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Mr. Cooper Group Inc (NASDAQ:COOP)
Q1 2020 Earnings Call
Apr 30, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Thank you for standing by and welcome to the Mr. Cooper's Group's fourth-quarter 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 today to Kenneth Posner, senior vice president of strategic planning and investor relations.

Thank you. Please go ahead, sir.

Kenneth Posner -- Senior Vice President of Strategic Planning and Investor Relations

Good morning, and welcome to Mr. Cooper Group's fourth-quarter earnings call. My name is Ken Posner and I'm the senior vice president 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. Also this call is being recorded. During the call, we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck. And finally, during the call, we may make forward-looking statements.

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've reported net income of $461 million or $4.95 per share. These results included a $285 million benefit from releasing the valuation allowance against the deferred tax asset, a mark-to-market gain of $102 million and very strong pre-tax operating income of $125 million equivalent to 21% ROTCE.

Once again, the origination segment produced excellent results. With $138 million in pre-tax earnings on a record $12.6 billion in funded loans and a margin of 1.1%, which was right in line with the update we provided in December. The servicing portfolio was stable during the fourth quarter, which demonstrated our ability to replenish the portfolio with originations as there were no bulk acquisitions in the quarter. In fact, there haven't been any bulk acquisitions since the first quarter.

Xome we reported another solid quarter with pre-tax operating income increasing to $14 million, thanks to strong momentum in the title unit, which is benefiting from refinances. Finally, subsequent to quarter end, we called another $100 million of senior notes and issued $600 million in new seven-year notes, which allowed us to refinance the remaining maturities in 2021 and 2022. We were extremely happy with the market reception to this transaction. We had a 100% subscription rate following the non-deal roadshow.

The deal ended up being six times oversubscribed and the notes were priced at record tight spreads for a single B rated Financial Services issuer. Since the WMIH bond issuance in 2018, our spreads have come in by roughly 200 basis points, which we take as positive feedback from the market on our progress executing against our strategic goals. If you'll turn to Slide 7, I'd like to talk more about the company's strategic direction. As you recall in our fourth-quarter call last year, we told you we were going to take a pause from growth to focus on integration, deleveraging and improving profitability and that's exactly what we've done.

During 2019, we completed the integration of our three acquisitions, achieved our initial deleveraging target and significantly improved the company's overall profitability. Now the question in your mind is what's next and the answer is more of the same. As the management team and board of directors have reflected on our market position and competitive strengths, we've developed a series of strategic pillars that will guide the next chapter of Mr. Cooper story.

The overarching goal is to drive the stock up to tangible book value or higher and we will do this by positioning the company for sustainable long-term growth and by generating a consistent return on equity at or above our target of 12%. The first priority under these strategic pillars is strengthening the balance sheet to ensure Mr. Cooper continues to serve as a source of strength for the U.S. housing and mortgage markets, even if the economic environment turns adverse.

In this regard, we're planning over the next two to three years for the ratio of tangible net worth to assets to increase to 15% or higher. We expect to grow into this ratio by prioritizing the use of cash flow to retire senior notes on an opportunistic basis. A strong balance sheet also means robust liquidity. The $600 million refinance transaction cleared out our maturities through July 2023, which leaves us with liquidity runway of three and one-half years, which is a great position to be in should the environment deteriorate Now let's turn to Slide #8 and talk about the second major pillar of our strategic plan, which is to drive continuous improvement in our cost structure.

Put simply, as we think about Mr. Cooper's business model, we believe that the key to profitability is continued improvement in productivity. We regard this pillar as essential to sustaining ROTCE in the face of headwinds, such as the normalization of origination margins once capacity finally returns to the market. You've heard us talk about Project Titan, which was an initiative designed to improve the customer experience and drive meaningful cost savings as well as how the home advisor team boost recapture rates and improved profitability.

These are both examples of our focus on unit costs. The two charts on this page show you that we've made progress here in recent years, but not enough. Moving forward, each of our business segments has a mandate to drive down unit cost by 5% per year, year in and year out. Unit cost numbers may move around from quarter to quarter due to mixed changes or volumes and market conditions but you should expect us to share progress here over time.

