Mr. Cooper Group (COOP) Q4 2023 Earnings Call Transcript


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Mr. Cooper Group (COOP 5.04%)
Q4 2023 Earnings Call
Feb 09, 2024, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Mr. Cooper Group’s fourth quarter 2023 earnings call. At this time, all participants are in a listen-only mode.

After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to our first speaker today. Please go ahead.

Ken PosnerSenior Vice President, Strategic Planning and Investor Relations

Good morning, and welcome to Mr. Cooper Group’s fourth quarter earnings call. My name is Ken Posner, and I’m SVP of strategic planning and investor relations. With me today are Jay Bray, chairman and CEO; Chris Marshall, vice chairman; Mike Weinbach, president; and Kurt Johnson, executive vice president and CFO.

As a reminder, this call is being recorded. You can find the slides on our investor relations webpage at investors.mrcoopergroup.com. During the call, we may refer to non-GAAP measures which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements which you should understand could be affected by risk factors that we’ve identified in our 10-K and other SEC filings.

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We are not undertaking any commitment to update these statements if conditions change. And with that, I’ll now turn the call over to Jay.

Jay BrayChairman and Chief Executive Officer

Thanks, Ken, and good morning, everyone, and welcome to our call. Typically, we start by reviewing the quarterly highlights, but I assume you saw our pre-release. So, instead, I’ll make some brief comments on full year results talking about our 1 trillion target and then share some thoughts on where we’re going from here. Turning to Slide 3, let’s talk about 2023.

For the full year, ROTCE was 12.5%, which was back within our target range. Pretax operating earnings totaled 660 million, thanks largely to servicing, while originations made a smaller contribution, given where we are in the cycle. Tangible book value ended the year at $63.67, up 12%. The servicing portfolio grew 14% to 992 billion at year-end, which we believe establishes us as the industry’s No.

1 servicer. As we commented last quarter, we expect to achieve our 1 trillion target during the first quarter once pending transactions have completed boarding. Contributing to portfolio growth during the year, we acquired Home Point and its $83 billion portfolio in a transaction which was accretive to tangible book value and which was essentially self-funded through the assumption of 500 million in senior notes. Additionally, the acquisitions of Rushmore Servicing and Roosevelt Management added another 32 billion and brought us best-in-class special servicing capabilities in the infrastructure to launch our first MSR fund.

A key theme for 2023 was operating leverage. We grew the portfolio at a double-digit pace during the year while at the same time cutting costs companywide by 8%. These results showcase our highly efficient digital platform, the benefits of incremental scale, and our agile management of originations capacity. Finally, stock repurchase totaled 276 million for the year at an average price of $49.53.

And given the current stock price, we’re obviously quite pleased. With that, let’s skip ahead to Slide 5 and spend a moment on our 1 trillion target because this milestone represents the culmination of a multiyear journey, one that’s taken us from very humble beginnings to our current position as industry leader. We’re extremely proud of our track record. Very few companies can boast of 30% growth compounded over 15 years.

We did this by relentlessly focusing on our platform, investing in the right technology, and building a people-first culture. If you go back to the WMIH merger in 2018, which is when we became a fully independent public company, our first priority was deleveraging, which we accomplished by refinancing our senior notes and extending our liquidity runway. At the same time, we were rolling out Project Titan, which was a series of technology investments designed to ready our platform for the next leg of growth. These investments paid huge dividends during the pandemic when we helped over 500,000 customers enter and exit forbearance plans while at the same time driving lower unit costs in servicing.

In fact, since 2018, we’ve cut servicing costs by 30%, leaving us now 38% below industry peers based on the most recent Mortgage Bankers Association benchmark study. Our investments also pay big dividends when we sold our cloud-native servicing technology to Sagent, which allowed us to focus our IT resources on the customer experience and the latest developments in generative AI. We told you we would monetize Xome. And while we still have work to do with the auction exchange, we generated 528 million in gains in 2021 by selling title, valuation, and field services with extremely opportune timing.

We’ve distinguished ourselves with industry-leading customer retention, which is currently near 80% or almost four times the industry average. And as you recall, during the refi boom of 2020, we generated in excess of 1 billion in profits from originations. The WMIH merger brought us 1 billion in deferred tax assets. At the time, there was skepticism about their value.

