 of 2021 to 41% in March of this year. Please turn to slide 11. The market opportunity continues to be strong in reverse originations, with continued home price appreciation resulting in increased customer borrowing capacity. Adjusted pre-tax income held at $10 million in the Q1 , consistent with the Q1 last year.
Origination volume was up $284 million YoY, led by the consumer direct channel, which has the highest channel margins. The growth in origination volume offset lower margins versus the Q1 last year. Margins by channel, while all were down from the Q1 last year, have been relatively stable in each channel since the Q3 of 2021. We remain optimistic on the growth opportunity in reverse originations, and we continue to invest in resources and marketing to grow the higher margin consumer direct channel. Please turn to slide 12. Profitability in the servicing segment has improved as expected with higher interest rates, our actions to build scale, deliver cost improvement, slower prepayments, and integrate our reverse subservicing platform ahead of plan.
On the left side of the slide, adjusted pre-tax income is up $23 million YoY to $16 million, driven by UPB increase to $275 billion, as well as cost reduction of approximately 4 basic points of UPB. Prepayment rates were 10 percentage points lower versus the Q1 of 2021 due to higher interest rates. Unfortunately, higher interest rates also drove $7 million lower in gain on sale due to asset revaluations, mainly on our Ginnie Mae portfolio. On the right side of the slide, we show reverse subservicing results. We generated a small positive adjusted pre-tax income in Q1 by accelerating onboarding loans and achieving planned operating expense reduction, driving an improved operating efficiency.
We believe we are on track to achieve $5 million in adjusted pre-tax income by the Q4 of 2022, per guidance provided on our earnings call in February. Please turn to slide 13. This is our roadmap from actual adjusted pre-tax income in the Q1 to the projected Q4 of 2022, assuming a stable interest rate environment and no adverse changes in market conditions or the legal and regulatory environment. The roadmap is broken down by key actions to deliver our targeted returns. We expect between $9 million and $10 million improvement from productivity and rightsizing actions. As I mentioned, originations is targeting reducing costs by approximately half, delivering annualized expense savings of roughly $30 million. We expect between $10 million and $11 million improvement from growing higher margin originations products and delivery options to correspondent.
Between $5 to $6 million improvements from subservicing growth and reduced runoff. Approximately $28 billion in subservicing is currently scheduled for boarding, and we have a strong subservicing opportunity pipeline in forward and reverse. Our projected adjusted pre-tax income in Q4 is approximately $15 million, up from the $11 million loss this quarter. We're targeting between 9% to 15% after-tax ROE before notables in the second half of this year. We've slightly reduced the lower end of our guidance since the last quarter, given the severe impact of the current market environment on forward originations. Our target return levels are consistent with our major competitors. We continue to guide to first half earnings being driven by MSR fair value gains offsetting origination market headwinds.
Finally, consistent with our expectation for lower origination volume levels in a more competitive market for MSRs, we're evaluating all our capital allocation options, including to support debt and share repurchases. Now I'll turn it back over to Glenn.
Thanks, June. Let's turn to slide 14. 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. Our Q1 results are consistent with our expectations, and we delivered strong net income and book value per share appreciation. Liquidity has improved from year-end, and we're taking a cautious and prudent approach to investing, managing our liquidity position, and capital allocation. Servicing financial performance is improving with rising interest rates, and we expect servicing will be an important driver of financial performance going forward. MSRs are appreciating in value. Runoff is declining.
We continue to improve our cost structure, our portfolio is growing, and we have $2.4 billion in escrow balances, which should generate increased revenues as short-term interest rates increase. We have a strong value proposition as demonstrated by our backlog of scheduled subservicing boardings, the NRZ renewal, and a robust subservicing opportunity pipeline. Forward originations is facing a challenging environment, and we're taking necessary actions to reduce our infrastructure, operating expenses, and shift our product and service mix to restore profitability. We believe we're uniquely positioned in a reverse mortgage market, and our reverse business is performing very well, both in originations and subservicing. Favorable demographics and home price appreciation are expected to drive further market growth. We are focused on delivering prudent growth and capital management, and we're evaluating all capital allocation options, including share and debt repurchases to maximize value for shareholders.