You've also heard us talk about core productions, which represent various opportunities to streamline overhead cost. This kind of initiative will be ongoing. Finally, I'll comment on the three other pillars, which relate to our customers and our talents. These pillars don't link exactly to ROTCE or balance sheet metrics but they are absolutely critical to all aspects of our business and we will update you from time to time when there are accomplishments or issues of note.

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 our results on Slide 9. As you've seen, we reported a net income of $461 million on a GAAP basis, which is equal to $4.95 per share.

These results included the release of the valuation allowance against our deferred tax asset, which totaled $285 million. As you know, we assumed $6 billion of net operating losses in connection with the WMIH merger and based on our projections at the time we established a DTA of $1.2 billion with the allowance met to cover a portion of the NOLs, which we estimated would expire unutilized. In conducting our 2019 year-end review of the DTA, we concluded that the allowance was no longer appropriate due to the company's improved profitability and the implementation of a prudent tax planning strategy. Based on the DTA carrying value at year end, we expect to save $1.3 billion in federal tax payments over time, which means more cash for deleveraging, building liquidity or investing in growth.

Our GAAP results also benefited from a mark to market of $102 million, which I'll discuss in just a minute. But first, let's focus on pre-tax operating income, which was a healthy $125 million in the quarter, down from the record $171 million in the prior quarter as originations margins normalized. On a full tax basis, this was equivalent to a 21.1% return on tangible common equity, which is well above our long-term target of 12%. In terms of adjustments, we excluded $6 million in severance charges which were split evenly between Xome and corporate and we expect to see a similar level of severance expense this quarter.

There were some other notable items in the quarter which I'd like to point out. Servicing benefited from a $19 million recovery which shows up as a reduction in expenses. Also the corporate line included $7 million in cost associated with shutting down certain facilities and activities that are no longer core. This cost and the severance charges are part of the corporate initiatives we discussed with you last quarter, which were intended to streamline our operations and improve efficiency.

Now let's turn to Slide 10 and discuss the carrying value of our MSR portfolio and $102 million mark-to-market gain booked in the quarter. The mark to market primarily reflected the 10-basis-point increase in mortgage rates during the fourth quarter and the implications for slightly slower prepayment speeds which you'll see in the 10-K as a decrease in the lifetime CPR assumption from 13.9% to 13.1%. Also, the move in the short end of the curve helped, implying a stronger outlook for net interest income. As a result of these changes, the value of the MSR portfolio increased from 109 to 118 basis points which were similar to the change we've seen reported by others in the marketplace.

The current level of interest rates results in higher amortization expenses in our servicing portfolio but at the same time creates very favorable conditions for our DTC channel, which focuses on helping our existing customers refinance. Taking a look at our portfolio, we estimate that 1.1 million of our customers or 28% of the total are in a position to save roughly $200 per month if they refinanced right now, which we estimate is the equivalent of a two-year payback, which for most people is a pretty good deal. The sensitivity table shows you that absent a major rate move we'd expect volume in our DTC channel to remain strong for the foreseeable future. Let's turn to Slide 11 and talk about originations, which once again contributed excellent results with pre-tax earnings of $138 million in the fourth quarter on record fundings of $12.6 billion.

These results obviously reflect favorable market conditions but they also point to the investments we've made in recent years, including the creation of our home advisor unit, the acquisition of Pacific Union as well as important for the intangible factors like the culture of our people or disciplined operators and extremely innovative. As a result of this progress in originations, our overall business model is more balanced and more profitable than it was in the past cycles. The margin remains strong at 110 basis points, which is right in line with the update we provided in December. As you know, we book revenues when the loan is locked and recognize expenses when the loan is funded.

The third quarter margin of 132 basis points was unusually high because locks outpaced fundings, whereas in the fourth quarter locks and fundings are right in line with each other, which is why the margin dropped to a more normalized level. Since year-end, mortgage rates have declined by approximately 20 basis points and as a result, we've seen another surge in lock volumes. During January, total funded volume was $4 billion while locks we're starting to inch ahead at $4.1 billion. If this trend continues, then we would expect to see the margin to see some expansion.

