Earnings Call
Onity Group Inc. (ONIT)
Earnings Call Transcript - ONIT Q1 2022
Operator, Operator
Good day. And welcome to the Ocwen Financial Corporation First Quarter Earnings and Business Update Conference Call. For your information today's call is being recorded. I would now like to turn the call over to Mr. Dico Akseraylian, Senior Vice President, Corporate Communications. Please go ahead, sir.
Dico Akseraylian, Senior Vice President, Corporate Communications
Morning. And thank you for joining us for Ocwen's First Quarter Earnings Call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chief Executive Officer, Glen Messina and Chief Financial Officer June Campbell. As a reminder, the presentation or comments today may contain forward-looking statements made pursuant to the safe harbor provisions within Federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are to different degrees uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements. Forward-looking statements involve assumptions, risks, and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2021, and our current and quarterly reports since such date. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. Our forward-looking statements speak only as of the date they are made and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. In addition, the presentation and our comments contain references to non-GAAP financial measures, such as adjusted pre-tax income and adjusted expenses among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition and an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States. The reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures may be found in the press release and the appendix to the investor presentation. Now, I will turn the call over to Glen Messina.
Glen Messina, Chief Executive Officer
Thanks, Dico. Good morning, everyone. And thanks for joining us. We're looking forward to sharing our progress with you this morning and our plans for the balance of the year. Let's get started with Slide 4 to review a few highlights for the first quarter. We believe our actions to build a balanced and diversified business have positioned us well to navigate the current mortgage cycle. And our first-quarter results are consistent with our expectations. We delivered net income of $58 million, strong annualized ROE in the quarter, and a 14% appreciation in book value per share from year-end 2021. We are taking a cautious and prudent approach to investing and managing our liquidity position, which has improved from year-end. Consistent with our previous guidance in the first quarter, we opportunistically sold select MSRs at what we believe were robust valuation levels to harvest value appreciation and mitigate asymmetric hedge risk in our MSR portfolio. Our servicing platform is performing well operationally, our servicing financial performance is improving with rising interest rates. MSRs are appreciating in value. Runoff is declining. We continue to improve our cost structure and our portfolio is growing. Yesterday, we announced our subservicing agreement with NRC was renewed into year-end 2023 with annual extension options thereafter. We thank NRC for their confidence in us, we appreciate their business, and we are looking forward to continuing to serve them and their borrowers. Forward originations faced a challenging environment in the first quarter, while total servicing additions of $20 billion is up about 46% year-over-year driven by subservicing additions. Origination volume was down 13% year-over-year and margins were below expectations. We are taking necessary actions in forward originations to reduce our operating expenses and shift our product mix and service mix to restore profitability. Our reverse business is performing very well both on originations and subservicing. Origination volume has more than doubled year-over-year. Margins are holding flat relative to Q4 and the market is growing. Reverse subservicing is performing ahead of expectations and we're building a strong opportunity pipeline to support future growth. Let's turn to Slide 5 to discuss the environment and our market positioning. Interest rates have risen higher and faster in the first quarter than industry forecast suggested just a few short months ago, and they continue to increase. In the current environment we see three main drivers of our profitability going forward. First, with the core strength in servicing and an expectation for even higher interest rates, we expect our servicing business will be an important driver of our future earnings. Our balanced business model is working; servicing pre-tax income in the first quarter is up significantly versus the first quarter of last year due to MSR value appreciation, lower payout volume, expense productivity, and portfolio growth. The profitability improvement in servicing and MSR value gains more than offset the decline in profitability in forward originations as volume and margins contract. Forward originations will be a less important driver of earnings in this market cycle, but a critical element to replenish and grow our servicing portfolio. Second driver is subservicing. We made great progress in growing our forward subservicing business supported by our global technology-enabled, scalable platform. We believe our success here reflects our proven industry-leading operating performance that has been recognized by