Welcome to the Ocwen Financial Corporation Second Quarter Earnings and Business U pdate Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to your host, Diko Aksirilian, Senior Vice President, Corporate Communications. Mr. Aksirilian, you may begin.
Good morning, thank you for joining us for Ocwen's Second Quarter 2023 Earnings Call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chair and 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, which speak only as of the date they are made, involve assumptions, risks, and uncertainties, including the risks and uncertainties described in our SEC filings.
In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. In addition, the presentation or comments contain references to Non-GAAP financial measures, such as adjusted pre-tax income, 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 GAAP results. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures, as well as management's view on why these measures may be useful to investors, may be found in the press release in the appendix to the investor presentation. Now, I will turn the call over to Glen Messina.
Thank you, Diko. Good morning, everyone, thanks for joining our call. Today, we'll review a few highlights for the second quarter, take you through our action to address the market environment, and discuss why we believe our balanced and diversified business can deliver long-term value. Please turn to slide three. I'm pleased to report our second quarter results, which reflect the strength of our balanced and diversified business and continued progress against our key initiatives. Adjusted pre-tax income of $23 million for the second quarter has materially improved versus the first quarter, largely driven by reverse servicing. Profitability in originations and forward servicing improved slightly versus the first quarter as well. We reported net income of $15 million, or $2.02 per share, which includes $6 million of pre-tax loss relating to notable items.
Notable items primarily include an unfavorable MSR fair value change due to interest rate assumptions, offset in part by a favorable adjustment to our legal and regulatory reserves for various matters, including the CFPB litigation. I am also pleased to report the CFPB did not appeal the district court's May 2023 ruling in our favor. As a result, that ruling is now final and the case will remain closed. We look forward to normalizing our relationship with the CFPB. We're excited to put this legacy matter behind us, the last of the matters filed against the company in 2017. We believe this removes what may be a perceived uncertainty in the eyes of potential counterparties.
Total servicing UPB was down slightly at the end of the second quarter versus the first quarter, reflecting our continued discipline in purchasing MSRs, a sale by MAV of $5 billion of MSR UPB to optimize portfolio returns, and consistent with expectations, we had nominal subservicing boardings in the second quarter. With both short-term and mortgage interest rates at the highest levels in 20 years, we're reducing our MSR interest rate risk exposure with higher hedge coverage and utilizing synthetic subservicing conversions and excess servicing spread financing. Our hedge coverage in the second quarter was roughly 92%. We added another new MSR investor and converted $7 billion of owned MSR to synthetic subservicing. We've delivered over $100 million in annualized cost reduction since 2Q last year, and our expense management actions throughout the company are on track.
We nearly achieved our year-end expense ratio target by the end of the second quarter. Total liquidity of $233 million is consistent with first quarter levels, despite the higher liquidity demands of our increased hedge coverage. We're very pleased with our results this quarter. The business is performing consistent with our expectations, and we believe we're on track to achieve our adjusted pre-tax income and return objectives for the remainder of the year. Let's turn to slide four to discuss the environment and our value creation plan. Market conditions in the second quarter were generally consistent with expectations. We continued to see slow MSR runoff, higher float earnings, and low delinquencies. During the second quarter, MSR trading volumes in the bulk market remained elevated, and I think it's fair to say it was largely a buyer's market.
While this represents a potential investment opportunity, at the same time, it can put downward pressure on MSR values, all other valuation factors being equal. Potential client interest in subservicing remains stronger than ever, and our opportunity pipeline continues to grow. However, we continue to see clients extending RFP processes and decision-making due to market factors and conflicting priorities. Opportunistic asset purchase transactions are beginning to appear, as is interest from investors who are seeking partners to source and service MSRs, whole loans, and non-performing loans. Moving to originations, we expect market conditions to continue to be reflective of interest rates being higher and for longer than expected at the beginning of 2023. This is impacting both forward and reverse origination volume opportunity. As a result, competition remains intense, but conditions are improving versus the first quarter.
