Mr. Cooper Group Inc (COOP) Q4 2020 Earnings Call Transcript

Mr. Cooper Group Inc (COOP 2.35%)
Q4 2020 Earnings Call
Feb 23, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Ken Posner

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

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

Good morning, everyone. We're going to start this morning, as always, by reviewing the quarterly highlights. But first, I want to express my deep appreciation to all my team members at Mr. Cooper for your fantastic work in 2020.

Despite the serious challenges of the pandemic, you never wavered in your commitment to our customers. Together, we helped thousands with forbearance plans. We helped thousands save money by refinancing and we were very diligent in managing our company through an incredibly volatile environment, which allowed Mr. Cooper to serve as a source of strength in the marketplace, and we produced outstanding results for all our stakeholders.

From myself, the Board and the executive management team, thank you very, very much. Now let's turn to Slide 3 and zero in on the highlights for the quarter. We reported $2 per share in GAAP EPS, with pre-tax operating income of $329 million, which is equivalent to an ROTCE of 44%, and that's more than three times our target. Tangible book value grew at a very solid rate, ending the quarter at $26.27 per share.

2021 is shaping up to be another excellent year for growth in tangible book value. Originations turned in excellent results, with pre-tax income of $435 million for the quarter. This is the third quarter in a row of income over $400 million. And I would add that first quarter is shaping up to be another exceptional quarter.

These very consistent results speak to the benefits of our unique model, in which most of our Originations profitability relates to serving our existing customers. Funded volumes were up 57% sequentially to a new record level, thanks to a very strong ramp in correspondent. And last quarter, we told you to expect growth to really pick up in the Servicing portfolio, and it did. During the fourth quarter, we saw 7% growth to $626 billion.

We're feeling positive about opportunities to win more bolt deals in 2021. For the full year, we're expecting the Servicing portfolio to grow in the range of 5% to 10%. And as you know, capital allocation is a constant focus for us. And as you saw, we redeemed $100 million in senior notes during this quarter, which brings our debt-to-equity ratio back to the level it was prior to the WMIH merger in 2018.

And during the fourth quarter, we also bought back 1.4 million shares of stock. Finally, we ended the quarter with nearly $700 million in cash, and we expect very strong cash flow from operations to continue throughout 2021. If you'll turn me to Slide 4, I want to spend a few minutes and focus on return on equity. Prior to the WMIH merger, we were a controlled company with an operational mission.

The merger has transformed us into a fully independent public company with a mandate to create investor value. We initially set an ROTCE target of 12% plus, which is a reasonable level for an institution of our size. But as we've demonstrated over the last two years, in the right market conditions, our returns can be much higher. We all understand that market cycles are a huge driver of profitability in the mortgage industry, but I want you to know that Mr.

Cooper's return on equity also reflects a multiyear focus on efficiency. As you can see, over the last 5 years, we've been driving some steady improvements in unit cost in both Servicing and Originations. And this progress is really a good measure of our capabilities with technology. We've talked on past calls about Project Titan, Home Advisor, Project Flash, our digital forbearance self-service tools and many other initiatives.

And this is really where you see the results. Higher return on equity also reflects a cost focus at the corporate level, where we've taken a variety of actions to rationalize expenses, and this includes the refinancing and deleveraging I mentioned earlier. Those actions have cut our funding costs by 41% or $81 million per year. So, going forward, you should expect us to continue driving efficiency gains in every part of the business year in and year out.

In a normal environment with stable economic growth and interest rates moving within a reasonable band, we expect the company to generate returns on equity in the range of 12% to 20%. 2021 looks like another exceptional year with returns likely to be well above this range. Now let's move to Slide 5 and talk about growth. As I mentioned this quarter, we posted strong portfolio growth of 7%.

And as you know, over the last two years, we told you that we are taking a pause on growth in order to focus on integration, deleveraging and efficiency. But we said pause, and we didn't say stop. And the growth pause is now over. I want to remind you that prior to the pause, Mr.

Cooper had a very impressive growth record with a 12-year CAGR in our Servicing portfolio of 39%. This growth propelled us to the #1 spot among nonbank servicers and No. 3 overall. And this growth record is solid proof of our technology and operational capabilities.

From here, we're planning to grow the portfolio at a rate of 5% to 10% per year, although the actual rate could be faster or slower depending on a number of factors. We've made the technology investments to drive new customer growth in our correspondent channel and to retain our customers in the direct-to-consumer channel. We have an unmatched track record of acquiring large portfolios. In terms of subservicing, we are the partner of choice for MSR investors.

And so we have the operational capacity to double our portfolio to more than $1 trillion. So we think we're really well positioned. But having said that, we've never chased market share and we're not about to start now. We will grow more quickly when financial returns in the market are attractive and more slowly or not at all, if they are below our hurdles.

Furthermore, we will grow in a disciplined and responsible manner, which means strict attention to capital and liquidity and an unwavering focus on the customer experience. I'm going to wrap up my comments on Slide 6 with some thoughts on the outlook for 2021 and longer term. For 2021, we see very strong housing fundamentals plus current low interest rates as underpinning another year of outstanding financial performance. We expect to generate very strong ROTCE well above consensus expectations.

We're very pleased with our momentum in Originations, and given the huge number of customers who could save money by refinancing, we expect to benefit from elevated margins throughout 2021, which will normalize as we roll into 2022. However, we expect our results in 2022 and thereafter will benefit from the ongoing technology investments, many of which, like Project Flash, are focused on further digitalization and which will help us continue to drive down unit costs. While we've been very focused on refinances recently, I want to remind you that we have a proven playbook for purchase markets too, which you saw us deliver on in 2018, when our volumes were 65% of the purchase money. The Servicing margin will benefit from EBOs in 2021.

