Earnings Call Transcript
Rithm Capital Corp. (RITM)
Earnings Call Transcript - RITM Q1 2022
Operator, Operator
Good morning and welcome to the New Residential First Quarter 2022 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Bohe Yu. Please go ahead.
Bohe Yu, Speaker
Thank you and good morning, everyone. I’d like to thank you for joining us for New Residential’s first quarter 2022 earnings call. With me today are Michael Nierenberg, Chairman, CEO and President of New Residential; Nick Santoro, Chief Financial Officer; and also Baron Silverstein, President of NewRez and Caliber. Throughout the call, we are going to reference the earnings supplement that was posted to the New Residential website this morning. If you have not already done so, I’d encourage you to download the presentation now. I’d like to point out that certain statements today will be forward-looking statements. These statements by their nature are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and review the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we will be discussing some non-GAAP financial measures during today’s call. Reconciliations of these measures to the most directly comparable GAAP measures can also be found in our earnings supplement. And with that, I will turn the call over to Michael.
Michael Nierenberg, CEO
Thanks, Bohe. Good morning, everyone. Thanks for joining us. As we all know, there is lots of pain and suffering in the world. As we think about everyone who is in need of help or a payer, we send out our warm wishes and hope for healing and an end to the war as soon as possible. Now on to business, despite the volatility in the markets, our company had a very good quarter. As we have mentioned during prior calls, we have positioned our company for a higher rate environment, taking all the necessary actions to protect our portfolios and operating companies from rising interest rates. During the quarter, our book value increased to $12.56. Currently, our book value sits at approximately $13.50. We have interest rate hedges in place, which protect our long-duration assets, along with our MSR portfolio, which should only help to increase our book value as we go forward based on expected Fed actions. We have increased our cash and liquidity levels to $1.7 billion. We will be patient as we look for opportunistic investments across the financial services sector. We believe patience will be rewarded in these markets, and the first quarter was a great example of our diversified business. Regarding our operating companies, the integration of NewRez and Caliber will be done by the end of Q2. As we previously mentioned, we expected sales in the area of $175 million to $200 million. As we go forward, we believe that number is light, and we will likely have more sales in excess of the $200 million number. We initially mentioned that as we think about our homeowners, we are looking for more ways to be able to offer them loans, products, and other ways to support our homeowners as we go forward. As we all know, the origination business, which had been extremely profitable in the past couple of years, is now in the middle of a serious contraction and will remain this way for the near future. The buildup of capacity is now part of the big unwind. We view the origination business as essential to our overall strategy. Our various channels will focus on customer retention and our retail will focus on the purchase market, which will become a bigger part of the origination business. Our ability to launch new products and focus on non-QM, jumbo, and HELOCs will differentiate us from our peers. Looking across the industry, I would expect very little profitability in the origination business unless we see the treasury market rally back to lower yields. This will put enormous pressure on the mortgage banking community as a whole. This will lead to more M&A, and we believe this will lead to more MSR sales as mortgage bankers will need to sell MSRs in order to fund their businesses. As we look at our broader base of operating businesses, Genesis, which is a fix-and-flip lender, we closed on in December. When we think about that business, we have embarked on an expansion plan that will open up many more markets across the U.S. Our ability to cross-sell through the Caliber sales force should create additional volumes for the company. The loan portfolio of floating REIT assets, coupled with the origination of high coupon, short duration assets make this a perfect asset for our balance sheet. On a door, our single-family rental business, we have taken a cautious approach to growth and believe with housing affordability at some of the lowest levels in years, cap rates should come our way, coupled with rent growth. Having dry powder will enable us to continue building a great business. On the investment front, yields on assets are beginning to look attractive with the widening of credit spreads and the rise in yields. To put this in context, credit spreads in securitized products, particularly in the mortgage space have more than doubled since the beginning of the year and are now at a point where levered returns in certain asset classes are in the mid-teens. When we look at the treasury market, the 10-year note has risen 100% from 150% to 3% yesterday and the 2-year treasury note has risen from 73 basis points at the end of December to 2.73%. These are massive moves, and we have positioned the company in a great way to take advantage of where we are. I will now refer to the supplement, which has been posted online. I am going to start on Page 3. When you look at our company today, we have paid out $4 billion in dividends since inception. Our dividend yield of 9.1%, our net equity of $7.1 billion, our market cap of $5.1 billion, our balance sheet today $38 billion, MSR portfolio, an industry-leading $626 billion of owned MSRs. When we look at our mortgage companies and operating businesses, we are a top 5 non-bank originator and servicer in the business. One thing I want to be clear about, we are not about size; we are about profitability. So as we go forward, if we originate fewer loans, that’s what we will do. We want to ensure that we make money for our shareholders and support our customers. We have an industry-leading business purpose lender in Genesis, which I just referred to. Our single-family rental business continues to grow, and then we have some complementary operating businesses, including title, appraisal, and a great property preservation business named Guardian. Financial results for the quarter, GAAP net income $661.9 million or $1.37 per diluted share; core earnings $177.4 million or $0.37 per diluted share; book value, $12.56 per common share; first quarter common stock dividend, $0.25; cash and liquidity, $1.7 billion; net equity, $7.1 billion. Business highlights on Page 5, the company today is positioned to perform. We always use this line across all interest rate environments. I will tell you today we are positioned for much higher rates. MSRs, as I pointed out before, $626 billion, an industry-leading MSR portfolio, will go up in value as rates rise. We saw the results of that in the first quarter. Our origination franchise continues – will continue to be focused on purchase and recapture, Baron will