Home Point Capital Inc. (NASDAQ:HMPT) Q3 2022 Earnings Conference Call November 10, 2022 8:30 AM ET
Company Participants
Lesley Alli – Investor Relations
Willie Newman – President and Chief Executive Officer
Mark Elbaum – Chief Financial Officer
Conference Call Participants
Doug Harter – Credit Suisse
Rick Shane – JPMorgan
Mihir Bhatia – Bank of America
Kevin Barker – Piper Sandler
Operator
Greetings and welcome to the Home Point Capital Third Quarter 2022 Financial Results Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lesley Alli. Please go ahead.
Lesley Alli
Thank you, operator. Welcome to Home Point’s third quarter 2022 earnings call. Joining me this morning are Willie Newman, President and Chief Executive Officer and Mark Elbaum, Chief Financial Officer. During our prepared remarks, we will be referring to a slide presentation, which is available in the Events section of the Home Point Investor Relations website.
Before we begin, I’d like to remind you this call may include forward-looking statements, which do not guarantee future events or performance. Please refer to Home Point’s most recent SEC filings, including the company’s annual report on Form 10-K, which was filed on March 17, 2022 for factors which could cause actual results to differ materially from these statements. We maybe discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to the nearest GAAP figures in Home Point’s earnings release, which is available on the company’s website.
Now I’d like to turn the call over to Willie Newman, President and Chief Executive Officer.
Willie Newman
Thanks, Lesley, and good morning, everyone. During our prepared remarks, I’m going to discuss the environment, which is becoming increasingly challenged. I’ll also discuss how we continue to take action to support Home Point’s long-term sustainability and success in the wholesale channel. After that, Mark will provide more details on our results for the third quarter as well as some initial insight into the fourth quarter. We’ll then open the call to take your questions.
The mortgage industry has been impacted by severe market volatility over the course of the year and those challenges intensified in the third quarter from interest rate movements to capital markets volatility to an industry that is still significantly overcapacity, the result is the most challenging origination market since the financial crisis. At Home Point, we have taken proactive steps to best position our company for both the current environment and long-term sustainability through significantly reducing expenses, building liquidity and focusing on margin over loan volume.
We communicated in our last earnings call that we weren’t afraid to get smaller. During the third quarter, we took action to reduce our expense base by over $100 million annually. We have been ahead of the industry curve in this respect and we’ll continue to calibrate our cost to the environment. Our objective is to get back to operational profitability as quickly as possible while preserving the upside opportunity in wholesale.
In addition, we continued making progress in creating additional liquidity and divesting of non-core businesses. Most notably, we signed a commitment to sell substantially all of our Ginnie Mae servicing. This sale will add over $110 million in liquidity. In addition, we completed the sale of our ownership stake in Longbridge Financial in early October. This, added to our prior non-core divestitures, MSR sales and operational consolidations has resulted in a strength in liquidity position. From a balance sheet perspective, in addition to enhancing our available liquidity, we are seeing historic lows in prepayments in our servicing portfolio. Industry prepayment models established a floor at 6% annual prepayment.
In September, we experienced a less than 5% annualized rate with a continuing downward trend. This provides support against challenge origination environment. On the origination front, we continue to see support for our decision to focus on wholesale. Based on all available data, we are continuing to see rapid migration of loan originators into brokerages. Since January 2021, almost 17,000 loan originators had joined our broker partners.
In the third quarter alone, our broker partners added over 2,700 loan originators, which raised our access point to over 53,000 originators nationwide. This movement, which we expect to continue for the foreseeable future, especially as rates remain elevated, creates an expanding opportunity for Home Point. Why is this migration accelerating? Simple, the benefit to consumers of working with the mortgage broker. With an over $9,400 per loan advantage provided to consumers in 2021 and the sustainable efficiencies built into the broker wholesale process, we are confident that broker market share will continue to grow. We are well-positioned to benefit from that trend. With our sole focus on the wholesale channel, we are optimistic about our long-term prospects. In the interim, we will remain highly focused on taking the actions required to navigate this extremely challenging market.
With that, I’d like to turn the call over to Mark.