Today, we have realized 63% of that balance in the form of incremental cash flow, which has helped us exceed expectations in terms of both growth and stock repurchase. So, where are we going from here? We’re now seeing some of the best growth opportunities in the company’s history. And we will continue to grow our servicing portfolio as we have for the past 15 years. But our strategic focus is now squarely on return on equity, which shouldn’t surprise you since we’ve been commenting on ROTCE on every quarterly call.

If you’ll turn to Slide 6, let me share some updated guidance with you. From 2019 to 2021, the entire mortgage industry enjoyed outsized returns, thanks to the massive refinance wave that generated what will probably turn out to be once-in-a-lifetime margins. During 2022, we passed through an inflection point as the market struggled with the sharpest mortgage rate increases in recent memory, which impacted originations immediately while it took servicing a few quarters to ramp up. During 2023, we crossed back into our target range of 12% to 20%.

And today, as we look out over the next few years, we would expect to drive these returns to a higher level. Specifically, we’re forecasting ROTCE to steadily increase, reaching the mid to upper teens by the end of 2025, which is a level that we believe we can sustain thereafter. Now, bear in mind, as is always the case, we face some headwinds. The market expects somewhat lower rates in 2024, which could create some margin pressure for servicing in terms of higher amortization expense and lower levels of interest income.

Although these would likely be offset by a pickup in originations. But the story for Mr. Cooper isn’t about interest rates. The real story is the strategic initiatives we’re working on that will lift ROTCE to a sustained higher level.

Let me highlight four broad categories. First, we’re making terrific progress with servicing costs; for example, by driving lower call volumes with better digital solutions for our customers. Plus, we think there’s enormous potential from rolling out the latest generation of AI. I would remind you that Mr.

Cooper is already a leader in AI with our mortgage-centric Pyro technology, which we developed in partnership with Google in 2021 in which, today, we’re using internally in marketing to third parties. In 2024, you should expect further positive operating leverage and servicing and across the company. Second, we believe there’s enormous opportunity for ROTCE accretion in our asset light strategies, including subservicing and our MSR fund since they don’t take up any of our liquidity. Third, we’re reengineering our DTC platform to drive higher volumes and wider margins in all environments.

And finally, the strength of our balance sheet and risk management gives us confidence we can hit these higher returns even in the face of market volatility or less favorable macro conditions. In summary, let me share our vision for where the company is going over the next few years. We envision Mr. Cooper as playing a leadership role in the mortgage industry with a platform that’s scalable and offers best-in-class efficiency.

For our customers, we’ll offer an experience that is frictionless and personalized and, as a result, will retain our customers for life. For our stakeholders, Mr. Cooper will work tirelessly to retain their trust. And for our investors, we’re optimistic that the company’s stock price will over time receive a premium multiple reflecting the outlook for return on equity, our track record, and the quality of our balance sheet.

Obviously, we do not control valuation. That’s up to you. But we will work diligently to compound tangible book value at a double-digit pace which for us is an exciting prospect. And now, I’ll turn the call over to Chris to take you through more details on our operational performance.

Chris MarshallVice Chairman and President

Thanks, Jay, and on that point it’s nice to see our stock finally trading over tangible book. I couldn’t help but remember when I first got here in 2019 and our stock dropped at 1 point to as low as half tangible book before the market understood the resilience of our balanced business model. But I don’t think one-time tangible book is the end of our story, not by a long shot. Certainly not for a company with such a successful track record and now such an impressive leadership position.

By the way, this will be my last call as a speaker. Next quarter, you’ll hear from Mike Weinbach, Mr. Cooper’s new president, who brings exceptional leadership experience at some of the most respected financial institutions in the country. Welcome, Mike.

I can’t imagine anyone better qualified than you to lead Mr. Cooper forward on our path to further growth and higher returns. So, with that being said, I’ll start this morning on Slide 7 and discuss servicing portfolio growth, which was very strong this quarter, as we ended the year at 992 billion, up 14% year over year. As Jay mentioned, you should look for the portfolio to exceed 1.1 trillion by the end of the first quarter.

As you recall, we announced the trillion-dollar target in July of 2021 when the portfolio was only 650 billion. It’s taken an enormous amount of energy, discipline, and effort on the part of our entire workforce. And it’s really very gratifying to be reaching the target so much faster than most people believe possible. And now, we’re already exceeding it.

So, I really need to share my heartfelt thanks to every single member of the Mr. Cooper team for your amazing work. I couldn’t be more proud of all of you. Now, Looking ahead, growth conditions remain extraordinarily attractive.