talk to that in a little bit. Assets that we have on our balance sheet that have positive duration are all hedged against rising rates. When we look at shareholder returns for the quarter, book value up approximately 10%; shareholder return for the quarter, up approximately 5%; our customer base, 3.2 million customers. We do a great job supporting our customers. As I pointed out earlier, we are looking for more ways to support them, and that will likely be through other types of products and down the road as we continue to expand our financial services company, anything is possible. When we look at our capital markets and financing capabilities, currently, 99% of our portfolio is non-daily mark-to-market. That’s away from our agency mortgage business. We closed five securitizations during the quarter, which represents $1.5 billion of collateral. Cash and liquidity, again, $1.7 billion, we continue to work with third parties, including our banking partners and insurance companies to establish new financing lines and capacity across all of our operating businesses. ROE and profitability, we continue to focus on reducing our expenses. As pointed out earlier, our $175 million to $200 million expense save initially quoted when we did the Caliber deal will likely be significantly higher as we go forward. The integration of NewRez and Caliber continues and that will be complete by the end of Q2. Page 6 is really just our strategic evolution of the company and how it was built and formed. It was spun out of Newcastle in 2013, really just to acquire excess MSRs and other residential assets. Over the years, we have grown into a real operating company on the mortgage side. We have added business purpose lending. We have added other complementary businesses in the financial services sector. I am excited for the future, and I will tell you that we have only just begun. The macro environment, there are no secrets here. Inflation is at multiyear highs. The Fed is going to raise rates; we believe, 50 basis points this week. The geopolitical uncertainties continue to add to market volatility and macroeconomic concerns. I pointed out where 2-year and 10-year treasury yields, what they have done in the quarter. Credit spreads, once again, have widened significantly, double where they were in the fourth quarter of ‘21. On the housing market, housing inventory remains extremely low. Price growth continues to increase. Affordability is under pressure, and this should lead to a much better market on the SFR side. We will be patient, however, in acquiring units at appropriate cap rates. And just to point out, when we look at the SFR business, we do not factor in HPA; we think about rent growth down the road and a great securitization market. We like where we currently sit in that business. Our overall experience in the markets, we have a very seasoned investment management team who has seen not only these current challenges in the markets, we have seen The Great Recession; we have seen, obviously, the 2020 March period during COVID; and we think we can handle anything. We continue to learn from difficult markets. Our balance sheet, again, $1.7 billion of cash and liquidity. We will continue to maintain an opportunistic approach to investments in capital allocation, prioritizing return on equity goals to be the best, not just the biggest. Page 8 shows you how we performed really in the first quarter as you think about the company. Mortgage rates rose, treasury yields rose rapidly in the first quarter, driving our MSR portfolio much higher. We will have much lower amortization as we progress. Earnings overall in the segment, origination pre-tax income, $25 million in the quarter, that will continue to remain under pressure. Book value growth will continue, from $12.56 at the end of Q1 to $13.5 today. Looking at core earnings, very, very stable core earnings, if you look across where we are today, citing a $0.37 core earnings number for the first quarter of ‘22. Page 9 shows our ability to manufacture assets. We do not need to go out in the marketplace and compete against others to buy assets. What we listed here is the total addressable market and what we believe across the different mortgage products; agency origination for ‘22, we expect to be in and around $2.5 trillion, the non-agency origination market in and around $600 billion, and business purpose lending about $500 billion. Below that, you can see our different operating companies, NewRez/Caliber, and then to the right side of the page, you will see Genesis Capital, which is our business purpose lender. Page 10 discusses our playbook. A large portfolio of MSRs will go up in value, again, complementary operating businesses, industry-leading origination franchises across not only the single-family residential business but also in the business lending market. And then as we look into ‘22, I have been vocal about getting into the commercial real estate space. We are going to be patient. We have some opportunities ahead of us, and we are very excited about what the opportunities will be as we go forward. I’ll now flip to Page 12, just to talk about our business and investment summary. When you look at our business across all the different verticals that we have or things that we can do here, we are a top five mortgage banking originator with many different channels, servicing, leading non-bank mortgage servicer, combined servicing owns about $625 billion, of which $400 billion is serviced in-house. We have MSR-related investments. We have MSR serviced by third parties. We love that asset in this rate environment. From a real estate standpoint, our bond businesses, when you look back to the first quarter, we did very little on the investment side with the markets being extremely choppy. We expect that to remain constant as we move forward until the market settles down. Page 13 presents some interesting stats about our MSR portfolio. Only 4% of our full MSR portfolio is in the money to refinance. If you go back to ‘20 or ‘21, that number was up towards 40%. Our newly originated MSRs this quarter had an average mortgage rate of 3.33%. A lot of those mortgages were originated in the fourth quarter. From an MSR front, I am not going to reiterate my earlier points. Let’s move on to Page 15 and just talk about our single-family rental business. Today, we have roughly 3,500 units. Our average cost basis is $255,000. We are positioned across 19 markets in 12 states. Our average cap rate is 5%. We are going to maintain discipline around our cap rates; stabilized occupancy stands at 98%. When we look at rent growth, we continue to see good rent growth in the area of approximately 5%. This business will grow over time. There are not a lot of activities on the call rights sector, as market volatilities prevent us from calling deals that the economics simply don’t warrant; thus, we will continue to build up more cash as we go forward. Page 17, our servicer advance business, has not a lot to talk about; servicer advances were down to $3.1 billion, which is down 7% from December. We have plenty of capacity. We do an excellent job in financing that business. I am now going to turn it over to Baron, who will talk about the mortgage company, and then we will come back for some Q&A.