Fannie Mae, Freddie Mac, and HUD with top honors in their respective servicing performance recognition programs. We continue to be a leader in special servicing, supporting borrowers and investors and outperforming MBA and Moody's industry operations benchmarks. We worked hard every day to earn our clients' trust and this has been rewarded with meaningful subservicing additions and potential opportunities. We've added $64 billion in subservicing UPB in the last 12 months, we have $28 billion in scheduled subservicing additions in the next six months. And our forward subservicing opportunity pipeline is roughly $280 billion in potential additions. In addition to the NRC renewal, we are in advanced discussions with MAV to potentially double our investment capacity. Third driver is our reverse business. We are the only large-scale, full-service, end-to-end reverse mortgage provider in the industry. The industry opportunity is growing, our origination volume and market share continue to improve and origination profitability is stable. Our reverse originations and our reverse subservicing business are gaining scale, profitability is improving, and we have an opportunity pipeline of roughly $55 billion. Overall, we're really excited about the potential for the reverse business and our overall business and do not believe our recent share price is reflective of our financial position, earnings power, or the strength of our business. With industry volume shrinking, we continue to look at potential M&A opportunities that can expand scale and capabilities or otherwise create value for shareholders. Let's turn to Slide 6 for some servicing highlights. In servicing, MSR value net of hedges increased by $56 million in the first quarter. So far through April, MSR value net of hedges has increased by roughly $36 million. Based on our MSR sensitivity profile, we estimate an immediate 25 basis point parallel increase in interest rates would increase our earnings per share by roughly $2.70, which translates into a DBO1 of roughly $1 million. Servicing income excluding MSR gains has increased by $23 million year-over-year, despite lower EBO gains and industry-driven fair value losses on repurchase loans held for sale. Our diversified growth strategy executed by our enterprise sales team has resulted in meaningful servicing portfolio growth year-over-year, up over 50%. All segments of our portfolio—owned servicing, subservicing, forward, reverse, and small balance commercial—are growing. We're targeting forward servicing and subservicing UPB of roughly $290 billion by year-end. The extension of our current subservicing agreement, which covers approximately $54 billion in UPB at the end of Q1, had been set to expire in July. The agreement has been extended until year-end 2023, with annual extension options thereafter. As part of the renewal, we agreed to share a portion of some ancillary revenues and simplify the future process for extensions at the end of each term. As we've said in the past, this contract has a thin margin, but considering the significant cost reductions we've achieved in our servicing platform, we believe the renewal is a good outcome for both companies. Moreover, we appreciate NRC as a business partner and their confidence in our servicing capability reflected in the renewal. Through the combination of scale, portfolio composition, technology investment, and process re-engineering, we've reduced our servicing cost structure in basis points of UPB by over 30%—or almost 4 basis points—in the last year. Through continued digitization and process improvement, we are targeting further reductions to 7 basis points of UPB by year-end. Higher interest rates are driving lower prepayments and related expenses. We believe runoff may slow further to between 13.5% and 14% as short-term interest rates increase. We expect higher revenue from our $2.4 billion of escrow balances. This should help offset higher interest costs on our $1.2 billion of funded repo debt. We are actively managing our portfolio as evidenced by our sale in the first quarter, and we are executing several sale transactions to reduce our severely aged Ginnie Mae loan population. We believe the sale will improve the quality of earnings going forward through lower unreimbursed claims expense and will de-risk our portfolio. We did experience a loss of MSR value for these loans in the first quarter, and we'll recognize a loss on sale in the second quarter upon completion of the sale. We believe we have tremendous leverage in our servicing platform and we're excited about the growth opportunity for servicing, particularly in subservicing. Let's turn to Slide 7 to review forward originations. I believe it's generally understood that the environment for forward originations is tough and likely to get tougher. We are taking actions in response. Our origination team delivered $20 billion in total servicing additions, up 46% year-over-year, largely driven by subservicing additions. But on a sequential quarter basis, total origination volume was down 23%. We experienced a pre-tax loss in forward origination driven by lower lock volume, lower margins, and volatility related to hedge ineffectiveness. During February through mid-March, we saw a wide range of MSR values between the primary origination market, valuation experts, and bulk sales transactions at sub-coupon levels; the variation was more than 