Now let's turn to Slide 12 and review the servicing portfolio. Total UPB ended the quarter at $643 billion, which was flat with the third-quarter level and consistent with our guidance. Looking at the components of the portfolio, reverse and private label mortgages continue to run off while sub-servicing grew nicely and the owned portfolio was largely flat. Despite elevated prepayments, we estimate our net replenishment rate held in right around 100%, which indicates that our originations are broadly speaking sufficient to sustain the portfolio net of run-off attributable to co-investment partners without us having to pursue bulk MSR acquisitions.

As Jay pointed out, that's pretty much what you've seen in 2019 since we haven't made any bulk acquisitions since closing the Seterus deal in the first quarter. As we enter 2020 we're planning for the total servicing UPB to be roughly flat and whether we grow a little or shrink a little will probably depend on the performance of our sub-servicing partner. Let's turn to Slide 13 and review the servicing margin which will discuss excluding the full mark. On this basis, the servicing margin was 5.5 basis points down from 5.8 basis points in the third quarter due to higher CPRs which peaked at 19.1% during the quarter and which translated into much higher amortization.

This pressure was offset by a $19 million recovery for a prior servicer associated with the portfolio we acquired several years ago. This benefit flows through the reduction of foreclosure and other liquidation related expenses, which you can see in the appendix to the deck. The reverse portfolio is in run-off and not a material driver of results but it does introduce some variability into the margin due to the timing of recoveries and the impact of interest rates on the accounting treatment of financing costs. As you can see from the chart reverse contributed 0.3 basis points this quarter down from one basis point in the third quarter.

Finally, I comment that the delinquency trend remains very favorable with 60-day delinquencies dropping to 2%. Now turning to Xome on Slide 14 we were pleased with another solid quarter of performance with pre-tax operating income rising sequentially from $13 million to $14 million. The highlight of the quarter at Xome was a strong refinance driven order flow in our title unit. As we've commented previously, Assurant is now fully integrated except for efforts related to onboarding some customers to our new platforms.

That effort is on track and is being very carefully managed and feedback has been very positive. You will notice that the proportion of third-party revenues dipped slightly from 53% to 51% in the fourth quarter. This reflects the typical seasonal slowdown in field services and should start moving up again later in the spring. We announced in January that Mike Rawls has taken over as CEO Xome.

Mike is a highly respected member of our executive team, a 20-year veteran of the company and for the last five years, he's led the servicing operation. Mike brings vast experience and credibility to Xome and will play an instrumental role in revenue generation as we compete to win new clients and cross-sell multiple services to existing clients. We remain confident in the $50 million guidance and pre-tax operating income for 2020 that we've already shared with you. However, the first quarter is typically a seasonal low point so you'll likely see a dip in earnings next quarter.

Now let's wrap up on Slide 15 with a review of liquidity and capital. We ended the year with very strong liquidity which allowed us to pay down operating lines by $90 million. As some of you noticed, the FHFA recently came out with proposed new requirements for non-bank mortgage services. We are comfortably in compliance with these proposals and if they are implemented, we don't expect any impact to our business.

Earlier this year, we shared with you an illustrative metrics called steady-state discretionary cash flow, which is the amount of cash available once we've sustained the MSR asset at its current level, net of excess spread. For the fourth quarter, steady-state cash flow was $129 million. I'll reiterate Jay's comments on how pleased we were with the market reception to our senior notes issuance in January. As he pointed out, this transaction clears out our maturities through July 2023 providing us with a three and a half year liquidity runway, which is a very good position to be in.

As you'd expect, we're monitoring the market closely as we analyze alternatives for the 2023 maturities which become callable in July of this year and the 2026 maturities, which become callable next year. Tangible net worth assets were 11% at year end. As Jay mentioned, we're managing the company toward a 15% or higher target. Now that's not a magic number, but rather reflects the capital planning process we've undertaken recently which considered our current balance sheet and the results of our internal simulation and stress test models.