We’re seeing a very significant pipeline of deals coming to market with rich margins. Consider this, we recently raised $1 billion in high-yield debt at a cost of 7/8, and we’re seeing bulk deals come to market with yields of plus or minus 13% for conventional and even higher returns for Ginnie loans. That’s a spread of roughly 6 percentage points. Whereas three years ago, we were funding a plus or minus 6 and investing at around 9.

But that’s not even the whole story because the pools today are highly seasoned with note rates well out of the money and very significant equity cushions. On a risk-adjusted basis, spreads today are second only to what we saw in the aftermath of the global financial crisis. And you can see this in option-adjusted spreads for bulk MSR deals, which have more than doubled in the last three years. What’s driving these returns is a huge supply demand imbalance, which reflects the large volumes of MSRs retained by originators during the refinance boom, as well as the ongoing retreat of the banks from the mortgage sector.

Mr. Cooper is extremely well positioned to exploit this opportunity because of our everwidening cost advantage, which means that we enjoy materially higher cash flow yields than our competitors. Also, we have an information advantage consisting with decade’s worth of data on collateral performance on the part of literally thousands of sellers. This information allows us to generate alpha by outperforming market returns.

So, servicing is also a great opportunity for us. As you know, we’re currently boarding a $90 billion portfolio for a very important new client, and we’re optimistic about additional wins in 2024. We’re in the process of raising capital for our first MSR fund, which will also be a source of subservicing volumes. Currently, we’re in discussions with several institutional investors, as well as pension plans, sovereign wealth funds, asset managers, and family offices.

We’ve also received reverse inquiries from some very large and sophisticated investors interested in separately managed accounts. Investors are focused on the secular opportunity resulting from the pullback of banks, which is a recurring theme in the private credit sector. And they find the return profile of MSR is extremely attractive, given the potential for fully hedged double-digit returns which are uncorrelated to systemic risk factors. And investors clearly understand the strengths we bring to this strategy as the market’s leading platform with significant scale driven operational and informational advantages.

Now, let’s turn to Slide 8 and talk about pre-tax servicing income, which totaled 229 million in the quarter, which was just slightly ahead of our revised guidance. As Jay mentioned, there could potentially be some headwinds in 2024 so we got you to model servicing income climbing steadily but at a pace below our portfolio growth. Specifically, based on the forward curve, we’re planning for slightly lower interest rates, which, of course, will benefit our origination segment but could drive CPRs and amortization to higher levels and put some pressure on net interest income. Having said that, we’re at a point where many of our strategic initiatives are paying off.

And as a result, we’re extremely confident in our ability to deliver additional operating leverage in 2024. One of the key initiatives we’ve commented on recently is our no-touch environment. The goal of which is to drive lower call volumes and not by cutting back on customer service, but by providing more information to our customers and easy-to-access digital tools. Through fourth quarter, you can see that calls per loan continue to fall.

During 2023, we spent a lot of time focused on calls related to payments. And by reworking our processes, we were able to eliminate as much as 90% of calls in that category. But this is only the tip of the iceberg. We’re now using generative AI to predict the intent of customer calls so we can route those calls to the right team members and to prompt our team members with the right information to answer questions on the fly, and then to summarize call logs and transcripts so we can identify opportunities to further refine our processes.

Jay mentioned our Pyro mortgage-centric AI platform, which we rolled out three years ago. Pyro gives us a decisive advantage in terms of onboarding portfolios because the system identifies missing documents, signatures, and stamps, and it does this with extremely high levels of accuracy without humans in the loop. Last year alone, we scanned, extracted, and classified millions of documents comprising 676 million pages of data. This contributes to our advantage in the bulk servicing market where prior servicing documentation is critical in understanding the profile of the loans being boarded.

Now, let’s turn to Slide 9 and talk about originations where we generated 10 million to EBT, which was above the high end of our updated guidance range, as our DTC team was very nimble in taking advantage of the late-quarter rally in mortgage rates. And we also enjoyed wider gain on sale margins from improved capital markets execution. Bear in mind, these numbers were impacted by the cyber event in November. Excluding that impact, we estimate EBT would have been double this level.

For similar reasons, refi recaptures dipped slightly during the quarter, but it’s now back up over 80%. Clearly, this remains a difficult environment for originations, but I’d highlight the tremendous progress we’ve made expanding the scope of DTC. During the refi boom, DTC focused on rate and term refinances. Period.

