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Mr. Cooper Group Inc (NASDAQ:COOP)
Q3 2019 Earnings Call
Oct 31, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by and welcome to the Mr Cooper's Q3, 2019 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker, Mr. Ken Posner.

Please go ahead, sir.

Ken Posner -- Senior Vice President, Strategic Planning & Investor Relations

Good morning and welcome to Mr. Cooper Group's third-quarter earnings call. My name is Ken Posner and I am SVP of strategic planning and investor relations. With me today is Jay Bray, chairman and CEO; and Chris Marshall, vice chairman and CFO.

As a quick reminder, we'll be referring to slides that can be accessed on our Investor Relations webpage at investors.mrcoopergroup.com. This call is being recorded. During the call, we may refer to non-GAAP measures, which are reconciled as GAAP results in the appendix to the slide deck. And finally, during the call, we may make forward-looking statements and you should understand that these statements could be affected by risk factors that we've identified in our 10-K and other SEC filings.

Further, we are not undertaking any commitment to update these statements if conditions change. I'll now turn the call over to Jay.

Jay Bray -- Chairman and Chief Executive Officer

Thanks, Ken and good morning everyone and welcome to our call. I'm going to start by reviewing the highlights of the quarter on Slide 6. We reported net income of $83 million or $0.90 per share, which was reduced by a mark to market of $83 million and very strong pre-tax operating income of $171 million. The key thing for us this quarter was the continued strong performance of our origination segment, which generated a $178 million in pre-tax earnings on a record $11.9 billion in funded loans.

We benefited from favorable market conditions, which as you can see in our gain on sale margins as well as the fact that locks, we're still running ahead of fundings. But at the same time, these results reflect extremely strong execution. In the last two quarters, we scaled up faster than the rest of the industry and we produced stronger margins, too. Strong execution as a result of investments we've made in the last few years, ranging from creation of the home advisor team to the acquisition of Pacific Union.

Stronger origination capabilities make our overall business model more balanced and more profitable than it was in the past. Of course, we all know that refinance conditions depend on the interest rate environment, which is why we're very focused on driving further progress in servicing in zone. The servicing portfolio was stable during the third quarter, which is very much in line with our guidance. And you all know we were able to replenish the UPB this quarter solely from originations, flow relationships and also sub-servicing without having to make bulk MSR acquisitions, which is an important milestone for us.

As you would expect, higher prepayment speeds impacted the servicing margin, which averaged 6.2 basis points for the quarter excluding the mark and tightened spending. I'm very pleased with our execution at zone, which reported pre-tax operating income of $13 million, up from $10 million last quarter. As we have commented back in September, Assurant cross the breakeven point in July and is now making money. Late last year, we made a decision to slow down the integration of Assurant to make sure that we deliver a smooth transition to our third-party clients.

And while this decision was painful in the short term, it was absolutely the right call. And today zone is back on track with our original expectations. For this quarter, I would highlight strong results and the title unit, which is benefiting from refinance conditions and I am very encouraged by continued third-party client wins at the auction exchange. Our cash flow was very strong in the quarter and as a result, the ratio of debt to EBITDA dropped to 4.1 times, which is below the target of five times we established earlier this year.

Additionally as we communicated recently, the company called $100 million in single notes, which settled in early October, which was another step in our direction of strengthening the balance sheet. While we feel confident in servicing our debt, we also believe that further deleveraging will drive stronger profitability and stronger cash flow and provide greater financial flexibility. Finally on Slide 6, I wanted to make sure that you saw that Mr. Cooper Group was certified as a great place to work.

I also like to share with you that in this quarter, we reported the lowest number of customer complaints in the company's history. I firmly believe that our culture, which extends to how we treat teammates, customers and other stakeholders will be a key determinant of our long-term success and I'm really pleased with these two accomplishments. If you'll turn to Slide 7, I'd like to talk about this quarter in the broader context of our strategic priorities. As you recall in our fourth quarter call last year, we told you, 2019 would be a year during which we take a pause from growth to focus on integration, deleveraging and improving profitability.

Since then, we've completed the integrations of the tariffs and Pacific Union and those acquisitions are delivering the results we anticipated. With respect to Assurant, we've integrated the field services and title units and the back office and we will complete the integration of the valuations unit in the first quarter of next year. Turning to profitability, Titan is on schedule. The investment spending should be minimal after next quarter and the projects are starting to deliver benefits.