Until we get closer to that range, we'll continue to prioritize retiring our senior notes and building liquidity over acquisitions. We believe that putting the strongest operating platform in the industry on top of a very strong balance sheet is a good strategy that will result in a sustainable 12% or higher return on equity and the stock price at or above tangible book value. So with that, I'll turn it back to Ken for Q&A.

Kenneth Posner -- Senior Vice President of Strategic Planning and Investor Relations

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

Questions & Answers:


Operator

Thank you, sir. [Operator instructions] Our first question comes from Bose George from KBW. Please go ahead.

Bose George -- KKBW

Yeah. Good morning. So let me just start with one on servicing expenses. So even if we add back that $19 million that was called out, it looks like the run rate or line item would be $154 million, it's still down quite a bit from the third quarter.

So we've got a good run rate number. As noted, the servicing portfolio is likely to stay flat in 2020. If that's the case, should we close?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I'm sorry to interrupt you, but we're having a hard time hearing you. Could you --

Bose George -- KKBW

Sorry. Is that better?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. It is.

Bose George -- KKBW

OK, Chris. Yeah. I wanted to start with a question on servicing expenses. If you add back the $19 million that you called out, the run rate for that line item would be $154 million, which is still down from the third quarter.

So I just wanted to get some color on how we should think about that line item going into next year. Is that a pretty good run rate?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think you should think of the run rate for servicing to be at or about five basis points at the core, and it's going to vary off of that depending on one-time items which happen quite frequently and amortization which has really peaked last quarter. So absent the one-time item, yeah, the number would've been down by a modest amount because CPRs peaked at over 19%. And more normal, if you were to look at our servicing margin over the last, I don't know, eight quarters and excluded both -- I think we have a chart in the deck that we could go through with you if you were to exclude one-time items and applied more normalized amortization. I think you'd see the number hanging in pretty steadily at about five basis points.

So I think that's a pretty good outlook. Now we do have a number of one-time items that we're always working on and that very well could occur this quarter, and for that matter, every quarter this year. But I wouldn't want you to forecast them because the timing of them is very hard to estimate. Just like last quarter, we concluded a negotiation with a prior servicer for a portfolio we bought several years ago and we've been working on that settlement for probably two years.

So the timing of one of these things has come to closure and we booked the results, very hard to predict. So again, I'd go back to assume five basis points and that number will vary depending on amortization and those one-time items.

Jay Bray -- Chairman and Chief Executive Officer

Yeah. And I think, Bose, if you look quarter over quarter, quarter-over-quarter amortization was a big part of the story. I think it was $11 million or $12 million from third to fourth quarter. So I think that would explain a big piece of that and to Chris's point, five is a reasonable number.

I think we will have some one-time items. And candidly, from an operational standpoint, we're always looking for improvements as well, which could help that and I think we've identified some that will flow in throughout the year. So I think that's how you should think about it.

Bose George -- KKBW

OK. Great. Thanks. And so just on the reverse segment, what's normalized expectation from there, because that obviously seems to bounce around a little bit as well?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yeah. I don't think we expect to see any contribution from reverse over the course of the year. The businesses are runoff. And, in fact, it may be slightly negative as we are continuing to try to right-size the overhead with the dwindling asset base.

The variability that we mentioned, that's just related to the purchase accounting that occurred when we did the WMIH merger. And as we mark the bonds, those marks accelerate or slow down depending on interest rates. So you'll see a little bit of variability. But you should think of that as a business that'll break even or maybe be slightly negative, possibly slightly positive.

But as it's in the runoff, I don't think that's going to change much for the next couple of years.

Bose George -- KKBW

OK. That helps. Thanks. And then one last one.

Historically, you guys obviously were, I guess, negatively impacted by lower rates. Now you've grown with the mortgage bank quite a bit. How would you characterize your position? Would you say you're neutral to rates? And just what are your thoughts there just given the rally we have seen in rates?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I would say I'm not sure I can give you an exact answer there. Going forward, I'd say, if you look at what we did in, over the last year, we weren't neutral, in that our marks were higher than the operating profit that we generated out of our origination segment, but that's really timing driven. Over the long haul, we expect our origination segment to benefit from lower rates and to recover those marks and then some, but I'm not sure if I give you a definitive position on whether we're neutral or not, because I think you're asking that within a very specific time period.