Consistent with the first quarter, we continue to observe market leaders having an aggressive view of new MSR values relative to bulk market levels. We are seeing heightened M&A opportunities in both originations and servicing. However, seller price expectations may restrict opportunity. As we've said before, the board and management are committed to evaluating all options to maximize value for shareholders. Overall, we believe the environment continues to favor our core strength in servicing, and remain focused on leveraging our balanced and diversified business, prudent growth adapted for the environment, industry-leading servicing cost structure, top-tier operational performance, and unmatched breadth of capabilities and capital partner relationships to support our growth. We believe we have a strong foundation to create value for shareholders in the current environment. Let's turn to slide five to discuss our balanced and diversified business.
Over the past several quarters, while originations A djusted PTI has been depressed due to rising interest rates and declining industry volume levels, higher interest rates are helping to drive improvement in servicing adjusted pre-tax income. In addition, in the second quarter, we also took advantage of a unique special servicing opportunity that further contributed to servicing adjusted pre-tax income. We'll talk more about this in a moment. Based on projected seasonality and home purchase activity, we do expect to see seasonal changes in origination volume, portfolio prepayments, and MSR runoff. Similarly, trends in property tax remittances and escalating insurance costs and their effect on escrow balances will also drive seasonal changes in MSR runoff. As in the past, changes in interest rates and bulk market trading prices of MSRs do impact the value of our MSRs and can drive quarterly volatility on our GAAP net income.
Market conditions in forward originations are beginning to improve. We remain laser-focused on yields versus volume and increasing our mix of higher-margin channels and products. Total originations volume is up 6% versus the first quarter, and margins in forward are up as well. After our decisive cost actions, originations returned to profitability in May and June and was roughly break even for the quarter. We continued to closely manage reverse originations, where industry volume levels remain depressed, and we have been impacted by spread volatility in the second quarter. Despite current market conditions, our origination business serves well its purpose to replenish our MSR portfolio. Our focus on diversification is evident when looking at our portfolio composition. Our operating performance and proven capabilities have supported material growth in forward and reverse subservicing.
We believe our emphasis on growing subservicing and GSE-owned MSRs also helps mitigate our exposure to liquidity demands due to advancing requirements in the event of a recession. Let's turn to slide six to discuss our growth focus in the current environment. In this environment, we're focused on growing our higher-margin origination channels and products, capital-light subservicing, and leveraging our unique special servicing skills to capitalize on high-return investment opportunities. As I just mentioned, our originations team delivered 6% growth in total originations volume quarter-over-quarter, and correspondent was up 8% versus the first quarter. Our mix of higher-margin channels and products increased by 11 percentage points versus the first quarter, and 22 percentage points over the second quarter of last year. As mentioned earlier, opportunistic asset purchase transactions are emerging.
We did execute on one such opportunity in the second quarter, which was enabled by our superior performance in special servicing. We purchased a $133 million portfolio of reverse whole loans and REO previously repurchased from HECM Securities. We combined these assets with roughly $167 million of our own existing buyouts and successfully financed the pool in a new non-recourse, non-mark-to-market securitization. This securitization allowed us to diversify our sources of funding and reduce our potential exposure to mark-to-market volatility. The combined transactions generated approximately $15 million in adjusted pre-tax income, was favorable for liquidity, and provided a stable financing source for future transactions. This is a terrific example of how our superior operating capabilities and diversified business allows us to capitalize on unique opportunities that are emerging in this environment. We continue to evaluate other similar opportunities.
However, the timing and the profitability of any such transaction cannot be estimated at this time. Regarding subservicing, demand remains stronger than ever, and our total opportunity pipeline continues to grow. In the last 24 months, we've added $118 billion in new loan onboardings. As expected, subservicing additions were roughly $3 billion in the quarter, as we're seeing clients extend RFP processes and decision-making due to market factors and conflicting priorities. With the delays we're seeing, we're now expecting roughly $15 billion-$25 billion in new subservicing additions through the first quarter, 2024, down from roughly $30 billion through the end of Q4. With those additions, we expect our mix of subservicing to increase to approximately 60% over the next three quarters, and total servicing UPB of roughly $305 billion-$315 billion.