We're also moving forward with a series of corporate actions designed to take $50 million out of the expense run rate. After growing the portfolio at a 40% compound annual growth rate over the last decade, these corporate actions are designed to proactively identify opportunities to realize efficiencies and we are now moving forward aggressively in areas like technology, use of consultants and overall staffing. And then as I just mentioned, we're making progress on the deleveraging plan, taking advantage of strong cash flows to retire debt ahead of schedule. Earlier this year, we shared with you a target of producing consistent and sustainable returns on equity of 12% or higher.

This quarter, we significantly exceeded that go on both in operating and GAAP basis, but we know that the refinanced conditions won't persist. As we look ahead, some of the key things for 2020 are likely to include strengthening of the balance sheet, driving further improvement in the cost structure, a thoughtful approach to growth, and improving the customer experience. And on that note, I'll turn the call over to Chris.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Thanks, Jay. Good morning, everyone. I'm going to start with a high-level review of results on Slide 8. On a GAAP basis, we reported net income of $83 million or $0.90 per share, which reflects pre-tax income of $107 million, a mark to market of $83 million, an intangible amortization of $12 million, an intangible book value increased from $15.95 to $16.88 per share at quarter-end.

Pretax operating income was very strong at $171 million and consistent with prior disclosures, we calculated operating income by taking out the interest rate related mark on our MSR, believing that portion of the mark attributable to amortizing the excess of fair value over cost. That difference was $32 million in the third quarter. We also added back intangible amortization. And finally we took out adjustments totaling $1 million, which included a $4 million gain from remeasuring the contingent consideration associated with the Assurant acquisition.

You may recall, we had a similar gain in the first quarter. This liability is now zero. So you won't see any further adjustments here. The other adjustment was a $5 million charge in the corporate segment for severance which relates to the corporate actions we mentioned on our call last quarter.

You should expect additional charges related to our corporate actions of approximately $10 million in the fourth quarter. Now I want to comment on those two other items, which we're not treating as adjustments, but I'd like to call them out, so they don't cause you any confusion as you go through our results. During the quarter, we collapsed a securitization trust and sell off the related loans, which we carried in our corporate segment as a legacy portfolio dating back to 2009, which produced a $21 million benefit. We allocated $10 million of that benefit to the corporate segment, which is where those loans were carried as non-core assets and $11 million to the servicing segment, which has had the responsibility for ongoing management of those loans since 2009 and which performed all the work related to the collapse of securitization.

In the corporate segment, there was also a $10 million reserve associated with the legacy business unit that's in the process of being shut down. Now let's turn to Slide 9 and discuss the mark, the carrying value of our MSR portfolio. During the quarter, we had a total mark of $83 million, which reflected the impact on our MSR of the 12 basis point decline in mortgage rates during this quarter, which you'll see in the 10-Q as an increase in the lifetime CPR assumption which moved from 13.7% to 13.9%. Offsetting the mark on the MSR was a mark on the excess spread liability, where we increased the discount rate to reflect recent comparable valuations we're seeing in the marketplace right now.

We commented last quarter on the opportunity to help our customers save money through refinancing their mortgages and with the additional reduction in rate since then. We estimate that as of quarter-end, 1 million or fully one-quarter of our customers would save on average $220 a month by refinancing. So that suggests that there is a huge opportunity for direct-to-consumer channel, even after two quarters of extremely strong funding volumes. Now let's turn to Slide 10 to talk about originations, which once again contributed record results in fact EBT was $178 million, up from $118 million in the second quarter on record funded volume of $11.9 billion.

Funded volume was up 19% sequentially and in line with the market. But since the refi boom began, we've dramatically outperformed with our volumes up 131% year over year compared to 30% for the market. The margin was very strong at 132 basis points, which is up from 90 basis points last quarter. This is partly a reflection of the refinance environment, which you can see in our gain on sale margins, which expanded by nearly 30 basis points sequentially and partly a reflection of strong expense leverage, especially in the direct-to-consumer channel with the origination margin remains above 200 basis points.

I want to comment on our recapture ratio, which you may have noticed on Slide 5, declined to 38% in the quarter. The reason for this decline is that we're being very disciplined and how we add capacity and during the last refinance boom in 2016, our recapture rate was at a similar level or approximately 40%. We'd expect the recapture rate to increase when refinance volumes begin to slow down. Looking ahead, based on our pipeline and the current interest rate outlook, we're expecting strong fundings to continue into the fourth quarter.