Jay Bray -- Chairman and Chief Executive Officer

Yeah. I think, Bose, the way we think about it is, the mark is going to happen if you have an MSR mark, depending on where rates are at, it's going to happen at one point in time. And then the origination business, obviously, is going to benefit from that for multiple quarters. And as Chris alluded, I mean, we're seeing an incredibly strong January in the origination business and we expect that to continue.

So the way we think about it is, the mark is kind of a one-time event and then over the coming quarters, you're going to recover that through the origination business. Is it dollar for dollar? Obviously, time will tell and timing associated with that, but that's how we're thinking about it.

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think long term, if you look at the 1.1 million customers that are in the money, so to speak, if rates stabilized, clearly they're down this quarter. But if they were stable, and we had 1.1 million customers that we could refinance, we'd certainly make a lot of money for the foreseeable future.

Bose George -- KKBW

OK. That makes sense. And my question was really the longer term, because I understand the timing difference. But clearly, it looks like the one position to benefit longer term from --

Jay Bray -- Chairman and Chief Executive Officer

Bose, I'm sorry. We're having trouble hearing you again.

Bose George -- KKBW

OK. Sorry. My question was really the longer-term benefit, because I understand the timing difference. But it does look like the volatility in rates should help you longer term, so that was the question.

Thanks very much.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. Yes. That's accurate.

Jay Bray -- Chairman and Chief Executive Officer

Absolutely.

Operator

Thank you. Our next question comes from Doug Harter from Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Just thinking about your tangible net worth to assets test, how do you think about the reverse business in that context? Kind of given that it grosses up the balance sheet, but now not really a recourse asset, I guess, how do you think about adjusting for that?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, we think you can adjust for it. We haven't. But we agree with you that that's a very, very low-risk item, and probably needs less capital allocated against it. But we're setting this as long-term target as the reverse book runs off.

That will help contribute to getting that target.

Doug Harter -- Credit Suisse -- Analyst

And, I guess --

Chris Marshall -- Vice Chairman and Chief Financial Officer

We agree with your general premise, Doug.

Jay Bray -- Chairman and Chief Executive Officer

Yeah. I think, Doug, we've always thought of that as kind of non-recourse could be excluded. Our target is going to be total assets. But clearly, I think you're thinking about it correctly.

Doug Harter -- Credit Suisse -- Analyst

Right. Because obviously, if you exclude those assets today, you're already well above the 15%. So, I mean, I guess how quickly do those assets run off? And, I guess, how should we, I guess, think about that runoff and relief from that?

Chris Marshall -- Vice Chairman and Chief Financial Officer

They're running off at about 20% a year.

Jay Bray -- Chairman and Chief Executive Officer

Yeah.

Chris Marshall -- Vice Chairman and Chief Financial Officer

We expect that to continue.

Doug Harter -- Credit Suisse -- Analyst

Got it. And then, cash flow, you indicated that the 23 notes are callable in July, I guess, how should we think about your thoughts on cash flow in the first half of the year until you have that callable event?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think cash flow is stable and solid. I think some of that will depend on what happens with the rates and our origination channel between now and the middle of the year, but we feel very good about our opportunity to refinance the 23 is at a very good rates.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Mark Hammond from Bank of America. Please go ahead.

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

Thanks. Hi, Jay, Chris, and Ken. On Slide 8, you have that. It's helpful.

The servicing cost per loan of $195 in 2019. If delinquencies doubled, what could that number be per loan?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think I'd want to think about that rather than give you a number up top of my head, Mark. But I don't have something right in front of me.

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

No problem. I can follow up on that. And then could you go into a bit more detail about why the 15% is the right number for tangible net worth to tangible assets as far as what the stress test you did imply and how you arrived at 15%?

Chris Marshall -- Vice Chairman and Chief Financial Officer

As you know, I appreciate the question and our comments did say that that was the result of our stress test. Our stress test really said we were in pretty good shape and that we would certainly survive a recession. But I think the bigger picture is, as the largest non-bank servicer and a really trusted counterparty to Fannie and Freddie and to the government, we just feel holding more capital is prudent. And as a market leader, again, I think, this may sound a little trite, but we feel we have the best operating platform in the industry, and putting that on an even stronger balance sheet, I think will signal to people this is really a strong company that can generate sustainable returns into the future.