And as we move into 2022, the margin should benefit from slower prepayment speeds and reduced amortization. If interest rates drift upwards, we stand to mark up our MSRs, which could drive sizable gains in tangible book value. We believe this positioning is a major differentiator as most of our peers are heavily overweighted to Originations whereas our business model is much more balanced. Our cash and liquidity are strong, and we're projecting robust cash flow throughout 2021.

As you know, we've undertaken a strategic process to monetize our Xome subsidiary. That process is ongoing, and a successful conclusion could generate significant additional cash. Also, I'd remind you when projecting our cash flow, don't overlook the value of the net operating losses we took on with the WMIH merger, which will shield us from paying federal taxes for many years to come. Finally, acting as the stewards of your capital, we'll continue to be thoughtful and disciplined about how we allocate our capital and cash.

August 1st of this year marks the third anniversary of the WMIH merger, at which point, tax limitations will be reduced significantly, giving us considerably more flexibility to buy back stock starting in five months' time. And if that's the best use of capital for investors, that's where we'll turn.And with that, I'll turn the call over to Chris.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Hey. Thanks, Jay, and good morning, everyone. I'm going to take you through the details of the quarter. And as always, I'll start on Page 7 with a high-level summary of our results.

We were very pleased with net income of $191 million or $2 a share, which included $85 million in breakage costs for the senior note refinancing we completed as well as $10 million in other adjustments as well as a $6 million mark-to-market charge. On an operating basis, our pre-tax operating income was $329 million, and as Jay mentioned, fully taxed operating ROTCE was 44%, which represents the seventh consecutive quarter during which we've exceeded our 12% target. As I said, adjustments totaled $10 million. There was a $5 million total of severance across the servicing, Xome and corporate segments related to corporate actions, which if you recall are efficiency initiatives we've been working on over these past two years to lower expenses and standardize our operations.

Also, we shut down a small unit in Xome, whose contribution was immaterial, which resulted in another $5 million charge. In terms of other notable items, I'd point out that Servicing benefited from $81 million in early buyout revenues, which I'm going to talk more about in just a minute. We're very happy with these results, which we translated into excellent growth in tangible book value, which increased 10% quarter over quarter to $26.27 a share. Jay mentioned the potential for strong TBV growth in 2021.

And depending on what happens in the macro and policy environment, there's potential for additional upside that could be quite meaningful. So let's turn to Slide 8 and discuss other catalysts for book value. The chart on the left shows the benefit that rising interest rates would have on our MSR asset. For example, if interest rates went up by 100 basis points, we'd expect to mark up our MSR by $418 million, which would equate to an increase of $3.54 a share in tangible book value.

Now bear in mind, these estimates are based on models, which factor in many different variables. And as you know, we carried the MSR in our books at fair value, which reflects market participant expectations, not our own proprietary views. Also, these estimates assume a parallel rise in rates relative to what's already discounted to market expectations. For the purpose of valuing the MSR, the most important rate is the fixed mortgage rate as this drives prepayments fees.

And of course, LIBOR and the swap curve that also matters as they drive expectations for income on custodial deposits. Now turning to the slide on the -- I'm sorry, the chart on the right, let's talk about the DTA. The Biden administration has proposed raising the corporate tax rate to 28%. If this goes through, it will result in a markup to our DTA by almost $400 million, which would add $4.28 in tangible book value, which would be an increase of 16%.

In that scenario, our cash flow will also be unaffected by higher corporate tax rates since the NOLs will shield us from paying federal taxes for many years to come. I'd add that due to the tax planning strategies we put in place, the composition of the DTA is changing. We've converted roughly 1/3 of the DTA from NOLs associated with the WMIH merger, which have expiration dates to ordinary NOLs, which never expire, and that conversion will continue over the next two years or so. Now let's turn to Slide 9 and then discuss the MSR, which was flat quarter over quarter at 100 basis points of UPB.

The mark was relatively small at $6 million and reflected lower mortgage rates in the quarter leading to an increase in the lifetime CPR assumption, partially offset by higher swap rates, which as I just mentioned, drive expectations for custodial deposit income. Each quarter, we provide you with an estimate of how many of our customers could save at least $200 a month by refinancing, which would be around 35% of the average monthly payment. With rates having drifted down during the quarter, you won't be surprised to see approximately 800,000 customers could benefit from refinancing. We also have another 511,000 customers who could lower their payments by $100 a month, which would still provide very meaningful savings.

Additionally, we have hundreds -- thousands of customers with substantial equity in their homes who could benefit from cash out refinances, which is not counted in these numbers. Our DTC channel has a lot of experience doing cash out refinances, which you saw from our performance in 2018. And this capability will help us sustain volumes, once the opportunity with rate and term refinances has returned to normal levels. Now on that note, let's turn to Slide 10 and talk about the Originations segment, which continue to produce excellent results with pre-tax income of $435 million in the quarter, which is the third consecutive quarter over $400 million.

Funded volumes increased 57% quarter over quarter to our new record level. Last quarter, we guided you to expect a ramp in correspondent, which is a cost-effective channel for new customer acquisition. Over the last couple of years, we've been investing in technology, rationalizing the cost structure and growing our network of clients. Fourth quarter saw record correspondent funded volumes of $13.6 billion, which was more than double the prior quarter.

We also had some record fundings in DTC. We're constantly improving our technology. And in 2020, those investments allowed us to smoothly and significantly expand capacity. Those actions also helped us drive the refinance recapture rate by four percentage points to 35%.

And similar to just last quarter, we're showing you how the recapture rate varies for different parts of the portfolio. For DTC customers, meaning people who have already gone through a refinance transaction with us, our recapture rate is 66%. And you should take that as a very good indication that our customers appreciate the service we provide and the money we help them save. The refinance recapture rate is also strong in the correspondent channel, which will make up a growing proportion of the portfolio now that we're ramping up volumes.