Baron Silverstein, President of NewRez and Caliber
Thanks Mike. Good morning, everyone. As Michael mentioned earlier, the current macro environment has changed dramatically over the last few months. The sharp increase in interest rates has certainly slowed refinance volumes and is pressuring origination margins overall. However, for NewRez and Caliber, coupled with our partnership with NRZ, the market environment proves the benefits of a balanced origination and servicing business. It’s shown in our performance for the first quarter with pre-tax income of $787 million, which includes an MSR mark-to-market gain of $631 million. We originated approximately $27 billion in funded volumes, which is a 29% decline quarter-over-quarter and increased our servicing portfolio to $497 billion notional servicing balances. With our reduction in originations, our MSR and sub-servicing will continue to provide stabilization in a higher interest rate market. Over the past two quarters, we have been talking about our integration progress of NewRez and Caliber, and we continue to see successes through implementing best practices between both companies. We expect to exceed our initial run-rate synergies target of $175 million to $200 million by the end of the year, and we will have finalized our origination channel integration by the end of the second quarter, as Michael talked about. But now our focus has shifted to aligning our business to the current environment. We continue to take steps to lower our overall costs and be disciplined in managing our capacity, while ensuring we deliver the best experience for our employees, customers, and partners. Even with the current origination headwinds, we continue to evaluate opportunities in our sector to maximize the value in our platform. Turning to Slide 19, the origination division ended the first quarter with approximately $26 million in pre-tax income and approximately $27 billion in pull-through adjusted lock volume, which is a decline of 74% and 20% respectively quarter-over-quarter. Regarding margins, there is further detail on Slide 32 in the appendix; we continue to see pressure in all channels. In our direct-to-consumer channel, we were able to maintain our margins with only a slight decline throughout the first quarter. The interest rate spike in April has further compressed margins, but still above historical averages for the channel. Our distributed retail and joint venture platform saw a 17% drop in margins quarter-over-quarter, which coupled with seasonal factors has added to the competitive pressures in this division. However, we have seen some easing in April as the spring buying season continues. The wholesale division has maintained margins quarter-over-quarter, benefiting from approximately 20% of our funded volume coming from our non-QM product. Similar to other channels, lower volumes and increased competition have driven correspondent lending margins lower. Our platform there is highly scalable, and we have been able to maintain the margins quickly, and we are noticing flattening in April as well. While our decline in pre-tax income reflects the current market conditions and these margin pressures, it also reflects our strategy of focusing on ROE while being disciplined, patient, and taking advantage of pricing opportunities when they arise. Turning to Slide 20. We have an incredible origination platform, and we’ve proven to be able to grow our purchase volume and market share. We will continue to do so through opportunistic partnerships, new joint ventures, and the expansion of our retail platform. Our growth strategy also includes a focus in alignment with the FHFA, affordable housing targets, and expansion in our local footprint. Continued growth of our non-QM program throughout all channels, growth of our product set; and Michael talked about this in our partnership with Genesis Capital through fix-and-flip renovation and construction of firm, which will help our LOs referral partners succeed in their respective markets; and expansion of our ancillary and title businesses within our own platform and also adding new third-party accounts. Our purchase-focused platform, coupled with product partnerships and investment in tech is the path to succeed in this environment. On Slide 21, the Servicing division ended the first quarter with approximately $762 million in pre-tax income, predominantly driven by the mark-to-market gain. As Michael previously talked about, the size of our MSR portfolio will remain positioned to benefit from higher interest rates and lower amortization. We also increased the size of our direct service portfolio by approximately 3% quarter-over-quarter, including an increase of our subservicing portfolio by approximately 9%. We’ve remained focused on growing our subservicing portfolio, showing in our results for the first quarter and in our clients’ confidence in us and our focus on helping homeowners stay in their homes. We have a lot of opportunity in our servicing business, and with the new residential MSRs, we have approximately 3.2 million homeowners to assist throughout their homeownership journey. On Slide 22, talking about recapture, you’ll see that our refinance recapture rates have remained strong quarter-over-quarter. While rates continue to rise, we’ve also seen the percentage of direct-to-consumer cash-out refinances continue to rise, which based upon April production now exceeds 75%. Since over half of our customer base now has at least 40% equity in their home, we are launching a new HELOC product that will target our servicing customers and allow homeowners to retain their existing low-rate mortgage while allowing them to tap into their home equity for home expansion, renovations, or otherwise. We expect this to be a successful product launch and also benefit us in retaining our customer base. Beginning in the second quarter, our plan is to strategically distribute leads across channels to utilize our local network and partner channels to maximize purchase and refinance outcomes. The key being, as we continue to mature our relationships with our homeowners, we will also be able to take a higher share of opportunities by offering additional products and services, including recapture in the future. On that, Michael, back to you.