As rates began to rise, they did a fantastic job pivoting to cash out refinance. Since then, we’ve rolled out second liens and are now making great progress with purchase recapture, which, together, make up more than a third of our total volumes. Our DTC platform is extremely profitable and maximizing DTC’s contribution is a strategic priority for us. In fact, it’s one of the key initiatives that will help us lift the company’s overall returns.

We’re continuing to invest in the platform to drive lower costs, faster turn times, and a more personalized customer experience. These investments include Project Flash, which is our approach to digitizing and automating workflow, which helped drive down unit costs by 22% in 2023. Looking ahead, we guide you to expect 20 million to 30 million in operating EBT in the first quarter. Bear in mind this guidance is based on current market conditions so both volumes and margins could change if interest rates surprise in either direction.

OK, if we can move to Slide 10, I’d like to finish with an update on Xome. Our team made a lot of progress during the year, enhancing our platform, winning market share, and performing admirably in very difficult conditions. Sales were up 75% year over year in the fourth quarter, and inventories continued to grow. But the foreclosure market remains dormant, thanks to home price gains and generous government programs.

And as a result, Xome continues to operate at roughly breakeven. But we’ll update you further on conditions as the year progresses. And with that, I’ll turn the call over to Kurt.

Kurt JohnsonExecutive Vice President, Chief Financial Officer

Thanks, Chris. Good morning, everyone. I’ll start on Page 11 which provides you a summary of the financials. I’ll start by taking you through the adjustments, which consisted of $27 million in costs related to the cyber incident as we previously disclosed, $8 million in deal costs associated with the Roosevelt and Home Point transactions, 2 million in severance, and a $2 million share in losses at Sagent.

During the quarter, we marked down the MSR by $217 million due to lower interest rates and higher expected CPRs, leading to a quarter-end valuation of 155 basis points of UPB or a 5.2 multiple of the base servicing fee strip. Now, this was offset by $176 million hedge gain which equates to 81% coverage. That’s well within policy tolerance as we continue to target a hedge ratio of 75%. Subsequent quarter-end, we issued $1 billion in senior notes with a coupon of 7/8 priced at 7.25% yield to maturity.

As a result, you should model in an incremental 12 million in corporate interest expense in the first quarter and 18 million in each quarter thereafter. This expense will be offset by lower MSR line interest expense in the servicing segment. Finally, I’d like to add some additional color on the ROTCE outlook. As Jay mentioned, we expect ROTCE to rise over the next two years into the mid to upper teen levels in 2025.

Now this forecast assumes slightly lower rates in line with the current yield curve and modest economic growth. Based on consensus estimate for Mr. Cooper, tangible books should exceed $70 per share a year in 2024. On this basis, it would be reasonable to look for $10 or more per share in operating EPS in 2025.

I would echo Jay’s comments, if we deliver on higher returns and demonstrate the continued sustainability of our business model, it’s not hard to imagine that our stock might trade at a higher multiple of earnings and book, implying significant potential upside. Now, obviously, we’ve got a lot of work to do to produce these results. And, of course, we don’t control the valuation. But we do look forward to continuing our growth story as the market leader in servicing.

Now, if you’ll turn to Slide 12, let’s give you an update on asset quality. I’ll be brief because concerns about recession have diminished in the last few months. But even so, we want you to know that we’re positioning the company to weather a future turnaround cycle whenever that may occur. In this regard, it was nice to see delinquencies fall another notch to 1.3%.

Now, that’s the lowest level of Mr. Cooper’s history as a public company. Turning to Slide 13, let’s review liquidity. We use the billion-dollar proceeds from the high-yield offering to pay down MSR lines.

And as a result, on a pro forma basis, our liquidity totaled 3.4 billion at year-end consisting of cash and immediately available capacity on our MSR lines. The new bonds aren’t due until 2032, which leaves us with a very strong liquidity runway for the next eight years. Finally, I’ll comment briefly on advances, which declined 2% year over year despite growth in the portfolio. Now, that’s consistent with the favorable delinquencies trends I just mentioned.

To summarize, our balance sheet has never been in stronger shape. If you’ll turn to Slide 14, I’d like to wrap up by putting our high-yield offering in some historical context. As Jay mentioned, when the WMIH merger closed in 2018, our first priority was deleveraging. And the reason for that was our core philosophy.