There's also opportunity for us to do more with our bulk portfolios we've acquired. Although these portfolios do contain some older loans with low balances, which is part of the reason the recapture rates there tended to be lower. Now turning to the outlook. Just like Q4 origination volumes, in January and so far in February, volumes continue to be extremely strong and we're projecting funded volumes to remain strong through the end of the quarter.

Turning to Slide 11, let's shift gears for a minute and talk about margins. Our total pre-tax margin compressed only slightly by 9 basis points down to 186 basis points. But that slight compression was due entirely to mix shift. This lower margin correspondent volumes ramped up to 55% of total funded volumes from only 41% in the prior quarter.

As a reminder, when we talk about origination margins, these are all net of the costs. Now let's talk about revenues for a minute. The chart on the right shows you the trend in revenue margins, by which we mean gain on sale revenues plus associated fee income divided by net locks. As you can see, corresponding gain on sale margin declined quarter over quarter, which was the result of some more aggressive pricing to grow the channel.

We previously limited volume to focus on pockets in the market where we could maximize revenues. Now we're bringing our pricing more in line with market, although we have backed out of and we'll continue to avoid certain niches where we're going to see signs of irrational competition. While the corresponding gain on sale margins are down, we significantly lowered costs during the year, which helped us sustain overall profitability in the channel. In the DTC channel, gain on sale margins have been very strong over the last three quarters, reflecting favorable secondary market conditions.

Because these are existing customers, who value their relationship with us, our marketing costs are essentially zero. And we don't face the same level of competitive frenzy, as you might see in the retail and wholesale markets. And based on what we've seen so far in January and February, we expect our total Originations margin to remain strong in the first quarter. Now let's turn to Slide 12 and review the Servicing portfolio.

Total UPB was up 7%, ending the quarter at $626 billion. The growth has benefited from subservicing, in particular. And as you may recall, last quarter, we commented on a new relationship with a large investment firm, which is off to an excellent start. In addition to Originations, we added $11 billion to the portfolio through bulk and flow deals, where we have very strong relationships in our market.

Despite CPRs at 33%, our net MSR position, which excludes excess spread, grew by 9% sequentially, which is equivalent to a net replenishment rate of 130%. This means that if you net out the runoff attributable to excess spread investors, our originations were more than sufficient to sustain and grow the portfolio. Going forward, you should expect the portfolio to be up slightly in the first quarter. But as Jay mentioned earlier, by the time we get to the end of the year, we expect to see solid growth of 5% to 10%.

Strong correspondent volumes and higher DTC recapture rates bode well for steady growth with upside potential from both subservicing and bulk, and we're encouraged by a recent pickup in activity in the bulk market. We've been watching a number of sellers holding on to product over the last few quarters in hopes of better pricing. And so recently, we've seen them starting to come to market and expect that to really continue. Now let's talk for a moment about forbearance.

Since the CARES Act was signed, we've helped approximately 364,000 homeowners go on forbearance, and we've helped 186,000 of them resolve and exit forbearance. The forbearance requests have continued to trend down. In January, we had 9,000 new requests compared to an average of 13,000 a month in the fourth quarter. Currently, about 5.5% of customers are still on some forbearance, which is down from our peak of 7.2%.

Now let's turn our attention to the Servicing margin on Slide 13. Excluding the full mark, the Servicing margin was a negative 1.4 basis points. Now as you'd expect, fast CPRs and low interest rates continue to weigh on the Servicing margin, with amortization up to 8.6 basis points in the quarter, which equals 3.3 basis points that were lost in margin over last year's already elevated rates. However, just to state what's obvious, we get the benefit of low interest rates in the Originations segment and what matters to us is the company's overall profitability, which in this environment continues to be well above our target range.

As you think ahead to 2022, remember that we'll naturally benefit in the Servicing margin from a slow CPR and reduced amortization. Last quarter, we told you to expect at least $250 million in our revenues associated with early buyouts of Ginnie Mae loans in 2021. During the fourth quarter, we had EBO revenues of $81 million, which reflects buyouts of $1.3 billion, redeliveries of $600 million and a margin in excess of 6%. You'll see this under other ancillary revenues in the detailed Servicing P&L we provide in the appendix.

As you may recall, under Ginnie Mae's streamlined modification program, we're able to refinance qualifying customers impacted by the pandemic into a new loan with a market rate and then buy out and redeliver that loan. This is an excellent program for customers as it helps them get back on their feet and provides a break in their mortgage payment. And it's straightforward for us to administer since it doesn't require extensive documentation or a lengthy trial period. For Ginnie Mae customers who don't qualify for streamlined mods, we can still buy out delinquent loans, modify the terms and then redeliver them after this trial period.

Based on our latest projections for 2021, total EBO revenue is looking likely to be meaningful higher than our previous $250 million estimate. Now with forbearance policies having recently been extended, the timing will continue to evolve. And we'd expect to see larger buyout volumes in the second half of the year. Also, I'd note that for planning purposes, and we think 4% is a more realistic margin.

Looking at the first quarter, we'd expect the Servicing margin to end up being right around breakeven. Now turning to Slide 14. Xome produced another solid quarter with pre-tax operating income of $18 million, in line with the prior quarter, thanks to continued strong performance in our title unit. With Ginnie Mae foreclosure moratoriums now in place through the end of June, the REO exchange continues to sit idle with no contribution during the quarter and none expected until the second half of the year.

While some moratoriums are a sensible policy to protect borrowers, at some point, there will be a backlog of REOs in the system that need to be processed and cleared. And at that time, the exchange will ramp back up again, then we would expect it to earn very strong profits once it's back in operation. Last quarter, we talked about the question of whether Xome is getting appropriate recognition in our stock price, given the fact that many investors focus on tangible book value and the book value associated with Xome is immaterial. We told you we were open to a variety of strategies to monetize the value of Xome, including raising a minority stake, issuing debt, or considering the disposition of parts of Xome or the entire subsidiary.