However, we expect to see rate locks decline as we have the typical seasonal slowdown in the fourth quarter of the holidays and the slower purchase market and pay off requests are already starting to slow down. As a reminder, rate locks drive revenues, while fundings drive expenses and therefore we would expect the overall margin to contract in the fourth quarter. As we think about 2020, I comment that we're now seeing industry capacity start to build back up again and accordingly, we're planning for more normal market conditions next year. Now let's turn to Slide 11 and review portfolio growth.

Total UPB ended the quarter at $641 billion, which is consistent with our prior guidance that we would take a pause from growth this year as we focused on integration profitability and deleveraging on a positive note, despite CPRs of 17.5% we're still able to sustain the portfolio without any both acquisitions. Thanks to extremely strong originations, as well as flow relationships and growth in sub-servicing netting out the portion of run-off economically attributable to the exits spread co-investors. We estimate the replenishment rate in the Ford owned MSR at 99%, which is consistent with last quarter and almost double the level of a year ago. Finally, the reverse portfolio continues to run off.

It was down 22% year over year and now accounts for less than 4% of the portfolio. Now let's turn to the servicing margin on Slide 12, which we've historically discussed. Excluding the full mark and tightening expenses and on that basis, it was 6.2 basis points in the third quarter, down from 6.7 basis points in the second quarter, which should not be a surprise, given this impact of higher CPR on amortization. I want to give you an update on project Titan, which is a major investment project designed to drive improved profitability and a better customer experience Titan spending in the quarter was $7 million, down from $11 million last quarter and we remain on schedule to complete most of the remaining spend by the end of the year.

In terms of benefits. I'd call out roughly $5 million this quarter coming from several, several different projects including instant pay off course productivity tools for the modification steam and optimization projects involving legacy mortgage trials. As we roll into 2020 we'll wrap up. Titan, but there'll be other investment projects with similar goals, and including profitability and further enhancements to the customer experience, which we regard as critical to our long-term success.

Instead of breaking out the spend will manage total servicing expenses as part of our plan to achieve and consistently sustain the 12% ROTC target for the company as a whole. It's still very premature to offer guidance on 2020. But what I'd emphasize is that while originations and servicing segment earnings can experience volatility when interest rates change when you look at them together. Much of that volatility is offsetting so we're confident that's two segments together will generate a relatively steady and stable base of earnings and cash flow in the fourth quarter and into next year.

Now turning to Zone, which you'll see on Slide 13 we saw excellent progress this quarter with pre-tax operating income, up sequentially from $10 million to $13 million highlights of the quarter in Zone include getting assurance from losing money to contributing positive results strong refinance driven order flow in the total unit and traction at the auction exchange with new third-party clients, which is helping offset the drag from the low delinquency environment. Over the next few months, we'll be working on integrating valuations unit, which is the last remaining integration from a churn as well as improving execution in each of the business units and going after more market share. What's exciting about the opportunity to win new clients cross sell multiple services to existing clients and grow wallet share by out executing the competition. We're very confident in the $50 million guidance and pre-tax operating income for 2020 that we've already shared with you and as a reminder, those earnings don't require capital, so these are very accretive to our ROTCE.

So let's wrap up on Slide 14 with a review of leverage and liquidity. And as you recall, earlier this year we shared with you a target of bringing debt so adjusted EBITDA down to five times or below with the review that a lower level of leverage will improve our profitability and financial flexibility. During the 3rd quarter, our EBITDA was very strong. Thanks to the profitability in the origination segment and as a result, the debt to EBITDA ratio fell to 4.1 times, which achieved that goal.

During September, we announced the retirement of $100 million in senior notes due in 2021, which settled in early October, we expect to continue retiring senior notes. Although as we've pointed out previously, we plan to do so on an opportunistic basis rather than a steady cadence and during certain periods, we may choose to build liquidity earlier this year we shared with you a metric called steady state discretionary cash flow which is the amount of cash available. Once we sustain the MSR asset at its current level net of excess spread on that basis, steady state cash flow increased from $93 million in the Q2 $170 million in the Q3, which reflects the strong performance in our originations segment as well as our contribution of the Trust collapse. As a reminder, steady state is an illustrative metrics and it doesn't include impact of March or any working capital fluctuations.

During the Q3 our cash balances increased more at the time, we paid down roughly $50 million in operating lines on a discretionary basis. So with that, I'll turn it back to Ken throughout things up.

Ken Posner -- Senior Vice President, Strategic Planning & Investor Relations

Thanks, Chris. I'm going to ask our operator to start the Q&A session.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from Doug Harter with Credit Suisse.

Doug Harter -- Credit Suisse -- Analyst

Thanks.

Jay Bray -- Chairman and Chief Executive Officer

Good morning, Doug.