Mark Elbaum
Thanks, Willie, and good morning, everyone. As we continue to navigate through these challenging market headwinds, Home Point remains focused on executing on our plan, investing in key areas of our business to bolster our efforts within the wholesale channel while managing our expenses and liquidity. We have included in the presentation and earnings release our standard period-over-period financial results.
I’m going to focus my discussion on a handful of key metrics. We will be happy to answer any questions you have regarding the financial results following our prepared remarks. The rapid rise in rates had a significant impact on purchase demand at vastly declined consumer sentiment at many people on the sidelines. That drop in demand coincided with our decision to strategically focus on margins over volume. As a result, our quarterly funded origination volume was $4.1 billion and gain on sale margin attributable to channels for the third quarter was 51 basis points, up from around 35 basis points in July. In addition to the expense savings Willie mentioned, which we expect to accrete in the fourth quarter, we took steps to optimize our financing facilities by proactively terminating warehouse lines of credit with two lenders and allowing a third to mature without renewal as origination volumes necessitated.
During the third quarter, we maintained a strong liquidity position, completing divestments from non-core operations and assets. Notably, we finalized the transition of our in-house service platform to ServiceMac, which converted a fixed cost into a lower variable cost and provided increased flexibility. A few key expenses materialized in the third quarter, impacting our financial performance.
Related to our expense reduction efforts, $13.4 million of severance costs contributed to our total expenses in the quarter. The capital market spread deterioration that we saw last quarter further widened in Q3, resulting in a material charge or inventory held for sale outside of agency execution as well as our repurchase reserves. As Willie mentioned, we completed the sale of our investment in Longbridge on October 3, 2022, for a price of approximately $38.9 million. We recognized an impairment of our investment of approximately $8.8 million during the third quarter. Also during the third quarter, due to deteriorating market conditions, we saw a significant decline in our market capitalization and recognized a goodwill impairment charge of $10.8 million.
Before I finish my prepared remarks, I would like to briefly discuss our forward action plan and financial outlook. As we look at the fourth quarter of 2022, we see a slight easing of margin pressure that has existed through the first three quarters of the year, but do not expect to see them back at normalized levels. In addition, we expect market seasonality, increased rates and issues with housing inventory and affordability to continue to pressure origination volume until at least the middle of 2023. Proceeds from our sale of Longbridge to Ellington Financial and our fourth quarter MSR sale will serve as an additional source of liquidity. We will continue to optimize our operational efficiency while concentrating on our wholesale-focused model. We will continue to monitor the MSR market for opportunities to additionally enhance our leverage and liquidity positions, while prioritizing the growth of our gain on sale margins. We believe that our sole focus on the wholesale channel will enable us to create long-term value even in a reduced volume environment.
That concludes our prepared remarks for this morning. We are now ready to turn the call back to the operator to take your questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question is from Doug Harter of Credit Suisse. Please go ahead.
Doug Harter
Thanks. I guess as we look into the fourth quarter, the combination of the MSR sale plus the Longbridge sale, what are you thinking about uses for that additional cash in that construct, how are you thinking about kind of rightsizing or optimizing your capital structure?
Willie Newman
Yes. Thanks, Doug. So at this point, we are going to maintain the kind of as a liquid position as possible. So we may pay down some of our leverage that we have against our MSR. We could look at buying back some of our debt. But at this point, we are going to maintain a position that’s as liquid as possible.
Doug Harter
Got it. I mean, I guess at what point do you kind of look to use some of that liquidity? What would be the point that you would utilize some of that, maybe try to take advantage of some of the discount that the unsecureds are offering in the market to kind of lower the debt cost and improve leverage?
Willie Newman
Sure. I think for us, we are really looking at what market conditions are. And considering the volatility in the market, we feel like being more liquid is better than kind of using that liquidity in a place where we are not able to get back to it. That said, to your point, there is an opportunity to optimize buying back some of the debt and we will continue to evaluate that. Mark, I don’t know if you have anything to add to that?