Please turn to slide seven for an update on our expense management actions. We remain committed to achieving and maintaining an industry-leading servicing cost structure, while at the same time, improving customer experience and maintaining an appropriate risk and compliance framework. In the second quarter, servicing operating expenses as a percent of UPB declined by 1.8 basis points, or roughly 15% versus second quarter last year, with comparable UPB levels. We've made solid progress towards achieving our year-end servicing operating expense efficiency objective. The year-over-year improvement in this operating expense ratio with servicing UPB roughly flat, demonstrates we're getting true unit cost productivity through execution of our technology roadmap, process reengineering, and improving utilization of our global platform. Where we're driving improved efficiency, we're also improving the borrower and subservicing client experience, with Net Promoter Scores up 11 and 12 percentage points, respectively, over last year.
With the improvements in our cost structure, we believe scaling up our subservicing portfolio with capital light subservicing can add between 2.5 to 3 basis points in pre-tax income per $1 billion of UPB added. We would expect the profit contribution from government, reverse, commercial, and special servicing additions to have more favorable pre-tax income contribution. Please turn to slide eight for an update on our operating performance. We continue to maintain industry-leading operational performance, improve service delivery to customers, clients, and investors, and sustain a prudent risk and compliance framework. Our breadth of capabilities is unmatched in the industry. We service forward, reverse, and small balance commercial loan portfolios covering GSE, Ginnie Mae, Federal Home Loan Bank, and private label products. We've been recognized by Fannie Mae, Freddie Mac, and HUD for delivering industry-leading operating performance for investors.
Over the last several years, while we have been driving productivity improvements, we've continued to invest in the client and borrower-facing technology and robotic process automation to improve customer experience. The execution of our technology roadmap has enabled reduced cycle time, enhanced access to information, and 24/7 assistance through multiple digital interface channels. For example, our artificial intelligence-powered borrower chatbot has hosted 600,000 sessions with an 80% success rate, giving customers improved responsiveness and minimizing calls to our call center. Our mobile app and loss mitigation bots are also aimed at increasing responsiveness to borrowers to improve their experience. We believe our investments in technology will allow us to further improve productivity without adversely impacting borrower experience as we scale up our platform. We continue to demonstrate proven leadership in special servicing in both forward and reverse.
Last quarter, we spoke about the significant performance improvements in customer experience we delivered for one of our key subservicing clients, our ability to cure 60+ delinquencies, and our superior HUD claims assignment performance. As you can see on the right, we also demonstrate strong performance in maximizing REO sales price versus appraised value, while selling within the time frames allowed by HUD, which maximizes our claim recovery. These performance elements were key drivers that enabled the financial outcome of our opportunistic reverse whole loan purchase in the second quarter. Please turn to slide nine. We continue to focus on expanding our capital partner relationships to support our growth objectives on a capital-like basis. Over the past two years, we have grown servicing UPB, supported by capital partners, to $79 billion, using a variety of subservicing, synthetic subservicing, which includes MAV, and ESS transaction structures.
In the last 12 months, we have grown our UPB funded with capital partners by over 75%, and we now have active relationships with four capital partners. With multiple investors, we have the capacity to fund MSRs purchased through our originations channels and bulk transactions which meet investor requirements, further enhancing our ability to generate capital-like growth as we manage our exposure to MSR valuation changes due to interest rates. Looking ahead, we're focused on developing additional investor relationships to support our growth objectives across multiple asset types. We're evaluating a diverse range of potential structures with several potential investors to satisfy their unique needs and further diversify our structural alternatives. We believe the development of investor relationships will further help us achieve our servicing scale objectives. In addition, our investor-driven approach to MSR purchases introduces an added level of price discipline for the originations business.
I want to thank our business partners at Oaktree and our new MSR investor partners for the trust and confidence they've placed in our team to help them achieve their growth and profitability objectives. Now I'll turn it over to Sean to discuss our results for the second quarter and outlook for 2023.
Thank you, Glen. Please turn to slide 10 for our financial highlights. I'm very pleased with the performance in the second quarter, especially the material improvement in adjusted pre-tax income from last quarter. Our results represent the hard work and resilience of our dedicated employees. Going to the blue column, in the second quarter, we recognized GAAP net income of $15 million, due primarily to strong adjusted pre-tax net income of $23 million. Add to that a net notable income tax result of a negative $6 million to result in earnings per share of $2.02. Book value per share of $57.