Doug Harter -- Credit Suisse -- Analyst

Good morning. Can you talk about your plans for cash flow in the fourth quarter 2020 now that you've kind of integrated the servicing acquisitions and brought leverage down kind of below your targets? Just how you're prioritizing cash flow now.

Jay Bray -- Chairman and Chief Executive Officer

Well, I think if I'm hearing your question correctly, is how we are prioritizing to do with our cash flow and that still is to delever. We've talked about paying back the debt that is due in 2021 as our highest priority use for cash flow and that hasn't changed.

Doug Harter -- Credit Suisse -- Analyst

Got it. I then, I guess, how do you -- growth opportunities, kind of in the current context along with that repayment of the 2021?

Jay Bray -- Chairman and Chief Executive Officer

Well, I think as we make more progress on the 2021, we think it's certain point next year, we will have done that. We will be a little more active in the acquisition market. But I think if you look at what we've done this year, even though you've taken a pause from any large bulk acquisitions, our UPB is up significantly, and that's the benefits of our flow arrangements and our growth in sub-servicing, and that will continue. But if you're asking specifically about buying pools, I think as we get into 2020 and make more progress on deleveraging, that will become a more important part of our go-forward plan.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes, I think, Doug, -- this is Jay. Obviously, we're in a really good spot. If you look at the replenishment rate, right, it is at a great level today. From an economic standpoint, we're still replenishing close to a 100% of the run-off.

I think there is -- we've had some recent wins in the sub-servicing area where folks I think are really starting to see the benefits of our recapture capability and so you have some financial buyers that are moving portfolios to us because of our recapture capability. So I think you'll see a lot of opportunity in sub-servicing. And then from an acquisition standpoint, look, I think in [Inaudible] land Fannie, Freddie, I don't think the returns are necessarily where we would want to invest capital today anyway. To Chris's point, [Inaudible] 2020 and look for opportunities, but I like where we're at today.

I'd like -- the origination platform is kind of hitting on all cylinders, corresponding channel is actually performing quite well and has a good mix of purchase and refi, and our platform can grow further. I mean, at the end of the day, we can continue to expand that look at some of the investments we're making within the origination platform. We're driving efficiencies and we're driving lean more leads and more submissions and home advisor in as we've talked about before, is just a home run. It's up 115% quarter over quarter.

So feel really good about our organic capability.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Bose George with KBW.

Bose George -- KBW -- Analyst

Yes, good morning. Actually, I just wanted to go back to the point, Chris made, just on the $21 million benefit. Can you just go over that again was that, is that going through the opex and servicing and corporate.

Chris Marshall -- Vice Chairman and Chief Financial Officer

The $21 million benefit from the Trust upscale?

Bose George -- KBW -- Analyst

Yeah, from the Trust collapse, yes.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes, that was allocated. This is -- I'm not sure how, what we actually included in our release, but this was a Trust collapse and resecuritization of non-core pool that had been sort of parked at corporate but as always been serviced by servicing. And so the $21 million gain was allocated between those two segments. And the way we traditionally do that is we first recapture any cost or overhead that have been allocated, basically cover any lost that's been recorded and then the rest of the revenue is allocated to servicing.

So I think it was but it was $10 million in corporate in $11 million in servicing.

Jay Bray -- Chairman and Chief Executive Officer

And this was in 2009 -- it goes all the way back in time, Bose, to the portfolio that we had back in 2009 that we actually securitize at that point in time and it eventually hit a cleanup call point where we can clean it up and and did so accordingly.

Bose George -- KBW -- Analyst

OK. And then the $10 million that you and Chris referred to as well. Could you just go over that again?

Chris Marshall -- Vice Chairman and Chief Financial Officer

The $10 million. I'm sorry. The $10 million that was the accrual at corporate?

Bose George -- KBW -- Analyst

Yes.

Chris Marshall -- Vice Chairman and Chief Financial Officer

That is -- that was a general legal accrual associated with a small unit that we are in the process of discontinuing and some of it is for some current litigation and some of, for some anticipated additional legal costs.

Bose George -- KBW -- Analyst

OK. So that $10 million kind of offset the other $10 million benefit?

Chris Marshall -- Vice Chairman and Chief Financial Officer

It did. That's right.

Bose George -- KBW -- Analyst

OK.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes, corporate was -- outside of those two things, corporate was right in line with our guidance from last quarter.