Michael Nierenberg, CEO
Thanks, Baron. Just two quick slides or a couple of quick comments. Page 23 is really just about our operating companies. This will grow over time as – again, as I pointed out, we will be in the commercial space. Once the markets settle down, we have a couple of things we’re working on that we’re very excited about. And then finally, on Page 24, how we think of ourselves and set ourselves apart. We like to think of ourselves as not just a REIT, but really an investment manager allocating capital appropriately across different investment strategies. No need to continue to talk about the MSR portfolio. Cash and liquidity, I think this is a really important note. $1.7 billion of cash and liquidity today. If you go back a couple of years ago, if we deployed $1 billion of that $1.7 billion and just think about it this way, if we deployed that, let's call it a, even using a 12% levered return, that would be an extra $120 million a year in earnings. So if you think about that with roughly 480 million shares or 470 million shares, it’s substantial – that would be a substantial pickup to core earnings in our business. We’re simply not going to go there because we do think we will be rewarded having a much larger cash and liquidity on our balance sheet today as we move forward. Our ability to manufacture assets, I think that truly differentiates us. We will be extremely prudent. We are in a horrible market for mortgage origination. It’s only going to get worse. Gain on sale will only get worse. You’re going to see a lot of folks actually have to really pull back in that business. Thus, that will create some great opportunities for us on the MSR side. We haven’t seen a ton of it yet, but I do think that will come going forward. As we think about our track record, being a steward of shareholder capital, we really care about making returns. Our numbers are good. And with that, I’ll turn it back to the operator, and we can open up for Q&A.
Operator, Operator
And our first question will come from Bose George of KBW. Please go ahead.
Bose George, Analyst
Hi, everyone. Good morning. Thanks for the book value update. I was just curious, what does that imply in terms of servicing valuations? And then how much room is left for further MSR valuation increases, if we see rates continue to trend up?
Michael Nierenberg, CEO
So at the end of the quarter, Bose, our weighted average MSR multiple was approximately 4.5 or 4.49. As we look forward, taking the 10-year treasury rate, which at the end of March 31 was 2.34. If we go up 100 basis points, I quoted a book value of approximately 13.5 today, up 100 basis points, we project an MSR multiple of about 4.89, and the change in book value would be $700 million. Some amount of that is already captured, but you’d likely get to somewhere between $14 and $15 in book value on the company.
Bose George, Analyst
Okay. Great, thanks, that’s helpful. And then on your subservicing contract with Ocwen that ends, I think, in July. I mean, is there any benefit to moving that stuff to your own platform or is that just too delinquent? Or just how do you think that plays out?
Michael Nierenberg, CEO
Obviously, we have a good working relationship with Ocwen. I think there is more to come. We will likely keep the portfolio with Ocwen. We have discussions with them frequently on that, and I think you’ll see something hopefully in the near future come out on that.
Bose George, Analyst
Okay, thanks. And then just actually one more. On servicing technology, have you made plans about consolidating onto one platform or where is that progressing?
Michael Nierenberg, CEO
So we’re currently on two different platforms. One is Service Director, which is the legacy Shellpoint system. Then when we acquired Caliber, Caliber essentially fired Sagent and went to MSP. We’re currently in discussions, as you could imagine, with a number of different parties regarding what would be best for our company and what we think will be best for the market, and there could be some equity component that comes along with that. We’ve had discussions with all the likely players in the marketplace, and we will continue to do so, and we hope to have a decision on that shortly.
Bose George, Analyst
Okay. Great. Thanks a lot.
Operator, Operator
The next question comes from Kevin Barker of Piper Sandler. Please go ahead.
Kevin Barker, Analyst
Good morning. Thank you. Could you discuss some of the initiatives that you’re putting in place to reduce operating expenses in the origination channel? And whether you’ve considered bigger structural changes, whether that’s reducing the number of channels you’re in or just focusing on retail and correspondent? I was just wondering if there is anything structurally you’re looking at on the origination side in order to sustain profitability? I understand you have a significant amount of cost synergies that are coming in place from the Caliber merger. You also alluded to additional cost saves there, but obviously, it’s a very difficult environment. Anything you can add as far as what you’re looking at on the origination side?
Baron Silverstein, President of NewRez and Caliber
Look, everything – Kevin, everything is on the table from the perspective of us to make sure that we maintain profitability. Our view is, and that includes from our technology perspective, from – and how we evaluate each of our businesses. So, we like the ability to be in all four channels. We want to ensure that each of our channels is profitable on a fully loaded perspective. That is where we are today, and our expectation is that, as I talked about, as we continue to drive additional products, as we continue to build out additional partnerships with our existing partners and continue growth is the way that we will succeed.