Whatever would be our position this is very profitable and well-run unit to get full market -- full credit from the market. At this time, I can report to you that our strategic process is under way, and we'll let you know more about what decisions we come to once that process is complete. Now if you turn to Slide 15, we'll focus on the balance sheet and talk a little bit about liquidity. We generated strong cash flow in the quarter with an estimated $370 million in steady state discretionary cash flow.

This allowed us to redeem $100 million in senior notes, absorb the breakage costs associated with the refinancing, buy back $34 million in shares and invest $100 million into flow and bulk MSRs on top of what we originated, while ending the quarter with robust cash of nearly $700 million. As we have guided to you, we expect advances increased to approximately $1 billion this quarter due to typical seasonal trends related to tax payments, although they're actually down by 4.9% year over year, which is a much more positive trend than what we were planning for when the pandemic first hit. From a liquidity perspective, however, we will continue to plan for adverse environments to ensure that Mr. Cooper always serves as a source of stability and strength.

Today, our liquidity is extremely robust. We have almost $1.4 billion in some unused capacity for servicing advances on multiyear committed lines. We have significant excess capacity on our originations and MSR lines as well. So from a liquidity standpoint, the company has never been in better shape.

Now let's finish up with some comments on capital and leverage on Slide 16. Operating with strong capital is a clear expectation for any financial institution that plays an important role in the U.S. mortgage market. At the beginning of 2020, we disclosed an internal leverage target defined as the ratio of tangible network to assets of 15% or higher.

Now that our ratio is under temporary pressure from Ginnie Mae loans eligible for buyout, which under accounting rules, we will consolidate on our balance sheet as soon as the underlying loans go 90 days delinquent, whether we buy them out or not. During the quarter, consolidated EBOs increased by $1.2 billion. Excluding EBOs, our capital ratio has increased to 13.2% from 11.6% a year ago. So based on the current outlook, we expect to reach the 15% target during the second half of 2021.

Meanwhile, to give you another perspective on how far we've come in building capital and deleveraging, you can see on the right that our debt-to-equity ratio is now down to 105, which is well below where we were prior to WMIH merger in 2018. Additionally, we also significantly extended maturities to the point that we now have a liquidity runway with no senior notes maturing for six years, which is obviously a great position to be in. So with that, I'll turn the call back to Ken for Q&A.

Ken Posner

Thank you, Chris. And now we'd like to ask the operator to start the Q&A session.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Bose George with KBW. Your line is now open.

Bose George -- KBW -- Analyst

Hey, guys. Good morning. [Inaudible] on the EBO gains this year. I mean you noted it will be meaningfully larger than your earlier guidance.

But just when we think about -- and you also, I guess, you have that 4% margin, but is there a way to think about the volumes that you could see this year? Is -- I mean, is the run rate from the fourth quarter something we should look at or do you have any guidance there?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. I, first of all, I think I'll give you two ways to consider that. The $250 million turned out to be conservative, just given the number of customers that are electing to go -- well, the choices that our customers are now making. That $250 million would probably be $350 million to $400 million.

But you're aware that the really extension -- the foreclosure extension or a -- I mean, the forbearance extension has just been extended last week. So I think we're not giving you that firm guidance because some of that revenue may actually slip into the beginning of '22, and depending on what customers elect to do. So far, we don't have enough data to see how many customers are going to elect to extend. But the basic answer to your question is just that $250 million is probably somewhere between $350 and $400 before any impact of the extension.

Bose George -- KBW -- Analyst

OK. OK. Great. That's helpful.

Thanks. And then just on the Servicing segment expenses, the settlement obviously took it down last quarter. Is it the number this quarter sort of a normalized number, excluding this $10 million that you guys highlighted on onetime costs?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. I think the the -- we should see a little bit of improvement in cost this year in line with what we saw last year. We've got a goal of reducing unit cost by at least 5% a year. And so I think over the course of the year, then drag from reverse will be lower because of some improvements we've made in the fourth quarter that I think will also improve unit costs even more than that.

But it's in that range.

Bose George -- KBW -- Analyst

OK. And just on the guidance you gave on the Servicing margin breakeven, was that by year-end?

Chris Marshall -- Vice Chairman and Chief Financial Officer

No, that was really what -- we expect Servicing margin to be a breakeven in this first quarter. And it may be -- then I would say it's probably safe to assume it will be breakeven through the year depending on how much of the EBO revenue that stays in the year or shifts into next year.

Bose George -- KBW -- Analyst

OK. OK. Great. Thanks.

Operator

Our next question comes from the line of Mark Hammond with Bank of America High-Yield. Your line is now open.

Mark Hammond -- BofA Securities -- Analyst

Thanks. Hi, Jay, Chris, and Ken. First question would be on your high-yield debt, which you really tackled last year. It now stands at $2.1 billion.

And in the past, you've said you wanted to return to a level -- pre WMIH debt level of around just $1.9 billion, but now your bonds are much lower rates, but all noncallable. So is it -- the $1.9 billion in still where you'd like to be? Or is the $2.1 billion kind of where you'll have to be given the non-call periods of your current bonds?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think right now, we're going to stay -- you should expect us to stay right where we are. Mark, we don't expect to do anything significant because of what you just said. I think the -- and actually, I think the ratio pre WMIH was 111, we're down to 105. And that's what we said beginning in the first quarter of '19, that's where we wanted to get to.

But we'll reassess where we are at the end of the year. And so if there are these any opportunities that make sense, we'll pursue. But we'll let you know and it's -- that we're not going to surprise you with regard to debt.

Mark Hammond -- BofA Securities -- Analyst

Understood. And then my last question is more of an industry question about just seeing Western Alliance Bank is going out and buying a nonbank mortgage firm. Usually, I see the other happen. Could you just comment on our -- are banks, then do you think trying to get back in or looking to get back in -- servicing or the originations platform, given what happened last year? Or is this more of like a one-off potential?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, I wouldn't generalize based on Western Alliance. I thought it was a really smart deal for Western Alliance. I think it was 30% accretive with a one-year payback. There's so much synergy between banks and your mortgage companies that the industrial logic is extremely compelling.