15 basis points. During this time frame, we made the prudent decision to intentionally constrain volume in correspondent lending by capping new origination MSR prices while we validated MSR values through our valuation experts and our own bulk sales transactions. Capping new origination MSR prices drove margin compression and volume reduction beyond competitive influences, as well as drove hedge ineffectiveness. Since mid-March, we've seen a much tighter range of MSR values. We have since lifted the pricing caps and correspondent lock volume, margins, and hedge performance have improved. We continue to focus on growing our client base, leveraging our multichannel capability. Our total client count is up over 2.5 times versus the first quarter last year, and it continues to grow. We're growing higher-margin Ginnie Mae, FHA, and non-agency products and best-efforts and non-delegated deliveries. Volume here is doubled year-over-year, and April volumes have exceeded the first-quarter levels. Our refinance recapture rate continues to improve. We achieved 39% during the first quarter with March levels at 41%. We estimate annual forward consumer direct volume for 2022 will be roughly half of 2021 levels. Portfolio growth, improved recapture rate, and cash-out refinancings, which are now 72% of our business, is offsetting in part the significant decline in rate-driven refinance opportunity. Under current market conditions, we must adjust our capacity and cost structure to match a smaller originations market. In March, we executed actions to reduce our forward origination staffing by 21% including contractors. Further reductions are expected to occur during the second quarter. We are targeting to reduce our cost structure in basis points of volume by roughly 45% by the fourth quarter versus the first quarter of this year. For the full-year, we're targeting about $75 billion in total servicing additions. This includes $45 billion in subservicing additions, including MAV, and about $30 billion of forward originations. Let's turn to Slide 8 to discuss our reverse business. We're very excited about the opportunity in the reverse mortgage market. Increases in home price appreciation and the increase in the maximum claim amount to roughly $970,000 in combination continue to fuel new loan production and are helping to offset the impact of higher interest rates. Demographics here are favorable with 12,000 people turning age 65 each day and home equity held by this group now tops $10 trillion. There is also a growing amount of research and positive press supporting the consideration of reverse mortgage as a retirement tool. Origination performance has been quite strong and is another successful example of our balanced and diversified business model. We continue growing market share, which is up 1.5 percentage points in Q1 versus the same quarter of last year. Origination volume has more than doubled year-over-year. We're seeing growth in all channels: direct-to-consumer, retail, wholesale; direct-to-consumer retail is our fastest-growing channel. As June will share in a moment, revenue margins have drifted down over the past year. However, margins by channel have been stable for the past several quarters. We are positioned as the only large reverse mortgage market participant that can offer end-to-end capabilities across originations and servicing. The integration of the RMS platform is going well, loan boardings are ahead of schedule, and we're slightly ahead of our financial expectations as a result. Our subservicing opportunity pipeline has grown to $55 billion, and interest in our platform has been quite strong. We expect the subservicing platform to be profitable by Q2 and thereafter, after we complete the integration and achieve our initial scale objectives. We believe we're uniquely positioned in the reverse mortgage market and the diversification this business provides helps mitigate our reliance on the forward mortgage origination market. Now I'll turn it over to June to go through our financial performance in more detail.
June Campbell, Chief Financial Officer
Thank you, Glen. Please turn to Slide 9. In the first quarter, we reported an $11 million adjusted pre-tax loss. You can see in the top right of the slide the year-over-year walk. Our originations segment reported a $40 million reduction in adjusted pre-tax income from reduced industry volume and lower margins, while our servicing segment reported a $30 million improvement in adjusted pre-tax income from higher UPB due to growing subservicing, slowing prepayments and operational efficiency. I'll talk more about the segment results in the next few slides. Net income in the quarter was $58 million, up from $9 million year-over-year. Consistent with our first half 2022 guidance, strong net income resulted from $56 million in MSR fair value adjustments, net of hedges, which included $13 million of evaluation assumption loss on delinquent Ginnie Mae loans scheduled for sale in the second quarter. Other notables included legal settlement recoveries and a favorable long-term incentive adjustment from the decrease in our stock price. We ended the quarter with strong liquidity: $269 million in cash and $45 million in available borrowing. Earnings per share increased to $6.30, and book value per share increased to $58. On the bottom right bar chart revenue held year-over-year as higher servicing and