Finishing off the table at the left, I would note liquidity was stable quarter-over-quarter at about $230 million, and expected to be well within excess of the new FHFA Ginnie Mae liquidity requirements starting this September. With respect to liquidity, in addition to our reverse securitization transaction we conducted this quarter, other drivers have been our strong track record in obtaining, extending, renewing, and rebalancing various asset-backed financing facilities throughout the quarter to support our growth and reduce our cost of debt. On the right side of the page, first, I'll note that quarter-over-quarter, our GAAP net income improved by about $56 million. This was driven by a $15 million gain from the opportunistic whole loan and REO purchase in the reverse space, which was then subsequently securitized in the same quarter.
This securitization was our first private-label securitization, as Glen mentioned, was quite successful in terms of generating liquidity and migrating our assets to a more stable and safe financing structure, which includes being non-mark-to-market and non-recourse. In addition, we saw about $7 million from improved operations across our businesses, $28 million due to significant legal and regulatory settlements during the quarter, and an improvement in the MSR valuation quarter-over-quarter of $6 million. With the positive GAAP net income result, you can see that our effective tax rate is only about 5% due to our existing portfolio of tax net operating loss carryforwards. The tax impact we did record was due to our Asia-Pacific operations.
Adjusted pre-tax income showed a strong improvement quarter-over-quarter of $17 million, with the same business drivers shown in GAAP net income. It excludes, as always, the MSR valuation adjustments and other notables. Finally, at the bottom of the page, I would mention we expect our third quarter adjusted pre-tax income to be closer to our first quarter levels. This is due to seasonally higher runoff in the third quarter, slightly lower pre-tax income due to the migration of $15 billion AUM to a subservice status, and lack of another opportunistic reverse transaction in the third quarter. I'd like to recap the notable items for the quarter that connect adjusted pre-tax income to GAAP net income. We provide adjusted pre-tax income as a supplemental measure for greater investor transparency. It is a metric we use in managing the business.
Second quarter notables, which are detailed in the appendix, are comprised primarily of two items: a $33 million decline in MSR valuation adjustments net of hedge. This is due primarily to changes in the valuation model assumptions made by our third-party valuation agent in response to market indications, and this includes two significant MSR transactions we recently initiated. The other driver is a $27 million gain in notables. This is a positive $28 million impact due to legal and regulatory settlements and minor offsets across severance and facility consolidation. In terms of adjusting guidance for 2023, the only change we are making at this point is a reduction in our subservicing segment forecast for a slightly lower growth, ranging of $15 billion-$25 billion UPB in gross adds for the next three quarters.
This will have no significant impact to our outlook on servicing income as we adjust our variable costs to mirror lower volumes. For a more detailed view of the quarter-over-quarter changes in adjusted pre-tax income, please turn to page 11. This page breaks out our typical income bridge with a view of all segments and then servicing and origination separately. The servicing graph on the upper right shows the impact of the whole loan purchase, plus an additional $1 million profit improvement from forward servicing. More detail will follow on page 13. The origination graph on the lower right has a slight improvement to a $1 million loss. Not captured here is the much stronger May and June results in origination that we anticipate will continue to improve in the near term.
On page 12, I will describe our hedging approach and the impact of our capital-light strategy on interest rate risk. The graph on the left shows the difference between what appears on our balance sheet for MSR assets, about $2.7 billion of fair market value, versus the amount of our net exposure that we actually hedge, which is about $1.7 billion of fair market value. The difference is primarily the transactions that don't achieve true sale, like the MAV or Rithm assets for which we do not assume any interest rate risk. Thus, the hedge for interest rate impact is focused on the smaller amount on the right of that graph. That $1.7 billion includes assets like the excess servicing spread or ESS transactions.
Here we only hedge a fraction of the total net exposure of $259 million to match the economics that we retain. We also have the PLS MSR book, or non-agency MSR book, which is primarily hedged only on a float component, given that they have very low interest rate sensitivity. Our hedge coverage ratio for the quarter was in the low 90% range. A very high hedge coverage ratio will diminish the impacts on the PNL of either interest rate increases or decreases. On the right, this graph shows the rapid growth of our excess servicing spread structures over the last few quarters. More detail on ESS can also be found in our Q, which we release at the end of business day today.