And if I were running a bank again, I would absolutely be looking at acquiring a mortgage company. If you think about the cross-sell opportunity with this -- when you think of us, we got 4 million customers and think about what a bank could do to monetize that. We've got all $10 billion in escrow deposits that banks could use. We could use deposit funding to pay down even the cheap debt we now have at so much lower rates.

And you've got access to FHLB. There are these so many things that make sense. But I'm not sure -- there's a lot that banks have on their plate right now. I would not be surprised, however, to see more mergers in the near future.

Mark Hammond -- BofA Securities -- Analyst

Got it. Thanks for helping me see the big picture. Thank you all.

Operator

Next question comes from the line of Kevin Barker with Piper Sandler. Your line is now open.

Kevin Barker -- Piper Sandler -- Analyst

Thanks. Good morning. With Xome, it's impacted pretty heavily by what's going on with the foreclosure moratoriums. And given we've seen forbearance extended and foreclosure moratoriums extended as well, here along with rapid increases in higher home prices, could you maybe give us a little more color on what your expectations are for Xome's revenue and just specifically the REO brokerage fees and when we expect that to ramp? And then maybe orders of magnitude as well just given that now we have a lot more higher home prices and probably more flexibility for borrowers in distress.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes, Kevin, I think the foreclosure moratorium, first of all, it could be extended again. We're not counting on revenue from the exchange platform of our -- through the end of the year. Because, number one, we really think there's a possibility, there's a further extension. It will take a few months to ramp up activity.

So if we have some, that will be -- if we have some revenue, there will be some upside. In the meantime, the other part of Xome led by these title businesses doing extremely well. So I think you should expect more of the same of what you saw in the back half of last year. The only caveat to that is we have an enormous backlog of orders in the REO exchange.

And even if some of those orders were to dwindle or erode because of our higher home prices and -- the sheer number of orders says that once the foreclosure moratorium is lifted, the exchange platform is also going to be extremely profitable right out of the gate. And that will probably continue at very, very elevated levels for 18 months or two years.

Jay Bray -- Chairman and Chief Executive Officer

Yes. I think you should think about 2021, Kevin, very consistent with 2020. You just -- you will not see any meaningful earnings from the exchange business, if any. And -- but I do think you'll see us -- continue to see strong title performance.

And then as one good thing on the exchange side of the business is we are continuing to win new clients. And so once the moratorium does get lifted and as you move forward, I think we'll have even more inventory. And the -- as you know, in the exchange, it's really FHA centric. And so that will be where the majority of the volume is coming from, as the PLS portfolio is kind of winding down, which will probably be less impacted by appreciation.

But really, that will have quite -- that will give customers options, which is a good thing. So that's how I'm thinking about it.

Kevin Barker -- Piper Sandler -- Analyst

OK. And then just given the delays in the -- or just the extensions that we're seeing, would that impact your monetization of Xome that you've talked about today and in the past?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think it's more likely that the exchange, if we would wait for some more clarity on at least the timing of our foreclosure moratorium being lifted before we tried to do anything with the exchange, but it doesn't impact actions we would take then -- it with the rest of the business.

Kevin Barker -- Piper Sandler -- Analyst

OK. And then one housekeeping item. I mean, interest income bumped up in both the Servicing and Originations segments that's pretty significantly quarter over quarter despite rates remaining very low on the short end of the curve. And was there anything in particular that was -- that you shifted that is driving interest income higher?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Nothing particular. I think that it's still -- unfortunately, really it's still depressed. We have been trying to maximize float income by consolidating deposits at banks that value them a little bit more, but that's about it.

Kevin Barker -- Piper Sandler -- Analyst

OK. Thank you for taking my questions I'll get back in the queue.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Kevin, the other part of what -- is interest income on the loans we're buying out.

Kevin Barker -- Piper Sandler -- Analyst

So how much of that?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I don't have that broken out. It's -- and I should have that for you, but I don't. So we'll follow up with you after the call.

Kevin Barker -- Piper Sandler -- Analyst

OK. And then one other item, is there a reversal of REO expense expected in the first quarter? I believe you forecasted that or guided to that previously, right?

Chris Marshall -- Vice Chairman and Chief Financial Officer

So REO expense.

Kevin Barker -- Piper Sandler -- Analyst

Was there any recovery faster settlements that were expected in the pipeline?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I don't remember that. I'll have to check on that.

Jay Bray -- Chairman and Chief Executive Officer

I don't think we're expecting anything in the first quarter, not this quarter.

Kevin Barker -- Piper Sandler -- Analyst

OK. Thank you.

Operator

Our next question comes from the line of Doug Harter with Credit Suisse. Your line is now open.

Doug Harter -- Credit Suisse -- Analyst

Thanks. I was hoping you could talk a little bit about your plans for kind of the level of liquidity you're planning on holding and kind of how you would see kind of cash deployment for MSR growth kind of then comparing to your cash flow generation in 2021.

Jay Bray -- Chairman and Chief Executive Officer

Yes. I mean, I think the -- Ken, if you look at 2021 from a cash flow generation standpoint, as we mentioned, we think it's going to be quite strong. And I think our current focus, when you look at this kind of the current landscape, our view is that there is going to be more MSR portfolios for sale. And we are going to participate in that market, and we think there's growth opportunities there.

And so I think you should think of cash deployment at the moment in the next couple of quarters is evaluating those real opportunities. As I said in my comments, we're looking at what's in the marketplace, but we're being very selective and are very disciplined in that approach. And -- but again, based on conversations we've had with kind of market participants, so I think that you're going to see a lot more activity there we had, and we think there will be some at attractive levels.