subservicing fees from higher UPB in both servicing and subservicing were offset by lower origination volume and margins. The chart on the bottom right of this slide demonstrates continued, successful execution of our continuous cost improvement discipline. Please turn to Slide 10. Forward originations adjusted pre-tax income declined to a $13 million loss. As discussed, forward originations profitability was impacted by reduced industry volume and margins. Our volumes were also impacted by our intentional strategy in correspondent to restrict volume as interest rates rapidly increased. We saw a wide range of MSR values amongst the primary origination market, broker values and bulk market values. In addition, consistent with the second quarter of last year, we transferred SMP and flow volume to math, consistent with the terms of our agreement with math. You can see on the top right the decline in revenue margins experienced in the consumer direct and correspondent channels. The margin decline is a function of intensified competition, our decision to limit new origination MSR prices, and resulting hedge ineffectiveness. We're taking actions to return the origination segment to profitability, reducing costs and rightsizing segment operations, as well as the corporate function supporting the segment by approximately half, while continuing to grow volume in higher-margin correspondent products and delivery options. This volume approximately doubled year-over-year. And as you saw in earlier slides, we're continuing to improve recapture rates, which were up ten points from the fourth quarter of 2021 to 41% in March of this year. Please turn to Slide 11. The market opportunity continues to be strong in reverse originations, with continued home price appreciation resulting in increased customer borrowing capacity. Adjusted pre-tax income held at $10 million in the first quarter, consistent with the first quarter last year. Origination volume was up $284 million year-over-year, led by the consumer direct channel, which has the highest channel margins. The growth in origination volume offset lower margins versus the first quarter last year. Margins by channel, while all were down from the first quarter last year, have been relatively stable in each channel since the third quarter of 2021. We remain optimistic on the growth opportunity in reverse originations, and we continue to invest in resources and marketing to grow the higher-margin consumer direct channel. Please turn to Slide 12. Profitability in the servicing segment has improved as expected, with higher interest rates, our actions to build scale, deliver cost improvement, slowed prepayments, and integrate our reverse subservicing platform ahead of plan. On the left side of the slide, adjusted pre-tax income is up $23 million year-over-year to $60 million driven by UPB increase to $275 billion as well as cost reduction of approximately four basis points of UPB. Prepayment rates were ten percentage points lower versus the first quarter of 2021 due to higher interest rates. Unfortunately, higher interest rates also drove $7 million lower gain on sale due to asset revaluation, mainly on our Ginnie Mae portfolio. On the right side of the slide, we show reverse subservicing results. We generated a small positive adjusted pre-tax income in Q1 by accelerating boarding loans and achieving planned operating expense reduction, driving improved operating efficiency. We believe we are on track to achieve $5 million in adjusted pre-tax income by the fourth quarter of 2022 per guidance provided on our earnings call in February. Please turn to Slide 13. This is our roadmap from actual adjusted pre-tax income in the first quarter to the projected fourth quarter of 2022, assuming a stable interest rate environment and no adverse changes in market conditions or the legal and regulatory environment. The roadmap is broken down by key actions to deliver our targeted returns. We expect between $9 million and $10 million improvement from productivity and rightsizing actions. As I mentioned, originations is targeting reducing costs by approximately half delivering annualized expense savings of roughly $30 million. We expect between $10 million and $11 million improvement from growing higher-margin origination products and delivery options of correspondent. And between $5 million and $6 million improvement from subservicing growth and reduced front office costs. Approximately $28 billion in subservicing is currently scheduled for boarding, and we have a strong subservicing opportunity pipeline in forward and reverse. Our projected adjusted pre-tax income in the fourth quarter is approximately $15 million up from the $11 million loss this quarter. We're targeting between 9% and 15% after-tax ROE before notables in the second half of this year. We're slightly reduced, at the lower end of our guidance since last quarter, given the severe impact of the current market environment on forward originations; our target return levels are consistent with our major competitors. We continue to guide to first half earnings being driven by MSR fair value gains, offsetting origination market headwinds. Finally, consistent with our expectation for lower origination volume levels in a more competitive market for MSRs, we're evaluating all our capital allocation options, including share and debt repurchases. Now I will turn it back over to Glen.