Bose George -- KBW -- Analyst

OK. And then in terms of the cleanup call opportunity is there more of this stuff that we could see periodically kind of benefiting in earnings?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Actually, yes, we have to a couple of other cleanup some unfortunately they don't have $21 million gains with them. I think there'll be small amounts of money. They do -- they will contribute cash, but they're -- it's not -- they're not huge numbers. So we will do these from time to time.

And there are occasions when they, they generate a little bit more P&L benefit. I think we had 1 earlier in the Q2, but that was in, I think the high-single digit millions. So this was a fairly robust pool benefit.

Bose George -- KBW -- Analyst

OK. Great. And actually just one more. The -- just you might be the size of the DTA valuation allowance? And just, obviously you've had a few profitable quarters is when does the accountants kind of revisit the potential reversal of that valuation allowance?

Chris Marshall -- Vice Chairman and Chief Financial Officer

We do it in the fourth quarter. We would traditionally do that it's also when we complete our tax return and this year is really the first year. We're employing some tax planning strategies. And so we have a lot to talk about when we announced the fourth quarter but I do think our improved profitability and the combination of that and our tax planning strategies says we have some opportunity to potentially reduce the valuation allowance, which I'd remind you is roughly $300 million.

The overall balance. I don't have it right in front me but it's roughly $1 billion.

Bose George -- KBW -- Analyst

OK. Great. Thank you.

Operator

Thank you. Our next question comes from Mark Hammond with Bank of America.

Mark Hammond -- Bank of America Merrill Lynch -- Analyst

Thanks, Hi, Jay, Chris and Ken. On your debt -- would you think about next year. So if, for the year 2021. If the 21s came out, on today's LTM EBITDA, you'd be a turn lower at 3.1 times, and that's pretty well below the target.

So you hit your target and your surpassed it now. And then maybe even further. So then after that. The question comes up in my mind is what's the right.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, I don't want to in anyway, take away from what was a great quarter across the board, but we're also very aware that we're enjoying the benefits of a very significant refinance boom and we want to hit a target and sustain the target. So I think we'll think more about that as we get to maybe the midpoint of next year and see how we continue to do. We have a big backlog of customers that will benefit from refinancing. So we -- as long as rates don't move materially, we should continue to see very strong and stable profitability through next year, but I don't think it's likely we're going to pivot away from our plan to reduce that -- the total, $592 million of debt do we paid down $100 million.

I think you should expect us to continue to pay that down, as we've said. However, we will look at various opportunities to take out that amount of senior debt. And that can change in time. It'll change if we see big opportunities.

But right now we think it's not just a matter of hitting the target is providing us greater financial flexibility to a number of things. And we would like to operate with that flexibility, as much as just with the lower a lower debt level.

Jay Bray -- Chairman and Chief Executive Officer

And I think we said previously that one of our goals is to get to the pre-merger kind of debt level. So if you think about it over the next, between 2021, we'd like to get back to where we're at from a pre-merger standpoint. To effectively take out 600, we'll be at that level. So I don't know if you were asking more of a longer-term question or not but --

Chris Marshall -- Vice Chairman and Chief Financial Officer

I'd just add the other part of it is our debts expenses. And so by taking it out, we think will be much better position to restructure some of the remaining debt at much more attractive prices, and that's important to us long-term.

Mark Hammond -- Bank of America Merrill Lynch -- Analyst

Got it, that makes sense. Pivoting more to an industry question, just wondering if you could share your thoughts on the recent news that [Inaudible] and the Department of Justice signed a memorandum of understanding around the False Claims Act that's supposed to encourage banks to reenter the FHA space. I guess, what do you make of that?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes, I think it's -- look, I think where we're great partners was [Inaudible] and [Inaudible]. Obviously, we're big fans of their programs and their products and I think the announcement is great. I think it's a good first step. I think how do we think about the bank's long term.

Still when you look at the customer profile of certainly some of the mix within [Inaudible], it probably doesn't fit within the bank. The banks target customer base. It depends on the bank and doesn't fit necessarily in their footprint. So I don't know that we see the bank's rushing back in, but I think it's a great first step.

And I welcome it and I think the industry welcomes and we're excited about it where there drives a lot more bank participation. I think we'll just have to kind of wait and see on there.

Mark Hammond -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks. That's all I've got, Jay, Chris, and Ken. Thanks.

Jay Bray -- Chairman and Chief Executive Officer

Thank you.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Thank you, Mark.

Operator

Thank you. Our next question comes from Giuliano Bologna with BTIG.

Giuliano Bologna -- BTIG -- Analyst

Good morning and congratulations on a great quarter.