Doug Harter -- Credit Suisse -- Analyst

And then I guess just as you're thinking about that 5% to 10% growth for this year in terms of balances, just how much of that subservicing versus kind of owned?

Chris Marshall -- Vice Chairman and Chief Financial Officer

You should assume it's half and half. I mean, it's not going to be that way every quarter, obviously, but that's I think what our -- and we have a long-term goal of maintaining about a 50-50 split because of the big subservicing contract we added in the fourth quarter, subservices ticked up a little bit more. But then long term, we expect it -- that to be about half and half.

Jay Bray -- Chairman and Chief Executive Officer

I mean I think one of the key takeaways is, if you look at our MSR owned book with our current origination with capability through correspondent, direct-to-consumer as well as co-issue and some other channels, I mean we're also going to be able to replenish and grow the MSR owned book just with our existing originations. And so I think that's -- we've been talking about that, the replenishment and our capability there. I think that's huge, and you'll see that continue to be very strong.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of Giuliano Bologna with Compass Point. Your line is now open.

Giuliano Bologna -- Compass Point -- Analyst

Good morning. I guess thinking about capital deployment, kind of your allocation of capital going forward. Now that your share price is slightly above tangible book value at this point, although you do have a pretty good outlook that should get you -- should make your current stock price that's below tangible book value in the near term, how do we think about share buybacks as a use of capital and kind of what your sensitivity is from a relative valuation? And then with that, is there really any sense of thinking about leverage because you're also not really writing or selling much excess spread strips at this point, which is also kind of delevering and sort -- kind of levering the MSRs that you're accumulating? And is there any way to think about kind of capital allocation and how you might consider different uses of your capital here?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. I think it's a simple answer, Giuliano. We're going to prioritize growth of the business. As Jay said, we also think that we can -- we know we can double the size of the portfolio with our existing infrastructure.

We already have the most efficient platform, and we want to take advantage of that, especially at such prices. And we think we'll have an opportunity to deploy a significant amount of capital this year toward MSR purchases. But our shares, while they're trading at a premium, it's an extremely slight premium. The idea that our business, our balanced business model, there are strong earnings we're generating is only generating a 10% premium to book says our shares are really cheap.

And at the rate we expect to grow this tangible book value, we'd expect to see a larger premium. So we think our shares are very attractive at these levels. And the you should expect us to continue to look at share buybacks as a very viable option at our current share price.

Giuliano Bologna -- Compass Point -- Analyst

That makes a lot of sense. And I agree with you since that you also have upside from higher rates and then corporate tax rates, you can also have a lot of leverage on top of strong earnings that could really to prevail with book value. From a little bit of different perspective, is there any interest in potentially investing into some different origination channels? Because obviously, you have a great direct-to-consumer platform, great correspondent platform. Will there be an interest to expanding and investing into other channels to build out over time?

Jay Bray -- Chairman and Chief Executive Officer

Yes. I think -- look, we look at every platform that comes to market. And we've had several conversations with folks around their platforms today. I mean, look, I don't know that there's anything imminent.

And so I think we like where we sit today, we like our capabilities. I mean, obviously, our direct-to-consumer channel is certainly top-tier and our correspondent channel has since post kind of Pacific Union acquisition just that's done a tremendous job. So we like those channels a lot. And as I said, the replenishment capability of those channels is quite strong.

So we'll continue to evaluate, but I'm very cautious on those transactions, and just given the culture integration, the systems integration, etc., etc., but we will evaluate them. There's really this -- nothing that I think in the near-term horizon that we would -- that we're going to act on.

Giuliano Bologna -- Compass Point -- Analyst

That sounds good. Thank you for taking my questions and I'll jump back in queue.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Thanks, Giuliano.

Operator

Our next question comes from the line of Henry Coffey with Wedbush. Your line is now open.

Henry Coffey -- Wedbush Securities -- Analyst

Yes. Good morning, everyone, and congrats on a great quarter and a fabulous year. Does strong -- in terms of gain on sale and DTC margins mean that we -- the first quarter is as good as the fourth or does it mean that it's probably going to be a little bit better than the fourth?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I'd say the first quarter looks every bit as strong as the fourth quarter gauging where we are in the middle of this quarter. That was one small blip because of the storm we had. That will probably cost us, I don't know, $5 million or so in revenue. It's not a huge number.

But I think the first quarter looks like it's right in line with the fourth quarter, could be maybe a little bit better. But think of it as flattish with our fourth quarter, both volume and margin.

Henry Coffey -- Wedbush Securities -- Analyst

Does -- you've given us a sense of where the gross margins on the two primary channels are going. Can you give us some specifics around what sort of margins you're realizing in correspondent? And then what sort of margins you're realizing in DTC? And sometimes Origination business is more just creating MSRs but that sometimes it's cash flow positive and so I was wondering if you could kind of address those related issues.

Chris Marshall -- Vice Chairman and Chief Financial Officer

OK. Henry, we've never broken those numbers out separately. So I'd rather not do it now. But I like to would say you should expect the DTC margin to -- certainly, this quarter, it's continues to be very strong.

We see no cracks in the margin on the DTC channel. We expect a lot of volatility, and then we've already seen it in the correspondent channel. Everybody, all the newly public companies are the ones that want to go public are saying they're going to grow correspondent by about 50%, 100%, 200%, 300% over the next few years. And so we expect tremendous amount of price competition.

But because of -- no matter what this margin is, we're going to be a major player there, and we're going to be able to use that even if the margins shrink, it's also still the primary way we get new customers and replenish our run up. So for us, I think we're in a much better position than those guys that are focusing on it exclusively for their overall profitability but we're not going to break out the numbers for you today, but I appreciate the question.