Glen Messina, Chief Executive Officer
Thanks, June. Let's turn to Slide 14. We believe our balanced, diversified business, exemplary servicing performance, proven cost management, and track record of execution position us well to navigate the market environment ahead. Our first-quarter results are consistent with our expectations. And we delivered strong net income and book value per share appreciation. Liquidity has improved since year-end. And we're taking a cautious and prudent approach to investing, managing our liquidity position and capital allocation. Servicing financial performance is improving with rising interest rates. MSRs are appreciating in value, runoff is declining. We continue to improve our cost structure. Our portfolio is growing, and we have $2.4 billion in escrow balances which should generate increased revenues as short-term interest rates increase. We have a strong value proposition as demonstrated by our backlog of scheduled subservicing boardings, the NRC renewal, and a robust subservicing opportunity pipeline. Total originations is facing a challenging environment and we're taking necessary actions to reduce our infrastructure, operating expenses, and shift our product and service mix to restore profitability. We believe we're uniquely positioned in the reverse mortgage market and the reverse business is performing very well, both on originations and subservicing. Favorable demographics and home price appreciation are expected to drive further market growth. We are focused on delivering prudent growth and capital management, and we're evaluating all capital allocation options, including share and debt repurchases to maximize value for shareholders. We expect first half 2022 earnings will be driven by MSR fair value adjustments, offsetting origination headwinds, and the build-out of our reverse subservicing platform. We are targeting after-tax ROE before notable items in the second half of 9% to 15% with the expected benefits of successfully executing our business initiatives. I am proud of how our team is executing in unprecedented market conditions. Our management team has a track record of successfully navigating multiple mortgage cycles with a focus on prudent growth, cost management, operational excellence, and customer experience. We will be unwavering in this focus. We're operating in a volatile and uncertain environment. We're closely monitoring the financial markets, economic environment, and industry conditions. We're dynamically managing our operations, plans, and targets and will adjust as necessary to address emerging opportunities and risks. I'd like to thank and recognize our Board of Directors and global business team for their hard work and commitment to our success. With that, George, let's open up the call for questions.
Operator, Operator
Thanks so much, sir. Ladies and gentlemen, once again, today's first question will be coming from Mr. Eric Hagen, calling in for BTIG. Please go ahead; your line is open.
Eric Hagen, Analyst (BTIG)
Hey, thanks. Good morning. Hope you guys are well. A couple for myself. Did you say that you expect to sell something at a loss in the second quarter? I may have just missed what it was and also the amount of what it was. Maybe you can re-highlight that. And then I think you noted some hedging effectiveness for more volatile interest rates; can you talk about any developments of hedging the MSR, the pipeline, and how you see that evolving with higher interest rates?
Glen Messina, Chief Executive Officer
Sure. So I will take those two separately, Eric. We are looking at selling some severely aged Ginnie Mae loans in our servicing portfolio. We had taken an MSR mark in the first quarter—June, I think there was $13 million?
June Campbell, Chief Financial Officer
Thirteen million, yes that's correct.
Glen Messina, Chief Executive Officer
And once we buy those loans out of the respective pools and sell them, there will be an additional loss on sale. We didn't really disclose how much loss on sale it is, but you get a sense of what we've done from an MSR market perspective. In terms of hedging and effectiveness: Number one, interest rate volatility during the quarter did give rise to some of the hedge volatility we saw in the mortgage pipeline. Less so on the MSR hedge, and the actions we took to, quite frankly, step on MSR prices—given the wide range of values we were seeing in the first quarter—also contributed to some of the hedge ineffectiveness because you're artificially constraining essentially the value of MSRs in the pipeline. We've since seen MSR values narrow. We've obviously confirmed values with our servicing brokers and our own books of transactions and we've lifted the constraints on pricing. We're seeing better hedge performance during the latter half of March and into April, and margins as well have improved because we're not artificially constraining MSR values. On the servicing hedge, again, with interest rates rising, we have repositioned our hedge. So we've switched to a more option-based strategy which I think is prudent as rates are moving up. We've rolled up the strikes in our TBAs and we've taken off swap coverage. That also helps preserve liquidity as rates are going up—you are not burning cash in terms of having to post margin. We have as well modified or adapted our hedging policy for this environment. We are focused now on rate protection down 25 and down 50, and targeting a 40 basis point hedge coverage ratio for the down-rate scenarios.
Eric Hagen, Analyst (BTIG)
Okay, that's helpful. Maybe just a couple more on servicing. Do you think you guys would ever look to sell MSRs as a form of liquidity and capital management, especially if MSR values stay relatively strong? And then can you also just quickly share how the profitability between the NRC portfolio compares with, say, agency subservicing once you consider the G&A that goes with it? Thanks.