And at the end of the day, that is what's going to drive improvement in our stock prices. So that's really the basis for us setting that target.

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

Got it. And then the last one. Just putting two and two together, so the discretionary steady-state cash flow, which is helpful and great. If we put that together with your tangible net worth goal, you could pay down the 23s in two years with cash flow roughly if continuing at that state and get to your 15% goal at the base case or as a refi or partial refi with a high-yield issuance more likely?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, because we've got the 23s and then the 26s behind them, I think we look at them both as an opportunity. We do intend to continue to pay down debt, but if the market provides us an opportunity to smooth out on maturities and refinance that on an attractive rate, then we would take that. And we'll have more to say about that in the next couple of months.

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

Sure. Got it. Thanks, Jay, Chris, and Ken.

Operator

Thank you. Our next question comes from Kevin Barker from Piper Sandler. Please go ahead.

Kevin Barker -- Piper Sandler -- Analyst

Good morning.

Jay Bray -- Chairman and Chief Executive Officer

Good morning, Kevin.

Kevin Barker -- Piper Sandler -- Analyst

So this is a follow-up on Bose's question about the run rate on the servicing expenses. It looks like the REO expense was at negative $20 million this quarter versus a positive $11 million and run rate of roughly $23 million year to date. Specifically around REO, what else impacted that besides the $19 million recoveries? And what's your expectation for the REO expense on a go-forward basis?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I'm not sure I can give you a forecast or a reconciliation of that on the spot, Kevin, and 2019 was the biggest driver in that number. But if it's OK with you, we'd follow up with you offline and give you a full reconciliation of it.

Kevin Barker -- Piper Sandler -- Analyst

Should the REO expense --

Chris Marshall -- Vice Chairman and Chief Financial Officer

And beyond that, I expect the line to be stable just because of credit trends are very muted. In fact, the delinquencies are down, but I expect that line to be stable for the rest of the year.

Kevin Barker -- Piper Sandler -- Analyst

So you expect that to be negative?

Chris Marshall -- Vice Chairman and Chief Financial Officer

No. No. No. No.

Absent the recovery that we had in the quarter. We will give you a reconciliation following the call.

Kevin Barker -- Piper Sandler -- Analyst

OK. And then was there any trust collapses like you've had in previous quarters coming through this quarter as well?

Chris Marshall -- Vice Chairman and Chief Financial Officer

No. We did not have a trust collapse.

Kevin Barker -- Piper Sandler -- Analyst

OK. And then your MSR mark was in line with most of the industry this quarter, nine basis points, give or take. But the markdown throughout the year was less severe. Was there anything in particular within the portfolio that shifted throughout this year that would call if the MSR marks throughout the year to be less severe compared to most of the industry?

Chris Marshall -- Vice Chairman and Chief Financial Officer

No. I think the answer would be no.

Kevin Barker -- Piper Sandler -- Analyst

OK. And then regarding the FHFA's new liquidity and capital requirements, do you expect any impact on how you manage the balance sheet whether it's additional lines of credit or sources of liquidity or, just in particular, around the FHA, which seemed a little bit more severe. It doesn't seem like there is anything in particular that stands out, just given your balance sheet.

Chris Marshall -- Vice Chairman and Chief Financial Officer

No. I don't think there's anything particular. I'd say long before these requirements came out and starting to the beginning of the year, we significantly expanded our EBO program. And I think you should expect that we'll be more active in buying out loans to manage, just have a better financing answer to certain delinquent loans.

But beyond that, there's no change. And with regard to the FHA requirements, I think it's interesting they came out with them, but our own internal policies actually requires the whole liquidity in cash at a higher level, so there's no impact to our business. But I think it's an interesting announcement, and will be interesting to see if anything else follows that.