Michael Nierenberg, CEO
And Kevin, just on that front, Baron spoke about fully loaded units. Every single day, we look at each channel to say, does that break even or make money? Part of the calculus, when you think about where we are in this business, we will get – we’ve gotten significantly smaller over the first quarter and into the second quarter on the origination business. Each unit we produce, we want to make sure that the channel in that unit is making money when you fully allocate corporate and all expenses to that channel. To the extent that we don’t think we can make money in that channel, we will either pull back significantly or will get out. We pulled back significantly; our volumes are down a lot. In my earlier comments about this being a horrible market for mortgage origination, I think that continues as we move forward because there is so much capacity in the system, as we all know, and people are going to be fighting for units. That’s not going to be us. We will roll out different products. I mentioned before about – Baron mentioned HELOC, we have non-QM jumbo, and maybe some of the other things. I would like to see us become a full-scale financial services company, rolling out other types of products to our customers, which I think could offset the decline you’re going to see in gains in the origination business. We’re not going to do something for the sake of doing it to compete against some of the larger originators in the market. We don’t need to compete for a conventional loan or a Ginnie Mae loan, unless – the other – the flip side of that could be is we love the MSR value, and we think it’s going to go up limits. Now on the MSR value side, we all know at some point that they get capped because they have negative convexity; they only go up so high. Where we are now, in Bose’s question about essentially our market 4.5, we think there is plenty of room to go. At some point, we need to be extremely mindful that we don’t think they are going to go up a ton more and the risk-reward is skewed to the downside.
Kevin Barker, Analyst
I mean just a follow-up on those comments. The servicing multiples that we’re seeing in the market today, approaching 5x, in some cases, transactions that are pushing 6x servicing fee. I mean do you feel like it’s – you’re getting to a point where you could start hedging or putting in place some type of instruments to protect the value given that we’re, I would say, probably the highest servicing multiples we’ve seen post-financial crisis?
Michael Nierenberg, CEO
Yes. No, it’s a good question. The – there is room to go. New production MSRs have, I think, have a five handle right now on the conventional side. If you think about it, if you put a hedge, if you get long an instrument against that and the 10-year goes to 4%, the Fed funds go to – I’m looking at some charts this morning, Fed – their projection is that Fed funds rate goes to north of 4% in 2024. If you look at the Fed futures, the implied Fed futures, we go to 3.5% in the middle of, call it, ‘23, getting along a fixed income asset that has duration will just go down in value. It will protect you if the market goes the other way. I think in that case, I’d rather keep more cash reallocated to, I pointed out, in the investment business. You could generate – we think right now, if we deploy capital with proper financing, we’re going to be able to deploy capital in kind of a mid-teens type return. So I think we need – this is where we go back to being an investment manager and not a REIT. We have to think about how we deploy capital across the different paradigms. We’re not just going to originate mortgages to originate mortgages and take on undue risk.
Kevin Barker, Analyst
Yes. I’m just saying like could you buy a significant amount of ADC MBS at this point and – by utilizing that cash to buy those assets that would probably have a countercyclical type asset class versus the MSR while still retaining some yield?
Michael Nierenberg, CEO
Well, think about it this way. You’re originating an MSR, let’s say, 5.5 you get long a Fannie 3% coupon, that 5.5 will go to 6 and your Fannie coupon is going to go down 10 points. So I don’t – I mean at some point, we may get there if we think we go into recession, quite frankly. But right now, we’re not going to fight the Fed, and we’re not going to fight what treasury is going to do around the mortgage basis.
Kevin Barker, Analyst
Okay. Thank you for the questions. Thank you, Michael.
Michael Nierenberg, CEO
Thank you.
Operator, Operator
The next question comes from Eric Hagen of BTIG. Please go ahead.
Eric Hagen, Analyst
Hi, thanks. Good morning, a nice quarter. Do you guys have any perspective on the liquidity and capital rules which FHFA and Ginnie Mae are in the process of modifying right now? And how that might drive the approach to capital management, if at all?
Michael Nierenberg, CEO
Why don’t we let Nick handle that one?
Nick Santoro, CFO
Sure. I’m sure you’ve read the FHFA all the comment letters that have gone back. As the industry has put out the expectation is as written, the rules would increase capital, call it, 3x current requirements. We believe the FHFA is listening to the industry, and those requirements will come down. We’re comfortable with our liquidity position in meeting the requirements as written, and the requirements as we ultimately think will align.
Eric Hagen, Analyst
Great, thank you. And then with MSRs appreciating in value, is there the opportunity to achieve a higher advance rate on those assets with secured funding? And can you remind us of the current secured funding, how much is fixed versus floating?