Glen Messina, Chief Executive Officer
Yeah. So in terms of selling MSRs, look, I think what we've shown over the last 12 to 14 months is we dynamically manage our MSR portfolio. We are always looking at a couple of things. One is value—starts with views. Do we have a view of value on an MSR that differs from some market participants? And if we think that our view of value is higher than where market participants are, we would choose to sell MSRs to harvest that value. Obviously, with rates going up, UPB in certain segments of our portfolio showing, for lack of a better term, refinancing burn-out and our prepayment speeds slowing to a very large degree create asymmetric hedge risk in your MSR portfolio. So essentially what we did in the first quarter was sell to reduce and mitigate that risk and harvest the capital appreciation in those assets. It was, as June mentioned on the call, a prudent action. We recognize we are operating in a volatile environment. We are constantly evaluating our capital allocation strategies and we'll look at opportunities to manage our MSR portfolio and generate liquidity in ways that can best maximize value for shareholders.
Eric Hagen, Analyst (BTIG)
That's really helpful. How about the profitability between the NRC portfolio relative to agency subservicing in this environment, once you consider the G&A expense? Appreciate it.
Glen Messina, Chief Executive Officer
Yes. So look, the NRC portfolio, as we've said, at one point in time was unprofitable on a fully allocated basis, but we've since done a lot of work on our cost structure and have radically reduced our cost structure, particularly in servicing. In basis points of UPB, our cost structure is different now. And with some of the modifications we've made in the contracts, NRC is not really that different than agency subservicing on a margin basis. Now, as a percent of revenue, its margin may appear lower because the costs associated with higher delinquencies are higher, so the optics of it may be a little bit different, but net-net we've managed our cost structure to the point where we believe that portfolio is generating profitability consistent with our agency subservicing.
Eric Hagen, Analyst (BTIG)
Looks good, color. Thank you guys very much.
Glen Messina, Chief Executive Officer
Thank you, Hagen.
Operator, Operator
Ladies and gentlemen, once again, if you have any questions, we'll now go to Matthew Howlett calling from B. Riley. Please go ahead.
Matthew Howlett, Analyst (B. Riley)
Good morning and thanks for taking my question. Glen and June, first on the April update—the estimate was roughly $6 million up on the MSR base. So we presume the book current now is over $60. Just give us an update on where we are on a book value basis.
Glen Messina, Chief Executive Officer
Yeah. We didn't meet—there's lots of other puts and takes. We didn't really disclose book value per share. I'll leave it to you guys to run through the math. Obviously, there's other things that go through our P&L that we've got to be conscious of. And quite frankly, the books aren't closed for April, so I really can't give you an updated book value per share number, but MSR values continue to appreciate even since April; interest rates are higher now than they were at the end of April. So MSRs are a working investment these days.
Matthew Howlett, Analyst (B. Riley)
Absolutely. I guess where I'm going with this is the stock here now yields below that of current or potentially book. When you prioritize capital management, you mentioned stock buybacks, you mentioned debt, possibly debt repurchases, upsizing MAV, and additional M&A. Could you just go through those priorities and how you expect to execute this year?
Glen Messina, Chief Executive Officer
Look, the priority for the Board and management is very simply maximizing value for shareholders. We're evaluating all our capital allocation options, and that includes share and debt repurchases, to allocate capital in a way that best makes sense for shareholders. We're frustrated that the strength of our business model and our business performance is not being recognized in the share price. I think it's prudent and appropriate for us to consider our capital allocation alternatives if there's a way to better allocate capital to create value for shareholders. To the extent we would choose to move forward with debt or equity repurchases, I'm conscious of the financial leverage in the business, so as we think about it, one of the things we consider is how much we allocate to debt versus equity and ensuring we don't end up in an over-levered situation for the company. So again, all options are being considered. You've hit the nail on the head in terms of what we're thinking through. Our focus here is maximizing value for shareholders.
Matthew Howlett, Analyst (B. Riley)
Got you. I certainly recognize you to be cognizant of leverage, but it seems like liquidity positions are improving and you should probably take advantage of some of the discounted debt and equity prices in the market. You mentioned M&A. What would you need? What are you looking for to add to the business? Just curious what would be something that you'd look to grow?