Since we retain title to these ESS MSRs, they remain on our balance sheet, cannot be sold or have the servicing transferred, unlike a standard subservicing contract. In addition to the ESS and MAV structure, we have other synthetic servicing transactions where we sell the MSR title and the bulk of the economics to a third party in return for liquidity and retained servicing rights. Often, we have very high termination fees in the first few years to discourage the contract from being moved early in the life of the MSR. In conclusion, we've leveraged synthetic servicing, including MAV and ESS transactions, which translates to less capital on the hedge and less risk in a declining interest rate scenario. We'll go into more detail on the segment information on page 13. We'll start with servicing, where we show adjusted pre-tax income in the upper left chart.
In addition to the previously mentioned reverse transaction, servicing saw improved flow income due to both higher balances, which are seasonal, and higher rates, and of course, lower expenses. Sub-servicing volumes saw gross adds of about $3 billion, offset by runoff in both forward and reverse. The reverse runoff was primarily due to higher assignment volume, which helps the MSR owner maximize returns by delivering the loan back to Ginnie Mae faster, but lowers the balance serviced. As a recap, the annual cost reduction year-over-year into the second quarter was $45 million for the servicing segment. Please turn to page 14 for an overview of our origination segment, both forward and reverse.
The origination forward business is starting to normalize, with correspondent lending and flow, that's CL, on the upper left chart, experiencing much better margins and slightly higher volumes than in the first quarter, mainly due to a continued focus on high-margin products such as Best Effort and Ginnie Mae loans. You can see here the margin improvement in the upper right graph, product growth in the lower left, client growth in the lower right. This returned the correspondent channel back to a positive, adjusted pre-tax income this quarter. We believe we are on a good trajectory for the rest of the year, we will continue to price this product for an appropriate yield linked to our corporate cost of capital. Consumer Direct continues to have improved volumes, albeit off a small first quarter base, as well as better margins and is tracking towards profitability.
This channel has shifted to a purchase cash out focus versus refinancing. Reverse had stronger origination volume, but experienced spread widening in the quarter, similar to the third quarter of last year. This was mostly driven by the regional bank crisis and inflationary pressures. We continue to ensure that the origination segment is sized appropriately for the prevailing market volumes in 2023. Please turn to page 15 for a view on our stock price. Using the same starting point, which is year-end 2020, that we have used in prior years, our stock continues to outperform not just the Russell 2000, but also a basket of our peers, which we list in our proxy and also show in the end notes.
We believe this performance is due to the strength of our balanced business, industry-leading cost structure, top-tier operational performance, and prudent capital-light growth, as well as our agility and broad expertise to execute on accretive opportunities such as the reverse whole loan and REO transaction and other opportunities going forward. While we are pleased with our performance versus our peers, at the end of July 2023, our stock was trading at about 60% of current book. This is an improvement over most of the 2023 trading range, but we think this discount is still not representative of the value we are creating or the strength of our current balance sheet. Before I turn the mic back to Glen, I want to point out to investors a few additional data points in our appendix. We continue to provide data on fully diluted shares in equity on page 27.
Our MSR valuation assumptions on page 28 show many valuation parameters across the three major investor types. With respect to our balance sheet, we provide a more granular view on page 20, which delineates assets that require matching asset and liability gross ups under DTA treatment. These are primarily due to an inability to achieve accounting true sale. These balance sheet impacts fall into three categories: the MAV Rithm assets that I referred to earlier, reverse HECM assets, and Ginnie Mae MSRs that are eligible for an early buyout. As a reminder, the excess servicing spread assets sit within the all other MSR category on the far right of this page. Back to you, Glen.
Thanks, Sean. I'd ask you to please turn to slide 16 for a few wrap-up comments before we go to Q&A. I'm proud of how our team is executing and the strong results we've delivered in the second quarter. We've made solid progress towards achieving our financial objectives. I'd like to thank and recognize our global business team for their hard work and commitment to our success. As we continue to execute our business strategy, we believe we're well positioned to navigate the market environment ahead and deliver long-term value for our shareholders....Our balanced and diversified business supports our ability to perform across multiple cycles. We're executing a focused growth strategy, leveraging our superior operating capabilities to grow subservicing across multiple investor and product types. Our subservicing opportunity pipeline is robust, and we are positioned to deliver value to clients, investors, and consumers in any economic environment.