Jay Bray -- Chairman and Chief Executive Officer

Thank you, Giuliano. Appreciate it. Good morning.

Giuliano Bologna -- BTIG -- Analyst

So one of the things I was wanted to touch on that's a little bit more of a cleanup question, is there a fairly large change in working capital during the quarter. As a way to think about that, I think you mentioned paying down some of the lines, but is there anything else that kind of flowed into that number?

Jay Bray -- Chairman and Chief Executive Officer

I think you'll see higher originations and usually warehouse lines during the quarter is the biggest item. That's the only single big change quarter over quarter.

Giuliano Bologna -- BTIG -- Analyst

That makes sense. And I think in the past there been a couple mentioned potential opportunities to release some working capital from a few other initiatives. Has any progress on that front or is there anything slowing in from that side?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I don't think there's any big development there. We have been paying down lines a little bit less this quarter than last quarter. But I think you'll see us paying down our MSR lines but certainly making greater use of our warehouse facilities. Net net, I'm not sure it will net out to a big change, but the cost is different between those two types of facilities.

So we are saving interest, interest expense as we go.

Giuliano Bologna -- BTIG -- Analyst

That sounds good. And the only other question is on the leverage side of the platform. Obviously, you're getting the benefit of originations right now, but are there -- would there be any opportunities down the line to look at refinancing some of the structure? And I appreciate that the call dates are a little bit further out and are extensive but is there -- would there be an opportunity to unwind to kind of in more of a global refi?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I definitely think that that is very much in our plans is to pay down the 2021s and then look at what opportunities we have to restructure, extend the maturities, and bring the overall cost down. Again the 2021s are 608 and the '23s and '24s are at eighth and eighth and nine and eighth. So it is pretty expensive debt and we think looking at levels today, if we were to restructure today, we could bring that down considerably. So that is very much what we're planning to do.

But of course, a lot can change between now and at that point, maybe at the end of next year.

Jay Bray -- Chairman and Chief Executive Officer

It's something we are have an active dialog around quite frequently and we would intend to do that, to Chris' point, depending on market conditions and performance going forward, but it makes a ton of sense to relook at that stack and drive costs down and get the maturities to the levels that we want them in.

Giuliano Bologna -- BTIG -- Analyst

That makes a lot of sense. That was all from me. For now, and I really appreciate the time.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Thank you, Giuliano.

Operator

Thank you. Our next question comes from Henry Coffey with Wedbush.

Henry Coffey -- Wedbush Securities -- Analyst

Good morning, everyone. And let me add my congratulations. It's been an amazing amount of work that's going on this year. I was wondering if you can expand on the $83 million MSR mark.

I know you said you had the basic mark against the MSR and then you had some changes related to the charges on the discount. I mean, the charges on the financing. So could you kind of expand on the details behind that?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. Well, actually I think the discount rates changed across the board, but just they were much more significant on the ESL --

Henry Coffey -- Wedbush Securities -- Analyst

And what is the rate?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Henry, there are different rates for each product type and so there will be in the queue, which we'll file tomorrow. So happy to go through them offline.

Henry Coffey -- Wedbush Securities -- Analyst

No, I can get it. That's easy. It's --

Chris Marshall -- Vice Chairman and Chief Financial Officer

But there is more of a change in the ESL and I think that was driven by the more significant volatility in rates this quarter and what we saw in market comparables, but we use a third-party to value that. And so I think quarter to quarter, we look at the market. If there aren't significant changes will stick with our discount rate. I think this quarter it was much more of a significant swing, but we are happy to go through that with you tomorrow.

After we release.

Henry Coffey -- Wedbush Securities -- Analyst

Well, the $83 million, the major components of that were the MSR mark and the ESL mark. Can you give us those numbers?

Chris Marshall -- Vice Chairman and Chief Financial Officer

The ESL offsets the MSR mark.

Henry Coffey -- Wedbush Securities -- Analyst

Yes, I know,

Chris Marshall -- Vice Chairman and Chief Financial Officer

[Inaudible] and then within the $83 million, there was $51 million due to interest rates. The balance was due to the difference of the their value to cost. Is that what you're asking me?

Henry Coffey -- Wedbush Securities -- Analyst

What was the MSR mark and what was the ESL offsetting number? I mean, I know it's in the Q, I was just trying to get it --

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes.