Glen Messina, Chief Executive Officer
As we think about M&A opportunities, they fall into a couple of different baskets. One is increasing scale of our business platforms. If there's an opportunity to increase scale of servicing, specifically from a subservicing perspective, we'd clearly look at it. And then as well increasing capabilities—so as the GSEs have put in place more punitive measures against third-party originations or punitive pricing against third-party originations, which affects all aggregators with correspondent lending platforms, including ourselves and our competitors, we've got to think about how much of our business flows through our correspondent channel and where we can add value, such as best-efforts delivery, non-delegated delivery, and non-agency products. Expanding our capabilities in those areas is very important. We evaluate all M&A options with the consideration of whether they'll be value accretive for our shareholders. TCB and RMS are examples of accretive deals—TCB was largely an MSR buy with a platform that made enormous sense for us to do. It has been hugely accretive to our business. RMS as well—we've built now a very powerful reverse mortgage business. Those are the types of things we're thinking about.
Matthew Howlett, Analyst (B. Riley)
Glen, just last question. What are the conversations like with Oaktree? They sound—clearly they're happy with the fresh mark-to-market MSR base and the secular gains. Is there anything beyond that? Would they look to restructure some of the sub-notes? Just can you give us an update on the conversations with them?
Glen Messina, Chief Executive Officer
Yes. Look, first and foremost, Oaktree has been an awesome partner. We really appreciate the support we get from the Oaktree team. They've been hugely supportive and we are very appreciative of everything they have done for our business. Our discussions have remained focused on MAV. MAV has been very successful for both of us. It's enabled us to grow subservicing quite a lot. The investments they've made in MSRs have appreciated nicely, generating great financial returns for MAV of which we're an investor and we get a portion of that. As we think about upsizing MAV, we really think about a couple of things. With the rapid slowdown in the originations market, we've got to think about how big we really need MAV to be. Bigger is often better to some degree, but we want to size it appropriately for our business. There have been changes in the originations market, so we benefit from having a multichannel origination platform that participates in many delivery channels, including correspondent mandatory best efforts, non-delegated, and flow delivery channels. As the GSEs incentivize sellers to move between correspondent and newer delivery channels, we have to make sure that's reflected appropriately from an operational mechanics perspective in our agreements with MAV. There's a lot of devil in the details and that's what we're sorting through. Lastly, we also consider whether we want a multi-sourced platform versus a single-source platform. A lot of things to talk about, but mostly the discussions have been focused on MAV. Again, Oaktree is a great partner and we've loved working with them.
Operator, Operator
Thanks much, sir. We'll now go to Mr. Marco Rodriguez calling from Stonegate Capital Markets. Please go ahead, sir.
Preston Graham, Analyst (Stonegate Capital Markets, sitting in for Marco Rodriguez)
Good morning. This is Preston sitting in for Marco. Thanks for taking my questions.
Glen Messina, Chief Executive Officer
Hey Preston.
Preston Graham, Analyst (Stonegate Capital Markets, sitting in for Marco Rodriguez)
You mentioned you're really optimistic about the growth opportunity in reverse originations and that you're going to keep investing resources and marketing to grow the consumer direct channel because it's the highest margin. Could you just expand on that growth opportunity and what you think is possible there?
Glen Messina, Chief Executive Officer
Yeah. You bet. We love the reverse business. If you look at the mortgage landscape today, it's one of the few areas where the opportunity continues to grow. Demographics are favorable and it's a product that makes a lot of sense for consumers today with home price appreciation and the higher maximum claim amount from Ginnie Mae, roughly $970,800. There's a fair amount of consumer education upfront, but the business continues to show strong momentum. Origination-side profitability continues to grow and sub-servicing is growing. Specifically, we are investing in growing the direct-to-consumer retail channel, which has been our fastest-growing channel. As you saw in June's remarks, it has the highest revenue margin (albeit with higher channel costs). We are investing approximately $2 to $2.5 million in additional marketing spend and sales resources over the course of the year to drive additional retail production, with more contribution expected in the back half of the year. Assuming we execute and achieve planned returns, we expect a good payback—contributing about $6 million to $7 million of incremental revenue to the channel through higher retail volumes, so the net contribution after the incremental spend should be attractive. We think it's a great payback on investment and something we want to continue to allocate capital toward.