We remain steadfast in our pursuit of industry servicing cost leadership by driving continuous cost and process improvement. We'll continue to optimize expenses further during 2023. We remain equally determined to maintain our industry-leading operational performance. We have delivered measurable performance improvements for our clients, borrowers, and investors, and provide an unmatched breadth of capabilities. Through our investment in technology and global operating capability, we've built an efficient and mature platform with capacity for growth that delivers industry-leading performance and improved financial outcomes for clients. We continue to expand our capital partner relationships. We are prudently managing capital and liquidity for economic and interest rate volatility, as well as the market risks and opportunities. Lastly, we're excited to put the legacy CFPB matter behind us, the last of the matters filed against the company in 2017.
We believe this removes what may be a perceived uncertainty in the eyes of potential counterparties. Overall, we're excited about the potential for our business and do not believe our recent share price is reflective of our financial position, growth opportunities, or strength of our business. With that, Jen, let's open up the call for questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star one on your phone now. Our first question comes from Eric Hagen with BTIG.
Hey, good morning. Hope you guys are well. A couple questions here. I mean, at this point, do you think you'd support a stronger ROE if mortgage rates were higher or lower than where they are today? Like, how much upside do you feel like there is in MSRs if rates go higher? How are you thinking about the impacts of hedging and what you could potentially recapture and maybe just the overall growth rate for the market if rates were to come down? Then as a follow-up to that, I mean, when you sort of guide to getting to, you know, $300+ billion of servicing into early next year like you do on, I think it's slide six, I mean, do you have an estimate for how much incremental capital you're using to get there?
Even how much you might even free up with the, with the portfolio at that size?
Sure. Good morning, Eric. You know, look, I think in the industry, if you look overall, it's fair to say that originations, in a stable environment or certainly in a downward rate environment, generates a substantially higher return on equity than servicing does. I think that's just, yeah, that's just the dynamics of our industry. You know, look, I think with, you know, an embedded base of very low coupon MSRs, I think further upside value appreciation in MSRs as interest rates rise is gonna be limited, not consistent with historical, you know, historical MSR value increases we've seen. It's the S-curve effect of prepayment speed, so to speak.
From a, you know, from a return on equity perspective, and this, I'll call it an adjusted pre-tax ROE, I think the adjusted pre-tax ROEs would be probably better with rates trending down because it creates refi opportunity, which again creates, you know, and originations uses less capital. You know, the refi margins typically expand in a downward rate environment. You know, as I think about the growth in our portfolio, you know, Eric, look, our strategy is capital-light growth. As we're growing our portfolio forward, we don't expect to deploy incremental capital to do that, with the exception of the opportunistic transactions like we executed in the second quarter for special servicing opportunities. Those always require a little bit of capital, but have very high returns, as we demonstrated in the second quarter.
The growth that we're expecting in the portfolio is really gonna come from, you know, growth in our subservicing book, both with, you know, new, new third-party subservicing relationships and growth in our capital partner book.
Okay. Okay, that's a, that's a helpful direction. You know, on slide 10, you show the same liquidity quarter-over-quarter, even though, you know, the book value went up normally, maybe wouldn't you have more liquidity if your capital position is improving? Would you say that there's a threshold for liquidity if it even strengthened enough where you might look to repurchase some stock?
Hey, Eric, it's Sean. Good morning.
Good morning.
What we, what we do is we sometimes de-lever assets, as needed because we don't want to have excess cash, since it's a pretty low returning asset. With respect to having excess liquidity and our options, that, that pretty much remains the same as, you know, recent quarters where we would consider debt repurchase and stock buyback. Currently, we're probably leaning more into a debt repurchase mode given our high degree of leverage on the company. Then, you know, having cash for either opportunistic asset purchases or for M&A transactions is also the other variable that we're considering.
Okay. Thank you guys very much.
Thank you.
Thanks, Eric.
Our next question will come from Matt Howlett with B. Riley Securities.
Morning, everyone. This is Mike Schafer on for Matt. I was wondering if you could give some commentary on the overall reverse space in the context of interest rate volatility that we're seeing, and kind of how you'd expect that outlook to adapt as the Fed roadmap develops.