We expect first half 2022 earnings will be driven by MSR fair value adjustments, offsetting originations headwinds and the build-out of our reverse subservicing platform. We are targeting after-tax ROEs before notable items in the second half of 9% to 15% with the expected benefits of successfully executing our business initiatives. I'm proud of how our team is executing in unprecedented market conditions. Our management team has a track record of successfully navigating multiple mortgage cycles with a focus on prudent growth, cost management, operational excellence, and customer experience. We will be unwavering in this focus. We are operating in a volatile and uncertain environment. We're closely monitoring the financial markets, economic environment, and industry conditions closely. We're dynamically managing our operations, plans, and targets, and we'll adjust as necessary to address emerging opportunities and risks.
I'd like to thank and recognize our board of directors and global business team for their hard work and commitment to our success. With that, George, let's open up the call for questions.
Thank you much, sir. Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad. Please just ensure your mute function is not activated unless you say with your equipment. Once again, please press star one. Today's first question is gonna be coming from Mr. Eric Hagen calling in from BTIG. Please go ahead, your line is open.
Hey, thanks. Good morning. Hope you guys are well. A couple from myself. Did you say that you expect to sell something at a loss in the Q2 ? I may have just missed what it was and also the amount of what it was. Maybe you can re-highlight that. I think you noted some hedge ineffectiveness from more volatile interest rates. Can you talk about any developments of hedging the MSR or the pipeline, how you see that evolving with higher interest rates?
Sure. I'll take those two separately, Eric. We are looking at selling some severely aged Ginnie Mae loans in our servicing portfolio. We had taken an MSR mark in the Q1 . June, I think that was 13.
13. Yes, that's correct.
Once we buy those loans out of the respective pools and sell them, there'll be an additional loss on sale. We didn't really disclose how much the loss on sale is, but you get a sense of what we've done from an MSR mark perspective. In terms of hedging and effectiveness, number one, the interest rate volatility during the quarter did give rise to some of the hedge volatility we saw in the mortgage pipeline, less so on the MSR hedge.
You know, the actions we took to, quite frankly, step on MSR prices just given the wide range of values we were seeing in the Q1 also contributed to some of the hedge ineffectiveness 'cause you're artificially constraining essentially the value of MSRs in the pipeline. W e've since seen MSR values narrow. We've obviously confirmed values with our servicing brokers and our own bulk sale transaction. We 've lifted the constraints on pricing. We're seeing better hedge performance during the latter half of March and into April. Margins as well, have improved because we're not artificially constraining MSR values.
You know, on the servicing hedge, again, with interest rates rising, we have repositioned our hedge. Obviously, we've switched to a more option-based strategy, as which I think is prudent as rates are moving up. We've you know, rolled up the strikes in our TBAs, and we've taken off swap coverage. You know, that also helps preserve liquidity as rates are going up. You 're not burning cash in terms of you know, having to post margin, so to speak. W e have as well you know, modified or adapted our hedging policy, MSR hedging policy for this environment.
We are focused now on, you know, rate protection down 25, down 50 and targeting, you know, 40 basis points hedge coverage ratio for the down rate scenarios.
Okay, that's helpful. Maybe just a couple more on the servicing. Do you think you guys would ever look to sell MSRs as a form of liquidity and capital management, especially if MSR values stay relatively strong? Can you also just quickly share how the profitability between the NRZ portfolio compares with just say, agency subservicing once you consider the G&A that goes with it? Thanks.
Yeah, sure. In terms of selling MSRs, look, I think what we've shown over the last, you know, 12 or 14 months, we dynamically manage our MSR portfolio. We are always looking at, you know, a couple of things. One is, you know, starts with view of value, right? So, do we have a view of value on MSRs that differs from market participants? If we think that our view of value is, you know, under where market participants are, you know, we would choose to, you know, sell MSRs and harvest that value.
Obviously, with interest rates going up and you know, certain segments of our portfolio showing, or lack of a better term, refinancing burnout or prepayment speed slowing to a very large degree, you know, it creates asymmetric hedge risk in your MSR portfolio. So that's essentially what we did in the Q1 , is we sold off those assets and mitigated that risk and harvested the capital appreciation or value appreciation in those assets. A s June and I mentioned on the call, look, we you know, we recognize, you know, look, we are operating in a volatile environment. We are constantly evaluating our capital allocation strategy. W e'll look at opportunities to manage our MSR portfolio and generate liquidity in ways that can you know, best maximize value for shareholders.