Michael Nierenberg, CEO
So the answer to your first question is yes. As the value of the asset goes up, theoretically, your LTV is going down. So you could create more equity. Thus, when you look at our $7.1 billion of net equity at the end of the quarter, a lot of that has been due to the MSR asset. When we look at our funding, essentially most of it is – it’s either – most of it’s in the capital markets that’s fixed. We do have some stuff with some of our banking partners, which is either locked in with fixed or it is floating. On the other side, we have strategic interest rate hedges on our own balance sheet, which offset the rise that we’re seeing in the Fed funds rate. So, leading to that same question in my comments earlier about us hedging our fixed-rate or assets that have duration with interest rate swaps. Our entire balance sheet has interest rate swaps, which will protect us towards higher rates. That also is applicable to our Genesis business where when you look at those loans, they are fabulous. They are give or take 8% coupon, initially your 7%, 8% floating rate loans. As they sit on our balance sheet, we get ready for their securitization or working with our banking friends from a financing standpoint, we have hedges to protect us in the front end as we do believe Fed funds are going to continue to increase. So across all of our different asset classes that we have, we’re biased more to the short side. But if we thought we’re going to enter into a recession, we would just immediately adapt to a longer rate bias. Right now, I think everything is protected on the balance sheet from an interest rate hedge standpoint; our financings with our bank friends are protected as we have these assets on our balance sheet with front-end swaps, so we feel that we’re more than covered or more than protected for the rate environment we’re in.
Eric Hagen, Analyst
That’s very helpful. Thanks, Michael.
Michael Nierenberg, CEO
Thanks, Eric.
Operator, Operator
The next question comes from Doug Harter of Credit Suisse. Please go ahead.
Doug Harter, Analyst
Thanks. Michael, I was hoping you could just help quantify. You said you want to run with kind of more liquidity; just I guess how should we think about how much of that $1.7 billion of cash and liquidity today is kind of investable? How much of that are you kind of saving to be opportunistic if there are deals that come around or would you kind of put it into the teens returns that you see available today?
Michael Nierenberg, CEO
Yes. I think, listen, of the $1.7 billion, could it be $1 billion that could be investable? Yes. Would we invest $1 billion in today’s market, the answer is no. I am not sure that the worst of what we have seen is over. I am just looking at some quotes as we are on this call; Paul Tudor Jones said, “This is the worst investing environment,” he thinks, for bonds and equities that he has seen based on the Fed being in play and what’s going on in the world. We are likely not just going to go out and spend money. I do think we will diversify away from some of the single-family residential stuff over time. The commercial space, again, I keep harping on that; we are going to be very patient in that space. We are making some strategic investments there, small amounts, and some commercial real estate debt and things like that. But it’s going to be patients we want to get rewarded. We want to think about our balance sheet today as when we do put out that capital, one is the financing has to be great and two is that the rewards have to be 15% to 20% returns as we go forward.
Doug Harter, Analyst
And just on the commercial, something you have talked about. I guess do you feel like you have the right investment team kind of in-house already, or is that something that might require kind of an investment in – or an acquisition to kind of get the right team?
Michael Nierenberg, CEO
Yes. No, there is – listen, we have great resources on the NRZ side. But investing in the commercial real estate space will come with some folks. So, people that we’ve known for a long time who have a great proven track record, who know how to make either LP’s money or shareholders’ money. So, our team here is terrific, but it’s going to – we will bring in more expertise around the business.
Doug Harter, Analyst
Great. Thank you.
Michael Nierenberg, CEO
Thank you, Doug.
Operator, Operator
The next question comes from Stephen Laws of Raymond James. Please go ahead.
Stephen Laws, Analyst
Hi. Good morning. I wanted to follow up on Kevin’s question about the expenses. The sequential decline, can you talk about how much of that is tied to variable compensation related to the decline in loan originations? How much of that decline was the synergies that you guys have been able to achieve so far? And as we think about from here, are there other steps you can take, or what the industry kind of overcapacity, should we expect to see more formal headcount reductions across the sector with where the outlook for mortgage volumes are today?
Michael Nierenberg, CEO
Yes. Why don’t I take the last part of your question, and then I will refer to Baron and Nick on the – on what we have realized so far. The mortgage origination business, when we look back to 2020, we were hiring 500 people a month to keep up with volumes. Most of those folks sat at home from a remote perspective because you needed folks to process loans. If we look at last year, we did $180 billion of origination. This year, we will do $80-ish billion or something, and I don’t want to just quote a number there because it’s going to be about profitability. If we thought we can make money and reduce our costs, we would originate more mortgages. I think the industry itself, every day you read another snippet, whether it be on Housing Wire or some other bridge that people are letting people go. It’s going to get smaller. There is just too much capacity in the system. For those folks that don’t reduce their headcount, what you are going to see is they are going to compete for units to try to make up for, or to substantiate headcount. As a result, there is going to be very little money to be made per unit. We have taken the approach to make sure, one, we reduce our headcount, two, synergies. One thing we didn’t mention before, and I think we probably mentioned in a prior call, we hired Neenu Kainth from – who has a lot of experience. She worked with Cooper on the digital marketing side. She is leading our effort there. So, when we think about our ability to either reduce costs or drive savings in technology, Neenu coupled with our Head of Technology, Dino Lack, we are pretty excited about those two folks and their groups. You’ve got to get synergies out of your business. You’ve got to create more efficiency, but you’re going to see headcount get smaller across the industry. We have made significant cuts. We don’t want to be those folks, but we need to get our business right-sized for the current environment and just move forward. Baron, maybe you want to take that kind of where we are?