Henry Coffey -- Wedbush Securities -- Analyst

I can get it later. Don't worry.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. We can -- if you want to call --

Henry Coffey -- Wedbush Securities -- Analyst

I'll call later, don't worry. And then in terms of your MSR, obviously, the -- I'm sorry, your origination margins obviously correspondent is a great way to build servicing a very, very low cost of origination and that's why I kind of like the fact that you're guiding toward that combined margin, but what are gain on sale in the two product areas look like?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I have overall gain on sale. I don't know if we have --

Henry Coffey -- Wedbush Securities -- Analyst

What was that number?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I would say two --

Jay Bray -- Chairman and Chief Executive Officer

I think it's over 200.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes, it's over 200 basis points. [Inaudible] specific question was gain on sale. Henry, let us give you those numbers right after the call.

Henry Coffey -- Wedbush Securities -- Analyst

Super. And then finally just -- it seems like all your cash flow is going to be dedicated to paying down debt over the next couple of years. In your discussions with the GSEs and the FHFA, and I know you're much more involved in the dialogue, and the conference is going on in as we speak. There has been a lot of chatter coming out of the FHFA about bringing new parties in, increasing credit risk transfer etc.

In your conversations with both Washington in the street, are there any concrete efforts? Is there anyone out there saying I'm going to put up capital, and this is what it's going to look like. Have you heard anything of substance besides all the political wins back and forth?

Jay Bray -- Chairman and Chief Executive Officer

No, I think even -- I think at some of the meetings acting MBA, I think the independent mortgage bankers meetings, executive meetings, I think there was a discussion with respect to [Inaudible] and I think they are gathering information, right? They've done a lot of work around that with different issuers, but publicly, they say, these are just more information gathering exercises and more kind of else to consider, but there is nothing absolutely, Henry that I think they really decided on or nothing that -- no action that they're going to take with respect to that process. I think it's more and I think this is a good thing, it's more keeping them informed of the different types of issuers, the different types of different capital, warehouse lines, all the different aspects of what makes up the different issuers, but there is nothing absolute that's come out from any of the agencies that we've seen.

Henry Coffey -- Wedbush Securities -- Analyst

Have you ever thought of issuing your own CRT bonds, given that you've got a good service or you're a good originator? You probably know your own product better than the next guy.

Jay Bray -- Chairman and Chief Executive Officer

Yes, we're actually spending time on that now. It's something that historically we've thought about it. Now we're actually doing quite a bit of work on it and it's something we're considering.

Henry Coffey -- Wedbush Securities -- Analyst

Could you issue those bonds?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Henry, just to come back --

Henry Coffey -- Wedbush Securities -- Analyst

I'm sorry.

Chris Marshall -- Vice Chairman and Chief Financial Officer

I'm sorry. I thought you were done. I was going to come back to MSR. The MSR mark was 195 and was offset by $112 million improvement in the ESL.

Henry Coffey -- Wedbush Securities -- Analyst

Great. Thank you very much. Just, Jay, one last question on the CRT bonds. Could you sort of issue create your own and then transfer them to a REIT? Some other REITs like --

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes.

Henry Coffey -- Wedbush Securities -- Analyst

I don't know, we'll call it NRG or some other REIT, two Harbors. So you can create the bond, but you wouldn't have to hold the bond and then you could move it to somebody else.

Jay Bray -- Chairman and Chief Executive Officer

Yes. I think that's right.

Henry Coffey -- Wedbush Securities -- Analyst

OK. Thank you.

Jay Bray -- Chairman and Chief Executive Officer

Yes. And then on the originations, Henry, I don't know if you were asking specifically gain on sale or pre-tax margin, and we tend to look at margin. But the overall pre-tax margin for origination, which is in the presentation was 132 basis points and which was up quite a bit from the second quarter and I think the direct-to-consumer channel was over, too. And so I don't know if that answers your questions around the margin --

Henry Coffey -- Wedbush Securities -- Analyst

No, it helps. Thank you.

Jay Bray -- Chairman and Chief Executive Officer

Sure.

Operator

Thank you. Our next question comes from Kevin Barker with Piper Jaffray.

Kevin Barker -- Piper Jaffray -- Analyst

Good morning.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Good morning, Kevin.

Kevin Barker -- Piper Jaffray -- Analyst

Yes. In the servicing segment, where do you think you could sustain pre-tax earnings per UPB once amortization comes down and some of the one timer's start to settle out and that come through mostly?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, we've said in the past that we think core profitability in the -- on servicing platform is somewhere five basis points or below fives but that's really a hard number to nail down. First of all, when you say the one-timers come down or stop coming through -- we've had them every quarter, this quarter and last year so -- and we have a number of items that are slated to occur next year. Just the timing of them are difficult to predict. So I think it's, it would be a little misleading for me to say that we expect servicing profitability to drop to five basis points when CPRs come down.