That's really helpful. How about the profitability between the NRZ portfolio relative to agency subservicing in this environment once you consider the G&A expense? Appreciate it.
Yeah. Look, the NRZ portfolio, as we've said, at one point in time, you know, it was unprofitable on a fully allocated basis. We've, you know, since done a lot of work on our cost structure and have radically reduced our cost structure, particularly in servicing. You know, in basis points of UPB, look, NRZ is, you know, and now that our cost structure is different, and with some of the modifications we've made in the contract. Look, NRZ is not really that different than agency subservicing and margin. A s a percent of revenue, it's lower as the costs are much higher given the delinquency. The optics of it may be a little bit different.
Net-net, we've managed our cost structure to the point where we believe that portfolio is generating profitability consistent with our agency subservicing.
That's good color. Thank you guys very much.
Thank you.
Thank you, Hagen. Ladies and gentlemen, once again, if you have any questions, please press star one. If you find your question has been answered, you may remove yourself from the queue by pressing star two. We now go to Matthew Howlett calling from B. Riley. Please go ahead.
Good morning, and thanks for taking my question. You know, Glenn and June, just first on the April update, the estimates' $36 million up on the MSR value. Are we to presume the current book now is, over $60 million? Just give us an update on, you know, where we are on a book value basis.
Yeah, you know, we didn't, you know, there's lots of other puts and takes. We didn't really disclose book value per share. I'll leave it to you guys to run through the math. Obviously, there's other things that go through our P&L that we've gotta be conscious of. And quite frankly, the books aren't closed for April. I really can't give you an updated book value per share number. MSR values continue to appreciate, you know, even since April. Interest rates are higher now than they were at the end of April. MSR is working investment these days.
Absolutely. I guess where I'm going with this is with the stock here now at, you know, 0.3 of, or below that of potentially current book. When you prioritize Glen's capital management, you mentioned stock buybacks, you mentioned debt, you know, possibly debt repurchases, upsizing M&A, additional M&A. Can you just sort of go through those and sort of what are the priorities and how you expect to execute in this year?
Yeah. Yeah, look, the priority for board of management is very simply maximizing value for shareholders, right? We're evaluating all our capital allocation options to include share and debt repurchases to, you know, to allocate our capital in a way that best makes sense for shareholders. Look, we're frustrated, you know, that the strength of our business model and our business performance is not being recognized in share price. I think it's prudent and appropriate for us that we consider our capital allocation alternatives if there's a way to better allocate capital to create value for shareholders. Yeah, I mean, to the extent we would choose to move forward with debt or equity repurchases.
I mean, I am conscious of the, you know, the leverage, the financial leverage that's on the business. As we think about it, you know, one of the things we think about is how much we allocate to debt versus equity and making sure we don't, you know, end up in an over-leveraged situation for the company. Again, all options are being considered. You've hit the nail on the head in terms of, you know, what we're thinking through. Again, our focus here is maximizing value for shareholders.
Got you. Well, I certainly, you know, recognize you have to be cognizant of the leverage, but it seems like liquidity positions' improving and you certainly take advantage of some of the, you know, the discounted debt and equity prices in the market. I mean, you mentioned M&A. I mean, what would you need? You know, what are you looking for to add to the business? Just curious what would be something that you'd look to, you know, growing.
Yeah. You know, as we think about M&A opportunities, you know, they fall into a couple of different baskets. I would say, one is increasing scale of our business platforms, right? If there's an opportunity to, you know, increase scale of servicing, clearly we'd look at it, particularly from a subservicing perspective because it's not capital intensive. Then as well, increasing capabilities. You know, as the you know GSEs have you know put in place more punitive measures against third party originations, more punitive pricing against third party originations, which you know affects all aggregators with correspondent lending platforms, including ourselves and all our competitors.
You know, we've got to think about how much of our business flows through our correspondent channel and where we can add value there, which is best efforts delivery, non-delegated delivery, non-agency products. Expanding our capabilities in those areas is very important to us as well too. Look, we evaluate all M&A options, you know, with the consideration of is it gonna be value accretive for our shareholders? L ook, TCB and RMS are examples of accretive deals, right? TCB was-
Right.
You know, was largely an MSR buy with a platform. Made enormous sense for us to do, and has been hugely accretive to our business. RMS as well too. W e've built now a very powerful reverse mortgage business. That's the type of things that we're thinking about.