Jay Bray -- Chairman and Chief Executive Officer

And to state the obvious, Henry, you know this, that the direct-to-consumer channel is significantly cash flow positive, obviously, given the margins there. And you're thinking about it correctly. We really look at it as what's the cost to acquire. And to Chris' point, I mean, obviously, there's no cost to acquiring the direct-to-consumer because of the cash flow positive nature of it, and we like the return profile on the correspondent business significantly.

So I think you should expect us to stay the course.

Henry Coffey -- Wedbush Securities -- Analyst

I mean, people have a positive bias toward servicing because they understand it and that they can predict it. And you've proven over and over again, the correspondent is a great way to keep that business to be alive. On the acquisition side, I know in the past, you've talked about perhaps seeing more Ginnie Mae deals out there. What are your thoughts about what sort of bulk acquisitions might come your way? And we've -- is it going to be someone just selling a flow business or is it going to be someone getting up in the morning and saying, I don't really want to be in servicing, I'm going to sell it to Mr.

Cooper Group.

Jay Bray -- Chairman and Chief Executive Officer

I think it's going to be more of the latter. I mean, I think there are -- when you look at what's in the marketplace today, it's probably a 50-50 Ginnie and Fannie, Freddie, but we think there's going to be some large Ginnie Mae transactions that take place throughout the year. And we plan to be very engaged in that. So I think it's more of the latter.

I mean, there is I think -- we have flow partners today. I think there will be some flow, but I think it's more people are going to want to sell the majority of just their portfolios.

Henry Coffey -- Wedbush Securities -- Analyst

Great. Thank you very much for answering my questions.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Thanks, Henry.

Operator

Our next question comes from the line of Lee Cooperman with Omega Family Office. Your line is now open.

Lee Cooperman -- Omega Family Office -- Analyst

Thank you very much. Let me first just congratulate you guys. I mean, you've had a rising tide, but you've capitalized on it in an extremely effective way. And I think you should be congratulated on your performance.

But I have four or five questions that are all kind of interrelated so maybe I can get them out and then you can handle them in the order that you want. Number one, what does the minimum cash needed to operate the business? You had $695 million of unrestricted cash. What do you need in the way of minimum to operate the business? Secondly, there's a very large range between the 12% and the 20% in terms of return on equity. What are you assuming in that number in terms of capital management? And what are the four or five things that would determine whether it's 20% or 12%? What do we watch? You mentioned that -- and I know this to be the case that the stock restrictions -- repurchase restrictions come off in August.

What does that enable you to do basically? And also fourthly, let me just give you a little speech in this question. Do you have a value -- view of the value of your business? And what I mean by that, Warren Buffett has said that it doesn't like -- since buying back stock in a sense you're trading against your shareholders, he wants to show us to know that exactly what's going through his minds. He tells you what price-to-book and what kind of cash level and etc., he would require before buying back stock. But it just seems to me your stock is very mispriced.

I think you also seem to agree with that. But do you have a view of the value of your business? And lastly, what is the likelihood of a transaction Xome?

Chris Marshall -- Vice Chairman and Chief Financial Officer

OK. Lee, let me start with a couple of the things. First of all, the normalized cash, if you think back before the pandemic, we would run the company with a minimum amount of liquidity. On any given day, the minimum was $300 million of liquidity, of which cash was generally about $100 million.

We wouldn't operate the business that way today because we're still in the midst of the pandemic and forbearance, and things like the extensions that are occurring have this potential to impact our liquidity in ways that we've run multiple scenarios, and there are times when we need more cash. We clearly have more cash than we need to operate the business. And if today is the status quo, then we have more cash than we need, and we're holding that I guess because we think we are going to have some very attractive opportunities to acquire more MSR. Second part of your question was 12% to 20%.

12% to 20% is the range that we think we can operate in. And obviously, there are factors, a number of them. But the biggest, there are rates. And I think it's -- in any given year, while we have a balanced business, it does take time to resize your workforce or do other things.

If rates would arise dramatically, for example, and sort of we'd see big write-ups in the MSR portfolio, but we have to resize other parts of the business. So I would say you should think that we are targeting somewhere in the middle of that range consistently over any period of time. But it could be -- we may be at the lower end of the range of one year because there's been a shock in interest rates, and we may be at the higher end of the range because are more stable, and we're able to continue to improve unit cost, which is something you should expect us to do every year. The third question had to do with what happens then after the end of August.

We're permitted to have a very small change in ownership, 5% owners, and part of that is driven by how much stock we buy back. This year, prior to August, there's a safe harbor that we've operated under in buying back stock that to be no more than 10% of our outstanding shares. In August, that would shift to 50%.

Lee Cooperman -- Omega Family Office -- Analyst

5-0, 50?

Chris Marshall -- Vice Chairman and Chief Financial Officer

5-0.

Lee Cooperman -- Omega Family Office -- Analyst

Great.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. The likelihood of Xome, I got to tell you, there's a lot of interest in our businesses, but I'm not good at just turning that into probabilities. I'm good at counting money, but not guessing what people will do. We're having lots of positive discussion, and we've got great businesses.

Can we really find an opportunity to monetize them at the right price? We'd rather surprise you and tell you we've got a deal than lead you to have some expectation that doesn't come true in the next quarter or two. And so -- but we're actively working on that. And in terms of the business, what is it worth? It's a hard question to answer, but I certainly think that the shares that I own are going to be worth a lot more in the future. I think we have an opportunity to -- the 25% ROTCE we've given that out, one thing you've -- I'm sure you've noticed is we're conservative in the guidance we give.

We feel very, very comfortable that we'll deliver that this year, if not more. So you add that potential for monetization of some or all of the -- Xome, you think about the changes in tax rates that are almost certain to occur and you could see our tangible book value be up by 50%. The question is how much premium are we going to get in the marketplace. When you look at the multiples that some of our competitors are trading at, and we look like a dirt cheap stock.