Preston Graham, Analyst (Stonegate Capital Markets, sitting in for Marco Rodriguez)
Got it. Makes sense. Thank you. And then you've discussed MSR values—that they were up $36 million in April. How much room do you think is left for additional MSR valuation increases? Obviously, there are many factors outside your control, but can you quantify that?
Glen Messina, Chief Executive Officer
So as we mentioned earlier, our current DBO1 is about $1 million, but that DBO1 did decline during the course of the first quarter due to convexity and our portfolio composition. It doesn't really move in a linear fashion because prepayments can slow and there's a flow. In the first quarter as rates went up, we saw the DBO1 decline in absolute value; it went from roughly $2.6 million at the start of the year to about $1.5 million by quarter-end. As we said, looking at our rate shock at quarter-end, it was about $1 million. From a model perspective, a lot of that's driven by flooring out of prepayment speeds. As rates go up, escrow and float balances that are modeled in MSR valuations are worth more, so the value will continue to appreciate in the model as rates rise. Ultimately, it's a question about market value and what kind of buyers are out there buying MSRs and what limits they may impose on MSR appreciation. We are seeing today multiples in the mid-fives, which historically are pretty high. Could they go to six? Maybe. Right now, it's certainly a unique environment. The rate of MSR appreciation may decline over time—one of the things we're doing is managing asymmetric risk. At some point MSR values can become expensive to hedge because there's more downside than upside and you end up spending a lot on options to hedge that. So we're being attentive to that and will make adjustments to our portfolio to avoid unnecessary asymmetric risk that is expensive to manage.
Preston Graham, Analyst (Stonegate Capital Markets, sitting in for Marco Rodriguez)
Got it. That's helpful. Thank you. Congrats on extending the NRC agreement. That was all I had, I'll pass back in the queue. Thank you.
Operator, Operator
Thank you, sir. We'll now go to Drew Mackintosh calling for Mackintosh Investor Relations, please go ahead, sir.
Drew Mackintosh, Investor Relations (Mackintosh Investor Relations)
Hey, good morning. Regarding the possibility of debt and share repurchases, has your board approved any buyback programs?
Glen Messina, Chief Executive Officer
Hey, Drew. No, our Board has not yet authorized a debt or stock buyback program, but we are evaluating all capital allocation options, including share and debt repurchases to maximize value for shareholders. If and when our Board authorizes such a program, obviously we would disclose it in a timely corporate timeframe after the Board authorization.
Drew Mackintosh, Investor Relations (Mackintosh Investor Relations)
Got it. Can you quantify the amount of excess capital that could currently be deployed, whether it's to MSR purchases or buybacks?
Glen Messina, Chief Executive Officer
As you know, we've improved our liquidity position since year-end. Liquidity in these volatile, uncertain times is very important and we're taking a cautious and prudent approach. We are working through with the Board right now how much excess capital we believe we have for discretionary deployment. A lot of factors go into that including our view of risks in the business, our view of risks in the environment, the capacity we have with MAV, any other synthetic subservicing arrangements we may put together, and how much capital our reverse business actually needs to support growth. There are still a lot of details to work through and I don't have any guidance on that today, but rest assured it's top of mind and we are giving it appropriate focus.
Drew Mackintosh, Investor Relations (Mackintosh Investor Relations)
Got it. Thank you.
Operator, Operator
Thanks so much, sir. As we have no further questions at this time, we turn the call back over to Glen for any additional closing remarks. Thank you.
Glen Messina, Chief Executive Officer
Great, George. Thank you and thanks everyone for your questions and for joining the call. Again, we believe our balanced and diversified business, exemplary servicing performance, proven cost management, and track record of execution position us well to navigate the environment ahead. As we mentioned, we're operating in a volatile and uncertain environment and we're actively monitoring the financial markets, economic environment, and industry conditions closely. I think we've got a lot of value drivers here in the business. I don't think it's being appropriately reflected in the value of the company, but we remain encouraged and excited about the opportunities in the business and our capabilities to navigate the market ahead. We look forward to talking to you next quarter at our next business update. Thank you, everyone.
Operator, Operator
Thank you so much, sir. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect. Have a good day and goodbye.