Kevin Barker -- Piper Sandler -- Analyst

OK. And then on your UPB roll-forward in the servicing portfolio from Page 23 of the presentation, you had a transfer to sub-servicing. Did you receive compensation for the move to sub-servicing? Or was that just part of some of the portfolios that you bought previously?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Transfers to sub-servicing. I'm sorry.

Kevin Barker -- Piper Sandler -- Analyst

$9.5 billion worth of UPB. That was in that forward owned servicing that was transferred to sub-servicing.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. We sold a pool, and are sub-servicing it until the actual transfer.

Kevin Barker -- Piper Sandler -- Analyst

OK. Thank you for taking my questions.

Operator

Thank you. Our next question comes from Henry Coffey from Wedbush. Please go ahead.

Henry Coffey -- Wedbush Securities -- Analyst

Yes. Good morning. You gave us a sense of January and made some positive comments on unlikely margins. I'm assuming you've had a decent sense of what February is all about as well.

With the coronavirus, with the distraction from the election in the South and the Super Tuesday states, sort of, etc., what does the housing mortgage equation look like from your perspective? Is it still as strong as it was before everyone started talking about coronavirus?

Chris Marshall -- Vice Chairman and Chief Financial Officer

No. I think we haven't seen any impact. Certainly, we're aware, like everybody else is and watching the headlines and watching the market yesterday. But in terms of refinance activity, our pipelines remain very, very strong.

The margin is very solid. And with the rate move yesterday, we'll see how that plays out in mortgage rates. So it's too early to tell. But I think prior to that, we were already expecting the quarter to be very strong.

Jay Bray -- Chairman and Chief Executive Officer

If you look, Henry, at locks, even prior to yesterday, we were having locks at all-time highs. I mean, we continue to have very, very strong days from a formula standpoint.

Henry Coffey -- Wedbush Securities -- Analyst

So the trend in February was, quote, as good as January's, or some version thereof?

Jay Bray -- Chairman and Chief Executive Officer

Yes. Yes.

Henry Coffey -- Wedbush Securities -- Analyst

And then in terms of where your customers are thinking, I mean, is it refinance and are people living, breathing people out there that haven't figured out they could refinance their mortgage? Is it improving credit where the people are finally able to take advantage of the rate? Is it purchase money? What's really driving the equation?

Jay Bray -- Chairman and Chief Executive Officer

It's a combination. Right? I think that still, majority is rate term refi to your point. There are people that are coming back again. There are people that never have refinanced.

Some of it is credit cures. We've always had a strong capability in the cash-out kind of debt consolidation piece as well, but that's probably 20%, 30% of what we're doing today. So it's a cross-section of what's going on in the market. I mean, as you know, appreciation has been very strong.

So you still are seeing a reasonable amount, call it, a third that are doing the debt consolidation cash out product. But the remainder is rate term and there's folks that have never done or refinanced in the past who are coming back again.

Chris Marshall -- Vice Chairman and Chief Financial Officer

It may surprise you that people haven't taken advantage of that opportunity yet. But again, we have 1.1 million customers. Nearly 30% of our customer base could refinance today and save $200 a month. And that's not taking into account people who could save even more through debt consolidation.

So there's still a huge opportunity for people to cash in on this refi boom.

Jay Bray -- Chairman and Chief Executive Officer

I mean, the origination is extremely de-harming. Right? We made the investments. We didn't talk about that as much last year because we focused on tight a lot in servicing, but we've made investments in the origination business through the home advisor program that we've talked about through our sales desk, which is a tool that allows all of our loan officers and home advisors to really work with the customer in a very efficient manner to get them in the right product. It gives them all the options they need really at their fingertips.

So we're seeing that resulted in really two things. One, it reduced our cost to originate by over $1,000 last year, and it also has resulted in just a more efficient better customer experience. And frankly, we don't have to hire as many folks because we just got the right tools.

Henry Coffey -- Wedbush Securities -- Analyst

Thank you very much. Good quarter.

Jay Bray -- Chairman and Chief Executive Officer

Thank you.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Thank you, Henry.

Operator

Thank you. Our next question comes from Mark DeVries from Barclays. Please go ahead.