The balance sheet strength is nonnegotiable for market leadership. I think it’s fair to say that our approach to balance sheet management has been favorably received by the marketplace where you can see our spreads have compressed by almost half over the last three years. During the fourth quarter, Fitch initiated coverage on us with a BB rating. At subsequent quarter-end, Moody’s upgraded our corporate credit rating to Ba3.

At quarter-end, our capital ratio is measured by tangible net worth assets with 29.3%. While this was down slightly quarter over quarter on a continued asset growth, it’s still well above our target range of 20% to 25%. With that, I’d like to thank you for listening to our presentation. And now, I’ll turn the call back to Ken for Q&A.

Ken PosnerSenior Vice President, Strategic Planning and Investor Relations

Richard, we’re ready to take questions, please.

Questions & Answers:

Operator

[Operator instructions] Our first question will come from the line of Giuliano Bologna from Compass Point. Your line is open.

Giuliano BolognaCompass Point Research and Trading — Analyst

Let me just start off by saying great quarter. And, Chris, you’ll be missed, you know, not being on the conference calls going forward. I remember, you know, way back when you first started, and I think, you know, [Inaudible] in the single digits and, you know, we were both trying to get the message out there back then. So, congrats on that.

If I shift a little bit, you obviously did a large bond deal, you have a lot of capital and liquidity and you have a lot of MSRs announced for the first quarter or, you know, in the pipeline. How should we think about your ability to onboard or the pace of onboarding of new MSRs over the next few quarters? You know, can you do 50 billion a quarter? Or is it — can you do 100 billion a quarter? I’m just curious about what the structural limitations are from a platform perspective because the opportunity is obviously large out there.

Chris MarshallVice Chairman and President

Giuliano, first of all, thank you very much. I remember our very first road show and appreciate you showing as well love early on. So, thank you. Look what there’s obviously some physical limitation, but it’s kind of theoretical.

I mean, we’re onboarding somewhere around 400,000 loans as we speak. So, our ability to ingest large pools is pretty significant. We have talked to you about some of our tools in the past, the technology we’ve developed. Probably the most noteworthy is Project Pyro, which — or the tool, Pyro, which allows us to ingest four or five times the amount of data and reconcile invoices really in real time.

So, we made a lot of advances there. I wouldn’t think of the technology or the process as being any kind of limitation.

Jay BrayChairman and Chief Executive Officer

If you look back in even a decade ago, when we bought the BofA portfolio, it was 200 billion, and we boarded it in nine months. And to Chris’ point, the level of sophistication of the day, the level of investment we’ve made, obviously, we’re much more capable today. So, you know, I think we can handle pretty much any size without any issues is the way I think about it.

Giuliano BolognaCompass Point Research and Trading — Analyst

That’s great. And, you know, to Chris’ point, fortunately, you know, I had my projections out there. But fortunately, you guys came in above and beyond, you know, consistently. So, that made me look at along the way.

The next question that I want to ask was related to the originations platform. You’re obviously bringing on a lot of new MSRs that should substantially increase or recap for opportunity. I’m curious how you think about kind of the evolution of getting new MSRs onboard versus the delay of potentially being able to, you know, pivot recapture onto the Mr. Cooper origination platform.

Chris MarshallVice Chairman and President

Well, remember, we’re buying pools of all different types. A lot of the pools we’re buying are well out of the money. Some of them are. I mean, everything’s priced differently.

But in our — the time lapse between us boarding a proposal and evaluating it for a recapture potential, that may be a couple of days. I mean, we rescore our entire portfolio every night. So, pools are loaded on a Monday. It may take till Wednesday, but it’s very, very quick.

Giuliano BolognaCompass Point Research and Trading — Analyst

That’s very helpful. Thank you very much, and I will jump back in the queue.

Chris MarshallVice Chairman and President

Thank you, Giuliano.

Operator

Thank you. One moment for our next. Our next question will come from the line of Kevin Barker from Piper Sandler. Your line is open.

Kevin BarkerPiper Sandler — Analyst

Great. Thanks for taking my question. I echo Giuliano’s comments, Chris. You will be missed on these calls.

I just wanted to follow up, you know, on the guidance for the ROE 14% to 18%. Could you lay out the different scenarios where you think, you know, you would come in the lower end versus the higher end? What type of macro scenarios should we consider? Or what type of shifts in the market may cause you to go at the lower end or the upper end of that viewpoint? Thanks.