Mark Elbaum
No, that’s exactly how we are looking at it, Doug, is liquidity is better. We want to be able to maintain as much runway as possible. And so the way to do that is to make sure we have adequate liquidity to continue to navigate through things. Very mindful of where the bonds are trading and the discount that’s available. So that’s certainly on the table and will be evaluated. But at this time, liquidity is going to be the priority.
Doug Harter
Okay, thank you.
Operator
Our next question is from Rick Shane of JPMorgan. Please go ahead.
Rick Shane
Good morning, guys. Thanks for taking my questions. First, in terms of the Ginnie Mae sale, how much UPB is coming off the books?
Willie Newman
Mark, do you want to take that?
Mark Elbaum
Sure. It’s going to be about $8.1 billion of notional. So that will be the amount that will be coming off the books.
Rick Shane
Got it. And is there a gain associated with that? You talked about the cash income, but given where it’s marked, should we assume any gain in the fourth quarter?
Mark Elbaum
No, I wouldn’t assume a gain. We were able to sell it at roughly our fair value. So we marked it to where it needed to be by the – in the third quarter. And so I would expect to not see a gain. There might be a slight loss due to transaction costs and things like that that we would incur in the fourth quarter, but that would be what I would expect?
Rick Shane
Understood. Thank you. And then you made the comment that from a margin perspective, it feels like things are starting to stabilize modestly in the fourth quarter. You also highlight the excess capacity in the industry. I’m curious, as we enter what is generally or seasonally a weaker quarter, there is still excess capacity. What do you think is driving that stabilization of margin? Is it just the industry starting to rationalize pricing? Is it reduced interest rate volatility? What do you think is contributing to that?
Willie Newman
Yes, Rick. So I think there is a couple of things. One is, obviously, margins, especially in the wholesale side have gone down pretty materially. So we feel like based on what we’re seeing out there, that there is kind of a stabilization at, I’ll say, around the lows. Second though, more specifically is our strategy, which is to really kind of keep margin more constant and let volume be the variable. So Mark, maybe you should talk a little bit about what we saw in October.
Mark Elbaum
Yes, sure. So I mean there is a couple of things that we’re seeing. Number one is we reported 51 basis points of margin. If you’ll recall, July, we reported about 35 basis points. So there has certainly been some upward momentum there. And then October, our margin attributed channels will be about 72 basis points or was about 72 basis points. So that’s what we’re seeing. As far as what’s contributing to it, a lot of it is our own focus on margin over volume. So – and we’re able to capture that margin. So that’s what we’re seeing just in the marketplace right now.
Rick Shane
Got it. And then one last question, obviously, there has been a drag on the net gain on sale, reflecting repurchases, etcetera. And a lot of that is driven by the denominator effect. How long – especially given how much volume compressed in the third quarter, how long should we assume the denominator effect will continue to create that drag?
Willie Newman
Mark, do you want to take that?
Mark Elbaum
Sure. There is going to be another couple of quarters of it. It’s really hard to know for sure. But you’re right, there is this denominator effect, which is that where the loans were repurchasing now are coming from a period of time where we had a lot more volume than we are doing now. And volumes are going to be, we think, pretty depressed here in the fourth quarter into the first quarter. Maybe by the second quarter, we start to see some recovery. And at that time also, we will have worked through a lot of the inventory. So it could be another quarter or two.
Rick Shane
Got it. Hey, I appreciate the clear answers in the challenging environment. Thank you.
Mark Elbaum
Thank you.
Operator
Our next question is from James Faucette of Morgan Stanley. Please go ahead.
Unidentified Analyst
This is [indiscernible] on for James. A question on the path to profitability, how are you thinking about that? What inning are we in? Obviously, it’s very difficult to forecast. And similarly, on the OpEx cost-cutting, which areas are you most focused on? Where have you found the most low-hanging fruit in terms of getting towards profitability? And how should we think about your actions in the near-term going forward here?
Willie Newman
Yes. Thanks for the question. So as far as I get the kind of the path, certainly during 2023, to your point, there is a number of variables that are involved. But I think what you’ve seen is that we’re continuing to grind down cost to a point where assuming reasonable margins and reasonable level of volume, we can get back to operational profitability. So Mark, do you want to talk a little more about some of the elements of the path?