Hey, Mike, thanks for your question. Look, in the reverse space, you know, look, it's no surprise reverse originations, the reverse originations market opportunity has declined substantially, probably more than 50%, with the rise in interest rates. Heck, mortgages are a variable rate. Short end of the curve is very high. You know, again, the amount of-- even though there's been home price appreciation, because interest rates have gone up quite a bit, the amount of equity or, that people could tap in their house with a reverse mortgage is limited by the level of interest rates. You know, we have seen originations volume come down.
You know, that said, I think it's fair to say that, you know, we are, we are, if you look at the league tables on HECM issuance, you know, we're still either number, number three or number four in the league tables. You know, year-over-year, our share is going up. You know, what we've seen during the course of 2023 has been a fair amount of volatility in what's called the discount margin or spread. Essentially, that reverse mortgage-backed securities get priced off of, or HECM securities get priced off of. That spread volatility has impacted our originations business and frankly, has impacted the valuation of our MSR portfolio. Market conditions continue to normalize, we'd expect to see those spreads stabilize and approach, you know, longer-term averages.
You know, I, I would say over, you know, right now, HECM spreads are probably a, you know, good 20, 30 basis points at a minimum above the long-term average, maybe even more. You know, in the servicing space, you know, the servicing side of the business continues to perform very well for us. You know, the, the platform we acquired from, you know, RMS, Reverse Mortgage Servicing, the, you know, MAM, Waterfall, had previously owned, performing well. We've driven a lot of cost productivity and, you know, as we discussed, the special servicing side of that business performs extremely well and has given us the opportunity to take advantage of opportunistic assets, purchases and generate, you know, decent returns for the company. You know, I, I think the reverse space is still one we like.
I still think the demographics of the U.S. population, support long-term, you know, stable, consistent growth in reverse mortgage originations. It's been a choppy market, and that's been, you know, that's affected the industry, and I think it's us and others. Again, we think there's long-term opportunity in both the origination and the servicing side.
Sure. Thank you. As far as the opportunistic side of, of the reverse segment, I see on the deck that you're not expecting any whole loan purchases in, in Q3, but I was curious if you could quantify what you might think that would look like for the next year.
You know, it's because these are opportunistic asset purchases, it's really hard to quantify. I think I said on the call that, look, we, you know, it's right now trying... You know, while we are working on a couple of things, both on the forward and reverse side, you know, it's really hard to dimension it. You know, they could be small opportunities, could be large opportunities. Unfortunately, right now, I just can't, I really can't dimension it, other than to say that, you know, we are seeing an increased number of opportunities pop up in the market. Here, obviously, you know, you've got to buy the assets right, you got to price them right.
I'm, you know, convinced if the assets come to market and, you know, we, we can acquire them at a fair price, that makes sense for us. We certainly have the servicing skills to address it and generate nice returns.
All right. Sounds good. I appreciate it. Thank you.
Thank you, Mike.
As a reminder, if you would like to ask a question, you may signal by pressing star one on your telephone now. Our next question will come from Derek Sommers with Jefferies.
Hey, good morning, everyone. Just given the increased capital requirements for mortgage activities at banks and the correspondent volume trends at Wells Fargo, I was wondering if you, you all could provide a, kind of an update on how things are shaking out, among the correspondent sellers. You know, has that market share been reallocated? Is the wallet share still shifting or things stabilized? Thanks.
Good morning, Derek Sommers. Thanks for your question. You know, we are seeing... Look, we saw the correspondent, correspondent market conditions improve in the second quarter. You know, we still, you know, like I said, on the call, we still believe, you know, there are certain market leaders who have a, you know, whose view of MSR values is not necessarily reflective of what we're seeing in the bulk market. That aside, our volume went up, and our margins went up as well, too. I think the market's beginning to improve. You know, I'd say the capacity that existed or that shifted from Wells Fargo is kind of balanced around. I think there's always an opportunity for, you know, performance, relationship, you know, an opportunity to, you know, expand our customer base.
You know, as Sean talked about, our correspondent customer base continued to grew, grow in the second quarter, and, you know, the team is continuing to look to add new sellers for the balance of the year. I still think there's an opportunity to grow in the correspondent space for the balance of the year. You know, in correspondent, we're getting very attractive, you know, we, we call it cash on cash yields, which, you know, includes the quote, origination margin. We're essentially, you know, buying the MSR at a price lower than its fair value. We're, you know, we, we feel good about our position in correspondent. I think our team there is executing really well. I think the returns we're seeing are attractive.