Kurt JohnsonExecutive Vice President, Chief Financial Officer

Hey, Kevin, it’s Kurt. So, I think, realistically, the way that we’ve modeled everything going forward is based on the forward yield curve today, and that doesn’t show a whole lot of change in the 10-year or, in fact, the mortgage rates over the next couple of years. You know, I think, realistically, what we’ve also said is we’ve got, you know, an equity-to-asset ratio range of 20% to 25%, and we are — and have been consistently above that amount. We’re trending closer to 30% at this point in time.

I think, you know, we did $1 billion of debt. I think that gives us a lot of ability as we’re seeing MSRs with really attractive returns to invest in those MSRs and to boost the earnings. I think that’s what you’ll see going forward. Obviously, i we get into an environment where there’s, you know, good refinance recapture ability, we can go up to the top end of the range.

But i think we’re comfortable in a forward yield curve within that range as we reported.

Kevin BarkerPiper Sandler — Analyst

Great. Thanks for taking my questions.

Chris MarshallVice Chairman and President

Thank you, Kevin.

Operator

Thank you. One moment for our next question. And our next question comes from line of Bose George from KBW. Your line is open.

Bose GeorgeKeefe, Bruyette and Woods — Analyst

Hey, everyone. Good morning. Actually, one follow-up on the guidance of the ROTCE. So, you guys noted, you know, next year, you expect to reach the high end of the range.

For full year 2024, do you think you’ll be above the low end of the range, so 14%-plus for the full year ’24?

Kurt JohnsonExecutive Vice President, Chief Financial Officer

Hey, Bose, look, I don’t think we are giving specific guidance nor have we historically, right? I think — but I think, again, if we’re able to execute on our plan, if we’re able to acquire servicing, continue attractive yields, you know, we’ve indicated where we’re comfortable. And to your point, I think guiding 2025, we’ve said, you know, mid to high teens, and I think we’re comfortable with that as well.

Bose GeorgeKeefe, Bruyette and Woods — Analyst

OK, great. Thanks. And then, actually, one on the MSR hedge. You know, you guys are right at 80% this quarter.

You know, any thoughts about increasing that? Or do you just feel like the remainder is kind of covered by your macro hedge and you sort of keep it at that level?

Kurt JohnsonExecutive Vice President, Chief Financial Officer

Yeah, I think that we’re planning on keeping it at that level. I think, you know, we have probably what I’d say is outperformed in both directions over the last quarter, you know, when the portfolio was going up, we had a little bit less than 75% coverage, which was great, which means that we didn’t lose as much on the hedge. And when the market was going down, we did better. So, we gained a little bit more on the hedge.

So, I think our hedge effectiveness over the last couple of quarters has been really good, but we’re still targeting that 75%. And I think, you know, as we continue to acquire a new current — coupon portfolio, we’ve got a little bit of, you know, kind of loans that are going to be in the money if we see a rate rally. And we think that can really give us sort of the upside potential against the remaining 25%.

Bose GeorgeKeefe, Bruyette and Woods — Analyst

Yeah. OK, great. Thanks.

Operator

Thank you. One moment for our next question. And our next question comes from line of Terry Ma from Barclays. Your line is open.

Terry MaBarclays — Analyst

Hi, thanks. Good morning. I just had to follow up on the ROE range of 14% to 18%. If I look at slide eight on a 2024 outlook, is it possible to maybe dimensionalize some of those drivers of portfolio growth, operating leverage? And DTC, how much they contribute toward that ROE range?

Chris MarshallVice Chairman and President

Terry, we wouldn’t break it down into those pieces. We — I think we’re giving you guidance that we expect a certain amount of operating leverage. We’ve been generating it for the last three years consistently. So, if you’re asking for a specific percentage for each, no, I’d say on balance, we’re very comfortable with the range.

And I think we just leave it at that point. I would say, on originations, it won’t take much in terms of rates to move to see originations produce more meaningful levels. Obviously, in the quarter, we had that rate rally right at the end of the quarter, and our team turned on a dime and started producing much higher volume of fundings. And that was really, you know, maybe 10 or 15 days of activity.

So, if rates do start to move down as many people expect them to this year, I would expect originations to play a bigger role.

Terry MaBarclays — Analyst

Got it, that’s helpful. So, if I look at the fourth quarter ROE of 11%, is it possible to, I guess, quantify what the ROE — or have the adjusted ROE for the disruption like what it would have been?