Mark Elbaum
Yes, absolutely. Let’s start with expenses because that’s certainly the easiest to control in terms of low-hanging fruit. I mean all of it’s hard because you have to make difficult decisions and it’s across the board. So there is no one particular area that we’re focused on. It’s across the board. But just to help you dimensionalize that. If you look at our third quarter, we had about $116 million of expenses. As we noted on the call, included in there were one-time costs related to severance from actions we took in the third quarter. That was about $13 million and then the goodwill impairment was about $11 million. So that would take us to about $92 million of expenses. And then as we mentioned, the actions we took resulted in a circa $100 million a year reduction in salary and benefits. So that’s about $25 million a quarter. So that would take us down to about $75 – excuse me, $67 million or under $70 million of quarterly expenses. From there, I would expect to see us continue to moderate that level relative to volume. So if volume continues to decline, variable costs will come out, we will make additional capacity decisions as well. So it could be we find our expenses somewhere in the low $60 millions or even below. So that’s where that would be. Secondly, as we start to move into the purchase season of 2023 and to the extent that’s a more normalized period, we should expect to see margins continue to be in that upper 70s, approaching 100 basis points area. So that’s the path to profitability. And to Willie’s point, we’re on that path. We’re looking to accomplish this in 2023. I feel like we’ve got a good approach to our expenses and the focus on margins is really going to be helpful too.
Willie Newman
Yes. I think I would add to that is – we talked about it in our prepared remarks, is the servicing portfolio is really performing at historic levels from a prepayment standpoint. And so that’s supportive of – kind of supporting us through the challenges of the origination environment. It’s also generating quite a bit of cash for us. So kind of back to that point about liquidity, liquidity really being the most important thing at this point from our perspective is that it’s generating the type of liquidity that, coupled with these expense management actions, kind of gets us to the part where we can navigate through the environment and get back to that path to profitability.
Unidentified Analyst
Got it. Thank you. And I’ll ask one follow-up. And you mentioned in terms of purchase, as the market becomes more purchase-heavy, obviously, the pricing strategy versus volumes, keeping that in mind, what can you do? Or are you still focused on initiatives to lean into purchase? Is that a benefit or an aspect of the broker channel that you can lean into? And how are you thinking about purchase versus refi, obviously, in the context of broader market share as the market continues to contract?
Willie Newman
Sure. What you hit on it is that the most important initiative that we have going is to do business with mortgage brokers. They are perfectly positioned to do purchase volume because they are in market. They have the referral sources established in order to do that. And so it really is for us – the organizational focus that we have, which is to continue to evolve from an efficiency standpoint, improve the experience, focus on quality, all those things bode very well to support our broker partners into a purchase market. So it’s really kind of the blocking and tackling that we’ve already established.
Unidentified Analyst
Got it. Thank you.
Operator
[Operator Instructions] Our next question is from Mihir Bhatia of Bank of America. Please go ahead.
Mihir Bhatia
Hi, thank you for taking my questions. I did want to go back a little bit to your comments about – I think you mentioned 72 basis points in October. I was curious, how much of that is being driven by your focus on profitability and you giving up additional volume? And I guess what I’m trying to solve a little bit in regarding your comments on your path to profitability, is there enough volume at those margins that you’ve talked about even the high 70 to 1. I think you mentioned for next year, 75 to 1 for next year in that range, do you expect there to be enough volume that your cost cuts will be enough or would you need to make more?
Willie Newman
Yes. I think that that is the challenge that we have. And a lot of that depends on size of the market. We do believe that broker share will continue to grow. As we said during our prepared remarks, every indication is that that is happening. And so it really is incumbent upon us to continue to focus on those fundamentals that I mentioned earlier in order to get the volume level up to the point where that combination results in us being operationally profitable.
Mihir Bhatia
Okay. And then in terms of just the movement towards the broker channel by – are you seeing any effects yet? There is been a few competitors who’ve gone out of business. Are you starting to see more incoming or any, like, I guess, any benefits from that from the competitors leading the channel, etcetera?