Baron Silverstein, President of NewRez and Caliber
Yes. So, Michael did talk about it as where we were at $140 million, what I call run rate synergies. You obviously see even in our origination business, our overall expense rate from a run rate perspective is down $90 million quarter-over-quarter. We expect to see that number continue to drop as we forecast where we think originations are headed for the rest of the year. Regarding what I will call fixed versus variable, I would recommend just having a follow-up call and we can have a discussion on that.
Stephen Laws, Analyst
Excellent. Look forward to that. As a second question, it looked like you did your first SFR securitization, your first residential transitional loan securitization. Can you talk about market reception for those? Obviously, the volatile rate spread environment, how you look at those markets and availability and pricing going forward as you continue to grow in SFR and the resi transitional loans?
Michael Nierenberg, CEO
Yes. I think one is the reception to our securitization was great. The advance rate on those assets creates a truly – once you are fully leased up, north of a 20% ROE for that pool of assets. The one thing that’s really important, Stephen, is that when we look at our business, we want to make sure that we assume the capital markets are shutdown. So, when we look at the volatility that we saw in the first quarter, and that’s why we called, I think $80 million in loans, when we think about volatility, we want to ensure that all of our financing is extremely buttoned up that if there is no capital markets, how do we protect our balance sheet? That’s the way we are running our business today. We will have another securitization probably in the late this quarter, probably into the third quarter as we acquire more units. But just to be clear, we are very, very small from an overall unit standpoint; we are roughly 3,500 units. The amount of total equity in the business is small today. But we are really looking to grow that. We are in some talks with some folks about adding resources and adding operating capacity. We have some very good relationships in the industry, and this will be a big growth area for us as we move forward. We would like to – with housing affordability decreasing, we do think that cap rates need to go up a little bit. Therefore, our entry points should be quite favorable as we move forward.
Stephen Laws, Analyst
I appreciate the comments this morning.
Michael Nierenberg, CEO
Thank you.
Operator, Operator
The next question comes from Giuliano Bologna of Compass Point. Please go ahead.
Giuliano Bologna, Analyst
Good morning and congrats on a great quarter. One of the areas I was curious about just picking your brains on those – on the custodial deposit side. I am curious if you disclosed the size of your custodian deposit portfolio on the servicing side. The reason for that is just to get a sense of how big it is and how – and kind of the direction of the size of that portfolio to get a sense of what kind of upside you might be able to have from short rates moving higher and obviously getting some additional carry income on those deposits?
Nick Santoro, CFO
Hi Giuliano, it’s Nick. Our custodial balances, we don’t disclose them in our financials, but they do run about $13 billion to $15 billion on average.
Michael Nierenberg, CEO
To your question, if the Fed is more aggressive and raises rates in a more, we will call it, extreme fashion you will see higher float income off our deposits.
Giuliano Bologna, Analyst
That’s right. That was kind of what I was going to the – just like to get some of the different pieces of the model, that’s an upside and yes. As short rates move higher, obviously, if we move 150 bps to 200 bps, that’s a material impact on $13 billion to $15 billion.
Nick Santoro, CFO
The pickup in value, Giuliano, as you know, is embedded in our MSR value.
Giuliano Bologna, Analyst
That’s right. And then shifting topics a little bit. I realize that a couple asked very similar questions around potentially hedging or how they think about MSR values as they reach kind of closer to peak values from – in terms of looking back over the last 10 years to 15 years or so. I would be curious from your perspective, there are a lot of platforms out there; there are even a handful of public companies that are out there that have MSR portfolios may be interesting that are marked by market lower than where you have your MSRs marked, and you also have some unique origination platforms showing a discount. Would you – do you have a preference or do you have any interest in adding more origination capabilities, or do you need something very unique on the origination side to add more capabilities there, or are you more asset-focused at this point?
Michael Nierenberg, CEO
We have all the pieces that we need at this point. If there was a great kind of distressed opportunity on the origination side, of course, we would pursue it. I think it goes back to the earlier comments about capital allocation matters. We are not a mortgage company; we are an investment manager. We are not a REIT. So as we think about deploying capital across financial services, for example, we have a property preservation business, named Guardian, which has a lot of third-party clients. Those guys do a great job. And that’s an example of something that’s not where we need to go out and just buy assets; we need to go out and buy another operating company. That company will grow. Assuming that if the economy does go into recession at some point, the earnings in that company will continue to grow, and that’s just a cash-on-cash business. The most important thing I would like to get across or one of the more important things to get across on this call, we are sitting on a lot of cash and liquidity. We don’t need to just go spend it. Our core run rate will likely be in the area of where we currently are, and book value should continue to grow. But capital allocation is a big deal. Just because you are in the mortgage business doesn’t mean that you have to take $1 billion and go buy another mortgage origination platform or buy MSRs at a six multiple. If the opportunity comes our way, we will do that. But it’s more about how do we diversify, one. Two, and how do we deploy capital in a more meaningful way that’s going to drive higher core earnings and higher returns for shareholders. I think that’s the point to get across.
Giuliano Bologna, Analyst
That’s great. I really appreciate the answer and questions. I will jump back in the queue.
Michael Nierenberg, CEO
Thank you.
Operator, Operator
The next question comes from Trevor Cranston of JMP Securities. Please go ahead.