Chris MarshallVice Chairman and President

Yeah, if not for the disruption of the fourth quarter, we would have doubled that operating income.

Kurt JohnsonExecutive Vice President, Chief Financial Officer

For originations.

Chris MarshallVice Chairman and President

Yeah, originations.

Kurt JohnsonExecutive Vice President, Chief Financial Officer

From a pro forma perspective.

Chris MarshallVice Chairman and President

Oh, yeah, I’m sorry, I was just talking about originations.

Kurt JohnsonExecutive Vice President, Chief Financial Officer

From a pro forma perspective, it would have been about 12.5% ROTCE for the fourth quarter.

Chris MarshallVice Chairman and President

Yeah.

Terry MaBarclays — Analyst

Got it. OK, that’s helpful.

Chris MarshallVice Chairman and President

Servicing business was back up. Just to remind everyone, our servicing business, although the event was disruptive, our servicing business was back up and running in four days. So, there was an interruption, but it was not very significant.

Kurt JohnsonExecutive Vice President, Chief Financial Officer

Right, although we did have, call it, 7 million to 8 million because we waived late fees for the month. And again, doing the right thing for the customer is something we’re always going to do. And it did have a slight impact. So, if you had kind of Chris’ doubling of originations, plus the servicing — waiving of late fees, I think you’ll get kind of to that.

You come back into that same 12.5 number.

Terry MaBarclays — Analyst

Got it. OK. That’s helpful. Thank you.

Operator

Thank you. One moment for our next question. Once again, one moment for our next question. Our next question comes from Doug Harter from UBS.

Your line is open.

Doug HarterUBS — Analyst

Thanks. Can you talk about the outlook for regulation for yourself in light of some of Treasury Secretary Yellen’s comments yesterday?

Chris MarshallVice Chairman and President

I think if you’re talking about regulation in terms of size growth, I’m not — I think you really have to look at our portfolio as in two pieces. While the overall portfolio has grown considerably and we expect it to grow by another 25% this year, only half of it is owned MSR. The other half is subserviced for a number of clients. So, I don’t think — if there are any limitations on concentration, I think it would be focused more on people on owned MSR.

So, I think we have quite a bit of room for us to grow before that becomes a concern to anybody.

Jay BrayChairman and Chief Executive Officer

Yeah, and if you look in total, I mean we’re still in kind of a single-digit market share, and so I think there’s plenty of room to grow from there. And if you look at other sectors, you know, in financial services, payments, processing — other processing businesses, you certainly see consolidation to, you know, a few players. And so, you know, I think that makes sense for the servicing business as well. I mean it’s a scale business.

You know, you have to be able to invest in the technology, etc. And so, we don’t have any concerns about, you know, continuing to grow the platform, I think. And, you know, the key for us is sustainability, right? We’ve invested heavily in technology and compliance and risk. And so, you know, those are real, you know, key strengths of the company.

And, you know, we’ll continue to focus on those. So, we feel good about future growth prospects.

Doug HarterUBS — Analyst

And, you know, any risk — obviously, you’re well above your own sort of target capital ratios, but, you know, if they were to apply more stringent capital rules to you, kind of how do you think capital liquidity rules, you know, how do you think you fair, you know, if it went to kind of more of a bank-like, you know, capital standards?

Chris MarshallVice Chairman and President

The targets — the equity targets that we put out, the range of 20 to 25 is so much so far ahead of what is required at banks that I don’t think that’s any type of concern for us. I can’t even imagine it becoming anything of a conversation. Again, we’re talking about a range of 20 to 25 from about 29 today. I’m not sure what the average bank is, but maybe it’s half that level.

So, I don’t think you should — I think you should think of us as having a rock-solid balance sheet.

Doug HarterUBS — Analyst

Great. Appreciate that, Chris. Thank you.

Operator

Thank you. One moment for our next question. And our next question will come from line of Michael Kaye from Wells Fargo. Your line is open.

Michael KayeWells Fargo Securities — Analyst

Hi, you know, you’ve grown your servicing portfolio very fast, and the outlook for further acquisition seems very favorable. But bringing on so much business, how do you think ahead and avoid a melting ice cube effect for the servicing portfolio when the acquisition opportunity eventually slows down, even now with the very low runoff of the portfolio, your originations are nowhere near able to offset that? Thanks.