Great, Glenn. Just last question. I mean, what are the conversations like with Oaktree? I mean, do they sound, you know, clearly they're happy with the first round of MAV, advanced talks in the second round of it. Is there anything, does it go beyond that? Would they look to restructure some of the sub notes? Just, can you just give us the updates on the conversations with them? Thank you.
Yeah. Look, first and foremost, you know, Oaktree has just been an awesome partner. Really, love the support we get from the Oaktree team. E very member is looking to certainly create value in MAV and create value in the company. They have been hugely supportive and we are just very appreciative of everything they've done for our business and continue to do for our business. Ou r discussions really have remained focused on MAV. MAV has been very successful for both of us. It's enabled us to grow subservicing quite a lot. C ertainly MAV is the investments they've made in MSRs have appreciated quite nicely. So, generating great financial returns for MAV, of which we're an investor, and we get a portion of that.
As we think about upsizing MAV, you know, we really think about a couple of things. A s we mentioned, we're in advanced discussions there, but you know, with this rapid slowdown in the originations market, we've got to think about how big do we really need MAV to be? B igger is always better to some degree, but you know, obviously, we wanna size it appropriately for our business. As I mentioned, as well, second, there's been changes in the originations market.
We have a benefit in that we have a multi-channel origination platform, so we participate in, you know, all the spaces in correspondent, mandatory best efforts, non-delegated, plus we participate in the flow delivery channel, so the CRX, Freddie Mac CRX channel and Fannie Mae SMP channel. We could take delivery however our customer wants to deliver it. As we think about how the GSEs are incentivizing sellers to move between correspondent and CRX, we have to make sure that that's reflected appropriately from an operational mechanics perspective in our agreements with MAV. So, there's a lot of devil in the details, and that's what we're currently sorting through.
Then, you know, lastly, you know, as we always think about, you know, building diversification in our business and, you know, a lot has changed in the past year, and there's a lot of people who are investing in MSRs. You know, we certainly, our first preference is always to work with Mav, but, you know, there are other players out there and do we wanna, you know, have a multi-source platform versus a single source platform. A lot of things to talk about, but most of the discussion's really been focused on Mav. Again, Oaktree, great partner, love working with them. They've been terrific.
Thank you.
Thanks so much, sir. We'll now go to Mr. Marco Rodriguez, calling in from Stonegate Capital Markets. Please go ahead, sir.
Good morning. This is Preston sitting in for Marco. Thanks for taking my questions.
Hey, Preston.
Hey, good morning. You mentioned you're really optimistic about the growth opportunity in reverse originations, that you're gonna keep investing resources and marketing to sort of grow the consumer direct channel, because it's the highest margin. Could you just sort of expand on that growth opportunity and what you think is possible there?
Yeah, you bet. Look, Preston, we just love the reverse business. Look, if you look at the mortgage landscape today, it's one of the few areas where opportunity continues to grow, demographics are favorable, and, you know, it's a product that, this day and age, you know, with home price appreciation and higher, the higher total claims amount from Ginnie Mae, which is roughly $970,800. Look, this product can make a lot of sense for consumers. And as you know, there's a fair amount that goes up front in terms of consulting with consumers to make sure the product is right for them. But look, it's a business where we continue to demonstrate really strong momentum. It's profitable. The origination side continues to grow.
Subservicing is growing. You know, more specifically on the investments in growing direct-to-consumer retail, that has been our fastest-growing channel, and as you probably saw on June's pages, has the highest revenue margin, obviously higher cost structure as well too. I t's been a good business. Look, you know, we are investing approximately $2 to $2.5 million in additional marketing spend and sales resources throughout the course of the year to drive additional production, you know, which we've seen some of it in the Q1 , but really towards the second and really more so towards the back half of the year. You know, we expect the payback on that investment, again, assuming we execute and achieve our you know our planned return.
We contribute about $6 to $7 million of incremental revenue to the channel through higher retail volumes. N et contribution, $4 to $4.5 million, we think it's, you know, a great payback on investments, and it's something we wanna continue to allocate capital towards.
Got it. Makes sense. Thank you. You've discussed in a few of the questions, this MSR values. I think it was up $36 million in April. Do you think, how much room do you think is left for additional MSR valuation increases? Obviously, there's a lot of factors outside your control, but if there's a way to quantify that.