Trevor Cranston, Analyst
Hey. Thanks. One more question related to MSR valuations. You mentioned the possibility of more MSR coming out for sale as mortgage companies potentially struggle more over the course of the year. Can you talk about how much upside you guys would have for adding sort of the low coupon MSR that’s been originated over the last couple of years? More generally, how would you see returns on bulk MSR purchases today versus other asset classes you might be able to deploy capital into? Thanks.
Michael Nierenberg, CEO
Trevor, it all comes back to returns. Are we going to buy a 3% gross WAC MSR at 6.5 multiple? I don’t think so. But if we could buy them at the right levels and we think we could get mid-teens returns because we can deploy that same capital in a different way in mid-teens returns, I think that’s really what it’s going to come down to. We will add MSRs if we think the value is there, but we don’t need to add anymore. We’ve got $625 billion between excess and full. Can we grow that, the answer is yes. Will we? Yes, we can grow it organically through our origination business. One of the things we look at every day is we say, 'Okay, what’s our breakeven on the MSR portfolio, where can we originate that unit? How do we think about the macro environment going forward?' If we think the macro environment is going to sell off, then it just comes down to saying, 'Okay, can we produce that unit fully loaded at this yield? How does that compare to, for example, when Charles Sorrentino is looking at the broader NRZ investment universe, how does that compare to him deploying capital, for example, in a AAA security on a levered basis, that’s going to be 15?' It all depends on – and again, it goes back to the capital allocation thing, or is there an operating business that may be in the commercial real estate side or on the consumer side that we think we are going to generate 20%-plus outsized returns. So it’s not just a growing MSR business; it’s not just to grow mortgage companies; it’s not just to grow a single-family bond business. It’s really how do we create value for shareholders and think of us as a total return manager with your capital.
Trevor Cranston, Analyst
Yes. Okay. It makes sense. Thank you.
Michael Nierenberg, CEO
Thank you.
Operator, Operator
The next question comes from Courtney Bahlman of Barclays. Please go ahead.
Courtney Bahlman, Analyst
Hey guys. Thanks for the time here and for the questions. Really just getting in the weeds, is there any color that you might be able to provide with regards to how the quarter panned out with regards to monthly cadence pertaining to origination volumes? Obviously, the first quarter was super volatile. We started the quarter with a third year; it was 3.25%. Throughout March, we averaged about 4.5%, huge difference there and one of the things that the market and I am trying to gauge just how sticky this consumer is on the purchase side? In the past, we have seen demand drop off around that 4%, 4.5% area, and this consumer seems much more resilient to me. Do you guys have any thoughts there? And then also, any color on how April is trending so far? Really appreciate it. Thank you.
Michael Nierenberg, CEO
I think on the consumer side, yes, it’s – the consumer is resilient. If you look at home price appreciation for the first quarter, I think the numbers were like 13% or something across the country. I – listen, I am not an economist, and we obviously read a lot into where we are. The unemployment rate continues to remain lower. People project that to go even lower as folks drop out of the workforce because they don’t want to work or they are of age and retiring. I do think right now, mortgage rates are in and around 5.5%. If you think about it this way, going back to the fourth quarter, mortgage rates have doubled; the average payment for a homeowner is doubled, and home prices are up 13% in the first quarter. I do think at some point that will impact the consumer, and you will have some slowdown. That’s just my own personal opinion. So far, the trends have been, I think where the consumer is pretty strong; you’ve seen a lot of folks rush in to acquire homes in the first quarter with the expectation that mortgage rates are going up. But right now, the consumer seems pretty healthy. The flip side of that is you couple a $5 cup of coffee at Starbucks, $5 a gallon for gas; mortgage rates double. At some point, it has to impact the consumer. If you look at the mortgage banking industry with the number of folks that are actually leaving the system, I do think at some point it plays on the consumer. We haven’t seen it yet; the consumer remains strong, probably worth looking at the data from a BofA or JPMorgan that have a large swath of data around their card business.
Courtney Bahlman, Analyst
Alright. Thank you. Any color with regards to monthly cadence in the quarter? Anything even directionally would be appreciated. Thank you.
Michael Nierenberg, CEO
Yes. I mean...
Baron Silverstein, President of NewRez and Caliber
We put in the forecast already that our expectation is that our funded volume will be somewhere between 17 to 22. We expect to be somewhere in that higher end of that range. But that’s the guidance that we provided.
Michael Nierenberg, CEO
And it’s what relates to profitability; it’s not about the volume number. We did $25 million in the first quarter. We project $80 billion to $90 billion or something like that for the full year. That number could be 50; that number could be 150. It depends – we have the machine to do it. It just depends on how much money that we think we can make for shareholders on each unit and what kind of service we can provide to the homeowner.
Courtney Bahlman, Analyst
Yes. Understood. Thanks guys.
Michael Nierenberg, CEO
Thank you.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks.
Michael Nierenberg, CEO
Thanks to everybody for your questions and for joining the call this morning. I look forward to hopefully performing for everybody as we go through the course of the year. Stay well, and we are around for any follow-up questions. Have a great day.
Operator, Operator
The conference is now concluded. Thank you for attending today’s presentation. And you may now disconnect.