Willie Newman
I would say that we’re seeing benefit in the level of the dialogue that we have with our broker partners and with new broker partners as well. Again, we mentioned during our prepared remarks, the migration of loan originators into the broker segment, specifically with our partners, which if you look at the flow of 2,700 in a quarter is a significant increase in flow over kind of the average over the last 1.5 years, which has been material. I think, transactionally, obviously, it’s a very competitive environment out there. The bar is at high in wholesale. That’s frankly one of the reasons why originators are migrating to broker. And so again, it’s incumbent upon us to make sure that we can reach that bar in order to continue to grow market share and drive volume in.
Mihir Bhatia
Okay, thank you for answering my questions and I will echo Rick’s comments about appreciate you being as transparent as you can in this type of environment. Thank you.
Operator
Our next question is from Kevin Barker of Piper Sandler. Please go ahead.
Kevin Barker
Good morning. Thanks for taking my questions. Could you help us understand what the gain on sale margins look like through this third quarter? And then what you’re seeing in the month of October? I believe you referenced last quarter you had about 35 basis points of margin in July. What did that look like in August and September?
Willie Newman
Mark, do you want to take that?
Mark Elbaum
Sure. So for the full quarter, Kevin, we ended up at 51 basis points. So if we started the quarter at about 35, we finished at 51. So that gives you a sense of that trajectory. And then for October, our gain on sale margins were 72 basis points.
Kevin Barker
Okay. Great. And so obviously some progress there. Do you expect that to continue to move higher as you focus on higher-margin business through the fourth quarter and into early ‘23?
Willie Newman
Yes. I think – I mean, Kevin, I think we can expect in that range. So we, on a daily basis, look at moving margins up, moving margins down. There is some sort of volume toggle that we have. But again, we’re emphasizing the margin over volume, so. I think we feel pretty comfortable with those levels and we’re trying to press it higher.
Kevin Barker
Great. And then do you expect to proactively continue to sell MSRs? And with that, are you seeing the market for MSRs continue – seeing bids near 5.5, 6x servicing multiple?
Willie Newman
Yes. So I think as we mentioned, we will be opportunistic. I think at this point, we feel really good about the liquidity position we have. So there is not a need to sell MSRs for us. And the performance itself has really been supportive of the effort that we’re making to reset the origination side of the business. So again, opportunistic. We’re not seeing levels that – we’re not seeing sales at the levels that you mentioned. So again, if and as valuations or multiples move up, we may take advantage of that opportunity. But right now we feel very comfortable with our position kind of across the board from an asset standpoint.
Kevin Barker
Okay. And then Ginnie and the FHFA put out these rules, which have been pretty controversial around capital, they got deferred for another year for allowing people to get prepared. But could you help us understand where you stand in relation to the risk-based capital rules for Ginnie Mae? I understand there is like a corporate structure versus subsidiary that may impact that. But could you just give us an idea where you are on that and what you can do to manage around those rules?
Willie Newman
Mark, do you want to take that?
Mark Elbaum
Yes, sure. So yes, it’s been deferred for another year, which is fine, I guess. We would be in compliance if the rules were in place today. In terms of running through the detailed calculations, I’m not really prepared to do that on the call, but I can say that if we – if the rules were in place, let’s say, at year-end, we would be in compliance.
Kevin Barker
So are you – do you feel like you’re well above those levels by a large margin? Or is it something that you’re going to need to manage over time, just given what – how restrictive they are around MSRs?
Mark Elbaum
We’re always going to be managing those types of things, monitoring it and managing it. So at this point, I’m comfortable with where we are. That’s not to say I would take it for granted. We will be managing it like we do everything else.
Kevin Barker
Oaky, thank you, Mark.
Operator
We have reached the end of the question-and-answer session. I would now like to turn the call back over to Willie Newman for closing comments. Please go ahead, sir.
Willie Newman
Well, I just want to thank you. Appreciate everybody’s comments, questions. And well, as we’ve talked about, we’re very focused on wholesale at executing and getting back to operational profitability. So with that, thanks very much.
Operator
Ladies and gentlemen that concludes today’s conference. Thank you for joining us. You may now disconnect your lines.
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