Mark DeVries -- Barclays -- Analyst

Thanks. I think you mentioned you're gain on sale margins are benefiting from capacity constraints across the industry. Could you just talk about what you're seeing from competitors in terms of adding capacity? Is everyone remaining relatively disciplined here and just thoughts for implications in the intermediate term for the margin?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, we can go back to what we told you last quarter. It remains the same that we expect the margin to normalize over the course of the year. We do see people adding capacity, and we expect them to continue to add capacity. So eventually, gain on sale margins will come in.

It's just a matter of when. So we expected the margin to normalize more in the first quarter, and we haven't seen that. So we're not hoping for it, but we expect it. And beyond that, I wouldn't give you any more specific forecast.

We actually expected to see normalization occur in the fourth quarter and it didn't happen.

Jay Bray -- Chairman and Chief Executive Officer

I mean, it feels to me -- I was with a few of our peer CEOs last week at a conference, and it does appear to me, at least on the nonbank side, we don't have a great view into the banks. But there is more discipline this time around. I mean, folks are adding capacity. I mean, we're still adding capacity, but it's not significant.

And so it feels to me that, to Chris' point, at some point, I'm sure there will be more capacity in place. But I do think people are definitely being more disciplined than we've seen in the past.

Mark DeVries -- Barclays -- Analyst

OK. That's helpful. And it sounds like these new FHFA requirements for non-bank servicers aren't really going to impact you materially, but any thoughts on whether it could impact other non-bank servicers? And if so, could that create some opportunity for you guys to get active again doing some bulk acquisitions?

Jay Bray -- Chairman and Chief Executive Officer

I think it will impact some. And I think they've run some analysis across their servicing population so they know the folks that it will impact. I don't think it's a significant number. But clearly, there is going to be a category that will be impacted.

Will that present opportunity? I think our focus is like we've been saying, focused on the core. We think we've got the best operating platform out there. I think we've got a lot of momentum in the origination business, a lot of momentum in the servicing business. We know we're going to take -- we're still, I think, early to middle innings of taking cost out so I want to focus, focus, focus on the core.

And if you think about what would be available in the marketplace, I don't know that it would have to be something pretty special, right, some capability that we do not have. And I just don't know what that would be at this moment in time. We've got a long runway of opportunity, a long runway on these strategic pillars. So I'm pretty happy about where we're at, and continuing to grow the profitability of the business and the return on the business.

Mark DeVries -- Barclays -- Analyst

OK. Thank you.

Operator

Thank you. Our next question comes from Kevin Barker from Piper Sandler. Please go ahead.

Kevin Barker -- Piper Sandler -- Analyst

I just wanted to get an update so far this quarter on where your pre-pay speeds are coming in, given the move-in rates. I know it's been pretty volatile here recently, but just trying to get a feel for pre-pay speeds versus the 18% that was running in the fourth quarter.

Chris Marshall -- Vice Chairman and Chief Financial Officer

We expected them to be modestly down this quarter and they are modestly down, but they're still elevated. I don't have the exact number through the quarter, but I'll just leave it at that. They're down modestly from where they were in the fourth quarter.

Kevin Barker -- Piper Sandler -- Analyst

OK. So would the lock volume that you're projecting in January be driven mostly by correspondent? Or would that be due to consumer direct volumes driving most of the increase in volume?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think I was quite a consumer direct -- very focused on the consumer-direct piece. So the lock increases all consumer-directed.

Jay Bray -- Chairman and Chief Executive Officer

Primarily.

Kevin Barker -- Piper Sandler -- Analyst

OK. Thank you.

Operator

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call over to Jay Bray, chairman and CEO, for closing remarks. Please go ahead.

Jay Bray -- Chairman and Chief Executive Officer

Thank you. Thanks, guys, for joining us, and we'll be available for questions later. Have a great day. Appreciate it.

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

Kenneth Posner -- Senior Vice President of Strategic Planning and Investor Relations

Jay Bray -- Chairman and Chief Executive Officer

Chris Marshall -- Vice Chairman and Chief Financial Officer

Bose George -- KKBW

Doug Harter -- Credit Suisse -- Analyst

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

Kevin Barker -- Piper Sandler -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

Mark DeVries -- Barclays -- Analyst

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