Chris MarshallVice Chairman and President

Well, in actuality, they are. With an 80% recapture rate, the concept of a melting ice cube doesn’t really apply to us. We’re growing the portfolio. CPRs are very, very low at the same time.

And we’re growing at both through acquisitions and through subservicing growth. So, I think if you look at the mortgage industry as a whole, historically, that melting ice cube description did apply. But when you have recapture as high as we do, as well as correspondent channel, co-issue channel, replenishment has not been a problem for us at all. And I can’t imagine even if acquisitions were to slow down to half the levels they’ve been, and if you look back to say 2019 through 2020, you know, that was the situation.

And we were still growing at a very, very strong clip.

Jay BrayChairman and Chief Executive Officer

Yeah, Michael, to be specific, if you look at our co-issue/correspondent DTC business, we’re — we can maintain the portfolio and grow it slightly. So, you know, we have a sustainable model without any bulk acquisitions. But I mean, look at our track record over the last, you know, 25 years from a bulk acquisition standpoint. And I think it speaks for itself.

There’s always going to be, you know, portfolios in the market. And as you’ve seen us execute the last few years, when we — you know, we will get our fair share of those. So, you know, I think from a growth standpoint, we feel very good about our existing kind of origination channels and co-issue channel. And the bulk opportunities are going to be there.

And so, I think we feel really good about it.

Michael KayeWells Fargo Securities — Analyst

OK, thank you very much.

Operator

[Operator instructions] One moment for any questions. And I’m not showing any further questions in the queue. I’d like to turn the call back over — actually, I have a question from Derek Sommers from Jefferies. Your line is open.

Derek SommersJefferies — Analyst

Hi, Good morning. On the 1.1 trillion guide for servicing book at the end of 1Q, is there — what should we anticipate for the mix between forward MSR and subservicing? And then, if you could talk about kind of your pipeline expectations for subservicing moving forward, that’d be great as well.

Chris MarshallVice Chairman and President

It’s a great question. I think in the first quarter, it’s about one-third subservicing — no, no, it’s about two-thirds of servicing; one-third, owned. A lot of these deals were deals we closed in the fourth quarter, and they’re just boarding now. Over the course of the year, we’d like to see a little bit more subservicing because traditionally, as we’ve told you, we like to have a 50-50 mix, and we’re a little bit higher.

I think we ended the year more like 60-40 or roughly. So, we’d like to board some large subservicing. But a little too early to tell, and that’ll play out depending on what market opportunities presented.

Derek SommersJefferies — Analyst

Got it. Thank you. And then, on your comments about originations EBT being double if it weren’t for the cybersecurity incident, is the assumption on that double that the incremental volume would have come majority from the DTC channel?

Chris MarshallVice Chairman and President

Yeah, yeah, exactly. And, you know, just the timing of the event, it happened really as there was that mini rate rally. So, we did lose some key days in the quarter.

Derek SommersJefferies — Analyst

OK, got it. And then, if we were to see any pickup, you know, in originations volume looking forward, would that, you know, assumption still hold that the, you know, the mix would shift toward the DTC channel as well?

Chris MarshallVice Chairman and President

Yeah, of course. I mean corresponding and co-issue are pretty steady producers. DTC, obviously, is going to flex up and down depending on rates. We don’t expect rates to go much higher.

But as they do come down, that should immediately generate more activity in DTC.

Derek SommersJefferies — Analyst

Got it. Thank you for answering my questions.

Operator

Thank you. And I’m not showing any further questions in the queue. I’d like to turn the call back over to Jay for any closing remarks.

Jay BrayChairman and Chief Executive Officer

Thanks, everybody, for joining us, and we look forward to further conversations. Thank you.

Operator

Thank you for your participation in today’s conference. That does conclude the program. [Operator signoff]

Duration: 0 minutes

Call participants:

Ken PosnerSenior Vice President, Strategic Planning and Investor Relations

Jay BrayChairman and Chief Executive Officer

Chris MarshallVice Chairman and President

Kurt JohnsonExecutive Vice President, Chief Financial Officer

Giuliano BolognaCompass Point Research and Trading — Analyst

Kevin BarkerPiper Sandler — Analyst

Bose GeorgeKeefe, Bruyette and Woods — Analyst

Terry MaBarclays — Analyst

Doug HarterUBS — Analyst

Michael KayeWells Fargo Securities — Analyst

Derek SommersJefferies — Analyst

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