Lee Cooperman -- Omega Family Office -- Analyst

That's my impression as well. And you have a $2.7 billion market cap. When you look at the deferred tax asset, value of Xome, and the earning power that you're generating from -- it would also seem to be very mispriced. But congratulations, you guys have done a great job.

Jay Bray -- Chairman and Chief Executive Officer

Thank you.

Operator

Our last question comes from the line of Matthew Howlett with Wolfe Research. Your line is now open.

Matthew Howlett -- Wolfe Research -- Analyst

Oh, hey, guys. Thanks for taking my question. Most of my questions have been answered. But just quickly, could you give us an overview of the various technology investments, what's budgeted for the year and what they are?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, there are a number of them, but I'd say the biggest are in the originations area, where we've talked in the past about Project Flash. Project Flash is really digitizing the middle and back offices of the Origination platform. And we've got some great technology there. But there's also nothing sexy about it.

It's really taking big processes. As we say, we take the big rocks, we break them down into little pebbles and then we digitize each one of those pebbles. And that's the biggest thing. I'll mention one other piece of technology because I think it's a massive efficiency enabler for us.

We've just completed a big project called ICE. And ICE allows us to be massive amounts of data. When you think about what goes into buying and boarding large portfolios, I think we are the best in the business at doing that. I think we're widely recognized.

ICE is going to make us dramatically even better because we can ingest massive, and really, I mean massive amounts of data at rates -- with accuracy rates far better than any OCR technology that exists today. So we have developed the state-of-the-art for OCR technology, and it's just not text. It's all the unusual things you see when you ingest mortgage documents, just things like tax stamps, they can -- we use AI to train the system, and this is something we've just gotten to patent with. We have developed it in partnership with Google.

And I think it's another example of the really outstanding proprietary technology we have in the company that enables us to operate at the most efficient platform in the industry.

Matthew Howlett -- Wolfe Research -- Analyst

Right. Exactly. On the -- I think getting back to the direct-to-consumer, you mentioned an investment there. So, do you expect to grow the, call it, non-portfolio originations in direct-to-consumer? You heard some people talk about growing the brand, looking outside the portfolio, just curious of where you stand.

Jay Bray -- Chairman and Chief Executive Officer

I mean I think there's -- we're going to stay the course. I think there's so many customers that we can really help in our existing portfolio. And obviously, the cost to acquire there is very economical. And then we'll stay the course on the course.

We are making some technology investments in correspondent as well. And I think that will improve the customer experience. It will also make the loan process, more efficient. So I think we'll stay the course.

I mean, look, I'd love to see us, and I think we can get -- to continue to get recapture to climb, right? And if you can get recapture to climb to five, 10, 15 points beyond where it's at today, that's just so powerful. It's a real cash flow generation machine and profitability machine. So I think that's where we need to really focus. And down the road, once we get to that level, and we are taking care of our customers and delivering the experience that gets us to about those levels, then you could start contemplating, do we want to spend money on different types of customer acquisition.

But until we get to that point, we just have so much opportunity in front of us that I want to stay focused.

Matthew Howlett -- Wolfe Research -- Analyst

The obvious position of having the largest servicing book. Great. Appreciate it. Just last question.

I know no one can guess mortgage rates in the industry as there are various forecasts out there, but then you look at just the substantial drop in the second or the back half of '21 of origination volume. Any I guess -- and you give us some great color on the incentives in your portfolio to refinance. So any comments on sort of the industry forecast today? I think the market just looks at this drop off at some point this year in these refinancings. I'm just curious where you believe the level of mortgage rates would have to be for that to occur.

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think I'd direct you back to the table, I forgot what page is on that shows. We assumed at the beginning of this year, mortgage rates would increase by somewhere in the neighborhood of 50 basis points. We've already -- and seeing that but you can see from that table that we've got 811,000 customers that save at least $200 a month. I mean you think about that it's a massive number, another 500,000 save of $100 a month.

I think the 811 goes down to 600 and change with a 50 basis point increase. For our refinances, forget about the industry, and I'm less concerned about that. For our refinances, rates would have to go up by 100, 150 basis points for us to be quite -- for our customers to not be able to save meaningful amounts of money. The likelihood of that happening and really dropping off this year is pretty slim.

Jay Bray -- Chairman and Chief Executive Officer

Yes. And you think about -- and you know this, I mean, the housing market overall is quite strong, right? And so yes, even if rates drift upwards, I mean we've proven before, we would do it again. We would -- we're going to recalibrate to a needs-based sale and go to a cash out refi product. And then our purchase of the business within -- our customer base is growing as well, and we're going to make investments there.

So I think speaking to Mr. Cooper, we don't see that trailing off for all those reasons.

Matthew Howlett -- Wolfe Research -- Analyst

Yes, you guys have demonstrated that in the past. I really appreciate it. Thanks a lot.

Jay Bray -- Chairman and Chief Executive Officer

Thank you.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Thank you, Matthew.

Operator

This concludes today's question-and-answer session. I will now turn the call back to Jay Bray for closing remarks.

Jay Bray -- Chairman and Chief Executive Officer

Thank you. I just would thank everyone for their participation and look forward to chatting further. Have a great day. Thank you.

Operator

[Operator signoff]

Duration: 72 minutes

Call participants:

Ken Posner

Jay Bray -- Chairman and Chief Executive Officer

Chris Marshall -- Vice Chairman and Chief Financial Officer

Bose George -- KBW -- Analyst

Bose George -- KBW -- Analyst

Mark Hammond -- BofA Securities -- Analyst

Mark Hammond -- BofA Securities -- Analyst

Kevin Barker -- Piper Sandler -- Analyst

Kevin Barker -- Piper Sandler -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Giuliano Bologna -- Compass Point -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

Lee Cooperman -- Omega Family Office -- Analyst

Lee Cooperman -- Omega Family Office -- Analyst

Matthew Howlett -- Wolfe Research -- Analyst

Matthew Howlett -- Wolfe Research -- Analyst

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