And of course, that depends where do CPRs end up. I mean, right now they're double from where they were a year -- even in the first quarter I think, to more than double. So if they return to eight or nine, our profitability is going to be better. If they stabilize at 12 or 13, it's going to be a little worse.

So it's a difficult number to give you real clear guidance on when we would hit that, but I don't think it's low probability that we may have a quarter from time to time, where we don't have something come through and see our profitability fall into the fives, especially with CPRs at such elevated rates. At the end of the day though, I think we feel very confident that we've got the lowest-cost platform with lots of ability to leverage it. And that combined with the investments we're making in automation of the servicing workstream says that hopefully over time, we'll be able to reduce costs there in advance of some of those one-time things running out. So we feel good about the profitability of servicing platform over the long-term.

Kevin Barker -- Piper Jaffray -- Analyst

OK. And then it's that like OREO expense dropped considerably. It's been about $25 million below the quarterly average over the last several quarters. Was there anything in particular that caused the foreclosure expense to drop?

Chris Marshall -- Vice Chairman and Chief Financial Officer

There are really two things there. One is the book, the reverse book is running down. It really is curtailment losses coming down. We have a new leader and an outstanding leader, who has joined us and is running reverse force now, Jay Jones, and he has had a laser-like focused on improving our forecasted curtailment losses.

So we're seeing the benefit of that flow through. And actually overall servicing expenses are down in the quarter and the big drivers were reduction in curtailment expenses and of course you're seeing Project Titan flow through on the servicing side. We'll see a lot more then in 2020.

Kevin Barker -- Piper Jaffray -- Analyst

So the $21 million drop quarter over quarter and foreclosure was all due to project tightening and some of the changes that are going on from the -- in which --

Chris Marshall -- Vice Chairman and Chief Financial Officer

Improvements in the reverse book.

Kevin Barker -- Piper Jaffray -- Analyst

OK. And then also on the ancillary revenue that tick up to $48 million, was that all due to the trust collapse or did that come somewhere else? And then also the servicing interest income was also very high at around $15 million to $20 million above the typical run rate. Was there something else that came through there as well?

Chris Marshall -- Vice Chairman and Chief Financial Officer

First of all, it wasn't all trust collapse. Trust collapsed contributed --

Jay Bray -- Chairman and Chief Executive Officer

It was $16 million.

Chris Marshall -- Vice Chairman and Chief Financial Officer

$21 million.

Jay Bray -- Chairman and Chief Executive Officer

It was at $16 million contribution from the trust collapse and revenue and that was offset by a $5 million expense.

Chris Marshall -- Vice Chairman and Chief Financial Officer

And I don't know of any other noteworthy --

Kevin Barker -- Piper Jaffray -- Analyst

I think when you look at the ancillaries that they were up overall.

Chris Marshall -- Vice Chairman and Chief Financial Officer

And prepays, as we have more prepays, you gather more ancillary.

Jay Bray -- Chairman and Chief Executive Officer

Yes. And so I think just a function of caption as fees from the additional prepayments. And then just general late fee etc. were up quarter over quarter.

Kevin Barker -- Piper Jaffray -- Analyst

OK and then the interest income will come through sort of -- will the trust collapse come through interest income?

Jay Bray -- Chairman and Chief Executive Officer

[Inaudible] revenues.

Kevin Barker -- Piper Jaffray -- Analyst

OK.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Did you hear that, Kevin?

Kevin Barker -- Piper Jaffray -- Analyst

Yes, I got it. Yes, OK. That's all I had. Thank you.

Jay Bray -- Chairman and Chief Executive Officer

Thank you, Kevin.

Operator

Speakers, I am showing no further questions in the queue at this time, I would now like to turn the call back over to you for any closing remarks.

Jay Bray -- Chairman and Chief Executive Officer

Great. Really appreciate everybody joining this morning and we'll be available for questions after. Thank you. Have a great day.

Operator

[Operator signoff]

Duration: 50 minutes

Call participants:

Ken Posner -- Senior Vice President, Strategic Planning & Investor Relations

Jay Bray -- Chairman and Chief Executive Officer

Chris Marshall -- Vice Chairman and Chief Financial Officer

Doug Harter -- Credit Suisse -- Analyst

Bose George -- KBW -- Analyst

Mark Hammond -- Bank of America Merrill Lynch -- Analyst

Giuliano Bologna -- BTIG -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

Kevin Barker -- Piper Jaffray -- Analyst

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