Yeah. As we mentioned, in our earlier comments, look, you know, our current DV01 is about $1 million, but, you know, that DV01, we've seen it decline certainly during the course of the Q1 . That's because of convexity MSR portfolio, right? It doesn't really, you know, move in a linear fashion, because prepayments tend to slow, and there's a floor, right? There's only so low prepayments can go, unscheduled prepayments. I n the Q1 , as rates went up, you know, we saw the DV01 decline in absolute value. It went from roughly $2.6 million at the start of the year to about $1.5 million by quarter end.
As we said, you know, looking at our rate shock at quarter end, it was about $1 million. L ook, from a model perspective, a lot of that's driven by flooring out of prepayment speeds. But again, yeah, as interest rates go up, there's escrow and float balances that are modeled in MSR valuations. As interest rates rise, those are worth more money. T he value will continue to appreciate from a model's perspective as rates go up. Ultimately , look, it's really a question about market value and what kind of buyers are out there buying MSRs and what limits may they impose on MSR values or appreciation they may see in MSR values. I t is a market-based asset.
You know, we are seeing, you know, today multiples in the mid-fives at, you know, quite frankly, which is, you know, from a historical perspective, really pretty high. Could they go to six? Maybe. R ight now it's, you know, certainly with a number of us in our business have experience for quite a few years in the industry, six seems kind of unheard of, but we are operating in unprecedented times for sure. So look, it's, you know, clearly the rate of MSR appreciation is declining. I think that's a given, with how low rates are. One of the things that we're doing, Preston, to, you know, manage our portfolios, as I said before, is managing this asymmetric risk.
At some point in time, MSR values become really hard to hedge because there's more downside than upside. You end up spending a lot of money on options to hedge that. We're being attentive to that. We're watching our portfolio, and we'll be making adjustments to our portfolio to make sure that we're not building unnecessary risk and asymmetric risk in our business that's expensive to manage.
Got it. That's helpful. Thank you. Congrats on extending the NRZ agreement. I was gonna ask for an update on the MAV upside, but I think you sort of already covered your discussions with Oaktree. That is all I have, so I'll jump back in the queue. Thank you.
Great. Thank you.
Thank you, sir. Ladies and gentlemen, once again, if you have any questions or follow-up questions, please press star one. We'll now go to Mr. Drew McIntosh calling from McIntosh Investor Relations. Please go ahead, sir.
Hey, good morning. Regarding the possibility of debt and share repurchases, has your board approved any buyback programs?
Hey, Drew. No, our board has not yet authorized, a debt or stock buyback program. We are, as I said, evaluating all capital allocation options, including share and debt repurchases to maximize value for shareholders. T o the extent our board authorizes such a program, obviously we would disclose it, you know, within the appropriate time frame after the board authorization.
Got it. Can you quantify the amount of excess capital that could currently be deployed, whether it's to MSR purchases or buybacks?
Yeah, you know, as you know, Drew, we certainly have improved our liquidity position since year-end. Managing liquidity in these volatile uncertain times is really very important, we believe, and we're taking a cautious and prudent approach to it. We are working through with the board right now how much excess capital we believe we have for discretionary deployment. A lot of factors go into that, to include, you know, our view of risks in the business, our view of risks in the environment, the capacity we have with Mav, any other, you know, synthetic subservicing arrangements we may put together and, our outlook for the originations business and how much capital it'll actually need to support it.
Still a lot of details to walk through, and I don't have any guidance on that. R est assured it's something that's top of mind, and we are having the appropriate level of focus to it.
Got it. Thank you.
Thank you, sir. As we have no further questions at this time, let's turn the call back over to Glenn for any additional closing remarks. Thank you.
Great, George. Thank you. Thanks, everyone for your questions and for joining the call. You know, again, we believe our balanced and diversified business, exemplary servicing performance, proven cost management, track record of execution all position us well to navigate the environment ahead. As we mentioned, look, we're operating in a volatile and uncertain environment. We're actively monitoring the financial markets, economic environment, industry conditions closely. Look, I think we've got a lot of value drivers here in the business. I don't think it's being appropriately reflected in the value of the company, but we remain encouraged and excited about the opportunities in the business and our capabilities to navigate the market ahead. Look forward to talking to you next quarter at our next business update. Thank you, everyone.
Thank you, sir. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect. Have a good day and goodbye.