You know, we're, we're approaching the market with a very disciplined and thoughtful approach, you know, making sure we price consistent with our cost of capital and where our MSR investors are looking to, you know, the returns they're looking to get. You know, I, I think with the new bank capital standards, you know, it's gonna create more opportunity for, you know, those who aren't affected by those capital standards. You know, our focus on growing our portfolio on a capital-like basis with, you know, MSR investor partners, you know, we've got four now, we're looking to expand that.
I think the more capital partners we have in the portfolio, within reason, you know, gives us, you know, multiple investors with different buy box appetites, so to speak, which will allow us to, you know, take advantage of the growth opportunity should volume shift into the correspondent sector, and the bulk markets as a result of, you know, banks perhaps exiting or not being as aggressive in, in the MSR space as they have been historically. I think it's an exciting time, for us and others in this industry.
Got it. Thank you. It's a helpful commentary. Just one more. Just on the, on the guidance, it seems consistent quarter-to-quarter, and previously, the 9% pre-tax ROE was contingent upon the origination segment normalizing. With this quarter's improvement in gain on sale margin, do you, do you view the, you know, normalization as, you know, primarily missing volume or, you know, further increases in margins, or, or what's the missing piece for, for that segment to normalize?
Yeah, I mean, for us, I think it'd be a little bit more volume. You know, the, I think is fairly widely known. Look, the, you know, home sales transactions are just not robust, right? For all the reasons that people talk about, you know, people have golden handcuffs with low mortgage rates and all kinds of good stuff, right? I would love to see a little bit more volume activity in the marketplace. I think that would be good and healthy for the industry and certainly good and healthy for, you know, the home buyer, home builder segment as well, too. I think it is a volume issue at this stage of the game. Again, I think conditions are improving. We did see volume go up in the second quarter.
You know, and, you know, right now, I'd say the early read on the third quarter from, you know, what we saw in, in, in the press is, you know, home sales were up for June, which, you know, and, and their home purchase applications were up in June, so that would bode well for, you know, July and August, in the summer buying season. It's just not as robust as I think, as we'd like to see it.
Got it. Thank you. That's all for me.
Great. Thanks, Derek.
Our next question today will come from Howard Amster with Ramat Securities.
Hi, Glen. Just wondered why the employee costs went up by $28 million, you know, for the quarter, and also from the previous year.
Oh, Howard, good morning, by the way. Thank you for your question. It's great to hear from you.
Good morning, Howard. Our staffing was flat quarter-over-quarter. We did pay higher incentive comp in some of the businesses like correspondent and CD, given the much higher volumes we experienced in some of those channels. That was the primary driver of that, as well as merit raises came through, which during a period of high inflation, you know, that's one of the things we have to do to make sure we're taking care of our employees to grant merit. Comp and bene went up, staffing stayed level.
I see. Was any of that due to severance or? I mean, $28 million on a $56 million base seem really high, just maybe, you know, way, way above, like, merit increases.
You know, I'm looking at the three months ended, page 21 of our appendix. You know, three months ended June 2022, comp and bene was $84 million. Three months ended June 30th, 2023 was $58 million. I'm seeing a reduction, and, you know, it looks like it's relatively flat to the first quarter as well. Sean, am I reading that right?
I, maybe I misunderstood, Glen, before.
Yeah, Howard, you may be looking at the June 30. It starts June 30, 2022, and then it jumps end of Q1 to end of Q2, and Q1- Q2, on page 21, is flat at $58 million.
Gotcha. Okay, I must have read it wrong. Thank, thank you very much. Thank you.
No worries, sir.
No worries.
All good. Yep.
Good, good.
This concludes our question and answer session. I'd like to turn the call back to Glen Messina for any additional or closing remarks.
Thank you, Jen. Look, I'd like to thank our shareholders and key business partners for their unyielding support of our business. I'd also like to thank and recognize our board of directors and global business team for their continued hard work and commitment to our success. Excited about the results we delivered for the quarter, and I look forward to updating you on our progress at our next earnings call. Thank you.
And this concludes-